UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDED FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-05387
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FRANKLIN MUTUAL SERIES FUND INC.
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(Exact name of registrant as specified in charter)

51 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078-2702
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(Address of principal executive offices) (Zip code)

MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)

Registrant's telephone number, including area code: (210) 912-2100
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/04
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ITEM 1. REPORTS TO STOCKHOLDERS.

MUTUAL BEACON FUND

[GRAPHIC OMITTED]

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DECEMBER 31, 2004
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ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
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WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?

MUTUAL BEACON FUND Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
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[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS

Franklin o Templeton o MUTUAL SERIES

THANK YOU FOR YOUR CONTINUED PARTICIPATION

At Mutual Series, we are pleased so many investors
share our long-term investment philosophy and have
remained shareholders for many years. Your ongoing
support plays a significant role in contributing
to the funds' success.

SPECIALIZED EXPERTISE Mutual Series is part of Franklin Templeton
Investments, which offers the specialized
expertise of three world-class investment
management groups -- Franklin, Templeton and
Mutual Series. Mutual Series is dedicated to a
unique style of value investing, searching
aggressively for opportunity among undervalued
stocks, arbitrage situations and distressed
companies. Franklin is a leader in tax-free fund
management and an expert in U.S. equity and fixed
income investing. Templeton pioneered
international investing and, with offices in over
25 countries, offers the broadest global reach in
the industry.

TRUE DIVERSIFICATION Because these management groups work independently
and adhere to distinctly different investment
approaches, Franklin, Templeton and Mutual Series
funds typically have a low overlap of securities.
That's why the funds can be used to build truly
diversified portfolios covering every major asset
class.

RELIABILITY YOU CAN TRUST Franklin Templeton Investments seeks to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable account services that have helped
the firm become one of the most trusted names in
financial services.

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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]

Not part of the annual report

CONTENTS

SHAREHOLDER LETTER ........................................................ 1

ANNUAL REPORT

Mutual Beacon Fund ........................................................ 4

Performance Summary ....................................................... 9

Your Fund's Expenses ...................................................... 14

Financial Highlights and Statement of Investments ......................... 16

Financial Statements ...................................................... 29

Notes to Financial Statements ............................................. 33

Report of Independent Registered Public

Accounting Firm ........................................................... 49

Tax Designation ........................................................... 50

Board Members and Officers ................................................ 51

Shareholder Information ................................................... 56

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ANNUAL REPORT

MUTUAL BEACON FUND

YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Beacon Fund seeks capital
appreciation, with income as a secondary goal, by investing primarily in common
and preferred stocks, bonds and convertible securities the Fund's managers
believe are at prices below their intrinsic value in the U.S. and other
countries.

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PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
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We are pleased to bring you Mutual Beacon Fund's annual report covering the
fiscal year ended December 31, 2004.

PERFORMANCE OVERVIEW

Mutual Beacon Fund - Class Z posted a 14.52% cumulative total return for the 12
months ended December 31, 2004. The Fund outperformed its benchmark, the
Standard & Poor's 500 Composite Index (S&P 500), which returned 10.87% over the
same period.(1) You can find the Fund's long-term performance data in the
Performance Summary beginning on page 9.

ECONOMIC AND MARKET OVERVIEW

During the year ended December 31, 2004, the domestic economy expanded solidly
and broadly across most industries, sectors and regions as gross domestic
product (GDP) rose an estimated 4.4%.(2) However, surging energy and other
commodity prices had a dampening effect. Although consumer confidence remained
below pre-recession levels, consumer spending supported strong auto sales,
increased durable goods consumption and a healthy housing market. Similarly,
business spending rose substantially even as business confidence wavered. The
labor market firmed as employers hired 2.2 million workers in 2004, and
unemployment dropped from 5.7% to 5.4% during the year.(3)

The U.S. dollar weakened throughout 2004 and hit an all-time low against the
euro and a multi-year low versus the yen. The widening trade and current

(1) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.

(2) Source: Bureau of Economic Analysis.

(3) Source: Bureau of Labor Statistics.

THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 20.

4 | Annual Report

account deficits and possibility for higher import prices contributed to
inflationary pressures. The core inflation rate rose to 2.2% in 2004, or 3.3%
including volatile food and energy costs. Aiming to keep inflation tame, the
Federal Reserve Board raised the federal funds target rate five times between
June and December, from 1.00% to 2.25%, the highest level in more than three
years.

Domestic equity markets rallied in early 2004 and then fluctuated; however, they
were essentially flat through early November. After the elections concluded, the
markets enjoyed another strong rally through year-end. The blue chip stocks of
the Dow Jones Industrial Average gained 5.31% for the year under review, while
the broader S&P 500 rose 10.87% and the technology-heavy NASDAQ Composite Index
increased 9.15%.(4)

Outside the U.S., the global economic recovery continued in 2004, led by growth
in China. The 12-nation euro zone lagged other regions in the current recovery.
However, the European Central Bank projected euro zone growth may be between
1.6% and 2.0% in 2004, compared with only 0.5% in 2003. In Japan, the economy
struggled to emerge from a decade-long deflationary period. Although the
country's consumer and business confidence reached their highest levels since
1991, economic growth slowed in response to higher oil prices and reduced
external demand. The U.S. dollar decline hurt Japanese and European exports to
the U.S., as it made their goods more expensive in the world's biggest market.

For the 12-month period ended December 31, 2004, the Morgan Stanley Capital
International (MSCI) World Index's total return was 15.25% in U.S. dollars.(5)
Emerging markets, as measured by the MSCI Emerging Markets Index, had a total
return of 25.95% in U.S. dollars.(6) In local currencies, these indexes had
notably lower total returns of 11.83% and 16.45% for the same period.(5,6)
During the period, most of the world's currencies strengthened in relation to
the U.S. dollar, which benefited U.S.-based investors of non-U.S. developed and
emerging market equities.

INVESTMENT STRATEGY

We follow a distinctive, three-pronged investment approach, which combines
investments in what we believe are substantially undervalued common stocks

(4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all
domestic and international common stocks listed on The NASDAQ Stock
Market. The index is market value weighted and includes over 3,000
companies.

(5) Source: Standard & Poor's Micropal. The MSCI World Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global developed markets.

(6) Source: Standard & Poor's Micropal. The MSCI Emerging Markets Index is a
free float-adjusted, market capitalization-weighted index designed to
measure equity market performance in global emerging markets.

[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]

GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets as of 12/31/04

U.S. 63.7%
U.K. 10.8%
Canada 4.3%
Spain 3.0%
France 2.4%
Irish Republic 2.3%
Japan 2.3%
Denmark 2.2%
Switzerland 2.1%
Norway 1.3%
South Africa 1.3%
Netherlands 1.2%
Other Countries 2.6%
Other Net Assets 0.5%

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/04

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% OF TOTAL
NET ASSETS
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Insurance 12.2%
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Metals & Mining 10.3%
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Tobacco 9.5%
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Media 9.0%
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Beverages 4.7%
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Food Products 4.1%
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Real Estate 3.4%
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Commercial Banks 2.9%
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Diversified Financial Services 2.3%
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Capital Markets 2.2%
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with distressed debt investing and risk arbitrage. Our style aims to provide our
shareholders with superior risk-adjusted results over time. We employ rigorous,
fundamental analysis to find compelling situations. In our opinion, successful
investing is as much about assessing risk and containing losses as it is about
achieving profits. In choosing investments, we look at the market price of an
individual company's securities relative to our evaluation of its intrinsic
value based on factors including book value, cash flow generation, long-term
earnings potential and earnings multiples. We may invest in bankrupt or
distressed companies if we believe the market overreacted to adverse
developments or failed to appreciate positive changes.

MANAGER'S DISCUSSION

All three prongs of our investment strategy contributed to the Fund's
performance during the year under review, with the equity portion providing the
greatest contribution. Three of the Fund's best performing stock investments
were White Mountains Insurance Group, a property and casualty insurer; Altadis,
a Franco-Spanish tobacco company; and Brascan, a Canadian diversified financial
services company.

White Mountains, one of the the largest contributors to Fund performance during
the fiscal year, was an excellent example of how substantial shareholder value
can be created when well-capitalized companies are run by strong managers. With
the company's solid balance sheet, White Mountains' management team has made
several acquisitions, enabling the company to profitably increase its bottom
line while extending its exposure to attractive lines of business. In addition
to exercising discipline with acquisitions, management remained committed to a
conservative underwriting strategy. This strategy enabled White Mountains to
continue to report solid underwriting results for 2004 despite record
industry-wide insurance claims from the Atlantic hurricane season. During the
year under review, the markets began to better appreciate White Mountains'
consistent results, strong balance sheet, and disciplined acquisition and
underwriting practices, as well as its shareholder-oriented management team.
White Mountains' stock rose about 41% in 2004 and has increased more than 443%
in the past five years.

6 | Annual Report

flow and create shareholder value. As a result of these and other factors,
Altadis shares appreciated about 65% in 2004. Despite this strong performance,
the stock still traded at a significant discount to its European peers and our
calculation of the stock's intrinsic value. In addition, some analysts believe
the industry is ready for more consolidation. For these and other reasons, we
remain enthusiastic about the prospects of our Altadis investment.

Brascan's core businesses include real estate, fund management and power
generation assets, and the company has been streamlining its operations to focus
on these core functions over the past three years. The company's businesses have
performed well recently, and Brascan's shares increased in value approximately
80% in 2004 largely as a result of reinvesting free cash flow into its
businesses and a favorable operating environment. Also, the prospects for
Brascan to invest proceeds from a potential sale of its Noranda stake appeared
promising. Brascan identified excess capital for share buybacks and to expand
core operations, as well as for other value-added programs. The potential effect
of redeploying excess capital to higher return areas could create additional
value for Brascan shareholders, and consistent with our strategy, we maintained
our position in the company's stock.

In general, if the value of the U.S. dollar goes up compared with a foreign
currency, an investment traded in that foreign currency will go down in value
because it will be worth fewer U.S. dollars. This can have a negative effect on
Fund performance. Conversely, when the U.S. dollar weakens in relation to a
foreign currency, an investment traded in that foreign currency will increase in
value, which can contribute to Fund performance. At Mutual Series, we typically
seek to hedge (protect) against currency risk, which can reduce or eliminate the
positive or negative effect on Fund performance of holding investments
denominated in currencies other than the U.S. dollar. In 2004, we remained less
than fully hedged in foreign currencies allowing shareholders to benefit from a
declining U.S. dollar. However, one cannot expect the same result in future
periods.

Although many of our investments performed well in 2004, some holdings
underperformed. Positions that declined in value during the reporting period
included Impala Platinum, a South African mining company; Eurotunnel, a
distressed investment in the operator of the English Channel tunnel; and Coeur
D'Alene, a U.S. mining firm.

Impala Platinum detracted from Fund performance during the year largely due to
the strengthening South African currency and a slower-than-expected approval
process for a mine in Zimbabwe. Eurotunnel's debt securities declined mainly due
to uncertainties surrounding the ultimate resolution of the company's financial
situation, as well as mediocre operating results after the board and management
team had been replaced in April 2004. Coeur

TOP 10 HOLDINGS
12/31/04

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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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White Mountains Insurance Group Inc. 4.4%
INSURANCE, U.S.
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Altadis SA 3.0%
TOBACCO, SPAIN
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Berkshire Hathaway Inc., A & B 2.9%
INSURANCE, U.S.
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International Steel Group 2.4%
METALS & MINING, U.S.
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Washington Post Co., B 2.1%
MEDIA, U.S.
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British American Tobacco PLC, ord. & ADR 1.9%
TOBACCO, U.K.
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Newmont Mining Corp. 1.9%
METALS & MINING, U.S.
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Brascan Corp., A 1.8%
DIVERSIFIED FINANCIAL SERVICES,
CANADA
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Carlsberg AS, A & B 1.6%
BEVERAGES, DENMARK
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Florida East Coast Industries Inc. 1.5%
ROAD & RAIL, U.S.
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Annual Report | 7

D'Alene's returns lagged during the reporting period in part because of an
unsuccessful acquisition attempt of Wheaton River, another mining company.

Thank you for your continued participation in Mutual Beacon Fund. We look
forward to serving your future investment needs.

[PHOTO OMITTED] /s/ David J. Winters

David J. Winters, CFA
Portfolio Manager

[PHOTO OMITTED] /s/ Charles M. Lahr

Charles M. Lahr, CFA
Assistant Portfolio Manager

Mutual Beacon Fund

THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.

CHARLES M. LAHR

Charles Lahr is an assistant portfolio manager for Mutual Beacon Fund and Mutual
Financial Services Fund. He is also an analyst for Franklin Mutual Advisers, LLC
(Mutual Series). Mr. Lahr specializes in the analysis of foreign equities and
focuses on non-U.S. financial services companies.

Prior to joining Mutual Series in 2003, Mr. Lahr was an international equities
research analyst for the State of Wisconsin Investment Board. He has 11 years of
experience in the financial services industry.

Mr. Lahr received a bachelor's of business administration in finance and
investments as well as an M.B.A. from the University of Iowa. He is also a CFA
charterholder and a member of the New York Society of Security Analysts.

8 | Annual Report

PERFORMANCE SUMMARY AS OF 12/31/04

Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.

PRICE AND DISTRIBUTION INFORMATION

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CLASS Z CHANGE 12/31/04 12/31/03
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Net Asset Value (NAV) +$1.54 $15.94 $14.40
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DISTRIBUTIONS (1/1/04-12/31/04)
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Dividend Income $0.3746
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Long-Term Capital Gain $0.1457
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TOTAL $0.5203
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CLASS A CHANGE 12/31/04 12/31/03
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Net Asset Value (NAV) +$1.53 $15.87 $14.34
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DISTRIBUTIONS (1/1/04-12/31/04)
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Dividend Income $0.3219
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Long-Term Capital Gain $0.1457
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TOTAL $0.4676
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CLASS B CHANGE 12/31/04 12/31/03
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Net Asset Value (NAV) +$1.48 $15.54 $14.06
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DISTRIBUTIONS (1/1/04-12/31/04)
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Dividend Income $0.2322
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Long-Term Capital Gain $0.1457
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TOTAL $0.3779
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CLASS C CHANGE 12/31/04 12/31/03
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Net Asset Value (NAV) +$1.51 $15.77 $14.26
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DISTRIBUTIONS (1/1/04-12/31/04)
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Dividend Income $0.2273
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Long-Term Capital Gain $0.1457
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TOTAL $0.3730
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Mutual Beacon Fund paid distributions derived from long-term capital gains of
14.57 cents ($0.1457) per share in December 2004. The Fund designated such
distributions as capital gain dividends per Internal Revenue Code Section 852
(b)(3).

Annual Report | 9

PERFORMANCE SUMMARY (CONTINUED)

PERFORMANCE(1)

CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE
MAXIMUM SALES CHARGES.

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CLASS Z 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return(2) 14.52% 59.97% 258.88%
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Average Annual Total Return(3) 14.52% 9.85% 13.63%
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Value of $10,000 Investment(4) $ 11,452 $ 15,997 $ 35,888
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CLASS A 1-YEAR 5-YEAR INCEPTION (11/1/96)
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Cumulative Total Return(2) 14.13% 57.13% 143.05%
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Average Annual Total Return(3) 7.60% 8.17% 10.69%
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Value of $10,000 Investment(4) $ 10,760 $ 14,812 $ 22,910
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CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return(2) 13.32% 52.21% 75.54%
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Average Annual Total Return(3) 9.32% 8.48% 9.73%
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Value of $10,000 Investment(4) $ 10,932 $ 15,021 $ 17,454
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CLASS C 1-YEAR 5-YEAR INCEPTION (11/1/96)
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Cumulative Total Return(2) 13.39% 52.21% 130.72%
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Average Annual Total Return(3) 12.39% 8.76% 10.78%
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Value of $10,000 Investment(4) $ 11,239 $ 15,221 $ 23,072
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PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.

FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.

10 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT(1)

Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.

[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]

This graph compares the performance of Mutual Beacon Fund - Class Z, as tracked
by the growth in value of a $10,000 investment, to that of the S&P 500 Index5
from 1/1/95-12/31/04.

CLASS Z (1/1/95-12/31/04)

MUTUAL BEACON S&P
DATE FUND 500(5)
---- -------------- ------
12/31/1995 $12,589 $13,753
1/31/1996 $13,072 $14,221
2/29/1996 $13,423 $14,353
3/31/1996 $13,598 $14,491
4/30/1996 $13,783 $14,705
5/31/1996 $13,976 $15,083
6/30/1996 $13,887 $15,141
7/31/1996 $13,342 $14,472
8/31/1996 $13,800 $14,778
9/30/1996 $14,186 $15,609
10/31/1996 $14,313 $16,039
11/30/1996 $15,035 $17,251
12/31/1996 $15,256 $16,909
1/31/1997 $15,781 $17,965
2/28/1997 $16,122 $18,106
3/31/1997 $15,898 $17,363
4/30/1997 $15,992 $18,399
5/31/1997 $16,650 $19,518
6/30/1997 $17,132 $20,392
7/31/1997 $18,082 $22,014
8/31/1997 $17,891 $20,782
9/30/1997 $18,776 $21,919
10/31/1997 $18,178 $21,188
11/30/1997 $18,441 $22,168
12/31/1997 $18,764 $22,548
1/31/1998 $18,658 $22,798
2/28/1998 $19,668 $24,441
3/31/1998 $20,505 $25,691
4/30/1998 $20,771 $25,950
5/31/1998 $20,837 $25,504
6/30/1998 $20,691 $26,540
7/31/1998 $20,187 $26,258
8/31/1998 $17,427 $22,465
9/30/1998 $17,062 $23,905
10/31/1998 $18,077 $25,847
11/30/1998 $19,105 $27,413
12/31/1998 $19,208 $28,992
1/31/1999 $19,545 $30,204
2/28/1999 $19,325 $29,265
3/31/1999 $20,218 $30,436
4/30/1999 $21,814 $31,614
5/31/1999 $22,019 $30,869
6/30/1999 $22,623 $32,581
7/31/1999 $22,145 $31,565
8/31/1999 $21,353 $31,408
9/30/1999 $20,800 $30,549
10/31/1999 $21,383 $32,481
11/30/1999 $21,891 $33,141
12/31/1999 $22,433 $35,092
1/31/2000 $21,882 $33,329
2/29/2000 $21,266 $32,699
3/31/2000 $23,390 $35,895
4/30/2000 $23,114 $34,816
5/31/2000 $23,406 $34,103
6/30/2000 $23,132 $34,944
7/31/2000 $23,721 $34,398
8/31/2000 $24,708 $36,534
9/30/2000 $24,760 $34,606
10/31/2000 $25,175 $34,459
11/30/2000 $24,517 $31,744
12/31/2000 $25,647 $31,900
1/31/2001 $27,315 $33,031
2/28/2001 $27,162 $30,021
3/31/2001 $26,376 $28,120
4/30/2001 $27,468 $30,304
5/31/2001 $28,388 $30,507
6/30/2001 $28,607 $29,765
7/31/2001 $28,783 $29,472
8/31/2001 $28,176 $27,629
9/30/2001 $25,689 $25,398
10/31/2001 $25,669 $25,882
11/30/2001 $26,590 $27,867
12/31/2001 $27,215 $28,111
1/31/2002 $27,111 $27,701
2/28/2002 $27,278 $27,167
3/31/2002 $28,029 $28,189
4/30/2002 $28,279 $26,481
5/31/2002 $28,383 $26,286
6/30/2002 $26,422 $24,414
7/31/2002 $24,693 $22,512
8/31/2002 $24,925 $22,659
9/30/2002 $23,575 $20,199
10/31/2002 $23,892 $21,975
11/30/2002 $24,356 $23,267
12/31/2002 $24,209 $21,901
1/31/2003 $23,952 $21,328
2/28/2003 $23,417 $21,008
3/31/2003 $23,481 $21,210
4/30/2003 $25,001 $22,958
5/31/2003 $26,350 $24,166
6/30/2003 $26,809 $24,475
7/31/2003 $27,111 $24,906
8/31/2003 $27,888 $25,391
9/30/2003 $27,845 $25,122
10/31/2003 $28,988 $26,543
11/30/2003 $30,023 $26,776
12/31/2003 $31,336 $28,179
1/31/2004 $31,467 $28,696
2/29/2004 $32,534 $29,095
3/31/2004 $32,490 $28,656
4/30/2004 $31,619 $28,207
5/31/2004 $31,793 $28,593
6/30/2004 $32,329 $29,149
7/31/2004 $31,912 $28,185
8/31/2004 $32,175 $28,298
9/30/2004 $32,745 $28,604
10/31/2004 $33,183 $29,041
11/30/2004 $34,915 $30,216
12/31/2004 $35,888 $31,243

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------------------------------------------
CLASS Z 12/31/04
- --------------------------------------------------------------------------------
1-Year 14.52%
- --------------------------------------------------------------------------------
5-Year 9.85%
- --------------------------------------------------------------------------------
10-Year 13.63%
- --------------------------------------------------------------------------------

[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]

This graph compares the performance of Mutual Beacon Fund - Class A, as tracked
by the growth in value of a $10,000 investment, to that of the S&P 500 Index5
from 11/1/96-12/31/04.

CLASS A (11/1/96-12/31/04)

MUTUAL BEACON S&P
DATE FUND 500(5)
---- -------------- -------
11/1/1996 $9,425 $10,000
11/30/1996 $9,895 $10,755
12/31/1996 $10,038 $10,542
1/31/1997 $10,381 $11,200
2/28/1997 $10,598 $11,288
3/31/1997 $10,451 $10,825
4/30/1997 $10,512 $11,471
5/31/1997 $10,938 $12,169
6/30/1997 $11,255 $12,714
7/31/1997 $11,873 $13,725
8/31/1997 $11,747 $12,957
9/30/1997 $12,322 $13,666
10/31/1997 $11,920 $13,210
11/30/1997 $12,094 $13,821
12/31/1997 $12,302 $14,058
1/31/1998 $12,232 $14,213
2/28/1998 $12,887 $15,238
3/31/1998 $13,428 $16,018
4/30/1998 $13,603 $16,179
5/31/1998 $13,638 $15,901
6/30/1998 $13,542 $16,546
7/31/1998 $13,211 $16,371
8/31/1998 $11,398 $14,006
9/30/1998 $11,149 $14,904
10/31/1998 $11,816 $16,115
11/30/1998 $12,491 $17,091
12/31/1998 $12,550 $18,075
1/31/1999 $12,771 $18,831
2/28/1999 $12,617 $18,246
3/31/1999 $13,193 $18,975
4/30/1999 $14,228 $19,710
5/31/1999 $14,372 $19,245
6/30/1999 $14,757 $20,313
7/31/1999 $14,444 $19,679
8/31/1999 $13,916 $19,582
9/30/1999 $13,554 $19,046
10/31/1999 $13,925 $20,251
11/30/1999 $14,258 $20,662
12/31/1999 $14,608 $21,878
1/31/2000 $14,249 $20,779
2/29/2000 $13,836 $20,386
3/31/2000 $15,211 $22,379
4/30/2000 $15,031 $21,706
5/31/2000 $15,222 $21,262
6/30/2000 $15,029 $21,786
7/31/2000 $15,413 $21,446
8/31/2000 $16,046 $22,777
9/30/2000 $16,080 $21,575
10/31/2000 $16,351 $21,484
11/30/2000 $15,922 $19,791
12/31/2000 $16,638 $19,888
1/31/2001 $17,723 $20,593
2/28/2001 $17,611 $18,717
3/31/2001 $17,099 $17,532
4/30/2001 $17,798 $18,893
5/31/2001 $18,397 $19,020
6/30/2001 $18,521 $18,557
7/31/2001 $18,636 $18,374
8/31/2001 $18,228 $17,225
9/30/2001 $16,636 $15,834
10/31/2001 $16,611 $16,137
11/30/2001 $17,196 $17,374
12/31/2001 $17,600 $17,526
1/31/2002 $17,533 $17,271
2/28/2002 $17,627 $16,938
3/31/2002 $18,114 $17,575
4/30/2002 $18,277 $16,510
5/31/2002 $18,331 $16,388
6/30/2002 $17,054 $15,221
7/31/2002 $15,932 $14,035
8/31/2002 $16,083 $14,127
9/30/2002 $15,208 $12,593
10/31/2002 $15,399 $13,701
11/30/2002 $15,686 $14,506
12/31/2002 $15,591 $13,654
1/31/2003 $15,425 $13,297
2/28/2003 $15,080 $13,098
3/31/2003 $15,107 $13,223
4/30/2003 $16,089 $14,313
5/31/2003 $16,961 $15,066
6/30/2003 $17,253 $15,259
7/31/2003 $17,435 $15,528
8/31/2003 $17,922 $15,830
9/30/2003 $17,895 $15,663
10/31/2003 $18,633 $16,548
11/30/2003 $19,288 $16,694
12/31/2003 $20,111 $17,569
1/31/2004 $20,209 $17,891
2/29/2004 $20,869 $18,140
3/31/2004 $20,840 $17,866
4/30/2004 $20,265 $17,586
5/31/2004 $20,377 $17,827
6/30/2004 $20,730 $18,173
7/31/2004 $20,448 $17,572
8/31/2004 $20,603 $17,643
9/30/2004 $20,970 $17,833
10/31/2004 $21,239 $18,106
11/30/2004 $22,340 $18,838
12/31/2004 $22,910 $19,479

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------------------------------------------
CLASS A 12/31/04
- --------------------------------------------------------------------------------
1-Year 7.60%
- --------------------------------------------------------------------------------
5-Year 8.17%
- --------------------------------------------------------------------------------
Since Inception (11/1/96) 10.69%
- --------------------------------------------------------------------------------

Annual Report | 11

PERFORMANCE SUMMARY (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------------------------------------------
CLASS B 12/31/04
- --------------------------------------------------------------------------------
1-Year 9.32%
- --------------------------------------------------------------------------------
5-Year 8.48%
- --------------------------------------------------------------------------------
Since Inception (1/1/99) 9.73%
- --------------------------------------------------------------------------------

[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]

This graph compares the performance of Mutual Beacon Fund - Class B, as tracked
by the growth in value of a $10,000 investment, to that of the S&P 500 Index5
from 1/1/99-12/31/04.

CLASS B (1/1/99-12/31/04)

MUTUAL BEACON S&P
DATE FUND 500(5)
---- -------------- -------
1/1/1999 $10,000 $10,000
1/31/1999 $10,160 $10,418
2/28/1999 $10,031 $10,094
3/31/1999 $10,481 $10,498
4/30/1999 $11,291 $10,905
5/31/1999 $11,398 $10,647
6/30/1999 $11,693 $11,238
7/31/1999 $11,436 $10,887
8/31/1999 $11,015 $10,834
9/30/1999 $10,719 $10,537
10/31/1999 $11,007 $11,203
11/30/1999 $11,265 $11,431
12/31/1999 $11,533 $12,104
1/31/2000 $11,247 $11,496
2/29/2000 $10,918 $11,279
3/31/2000 $11,996 $12,381
4/30/2000 $11,845 $12,009
5/31/2000 $11,988 $11,763
6/30/2000 $11,840 $12,053
7/31/2000 $12,127 $11,865
8/31/2000 $12,622 $12,601
9/30/2000 $12,631 $11,936
10/31/2000 $12,846 $11,886
11/30/2000 $12,496 $10,949
12/31/2000 $13,054 $11,003
1/31/2001 $13,896 $11,393
2/28/2001 $13,806 $10,355
3/31/2001 $13,390 $9,699
4/30/2001 $13,935 $10,453
5/31/2001 $14,401 $10,523
6/30/2001 $14,487 $10,267
7/31/2001 $14,568 $10,166
8/31/2001 $14,244 $9,530
9/30/2001 $12,990 $8,760
10/31/2001 $12,959 $8,927
11/30/2001 $13,415 $9,612
12/31/2001 $13,722 $9,696
1/31/2002 $13,658 $9,555
2/28/2002 $13,722 $9,371
3/31/2002 $14,097 $9,723
4/30/2002 $14,215 $9,134
5/31/2002 $14,258 $9,067
6/30/2002 $13,253 $8,421
7/31/2002 $12,375 $7,765
8/31/2002 $12,483 $7,816
9/30/2002 $11,801 $6,967
10/31/2002 $11,942 $7,580
11/30/2002 $12,169 $8,025
12/31/2002 $12,081 $7,554
1/31/2003 $11,950 $7,357
2/28/2003 $11,677 $7,246
3/31/2003 $11,688 $7,316
4/30/2003 $12,441 $7,919
5/31/2003 $13,107 $8,335
6/30/2003 $13,320 $8,442
7/31/2003 $13,463 $8,591
8/31/2003 $13,825 $8,758
9/30/2003 $13,793 $8,665
10/31/2003 $14,353 $9,155
11/30/2003 $14,848 $9,236
12/31/2003 $15,491 $9,720
1/31/2004 $15,546 $9,898
2/29/2004 $16,052 $10,036
3/31/2004 $16,019 $9,884
4/30/2004 $15,568 $9,729
5/31/2004 $15,645 $9,863
6/30/2004 $15,903 $10,054
7/31/2004 $15,681 $9,722
8/31/2004 $15,792 $9,761
9/30/2004 $16,069 $9,866
10/31/2004 $16,268 $10,017
11/30/2004 $17,099 $10,422
12/31/2004 $17,454 $10,777

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------------------------------------------
CLASS C 12/31/04
- --------------------------------------------------------------------------------
1-Year 12.39%
- --------------------------------------------------------------------------------
5-Year 8.76%
- --------------------------------------------------------------------------------
Since Inception (11/1/96) 10.78%
- --------------------------------------------------------------------------------

[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]

This graph compares the performance of Mutual Beacon Fund - Class C, as tracked
by the growth in value of a $10,000 investment, to that of the S&P 500 Index5
from 11/1/96-12/31/04.

CLASS C (11/1/96-12/31/04)

MUTUAL BEACON S&P
DATE FUND 500(5)
---- -------------- -------
11/1/1996 $10,000 $10,000
11/30/1996 $10,497 $10,755
12/31/1996 $10,645 $10,542
1/31/1997 $11,000 $11,200
2/28/1997 $11,221 $11,288
3/31/1997 $11,057 $10,825
4/30/1997 $11,123 $11,471
5/31/1997 $11,566 $12,169
6/30/1997 $11,894 $12,714
7/31/1997 $12,537 $13,725
8/31/1997 $12,403 $12,957
9/30/1997 $13,004 $13,666
10/31/1997 $12,578 $13,210
11/30/1997 $12,745 $13,821
12/31/1997 $12,953 $14,058
1/31/1998 $12,870 $14,213
2/28/1998 $13,562 $15,238
3/31/1998 $14,124 $16,018
4/30/1998 $14,290 $16,179
5/31/1998 $14,327 $15,901
6/30/1998 $14,217 $16,546
7/31/1998 $13,860 $16,371
8/31/1998 $11,956 $14,006
9/30/1998 $11,694 $14,904
10/31/1998 $12,378 $16,115
11/30/1998 $13,082 $17,091
12/31/1998 $13,134 $18,075
1/31/1999 $13,355 $18,831
2/28/1999 $13,184 $18,246
3/31/1999 $13,789 $18,975
4/30/1999 $14,866 $19,710
5/31/1999 $14,997 $19,245
6/30/1999 $15,397 $20,313
7/31/1999 $15,059 $19,679
8/31/1999 $14,505 $19,582
9/30/1999 $14,115 $19,046
10/31/1999 $14,495 $20,251
11/30/1999 $14,833 $20,662
12/31/1999 $15,189 $21,878
1/31/2000 $14,802 $20,779
2/29/2000 $14,372 $20,386
3/31/2000 $15,797 $22,379
4/30/2000 $15,598 $21,706
5/31/2000 $15,786 $21,262
6/30/2000 $15,580 $21,786
7/31/2000 $15,968 $21,446
8/31/2000 $16,616 $22,777
9/30/2000 $16,639 $21,575
10/31/2000 $16,910 $21,484
11/30/2000 $16,451 $19,791
12/31/2000 $17,196 $19,888
1/31/2001 $18,296 $20,593
2/28/2001 $18,180 $18,717
3/31/2001 $17,636 $17,532
4/30/2001 $18,348 $18,893
5/31/2001 $18,957 $19,020
6/30/2001 $19,076 $18,557
7/31/2001 $19,182 $18,374
8/31/2001 $18,759 $17,225
9/30/2001 $17,106 $15,834
10/31/2001 $17,067 $16,137
11/30/2001 $17,662 $17,374
12/31/2001 $18,065 $17,526
1/31/2002 $17,982 $17,271
2/28/2002 $18,079 $16,938
3/31/2002 $18,568 $17,575
4/30/2002 $18,721 $16,510
5/31/2002 $18,763 $16,388
6/30/2002 $17,450 $15,221
7/31/2002 $16,294 $14,035
8/31/2002 $16,435 $14,127
9/30/2002 $15,532 $12,593
10/31/2002 $15,729 $13,701
11/30/2002 $16,011 $14,506
12/31/2002 $15,899 $13,654
1/31/2003 $15,729 $13,297
2/28/2003 $15,360 $13,098
3/31/2003 $15,388 $13,223
4/30/2003 $16,381 $14,313
5/31/2003 $17,246 $15,066
6/30/2003 $17,537 $15,259
7/31/2003 $17,722 $15,528
8/31/2003 $18,208 $15,830
9/30/2003 $18,165 $15,663
10/31/2003 $18,893 $16,548
11/30/2003 $19,550 $16,694
12/31/2003 $20,389 $17,569
1/31/2004 $20,461 $17,891
2/29/2004 $21,133 $18,140
3/31/2004 $21,090 $17,866
4/30/2004 $20,504 $17,586
5/31/2004 $20,604 $17,827
6/30/2004 $20,938 $18,173
7/31/2004 $20,650 $17,572
8/31/2004 $20,794 $17,643
9/30/2004 $21,153 $17,833
10/31/2004 $21,412 $18,106
11/30/2004 $22,521 $18,838
12/31/2004 $23,072 $19,479

12 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

ENDNOTES

THE FUND'S INVESTMENTS INCLUDE SMALLER-COMPANY STOCKS AND FOREIGN SECURITIES.
SMALLER-COMPANY STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN
LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. FOREIGN SECURITIES
RISKS INCLUDE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND
REGULATORY UNCERTAINTY. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, AS WELL AS LOWER-RATED "JUNK BONDS,"
WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.

