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

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-05387

FRANKLIN MUTUAL SERIES FUND INC.
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(Exact name of registrant as specified in charter)

101 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078-2705
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(Address of principal executive offices) (Zip code)

CRAIG S. TYLE, 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: 12/31/05
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ITEM 1. REPORTS TO STOCKHOLDERS.

MUTUAL BEACON FUND

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DECEMBER 31, 2005
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ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
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WANT TO RECEIVE
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Eligible shareholders can
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See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
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 what we
believe are undervalued stocks, as well as arbitrage
situations and distressed securities. Franklin is a
recognized leader in fixed income investing and also
brings expertise in growth- and value-style U.S.
equity investing. Templeton pioneered international
investing and, with offices in over 25 countries,
offers investors a truly global perspective.

TRUE DIVERSIFICATION Because these management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why the
funds can be used to build truly diversified
allocation plans 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,
accurate and personal service that has 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 ................................................... 30

Notes to Financial Statements .......................................... 34

Report of Independent Registered Public Accounting Firm ................ 50

Tax Designation ........................................................ 51

Board Members and Officers ............................................. 52

Shareholder Information ................................................ 57

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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 mainly in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to 35% of its assets in foreign
securities.

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PERFORMANCE DATA 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.
- --------------------------------------------------------------------------------

We are pleased to bring you Mutual Beacon Fund's annual report for the fiscal
year ended December 31, 2005.

PERFORMANCE OVERVIEW

Mutual Beacon Fund - Class Z posted a +9.25% cumulative total return for the 12
months ended December 31, 2005. The Fund outperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +4.91% 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 12 months ended December 31, 2005, U.S. economic expansion was driven
by strength across most industries, sectors and regions. Gross domestic product
(GDP) rose during the period, benefiting primarily from increased personal
consumption, business investment and federal spending. The U.S. dollar rallied
in 2005, supported by relatively strong domestic economic growth and rising
short-term domestic interest rates, as the Federal Reserve Board raised the
federal funds target rate from 2.25% to 4.25% during the period. Compared with
the rise in short-term interest rates, long-term rates remained relatively
stable, supporting overall robust housing and commercial real estate activity,
which contributed to economic growth.

(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.

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

as measured by the 2.2% rise for the core Consumer Price Index (CPI).(2) In this
environment, the blue chip stocks of the Dow Jones Industrial Average posted a
one-year total return of +1.72%, while the broader S&P 500 and the
technology-heavy NASDAQ Composite Index returned +4.91% and +2.12%.(3)

Outside the U.S., the global economy overcame fears of derailment generated by
higher energy costs and advanced at a solid clip during 2005, with Europe
surpassing expectations. Excluding the volatile energy and food sectors,
inflation remained relatively subdued worldwide.

In addition to high energy prices, prices for other commodities such as
industrial metals also rose. This contributed to economic growth in countries
that are tied to mining and industrial commodities, such as Australia and
Canada, and some Asian and Latin American emerging markets. For the 12 months
under review, equity markets outside the U.S. performed strongly. The Morgan
Stanley Capital International (MSCI) All Country (AC) World ex US Index rose
+17.11%.(4) In terms of sectors, energy and materials led equity market
performance, and telecommunication services and consumer-related sectors lagged.

INVESTMENT STRATEGY

At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets, high-quality
assets, substantial free cash flow and shareholder-oriented management teams and
whose stocks are trading at discounts to our assessment of the companies'
intrinsic or business value. We also look for asset rich companies whose shares
may be trading at depressed levels due to concerns over short-term earnings
disappointments, litigation, management strategy or other perceived negatives.
This strict value approach is not only intended to improve the likelihood of
upside potential, but it is also intended to reduce the risk of substantial
declines. While the vast majority of our undervalued equity investments are made
in publicly traded companies globally, we may invest occasionally in privately
held companies as well.

GEOGRAPHIC BREAKDOWN

Based on Total Net Assets as of 12/31/05

[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

U.S. 56.0%

U.K. 9.1%

France 4.9%

Spain 2.5%

Denmark 2.2%

Japan 1.7%

Switzerland 1.6%

Norway 1.6%

Ireland 1.5%

Belgium 1.2%

South Korea 1.1%

Canada 1.1%

Italy 1.0%

Other 3.6%

Short-Term Investments & Other Net Assets 10.9%

(2) Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.

(3) 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 NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.

(4) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a
free float-adjusted market capitalization-weighted index designed to
measure equity market performance in global developed and emerging markets
excluding the U.S.

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES

Based on Equity Securities as of 12/31/05

- ---------------------------------------------------
% OF TOTAL
NET ASSETS
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Insurance 11.9%
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Tobacco 10.0%
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Media 8.6%
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Commercial Banks 6.8%
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Beverages 4.6%
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Food Products 4.4%
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Diversified Telecommunication Services 4.1%
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Paper & Forest Products 3.9%
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Metals & Mining 3.3%
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Oil, Gas & Consumable Fuels 3.2%
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We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.

The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals, and eschew rumored deals or other situations we consider
relatively risky. In addition, 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.

MANAGER'S DISCUSSION

The Fund's outperformance relative to U.S. equities as measured by the S&P 500
during the year was driven primarily by its shares in companies located outside
the U.S. Specifically, eight of the top ten performers during the period
represented international exposure, primarily companies located in Western
Europe. The MSCI Europe Index returned +9.93% in U.S. dollars in 2005, versus a
+4.91% return from the S&P 500.(5)

London-based British American Tobacco (BAT) was the largest contributor to Fund
performance during year under review. BAT is the world's second-largest
cigarette manufacturer behind Philip Morris. With about a 15% global market
share, BAT enjoys strong market positions in Europe, North America and several
emerging markets. The company's stock appreciated 52% in local currency in 2005
as the company delivered robust operational performance driven by increasing
sales volumes and an improving product mix. BAT benefited from an acceleration
of its sales in emerging markets, a focused development of its

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

6 | Annual Report

higher-margin global brands, and a further reduction of its cost base. During
the year, the company returned most of its free cash flow to shareholders
through dividends and share buybacks. This caused a number of analysts to raise
their earnings growth projections for BAT.

Another top performer for the period was Canadian Oil Sands Trust (appreciated
91% in local currency), which exploits the massive oil reserves contained in
western Canada's oil sands. The company, along with the entire energy sector,
benefited from historically high oil prices in 2005.

The Fund also benefited from a private investment made across the Mutual Series
Funds in an entity that owns a controlling position in Aozora Bank. This
Japanese bank, formerly known as Nippon Credit Bank, was nationalized and then
reprivatized by the Japanese government. The Fund invested in a vehicle created
by Cerberus Partners, which owns more than 60% of the bank. The position
benefited from significant appreciation in Japanese banking stocks in general,
and recently, the investment vehicle made a significant capital distribution to
shareholders.

Unfortunately, not every security in the Fund's portfolio appreciated during the
12 months under review. Three positions that detracted from performance included
White Mountains Insurance Group, a U.S. insurance company; Washington Post, a
U.S. newspaper and publishing company; and Kindred Healthcare, a U.S. health
care provider.

White Mountains' shares weakened 12% largely due to the company's exposure to
areas devastated by Hurricane Katrina, which may have caused the largest total
insured loss in history.

Shares in Washington Post underperformed (declined 22%) as Kaplan, the company's
education business, reported limited margin expansion; and hurricane damage to
the Gulf Coast negatively impacted Cable One, its cable operations.
Additionally, the advertising market was soft overall, but particularly
pronounced for weekly publications, which hurt revenues at Newsweek.

Kindred shares declined 14% in 2005 after the company posted disappointing
results in its second and third quarters. Valuations at year-end also reflected
the industry's challenging Medicare reimbursement climate, which was pressured
by high federal deficits.(6)

TOP 10 HOLDINGS
12/31/05

- -----------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- -----------------------------------------------------
White Mountains Insurance Group Inc. 3.7%
INSURANCE, U.S.
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Berkshire Hathaway Inc., A & B 3.0%
INSURANCE, U.S.
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Weyerhaeuser Co. 3.0%
PAPER & FOREST PRODUCTS, U.S.
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Altadis SA 2.5%
TOBACCO, SPAIN
- -----------------------------------------------------
News Corp., A 2.4%
MEDIA, U.S.
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Reynolds American Inc. 1.7%
TOBACCO, U.S.
- -----------------------------------------------------
Altria Group Inc. 1.6%
TOBACCO, U.S.
- -----------------------------------------------------
Orkla ASA 1.6%
FOOD PRODUCTS, NORWAY
- -----------------------------------------------------
British American Tobacco PLC, ord. & ADR 1.6%
TOBACCO, U.K.
- -----------------------------------------------------
Washington Post Co., B 1.5%
MEDIA, U.S.
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(6) A member of Franklin Mutual Advisers, Inc., serves on Kindred's board of
directors.

Annual Report | 7

Finally, investors should note that we entered 2005 less than fully hedged in
foreign currencies and increased the hedges on foreign currency exposure over
the course of the year.

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

[PHOTO OMITTED]

/s/ Michael J. Embler

Michael J. Embler
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, 2005, 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.

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MICHAEL EMBLER has been a member of the management team of the Mutual Series
Funds since 2001, with primary responsibility for special situation investments.
In addition to his portfolio management responsibilities for another fund, Mr.
Embler assumed the duties of portfolio manager of Mutual Beacon Fund in May
2005. Before joining Franklin Templeton Investments in 2001, he was Managing
Director and portfolio manager at Nomura Holding America, Inc.

CHARLES LAHR is an assistant portfolio manager of Mutual Beacon, Mutual European
and Mutual Financial Services Funds. He is also an analyst for Franklin Mutual
Advisers specializing in foreign equities and focusing 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.
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8 | Annual Report

Performance Summary as of 12/31/05

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
that a shareholder would pay 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 (SYMBOL: BEGRX) CHANGE 12/31/05 12/31/04
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Net Asset Value (NAV) -$ 0.42 $ 15.52 $ 15.94
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DISTRIBUTIONS (1/1/05-12/31/05)
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Dividend Income $ 0.2992
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Short-Term Capital Gain $ 0.1034
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Long-Term Capital Gain $ 1.4914
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TOTAL $ 1.8940
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CLASS A (SYMBOL: TEBIX) CHANGE 12/31/05 12/31/04
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Net Asset Value (NAV) -$ 0.43 $ 15.44 $ 15.87
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DISTRIBUTIONS (1/1/05-12/31/05)
- ----------------------------------------------------------------------------
Dividend Income $ 0.2460
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Short-Term Capital Gain $ 0.1034
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Long-Term Capital Gain $ 1.4914
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TOTAL $ 1.8408
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CLASS B (SYMBOL: TEBBX) CHANGE 12/31/05 12/31/04
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Net Asset Value (NAV) -$ 0.45 $ 15.09 $ 15.54
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DISTRIBUTIONS (1/1/05-12/31/05)
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Dividend Income $ 0.1352
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Short-Term Capital Gain $ 0.1034
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Long-Term Capital Gain $ 1.4914
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TOTAL $ 1.7300
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CLASS C (SYMBOL: TEMEX) CHANGE 12/31/05 12/31/04
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Net Asset Value (NAV) -$ 0.44 $ 15.33 $ 15.77
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DISTRIBUTIONS (1/1/05-12/31/05)
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Dividend Income $ 0.1371
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Short-Term Capital Gain $ 0.1034
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Long-Term Capital Gain $ 1.4914
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TOTAL $ 1.7319
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Mutual Beacon Fund paid distributions derived from long-term capital gains
totaling $1.4914 per share in June and December 2005. The Fund designates such
distributions as capital gain dividends per Internal Revenue Code Section
852(b)(3)(C).

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
- -----------------------------------------------------------------------------
Cumulative Total Return(2) +9.25% +52.88% +211.45%
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Average Annual Total Return(3) +9.25% +8.86% +12.03%
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Value of $10,000 Investment(4) $ 10,925 $ 15,288 $ 31,145
- -----------------------------------------------------------------------------

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CLASS A 1-YEAR 5-YEAR INCEPTION (11/1/96)
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Cumulative Total Return(2) +8.89% +50.23% +164.67%
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Average Annual Total Return(3) +2.62% +7.21% +10.49%
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Value of $10,000 Investment(4) $ 10,262 $ 14,163 $ 24,947
- -----------------------------------------------------------------------------

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CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return(2) +8.17% +45.45% +89.87%
- -----------------------------------------------------------------------------
Average Annual Total Return(3) +4.28% +7.48% +9.60%
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Value of $10,000 Investment(4) $ 10,428 $ 14,345 $ 18,987
- -----------------------------------------------------------------------------

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CLASS C 1-YEAR 5-YEAR INCEPTION (11/1/96)
- -----------------------------------------------------------------------------
Cumulative Total Return(2) +8.12% +45.37% +149.46%
- -----------------------------------------------------------------------------
Average Annual Total Return(3) +7.15% +7.77% +10.49%
- -----------------------------------------------------------------------------
Value of $10,000 Investment(4) $ 10,715 $ 14,537 $ 24,946
- -----------------------------------------------------------------------------

PERFORMANCE DATA 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.

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------
CLASS Z 12/31/05
- --------------------------------------------
1-Year +9.25%
- --------------------------------------------
5-Year +8.86%
- --------------------------------------------
10-Year +12.03%
- --------------------------------------------

CLASS Z (1/1/96-12/31/05)

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

MUTUAL BEACON
DATE FUND - CLASS Z S&P 500 INDEX(5)
- ---------- -------------- ----------------
1/1/1996 $10,000 $10,000
1/31/1996 $10,384 $10,340
2/29/1996 $10,662 $10,436
3/31/1996 $10,801 $10,537
4/30/1996 $10,949 $10,692
5/31/1996 $11,102 $10,967
6/30/1996 $11,031 $11,009
7/31/1996 $10,598 $10,523
8/31/1996 $10,962 $10,745
9/30/1996 $11,269 $11,349
10/31/1996 $11,369 $11,662
11/30/1996 $11,943 $12,543
12/31/1996 $12,119 $12,295
1/31/1997 $12,536 $13,062
2/28/1997 $12,806 $13,165
3/31/1997 $12,629 $12,625
4/30/1997 $12,704 $13,378
5/31/1997 $13,226 $14,192
6/30/1997 $13,609 $14,827
7/31/1997 $14,364 $16,006
8/31/1997 $14,212 $15,110
9/30/1997 $14,915 $15,937
10/31/1997 $14,440 $15,406
11/30/1997 $14,649 $16,118
12/31/1997 $14,905 $16,395
1/31/1998 $14,821 $16,576
2/28/1998 $15,623 $17,771
3/31/1998 $16,288 $18,680
4/30/1998 $16,499 $18,868
5/31/1998 $16,552 $18,544
6/30/1998 $16,436 $19,297
7/31/1998 $16,036 $19,092
8/31/1998 $13,843 $16,334
9/30/1998 $13,553 $17,381
10/31/1998 $14,359 $18,793
11/30/1998 $15,176 $19,932
12/31/1998 $15,258 $21,080
1/31/1999 $15,525 $21,961
2/28/1999 $15,351 $21,278
3/31/1999 $16,060 $22,130
4/30/1999 $17,328 $22,987
5/31/1999 $17,491 $22,445
6/30/1999 $17,970 $23,689
7/31/1999 $17,591 $22,951
8/31/1999 $16,962 $22,837
9/30/1999 $16,522 $22,212
10/31/1999 $16,985 $23,617
11/30/1999 $17,389 $24,097
12/31/1999 $17,820 $25,515
1/31/2000 $17,382 $24,233
2/29/2000 $16,893 $23,775
3/31/2000 $18,580 $26,099
4/30/2000 $18,361 $25,314
5/31/2000 $18,592 $24,796
6/30/2000 $18,375 $25,408
7/31/2000 $18,843 $25,011
8/31/2000 $19,627 $26,564
9/30/2000 $19,668 $25,162
10/31/2000 $19,998 $25,055
11/30/2000 $19,475 $23,081
12/31/2000 $20,373 $23,194
1/31/2001 $21,698 $24,017
2/28/2001 $21,576 $21,828
3/31/2001 $20,952 $20,446
4/30/2001 $21,820 $22,034
5/31/2001 $22,550 $22,181
6/30/2001 $22,724 $21,642
7/31/2001 $22,864 $21,429
8/31/2001 $22,381 $20,089
9/30/2001 $20,406 $18,466
10/31/2001 $20,391 $18,819
11/30/2001 $21,122 $20,262
12/31/2001 $21,619 $20,440
1/31/2002 $21,536 $20,141
2/28/2002 $21,668 $19,753
3/31/2002 $22,265 $20,496
4/30/2002 $22,463 $19,254
5/31/2002 $22,546 $19,113
6/30/2002 $20,988 $17,752
7/31/2002 $19,615 $16,368
8/31/2002 $19,799 $16,475
9/30/2002 $18,727 $14,686
10/31/2002 $18,978 $15,978
11/30/2002 $19,347 $16,917
12/31/2002 $19,231 $15,924
1/31/2003 $19,027 $15,508
2/28/2003 $18,601 $15,275
3/31/2003 $18,652 $15,421
4/30/2003 $19,860 $16,692
5/31/2003 $20,931 $17,571
6/30/2003 $21,296 $17,795
7/31/2003 $21,536 $18,109
8/31/2003 $22,153 $18,462
9/30/2003 $22,118 $18,266
10/31/2003 $23,026 $19,299
11/30/2003 $23,849 $19,469
12/31/2003 $24,892 $20,489
1/31/2004 $24,995 $20,865
2/29/2004 $25,843 $21,155
3/31/2004 $25,808 $20,836
4/30/2004 $25,117 $20,509
5/31/2004 $25,255 $20,790
6/30/2004 $25,680 $21,194
7/31/2004 $25,349 $20,493
8/31/2004 $25,558 $20,575
9/30/2004 $26,011 $20,798
10/31/2004 $26,359 $21,116
11/30/2004 $27,735 $21,970
12/31/2004 $28,507 $22,717
1/31/2005 $27,917 $22,163
2/28/2005 $28,793 $22,629
3/31/2005 $28,614 $22,229
4/30/2005 $28,382 $21,808
5/31/2005 $28,972 $22,501
6/30/2005 $29,339 $22,533
7/31/2005 $30,116 $23,371
8/31/2005 $30,260 $23,158
9/30/2005 $30,640 $23,345
10/31/2005 $29,772 $22,956
11/30/2005 $30,585 $23,823
12/31/2005 $31,145 $23,832

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------
CLASS A 12/31/05
- --------------------------------------------
1-Year +2.62%
- --------------------------------------------
5-Year +7.21%
- --------------------------------------------
Since Inception (11/1/96) +10.49%
- --------------------------------------------

CLASS A (11/1/96-12/31/05)

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

MUTUAL BEACON
DATE FUND - CLASS Z S&P 500 INDEX(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 $22,953 $19,479
1/31/2005 $22,476 $19,004
2/28/2005 $23,185 $19,404
3/31/2005 $23,026 $19,061
4/30/2005 $22,823 $18,699
5/31/2005 $23,300 $19,294
6/30/2005 $23,605 $19,322
7/31/2005 $24,218 $20,040
8/31/2005 $24,321 $19,857
9/30/2005 $24,613 $20,018
10/31/2005 $23,926 $19,684
11/30/2005 $24,569 $20,428
12/31/2005 $24,947 $20,435

Annual Report | 11

Performance Summary (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------
CLASS B 12/31/05
- --------------------------------------------
1-Year +4.28%
- --------------------------------------------
5-Year +7.48%
- --------------------------------------------
Since Inception (1/1/99) +9.60%
- --------------------------------------------

CLASS B (1/1/99-12/31/05)

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

MUTUAL BEACON
DATE FUND - CLASS B S&P 500 INDEX(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 $17,554 $10,777
1/31/2005 $17,181 $10,514
2/28/2005 $17,712 $10,735
3/31/2005 $17,588 $10,545
4/30/2005 $17,430 $10,345
5/31/2005 $17,769 $10,674
6/30/2005 $17,985 $10,690
7/31/2005 $18,453 $11,087
8/31/2005 $18,510 $10,986
9/30/2005 $18,738 $11,075
10/31/2005 $18,190 $10,890
11/30/2005 $18,681 $11,301
12/31/2005 $18,987 $11,305

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------
CLASS C 12/31/05
- --------------------------------------------
1-Year +7.15%
- --------------------------------------------
5-Year +7.77%
- --------------------------------------------
Since Inception (11/1/96) +10.49%
- --------------------------------------------

CLASS C (11/1/96-12/31/05)

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

MUTUAL BEACON
DATE FUND - CLASS C S&P 500 INDEX(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 $23,119 $19,479
1/31/2005 $22,621 $19,004
2/28/2005 $23,324 $19,404
3/31/2005 $23,148 $19,061
4/30/2005 $22,943 $18,699
5/31/2005 $23,397 $19,294
6/30/2005 $23,679 $19,322
7/31/2005 $24,285 $20,040
8/31/2005 $24,374 $19,857
9/30/2005 $24,670 $20,018
10/31/2005 $23,960 $19,684
11/30/2005 $24,581 $20,428
12/31/2005 $24,946 $20,435

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 7/1/05 VALUE 12/31/05 PERIOD* 7/1/05-12/31/05
- -------------------------------------------------------------------------------------------------------

Actual $ 1,000 $ 1,061.60 $ 4.83
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.52 $ 4.74
- -------------------------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,058.90 $ 6.59
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.80 $ 6.46
- -------------------------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,055.70 $ 10.00
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,015.48 $ 9.80
- -------------------------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,055.70 $ 10.00
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,015.48 $ 9.80
- -------------------------------------------------------------------------------------------------------

* Expenses are equal to the annualized expense ratio for each class
(Z: 0.93%; A: 1.27%; B: 1.93%; and C: 1.93%), multiplied by the average
account value over the period, multiplied by 184/365 to reflect the
one-half year period.

Annual Report | 15

Mutual Beacon Fund

FINANCIAL HIGHLIGHTS

--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2005 2004 2003 2002 2001
--------------------------------------------------------------------------

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

Net asset value, beginning of year .............. $ 15.94 $ 14.40 $ 11.31 $ 13.05 $ 13.38
--------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ..................... 0.31 0.30 0.19 0.23 0.21

Net realized and unrealized gains (losses) ... 1.16 1.76 3.13 (1.66) 0.60
--------------------------------------------------------------------------
Total from investment operations ................ 1.47 2.06 3.32 (1.43) 0.81
--------------------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.30) (0.37) (0.23) (0.20) (0.20)

Net realized gains ........................... (1.59) (0.15) -- (0.11) (0.94)
--------------------------------------------------------------------------
Total distributions ............................. (1.89) (0.52) (0.23) (0.31) (1.14)
--------------------------------------------------------------------------
Redemption fees ................................. --(c) --(c) -- -- --
--------------------------------------------------------------------------
Net asset value, end of year .................... $ 15.52 $ 15.94 $ 14.40 $ 11.31 $ 13.05
==========================================================================

Total return .................................... 9.25% 14.52% 29.44% (11.05)% 6.11%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 3,433,665 $ 3,359,389 $ 3,112,212 $ 2,572,002 $ 3,090,827
Ratios to average net assets:*
Expenses(b) .................................. 0.89% 0.83% 0.86% 0.80% 0.79%
Net investment income ........................ 1.91% 1.99% 1.48% 1.88% 1.47%
Portfolio turnover rate ......................... 35.36% 29.17% 49.61% 52.27% 55.25%
*Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ..................................... 0.84% 0.82% 0.83% 0.79% 0.78%

(a) Based on average daily shares outstanding.

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

16 | See notes to financial statements. | Annual Report

Mutual Beacon Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2005 2004 2003 2002 2001
--------------------------------------------------------------------------

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

Net asset value, beginning of year .............. $ 15.87 $ 14.34 $ 11.27 $ 13.01 $ 13.34
--------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... 0.26 0.25 0.14 0.19 0.16

Net realized and unrealized gains (losses) ... 1.15 1.75 3.12 (1.66) 0.60
--------------------------------------------------------------------------
Total from investment operations ................ 1.41 2.00 3.26 (1.47) 0.76
--------------------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.25) (0.32) (0.19) (0.16) (0.15)

Net realized gains ........................... (1.59) (0.15) -- (0.11) (0.94)
--------------------------------------------------------------------------
Total distributions ............................. (1.84) (0.47) (0.19) (0.27) (1.09)
--------------------------------------------------------------------------
Redemption fees ................................. --(d) --(d) -- -- --
--------------------------------------------------------------------------
Net asset value, end of year .................... $ 15.44 $ 15.87 $ 14.34 $ 11.27 $ 13.01
==========================================================================

Total return(b) ................................. 8.89% 14.13% 28.99% (11.41)% 5.78%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ................. $ 1,633,022 $ 1,462,133 $ 1,301,620 $ 918,983 $ 977,558
Ratios to average net assets:*
Expenses(c) .................................. 1.22% 1.18% 1.21% 1.15% 1.14%

Net investment income ........................ 1.58% 1.64% 1.13% 1.53% 1.12%
Portfolio turnover rate ......................... 35.36% 29.17% 49.61% 52.27% 55.25%
*Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ..................................... 1.17% 1.17% 1.18% 1.14% 1.13%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the sales commissions or the contingent
deferred sales charge.

(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 $0.01 per share.

Annual Report | See notes to financial statements. | 17

Mutual Beacon Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2005 2004 2003 2002 2001
--------------------------------------------------------------

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

Net asset value, beginning of year ................. $ 15.54 $ 14.06 $ 11.07 $ 12.80 $ 13.18
--------------------------------------------------------------

Income from investment operations:

Net investment income(a) ........................ 0.14 0.15 0.05 0.11 0.06

Net realized and unrealized gains (losses) ...... 1.14 1.71 3.06 (1.63) 0.60
--------------------------------------------------------------
Total from investment operations ................... 1.28 1.86 3.11 (1.52) 0.66
--------------------------------------------------------------
Less distributions from:

Net investment income ........................... (0.14) (0.23) (0.12) (0.10) (0.10)

Net realized gains .............................. (1.59) (0.15) -- (0.11) (0.94)
--------------------------------------------------------------
Total distributions ................................ (1.73) (0.38) (0.12) (0.21) (1.04)
--------------------------------------------------------------
Redemption fees .................................... --(d) --(d) -- -- --
--------------------------------------------------------------
Net asset value, end of year ....................... $ 15.09 $ 15.54 $ 14.06 $ 11.07 $ 12.80
==============================================================

Total return(b) .................................... 8.17% 13.32% 28.22% (11.96)% 5.12%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) .................... $ 186,169 $ 186,840 $ 155,572 $ 100,405 $ 64,512
Ratios to average net assets:*
Expenses(c) ..................................... 1.89% 1.83% 1.86% 1.80% 1.79%
Net investment income ........................... 0.91% 0.99% 0.48% 0.88% 0.44%
Portfolio turnover rate ............................ 35.36% 29.17% 49.61% 52.27% 55.25%
*Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ........................................ 1.84% 1.82% 1.83% 1.79% 1.78%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

18 | See notes to financial statements. | Annual Report

Mutual Beacon Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2005 2004 2003 2002 2001
--------------------------------------------------------------

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

Net asset value, beginning of year ................. $ 15.77 $ 14.26 $ 11.22 $ 12.94 $ 13.28
--------------------------------------------------------------

Income from investment operations:

Net investment income(a) ........................ 0.15 0.14 0.06 0.11 0.07

Net realized and unrealized gains (losses) ...... 1.14 1.74 3.09 (1.64) 0.60
--------------------------------------------------------------
Total from investment operations ................... 1.29 1.88 3.15 (1.53) 0.67
--------------------------------------------------------------
Less distributions from:

Net investment income ........................... (0.14) (0.23) (0.11) (0.08) (0.07)

Net realized gains .............................. (1.59) (0.14) -- (0.11) (0.94)
--------------------------------------------------------------
Total distributions ................................ (1.73) (0.37) (0.11) (0.19) (1.01)
--------------------------------------------------------------
Redemption fees .................................... --(d) --(d) -- -- --
--------------------------------------------------------------
Net asset value, end of year ....................... $ 15.33 $ 15.77 $ 14.26 $ 11.22 $ 12.94
==============================================================

Total return(b) .................................... 8.12% 13.39% 28.24% (11.99)% 5.06%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) .................... $ 697,400 $ 658,813 $ 579,825 $ 443,683 $482,080

Ratios to average net assets:*

Expenses(c) ..................................... 1.89% 1.83% 1.86% 1.79% 1.78%

Net investment income ........................... 0.91% 0.99% 0.48% 0.89% 0.48%

Portfolio turnover rate ............................ 35.36% 29.17% 49.61% 52.27% 55.25%

*Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ........................................ 1.84% 1.82% 1.83% 1.78% 1.77%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

Annual Report | See notes to financial statements. | 19

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005

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

COMMON STOCKS AND OTHER EQUITY INTERESTS 86.1%
AIRLINES 0.5%
(a)ACE Aviation Holdings Inc. ............................. Canada 828,902 $ 27,099,953
(a),b)ACE Aviation Holdings Inc., A, 144A .................... Canada 101,565 3,320,545
(a)ACE Aviation Holdings Inc., B .......................... Canada 1,670 54,397
(a),(c)Air Canada Inc., Contingent Distribution ............... Canada 288,242,292 --
------------
30,474,895
------------
AUTO COMPONENTS 0.0%(d)
(a),(e)Lancer Industries Inc., B .............................. United States 1 764,320
------------
BEVERAGES 4.6%
Brown-Forman Corp., A .................................. United States 308,260 21,867,964
Brown-Forman Corp., B .................................. United States 362,618 25,136,680
Carlsberg AS, A ........................................ Denmark 74,900 3,743,633
Carlsberg AS, B ........................................ Denmark 1,296,233 69,518,550
Coca-Cola Enterprises Inc. ............................. United States 2,972,225 56,977,553
Diageo PLC ............................................. United Kingdom 3,705,621 53,712,201
Pernod Ricard SA ....................................... France 252,985 44,145,754
------------
275,102,335
------------
CAPITAL MARKETS 0.6%
Bear Stearns Cos. Inc. ................................. United States 286,002 33,041,811
------------
CHEMICALS 0.6%
Givaudan AG ............................................ Switzerland 55,850 37,856,841
Koninklijke DSM NV ..................................... Netherlands 14,800 604,474
------------
38,461,315
------------
COMMERCIAL BANKS 7.3%
Allied Irish Banks PLC ................................. Ireland 1,666,118 35,839,122
Banca Intesa SpA ....................................... Italy 11,287,551 59,798,384
Bank of Ireland ........................................ Ireland 1,870,698 29,454,524
BNP Paribas SA ......................................... France 565,850 45,786,402
Chinatrust Financial Holding Co. Ltd. .................. Taiwan 57,832,000 45,805,431
Danske Bank ............................................ Denmark 1,770,010 62,349,019
(a),(e),(f)FE Capital Holdings Ltd. ............................... Japan 13,981 19,922,914
ForeningsSparbanken AB, A .............................. Sweden 1,816,300 49,490,775
Mitsubishi UFJ Financial Group Inc. .................... Japan 5,727 77,634,500
(a),(e)NCB Warrant Holdings Ltd., A ........................... Japan 67,420 10,892,382
------------
436,973,453
------------
COMMERCIAL SERVICES & SUPPLIES 0.0%(d)
(a)Comdisco Holding Co. Inc. .............................. United States 453 8,607
(c)Comdisco Holding Co. Inc., Contingent Distribution ..... United States 54,914,113 --
(a),(c)Safety Kleen Corp., Contingent Distribution ............ United States 630,000 --
------------
8,607
------------
COMPUTERS & PERIPHERALS 0.5%
(a),(e),(f)DecisionOne Corp. ...................................... United States 1,142,353 814,498
(a)Lexmark International Inc., A .......................... United States 592,200 26,548,326
------------
27,362,824
------------

20 | Annual Report

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
CONSUMER FINANCE 0.6%
MBNA Corp. ............................................. United States 1,328,500 $ 36,068,775
-------------
CONTAINERS & PACKAGING 1.3%
Temple-Inland Inc. ..................................... United States 1,672,900 75,029,565
-------------
DIVERSIFIED FINANCIAL SERVICES 2.2%
Fortis Group NV ........................................ Belgium 2,265,821 72,129,527
Leucadia National Corp. ................................ United States 1,297,560 61,582,197
(a),(c)Marconi Corp., Contingent Distribution ................. United Kingdom 42,651,300 --
-------------
133,711,724
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 4.1%
(a),(e),(g)AboveNet Inc. .......................................... United States 439,477 10,531,363
(a),(c),(g)AboveNet Inc., Contingent Distribution ................. United States 61,502,000 --
(a),(e),(g)AboveNet Inc., wts., 9/08/08 ........................... United States 14,770 59,080
(a),(e),(g)AboveNet Inc., wts., 9/08/10 ........................... United States 17,376 13,901
Chunghwa Telecom Co. Ltd., ADR ......................... Taiwan 299,300 5,492,155
(a),(c)Global Crossing Holdings Ltd., Contingent Distribution . United States 60,632,757 --
MCI Inc. ............................................... United States 1,601,623 31,600,022
(a)NTL Inc. ............................................... United Kingdom 1,161,195 79,054,155
(a),(c)Telewest Communications PLC, Contingent Distribution ... United Kingdom 64,216,863 --
(a),(c)Telewest Finance Ltd., Contingent Distribution ......... United Kingdom 7,240,000 --
(a)Telewest Global Inc. ................................... United Kingdom 3,785,613 90,173,302
Verizon Communications Inc. ............................ United States 820,500 24,713,460
-------------
241,637,438
-------------
ELECTRIC UTILITIES 0.8%
E.ON AG ................................................ Germany 441,388 45,701,103
(a),(b)Entegra/Union Power, 144A .............................. United States 147,820 --
-------------
45,701,103
-------------
FOOD & STAPLES RETAILING 1.0%
Albertson's Inc. ....................................... United States 787,600 16,815,260
Carrefour SA ........................................... France 881,638 41,310,721
-------------
58,125,981
-------------
FOOD PRODUCTS 4.8%
Cadbury Schweppes PLC .................................. United Kingdom 4,497,511 42,518,895
(f)Farmer Brothers Co. .................................... United States 1,033,896 19,995,549
Groupe Danone .......................................... France 640,200 66,884,744
Nestle SA .............................................. Switzerland 198,235 59,300,746
Orkla ASA .............................................. Norway 2,332,900 96,605,065
-------------
285,304,999
-------------

Annual Report | 21

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HEALTH CARE EQUIPMENT & SUPPLIES 2.0%
Guidant Corp. .......................................... United States 956,700 $ 61,946,325
Hillenbrand Industries Inc. ............................ United States 1,170,900 57,854,169
-------------
119,800,494
-------------
HEALTH CARE PROVIDERS & SERVICES 1.0%
(a)Beverly Enterprises Inc. ............................... United States 1,499,100 17,494,497
(a),(e),(g)Kindred Healthcare Inc. ................................ United States 1,364,570 33,393,757
(a),(e),(g)Kindred Healthcare Inc., Jan. 9.07 Calls, 1/01/13 ...... United States 657 10,116
(a),(e),(g)Kindred Healthcare Inc., Jan. 25.99 Calls, 1/01/14 ..... United States 325 --
(a),(e),(g)Kindred Healthcare Inc., Jan. 26.00 Calls, 1/01/12 ..... United States 989 --
(a),(e),(g)Kindred Healthcare Inc., Jul. 23.75 Calls, 7/17/11 ..... United States 4,380 3,162
(a),(e),(g)Kindred Healthcare Inc., wts., Series A, 4/20/06 ....... United States 121,432 2,348,738
(a),(e),(g)Kindred Healthcare Inc., wts., Series B, 4/20/06 ....... United States 303,580 4,989,337
WellPoint Inc. ......................................... United States 19 1,516
-------------
58,241,123
-------------
HOTELS, RESTAURANTS & LEISURE 0.3%
(a),(f)FHC Delaware Inc. ...................................... United States 507,977 1,765,677
(a),(c)Trump Atlantic, Contingent Distribution ................ United States 26,587,000 1,002,330
(a)Trump Entertainment Resorts Inc. ....................... United States 890,620 17,928,181
-------------
20,696,188
-------------
INDUSTRIAL CONGLOMERATES 1.0%
Tyco International Ltd. ................................ United States 2,115,600 61,056,216
-------------
INSURANCE 11.9%
(a)Alleghany Corp. ........................................ United States 163,026 46,299,384
(a)Berkshire Hathaway Inc., A ............................. United States 741 65,667,420
(a)Berkshire Hathaway Inc., B ............................. United States 38,925 114,264,337
Hartford Financial Services Group Inc. ................. United States 741,800 63,713,202
Irish Life & Permanent PLC ............................. Ireland 1,597,279 32,448,509
Montpelier Re Holdings Ltd. ............................ Bermuda 388,350 7,339,815
Old Republic International Corp. ....................... United States 2,225,245 58,434,934
(a),(e)Olympus Re Holdings Ltd. ............................... Bermuda 106,700 1,973,950
Prudential Financial Inc. .............................. United States 541,900 39,661,661
(a),(e)Symetra Financial ...................................... United States 511,600 58,834,000
White Mountains Insurance Group Inc. ................... United States 389,021 217,287,680
-------------
705,924,892
-------------
LEISURE EQUIPMENT & PRODUCTS 0.8%
Mattel Inc. ............................................ United States 3,049,400 48,241,508
-------------
MACHINERY 1.4%
(a)Agco Corp. ............................................. United States 2,497,400 41,381,918
Deere & Co. ............................................ United States 511,500 34,838,265
Schindler Holding AG ................................... Switzerland 23,838 9,453,547
-------------
85,673,730
-------------

22 | Annual Report

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA 8.6%
Clear Channel Communications Inc. ..................... United States 1,788,300 $ 56,242,035
(a)Comcast Corp., A ...................................... United States 1,012,900 26,021,401
E.W. Scripps Co., A ................................... United States 146,750 7,046,935
Hollinger International Inc. .......................... United States 985,458 8,388,219
Knight Ridder Inc. .................................... United States 129,900 8,222,670
(a)Liberty Media Corp., A ................................ United States 6,957,360 54,754,423
News Corp., A ......................................... United States 9,347,100 145,347,405
(e)Time Warner Inc. ...................................... United States 2,833,800 48,433,043
(e)Time Warner Inc., Jan. 10.00 Calls, 1/21/06 ........... United States 10,958 8,054,130
(a)TVMAX Holdings Inc. ................................... United States 133,855 133,855
Viacom Inc., B ........................................ United States 1,702,100 55,488,460
Washington Post Co., B ................................ United States 119,022 91,051,830
--------------
509,184,406
--------------
METALS & MINING 2.7%
Anglo American PLC .................................... South Africa 1,737,547 59,159,487
Anglo American PLC, ADR ............................... South Africa 1,200 41,736
(a)Coeur d'Alene Mines Corp. ............................. United States 549,600 2,198,400
(a)Goldcorp Inc., wts., 5/30/07 .......................... Canada 930,257 3,881,738
Newmont Mining Corp. .................................. United States 1,145,600 61,175,040
Placer Dome Inc. ...................................... Canada 1,128,993 25,857,174
(a),(f)PMG LLC ............................................... United States 48,890 4,204,554
(a)Rio Narcea Gold Mines Ltd. ............................ Canada 1,213,700 1,670,756
--------------
158,188,885
--------------
MULTI-UTILITIES & UNREGULATED POWER 1.0%
NorthWestern Corp. .................................... United States 389,255 12,094,153
(a),(c)NorthWestern Corp., Contingent Distribution ........... United States 11,805,000 1,003,425
Suez SA ............................................... France 1,580,555 49,210,984
--------------
62,308,562
--------------
OIL, GAS & CONSUMABLE FUELS 3.8%
(a),(f)Anchor Resources LLC .................................. United States 69,184 --
BP PLC ................................................ United Kingdom 2,690,300 28,650,579
BP PLC, ADR ........................................... United Kingdom 26,100 1,676,142
Burlington Resources Inc. ............................. United States 579,450 49,948,590
Canadian Oil Sands Trust .............................. Canada 44,900 4,867,418
(a),(b)CNX Gas Corp., 144A ................................... United States 443,000 9,192,250
CONSOL Energy Inc. .................................... United States 973,110 63,427,310
Oil & Natural Gas Corp. Ltd. .......................... India 392,114 10,239,234
Pogo Producing Co. .................................... United States 794,600 39,579,026
Vintage Petroleum Inc. ................................ United States 353,060 18,828,690
--------------
226,409,239
--------------
PAPER & FOREST PRODUCTS 3.9%
International Paper Co. ............................... United States 1,520,500 51,104,005
Weyerhaeuser Co. ...................................... United States 2,709,391 179,740,999
--------------
230,845,004
--------------