CLASS Z: Shares are available to certain eligible investors as
described in the prospectus.

CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.

CLASS B: These shares have higher annual fees and expenses than Class A
shares.

CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.

(1) Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.

(2) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.

(3) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.

(4) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include any current, applicable,
maximum sales charge.

Annual Report | 13

YOUR FUND'S EXPENSES

As a Fund shareholder, you can incur two types of costs:

o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and

o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.

ACTUAL FUND EXPENSES

The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.

You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:

1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.

2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS

Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.

14 | Annual Report

YOUR FUND'S EXPENSES (CONTINUED)

PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.

- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS Z VALUE 6/30/04 VALUE 12/31/04 PERIOD* 6/30/04-12/31/04
- --------------------------------------------------------------------------------------------------------

Actual $1,000 $1,110.10 $4.35
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.01 $4.17
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,107.20 $6.20
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.94
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,103.80 $9.62
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.99 $9.22
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,104.20 $9.63
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.99 $9.22
- --------------------------------------------------------------------------------------------------------

* Expenses are equal to the annualized expense ratio for each class (Z:
0.82%; A: 1.17%; B: 1.82%; and C: 1.82%), multiplied by the average
account value over the period, multiplied by 184/366 to reflect the
one-half year period.

Annual Report | 15

MUTUAL BEACON FUND

FINANCIAL HIGHLIGHTS

--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2004 2003 2002 2001 2000
--------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year ......................... $ 14.40 $ 11.31 $ 13.05 $ 13.38 $ 13.84
--------------------------------------------------------------------
Income from investment operations:

Net investment income(a) .................................. .30 .19 .23 .21 .22

Net realized and unrealized gains (losses) ................ 1.76 3.13 (1.66) .60 1.62
--------------------------------------------------------------------
Total from investment operations ........................... 2.06 3.32 (1.43) .81 1.84
--------------------------------------------------------------------
Less distributions from:

Net investment income ..................................... (.37) (.23) (.20) (.20) (.44)

Net realized gains ........................................ (.15) -- (.11) (.94) (1.86)
--------------------------------------------------------------------
Total distributions ........................................ (.52) (.23) (.31) (1.14) (2.30)
--------------------------------------------------------------------
Redemption fees ............................................ --(d) -- -- -- --
--------------------------------------------------------------------
Net asset value, end of year ............................... $ 15.94 $ 14.40 $ 11.31 $ 13.05 $ 13.38
====================================================================

Total return(b) ............................................ 14.52% 29.44% (11.05)% 6.11% 14.33%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............................ $3,359,389 $3,112,212 $2,572,002 $3,090,827 $3,041,905

Ratios to average net assets:*

Expenses(c) ............................................... .83% .86% .80% .79% .83%

Expenses, net of waiver and payments by affiliate(c) ...... .83% .86% .80% .79% .81%

Net investment income ..................................... 1.99% 1.48% 1.88% 1.47% 1.55%

Portfolio turnover rate .................................... 29.17% 49.61% 52.27% 55.25% 62.11%

*Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses .................................................. .82% .83% .79% .78% .80%

Expenses net of waiver and payments by affiliate .......... .82% .83% .79% .78% .78%

(a) Based on average daily shares outstanding.

(b) Total return is not annualized for periods less than one year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

16 | See notes to financial statements. | Annual Report

MUTUAL BEACON FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2004 2003 2002 2001 2000
--------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year ......................... $ 14.34 $ 11.27 $ 13.01 $ 13.34 $ 13.81
--------------------------------------------------------------------
Income from investment operations:

Net investment income(a) .................................. .25 .14 .19 .16 .17

Net realized and unrealized gains (losses) ................ 1.75 3.12 (1.66) .60 1.61
--------------------------------------------------------------------
Total from investment operations ........................... 2.00 3.26 (1.47) .76 1.78
--------------------------------------------------------------------
Less distributions from:

Net investment income ..................................... (.32) (.19) (.16) (.15) (.39)

Net realized gains ........................................ (.15) -- (.11) (.94) (1.86)
--------------------------------------------------------------------
Total distributions ........................................ (.47) (.19) (.27) (1.09) (2.25)
--------------------------------------------------------------------
Redemption fees ............................................ --(d) -- -- -- --
--------------------------------------------------------------------
Net asset value, end of year ............................... $ 15.87 $ 14.34 $ 11.27 $ 13.01 $ 13.34
====================================================================

Total return(b) ............................................ 14.13% 28.99% (11.41)% 5.78% 13.89%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............................ $1,462,133 $1,301,620 $ 918,983 $ 977,558 $ 757,323

Ratios to average net assets:*

Expenses(c) ............................................... 1.18% 1.21% 1.15% 1.14% 1.18%

Expenses, net of waiver and payments by affiliate(c) ...... 1.18% 1.21% 1.15% 1.14% 1.16%

Net investment income ..................................... 1.64% 1.13% 1.53% 1.12% 1.20%

Portfolio turnover rate .................................... 29.17% 49.61% 52.27% 55.25% 62.11%

*Ratios to average net assets, excluding dividend expense
on securities sold short:

Expenses ................................................... 1.17% 1.18% 1.14% 1.13% 1.15%

Expenses net of waiver and payments by affiliate .......... 1.17% 1.18% 1.14% 1.13% 1.13%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the sales commissions or the contingent
deferred sales charge, and is not annualized for periods less than one
year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

Annual Report | See notes to financial statements. | 17

MUTUAL BEACON FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2004 2003 2002 2001 2000
--------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year ......................... $ 14.06 $ 11.07 $ 12.80 $ 13.18 $ 13.69
--------------------------------------------------------------------
Income from investment operations:

Net investment income(a) .................................. .15 .05 .11 .06 --

Net realized and unrealized gains (losses) ................ 1.71 3.06 (1.63) .60 1.67
--------------------------------------------------------------------
Total from investment operations ........................... 1.86 3.11 (1.52) .66 1.67
--------------------------------------------------------------------
Less distributions from:

Net investment income ..................................... (.23) (.12) (.10) (.10) (.32)

Net realized gains ........................................ (.15) -- (.11) (.94) (1.86)
--------------------------------------------------------------------
Total distributions ........................................ (.38) (.12) (.21) (1.04) (2.18)
--------------------------------------------------------------------
Redemption fees ............................................ --(d) -- -- -- --
--------------------------------------------------------------------
Net asset value, end of year ............................... $ 15.54 $ 14.06 $ 11.07 $ 12.80 $ 13.18
====================================================================

Total return(b) ............................................ 13.32% 28.22% (11.96)% 5.12% 13.19%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............................ $ 186,840 $ 155,572 $ 100,405 $ 64,512 $ 18,376

Ratios to average net assets:*

Expenses(c) ............................................... 1.83% 1.86% 1.80% 1.79% 1.83%

Expenses, net of waiver and payments by affiliate(c) ....... 1.83% 1.86% 1.80% 1.79% 1.81%

Net investment income ..................................... .99% .48% .88% .44% .58%

Portfolio turnover rate .................................... 29.17% 49.61% 52.27% 55.25% 62.11%

*Ratios to average net assets, excluding dividend expense

on securities sold short:

Expenses .................................................. 1.82% 1.83% 1.79% 1.78% 1.80%

Expenses net of waiver and payments by affiliate .......... 1.82% 1.83% 1.79% 1.78% 1.78%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

18 | See notes to financial statements. | Annual Report

MUTUAL BEACON FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2004 2003 2002 2001 2000
--------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year ......................... $ 14.26 $ 11.22 $ 12.94 $ 13.28 $ 13.75
--------------------------------------------------------------------
Income from investment operations:

Net investment income(a) .................................. .14 .06 .11 .07 .08

Net realized and unrealized gains (losses) ................ 1.74 3.09 (1.64) .60 1.61
--------------------------------------------------------------------
Total from investment operations ........................... 1.88 3.15 (1.53) .67 1.69
--------------------------------------------------------------------
Less distributions from:

Net investment income ..................................... (.23) (.11) (.08) (.07) (.30)

Net realized gains ........................................ (.14) -- (.11) (.94) (1.86)
--------------------------------------------------------------------
Total distributions ........................................ (.37) (.11) (.19) (1.01) (2.16)
--------------------------------------------------------------------
Redemption fees ............................................ --(d) -- -- -- --
--------------------------------------------------------------------
Net asset value, end of year ............................... $ 15.77 $ 14.26 $ 11.22 $ 12.94 $ 13.28
====================================================================

Total return(b) ............................................ 13.39% 28.24% (11.99)% 5.06% 13.21%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............................ $ 658,813 $ 579,825 $ 443,683 $ 482,080 $ 419,481

Ratios to average net assets:*

Expenses(c) ............................................... 1.83% 1.86% 1.79% 1.78% 1.82%

Expenses, net of waiver and payments by affiliate(c) ...... 1.83% 1.86% 1.79% 1.78% 1.80%

Net investment income ..................................... .99% .48% .89% .48% .56%

Portfolio turnover rate .................................... 29.17% 49.61% 52.27% 55.25% 62.11%

*Ratios to average net assets, excluding dividend expense
on securities sold short:

Expenses .................................................. 1.82% 1.83% 1.78% 1.77% 1.79%

Expenses net of waiver and payments by affiliate .......... 1.82% 1.83% 1.78% 1.77% 1.77%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

Annual Report | See notes to financial statements. | 19

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004

- -----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

COMMON STOCKS AND OTHER EQUITY INTERESTS 76.0%
AEROSPACE & DEFENSE .5%
Northrop Grumman Corp. ............................................. United States 546,200 $ 29,691,432
------------

AIRLINES .5%
(a) Ace Aviation Holdings Inc. ......................................... Canada 865,215 25,645,899
(a),(b),(f) Air Canada Inc., Contingent Distribution ........................... Canada 288,242,292 --
------------
25,645,899
------------

BEVERAGES 4.7%
Brown-Forman Corp., A .............................................. United States 308,260 15,647,277
Brown-Forman Corp., B .............................................. United States 362,618 17,652,244
Carlsberg AS, A .................................................... Denmark 74,900 3,442,956
Carlsberg AS, B .................................................... Denmark 1,772,503 89,560,361
Coca-Cola Enterprises Inc. ......................................... United States 946,000 19,724,100
Diageo PLC ......................................................... United Kingdom 4,764,700 67,952,169
Heineken Holding NV, A ............................................. Netherlands 1,680,264 50,732,601
------------
264,711,708
------------

CAPITAL MARKETS 2.2%
Bear Stearns Cos. Inc. ............................................. United States 271,302 27,756,908
Irish Life & Permanent PLC ......................................... Irish Republic 2,265,819 41,908,366
(c) Leucadia National Corp. ............................................ United States 865,040 57,097,830
------------
126,763,104
------------
CHEMICALS 1.1%
Givaudan AG ........................................................ Switzerland 55,850 36,777,295
Solvay SA .......................................................... Belgium 243,964 26,815,779
------------
63,593,074
------------

COMMERCIAL BANKS 2.9%
Allied Irish Banks PLC ............................................. Irish Republic 2,193,118 45,474,194
Bank of Ireland .................................................... Irish Republic 2,675,749 44,182,973
BNP Paribas SA ..................................................... France 245,000 17,720,377
(a) Cerberus NCB Acquisition LP Ltd., wts., 8/29/13 .................... Japan 11,820,937 5,910,469
Danske Bank ........................................................ Denmark 996,500 30,492,211
(a),(c),(d) FE Capital Holdings Ltd. ........................................... Japan 13,981 18,594,719
Kansai Urban Banking Corp. ......................................... Japan 851,803 1,580,185
(a),(d) Nippon Investment LLC .............................................. Japan 10,862,000 --
------------
163,955,128
------------

COMMERCIAL SERVICES & SUPPLIES
(a) Comdisco Holding Co., Inc. ......................................... United States 75 1,674
(b) Comdisco, Contingent Distribution .................................. United States 54,914,113 --
(a),(b) Safety Kleen Corp., Contingent Distribution ........................ United States 630,000 --
------------
1,674
------------

COMPUTERS & PERIPHERALS
(a) DecisionOne Corp. .................................................. United States 278,121 --
------------

DIVERSIFIED FINANCIAL SERVICES 2.4%
Brascan Corp., A ................................................... Canada 2,889,000 103,939,926

20 | Annual Report

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
DIVERSIFIED FINANCIAL SERVICES (CONT.)
(b) Marconi Corp., Contingent Distribution ............................. United Kingdom 42,651,300 $ --
Pargesa Holdings SA ................................................ Switzerland 8,947 31,421,924
------------
135,361,850
------------

DIVERSIFIED TELECOMMUNICATION SERVICES 1.8%
(a),(c),(e) AboveNet Inc. ...................................................... United States 439,477 10,531,363
(a),(b),(e) AboveNet Inc., Contingent Distribution ............................. United States 61,502,000 --
(a),(c),(e) AboveNet Inc., wts., 9/08/08 ....................................... United States 14,770 94,528
(a),(c),(e) AboveNet Inc., wts., 9/08/10 ....................................... United States 17,376 69,504
(b) Global Crossing Holdings Ltd., Contingent Distribution ............. United States 60,632,757 75,791
(a) MCI Inc ............................................................ United States 944,423 19,039,568
Sprint Corp. ....................................................... United States 158,600 3,941,210
(a),(b) Telewest Communications PLC, Contingent Distribution ............... United Kingdom 66,741,863 --
(a) Telewest Global Inc ................................................ United Kingdom 3,785,613 66,551,076
(a),(b) Telewest Finance Ltd., Contingent Distribution ..................... United Kingdom 7,240,000 --
------------
100,303,040
------------

ELECTRIC UTILITIES .6%
E.ON AG ............................................................ Germany 380,580 34,694,898
------------

FOOD & STAPLES RETAILING .3%
(a) Kroger Co. ......................................................... United States 1,103,040 19,347,322
------------

FOOD PRODUCTS 4.5%
Cadbury Schweppes PLC .............................................. United Kingdom 4,497,511 41,869,032
(d) Farmer Brothers Co ................................................. United States 1,033,896 25,061,639
Groupe Danone ...................................................... France 640,200 59,031,632
Nestle SA .......................................................... Switzerland 198,235 51,780,072
Orkla ASA .......................................................... Norway 2,289,200 75,118,238
------------
252,860,613
------------

HEALTH CARE EQUIPMENT & SUPPLIES .9%
(n) Guidant Corp. ...................................................... United States 176,500 12,725,650
Hillenbrand Industries Inc ......................................... United States 655,900 36,428,686
------------
49,154,336
------------

HEALTH CARE PROVIDERS & SERVICES 1.2%
(a) Alderwoods Group Inc. .............................................. United States 206,498 2,349,947
(a) Beverly Enterprises Inc. ........................................... United States 1,511,000 13,825,650
(a),(e) Kindred Healthcare Inc. ............................................ United States 1,364,570 38,825,428
(a),(e) Kindred Healthcare Inc., Jan. 26.00 Calls, 1/01/12 ................. United States 664 2,623
(a),(e) Kindred Healthcare Inc., Jan. 9.07 Calls, 1/01/13 .................. United States 332 6,930
(a),(e) Kindred Healthcare Inc., Jul. 23.75 Calls, 7/17/11 ................. United States 3,296 20,435
(a),(e) Kindred Healthcare Inc., wts., Series A, 4/20/06 ................... United States 121,432 3,608,473
(a),(e) Kindred Healthcare Inc., wts., Series B, 4/20/06 ................... United States 303,580 7,959,868
Select Medical Corp. ............................................... United States 178,600 3,143,360
------------
69,742,714
------------

Annual Report | 21

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
HOTELS RESTAURANTS & LEISURE .3%
(a) Caesars Entertainment Inc. ......................................... United States 359,300 $ 7,236,302
(a),(d) FHC Delaware Inc ................................................... United States 507,977 3,997,779
Mandalay Resort Group .............................................. United States 86,000 6,056,980
------------
17,291,061
------------

INSURANCE 12.2%
(a) Alleghany Corp. .................................................... United States 159,830 45,591,507
(a) Berkshire Hathaway Inc., A ......................................... United States 741 65,133,900
(a) Berkshire Hathaway Inc., B ......................................... United States 33,690 98,913,840
Hartford Financial Services Group Inc. ............................. United States 605,600 41,974,136
Montpelier Re Holdings Ltd. ........................................ Bermuda 242,150 9,310,668
(a),(c) Occum Acquisition Corp. ............................................ United States 511,600 51,160,000
Old Republic International Corp .................................... United States 2,225,245 56,298,699
(a),(c) Olympus Re Holdings Ltd. ........................................... Bermuda 106,700 18,264,906
Prudential Financial Inc. .......................................... United States 541,900 29,782,824
St. Paul Travelers Cos. Inc. ....................................... United States 674,305 24,996,486
White Mountains Insurance Group Inc. ............................... United States 389,021 251,307,566
------------
692,734,532
------------

LEISURE EQUIPMENT & PRODUCTS .3%
Mattel Inc. ........................................................ United States 807,200 15,732,328
------------

MACHINERY
(a),(c) Lancer Industries Inc., B .......................................... United States 1 287,261
------------

MEDIA 9.0%
Clear Channel Communications Inc. .................................. United States 934,000 31,279,660
(a) Comcast Corp., A ................................................... United States 188,500 6,190,340
Dow Jones & Co. Inc ................................................ United States 191,200 8,233,072
E.W. Scripps Co., A ................................................ United States 1,099,050 53,062,134
EchoStar Communications Corp., A ................................... United States 670,330 22,281,769
(a) Fox Entertainment Group Inc., A .................................... United States 193,410 6,045,997
Hollinger International Inc ........................................ United States 985,458 13,906,783
(a) Liberty Media Corp., A ............................................. United States 6,957,360 76,391,813
Meredith Corp. ..................................................... United States 570,410 30,916,222
(a) News Corp. Ltd., A ................................................. United States 739,200 13,793,472
(a) NTL Inc ............................................................ United Kingdom 1,135,995 82,882,195
NV Holdingsmig De Telegraaf ........................................ Netherlands 530,294 13,132,858
Omnicom Group Inc. ................................................. United States 242,800 20,472,896
(a) TVMAX Holdings Inc. ................................................ United States 133,855 133,855
Viacom Inc., B ..................................................... United States 411,200 14,963,568
Washington Post Co., B ............................................. United States 119,022 117,001,006
------------
510,687,640
------------

METALS & MINING 10.0%
Anglo American PLC ................................................. United Kingdom 1,737,547 41,089,061
Anglo American PLC, ADR ............................................ United Kingdom 1,200 28,548
Barrick Gold Corp. ................................................. Canada 689,000 16,687,580
(a) Coeur D'Alene Mines Corp. .......................................... United States 6,326,300 24,862,359
Compania de Minas Buenaventura SA, ADR ............................. Peru 380,700 8,718,030
Consol Energy Inc. ................................................. United States 1,149,900 47,203,395

22 | Annual Report

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
METALS & MINING (CONT.)
(a) Eldorado Gold Corp. ................................................ Canada 1,029,500 $ 3,047,255
Freeport McMoran Copper & Gold Inc., B ............................. United States 1,611,400 61,603,822
(a) Glamis Gold Ltd. ................................................... Canada 663,900 11,380,985
Gold Fields Ltd. ................................................... South Africa 331,307 4,064,578
Impala Platinum Holdings Ltd. ...................................... South Africa 809,948 68,484,570
(a),(c) International Steel Group .......................................... United States 3,546,660 136,659,903
Newmont Mining Corp. ............................................... United States 2,376,400 105,535,924
Noranda Inc ........................................................ Canada 1,145,400 20,112,664
(a),(d) PMG, LLC ........................................................... United States 48,890 3,226,751
(a) Randgold & Exploration Co. Ltd., ADR ............................... South Africa 172,500 303,600
(a) Rio Narcea Gold Mines Ltd. ......................................... Canada 1,213,700 2,782,903
(a) Wheaton River Minerals Ltd. ........................................ Canada 2,242,026 7,290,534
(a) Wheaton River Minerals Ltd., wts., 5/30/07 ......................... Canada 930,257 1,830,496
------------
564,912,958
------------

MULTI-UTILITIES & UNREGULATED POWER .5%
(a) Northwestern Corp. ................................................. United States 384,837 10,775,436
(a),(b) Northwestern Corp., Contingent Distribution ........................ United States 11,805,000 924,241
(a),(f) NRG Energy Inc. .................................................... United States 442,903 15,966,653
------------
27,666,330
------------

OIL & GAS 2.2%
(a),(d) Anchor Resources LLC ............................................... United States 69,184 --
BP PLC ............................................................. United Kingdom 2,690,300 26,232,723
BP PLC, ADR ........................................................ United Kingdom 26,100 1,524,240
Canadian Oil Sands Trust ........................................... Canada 865,700 48,801,415
(a) General Maritime Corp. ............................................. United States 16,800 671,160
Total SA, B ........................................................ France 207,900 45,336,712
------------
122,566,250
------------

PERSONAL PRODUCTS .3%
Beiersdorf AG ...................................................... Germany 155,088 18,082,235
------------

PHARMACEUTICALS 1.7%
Fujisawa Pharmaceutical Co. Ltd. ................................... Japan 756,100 20,707,484
Pfizer Inc. ........................................................ United States 481,500 12,947,535
(a) Pfizer Inc., Mar. 25.00 Puts, 3/18/05 .............................. United States 2,685 187,950
Takeda Pharmaceutical Co. Ltd. ..................................... Japan 732,680 36,912,993
Wyeth .............................................................. United States 605,500 25,788,245
Yamanouchi Pharmaceutical Co. Ltd. ................................. Japan 47,500 1,850,469
------------
98,394,676
------------

REAL ESTATE 3.0%
(a) Alexander's Inc .................................................... United States 38,800 8,342,000
(a) Canary Wharf Group PLC ............................................. United Kingdom 10,069,634 57,211,633
Homebanc Corp. ..................................................... United States 2,117,968 20,501,930
iStar Financial Inc. ............................................... United States 932,800 42,218,528
(a),(c) Security Capital European Realty ................................... Luxembourg 20,244 145,757
St. Joe Co. ........................................................ United States 400,698 25,724,812
Ventas Inc. ........................................................ United States 608,900 16,689,949
------------
170,834,609
------------

Annual Report | 23

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
ROAD & RAIL 1.8%
CSX Corp. .......................................................... United States 474,500 $ 19,017,960
(c),(d) Florida East Coast Industries Inc. ................................. United States 1,967,636 84,303,364
-------------
103,321,324
-------------

SOFTWARE .9%
Nintendo Co. Ltd. .................................................. Japan 336,200 42,246,573
(a),(n) Symantec Corp ...................................................... United States 167,600 4,317,376
(a),(n) Veritas Software Corp. ............................................. United States 168,800 4,819,240
-------------
51,383,189
-------------

THRIFTS & MORTGAGE FINANCE .7%
Astoria Financial Corp ............................................. United States 346,145 13,835,416
First Niagara Financial Group Inc. ................................. United States 535,650 7,472,317
Hudson City Bancorp Inc. ........................................... United States 471,830 17,372,781
-------------
38,680,514
-------------

TOBACCO 9.5%
Altadis SA ......................................................... Spain 3,686,149 168,570,837
Altria Group Inc. .................................................. United States 1,182,459 72,248,245
British American Tobacco PLC ....................................... United Kingdom 6,316,228 108,810,600
British American Tobacco PLC, ADR .................................. United Kingdom 40,400 1,399,860
Imperial Tobacco Group PLC ......................................... United Kingdom 3,009,443 82,430,711
KT & G Corp. ....................................................... South Korea 204,000 6,099,111
KT & G Corp., GDR, 144A ............................................ South Korea 1,579,000 23,211,300
Reynolds American Inc. ............................................. United States 947,800 74,497,080
-------------
537,267,744
-------------

WIRELESS TELECOMMUNICATION SERVICES
(a) Vast Solutions Inc., B1 ............................................ United States 43,358 --
(a) Vast Solutions Inc., B2 ............................................ United States 43,358 --
(a) Vast Solutions Inc., B3 ............................................ United States 43,358 --
-------------
--
-------------

TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $2,594,931,357) ............................................. 4,305,669,443
-------------

PREFERRED STOCKS .8%
DIVERSIFIED TELECOMMUNICATION SERVICES
PTV Inc., 10.00%, A, pfd. .......................................... United Kingdom 114,246 517,535
-------------

ELECTRIC UTILITIES
(a) Montana Power Co., 8.45%, pfd. ..................................... United States 58,900 485,925
-------------

FOOD PRODUCTS .1%
Unilever NV, pfd. .................................................. Netherlands 606,458 4,123,045
-------------

METALS & MINING .3%
(a),(d),(e) Esmark Inc., Series A, 10.00%, cvt. pfd. ........................... United States 19,151 19,151,400
-------------

REAL ESTATE .4%
Istar Financial Inc., 7.80%, pfd. .................................. United States 770,100 20,022,600
-------------
TOTAL PREFERRED STOCKS (COST $43,163,186) .......................... 44,300,505
-------------

24 | Annual Report

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
COUNTRY AMOUNT(g) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

CORPORATE BONDS & NOTES 1.6%
Anchor Resources LLC, 12.00%, 12/17/06 ............................. United States $ 32,368 $ 32,368
Calpine Generating Co., 144A, FRN, 11.169%, 4/01/11 ................ United States 10,441,000 10,258,282
Eurotunnel PLC,
FRN, 6.347%, 12/31/18, Tier 2 .................................... United Kingdom 7,592,095 GBP 10,492,357
FRN, 6.347%, 12/31/25, Tier 3 .................................... United Kingdom 28,404,485 GBP 22,898,929
Participating Loan Note, 1.00%, 4/30/40 .......................... United Kingdom 858,000 GBP 189,393
Eurotunnel SA, FRN,
3.449%, 12/31/18, Tier 2 (LIBOR) ................................. France 1,880,987 EUR 1,837,798
3.449%, 12/31/25, Tier 3 (LIBOR) ................................. France 20,347,101 EUR 11,596,622
3.453%, 12/31/18, Tier 2 (PIBOR) ................................. France 832,034 EUR 812,930
3.453%, 12/31/25, Tier 3 (PIBOR) ................................. France 1,048,320 EUR 597,479
Guadalupe Power Partners LP,
Power Sale Agreement, 6.00%, 9/21/06 ............................. United States 203,900 179,432
Term Loan, 4.313%, 9/21/06 ....................................... United States 1,506,803 1,325,986
Motor Coach Industries International Inc., FRN,
15.40%, 10/01/08 ................................................. United States 27,558,237 27,558,237
Reliant Energy Channelview LP Inc.,
Revolver, 5.50%, 8/15/07 ......................................... United States 342,900 291,465
Term Loan A, 3.813%, 11/26/17 .................................... United States 3,619,627 3,076,683
TVMAX Holdings Inc., PIK,
11.50%, 6/30/05 .................................................. United States 152,342 152,342
14.00%, 6/30/05 .................................................. United States 561,804 561,804
------------
TOTAL CORPORATE BONDS & NOTES (COST $96,482,682) ................... 91,862,107
------------

BONDS & NOTES IN REORGANIZATION 2.7%
(a),(h) Adelphia Communications Corp.,
9.25%, 10/01/02 .................................................. United States 3,244,000 3,122,350
8.125%, 7/15/03 .................................................. United States 825,000 779,625
7.50%, 1/15/04 ................................................... United States 2,160,000 2,008,800
10.50%, 7/15/04 .................................................. United States 3,375,000 3,341,250
9.875%, 3/01/05 .................................................. United States 1,304,000 1,255,100
10.25%, 11/01/06 ................................................. United States 4,751,000 4,644,102
9.875%, 3/01/07 .................................................. United States 187,000 179,987
8.375%, 2/01/08 .................................................. United States 4,959,000 4,698,652
7.75%, 1/15/09 ................................................... United States 5,790,000 5,442,600
7.875%, 5/01/09 .................................................. United States 4,398,000 4,112,130
9.375%, 11/15/09 ................................................. United States 959,000 951,807
10.875%, 10/01/10 ................................................ United States 3,621,000 3,602,895
(a),(h) Aiken Cnty S C Indl Rev Beloit, 6.00%, 12/01/11 .................... United States 420,000 2,100
(a),(h) Armstrong Holdings Inc.,
6.50%, 8/15/05 ................................................... United States 1,046,000 760,965
9.75%, 4/15/08 ................................................... United States 1,953,000 1,420,807
Revolver, 10/29/03 ............................................... United States 1,880,775 1,297,735
Trade Claim ...................................................... United States 5,042,800 3,529,960
(a),(h) Century Communications Corp.,
9.50%, 3/01/05 ................................................... United States 1,023,000 1,242,945
8.875%, 1/15/07 .................................................. United States 1,275,000 1,536,375
8.75%, 10/01/07 .................................................. United States 1,889,000 2,229,020
8.375%, 12/15/07 ................................................. United States 500,000 597,500

Annual Report | 25

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

BONDS & NOTES IN REORGANIZATION (CONT.)
(a),(h) Century Communications Corp., (cont.)
Series B, zero cpn., 1/15/08 ..................................... United States $ 3,405,000 $ 2,400,525
zero cpn., 3/15/03 ............................................... United States 7,710,000 8,211,150
(h) DecisionOne Corp., Term Loan ....................................... United States 8,374,702 2,093,676
(a),(h) Harnischfeger Industries Inc.,
8.90%, 3/01/22 ................................................... United States 3,775,000 35,108
8.70%, 6/15/22 ................................................... United States 3,460,000 32,870
7.25%, 12/15/25 .................................................. United States 5,165,000 48,551
6.875%, 2/15/27 .................................................. United States 4,430,000 40,756
Stipulated Bank Claim ............................................ United States 5,708,150 51,944
(a),(h) Mirant Americas Generation Inc.,
7.625%, 5/01/06 .................................................. United States 863,000 932,040
8.30%, 5/01/11 ................................................... United States 4,134,000 4,392,375
9.125%, 5/01/31 .................................................. United States 3,137,000 3,286,008
(a),(h) Mirant Corp.,
Tranche C Revolver ............................................... United States 7,016,181 4,841,165
4 Year Revolver, 7/17/05 ......................................... United States 4,474,363 3,378,144
364 Day Revolver ................................................. United States 11,868,000 8,248,260
(a),(h) Owens Corning, Revolver ............................................ United States 31,524,863 28,057,128
(a),(h) Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17 ............ United States 225,000 1,125
(a),(h) Safety Kleen Services, 9.25%, 6/01/08 .............................. United States 50,000 188
(a),(h) Teco Panda,
Bank Claim ....................................................... United States 1,804,200 1,082,520
Bank Claim #2 .................................................... United States 14,519,100 9,147,033
Bank Claim #3 .................................................... United States 82,705 82,705
Debt Service Reserve L/C Loan .................................... United States 488,400 307,692
Project L/C Loan Facility ........................................ United States 1,995,490 1,257,159
(h) Trump Atlantic,
11.25%, 5/01/06 .................................................. United States 20,273,000 19,436,739
Series B, 11.25%, 5/01/06 ........................................ United States 5,945,000 5,699,769
Series B, 144A, 11.25%, 5/01/06 .................................. United States 369,000 353,779
------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $129,375,220) .......... 150,175,114
------------

----------------
SHARES/PRINCIPAL
AMOUNT(G)
----------------

COMPANIES IN LIQUIDATION
(a) Brunos Inc., Liquidating Unit ...................................... United States 62,735 138,017
(a) City Investing Co. Liquidating Trust ............................... United States 423,187 816,751
(a) Eli Jacobs, bank claim ............................................. United States 25,305,910 136,652
(a) MBOP Liquidating Trust ............................................. United States 205,135 513
(a) United Cos. Financial Corp.,
Bank Claim ....................................................... United States 112,077 --
Revolver ......................................................... United States 28,431,827 --
------------
TOTAL COMPANIES IN LIQUIDATION (COST $145,071) ..................... 1,091,933
------------

26 | Annual Report

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

GOVERNMENT AGENCIES 19.2%
(i) Federal Home Loan Bank, 1.000% - 2.846%, 1/03/05 - 11/17/05 ........ United States $1,021,478,000 $1,014,853,209
Federal Home Loan Mortgage Corp., 2.50%, 5/19/06 ................... United States 10,000,000 9,919,330
Federal National Mortgage Association, 1.44% - 2.20%,
6/01/05 - 12/29/06 ............................................... United States 43,375,000 42,788,451
U.S. Treasury Bills, 1.895% - 2.527%, 2/24/05 - 6/30/05 ............ United States 22,000,000 21,825,118
--------------
TOTAL GOVERNMENT AGENCIES (COST $1,091,882,612) .................... 1,089,386,108
--------------

TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $3,955,980,128) ............................................ 5,682,485,210
--------------

REPURCHASE AGREEMENTS
(j),(k) Bank of America LLC, 2.32%, 1/03/05 (Maturity Value $6,001)
Collateralized by U.S. Gov't Agency Securities,
3.929-6.50%, 11/1/17-12/1/34 ..................................... United States 6,000 6,000
(j),(k) Barclays Capital Inc., 2.25%, 1/03/05 (Maturity Value $10,003)
Collateralized by U.S. Gov't Agency Securities,
0.00-7.00%, 3/21/05-8/15/19 ...................................... United States 10,001 10,001
(j),(k) Bear Stearns & Co. 2.25%, 1/03/05 (Maturity Value $10,003)
Collateralized by U.S. Gov't Agency Securities,
0.00-8.625%, 1/11/05-3/18/33 ..................................... United States 10,001 10,001
(j),(k) Deutche Bank Securities Inc., 2.25%, 1/03/05
(Maturity Value $10,003) Collateralized by U.S. Gov't Agency
Securities, 0.00-4.45%, 8/19/05-8/27/10 .......................... United States 10,001 10,001
(j),(k) JP Morgan Securities, 2.19%, 1/03/05 (Maturity Value $10,003)
Collateralized by U.S. Gov't Agency Securities,
2.00-7.125%, 1/15/06-7/15/32 ..................................... United States 10,001 10,001
(j),(k) Morgan Stanley & Co. Inc., 2.30%, 1/03/05
(Maturity Value $10,003) Collateralized by U.S. Gov't Agency
Securities, 4.00-8.00%, 7/1/08-1/1/35 ............................ United States 10,001 10,001
--------------
TOTAL REPURCHASE AGREEMENTS (COST $56,005) ......................... 56,005
--------------
TOTAL INVESTMENTS (COST $3,956,036,133) 100.3% ..................... 5,682,541,215
OPTIONS WRITTEN .................................................... (107,904)
SECURITIES SOLD SHORT (.8)% ........................................ (44,521,228)
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS (1.0)% ........... (55,442,584)
OTHER ASSETS, LESS LIABILITIES 1.5% ................................ 84,706,211
--------------
NET ASSETS 100.0% .................................................. $5,667,175,710
==============

Annual Report | 27

MUTUAL BEACON FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

OPTIONS WRITTEN
ISSUER
HEALTH CARE EQUIPMENT & SUPPLIES
(l) Guidant Corp., Jan. 70.00 Calls, 01/21/05 .......................... United States 181 $ 42,535
--------------
SOFTWARE
(l) Symantec Corp., Jan. 25.00 Calls, 1/21/05 .......................... United States 254 38,100
(l) Symantec Corp., Jan. 27.50 Calls, 1/21/05 .......................... United States 169 6,929
(l) Veritas Software Corp., Jan. 30.00 Calls, 1/21/05 .................. United States 339 20,340
--------------
65,369
--------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $113,289) ................. $ 107,904
--------------

--------------
SHARES
--------------

SECURITIES SOLD SHORT .8%
ISSUER
COMMUNICATIONS EQUIPMENT
(m) Tellabs Inc ........................................................ United States 78,092 670,810
--------------

DIVERSIFIED FINANCIAL SERVICES .1%
(m) Nasdaq 100 ......................................................... United States 179,200 7,153,664
--------------

FOOD PRODUCTS .5%
(m) Kraft Foods Inc., A ................................................ United States 776,718 27,658,928
--------------

HOTELS RESTAURANTS & LEISURE .1%
(m) Harrah's Entertainment Inc. ........................................ United States 77,630 5,192,671
--------------

PHARMACEUTICALS .1%
(m) Johnson & Johnson .................................................. United States 60,630 3,845,155
--------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $41,532,212) ................. $ 44,521,228
--------------

CURRENCY ABBREVIATIONS: | EUR - Euro | GBP - British Pound

(a) Non-income producing.

(b) Contingent Distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.

(d) See Note 11 regarding holdings of 5% voting securities.

(e) See Note 12 regarding other considerations.

(f) Security on loan. See Note 1(i).

(g) The principal amount is stated in U.S. dollars unless otherwise indicated.

(h) Defaulted securities. See Note 9.

(i) See Note 1(h) regarding securities segregated with broker for securities
sold short.

(j) Investments from cash collateral received for loaned securities. See Note
1(i).

(k) See Note 1(c) regarding repurchase agreements.

(l) See Note 1(g) regarding written options.

(m) See Note 1(h) regarding securities sold short.

(n) A portion of the security held in connection with open option contracts.

28 | See notes to financial statements. | Annual Report

MUTUAL BEACON FUND

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2004

Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................................. $ 3,852,682,878
Cost - Non-controlled affiliated issuers (Note 11) .......................... 99,874,939
Cost - Controlled affiliates (Note 11) ...................................... 3,422,311
Cost - Repurchase agreements ................................................ 56,005
---------------
Total cost of investments ................................................... 3,956,036,133
===============
Value - Unaffiliated issuers (includes securities segregated with broker for
securities sold short in the amount of $24,555,375) ........................ 5,528,149,558
Value - Non-controlled affiliated issuers (Note 11) ......................... 151,108,901
Value - Controlled affiliates (Note 11) ..................................... 3,226,751
Value - Repurchase agreements ............................................... 56,005
---------------
Total value of investments .................................................. 5,682,541,215
Cash ......................................................................... 12,414,391
Foreign currency, at value (cost $10,340,096) ................................ 12,148,712
Receivables:
Investment securities sold .................................................. 25,531,371
Capital shares sold ......................................................... 3,362,102
Dividends and interest ...................................................... 12,968,049
Unrealized gain on forward exchange contracts (Note 8) ....................... 1,681,028
Due from broker - synthetic equity swaps ..................................... 1,048,568
Cash on deposit with brokers for securities sold short ....................... 44,952,783
---------------
Total assets ........................................................... 5,796,648,219
---------------
Liabilities:
Payables:
Investment securities purchased ............................................. 9,220,270
Capital shares redeemed ..................................................... 13,138,636
Affiliates .................................................................. 5,013,796
Options written, at value (premiums received $113,289) ....................... 107,904
Securities sold short, at value (proceeds $41,532,212) ....................... 44,521,228
Payable upon return of securities loaned ..................................... 56,005
Unrealized loss on forward exchange contracts (Note 8) ....................... 57,123,612
Other liabilities ............................................................ 291,058
---------------
Total liabilities ...................................................... 129,472,509
---------------
Net assets, at value ................................................. $ 5,667,175,710
===============
Net assets consist of:
Distributions in excess of net investment income ............................. $ (12,838,004)
Net unrealized appreciation (depreciation) ................................... 1,670,432,172
Accumulated net realized gain (loss) ......................................... 80,135,742
Capital shares ............................................................... 3,929,445,800
---------------
Net assets, at value ................................................. $ 5,667,175,710
===============

Annual Report | See notes to financial statements. | 29

MUTUAL BEACON FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2004

CLASS Z:
Net assets, at value ......................................................... $ 3,359,388,929
===============
Shares outstanding ........................................................... 210,815,754
===============
Net asset value and maximum offering price per share(a) ...................... $ 15.94
===============
CLASS A:
Net assets, at value ......................................................... $ 1,462,133,389
===============
Shares outstanding ........................................................... 92,128,035
===============
Net asset value per share(a) ................................................. $ 15.87
===============
Maximum offering price per share (net asset value per share / 94.25%)......... $ 16.84
===============
CLASS B:
Net assets, at value ......................................................... $ 186,840,161
===============
Shares outstanding ........................................................... 12,021,141
===============
Net asset value and maximum offering price per share(a) ...................... $ 15.54
===============
CLASS C:
Net assets, at value ......................................................... $ 658,813,231
===============
Shares outstanding ........................................................... 41,784,988
===============
Net asset value and maximum offering price per share(a) ...................... $ 15.77
===============

(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.

30 | See notes to financial statements. | Annual Report

MUTUAL BEACON FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended December 31, 2004

Investment income:
Dividends: (net of foreign taxes of $6,173,377)
Unaffiliated issuers ........................................................ $ 95,732,358
Non-controlled affiliated issuers (Note 11) ................................. 571,280
Interest ..................................................................... 52,867,755
---------------
Total investment income ................................................. 149,171,393
---------------
Expenses:
Management fees (Note 3) ..................................................... 31,706,865
Administrative fees (Note 3) ................................................. 4,079,418
Distribution fees (Note 3)
Class A ..................................................................... 4,758,171
Class B ..................................................................... 1,676,046
Class C ..................................................................... 6,042,018
Transfer agent fees (Note 3) ................................................. 5,764,200
Custodian fees (Note 4) ...................................................... 443,700
Reports to shareholders ...................................................... 216,500
Registration and filing fees ................................................. 176,763
Professional fees ............................................................ 427,485
Directors' fees and expenses ................................................. 139,900
Dividends on securities sold short ........................................... 728,423
Other ........................................................................ 221,237
---------------
Total expenses .......................................................... 56,380,726
Expense reductions (Note 4) ............................................. (25,392)
---------------
Net expenses .......................................................... 56,355,334
---------------
Net investment income ............................................... 92,816,059
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from :
Investments:
Unaffiliated issuers ....................................................... 336,310,054
Non-controlled affiliated issuers (Note 11) ................................ 1,037,765
Written options ............................................................. 854,334
Foreign currency transactions ............................................... (103,206,358)
Securities sold short ....................................................... (2,365,541)
---------------
Net realized gain (loss) ................................................ 232,630,254
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................. 375,655,289
Translation of assets and liabilities denominated in foreign currencies ..... 11,661,121
---------------
Net change in unrealized appreciation (depreciation) .................... 387,316,410
---------------
Net realized and unrealized gain (loss) ...................................... 619,946,664
---------------
Net increase (decrease) in net assets resulting from operations .............. $ 712,762,723
===============

Annual Report | See notes to financial statements. | 31

MUTUAL BEACON FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 2004 and 2003

---------------------------------
2004 2003
---------------------------------

Increase (decrease) in net assets:
Operations:
Net investment income .................................................................... $ 92,816,059 $ 55,284,747
Net realized gain (loss) from investments, written options, foreign currency transactions,
and securities sold short ............................................................. 232,630,254 22,660,560
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies ................ 387,316,410 1,087,534,740
---------------------------------
Net increase (decrease) in net assets resulting from operations ..................... 712,762,723 1,165,480,047
Distributions to shareholders from:
Net investment income:
Class Z ............................................................................... (77,913,804) (50,293,581)
Class A ............................................................................... (29,186,869) (16,775,978)
Class B ............................................................................... (2,726,902) (1,221,776)
Class C ............................................................................... (9,336,828) (4,420,080)
Net realized gains:
Class Z ............................................................................... (30,107,862) --
Class A ............................................................................... (13,165,077) --
Class B ............................................................................... (1,717,371) --
Class C ............................................................................... (5,979,789) --
---------------------------------
Total distributions to shareholders ........................................................ (170,134,502) (72,711,415)
Capital share transactions: (Note 2)
Class Z ............................................................................... (76,914,860) (133,826,403)
Class A ............................................................................... 21,294,207 115,460,107
Class B ............................................................................... 13,963,459 24,317,663
Class C ............................................................................... 16,973,359 15,436,107
---------------------------------
Total capital share transactions ........................................................... (24,683,835) 21,387,474
Redemption fees ............................................................................ 2,731 --
---------------------------------
Net increase (decrease) in net assets ............................................... 517,947,117 1,114,156,106
Net assets
Beginning of year .......................................................................... 5,149,228,593 4,035,072,487
---------------------------------
End of year ................................................................................ $ 5,667,175,710 $ 5,149,228,593
=================================
Distributions in excess of net investment income/undistributed net investment
income included in net assets:
End of year ................................................................................ $ (12,838,004) $ 8,284,651
=================================

32 | See notes to financial statements. | Annual Report

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mutual Beacon Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), consisting of 6 separate series. The
Company is an open-end investment company registered under the Investment
Company Act of 1940. The financial statements of the remaining funds in the
Series are presented separately. The Fund seeks capital appreciation, with
income as a secondary objective, by investing primarily in common and preferred
stocks, bonds, and convertible securities in the U.S. and other countries. The
following summarizes the Fund's significant accounting policies.

A. SECURITY VALUATION

Securities listed on a securities exchange or on the NASDAQ National Market
System, are valued at the last quoted sale price or the official closing price
of the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Repurchase agreements are valued at cost.

Corporate debt securities and U.S. Government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.

Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at the close of the NYSE on the day that the
value of the foreign security is determined. If no sale is reported at that
time, the foreign security will be valued within the range of the most recent
quoted bid and ask prices.

Annual Report | 33

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A. SECURITY VALUATION (CONTINUED)

The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Occasionally, events occur between the
time at which trading in a security is completed and the close of the NYSE that
might call into question the availability (including the reliability) of the
value of a portfolio security held by the Fund. If such an event occurs, the
securities may be valued using fair value procedures, which may include the use
of independent pricing services. All security valuation procedures are approved
by the Fund's Board of Directors.

B. FOREIGN CURRENCY TRANSLATION

Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.

The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.

C. REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements, which are accounted for as a loan
by the Fund to the seller, collateralized by securities which are delivered to
the Fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Funds, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. At December 31, 2004, all
repurchase agreements held by the Fund had been entered into on that date.

34 | Annual Report

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS

The Fund may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Fund will generally purchase these securities with the intention of holding the
securities, it may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.

E. FOREIGN CURRENCY CONTRACTS

The Fund may enter into forward exchange contracts to hedge against fluctuations
in foreign exchange rates. A forward exchange contract is an agreement between
two parties to exchange different currencies at an agreed upon exchange rate at
a future date. These contracts are valued daily by the Fund and any equity
therein is included in the Statement of Assets and Liabilities. Realized and
unrealized gains and losses on these contracts are included in the Statement of
Operations.

When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. Realized and unrealized gains and losses on
these contracts are included in the Statement of Operations.

The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.

F. SYNTHETIC EQUITY SWAPS

The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or sale of the underlying security
taken place. Upon entering into synthetic equity swaps, the Fund is required to
pledge to the broker an amount of cash and/or other assets equal to a certain
percentage of the contract amount ("initial margin"). Subsequent payments known
as "variation margin", are made or received by the Fund periodically, depending
on fluctuations in the value of the underlying security. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the time it
was closed. The risks of entering into synthetic equity swaps include
unfavorable price movements in the underlying securities or the inability of the
counterparties to fulfill their obligations under the contract.

Annual Report | 35

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

G. OPTION CONTRACTS

The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.

H. SECURITIES SOLD SHORT

The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.

The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.

I. SECURITIES LENDING

The Fund loans securities to certain brokers through a securities lending agent
for which it received cash collateral against the loaned securities in an amount
equal to at least 102% of the market value of the loaned securities. The
collateral is invested in short-term instruments as noted in the Statement of
Investments. The Fund received interest income of $47,170 from the investment of
cash collateral, adjusted by lender fees and broker rebates. The Fund bears the
risk of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the Fund in the
case of default of any securities borrower.

36 | Annual Report

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J. INCOME TAXES

No provision has been made for U.S. income taxes because the Fund's policy is to
qualify as a regulated investment company under Sub Chapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.

K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS

Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Dividend income, dividends declared on securities sold short, and
distributions to shareholders are recorded on the ex-dividend date.

Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.

Common expenses incurred by the Series Fund are allocated among the Funds based
on the ratio of net assets of each Fund to the combined net assets. Other
expenses are charged to each Fund on a specific identification basis.

L. ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.

M. REDEMPTION FEES

Effective June 1, 2004, redemptions and exchanges of Fund shares held five
trading days or less may be subject to the Fund's redemption fee, which is 2% of
the amount redeemed. Such fees are retained by the Fund and accounted for as
additional paid-in capital as noted in the Statements of Changes in Net Assets.

Annual Report | 37

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

N. GUARANTEES AND INDEMNIFICATIONS

Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liability arising out of the performance
of their duties to the Fund. Additionally, in the normal course of business, the
Fund enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.

2. CAPITAL STOCK

The Fund offers five classes of shares: Class Z, Class A, Class B, Class C and
Class R. Effective March 1, 2005, Class B shares will no longer be offered
except to existing Class B shareholders through reinvested distributions or
exchanges into other Franklin Templeton funds' Class B shares, as permitted by
the applicable fund prospectus. Each class of shares differs by its initial
sales load, contingent deferred sales charges, distribution fees, voting rights
on matters affecting a single class and its exchange privilege.

At December 31, 2004, there were 1.55 billion shares authorized ($0.001 par
value) of which 750 million, 300 million, 200 million, and 300 million were
designated as Class Z, Class A, Class B, and Class C shares, respectively.
Transactions in the Fund's shares were as follows:

--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2004 2003
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------

CLASS Z SHARES:
Shares sold .................... 9,311,423 $ 138,383,364 10,838,451 $ 134,762,381
Shares issued in reinvestment of
distributions ................ 6,402,049 98,844,650 3,412,886 45,700,241
Shares redeemed ................ (21,085,193) (314,142,874) (25,512,048) (314,289,025)
--------------------------------------------------------------
Net increase (decrease) ........ (5,371,721) $ (76,914,860) (11,260,711) $(133,826,403)
==============================================================
CLASS A SHARES:
Shares sold .................... 17,626,495 $ 260,036,176 22,121,507 $ 273,306,831
Shares issued in reinvestment of
distributions ................ 2,612,744 40,150,928 1,202,510 15,931,792
Shares redeemed ................ (18,863,471) (278,892,897) (14,091,787) (173,778,516)
--------------------------------------------------------------
Net increase (decrease) ........ 1,375,768 $ 21,294,207 9,232,230 $ 115,460,107
==============================================================
CLASS B SHARES:
Shares sold .................... 1,843,917 $ 26,599,867 2,993,364 $ 35,998,720
Shares issued in reinvestment of
distributions ................ 273,719 4,112,587 90,069 1,135,983
Shares redeemed ................ (1,158,155) (16,748,995) (1,089,762) (12,817,040)
--------------------------------------------------------------
Net increase (decrease) ........ 959,481 $ 13,963,459 1,993,671 $ 24,317,663
==============================================================

38 | Annual Report

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. CAPITAL STOCK (CONTINUED)

CLASS C SHARES:
Shares sold .................... 6,114,281 $ 89,688,362 6,809,888 $ 83,970,999
Shares issued in reinvestment of
distributions ................ 908,460 13,841,462 316,168 4,009,329
Shares redeemed ................ (5,908,416) (86,556,465) (6,010,932) (72,544,221)
--------------------------------------------------------------
Net increase (decrease) ........ 1,114,325 $ 16,973,359 1,115,124 $ 15,436,107
==============================================================

3. TRANSACTIONS WITH AFFILIATES

Certain officers of the Fund are also officers and/or directors of the following
entities:

- -------------------------------------------------------------------------------------
ENTITY AFFILIATION
- -------------------------------------------------------------------------------------

Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent

A. MANAGEMENT FEES

Effective July 1, 2004, the Fund pays an investment management fee to Franklin
Mutual based on the average daily net assets of the Fund as follows:

- ----------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ----------------------------------------------------------------------
0.600% First $5 billion
0.570% Over $5 billion, up to and including $7 billion
0.550% Over $7 billion, up to and including $10 billion
0.540% Over $10 billion

Prior to July 1, 2004, the Fund paid fees of 0.60% per year of the average daily
net assets of the Fund.

B. ADMINISTRATIVE FEES

The Fund pays its allocated share of an administrative fee to FT Services based
on the Fund's aggregate average daily net assets as follows:

- --------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------
0.150% First $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion

Annual Report | 39

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

C. DISTRIBUTION FEES

The Fund reimburses Distributors up to 0.35%, 1.00%, and 1.00% per year of the
average daily net assets of Class A, Class B, and Class C, respectively, for
costs incurred in marketing the Fund's shares under a Rule 12b-1 plan. Under the
Class A distribution plan, costs exceeding the maximum for the current plan year
cannot be reimbursed in subsequent periods.

D. SALES CHARGES/UNDERWRITING AGREEMENTS

Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:

Net sales charges received.............................. $ 425,013
Contingent deferred sales charges retained.............. $ 311,416

E. TRANSFER AGENT FEES

The Fund paid transfer agent fees of $5,764,200, of which $3,823,542, was paid
to Investor Services.

4. EXPENSE OFFSET ARRANGEMENT

The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2004, the
custodian fees were reduced as noted in the Statement of Operations.

5. INCOME TAXES

Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, bond discounts and
premiums, and certain dividends on securities sold short.

Net realized gains differ for financial statement and tax purposes primarily due
to differing treatments of wash sales, foreign currency transactions, passive
foreign investment company shares, bond discounts and premiums, and certain
dividends on securities sold short.

40 | Annual Report

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES (CONTINUED)

At December 31, 2004, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:

Cost of investments .................................. $ 3,980,847,410
===============
Unrealized appreciation .............................. $ 1,762,750,280
Unrealized depreciation .............................. (61,056,475)
---------------
Net unrealized appreciation (depreciation) ........... $ 1,701,693,805
===============

Undistributed ordinary income ........................ $ 6,959,551
Undistributed long term capital gains ................ 44,453,846
---------------
Distributable earnings ............................... $ 51,413,397
===============

The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:

---------------------------
2004 2003
---------------------------
Distributions paid from:
Ordinary income ......................... $ 119,164,403 $ 72,711,415
Long term capital gain .................. 50,970,099 --
---------------------------
$ 170,134,502 $ 72,711,415
---------------------------

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short-term securities and
securities sold short) for the year ended December 31, 2004 aggregated
$1,320,896,467 and $1,566,051,985, respectively.

Transactions in options written during the year ended December 31, 2004 were as
follows:

---------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------------------------
Options outstanding at
December 31, 2003 ....................... 1,349,370 $ 337,343
Options written .......................... 18,663 1,562,296
Options expired .......................... (10,116) (646,019)
Options exercised ........................ (1,354,528) (695,439)
Options closed ........................... (2,446) (444,892)
---------------------------
Options outstanding at
December 31, 2004 ....................... 943 $ 113,289
===========================

Annual Report | 41

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. SYNTHETIC EQUITY SWAPS

As of December 31, 2004, the Fund had the following synthetic equity swaps
outstanding:

- ---------------------------------------------------------------------------------------------------------
NUMBER OF UNREALIZED
CONTRACTS TO BUY CONTRACTS VALUE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------

Christian Dior SA (47.22 - 55.43 EUR) ................ 82,441 $ 5,599,213 $ 50,834
----------
Total contracts to buy ............................... $ 50,834
----------

- ---------------------------------------------------------------------------------------------------------
NUMBER OF UNREALIZED
CONTRACTS TO SELL CONTRACTS VALUE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------

LVMH Moet Hennessy Louis Vuitton (54.65 - 61.76 EUR) . 79,946 $ 6,113,224 $ 331,038
----------
Total contracts to sell ................................................................ 331,038
----------
Net unrealized gain (loss) ............................................................. $ 381,872
==========

8. FORWARD EXCHANGE CONTRACTS

At December 31, 2004, the Fund has outstanding forward exchange contracts as set
out below. The contracts are reported in the financial statements at the Fund's
net equity, as measured by the difference between the forward exchange rates at
the reporting date and the forward exchange rates at the day of entry into the
contracts.

- ---------------------------------------------------------------------------------------------------------
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY EXCHANGE FOR DATE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------

30,272,722 Canadian Dollars .................. U.S. $ 25,100,000 4/21/05 U.S. $ 138,555
------------- ----------

- ---------------------------------------------------------------------------------------------------------
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR DATE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------

1,900,000 British Pounds .................... U.S. $ 3,649,387 2/10/05 U.S. $ 12,599
1,700,000 Euro .............................. 2,314,720 2/23/05 6,675
33,775,000 British Pounds .................... 64,850,929 3/21/05 341,064
67,400,000 British Pounds .................... 129,410,012 6/08/05 1,180,737
673,725,000 Korean Won ........................ 650,000 6/17/05 1,398
------------- ----------
U.S. $ 200,875,048 1,542,473
============= ----------
Unrealized gain on forward exchange contracts ................................ U.S. $1,681,028
==========

42 | Annual Report

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS (CONTINUED)

- -----------------------------------------------------------------------------------------------------------
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY EXCHANGE FOR DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------

22,000,000 South African Rand ................ U.S. $ 3,891,285 1/26/05 U.S. $ (23,028)
14,860,938 Canadian Dollars .................. 12,500,000 4/21/05 (110,344)
------------- ------------
U.S. $ 16,391,285 U.S. $ (133,372)
============= ============

- -----------------------------------------------------------------------------------------------------------
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------

123,686,730 Canadian Dollars .................. U.S. $ 94,111,155 1/21/05 U.S. $ (9,003,140)
393,136,701 South African Rand ................ 62,086,884 1/26/05 (7,038,281)
51,850,000 British Pounds .................... 95,742,590 2/10/05 (3,503,447)
13,300,000 Euro .............................. 16,582,839 2/23/05 (1,474,221)
635,303,036 Danish Krona ...................... 103,835,559 3/17/05 (12,135,367)
7,934,564,068 Japanese Yen ...................... 72,569,145 3/28/05 (5,376,246)
54,156,980 Canadian Dollars .................. 41,246,383 4/21/05 (3,904,626)
41,122,677 Euro .............................. 51,910,292 4/25/05 (3,978,477)
17,300,000 Euro .............................. 21,412,553 5/23/05 (2,112,859)
15,900,000 Euro .............................. 21,179,436 6/13/05 (451,451)
17,543,384,965 Korean Won ........................ 16,725,000 6/17/05 (201,580)
27,000,000 Euro .............................. 34,095,600 7/25/05 (2,670,063)
12,500,000 Euro .............................. 15,452,812 8/23/05 (1,579,687)
16,700,000 Euro .............................. 20,340,600 9/13/05 (2,425,822)
------------- ------------
U.S. $ 667,290,848 (55,855,267)
============= ------------
Net unrealized loss on offsetting forward exchange contracts .......................... (1,134,973)
------------
Unrealized loss on forward exchange contracts ...................................... (57,123,612)
------------
Net unrealized loss on forward exchange contracts ............................... U.S. $(55,442,584)
============

Annual Report | 43

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. CREDIT RISK AND DEFAULTED SECURITIES

The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At December 31, 2004, the value of these
securities was $150,175,114, representing 2.65% of the Fund's net assets. For
information as to specific securities, see the accompanying Statement of
Investments.

10. RESTRICTED SECURITIES

At December 31, 2004, investments in securities included issues that are
restricted and illiquid. Restricted securities are often purchased in private
placement transactions, are not registered under the Securities Act of 1933, may
have contractual restrictions on resale, and are valued under methods approved
by the Board of Directors as reflecting fair value. A security may also be
considered illiquid if it lacks a readily available market or if its valuation
has not changed for a certain period of time. At December 31, 2004, the Fund
held investments in restricted and illiquid securities that were valued under
approved methods by the Directors, as follows:

- -----------------------------------------------------------------------------------------------------
SHARES/ ACQUISITION
WARRANTS ISSUER DATE COST VALUE
- -----------------------------------------------------------------------------------------------------

439,477 AboveNet Inc ........................... 10/01/03 $20,497,153 $ 10,531,363
14,770 AboveNet Inc., wts., 9/08/08 ........... 10/02/03 3,420,472 94,528
17,376 AboveNet Inc., wts., 9/08/10 ........... 10/02/03 1,972,095 69,504
13,981 FE Capital Holdings Ltd ................ 8/29/03 13,985,422 18,594,719
1,967,636 Florida East Coast Industries Inc ...... 7/15/04 46,735,956 84,303,364
3,546,660 International Steel Group .............. 4/25/03 17,173,750 136,659,903
1 Lancer Industries Inc., B .............. 8/11/89 -- 287,261
865,040 Leucadia National Corp ................. 12/20/02 30,492,660 57,097,830
511,600 Occum Acquisition Corp ................. 7/27/04 51,160,000 51,160,000
106,700 Olympus Re Holdings Ltd ................ 12/19/01 10,670,000 18,264,906
20,244 Security Capital European Realty ....... 11/08/99 1,108,993 145,757
------------
TOTAL RESTRICTED SECURITIES (6.66% OF NET ASSETS) .................................... $377,209,135
============

44 | Annual Report

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Fund at December 31, 2004 were as shown below.

- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES HELD NUMBER OF
AT BEGINNING GROSS GROSS SHARES HELD VALUE INVESTMENT REALIZED CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS AT END OF YEAR AT END OF YEAR INCOME GAINS/(LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------

CONTROLLED AFFILIATES(a)
PMG, LLC ...................... -- 48,890 -- 48,890 $ 3,226,751 $ -- $ --
----------------------------------------------
NON-CONTROLLED AFFILIATES
Anchor Resources LLC .......... -- 69,184 -- 69,184 $ -- $ -- $ --
Esmark Inc., Series A,
10.00%, cvt. pfd .............. -- 19,151 -- 19,151 19,151,400 -- --
Farmer Brothers Co. ........... 92,236 941,660 -- 1,033,896 25,061,639 374,516 --
FE Capital Holdings Ltd. ...... 13,807 174 -- 13,981 18,594,719 -- --
FHC Delaware Inc. ............. 507,977 -- -- 507,977 3,997,779 -- --
Florida East Coast Industries
Inc ........................... -- 1,967,636 -- 1,967,636 84,303,364 196,764 --
Kindred Healthcare Inc ........ 682,285 682,285 -- 1,364,570 --(b) -- --
Kindred Healthcare Inc Strike
23.75 Expires 7/11/11 Calls ... 1,106 2,190 -- 3,296 --(b) -- --
Kindred Healthcare Inc Strike
26.00 Expires 1/01/12 Calls ... 166 498 -- 664 --(b) -- --
Kindred Healthcare Inc wts,
Series A, 4/20/06 ............. 121,432 -- -- 121,432 --(b) -- --
Kindred Healthcare Inc wts,
Series B, 4/20/07 ............. 303,580 -- -- 303,580 --(b) -- --
Nippon Investment LLC ......... 10,862,000 -- -- 10,862,000 -- -- --
Southwest Royalties Inc. ...... 69,184 -- (69,184) -- --(b) -- 1,037,765
----------------------------------------------
TOTAL NON-CONTROLLED AFFILIATES ................................................... $ 151,108,901 $ 571,280 $ 1,037,765
----------------------------------------------
TOTAL AFFILIATED SECURITIES (2.72% OF NET ASSETS) ................................. $ 154,335,652 $ 571,280 $ 1,037,765
==============================================

(a) Issuer in which the Fund owns 25% or more of the outstanding voting
securities.

(b) As of December 31, 2004, no longer an affiliate.

12. OTHER CONSIDERATIONS

Franklin Mutual, as the Fund's Manager, may serve as a member on the board of
directors of certain companies in which the Fund invests and/or may represent
the Fund in certain corporate negotiations. At December 31, 2004, the Manager
serves in one or more of these capacities for Kindred Healthcare, AboveNet Inc.
and Esmark Inc. As a result of this involvement, the Manager may be in
possession of certain material non-public information which, pursuant to the
Fund's policies and the requirements of the federal securities laws, could
prevent the Fund from trading in the securities of such companies for limited or
extended periods of time.

Annual Report | 45

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. REGULATORY MATTERS

INVESTIGATIONS

As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.

SETTLEMENTS

Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").

On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.

Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.

On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to its administrative complaint filed on February 4,
2004, concerning one instance of market timing that was also a subject of the
August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as
described above.

46 | Annual Report

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. REGULATORY MATTERS (CONTINUED)

SETTLEMENTS (CONTINUED)

Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.

On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.

On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty, $14 million to the funds, to be
allocated by an independent distribution consultant to be paid for by FTDI, and
$2 million to the CAGO for its investigative costs.

On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").

Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.

Annual Report | 47

MUTUAL BEACON FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. REGULATORY MATTERS (CONTINUED)

OTHER LEGAL PROCEEDINGS

The Fund, in addition to the Company and other funds, and certain current and
former officers, employees, and directors have been named in multiple lawsuits
in different federal courts in Nevada, California, Illinois, New York and
Florida, alleging violations of various federal securities laws and seeking,
among other relief, monetary damages, restitution, removal of fund trustees,
directors, advisers, administrators, and distributors, rescission of management
contracts and 12b-1 Plans, and/or attorneys' fees and costs. Specifically, the
lawsuits claim breach of duty with respect to alleged arrangements to permit
market timing and/or late trading activity, or breach of duty with respect to
the valuation of the portfolio securities of certain Templeton funds managed by
Franklin Resources, Inc. subsidiaries, resulting in alleged market timing
activity. The majority of these lawsuits duplicate, in whole or in part, the
allegations asserted in the February 4, 2004 Massachusetts administrative
complaint and the findings in the SEC's August 2, 2004 Order, as described
above. The lawsuits are styled as class actions, or derivative actions on behalf
of either the named funds or Franklin Resources, Inc.

In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.

The Company and fund management strongly believes that the claims made in each
of the lawsuits identified above are without merit and intends to vigorously
defend against them. The Company cannot predict with certainty, however, the
eventual outcome of the remaining governmental investigations or private
lawsuits, nor whether they will have a material negative impact on the Company.
Public trust and confidence are critical to the Company's business and any
material loss of investor and/or client confidence could result in a significant
decline in assets under management by the Company, which would have an adverse
effect on the Company's future financial results. If it is determined that the
Company bears responsibility for any unlawful or inappropriate conduct that
caused losses to the Fund, it is committed to making the Fund or its
shareholders whole, as appropriate. The Company is committed to taking all
appropriate actions to protect the interests of its funds' shareholders.