Annual Report | 23

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PHARMACEUTICALS 2.0%
(a)IVAX Corp. ............................................ United States 137,800 $ 4,317,274
Pfizer Inc. ........................................... United States 1,505,700 35,112,924
Sanofi-Aventis ........................................ France 391,320 34,281,550
Valeant Pharmaceuticals International ................. 36,300 656,304
Wyeth ................................................. United States 1,023,300 47,143,431
--------------
121,511,483
--------------
REAL ESTATE 2.7%
(a)Alexander's Inc. ...................................... United States 38,800 9,525,400
Canary Wharf Group PLC ................................ United Kingdom 10,069,634 41,578,323
iStar Financial Inc. .................................. United States 1,426,334 50,848,807
(a),(e)Security Capital European Realty ...................... Luxembourg 20,244 147,123
Shurgard Storage Centers Inc., A ...................... United States 113,400 6,430,914
St. Joe Co. ........................................... United States 482,598 32,440,238
Ventas Inc. ........................................... United States 608,900 19,496,978
--------------
160,467,783
--------------
ROAD & RAIL 1.3%
(e),(f)Florida East Coast Industries Inc. .................... United States 1,967,636 79,200,300
--------------
SOFTWARE 0.8%
Microsoft Corp. ....................................... United States 1,778,800 46,515,620
--------------
TEXTILES APPAREL & LUXURY GOODS 0.2%
Reebok International Ltd. ............................. United States 209,700 12,210,831
--------------
THRIFTS & MORTGAGE FINANCE 1.8%
First Niagara Financial Group Inc. .................... United States 427,550 6,186,648
Hudson City Bancorp Inc. .............................. United States 4,654,880 56,417,146
Sovereign Bancorp Inc. ................................ United States 2,044,600 44,204,252
--------------
106,808,046
--------------
TOBACCO 10.0%
Altadis SA ............................................ Spain 3,285,375 149,041,472
(h)Altria Group Inc. ..................................... United States 1,297,959 96,983,496
British American Tobacco PLC .......................... United Kingdom 4,189,876 93,710,135
British American Tobacco PLC, ADR ..................... United Kingdom 40,400 1,819,616
Imperial Tobacco Group PLC ............................ United Kingdom 2,703,833 80,801,928
KT&G Corp. ............................................ South Korea 835,850 37,374,732
(b)KT&G Corp., GDR, 144A ................................. South Korea 1,579,000 34,738,000
(h)Reynolds American Inc. ................................ United States 1,055,718 100,641,597
--------------
595,110,976
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $3,708,202,488) .............................. 5,126,164,431
--------------
PREFERRED STOCKS 1.0%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(d)
PTV Inc., 10.00%, pfd., A ............................. United Kingdom 114,246 239,916
--------------
ELECTRIC UTILITIES 0.0%(d)
(a)Montana Power Co., 8.45%, pfd. ........................ United States 58,900 485,925
--------------

24 | Annual Report

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------

PREFERRED STOCKS (CONTINUED)
METALS & MINING 0.7%
(e),(f),(g)Esmark Inc., Series A, 10.00%, cvt. pfd. .............. United States 28,644 $ 30,037,244
Falconbridge Ltd. ..................................... Canada 195,493 5,802,726
Falconbridge Ltd., 6.00%, cvt. pfd., 1 ................ Canada 26,025 657,132
Falconbridge Ltd., 6.25%, cvt. pfd., 2 ................ Canada 26,025 657,131
Falconbridge Ltd., 6.50%, cvt. pfd., 3 ................ Canada 13,012 329,854
--------------
37,484,087
--------------
REAL ESTATE 0.3%
iStar Financial Inc., 7.80%, pfd. ..................... United States 770,100 19,291,005
--------------
TOTAL PREFERRED STOCKS (COST $57,543,135) ............. 57,500,933
--------------

-------------------
PRINCIPAL AMOUNT(k)
-------------------
CORPORATE BONDS & NOTES 1.9%
(b)ACE Aviation Holdings Inc., cvt., 144A, 4.25%,
6/01/35 ............................................ Canada 1,993,000 CAD 1,680,410
(i)Collins & Aikman Products Co.,
Revolver, FRN, 10.75%, 8/31/09 ..................... United States 453,400 439,798
Tranche B1 Term Loan, FRN, 10.75%, 8/31/11 ......... United States 1,061,996 1,030,136
Dana Corp.,
5.85%, 1/15/15 ..................................... United States 5,055,000 3,614,325
7.00%, 3/01/29 ..................................... United States 745,000 538,262
(e),(f)DecisionOne Corp., 144A, 12.00%, 4/15/10 .............. United States 1,240,025 1,240,025
Entegra/Union Power,
Term Loan A, 4.00%, 6/01/12 ........................ United States 7,530,458 6,476,194
Term Loan B, 9.00%, 6/01/20 ........................ United States 7,251,552 6,236,335
Eurotunnel PLC,
Participating Loan Note, 1.00%, 4/30/40 ............ United Kingdom 858,000 GBP 140,234
(i)Tier 2, FRN, 5.796%, 12/31/18 ...................... United Kingdom 7,592,095 GBP 11,102,546
(i)Tier 3, FRN, 5.796%, 12/31/25 ...................... United Kingdom 28,404,485 GBP 22,968,193
Eurotunnel SA,
Senior Tranche H1 Term Loan (KfW Advance), 8.78%,
12/15/12 ......................................... France 605,300 EUR 680,755
(i)Tier 2 (LIBOR), FRN, 3.393%, 12/31/18 .............. France 1,880,987 EUR 1,892,785
(i)Tier 2 (PIBOR), FRN, 3.393%, 12/31/18 .............. France 832,034 EUR 837,253
(i)Tier 3 (LIBOR), FRN, 3.393%, 12/31/25 .............. France 20,347,101 EUR 11,321,320
(i)Tier 3 (PIBOR), FRN, 3.393%, 12/31/25 .............. France 1,048,320 EUR 583,295
(i)Motor Coach Industries International Inc., FRN,
17.406%, 12/01/08 .................................. United States 28,727,281 27,290,917
Trump Entertaiment Resorts Inc., 8.50%, 5/20/15 ....... United States 17,380,260 17,032,655
TVMAX Holdings Inc., PIK,
11.50%, 1/16/06 .................................... United States 249,584 249,584
(j)14.00%, 1/16/06 .................................... United States 646,911 646,911
--------------
TOTAL CORPORATE BONDS & NOTES (COST $124,910,667) ..... 116,001,933
--------------

Annual Report | 25

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT(k) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

CORPORATE BONDS & NOTES IN REORGANIZATION 1.3%
(l)Adelphia Communications Corp.,
9.25%, 10/01/02 ............................................ United States 3,244,000 $ 1,816,640
8.125%, 7/15/03 ............................................ United States 825,000 470,250
7.50%, 1/15/04 ............................................. United States 2,160,000 1,231,200
10.50%, 7/15/04 ............................................ United States 3,375,000 1,923,750
9.875%, 3/01/05 ............................................ United States 1,304,000 740,020
10.25%, 11/01/06 ........................................... United States 5,565,000 3,116,400
9.875%, 3/01/07 ............................................ United States 493,000 281,010
8.375%, 2/01/08 ............................................ United States 4,959,000 2,826,630
7.75%, 1/15/09 ............................................. United States 10,231,000 5,780,515
7.875%, 5/01/09 ............................................ United States 4,398,000 2,440,890
9.375%, 11/15/09 ........................................... United States 4,390,000 2,590,100
10.875%, 10/01/10 .......................................... United States 4,080,000 2,305,200
10.25%, 6/15/11 ............................................ United States 4,305,000 2,604,525
(l)Armstrong World Industries Inc.,
6.35%, 8/15/03 ............................................. United States 9,183,000 6,611,760
6.50%, 8/15/05 ............................................. United States 723,000 513,330
9.75%, 4/15/08 ............................................. United States 2,583,000 1,911,420
7.45%, 5/15/29 ............................................. United States 1,519,000 1,124,060
Revolver, 10/29/03 ......................................... United States 1,880,775 1,318,893
Trade Claim ................................................ United States 5,042,800 3,511,050
(l)Century Communications Corp.,
(m)8.875%, 1/15/07 ............................................ United States 266,000 255,360
8.75%, 10/01/07 ............................................ United States 2,620,000 2,462,800
8.375%, 12/15/07 ........................................... United States 500,000 480,000
senior note, 9.50%, 3/01/05 ................................ United States 773,000 749,810
Series B, zero cpn., 1/15/08 ............................... United States 4,386,000 2,434,230
zero cpn., 3/15/03 ......................................... United States 8,441,000 7,174,850
(j),(l)Owens Corning, Revolver, 6/26/02 ................................ United States 16,720,570 23,408,798
(l)Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ......... United States 50,000 25
---------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $76,555,782) ........................................... 80,083,516
---------------
----------------
SHARES/PRINCIPAL
AMOUNT(k)
----------------
COMPANIES IN LIQUIDATION 0.0%(d)
(a)City Investing Co. Liquidating Trust ............................ United States 423,187 46,550
(a)MBOP Liquidating Trust .......................................... United States 205,135 27
(a)United Cos. Financial Corp., Bank Claim ......................... United States 112,077 --
---------------
TOTAL COMPANIES IN LIQUIDATION (COST $--) ....................... 46,577
---------------

26 | Annual Report

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
ISSUER COUNTRY PRINCIPAL AMOUNT(k) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

GOVERNMENT AGENCIES 8.1%
(h)Federal Home Loan Bank, 2.125% - 3.60%, 1/03/06 - 1/26/07 ......... United States 448,310,000 $ 443,226,593
Federal Home Loan Mortgage Corp., 2.50%, 05/19/06 ................. United States 10,000,000 9,922,420
Federal National Mortgage Association, 2.15% - 2.20%,
12/18/06 - 12/29/06 ............................................ United States 20,000,000 19,515,700
(n)U.S. Treasury Bills, 2/02/06 - 2/16/06 ............................ United States 8,000,000 7,967,123
---------------
TOTAL GOVERNMENT AGENCIES (COST $482,991,348) ..................... 480,631,836
---------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $4,450,203,420) .......................................... 5,860,429,226
---------------
REPURCHASE AGREEMENTS 0.0%(d)
(o),(p)Bank of America LLC, 4.32%, 1/03/06 (Maturity Value $44,026)
Collateralized by U.S. Government Agency Securities,
5.00% - 5.50%, 9/01/33 - 10/01/35 .............................. United States 44,005 44,005
(o),(p)Bear Stearns & Co. Inc., 4.25%, 1/03/06 (Maturity Value $47,028)
Collateralized by U.S. Government Agency Securities,
3.282% - 7.155%, 3/01/07 - 9/01/45 ............................. United States 47,006 47,006
(o),(p)J.P. Morgan Securites, 4.31%, 1/03/06 (Maturity Value $48,029)
Collateralized by U.S. Government Agency Securities,
3.614% - 5.625%, 12/01/11 - 9/01/35 ............................ United States 48,006 48,006
(o),(p)Merrill Lynch GSI, 4.25%, 1/03/06 (Maturity Value $60,035)
Collateralized by U.S. Government Agency Securities,
3.987% - 5.828%, 8/01/27 - 5/01/38 ............................. United States 60,007 60,007
(o),(p)Morgan Stanley & Co. Inc., 4.31%, 1/03/06 (Maturity Value $62,014)
Collateralized by U.S. Government Agency Securities,
5.00%, 6/01/35 - 7/01/35 ....................................... United States 62,007 62,007
---------------
TOTAL REPURCHASE AGREEMENTS (COST $261,031) ....................... 261,031
---------------
TOTAL INVESTMENTS (COST $4,450,464,451) 98.4% ..................... 5,860,690,257
OPTIONS WRITTEN 0.0%(d) ........................................... (6,000)
SECURITIES SOLD SHORT (1.8)% ...................................... (110,046,110)
NET UNREALIZED GAIN ON FORWARD EXCHANGE
CONTRACTS 0.6% ................................................. 34,974,122
OTHER ASSETS, LESS LIABILITIES 2.8% ............................... 164,643,538
---------------
NET ASSETS 100.0% ................................................. $ 5,950,255,807
===============
------------------
CONTRACTS
------------------
(q)OPTIONS WRITTEN (PREMIUMS RECEIVED $25,199) 0.0%(d)
PHARMACEUTICALS 0.0%(d)
Pfizer Inc., Jan. 22.50 Puts, 1/21/06 ............................. United States 300 $ 6,000
---------------

Annual Report | 27

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

(r)SECURITIES SOLD SHORT 1.8%
COMMERCIAL BANKS 0.5%
Bank of America Corp. ............................................. United States 666,125 $ 30,741,669
---------------
FOOD PRODUCTS 0.4%
Kraft Foods Inc., A ............................................... United States 776,718 21,856,844
---------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.1%
Alcon Inc. ........................................................ Switzerland 63,100 8,177,760
---------------
HEALTH CARE PROVIDERS & SERVICES 0.0%(d)
UnitedHealth Group Inc. ........................................... United States 130 8,078
---------------
METALS & MINING 0.1%
Inco Ltd. ......................................................... Canada 102,352 4,447,024
---------------
OIL, GAS & CONSUMABLE FUELS 0.6%
ConocoPhillips .................................................... United States 418,010 24,319,822
Occidental Petroleum Corp. ........................................ United States 148,200 11,838,216
---------------
36,158,038
---------------
PHARMACEUTICALS 0.0%(d)
Teva Pharmaceutical Industries Ltd., ADR .......................... Israel 58,400 2,511,784
---------------
REAL ESTATE 0.1%
Public Storage Inc. ............................................... United States 90,740 6,144,913
---------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $112,788,699) ............... $ 110,046,110
---------------

28 | Annual Report

Mutual Beacon Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

CURRENCY ABBREVIATIONS

CAD - Canadian Dollar
EUR - Euro
GBP - British Pound

SELECTED PORTFOLIO ABBREVIATIONS

ADR - American Depository Receipt
FRN - Floating Rate Note
GDR - Global Depository Receipt
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
PIK - Payment In Kind

(a) Non-income producing.

(b) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2005, the aggregate value of these securities was $48,931,205,
representing 0.82% of net assets.

(c) 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) Rounds to less than 0.05% of net assets.

(e) See Note 11 regarding restricted and illiquid securities.

(f) See Note 13 regarding holdings of 5% voting securities.

(g) See Note 14 regarding other considerations.

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

(i) The coupon rate shown represents the rate at period end.

(j) See Note 12 regarding unfunded loan commitments.

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

(l) See Note 10 regarding defaulted securities.

(m) A portion or all of the security is on loan as of December 31, 2005. See
Note 1(i).

(n) The security is traded on a discount basis with no stated coupon rate.

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

(p) Investment from cash collateral received for loaned securities. See Note
1(i).

(q) See Note 1(f) regarding written options.

(r) See Note 1(g) regarding securities sold short.

Annual Report | See notes to financial statements. | 29

Mutual Beacon Fund

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005

Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................................. $ 4,346,258,584
Cost - Controlled affiliates issuers (Note 13) ........................... 3,422,311
Cost - Non-controlled affiliated issuers (Note 13) ....................... 100,522,525
Cost - Repurchase agreements ............................................. 261,031
================
Total cost of investments ................................................ $ 4,450,464,451
================
Value - Unaffiliated issuers (includes securities segregated
with broker for securities sold short in the amount of $124,535,400) .. $ 5,703,248,465
Value - Controlled affiliated issuers (Note 13) .......................... 4,204,554
Value - Non-controlled affiliated issuers (Note 13) ...................... 152,976,207
Value - Repurchase agreements ............................................ 261,031
================
Total value of investments ............................................... 5,860,690,257
Cash ........................................................................ 538,867
Foreign currency, at value (cost $39,285,820) ............................... 38,800,201
Receivables:
Investment securities sold ............................................... 24,630,771
Capital shares sold ...................................................... 5,442,522
Dividends and interest ................................................... 10,822,952
Unrealized gain on forward exchange contracts (Note 8) ...................... 43,164,573
Unrealized gain on unfunded loan commitments (Note 12) ...................... 709,701
Cash on deposits with brokers for securities sold short ..................... 122,184,369
Due from broker - synthetic equity swaps .................................... 7,671,251
----------------
Total assets .......................................................... 6,114,655,464
----------------
Liabilities:
Payables:
Investment securities purchased .......................................... 28,119,036
Capital shares redeemed .................................................. 10,155,723
Affiliates ............................................................... 6,680,906
Options written, at value (premiums received $25,199) ....................... 6,000
Securities sold short, at value (proceeds $112,788,699) ..................... 110,046,110
Payable upon return of securities loaned .................................... 261,031
Unrealized loss on forward exchange contracts (Note 8) ...................... 8,190,451
Accrued expenses and other liabilities ...................................... 940,400
----------------
Total liabilities ..................................................... 164,399,657
----------------
Net assets, at value ............................................... $ 5,950,255,807
================
Net assets consist of:
Paid-in capital ............................................................. $ 4,365,102,108
Undistributed net investment income ......................................... 4,564,461
Net unrealized appreciation (depreciation) .................................. 1,449,095,256
Accumulated net realized gain (loss) ........................................ 131,493,982
----------------
Net assets, at value ............................................... $ 5,950,255,807
================

30 | See notes to financial statements. | Annual Report

Mutual Beacon Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2005

CLASS Z:
Net assets, at value ........................................................ $ 3,433,665,052
================
Shares outstanding .......................................................... 221,282,669
================
Net asset value and maximum offering price per share(a) ..................... $ 15.52
================
CLASS A:
Net assets, at value ........................................................ $ 1,633,021,745
================
Shares outstanding .......................................................... 105,752,574
================
Net asset value per share(a) ................................................ $ 15.44
================
Maximum offering price per share (net asset value per share / 94.25%) ....... $ 16.38
================
CLASS B:
Net assets, at value ........................................................ $ 186,168,554
================
Shares outstanding .......................................................... 12,341,125
================
Net asset value and maximum offering price per share(a) ..................... $ 15.09
================
CLASS C:
Net assets, at value ........................................................ $ 697,400,456
================
Shares outstanding .......................................................... 45,506,651
================
Net asset value and maximum offering price per share(a) ..................... $ 15.33
================

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

Annual Report | See notes to financial statements. | 31

Mutual Beacon Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended December 31, 2005

Investment income:
Dividends (net of foreign taxes of $3,706,051)
Unaffiliated issuers ..................................................... $ 120,985,125
Non-controlled affiliated issuers (Note 13) .............................. 1,919,625
Interest
Unaffiliated issuers ..................................................... 37,274,351
Non-controlled affiliated issuers (Note 13) .............................. 118,558
Income from securities loaned - net ......................................... 8,300
Other income (Note 15) ...................................................... 289,755
----------------
Total investment income .............................................. 160,595,714
----------------
Expenses:
Management fees (Note 3a) ................................................... 34,249,367
Administrative fees (Note 3b) ............................................... 4,415,575
Distribution fees (Note 3c)
Class A .................................................................. 5,087,936
Class B .................................................................. 1,849,594
Class C .................................................................. 6,714,359
Transfer agent fees (Note 3e) ............................................... 5,968,700
Custodian fees (Note 4) ..................................................... 516,600
Reports to shareholders ..................................................... 403,100
Registration and filing fees ................................................ 393,104
Professional fees ........................................................... 1,808,561
Directors' fees and expenses ................................................ 152,300
Dividends on securities sold short .......................................... 2,651,538
Other ....................................................................... 404,874
----------------
Total expenses ....................................................... 64,615,608
Expense reductions (Note 4) .......................................... (41,094)
----------------
Net expenses ....................................................... 64,574,514
----------------
Net investment income ........................................... 96,021,200
----------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers .................................................. 602,197,318
Non-controlled affiliated issuers (Note 13) ........................... 12,634,531
Written options .......................................................... 396,640
Foreign currency transactions ............................................ 12,146,932
Securities sold short .................................................... (1,896,827)
----------------
Net realized gain (loss) ........................................... 625,478,594
----------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................. (308,930,486)
Translation of assets and liabilities denominated in foreign currencies .. 87,593,570
----------------
Net change in unrealized appreciation (depreciation) ............... (221,336,916)
----------------
Net realized and unrealized gain (loss) ..................................... 404,141,678
----------------
Net increase (decrease) in net assets resulting from operations ............. $ 500,162,878
================

32 | See notes to financial statements. | Annual Report

Mutual Beacon Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS

---------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
2005 2004
---------------------------------

Increase (decrease) in net assets:
Operations:
Net investment income .................................................................... $ 96,021,200 $ 92,816,059
Net realized gain (loss) from investments, written options, securities sold short,
and foreign currency transactions .................................................... 625,478,594 232,630,254
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies ............................. (221,336,916) 387,316,410
---------------------------------
Net increase (decrease) in net assets resulting from operations ................... 500,162,878 712,762,723
=================================
Distributions to shareholders from:

Net investment income:
Class Z ................................................................................ (60,342,727) (77,913,804)
Class A ................................................................................ (23,520,169) (29,186,869)
Class B ................................................................................ (1,530,106) (2,726,902)
Class C ................................................................................ (5,682,282) (9,336,828)
Net realized gains:
Class Z ................................................................................ (321,411,244) (30,107,862)
Class A ................................................................................ (152,696,307) (13,165,077)
Class B ................................................................................ (18,000,266) (1,717,371)
Class C ................................................................................ (66,098,869) (5,979,789)
---------------------------------
Total distributions to shareholders ........................................................ (649,281,970) (170,134,502)
---------------------------------
Capital share transactions: (Note 2)
Class Z ................................................................................ 155,432,764 (76,914,860)
Class A ................................................................................ 215,432,427 21,294,207
Class B ................................................................................ 4,237,354 13,963,459
Class C ................................................................................ 57,084,985 16,973,359
---------------------------------
Total capital share transactions ........................................................... 432,187,530 (24,683,835)
---------------------------------

Redemption fees ............................................................................ 11,659 2,731
---------------------------------
Net increase (decrease) in net assets ................................................. 283,080,097 517,947,117
Net assets
Beginning of year .......................................................................... 5,667,175,710 5,149,228,593
---------------------------------
End of year ................................................................................ $ 5,950,255,807 $5,667,175,710
=================================
Undistributed net investment income/distributions in excess of net investment
income included in net assets:
End of year ................................................................................ $ 4,564,461 $ (12,838,004)
=================================

Annual Report | See notes to financial statements. | 33

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 six separate series.
The Series Fund 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 following summarizes the Funds' 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.

Corporate debt securities and 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. 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. 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.

34 | Annual Report

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A. SECURITY VALUATION (CONTINUED)

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 Fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. Repurchase agreements are
valued at cost. At December 31, 2005, all repurchase agreements held by the Fund
had been entered into on December 30, 2005.

Annual Report | 35

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. 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 the net
unrealized gain or loss on the contracts, as measured by the difference between
the contractual forward foreign exchange rates and the forward rates at the
reporting date, 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, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.

E. 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.

36 | Annual Report

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

F. OPTIONS

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.

G. 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 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.

H. 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 receives interest income 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.

Annual Report | 37

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

I. INCOME TAXES

No provision has been made for U.S. income taxes because the Fund's policy is to
continue to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.

Foreign securities held by the Fund may be subject to foreign taxation. Foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign markets in which the Fund invests.

J. 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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with generally accepted accounting principles. These differences may
be permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.

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 of the Series
Fund. Fund specific expenses are charged directly to the fund that incurred the
expense.

K. 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.

38 | Annual Report

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

L. REDEMPTION FEES

A short term trading redemption fee will be imposed, with some exceptions, on
Fund shares that are redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee is 2% of the amount redeemed. Such fees
are retained by the Fund and accounted for as an addition to paid-in capital.

M. GUARANTEES AND INDEMNIFICATIONS

Under the Series Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities 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 four classes of shares: Class Z, Class A, Class B and Class C.
Effective March 1, 2005, Class B shares are only offered to existing Class B
shareholders in the form of reinvested distributions and certain exchanges from
other Franklin Templeton Class B shares. 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, 2005, there were 1.55 billion shares authorized ($0.001 par
value) of which 750 million shares were designated as Class Z, 300 million
shares as Class A, 200 million shares as Class B and 300 million shares as Class
C. Transactions in the Fund's shares were as follows:

---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------

CLASS Z SHARES:
Shares sold ........................ 9,627,199 $ 157,823,087 9,311,423 $ 138,383,364
Shares issued in reinvestment
of distributions ................ 22,556,761 353,149,844 6,402,049 98,844,650
Shares redeemed .................... (21,717,045) (355,540,167) (21,085,193) (314,142,874)
---------------------------------------------------------------------
Net increase (decrease) ............ 10,466,915 $ 155,432,764 (5,371,721) $ (76,914,860)
=====================================================================
CLASS A SHARES:
Shares sold ........................ 20,638,795 $ 336,110,441 17,626,495 $ 260,036,176
Shares issued in reinvestment
of distributions ................ 10,784,005 167,935,388 2,612,744 40,150,928
Shares redeemed .................... (17,798,261) (288,613,402) (18,863,471) (278,892,897)
---------------------------------------------------------------------
Net increase (decrease) ............ 13,624,539 $ 215,432,427 1,375,768 $ 21,294,207
=====================================================================

Annual Report | 39

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. CAPITAL STOCK (CONTINUED)

---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 sc2004
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------

CLASS B SHARES:
Shares sold ........................ 441,856 $ 6,909,193 1,843,917 $ 26,599,867
Shares issued in reinvestment of
distributions ................... 1,187,718 18,082,957 273,719 4,112,587
Shares redeemed .................... (1,309,590) (20,754,796) (1,158,155) (16,748,995)
---------------------------------------------------------------------
Net increase (decrease) ............ 319,984 $ 4,237,354 959,481 $ 13,963,459
=====================================================================
CLASS C SHARES:
Shares sold ........................ 5,683,466 $ 91,278,462 6,114,281 $ 89,688,362
Shares issued in reinvestment of
distributions ................... 4,219,758 65,245,399 908,460 13,841,462
Shares redeemed .................... (6,181,561) (99,438,876) (5,908,416) (86,556,465)
---------------------------------------------------------------------
Net increase (decrease) ............ 3,721,663 $ 57,084,985 1,114,325 $ 16,973,359
=====================================================================

3. TRANSACTIONS WITH AFFILIATES

Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Series 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

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% Up to and including $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% In excess of $10 billion

40 | Annual Report

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

B. ADMINISTRATIVE FEES

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

- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $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% In excess of $1.2 billion

C. DISTRIBUTION FEES

The Fund's Board of Directors has adopted distribution plans for each share
class, with the exception of Class Z shares, pursuant to Rule 12b-1 under the
1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors up to 0.35% per year of Class A's average daily net
assets for costs incurred in connection with the sale and distribution of the
Fund's shares. Under the Class A reimbursement distribution plan, costs
exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.

Under the Fund's compensation distribution plans, the Fund pays Distributors for
costs incurred in connection with the sale and distribution of the Fund's shares
up to a certain percentage per year of its average daily net assets of each
class as follows:

Class B ............................................................. 1.00%
Class C ............................................................. 1.00%

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 charge received(a) ........................................ $853,183
Contingent deferred sales charges retained .......................... $298,601

(a) Net of commissions paid to unaffiliated broker/dealers.

E. TRANSFER AGENT FEES

The Fund paid transfer agent fees of $5,968,700, of which $3,734,685 was
retained by Investor Services.

Annual Report | 41

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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, 2005, the
custodian fees were reduced as noted in the Statement of Operations.

5. INCOME TAXES

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

At December 31, 2005, 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 .......................................... $ 4,467,981,560
===============

Unrealized appreciation ...................................... $ 1,539,612,177
Unrealized depreciation ...................................... (146,903,480)
---------------
Net unrealized appreciation (depreciation) ................... $ 1,392,708,697
===============

Undistributed ordinary income ................................ $ 17,803,197
Undistributed long term capital gains ........................ 157,258,364
---------------
Distributable earnings ....................................... $ 175,061,561
===============

The tax character of distributions paid during the years ended December 31, 2005
and 2004, was as follows:

---------------------------
2005 2004
---------------------------
Distributions paid from:
Ordinary income ............................... $127,255,911 $119,164,403
Long term capital gain ........................ 522,026,059 50,970,099
---------------------------
$649,281,970 $170,134,502
---------------------------

42 | Annual Report

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2005, aggregated
$2,502,297,864 and $1,825,823,484, respectively.

Transactions in options written during the year ended December 31, 2005, were as
follows:

---------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------------------------
Options outstanding at
December 31, 2004 ............................. 943 $ 113,289
Options written .................................. 10,641 756,897
Options expired .................................. (3,383) (259,156)
Options exercised ................................ (687) (99,520)
Options closed ................................... (7,214) (486,311)
---------------------------
Options outstanding at
December 31, 2005 ............................. 300 $ 25,199
===========================

7. SYNTHETIC EQUITY SWAPS

As of December 31, 2005, the Fund had the following synthetic equity swaps
outstanding:

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

Christian Dior SA (46.76 - 54.99 EUR) ............ 72,087 $ 6,409,049 $ 2,236,839
02 PLC (1.95 - 1.97 GBP) ......................... 12,449,912 42,410,512 403,930
-----------
Total contracts to buy ........................... 2,640,769
-----------

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

LVMH Moet Hennessy Louis Vuitton
(54.61 - 61.76 EUR) ........................... 71,930 $ 6,390,833 $(1,365,226)
-----------
Total contracts to sell .......................... (1,365,226)
===========
Net unrealized gain (loss) ....................... $ 1,275,543
===========

Annual Report | 43

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS

At December 31, 2005, the Fund has outstanding forward exchange contracts as set
out below.

- --------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO BUY AMOUNT(a) DATE GAIN (LOSS)
- --------------------------------------------------------------------------------------------

93,475,264 Canadian Dollar .................. 79,377,056 1/23/06 $ 1,104,050
-------------

- --------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT(a) DATE GAIN (LOSS)
- --------------------------------------------------------------------------------------------

6,750,000 Euro ............................. 8,003,003 1/17/06 $ 3,860
57,475,000 Euro ............................. 70,905,231 1/23/06 2,770,834
34,960,448 Swiss Franc ...................... 28,050,000 2/02/06 1,344,580
24,425,000 British Pound .................... 44,042,141 2/15/06 2,025,583
9,638,443 Canadian Dollar .................. 8,342,036 2/15/06 37,909
33,800,000 Euro ............................. 41,028,433 2/27/06 883,305
67,088,438 Norwegian Krone .................. 9,983,398 3/06/06 7,096
47,423,155 Euro ............................. 56,531,659 3/15/06 201,861
340,107,678 Swedish Krona .................... 43,535,087 3/15/06 495,741
791,797,067 Danish Krone ..................... 140,963,688 3/17/06 14,790,808
14,025,000 British Pound .................... 25,261,830 3/21/06 1,133,481
26,900,000 British Pound .................... 47,361,156 4/04/06 1,078,770
39,461,542 Euro ............................. 50,549,924 4/25/06 3,527,914
31,500,000 British Pound .................... 54,895,050 5/15/06 673,674
60,010,000 Euro ............................. 74,901,063 5/23/06 3,279,876
221,114,000 Taiwan Dollar .................... 6,775,000 5/30/06 39,152
14,395,040 Norwegian Krone .................. 2,200,000 6/06/06 48,211
4,440,813 Swiss Franc ...................... 3,450,660 6/06/06 19,929
13,750,000 Euro ............................. 16,698,519 6/15/06 266,580
3,468,632,983 Japanese Yen ..................... 31,674,734 6/28/06 1,602,923
8,400,000 Euro ............................. 10,063,305 7/17/06 7,160
37,754,299 British Pound .................... 65,892,215 8/14/06 830,793
38,615,000 Euro ............................. 48,172,935 8/23/06 1,852,203
45,557,500 British Pound .................... 79,293,331 9/08/06 757,236
45,540,000 Euro ............................. 57,703,342 9/13/06 3,013,667
51,755,687 Euro ............................. 63,472,392 10/18/06 1,205,825
------------
41,898,971
------------
Net unrealized gain on offsetting forward
exchange contracts ........................ 161,552
------------
Unrealized gain on forward exchange
contracts ................................. $ 43,164,573
============

7,737,588 Canadian Dollar .................. 6,632,199 1/23/06 $ (4,133)
9,333,491 Danish Krone ..................... 1,511,207 3/17/06 (23,915)
------------
$ (28,048)
------------

44 | Annual Report

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS (CONTINUED)

5,762,585,000 Korean Won ....................... 5,605,000 1/18/06 $ (115,766)
155,705,240 Canadian Dollar .................. 127,984,559 1/23/06 (6,075,827)
150,849,105 Norwegian Krone .................. 22,381,173 2/06/06 (16,017)
12,138,917 Canadian Dollar .................. 10,214,110 2/15/06 (244,333)
130,000,000 Norwegian Krone .................. 19,309,607 3/06/06 (21,880)
20,000,000 Euro ............................. 23,564,000 3/15/06 (212,231)
29,637,312,600 Korean Won ....................... 28,676,800 3/22/06 (767,846)
463,668,185 Taiwan Dollar .................... 14,023,576 5/30/06 (101,257)
140,000,000 Norwegian Krone .................. 20,879,940 6/06/06 (47,442)
48,121,515 Swiss Franc ...................... 37,117,336 6/06/06 (78,460)
31,789,484 Euro ............................. 37,904,497 6/15/06 (85,529)
789,243,900 Japanese Yen ..................... 6,820,000 6/28/06 (22,463)
42,326,483 Euro ............................. 50,298,224 7/17/06 (373,352)
------------
(8,162,403)
------------
Unrealized loss on forward exchange
contracts ................................. (8,190,451)
------------
Net unrealized gain on forward exchange
contracts .................................. $ 34,974,122
============

(a) In U.S. Dollar unless otherwise indicated.

9. CONCENTRATION OF RISK

Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.

10. DEFAULTED SECURITIES

The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. The risks of purchasing these securities are that the issuer is
unable to meet its obligation and any subsequent bankruptcy proceeding may
result in unfavorable consequences to the Fund. At December 31, 2005, the value
of these securities was $80,083,516, representing 1.35% of the Fund's net
assets. For information as to specific securities, see the accompanying
Statement of Investments.

Annual Report | 45

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. RESTRICTED AND ILLIQUID SECURITIES

At December 31, 2005, investments in securities included issues that are
restricted and illiquid. Restricted securities are often purchased in private
placement transactions, and cannot be sold without prior registration under the
Securities Act of 1933, unless the sale is pursuant to an exemption under the
1933 Act. The Fund has registration rights for all restricted securities held at
period end. The issuer generally incurs all registration costs.

A security may 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,
2005, the Fund held investments in restricted and illiquid securities, valued in
accordance with procedures approved by the Fund's Board of Directors as
reflecting fair value, as follows:

- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, CONTRACTS ACQUISITION
AND WARRANTS ISSUER DATE COST VALUE
- -----------------------------------------------------------------------------------------------------------------

439,477 AboveNet Inc. ................................. 10/02/01 $ 20,497,153 $ 10,531,363
14,770 AboveNet Inc., wts., 9/08/08 .................. 10/02/01 1,836,931 59,080
17,376 AboveNet Inc., wts., 9/08/10 .................. 10/02/01 1,972,095 13,901
1,142,353 DecisionOne Corp. ............................. 3/12/99 793,798 814,498
1,240,025 DecisionOne Corp., 144A, 12.00%,
4/15/10 .................................... 3/12/99 4,346,610 1,240,025
28,644 Esmark Inc., Series A, 10.00%, cvt. pfd ....... 11/08/04 28,644,000 30,037,244
13,981 FE Capital Holdings Ltd. ...................... 8/29/03 -- 19,922,914
1,967,636 Florida East Coast Industries Inc. ............ 1/17/86 46,735,956 79,200,300
1,364,570 Kindred Healthcare Inc. ....................... 4/28/99 14,230,143 33,393,757
657 Kindred Healthcare Inc., Jan. 9.07 Calls,
1/01/13 .................................... 1/1/04 -- 10,116
325 Kindred Healthcare Inc., Jan. 25.99 Calls,
1/01/14 .................................... 1/4/05 -- --
989 Kindred Healthcare Inc., Jan. 26.00 Calls,
1/01/12 .................................... 1/13/03 -- --
4,380 Kindred Healthcare Inc., Jul. 23.75 Calls,
7/17/11 .................................... 7/17/02 -- 3,162
121,432 Kindred Healthcare Inc., wts., Series A,
4/20/06 .................................... 4/24/01 1,092,889 2,348,738
303,580 Kindred Healthcare Inc., wts., Series B,
4/20/06 .................................... 4/24/01 2,428,643 4,989,337
1 Lancer Industries Inc., B ..................... 8/11/89 -- 764,320
67,420 NCB Warrant Holdings Ltd., A .................. 12/16/05 -- 10,892,382
106,700 Olympus Re Holdings Ltd. ...................... 12/19/01 10,670,000 1,973,950
20,244 Security Capital European Realty .............. 4/08/98 1,108,993 147,123
511,600 Symetra Financial ............................. 7/27/04 51,160,000 58,834,000
2,833,800 Time Warner Inc. .............................. 8/02/05 48,945,601 48,433,043
10,958 Time Warner Inc., Jan 10.00 Calls,
1/21/06 .................................... 8/17/05 9,179,627 8,054,130
TOTAL RESTRICTED AND ILLIQUID
SECURITIES (5.24% of Net Assets) ........ $ 311,663,383
=============

46 | Annual Report

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. UNFUNDED LOAN COMMITMENTS

The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion.

At December 31, 2005, unfunded commitments were as follows:

- ------------------------------------------------------------------------------------------
BORROWER UNFUNDED COMMITMENT
- ------------------------------------------------------------------------------------------

Entegra/Union Power, LOC Facility, FRN, 6/01/12 .................... $ 2,081,545
Entegra/Union Power, Working Capital Facility, FRN, 6/01/12 ........ 312,232
Mirant Corp., 4 Year Revolver, 7/17/05 ............................. 297,276
Owens Corning, Revolver, 6/26/02 ................................... 955,030
TVMAX Holdings Inc., PIK, 14.00%, 1/16/06 .......................... 31
-----------
$ 3,646,114
===========

Unfunded loan commitments are marked to market daily and any unrealized gain or
loss is included in the Statement of Assets and Liabilities and Statement of
Operations.