48 | Annual Report

MUTUAL BEACON FUND

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS OF FRANKLIN MUTUAL SERIES FUND INC.
AND SHAREHOLDERS OF MUTUAL BEACON FUND

We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Mutual Beacon Fund (one of the portfolios
constituting the Franklin Mutual Series Fund Inc.) (the Fund), as of December
31, 2004, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with 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. An audit
includes 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, as well as evaluating the overall financial statement
presentation. Our procedures included confirmation of securities owned as of
December 31, 2004, 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 the
Mutual Beacon Fund of the Franklin Mutual Series Fund Inc. as of December 31,
2004, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Boston, Massachusetts
February 7, 2005

Annual Report | 49

MUTUAL BEACON FUND

TAX DESIGNATION

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designated $95,423,945 as a capital gain dividend for the fiscal year ended
December 31, 2004.

Under Section 854(b)(2) of the Code, the Fund hereby designates up to a maximum
of $88,271,656 as qualified dividends for purposes of the maximum rate under
Section 1(h)(11) of the Code for the fiscal year ended December 31, 2004. In
January 2005, shareholders will receive Form 1099-DIV which will include their
share of qualified dividends distributed during the calendar year 2004.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.

Under Section 854(b)(2) of the Code, the Fund hereby designates 29.47% of the
ordinary income dividends as income qualifying for the dividends received
deduction for the fiscal year ended December 31, 2004.

50 | Annual Report

BOARD MEMBERS AND OFFICERS

The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of portfolios overseen in the Franklin Templeton
Investments fund complex are shown below.

INDEPENDENT BOARD MEMBERS

- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------

EDWARD I. ALTMAN, PH.D. (63) Director Since 1987 7 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, NYU Salomon Center, Stern School
of Business, New York University; editor and author of numerous financial publications; and financial consultant; and FORMERLY,
Vice Director, NYU Salomon Center, Stern School of Business, New York University; and Director, Stern School of Business M.B.A.
Program.
- ------------------------------------------------------------------------------------------------------------------------------------

ANN TORRE GRANT (46) Director Since 1994 7 Independent Director, SLM,
51 John F. Kennedy Parkway Corporation (Sallie Mae) and Allied
Short Hills, NJ 07078 Capital Corporation (financial
services).

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- ------------------------------------------------------------------------------------------------------------------------------------

BURTON J. GREENWALD (75) Director Since 2002 12 Director, Fiduciary Emerging Markets
51 John F. Kennedy Parkway Bond Fund PLC and Fiduciary
Short Hills, NJ 07078 International Ireland Limited.

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates, management consultants to the financial services industry.
- ------------------------------------------------------------------------------------------------------------------------------------

BRUCE A. MACPHERSON (74) Director Since 1974 7 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers); and part owner
McKinstry Inc., Chicopee, MA (manufacturer of electrical enclosures).
- ------------------------------------------------------------------------------------------------------------------------------------

FRED R. MILLSAPS (75) Director Since 1996 28 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman
and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light
(1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965).
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 51

CHARLES RUBENS II (74) Director Since 1998 12 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------

LEONARD RUBIN (79) Director Since 1996 12 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Partner in LDR Equities, LLC (manages personal investments); and FORMERLY, President, F.N.C. Textiles, Inc.; and Chairman of the
Board, Carolace Embroidery Co., Inc. (until 1996).
- ------------------------------------------------------------------------------------------------------------------------------------

ROBERT E. WADE (58) Director Since 1991 12 Director, El Oro Mining and
51 John F. Kennedy Parkway Exploration Co., p.l.c.
Short Hills, NJ 07078

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------

INTERESTED BOARD MEMBERS AND OFFICERS

**WILLIAM J. LIPPMAN (79) Director Since 1996 18 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Private Client Group, Inc.; President, Franklin Advisory Services, LLC; and officer and/or
director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of seven of the
investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

**ANNE M. TATLOCK (65) Director Since 2002 7 Director, Fortune Brands, Inc.
600 Fifth Avenue, 7th Floor (consumer products) and Merck &
New York, NY 10020-2302 Co. Inc. (pharmaceuticals).

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman and Chief Executive Officer, Fiduciary Trust Company International; Vice Chairman, Member - Office of the Chairman and
Director, Franklin Resources, Inc.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------

52 | Annual Report

**DAVID J. WINTERS (42) Director, Director 7 None
51 John F. Kennedy Parkway President, since 2001,
Short Hills, NJ 07078-2702 Chairman of President
the Board and since 1999,
Chief Chairman of
Executive the Board
Officer- and Chief
Investment Executive
Management Officer-
Investment
Management
since 2002

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer, and Chief Executive Officer, Franklin Mutual Advisers, officer and/or director, as the case
LLC; and may be, of three of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

JAMES M. DAVIS (52) Chief Since July Not Applicable Not Applicable
One Franklin Parkway Compliance 2004
San Mateo, CA 94403-1906 Officer

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources,
Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------

JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources,
Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive
Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 53

BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc.,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC,
Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc., and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant
and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts)
(until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------

MICHAEL O. MAGDOL (67) Vice President Since 2002 Not Applicable Not Applicable
600 Fifth Avenue -AML
Rockefeller Center Compliance
New York, NY 10020-2302

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals,
Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

MICHAEL MORANTZ (35) Treasurer Since July Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; and officer of two of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of
the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and
Director, Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------

54 | Annual Report

GALEN G. VETTER (53) Chief Financial Since May Not Applicable Not Applicable
500 East Broward Blvd. Officer and 2004
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------

* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment adviser or
affiliated investment advisers.

** William J. Lippman is considered to be an interested person of Mutual
Series under the federal securities laws due to his position as an officer
of some of the subsidiaries of Franklin Resources, Inc. (Resources), which
is the parent company of Mutual Series' adviser and distributor. Anne M.
Tatlock is considered to be an interested person of Mutual Series under
the federal securities laws due to her position as an officer and director
of Resources. David J. Winters is considered to be an interested person of
Mutual Series under the federal securities laws due to his position as an
officer of Franklin Mutual Advisers, LLC, Mutual Series' adviser.

THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE GRANT, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.

THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.

Annual Report | 55

MUTUAL BEACON FUND

SHAREHOLDER INFORMATION

PROXY VOTING POLICIES AND PROCEDURES

The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the Securities and Exchange Commission's
website at sec.gov and reflect the 12-month period beginning July 1, 2003, and
ending June 30, 2004.

QUARTERLY STATEMENT OF INVESTMENTS

The Fund files a complete statement of investments with the Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.

56 | Annual Report

LITERATURE REQUEST

LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF
SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR
SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR
BEEPING TONE.

FRANKLIN TEMPLETON INVESTMENTS

INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund

GLOBAL
Mutual Discovery Fund
Templeton Capital Accumulator Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund

GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)

VALUE
Franklin Balance Sheet Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(2)
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(3)
Mutual Shares Fund

BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund(4)

SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund

ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund

TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund

INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Floating Rate Trust(3)
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5,6)
Franklin Low Duration Total Return
Fund Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund

TAX-FREE INCOME(7)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(8)

LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund

INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund

STATE-SPECIFIC
Alabama
Arizona
California(9)
Colorado
Connecticut
Florida(9)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(8)
Michigan(8)
Minnesota(8)
Missouri
New Jersey
New York(9)
North Carolina
Ohio(8)
Oregon
Pennsylvania
Tennessee
Virginia

INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(10)

(1) The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.

(2) The fund is only open to existing shareholders and select retirement
plans.

(3) The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.

(4) Upon reaching approximately $350 million in assets, the fund intends to
close to all investors.

(5) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.

(6) Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and
strategy remained the same.

(7) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.

(8) Portfolio of insured municipal securities.

(9) These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).

(10) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.

11/04 Not part of the annual report

[LOGO](R)
FRANKLIN(R) TEMPLETON(R) One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906

o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?

Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.

ANNUAL REPORT AND SHAREHOLDER LETTER

MUTUAL BEACON FUND

CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF INVESTMENT OFFICER

David J. Winters, CFA

INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
51 John F. Kennedy Parkway
Short Hills, NJ 07078

DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com

SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B, & C)
1-800/448-FUND - (Class Z)

Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.

To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.

476 A2004 02/05

MUTUAL DISCOVERY FUND

[GRAPHIC OMITTED]

- --------------------------------------------------------------------------------
DECEMBER 31, 2004
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER | GLOBAL
- --------------------------------------------------------------------------------
Want to receive this
document FASTER via email?

MUTUAL DISCOVERY FUND

Eligible shareholders can
sign up for eDelivery at
franklintempleton.com. See
inside for details.
- --------------------------------------------------------------------------------

[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS

Franklin o Templeton o MUTUAL SERIES

THANK YOU FOR YOUR
CONTINUED PARTICIPATION

- -------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- -------------------------------------------------------------------------------

[GRAPHIC OMITTED]

Not part of the annual report

CONTENTS

SHAREHOLDER LETTER ........................................................ 1

ANNUAL REPORT

Mutual Discovery Fund ..................................................... 4

Performance Summary ....................................................... 10

Your Fund's Expenses ...................................................... 15

Financial Highlights and Statement of Investments ......................... 17

Financial Statements ...................................................... 33

Notes to Financial Statements ............................................. 37

Report of Independent Registered Public Accounting Firm ................... 54

Tax Designation ........................................................... 55

Board Members and Officers ................................................ 60

Shareholder Information ................................................... 65

- --------------------------------------------------------------------------------

ANNUAL REPORT

MUTUAL DISCOVERY FUND

YOUR FUND'S GOAL AND MAIN INVESTMENTS: Mutual Discovery Fund seeks long-term
capital appreciation by investing primarily in common and preferred stocks,
bonds and convertible securities. The Fund may invest up to 100% of its assets
in foreign securities.

We are pleased to bring you Mutual Discovery Fund's annual report covering the
fiscal year ended December 31, 2004.

PERFORMANCE OVERVIEW

Mutual Discovery Fund - Class Z posted a 19.39% cumulative total return for the
12 months ended December 31, 2004. The Fund outperformed its benchmarks, the
Standard & Poor's 500 Composite Index (S&P 500) and Morgan Stanley Capital
International (MSCI) World Index, which returned 10.87% and 15.25% for the same
period.(1) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 9.

ECONOMIC AND MARKET OVERVIEW

The global economic recovery continued in 2004, led by growth in China and the
U.S. As of December 31, 2004, U.S. gross domestic product (GDP) had increased
for 13 consecutive quarters.(2) In China, GDP grew 9.5% in 2004.(3)

The 12-nation euro zone lagged other regions in the current recovery. However,
the European Central Bank projected euro zone growth may be between 1.6% and
2.0% in 2004, compared with only 0.5% in 2003. In Japan, the economy struggled
to emerge from a decade-long deflationary period. Although the country's
consumer and business confidence reached

(1) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The MSCI World Index is a free float-adjusted, market capitalization-
weighted index designed to measure equity market performance in global
developed markets. The indexes are unmanaged and include reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.

(2) Source: Bureau of Economic Analysis.

(3) Source: National Bureau of Statistics of China.

THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 22.

4 | Annual Report

their highest levels since 1991, economic growth slowed in response to higher
oil prices and reduced external demand. In addition, the U.S. dollar declined
approximately 4% versus the yen and 7% versus the euro during 2004.(4) This hurt
Japanese and European exports into the U.S., as it made their goods more
expensive in the world's biggest market. However, the greenback's protracted
decline should also benefit the U.S. current account deficit by making U.S.
goods more competitive in international markets.

Oil prices increased during most of 2004, reaching $56 dollars per barrel in
October, but declined to end the year at $43. Higher oil prices triggered
investor worries about inflation, decreased spending -- due to cautionary
consumer and business sentiment -- and slower economic and corporate profit
growth. As of December 31, 2004, the 12-month moving average price of oil was
about $41 per barrel.(5)

In this environment, the MSCI World Index's total return was 15.25% in U.S.
dollars for the 12-month period ended December 31, 2004.6 Emerging markets, as
measured by the MSCI Emerging Markets Index, had a one-year total return of
25.95% in U.S. dollars.(7) In local currencies, these indexes had notably lower
total returns of 11.83% and 16.45% for the same period.(6), (7) In 2004, most of
the world's currencies strengthened in relation to the U.S. dollar, which
benefited U.S.-based investors of non-U.S. developed and emerging market
equities.

INVESTMENT STRATEGY

At Mutual Series, we follow a distinctive, three-pronged investment approach,
which combines purchasing undervalued equities with investing in distressed debt
and risk arbitrage. We invest in undervalued common stocks of companies we
believe are trading at a substantial discount to their intrinsic or business
value. We focus on situations we perceive have limited downside risk and the
potential for substantial long-term appreciation. In our opinion, successful
investing is as much about avoiding and containing losses as it is about
generating gains. We also invest in distressed securities and bankruptcy
situations. We have been involved in this highly specialized field for many
years and have found it can provide attractive returns over time. As with
equities, we undertake our own rigorous fundamental analysis of each

(4) Source: FactSet Research Systems Inc.

(5) Source: U.S. Department of Energy.

(6) Source: Standard & Poor's Micropal. See footnote 1 for a description of
the MSCI World Index.

(7) Source: Standard & Poor's Micropal. The MSCI Emerging Markets Index is a
free float-adjusted, market capitalization-weighted index designed to
measure equity market performance in global emerging markets.

GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets as of 12/31/04

U.S. 33.7%
U.K. 15.6%
Canada 6.3%
Switzerland 4.9%
France 4.1%
South Korea 3.5%
Irish Republic 3.3%
Japan 3.2%
Spain 3.0%
Denmark 2.9%
Germany 2.8%
Norway 2.7%
Hong Kong 2.0%
South Africa 2.0%
Netherlands 1.8%
Luxembourg 1.5%
Other Countries 6.5%
Other Net Assets 0.2%

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/04

- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Tobacco 13.3%
- --------------------------------------------------------------------------------
Insurance 10.0%
- --------------------------------------------------------------------------------
Media 8.6%
- --------------------------------------------------------------------------------
Metals & Mining 8.3%
- --------------------------------------------------------------------------------
Diversified Financial Services 6.6%
- --------------------------------------------------------------------------------
Food Products 6.4%
- --------------------------------------------------------------------------------
Beverages 5.4%
- --------------------------------------------------------------------------------
Commercial Banks 4.0%
- --------------------------------------------------------------------------------
Oil & Gas 3.1%
- --------------------------------------------------------------------------------
Chemicals 2.9%
- --------------------------------------------------------------------------------

situation and focus our efforts on those we believe have limited risk and
substantial upside potential. Lastly, the Fund invests in arbitrage situations,
another highly specialized field where we have been active for some time. In
arbitrage investing, we generally seek to invest in companies in the process of
being acquired or undergoing mergers. By buying those shares at a discount to
the announced deal value, the Fund seeks to earn a return as that discount
narrows and the transaction is completed.

Although we believe returns from each of these three prongs can be attractive
over time, we will migrate the Fund's capital toward areas where we find the
most compelling opportunities at any given moment. Typically, the bulk of the
Fund's assets will be invested in equities, while distressed investing and
arbitrage will each represent a much smaller portion of the Fund. We may also
hold a significant portion of the Fund's assets in cash or high-quality,
short-term debt instruments when other investment opportunities are not
sufficiently compelling to us. As a global fund, Mutual Discovery Fund will seek
out opportunities around the world, with an emphasis on developed markets where
we believe political risks are low and potential returns are attractive. We will
generally seek to hedge the Fund's currency exposure when we deem it
advantageous, to focus our efforts on analyzing business fundamentals and
assessing the value of company assets and liabilities. We believe our
three-pronged approach, coupled with rigorous fundamental analysis and an
aversion to risk, should allow the Fund to achieve attractive risk-adjusted
returns over time.

MANAGER'S DISCUSSION

Notwithstanding positive overall performance from our distressed debt and risk
arbitrage investments, the Fund's equity portfolio was the strongest contributor
to performance in 2004. Three of our best performing stock investments were
Altadis, a Franco-Spanish tobacco company; Orkla, a Norwegian conglomerate; and
White Mountains Insurance Group, a U.S. property and casualty insurer.

6 | Annual Report

challenges in France and elsewhere, Altadis shares performed well as management
returned cash to shareholders through dividends and share repurchases. In
addition, the company announced two acquisitions and a cost-restructuring
program, all of which could enable management to continue to increase cash flow
and create shareholder value. As a result of these and other factors, Altadis
shares appreciated about 65% in 2004. Despite this strong performance, the stock
still traded at a significant discount to its European peers and our calculation
of the stock's intrinsic value. In addition, some analysts believe the industry
is ready for more consolidation. For these and other reasons, we remain
enthusiastic about the prospects of our Altadis investment.

Oslo-based Orkla is one of Norway's largest conglomerates with operations in
food, media, chemicals and beverages. In early 2004, Orkla's management
announced it would divest the company's beverage operations, a 40% stake in the
Danish company Carlsberg Breweries. We believed the negotiated price for
Carlsberg was favorable, and the market rewarded management's decision to return
part of the proceeds to shareholders in the form of a special dividend. The
equity market anticipates Orkla to further divest non-core assets and return the
proceeds to shareholders. The company reported better-than-expected quarterly
results for most of 2004 as its restructuring program progressed ahead of
expectations and as some new product launches experienced success. Largely as a
result, the stock's discount to its intrinsic value narrowed, and including the
special dividend, Orkla shares returned 73% in 2004.

White Mountains, a significant contributor to Fund performance during the fiscal
year, was an excellent example of how substantial shareholder value can be
created when well-capitalized companies are run by strong managers. With the
company's solid balance sheet, White Mountains' management team has made several
acquisitions, enabling the company to profitably increase its bottom line while
extending its exposure to attractive lines of business. In addition to
exercising discipline with acquisitions, management remained committed to a
conservative underwriting strategy. This strategy enabled White Mountains to
continue to report solid underwriting results for 2004 despite record
industry-wide insurance claims from the Atlantic hurricane season. During the
year under review, the markets began to better appreciate White Mountains'
consistent results, strong balance sheet, and disciplined acquisition and
underwriting practices, as well as its shareholder-oriented management team.
White Mountains' stock rose about 41% in 2004 and has increased more than 443%
in the past five years.

TOP 10 HOLDINGS
12/31/04

- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Berkshire Hathaway Inc., A & B 3.2%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
British American Tobacco PLC 3.0%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Imperial Tobacco Group PLC 2.7%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Orkla ASA 2.6%
FOOD PRODUCTS, NORWAY
- --------------------------------------------------------------------------------
Altadis SA 2.5%
TOBACCO, SPAIN
- --------------------------------------------------------------------------------
White Mountains Insurance Group Inc. 1.9%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
Potlatch Corp. 1.9%
PAPER & FOREST PRODUCTS, U.S.
- --------------------------------------------------------------------------------
KT&G Corp., ord. & GDR 1.8%
TOBACCO, SOUTH KOREA
- --------------------------------------------------------------------------------
Schindler Holding AG, ord. & Reg D 1.8%
MACHINERY, SWITZERLAND
- --------------------------------------------------------------------------------
International Steel Group 1.8%
METALS & MINING, U.S.
- --------------------------------------------------------------------------------

Annual Report | 7

Detractors from Fund performance during the fiscal year included Eurotunnel, the
operator of the English Channel tunnel; MG Technologies, a German industrial
firm; and Impala Platinum, a South African mining company. Eurotunnel's debt
securities declined in value during 2004 largely due to uncertainties
surrounding the ultimate resolution of the company's financial situation, as
well as continuing mediocre operating results after the board and management
team were replaced in April 2004. MG Technologies' stock fell in value mainly
due to a failed attempt to dispose of an asset, a division's slower-than-
expected turnaround, and the chief executive officer's resignation.
Impala Platinum underperformed during the period because of the strengthening
South African currency and a slower-than-expected approval process for a mine in
Zimbabwe.

8 | Annual Report

Thank you for your continued participation in Mutual Discovery Fund. We look
forward to serving your future investment needs.

/s/ David J. Winters
[PHOTO OMITTED]
David J. Winters, CFA
Portfolio Manager

/s/ F. David Segal
[PHOTO OMITTED]
F. David Segal, CFA
Assistant Portfolio Manager

Mutual Discovery Fund

- --------------------------------------------------------------------------------
F. DAVID SEGAL

David Segal is an assistant portfolio manager for Mutual Discovery Fund and an
analyst for Franklin Mutual Advisers, LLC (Mutual Series). He specializes in the
analysis of the oil and gas, paper and forest products and the defense sectors.

Prior to joining Mutual Series in 2002, Mr. Segal was an associate director in
the structured finance group at MetLife. He has 12 years of experience in the
financial services industry.

Mr. Segal received a bachelor of arts degree from the University of Michigan,
Ann Arbor and an M.B.A. from New York University's Stern School of Business. He
is also a CFA charter-holder and a member of the New York Society of Security
Analysts.
- --------------------------------------------------------------------------------

Annual Report | 9

PERFORMANCE SUMMARY AS OF 12/31/04

PRICE AND DISTRIBUTION INFORMATION

- ------------------------------------------------------------------------------------------------------
CLASS Z CHANGE 12/31/04 12/31/03
- ------------------------------------------------------------------------------------------------------
<c>
Net Asset Value (NAV) +$3.45 $24.26 $20.81
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/04-12/31/04)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.5428
- ------------------------------------------------------------------------------------------------------
CLASS A CHANGE 12/31/04 12/31/03
- ------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.40 $24.07 $20.67
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/04-12/31/04)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.4733
- ------------------------------------------------------------------------------------------------------
CLASS B CHANGE 12/31/04 12/31/03
- ------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.32 $23.67 $20.35
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/04-12/31/04)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.3539
- ------------------------------------------------------------------------------------------------------
CLASS C CHANGE 12/31/04 12/31/03
- ------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.38 $23.97 $20.59
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/04-12/31/04)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.3384
- ------------------------------------------------------------------------------------------------------
CLASS R CHANGE 12/31/04 12/31/03
- ------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.37 $23.94 $20.57
- ------------------------------------------------------------------------------------------------------
Distributions (1/1/04-12/31/04)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.4557
- ------------------------------------------------------------------------------------------------------

10 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

PERFORMANCE

CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY.
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.

- -------------------------------------------------------------------------------------------------------------
CLASS Z(1) 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------------------

Cumulative Total Return(2) 19.39% 62.85% 300.20%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return(3) 19.39% 10.24% 14.88%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,939 $16,285 $40,020
- -------------------------------------------------------------------------------------------------------------
CLASS A(1) 1-YEAR 5-YEAR INCEPTION (11/1/96)
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return(2) 18.98% 60.09% 153.66%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return(3) 12.14% 8.58% 11.27%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,214 $15,089 $23,905
- -------------------------------------------------------------------------------------------------------------
CLASS B(1) 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return(2) 18.22% 54.91% 94.49%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return(3) 14.22% 8.87% 11.63%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,422 $15,291 $19,349
- -------------------------------------------------------------------------------------------------------------
CLASS C(1) 1-YEAR 5-YEAR INCEPTION (11/1/96)
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return(2) 18.17% 54.97% 140.94%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return(3) 17.17% 9.16% 11.37%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,717 $15,497 $24,094
- -------------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (1/1/02)
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return(2) 18.84% 40.77%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return(3) 17.84% 12.10%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,784 $14,077
- -------------------------------------------------------------------------------------------------------------

FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.

Annual Report | 11

PERFORMANCE SUMMARY (CONTINUED)

TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT

Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.

CLASS Z (1/1/95-12/31/04)(1)

GRAPHIC MATERIAL (1)
This graph compares the performance of Mutual Discovery Fund - Class Z, 1 as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
Index5 and the MSCI World Index5 from 1/1/95-12/31/04.

Mutual Discovery
Date Fund S&P 500 Index MSCI World Index
1/1/1995 $10,000 $10,000 $10,000
1/31/1995 $10,215 $10,259 $9,852
2/28/1995 $10,582 $10,659 $9,997
3/31/1995 $10,590 $10,973 $10,481
4/30/1995 $10,996 $11,295 $10,849
5/31/1995 $11,251 $11,746 $10,943
6/30/1995 $11,554 $12,019 $10,942
7/31/1995 $12,011 $12,417 $11,492
8/31/1995 $12,276 $12,448 $11,238
9/30/1995 $12,590 $12,973 $11,567
10/31/1995 $12,389 $12,927 $11,387
11/30/1995 $12,630 $13,493 $11,785
12/31/1995 $12,863 $13,753 $12,132
1/31/1996 $13,338 $14,221 $12,353
2/29/1996 $13,788 $14,353 $12,431
3/31/1996 $13,983 $14,491 $12,640
4/30/1996 $14,288 $14,705 $12,939
5/31/1996 $14,534 $15,083 $12,953
6/30/1996 $14,515 $15,141 $13,021
7/31/1996 $14,082 $14,472 $12,563
8/31/1996 $14,567 $14,778 $12,710
9/30/1996 $14,922 $15,609 $13,210
10/31/1996 $15,295 $16,039 $13,304
11/30/1996 $15,927 $17,251 $14,052
12/31/1996 $16,069 $16,909 $13,830
1/31/1997 $16,836 $17,965 $13,999
2/28/1997 $17,164 $18,106 $14,162
3/31/1997 $17,005 $17,363 $13,884
4/30/1997 $17,033 $18,399 $14,341
5/31/1997 $17,650 $19,518 $15,228
6/30/1997 $18,305 $20,392 $15,990
7/31/1997 $19,100 $22,014 $16,729
8/31/1997 $18,919 $20,782 $15,613
9/30/1997 $19,871 $21,919 $16,463
10/31/1997 $19,300 $21,188 $15,599
11/30/1997 $19,414 $22,168 $15,878
12/31/1997 $19,756 $22,548 $16,074
1/31/1998 $19,767 $22,798 $16,524
2/28/1998 $20,781 $24,441 $17,645
3/31/1998 $21,973 $25,691 $18,392
4/30/1998 $22,381 $25,950 $18,575
5/31/1998 $22,685 $25,504 $18,345
6/30/1998 $22,120 $26,540 $18,783
7/31/1998 $21,600 $26,258 $18,755
8/31/1998 $18,655 $22,465 $16,257
9/30/1998 $17,819 $23,905 $16,547
10/31/1998 $18,312 $25,847 $18,046
11/30/1998 $19,233 $27,413 $19,122
12/31/1998 $19,381 $28,992 $20,059
1/31/1999 $19,516 $30,204 $20,501
2/28/1999 $19,291 $29,265 $19,959
3/31/1999 $20,178 $30,436 $20,793
4/30/1999 $21,536 $31,614 $21,615
5/31/1999 $21,547 $30,869 $20,828
6/30/1999 $22,313 $32,581 $21,803
7/31/1999 $22,062 $31,565 $21,740
8/31/1999 $21,800 $31,408 $21,705
9/30/1999 $21,514 $30,549 $21,497
10/31/1999 $21,960 $32,481 $22,618
11/30/1999 $23,112 $33,141 $23,257
12/31/1999 $24,575 $35,092 $25,142
1/31/2000 $24,482 $33,329 $23,705
2/29/2000 $25,262 $32,699 $23,772
3/31/2000 $26,346 $35,895 $25,418
4/30/2000 $26,054 $34,816 $24,346
5/31/2000 $26,206 $34,103 $23,733
6/30/2000 $26,281 $34,944 $24,535
7/31/2000 $26,617 $34,398 $23,848
8/31/2000 $27,403 $36,534 $24,627
9/30/2000 $27,129 $34,606 $23,320
10/31/2000 $27,341 $34,459 $22,932
11/30/2000 $26,879 $31,744 $21,543
12/31/2000 $27,670 $31,900 $21,894
1/31/2001 $28,518 $33,031 $22,320
2/28/2001 $28,518 $30,021 $20,436
3/31/2001 $27,670 $28,120 $19,097
4/30/2001 $28,474 $30,304 $20,514
5/31/2001 $29,336 $30,507 $20,259
6/30/2001 $29,472 $29,765 $19,627
7/31/2001 $29,413 $29,472 $19,369
8/31/2001 $29,117 $27,629 $18,443
9/30/2001 $26,642 $25,398 $16,820
10/31/2001 $26,716 $25,882 $17,144
11/30/2001 $27,398 $27,867 $18,161
12/31/2001 $28,020 $28,111 $18,277
1/31/2002 $28,113 $27,701 $17,725
2/28/2002 $28,390 $27,167 $17,575
3/31/2002 $29,330 $28,189 $18,355
4/30/2002 $29,838 $26,481 $17,739
5/31/2002 $30,069 $26,286 $17,780
6/30/2002 $28,224 $24,414 $16,705
7/31/2002 $26,363 $22,512 $15,299
8/31/2002 $26,626 $22,659 $15,331
9/30/2002 $25,231 $20,199 $13,648
10/31/2002 $25,324 $21,975 $14,658
11/30/2002 $25,696 $23,267 $15,451
12/31/2002 $25,482 $21,901 $14,706
1/31/2003 $25,057 $21,328 $14,261
2/28/2003 $24,379 $21,008 $14,017
3/31/2003 $24,489 $21,210 $13,979
4/30/2003 $26,365 $22,958 $15,227
5/31/2003 $27,848 $24,166 $16,105
6/30/2003 $28,321 $24,475 $16,389
7/31/2003 $28,671 $24,906 $16,725
8/31/2003 $29,527 $25,391 $17,091
9/30/2003 $29,686 $25,122 $17,199
10/31/2003 $30,955 $26,543 $18,223
11/30/2003 $32,034 $26,776 $18,505
12/31/2003 $33,521 $28,179 $19,670
1/31/2004 $33,940 $28,696 $19,990
2/29/2004 $35,020 $29,095 $20,332
3/31/2004 $34,891 $28,656 $20,205
4/30/2004 $34,295 $28,207 $19,803
5/31/2004 $34,278 $28,593 $19,997
6/30/2004 $34,931 $29,149 $20,416
7/31/2004 $34,575 $28,185 $19,755
8/31/2004 $34,802 $28,298 $19,850
9/30/2004 $35,742 $28,604 $20,231
10/31/2004 $36,471 $29,041 $20,731
11/30/2004 $38,562 $30,216 $21,830
12/31/2004 $40,020 $31,243 $22,670

AVERAGE ANNUAL TOTAL RETURN

- -------------------------------------
CLASS Z(1) 12/31/04
- -------------------------------------
1-Year 19.39%
- -------------------------------------
5-Year 10.24%
- -------------------------------------
10-Year 14.88%
- -------------------------------------

CLASS A (11/1/96-12/31/04)(1)

GRAPHIC MATERIAL (2)
This graph compares the performance of Mutual Discovery Fund - Class A, 1 as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
Index 5 and the MSCI World Index 5 from 11/1/96-12/31/04.

Mutual Discovery S&P 500 MSCI World
Date Fund Index Index
11/1/1996 $9,424 $10,000 $10,000
11/30/1996 $9,808 $10,755 $10,562
12/31/1996 $9,887 $10,542 $10,395
1/31/1997 $10,348 $11,200 $10,522
2/28/1997 $10,544 $11,288 $10,645
3/31/1997 $10,446 $10,825 $10,436
4/30/1997 $10,463 $11,471 $10,779
5/31/1997 $10,838 $12,169 $11,446
6/30/1997 $11,235 $12,714 $12,019
7/31/1997 $11,718 $13,725 $12,574
8/31/1997 $11,607 $12,957 $11,735
9/30/1997 $12,188 $13,666 $12,374
10/31/1997 $11,830 $13,210 $11,725
11/30/1997 $11,900 $13,821 $11,934
12/31/1997 $12,109 $14,058 $12,082
1/31/1998 $12,109 $14,213 $12,420
2/28/1998 $12,726 $15,238 $13,262
3/31/1998 $13,453 $16,018 $13,824
4/30/1998 $13,697 $16,179 $13,962
5/31/1998 $13,877 $15,901 $13,789
6/30/1998 $13,530 $16,546 $14,118
7/31/1998 $13,208 $16,371 $14,097
8/31/1998 $11,398 $14,006 $12,219
9/30/1998 $10,885 $14,904 $12,438
10/31/1998 $11,181 $16,115 $13,564
11/30/1998 $11,741 $17,091 $14,373
12/31/1998 $11,822 $18,075 $15,077
1/31/1999 $11,905 $18,831 $15,409
2/28/1999 $11,760 $18,246 $15,002
3/31/1999 $12,303 $18,975 $15,629
4/30/1999 $13,122 $19,710 $16,247
5/31/1999 $13,129 $19,245 $15,655
6/30/1999 $13,594 $20,313 $16,388
7/31/1999 $13,440 $19,679 $16,341
8/31/1999 $13,266 $19,582 $16,314
9/30/1999 $13,091 $19,046 $16,158
10/31/1999 $13,357 $20,251 $17,000
11/30/1999 $14,056 $20,662 $17,481
12/31/1999 $14,941 $21,878 $18,898
1/31/2000 $14,877 $20,779 $17,818
2/29/2000 $15,353 $20,386 $17,868
3/31/2000 $16,008 $22,379 $19,105
4/30/2000 $15,823 $21,706 $18,300
5/31/2000 $15,915 $21,262 $17,839
6/30/2000 $15,954 $21,786 $18,442
7/31/2000 $16,152 $21,446 $17,925
8/31/2000 $16,624 $22,777 $18,510
9/30/2000 $16,449 $21,575 $17,528
10/31/2000 $16,579 $21,484 $17,237
11/30/2000 $16,289 $19,791 $16,192
12/31/2000 $16,773 $19,888 $16,457
1/31/2001 $17,281 $20,593 $16,776
2/28/2001 $17,272 $18,717 $15,360
3/31/2001 $16,746 $17,532 $14,354
4/30/2001 $17,227 $18,893 $15,419
5/31/2001 $17,744 $19,020 $15,227
6/30/2001 $17,822 $18,557 $14,752
7/31/2001 $17,786 $18,374 $14,558
8/31/2001 $17,605 $17,225 $13,862
9/30/2001 $16,098 $15,834 $12,643
10/31/2001 $16,143 $16,137 $12,886
11/30/2001 $16,549 $17,374 $13,650
12/31/2001 $16,918 $17,526 $13,738
1/31/2002 $16,975 $17,271 $13,323
2/28/2002 $17,134 $16,938 $13,210
3/31/2002 $17,695 $17,575 $13,797
4/30/2002 $17,995 $16,510 $13,333
5/31/2002 $18,126 $16,388 $13,364
6/30/2002 $17,009 $15,221 $12,556
7/31/2002 $15,888 $14,035 $11,499
8/31/2002 $16,039 $14,127 $11,523
9/30/2002 $15,191 $12,593 $10,258
10/31/2002 $15,248 $13,701 $11,017
11/30/2002 $15,465 $14,506 $11,614
12/31/2002 $15,331 $13,654 $11,053
1/31/2003 $15,073 $13,297 $10,719
2/28/2003 $14,662 $13,098 $10,536
3/31/2003 $14,729 $13,223 $10,507
4/30/2003 $15,846 $14,313 $11,445
5/31/2003 $16,734 $15,066 $12,105
6/30/2003 $17,006 $15,259 $12,319
7/31/2003 $17,218 $15,528 $12,571
8/31/2003 $17,727 $15,830 $12,846
9/30/2003 $17,823 $15,663 $12,927
10/31/2003 $18,572 $16,548 $13,697
11/30/2003 $19,215 $16,694 $13,909
12/31/2003 $20,103 $17,569 $14,785
1/31/2004 $20,346 $17,891 $15,025
2/29/2004 $20,979 $18,140 $15,282
3/31/2004 $20,901 $17,866 $15,187
4/30/2004 $20,541 $17,586 $14,884
5/31/2004 $20,531 $17,827 $15,030
6/30/2004 $20,910 $18,173 $15,345
7/31/2004 $20,695 $17,572 $14,848
8/31/2004 $20,822 $17,643 $14,920
9/30/2004 $21,380 $17,833 $15,207
10/31/2004 $21,800 $18,106 $15,582
11/30/2004 $23,043 $18,838 $16,408
12/31/2004 $23,905 $19,479 $17,039

AVERAGE ANNUAL TOTAL RETURN

- -------------------------------------
CLASS A(1) 12/31/04
- -------------------------------------
1-Year 12.14%
- -------------------------------------
5-Year 8.58%
- -------------------------------------
Since Inception (11/1/96) 11.27%
- -------------------------------------

12 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- -------------------------------------
CLASS B(1) 12/31/04
- -------------------------------------
1-Year 14.22%
- -------------------------------------
5-Year 8.87%
- -------------------------------------
Since Inception (1/1/99) 11.63%
- -------------------------------------

CLASS B (1/1/99-12/31/04)(1)

GRAPHIC MATERIAL (3)
This graph compares the performance of Mutual Discovery Fund - Class B, 1 as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
Index 5 and the MSCI World Index 5 from 1/1/99-12/31/04.