13. 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, 2005 were as shown below.

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

CONTROLLED AFFILIATES(A)
PMG, LLC ................ 48,890 -- -- 48,890 $ 4,204,554 $ -- $ --
------------------------------------------
NON-CONTROLLED
AFFILIATES
Anchor Resources LLC ...... 69,184 -- -- 69,184 $ -- $ -- $ --
Anchor Resources LLC,
12.00%, 12/17/2006 ...... 32,368 -- 32,368 -- -- 3,874 --
DecisionOne Corp. ......... 278,121 864,232 -- 1,142,353 814,498 -- --
DecisionOne Corp., 144A,
12.00%, 4/15/10 ......... -- 1,441,175 201,150 1,240,025 1,240,025 114,684 (802,217)
Esmark Inc., Series A,
10.00% cvt. pfd. ........ 19,151 9,493 -- 28,644 30,037,244 2,801,797 --
Farmer Brothers Co. ....... 1,033,896 -- -- 1,033,896 19,995,549 418,728 --
FE Capital Holdings Ltd. .. 13,981 -- -- 13,981 19,922,914 (1,753,456) 15,440,621
FHC Delaware Inc. ......... 507,977 -- -- 507,977 1,765,677 -- --
Florida East Coast
Industries Inc. ......... 1,967,636 -- -- 1,967,636 79,200,300 452,556 --
Nippon Investment, LLC .... 10,862,000 -- 10,862,00 -- -- -- (2,003,873)
------------------------------------------
TOTAL NON-CONTROLLED
AFFILIATES .............. $ 152,976,207 $ 2,038,183 $ 12,634,531
------------------------------------------
TOTAL AFFILIATED
SECURITIES
(2.64% of Net Assets) .. $ 157,180,761 $ 2,038,183 $ 12,634,531
==========================================

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

Annual Report | 47

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

14. OTHER CONSIDERATIONS

Directors or employees of Franklin Mutual, as the Fund's Investment Manager, may
serve as members 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, 2005, such individuals serve in one or more of these capacities for
Kindred Healthcare Inc., AboveNet Inc. and Esmark Inc. As a result of this
involvement, such individuals 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.

15. REGULATORY MATTERS

As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.

Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds and are recorded as
other income in the current period. The SEC has not yet approved the
distribution plan pertaining to the December 13, 2004 SEC Order. When approved,
disbursements of settlement monies will be made promptly to the relevant funds,
in accordance with the terms and conditions of that order. The IDC continues to
develop the plan of distribution under the August 2, 2004 SEC Order that
resolved the SEC's market timing investigation.

48 | Annual Report

Mutual Beacon Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. REGULATORY MATTERS (CONTINUED)

In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.

The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. 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.

Annual Report | 49

Mutual Beacon Fund

REPORT OF 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 of the
Mutual Beacon Fund (one of the portfolio constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2005, 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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2005, by correspondence with the custodian
and brokers, or by other appropriate auditing procedures where replies from the
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. at December 31, 2005,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 10, 2006

50 | Annual Report

Mutual Beacon Fund

TAX DESIGNATION (UNAUDITED)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds
designate the maximum amount allowable but no less than $634,603,162 as a
capital gain dividends for the fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $96,850,147 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2005. 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 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $30,077,560 as interest-related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $44,302,035 as a short-term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates 41.15% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2005.

Annual Report | 51

Mutual Beacon Fund

BOARD MEMBERS AND OFFICERS

The name, year of birth 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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------

EDWARD I. ALTMAN, PH.D. Director Since 1987 7 Director, A.T.D. Inc.(financial
(1941) technology and investment company).
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center; editor and author of
numerous financial publications; financial consultant; and serves on the Investment Advisory Committee of the New York State Common
Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM Corporation
101 John F. Kennedy Parkway (Sallie Mae) and Allied Capital
Short Hills, NJ 07078-2789 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 (1929) Director Since 2002 13 Director, Fiduciary Emerging Markets
101 John F. Kennedy Parkway Bond Fund PLC and Fiduciary
Short Hills, NJ 07078-2789 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 (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

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

52 | Annual Report

LEONARD RUBIN (1925) Director Since 1996 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

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 (1946) Director and Director since 13 Director, El Oro and Exploration Co.,
101 John F. Kennedy Parkway Chairman of 1991 and p.l.c., and ARC Wireless Solutions,
Short Hills, NJ 07078-2789 the Board Chairman of the Inc.
Board since 2005

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

INTERESTED BOARD MEMBERS AND OFFICERS

**WILLIAM J. LIPPMAN (1925) Director Since 1996 14 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case
may be, of five of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**ANNE M. TATLOCK (1939) Director Since 2002 7 Director, Fortune Brands, Inc.
600 Fifth Avenue, 7th Floor (consumer products) and Merck & Co.
New York, NY 10020-2302 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.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 53

MICHAEL J. EMBLER (1964) Senior Vice Since May 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President, and Since May 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------

54 | Annual Report

STEVEN J. GRAY (1955) Secretary Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer of 33 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Legal Counsel, Atlas Advisers, Inc. (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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, LLC,
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 47 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 (1937) Vice Since 2002 Not Applicable Not Applicable
600 Fifth Avenue President -
Rockefeller Center AML
New York, NY 10020-2302 Compliance

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton Institutional
Suisse S.A., 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 45 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since December Not Applicable Not Applicable
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 55

GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------

* 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.

THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, 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.

56 | Annual Report

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 U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.

QUARTERLY STATEMENT OF INVESTMENTS

The Fund files a complete statement of investments with the U.S. 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.

Annual Report | 57

This page intentionally left blank.

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 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 MidCap Value Fund
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

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(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(4)
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(4)
Templeton Global Bond Fund
Templeton Income Fund

TAX-FREE INCOME(5)

NATIONAL FUNDS

Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(6)

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(7)
Colorado
Connecticut
Florida(7)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(6)
Michigan(6)
Minnesota(6)
Missouri
New Jersey
New York(7)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia

INSURANCE FUNDS

Franklin Templeton Variable Insurance Products Trust(8)

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

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

(6) Portfolio of insured municipal securities.

(7) 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).

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

09/05 Not part of the annual report

[LOGO](R)
FRANKLIN TEMPLETON 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

INVESTMENT MANAGER

Franklin Mutual Advisers, LLC
101 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 A2005 02/06

MUTUAL DISCOVERY FUND

[GRAPHIC OMITTED]

- --------------------------------------------------------------------------------
DECEMBER 31, 2005
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
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 TEMPLETON
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 ................. 53

Tax Designation ......................................................... 54

Board Members and Officers ............................................. 58

Shareholder Information ................................................. 63

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

ANNUAL REPORT

MUTUAL DISCOVERY FUND

YOUR FUND'S GOAL AND MAIN INVESTMENTS: Mutual Discovery Fund seeks long-term
capital appreciation by investing mainly in equity securities of companies of
any nation the Fund's managers believe are at prices below their intrinsic
value. 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 for the fiscal
year ended December 31, 2005.

PERFORMANCE OVERVIEW

Mutual Discovery Fund - Class Z posted a +15.70% cumulative total return for the
12 months ended December 31, 2005. The Fund outperformed its benchmarks, the
Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital
International (MSCI) World Index, which returned +4.91% and +10.02% for the same
period.(1) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 10.

ECONOMIC AND MARKET OVERVIEW

The global economy overcame fears of derailment generated by higher energy costs
and advanced at a solid pace during 2005, with Europe surpassing expectations.
Excluding the volatile energy and food sectors, inflation remained relatively
subdued worldwide, and monetary policy remained fairly accommodative. The U.S.
Federal Reserve Board raised the short-term federal funds target rate with eight
quarter-point increases, bringing it to 4.25%. The European Central Bank (ECB)
made one quarter-point rise in short-term rates, its first increase after
keeping rates at historically low levels for more than two and a half years.
Even after the increases, both rates remained at levels considered accommodative
for economic growth.

(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.

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

Strong demand for oil sustained high prices during most of the year, while
prices for other commodities such as industrial metals were also high, led by
copper, whose contract price rose 45.4% during 2005.(2) This contributed to
economic growth in countries such as Australia and Canada, and emerging markets
in Asia and Latin America that are tied to mining and industrial commodities.

In this environment, global equity markets performed strongly, particularly
outside the U.S. One-year total return for the MSCI All Country (AC) World ex US
Index was +17.11% in U.S. dollar terms.(3) By comparison the total return for
the MSCI USA Index was +5.72%.(4) In terms of sectors, energy and materials led
equity market performance, and telecommunication services and consumer-related
sectors lagged.

Among developed countries, the Japanese equity market performed well, returning
+44.70% in local currency terms for the year under review.(4) However, this
market benefited primarily from investors outside Japan, and the return was
significantly less (+25.62%) after conversion into U.S. dollars.(4) In contrast,
the conversion into dollars enhanced equity market returns in Brazil (+57.04%),
Mexico (+49.11%) and South Korea (+58.00%).(4) At the beginning of the year, the
consensus of many analysts appeared to be that the U.S. dollar would decline in
value relative to major currencies. In fact, for the year the dollar appreciated
versus the yen, the euro, the pound and most other currencies.

INVESTMENT STRATEGY

GEOGRAPHIC BREAKDOWN

Based on Total Net Assets as of 12/31/05

[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

U.S 29.4%

U.K 10.8%

France 8.4%

South Korea 5.1%

Canada 4.4%

Hong Kong 3.4%

Switzerland 3.3%

Norway 3.1%

Japan 2.9%

Netherlands 2.7%

Ireland 2.3%

Spain 2.0%

Denmark 1.7%

Germany 1.6%

South Africa 1.5%

India 1.2%

Other 5.7%

Short-Term Investments & Other Net Assets 10.5%

(2) Source: New York Mercantile Exchange.

(3) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a
free float-adjusted, market capitalization-weighted index designed to
measure equity market performance in global developed and emerging markets
excluding the U.S.

(4) Source: Standard & Poor's Micropal. Individual country market returns are
measured by MSCI country-specific indexes. The MSCI USA Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in the U.S.

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES

Based on Equity Securities as of 12/31/05

- -----------------------------------------------
% OF TOTAL
NET ASSETS
- -----------------------------------------------
Tobacco 11.6%
- -----------------------------------------------
Food Products 7.8%
- -----------------------------------------------
Insurance 7.6%
- -----------------------------------------------
Commercial Banks 7.0%
- -----------------------------------------------
Beverages 6.2%
- -----------------------------------------------
Media 5.6%
- -----------------------------------------------
Metals & Mining 4.8%
- -----------------------------------------------
Diversified Financial Services 4.6%
- -----------------------------------------------
Paper & Forest Products 4.0%
- -----------------------------------------------
Diversified Telecommunication Services 3.4%
- -----------------------------------------------

whose shares may be trading at depressed levels due to concerns over short-term
earnings disappointments, litigation, management strategy or other perceived
negatives. This strict value approach is not only intended to improve the
likelihood of upside potential, but it is also intended to reduce the risk of
substantial declines. While the vast majority of our undervalued equity
investments are made in publicly traded companies globally, we may invest
occasionally in privately held companies as well.

MANAGER'S DISCUSSION

While our distressed debt and risk arbitrage portfolios were positive
contributors to performance, the Fund's equity portfolio was the strongest
contributor to performance for the 12 months under review. Three of our best
performing stock investments were British American Tobacco (BAT), Mitsubishi UFJ
Financial Group (MUFG) and Anglo American.

6 | Annual Report

London-based BAT is the world's second-largest cigarette manufacturer behind
Philip Morris. With about a 15% global market share, BAT enjoys strong market
positions in Europe, North America and several emerging markets. The company's
stock appreciated 52% in local currency in 2005 as the company delivered robust
operational performance driven by increasing sales volumes and an improving
product mix. BAT benefited from an acceleration of its sales in emerging
markets, a focused development of its higher-margin global brands, and a further
reduction of its cost base. During the year, the company returned most of its
free cash flow to shareholders through dividends and share buybacks. This caused
a number of analysts to raise their earnings growth projections for BAT.

MUFG contributed positively to the Fund's performance during the period with a
stock price appreciation of 55% in local currency. MUFG, the largest of Japan's
megabanks, as well as the largest bank in the world by assets, experienced a
significant expansion in profitability as Japan's credit quality recovery and
economic turnaround continued throughout 2005. Foreign investors purchased
shares as they anticipated growth in fee income, a pickup in loan demand, and
higher interest rates as Japan's economy grows. Further bolstering MUFG's
prospects was the integration of UFJ Holdings, which has the potential to
deliver significant cost and tax synergies in coming years. We continued to find
Japan an interesting market given that the banks are seeing the return of
consumer confidence and are finally building adequate capital ratios. Further,
much of the rest of the world has seen a peak in the credit cycle while Japan
continues to experience a recovery.

U.K.-headquartered Anglo American is a global mining and natural resources
company with substantial interests in platinum, gold, diamonds, base and ferrous
metals, coal, industrial minerals, and paper and packaging. The company is
geographically diverse with operations in Africa, Europe, the Americas,
Australia and Asia. The stock appreciated 66% in local currency during the year.
In 2005, Anglo and its peers in the mining sector benefited from a strong
commodity cycle and high metal prices driven by sustained world demand,
particularly from China. Furthermore, management announced in October that the
company would strategically refocus activities on its core mining businesses and
return capital to shareholders. This development was positively received by
investors and resulted in a reduction of the conglomerate discount traditionally
given to Anglo by the markets.

TOP 10 HOLDINGS

12/31/05

- --------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------
British American Tobacco PLC 2.8%
TOBACCO, U.K.
- --------------------------------------------------------
Weyerhaeuser Co. 2.4%
PAPER & FOREST PRODUCTS, U.S.
- --------------------------------------------------------
Orkla ASA 2.4%
FOOD PRODUCTS, NORWAY
- --------------------------------------------------------
Berkshire Hathaway Inc., A & B 2.1%
INSURANCE, U.S.
- --------------------------------------------------------
KT&G Corp., GDR & 144A 2.1%
TOBACCO, SOUTH KOREA
- --------------------------------------------------------
Imperial Tobacco Group PLC 2.1%
TOBACCO, U.K.
- --------------------------------------------------------
Mitsubishi UFJ Financial Group Inc. 1.7%
COMMERCIAL BANKS, JAPAN
- --------------------------------------------------------
Altadis SA 1.7%
TOBACCO, SPAIN
- --------------------------------------------------------
Pernod Ricard SA 1.6%
BEVERAGES, FRANCE
- --------------------------------------------------------
Potlatch Corp. 1.6%
PAPER & FOREST PRODUCTS, U.S.
- --------------------------------------------------------

Annual Report | 7

Detractors from Fund performance during the 12 months under review included
Kindred Healthcare, a U.S. health care provider; White Mountains Insurance
Group, a U.S. insurance company; and Washington Post, a U.S. newspaper and
publishing company.

White Mountains' shares weakened 12% largely due to the company's exposure to
areas devastated by Hurricane Katrina, which may have caused the largest total
insured loss in history.

Finally, investors should note that we entered 2005 less than fully hedged in
foreign currencies and increased the hedges on foreign currency exposure over
the course of the year.

(5) A member of Franklin Mutual Advisers, Inc., serves on Kindred's board of
directors.

8 | Annual Report

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

[PHOTO] /s/ Anne E. Gudefin

Anne E. Gudefin, CFA
Portfolio Manager

[PHOTO] /s/ F. David Segal

F. David Segal, CFA
Assistant Portfolio Manager

Mutual Discovery Fund

ANNE GUDEFIN has been a member of the management team of the Funds since 2000,
when she joined Franklin Templeton Investments. Ms. Gudefin has been a portfolio
manager for Mutual Qualified Fund since 2002. She assumed the duties of
portfolio manager for Mutual Discovery Fund in May 2005. Previously, she was an
analyst at Perry Capital.

F. DAVID SEGAL has been an assistant portfolio manager for Mutual Discovery Fund
since 2004. He assumed the duties of assistant portfolio manager for Mutual
Shares Fund in May 2005. He joined Franklin Templeton Investments in 2002.
Previously, he was an analyst in the Structured Finance Group of MetLife for the
period 1999-2002.

Annual Report | 9

PERFORMANCE SUMMARY AS OF 12/31/05

PRICE AND DISTRIBUTION INFORMATION

- --------------------------------------------------------------------------------
CLASS Z (SYMBOL: MDISX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.02 $26.28 $24.26
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.4412
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1274
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2118
- --------------------------------------------------------------------------------
TOTAL $1.7804
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
CLASS A (SYMBOL: TEDIX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.97 $26.04 $24.07
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.3668
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1274
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2118
- --------------------------------------------------------------------------------
TOTAL $1.7060
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
CLASS B (SYMBOL: TEDBX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.90 $25.57 $23.67
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.1983
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1274
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2118
- --------------------------------------------------------------------------------
TOTAL $1.5375
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
CLASS C (SYMBOL: TEDSX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.93 $25.90 $23.97
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.2169
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1274
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2118
- --------------------------------------------------------------------------------
TOTAL $1.5561
- --------------------------------------------------------------------------------

10 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

PRICE AND DISTRIBUTION INFORMATION (CONTINUED)

- --------------------------------------------------------------------------------
CLASS R (SYMBOL: TEDRX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.94 $25.88 $23.94
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.3391
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1274
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2118
- --------------------------------------------------------------------------------
TOTAL $1.6783
- --------------------------------------------------------------------------------

Mutual Discovery Fund paid distributions derived from long-term capital gains
totaling $1.2118 per share in June and December 2005. The Fund designates such
distributions as capital gain dividends per Internal Revenue Code Section
852(b)(3)(C).

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) +15.70% +67.34% +259.96%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +15.70% +10.85% +13.66%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,570 $16,734 $35,996
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
CLASS A(1) 1-YEAR 5-YEAR INCEPTION (11/1/96)
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +15.29% +64.40% +192.46%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +8.66% +9.15% +11.70%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $10,866 $15,494 $27,561
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
CLASS B(1) 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +14.59% +59.21% +122.86%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +10.59% +9.47% +12.13%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,059 $15,721 $22,286
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
CLASS C(1) 1-YEAR 5-YEAR INCEPTION (11/1/96)
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +14.56% +59.19% +176.02%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +13.56% +9.74% +11.72%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,356 $15,919 $27,602
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +15.13% +79.05% +62.07%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +14.13% +21.43% +12.85%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,413 $17,905 $16,207
- --------------------------------------------------------------------------------

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.

AVERAGE ANNUAL TOTAL RETURN(1)

- ------------------------------------------
CLASS Z 12/31/05
- ------------------------------------------
1-Year +15.70%
- ------------------------------------------
5-Year +10.85%
- ------------------------------------------
10-Year +13.66%
- ------------------------------------------

CLASS Z (1/196-12/31/05)(1)

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

MUTUAL DISCOVERY
DATE FUND - CLASS Z S&P 500 INDEX(5) MSCI WORLD INDEX(5)
---------- ---------------- ---------------- ------------------
1/1/1996 $10,000 $10,000 $10,000
1/31/1996 $10,369 $10,340 $10,183
2/29/1996 $10,719 $10,436 $10,247
3/31/1996 $10,871 $10,537 $10,419
4/30/1996 $11,108 $10,692 $10,666
5/31/1996 $11,299 $10,967 $10,677
6/30/1996 $11,285 $11,009 $10,733
7/31/1996 $10,948 $10,523 $10,356
8/31/1996 $11,325 $10,745 $10,477
9/30/1996 $11,601 $11,349 $10,889
10/31/1996 $11,890 $11,662 $10,967
11/30/1996 $12,382 $12,543 $11,583
12/31/1996 $12,493 $12,295 $11,400
1/31/1997 $13,089 $13,062 $11,539
2/28/1997 $13,343 $13,165 $11,674
3/31/1997 $13,220 $12,625 $11,445
4/30/1997 $13,242 $13,378 $11,821
5/31/1997 $13,722 $14,192 $12,553
6/30/1997 $14,231 $14,827 $13,181
7/31/1997 $14,849 $16,006 $13,790
8/31/1997 $14,708 $15,110 $12,869
9/30/1997 $15,449 $15,937 $13,570
10/31/1997 $15,004 $15,406 $12,858
11/30/1997 $15,093 $16,118 $13,088
12/31/1997 $15,359 $16,395 $13,249
1/31/1998 $15,367 $16,576 $13,621
2/28/1998 $16,156 $17,771 $14,544
3/31/1998 $17,083 $18,680 $15,161
4/30/1998 $17,400 $18,868 $15,311
5/31/1998 $17,636 $18,544 $15,121
6/30/1998 $17,197 $19,297 $15,483
7/31/1998 $16,792 $19,092 $15,460
8/31/1998 $14,503 $16,334 $13,401
9/30/1998 $13,853 $17,381 $13,640
10/31/1998 $14,236 $18,793 $14,875
11/30/1998 $14,952 $19,932 $15,762
12/31/1998 $15,067 $21,080 $16,535
1/31/1999 $15,172 $21,961 $16,899
2/28/1999 $14,998 $21,278 $16,452
3/31/1999 $15,687 $22,130 $17,139
4/30/1999 $16,743 $22,987 $17,817
5/31/1999 $16,751 $22,445 $17,169
6/30/1999 $17,347 $23,689 $17,972
7/31/1999 $17,152 $22,951 $17,920
8/31/1999 $16,948 $22,837 $17,891
9/30/1999 $16,726 $22,212 $17,720
10/31/1999 $17,072 $23,617 $18,643
11/30/1999 $17,968 $24,097 $19,170
12/31/1999 $19,105 $25,515 $20,725
1/31/2000 $19,033 $24,233 $19,540
2/29/2000 $19,640 $23,775 $19,595
3/31/2000 $20,482 $26,099 $20,952
4/30/2000 $20,255 $25,314 $20,069
5/31/2000 $20,373 $24,796 $19,563
6/30/2000 $20,431 $25,408 $20,224
7/31/2000 $20,693 $25,011 $19,657
8/31/2000 $21,304 $26,564 $20,299
9/30/2000 $21,091 $25,162 $19,222
10/31/2000 $21,256 $25,055 $18,903
11/30/2000 $20,897 $23,081 $17,758
12/31/2000 $21,511 $23,194 $18,047
1/31/2001 $22,170 $24,017 $18,398
2/28/2001 $22,170 $21,828 $16,845
3/31/2001 $21,511 $20,446 $15,742
4/30/2001 $22,136 $22,034 $16,909
5/31/2001 $22,807 $22,181 $16,699
6/30/2001 $22,913 $21,642 $16,178
7/31/2001 $22,867 $21,429 $15,965
8/31/2001 $22,636 $20,089 $15,202
9/30/2001 $20,712 $18,466 $13,865
10/31/2001 $20,770 $18,819 $14,132
11/30/2001 $21,300 $20,262 $14,970
12/31/2001 $21,784 $20,440 $15,066
1/31/2002 $21,856 $20,141 $14,611
2/28/2002 $22,071 $19,753 $14,487
3/31/2002 $22,802 $20,496 $15,130
4/30/2002 $23,197 $19,254 $14,622
5/31/2002 $23,376 $19,113 $14,656
6/30/2002 $21,942 $17,752 $13,770
7/31/2002 $20,495 $16,368 $12,611
8/31/2002 $20,700 $16,475 $12,637
9/30/2002 $19,615 $14,686 $11,250
10/31/2002 $19,687 $15,978 $12,082
11/30/2002 $19,977 $16,917 $12,736
12/31/2002 $19,811 $15,924 $12,122
1/31/2003 $19,480 $15,508 $11,755
2/28/2003 $18,953 $15,275 $11,554
3/31/2003 $19,038 $15,421 $11,522
4/30/2003 $20,497 $16,692 $12,551
5/31/2003 $21,650 $17,571 $13,275
6/30/2003 $22,018 $17,795 $13,510
7/31/2003 $22,289 $18,109 $13,786
8/31/2003 $22,955 $18,462 $14,088
9/30/2003 $23,079 $18,266 $14,177
10/31/2003 $24,066 $19,299 $15,021
11/30/2003 $24,904 $19,469 $15,253
12/31/2003 $26,060 $20,489 $16,214
1/31/2004 $26,386 $20,865 $16,478
2/29/2004 $27,225 $21,155 $16,760
3/31/2004 $27,125 $20,836 $16,655
4/30/2004 $26,662 $20,509 $16,323
5/31/2004 $26,649 $20,790 $16,483
6/30/2004 $27,157 $21,194 $16,829
7/31/2004 $26,879 $20,493 $16,284
8/31/2004 $27,056 $20,575 $16,362
9/30/2004 $27,787 $20,798 $16,677
10/31/2004 $28,354 $21,116 $17,089
11/30/2004 $29,979 $21,970 $17,994
12/31/2004 $31,114 $22,717 $18,686
1/31/2005 $30,421 $22,163 $18,269
2/28/2005 $31,729 $22,629 $18,856
3/31/2005 $31,460 $22,229 $18,499
4/30/2005 $31,216 $21,808 $18,108
5/31/2005 $31,883 $22,501 $18,443
6/30/2005 $32,572 $22,533 $18,611
7/31/2005 $33,682 $23,371 $19,265
8/31/2005 $33,812 $23,158 $19,419
9/30/2005 $34,767 $23,345 $19,929
10/31/2005 $33,682 $22,956 $19,450
11/30/2005 $34,741 $23,823 $20,109
12/31/2005 $35,996 $23,832 $20,559

AVERAGE ANNUAL TOTAL RETURN(1)

- ------------------------------------------
CLASS A 12/31/05
- ------------------------------------------
1-Year +8.66%
- ------------------------------------------
5-Year +9.15%
- ------------------------------------------
Since Inception (11/1/96) +11.70%
- ------------------------------------------

CLASS A (11/1/96-12/31/05)(1)

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

MUTUAL DISCOVERY
DATE FUND - CLASS A S&P 500 INDEX(5) MSCI WORLD INDEX(5)
---------- ---------------- ---------------- -------------------
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 $23,918 $19,479 $17,039
1/31/2005 $23,372 $19,004 $16,659
2/28/2005 $24,375 $19,404 $17,194
3/31/2005 $24,157 $19,061 $16,869
4/30/2005 $23,968 $18,699 $16,512
5/31/2005 $24,465 $19,294 $16,818
6/30/2005 $24,992 $19,322 $16,971
7/31/2005 $25,832 $20,040 $17,567
8/31/2005 $25,922 $19,857 $17,708
9/30/2005 $26,652 $20,018 $18,173
10/31/2005 $25,812 $19,684 $17,736
11/30/2005 $26,612 $20,428 $18,336
12/31/2005 $27,561 $20,435 $18,747

12 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

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

MUTUAL DISCOVERY
DATE FUND - CLASS B S&P 500 INDEX(5) MSCI WORLD INDEX(5)
---------- ---------------- ---------------- -------------------
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 $19,450 $10,777 $11,301
1/31/2005 $18,998 $10,514 $11,049
2/28/2005 $19,803 $10,735 $11,404
3/31/2005 $19,614 $10,545 $11,188
4/30/2005 $19,450 $10,345 $10,951
5/31/2005 $19,844 $10,674 $11,154
6/30/2005 $20,261 $10,690 $11,256
7/31/2005 $20,931 $11,087 $11,651
8/31/2005 $20,997 $10,986 $11,745
9/30/2005 $21,576 $11,075 $12,053
10/31/2005 $20,881 $10,890 $11,763
11/30/2005 $21,518 $11,301 $12,161
12/31/2005 $22,286 $11,305 $12,434

AVERAGE ANNUAL TOTAL RETURN(1)

- --------------------------------------------
CLASS B 12/31/05
- --------------------------------------------
1-Year +10.59%
- --------------------------------------------
5-Year +9.47%
- --------------------------------------------
Since Inception (1/1/99) +12.13%
- --------------------------------------------

CLASS B (11/1/99-12/31/05)(1)

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

MUTUAL DISCOVERY
DATE FUND - CLASS C S&P 500 INDEX(5) MSCI WORLD INDEX(5)
---------- ---------------- ---------------- -------------------
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 $24,107 $19,479 $17,039
1/31/2005 $23,544 $19,004 $16,659
2/28/2005 $24,550 $19,404 $17,194
3/31/2005 $24,319 $19,061 $16,869
4/30/2005 $24,107 $18,699 $16,512
5/31/2005 $24,600 $19,294 $16,818
6/30/2005 $25,112 $19,322 $16,971
7/31/2005 $25,942 $20,040 $17,567
8/31/2005 $26,023 $19,857 $17,708
9/30/2005 $26,742 $20,018 $18,173
10/31/2005 $25,881 $19,684 $17,736
11/30/2005 $26,671 $20,428 $18,336
12/31/2005 $27,602 $20,435 $18,747

AVERAGE ANNUAL TOTAL RETURN(1)
- --------------------------------------------
CLASS C 12/31/05
- --------------------------------------------
1-Year +13.56%
- --------------------------------------------
5-Year +9.74%
- --------------------------------------------
Since Inception (11/1/96) +11.72%
- --------------------------------------------

CLASS C (11/1/99-12/31/05)(1)

Annual Report | 13

PERFORMANCE SUMMARY (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- --------------------------------------------
CLASS R 12/31/05
- --------------------------------------------
1-Year +14.13%
- --------------------------------------------
3-Year +21.43%
- --------------------------------------------
Since Inception (1/1/02) +12.85%
- --------------------------------------------

CLASS R (1/1/02-12/31/05)(1)

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

MUTUAL DISCOVERY
DATE FUND - CLASS R S&P 500 INDEX(5) MSCI WORLD INDEX(5)
- ---------- ---------------- ---------------- -------------------
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 $14,076 $11,114 $12,403
1/31/2005 $13,753 $10,843 $12,126
2/28/2005 $14,341 $11,071 $12,516
3/31/2005 $14,211 $10,876 $12,279
4/30/2005 $14,100 $10,669 $12,019
5/31/2005 $14,394 $11,009 $12,242
6/30/2005 $14,699 $11,024 $12,353
7/31/2005 $15,190 $11,434 $12,788
8/31/2005 $15,243 $11,330 $12,890
9/30/2005 $15,669 $11,422 $13,228
10/31/2005 $15,178 $11,231 $12,910
11/30/2005 $15,646 $11,655 $13,347
12/31/2005 $16,207 $11,660 $13,646

ENDNOTES

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 X $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 7/1/05 VALUE 12/31/05 PERIOD* 7/1/05-12/31/05
- --------------------------------------------------------------------------------------------------------

Actual $ 1,000 $ 1,105.20 $ 5.68
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.81 $ 5.45
- --------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,103.40 $ 7.53
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.05 $ 7.22
- --------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,100.00 $ 10.96
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,014.77 $ 10.51
- --------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,099.80 $ 10.96
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,014.77 $ 10.51
- --------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,102.60 $ 8.32
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,017.29 $ 7.98
- --------------------------------------------------------------------------------------------------------

* Expenses are equal to the annualized expense ratio for each class (Z:
1.07%; A: 1.42%; B: 2.07%; C: 2.07%; and R: 1.57%), multiplied by the
average account value over the period, multiplied by 184/365 to reflect
the one-half year period.

16 | Annual Report

Mutual Discovery Fund

FINANCIAL HIGHLIGHTS

----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2005 2004 2003 2002 2001
----------------------------------------------------------------------

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

Net asset value, beginning of year ............ $ 24.26 $ 20.81 $ 16.16 $ 18.19 $ 18.93
----------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ................... 0.37 0.41 0.28 0.33 0.37

Net realized and unrealized gains (losses).. 3.43 3.58 4.80 (1.96) (0.14)
----------------------------------------------------------------------
Total from investment operations .............. 3.80 3.99 5.08 (1.63) 0.23
----------------------------------------------------------------------
Less distributions from:

Net investment income ...................... (0.44) (0.54) (0.43) (0.32) (0.34)

Net realized gains ......................... (1.34) -- -- (0.08) (0.63)
----------------------------------------------------------------------
Total distributions ........................... (1.78) (0.54) (0.43) (0.40) (0.97)
----------------------------------------------------------------------
Redemption fees ............................... --(c) --(c) -- -- --
----------------------------------------------------------------------
Net asset value, end of year .................. $ 26.28 $ 24.26 $ 20.81 $ 16.16 $ 18.19
======================================================================

Total return .................................. 15.70% 19.39% 31.55% (9.06)% 1.26%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............... $ 3,033,756 $ 2,578,585 $ 2,168,161 $ 1,673,786 $ 1,931,117

Ratios to average net assets:*

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

Net investment income ...................... 1.42% 1.87% 1.55% 1.88% 1.93%

Portfolio turnover rate ....................... 25.69% 34.34% 46.34% 40.95% 59.32%

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

Expenses ................................... 1.04% 1.06% 1.08% 1.03% 1.02%

(a) Based on average daily shares outstanding.

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

Annual Report | See notes to financial statements. | 17

Mutual Discovery Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2005 2004 2003 2002 2001
----------------------------------------------------------------------

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

Net asset value, beginning of year ............ $ 24.07 $ 20.67 $ 16.06 $ 18.08 $ 18.83
----------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ................... 0.27 0.33 0.21 0.27 0.30

Net realized and unrealized gains (losses).. 3.41 3.54 4.78 (1.95) (0.14)
----------------------------------------------------------------------
Total from investment operations .............. 3.68 3.87 4.99 (1.68) 0.16
----------------------------------------------------------------------
Less distributions from:

Net investment income ...................... (0.37) (0.47) (0.38) (0.26) (0.28)

Net realized gains ......................... (1.34) -- -- (0.08) (0.63)
----------------------------------------------------------------------
Total distributions ........................... (1.71) (0.47) (0.38) (0.34) (0.91)
----------------------------------------------------------------------
Redemption fees ............................... --(d) --(d) -- -- --
----------------------------------------------------------------------
Net asset value, end of year .................. $ 26.04 $ 24.07 $ 20.67 $ 16.06 $ 18.08
======================================================================

Total return(b) ............................... 15.29% 18.98% 31.13% (9.39)% 0.86%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............... $ 3,545,288 $ 2,106,695 $ 1,439,579 $ 925,278 $ 911,434

Ratios to average net assets:*

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

Net investment income ...................... 1.07% 1.52% 1.20% 1.53% 1.57%

Portfolio turnover rate ....................... 25.69% 34.34% 46.34% 40.95% 59.32%

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

Expenses ................................... 1.39% 1.41% 1.43% 1.38% 1.37%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the sales commissions or the contingent
deferred sales charge.

(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 $0.01 per share.

18 | See notes to financial statements. | Annual Report

Mutual Discovery Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2005 2004 2003 2002 2001
----------------------------------------------------------------------

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

Net asset value, beginning of year ............ $ 23.67 $ 20.35 $ 15.85 $ 17.87 $ 18.66
----------------------------------------------------------------------

Income from investment operations:

Net investment income(a) ................... 0.11 0.18 0.09 0.16 0.16

Net realized and unrealized gains (losses).. 3.33 3.49 4.69 (1.92) (0.12)
----------------------------------------------------------------------
Total from investment operations .............. 3.44 3.67 4.78 (1.76) 0.04
----------------------------------------------------------------------
Less distributions from:

Net investment income ...................... (0.20) (0.35) (0.28) (0.18) (0.20)

Net realized gains ......................... (1.34) -- -- (0.08) (0.63)
----------------------------------------------------------------------
Total distributions ........................... (1.54) (0.35) (0.28) (0.26) (0.83)
----------------------------------------------------------------------
Redemption fees ............................... --(d) --(d) -- -- --
----------------------------------------------------------------------
Net asset value, end of year .................. $ 25.57 $ 23.67 $ 20.35 $ 15.85 $ 17.87
======================================================================

Total return(b) ............................... 14.59% 18.22% 30.22% (9.94)% 0.21%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............... $ 225,158 $ 186,841 $ 115,801 $ 64,747 $ 41,346

Ratios to average net assets:*

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

Net investment income ...................... 0.42% 0.87% 0.55% 0.88% 0.85%

Portfolio turnover rate ....................... 25.69% 34.34% 46.34% 40.95% 59.32%

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

Expenses ................................... 2.04% 2.06% 2.08% 2.03% 2.02%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

Annual Report | See notes to financial statements. | 19

Mutual Discovery Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2005 2004 2003 2002 2001
----------------------------------------------------------------------

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

Net asset value, beginning of year ............ $ 23.97 $ 20.59 $ 16.02 $ 18.03 $ 18.77
----------------------------------------------------------------------

Income from investment operations:

Net investment income(a) ................... 0.11 0.19 0.10 0.16 0.18

Net realized and unrealized gains (losses).. 3.38 3.53 4.73 (1.94) (0.13)
----------------------------------------------------------------------
Total from investment operations .............. 3.49 3.72 4.83 (1.78) 0.05
----------------------------------------------------------------------
Less distributions from:

Net investment income ...................... (0.22) (0.34) (0.26) (0.15) (0.16)

Net realized gains ......................... (1.34) -- -- (0.08) (0.63)
----------------------------------------------------------------------
Total distributions ........................... (1.56) (0.34) (0.26) (0.23) (0.79)
----------------------------------------------------------------------
Redemption fees ............................... --(d) --(d) -- -- --
----------------------------------------------------------------------
Net asset value, end of year .................. $ 25.90 $ 23.97 $ 20.59 $ 16.02 $ 18.03
======================================================================

Total return(b) ............................... 14.56% 18.17% 30.29% (9.98)% 0.25%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............... $ 1,435,702 $ 968,934 $ 725,489 $ 525,375 $ 561,808

Ratios to average net assets:*

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

Net investment income ...................... 0.42% 0.87% 0.55% 0.89% 0.93%

Portfolio turnover rate ....................... 25.69% 34.34% 46.34% 40.95% 59.32%

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

Expenses ................................... 2.04% 2.06% 2.08% 2.02% 2.01%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

20 | See notes to financial statements. | Annual Report

Mutual Discovery Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS R 2005 2004 2003 2002(e)
------------------------------------------------

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

Net asset value, beginning of year ............ $ 23.94 $ 20.57 $ 16.01 $ 18.08
------------------------------------------------

Income from investment operations:

Net investment income(a) ................... 0.22 0.29 0.17 0.25

Net realized and unrealized gains (losses).. 3.40 3.54 4.76 (1.95)
------------------------------------------------
Total from investment operations .............. 3.62 3.83 4.93 (1.70)
================================================
Less distributions from:

Net investment income ...................... (0.34) (0.46) (0.37) (0.29)

Net realized gains ......................... (1.34) -- -- (0.08)
------------------------------------------------
Total distributions ........................... (1.68) (0.46) (0.37) (0.37)
------------------------------------------------
Redemption fees ............................... --(d) --(d) -- --
------------------------------------------------
Net asset value, end of year .................. $ 25.88 $ 23.94 $ 20.57 $ 16.01
================================================

Total return(b) ............................... 15.13% 18.84% 30.87% (9.49)%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............... $ 99,501 $ 46,690 $ 19,546 $ 3,932

Ratios to average net assets:*

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

Net investment income ...................... 0.92% 1.37% 1.05% 1.38%(f)

Portfolio turnover rate ....................... 25.69% 34.34% 46.34% 40.95%

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

Expenses ................................... 1.54% 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 $0.01 per share.