Mutual Discovery S&P 500 MSCI World
Date Fund Index Index
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,070 $10,418 $10,220
2/28/1999 $9,942 $10,094 $9,950
3/31/1999 $10,396 $10,498 $10,366
4/30/1999 $11,076 $10,905 $10,776
5/31/1999 $11,076 $10,647 $10,383
6/30/1999 $11,462 $11,238 $10,869
7/31/1999 $11,320 $10,887 $10,838
8/31/1999 $11,172 $10,834 $10,820
9/30/1999 $11,018 $10,537 $10,717
10/31/1999 $11,231 $11,203 $11,275
11/30/1999 $11,816 $11,431 $11,594
12/31/1999 $12,555 $12,104 $12,534
1/31/2000 $12,495 $11,496 $11,818
2/29/2000 $12,885 $11,279 $11,851
3/31/2000 $13,420 $12,381 $12,672
4/30/2000 $13,264 $12,009 $12,137
5/31/2000 $13,330 $11,763 $11,831
6/30/2000 $13,356 $12,053 $12,231
7/31/2000 $13,517 $11,865 $11,889
8/31/2000 $13,903 $12,601 $12,277
9/30/2000 $13,755 $11,936 $11,626
10/31/2000 $13,851 $11,886 $11,432
11/30/2000 $13,607 $10,949 $10,740
12/31/2000 $13,998 $11,003 $10,915
1/31/2001 $14,411 $11,393 $11,127
2/28/2001 $14,396 $10,355 $10,188
3/31/2001 $13,961 $9,699 $9,520
4/30/2001 $14,351 $10,453 $10,227
5/31/2001 $14,771 $10,523 $10,100
6/30/2001 $14,832 $10,267 $9,785
7/31/2001 $14,787 $10,166 $9,656
8/31/2001 $14,627 $9,530 $9,194
9/30/2001 $13,373 $8,760 $8,385
10/31/2001 $13,403 $8,927 $8,547
11/30/2001 $13,730 $9,612 $9,054
12/31/2001 $14,028 $9,696 $9,112
1/31/2002 $14,068 $9,555 $8,837
2/28/2002 $14,193 $9,371 $8,761
3/31/2002 $14,656 $9,723 $9,151
4/30/2002 $14,892 $9,134 $8,843
5/31/2002 $14,994 $9,067 $8,864
6/30/2002 $14,061 $8,421 $8,328
7/31/2002 $13,121 $7,765 $7,627
8/31/2002 $13,247 $7,816 $7,643
9/30/2002 $12,536 $6,967 $6,804
10/31/2002 $12,576 $7,580 $7,307
11/30/2002 $12,749 $8,025 $7,703
12/31/2002 $12,633 $7,554 $7,331
1/31/2003 $12,410 $7,357 $7,110
2/28/2003 $12,068 $7,246 $6,988
3/31/2003 $12,115 $7,316 $6,969
4/30/2003 $13,032 $7,919 $7,591
5/31/2003 $13,749 $8,335 $8,029
6/30/2003 $13,971 $8,442 $8,170
7/31/2003 $14,131 $8,591 $8,338
8/31/2003 $14,540 $8,758 $8,520
9/30/2003 $14,612 $8,665 $8,574
10/31/2003 $15,221 $9,155 $9,085
11/30/2003 $15,742 $9,236 $9,225
12/31/2003 $16,452 $9,720 $9,806
1/31/2004 $16,646 $9,898 $9,966
2/29/2004 $17,155 $10,036 $10,136
3/31/2004 $17,082 $9,884 $10,073
4/30/2004 $16,775 $9,729 $9,872
5/31/2004 $16,759 $9,863 $9,969
6/30/2004 $17,058 $10,054 $10,178
7/31/2004 $16,871 $9,722 $9,848
8/31/2004 $16,969 $9,761 $9,895
9/30/2004 $17,416 $9,866 $10,086
10/31/2004 $17,749 $10,017 $10,335
11/30/2004 $18,757 $10,422 $10,883
12/31/2004 $19,349 $10,777 $11,301

AVERAGE ANNUAL TOTAL RETURN

- -------------------------------------
CLASS C(1) 12/31/04
- -------------------------------------
1-Year 17.17%
- -------------------------------------
5-Year 9.16%
- -------------------------------------
Since Inception (11/1/96) 11.37%
- -------------------------------------

CLASS C (11/1/96-12/31/04)(1)

This graph compares the performance of Mutual Discovery Fund - Class C, 1 as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
Index 5 and the MSCI World Index 5 from 11/1/96-12/31/04

Mutual Discovery S&P 500 MSCI World
Date Fund Index Index
11/1/1996 $10,000 $10,000 $10,000
11/30/1996 $10,408 $10,755 $10,562
12/31/1996 $10,491 $10,542 $10,395
1/31/1997 $10,980 $11,200 $10,522
2/28/1997 $11,182 $11,288 $10,645
3/31/1997 $11,066 $10,825 $10,436
4/30/1997 $11,078 $11,471 $10,779
5/31/1997 $11,469 $12,169 $11,446
6/30/1997 $11,878 $12,714 $12,019
7/31/1997 $12,390 $13,725 $12,574
8/31/1997 $12,266 $12,957 $11,735
9/30/1997 $12,868 $13,666 $12,374
10/31/1997 $12,483 $13,210 $11,725
11/30/1997 $12,551 $13,821 $11,934
12/31/1997 $12,768 $14,058 $12,082
1/31/1998 $12,761 $14,213 $12,420
2/28/1998 $13,400 $15,238 $13,262
3/31/1998 $14,161 $16,018 $13,824
4/30/1998 $14,412 $16,179 $13,962
5/31/1998 $14,589 $15,901 $13,789
6/30/1998 $14,222 $16,546 $14,118
7/31/1998 $13,874 $16,371 $14,097
8/31/1998 $11,970 $14,006 $12,219
9/30/1998 $11,428 $14,904 $12,438
10/31/1998 $11,734 $16,115 $13,564
11/30/1998 $12,311 $17,091 $14,373
12/31/1998 $12,395 $18,075 $15,077
1/31/1999 $12,468 $18,831 $15,409
2/28/1999 $12,316 $18,246 $15,002
3/31/1999 $12,872 $18,975 $15,629
4/30/1999 $13,724 $19,710 $16,247
5/31/1999 $13,724 $19,245 $15,655
6/30/1999 $14,205 $20,313 $16,388
7/31/1999 $14,030 $19,679 $16,341
8/31/1999 $13,846 $19,582 $16,314
9/30/1999 $13,656 $19,046 $16,158
10/31/1999 $13,927 $20,251 $17,000
11/30/1999 $14,645 $20,662 $17,481
12/31/1999 $15,556 $21,878 $18,898
1/31/2000 $15,489 $20,779 $17,818
2/29/2000 $15,972 $20,386 $17,868
3/31/2000 $16,640 $22,379 $19,105
4/30/2000 $16,447 $21,706 $18,300
5/31/2000 $16,529 $21,262 $17,839
6/30/2000 $16,557 $21,786 $18,442
7/31/2000 $16,756 $21,446 $17,925
8/31/2000 $17,232 $22,777 $18,510
9/30/2000 $17,049 $21,575 $17,528
10/31/2000 $17,168 $21,484 $17,237
11/30/2000 $16,867 $19,791 $16,192
12/31/2000 $17,349 $19,888 $16,457
1/31/2001 $17,867 $20,593 $16,776
2/28/2001 $17,849 $18,717 $15,360
3/31/2001 $17,303 $17,532 $14,354
4/30/2001 $17,793 $18,893 $15,419
5/31/2001 $18,311 $19,020 $15,227
6/30/2001 $18,382 $18,557 $14,752
7/31/2001 $18,335 $18,374 $14,558
8/31/2001 $18,129 $17,225 $13,862
9/30/2001 $16,575 $15,834 $12,643
10/31/2001 $16,612 $16,137 $12,886
11/30/2001 $17,015 $17,374 $13,650
12/31/2001 $17,393 $17,526 $13,738
1/31/2002 $17,441 $17,271 $13,323
2/28/2002 $17,595 $16,938 $13,210
3/31/2002 $18,164 $17,575 $13,797
4/30/2002 $18,454 $16,510 $13,333
5/31/2002 $18,589 $16,388 $13,364
6/30/2002 $17,429 $15,221 $12,556
7/31/2002 $16,264 $14,035 $11,499
8/31/2002 $16,420 $14,127 $11,523
9/30/2002 $15,546 $12,593 $10,258
10/31/2002 $15,585 $13,701 $11,017
11/30/2002 $15,808 $14,506 $11,614
12/31/2002 $15,658 $13,654 $11,053
1/31/2003 $15,384 $13,297 $10,719
2/28/2003 $14,964 $13,098 $10,536
3/31/2003 $15,013 $13,223 $10,507
4/30/2003 $16,147 $14,313 $11,445
5/31/2003 $17,046 $15,066 $12,105
6/30/2003 $17,316 $15,259 $12,319
7/31/2003 $17,513 $15,528 $12,571
8/31/2003 $18,024 $15,830 $12,846
9/30/2003 $18,112 $15,663 $12,927
10/31/2003 $18,869 $16,548 $13,697
11/30/2003 $19,507 $16,694 $13,909
12/31/2003 $20,401 $17,569 $14,785
1/31/2004 $20,639 $17,891 $15,025
2/29/2004 $21,273 $18,140 $15,282
3/31/2004 $21,174 $17,866 $15,187
4/30/2004 $20,798 $17,586 $14,884
5/31/2004 $20,778 $17,827 $15,030
6/30/2004 $21,152 $18,173 $15,345
7/31/2004 $20,923 $17,572 $14,848
8/31/2004 $21,043 $17,643 $14,920
9/30/2004 $21,590 $17,833 $15,207
10/31/2004 $22,009 $18,106 $15,582
11/30/2004 $23,244 $18,838 $16,408
12/31/2004 $24,094 $19,479 $17,039

Annual Report | 13

PERFORMANCE SUMMARY (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- -------------------------------------
CLASS R 12/31/04
- -------------------------------------
1-Year 17.84%
- -------------------------------------
Since Inception (1/1/02) 12.10%
- -------------------------------------

CLASS R (1/1/02-12/31/04)(1)

GRAPHIC MATERIAL (5)
This graph compares the performance of Mutual Discovery Fund - Class R, 1 as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
Index 5 and the MSCI World Index 5 from 1/1/02-12/31/04.

Mutual Discovery S&P 500 MSCI World
Date Fund Index Index
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $10,033 $9,854 $9,698
2/28/2002 $10,127 $9,664 $9,616
3/31/2002 $10,459 $10,028 $10,043
4/30/2002 $10,630 $9,420 $9,705
5/31/2002 $10,708 $9,351 $9,728
6/30/2002 $10,050 $8,685 $9,140
7/31/2002 $9,382 $8,008 $8,370
8/31/2002 $9,471 $8,061 $8,388
9/30/2002 $8,970 $7,185 $7,467
10/31/2002 $9,004 $7,817 $8,020
11/30/2002 $9,132 $8,277 $8,454
12/31/2002 $9,051 $7,791 $8,046
1/31/2003 $8,893 $7,587 $7,803
2/28/2003 $8,655 $7,473 $7,669
3/31/2003 $8,689 $7,545 $7,648
4/30/2003 $9,351 $8,167 $8,331
5/31/2003 $9,871 $8,596 $8,811
6/30/2003 $10,033 $8,706 $8,967
7/31/2003 $10,153 $8,860 $9,151
8/31/2003 $10,454 $9,032 $9,351
9/30/2003 $10,505 $8,937 $9,410
10/31/2003 $10,949 $9,442 $9,970
11/30/2003 $11,324 $9,525 $10,125
12/31/2003 $11,845 $10,024 $10,762
1/31/2004 $11,989 $10,208 $10,937
2/29/2004 $12,364 $10,350 $11,124
3/31/2004 $12,312 $10,194 $11,055
4/30/2004 $12,099 $10,034 $10,835
5/31/2004 $12,093 $10,171 $10,941
6/30/2004 $12,316 $10,369 $11,170
7/31/2004 $12,189 $10,026 $10,808
8/31/2004 $12,258 $10,066 $10,860
9/30/2004 $12,589 $10,175 $11,069
10/31/2004 $12,838 $10,331 $11,343
11/30/2004 $13,568 $10,749 $11,944
12/31/2004 $14,077 $11,114 $12,403

ENDNOTES

THE FUND'S INVESTMENTS INCLUDE FOREIGN SECURITIES AND SMALLER-COMPANY STOCKS.
FOREIGN SECURITIES RISKS INCLUDE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL,
ECONOMIC AND REGULATORY UNCERTAINTY. SMALLER-COMPANY STOCKS HAVE HISTORICALLY
EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER
THE SHORT TERM. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN MERGERS,
REORGANIZATIONS OR LIQUIDATIONS, AS WELL AS LOWER-RATED "JUNK BONDS," WHICH
ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF
THE MAIN INVESTMENT RISKS.

CLASS Z: Shares are available to certain eligible investors as described in
the prospectus.

CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.

CLASS B: These shares have higher annual fees and expenses than Class A
shares.

CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.

CLASS R: Shares are available to certain eligible investors as described in
the prospectus. These shares have higher annual fees and expenses
than Class A shares.

(1) Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.

(2) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.

(3) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.

(4) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include any current, applicable,
maximum sales charge.

(5) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The MSCI World Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity securities in
global developed markets.

14 | Annual Report

YOUR FUND'S EXPENSES

As a Fund shareholder, you can incur two types of costs:

o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and

o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.

ACTUAL FUND EXPENSES

You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:

1. Divide your account value by $1,000.

IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.

2. Multiply the result by the number under the heading "Expenses Paid During
Period."

IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 / $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS

Annual Report | 15

YOUR FUND'S EXPENSES (CONTINUED)

- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS Z VALUE 6/30/04 VALUE 12/31/04 PERIOD* 6/30/04-12/31/04
- ----------------------------------------------------------------------------------------------------------------

Actual $1,000 $1,145.70 $ 5.72
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.81 $ 5.38
- ----------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,143.90 $ 7.60
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.05 $ 7.15
- ----------------------------------------------------------------------------------------------------------------
Class B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,140.20 $11.08
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.78 $10.43
- ----------------------------------------------------------------------------------------------------------------
Class C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,139.70 $11.08
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.78 $10.43
- ----------------------------------------------------------------------------------------------------------------
Class R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,142.90 $ 8.40
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.29 $ 7.91
- ----------------------------------------------------------------------------------------------------------------

* Expenses are equal to the annualized expense ratio for each class (Z:
1.06%; A: 1.41%; B: 2.06%; C: 2.06%; and R: 1.56%), multiplied by the
average account value over the period, multiplied by 184/366 to reflect
the one-half year period.

16 | Annual Report

MUTUAL DISCOVERY FUND

FINANCIAL HIGHLIGHTS

---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2004 2003 2002 2001 2000
---------------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year .................. $ 20.81 $ 16.16 $ 18.19 $ 18.93 $ 21.10
---------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ........................... .41 .28 .33 .37 .36

Net realized and unrealized gains (losses) ......... 3.58 4.80 (1.96) (.14) 2.14
---------------------------------------------------------------------------

Total from investment operations .................... 3.99 5.08 (1.63) .23 2.50
---------------------------------------------------------------------------

Less distributions from:

Net investment income .............................. (.54) (.43) (.32) (.34) (.63)

Net realized gains ................................. -- -- (.08) (.63) (4.04)
---------------------------------------------------------------------------

Total distributions ................................. (.54) (.43) (.40) (.97) (4.67)
---------------------------------------------------------------------------

Redemption fees ..................................... --(d) -- -- -- --
---------------------------------------------------------------------------

Net asset value, end of year ........................ $ 24.26 $ 20.81 $ 16.16 $ 18.19 $ 18.93
===========================================================================

Total return(b) ..................................... 19.39% 31.55% (9.06)% 1.26% 12.59%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ..................... $2,578,585 $2,168,161 $1,673,786 $1,931,117 $2,010,578

Ratios to average net assets:*

Expenses(c) ........................................ 1.07% 1.11% 1.04% 1.04% 1.07%

Expenses, net of waiver and payments by affiliate(c) 1.07% 1.11% 1.04% 1.04% 1.05%

Net investment income .............................. 1.87% 1.55% 1.88% 1.93% 1.64%

Portfolio turnover rate ............................. 34.34% 46.34% 40.95% 59.32% 75.34%

*Ratios to average net assets, excluding
dividend expense on securities sold short:
Expenses ........................................... 1.06% 1.08% 1.03% 1.02% 1.04%
Expenses, net of waiver and payments by affiliate .. 1.06% 1.08% 1.03% 1.02% 1.02%

(a) Based on average daily shares outstanding.

(b) Total return is not annualized for periods less than one year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

Annual Report | See notes to financial statements. | 17

MUTUAL DISCOVERY FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2004 2003 2002 2001 2000
-----------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year .................. $ 20.67 $ 16.06 $ 18.08 $ 18.83 $ 21.00
-----------------------------------------------------------------------

Income from investment operations:

Net investment income(a) ........................... .33 .21 .27 .30 .28

Net realized and unrealized gains (losses) ......... 3.54 4.78 (1.95) (.14) 2.14
-----------------------------------------------------------------------

Total from investment operations .................... 3.87 4.99 (1.68) .16 2.42
-----------------------------------------------------------------------

Less distributions from:

Net investment income .............................. (.47) (.38) (.26) (.28) (.55)

Net realized gains ................................. -- -- (.08) (.63) (4.04)
-----------------------------------------------------------------------

Total distributions ................................. (.47) (.38) (.34) (.91) (4.59)
-----------------------------------------------------------------------

Redemption fees ..................................... --(d) -- -- -- --
-----------------------------------------------------------------------

Net asset value, end of year ........................ $ 24.07 $ 20.67 $ 16.06 $ 18.08 $ 18.83
=======================================================================

Total return(b) ..................................... 18.98% 31.13% (9.39)% .86% 12.27%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ..................... $2,106,695 $1,439,579 $925,278 $911,434 $877,528
Ratios to average net assets:*

Expenses(c) ........................................ 1.42% 1.46% 1.39% 1.39% 1.42%

Expenses, net of waiver and payments by affiliate(c) 1.42% 1.46% 1.39% 1.39% 1.40%

Net investment income .............................. 1.52% 1.20% 1.53% 1.57% 1.30%

Portfolio turnover rate ............................. 34.34% 46.34% 40.95% 59.32% 75.34%

*Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ........................................... 1.41% 1.43% 1.38% 1.37% 1.39%
Expenses, net of waiver and payments by affiliate .. 1.41% 1.43% 1.38% 1.37% 1.37%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the sales commissions or the contingent
deferred sales charge, and is not annualized for periods less than one
year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

18 | See notes to financial statements. | Annual Report

MUTUAL DISCOVERY FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2004 2003 2002 2001 2000
-------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year .................. $ 20.35 $ 15.85 $ 17.87 $ 18.66 $ 20.90
-------------------------------------------------------------------

Income from investment operations:

Net investment income(a) ........................... .18 .09 .16 .16 .15

Net realized and unrealized gains (losses) ......... 3.49 4.69 (1.92) (.12) 2.11
-------------------------------------------------------------------

Total from investment operations .................... 3.67 4.78 (1.76) .04 2.26
-------------------------------------------------------------------

Less distributions from:

Net investment income .............................. (.35) (.28) (.18) (.20) (.46)

Net realized gains ................................. -- -- (.08) (.63) (4.04)
-------------------------------------------------------------------

Total distributions ................................. (.35) (.28) (.26) (.83) (4.50)
-------------------------------------------------------------------

Redemption fees ..................................... --(d) -- -- -- --
-------------------------------------------------------------------

Net asset value, end of year ........................ $ 23.67 $ 20.35 $ 15.85 $ 17.87 $ 18.66
===================================================================

Total return(b) ..................................... 18.22% 30.22% (9.94)% .21% 11.50%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ..................... $186,841 $115,801 $64,747 $41,346 $19,949

Ratios to average net assets:*

Expenses(c) ........................................ 2.07% 2.11% 2.04% 2.04% 2.07%

Expenses, net of waiver and payments by affiliate(c) 2.07% 2.11% 2.04% 2.04% 2.05%

Net investment income .............................. .87% .55% .88% .85% .70%

Portfolio turnover rate ............................. 34.34% 46.34% 40.95% 59.32% 75.34%

*Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ........................................... 2.06% 2.08% 2.03% 2.02% 2.04%
Expenses, net of waiver and payments by affiliate .. 2.06% 2.08% 2.03% 2.02% 2.02%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

Annual Report | See notes to financial statements. | 19

MUTUAL DISCOVERY FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2004 2003 2002 2001 2000
---------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year .................. $ 20.59 $ 16.02 $ 18.03 $ 18.77 $ 20.95
---------------------------------------------------------------------

Income from investment operations:

Net investment income(a) ........................... .19 .10 .16 .18 .14

Net realized and unrealized gains (losses) ......... 3.53 4.73 (1.94) (.13) 2.13
---------------------------------------------------------------------

Total from investment operations .................... 3.72 4.83 (1.78) .05 2.27
---------------------------------------------------------------------

Less distributions from:

Net investment income .............................. (.34) (.26) (.15) (.16) (.41)

Net realized gains ................................. -- -- (.08) (.63) (4.04)
---------------------------------------------------------------------

Total distributions ................................. (.34) (.26) (.23) (.79) (4.45)
---------------------------------------------------------------------

Redemption fees ..................................... --(d) -- -- -- --
---------------------------------------------------------------------

Net asset value, end of year ........................ $ 23.97 $ 20.59 $ 16.02 $ 18.03 $ 18.77
=====================================================================

Total return(b) ..................................... 18.17% 30.29% (9.98)% .25% 11.53%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ..................... $968,934 $725,489 $525,375 $561,808 $554,968

Ratios to average net assets:*

Expenses(c) ........................................ 2.07% 2.11% 2.03% 2.03% 2.07%

Expenses, net of waiver and payments by affiliate(c) 2.07% 2.11% 2.03% 2.03% 2.04%

Net investment income .............................. .87% .55% .89% .93% .65%

Portfolio turnover rate ............................. 34.34% 46.34% 40.95% 59.32% 75.34%

*Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ........................................... 2.06% 2.08% 2.02% 2.01% 2.04%
Expenses, net of waiver and payments by affiliate .. 2.06% 2.08% 2.02% 2.01% 2.01%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

20 | See notes to financial statements. | Annual Report

MUTUAL DISCOVERY FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

------------------------------------
YEAR ENDED DECEMBER 31,
CLASS R 2004 2003 2002(e)
------------------------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year .................................................. $ 20.57 $ 16.01 $18.08
------------------------------------

Income from investment operations:

Net investment income(a) ........................................................... .29 .17 .25

Net realized and unrealized gains (losses) ......................................... 3.54 4.76 (1.95)
------------------------------------

Total from investment operations .................................................... 3.83 4.93 (1.70)
------------------------------------

Less distributions from:

Net investment income .............................................................. (.46) (.37) (.29)

Net realized gains ................................................................. -- -- (.08)
------------------------------------

Total distributions ................................................................. (.46) (.37) (.37)
------------------------------------

Redemption fees ..................................................................... --(d) -- --
------------------------------------

Net asset value, end of year ........................................................ $ 23.94 $ 20.57 $16.01
====================================

Total return(b) ..................................................................... 18.84% 30.87% (9.49)%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ..................................................... $46,690 $19,546 $3,932

Ratios to average net assets:*

Expenses(c) ........................................................................ 1.57% 1.61% 1.54%(f)

Net investment income .............................................................. 1.37% 1.05% 1.38%(f)

Portfolio turnover rate ............................................................. 34.34% 46.34% 40.95%

*Ratios to average net assets, excluding dividend expense on securities sold short:
Expenses ........................................................................... 1.56% 1.58% 1.54%(f)

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.

(c) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.

(d) Amount is less than $0.001 per share.

(e) Effective date of Class R shares was January 2, 2002.

(f) Annualized.

Annual Report | See notes to financial statements. | 21

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004

- ---------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------

COMMON STOCKS AND OTHER EQUITY INTERESTS 92.0%
AEROSPACE & DEFENSE .4%
Northrop Grumman Corp. ................................. United States 433,600 $ 23,570,496
--------------
AIRLINES .6%
(a)Ace Aviation Holdings Inc. ............................. Canada 1,198,374 35,521,077
(a),(b),(f)Air Canada Inc., Contingent Distribution ............... Canada 249,992,002 --
--------------
35,521,077
--------------
AUTOMOBILES .2%
Hero Honda Motors Ltd. ................................. India 1,042,903 13,771,142
--------------
BEVERAGES 5.3%
Brown-Forman Corp., A .................................. United States 143,200 7,268,832
Brown-Forman Corp., B .................................. United States 391,650 19,065,522
Carlsberg AS, A ........................................ Denmark 113,300 5,208,103
Carlsberg AS, B ........................................ Denmark 1,876,968 94,838,728
Coca-Cola Enterprises Inc. ............................. United States 894,300 18,646,155
Diageo PLC ............................................. United Kingdom 5,181,408 73,895,085
Fomento Economico Mexicano SA de CV Femsa, ADR ......... Mexico 991,000 52,136,510
Heineken Holding NV, A ................................. Netherlands 1,453,069 43,872,849
--------------
314,931,784
--------------
CAPITAL MARKETS 2.2%
(a)A.B. Watley Group Inc. ................................. United States 128,355 21,820
Guinness Peat Group PLC ................................ New Zealand 19,778,076 30,817,590
Irish Life & Permanent PLC ............................. Irish Republic 2,899,665 53,631,919
(c)Leucadia National Corp. ................................ United States 684,780 45,199,589
--------------
129,670,918
--------------
CHEMICALS 2.9%
Givaudan AG ............................................ Switzerland 88,065 57,990,913
Linde AG ............................................... Germany 440,300 27,430,621
(a)MG Technologies AG ..................................... Germany 2,933,641 34,634,257
Solvay SA .............................................. Belgium 437,923 48,135,161
--------------
168,190,952
--------------
COMMERCIAL BANKS 4.0%
Allied Irish Banks PLC ................................. Irish Republic 4,877,727 101,139,430
Bank of Ireland ........................................ Irish Republic 2,475,126 40,870,211
BNP Paribas SA ......................................... France 427,700 30,934,715
(a)Cerberus NCB Acquisition LP Ltd., wts., 8/29/13 ........ Japan 9,799,350 4,899,675
Danske Bank ............................................ Denmark 1,352,880 41,397,192
(a),(c),(d)FE Capital Holdings Ltd. ............................... Japan 11,589 15,412,910
Kansai Urban Banking Corp. ............................. Japan 678,808 1,259,261
(a),(d)Nippon Investment LLC .................................. Japan 8,656,000 --
--------------
235,913,394
--------------

22 | Annual Report

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
COMMERCIAL SERVICES & SUPPLIES .5%
(a)Comdisco Holding Co., Inc. ................................... United States 57 $ 1,272
(b)Comdisco, Contingent Distribution ............................ United States 41,726,153 --
(a)Fursys Inc. .................................................. South Korea 319,900 4,326,314
Republic Services Inc. ....................................... United States 731,600 24,537,864
(a),(b)Safety Kleen Corp., Contingent Distribution .................. United States 520,000 --
------------
28,865,450
------------
COMPUTERS & PERIPHERALS
(a)DecisionOne Corp. ............................................ United States 87,619 --
------------
CONSTRUCTION MATERIALS 1.1%
Ciments Francais SA .......................................... France 399,572 37,304,665
(a)Hanil Cement Manufacturing Co. Ltd. .......................... South Korea 45,950 2,663,254
RMC Group PLC ................................................ United Kingdom 1,357,750 22,126,180
------------
62,094,099
------------
DISTRIBUTORS .5%
Compania de Distribucion Integral Logista SA ................. Spain 564,170 30,538,920
------------

DIVERSIFIED FINANCIAL SERVICES 6.7%
Brascan Corp., A ............................................. Canada 2,147,100 77,247,980
Deutsche Bourse AG ........................................... Germany 409,100 24,581,974
Euronext ..................................................... Netherlands 1,329,836 40,549,062
Jardine Matheson Holdings Ltd. ............................... Hong Kong 3,381,000 53,757,900
Jardine Strategic Holdings Ltd. .............................. Hong Kong 7,110,400 58,305,280
London Stock Exchange PLC .................................... United Kingdom 5,600 62,559
(b)Marconi Corp., Contingent Distribution ....................... United Kingdom 33,909,700 --
Pargesa Holdings SA .......................................... Switzerland 18,959 66,584,134
Remgro Ltd. .................................................. South Africa 4,382,450 72,996,996
------------
394,085,885
------------
DIVERSIFIED TELECOMMUNICATION SERVICES 2.4%
(a),(c),(e)AboveNet Inc. ................................................ United States 332,512 7,968,118
(a),(b),(e)AboveNet Inc., Contingent Distribution ....................... United States 46,367,000 --
(a),(c),(e)AboveNet Inc., wts., 9/08/08 ................................. United States 11,105 71,072
(a),(c),(e)AboveNet Inc., wts., 9/08/10 ................................. United States 13,066 52,264
(a)Belgacom SA .................................................. Belgium 458,000 19,763,882
Chunghwa Telecom Co. Ltd., ADR ............................... Taiwan 999,982 21,049,621
(b)Global Crossing Holdings Ltd., Contingent Distribution ....... United States 45,658,716 57,073
Koninklijke KPN NV ........................................... Netherlands 2,137,200 20,272,252
(a)MCI Inc. ..................................................... United States 774,034 15,604,526
Sprint Corp. ................................................. United States 162,100 4,028,185
(a),(b)Telewest Communications PLC, Contingent Distribution ......... United Kingdom 53,009,022 --
(a),(b)Telewest Finance Ltd., Contingent Distribution ............... United Kingdom 5,738,000 --
(a)Telewest Global Inc. ......................................... United Kingdom 3,124,100 54,921,678
------------
143,788,671
------------

Annual Report | 23

MUTUAL DISCOVERY FUND

Statement of Investments, December 31, 2004 (continued)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
ELECTRIC UTILITIES .5%
E.ON AG ...................................................... Germany 320,100 $ 29,181,347
------------

FOOD & STAPLES RETAILING .2%
(a)Kroger Co. ................................................... United States 722,800 12,677,912
------------

FOOD PRODUCTS 6.7%
Cadbury Schweppes PLC ........................................ United Kingdom 4,575,019 42,590,583
CSM NV ....................................................... Netherlands 7,700 239,489
(d)Farmer Brothers Co. .......................................... United States 904,637 21,928,401
General Mills Inc. ........................................... United States 478,600 23,791,206
Groupe Danone ................................................ France 606,400 55,914,997
(a)Lotte Confectionary Co. Ltd. ................................. South Korea 50,489 38,676,369
Nestle SA .................................................... Switzerland 219,229 57,263,820
Orkla ASA .................................................... Norway 4,611,582 151,325,317
------------
391,730,182
------------

GAS UTILITIES .4%
Tokyo Gas Co. Ltd. ........................................... Japan 6,217,500 25,496,485
------------

HEALTH CARE EQUIPMENT & SUPPLIES .2%
(n)Guidant Corp. ................................................ United States 180,200 12,992,420
------------

HEALTH CARE PROVIDERS & SERVICES .6%
(a)Alderwoods Group Inc. ........................................ United States 50,322 572,664
(a),(e)Kindred Healthcare Inc. ...................................... United States 934,740 26,595,690
(a),(e)Kindred Healthcare Inc., Jul. 23.75 Calls, 7/17/11 ........... United States 2,259 14,006
(a),(e)Kindred Healthcare Inc., Jan. 26.00 Calls, 1/01/12 ........... United States 452 1,785
(a),(e)Kindred Healthcare Inc., Jan. 9.07 Calls, 1/01/13 ............ United States 226 4,718
(a),(e)Kindred Healthcare Inc., wts., Series A, 4/20/06 ............. United States 88,766 2,637,771
(a),(e)Kindred Healthcare Inc., wts., Series B, 4/20/06 ............. United States 221,915 5,818,611
Select Medical Corp. ......................................... United States 177,100 3,116,960
------------
38,762,205
------------

HOTELS RESTAURANTS & LEISURE .2%
(a)Caesars Entertainment Inc. ................................... United States 67,100 1,351,394
(a)FHC Delaware Inc. ............................................ United States 212,022 1,668,613
(a),(c),(d)Hancock Discovery LLC ........................................ United States 8,758,216 500,007
Mandalay Resort Group ........................................ United States 83,200 5,859,776
------------
9,379,790
------------

HOUSEHOLD PRODUCTS .7%
(a)Amorepacific Corp. ........................................... South Korea 111,070 27,842,606
KAO Corp. .................................................... Japan 520,900 13,325,112
------------
41,167,718
------------

INDUSTRIAL CONGLOMERATES .1%
Swire Pacific Ltd., B ........................................ Hong Kong 5,062,100 7,522,033
------------

INSURANCE 10.0%
(a)Alleghany Corp. .............................................. United States 72,132 20,575,653
(a)Berkshire Hathaway Inc., A ................................... United States 853 74,978,700
(a)Berkshire Hathaway Inc., B ................................... United States 38,270 112,360,720

24 | Annual Report

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
INSURANCE (CONT.)
Catlin Group ....................................................... United Kingdom 4,088,580 $ 25,721,373
E-L Financial Corp. Ltd. ........................................... Canada 177,619 50,022,404
Hartford Financial Services Group Inc. ............................. United States 511,000 35,417,410
(a),(c),(d)Imagine Group Holdings Ltd. ........................................ Bermuda 4,551,501 46,614,334
IPC Holdings Ltd. .................................................. Bermuda 325,665 14,169,684
Montpelier Re Holdings Ltd. ........................................ Bermuda 107,027 4,115,188
Old Republic International Corp. ................................... United States 1,518,550 38,419,315
(a),(c)Olympus Re Holdings Ltd. ........................................... Bermuda 47,160 8,072,849
Prudential Financial Inc. .......................................... United States 421,200 23,149,152
St. Paul Travelers Cos. Inc. ....................................... United States 559,763 20,750,414
White Mountains Insurance Group Inc. ............................... United States 175,415 113,318,090
------------
587,685,286
------------

LEISURE EQUIPMENT & PRODUCTS .5%
Agfa Gevaert NV .................................................... Belgium 367,220 12,438,000
Mattel Inc. ........................................................ United States 721,400 14,060,086
Shimano Inc. ....................................................... Japan 34,800 993,849
------------
27,491,935
------------

MACHINERY 1.8%
Schindler Holding AG ............................................... Switzerland 201,292 79,707,355
Schindler Holding AG, Reg D ........................................ Switzerland 65,126 27,160,850
------------
106,868,205
------------

MARINE .5%
A P Moller - Maersk A/S ............................................ Denmark 3,748 30,902,037
------------

MEDIA 8.6%
Astral Media Inc., A ............................................... Canada 1,394,900 37,892,060
British Sky Broadcasting Group PLC ................................. United Kingdom 2,146,300 23,152,916
Clear Channel Communications Inc. .................................. United States 945,700 31,671,493
(a)Comcast Corp., A ................................................... United States 179,400 5,891,496
Daekyo Co. Ltd. .................................................... South Korea 31,760 2,141,468
E.W. Scripps Co., A ................................................ United States 290,600 14,030,168
EchoStar Communications Corp., A ................................... United States 581,900 19,342,356
Hollinger International Inc. ....................................... United States 880,440 12,424,769
(a)JC Decaux SA ....................................................... France 494,086 14,401,790
(a)Liberty Media Corp., A ............................................. United States 4,255,518 46,725,588
(a)News Corp. Ltd., A ................................................. United States 1,615,600 30,147,096
(a)NTL Inc. ........................................................... United Kingdom 1,315,722 95,995,077
Omnicom Group Inc. ................................................. United States 197,900 16,686,928
SES Global, FDR .................................................... Luxembourg 6,440,290 83,461,936
(a)TVMAX Holdings Inc. ................................................ United States 118,432 118,432
Viacom Inc., B ..................................................... United States 388,900 14,152,071
Washington Post Co., B ............................................. United States 60,003 58,984,149
------------
507,219,793
------------

Annual Report | 25

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
METALS & MINING 8.0%
Anglo American PLC ..................................................... United Kingdom 3,561,117 $ 84,212,372
Anglo American PLC, ADR ................................................ United Kingdom 1,000 23,790
(a)Apollo Gold Corp. ...................................................... Canada 1,115,900 958,333
Barrick Gold Corp. ..................................................... Canada 547,000 13,248,340
Freeport McMoran Copper & Gold Inc., B ................................. United States 723,200 27,647,936
(a),(d)Gammon Lake Resources Inc. ............................................. Canada 2,136,800 11,455,892
(a),(d)Gammon Lake Resources Inc., wts., 4/30/05 .............................. Canada 2,265,300 12,144,811
(a)Glamis Gold Ltd. ....................................................... Canada 782,700 13,417,528
Gold Fields Ltd. ....................................................... South Africa 152,344 1,869,004
Harmony Gold Mining Ltd., ADR .......................................... South Africa 438,500 4,064,895
Hindalco Industries Inc. ............................................... India 397,500 13,113,364
Impala Platinum Holdings Ltd. .......................................... South Africa 462,062 39,069,320
(a),(c)International Steel Group .............................................. United States 2,689,230 103,621,410
(a)Kinross Gold Corp. ..................................................... Canada 687,500 4,843,770
(a)LionOre Mining International Ltd. ...................................... Canada 3,598,900 20,584,862
Newmont Mining Corp. ................................................... United States 1,874,600 83,250,986
Noranda Inc. ........................................................... Canada 1,069,800 18,785,165
Placer Dome Inc. ....................................................... Canada 326,500 6,146,971
(a)Randgold & Exploration Co. Ltd., ADR ................................... South Africa 143,100 251,856
(a)Wheaton River Minerals Ltd. ............................................ Canada 1,868,279 6,075,198
(a)Wheaton River Minerals Ltd., wts., 5/30/07 ............................. Canada 600,670 1,181,957
(n)WMC Resources Ltd. ..................................................... Australia 1,073,300 6,065,693
------------
472,033,453
------------
MULTI-UTILITIES & UNREGULATED POWER .4%
(a)Northwestern Corp. ..................................................... United States 319,179 8,937,012
(a),(b)Northwestern Corp., Contingent Distribution ............................ United States 9,790,000 766,482
(a),(f)NRG Energy Inc. ........................................................ United States 358,328 12,917,724
------------
22,621,218
------------
OIL & GAS 3.1%
(a)Anchor Resources LLC ................................................... United States 53,272 --
Bharat Petroleum Corp. Ltd. ............................................ India 211,700 2,245,978
BP PLC ................................................................. United Kingdom 2,095,000 20,428,040
BP PLC, ADR ............................................................ United Kingdom 180,900 10,564,560
Canadian Oil Sands Trust ............................................... Canada 389,100 21,934,424
Eni SpA ................................................................ Italy 847,600 21,186,549
(a)General Maritime Corp. ................................................. United States 17,000 679,150
Oil & Natural Gas Corp. Ltd. ........................................... India 861,829 16,330,912
Suncor Energy Inc. ..................................................... Canada 1,037,600 36,681,736
Total SA, B ............................................................ France 127,671 27,841,190
Total SA, B, ADR ....................................................... France 208,648 22,917,896
------------
180,810,435
------------
PAPER & FOREST PRODUCTS 1.9%
(d)Potlatch Corp. ......................................................... United States 2,190,150 110,777,787
------------

26 | Annual Report

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
PERSONAL PRODUCTS .3%
Beiersdorf AG ...................................................... Germany 130,510 $ 15,216,603
------------

PHARMACEUTICALS 2.3%
Fujisawa Pharmaceutical Co. Ltd. ................................... Japan 1,218,800 33,379,555
Pfizer Inc. ........................................................ United States 491,500 13,216,435
(a)Pfizer Inc., Mar. 25.00 Puts, 3/18/05 .............................. United States 2,776 194,320
Sanofi-Aventis ..................................................... France 388,595 31,006,603
Takeda Pharmaceutical Co. Ltd. ..................................... Japan 672,500 33,881,078
Wyeth .............................................................. United States 540,300 23,011,377
Yamanouchi Pharmaceutical Co. Ltd. ................................. Japan 42,300 1,647,891
------------
136,337,259
------------

REAL ESTATE 1.8%
(a)Canary Wharf Group PLC ............................................. United Kingdom 5,400,183 30,681,680
iStar Financial Inc. ............................................... United States 1,056,000 47,794,560
(a),(c)Security Capital European Realty ................................... Luxembourg 14,787 106,466
(a),(c)(d)Torre Mayor Investments, LP ........................................ Mexico 170
11,050,000
Ventas Inc. ........................................................ United States 516,500 14,157,265
------------
103,789,971
------------
ROAD & RAIL 1.9%
CSX Corp. .......................................................... United States 443,700 17,783,496
(c),(d)Florida East Coast Industries Inc. ................................. United States 2,247,600 96,298,422

------------
114,081,918
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT .4%
Samsung Electronics Co. Ltd. ....................................... South Korea 55,500 24,152,579
------------

SOFTWARE .6%
Nintendo Co. Ltd. .................................................. Japan 200,200 25,156,942
(a),(n)Symantec Corp. ..................................................... United States 171,100 4,407,536
(a),(n)Veritas Software Corp. ............................................. United States 172,800 4,933,440
------------
34,497,918
------------
THRIFTS & MORTGAGE FINANCE .2%
Hudson City Bancorp Inc. ........................................... United States 376,333 13,856,581
------------

TOBACCO 13.3%
Altadis SA ......................................................... Spain 3,181,151 145,476,834
Altria Group Inc. .................................................. United States 995,105 60,800,915
British American Tobacco PLC ....................................... United Kingdom 10,342,443 178,170,805
Gallaher Group PLC ................................................. United Kingdom 3,944,642 59,929,059
Imperial Tobacco Group PLC ......................................... United Kingdom 5,733,336 157,040,011
ITC Ltd. ........................................................... India 1,202,467 36,415,983
Japan Tobacco Inc. ................................................. Japan 2,997 34,236,380
KT & G Corp. ....................................................... South Korea 1,335,770 39,936,323
KT & G Corp., GDR, 144A ............................................ South Korea 4,680,078 68,797,147
------------
780,803,457
------------

Annual Report | 27

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONT.)
WIRELESS TELECOMMUNICATION SERVICES
(a)Vast Solutions Inc., B1 .......................................... United States 36,976 $ --
(a)Vast Solutions Inc., B2 .......................................... United States 36,976 --
(a)Vast Solutions Inc., B3 .......................................... United States 36,976 --
--------------
--
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $3,658,167,648) .......................................... 5,418,999,315
--------------
PREFERRED STOCKS .4%
DIVERSIFIED TELECOMMUNICATION SERVICES
PTV Inc., 10.00%, A, pfd ......................................... United Kingdom 86,280 390,848
--------------
ELECTRIC UTILITIES
(a)Montana Power Co., 8.45%, pfd .................................... United States 49,500 408,375
--------------
FOOD PRODUCTS .1%
Unilever NV, pfd ................................................. Netherlands 494,300 3,360,532
--------------
METALS & MINING .3%
(a),(d),(e)Esmark Inc., Series A, 10.00%, cvt., pfd ......................... United States 18,647 18,646,800
--------------
TOTAL PREFERRED STOCKS (COST $22,524,301) ........................ 22,806,555
--------------

-------------------
PRINCIPAL AMOUNT(g)
-------------------

CORPORATE BONDS & NOTES 1.7%
Anchor Resources LLC, 12.00%, 12/17/06 ........................... United States $ 24,923 24,923
Calpine Generating Co., 144A, FRN, 11.169%, 4/01/11 .............. United States 9,411,000 9,246,308
Eurotunnel PLC, FRN,
6.347%, 12/31/18, Tier 2 ....................................... United Kingdom 6,155,799GBP 8,507,381
6.347%, 12/31/25, Tier 3 ....................................... United Kingdom 23,082,138GBP 18,608,196
Eurotunnel SA, FRN,
3.449%, 12/31/18, Tier 2 (LIBOR) ............................... France 1,420,047EUR 1,387,442
3.449%, 12/31/25, Tier 3 (LIBOR) ............................... France 27,236,561EUR 15,523,199
3.453%, 12/31/18, Tier 2 (PIBOR) ............................... France 628,134EUR 613,711
3.453%, 12/31/25, Tier 3 (PIBOR) ............................... France 5,943,809EUR 3,387,613
Guadalupe Power Partners LP,
Power Sale Agreement, 6.00%, 9/21/06 ........................... United States 180,700 159,016
Term Loan, 4.313%, 9/21/06 ..................................... United States 1,335,767 1,175,475
Motor Coach Industries International Inc., FRN, 15.40%, 10/01/08 . United States 25,087,380 25,087,380
Reliant Energy Channelview LP Inc.,
Revolver, 5.50%, 8/15/07 ....................................... United States 306,300 260,355
Term Loan A, 3.813%, 11/26/17 .................................. United States 3,232,461 2,747,592
Seton House Finance Ltd., zero cpn., 2/07/12 ..................... United Kingdom 41,212,000EUR 14,260,788
TVMAX Holdings Inc., PIK,
11.50%, 6/30/05 ................................................ United States 119,035 119,035
14.00%, 6/30/05 ................................................ United States 477,104 477,104
--------------
TOTAL CORPORATE BONDS & NOTES (Cost $107,487,633) ................ 101,585,518
--------------

28 | Annual Report

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

- -------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT(g) VALUE
- -------------------------------------------------------------------------------------------------------------------------------

BONDS & NOTES IN REORGANIZATION 2.2%
(a),(h)Adelphia Communications Corp.,
9.25%, 10/01/02 .............................................. United States $ 4,491,000 $ 4,322,587
8.125%, 7/15/03 .............................................. United States 650,000 614,250
7.50%, 1/15/04 ............................................... United States 1,655,000 1,539,150
10.50%, 7/15/04 .............................................. United States 2,605,000 2,578,950
9.875%, 3/01/05 .............................................. United States 1,168,000 1,124,200
10.25%, 11/01/06 ............................................. United States 4,326,000 4,228,665
9.875%, 3/01/07 .............................................. United States 167,000 160,737
8.375%, 2/01/08 .............................................. United States 4,053,000 3,840,217
7.75%, 1/15/09 ............................................... United States 4,500,000 4,230,000
7.875%, 5/01/09 .............................................. United States 4,280,000 4,001,800
9.375%, 11/15/09 ............................................. United States 829,000 822,783
10.875%, 10/01/10 ............................................ United States 3,229,000 3,212,855
(a),(h)Aiken Cnty S C Indl Rev Beloit, 6.00%, 12/01/11 ................ United States 280,000 1,400
(a),(h)Armstrong Holdings Inc.,
6.50%, 8/15/05 ............................................... United States 982,000 714,405
9.75%, 4/15/08 ............................................... United States 1,837,000 1,336,418
Revolver, 10/29/03 ........................................... United States 1,912,950 1,319,936
Trade Claim .................................................. United States 5,129,100 3,590,370
(a),(h)Century Communications Corp.,
9.50%, 3/01/05 ............................................... United States 870,000 1,057,050
8.875%, 1/15/07 .............................................. United States 1,101,000 1,326,705
8.75%, 10/01/07 .............................................. United States 1,677,000 1,978,860
8.375%, 12/15/07 ............................................. United States 392,000 468,440
Series B, zero cpn., 1/15/08 ................................. United States 3,017,000 2,126,985
zero cpn., 3/15/03 ........................................... United States 6,285,000 6,693,525
(h)DecisionOne Corp., Term Loan ................................... United States 2,638,349 659,587
(a),(h)Harnischfeger Industries Inc.,
8.90%, 3/01/22 ............................................... United States 2,885,000 26,831
8.70%, 6/15/22 ............................................... United States 2,715,000 25,793
7.25%, 12/15/25 .............................................. United States 3,930,000 36,942
6.875%, 2/15/27 .............................................. United States 3,670,000 33,764
Stipulated Bank Claim ........................................ United States 4,550,000 41,405
(a),(h)Mirant Americas Generation Inc.,
7.625%, 5/01/06 .............................................. United States 834,000 900,720
8.30%, 5/01/11 ............................................... United States 3,665,000 3,894,063
9.125%, 5/01/31 .............................................. United States 2,868,000 3,004,230
(a),(h)Mirant Corp.,
Tranche C Revolver ........................................... United States 5,745,885 3,964,661
4 Year Revolver, 7/17/05 ..................................... United States 3,663,585 2,766,006
364 Day Revolver ............................................. United States 9,888,400 6,872,438
(a),(h)Owens Corning, Revolver ........................................ United States 24,781,989 22,055,970
(a),(h)Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17 ........ United States 150,000 750
(a),(h)Safety Kleen Services, 9.25%, 6/01/08 .......................... United States 40,000 150

Annual Report | 29

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT(g) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------

BONDS & NOTES IN REORGANIZATION (CONT.)
(a),(h)Teco Panda,
Bank Claim ....................................................... United States $ 1,664,400 $ 998,640
Bank Claim 2 ..................................................... United States 12,815,600 8,073,828
Bank Claim 3 ..................................................... United States 75,608 75,608
Debt Service Reserve L/C Loan .................................... United States 413,400 260,442
Project L/C Loan Facility ........................................ United States 1,757,010 1,106,916
(h)Trump Atlantic,
11.25%, 5/01/06 .................................................. United States 18,480,000 17,717,700
Series B, 11.25%, 5/01/06 ........................................ United States 5,431,000 5,206,971
Series B, 144A, 11.25%, 5/01/06 .................................. United States 335,000 321,181
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $109,513,222) .......... 129,334,884
--------------

----------------
SHARES/PRINCIPAL
AMOUNT(g)
----------------

COMPANIES IN LIQUIDATION
(a)Brunos Inc., Liquidating Unit ...................................... United States 40,574 89,263
(a)City Investing Co. Liquidating Trust ............................... United States 125,500 242,215
(a)MBOP Liquidating Trust ............................................. United States 273,144 683
(a)Petrie Stores Liquidating Trust, CBI ............................... United States 1,213,700 534,028
(a)United Cos. Financial Corp.,
Bank Claim ....................................................... United States 77,701 --
Revolver ......................................................... United States 19,711,401 --
--------------
TOTAL COMPANIES IN LIQUIDATION (COST $102,845) ..................... 866,189
--------------

GOVERNMENT AGENCIES 4.1%
(i)Federal Home Loan Bank, 1.25% - 2.26%, 1/03/05 - 1/26/07 ........... United States 171,656,000 170,401,126
Federal National Mortgage Association, 1.81% - 2.20%, 12/23/05 -
12/18/06 ......................................................... United States 20,000,000 19,692,690
Federal Republic of Germany, 4.25%, 2/18/05 ........................ Germany 15,000,000EUR 20,408,118
German Treasury Bill, 2.028% - 2.090%, 1/12/05 - 3/16/05 ........... Germany 10,000,000EUR 13,533,183
Kingdom of Norway, 6.75%, 1/15/07 .................................. Norway 51,550,000NOK 9,215,834
U.S. Treasury Bill, 1.895%, 2/24/05 ................................ United States 10,000,000 9,971,590
--------------
TOTAL GOVERNMENT AGENCIES (COST $239,395,817) ...................... 243,222,541
--------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $4,137,191,466) ............................................ 5,916,815,002
--------------

30 | Annual Report

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

REPURCHASE AGREEMENTS
(j),(k)Bank of America LLC, 2.32%, 1/03/05 (Maturity Value $20,005),
Collateralized by U.S. Government Agency Securities,
3.929-6.50%, 11/1/17-12/1/34 ....................................... United States $ 20,001 $ 20,001
(j),(k)Barclays Capital Inc., 2.25%, 1/03/05 (Maturity Value $20,2005),
Collateralized by U.S. Government Agency Securities,
0.00-7.00%, 3/21/05-8/15/19 ........................................ United States 20,001 20,001
(j),(k)Bear Stearns & Co. 2.25% 1/03/05 (Maturity Value $20,005),
Collateralized by U.S. Treasury Bond, 11/15/21; and
U.S. Treasury Note, 2/15/07 ........................................ United States 20,001 20,001
(j),(k)Goldman Sachs & Co., 2.29%, 1/03/05 (Maturity Value $15,004),
Collateralized by U.S. Government Agency Securities,
4.00-6.50%, 3/01/17-1/01/35 ........................................ United States 15,001 15,001
(j),(k)Morgan Stanley & Co. Inc., 2.25%, 1/03/05 (Maturity Value $20,005),
Collateralized by U.S. Government Agency Securities,
4.00-8.00%, 7/01/08-1/01/35 ........................................ United States 20,001 20,001
---------------
TOTAL REPURCHASE AGREEMENTS (COST $95,005) ........................... 95,005
---------------

TOTAL INVESTMENTS (COST $4,137,286,471) 100.4% ....................... 5,916,910,007
OPTIONS WRITTEN ...................................................... (201,533)
SECURITIES SOLD SHORT (.6)% .......................................... (36,223,652)
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS (1.3)% ............. (78,710,158)
OTHER ASSETS, LESS LIABILITIES 1.5% .................................. 85,970,349
---------------
NET ASSETS 100.0% .................................................... $ 5,887,745,013
---------------
OPTIONS WRITTEN

---------
ISSUER CONTRACTS
---------

HEALTH CARE EQUIPMENT & Supplies
(l)Guidant Corp., Jan. 70.00 Calls, 1/21/05 ............................. United States 183 43,005
---------------
METALS & MINING
(l)WMC Resources Ltd., Jan. 7.00 Calls, 1/26/05 ......................... Australia 279 73,159
(l)WMC Resources Ltd., Jan. 7.25 Calls, 1/26/05 ......................... Australia 126 18,246
---------------
91,405
---------------
SOFTWARE
(l)Symantec Corp., Jan. 25.00 Calls, 1/21/05 ............................ United States 261 39,150
(l)Symantec Corp., Jan. 27.50 Calls, 1/21/05 ............................ United States 173 7,093
(l)Veritas Software Corp., Jan. 30.00 Calls, 1/21/05 .................... United States 348 20,880
---------------
67,123
---------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $187,538) ................... $ 201,533
---------------

Annual Report | 31

MUTUAL DISCOVERY FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)

SECURITIES SOLD SHORT .6% -----------------------------------------------------
ISSUER COUNTRY SHARES VALUE
-----------------------------------------------------

COMMUNICATIONS EQUIPMENT
(m)Tellabs Inc. United States 72,497 $ 622,749
--------------
DIVERSIFIED FINANCIAL SERVICES .1%
(m)Nasdaq 100 United States 178,100 7,109,752
--------------
FOOD PRODUCTS .4%
(m)Kraft Foods Inc., A United States 661,443 23,553,985
--------------
HOTELS RESTAURANTS & LEISURE
(m)Harrah's Entertainment Inc. United States 15,000 1,003,350
--------------
PHARMACEUTICALS .1%
(m)Johnson & Johnson United States 62,028 3,933,816
--------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $34,463,607) $ 36,223,652
--------------

CURRENCY ABBREVIATIONS: | EUR - Euro | GBP - British Pound
| NOK - Norwegian Krone

(a) Non-income producing.

(d) See Note 11 regarding holdings of 5% voting securities.

(e) See Note 12 regarding other considerations.

(f) Security on loan. See Note 1(i).

(g) The principal amount is stated in U.S. dollars unless otherwise indicated.

(h) Defaulted securities. See Note 9.

(i) See Note 1(h) regarding securities segregated with broker for securities
sold short.

(j) See Note 1(c) regarding repurchase agreements.

(k) Investments from cash collateral received for loaned securities. See Note
1(i).

(l) See Note 1(g) regarding written options.

(m) See Note 1(h) regarding securities sold short.

(n) A portion of the security held in connection with open option contracts.

32 | See notes to financial statements. | Annual Report

MUTUAL DISCOVERY FUND

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2004

Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................................................................... $ 3,834,861,535
Cost - Controlled affiliates (Note 11) .................................................................... 13,458,320
Cost - Non-controlled affiliated issuers (Note 11) ........................................................ 288,871,611
Cost - Repurchase agreements .............................................................................. 95,005
---------------
Total cost of investments ................................................................................. 4,137,286,471
===============
Value - Unaffiliated issuers (includes securities segregated with broker for securities sold short
in the amount of $19,165,387) .............................................................................. 5,571,985,638
Value - Controlled affiliates (Note 11) ................................................................... 500,007
Value - Non-controlled affiliated issuers (Note 11) ....................................................... 344,329,357
Value - Repurchase agreements ............................................................................. 95,005
---------------
Total value of investments ................................................................................ 5,916,910,007
Cash ....................................................................................................... 7,063,536
Foreign currency, at value (cost $10,995,492) .............................................................. 11,014,524
Receivables:
Investment securities sold ................................................................................ 25,155,546
Capital shares sold ....................................................................................... 11,272,115
Dividends and interest .................................................................................... 15,004,182
Unrealized gain on forward exchange contracts (Note 8) ..................................................... 5,886,272
Due from broker - synthetic equity swaps ................................................................... 3,622,149
Cash on deposit with brokers for securities sold short ..................................................... 38,155,045
---------------
Total assets .......................................................................................... 6,034,083,376
---------------
Liabilities:
Payables:
Investment securities purchased ........................................................................... 11,906,130
Capital shares redeemed ................................................................................... 5,491,930
Affiliates ................................................................................................ 6,739,933
Options written, at value (premiums received $187,538) ..................................................... 201,533
Securities sold short, at value (proceeds $34,463,607) ..................................................... 36,223,652
Payable upon return of securities loaned ................................................................... 95,005
Unrealized loss on forward exchange contracts (Note 8) ..................................................... 84,596,430
Deferred tax ............................................................................................... 563,650
Other liabilities .......................................................................................... 520,100
---------------
Total liabilities ..................................................................................... 146,338,363
---------------
Net assets, at value ................................................................................ $ 5,887,745,013
===============
Net assets consist of:
Distributions in excess of net investment income ........................................................... $ (31,462,123)
Net unrealized appreciation (depreciation) ................................................................. 1,699,381,958
Accumulated net realized gain (loss) ....................................................................... 9,860,772
Capital shares ............................................................................................. 4,209,964,406
---------------
Net assets, at value ................................................................................ $ 5,887,745,013
===============

Annual Report | See notes to financial statements. | 33

MUTUAL DISCOVERY FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2004

CLASS Z:
Net assets, at value .......................................................... $2,578,584,837
==============
Shares outstanding ............................................................ 106,297,981
==============
Net asset value and maximum offering price per share(a) ....................... $ 24.26
==============
CLASS A:
Net assets, at value .......................................................... $2,106,695,119
==============
Shares outstanding ............................................................ 87,510,451
==============
Net asset value per sharea .................................................... $ 24.07
==============
Maximum offering price per share (net asset value per share / 94.25%) ......... $ 25.54
==============
CLASS B:
Net assets, at value .......................................................... $ 186,841,082
==============
Shares outstanding ............................................................ 7,894,501
==============
Net asset value and maximum offering price per share(a) ....................... $ 23.67
==============
CLASS C:
Net assets, at value .......................................................... $ 968,933,673
==============
Shares outstanding ............................................................ 40,422,852
==============
Net asset value and maximum offering price per share(a) ....................... $ 23.97
==============
CLASS R:
Net assets, at value .......................................................... $ 46,690,302
==============
Shares outstanding ............................................................ 1,949,950
==============
Net asset value and maximum offering price per share(a) ....................... $ 23.94
==============

(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.

34 | See notes to financial statements. | Annual Report

MUTUAL DISCOVERY FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended December 31, 2004

Investment income:
Dividends:
(net of foreign taxes of $10,781,725)
Unaffiliated issuers .................................................................. $ 100,224,497
Non-controlled affiliated issuers (Note 11) ........................................... 6,872,137
Interest ............................................................................... 38,669,278
-------------
Total investment income ........................................................... 145,765,912
-------------
Expenses:
Management fees (Note 3) ............................................................... 39,454,603
Administrative fees (Note 3) ........................................................... 3,821,604
Distribution fees (Note 3)
Class A ............................................................................... 5,894,152
Class B ............................................................................... 1,446,706
Class C ............................................................................... 8,100,985
Class R ............................................................................... 163,534
Transfer agent fees (Note 3) ........................................................... 6,931,200
Custodian fees (Note 4) ................................................................ 845,132
Reports to shareholders ................................................................ 290,500
Registration and filing fees ........................................................... 245,500
Professional fees ...................................................................... 509,630
Directors' fees and expenses ........................................................... 124,200
Dividends on securities sold short ..................................................... 578,566
Other .................................................................................. 206,038
-------------
Total expenses .................................................................... 68,612,350
Expense reductions (Note 4) ....................................................... (20,510)
-------------
Net expenses .................................................................... 68,591,840
-------------
Net investment income ....................................................... 77,174,072
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ................................................................. 334,479,656
Non-controlled affiliated issuers (Note 11) .......................................... 799,076
Written options ....................................................................... 1,030,921
Foreign currency transactions ......................................................... (144,638,938)
Securities sold short ................................................................. (1,980,229)
-------------
Net realized gain (loss) .......................................................... 189,690,486
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................................... 629,231,511
Translation of assets and liabilities denominated in foreign currencies ............... 11,521,106
Deferred taxes ........................................................................ 457,330
-------------
Net change in unrealized appreciation (depreciation) .............................. 641,209,947
-------------
Net realized and unrealized gain (loss) ................................................. 830,900,433
-------------
Net increase (decrease) in net assets resulting from operations ......................... $ 908,074,505
=============

Annual Report | See notes to financial statements. | 35

MUTUAL DISCOVERY FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 2004 and 2003

------------------------------------
2004 2003
------------------------------------

Increase (decrease) in net assets:
Operations:
Net investment income .................................................................... $ 77,174,072 $ 45,532,915
Net realized gain (loss) from investments, written options, foreign currency transactions,
and securities sold short ............................................................... 189,690,486 29,981,143
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes ............ 641,209,947 953,339,663
------------------------------------
Net increase (decrease) in net assets resulting from operations ....................... 908,074,505 1,028,853,721
Distributions to shareholders from:
Net investment income:
Class Z ................................................................................. (56,656,081) (44,545,119)
Class A ................................................................................. (39,448,944) (24,770,503)
Class B ................................................................................. (2,633,811) (1,472,248)
Class C ................................................................................. (13,213,407) (8,953,988)
Class R ................................................................................. (815,309) (310,609)
------------------------------------
Total distributions to shareholders ....................................................... (112,767,552) (80,052,467)
Capital share transactions (Note 2):
Class Z ................................................................................. 50,114,536 13,927,225
Class A ................................................................................. 391,763,708 225,050,877
Class B ................................................................................. 47,123,925 28,358,365
Class C ................................................................................. 113,386,535 47,141,801
Class R ................................................................................. 21,446,986 12,178,619
------------------------------------
Total capital share transactions .......................................................... 623,835,690 326,656,887
Redemption fees ........................................................................... 25,982 --
------------------------------------
Net increase (decrease) in net assets ................................................. 1,419,168,625 1,275,458,141
Net assets:
Beginning of year ......................................................................... 4,468,576,388 3,193,118,247
------------------------------------
End of year ............................................................................... $ 5,887,745,013 $ 4,468,576,388
====================================
Distributions in excess of net investment income included in net assets:
End of year ............................................................................... $ (31,462,123) $ (12,232,773)
====================================

36 | See notes to financial statements. | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mutual Discovery Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), consisting of 6 separate series. The
Company is an open-end investment company registered under the Investment
Company Act of 1940. The financial statements of the remaining funds in the
series are presented separately. The Fund seeks long-term capital appreciation
by investing primarily in common and preferred stocks and bonds. The Fund may
also invest up to 100% of its assets in foreign securities. The following
summarizes the Fund's significant accounting policies.

A. SECURITY VALUATION

Annual Report | 37

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A. SECURITY VALUATION (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION

C. REPURCHASE AGREEMENTS

38 | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS

E. FOREIGN CURRENCY CONTRACTS

F. SYNTHETIC EQUITY SWAPS

Annual Report | 39

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

G. OPTION CONTRACTS

H. SECURITIES SOLD SHORT

I. SECURITIES LENDING

The Fund loans securities to certain brokers through a securities lending agent
for which it received cash collateral against the loaned securities in an amount
equal to at least 102% of the market value of the loaned securities. The
collateral is invested in short-term instruments as noted in the Statement of
Investments. The Fund received interest income of $45,049 from the investment of
cash collateral, adjusted by lender fees and broker rebates. The Fund bears the
risk of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the Fund in the
case of default of any securities borrower.