(e) For the period January 2, 2002 (effective date) to December 31, 2002.

(f) Annualized.

Annual Report | See notes to financial statements. | 21

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005

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

COMMON STOCKS AND OTHER EQUITY INTERESTS 87.8%
AEROSPACE & DEFENSE 0.2%
Northrop Grumman Corp. ...................................... United States 280,140 $ 16,839,215
------------------

AIRLINES 0.5%
(a)ACE Aviation Holdings Inc. .................................. Canada 917,052 29,981,911
(a),(b)ACE Aviation Holdings Inc., A, 144A ......................... Canada 375,491 12,276,227
(a)ACE Aviation Holdings Inc., B ............................... Canada 1,378 44,886
(a),(c)Air Canada Inc., Contingent Distribution .................... Canada 249,992,001 --
------------------
42,303,024
------------------

AUTOMOBILES 0.2%
Hero Honda Motors Ltd. ...................................... India 1,042,903 19,926,296
------------------
BEVERAGES 6.2%
Brown-Forman Corp., A ....................................... United States 143,200 10,158,608
Brown-Forman Corp., B ....................................... United States 391,650 27,149,178
Carlsberg AS, A ............................................. Denmark 113,300 5,662,933
Carlsberg AS, B ............................................. Denmark 1,876,968 100,664,072
Coca-Cola Enterprises Inc. .................................. United States 2,520,300 48,314,151
Diageo PLC .................................................. United Kingdom 2,985,315 43,271,516
Fomento Economico Mexicano SA de CV (Femsa), ADR ............ Mexico 1,050,228 76,152,032
Heineken Holding NV, A ...................................... Netherlands 981,549 28,841,009
(a)Lotte Chilsung Beverage Co. Ltd. ............................ South Korea 38,846 37,824,244
Pernod Ricard SA ............................................ France 772,613 134,820,576
------------------
512,858,319
------------------
CAPITAL MARKETS 0.0%(d)
(a)A.B. Watley Group Inc. ...................................... United States 128,355 2,054
------------------

CHEMICALS 1.7%
Givaudan AG ................................................. Switzerland 88,065 59,693,155
Linde AG .................................................... Germany 440,300 34,287,770
(a)Sika AG ..................................................... Switzerland 53,892 44,713,439
------------------
138,694,364
------------------

COMMERCIAL BANKS 7.3%
Allied Irish Banks PLC ...................................... Ireland 4,877,727 104,922,614
Banca Intesa SpA ............................................ Italy 12,705,212 67,308,768
Bank of Ireland ............................................. Ireland 2,475,126 38,971,367
BNP Paribas SA .............................................. France 594,632 48,115,331
Chinatrust Financial Holding Co. Ltd. ....................... Taiwan 52,774,000 41,799,278
Danske Bank ................................................. Denmark 1,352,880 47,655,516
(a),(e),(f)FE Capital Holdings Ltd. .................................... Japan 11,589 16,513,832
ForeningsSparbanken AB, A ................................... Sweden 3,112,200 84,801,623
(a)Investors Bancorp Inc. ...................................... United States 1,775 19,578
Mitsubishi UFJ Financial Group Inc. ......................... Japan 10,709 145,169,872
(a),(e)NCB Warrant Holdings Ltd., A ................................ Japan 55,890 9,029,594
------------------
604,307,373
------------------

22 | Annual Report

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL SERVICES & SUPPLIES 0.4%
(a)Comdisco Holding Co. Inc. ................................... United States 344 $ 6,536
(c)Comdisco Holding Co. Inc., Contingent Distribution .......... United States 41,726,153 --
(a)Fursys Inc. ................................................. South Korea 387,960 8,760,387
Republic Services Inc. ...................................... United States 600,900 22,563,795
(a),(c)Safety Kleen Corp., Contingent Distribution ................. United States 520,000 --
------------------
31,330,718
------------------

COMPUTERS & PERIPHERALS 0.4%
(a),(e)DecisionOne Corp. ........................................... United States 359,884 256,597
(a)Lexmark International Inc., A ............................... United States 678,100 30,399,223
------------------
30,655,820
------------------

CONSTRUCTION MATERIALS 0.9%
Ciments Francais SA ......................................... France 399,572 51,939,058
(a)Hanil Cement Manufacturing Co. Ltd. ......................... South Korea 321,760 23,058,136
------------------
74,997,194
------------------

CONSUMER FINANCE 0.4%
MBNA Corp. .................................................. United States 1,143,500 31,046,025
------------------

CONTAINERS & PACKAGING 0.7%
Temple-Inland Inc. .......................................... United States 1,371,420 61,508,187
------------------

DISTRIBUTORS 0.3%
Compania de Distribucion Integral Logista SA ................ Spain 564,170 27,717,545
------------------

DIVERSIFIED FINANCIAL SERVICES 4.6%
Euronext .................................................... Netherlands 1,357,836 70,728,863
Fortis Group NV ............................................. Belgium 2,222,940 70,764,465
Guinness Peat Group PLC ..................................... New Zealand 22,027,831 31,571,388
Jardine Matheson Holdings Ltd. .............................. Hong Kong 4,554,012 78,329,007
Jardine Strategic Holdings Ltd. ............................. Hong Kong 7,356,100 78,710,270
Leucadia National Corp. ..................................... United States 1,027,170 48,749,488
(a),(c)Marconi Corp., Contingent Distribution ...................... United Kingdom 33,909,700 --
(b)Spinrite Income Fund, 144A .................................. Canada 274,300 1,472,625
------------------
380,326,106
------------------

DIVERSIFIED TELECOMMUNICATION SERVICES 3.4%
(a),(e),(g)AboveNet Inc. ............................................... United States 332,512 7,968,118
(a),(e),(g)AboveNet Inc., Contingent Distribution ...................... United States 46,367,000 --
(a),(e),(g)AboveNet Inc., wts., 9/08/08 ................................ United States 11,105 44,420
(a),(e),(g)AboveNet Inc., wts., 9/08/10 ................................ United States 13,066 10,453
Belgacom SA ................................................. Belgium 545,400 17,788,258
Chunghwa Telecom Co. Ltd., ADR .............................. Taiwan 1,169,682 21,463,665
(a),(c)Global Crossing Holdings Ltd., Contingent Distribution ...... United States 45,658,716 --
Koninklijke KPN NV .......................................... Netherlands 2,428,999 24,356,082
MCI Inc. .................................................... United States 1,148,134 22,652,684
(a)NTL Inc. .................................................... United Kingdom 1,344,522 91,535,058
Sprint Nextel Corp. ......................................... United States 160,782 3,755,867
(a),(c)Telewest Communications PLC, Contingent Distribution ........ United Kingdom 53,009,022 --

Annual Report | 23

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
(a),(c)Telewest Finance Ltd., Contingent Distribution .............. United Kingdom 5,738,000 $ --
(a)Telewest Global Inc. ........................................ United Kingdom 3,124,100 74,416,062
Verizon Communications Inc. ................................. United States 726,600 21,885,192
------------------
285,875,859
------------------

ELECTRIC UTILITIES 0.5%
E.ON AG ..................................................... Germany 415,020 42,970,972
(a),(b)Entegra/Union Power, 144A ................................... United States 131,128 --
------------------
42,970,972
------------------

FOOD & STAPLES RETAILING 1.5%
Albertson's Inc. ............................................ United States 383,400 8,185,590
Carrefour SA ................................................ France 2,187,570 102,502,494
RHM PLC ..................................................... United Kingdom 3,574,200 16,280,092
------------------
126,968,176
------------------

FOOD PRODUCTS 8.0%
Cadbury Schweppes PLC ....................................... United Kingdom 5,477,342 51,782,092
(a)Cermaq ASA .................................................. Norway 1,368,728 11,102,563
CSM NV ...................................................... Netherlands 3,219,606 87,779,550
(f)Farmer Brothers Co. ......................................... United States 904,637 17,495,680
General Mills Inc. .......................................... United States 478,600 23,604,552
Groupe Danone ............................................... France 772,770 80,734,963
(a)Lotte Confectionary Co. Ltd. ................................ South Korea 52,189 61,953,394
Nestle SA ................................................... Switzerland 219,229 65,580,968
(a)Nong Shim Co. Ltd. .......................................... South Korea 153,896 42,770,104
Orkla ASA ................................................... Norway 4,856,682 201,114,528
Rieber & Son ASA ............................................ Norway 3,472,090 25,849,313
------------------
669,767,707
------------------

HEALTH CARE EQUIPMENT & SUPPLIES 0.4%
Guidant Corp. ............................................... United States 444,400 28,774,900
------------------

HEALTH CARE PROVIDERS & SERVICES 0.6%
(a),(e),(g)Kindred Healthcare Inc. ..................................... United States 934,740 22,874,957
(a),(e),(g)Kindred Healthcare Inc., Jan. 9.07 Calls, 1/01/13 ........... United States 449 6,913
(a),(e),(g)Kindred Healthcare Inc., Jan. 25.99 Calls, 1/01/14 .......... United States 223 --
(a),(e),(g)Kindred Healthcare Inc., Jan. 26.00 Calls, 1/01/12 .......... United States 675 --
(a),(e),(g)Kindred Healthcare Inc., Jul. 23.75 Calls, 7/17/11 .......... United States 3,002 2,167
(a),(e),(g)Kindred Healthcare Inc., wts., Series A, 4/20/06 ............ United States 88,766 1,716,912
(a),(e),(g)Kindred Healthcare Inc., wts., Series B, 4/20/06 ............ United States 221,915 3,647,173
MDS Inc. .................................................... Canada 750,400 12,983,347
Rhoen-Klinikum AG ........................................... Germany 189,234 7,233,757
UnitedHealth Group Inc. ..................................... United States 620 38,527
------------------
48,503,753
------------------

24 | Annual Report

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HOTELS, RESTAURANTS & LEISURE 0.8%
(a)FHC Delaware Inc. ........................................... United States 212,022 $ 736,967
(a),(e),(f)Hancock Discovery LLC ....................................... United States 8,758,216 500,007
Hilton Group ................................................ United Kingdom 6,917,939 43,293,408
(a),(c)Trump Atlantic, Contingent Distribution ..................... United States 24,246,000 914,074
(a)Trump Entertainment Resorts Inc. ............................ United States 835,578 16,820,185
------------------
62,264,641
------------------

HOUSEHOLD DURABLES 0.2%
Hunter Douglas NV ........................................... Netherlands 329,019 17,909,631
------------------

INDUSTRIAL CONGLOMERATES 1.1%
Siemens AG .................................................. Germany 654,803 56,100,395
Tyco International Ltd. ..................................... United States 1,282,600 37,015,836
------------------
93,116,231
------------------
INSURANCE 7.6%
(a)Alleghany Corp. ............................................. United States 73,574 20,895,016
(a)Berkshire Hathaway Inc., A .................................. United States 853 75,592,860
(a)Berkshire Hathaway Inc., B .................................. United States 34,470 101,186,685
Catlin Group ................................................ United Kingdom 1,993,464 16,650,975
E-L Financial Corp. Ltd. .................................... Canada 177,619 81,757,004
Hartford Financial Services Group Inc. ...................... United States 511,000 43,889,790
(a),(e),(f)Imagine Group Holdings Ltd. ................................. Bermuda 4,551,501 46,614,334
IPC Holdings Ltd. ........................................... United States 404,624 11,078,605
Irish Life & Permanent PLC .................................. Ireland 2,899,665 58,906,307
Montpelier Re Holdings Ltd. ................................. Bermuda 348,227 6,581,490
Old Republic International Corp. ............................ United States 1,518,550 39,877,123
(a),(e)Olympus Re Holdings Ltd. .................................... Bermuda 47,160 872,460
Prudential Financial Inc. ................................... United States 421,200 30,827,628
White Mountains Insurance Group Inc. ........................ United States 175,415 97,978,048
------------------
632,708,325
------------------

LEISURE EQUIPMENT & PRODUCTS 0.2%
Mattel Inc. ................................................. United States 721,400 11,412,548
Shimano Inc. ................................................ Japan 339,500 8,916,801
------------------
20,329,349
------------------

MACHINERY 1.4%
Metso OYJ ................................................... Finland 373,898 10,233,817
Schindler Holding AG ........................................ Switzerland 212,277 84,183,686
Schindler Holding AG, Reg D ................................. Switzerland 65,126 25,752,964
------------------
120,170,467
------------------

MEDIA 5.6%
(a)CJ CGV Co. Ltd. ............................................. South Korea 849,040 25,070,908
Clear Channel Communications Inc. ........................... United States 1,598,100 50,260,245
(a)Comcast Corp., A ............................................ United States 179,400 4,608,786
Daekyo Co. Ltd. ............................................. South Korea 127,920 10,005,058
E.W. Scripps Co., A ......................................... United States 116,100 5,575,122
(a)EchoStar Communications Corp., A ............................ United States 581,900 15,810,223
Hollinger International Inc. ................................ United States 880,440 7,494,305

Annual Report | 25

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA (CONTINUED)
(a)JC Decaux SA ................................................ France 2,791,333 $ 65,099,036
Knight Ridder Inc. .......................................... United States 174,900 11,071,170
(a),(h)Liberty Media Corp., A ...................................... United States 4,255,518 33,490,927
News Corp., A ............................................... United States 3,489,300 54,258,615
Omnicom Group Inc. .......................................... United States 197,900 16,847,227
Pearson PLC ................................................. United Kingdom 3,178,598 37,596,754
(e)Time Warner Inc. ............................................ United States 2,833,800 48,433,043
(e)Time Warner Inc., Jan. 10.00 Calls, 1/21/06 ................. United States 18,832 13,841,520
(a)TVMAX Holdings Inc. ......................................... United States 118,432 118,432
Viacom Inc., B .............................................. United States 658,900 21,480,140
Washington Post Co., B ...................................... United States 60,003 45,902,295
------------------
466,963,806
------------------

METALS & MINING 4.4%
Anglo American PLC .......................................... South Africa 3,729,617 126,984,897
Anglo American PLC, ADR ..................................... South Africa 1,000 34,780
Dofasco Inc. ................................................ Canada 597,441 33,400,771
Freeport-McMoRan Copper & Gold Inc., B ...................... United States 118,300 6,364,540
(a),(f)Gammon Lake Resources Inc. .................................. Canada 4,402,100 52,304,053
(a)Glamis Gold Ltd. ............................................ Canada 719,700 19,795,930
Gold Fields Ltd. ............................................ South Africa 20,244 357,689
Goldcorp Inc. ............................................... Canada 538,769 12,005,116
(a)Goldcorp Inc., wts., 5/30/07 ................................ Canada 600,670 2,506,451
(a)Harmony Gold Mining Co. Ltd., ADR ........................... South Africa 438,500 5,722,425
(a)Kinross Gold Corp. .......................................... Canada 687,500 6,352,706
(a)LionOre Mining International Ltd. ........................... Canada 4,500,000 19,164,587
Newmont Mining Corp. ........................................ United States 1,357,100 72,469,140
Placer Dome Inc. ............................................ Canada 496,500 11,371,273
------------------
368,834,358
------------------

MULTI-UTILITIES & UNREGULATED POWER 1.1%
NorthWestern Corp. .......................................... United States 322,840 10,030,639
(a),(c)NorthWestern Corp., Contingent Distribution ................. United States 9,790,000 832,150
Suez SA ..................................................... France 2,793,883 86,988,261
------------------
97,851,050
------------------

MULTILINE RETAIL 0.1%
Jelmoli Holding AG .......................................... Switzerland 8,345 11,910,086
------------------

OIL, GAS & CONSUMABLE FUELS 3.7%
(a)Anchor Resources LLC ........................................ United States 53,272 --
BP PLC ...................................................... United Kingdom 2,095,000 22,310,881
BP PLC, ADR ................................................. United Kingdom 180,900 11,617,398
Burlington Resources Inc. ................................... United States 546,590 47,116,058
Canadian Oil Sands Trust .................................... Canada 313,392 33,973,494
Eni SpA ..................................................... Italy 847,600 23,510,395
Oil & Natural Gas Corp. Ltd. ................................ India 1,095,168 28,598,014
Statoil ASA ................................................. Norway 932,557 21,415,541
Suncor Energy Inc. .......................................... Canada 695,584 43,878,705

26 | Annual Report

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS (CONTINUED)
Total SA, B .................................................. France 127,671 $ 32,072,611
Total SA, B, ADR ............................................. France 208,648 26,373,107
Vintage Petroleum Inc. ....................................... United States 304,910 16,260,850
------------------
307,127,054
------------------

PAPER & FOREST PRODUCTS 4.0%
(f)Potlatch Corp. ............................................... United States 2,580,250 131,541,145
(h)Weyerhaeuser Co. ............................................. United States 3,052,200 202,482,948
------------------
334,024,093
------------------

PERSONAL PRODUCTS 0.6%
(a)Amorepacific Corp. ........................................... South Korea 160,937 50,477,511
------------------

PHARMACEUTICALS 2.0%
Bristol-Myers Squibb Co. ..................................... United States 641,300 14,737,074
(a)IVAX Corp. ................................................... United States 43,600 1,365,988
Merck & Co. Inc. ............................................. United States 468,600 14,906,166
Pfizer Inc. .................................................. United States 2,593,430 60,478,788
Sanofi-Aventis ............................................... France 686,623 60,151,540
Wyeth ........................................................ United States 395,300 18,211,471
------------------
169,851,027
------------------

REAL ESTATE 2.8%
Canary Wharf Group PLC ....................................... United Kingdom 5,400,183 22,297,787
Great Eagle Holdings Ltd. .................................... Hong Kong 12,345,700 34,551,687
iStar Financial Inc. ......................................... United States 1,056,000 37,646,400
(a)Link REIT .................................................... Hong Kong 3,337,130 6,326,802
(a),(e)Security Capital European Realty ............................. Luxembourg 14,787 107,465
Shurgard Storage Centers Inc., A ............................. United States 146,600 8,313,686
Swire Pacific Ltd., A ........................................ Hong Kong 7,563,600 67,894,032
Swire Pacific Ltd., B ........................................ Hong Kong 13,605,000 23,687,876
(a),(e),(f)Torre Mayor Investments LP ................................... Mexico 170 11,730,000
Ventas Inc. .................................................. United States 516,500 16,538,330
------------------
229,094,065
------------------

ROAD & RAIL 1.1%
(e),(f)Florida East Coast Industries Inc. ........................... United States 2,247,600 90,469,271
------------------

SOFTWARE 0.5%
Microsoft Corp. .............................................. United States 1,517,700 39,687,855
------------------

TEXTILES APPAREL & LUXURY GOODS 0.2%
Reebok International Ltd. .................................... United States 268,600 15,640,578
------------------

THRIFTS & MORTGAGE FINANCE 0.6%
Hudson City Bancorp Inc. ..................................... United States 2,326,520 28,197,422
Sovereign Bancorp Inc. ....................................... United States 920,800 19,907,696
------------------
48,105,118
------------------

TOBACCO 11.6%
Altadis SA ................................................... Spain 3,181,151 144,313,337
(h)Altria Group Inc. ............................................ United States 995,105 74,354,246
British American Tobacco PLC ................................. United Kingdom 10,342,443 231,317,521

Annual Report | 27

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TOBACCO (CONTINUED)
Gallaher Group PLC ........................................... United Kingdom 2,904,884 $ 43,854,883
Imperial Tobacco Group PLC ................................... United Kingdom 5,733,336 171,336,248
ITC Ltd. ..................................................... India 18,037,005 56,923,096
Japan Tobacco Inc. ........................................... Japan 5,097 74,276,370
KT&G Corp. ................................................... South Korea 1,586,130 70,923,232
(b)KT&G Corp., GDR, 144A ........................................ South Korea 4,680,078 102,961,716
------------------
970,260,649
------------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $5,270,155,096) ..................................... 7,322,168,772
------------------
PREFERRED STOCKS 0.4%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(d)
PTV Inc., 10.00%, pfd., A .................................... United Kingdom 86,280 181,188
------------------
ELECTRIC UTILITIES 0.0%(d)
(a)Montana Power Co., 8.45%, pfd. ............................... United States 49,500 408,375
------------------

METALS & MINING 0.4%
(e),(f),(g)Esmark Inc., Series A, 10.00%, cvt. pfd. ..................... United States 27,889 29,245,521
Falconbridge Ltd., 6.00%, cvt. pfd., 1 ....................... Canada 24,284 613,171
Falconbridge Ltd., 6.25%, cvt. pfd., 2 ....................... Canada 24,284 613,171
Falconbridge Ltd., 6.50%, cvt. pfd., 3 ....................... Canada 12,142 307,800
------------------
30,779,663
------------------
TOTAL PREFERRED STOCKS (COST $31,280,649) .................... 31,369,226
------------------
-------------------
PRINCIPAL AMOUNT(j)
-------------------
CORPORATE BONDS & NOTES 1.4%
(b)ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ....... Canada 2,761,000 CAD 2,327,953
(i)Collins & Aikman Products Co.,
Revolver, FRN, 10.75%, 8/31/09 ............................ United States 592,200 574,434
Tranche B1 Term Loan, FRN, 10.75%, 8/31/11 ................ United States 1,387,200 1,345,584
Dana Corp.,
5.85%, 1/15/15 ............................................ United States 6,756,000 4,830,540
7.00%, 3/01/29 ............................................ United States 913,000 659,643
(e)DecisionOne Corp., 144A, 12.00%, 4/15/10 ..................... United States 390,655 390,655
Entegra/Union Power,
Term Loan A, 4.00%, 6/01/12 ............................... United States 6,680,085 5,744,873
Term Loan B, 9.00%, 6/01/20 ............................... United States 6,432,674 5,532,100
Eurotunnel PLC,
(b),(i)Senior Tranche G2 Term Loan A, 144A, FRN, 5.618%,
12/15/12 .............................................. United Kingdom 657,069 GBP 1,088,063
(i)Tier 2, FRN, 5.796%, 12/31/18 ......................... United Kingdom 6,155,799 GBP 9,002,132
(i)Tier 3, FRN, 5.796%, 12/31/25 ......................... United Kingdom 24,432,938 GBP 19,756,754
Eurotunnel SA,
Senior Tranche H1 Term Loan (KfW Advance), 8.78%,
12/15/12 ........................................... France 706,000 EUR 794,008
(i)Tier 2 (LIBOR), FRN, 3.393%, 12/31/18 .................. France 1,420,047 EUR 1,428,955
(i)Tier 2 (PIBOR), FRN, 3.393%, 12/31/18 .................. France 628,134 EUR 632,074
(i)Tier 3 (LIBOR), FRN, 3.393%, 12/31/25 .................. France 27,236,561 EUR 15,154,681
(i)Tier 3 (PIBOR), FRN, 3.393%, 12/31/25 .................. France 5,943,809 EUR 3,307,192

28 | Annual Report

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- ----------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------

CORPORATE BONDS & NOTES (CONTINUED)
(i)Motor Coach Industries International Inc., FRN, 17.406%,
12/01/08 .................................................. United States 26,151,608 $ 24,844,027
Trump Entertaiment Resorts Inc., 8.50%, 5/20/15 .............. United States 17,141,134 16,798,311
TVMAX Holdings Inc., PIK,
11.50%, 1/16/06 ........................................... United States 195,016 195,016
(k)14.00%, 1/16/06 ........................................... United States 549,381 549,381
------------------
TOTAL CORPORATE BONDS & NOTES (COST $124,006,556) ............ 114,956,376
------------------

CORPORATE BONDS & NOTES IN REORGANIZATION 0.9%
(l)Adelphia Communications Corp.,
9.25%, 10/01/02 ........................................... United States 4,491,000 2,514,960
8.125%, 7/15/03 ........................................... United States 650,000 370,500
7.50%, 1/15/04 ............................................ United States 1,655,000 943,350
10.50%, 7/15/04 ........................................... United States 2,605,000 1,484,850
9.875%, 3/01/05 ........................................... United States 1,168,000 662,840
10.25%, 11/01/06 .......................................... United States 5,186,000 2,904,160
9.875%, 3/01/07 ........................................... United States 528,000 300,960
8.375%, 2/01/08 ........................................... United States 4,053,000 2,310,210
7.75%, 1/15/09 ............................................ United States 8,875,000 5,014,375
7.875%, 5/01/09 ........................................... United States 4,280,000 2,375,400
9.375%, 11/15/09 .......................................... United States 4,509,000 2,660,310
10.875%, 10/01/10 ......................................... United States 3,769,000 2,129,485
10.25%, 6/15/11 ........................................... United States 4,712,000 2,850,760
(l)Armstrong World Industries Inc.,
6.35%, 8/15/03 ............................................ United States 11,769,000 8,473,680
6.50%, 8/15/05 ............................................ United States 939,000 666,690
9.75%, 4/15/08 ............................................ United States 2,542,000 1,881,080
7.45%, 5/15/29 ............................................ United States 1,511,000 1,118,140
Revolver, 10/29/03 ........................................ United States 1,912,950 1,341,456
Trade Claim ............................................... United States 5,129,100 3,571,136
(l)Century Communications Corp.,
(m)8.875%, 1/15/07 ........................................... United States 262,000 251,520
8.75%, 10/01/07 ........................................... United States 2,620,000 2,462,800
8.375%, 12/15/07 .......................................... United States 392,000 376,320
senior note, 9.50%, 3/01/05 ............................... United States 735,000 712,950
Series B, zero cpn., 1/15/08 .............................. United States 4,045,000 2,244,975
zero cpn., 3/15/03 ........................................ United States 7,228,000 6,143,800
(k),(l)Owens Corning, Revolver, 6/26/02 ............................. United States 13,143,250 18,400,550
(l)Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ...... United States 40,000 20
------------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION (COST $73,759,223) 74,167,277
------------------

Annual Report | 29

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- ----------------------------------------------------------------------------------------------------------------------------------
SHARES/
COUNTRY PRINCIPAL AMOUNT(j) VALUE
- ----------------------------------------------------------------------------------------------------------------------------------

COMPANIES IN LIQUIDATION 0.0%(d)
(a)City Investing Co. Liquidating Trust ......................... United States 125,500 $ 13,805
(a)MBOP Liquidating Trust ....................................... United States 273,144 35
(a)Petrie Stores Liquidating Trust, CBI ......................... United States 1,213,700 436,932
(a)United Cos. Financial Corp., Bank Claim ...................... United States 77,701 --
------------------

TOTAL COMPANIES IN LIQUIDATION (COST $--) .................... 450,772
------------------

GOVERNMENT AGENCIES 6.9%
Federal Home Loan Bank, 2.26% - 3.35%, 1/03/06 - 9/27/07 ..... United States 563,155,000 558,399,374
Federal National Mortgage Association, 2.20%, 12/18/06 ....... United States 10,000,000 9,764,380
Government of Norway, 6.75%, 1/15/07 ......................... Norway 51,550,000 NOK 7,939,369
(n)U.S. Treasury Bill, 2/02/06 .................................. United States 3,000,000 2,990,388
------------------
TOTAL GOVERNMENT AGENCIES (COST $579,478,308) ................ 579,093,511
------------------

TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $6,078,679,832) ..................................... 8,122,205,934
------------------

REPURCHASE AGREEMENTS 0.0%(d)
(o),(p)Bank of America LLC, 4.32%, 1/03/06 (Maturity Value
$45,027) Collateralized by U.S. Government Agency
Securities, 5.00% - 5.50%, 9/01/33-10/01/35 ............... United States 45,005 45,005
(o),(p)Bear Stearns & Co. Inc., 4.25%, 1/03/06 (Maturity Value
$52,031) Collateralized by U.S. Government Agencies,
3.282% - 7.155%, 3/01/07 - 9/01/45 ........................ United States 52,006 52,006
(o),(p)Citigroup Global Markets Inc., 4.26%, 1/03/06 (Maturity
Value $39,023) Collateralized by U.S. Government
Agency Securities and
(n)U.S. Treasury Bills, 0.00% - 14.00%, 1/03/06 - 8/06/38 .. United States 39,005 39,005
(o),(p)Merrill Lynch GSI, 4.25%, 1/03/06 (Maturity Value $58,034)
Collateralized by (n)U.S. Government Agency Securities,
1/03/06 - 1/04/06 ......................................... United States 58,007 58,007
(o),(p)Morgan Stanley & Co. Inc., 4.31%, 1/03/06 (Maturiy Value
$63,008) Collateralized by U.S. Government Agency
Securities, 5.00%, 6/01/35 - 7/01/35 ...................... United States 63,008 63,008
------------------
TOTAL REPURCHASE AGREEMENTS (COST $257,031) .................. 257,031
------------------
TOTAL INVESTMENTS (COST $6,078,936,863) 97.4% ................ 8,122,462,965
OPTIONS WRITTEN 0.0%(d) ...................................... (8,000)
SECURITIES SOLD SHORT (1.1)% ................................. (91,331,667)
NET UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS 0.7% ....... 61,924,563
OTHER ASSETS, LESS LIABILITIES 2.9% .......................... 246,355,956
------------------
NET ASSETS 100.0% ............................................ $ 8,339,403,817
------------------

30 | Annual Report

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

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

(q)OPTIONS WRITTEN (PREMIUMS RECEIVED $33,599) 0.0%(d)
PHARMACEUTICALS 0.0%(D)
Pfizer Inc., Jan. 22.50 Puts, 1/21/06 ........................ United States 400 $ 8,000
------------------

------
SHARES
------
(r)SECURITIES SOLD SHORT 1.1%
COMMERCIAL BANKS 0.3%
Bank of America Corp. ........................................ United States 573,391 26,461,995
------------------
FOOD PRODUCTS 0.2%
Kraft Foods Inc., A .......................................... United States 661,443 18,613,006
------------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.1%
Alcon Inc. ................................................... Switzerland 34,100 4,419,360
------------------
HEALTH CARE PROVIDERS & SERVICES 0.0%(d)
WellPoint Inc. ............................................... United States 15 1,197
------------------
OIL & GAS, & CONSUMABLE FUELS 0.4%
ConocoPhillips ............................................... United States 394,150 22,931,647
Occidental Petroleum Corp. ................................... United States 127,310 10,169,523
------------------
33,101,170
------------------

PHARMACEUTICALS 0.0%(d)
Teva Pharmaceutical Industries Ltd., ADR ..................... Israel 18,400 791,384
------------------

REAL ESTATE 0.1%
Public Storage Inc. .......................................... United States 117,300 7,943,555
------------------

TOTAL SECURITIES SOLD SHORT (PROCEEDS $93,334,499) ........... $ 91,331,667
------------------

CURRENCY ABBREVIATIONS

CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
NOK - Norwegian Krone

Annual Report | 31

Mutual Discovery Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

SELECTED PORTFOLIO ABBREVIATIONS

ADR - American Depository Receipt
CBI - Certificate of Beneficial Interest
FRN - Floating Rate Note
GDR - Global Depository Receipt
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
PIK - Payment In Kind
REIT - Real Estate Investment Trust

(a) Non-income producing.

(d) Rounds to less than 0.05% of net assets.

(e) See Note 11 regarding restricted and illiquid securities.

(f) See Note 13 regarding holdings of 5% voting securities.

(g) See Note 14 regarding other considerations.

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

(i) The coupon rate shown represents the rate at period end.

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

(k) See Note 12 regarding unfunded loan commitments.

(l) See Note 10 regarding defaulted securities.

(m) A portion or all of the security is on loan as of December 31, 2005. See
Note 1(i).

(n) A portion or all of the security is traded on a discount basis with no
stated coupon rate.

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

(p) Investment from cash collateral received for loaned security. See Note
1(i).

(q) See Note 1(f) regarding written options.

(r) See Note 1(g) regarding securities sold short.

32 | See notes to financial statements. | Annual Report

Mutual Discovery Fund

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005

Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................................................ $ 5,765,665,686
Cost - Controlled affiliated issuers (Note 13) ............................................. 12,872,099
Cost - Non-controlled affiliated issuers (Note 13) ......................................... 300,142,047
Cost - Repurchase agreements ............................................................... 257,031
---------------
Total cost of investments .................................................................. $ 6,078,936,863
===============
Value - Unaffiliated issuers (includes securities segregated with
broker for securities sold short in the amount of $170,128,000) ......................... $ 7,725,792,091
Value - Controlled affiliated issuers (Note 13) ............................................ 500,007
Value - Non-controlled affiliated issuers (Note 13) ........................................ 395,913,836
Value - Repurchase agreements .............................................................. 257,031
---------------
Total value of investments ................................................................. 8,122,462,965
Cash .......................................................................................... 910,477
Foreign currency, at value (cost $107,462,080 ) ............................................... 107,604,420
Receivables:
Investment securities sold ................................................................. 25,901,771
Capital shares sold ........................................................................ 39,042,583
Dividends and interest ..................................................................... 10,971,785
Unrealized gain on forward exchange contracts (Note 8) ........................................ 81,701,561
Unrealized gain on unfunded loan commitments (Note 12) ........................................ 557,395
Cash on deposits with brokers for securities sold short ....................................... 97,475,601
Due from broker - synthetic equity swaps ...................................................... 10,284,999
---------------
Total assets ............................................................................ 8,496,913,557
---------------
Liabilities:
Payables:
Investment securities purchased ............................................................... 18,058,571
Capital shares redeemed .................................................................... 14,922,513
Affiliates ................................................................................. 11,505,988
Options written, at value (premiums received $33,599) ......................................... 8,000
Securities sold short, at value (proceeds $93,334,499) ........................................ 91,331,667
Payable upon return of securities loaned ...................................................... 257,031
Unrealized loss on forward exchange contracts (Note 8) ........................................ 19,776,998
Deferred tax .................................................................................. 212,578
Accrued expenses and other liabilities ........................................................ 1,436,394
---------------
Total liabilities ....................................................................... 157,509,740
---------------
Net assets, at value ................................................................. $ 8,339,403,817
===============
Net assets consist of:
Paid-in capital ............................................................................... $ 6,139,428,539
Distributions in excess of net investment income .............................................. (1,761,200)
Net unrealized appreciation (depreciation) .................................................... 2,109,711,128
Accumulated net realized gain (loss) .......................................................... 92,025,350
---------------
Net assets, at value ................................................................. $ 8,339,403,817
===============

Annual Report | See notes to financial statements. | 33

Mutual Discovery Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2005

CLASS Z:
Net assets, at value ............................................................................. $ 3,033,755,606
===============
Shares outstanding ............................................................................... 115,456,745
===============
Net asset value and maximum offering price per share(a) .......................................... $ 26.28
===============
CLASS A:
Net assets, at value ............................................................................. $ 3,545,288,399
===============
Shares outstanding ............................................................................... 136,142,798
===============
Net asset value per share(a) ..................................................................... $ 26.04
===============
Maximum offering price per share (net asset value per share / 94.25%) ............................ $ 27.63
===============
CLASS B:
Net assets, at value ............................................................................. $ 225,157,668
===============
Shares outstanding ............................................................................... 8,805,916
===============
Net asset value and maximum offering price per share(a) .......................................... $ 25.57
===============
CLASS C:
Net assets, at value ............................................................................. $ 1,435,701,504
===============
Shares outstanding ............................................................................... 55,442,603
===============
Net asset value and maximum offering price per share(a) .......................................... $ 25.90
===============
CLASS R:
Net assets, at value ............................................................................. $ 99,500,640
===============
Shares outstanding ............................................................................... 3,844,449
===============
Net asset value and maximum offering price per share(a) .......................................... $ 25.88
===============

(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, 2005

Investment income:
Dividends (net of foreign taxes of $8,544,990)
Unaffiliated issuers ....................................................................... $ 141,624,235
Controlled affiliated issuers (Note 13) .................................................... (170,273)
Non-controlled affiliated issuers (Note 13) ................................................ (1,022,289)
Interest ...................................................................................... 30,117,220
Income from securities loaned - net ........................................................... 9,835
Other income (Note 15) ........................................................................ 166,932
---------------
Total investment income ................................................................. 170,725,660
===============
Expenses:
Management fees (Note 3a) ..................................................................... 54,005,775
Administrative fees (Note 3b) ................................................................. 5,274,950
Distribution fees (Note 3c)
Class A .................................................................................... 9,360,408
Class B .................................................................................... 2,029,470
Class C .................................................................................... 11,640,631
Class R .................................................................................... 362,842
Transfer agent fees (Note 3e) ................................................................. 8,042,700
Custodian fees (Note 4) ....................................................................... 1,707,300
Reports to shareholders ....................................................................... 608,400
Registration and filing fees .................................................................. 416,650
Professional fees ............................................................................. 412,312
Directors' fees and expenses .................................................................. 174,400
Dividends on securities sold short ............................................................ 2,377,235
Other ......................................................................................... 217,843
---------------
Total expenses .......................................................................... 96,630,916
Expense reductions (Note 4) ............................................................. (44,935)
---------------
Net expenses ......................................................................... 96,585,981
---------------
Net investment income ............................................................. 74,139,679
===============
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers .................................................................... 493,383,294
Non-controlled affiliated issuers (Note 13) ............................................. 15,783,841
Written options ............................................................................ 506,328
Foreign currency transactions .............................................................. 36,652,813
Securities sold short ...................................................................... (1,033,170)
---------------
Net realized gain (loss) .......................................................... 545,293,106
===============
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................................ 269,117,949
Translation of assets and liabilities denominated in foreign
currencies .............................................................................. 140,860,149
Change in deferred taxes on unrealized appreciation ........................................... 351,072
---------------
Net change in unrealized appreciation (depreciation) .............................. 410,329,170
---------------
Net realized and unrealized gain (loss) .......................................................... 955,622,276
---------------
Net increase (decrease) in net assets resulting from operations .................................. $ 1,029,761,955
===============

Annual Report | See notes to financial statements. | 35

Mutual Discovery Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS

----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
2005 2004
----------------------------------

Increase (decrease) in net assets:
Operations:
Net investment income .................................................... $ 74,139,679 $ 77,174,072
Net realized gain (loss) from investments, written options,
securities sold short, and foreign currency transactions .............. 545,293,106 189,690,486
Net change in unrealized appreciation (depreciation) on investments,
translation of assets and liabilities denominated in foreign
currencies, and deferred taxes ........................................ 410,329,170 641,209,947
----------------------------------
Net increase (decrease) in net assets resulting from operations .... 1,029,761,955 908,074,505
----------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ............................................................... (48,037,194) (56,656,081)
Class A ............................................................... (42,518,253) (39,448,944)
Class B ............................................................... (1,634,133) (2,633,811)
Class C ............................................................... (10,283,880) (13,213,407)
Class R ............................................................... (1,080,128) (815,309)

Net realized gains:
Class Z ............................................................... (146,590,402) --
Class A ............................................................... (171,167,526) --
Class B ............................................................... (11,212,671) --
Class C ............................................................... (70,203,636) --
Class R ............................................................... (4,839,461) --
----------------------------------
Total distributions to shareholders ......................................... (507,567,284) (112,767,552)
----------------------------------
Capital share transactions: (Note 2)
Class Z ............................................................... 236,977,632 50,114,536
Class A ............................................................... 1,242,352,449 391,763,708
Class B ............................................................... 22,746,797 47,123,925
Class C ............................................................... 379,781,109 113,386,535
Class R ............................................................... 47,560,961 21,446,986
----------------------------------
Total capital share transactions ............................................ 1,929,418,948 623,835,690
----------------------------------

Redemption fees ............................................................. 45,185 25,982
----------------------------------
Net increase (decrease) in net assets .............................. 2,451,658,804 1,419,168,625
Net assets:
Beginning of year ........................................................... 5,887,745,013 4,468,576,388
----------------------------------
End of year ................................................................. $ 8,339,403,817 $ 5,887,745,013
==================================
Distributions in excess of net investment income included in net assets:
End of year ................................................................. $ (1,761,200) $ (31,462,123)
==================================

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 six separate series.
The Series Fund 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 following summarizes the Funds' significant accounting policies.