40 | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J. INCOME AND DEFERRED TAXES

The Fund is subject to a tax imposed on net realized gains of securities of
certain foreign countries. When the Fund invests in these securities, the Fund
records an estimated deferred tax liability for net unrealized gains.

K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS

L. ACCOUNTING ESTIMATES

M. REDEMPTION FEES

Redemptions and exchanges of Fund shares held five trading days or less (30 days
or less prior to June 1, 2004 and 90 days or less prior to January 1, 2004) may
be subject to the Fund's redemption fee, which is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as additional paid-in
capital as noted in the Statements of Changes in Net Assets.

Annual Report | 41

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

N. GUARANTEES AND INDEMNIFICATIONS

Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liability arising out of the performance
of their duties to the Funds. Additionally, in the normal course of business,
the Fund enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.

2. CAPITAL STOCK

At December 31, 2004 there were 800 million shares authorized ($0.001 par value)
of which 300 million, 100 million, 100 million, 100 million and 200 million were
designated as Class Z, Class A, Class B, Class C and Class R, respectively.
Transactions in the Fund's shares were as follows:

----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2004 2003
----------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------

CLASS Z SHARES:
Shares sold ................................... 7,946,686 $ 174,333,866 9,521,544 $ 169,344,371
Shares issued in reinvestment of
distributions ................................ 2,248,630 51,872,202 2,060,606 40,579,936
Shares redeemed ............................... (8,088,625) (176,091,532) (10,979,119) (195,997,082)
----------------------------------------------------------------------------
Net increase (decrease) ....................... 2,106,691 $ 50,114,536 603,031 $ 13,927,225
============================================================================
CLASS A SHARES:
Shares sold ................................... 28,991,422 $ 629,994,733 22,055,132 $ 399,929,888
Shares issued in reinvestment of
distributions ................................ 1,608,954 36,824,687 1,194,006 23,361,387
Shares redeemed ............................... (12,750,856) (275,055,712) (11,199,697) (198,240,398)
----------------------------------------------------------------------------
Net increase (decrease) ....................... 17,849,520 $ 391,763,708 12,049,441 $ 225,050,877
============================================================================

42 | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. CAPITAL STOCK (CONTINUED)

--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2004 2003
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------

CLASS B SHARES:
Shares sold ..................................... 2,611,993 $ 55,685,546 2,016,211 $ 35,204,480
Shares issued in reinvestment of
distributions .................................. 106,415 2,382,517 69,605 1,329,652
Shares redeemed ................................. (514,048) (10,944,138) (481,371) (8,175,767)
--------------------------------------------------------------------------
Net increase (decrease) ......................... 2,204,360 $ 47,123,925 1,604,445 $ 28,358,365
==========================================================================
CLASS C SHARES:
Shares sold ..................................... 9,235,697 $ 199,753,205 6,757,550 $ 121,233,343
Shares issued in reinvestment of
distributions .................................. 519,083 11,739,964 418,839 8,050,042
Shares redeemed ................................. (4,560,279) (98,106,634) (4,741,353) (82,141,584)
--------------------------------------------------------------------------
Net increase (decrease) ......................... 5,194,501 $ 113,386,535 2,435,036 $ 47,141,801
==========================================================================
CLASS R SHARES:
Shares sold ..................................... 1,223,108 $ 26,261,073 854,653 $ 14,829,497
Shares issued in reinvestment of
distributions .................................. 35,218 803,727 15,801 308,897
Shares redeemed ................................. (258,493) (5,617,814) (165,979) (2,959,775)
--------------------------------------------------------------------------
Net increase (decrease) ......................... 999,833 $ 21,446,986 704,475 $ 12,178,619
==========================================================================

3. TRANSACTIONS WITH AFFILIATES

Certain officers of the Fund are also officers and/or directors of the following
entities:

- --------------------------------------------------------------------------------------------------
ENTITY AFFILIATION
- --------------------------------------------------------------------------------------------------

A. MANAGEMENT FEES

Effective July 1, 2004, the Fund pays an investment management fee to Franklin
Mutual based on the average daily net assets of the Fund as follows:

- --------------------------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------------------------

0.800% First $4 billion
0.770% Over $4 billion, up to and including $7 billion
0.750% Over $7 billion, up to and including $10 billion
0.730% Over $10 billion

Annual Report | 43

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

A. MANAGEMENT FEES (CONTINUED)

Prior to July 1, 2004, the Fund paid fees of 0.80% per year of the average daily
net assets of the Fund.

B. ADMINISTRATIVE FEES

The Fund pays its allocated share of an administrative fee to FT Services based
on the Fund's aggregated average daily net assets as follows:

- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% First $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion

C. DISTRIBUTION FEES

The Fund reimburses Distributors up to 0.35% , 1.00%, 1.00%, and 0.50% per year
of the average daily net asset of Class A, Class B, Class C, and Class R ,
respectively, for costs incurred in marketing the Fund's shares under a Rule
12b-1 plan. Under the Class A distribution plan, costs exceeding the maximum for
the current plan year cannot be reimbursed in subsequent periods.

D. SALES CHARGES/UNDERWRITING AGREEMENTS

Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:

Net sales charges received .............................. $ 804,272
Contingent deferred sales charges retained .............. $ 209,083

E. TRANSFER AGENT FEES

The Fund paid transfer agent fees of $6,931,200, of which $4,610,634 was paid to
Investor Services.

4. EXPENSE OFFSET ARRANGEMENT

The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended December 31, 2004, the
custodian fees were reduced as noted in the Statement of Operations.

44 | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES

At December 31, 2004, the Fund had tax basis capital losses of $20,570,378 which
may be carried over to offset future capital gains. Such losses expire in year
2011.

At December 31, 2004, the Fund had deferred capital losses occurring subsequent
to October 31, 2004 of $24,933,773. For tax purposes, such losses will be
reflected in the year ending December 31, 2005.

At December 31, 2004, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:

Cost of investments ....................................... $ 4,213,041,550
===============
Unrealized appreciation ................................... $ 1,788,258,135
Unrealized depreciation ................................... (84,389,678)
---------------
Net unrealized appreciation (depreciation) ................ $ 1,703,868,457
===============
Distributable earnings--undistributed ordinary income ..... $ 39,518,138
===============

The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:

----------------------------
2004 2003
----------------------------
Distributions paid from -- ordinary income $112,767,552 $80,052,467

Annual Report | 45

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short-term securities and
securities sold short) for the period ended December 31, 2004, aggregated
$2,224,719,762 and $1,629,659,359, respectively.

Transactions in options written during the period ended December 31, 2004 were
as follows:

------------------------------------
NUMBER PREMIUMS
OF CONTRACTS RECEIVED
------------------------------------
Options outstanding at
December 31, 2003 1,044,821 $ 279,446
Options written 895,988 2,156,163
Options expired (450,098) (826,698)
Options exercised (1,486,906) (980,125)
Options closed (2,435) (441,248)
------------------------------------
Options outstanding at
December 31, 2004 1,370 $ 187,538
====================================

7. SYNTHETIC EQUITY SWAPS

As of December 31, 2004, the Fund had the following synthetic equity swaps
outstanding:

- ---------------------------------------------------------------------------------------------------------------
NUMBER OF UNREALIZED
CONTRACTS TO BUY CONTRACTS VALUE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------------

Christian Dior SA (46.76 - 55.43 EUR) ..................... 97,920 $6,650,513 $ 79,995
London Stock Exchange PLC (5.36 - 5.71 GBP) ............... 82,453 921,103 33,074
--------
Total contracts to buy .................................... ..................................... $113,069
========

- ---------------------------------------------------------------------------------------------------------------
NUMBER OF UNREALIZED
CONTRACTS TO SELL CONTRACTS VALUE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------------

LVMH Moet Hennessy Louis Vuitton (53.87 - 61.76 EUR) ...... 98,272 $7,514,557 $242,572
--------
Total contracts to sell ......................................................................... 242,572
--------
Net unrealized gain (loss) ...................................................................... $355,641
========

46 | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS

- ------------------------------------------------------------------------------------------------------------------
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------------------------------------------------------------------------------------------------------

60,808,319 Canadian Dollars ....... U.S. $ 47,202,905 1/21/05 U.S. $ 3,491,352
77,880,000 Taiwan Dollar .......... 2,400,000 2/16/05 49,827
19,144,132 Canadian Dollars ....... 15,875,001 4/21/05 85,580
-------------- -------------
U.S. $ 65,477,906 U.S. 3,626,759
============== =============

- ------------------------------------------------------------------------------------------------------------------
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------------------------------------------------------------------------------------------------------

1,700,000 British Pounds ......... U.S. $ 3,265,241 2/10/05 U.S. $ 11,273
46,501,643 British Pounds ......... 89,290,624 3/21/05 473,017
99,779,534 British Pounds ......... 191,593,440 6/08/05 1,761,729
5,130,675,000 Korean Won ............. 4,950,000 6/17/05 13,494
-------------- -------------
U.S. $ 289,099,305 2,259,513
============== -------------
Unrealized gain on forward exchange contracts .......................................... U.S. $ 5,886,272
=============

8,367,365 Canadian Dollars ....... U.S. $ 7,050,000 4/21/05 U.S. $ (74,076)
-------------- -------------

208,456,395 Canadian Dollars ....... U.S. $ 158,576,382 1/21/05 U.S. $(15,208,098)
536,212,973 South African Rand ..... 85,111,067 1/26/05 (9,171,176)
67,800,000 British Pounds ......... 125,159,520 2/10/05 (4,616,396)
418,626,000 Taiwan Dollar .......... 12,850,000 2/16/05 (318,483)
20,150,000 Euro ................... 24,885,250 2/23/05 (2,471,875)
808,433,744 Danish Krona ........... 132,694,884 3/17/05 (14,880,060)
11,980,853,199 Japanese Yen ........... 110,442,169 3/28/05 (7,252,045)
79,867,880 Canadian Dollars ....... 60,694,327 4/21/05 (5,892,018)
66,334,148 Euro ................... 83,735,049 4/25/05 (6,417,980)
21,400,000 Euro ................... 26,445,894 5/23/05 (2,654,905)
120,676,802,260 Korean Won ............. 115,075,000 6/17/05 (1,358,949)
45,000,000 Euro ................... 56,826,000 7/25/05 (4,450,104)
21,000,000 Euro ................... 25,960,725 8/23/05 (2,653,874)
15,500,000 Euro ................... 18,879,000 9/13/05 (2,251,512)
-------------- -------------
U.S. $1,037,335,267 (79,597,475)
============== -------------
Net unrealized loss on offsetting forward exchange contracts ............................. (4,924,879)
-------------
Unrealized loss on forward exchange contracts .......................................... (84,596,430)
-------------
Net unrealized loss on forward exchange contracts .................................... U.S. $(78,710,158)
=============

Annual Report | 47

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. CREDIT RISK AND DEFAULTED SECURITIES

The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At December 31, 2004, the value of these
securities was $129,334,884, representing 2.19% of the Fund's net assets. For
information as to specific securities, see the accompanying Statement of
Investments.

10. RESTRICTED SECURITIES

- ----------------------------------------------------------------------------------------------------------------
SHARES/ ACQUISITION
WARRANTS ISSUER DATE COST VALUE
- ----------------------------------------------------------------------------------------------------------------

332,512 AboveNet Inc. ................................ 10/02/01 $14,529,931 $ 7,968,118
11,105 AboveNet Inc., wts., 9/08/08 ................. 10/02/01 1,437,838 71,072
13,066 AboveNet Inc., wts., 9/08/10 ................. 10/02/01 1,768,651 52,264
11,589 FE Capital Holdings Ltd. ..................... 8/29/03 11,592,327 15,412,910
2,247,600 Florida East Coast Industries Inc. ........... 12/29/95 67,070,841 96,298,422
8,758,216 Hancock Discovery LLC ........................ 3/06/97 13,458,320 500,007
4,551,501 Imagine Group Holdings Ltd. .................. 8/31/04 46,614,334 46,614,334
2,689,230 International Steel Group .................... 4/10/02 12,990,000 103,621,410
684,780 Leucadia National Corp. ...................... 12/20/02 24,138,495 45,199,589
47,160 Olympus Re Holdings Ltd. ..................... 12/19/01 4,716,000 8,072,849
14,787 Security Capital European Realty ............. 4/08/98 810,051 106,466
170 Torre Mayor Investments, LP .................. 10/28/02 17,000,000 11,050,000
------------
TOTAL RESTRICTED SECURITIES (5.69% OF NET ASSETS) ............................................ $334,967,441
============

48 | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES HELD AT SHARES REALIZED
BEGINNING GROSS GROSS HELD AT VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS END OF YEAR END OF YEAR INCOME GAIN/(LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------

CONTROLLED AFFILIATES(a)

Hancock Discovery LLC .................. 8,758,216 -- -- 8,758,216 $ 500,007 $ -- $ --
---------------------------------------
NON-CONTROLLED AFFILIATES

Esmark Inc., Series A, 10.00%,
cvt., pfd ............................ -- 18,647 -- 18,647 $ 18,646,800 $ -- $ --
Farmer Brothers Co. .................... 81,152 823,485 -- 904,637 21,928,401 326,527 --
FE Capital Holdings Ltd. ............... 11,445 144 -- 11,589 15,412,910 -- --
Florida East Coast
Industries Inc. ...................... -- 2,247,600 -- 2,247,600 96,298,422 224,760 --
Gammon Lake Resources Inc. ............. -- 2,136,800 -- 2,136,800 11,455,892 -- --
Gammon Lake Resources Inc.,
wts., 4/30/05 ........................ -- 2,265,300 -- 2,265,300 12,144,811 -- --
Imagine Group Holdings Ltd. ............ -- 4,551,501 -- 4,551,501 46,614,334 -- --
Nippon Investment LLC .................. 8,656,000 -- -- 8,656,000 -- -- --
Potlatch Corp. ......................... 1,111,450 1,078,700 -- 2,190,150 110,777,787 6,320,850 --
Southwest Royalties Inc., A ............ 53,272 -- 53,272 -- (b) -- 799,076
Torre Mayor Investments, LP ............ 170 -- -- 170 11,050,000 -- --
---------------------------------------
TOTAL NON-CONTROLLED AFFILIATES ........ ............................................... $344,329,357 $6,872,137 $799,076
---------------------------------------
TOTAL AFFILIATED SECURITIES (5.86% OF NET ASSETS) ...................................... $344,829,364 $6,872,137 $799,076
=======================================

(a) Issuer in which the Fund owns 25% or more of the outstanding voting
securities.

(b) As of December 31, 2004, no longer an affiliate.

12. OTHER CONSIDERATIONS

Franklin Mutual, as the Fund's Manager, may serve as a member on the board of
directors of certain companies in which the Fund invests and/or may represent
the Fund in certain corporate negotiations. At December 31, 2004, the Manager
serves in one or more of these capacities for Kindred Healthcare, AboveNet Inc.,
and Esmark Inc. As a result of this involvement, the Manager may be in
possession of certain material non-public information which, pursuant to the
Fund's policies and the requirements of the federal securities laws, could
prevent the Fund from trading in the securities of such companies for limited or
extended periods of time.

Annual Report | 49

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. REGULATORY MATTERS

INVESTIGATIONS

SETTLEMENTS

50 | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. REGULATORY MATTERS (continued)

SETTLEMENTS (CONTINUED)

Annual Report | 51

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. REGULATORY MATTERS (CONTINUED)

SETTLEMENTS (CONTINUED)

OTHER LEGAL PROCEEDINGS

52 | Annual Report

MUTUAL DISCOVERY FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. REGULATORY MATTERS (CONTINUED)

OTHER LEGAL PROCEEDINGS (CONTINUED)

Annual Report | 53

MUTUAL DISCOVERY FUND

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS OF FRANKLIN MUTUAL SERIES FUND INC.
AND SHAREHOLDERS OF MUTUAL DISCOVERY FUND

We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Mutual Discovery Fund (one of the
portfolios constituting the Franklin Mutual Series Fund Inc.) (the Fund), as of
December 31, 2004, 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.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Discovery Fund of the Franklin Mutual Series Fund Inc. as of December 31,
2004, 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

Boston, Massachusetts
February 7, 2005

54 | Annual Report

MUTUAL DISCOVERY FUND

TAX DESIGNATION (UNAUDITED)

Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designated
up to a maximum of $ 106,530,570 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended 2004.
In January 2005, shareholders will receive Form 1099-DIV which will include
their share of qualified dividends distributed during the calendar year 2004.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.

Under Section 854(b) (2) of the Code, the Fund hereby designates 17.39% of the
ordinary income dividends as income qualifying for the dividends received
deducion for the fiscal year ended 2004.

At 2004, more than 50% of the Mutual Discovery Fund's total assets were invested
in securities of foreign issuers. In most instances, foreign taxes were withheld
from dividends paid to the Fund on these investments. As shown in the tables
below, the Fund hereby designates to shareholders the foreign source income and
foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This
designation will allow shareholders of record on December 16, 2004, to treat
their proportionate share of foreign taxes paid by the Fund as having been paid
directly by them. The shareholder shall consider these amounts as foreign taxes
paid in the tax year in which they receive the Fund distribution.

The following tables provide a detailed analysis, by country, of foreign tax
paid, foreign source income, foreign qualified dividends, and adjusted foreign
source income as designated by the Fund, to Class Z, Class A, Class B, Class C
and Class R shareholders of record. As a service to individual shareholders
filing Form 1116, "Adjusted Foreign Source Income per Share" in column 4 below
reports foreign source income with the required adjustments to foreign source
qualified dividends. This information is provided to simplify your reporting of
foreign source income for line 1 of Form 1116.

Annual Report | 55

MUTUAL DISCOVERY FUND

TAX DESIGNATION (UNAUDITED) (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------
CLASS Z
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------------------

Australia ................................... 0.0000 0.0004 0.0004 0.0002
Belgium ..................................... 0.0010 0.0047 0.0047 0.0020
Bermuda ..................................... 0.0000 0.0021 0.0012 0.0014
Canada ...................................... 0.0045 0.0148 0.0139 0.0069
Denmark ..................................... 0.0017 0.0081 0.0081 0.0035
France ...................................... 0.0048 0.0297 0.0230 0.0166
Germany ..................................... 0.0011 0.0096 0.0051 0.0067
Hong Kong ................................... 0.0000 0.0005 0.0000 0.0005
India ....................................... 0.0000 0.0027 0.0027 0.0012
Ireland ..................................... 0.0000 0.0176 0.0176 0.0075
Italy ....................................... 0.0005 0.0022 0.0022 0.0009
Japan ....................................... 0.0005 0.0090 0.0048 0.0063
Jersey Islands .............................. 0.0000 0.0017 0.0000 0.0017
Luxembourg .................................. 0.0011 0.0049 0.0049 0.0021
Mexico ...................................... 0.0000 0.0013 0.0013 0.0006
Netherlands ................................. 0.0020 0.0091 0.0089 0.0040
New Zealand ................................. 0.0001 0.0009 0.0000 0.0009
Norway ...................................... 0.0073 0.0369 0.0337 0.0176
South Africa ................................ 0.0000 0.0119 0.0044 0.0094
South Korea ................................. 0.0048 0.0200 0.0200 0.0086
Spain ....................................... 0.0022 0.0102 0.0102 0.0044
Sweden ...................................... 0.0005 0.0026 0.0026 0.0011
Switzerland ................................. 0.0026 0.0121 0.0121 0.0052
Taiwan ...................................... 0.0011 0.0038 0.0038 0.0016
United Kingdom .............................. 0.0092 0.0800 0.0629 0.0441
------------------------------------------------------------------
TOTAL ....................................... $0.0450 $0.2968 $0.2485 $0.1550
====================================================================

- -----------------------------------------------------------------------------------------------------------------------
CLASS A
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------------------

Australia ................................... 0.0000 0.0003 0.0003 0.0001
Belgium ..................................... 0.0010 0.0040 0.0040 0.0017
Bermuda ..................................... 0.0000 0.0018 0.0011 0.0012
Canada ...................................... 0.0045 0.0127 0.0119 0.0059
Denmark ..................................... 0.0017 0.0069 0.0069 0.0030
France ...................................... 0.0048 0.0255 0.0197 0.0142
Germany ..................................... 0.0011 0.0082 0.0043 0.0057
Hong Kong ................................... 0.0000 0.0004 0.0000 0.0004
India ....................................... 0.0000 0.0023 0.0023 0.0010
Ireland ..................................... 0.0000 0.0151 0.0151 0.0065
Italy ....................................... 0.0005 0.0019 0.0019 0.0008
Japan ....................................... 0.0005 0.0078 0.0042 0.0054
Jersey Islands .............................. 0.0000 0.0014 0.0000 0.0014
Luxembourg .................................. 0.0011 0.0042 0.0042 0.0018
Mexico ...................................... 0.0000 0.0012 0.0012 0.0005
Netherlands ................................. 0.0020 0.0078 0.0076 0.0035
New Zealand ................................. 0.0001 0.0008 0.0000 0.0008
Norway ...................................... 0.0073 0.0317 0.0289 0.0152
South Africa ................................ 0.0000 0.0102 0.0038 0.0080
South Korea ................................. 0.0048 0.0172 0.0172 0.0074
Spain ....................................... 0.0022 0.0088 0.0088 0.0038
Sweden ...................................... 0.0005 0.0022 0.0022 0.0009
Switzerland ................................. 0.0026 0.0104 0.0104 0.0045
Taiwan ...................................... 0.0011 0.0033 0.0033 0.0014
United Kingdom .............................. 0.0092 0.0688 0.0541 0.0379
--------------------------------------------------------------------
TOTAL ....................................... $0.0450 $0.2549 $0.2134 $0.1330
====================================================================

56 | Annual Report

MUTUAL DISCOVERY FUND

TAX DESIGNATION (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------
CLASS B
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------------------

Australia ................................. 0.0000 0.0002 0.0002 0.0001
Belgium ................................... 0.0010 0.0029 0.0029 0.0012
Bermuda ................................... 0.0000 0.0013 0.0008 0.0008
Canada .................................... 0.0045 0.0092 0.0087 0.0042
Denmark ................................... 0.0017 0.0050 0.0050 0.0021
France .................................... 0.0048 0.0184 0.0142 0.0103
Germany ................................... 0.0011 0.0059 0.0031 0.0041
Hong Kong ................................. 0.0000 0.0003 0.0000 0.0003
India ..................................... 0.0000 0.0017 0.0017 0.0007
Ireland ................................... 0.0000 0.0109 0.0109 0.0047
Italy ..................................... 0.0005 0.0014 0.0014 0.0006
Japan ..................................... 0.0005 0.0056 0.0030 0.0039
Jersey Islands ............................ 0.0000 0.0010 0.0000 0.0010
Luxembourg ................................ 0.0011 0.0030 0.0030 0.0013
Mexico .................................... 0.0000 0.0008 0.0008 0.0003
Netherlands ............................... 0.0020 0.0056 0.0055 0.0025
New Zealand ............................... 0.0001 0.0005 0.0000 0.0005
Norway .................................... 0.0073 0.0229 0.0209 0.0110
South Africa .............................. 0.0000 0.0074 0.0027 0.0059
South Korea ............................... 0.0048 0.0124 0.0124 0.0053
Spain ..................................... 0.0022 0.0063 0.0063 0.0027
Sweden .................................... 0.0005 0.0016 0.0016 0.0007
Switzerland ............................... 0.0026 0.0075 0.0075 0.0032
Taiwan .................................... 0.0011 0.0024 0.0024 0.0010
United Kingdom ............................ 0.0092 0.0496 0.0390 0.0273
--------------------------------------------------------------------
Total ..................................... $0.0450 $0.1838 $0.1540 $0.0957
====================================================================

- -----------------------------------------------------------------------------------------------------------------------
CLASS C
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------------------

Australia ................................. 0.0000 0.0002 0.0002 0.0001
Belgium ................................... 0.0010 0.0027 0.0027 0.0012
Bermuda ................................... 0.0000 0.0013 0.0008 0.0008
Canada .................................... 0.0045 0.0087 0.0082 0.0040
Denmark ................................... 0.0017 0.0048 0.0048 0.0021
France .................................... 0.0048 0.0174 0.0135 0.0097
Germany ................................... 0.0011 0.0056 0.0030 0.0039
Hong Kong ................................. 0.0000 0.0003 0.0000 0.0003
India ..................................... 0.0000 0.0016 0.0016 0.0007
Ireland ................................... 0.0000 0.0103 0.0103 0.0044
Italy ..................................... 0.0005 0.0013 0.0013 0.0006
Japan ..................................... 0.0005 0.0053 0.0028 0.0037
Jersey Islands ............................ 0.0000 0.0010 0.0000 0.0010
Luxembourg ................................ 0.0011 0.0029 0.0029 0.0012
Mexico .................................... 0.0000 0.0008 0.0008 0.0003
Netherlands ............................... 0.0020 0.0053 0.0052 0.0023
New Zealand ............................... 0.0001 0.0005 0.0000 0.0005
Norway .................................... 0.0073 0.0217 0.0198 0.0104
South Africa .............................. 0.0000 0.0070 0.0026 0.0055
South Korea ............................... 0.0048 0.0118 0.0118 0.0051
Spain ..................................... 0.0022 0.0060 0.0060 0.0026
Sweden .................................... 0.0005 0.0015 0.0015 0.0006
Switzerland ............................... 0.0026 0.0071 0.0071 0.0030
Taiwan .................................... 0.0011 0.0023 0.0023 0.0010
United Kingdom ............................ 0.0092 0.0470 0.0370 0.0259
--------------------------------------------------------------------
Total ..................................... $0.0450 $0.1744 $0.1462 $0.0909
====================================================================

Annual Report | 57

MUTUAL DISCOVERY FUND

TAX DESIGNATION (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------
CLASS R
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------------------

Australia ................................... 0.0000 0.0003 0.0003 0.0001
Belgium ..................................... 0.0010 0.0039 0.0039 0.0017
Bermuda ..................................... 0.0000 0.0018 0.0011 0.0012
Canada ...................................... 0.0045 0.0122 0.0115 0.0056
Denmark ..................................... 0.0017 0.0067 0.0067 0.0029
France ...................................... 0.0048 0.0245 0.0189 0.0137
Germany ..................................... 0.0011 0.0079 0.0042 0.0055
Hong Kong ................................... 0.0000 0.0004 0.0000 0.0004
India ....................................... 0.0000 0.0022 0.0022 0.0009
Ireland ..................................... 0.0000 0.0145 0.0145 0.0062
Italy ....................................... 0.0005 0.0018 0.0018 0.0008
Japan ....................................... 0.0005 0.0075 0.0040 0.0052
Jersey Islands .............................. 0.0000 0.0014 0.0000 0.0014
Luxembourg .................................. 0.0011 0.0040 0.0040 0.0017
Mexico ...................................... 0.0000 0.0011 0.0011 0.0005
Netherlands ................................. 0.0020 0.0075 0.0074 0.0033
New Zealand ................................. 0.0001 0.0007 0.0000 0.0007
Norway ...................................... 0.0073 0.0305 0.0278 0.0146
South Africa ................................ 0.0000 0.0098 0.0036 0.0077
South Korea ................................. 0.0048 0.0166 0.0166 0.0071
Spain ....................................... 0.0022 0.0084 0.0084 0.0036
Sweden ...................................... 0.0005 0.0021 0.0021 0.0009
Switzerland ................................. 0.0026 0.0100 0.0100 0.0043
Taiwan ...................................... 0.0011 0.0032 0.0032 0.0014
United Kingdom .............................. 0.0092 0.0662 0.0520 0.0365
--------------------------------------------------------------------
Total ....................................... $0.0450 $0.2452 $0.2053 $0.1279
====================================================================

Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit or deduction (assuming you held your shares in the Fund for a
minimum of 16 days during the 30-day period beginning 15 days before the
ex-dividend date of the Fund's distribution to which the foreign taxes relate).

Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
Fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends without adjustment for the lower U.S.
tax rates. Generally, this is the foreign source income to be reported by
certain trusts and corporate shareholders.

Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund. If you are an individual shareholder who
does not meet the qualified dividend holding period requirements, you may find
this information helpful to calculate the foreign source income adjustment
needed to complete line 1 of Form 1116.

58 | Annual Report

MUTUAL DISCOVERY FUND

TAX DESIGNATION (CONTINUED)

Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per
share of foreign source income the Fund paid to you. These amounts reflect the
Foreign Source Income reported in column 2 adjusted for the tax rate
differential on foreign source qualified dividends that may be required for
certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B).
If you are an individual shareholder who meets the qualified dividend holding
period requirements, generally, these Adjusted Foreign Source Income amounts may
be reported directly on line 1 of Form 1116 without additional adjustment.

In January 2005, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2004. The Foreign Source Income reported on Form 1099-DIV has been
reduced to take into account the tax rate differential on foreign source
qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B).
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their 2004 individual income tax returns.

Annual Report | 59

BOARD MEMBERS AND OFFICERS

INDEPENDENT BOARD MEMBERS

EDWARD I. ALTMAN, PH.D. (63) Director Since 1987 7 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, NYU Salomon Center, Stern School
of Business, New York University; editor and author of numerous financial publications; and financial consultant; and FORMERLY,
Vice Director, NYU Salomon Center, Stern School of Business, New York University; and Director, Stern School of Business M.B.A.
Program.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE GRANT (46) Director Since 1994 7 Independent Director, SLM,
51 John F. Kennedy Parkway Corporation (Sallie Mae)
Short Hills, NJ 07078 and Allied Capital
Corporation (financial
services).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (75) Director Since 2002 12 Director, Fiduciary
51 John F. Kennedy Parkway Emerging Markets Bond Fund
Short Hills, NJ 07078 PLC and Fiduciary
International Ireland
Limited.
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates, management consultants to the financial services industry.
- ------------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (74) Director Since 1974 7 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers); and part owner McKinstry
Inc., Chicopee, MA (manufacturer of electrical enclosures).
- ------------------------------------------------------------------------------------------------------------------------------------
FRED R. MILLSAPS (75) Director Since 1996 28 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and
Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969);
and Vice President, Federal Reserve Bank of Atlanta (1958-1965).
- ------------------------------------------------------------------------------------------------------------------------------------

60 | Annual Report

CHARLES RUBENS II (74) Director Since 1998 12 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
LEONARD RUBIN (79) Director Since 1996 12 None
51 John F. Kennedy Parkway
Short Hills, NJ 07078
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Partner in LDR Equities, LLC (manages personal investments); and FORMERLY, President, F.N.C. Textiles, Inc.; and Chairman of the
Board, Carolace Embroidery Co., Inc. (until 1996).
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (58) Director Since 1991 12 Director, El Oro Mining and
51 John F. Kennedy Parkway Exploration Co., p.l.c.
Short Hills, NJ 07078
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------

INTERESTED BOARD MEMBERS AND OFFICERS

**WILLIAM J. LIPPMAN (79) Director Since 1996 18 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Private Client Group, Inc.; President, Franklin Advisory Services, LLC; and officer and/or director
or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of seven of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**ANNE M. TATLOCK (65) Director Since 2002 7 Director, Fortune Brands,
600 Fifth Avenue, 7th Floor Inc. (consumer products)
New York, NY 10020-2302 and Merck & Co. Inc.
(pharmaceuticals).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman and Chief Executive Officer, Fiduciary Trust Company International; Vice Chairman, Member - Office of the Chairman and
Director, Franklin Resources, Inc.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 61

**DAVID J. WINTERS (42) Director, Director since 7 None
51 John F. Kennedy Parkway President, 2001, President
Short Hills, NJ 07078-2702 Chairman of since 1999,
the Board and Chairman of the
Chief Board and Chief
Executive Executive Officer
Officer - - Investment
Investment Management
Management since 2002
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer, and Chief Executive Officer, Franklin Mutual Advisers, LLC; and officer and/or director, as the
case may be, of three of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ----------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL 33394-3091 Officer - Finance
and Administration
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the
investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources,
Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer
and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------

62 | Annual Report

BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc.,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc., and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in
Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission
(1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until
1979).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (67) Vice President - Since 2000 Not Applicable Not Applicable
600 Fifth Avenue AML Compliance
Rockefeller Center
New York, NY 10020-2302
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals, Inc.
and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources,
Inc. and of 48 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL MORANTZ (35) Treasurer Since July 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; and officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY,
Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director,
Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 63

GALEN G. VETTER (53) Chief Financial Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief Accounting
Fort Lauderdale, FL 33394-3091 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------

64 | Annual Report

MUTUAL DISCOVERY FUND

SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES

QUARTERLY STATEMENT OF INVESTMENTS

Annual Report | 65

This page intentionally left blank.

LITERATURE REQUEST

FRANKLIN TEMPLETON INVESTMENTS

INTERNATIONAL

Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund

GLOBAL

Mutual Discovery Fund
Templeton Capital Accumulator Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund

GROWTH

Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)

VALUE

Franklin Balance Sheet
Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund2
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(3)
Mutual Shares Fund

BLEND

Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund(4)

SECTOR

Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund

ASSET ALLOCATION

Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund

TARGET FUNDS

Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund

INCOME

Franklin Adjustable U.S. Government Securities Fund(5)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Floating Rate Trust(3)
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(5), (6)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund

TAX-FREE INCOME(7)

National Funds
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(8)

LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund

INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund

INSURANCE FUNDS

Franklin Templeton Variable Insurance Products Trust(10)

(1) The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.

(2) The fund is only open to existing shareholders and select retirement
plans.

(4) Upon reaching approximately $350 million in assets, the fund intends to
close to all investors.

(5) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.

(6) Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and
strategy remained the same.

(7) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.

(8) Portfolio of insured municipal securities.

(10) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.

11/04 Not part of the annual report

[LOGO](R)
FRANKLIN(R) TEMPLETON(R) One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906

o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?

Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.

ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL DISCOVERY FUND

CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF INVESTMENT OFFICER

David J. Winters, CFA

INVESTMENT MANAGER

Franklin Mutual Advisers, LLC
51 John F. Kennedy Parkway
Short Hills, NJ 07078

DISTRIBUTOR

Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com

Shareholder Services

1-800/632-2301 - (Class A, B, & C)
1-800/448-FUND - (Class Z)

477 A2004 02/05

MUTUAL EUROPEAN FUND

[GRAPHIC OMITTED]

- --------------------------------------------------------------------------------
DECEMBER 31, 2004
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER INTERNATIONAL
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
MUTUAL EUROPEAN FUND
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------

[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS

Franklin o Templeton o MUTUAL SERIES

THANK YOU FOR YOUR CONTINUED PARTICIPATION

[GRAPHIC OMITTED]

Not part of the annual report

CONTENTS

SHAREHOLDER LETTER ........................................................ 1

ANNUAL REPORT

Mutual European Fund ...................................................... 4

Performance Summary ....................................................... 9

Your Fund's Expenses ...................................................... 14

Financial Highlights and Statement of Investments ......................... 16

Financial Statements ...................................................... 25

Notes to Financial Statements ............................................. 29

Report of Independent Registered Public
Accounting Firm ........................................................... 43

Tax Designation ........................................................... 44

Board Members and Officers ................................................ 48

Shareholder Information ................................................... 53

- --------------------------------------------------------------------------------

ANNUAL REPORT

MUTUAL EUROPEAN FUND

YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual European Fund seeks capital
appreciation, with income as a secondary goal, by investing primarily in common
and preferred stocks, bonds and convertible securities. The Fund normally will
invest at least 80% of its assets in the securities of issuers organized under
the laws of or whose principal business operations are located in, or who earn
at least 50% of their revenue from, European countries.

We are pleased to bring you Mutual European Fund's annual report for the fiscal
year ended December 31, 2004.

PERFORMANCE OVERVIEW

Mutual European Fund - Class Z posted a 21.58% cumulative total return for the
12 months ended December 31, 2004. The Fund performed in line with its
benchmark, the Morgan Stanley Capital International (MSCI) All Country (AC)
Europe Index, which returned 21.61% over the same period.(1) You can find the
Fund's long-term performance data in the Performance Summary beginning on page
9.

ECONOMIC AND MARKET OVERVIEW

The global economic recovery continued in 2004, led by growth in the U.S. As of
December 31, 2004, U.S. gross domestic product (GDP) had increased for 13
consecutive quarters.(2) The 12-nation euro zone lagged other regions in the
current recovery. However, the European Central Bank projected euro zone growth
may be between 1.6% and 2.0% in 2004, compared with only 0.5% in 2003. The U.S.
dollar declined about 7% versus the euro during 2004.(3)

(1) Source: Standard & Poor's Micropal. The MSCI AC Europe Index is market
capitalization weighted and measures total returns of equity securities
available to foreign (non-local) investors in developed and emerging
markets in Europe. The index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.

(2) Source: Bureau of Economic Analysis.

(3) Source: FactSet Research Systems Inc.

THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 20.

4 | Annual Report

This hurt European exports into the U.S., as it made their goods more expensive
in the world's biggest market.

In this environment, the MSCI World ex-U.S. Index's total return was 20.84% in
U.S. dollars for the 12-month period ended December 31, 2004.(5) European
markets, as measured by the MSCI AC Europe Index, had a one-year total return of
21.61% in U.S. dollars.(6) In local currencies, these indexes had notably lower
total returns of 13.16% and 12.90% for the same period.(5), (6) In 2004, most
of the world's currencies strengthened in relation to the U.S. dollar, which
benefited U.S.-based investors of non-U.S. developed and emerging market
equities.

INVESTMENT STRATEGY

We follow a distinctive, three-pronged investment approach, which combines
investments in what we believe are undervalued common stocks with distressed
debt investing and risk arbitrage. Our style aims to provide our shareholders
with superior risk-adjusted results over time. We employ rigorous, fundamental
analysis to find compelling situations. In our opinion, successful investing is
as much about assessing risk and containing losses as it is about achieving
profits. In choosing investments, we look at the market price of an individual
company's securities relative to our evaluation of its intrinsic value based on
factors including book value, cash flow generation, long-term earnings potential
and earnings multiples. We may invest in bankrupt or distressed companies if we
believe the market overreacted to adverse developments or failed to appreciate
positive changes.

(4) Source: U.S. Department of Energy.

(5) Source: Standard & Poor's Micropal. The MSCI World ex-U.S. Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global developed markets, excluding the U.S.

(6) Source: Standard & Poor's Micropal. See footnote 1 for a description of
the MSCI AC Europe Index.

GEOGRAPHIC DISTRIBUTION*

Based on Total Net Assets as of 12/31/04

[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]

U.K. 24.3%
Germany 10.5%
U.S. 9.4%
Switzerland 8.5%
Netherlands 8.3%
Irish Republic 7.2%
France 6.6%
Norway 4.7%
Spain 4.6%
Denmark 3.7%
Belgium 3.4%
Finland 2.7%
Luxembourg 1.6%
Italy 1.4%
Poland 1.2%
Other Countries 2.4%

* Other Net Assets = -0.5% because of foreign currency hedging.

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/04

- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Tobacco 10.1%
- --------------------------------------------------------------------------------
Food Products 9.3%
- --------------------------------------------------------------------------------
Commercial Banks 7.6%
- --------------------------------------------------------------------------------
Media 6.3%
- --------------------------------------------------------------------------------
Metals & Mining 5.6%
- --------------------------------------------------------------------------------
Machinery 5.6%
- --------------------------------------------------------------------------------
Beverages 5.5%
- --------------------------------------------------------------------------------
Insurance 4.5%
- --------------------------------------------------------------------------------
Chemicals 3.9%
- --------------------------------------------------------------------------------
Diversified Telecommunication Services 3.3%
- --------------------------------------------------------------------------------

MANAGER'S DISCUSSION

The Fund's equity investments provided the most significant contribution to
performance in 2004. Examples of holdings that performed well included Altadis,
a Franco-Spanish tobacco company; Orkla, a Norwegian conglomerate; and Almanij,
a Belgian financial holding company.

In 2004, tobacco companies operating in Europe, such as Altadis, encountered a
challenging sales environment, especially in France after the government imposed
two substantial tax increases by early 2004 that pressured volumes and
contributed to reduced consumption of about 25% in volume. Despite challenges in
France and elsewhere, Altadis shares performed well as management returned cash
to shareholders through dividends and share repurchases. In addition, the
company announced two acquisitions and a cost-restructuring program, all of
which could enable management to continue to increase cash flow and create
shareholder value. As a result of these and other factors, Altadis shares
appreciated about 65% in 2004. Despite this strong performance, the stock still
traded at a significant discount to its European peers and our calculation of
the stock's intrinsic value. In addition, some analysts believe the industry is
ready for more consolidation. For these and other reasons, we remain
enthusiastic about the prospects of our Altadis investment.

Almanij is a Belgian holding company that owns equity stakes in a number of
European financial institutions, with its primary investment being a controlling
interest in Belgian bank KBC Bancassurance (KBC). For many years, Almanij shares
traded at a substantial discount to the sum of its parts largely due to the
complex nature of its holding structure, as well as the low valuation afforded
by the market to KBC. We bought the company's shares bearing in mind the
potential for cost rationalization in KBC's Belgian home market, the growth of
KBC's operations in central Europe and the opportunities to simplify Almanij's
ownership structure. In 2004, KBC succeeded in controlling its

6 | Annual Report

costs and realized strong growth in its central European operations. Largely as
a result, KBC shares appreciated sharply. Furthermore, with the aim of
untangling the relationship between the two companies, KBC and Almanij in
December 2004 entered into an agreement whereby KBC will acquire Almanij at a
significant premium. With the rise in KBC's stock price during the period and
KBC's share offer, Almanij stock appreciated 108% in 2004. At period-end, we
continued to own Almanij shares as we believed the shares in KBC, which we will
receive in exchange for our Almanij shares, were still priced below our estimate
of their intrinsic value.

Although many of our investments performed well, there were several detractors
from Fund performance during the fiscal year. Positions that declined in value
during the period included Eurotunnel, a distressed investment in the operator
of the English Channel tunnel; MG Technologies, a German conglomerate with
interests in the engineering and chemicals sectors; and Highland Gold Mining, a
U.K.-based gold mining company operating mainly in eastern Europe.

Eurotunnel's debt securities declined in 2004 largely due to uncertainties
surrounding the ultimate resolution of the company's financial situation, as
well as continuing mediocre operating results after the board and management
team were replaced in April 2004. Distressed investing can be a lengthy process,
and it is not unusual for securities to weaken somewhat before a restructuring
or financial resolution is ultimately worked out.

MG Technologies declined mainly due to the failed divestment of its plastics
operations, the slower-than-expected turnaround of the company's plant
engineering division, and the sudden departure of its chief executive officer.
The company is also in the midst of a restructuring.

In December, Highland's share price fell in anticipation of an equity offering,
which was subsequently priced at a discount to the market. However, the
fundamental stock valuations improved because of the offering.

TOP 10 HOLDINGS
12/31/04

- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
British American Tobacco PLC 3.5%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Altadis SA 3.4%
TOBACCO, SPAIN
- --------------------------------------------------------------------------------
NTL Inc. 3.1%
MEDIA, U.K.
- --------------------------------------------------------------------------------
Schindler Holding AG, ord. & Reg D 3.1%
MACHINERY, SWITZERLAND
- --------------------------------------------------------------------------------
Orkla ASA 3.1%
FOOD PRODUCTS, NORWAY
- --------------------------------------------------------------------------------
Allied Irish Banks PLC 2.6%
COMMERCIAL BANKS, IRISH REPUBLIC
- --------------------------------------------------------------------------------
White Mountains Insurance Group Inc. 2.6%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
Imperial Tobacco Group PLC 2.2%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Carlsberg AS, A & B 2.0%
BEVERAGES, DENMARK
- --------------------------------------------------------------------------------
Anglo American PLC, ord. & ADR 1.9%
METALS & MINING, U.K.
- --------------------------------------------------------------------------------

Annual Report | 7

Thank you for your continued participation in Mutual European Fund. We look
forward to serving your future investment needs.

[PHOTO OMITTED] /s/ David J. Winters, CFA

David J. Winters, CFA

[PHOTO OMITTED] /s/ Philippe Brugere-Trelat

Philippe Brugere-Trelat

Co-Portfolio Managers
Mutual European Fund

- --------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT

Philippe Brugere-Trelat is vice president of Franklin Mutual Advisers, LLC
(Mutual Series) and portfolio manager of Mutual European Fund. Mr.
Brugere-Trelat brings over 20 years of experience in the European equity
markets. He is intimately familiar with Mutual Series' approach to investing,
having begun his career with Mutual Series Fund in 1984 under Max Heine and
Michael Price. He spent over 10 years (1984-1994) following European investments
for the funds.

Prior to rejoining Mutual Series in 2004, Mr. Brugere-Trelat was president and
portfolio manager of Eurovest, a French registered fund exclusively invested in
European markets (1996-2004). Before that, he was a principal of Omega Advisors
Inc., a large New York-based hedge fund, where he was responsible for European
equity markets (1994-1996). Mr. Brugere-Trelat is a graduate of the University
of Paris, France, where he earned a master's degree in law and political
science.
- --------------------------------------------------------------------------------

8 | Annual Report

PERFORMANCE SUMMARY AS OF 12/31/04

PRICE AND DISTRIBUTION INFORMATION

- ---------------------------------------------------------------------------------------------
CLASS Z CHANGE 12/31/04 12/31/03
- ---------------------------------------------------------------------------------------------

Net Asset Value (NAV) +$2.96 $19.75 $16.79
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/04-12/31/04)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.6010
- ---------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0230
- ---------------------------------------------------------------------------------------------
TOTAL $0.6240
- ---------------------------------------------------------------------------------------------
CLASS A CHANGE 12/31/04 12/31/03
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.91 $19.50 $16.59
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/04-12/31/04)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.5419
- ---------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0230
- ---------------------------------------------------------------------------------------------
TOTAL $0.5649
- ---------------------------------------------------------------------------------------------
CLASS B CHANGE 12/31/04 12/31/03
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.83 $19.14 $16.31
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/04-12/31/04)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4350
- ---------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0230
- ---------------------------------------------------------------------------------------------
TOTAL $0.4580
- ---------------------------------------------------------------------------------------------
CLASS C CHANGE 12/31/04 12/31/03
- ---------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.90 $19.50 $16.60
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/04-12/31/04)
- ---------------------------------------------------------------------------------------------
Dividend Income $0.4279
- ---------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.0230
- ---------------------------------------------------------------------------------------------
TOTAL $0.4509
- ---------------------------------------------------------------------------------------------

Mutual European Fund paid distributions derived from long-term capital gains of
2.30 cents ($0.0230) per share in December 2004. The Fund designated such
distributions as capital gain dividends per Internal Revenue Code Section 852
(b)(3).

Annual Report | 9

PERFORMANCE SUMMARY (CONTINUED)

PERFORMANCE(1)

- ------------------------------------------------------------------------------------------
CLASS Z 1-YEAR 5-YEAR INCEPTION (7/3/96)
- ------------------------------------------------------------------------------------------

Cumulative Total Return(2) 21.58% 62.53% 252.75%
- ------------------------------------------------------------------------------------------
Average Annual Total Return(3) 21.58% 10.20% 15.99%
- ------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $12,158 $16,253 $35,275
- ------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR INCEPTION (11/1/96)
- ------------------------------------------------------------------------------------------
Cumulative Total Return(2) 21.23% 59.77% 214.10%
- ------------------------------------------------------------------------------------------
Average Annual Total Return(3) 14.27% 8.53% 14.22%
- ------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,427 $15,060 $29,610
- ------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------
Cumulative Total Return(2) 20.41% 54.03% 124.48%
- ------------------------------------------------------------------------------------------
Average Annual Total Return(3) 16.41% 8.82% 14.35%
- ------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,641 $15,263 $22,348
- ------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (11/1/96)
- ------------------------------------------------------------------------------------------
Cumulative Total Return(2) 20.43% 54.83% 199.58%
- ------------------------------------------------------------------------------------------
Average Annual Total Return(3) 19.43% 9.14% 14.38%
- ------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,943 $15,483 $29,958
- ------------------------------------------------------------------------------------------

FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.

10 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT(1)

[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]

This graph compares the performance of Mutual European Fund - Class Z, as
tracked by the growth in value of a $10,000 investment, to that of the MSCI All
Country Europe Index5 from 7/3/96-12/31/04.

CLASS Z (7/3/96-12/31/04)

MUTUAL EUROPEAN MSCI AC EUROPE
DATE FUND INDEX(5)
---- --------------- --------------
7/3/1996 $10,000 $10,000
7/31/1996 $10,060 $9,892
8/31/1996 $10,430 $10,191
9/30/1996 $10,640 $10,399
10/31/1996 $10,840 $10,636
11/30/1996 $11,260 $11,171
12/31/1996 $11,461 $11,393
1/31/1997 $11,985 $11,468
2/28/1997 $12,237 $11,625
3/31/1997 $12,398 $11,992
4/30/1997 $12,377 $11,926
5/31/1997 $12,538 $12,443
6/30/1997 $12,961 $13,065
7/31/1997 $13,526 $13,668
8/31/1997 $13,283 $12,900
9/30/1997 $14,164 $14,168
10/31/1997 $13,628 $13,472
11/30/1997 $13,769 $13,673
12/31/1997 $14,116 $14,215
1/31/1998 $14,351 $14,726
2/28/1998 $15,135 $15,878
3/31/1998 $16,222 $17,013
4/30/1998 $16,636 $17,381
5/31/1998 $17,219 $17,652
6/30/1998 $16,827 $17,824
7/31/1998 $16,692 $18,208
8/31/1998 $14,793 $15,837
9/30/1998 $13,434 $15,203
10/31/1998 $13,826 $16,423
11/30/1998 $14,724 $17,319
12/31/1998 $14,784 $18,079
1/31/1999 $14,820 $17,989
2/28/1999 $15,008 $17,553
3/31/1999 $15,350 $17,757
4/30/1999 $16,246 $18,310
5/31/1999 $16,282 $17,466
6/30/1999 $16,848 $17,764
7/31/1999 $16,872 $17,958
8/31/1999 $17,027 $18,148
9/30/1999 $17,027 $18,019
10/31/1999 $17,576 $18,671
11/30/1999 $19,055 $19,193
12/31/1999 $21,705 $21,215
1/31/2000 $22,193 $19,731
2/29/2000 $25,034 $20,747
3/31/2000 $24,263 $21,246
4/30/2000 $23,594 $20,318
5/31/2000 $23,633 $20,143
6/30/2000 $23,650 $20,530
7/31/2000 $23,799 $20,206
8/31/2000 $24,395 $19,952
9/30/2000 $23,799 $19,020
10/31/2000 $24,070 $18,867
11/30/2000 $23,975 $18,064
12/31/2000 $24,845 $19,334
1/31/2001 $25,533 $19,364
2/28/2001 $25,389 $17,635
3/31/2001 $24,397 $16,325
4/30/2001 $25,133 $17,519
5/31/2001 $25,565 $16,692
6/30/2001 $25,406 $16,066
7/31/2001 $25,262 $16,085
8/31/2001 $25,021 $15,675
9/30/2001 $22,161 $14,099
10/31/2001 $22,884 $14,567
11/30/2001 $23,366 $15,166
12/31/2001 $23,668 $15,566
1/31/2002 $24,176 $14,780
2/28/2002 $24,537 $14,759
3/31/2002 $25,506 $15,572
4/30/2002 $26,031 $15,481
5/31/2002 $26,179 $15,449
6/30/2002 $25,179 $14,905
7/31/2002 $23,225 $13,255
8/31/2002 $23,258 $13,260
9/30/2002 $21,785 $11,530
10/31/2002 $21,851 $12,645
11/30/2002 $22,066 $13,271
12/31/2002 $21,842 $12,788
1/31/2003 $21,236 $12,187
2/28/2003 $20,579 $11,804
3/31/2003 $20,882 $11,625
4/30/2003 $22,549 $13,220
5/31/2003 $23,981 $14,102
6/30/2003 $24,301 $14,249
7/31/2003 $24,860 $14,532
8/31/2003 $25,385 $14,533
9/30/2003 $25,792 $14,835
10/31/2003 $26,876 $15,812
11/30/2003 $27,859 $16,480
12/31/2003 $29,016 $17,842
1/31/2004 $29,344 $18,058
2/29/2004 $30,312 $18,603
3/31/2004 $30,191 $18,066
4/30/2004 $29,949 $17,901
5/31/2004 $30,036 $18,202
6/30/2004 $30,711 $18,456
7/31/2004 $30,362 $17,953
8/31/2004 $30,449 $17,982
9/30/2004 $31,355 $18,715
10/31/2004 $32,157 $19,399
11/30/2004 $33,865 $20,809
12/31/2004 $35,275 $21,697

AVERAGE ANNUAL TOTAL RETURN

- -----------------------------------------------
CLASS Z 12/31/04
- -----------------------------------------------
1-Year 21.58%
- -----------------------------------------------
5-Year 10.20%
- -----------------------------------------------
Since Inception (7/3/96) 15.99%
- -----------------------------------------------

[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]

This graph compares the performance of Mutual European Fund - Class A, as
tracked by the growth in value of a $10,000 investment, to that of the MSCI All
Country Europe Index5 from 11/1/96-12/31/04.

CLASS A (11/1/96-12/31/04)

MUTUAL EUROPEAN MSCI AC EUROPE
DATE FUND INDEX(5)
---- --------------- --------------
11/1/1996 $9,426 $10,000
11/30/1996 $9,783 $10,503
12/31/1996 $9,954 $10,712
1/31/1997 $10,409 $10,783
2/28/1997 $10,619 $10,930
3/31/1997 $10,759 $11,276
4/30/1997 $10,742 $11,213
5/31/1997 $10,873 $11,699
6/30/1997 $11,240 $12,284
7/31/1997 $11,723 $12,851
8/31/1997 $11,512 $12,129
9/30/1997 $12,269 $13,321
10/31/1997 $11,802 $12,667
11/30/1997 $11,917 $12,856
12/31/1997 $12,214 $13,366
1/31/1998 $12,419 $13,846
2/28/1998 $13,079 $14,929
3/31/1998 $14,002 $15,996
4/30/1998 $14,352 $16,342
5/31/1998 $14,858 $16,597
6/30/1998 $14,517 $16,759
7/31/1998 $14,374 $17,120
8/31/1998 $12,737 $14,890
9/30/1998 $11,559 $14,294
10/31/1998 $11,889 $15,442
11/30/1998 $12,657 $16,284
12/31/1998 $12,711 $16,999
1/31/1999 $12,742 $16,914
2/28/1999 $12,895 $16,504
3/31/1999 $13,180 $16,696
4/30/1999 $13,955 $17,216
5/31/1999 $13,965 $16,422
6/30/1999 $14,442 $16,702
7/31/1999 $14,463 $16,885
8/31/1999 $14,597 $17,063
9/30/1999 $14,587 $16,942
10/31/1999 $15,050 $17,555
11/30/1999 $16,308 $18,046
12/31/1999 $18,565 $19,947
1/31/2000 $18,975 $18,552
2/29/2000 $21,402 $19,507
3/31/2000 $20,737 $19,976
4/30/2000 $20,161 $19,104
5/31/2000 $20,194 $18,939
6/30/2000 $20,190 $19,303
7/31/2000 $20,319 $18,999
8/31/2000 $20,810 $18,759
9/30/2000 $20,307 $17,883
10/31/2000 $20,529 $17,739
11/30/2000 $20,447 $16,985
12/31/2000 $21,177 $18,178
1/31/2001 $21,756 $18,206
2/28/2001 $21,618 $16,581
3/31/2001 $20,777 $15,350
4/30/2001 $21,398 $16,472
5/31/2001 $21,756 $15,694
6/30/2001 $21,614 $15,105
7/31/2001 $21,475 $15,124
8/31/2001 $21,282 $14,738
9/30/2001 $18,834 $13,256
10/31/2001 $19,456 $13,696
11/30/2001 $19,857 $14,259
12/31/2001 $20,106 $14,636
1/31/2002 $20,529 $13,897
2/28/2002 $20,825 $13,876
3/31/2002 $21,642 $14,642
4/30/2002 $22,079 $14,555
5/31/2002 $22,206 $14,526
6/30/2002 $21,342 $14,014
7/31/2002 $19,694 $12,462
8/31/2002 $19,708 $12,467
9/30/2002 $18,458 $10,841
10/31/2002 $18,501 $11,889
11/30/2002 $18,671 $12,478
12/31/2002 $18,489 $12,023
1/31/2003 $17,970 $11,459
2/28/2003 $17,408 $11,098
3/31/2003 $17,653 $10,930
4/30/2003 $19,065 $12,430
5/31/2003 $20,261 $13,260
6/30/2003 $20,529 $13,397
7/31/2003 $20,993 $13,664
8/31/2003 $21,442 $13,664
9/30/2003 $21,776 $13,948
10/31/2003 $22,675 $14,867
11/30/2003 $23,501 $15,495
12/31/2003 $24,468 $16,776
1/31/2004 $24,733 $16,979
2/29/2004 $25,545 $17,492
3/31/2004 $25,442 $16,986
4/30/2004 $25,235 $16,831
5/31/2004 $25,294 $17,114
6/30/2004 $25,862 $17,353
7/31/2004 $25,550 $16,880
8/31/2004 $25,625 $16,907
9/30/2004 $26,368 $17,596
10/31/2004 $27,037 $18,240
11/30/2004 $28,480 $19,566
12/31/2004 $29,610 $20,400

AVERAGE ANNUAL TOTAL RETURN

- -----------------------------------------------
CLASS A 12/31/04
- -----------------------------------------------
1-Year 14.27%
- -----------------------------------------------
5-Year 8.53%
- -----------------------------------------------
Since Inception (11/1/96) 14.22%
- -----------------------------------------------

Annual Report | 11

PERFORMANCE SUMMARY (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- -----------------------------------------------
CLASS B 12/31/04
- -----------------------------------------------
1-Year 16.41%
- -----------------------------------------------
5-Year 8.82%
- -----------------------------------------------
Since Inception (1/1/99) 14.35%
- -----------------------------------------------

[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]

This graph compares the performance of Mutual European Fund - Class B, as
tracked by the growth in value of a $10,000 investment, to that of the MSCI All
Country Europe Index5 from 1/1/99-12/31/04.

CLASS B (1/1/99-12/31/04)

MUTUAL EUROPEAN MSCI AC EUROPE
DATE FUND INDEX(5)
---- --------------- --------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,016 $9,950
2/28/1999 $10,136 $9,709
3/31/1999 $10,361 $9,822
4/30/1999 $10,954 $10,128
5/31/1999 $10,962 $9,661
6/30/1999 $11,334 $9,826
7/31/1999 $11,342 $9,933
8/31/1999 $11,439 $10,038
9/30/1999 $11,431 $9,967
10/31/1999 $11,788 $10,327
11/30/1999 $12,770 $10,616
12/31/1999 $14,517 $11,735
1/31/2000 $14,831 $10,914
2/29/2000 $16,713 $11,476
3/31/2000 $16,190 $11,752
4/30/2000 $15,729 $11,239
5/31/2000 $15,746 $11,141
6/30/2000 $15,738 $11,356
7/31/2000 $15,820 $11,177
8/31/2000 $16,206 $11,036
9/30/2000 $15,802 $10,520
10/31/2000 $15,967 $10,436
11/30/2000 $15,894 $9,992
12/31/2000 $16,450 $10,694
1/31/2001 $16,894 $10,710
2/28/2001 $16,775 $9,754
3/31/2001 $16,114 $9,030
4/30/2001 $16,580 $9,690
5/31/2001 $16,861 $9,232
6/30/2001 $16,744 $8,886
7/31/2001 $16,624 $8,897
8/31/2001 $16,462 $8,670
9/30/2001 $14,572 $7,798
10/31/2001 $15,028 $8,057
11/30/2001 $15,332 $8,389
12/31/2001 $15,518 $8,610
1/31/2002 $15,838 $8,175
2/28/2002 $16,058 $8,163
3/31/2002 $16,675 $8,613
4/30/2002 $17,006 $8,563
5/31/2002 $17,094 $8,545
6/30/2002 $16,425 $8,244
7/31/2002 $15,136 $7,331
8/31/2002 $15,147 $7,334
9/30/2002 $14,169 $6,378
10/31/2002 $14,203 $6,994
11/30/2002 $14,325 $7,340
12/31/2002 $14,182 $7,073
1/31/2003 $13,778 $6,741
2/28/2003 $13,329 $6,529
3/31/2003 $13,520 $6,430
4/30/2003 $14,586 $7,312
5/31/2003 $15,494 $7,800
6/30/2003 $15,696 $7,881
7/31/2003 $16,034 $8,038
8/31/2003 $16,373 $8,038
9/30/2003 $16,621 $8,205
10/31/2003 $17,298 $8,746
11/30/2003 $17,919 $9,115
12/31/2003 $18,642 $9,869
1/31/2004 $18,836 $9,988
2/29/2004 $19,442 $10,290
3/31/2004 $19,351 $9,993
4/30/2004 $19,191 $9,902
5/31/2004 $19,225 $10,068
6/30/2004 $19,633 $10,209
7/31/2004 $19,391 $9,930
8/31/2004 $19,437 $9,946
9/30/2004 $19,990 $10,352
10/31/2004 $20,485 $10,730
11/30/2004 $21,568 $11,510
12/31/2004 $22,348 $12,001

AVERAGE ANNUAL TOTAL RETURN

- -----------------------------------------------
CLASS C 12/31/04
- -----------------------------------------------
1-Year 19.43%
- -----------------------------------------------
5-Year 9.14%
- -----------------------------------------------
Since Inception (11/1/96) 14.38%
- -----------------------------------------------

[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]

This graph compares the performance of Mutual European Fund - Class C, as
tracked by the growth in value of a $10,000 investment, to that of the MSCI All
Country Europe Index5 from 11/1/96-12/31/04.

CLASS C (11/1/96-12/31/04)

MUTUAL EUROPEAN MSCI AC EUROPE
DATE FUND INDEX(5)
---- --------------- --------------
11/1/1996 $10,000 $10,000
11/30/1996 $10,369 $10,503
12/31/1996 $10,552 $10,712
1/31/1997 $11,025 $10,783
2/28/1997 $11,248 $10,930
3/31/1997 $11,378 $11,276
4/30/1997 $11,359 $11,213
5/31/1997 $11,489 $11,699
6/30/1997 $11,869 $12,284
7/31/1997 $12,370 $12,851
8/31/1997 $12,137 $12,129
9/30/1997 $12,929 $13,321
10/31/1997 $12,435 $12,667
11/30/1997 $12,556 $12,856
12/31/1997 $12,862 $13,366
1/31/1998 $13,067 $13,846
2/28/1998 $13,776 $14,929
3/31/1998 $14,751 $15,996
4/30/1998 $15,110 $16,342
5/31/1998 $15,634 $16,597
6/30/1998 $15,264 $16,759
7/31/1998 $15,122 $17,120
8/31/1998 $13,383 $14,890
9/30/1998 $12,140 $14,294
10/31/1998 $12,487 $15,442
11/30/1998 $13,288 $16,284
12/31/1998 $13,332 $16,999
1/31/1999 $13,354 $16,914
2/28/1999 $13,515 $16,504
3/31/1999 $13,814 $16,696
4/30/1999 $14,607 $17,216
5/31/1999 $14,618 $16,422
6/30/1999 $15,116 $16,702
7/31/1999 $15,127 $16,885
8/31/1999 $15,257 $17,063
9/30/1999 $15,246 $16,942
10/31/1999 $15,722 $17,555
11/30/1999 $17,030 $18,046
12/31/1999 $19,385 $19,947
1/31/2000 $19,802 $18,552
2/29/2000 $22,336 $19,507
3/31/2000 $21,630 $19,976
4/30/2000 $21,017 $19,104
5/31/2000 $21,040 $18,939
6/30/2000 $21,026 $19,303
7/31/2000 $21,147 $18,999
8/31/2000 $21,659 $18,759
9/30/2000 $21,111 $17,883
10/31/2000 $21,342 $17,739
11/30/2000 $21,233 $16,985
12/31/2000 $21,987 $18,178
1/31/2001 $22,574 $18,206
2/28/2001 $22,431 $16,581
3/31/2001 $21,529 $15,350
4/30/2001 $22,159 $16,472
5/31/2001 $22,531 $15,694
6/30/2001 $22,371 $15,105
7/31/2001 $22,213 $15,124
8/31/2001 $21,998 $14,738
9/30/2001 $19,460 $13,256
10/31/2001 $20,090 $13,696
11/30/2001 $20,492 $14,259
12/31/2001 $20,745 $14,636
1/31/2002 $21,166 $13,897
2/28/2002 $21,471 $13,876
3/31/2002 $22,284 $14,642
4/30/2002 $22,734 $14,555
5/31/2002 $22,850 $14,526
6/30/2002 $21,950 $14,014
7/31/2002 $20,238 $12,462
8/31/2002 $20,252 $12,467
9/30/2002 $18,950 $10,841
10/31/2002 $18,979 $11,889
11/30/2002 $19,155 $12,478
12/31/2002 $18,952 $12,023
1/31/2003 $18,406 $11,459
2/28/2003 $17,831 $11,098
3/31/2003 $18,067 $10,930
4/30/2003 $19,497 $12,430
5/31/2003 $20,722 $13,260
6/30/2003 $20,972 $13,397
7/31/2003 $21,432 $13,664
8/31/2003 $21,877 $13,664
9/30/2003 $22,218 $13,948
10/31/2003 $23,123 $14,867
11/30/2003 $23,953 $15,495
12/31/2003 $24,921 $16,776
1/31/2004 $25,176 $16,979
2/29/2004 $25,987 $17,492
3/31/2004 $25,867 $16,986
4/30/2004 $25,657 $16,831
5/31/2004 $25,702 $17,114
6/30/2004 $26,251 $17,353
7/31/2004 $25,933 $16,880
8/31/2004 $25,994 $16,907
9/30/2004 $26,735 $17,596
10/31/2004 $27,401 $18,240
11/30/2004 $28,838 $19,566
12/31/2004 $29,958 $20,400

12 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

ENDNOTES

BECAUSE THE FUND INVESTS PRIMARILY IN ISSUERS LOCATED IN A SINGLE REGION, IT MAY
BE AFFECTED BY GREATER VOLATILITY THAN A MORE GEOGRAPHICALLY DIVERSIFIED FUND.
FOREIGN SECURITIES RISKS INCLUDE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL,
ECONOMIC AND REGULATORY UNCERTAINTY. SMALLER-COMPANY STOCKS HAVE HISTORICALLY
EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER
THE SHORT TERM. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN MERGERS,
REORGANIZATIONS OR LIQUIDATIONS, AS WELL AS LOWER-RATED "JUNK BONDS," WHICH
ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF
THE MAIN INVESTMENT RISKS.