A. SECURITY VALUATION

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. 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. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. 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.

Annual Report | 37

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION

C. REPURCHASE AGREEMENTS

D. FOREIGN CURRENCY CONTRACTS

38 | Annual Report

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. FOREIGN CURRENCY CONTRACTS (CONTINUED)

E. SYNTHETIC EQUITY SWAPS

F. OPTIONS

Annual Report | 39

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

G. SECURITIES SOLD SHORT

H. 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 receives interest income 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.

I. INCOME AND DEFERRED TAXES

The Fund is subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.

Foreign securities held by the Fund may be subject to foreign tax. The foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign market in which the Fund invests.

40 | Annual Report

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J. 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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Such distributions
are reinvested in additional shares of the Fund. Distributable earnings
determined on a tax basis may differ from earnings recorded in accordance with
generally accepted accounting principles. These differences may be permanent or
temporary. Permanent differences are reclassified among capital accounts to
reflect their tax character. These reclassifications have no impact on net
assets or the results of operations. Temporary differences are not reclassified,
as they may reverse in subsequent periods.

K. ACCOUNTING ESTIMATES

L. REDEMPTION FEES

A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date (30 days or less prior to June 1, 2004. The
redemption fee is 2% of the amount redeemed. Such fees are retained by the Fund
and accounted for as an addition to paid-in capital.

Annual Report | 41

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M. GUARANTEES AND INDEMNIFICATIONS

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 are only offered to existing
Class B shareholders in the form of reinvested distributions and certain
exchanges from other Franklin Templeton Class B shares. 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, 2005, there were 800 million shares authorized ($0.001 par
value) of which 300 million shares were designated as Class Z, 100 million
shares as Class A, 100 million shares as Class B, 100 million shares as Class C
and 200 million shares as Class R. Transactions in the Fund's shares were as
follows:

------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------

CLASS Z SHARES:
Shares sold .................... 11,753,534 $ 299,204,550 7,946,686 $ 174,333,866
Shares issued in reinvestment of
distributions ............... 6,789,554 177,729,592 2,248,630 51,872,202
Shares redeemed ................ (9,384,324) (239,956,510) (8,088,625) (176,091,532)
------------------------------------------------------------
Net increase (decrease) ........ 9,158,764 $ 236,977,632 2,106,691 $ 50,114,536
============================================================

CLASS A SHARES:
Shares sold .................... 56,645,618 $ 1,439,893,472 28,991,422 $ 629,994,733
Shares issued in reinvestment of
distributions ............... 7,726,972 200,597,742 1,608,954 36,824,687
Shares redeemed ................ (15,740,243) (398,138,765) (12,750,856) (275,055,712)
------------------------------------------------------------
Net increase (decrease) ........ 48,632,347 $ 1,242,352,449 17,849,520 $ 391,763,708
============================================================

42 | Annual Report

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. CAPITAL STOCK (CONTINUED)

CLASS B SHARES:
Shares sold ....................... 1,235,020 $ 30,441,216 2,611,993 $ 55,685,546
Shares issued in reinvestment of
distributions .................. 458,269 11,673,181 106,415 2,382,517
Shares redeemed ................... (781,874) (19,367,600) (514,048) (10,944,138)
------------------------------------------------------------
Net increase (decrease) ........... 911,415 $ 22,746,797 2,204,360 $ 47,123,925
============================================================

CLASS C SHARES:
Shares sold ....................... 17,305,812 $ 435,052,733 9,235,697 $ 199,753,205
Shares issued in reinvestment of
distributions .................. 2,753,526 71,071,498 519,083 11,739,964
Shares redeemed ................... (5,039,587) (126,343,122) (4,560,279) (98,106,634)
------------------------------------------------------------
Net increase (decrease) ........... 15,019,751 $ 379,781,109 5,194,501 $ 113,386,535
============================================================

CLASS R SHARES:
Shares sold ....................... 2,257,530 $ 56,609,057 1,223,108 $ 26,261,073
Shares issued in reinvestment of
distributions .................. 224,837 5,801,526 35,218 803,727
Shares redeemed ................... (587,868) (14,849,622) (258,493) (5,617,814)
------------------------------------------------------------
Net increase (decrease) ........... 1,894,499 $ 47,560,961 999,833 $ 21,446,986
============================================================

3. TRANSACTIONS WITH AFFILIATES

Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain directors of
the Series Fund are also officers and/or directors of the following
subsidiaries:

- --------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------

Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Investment Management Limited (FTIML) 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

The Fund pay 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% Up to and including $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% In excess of $10 billion

Effective May 19, 2005, under a subadvisory agreement, FTIML, an affiliate of
Franklin Mutual, provides subadvisory services to the Fund and receives from
Franklin Mutual fees based on the average daily net assets of the Fund.

Annual Report | 43

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

B. ADMINISTRATIVE FEES

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

- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $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% In excess of $1.2 billion

C. DISTRIBUTION FEES

Class B ................................................................ 1.00%
Class C ................................................................ 1.00%
Class R ................................................................ 0.50%

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 charge received(a) ..................................... $ 3,043,646
Contingent deferred sales charges retained ....................... $ 299,536

(a) Net of commissions paid to unaffiliated broker/dealers.

E. TRANSFER AGENT FEES

The Fund paid transfer agent fees of $8,042,700, of which $5,363,139 was
retained by Investor Services.

44 | Annual Report

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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, the custodian fees were
reduced as noted in the Statement of Operations.

5. INCOME TAXES

During the year ended December 31, 2005, the Fund utilized $20,570,378 of
capital loss carry-forwards.

For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2005, the Fund deferred realized currency losses of
$2,381,508.

Net investment income 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, certain dividends on securities sold short and foreign taxes paid on
net realized gains.

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

Cost of investments ......................................... $ 6,116,705,735
===============

Unrealized appreciation ..................................... $ 2,144,287,075
Unrealized depreciation ..................................... (138,529,845)
---------------
Net unrealized appreciation (depreciation) .................. $ 2,005,757,230
===============

Undistributed ordinary income ............................... $ 56,789,348
Undistributed long term capital gains ....................... 122,452,041
---------------
Distributable earnings ...................................... $ 179,241,389
===============

Annual Report | 45

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES (CONTINUED)

The tax character of distributions paid during the years ended December 31, 2005
and 2004, was as follows:

-----------------------------
2005 2004
-----------------------------
Distributions paid from:
Ordinary income ................................ $ 141,987,989 $ 112,767,552
Long term capital gain ......................... 365,579,295 --
-----------------------------
$ 507,567,284 $ 112,767,552
=============================

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2005, aggregated
$2,988,697,832 and $1,695,819,654, respectively.

Transactions in options written during the year ended December 31, 2005, were as
follows:

NUMBER PREMIUMS
OF CONTRACTS RECEIVED
--------------------------
Options outstanding at December 31, 2004 .......... 1,370 $ 187,538
Options written ................................... 128,100 673,620
Options expired ................................... (124,793) (288,456)
Options exercised ................................. (428) (74,935)
Options closed .................................... (3,849) (464,168)
--------------------------
Options outstanding at December 31, 2005 .......... 400 $ 33,599
==========================

7. SYNTHETIC EQUITY SWAPS

As of December 31, 2005, the Fund had the following synthetic equity swaps
outstanding:

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

Christian Dior SA (46.76 - 54.99 EUR) ................... 75,476 $ 6,710,355 $ 2,350,179
02 PLC (1.95 - 1.97 GBP) ................................ 14,418,653 49,117,010 360,544
------------
Total contracts to buy .............................................................. 2,710,723
------------

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

LVMH Moet Hennessy Louis Vuitton (54.61 - 61.76 EUR) .... 75,332 $ 6,693,093 $ (1,499,564)
Total contracts to sell ............................................................. (1,499,564)
============
Net unrealized gain (loss) .......................................................... $ 1,211,159
============

46 | Annual Report

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS

At December 31, 2005, the Fund had outstanding forward exchange contracts as set
out below.

- ------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO BUY AMOUNT(a) DATE GAIN (LOSS)
- ------------------------------------------------------------------------------------------

5,824,365 Canadian Dollar ........... 4,932,190 1/23/06 $ 82,521
------------

- ------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT(a) DATE GAIN (LOSS)
- ------------------------------------------------------------------------------------------

11,250,000 Euro ................... 13,338,338 1/17/06 $ 6,433
132,084,834 Euro ................... 163,202,674 1/23/06 6,620,007
38,699,382 Swiss Franc ............ 31,050,000 2/02/06 1,488,501
60,025,000 British Pound .......... 107,400,618 2/15/06 4,143,961
2,826,994 Canadian Dollar ........ 2,450,000 2/15/06 14,367
50,308,098 Euro ................... 61,105,631 2/27/06 1,353,411
103,060,213 Norwegian Krone ........ 15,336,341 3/06/06 10,901
41,543,824 Euro ................... 49,508,459 3/15/06 202,154
572,724,389 Swedish Krone .......... 73,314,940 3/15/06 838,824
888,354,094 Danish Krone ........... 160,466,764 3/17/06 18,907,520
2,325,000 Euro ................... 18,006,892 DKK 3/17/06 105,095
25,292,410 British Pound .......... 45,556,689 3/21/06 2,044,098
47,200,000 British Pound .......... 83,299,515 4/04/06 2,090,272
170,984,993 Euro ................... 213,503,317 4/25/06 9,759,171
121,873,910 Norwegian Krone ........ 18,945,113 5/08/06 756,809
39,750,000 British Pound .......... 69,272,325 5/15/06 850,112
40,200,000 Euro ................... 50,602,090 5/23/06 2,623,891
224,017,000 Taiwan Dollar .......... 6,875,000 5/30/06 50,718
31,101,956 Norwegian Krone ........ 4,751,686 6/06/06 102,525
12,165,938 Swiss Franc ............ 9,500,000 6/06/06 95,808
36,705,000 New Zealand Dollar ..... 25,987,140 6/07/06 1,250,892
31,980,000 Euro ................... 38,840,955 6/15/06 623,253

12,834,949,648 Japanese Yen ........... 117,632,320 6/28/06 $ 6,357,886
18,830,000 Euro ................... 22,558,547 7/17/06 16,023
47,666,230 British Pound .......... 83,191,455 8/14/06 1,048,950
170,265,714 Euro ................... 212,031,918 8/23/06 7,789,202
122,396,814 British Pound .......... 212,989,708 9/08/06 1,991,124
130,641,355 Euro ................... 163,983,550 9/13/06 7,094,371
130,963,072 Euro ................... 160,942,663 10/18/06 3,382,761
------------
81,619,040
------------
Unrealized gain on forward exchange contracts ............................. $ 81,701,561
============

1,105,337 Canadian Dollar ........ 947,429 1/23/06 $ (590)
------------

Annual Report | 47

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS (CONTINUED)

27,686,380,000 Korean Won ............. 26,940,000 1/18/06 $ (545,461)
333,831,351 Canadian Dollar ........ 276,399,554 1/23/06 (11,025,325)
422,533,736 Norwegian Krone ........ 62,690,465 2/06/06 (44,864)
79,495,789 Canadian Dollar ........ 67,853,546 2/15/06 (637,088)
1,789,238 South African Rand ..... 275,000 2/15/06 (6,782)
364,000,000 Norwegian Krone ........ 54,066,900 3/06/06 (61,264)
73,750,000 Euro ................... 86,892,250 3/15/06 (782,603)
4,425,000 Euro ................... 32,956,260 DKK 3/17/06 (9,514)
184,267,115,625 Korean Won ............. 178,112,500 3/22/06 (4,956,733)
328,137,892 Taiwan Dollar .......... 9,924,505 5/30/06 (71,636)
392,000,000 Norwegian Krone ........ 58,463,833 6/06/06 (132,837)
239,125,814 Swiss Francs ........... 184,368,383 6/06/06 (474,340)
1,458,022 Euro ................... 1,739,041 6/15/06 (3,368)
268,750,400 Japanese Yen ........... 2,300,000 6/28/06 (29,971)
111,129,253 Euro ................... 132,044,881 7/17/06 (994,622)
------------
(19,776,408)
------------
Unrealized loss on forward exchange contracts .......................... (19,776,998)
------------
Net unrealized gain on forward exchange contracts ................... $ 61,924,563
============

(a)In U.S. Dollar unless otherwise indicated.

CURRENCY ABBREVIATIONS

DKK - Danish Krone

9. CONCENTRATION OF RISK

Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values, and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.

10. DEFAULTED SECURITIES

The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. The risks of purchasing these securities are that the issuer is
unable to meet its obligation and any subsequent bankruptcy proceeding may
result in unfavorable consequences to the Fund. At December 31, 2005, the value
of these securities was $74,167,277, representing 0.89% of the Fund's net
assets. For information as to specific securities, see the accompanying
Statement of Investments.

48 | Annual Report

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. RESTRICTED AND ILLIQUID SECURITIES

- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, CONTRACTS ACQUISITION
AND WARRANTS ISSUER DATE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------------------

332,512 AboveNet Inc. ....................................................... 10/02/01 $ 15,655,782 $ 7,968,118
11,105 AboveNet Inc., wts., 9/08/08 ........................................ 10/02/01 1,437,838 44,420
13,066 AboveNet Inc., wts., 9/08/10 ........................................ 10/02/01 1,768,651 10,453
359,884 DecisionOne Corp. ................................................... 9/28/99 273,004 256,597
390,655 DecisionOne Corp., 144A, 12.00%, 4/15/10 ............................ 10/21/99 1,460,727 390,655
27,889 Esmark Inc., Series A, 10.00%, cvt. pfd. ............................ 11/08/04 27,889,000 29,245,521
11,589 FE Capital Holdings Ltd. ............................................ 8/29/03 -- 16,513,832
2,247,600 Florida East Coast Industries Inc. .................................. 12/29/95 67,070,841 90,469,271
8,758,216 Hancock Discovery LLC ............................................... 3/06/97 12,872,099 500,007
4,551,501 Imagine Group Holdings Ltd. ......................................... 8/31/04 46,614,197 46,614,334
934,740 Kindred Healthcare Inc. ............................................. 12/12/01 9,954,196 22,874,957
449 Kindred Healthcare Inc., Jan. 9.07 Calls, 1/01/13 ................... 1/01/05 -- 6,913
223 Kindred Healthcare Inc., Jan. 25.99 Calls, 1/01/14 .................. 1/01/05 -- --
675 Kindred Healthcare Inc., Jan. 26.00 Calls, 1/01/12 .................. 1/01/05 -- --
3,002 Kindred Healthcare Inc., Jul. 23.75 Calls, 7/17/11 .................. 7/17/05 -- 2,167
88,766 Kindred Healthcare Inc., wts., Series A, 4/20/06 .................... 4/24/01 798,892 1,716,912
221,915 Kindred Healthcare Inc., wts., Series B, 4/20/06 .................... 4/24/01 1,775,317 3,647,173
55,890 NCB Warrant Holdings Ltd., A ........................................ 12/16/05 -- 9,029,594
47,160 Olympus Re Holdings Ltd. ............................................ 12/19/01 4,716,000 872,460
14,787 Security Capital European Realty .................................... 4/08/98 810,051 107,465
2,833,800 Time Warner Inc. .................................................... 8/02/05 48,945,601 48,433,043
18,832 Time Warner Inc., Jan 10.00 calls, 1/21/06 .......................... 8/17/05 15,790,114 13,841,520
170 Torre Mayor Investments LP .......................................... 10/28/02 14,065,434 11,730,000
-------------
TOTAL RESTRICTED AND ILLIQUID SECURITIES (3.65% of Net Assets) .............................. $ 304,275,412
=============

Annual Report | 49

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. UNFUNDED LOAN COMMITMENTS

The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion.

At December 31, 2005, unfunded commitments were as follows:

- ----------------------------------------------------------------------------------
BORROWER UNFUNDED COMMITMENT
- ----------------------------------------------------------------------------------

Entegra/Union Power, LOC Facility, FRN, 6/01/12 ............. $1,837,389
Entegra/Union Power, Working Capital Facility FRN, 6/01/12 .. 275,608
Mirant Corp, 4 Year Revolver, 7/17/05 ....................... 243,193
Owens Corning, Revolver, 6/26/02 ............................ 750,784
TVMAX Holdings, PIK, 14.00%, 1/16/06 ........................ 26
----------
$3,107,000
==========

Unfunded loan commitments are marked to market daily and any unrealized gain or
loss is included in the Statement of Assets and Liabilities and Statement of
Operations.

13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

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

CONTROLLED AFFILIATES(a)
Hancock Discovery LLC ......... 8,758,216 -- -- 8,758,216 $ 500,007 $ (170,273) $ --
---------------------------------------
NON-CONTROLLED AFFILIATES
Esmark Inc., Series A, 10%,
cvt. pdf. ................... 18,647 9,242 -- 27,889 $ 29,245,521 $ 2,727,954 $ --
Farmer Brothers Co. ........... 904,637 -- -- 904,637 17,495,680 366,378 --
FE Capital Holdings Ltd. ...... 11,589 -- -- 11,589 16,513,832 (1,453,416) 12,798,519
Florida East Coast
Industries Inc. ............. 2,247,600 -- -- 2,247,600 90,469,271 516,948 --
Gammon Lake Resources Inc. .... 2,136,800 2,265,300 -- 4,402,100 52,304,053 -- --
Gammon Lake Resources, Inc.,
wts., 4/30/05 ............... 2,265,300 -- 2,265,300 -- -- -- --
Imagine Group Holdings Ltd. ... 4,551,501 -- -- 4,551,501 46,614,334 -- --
Nippon Investment LLC ......... 8,656,000 -- 8,656,000 -- -- -- (1,597,970)
Pig Iron, LLC ................. -- 2,645,800 2,645,800 -- -- -- (12,025)
Potlatch Corp. ................ 2,190,150 667,600 277,500 2,580,250 131,541,145 1,531,260 2,818,470
Torre Mayor Investments, LP ... 170 -- -- 170 11,730,000 (4,711,413) 1,776,847
---------------------------------------
TOTAL NON-CONTROLLED
AFFILIATES .................. $395,913,836 $(1,022,289) $15,783,841
---------------------------------------
TOTAL AFFILIATED SECURITIES
(4.75% of Net Assets) ....... $396,413,843 $(1,192,562) $15,783,841
=======================================

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

50 | Annual Report

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

14. OTHER CONSIDERATIONS

15. REGULATORY MATTERS

Annual Report | 51

Mutual Discovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. REGULATORY MATTERS (CONTINUED)

52 | Annual Report

Mutual Discovery Fund

REPORT OF 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 of the
Mutual Discovery Fund (one of the portfolio constituting the Franklin Mutual
Series Fund Inc.) (the "Fund"), including the statement of investments, as of
December 31, 2005, 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. at December 31,
2005, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein, in conformity with U.S.
generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 10, 2006

Annual Report | 53

Mutual Discovery Fund

TAX DESIGNATION (UNAUDITED)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $488,033,336 as a
capital gain dividend for the fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $126,351,826 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2005. 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 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $17,055,277 as interest-related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $69,736,181 as a short-term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates 26.54% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2005.

At December 31, 2005, more than 50% of the 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 table
below, the Fund designates to shareholders the foreign source income and foreign
taxes paid as allowed, pursuant to Section 853 of the Code. This designation
will allow shareholders of record on December 22, 2005, 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, and foreign qualified dividends as designated by
the Fund, to Class Z, Class A, Class B, Class C and Class R shareholders of
record.

54 | Annual Report

Mutual Discovery Fund

TAX DESIGNATION (UNAUDITED) (CONTINUED)

RECORD DATE: 12/22/2005

- --------------------------------------------------------------------------------
CLASS Z
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Belgium .............. $0.0012 $0.0054 $0.0054
Bermuda .............. 0.0000 0.0049 0.0024
Canada ............... 0.0015 0.0072 0.0044
Denmark .............. 0.0020 0.0086 0.0085
France ............... 0.0032 0.0194 0.0145
Germany .............. 0.0007 0.0035 0.0030
Hong Kong ............ 0.0000 0.0080 0.0000
India ................ 0.0000 0.0059 0.0059
Ireland .............. 0.0000 0.0157 0.0157
Italy ................ 0.0007 0.0030 0.0030
Japan ................ 0.0005 0.0045 0.0045
Luxembourg ........... 0.0012 0.0053 0.0053
Mexico ............... 0.0000 0.0013 0.0013
Netherlands .......... 0.0050 0.0213 0.0120
New Zealand .......... 0.0001 0.0009 0.0000
Norway ............... 0.0044 0.0229 0.0229
South Africa ......... 0.0000 0.0050 0.0031
South Korea .......... 0.0016 0.0062 0.0062
Spain ................ 0.0021 0.0090 0.0090
Switzerland .......... 0.0029 0.0127 0.0127
Taiwan ............... 0.0011 0.0037 0.0037
United Kingdom ....... 0.0000 0.0921 0.0531
-------------------------------------------------------
Total ................ $0.0282 $0.2665 $0.1966
=======================================================

- --------------------------------------------------------------------------------
CLASS A
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Belgium .............. $0.0012 $0.0046 $0.0046
Bermuda .............. 0.0000 0.0041 0.0020
Canada ............... 0.0015 0.0060 0.0037
Denmark .............. 0.0020 0.0072 0.0071
France ............... 0.0032 0.0163 0.0122
Germany .............. 0.0007 0.0029 0.0025
Hong Kong ............ 0.0000 0.0067 0.0000
India ................ 0.0000 0.0049 0.0049
Ireland .............. 0.0000 0.0132 0.0132
Italy ................ 0.0007 0.0025 0.0025
Japan ................ 0.0005 0.0037 0.0037
Luxembourg ........... 0.0012 0.0045 0.0045
Mexico ............... 0.0000 0.0011 0.0011
Netherlands .......... 0.0050 0.0179 0.0101
New Zealand .......... 0.0001 0.0008 0.0000
Norway ............... 0.0044 0.0193 0.0193
South Africa ......... 0.0000 0.0042 0.0026
South Korea .......... 0.0016 0.0052 0.0052
Spain ................ 0.0021 0.0076 0.0076
Switzerland .......... 0.0029 0.0106 0.0106
Taiwan ............... 0.0011 0.0031 0.0031
United Kingdom ....... 0.0000 0.0773 0.0445
-------------------------------------------------------
Total ................ $0.0282 $0.2237 $0.1650
=======================================================

Annual Report | 55

Mutual Discovery Fund

TAX DESIGNATION (UNAUDITED) (CONTINUED)

- --------------------------------------------------------------------------------
CLASS B
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Belgium .............. $0.0012 $0.0025 $0.0025
Bermuda .............. 0.0000 0.0023 0.0011
Canada ............... 0.0015 0.0034 0.0021
Denmark .............. 0.0020 0.0040 0.0040
France ............... 0.0032 0.0091 0.0068
Germany .............. 0.0007 0.0016 0.0014
Hong Kong ............ 0.0000 0.0037 0.0000
India ................ 0.0000 0.0027 0.0027
Ireland .............. 0.0000 0.0074 0.0074
Italy ................ 0.0007 0.0014 0.0014
Japan ................ 0.0005 0.0021 0.0021
Luxembourg ........... 0.0012 0.0025 0.0025
Mexico ............... 0.0000 0.0006 0.0006
Netherlands .......... 0.0050 0.0100 0.0056
New Zealand .......... 0.0001 0.0004 0.0000
Norway ............... 0.0044 0.0107 0.0107
South Africa ......... 0.0000 0.0023 0.0014
South Korea .......... 0.0016 0.0029 0.0029
Spain ................ 0.0021 0.0042 0.0042
Switzerland .......... 0.0029 0.0059 0.0059
Taiwan ............... 0.0011 0.0018 0.0018
United Kingdom ....... 0.0000 0.0431 0.0248
-------------------------------------------------------
Total ................ $0.0282 $0.1246 $0.0919
=======================================================

- --------------------------------------------------------------------------------
CLASS C
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Belgium .............. $0.0012 $0.0029 $0.0029
Bermuda .............. 0.0000 0.0026 0.0013
Canada ............... 0.0015 0.0038 0.0023
Denmark .............. 0.0020 0.0046 0.0046
France ............... 0.0032 0.0103 0.0077
Germany .............. 0.0007 0.0018 0.0016
Hong Kong ............ 0.0000 0.0042 0.0000
India ................ 0.0000 0.0031 0.0031
Ireland .............. 0.0000 0.0083 0.0083
Italy ................ 0.0007 0.0016 0.0016
Japan ................ 0.0005 0.0024 0.0024
Luxembourg ........... 0.0012 0.0028 0.0028
Mexico ............... 0.0000 0.0007 0.0007
Netherlands .......... 0.0050 0.0113 0.0064
New Zealand .......... 0.0001 0.0005 0.0000
Norway ............... 0.0044 0.0122 0.0122
South Africa ......... 0.0000 0.0027 0.0017
South Korea .......... 0.0016 0.0033 0.0033
Spain ................ 0.0021 0.0048 0.0048
Switzerland .......... 0.0029 0.0067 0.0067
Taiwan ............... 0.0011 0.0020 0.0020
United Kingdom ....... 0.0000 0.0489 0.0282
-------------------------------------------------------
Total ................ $0.0282 $0.1415 $0.1046
=======================================================

56 | Annual Report

Mutual Discovery Fund

TAX DESIGNATION (UNAUDITED) (CONTINUED)

- --------------------------------------------------------------------------------
CLASS R
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Belgium .............. $0.0012 $0.0042 $0.0042
Bermuda .............. 0.0000 0.0038 0.0019
Canada ............... 0.0015 0.0056 0.0034
Denmark .............. 0.0020 0.0067 0.0066
France ............... 0.0032 0.0151 0.0113
Germany .............. 0.0007 0.0027 0.0023
Hong Kong ............ 0.0000 0.0062 0.0000
India ................ 0.0000 0.0046 0.0046
Ireland .............. 0.0000 0.0123 0.0123
Italy ................ 0.0007 0.0023 0.0023
Japan ................ 0.0005 0.0035 0.0035
Luxembourg ........... 0.0012 0.0042 0.0042
Mexico ............... 0.0000 0.0010 0.0010
Netherlands .......... 0.0050 0.0166 0.0093
New Zealand .......... 0.0001 0.0007 0.0000
Norway ............... 0.0044 0.0179 0.0179
South Africa ......... 0.0000 0.0039 0.0024
South Korea .......... 0.0016 0.0049 0.0049
Spain ................ 0.0021 0.0070 0.0070
Switzerland .......... 0.0029 0.0099 0.0099
Taiwan ............... 0.0011 0.0029 0.0029
United Kingdom ....... 0.0000 0.0719 0.0414
-------------------------------------------------------
Total ................ $0.0282 $0.2079 $0.1533
=======================================================

Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or, as a tax
deduction.

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 that have not been adjusted for the
rate differential applicable to such dividend income.(1)

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.(1)

In January 2006, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2005 individual income
tax returns.

(1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax bracket). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.

Annual Report | 57

Mutual Discovery Fund

BOARD MEMBERS AND OFFICERS

INDEPENDENT BOARD MEMBERS

EDWARD I. ALTMAN, PH.D. (1941) Director Since 1987 7 Director, A.T.D. Inc.(financial
technology and investment company).
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center; editor and author of
numerous financial publications; financial consultant; and serves on the Investment Advisory Committee of the New York State Common
Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM Corporation
101 John F. Kennedy Parkway (Sallie Mae) and Allied Capital
Short Hills, NJ 07078-2789 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 (1929) Director Since 2002 13 Director, Fiduciary Emerging Markets
101 John F. Kennedy Parkway Bond Fund PLC and Fiduciary
Short Hills, NJ 07078-2789 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 (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------

58 | Annual Report

LEONARD RUBIN (1925) Director Since 1996 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
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 (1946) Director and Director since 13 Director, El Oro and Exploration Co.,
101 John F. Kennedy Parkway Chairman of 1991 and p.l.c., and ARC Wireless Solutions,
Short Hills, NJ 07078-2789 the Board Chairman of the Inc.
Board since 2005
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------

INTERESTED BOARD MEMBERS AND OFFICERS

**WILLIAM J. LIPPMAN (1925) Director Since 1996 14 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case
may be, of five of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**ANNE M. TATLOCK (1939) Director Since 2002 7 Director, Fortune Brands, Inc.
600 Fifth Avenue, 7th Floor (consumer products) and Merck & Co.
New York, NY 10020-2302 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.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 59

MICHAEL J. EMBLER (1964) Senior Vice Since May 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President, and Since May 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------

60 | Annual Report

STEVEN J. GRAY (1955) Secretary Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer of 33 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Legal Counsel, Atlas Advisers, Inc. (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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, LLC,
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 47 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 (1937) Vice Since 2002 Not Applicable Not Applicable
600 Fifth Avenue President -
Rockefeller Center AML
New York, NY 10020-2302 Compliance
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton Institutional
Suisse S.A., 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 45 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since December Not Applicable Not Applicable
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 61

GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------

62 | Annual Report

Mutual Discovery Fund

SHAREHOLDER INFORMATION

PROXY VOTING POLICIES AND PROCEDURES

QUARTERLY STATEMENT OF INVESTMENTS

Annual Report | 63

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 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

BLEND

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

SECTOR

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(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(4)
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(4)
Templeton Global Bond Fund
Templeton Income Fund

TAX-FREE INCOME(5)

NATIONAL FUNDS

Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(6)

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

INSURANCE FUNDS

Franklin Templeton Variable Insurance Products Trust(8)

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

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

(6.) Portfolio of insured municipal securities.

(7.) 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).

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

09/05 Not part of the annual report

[LOGO](R)
FRANKLIN TEMPLETON 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

INVESTMENT MANAGER

Franklin Mutual Advisers, LLC
101 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 & R)
1-800/448-FUND - (Class Z)

477 A2005 02/06

MUTUAL EUROPEAN FUND

[GRAPHIC OMITTED]

- --------------------------------------------------------------------------------
DECEMBER 31, 2005
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
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 TEMPLETON
INVESTMENTS

Franklin o Templeton o MUTUAL SERIES

THANK YOU FOR YOUR
CONTINUED PARTICIPATION

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 what we believe are undervalued stocks, as
well as arbitrage situations and distressed
securities. Franklin is a recognized leader in
fixed income investing and also brings expertise in
growth- and value-style U.S. equity investing.
Templeton pioneered international investing and,
with offices in over 25 countries, offers investors
a truly global perspective.

[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 ................ 42

Tax Designation ........................................................ 43

Board Members and Officers ............................................. 47

Shareholder Information ................................................ 52

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

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 at least 80% of its
net assets in securities of European companies that the manager believes are
available at market prices less than their intrinsic value. The Fund defines
European companies as 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, 2005.

PERFORMANCE OVERVIEW

Mutual European Fund - Class Z posted a +18.03% cumulative total return for the
12 months ended December 31, 2005. The Fund outperformed its benchmark, the
Morgan Stanley Capital International (MSCI) All Country (AC) Europe Index, which
returned +10.71% in U.S. dollars 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

For the year under review, Europe's economic environment remained subdued
despite sustained growth in the global economy. Continued high unemployment,
rising energy and raw materials prices, and a strong U.S. dollar adversely
impacted the region's economy, particularly during the first six months of the
year. In the second half, signs of a pick-up in corporate spending became
visible, in sharp contrast to consumer confidence, which remained depressed
throughout the region. The French and Dutch electorates' rejection in May of the
proposed European constitution, and France's racial riots in the fall,

(1) Source: Standard & Poor's Micropal. The MSCI AC Europe Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in the European region. 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.

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

deepened an already morose social climate. Despite this uninspiring backdrop,
European equities had a good year, driven primarily by a decline in the equity
risk premium demanded by investors, strong corporate earnings, ample liquidity,
and a reawakened mergers and acquisitions market.

Excluding the volatile energy and food sectors, inflation remained relatively
subdued worldwide, and monetary policy remained fairly accommodative. The U.S.
Federal Reserve Board raised the short-term federal funds target rate with eight
quarter-point increases, bringing it to 4.25%. The European Central Bank (ECB)
made one quarter-point rise in short-term rates, its first increase after
keeping rates at historically low levels for more than two and a half years.
Even after the increases, both rates remained at levels considered accommodative
for economic growth.

In this environment, global equity markets performed strongly, particularly
outside the U.S. One-year total return for the MSCI AC World ex US Index was
+17.11% in U.S. dollar terms.(3) European equity markets returned +25.52%, as
measured by the MSCI Europe Index, using the local currencies of this index's
constituents.(4) By comparison the total return for the MSCI USA Index was
+5.72%.(5) In terms of sectors, energy and materials led equity market
performance, and telecommunication services and consumer-related sectors lagged.
At the beginning of the year, the consensus of many analysts appeared to be that
the U.S. dollar would decline in value relative to major currencies. In fact,
for the year the dollar appreciated versus the yen, the euro, the pound and most
other currencies.

GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/05

[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

- ------------------------------------------------
U.K. 15.7%
- ------------------------------------------------
France 14.0%
- ------------------------------------------------
U.S. 9.9%
- ------------------------------------------------
Switzerland 8.4%
- ------------------------------------------------
Germany 6.7%
- ------------------------------------------------
Netherlands 5.8%
- ------------------------------------------------
Norway 4.8%
- ------------------------------------------------
Belgium 4.2%
- ------------------------------------------------
Ireland 4.2%
- ------------------------------------------------
South Africa 3.5%
- ------------------------------------------------
Spain 3.5%
- ------------------------------------------------
Italy 2.5%
- ------------------------------------------------
Denmark 2.5%
- ------------------------------------------------
Sweden 1.9%
- ------------------------------------------------
Finland 1.7%
- ------------------------------------------------
Other 1.5%
- ------------------------------------------------
Short-Term Investments & Other Net Assets 9.2%
- ------------------------------------------------

(2) Source: New York Mercantile Exchange.

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

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

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/05

- ----------------------------------------------------
% OF TOTAL
NET ASSETS
- ----------------------------------------------------
Tobacco 11.4%
- ----------------------------------------------------
Commercial Banks 11.0%
- ----------------------------------------------------
Food Products 10.4%
- ----------------------------------------------------
Insurance 5.3%
- ----------------------------------------------------
Metals & Mining 5.1%
- ----------------------------------------------------
Machinery 5.1%
- ----------------------------------------------------
Beverages 4.3%
- ----------------------------------------------------
Diversified Telecommunication Services 4.3%
- ----------------------------------------------------
Oil, Gas & Consumable Fuels 4.0%
- ----------------------------------------------------
Diversified Financial Services 3.4%
- ----------------------------------------------------

INVESTMENT STRATEGY

We follow a distinctive value 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. In addition, 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.

MANAGER'S DISCUSSION

While our investment approach contributed to positive Fund performance during
the year under review, our equity portfolio was our strongest contributor. Three
of the Fund's best performing stock investments included British American
Tobacco (BAT), Anglo American and Euronext.

London-based BAT was the largest contributor to Fund performance during the year
under review. BAT is the world's second-largest cigarette manufacturer behind
Philip Morris. With about a 15% global market share, BAT enjoys strong market
positions in Europe, North America and several emerging markets. The company's
stock appreciated 52% in local currency in 2005 as the company delivered robust
operational performance driven by increasing sales volumes and an improving
product mix. BAT benefited from an acceleration of its sales in emerging
markets, a focused development of its higher-margin global brands, and a further
reduction of its cost base. During the year, the company returned most of its
free cash flow to shareholders through dividends and share buybacks. This caused
a number of analysts to raise their earnings growth projections for BAT.

6 | Annual Report

from a strong commodity cycle and high metal prices driven by sustained world
demand, particularly from China. Furthermore, management announced in October
that the company would strategically refocus activities on its core mining
businesses and return capital to shareholders. This development was positively
received by investors and resulted in a reduction of the conglomerate discount
traditionally given to Anglo by the markets.

Euronext, the Netherlands-based pan-European stock and derivatives exchange,
also performed well during the period as investors focused on the company's
attractive fundamentals and valuation. Despite uncertainty about a formal bid
for the London Stock Exchange, Euronext's share price appreciated 100% in local
currency in 2005, reflecting the strength of the company's business model and
buoyant trading environment. The market backdrop remained positive for Euronext,
and management's focus on value creation continued to be resolute.

Although many of our investments performed well in 2005, some of the Fund's
securities posted negative performance. Three positions that declined in value
during the year included Rio Narcea Gold Mines, a Canada-based mining company
with operations in Western Europe as well as other geographic locations; White
Mountains Insurance Group, a U.S. insurance company; and NTL, a communication
services provider with operations in the U.K.

Our investment in Rio Narcea performed poorly and declined 42% in local currency
due to a delay in the start-up date of a new nickel mine in Spain. The stock
continued to trade at very low valuations.

White Mountains' shares weakened 12% largely due to the company's exposure to
areas devastated by Hurricane Katrina, which may have caused the largest total
insured loss in history.

Cable company NTL's shares declined modestly (down 7%) in 2005. However, the
company's core consumer business continued to perform solidly. Additionally, in
October 2005, the company announced its acquisition of Telewest Communications,
the other significant player in the U.K. cable market. We believed that this
transaction should generate meaningful cost savings, and that NTL shares
remained attractively valued relative to the cash flow generating capacity of
the combined businesses.

Finally, investors should note that we entered 2005 less than fully hedged in
foreign currencies and increased the hedges on foreign currency exposure over
the course of the year.

TOP 10 HOLDINGS
12/31/05

- --------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------
British American Tobacco PLC 4.5%
TOBACCO, U.K.
- --------------------------------------------------------
Anglo American PLC, ord. & ADR 3.6%
METALS & MINING, SOUTH AFRICA
- --------------------------------------------------------
Orkla ASA 3.2%
FOOD PRODUCTS, NORWAY
- --------------------------------------------------------
Imperial Tobacco Group PLC 2.8%
TOBACCO, U.K.
- --------------------------------------------------------
Nestle SA 2.8%
FOOD PRODUCTS, SWITZERLAND
- --------------------------------------------------------
Altadis SA 2.7%
TOBACCO, SPAIN
- --------------------------------------------------------
Schindler Holding AG, ord. & Reg D 2.7%
MACHINERY, SWITZERLAND
- --------------------------------------------------------
NTL Inc. 2.4%
DIVERSIFIED TELECOMMUNICATION SERVICES,
U.K.
- --------------------------------------------------------
Allied Irish Banks PLC 2.2%
COMMERCIAL BANKS, IRELAND
- --------------------------------------------------------
Siemens AG 2.2%
INDUSTRIAL CONGLOMERATES, GERMANY
- --------------------------------------------------------

Annual Report | 7

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

[PHOTO] /s/ Philippe Brugere-Trelat

Philippe Brugere-Trelat
Portfolio Manager

[PHOTO] /s/ Charles M. Lahr

Charles M. Lahr, CFA
Assistant Portfolio Manager

Mutual European Fund

- --------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT has been a manager of Mutual European Fund since January
2005 and assumed the duties of lead portfolio manager in May 2005. He has been a
member of the management team of the Mutual Series Funds since 2004, when he
rejoined Franklin Templeton Investments. Previously, he was president and
portfolio manager of Eurovest. Between 1984 and 1994, Mr. Brugere-Trelat was
employed at Heine Securities Corporation, the Fund's former manager.

8 | Annual Report

PERFORMANCE SUMMARY AS OF 12/31/05

PRICE AND DISTRIBUTION INFORMATION

- ------------------------------------------------------------------------
CLASS Z (SYMBOL: MEURX) CHANGE 12/31/05 12/31/04
- ------------------------------------------------------------------------
Net Asset Value (NAV) +$1.55 $ 21.30 $ 19.75
- ------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- ------------------------------------------------------------------------
Dividend Income $0.5525
- ------------------------------------------------------------------------
Short-Term Capital Gain $0.3817
- ------------------------------------------------------------------------
Long-Term Capital Gain $1.0448
- ------------------------------------------------------------------------
TOTAL $1.9790
- ------------------------------------------------------------------------
CLASS A (SYMBOL: TEMIX) CHANGE 12/31/05 12/31/04
- ------------------------------------------------------------------------
Net Asset Value (NAV) +$1.49 $ 20.99 $ 19.50
- ------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- ------------------------------------------------------------------------
Dividend Income $0.4882
- ------------------------------------------------------------------------
Short-Term Capital Gain $0.3817
- ------------------------------------------------------------------------
Long-Term Capital Gain $1.0448
- ------------------------------------------------------------------------
TOTAL $1.9147
- ------------------------------------------------------------------------
CLASS B (SYMBOL: TEUBX) CHANGE 12/31/05 12/31/04
- ------------------------------------------------------------------------
Net Asset Value (NAV) +$1.44 $ 20.58 $ 19.14
- ------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- ------------------------------------------------------------------------
Dividend Income $0.3456
- ------------------------------------------------------------------------
Short-Term Capital Gain $0.3817
- ------------------------------------------------------------------------
Long-Term Capital Gain $1.0448
- ------------------------------------------------------------------------
TOTAL $1.7721
- ------------------------------------------------------------------------
CLASS C (SYMBOL: TEURX) CHANGE 12/31/05 12/31/04
- ------------------------------------------------------------------------
Net Asset Value (NAV) +$1.48 $ 20.98 $ 19.50
- ------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- ------------------------------------------------------------------------
Dividend Income $0.3489
- ------------------------------------------------------------------------
Short-Term Capital Gain $0.3817
- ------------------------------------------------------------------------
Long-Term Capital Gain $1.0448
- ------------------------------------------------------------------------
TOTAL $1.7754
- ------------------------------------------------------------------------

Mutual European Fund paid distributions derived from long-term capital gains of
$1.0448 per share in December 2005. The Fund designates such distributions as
capital gain dividends per Internal Revenue Code Section 852(b)(3)(C).

Annual Report | 9

PERFORMANCE SUMMARY (CONTINUED)

PERFORMANCE(1)

- ---------------------------------------------------------------------------
CLASS Z 1-YEAR 5-YEAR INCEPTION (7/3/96)
- ---------------------------------------------------------------------------
Cumulative Total Return(2) +18.03% +67.60% +316.36%
- ---------------------------------------------------------------------------
Average Annual Total Return(3) +18.03% +10.88% +16.21%
- ---------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,803 $16,760 $41,636
- ---------------------------------------------------------------------------

- ---------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR INCEPTION (11/1/96)
- ---------------------------------------------------------------------------
Cumulative Total Return(2) +17.56% +64.66% +269.24%
- ---------------------------------------------------------------------------
Average Annual Total Return(3) +10.80% +9.18% +14.58%
- ---------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,080 $15,516 $34,809
- ---------------------------------------------------------------------------

- ---------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------
Cumulative Total Return(2) +16.87% +59.48% +162.34%
- ---------------------------------------------------------------------------
Average Annual Total Return(3) +12.87% +9.51% +14.78%
- ---------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,287 $15,748 $26,234
- ---------------------------------------------------------------------------

- ---------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (11/1/96)
- ---------------------------------------------------------------------------
Cumulative Total Return(2) +16.78% +59.40% +249.83%
- ---------------------------------------------------------------------------
Average Annual Total Return(3) +15.78% +9.77% +14.64%
- ---------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,578 $15,940 $34,983
- ---------------------------------------------------------------------------

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)

CLASS Z (7/3/96-12/31/05)

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

- --------------------------------------------------------------------------------
DATE MUTUAL EUROPEAN FUND - CLASS Z MSCI AC EUROPE 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 $11,984 $11,468
2/28/1997 $12,236 $11,625
3/31/1997 $12,397 $11,992
4/30/1997 $12,376 $11,926
5/31/1997 $12,537 $12,443
6/30/1997 $12,960 $13,065
7/31/1997 $13,525 $13,668
8/31/1997 $13,282 $12,900
9/30/1997 $14,163 $14,168
10/31/1997 $13,627 $13,472
11/30/1997 $13,768 $13,673
12/31/1997 $14,115 $14,215
1/31/1998 $14,350 $14,726
2/28/1998 $15,134 $15,878
3/31/1998 $16,221 $17,013
4/30/1998 $16,635 $17,381
5/31/1998 $17,218 $17,652
6/30/1998 $16,826 $17,824
7/31/1998 $16,691 $18,208
8/31/1998 $14,792 $15,837
9/30/1998 $13,433 $15,203
10/31/1998 $13,825 $16,423
11/30/1998 $14,723 $17,319
12/31/1998 $14,783 $18,079
1/31/1999 $14,819 $17,989
2/28/1999 $15,007 $17,553
3/31/1999 $15,349 $17,757
4/30/1999 $16,245 $18,310
5/31/1999 $16,281 $17,466
6/30/1999 $16,847 $17,764
7/31/1999 $16,871 $17,958
8/31/1999 $17,026 $18,148
9/30/1999 $17,026 $18,019
10/31/1999 $17,575 $18,671
11/30/1999 $19,054 $19,193
12/31/1999 $21,704 $21,215
1/31/2000 $22,192 $19,731
2/29/2000 $25,032 $20,747
3/31/2000 $24,261 $21,246
4/30/2000 $23,592 $20,318
5/31/2000 $23,631 $20,143
6/30/2000 $23,648 $20,530
7/31/2000 $23,797 $20,206
8/31/2000 $24,393 $19,952
9/30/2000 $23,797 $19,020
10/31/2000 $24,068 $18,867
11/30/2000 $23,973 $18,064
12/31/2000 $24,843 $19,334
1/31/2001 $25,531 $19,364
2/28/2001 $25,387 $17,635
3/31/2001 $24,395 $16,325
4/30/2001 $25,131 $17,519
5/31/2001 $25,563 $16,692
6/30/2001 $25,404 $16,066
7/31/2001 $25,260 $16,085
8/31/2001 $25,019 $15,675
9/30/2001 $22,160 $14,099
10/31/2001 $22,883 $14,567
11/30/2001 $23,365 $15,166
12/31/2001 $23,666 $15,566
1/31/2002 $24,174 $14,780
2/28/2002 $24,535 $14,759
3/31/2002 $25,504 $15,572
4/30/2002 $26,029 $15,481
5/31/2002 $26,177 $15,449
6/30/2002 $25,177 $14,905
7/31/2002 $23,224 $13,255
8/31/2002 $23,257 $13,260
9/30/2002 $21,784 $11,530
10/31/2002 $21,850 $12,645
11/30/2002 $22,065 $13,271
12/31/2002 $21,841 $12,788
1/31/2003 $21,235 $12,187
2/28/2003 $20,578 $11,804
3/31/2003 $20,881 $11,625
4/30/2003 $22,548 $13,220
5/31/2003 $23,979 $14,102
6/30/2003 $24,299 $14,249
7/31/2003 $24,858 $14,532
8/31/2003 $25,383 $14,533
9/30/2003 $25,790 $14,835
10/31/2003 $26,874 $15,812
11/30/2003 $27,857 $16,480
12/31/2003 $29,014 $17,842
1/31/2004 $29,342 $18,058
2/29/2004 $30,310 $18,603
3/31/2004 $30,189 $18,066
4/30/2004 $29,947 $17,901
5/31/2004 $30,034 $18,202
6/30/2004 $30,709 $18,456
7/31/2004 $30,360 $17,953
8/31/2004 $30,447 $17,982
9/30/2004 $31,353 $18,715
10/31/2004 $32,155 $19,399
11/30/2004 $33,863 $20,809
12/31/2004 $35,275 $21,697
1/31/2005 $34,685 $21,311
2/28/2005 $36,454 $22,415
3/31/2005 $35,686 $21,825
4/30/2005 $35,221 $21,295
5/31/2005 $35,793 $21,409
6/30/2005 $36,633 $21,733
7/31/2005 $37,998 $22,556
8/31/2005 $38,627 $22,937
9/30/2005 $39,489 $23,546
10/31/2005 $38,878 $22,775
11/30/2005 $39,991 $23,202
12/31/2005 $41,636 $24,020

AVERAGE ANNUAL TOTAL RETURN

- ------------------------------------------
CLASS Z 12/31/05
- ------------------------------------------
1-Year +18.03%
- ------------------------------------------
5-Year +10.88%
- ------------------------------------------
Since Inception (7/3/96) +16.21%
- ------------------------------------------

CLASS A (11/1/96-12/31/05)

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

- --------------------------------------------------------------------------------
DATE MUTUAL EUROPEAN FUND - CLASS A MSCI AC EUROPE 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 $29,662 $20,400
1/31/2005 $29,144 $20,038
2/28/2005 $30,620 $21,076
3/31/2005 $29,966 $20,521
4/30/2005 $29,570 $20,023
5/31/2005 $30,042 $20,130
6/30/2005 $30,733 $20,434
7/31/2005 $31,864 $21,207
8/31/2005 $32,384 $21,566
9/30/2005 $33,102 $22,139
10/31/2005 $32,582 $21,414
11/30/2005 $33,515 $21,815
12/31/2005 $34,869 $22,585

AVERAGE ANNUAL TOTAL RETURN

- ------------------------------------------
CLASS A 12/31/05
- ------------------------------------------
1-Year +10.80%
- ------------------------------------------
5-Year +9.18%
- ------------------------------------------
Since Inception (11/1/96) +14.58%
- ------------------------------------------

Annual Report | 11

PERFORMANCE SUMMARY (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- ------------------------------------------
CLASS B 12/31/05
- ------------------------------------------
1-Year +12.87%
- ------------------------------------------
5-Year +9.51%
- ------------------------------------------
Since Inception (1/1/99) +14.78%
- ------------------------------------------

CLASS B (1/1/99-12/31/05)

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

- --------------------------------------------------------------------------------
DATE MUTUAL EUROPEAN FUND - CLASS B MSCI AC EUROPE 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 $22,448 $12,001
1/31/2005 $22,060 $11,788
2/28/2005 $23,163 $12,399
3/31/2005 $22,647 $12,072
4/30/2005 $22,342 $11,779
5/31/2005 $22,682 $11,842
6/30/2005 $23,191 $12,021
7/31/2005 $24,039 $12,476
8/31/2005 $24,416 $12,687
9/30/2005 $24,946 $13,024
10/31/2005 $24,533 $12,598
11/30/2005 $25,216 $12,834
12/31/2005 $26,234 $13,286

AVERAGE ANNUAL TOTAL RETURN

- ------------------------------------------
CLASS C 12/31/05
- ------------------------------------------
1-Year +15.78%
- ------------------------------------------
5-Year +9.77%
- ------------------------------------------
Since Inception (11/1/96) +14.64%
- ------------------------------------------

CLASS C (11/1/96-12/31/05)

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

- --------------------------------------------------------------------------------
DATE MUTUAL EUROPEAN FUND - CLASS C MSCI AC EUROPE 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 $30,013 $20,400
1/31/2005 $29,490 $20,038
2/28/2005 $30,952 $21,076
3/31/2005 $30,275 $20,521
4/30/2005 $29,859 $20,023
5/31/2005 $30,321 $20,130
6/30/2005 $31,004 $20,434
7/31/2005 $32,132 $21,207
8/31/2005 $32,627 $21,566
9/30/2005 $33,338 $22,139
10/31/2005 $32,797 $21,414
11/30/2005 $33,709 $21,815
12/31/2005 $35,048 $22,585

12 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

ENDNOTES

BECAUSE THE FUND INVESTS IN ISSUERS LOCATED IN EUROPE, IT MAY EXPERIENCE GREATER
VOLATILITY THAN A MORE GEOGRAPHICALLY DIVERSIFIED FUND. FOREIGN SECURITIES RISKS
INCLUDE EXPOSURE TO CURRENCY FLUCTUATIONS AND ECONOMIC AND POLITICAL
UNCERTAINTIES. IN ADDITION, THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS
CARRY AN INCREASED RISK OF PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM.
THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN MERGERS, REORGANIZATIONS OR
LIQUIDATIONS, AS WELL AS LOWER-RATED 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.

(5) Source: Standard & Poor's Micropal. The MSCI AC Europe Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in the European region.

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.

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 X $7.50 = $64.50.

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

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS

14 | Annual Report

YOUR FUND'S EXPENSES (CONTINUED)

Actual $1,000 $1,136.60 $ 5.76
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.81 $ 5.45
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,134.60 $ 7.48
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.20 $ 7.07
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,131.20 $11.12
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.77 $10.51
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,130.40 $11.12
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.77 $10.51
- --------------------------------------------------------------------------------------------------------

* Expenses are equal to the annualized expense ratio for each class
(Z: 1.07%; A: 1.39%; B: 2.07%; and C: 2.07%), multiplied by the average
account value over the period, multiplied by 184/365 to reflect the
one-half year period.

Annual Report | 15

MUTUAL EUROPEAN FUND

FINANCIAL HIGHLIGHTS

----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------

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

Net asset value, beginning of year ............. $ 19.75 $ 16.79 $ 12.97 $ 14.43 $ 15.52
----------------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ..................... 0.42 0.37 0.32 0.27 0.35

Net realized and unrealized gains (losses) ... 3.11 3.21 3.93 (1.38) (1.08)
----------------------------------------------------------------------------------
Total from investment operations ............... 3.53 3.58 4.25 (1.11) (0.73)
----------------------------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.55) (0.60) (0.43) (0.25) (0.32)

Net realized gains ........................... (1.43) (0.02) -- (0.10) (0.04)
----------------------------------------------------------------------------------
Total distributions ............................ (1.98) (0.62) (0.43) (0.35) (0.36)
----------------------------------------------------------------------------------
Redemption fees ................................ --(c) --(c) --(c) -- --
----------------------------------------------------------------------------------
Net asset value, end of year ................... $ 21.30 $ 19.75 $ 16.79 $ 12.97 $ 14.43
==================================================================================

Total return ................................... 18.03% 21.58% 32.84% (7.71)% (4.74)%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ................ $ 788,228 $ 650,547 $ 498,667 $ 376,828 $ 448,732

Ratios to average net assets:*

Expenses(b) .................................. 1.05% 1.07% 1.08% 1.05% 1.05%

Net investment income ........................ 1.99% 2.10% 2.19% 1.88% 2.27%

Portfolio turnover rate ........................ 29.84% 33.11% 52.33% 29.86% 52.15%

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

Expenses ..................................... 1.04% 1.07% 1.08% 1.04% 1.04%

(a) Based on average daily shares outstanding.

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

16 | See notes to financial statements. | Annual Report

MUTUAL EUROPEAN FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------

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

Net asset value, beginning of year ............. $ 19.50 $ 16.59 $ 12.83 $ 14.27 $ 15.36
----------------------------------------------------------------------------------
Income from investment operations:

Net investment income(a)...................... 0.34 0.31 0.26 0.22 0.28

Net realized and unrealized gains (losses) ... 3.07 3.16 3.88 (1.35) (1.06)
----------------------------------------------------------------------------------
Total from investment operations ............... 3.41 3.47 4.14 (1.13) (0.78)
----------------------------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.49) (0.54) (0.38) (0.21) (0.27)

Net realized gains ........................... (1.43) (0.02) -- (0.10) (0.04)
----------------------------------------------------------------------------------
Total distributions ............................ (1.92) (0.56) (0.38) (0.31) (0.31)
----------------------------------------------------------------------------------
Redemption fees . ............................. --(d) --(d) --(d) -- --
----------------------------------------------------------------------------------
Net asset value, end of year ................... $ 20.99 $ 19.50 $ 16.59 $ 12.83 $ 14.27
==================================================================================

Total return(b) ................................ 17.56% 21.23% 32.34% (8.05)% (5.05)%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ................ $ 707,995 $ 545,120 $ 417,630 $ 302,735 $ 254,632

Ratios to average net assets:*

Expenses(c) .................................. 1.38% 1.42% 1.43% 1.40% 1.40%

Net investment income ........................ 1.66% 1.75% 1.84% 1.53% 1.88%

Portfolio turnover rate ....................... 29.84% 33.11% 52.33% 29.86% 52.15%

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

Expenses ..................................... 1.37% 1.42% 1.43% 1.39% 1.39%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the sales commissions or the contingent
deferred sales charge.

(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 $0.01 per share.

Annual Report | See notes to financial statements. | 17

MUTUAL EUROPEAN FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------

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

Net asset value, beginning of year ............. $ 19.14 $ 16.31 $ 12.64 $ 14.09 $ 15.19
----------------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ..................... 0.21 0.19 0.16 0.10 0.18

Net realized and unrealized gains (losses) ... 3.01 3.10 3.81 (1.31) (1.03)
----------------------------------------------------------------------------------
Total from investment operations ............... 3.22 3.29 3.97 (1.21) (0.85)
----------------------------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.35) (0.44) (0.30) (0.14) (0.21)

Net realized gains ........................... (1.43) (0.02) -- (0.10) (0.04)
----------------------------------------------------------------------------------
Total distributions ............................ (1.78) (0.46) (0.30) (0.24) (0.25)
----------------------------------------------------------------------------------
Redemption fees ................................ --(d) --(d) --(d) -- --
----------------------------------------------------------------------------------
Net asset value, end of year ................... $ 20.58 $ 19.14 $ 16.31 $ 12.64 $ 14.09
==================================================================================

Total return(b) ................................ 16.87% 20.41% 31.45% (8.61)% (5.66)%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ................ $ 55,303 $ 50,216 $ 38,526 $ 24,855 $ 12,960

Ratios to average net assets:*

Expenses(c) .................................. 2.05% 2.07% 2.08% 2.05% 2.03%

Net investment income ........................ 0.99% 1.10% 1.19% 0.87% 1.20%

Portfolio turnover rate ........................ 29.84% 33.11% 52.33% 29.86% 52.15%

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

Expenses ..................................... 2.04% 2.07% 2.08% 2.04% 2.02%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

18 | See notes to financial statements. | Annual Report

MUTUAL EUROPEAN FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------

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

Net asset value, beginning of year ............. $ 19.50 $ 16.60 $ 12.85 $ 14.29 $ 15.37
----------------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ..................... 0.21 0.20 0.17 0.13 0.19

Net realized and unrealized gains (losses) ... 3.05 3.15 3.87 (1.35) (1.06)
----------------------------------------------------------------------------------
Total from investment operations ............... 3.26 3.35 4.04 (1.22) (0.87)
----------------------------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.35) (0.43) (0.29) (0.12) (0.17)

Net realized gains ........................... (1.43) (0.02) -- (0.10) (0.04)
----------------------------------------------------------------------------------
Total distributions ............................ (1.78) (0.45) (0.29) (0.22) (0.21)
----------------------------------------------------------------------------------
Redemption fees ................................ --(d) --(d) --(d) -- --
----------------------------------------------------------------------------------
Net asset value, end of year ................... $ 20.98 $ 19.50 $ 16.60 $ 12.85 $ 14.29
==================================================================================

Total return(b) ................................ 16.78% 20.43% 31.49% (8.65)% (5.65)%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ................ $ 242,894 $ 205,197 $ 166,758 $ 123,374 $ 117,238

Ratios to average net assets:*

Expenses(c) .................................. 2.05% 2.07% 2.08% 2.02% 2.04%

Net investment income ........................ 0.99% 1.10% 1.19% 0.91% 1.27%

Portfolio turnover rate ........................ 29.84% 33.11% 52.33% 29.86% 52.15%

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

Expenses ..................................... 2.04% 2.07% 2.08% 2.01% 2.03%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

Annual Report | See notes to financial statements. | 19

MUTUAL EUROPEAN FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005

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

COMMON STOCKS AND OTHER EQUITY INTERESTS 88.4%
BEVERAGES 4.3%
Carlsberg AS, A ......................................................... Denmark 28,600 $ 1,429,478
Carlsberg AS, B ......................................................... Denmark 539,506 28,934,362
Diageo PLC .............................................................. United Kingdom 1,356,822 19,666,851
Heineken Holding NV, A .................................................. Netherlands 43,154 1,268,001
Pernod Ricard SA ........................................................ France 152,649 26,637,173
---------------
77,935,865
---------------
BUILDING PRODUCTS 0.3%
Geberit AG .............................................................. Switzerland 7,100 5,620,552
---------------
CHEMICALS 2.9%
Givaudan AG ............................................................. Switzerland 32,675 22,148,116
Koninklijke DSM NV ...................................................... Netherlands 58,844 2,403,355
Linde AG ................................................................ Germany 184,723 14,385,055
(a)Sika AG ................................................................. Switzerland 16,481 13,674,055
---------------
52,610,581
---------------
COMMERCIAL BANKS 11.0%
(a)Aareal Bank AG .......................................................... Germany 22,600 856,160
Allied Irish Banks PLC .................................................. Ireland 1,813,400 39,007,240
Banca Intesa SpA ........................................................ Italy 4,272,870 22,636,507
Bank of Ireland ......................................................... Ireland 1,034,775 16,292,745
BNP Paribas SA .......................................................... France 450,100 36,420,358
Danske Bank ............................................................. Denmark 444,900 15,671,707
ForeningsSparbanken AB, A ............................................... Sweden 1,243,700 33,888,497
KBC Bancassurance Holding NV ............................................ Belgium 358,389 33,369,529
---------------
198,142,743
---------------
COMMERCIAL SERVICES & SUPPLIES 0.5%
(a)Techem AG ............................................................... Germany 190,982 8,532,789
---------------
CONSTRUCTION & ENGINEERING 1.1%
Imtech NV ............................................................... Netherlands 606,012 19,729,251
---------------
CONSTRUCTION MATERIALS 1.6%
Ciments Francais SA ..................................................... France 113,977 14,815,498
Italcementi SpA ......................................................... Italy 722,765 13,493,527
---------------
28,309,025
---------------
DISTRIBUTORS 1.0%
Compania de Distribucion Integral Logista SA ............................ Spain 322,008 15,820,181
Inchcape PLC ............................................................ United Kingdom 61,661 2,419,791
---------------
18,239,972
---------------

20 | Annual Report

MUTUAL EUROPEAN FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES 3.4%
Euronext ................................................................ Netherlands 459,879 $ 23,954,822
Fortis Group NV ......................................................... Belgium 1,151,880 36,668,633
(a,b)Marconi Corp., Contingent Distribution .................................. United Kingdom 28,582,000 --
---------------
60,623,455
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 4.3%
(a,c,d)AboveNet Inc. ........................................................... United States 83,713 2,006,048
(a,b,d)AboveNet Inc., Contingent Distribution .................................. United States 11,722,000 --
(a,c,d)AboveNet Inc., wts., 9/08/08 ............................................ United States 2,816 11,264
(a,c,d)AboveNet Inc., wts., 9/08/10 ............................................ United States 3,313 2,650
Belgacom SA ............................................................. Belgium 241,430 7,874,256
Koninklijke KPN NV ...................................................... Netherlands 1,352,764 13,564,448
(a)NTL Inc. ................................................................ United Kingdom 630,105 42,897,549
Telekom Austria AG ...................................................... Austria 236,254 5,314,097
(a,b)Telewest Communications PLC, Contingent Distribution .................... United Kingdom 1,090,947 --
(a,b)Telewest Finance Ltd., Contingent Distribution .......................... United Kingdom 1,465,000 --
(a)Telewest Global Inc. .................................................... United Kingdom 199,109 4,742,776
---------------
76,413,088
---------------
ELECTRIC UTILITIES 1.7%
E.ON AG ................................................................. Germany 302,100 31,279,290
---------------
ENERGY EQUIPMENT & SERVICES 0.7%
Fugro NV ................................................................ Netherlands 371,192 11,921,889
---------------
FOOD & STAPLES RETAILING 2.5%
Bourbon SA .............................................................. France 169,849 14,869,551
Carrefour SA ............................................................ France 553,880 25,953,035
RHM PLC ................................................................. United Kingdom 808,100 3,680,808
---------------
44,503,394
---------------
FOOD PRODUCTS 10.4%
Cadbury Schweppes PLC ................................................... United Kingdom 2,410,112 22,784,891
CSM NV .................................................................. Netherlands 442,856 12,074,055
Groupe Danone ........................................................... France 323,470 33,794,452
Nestle SA ............................................................... Switzerland 166,037 49,668,918
Orkla ASA ............................................................... Norway 1,387,640 57,461,980
Rieber & Son ASA ........................................................ Norway 1,507,950 11,226,515
---------------
187,010,811
---------------
HEALTH CARE PROVIDERS & SERVICES 1.0%
Rhoen-Klinikum AG ....................................................... Germany 455,450 17,410,267
---------------
HOTELS RESTAURANTS & LEISURE 1.7%
Hilton Group ............................................................ United Kingdom 4,922,359 30,804,795
---------------

Annual Report | 21

MUTUAL EUROPEAN FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HOUSEHOLD DURABLES 1.1%
Hunter Douglas NV ....................................................... Netherlands 370,265 $ 20,154,792
---------------
INDUSTRIAL CONGLOMERATES 2.2%
Siemens AG .............................................................. Germany 452,472 38,765,641
---------------
INSURANCE 5.3%
(a)Berkshire Hathaway Inc., A .............................................. United States 203 17,989,860
Catlin Group ............................................................ United Kingdom 490,821 4,099,722
(a)CNP Assurances .......................................................... France 244,200 19,253,805
Irish Life & Permanent PLC .............................................. Ireland 1,045,905 21,247,420
(a,c)Olympus Re Holdings Ltd. ................................................ Bermuda 16,080 297,480
White Mountains Insurance Group Inc. .................................... United States 58,172 32,491,971
---------------
95,380,258
---------------
MACHINERY 4.5%
(a)Kone OYJ ................................................................ Finland 579,380 22,998,194
Metso OYJ ............................................................... Finland 344,623 9,432,542
Schindler Holding AG .................................................... Switzerland 73,082 28,982,472
Schindler Holding AG, Reg D ............................................. Switzerland 49,081 19,408,243
---------------
80,821,451
---------------
MEDIA 2.5%
Hollinger International Inc. ............................................ United States 215,694 1,835,987
(a)JC Decaux SA ............................................................ France 619,833 14,455,649
Pearson PLC ............................................................. United Kingdom 759,700 8,985,803
(c)Time Warner Inc. ........................................................ United States 1,183,200 20,222,308
---------------
45,499,747
---------------
METALS & MINING 5.1%
(a)African Platinum PLC .................................................... United Kingdom 2,631,000 1,007,147
Anglo American PLC ...................................................... South Africa 1,919,281 65,347,112
Anglo American PLC, ADR ................................................. South Africa 200 6,956
Highland Gold Mining Ltd. ............................................... United Kingdom 1,567,170 6,619,263
(a,e,f)International Metal Enterprises Inc., 144A .............................. United States 2,050,000 10,762,500
(a,e,f)International Metal Enterprises Inc., wts., 144A, 10/03/06 .............. United States 4,100,000 2,255,000
(a)Rio Narcea Gold Mines Ltd. .............................................. Canada 4,430,100 6,098,391
---------------
92,096,369
---------------
MULTI-UTILITIES & UNREGULATED POWER 1.1%
Suez SA ................................................................. France 621,656 19,355,418
---------------
MULTILINE RETAIL 0.7%
Jelmoli Holding AG ...................................................... Switzerland 8,844 12,622,265
---------------
OIL, GAS & CONSUMABLE FUELS 4.0%
BP PLC .................................................................. United Kingdom 747,800 7,963,760
Eni SpA ................................................................. Italy 361,200 10,018,823
(a,c,e)Euro Wagon LP ........................................................... Jersey Islands 14,000,000 16,573,900
Norsk Hydro ASA ......................................................... Norway 88,200 9,055,737
Royal Dutch Shell PLC, A ................................................ United Kingdom 222,837 6,800,908
Statoil ASA ............................................................. Norway 327,362 7,517,647
Total SA, B ............................................................. France 53,750 13,502,697
---------------
71,433,472
---------------

22 | Annual Report

MUTUAL EUROPEAN FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PHARMACEUTICALS 1.3%
Sanofi-Aventis .......................................................... France 269,626 $ 23,620,559
---------------
REAL ESTATE 0.1%
Canary Wharf Group PLC .................................................. United Kingdom 192,100 793,196
(a,c)Security Capital European Realty ........................................ Luxembourg 5,281 38,380
---------------
831,576
---------------
THRIFTS & MORTGAGE FINANCE 0.7%
Sovereign Bancorp Inc. .................................................. United States 593,900 12,840,118
---------------
TOBACCO 11.4%
Altadis SA .............................................................. Spain 1,086,551 49,291,530
British American Tobacco PLC ............................................ United Kingdom 3,627,758 81,137,888
Gallaher Group PLC ...................................................... United Kingdom 1,487,125 22,451,049
Imperial Tobacco Group PLC .............................................. United Kingdom 1,706,404 50,994,545
---------------
203,875,012
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $1,112,363,807) ................................................ 1,586,384,445
---------------
PREFERRED STOCKS 0.6%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(g)
PTV Inc., 10.00%, pfd., A ............................................... United Kingdom 46,841 98,366
---------------
MACHINERY 0.6%
Jungheinrich AG, pfd. ................................................... Germany 452,549 10,500,703
---------------
TOTAL PREFERRED STOCKS (COST $9,849,000) ................................ 10,599,069
---------------

-------------------
PRINCIPAL AMOUNT(j)
-------------------
CORPORATE BONDS & NOTES 1.8%
Eurotunnel PLC,
Participating Loan Note, 1.00%, 4/30/40 ........................... United Kingdom 210,000 GBP 34,323
(f,h)Senior Tranche G2 Term Loan A, 144A, FRN, 5.618%,
12/15/12 .......................................................... United Kingdom 380,300 GBP 629,751
(h)Tier 2, FRN, 5.796%, 12/31/18 ..................................... United Kingdom 7,595,283 GBP 11,107,208
(h)Tier 3, FRN, 5.796%, 12/31/25 ..................................... United Kingdom 14,544,322 GBP 11,760,706
Eurotunnel SA,
Senior Tranche H1 Term Loan (KfW Advance), 8.78%, 12/15/12 ........ France 163,300 EUR 183,657
(h)Tier 2 (LIBOR), FRN, 3.393%, 12/31/18 ............................. France 988,713 EUR 994,915
(h)Tier 2 (PIBOR), FRN, 3.393%, 12/31/18 ............................. France 437,395 EUR 440,138
(h)Tier 3 (LIBOR), FRN, 3.393%, 12/31/25 ............................. France 8,732,014 EUR 4,858,576
(h)Tier 3 (PIBOR), FRN, 3.393%, 12/31/25 ............................. France 5,798,977 EUR 3,226,606
---------------
TOTAL CORPORATE BONDS & NOTES (COST $35,960,040) ........................ 33,235,880
---------------
GOVERNMENT AGENCIES 4.5%
(i)Federal Home Loan Bank, 1/03/06-12/01/06 ................................ United States 79,305,000 78,456,980
Government of Norway, 6.75%, 1/15/07 .................................... Norway 13,450,000 NOK 2,071,475
---------------
TOTAL GOVERNMENT AGENCIES (COST $80,471,021) ............................ 80,528,455
---------------

Annual Report | 23

MUTUAL EUROPEAN FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

TOTAL INVESTMENTS (COST $1,238,643,868) 95.3% ........................... $ 1,710,747,849
NET UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS 1.8% .................. 32,493,149
OTHER ASSETS, LESS LIABILITIES 2.9% ..................................... 51,177,794
---------------
NET ASSETS 100.0% ....................................................... $ 1,794,418,792
===============

CURRENCY ABBREVIATIONS

EUR - Euro
GBP - British Pound
NOK - Norwegian Krone

SELECTED PORTFOLIO ABBREVIATIONS

ADR - American Depository Receipt
FRN - Floating Rate Note
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate

(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 12 regarding other considerations.

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

(f) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2005, the aggreggate value of these securities was $13,647,251,
representing 0.76% of net assets.

(g) Rounds to less than 0.05% of net assets.

(h) The coupon shown represents the rate at period end.

(i) The security is traded on a discount basis with no stated coupon rate.

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

24 | See notes to financial statements. | Annual Report

MUTUAL EUROPEAN FUND

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005

Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................................................................. $ 1,209,797,947
Cost - Non-controlled affiliated issuers (Note 11) .......................................................... 28,845,921
---------------
Total cost of investments ................................................................................... $ 1,238,643,868
===============
Value - Unaffiliated issuers ................................................................................ $ 1,681,156,449
Value - Non-controlled affiliated issuers (Note 11) ......................................................... 29,591,400
---------------
Total value of investments .................................................................................. 1,710,747,849
Cash .......................................................................................................... 37,590
Foreign currency, at value (cost $42,624,601) ................................................................. 42,251,875
Receivables:
Investment securities sold .................................................................................. 2,317,839
Capital shares sold ......................................................................................... 4,362,352
Dividends and interest ...................................................................................... 3,480,734
Unrealized gain on forward exchange contracts (Note 8) ........................................................ 33,817,447
Cash on deposits with brokers for securities sold short ....................................................... 181,712
Due from broker - synthetic equity swaps ...................................................................... 4,298,416
---------------
Total assets .............................................................................................. 1,801,495,814
---------------
Liabilities:
Payables:
Investment securities purchased ............................................................................. 316,650
Capital shares redeemed ..................................................................................... 2,752,156
Affiliates .................................................................................................. 2,428,066
Unrealized loss on forward exchange contracts (Note 8) ........................................................ 1,324,298
Accrued expenses and other liabilities ........................................................................ 255,852
---------------
Total liabilities ......................................................................................... 7,077,022
---------------
Net assets, at value .................................................................................... $ 1,794,418,792
===============
Net assets consist of:
Paid-in capital ............................................................................................... $ 1,284,572,375
Undistributed net investment income ........................................................................... 249,169
Net unrealized appreciation (depreciation) .................................................................... 507,331,518
Accumulated net realized gain (loss) .......................................................................... 2,265,730
---------------
Net assets, at value .................................................................................... $ 1,794,418,792
===============

Annual Report | See notes to financial statements. | 25

MUTUAL EUROPEAN FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2005

CLASS Z:
Net assets, at value .......................................................................................... $ 788,227,627
===============
Shares outstanding ............................................................................................ 37,014,289
===============
Net asset value and maximum offering price per share(a) ....................................................... $ 21.30
===============
CLASS A:
Net assets, at value .......................................................................................... $ 707,994,832
===============
Shares outstanding ............................................................................................ 33,727,052
===============
Net asset value per share(a) .................................................................................. $ 20.99
===============
Maximum offering price per share (net asset value per share / 94.25%) ......................................... $ 22.27
===============
CLASS B:
Net assets, at value .......................................................................................... $ 55,302,640
===============
Shares outstanding ............................................................................................ 2,687,790
===============
Net asset value and maximum offering price per share(a) ....................................................... $ 20.58
===============
CLASS C:
Net assets, at value .......................................................................................... $ 242,893,693
===============
Shares outstanding ............................................................................................ 11,574,915
===============
Net asset value and maximum offering price per share(a) ....................................................... $ 20.98
===============

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

26 | See notes to financial statements. | Annual Report

MUTUAL EUROPEAN FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended December 31, 2005

Investment income:
Dividends (net of foreign taxes of $3,699,272) ........... $ 35,473,490
Interest ................................................. 12,951,067
Other income (Note 13) ................................... 17,202
---------------
Total investment income ............................ 48,441,759
---------------
Expenses:
Management fees (Note 3a) ................................ 12,548,913
Administrative fees (Note 3b) ............................ 1,222,491
Distribution fees (Note 3c)
Class A ............................................... 2,017,925
Class B ............................................... 518,007
Class C ............................................... 2,188,839
Transfer agent fees (Note 3e) ............................ 1,992,500
Custodian fees (Note 4) .................................. 385,660
Reports to shareholders .................................. 157,500
Registration and filing fees ............................. 63,950
Professional fees ........................................ 187,631
Directors' fees and expenses ............................. 41,400
Dividends on securities sold short ....................... 134,922
Other .................................................... 48,074
---------------
Total expenses ..................................... 21,507,812
Expense reductions (Note 4) ........................ (2,457)
---------------
Net expenses .................................... 21,505,355
---------------
Net investment income ........................ 26,936,404
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................... 108,312,499
Written options ....................................... 7,955
Foreign currency transactions ......................... 21,574,619
---------------
Net realized gain (loss) ........................ 129,895,073
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................... 55,835,340
Translation of assets and liabilities denominated in
foreign currencies ................................. 53,466,055
---------------
Net change in unrealized appreciation
(depreciation) ............................... 109,301,395
---------------
Net realized and unrealized gain (loss) ..................... 239,196,468
---------------
Net increase (decrease) in net assets resulting
from operations .......................................... $ 266,132,872
===============

Annual Report | See notes to financial statements. | 27

MUTUAL EUROPEAN FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS

------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
2005 2004
------------------------------------

Increase (decrease) in net assets:
Operations:
Net investment income ................................ $ 26,936,404 $ 21,993,224
Net realized gain (loss) from investments, written
options, securities sold short, and foreign
currency transaction ............................... 129,895,073 50,281,482
Net change in unrealized appreciation (depreciation)
on investments and translation of assets and
liabilities denominated in foreign currencies ...... 109,301,395 175,300,161
------------------------------------
Net increase (decrease) in net assets resulting
from operations ................................ 266,132,872 247,574,867
------------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ............................................ (18,812,712) (19,099,453)
Class A ............................................ (15,200,452) (14,530,645)
Class B ............................................ (869,707) (1,110,260)
Class C ............................................ (3,747,958) (4,388,373)
Net realized gains:
Class Z ............................................ (48,659,125) (737,739)
Class A ............................................ (45,158,712) (624,939)
Class B ............................................ (3,565,400) (59,493)
Class C ............................................ (15,354,401) (236,978)
------------------------------------
Total distributions to shareholders ..................... (151,368,467) (40,787,880)
------------------------------------
Capital share transactions: (Note 2)
Class Z ............................................ 84,943,484 58,975,823
Class A ............................................ 120,359,620 50,452,466
Class B ............................................ 1,351,079 4,515,208
Class C ............................................ 21,918,475 8,767,698
------------------------------------
Total capital share transactions ........................ 228,572,658 122,711,195
------------------------------------
Redemption fees ......................................... 1,678 787
------------------------------------
Net increase (decrease) in net assets ............ 343,338,741 329,498,969
Net assets:
Beginning of year ....................................... 1,451,080,051 1,121,581,082
------------------------------------
End of year ............................................. $ 1,794,418,792 $ 1,451,080,051
====================================
Undistributed net investment income/distributions in excess
of net investment included in net assets:
End of year ............................................. $ 249,169 $ (7,485,194)
====================================

28 | See notes to financial statements. | Annual Report

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mutual European Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund Inc. (the Series Fund), consisting of six separate series.
The Series Fund 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 following summarizes the Fund's significant accounting policies.

A. SECURITY VALUATION

Annual Report | 29

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION

C. FOREIGN CURRENCY CONTRACTS

30 | Annual Report

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. SYNTHETIC EQUITY SWAPS

E. OPTIONS

F. SECURITIES SOLD SHORT

Annual Report | 31

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

F. SECURITIES SOLD SHORT (CONTINUED)

G. INCOME TAXES

H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS

32 | Annual Report

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

I. ACCOUNTING ESTIMATES

J. REDEMPTION FEES

A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date (30 days or less prior to June 1, 2004). The
redemption fee is 2% of the amount redeemed. Such fees are retained by the Fund
and accounted for as an addition to paid-in capital.

K. GUARANTEES AND INDEMNIFICATIONS

2. CAPITAL STOCK

Annual Report | 33

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. CAPITAL STOCK (CONTINUED)

At December 31, 2005, there were 500 million shares authorized ($0.001 par
value) of which 200 million shares were designated as Class Z, 100 million
shares as Class A, 100 million shares as Class B and 100 million shares as Class
C. Transactions in the Fund's shares were as follows:

-------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
-------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------

CLASS Z SHARES:
Shares sold ................. 5,377,432 $ 112,505,328 5,037,189 $ 89,701,240
Shares issued in reinvestment
of distributions ........... 2,984,092 63,192,364 985,268 18,482,745
Shares redeemed ............. (4,294,224) (90,754,208) (2,784,547) (49,208,162)
-------------------------------------------------------------------------
Net increase (decrease) ..... 4,067,300 $ 84,943,484 3,237,910 $ 58,975,823
=========================================================================
CLASS A SHARES:
Shares sold ................. 9,974,175 $ 205,918,108 7,412,359 $ 130,660,983
Shares issued in reinvestment
of distributions ........... 2,152,673 44,944,939 644,632 11,925,302
Shares redeemed ............. (6,359,520) (130,503,427) (5,274,697) (92,133,819)
-------------------------------------------------------------------------
Net increase (decrease) ..... 5,767,328 $ 120,359,620 2,782,294 $ 50,452,466
=========================================================================
CLASS B SHARES:
Shares sold ................. 177,278 $ 3,527,919 470,582 $ 8,073,637
Shares issued in reinvestment
of distributions ........... 196,622 4,024,563 57,630 1,042,916
Shares redeemed ............. (309,160) (6,201,403) (267,734) (4,601,345)
-------------------------------------------------------------------------
Net increase (decrease) ..... 64,740 $ 1,351,079 260,478 $ 4,515,208
=========================================================================
CLASS C SHARES:
Shares sold ................. 1,782,398 $ 36,506,909 1,880,792 $ 33,100,927
Shares issued in reinvestment
of distributions ........... 823,947 17,201,713 224,707 4,138,711
Shares redeemed ............. (1,554,721) (31,790,147) (1,629,046) (28,471,940)
-------------------------------------------------------------------------
Net increase (decrease) ..... 1,051,624 $ 21,918,475 476,453 $ 8,767,698
=========================================================================

3. TRANSACTIONS WITH AFFILIATES

34 | Annual Report

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

A. MANAGEMENT FEES

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% Up to and including $1 billion
0.770% Over $1 billion, up to and including $2 billion
0.750% Over $2 billion, up to and including $5 billion
0.730% In excess of $5 billion

B. ADMINISTRATION FEES

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

- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $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% In excess of $1.2 billion

C. DISTRIBUTION FEES

Class B ........................................................... 1.00%
Class C ........................................................... 1.00%

Annual Report | 35

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

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(a) .............................. $ 198,243
Contingent deferred sales charges retained ................. $ 87,504

(a) Net of commissions paid to unaffiliated broker/dealers.

E. TRANSFER AGENT FEES

The Fund paid transfer agent fees of $1,992,500, of which $1,233,362 was
retained by Investor Services.

4. EXPENSE OFFSET ARRANGEMENT

5. INCOME TAXES

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and bond discounts and premiums.

36 | Annual Report

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES (CONTINUED)

Cost of investments ........................................ $ 1,240,752,333
----------------

Unrealized appreciation .................................... $ 491,537,033
Unrealized depreciation .................................... (21,541,517)
----------------
Net unrealized appreciation (depreciation) ................. $ 469,995,516
================

Undistributed ordinary income .............................. $ 15,023,830
Undistributed long term capital gains ...................... 16,086,535
----------------
Distributable earnings ..................................... $ 31,110,365
================

The tax character of distributions paid during the years ended December 31,
2005and 2004, were as follows:

---------------------------------
2005 2004
---------------------------------
Distributions paid from:
Ordinary income ........................ $ 68,796,936 $ 39,137,765
Long term capital gain ................. 82,571,531 1,650,115
---------------------------------
$ 151,368,467 $ 40,787,880
=================================

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2005, aggregated
$570,815,722 and $437,722,940, respectively.

Transactions in options written during the year ended December 31, 2005, were as
follows:
-----------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
-----------------------------
Options outstanding at December 31, 2004 .. -- $ --
Options written ........................... 25,380 7,955
Options expired ........................... (25,380) (7,955)
Options exercised ......................... -- --
Options closed ............................ -- --
-----------------------------
Options outstanding at December 31, 2005 .. -- $ --
=============================

Annual Report | 37

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. SYNTHETIC EQUITY SWAPS

As of December 31, 2005, the Fund had the following synthetic equity swaps
outstanding:

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

O2 PLC (1.9550 - 1.9715 GBP) .......................... 3,686,887 $12,559,347 $ 90,697
AAReal Bank AG (23.48 - 25.89 EUR) .................... 284,453 10,775,990 2,510,575
Christian Dior SA (46.76 - 54.99 EUR) ................. 38,450 3,418,479 1,204,287
-------------
Total contracts to buy ................................ 3,805,559
-------------

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

LVMH Moet Hennessy Louis Vuitton (54.61 - 61.76 EUR) .. 39,268 $ 3,488,881 $ (777,748)
-------------
Total contacts to sell ................................ (777,748)
=============
Net unrealized gain (loss) ............................ $ 3,027,811
=============

8. FORWARD EXCHANGE CONTRACTS

At December 31, 2005, the Fund had outstanding forward exchange contracts as set
out below.

- --------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO BUY AMOUNT(a) DATE GAIN (LOSS)
- --------------------------------------------------------------------------------------

700,000 Canadian Dollar ....... 593,623 1/23/06 $ 9,069
-------------

- --------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT(a) DATE GAIN (LOSS)
- --------------------------------------------------------------------------------------

4,250,000 Euro .................. 5,038,927 1/17/06 $ 2,430
66,195,000 Euro .................. 81,868,284 1/23/06 3,396,662
29,314,577 Swiss Franc ........... 23,525,000 2/02/06 1,132,321
20,075,000 British Pound ......... 36,027,236 2/15/06 1,493,669
57,694 Canadian Dollar ....... 50,000 2/15/06 293
18,450,000 Euro .................. 22,435,227 2/27/06 521,688
37,398,338 Norwegian Krone ....... 5,565,229 3/06/06 3,956
9,407,173 Euro .................. 11,238,471 3/15/06 55,114
230,009,152 Swedish Krona ......... 29,443,321 3/15/06 336,528
286,255,419 Danish Krone .......... 51,729,476 3/17/06 6,114,669
1,750,000 Euro .................. 13,553,575 DKK 3/17/06 79,104
18,356,107 British Pound ......... 33,063,019 3/21/06 1,483,516
24,175,000 British Pound ......... 42,589,916 4/04/06 995,987
79,025,000 Euro .................. 98,932,212 4/25/06 4,766,748
41,893,120 Norwegian Krone ....... 6,512,221 5/08/06 260,147
15,500,000 British Pound ......... 27,011,850 5/15/06 331,490
43,964,938 Euro .................. 54,872,996 5/23/06 2,401,390
11,123,440 Norwegian Krone ....... 1,700,000 6/06/06 37,254
8,708,108 Swiss Franc ........... 6,800,000 6/06/06 68,689
16,770,000 Euro .................. 20,369,569 6/15/06 328,579
23,200,000 Euro .................. 27,785,160 7/17/06 11,046
18,464,746 British Pound ......... 32,226,147 8/14/06 406,125
94,043,121 Euro .................. 117,383,208 8/23/06 4,573,518
37,773,470 British Pound ......... 65,778,043 9/08/06 660,755

38 | Annual Report

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS (CONTINUED)

- --------------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT(a) DATE GAIN (LOSS)
- --------------------------------------------------------------------------------------------------

64,797,282 Euro ............................... 81,065,087 9/13/06 $ 3,249,051
40,758,240 Euro ............................... 50,133,336 10/18/06 1,097,649
-------------
33,808,378
-------------
Unrealized gain on forward
exchange contracts .......................... $ 33,817,447
=============

6,284,233 Canadian Dollar .................... 5,309,416 1/23/06 $ (101,235)
136,337,740 Norwegian Krone .................... 20,228,151 2/06/06 (14,476)
813,641 Canadian Dollar .................... 699,000 2/15/06 (2,003)
117,000,000 Norwegian Krone .................... 17,378,647 3/06/06 (19,692)
38,750,000 Euro ............................... 45,655,250 3/15/06 (411,198)
3,150,000 Euro ............................... 23,460,360 DKK 3/17/06 (6,778)
126,000,000 Norwegian Krone .................... 18,791,946 6/06/06 (42,697)
103,722,044 Swiss Franc ........................ 79,970,736 6/06/06 (205,740)
58,214,751 Euro ............................... 69,171,896 7/17/06 (520,479)
-------------
Unrealized loss on forward exchange
contracts .................................. (1,324,298)
-------------
Net unrealized gain on forward
exchange contracts ....................... $ 32,493,149
=============

(a) In U.S. Dollar unless other wise indicated.

CURRENCY ABBREVIATIONS

DKK - Danish Krone

9. CONCENTRATION OF RISK

10. RESTRICTED AND ILLIQUID SECURITIES

Annual Report | 39

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. RESTRICTED AND ILLIQUID SECURITIES (CONTINUED)

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

83,713 AboveNet Inc. ..................... 10/02/01 $ 4,201,546 $ 2,006,048
2,816 AboveNet Inc., wts., 9/08/08 ...... 10/02/01 348,479 11,264
3,313 AboveNet Inc., wts., 9/08/10 ...... 10/02/01 373,672 2,650
14,000,000 Euro Wagon LP ..................... 12/08/05 16,545,921 16,573,900
16,080 Olympus Re Holdings Ltd. .......... 12/19/01 1,608,000 297,480
1,183,200 Time Warner Inc. .................. 8/02/05 20,436,258 20,222,308
5,281 Security Capital European Realty .. 4/08/98 289,278 38,380
-------------
TOTAL RESTRICTED AND ILLIQUID
SECURITIES (2.18% of Net Assets) ........................ $ 39,152,030
=============

11. HOLDINGS OF 5% VOTING SECURITIES

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 securiites. Investments in "affiliated companies" for the
Fund at December 31, 2005 were as shown below.

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

NON-CONTROLLED AFFILIATES
Euro Wagon LP ................. -- 14,000,000 -- 14,000,000 $16,573,900 $ -- $ --
International Metal
Enterprises Inc., 144A ...... -- 2,050,000 -- 2,050,000 10,762,500 -- --
International Metal Enterprises
Inc., wts., 144A, 10/03/06 .. -- 4,100,000 -- 4,100,000 2,255,000 -- --
------------------------------------
TOTAL AFFILIATED SECURITIES
(1.65% of Net Assets) ....... $29,591,400 $ -- $ --
====================================

12. OTHER CONSIDERATIONS

Directors or employees of Franklin Mutual, as the Fund's Investment Manager, may
serve as members 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, 2005, such individuals serve in one or more of these capacities for
AboveNet Inc. As a result of this involvement, such individuals 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.

40 | Annual Report

MUTUAL EUROPEAN FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. REGULATORY MATTERS

Annual Report | 41

MUTUAL EUROPEAN FUND

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying statement of assets and liabilities of the
Mutual European Fund (one of the portfolio constituting the Franklin Mutual
Series Fund Inc.) (the "Fund"), including the statement of investments, as of
December 31, 2005, 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.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual European Fund of the Franklin Mutual Series Fund Inc. at December 31,
2005, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 10, 2006

42 | Annual Report

MUTUAL EUROPEAN FUND

TAX DESIGNATION (UNAUDITED)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $98,658,066 as a
capital gain dividend for the fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $35,228,828 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2005. In January 2006, shareholders will receive Form 1099 DIV
which will include their share of qualified dividends distributed during the
calendar year 2005. 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 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $2,184,797 as interest-related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended December 31, 2005.

Under Section (k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $43,789,349 as a short-term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates 1.23% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2005.

Annual Report | 43

MUTUAL EUROPEAN FUND

TAX DESIGNATION (UNAUDITED) (CONTINUED)

RECORD DATE: 12/22/2005
- --------------------------------------------------------------------------------
CLASS Z
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Austria ............... $0.0004 $0.0019 $0.0019
Belgium ............... 0.0031 0.0165 0.0165
Bermuda ............... 0.0000 0.0053 0.0024
Denmark ............... 0.0024 0.0131 0.0129
Finland ............... 0.0014 0.0075 0.0075
France ................ 0.0049 0.0369 0.0255
Germany ............... 0.0019 0.0198 0.0081
Ireland ............... 0.0000 0.0296 0.0292
Italy ................. 0.0016 0.0088 0.0088
Luxembourg ............ 0.0013 0.0071 0.0071
Netherlands ........... 0.0120 0.0626 0.0460
Norway ................ 0.0069 0.0369 0.0369
Poland ................ 0.0018 0.0098 0.0003
South Africa .......... 0.0000 0.0056 0.0056
Spain ................. 0.0030 0.0159 0.0159
Switzerland ........... 0.0061 0.0326 0.0317
United Kingdom ........ 0.0000 0.1845 0.0885
-------------------------------------------------------
TOTAL ................. $0.0468 $0.4944 $0.3448
=======================================================

- --------------------------------------------------------------------------------
CLASS A
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Austria ............... $0.0004 $0.0017 $0.0017
Belgium ............... 0.0031 0.0153 0.0153
Bermuda ............... 0.0000 0.0049 0.0023
Denmark ............... 0.0024 0.0122 0.0120
Finland ............... 0.0014 0.0069 0.0069
France ................ 0.0049 0.0342 0.0236
Germany ............... 0.0019 0.0184 0.0075
Ireland ............... 0.0000 0.0274 0.0271
Italy ................. 0.0016 0.0082 0.0082
Luxembourg ............ 0.0013 0.0066 0.0066
Netherlands ........... 0.0120 0.0580 0.0426
Norway ................ 0.0069 0.0342 0.0342
Poland ................ 0.0018 0.0091 0.0003
South Africa .......... 0.0000 0.0052 0.0052
Spain ................. 0.0030 0.0148 0.0148
Switzerland ........... 0.0061 0.0302 0.0294
United Kingdom ........ 0.0000 0.1711 0.0821
-------------------------------------------------------
TOTAL ................. $0.0468 $0.4584 $0.3198
=======================================================

44 | Annual Report

MUTUAL EUROPEAN FUND

TAX DESIGNATION (UNAUDITED) (CONTINUED)

- --------------------------------------------------------------------------------
CLASS B
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Austria ............... $0.0004 $0.0014 $0.0014
Belgium ............... 0.0031 0.0125 0.0125
Bermuda ............... 0.0000 0.0041 0.0019
Denmark ............... 0.0024 0.0100 0.0099
Finland ............... 0.0014 0.0057 0.0057
France ................ 0.0049 0.0282 0.0195
Germany ............... 0.0019 0.0151 0.0062
Ireland ............... 0.0000 0.0225 0.0222
Italy ................. 0.0016 0.0067 0.0067
Luxembourg ............ 0.0013 0.0054 0.0054
Netherlands ........... 0.0120 0.0478 0.0351
Norway ................ 0.0069 0.0281 0.0281
Poland ................ 0.0018 0.0075 0.0003
South Africa .......... 0.0000 0.0042 0.0042
Spain ................. 0.0030 0.0121 0.0121
Switzerland ........... 0.0061 0.0248 0.0241
United Kingdom ........ 0.0000 0.1407 0.0675
-------------------------------------------------------
TOTAL ................. $0.0468 $0.3768 $0.2628
=======================================================

- --------------------------------------------------------------------------------
CLASS C
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Austria ............... $0.0004 $0.0014 $0.0014
Belgium ............... 0.0031 0.0126 0.0126
Bermuda ............... 0.0000 0.0041 0.0019
Denmark ............... 0.0024 0.0101 0.0100
Finland ............... 0.0014 0.0057 0.0057
France ................ 0.0049 0.0283 0.0196
Germany ............... 0.0019 0.0152 0.0062
Ireland ............... 0.0000 0.0227 0.0224
Italy ................. 0.0016 0.0068 0.0068
Luxembourg ............ 0.0013 0.0054 0.0054
Netherlands ........... 0.0120 0.0480 0.0352
Norway ................ 0.0069 0.0283 0.0283
Poland ................ 0.0018 0.0075 0.0003
South Africa .......... 0.0000 0.0043 0.0043
Spain ................. 0.0030 0.0122 0.0122
Switzerland ........... 0.0061 0.0250 0.0243
United Kingdom ........ 0.0000 0.1416 0.0679
-------------------------------------------------------
TOTAL ................. $0.0468 $0.3792 $0.2645
=======================================================

Annual Report | 45

MUTUAL EUROPEAN FUND

TAX DESIGNATION (UNAUDITED) (CONTINUED)

46 | Annual Report

MUTUAL EUROPEAN FUND

BOARD MEMBERS AND OFFICERS

INDEPENDENT BOARD MEMBERS

EDWARD I. ALTMAN, PH.D. (1941) Director Since 1987 7 Director, A.T.D. Inc. (financial
101 John F. Kennedy Parkway technology and investment
ShortHills, NJ 07078-2789 company).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center; editor and author of
numerous financial publications; financial consultant; and serves on the Investment Advisory Committee of the New York State Common
Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM
101 John F. Kennedy Parkway Corporation(Sallie Mae) and Allied
Short Hills, NJ 07078-2789 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 (1929) Director Since 2002 13 Director, Fiduciary Emerging
101 John F. Kennedy Parkway Markets Bond Fund PLC and
Short Hills, NJ 07078-2789 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 (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 47

LEONARD RUBIN (1925) Director Since 1996 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
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 (1946) Director and Director since 13 Director, El Oro and Exploration
101 John F. Kennedy Parkway Chairman of 1991 and Co., p.l.c., and ARC Wireless
Short Hills, NJ 07078-2789 the Board Chairman of the Solutions, Inc.
Board since 2005
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------

INTERESTED BOARD MEMBERS AND OFFICERS

**WILLIAM J. LIPPMAN (1925) Director Since 1996 14 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case
may be, of five of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**ANNE M. TATLOCK (1939) 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.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

48 | Annual Report

Annual Report | 49

STEVEN J. GRAY (1955) Secretary Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer of 33 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Legal Counsel, Atlas Advisers, Inc. (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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, LLC,
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 47 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 (1937) Vice Since 2002 Not Applicable Not Applicable
600 Fifth Avenue President - 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, Franklin Templeton Institutional
Suisse S.A., 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 45 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since December Not Applicable Not Applicable
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------

50 | Annual Report

Annual Report | 51

MUTUAL EUROPEAN FUND

SHAREHOLDER INFORMATION

PROXY VOTING POLICIES AND PROCEDURES

QUARTERLY STATEMENT OF INVESTMENTS

52 | Annual Report

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 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

BLEND

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

SECTOR

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(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(4)
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(4)
Templeton Global Bond Fund
Templeton Income Fund

TAX-FREE INCOME(5)

NATIONAL FUNDS

Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(6)

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

INSURANCE FUNDS

Franklin Templeton Variable Insurance Products
Trust(8)

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

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

(6) Portfolio of insured municipal securities.

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

09/05 Not part of the annual report

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

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ANNUAL REPORT AND SHAREHOLDER LETTER

MUTUAL EUROPEAN FUND

INVESTMENT MANAGER

Franklin Mutual Advisers, LLC
101 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)

478 A2005 02/06

MUTUAL QUALIFIED FUND

[GRAPHIC OMITTED]

- --------------------------------------------------------------------------------
DECEMBER 31, 2005
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- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
MUTUAL QUALIFIED FUND
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sign up for eDelivery at
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See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
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 Qualified 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 ................ 48

Tax Designation ........................................................ 49

Board Members and Officers ............................................. 50

Shareholder Information ................................................ 55

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

ANNUAL REPORT

MUTUAL QUALIFIED FUND

YOUR FUND'S GOAL AND MAIN INVESTMENTS: Mutual Qualified Fund seeks capital
appreciation, with income as a secondary goal, by investing mainly in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to, but less than, 50% of its assets in
foreign securiteis.

We are pleased to bring you Mutual Qualified Fund's annual report for the fiscal
year ended December 31, 2005.

PERFORMANCE OVERVIEW

Mutual Qualified Fund - Class Z posted a +11.26% cumulative total return for the
12 months ended December 31, 2005. The Fund outperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +4.91% 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 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

measured by the 2.2% rise for the core Consumer Price Index (CPI).(2) In this
environment, the blue chip stocks of the Dow Jones Industrial Average posted a
one-year total return of +1.72%, while the broader S&P 500 and the
technology-heavy NASDAQ Composite Index returned +4.91% and +2.12%.(3)

INVESTMENT STRATEGY

GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/05

[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

U.S. 46.8%
France 9.5%
U.K. 9.3%
South Korea 4.3%
Canada 2.6%
Ireland 2.4%
Spain 2.3%
Japan 2.0%
Germany 2.0%
Norway 1.9%
Switzerland 1.6%
Finland 1.2%
Netherlands 1.0%
Other 6.8%
Short-Term Investments & Other Net Assets 6.3%

(2) Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/05

- --------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------
Insurance 11.1%
- --------------------------------------------------
Tobacco 10.2%
- --------------------------------------------------
Commercial Banks 8.2%
- --------------------------------------------------
Food Products 7.1%
- --------------------------------------------------
Media 5.9%
- --------------------------------------------------
Metals & Mining 5.3%
- --------------------------------------------------
Diversified Telecommunication Services 4.3%
- --------------------------------------------------
Oil, Gas & Consumable Fuels 3.5%
- --------------------------------------------------
Real Estate 3.3%
- --------------------------------------------------
Beverages 3.2%
- --------------------------------------------------

MANAGER'S DISCUSSION

The main contributors to the Fund's performance during the 12 months under
review were undervalued, foreign equities. They include Generale de Sante,
British American Tobacco (BAT) and Mitsubishi UFJ Financial Group (MUFG).

Generale de Sante is France's leading clinic operator with a market share of
approximately 12%. The stock appreciated 92% in local currency during 2005 as
the company benefited from many positive factors: strong revenue growth in
excess of 8%, a new reimbursement system that favors private hospitals, the
continued optimization and restructuring of its existing portfolio, significant
savings from its cost-cutting program, and a 20% cost of debt reduction
following a refinancing. The stock price also benefited from an announcement
that the company will sell and lease back its real estate portfolio, which
represents more than 50% of its market capitalization. In addition, Generale de
Sante acquired several clinics this year from Groupe Chiche and Hexagone,
reinforcing its dominance in the French market while paying multiples typical of
the sector.

London-based BAT is the world's second-largest cigarette manufacturer behind
Philip Morris. With about a 15% global market share, BAT enjoys

6 | Annual Report

strong market positions in Europe, North America and several emerging markets.
The company's stock appreciated 52% in local currency in 2005 as the company
delivered robust operational performance driven by increasing sales volumes and
an improving product mix. BAT benefited from an acceleration of its sales in
emerging markets, a focused development of its higher-margin global brands, and
a further reduction of its cost base. During the year, the company returned most
of its free cash flow to shareholders through dividends and share buybacks. This
caused a number of analysts to raise their earnings growth projections for BAT.

As always, some stocks didn't meet our expectations in 2005 and detracted from
Fund performance. They included Kindred Healthcare, a U.S. health care provider;
White Mountains Insurance Group, a U.S. insurance company; and Washington Post,
a U.S. newspaper and publishing company.

White Mountains' shares weakened 12% largely due to the company's exposure to
areas devastated by Hurricane Katrina, which may have caused the largest total
insured loss in history.

TOP 10 HOLDINGS
12/31/05

- --------------------------------------------------------------
COMPANY % OFTOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------
White Mountains Insurance Group Inc. 4.1%
INSURANCE, U.S.
- --------------------------------------------------------------
Weyerhaeuser Co. 2.9%
PAPER & FOREST PRODUCTS, U.S.
- --------------------------------------------------------------
KT&G Corp., common & restricted 2.7%
TOBACCO, SOUTH KOREA
- --------------------------------------------------------------
Altadis SA 2.3%
TOBACCO, SPAIN
- --------------------------------------------------------------
Berkshire Hathaway Inc., A & B 2.0%
INSURANCE, U.S.
- --------------------------------------------------------------
Orkla ASA 1.9%
FOOD PRODUCTS, NORWAY
- --------------------------------------------------------------
Pernod Ricard SA 1.9%
BEVERAGES, FRANCE
- --------------------------------------------------------------
British American Tobacco PLC 1.8%
TOBACCO, U.K.
- --------------------------------------------------------------
Allied Irish Banks PLC 1.8%
COMMERCIAL BANKS, IRELAND
- --------------------------------------------------------------
Groupe Danone 1.7%
FOOD PRODUCTS, FRANCE
- --------------------------------------------------------------

(5) A member of Franklin Mutual Advisers, Inc., serves on Kindred's board of
directors.

Annual Report | 7

operations. Additionally, the advertising market was soft overall, but
particularly pronounced for weekly publications, which hurt revenues at
Newsweek.

Finally, investors should note that we entered 2005 less than fully hedged in
foreign currencies and increased the hedges on foreign currency exposure over
the course of the year.

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

/s/ Anne E. Gudefin

[PHOTO] Anne E. Gudefin, CFA
Portfolio Manager

/s/ Shawn M. Tumulty

[PHOTO] Shawn M. Tumulty, CFA
Assistant Portfolio Manager

Mutual Qualified Fund

- --------------------------------------------------------------------------------
ANNE GUDEFIN has been a member of the management team of the Mutual Series Funds
since 2000, when she joined Franklin Templeton Investments. Ms. Gudefin has been
a portfolio manager for Mutual Qualified Fund since 2002. She assumed the duties
of portfolio manager for Mutual Discovery Fund in May 2005. Previously, she was
an analyst at Perry Capital.

SHAWN TUMULTY has been an assistant portfolio manager for Mutual Qualified Fund
since 2003. He joined Franklin Templeton Investments in 2000. Prior to joining
Franklin Templeton Investments, Mr. Tumulty was an analyst and portfolio manager
at Hamilton Partners Limited.
- --------------------------------------------------------------------------------

8 | Annual Report

PERFORMANCE SUMMARY AS OF 12/31/05

PRICE AND DISTRIBUTION INFORMATION

- --------------------------------------------------------------------------------
CLASS Z (SYMBOL: MQIFX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 0.32 $ 19.81 $ 19.49
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $ 0.4181
- --------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.2269
- --------------------------------------------------------------------------------
Long-Term Capital Gain $ 1.2171
- --------------------------------------------------------------------------------
TOTAL $ 1.8621
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: TEQIX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 0.30 $ 19.71 $ 19.41
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $ 0.3495
- --------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.2269
- --------------------------------------------------------------------------------
Long-Term Capital Gain $ 1.2171
- --------------------------------------------------------------------------------
TOTAL $ 1.7935
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: TEBQX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 0.26 $ 19.34 $ 19.08
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $ 0.2178
- --------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.2269
- --------------------------------------------------------------------------------
Long-Term Capital Gain $ 1.2171
- --------------------------------------------------------------------------------
TOTAL $ 1.6618
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: TEMQX) CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$ 0.28 $ 19.58 $ 19.30
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $ 0.2219
- --------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.2269
- --------------------------------------------------------------------------------
Long-Term Capital Gain $ 1.2171
- --------------------------------------------------------------------------------
TOTAL $ 1.6659
- --------------------------------------------------------------------------------

Mutual Qualified Fund paid distributions derived from long-term capital gains
totaling $1.2171 per share in June and December 2005. The Fund designates such
distributions as capital gain dividends per Internal Revenue Code Section
852(b)(3)(C).

Annual Report | 9

PERFORMANCE SUMMARY (CONTINUED)

PERFORMANCE(1)

- --------------------------------------------------------------------------------
CLASS Z 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +11.26% +59.98% +218.90%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +11.26% +9.85% +12.30%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,126 $15,998 $31,890
- --------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR INCEPTION (11/1/96)
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +10.85% +57.19% +168.24%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +4.49% +8.18% +10.65%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $10,449 $14,815 $25,279
- --------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +10.12% +52.18% +93.75%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +6.12% +8.47% +9.91%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $10,612 $15,018 $19,375
- --------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (11/1/96)
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +10.08% +52.18% +152.81%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +9.08% +8.76% +10.65%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(4) $10,908 $15,218 $25,281
- --------------------------------------------------------------------------------

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)

AVERAGE ANNUAL TOTAL RETURN

- ------------------------------------------
CLASS Z 12/31/05
- ------------------------------------------
1-Year +11.26%
- ------------------------------------------
5-Year +9.85%
- ------------------------------------------
10-Year +12.30%
- ------------------------------------------

CLASS Z (1/1/96-12/31/05)

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

MUTUAL QUALIFIED
DATE FUND S&P 500(5)
---------- ---------------- ------------
1/1/1996 $10,000 $10,000
1/31/1996 $10,465 $10,340
2/29/1996 $10,760 $10,436
3/31/1996 $10,872 $10,537
4/30/1996 $10,930 $10,692
5/31/1996 $11,086 $10,967
6/30/1996 $11,021 $11,009
7/31/1996 $10,661 $10,523
8/31/1996 $11,018 $10,745
9/30/1996 $11,350 $11,349
10/31/1996 $11,480 $11,662
11/30/1996 $12,071 $12,543
12/31/1996 $12,230 $12,295
1/31/1997 $12,629 $13,062
2/28/1997 $12,904 $13,165
3/31/1997 $12,738 $12,625
4/30/1997 $12,851 $13,378
5/31/1997 $13,469 $14,192
6/30/1997 $13,913 $14,827
7/31/1997 $14,636 $16,006
8/31/1997 $14,514 $15,110
9/30/1997 $15,241 $15,937
10/31/1997 $14,820 $15,406
11/30/1997 $14,996 $16,118
12/31/1997 $15,277 $16,395
1/31/1998 $15,201 $16,576
2/28/1998 $16,083 $17,771
3/31/1998 $16,714 $18,680
4/30/1998 $16,730 $18,868
5/31/1998 $16,672 $18,544
6/30/1998 $16,562 $19,297
7/31/1998 $16,074 $19,092
8/31/1998 $13,683 $16,334
9/30/1998 $13,631 $17,381
10/31/1998 $14,426 $18,793
11/30/1998 $15,143 $19,932
12/31/1998 $15,353 $21,080
1/31/1999 $15,456 $21,961
2/28/1999 $15,036 $21,278
3/31/1999 $15,801 $22,130
4/30/1999 $17,191 $22,987
5/31/1999 $17,405 $22,445
6/30/1999 $17,920 $23,689
7/31/1999 $17,584 $22,951
8/31/1999 $16,757 $22,837
9/30/1999 $16,372 $22,212
10/31/1999 $16,815 $23,617
11/30/1999 $17,305 $24,097
12/31/1999 $17,447 $25,515
1/31/2000 $16,962 $24,233
2/29/2000 $16,188 $23,775
3/31/2000 $17,953 $26,099
4/30/2000 $17,973 $25,314
5/31/2000 $18,365 $24,796
6/30/2000 $18,074 $25,408
7/31/2000 $18,621 $25,011
8/31/2000 $19,448 $26,564
9/30/2000 $19,504 $25,162
10/31/2000 $19,672 $25,055
11/30/2000 $19,057 $23,081
12/31/2000 $19,934 $23,194
1/31/2001 $21,002 $24,017
2/28/2001 $20,966 $21,828
3/31/2001 $20,510 $20,446
4/30/2001 $21,482 $22,034
5/31/2001 $22,250 $22,181
6/30/2001 $22,597 $21,642
7/31/2001 $22,696 $21,429
8/31/2001 $22,302 $20,089
9/30/2001 $20,230 $18,466
10/31/2001 $20,082 $18,819
11/30/2001 $20,933 $20,262
12/31/2001 $21,570 $20,440
1/31/2002 $21,479 $20,141
2/28/2002 $21,583 $19,753
3/31/2002 $22,329 $20,496
4/30/2002 $22,486 $19,254
5/31/2002 $22,486 $19,113
6/30/2002 $20,955 $17,752
7/31/2002 $19,478 $16,368
8/31/2002 $19,651 $16,475
9/30/2002 $18,374 $14,686
10/31/2002 $18,627 $15,978
11/30/2002 $19,092 $16,917
12/31/2002 $18,831 $15,924
1/31/2003 $18,683 $15,508
2/28/2003 $18,291 $15,275
3/31/2003 $18,332 $15,421
4/30/2003 $19,587 $16,692
5/31/2003 $20,680 $17,571
6/30/2003 $21,021 $17,795
7/31/2003 $21,334 $18,109
8/31/2003 $21,863 $18,462
9/30/2003 $21,755 $18,266
10/31/2003 $22,679 $19,299
11/30/2003 $23,440 $19,469
12/31/2003 $24,574 $20,489
1/31/2004 $24,807 $20,865
2/29/2004 $25,412 $21,155
3/31/2004 $25,412 $20,836
4/30/2004 $24,670 $20,509
5/31/2004 $24,876 $20,790
6/30/2004 $25,345 $21,194
7/31/2004 $24,960 $20,493
8/31/2004 $25,290 $20,575
9/30/2004 $25,896 $20,798
10/31/2004 $26,186 $21,116
11/30/2004 $27,811 $21,970
12/31/2004 $28,662 $22,717
1/31/2005 $28,030 $22,163
2/28/2005 $28,809 $22,629
3/31/2005 $28,574 $22,229
4/30/2005 $28,338 $21,808
5/31/2005 $29,044 $22,501
6/30/2005 $29,640 $22,533
7/31/2005 $30,608 $23,371
8/31/2005 $30,563 $23,158
9/30/2005 $31,055 $23,345
10/31/2005 $30,251 $22,956
11/30/2005 $31,159 $23,823
12/31/2005 $31,890 $23,832

AVERAGE ANNUAL TOTAL RETURN

- ------------------------------------------
CLASS A 12/31/05
- ------------------------------------------
1-Year +4.49%
- ------------------------------------------
5-Year +8.18%
- ------------------------------------------
Since Inception (11/1/96) +10.65%
- ------------------------------------------

CLASS A (11/1/96-12/31/05)

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

MUTUAL QUALIFIED
DATE FUND S&P 500(5)
---------- ---------------- ------------
11/1/1996 $ 9,425 $10,000
11/30/1996 $ 9,908 $10,755
12/31/1996 $10,035 $10,542
1/31/1997 $10,360 $11,200
2/28/1997 $10,579 $11,288
3/31/1997 $10,437 $10,825
4/30/1997 $10,530 $11,471
5/31/1997 $11,031 $12,169
6/30/1997 $11,389 $12,714
7/31/1997 $11,982 $13,725
8/31/1997 $11,875 $12,957
9/30/1997 $12,466 $13,666
10/31/1997 $12,120 $13,210
11/30/1997 $12,258 $13,821
12/31/1997 $12,488 $14,058
1/31/1998 $12,419 $14,213
2/28/1998 $13,135 $15,238
3/31/1998 $13,644 $16,018
4/30/1998 $13,658 $16,179
5/31/1998 $13,603 $15,901
6/30/1998 $13,506 $16,546
7/31/1998 $13,111 $16,371
8/31/1998 $11,153 $14,006
9/30/1998 $11,111 $14,904
10/31/1998 $11,762 $16,115
11/30/1998 $12,335 $17,091
12/31/1998 $12,507 $18,075
1/31/1999 $12,590 $18,831
2/28/1999 $12,240 $18,246
3/31/1999 $12,864 $18,975
4/30/1999 $13,992 $19,710
5/31/1999 $14,167 $19,245
6/30/1999 $14,577 $20,313
7/31/1999 $14,295 $19,679
8/31/1999 $13,620 $19,582
9/30/1999 $13,306 $19,046
10/31/1999 $13,659 $20,251
11/30/1999 $14,052 $20,662
12/31/1999 $14,166 $21,878
1/31/2000 $13,772 $20,779
2/29/2000 $13,134 $20,386
3/31/2000 $14,561 $22,379
4/30/2000 $14,570 $21,706
5/31/2000 $14,889 $21,262
6/30/2000 $14,655 $21,786
7/31/2000 $15,091 $21,446
8/31/2000 $15,746 $22,777
9/30/2000 $15,791 $21,575
10/31/2000 $15,918 $21,484
11/30/2000 $15,418 $19,791
12/31/2000 $16,123 $19,888
1/31/2001 $16,980 $20,593
2/28/2001 $16,951 $18,717
3/31/2001 $16,571 $17,532
4/30/2001 $17,360 $18,893
5/31/2001 $17,973 $19,020
6/30/2001 $18,241 $18,557
7/31/2001 $18,321 $18,374
8/31/2001 $17,991 $17,225
9/30/2001 $16,321 $15,834
10/31/2001 $16,201 $16,137
11/30/2001 $16,881 $17,374
12/31/2001 $17,388 $17,526
1/31/2002 $17,304 $17,271
2/28/2002 $17,388 $16,938
3/31/2002 $17,981 $17,575
4/30/2002 $18,097 $16,510
5/31/2002 $18,097 $16,388
6/30/2002 $16,855 $15,221
7/31/2002 $15,671 $14,035
8/31/2002 $15,800 $14,127
9/30/2002 $14,779 $12,593
10/31/2002 $14,972 $13,701
11/30/2002 $15,338 $14,506
12/31/2002 $15,129 $13,654
1/31/2003 $15,009 $13,297
2/28/2003 $14,693 $13,098
3/31/2003 $14,704 $13,223
4/30/2003 $15,716 $14,313
5/31/2003 $16,586 $15,066
6/30/2003 $16,856 $15,259
7/31/2003 $17,097 $15,528
8/31/2003 $17,513 $15,830
9/30/2003 $17,436 $15,663
10/31/2003 $18,158 $16,548
11/30/2003 $18,771 $16,694
12/31/2003 $19,665 $17,569
1/31/2004 $19,853 $17,891
2/29/2004 $20,328 $18,140
3/31/2004 $20,328 $17,866
4/30/2004 $19,720 $17,586
5/31/2004 $19,886 $17,827
6/30/2004 $20,257 $18,173
7/31/2004 $19,936 $17,572
8/31/2004 $20,190 $17,643
9/30/2004 $20,677 $17,833
10/31/2004 $20,898 $18,106
11/30/2004 $22,193 $18,838
12/31/2004 $22,864 $19,479
1/31/2005 $22,346 $19,004
2/28/2005 $22,970 $19,404
3/31/2005 $22,770 $19,061
4/30/2005 $22,581 $18,699
5/31/2005 $23,135 $19,294
6/30/2005 $23,594 $19,322
7/31/2005 $24,357 $20,040
8/31/2005 $24,321 $19,857
9/30/2005 $24,715 $20,018
10/31/2005 $24,059 $19,684
11/30/2005 $24,774 $20,428
12/31/2005 $25,279 $20,435

Annual Report | 11

PERFORMANCE SUMMARY (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- ------------------------------------------
CLASS B 12/31/05
- ------------------------------------------
1-Year +6.12%
- ------------------------------------------
5-Year +8.47%
- ------------------------------------------
Since Inception (1/1/99) +9.91%
- ------------------------------------------

CLASS B (1/1/99-12/31/05)

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

MUTUAL QUALIFIED
DATE FUND S&P 500(5)
---------- ---------------- ------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,061 $10,418
2/28/1999 $ 9,787 $10,094
3/31/1999 $10,274 $10,498
4/30/1999 $11,163 $10,905
5/31/1999 $11,297 $10,647
6/30/1999 $11,617 $11,238
7/31/1999 $11,385 $10,887
8/31/1999 $10,851 $10,834
9/30/1999 $10,588 $10,537
10/31/1999 $10,864 $11,203
11/30/1999 $11,171 $11,431
12/31/1999 $11,255 $12,104
1/31/2000 $10,933 $11,496
2/29/2000 $10,423 $11,279
3/31/2000 $11,550 $12,381
4/30/2000 $11,557 $12,009
5/31/2000 $11,805 $11,763
6/30/2000 $11,605 $12,053
7/31/2000 $11,946 $11,865
8/31/2000 $12,461 $12,601
9/30/2000 $12,491 $11,936
10/31/2000 $12,585 $11,886
11/30/2000 $12,186 $10,949
12/31/2000 $12,731 $11,003
1/31/2001 $13,405 $11,393
2/28/2001 $13,366 $10,355
3/31/2001 $13,064 $ 9,699
4/30/2001 $13,676 $10,453
5/31/2001 $14,156 $10,523
6/30/2001 $14,358 $10,267
7/31/2001 $14,413 $10,166
8/31/2001 $14,151 $ 9,530
9/30/2001 $12,830 $ 8,760
10/31/2001 $12,719 $ 8,927
11/30/2001 $13,252 $ 9,612
12/31/2001 $13,644 $ 9,696
1/31/2002 $13,569 $ 9,555
2/28/2002 $13,628 $ 9,371
3/31/2002 $14,089 $ 9,723
4/30/2002 $14,173 $ 9,134
5/31/2002 $14,165 $ 9,067
6/30/2002 $13,184 $ 8,421
7/31/2002 $12,253 $ 7,765
8/31/2002 $12,338 $ 7,816
9/30/2002 $11,536 $ 6,967
10/31/2002 $11,681 $ 7,580
11/30/2002 $11,963 $ 8,025
12/31/2002 $11,792 $ 7,554
1/31/2003 $11,689 $ 7,357
2/28/2003 $11,439 $ 7,246
3/31/2003 $11,448 $ 7,316
4/30/2003 $12,222 $ 7,919
5/31/2003 $12,900 $ 8,335
6/30/2003 $13,099 $ 8,442
7/31/2003 $13,280 $ 8,591
8/31/2003 $13,600 $ 8,758
9/30/2003 $13,523 $ 8,665
10/31/2003 $14,076 $ 9,155
11/30/2003 $14,543 $ 9,236
12/31/2003 $15,237 $ 9,720
1/31/2004 $15,368 $ 9,898
2/29/2004 $15,733 $10,036
3/31/2004 $15,715 $ 9,884
4/30/2004 $15,246 $ 9,729
5/31/2004 $15,359 $ 9,863
6/30/2004 $15,634 $10,054
7/31/2004 $15,382 $ 9,722
8/31/2004 $15,573 $ 9,761
9/30/2004 $15,938 $ 9,866
10/31/2004 $16,104 $10,017
11/30/2004 $17,086 $10,422
12/31/2004 $17,594 $10,777
1/31/2005 $17,188 $10,514
2/28/2005 $17,658 $10,735
3/31/2005 $17,502 $10,545
4/30/2005 $17,336 $10,345
5/31/2005 $17,760 $10,674
6/30/2005 $18,100 $10,690
7/31/2005 $18,678 $11,087
8/31/2005 $18,632 $10,986
9/30/2005 $18,921 $11,075
10/31/2005 $18,408 $10,890
11/30/2005 $18,949 $11,301
12/31/2005 $19,375 $11,305

AVERAGE ANNUAL TOTAL RETURN

- ------------------------------------------
CLASS C 12/31/05
- ------------------------------------------
1-Year +9.08%
- ------------------------------------------
5-Year +8.76%
- ------------------------------------------
Since Inception (11/1/96) +10.65%
- ------------------------------------------

CLASS C (11/1/96-12/31/05)

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

MUTUAL QUALIFIED
DATE FUND S&P 500(5)
---------- ---------------- ------------
11/1/1996 $10,000 $10,000
11/30/1996 $10,509 $10,755
12/31/1996 $10,637 $10,542
1/31/1997 $10,974 $11,200
2/28/1997 $11,204 $11,288
3/31/1997 $11,046 $10,825
4/30/1997 $11,138 $11,471
5/31/1997 $11,669 $12,169
6/30/1997 $12,043 $12,714
7/31/1997 $12,659 $13,725
8/31/1997 $12,545 $12,957
9/30/1997 $13,158 $13,666
10/31/1997 $12,785 $13,210
11/30/1997 $12,925 $13,821
12/31/1997 $13,158 $14,058
1/31/1998 $13,078 $14,213
2/28/1998 $13,827 $15,238
3/31/1998 $14,358 $16,018
4/30/1998 $14,358 $16,179
5/31/1998 $14,292 $15,901
6/30/1998 $14,190 $16,546
7/31/1998 $13,757 $16,371
8/31/1998 $11,698 $14,006
9/30/1998 $11,646 $14,904
10/31/1998 $12,318 $16,115
11/30/1998 $12,916 $17,091
12/31/1998 $13,082 $18,075
1/31/1999 $13,162 $18,831
2/28/1999 $12,794 $18,246
3/31/1999 $13,434 $18,975
4/30/1999 $14,602 $19,710
5/31/1999 $14,778 $19,245
6/30/1999 $15,200 $20,313
7/31/1999 $14,895 $19,679
8/31/1999 $14,196 $19,582
9/30/1999 $13,850 $19,046
10/31/1999 $14,212 $20,251
11/30/1999 $14,615 $20,662
12/31/1999 $14,722 $21,878
1/31/2000 $14,302 $20,779
2/29/2000 $13,636 $20,386
3/31/2000 $15,108 $22,379
4/30/2000 $15,117 $21,706
5/31/2000 $15,441 $21,262
6/30/2000 $15,178 $21,786
7/31/2000 $15,623 $21,446
8/31/2000 $16,305 $22,777
9/30/2000 $16,343 $21,575
10/31/2000 $16,457 $21,484
11/30/2000 $15,936 $19,791
12/31/2000 $16,653 $19,888
1/31/2001 $17,532 $20,593
2/28/2001 $17,491 $18,717
3/31/2001 $17,097 $17,532
4/30/2001 $17,885 $18,893
5/31/2001 $18,521 $19,020
6/30/2001 $18,789 $18,557
7/31/2001 $18,852 $18,374
8/31/2001 $18,509 $17,225
9/30/2001 $16,778 $15,834
10/31/2001 $16,643 $16,137
11/30/2001 $17,338 $17,374
12/31/2001 $17,845 $17,526
1/31/2002 $17,757 $17,271
2/28/2002 $17,834 $16,938
3/31/2002 $18,423 $17,575
4/30/2002 $18,532 $16,510
5/31/2002 $18,521 $16,388
6/30/2002 $17,252 $15,221
7/31/2002 $16,021 $14,035
8/31/2002 $16,143 $14,127
9/30/2002 $15,090 $12,593
10/31/2002 $15,278 $13,701
11/30/2002 $15,655 $14,506
12/31/2002 $15,430 $13,654
1/31/2003 $15,296 $13,297
2/28/2003 $14,962 $13,098
3/31/2003 $14,973 $13,223
4/30/2003 $15,987 $14,313
5/31/2003 $16,867 $15,066
6/30/2003 $17,135 $15,259
7/31/2003 $17,371 $15,528
8/31/2003 $17,785 $15,830
9/30/2003 $17,696 $15,663
10/31/2003 $18,424 $16,548
11/30/2003 $19,029 $16,694
12/31/2003 $19,929 $17,569
1/31/2004 $20,098 $17,891
2/29/2004 $20,582 $18,140
3/31/2004 $20,559 $17,866
4/30/2004 $19,940 $17,586
5/31/2004 $20,087 $17,827
6/30/2004 $20,453 $18,173
7/31/2004 $20,126 $17,572
8/31/2004 $20,374 $17,643
9/30/2004 $20,847 $17,833
10/31/2004 $21,061 $18,106
11/30/2004 $22,345 $18,838
12/31/2004 $23,022 $19,479
1/31/2005 $22,485 $19,004
2/28/2005 $23,105 $19,404
3/31/2005 $22,890 $19,061
4/30/2005 $22,676 $18,699
5/31/2005 $23,224 $19,294
6/30/2005 $23,675 $19,322
7/31/2005 $24,436 $20,040
8/31/2005 $24,376 $19,857
9/30/2005 $24,750 $20,018
10/31/2005 $24,086 $19,684
11/30/2005 $24,786 $20,428
12/31/2005 $25,281 $20,435

12 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

ENDNOTES

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.

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 X $7.50 = $64.50.

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

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS

14 | Annual Report

YOUR FUND'S EXPENSES (CONTINUED)

Actual $1,000 $1,075.90 $4.55
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,050.82 $4.43
- -------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,074.20 $6.38
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.06 $6.21
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,070.50 $9.76
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.78 $9.50
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,070.40 $9.76
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.78 $9.50
- -------------------------------------------------------------------------------------------------------

* Expenses are equal to the annualized expense ratio for each class (Z:
0.87%; A: 1.22%; B: 1.87%; and C: 1.87%), multiplied by the average
account value over the period, multiplied by 184/365 to reflect the
one-half year period.

Annual Report | 15

MUTUAL QUALIFIED FUND

FINANCIAL HIGHLIGHTS

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

Net asset value, beginning of year .......... $ 19.49 $ 17.88 $ 13.95 $ 16.49 $ 16.61
----------------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ................... 0.41 0.37 0.20 0.28 0.23

Net realized and unrealized gains (losses) . 1.77 2.56 4.04 (2.34) 1.12
----------------------------------------------------------------------------------
Total from investment operations ............ 2.18 2.93 4.24 (2.06) 1.35
----------------------------------------------------------------------------------
Less distributions from:

Net investment income ...................... (0.42) (0.39) (0.31) (0.26) (0.20)

Net realized gains ......................... (1.44) (0.93) -- (0.22) (1.27)
----------------------------------------------------------------------------------
Total distributions ......................... (1.86) (1.32) (0.31) (0.48) (1.47)
----------------------------------------------------------------------------------
Redemption fees ............................. --(c) --(c) -- -- --
----------------------------------------------------------------------------------
Net asset value, end of year ................ $ 19.81 $ 19.49 $ 17.88 $ 13.95 $ 16.49
==================================================================================

Total return ................................ 11.26% 16.64% 30.50% (12.70)% 8.21%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............. $ 3,646,593 $ 3,419,744 $ 3,102,506 $ 2,503,544 $ 3,022,299

Ratios to average net assets:*

Expenses(b) ................................ 0.85% 0.82% 0.85% 0.80% 0.80%

Net investment income ...................... 2.04% 2.01% 1.34% 1.81% 1.29%

Portfolio turnover rate ..................... 20.98% 37.61% 49.70% 51.24% 52.64%

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

Expenses ................................... 0.81% 0.81% 0.82% 0.79% 0.79%

(a) Based on average daily shares outstanding.

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

16 | See notes to financial statements. | Annual Report

MUTUAL QUALIFIED FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

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

Net asset value, beginning of year .......... $ 19.41 $ 17.81 $ 13.91 $ 16.44 $ 16.56
----------------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ................... 0.34 0.31 0.15 0.23 0.17

Net realized and unrealized gains (losses) . 1.75 2.55 4.01 (2.33) 1.12
----------------------------------------------------------------------------------
Total from investment operations ............ 2.09 2.86 4.16 (2.10) 1.29
----------------------------------------------------------------------------------
Less distributions from:

Net investment income ...................... (0.35) (0.33) (0.26) (0.21) (0.14)

Net realized gains ......................... (1.44) (0.93) -- (0.22) (1.27)
----------------------------------------------------------------------------------
Total distributions ......................... (1.79) (1.26) (0.26) (0.43) (1.41)
----------------------------------------------------------------------------------
Redemption fees ............................. --(d) --(d) -- -- --
----------------------------------------------------------------------------------
Net asset value, end of year ................ $ 19.71 $ 19.41 $ 17.81 $ 13.91 $ 16.44
==================================================================================

Total return(b) ............................. 10.85% 16.27% 29.98% (13.00)% 7.85%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............. $ 794,789 $ 692,523 $ 625,088 $ 449,507 $ 482,182

Ratios to average net assets:*

Expenses(c) ................................ 1.20% 1.17% 1.20% 1.15% 1.15%

Net investment income ...................... 1.69% 1.66% 0.99% 1.46% 0.94%

Portfolio turnover rate ..................... 20.98% 37.61% 49.70% 51.24% 52.64%

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

Expenses ................................... 1.16% 1.16% 1.17% 1.14% 1.14%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the sales commissions or the contingent
deferred sales charge.

(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 $0.01 per share.

Annual Report | See notes to financial statements. | 17

MUTUAL QUALIFIED FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

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

Net asset value, beginning of year .......... $ 19.08 $ 17.54 $ 13.72 $ 16.25 $ 16.44
----------------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ................... 0.20 0.19 0.05 0.13 0.04

Net realized and unrealized gains (losses) . 1.72 2.50 3.94 (2.30) 1.13
----------------------------------------------------------------------------------
Total from investment operations ............ 1.92 2.69 3.99 (2.17) 1.17
----------------------------------------------------------------------------------
Less distributions from:

Net investment income ...................... (0.22) (0.22) (0.17) (0.14) (0.09)

Net realized gains ......................... (1.44) (0.93) -- (0.22) (1.27)
----------------------------------------------------------------------------------
Total distributions ......................... (1.66) (1.15) (0.17) (0.36) (1.36)
----------------------------------------------------------------------------------
Redemption fees ............................. --(d) --(d) -- -- --
----------------------------------------------------------------------------------
Net asset value, end of year ................ $ 19.34 $ 19.08 $ 17.54 $ 13.72 $ 16.25
==================================================================================

Total return(b) ............................. 10.12% 15.46% 29.22% (13.58)% 7.17%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............. $ 69,847 $ 67,714 $ 53,760 $ 36,023 $ 20,581

Ratios to average net assets:*

Expenses(c) ................................ 1.85% 1.82% 1.85% 1.80% 1.80%

Net investment income ...................... 1.04% 1.01% 0.34% 0.81% 0.24%

Portfolio turnover rate ..................... 20.98% 37.61% 49.70% 51.24% 52.64%

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

Expenses ................................... 1.81% 1.81% 1.82% 1.79% 1.79%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

18 | See notes to financial statements. | Annual Report

MUTUAL QUALIFIED FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

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

Net asset value, beginning of year .......... $ 19.30 $ 17.72 $ 13.85 $ 16.36 $ 16.49
----------------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ................... 0.20 0.19 0.05 0.13 0.05

Net realized and unrealized gains (losses) . 1.74 2.52 3.98 (2.31) 1.12
----------------------------------------------------------------------------------
Total from investment operations ............ 1.94 2.71 4.03 (2.18) 1.17
----------------------------------------------------------------------------------
Less distributions from:

Net investment income ...................... (0.22) (0.20) (0.16) (0.11) (0.03)

Net realized gains ......................... (1.44) (0.93) -- (0.22) (1.27)
----------------------------------------------------------------------------------
Total distributions ......................... (1.66) (1.13) (0.16) (0.33) (1.30)
----------------------------------------------------------------------------------
Redemption fees ............................. --(d) --(d) -- -- --
----------------------------------------------------------------------------------
Net asset value, end of year ................ $ 19.58 $ 19.30 $ 17.72 $ 13.85 $ 16.36
==================================================================================

Total return(b) ............................. 10.08% 15.52% 29.16% (13.53)% 7.16%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............. $ 336,786 $ 311,071 $ 285,668 $ 225,699 $ 251,798

Ratios to average net assets:*

Expenses(c) ................................ 1.85% 1.82% 1.85% 1.79% 1.79%

Net investment income ...................... 1.04% 1.01% 0.34% 0.82% 0.30%

Portfolio turnover rate ..................... 20.98% 37.61% 49.70% 51.24% 52.64%

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

Expenses ................................... 1.81% 1.81% 1.82% 1.78% 1.78%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

Annual Report | See notes to financial statements. | 19

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005

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

COMMON STOCKS AND OTHER EQUITY INTERESTS 90.2%
AEROSPACE & DEFENSE 0.4%
Northrop Grumman Corp. ...................................... United States 283,930 $ 17,067,032
---------------
AIRLINES 0.8%
(a) ACE Aviation Holdings Inc. .................................. Canada 849,428 27,771,026
(a),(b) ACE Aviation Holdings Inc., A, 144A ......................... Canada 323,217 10,567,191
(a) ACE Aviation Holdings Inc., B ............................... Canada 1,330 43,323
(a),(c) Air Canada Inc., Contingent Distribution .................... Canada 238,886,992 --
---------------
38,381,540
---------------
AUTO COMPONENTS 0.2%
(a),(d),(e) Lancer Industries Inc., B ................................... United States 4 7,641,080
---------------
BEVERAGES 3.2%
Brown-Forman Corp., A ....................................... United States 79,200 5,618,448
Coca-Cola Enterprises Inc. .................................. United States 1,570,200 30,100,734
Diageo PLC .................................................. United Kingdom 1,989,960 28,844,054
Pernod Ricard SA ............................................ France 523,094 91,279,637
---------------
155,842,873
---------------
CAPITAL MARKETS 1.6%
(a) A.B. Watley Group Inc. ...................................... United States 128,325 2,053
(b) KKR Financial Corp., 144A ................................... United States 2,581,600 61,932,584
MCG Capital Corp. ........................................... United States 938,382 13,690,993
---------------
75,625,630
---------------
CHEMICALS 0.0%(f)
(a) Sika AG ..................................................... Switzerland 696 577,461
---------------
COMMERCIAL BANKS 8.6%
Allied Irish Banks PLC ...................................... Ireland 4,041,494 86,934,778
Bank of Ireland ............................................. Ireland 2,248,075 35,396,402
BNP Paribas SA .............................................. France 515,209 41,688,728
(a) Centennial Bank Holdings Inc. ............................... United States 1,735,639 21,469,854
Chinatrust Financial Holding Co. Ltd. ....................... Taiwan 29,259,000 23,174,386
Danske Bank ................................................. Denmark 1,249,080 43,999,137
(a),(d),(e) Elephant Capital Holdings Ltd. .............................. Japan 11,087 15,798,424
ForeningsSparbanken AB, A ................................... Sweden 974,500 26,553,301
Mitsubishi UFJ Financial Group Inc. ......................... Japan 5,648 76,563,585
(a),(d) NCB Warrant Holdings Ltd., A ................................ Japan 53,490 8,641,850
(a),(e) State National Bancshares Inc. .............................. United States 1,375,000 34,876,875
---------------
415,097,320
---------------
COMMERCIAL SERVICES & SUPPLIES 1.4%
(a) Comdisco Holding Co. Inc. ................................... United States 370 7,030
(c) Comdisco Holding Co. Inc., Contingent Distribution .......... United States 44,591,246 --
(a),(e) Insun ENT Co. Ltd. .......................................... South Korea 687,953 9,218,229
Republic Services Inc. ...................................... United States 1,571,600 59,013,580
(a),(c) Safety Kleen Corp., Contingent Distribution ................. United States 535,000 --
---------------
68,238,839
---------------

20 | Annual Report

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMPUTERS & PERIPHERALS 0.4%
(a),(d),(e) DecisionOne Corp. ........................................... United States 1,008,199 $ 718,846
(a) Lexmark International Inc., A ............................... United States 422,800 18,954,124
---------------
19,672,970
---------------
CONSUMER FINANCE 0.6%
MBNA Corp. .................................................. United States 818,800 22,230,420
(a),(e) White River Capital Inc. .................................... United States 549,751 7,833,952
---------------
30,064,372
---------------
CONTAINERS & PACKAGING 1.0%
Temple-Inland Inc. .......................................... United States 1,042,200 46,742,670
---------------
DIVERSIFIED FINANCIAL SERVICES 1.6%
Euronext .................................................... Netherlands 51,422 2,678,541
Fortis Group NV ............................................. Belgium 795,800 25,333,280
Leucadia National Corp. ..................................... United States 1,037,460 49,237,852
(a),(c) Marconi Corp., Contingent Distribution ...................... United Kingdom 34,293,500 --
---------------
77,249,673
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 4.3%
(a),(d),(g) AboveNet Inc. ............................................... United States 365,293 8,753,662
(a),(c),(g) AboveNet Inc., Contingent Distribution ...................... United States 50,430,000 --
(a),(d),(g) AboveNet Inc., wts., 9/08/08 ................................ United States 11,991 47,964
(a),(d),(g) AboveNet Inc., wts., 9/08/10 ................................ United States 14,107 11,286
Belgacom SA ................................................. Belgium 396,300 12,925,351
Chunghwa Telecom Co. Ltd., ADR .............................. Taiwan 974,078 17,874,331
(a),(c) Global Crossing Holdings Ltd., Contingent Distribution ...... United States 49,411,586 --
MCI Inc. .................................................... United States 754,046 14,877,328
(a) NTL Inc. .................................................... United Kingdom 947,728 64,521,322
Sprint Nextel Corp. ......................................... United States 118,861 2,776,593
(a),(c) Telewest Communications PLC, Contingent Distribution ........ United Kingdom 53,559,146 --
(a),(c) Telewest Finance Ltd., Contingent Distribution .............. United Kingdom 5,795,000 --
(a) Telewest Global Inc. ........................................ United Kingdom 3,122,294 74,373,043
Verizon Communications Inc. ................................. United States 484,600 14,596,152
---------------
210,757,032
---------------
ELECTRIC UTILITIES 0.3%
E.ON AG ..................................................... Germany 153,710 15,915,060
(b) Entegra/Union Power, 144A ................................... United States 115,572 --
---------------
15,915,060
---------------
FOOD & STAPLES RETAILING 1.7%
Bourbon SA .................................................. France 215,723 18,885,623
Carrefour SA ................................................ France 1,305,508 61,171,906
---------------
80,057,529
---------------

Annual Report | 21

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
FOOD PRODUCTS 7.4%
Cadbury Schweppes PLC ....................................... United Kingdom 2,728,621 $ 25,796,035
CSM NV ...................................................... Netherlands 1,909,144 52,051,028
Groupe Danone ............................................... France 789,560 82,489,094
(a) Lotte Confectionary Co. Ltd. ................................ South Korea 30,405 36,093,677
Nestle SA ................................................... Switzerland 160,750 48,087,345
(a) Nong Shim Co. Ltd. .......................................... South Korea 81,743 22,717,658
Orkla ASA ................................................... Norway 2,216,900 91,801,522
---------------
359,036,359
---------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.8%
Guidant Corp. ............................................... United States 570,300 36,926,925
---------------
HEALTH CARE PROVIDERS & SERVICES 3.1%
Generale de Sante ........................................... France 2,010,450 69,260,074
(a),(d),(g) Kindred Healthcare Inc. ..................................... United States 1,208,060 29,563,644
(a),(d),(g) Kindred Healthcare Inc., Jan. 9.07 Calls, 1/01/13 ........... United States 582 8,961
(a),(d),(g) Kindred Healthcare Inc., Jan. 25.99 Calls, 1/01/14 .......... United States 288 --
(a),(d),(g) Kindred Healthcare Inc., Jan. 26.00 Calls, 1/01/12 .......... United States 876 --
(a),(d),(g) Kindred Healthcare Inc., Jul. 23.75 Calls, 7/17/11 .......... United States 3,876 2,798
(a),(d),(g) Kindred Healthcare Inc., wts., Series A, 4/20/06 ............ United States 104,567 2,022,535
(a),(d),(g) Kindred Healthcare Inc., wts., Series B, 4/20/06 ............ United States 261,416 4,296,372
Rhoen-Klinikum AG ........................................... Germany 1,157,046 44,229,839
UnitedHealth Group Inc. ..................................... United States 250 15,535
WellPoint Inc. .............................................. United States 46 3,670
---------------
149,403,428
---------------
HOTELS, RESTAURANTS & LEISURE 0.6%
(a) FHC Delaware Inc. ........................................... United States 452,571 1,573,092
Hilton Group ................................................ United Kingdom 1,739,118 10,883,638
(a),(c) Trump Atlantic, Contingent Distribution ..................... United States 20,453,000 774,471
(a) Trump Entertainment Resorts Inc. ............................ United States 690,230 13,894,330
---------------
27,125,531
---------------
INDUSTRIAL CONGLOMERATES 0.8%
Siemens AG .................................................. Germany 460,520 39,455,155
---------------
INSURANCE 11.1%
(a) Alleghany Corp. ............................................. United States 140,978 40,037,752
(a) Berkshire Hathaway Inc., A .................................. United States 468 41,474,160
(a),(h) Berkshire Hathaway Inc., B .................................. United States 18,875 55,407,563
Hartford Financial Services Group Inc. ...................... United States 482,200 41,416,158
(a),(d),(e) Imagine Group Holdings Ltd. ................................. Bermuda 2,814,856 28,828,432
Montpelier Re Holdings Ltd. ................................. Bermuda 332,216 6,278,882
Old Republic International Corp. ............................ United States 1,708,400 44,862,584
(a),(d) Olympus Re Holdings Ltd. .................................... Bermuda 97,300 1,800,050
Prudential Financial Inc. ................................... United States 461,000 33,740,590
(a),(d) Symetra Financial ........................................... United States 394,800 45,402,000
White Mountains Insurance Group Inc. ........................ United States 352,130 196,682,211
---------------
535,930,382
---------------

22 | Annual Report

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MACHINERY 1.8%
(a) Kone OYJ .................................................... Finland 1,438,600 $ 57,104,495
NACCO Industries Inc., A .................................... United States 274,700 32,181,105
---------------
89,285,600
---------------
MEDIA 5.9%
(a) CJ CGV Co. Ltd. ............................................. South Korea 574,910 16,976,251
Clear Channel Communications Inc. ........................... United States 658,200 20,700,390
(a) Comcast Corp., A ............................................ United States 146,500 3,763,585
E.W. Scripps Co., A ......................................... United States 31,900 1,531,838
(a) EchoStar Communications Corp., A ............................ United States 529,300 14,381,081
Hollinger International Inc. ................................ United States 767,234 6,530,696
Knight Ridder Inc. .......................................... United States 84,300 5,336,190
(a) Liberty Media Corp., A ...................................... United States 6,148,259 48,386,798
News Corp., A ............................................... United States 1,126,900 17,523,295
Omnicom Group Inc. .......................................... United States 177,700 15,127,601
Pearson PLC ................................................. United Kingdom 2,228,900 26,363,637
(d) Time Warner Inc. ............................................ United States 2,364,120 46,221,441
(a) TVMAX Holdings Inc. ......................................... United States 111,391 111,391
Viacom Inc., B .............................................. United States 428,100 13,956,060
Washington Post Co., B ...................................... United States 66,050 50,528,250
---------------
287,438,504
---------------
METALS & MINING 4.8%
Anglo American PLC .......................................... South Africa 1,226,724 41,767,136
(a) Apex Silver Mines Ltd. ...................................... Bolivia 1,081,300 17,192,670
Barrick Gold Corp. .......................................... Canada 313,800 8,745,606
Dofasco Inc. ................................................ Canada 284,910 15,928,290
(a) Eldorado Gold Corp. ......................................... Canada 3,158,200 15,460,860
Freeport-McMoRan Copper & Gold Inc., B ...................... United States 204,600 11,007,480
(a) Glamis Gold Ltd. ............................................ Canada 677,100 18,624,182
Gold Fields Ltd. ............................................ South Africa 146,300 2,584,961
Goldcorp Inc. ............................................... Canada 577,581 12,870,100
(a) Goldcorp Inc., wts., 5/30/07 ................................ Canada 777,331 3,243,618
(a) Harmony Gold Mining Co. Ltd., ADR ........................... South Africa 341,800 4,460,490
Newmont Mining Corp. ........................................ United States 1,334,880 71,282,592
Placer Dome Inc. ............................................ Canada 470,800 10,782,669
---------------
233,950,654
---------------
MULTI-UTILITIES 0.2%
NorthWestern Corp. .......................................... United States 306,642 9,527,367
(a),(c) NorthWestern Corp., Contingent Distribution ................. United States 9,300,000 790,500
---------------
10,317,867
---------------
MULTILINE RETAIL 0.7%
Jelmoli Holding AG .......................................... Switzerland 24,399 34,822,550
---------------

Annual Report | 23

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS 3.5%
(a) Anchor Resources LLC ........................................ United States 58,923 $ --
BP PLC ...................................................... United Kingdom 1,221,600 13,009,533
BP PLC, ADR ................................................. United Kingdom 193,700 12,439,414
Consol Energy Inc. .......................................... United States 624,220 40,686,660
Eni SpA ..................................................... Italy 1,452,100 40,277,777
Oil & Natural Gas Corp. Ltd. ................................ India 833,600 21,767,715
Total SA, B ................................................. France 166,368 41,793,800
---------------
169,974,899
---------------
PAPER & FOREST PRODUCTS 3.0%
Abitibi-Consolidated Inc. ................................... Canada 1,139,500 4,568,588
(h) Weyerhaeuser Co. ............................................ United States 2,142,200 142,113,548
---------------
146,682,136
---------------
PHARMACEUTICALS 2.5%
Bristol-Myers Squibb Co. .................................... United States 398,200 9,150,636
(a) IVAX Corp. .................................................. United States 111,500 3,493,295
Merck & Co. Inc. ............................................ United States 162,700 5,175,487
Pfizer Inc. ................................................. United States 1,751,030 40,834,019
Sanofi-Aventis .............................................. France 321,748 28,186,702
Valeant Pharmaceuticals International ....................... United States 1,025,100 18,533,808
Wyeth ....................................................... United States 344,500 15,871,115
---------------
121,245,062
---------------
REAL ESTATE 3.3%
(a) Alexander's Inc. ............................................ United States 108,590 26,658,845
Canary Wharf Group PLC ...................................... United Kingdom 8,298,072 34,263,402
(b) Medical Properties Trust Inc., 144A ......................... United States 823,500 8,053,830
(e) Saxon Capital Inc. .......................................... United States 2,663,585 30,178,418
(a),(d) Security Capital European Realty ............................ Luxembourg 17,603 127,930
Swire Pacific Ltd., A ....................................... Hong Kong 3,620,800 32,501,813
Swire Pacific Ltd., B ....................................... Hong Kong 5,292,600 9,215,028
Ventas Inc. ................................................. United States 669,525 21,438,190
---------------
162,437,456
---------------
ROAD & RAIL 1.2%
(d) Florida East Coast Industries Inc. .......................... United States 1,497,000 60,256,495
---------------
SOFTWARE 0.2%
Microsoft Corp. ............................................. United States 383,200 10,020,680
---------------
THRIFTS & MORTGAGE FINANCE 3.0%
(a) Franklin Bancorp ............................................ United States 889,879 16,008,923
Hudson City Bancorp Inc. .................................... United States 2,308,140 27,974,657
(a),(e) ITLA Capital Corp. .......................................... United States 445,796 21,777,135
Sovereign Bancorp Inc. ...................................... United States 3,735,520 80,761,942
---------------
146,522,657
---------------

24 | Annual Report

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TOBACCO 10.2%
Altadis SA .................................................. Spain 2,499,700 $ 113,399,222
(h) Altria Group Inc. ........................................... United States 796,507 59,515,003
British American Tobacco PLC ................................ United Kingdom 3,939,454 88,109,234
Imperial Tobacco Group PLC .................................. United Kingdom 1,301,759 38,902,046
KT&G Corp. .................................................. South Korea 2,193,720 98,091,400
(b) KT&G Corp., GDR, 144A ....................................... South Korea 1,433,500 31,537,000
(h) Reynolds American Inc. ...................................... United States 686,300 65,424,979
---------------
494,978,884
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $2,943,244,584)..................................... 4,374,742,305
---------------
PREFERRED STOCKS 0.5%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(f)
PTV Inc., 10.00%, A, pfd. ................................... United Kingdom 92,939 195,172
---------------
ELECTRIC UTILITIES 0.0%(f)
(a) Montana Power Co., 8.45%, pfd. .............................. United States 46,450 383,212
---------------
METALS & MINING 0.5%
(d),(e),(g) Esmark Inc., Series A, 10.00%, cvt. pfd. .................... United States 22,360 23,447,591
Falconbridge Ltd., 6.00%, cvt. pfd., 1 ...................... Canada 21,509 543,102
Falconbridge Ltd., 6.25%, cvt. pfd., 2 ...................... Canada 21,509 543,102
Falconbridge Ltd., 6.50%, cvt. pfd., 3 ...................... Canada 10,754 272,614
---------------
24,806,409
---------------
TOTAL PREFERRED STOCKS (COST $25,444,306).................... 25,384,793
---------------

-------------------
PRINCIPAL AMOUNT(J)
-------------------
CORPORATE BONDS & NOTES 2.5%
(b) ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ...... Canada 2,505,000 CAD 2,112,105
(i) Collins & Aikman Products Co.,
Revolver, FRN, 10.75%, 8/31/09 ...................... United States 366,400 355,408
Tranche B1 Term Loan, FRN, 10.75%, 8/31/11 .......... United States 858,200 832,454
Dana Corp.,
5.85%, 1/15/15 ...................................... United States 4,088,000 2,922,920
7.00%, 3/01/29 ...................................... United States 600,000 433,500
(d),(e) DecisionOne Corp., 144A, 12.00%, 4/15/10 .................... United States 1,094,401 1,094,401
Entegra/Union Power,
Term Loan A, 4.00%, 6/01/12 ......................... United States 5,887,605 5,063,340
Term Loan B, 9.00%, 6/01/20 ......................... United States 5,669,545 4,875,809
Eurotunnel PLC,
(b),(i) Senior Tranche G2 Term Loan A, 144A, FRN, 5.618%,
12/15/12 ........................................... United Kingdom 828,649 GBP 1,372,187
(i) Tier 2, FRN, 5.796%, 12/31/18 ....................... United Kingdom 10,332,415 GBP 15,109,943
(i) Tier 3, FRN, 5.796%, 12/31/25 ....................... United Kingdom 24,858,208 GBP 20,100,632
Participating Loan Note, 1.00%, 4/30/40 ............. United Kingdom 1,020,000 GBP 166,712

Annual Report | 25

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT(J) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

CORPORATE BONDS & NOTES (CONTINUED)
Eurotunnel SA,
Senior Tranche H1 Term Loan (KfW Advance), 8.78%,
12/15/12 ............................................. France 482,500 EUR $ 542,647
(i) Tier 2 LIBOR, FRN, 3.393%, 12/31/18 ................... France 2,479,106 EUR 2,494,657
(i) Tier 2 PIBOR, FRN, 3.393%, 12/31/18 ................... France 1,096,535 EUR 1,103,413
(i) Tier 3 LIBOR, FRN, 3.393%, 12/31/25 ................... France 37,541,397 EUR 20,888,390
(i) Tier 3 PIBOR, FRN, 3.393%, 12/31/25 ................... France 6,693,302 EUR 3,724,217
(i) Motor Coach Industries International Inc., FRN, 17.406%,
12/01/08 ................................................. United States 22,189,395 21,079,925
Trump Entertaiment Resorts Inc., 8.50%, 5/20/15 ............. United States 13,553,108 13,282,046
TVMAX Holdings Inc., PIK,
11.50%, 1/16/06 ....................................... United States 216,407 216,407
(k) 14.00%, 1/16/06 ....................................... United States 546,720 546,720
---------------
TOTAL CORPORATE BONDS & NOTES (COST $128,596,675)............ 118,317,833
---------------
CORPORATE BONDS & NOTES IN REORGANIZATION 1.3%
(l) Adelphia Communications Corp.,
9.25%, 10/01/02 ....................................... United States 2,551,000 1,428,560
8.125%, 7/15/03 ....................................... United States 660,000 376,200
7.50%, 1/15/04 ........................................ United States 1,740,000 991,800
10.50%, 7/15/04 ....................................... United States 2,715,000 1,547,550
9.875%, 3/01/05 ....................................... United States 1,013,000 574,878
10.25%, 11/01/06 ...................................... United States 4,368,000 2,446,080
9.875%, 3/01/07 ....................................... United States 390,000 222,300
8.375%, 2/01/08 ....................................... United States 3,934,000 2,242,380
7.75%, 1/15/09 ........................................ United States 8,148,000 4,603,620
7.875%, 5/01/09 ....................................... United States 3,491,000 1,937,505
9.375%, 11/15/09 ...................................... United States 3,471,000 2,047,890
10.875%, 10/01/10 ..................................... United States 3,183,000 1,798,395
10.25%, 6/15/11 ....................................... United States 3,429,000 2,074,545
(l) Armstrong World Industries Inc.,
6.35%, 8/15/03 ........................................ United States 7,435,000 5,353,200
6.50%, 8/15/05 ........................................ United States 584,000 414,640
9.75%, 4/15/08 ........................................ United States 2,010,000 1,487,400
7.45%, 5/15/29 ........................................ United States 1,180,000 873,200
Revolver, 10/29/03 .................................... United States 1,483,875 1,040,567
Trade Claim ........................................... United States 3,978,800 2,770,240
(l) Century Communications Corp.,
(m) 8.875%, 1/15/07 ....................................... United States 210,000 201,600
8.75%, 10/01/07 ....................................... United States 2,062,000 1,938,280
8.375%, 12/15/07 ...................................... United States 400,000 384,000
senior note, 9.50%, 3/01/05 ........................... United States 610,000 591,700
Series B, zero cpn., 1/15/08 .......................... United States 3,450,000 1,914,750
zero cpn., 3/15/03 .................................... United States 6,765,000 5,750,250
(k),(l) Owens Corning, Revolver, 6/26/02 ............................ United States 13,688,022 19,163,231
(l) Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ..... United States 40,000 20
---------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $60,919,005)........................................ 64,174,781
---------------

26 | Annual Report

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
SHARES
COUNTRY PRINCIPAL AMOUNT(J) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

COMPANIES IN LIQUIDATION 0.0%(f)
(a) City Investing Co. Liquidating Trust ........................... United States 1,607,485 $ 176,824
(a),(e) MBOP Liquidating Trust ......................................... United States 412,418 54
(a) United Cos. Financial Corp., Bank Claim ........................ United States 98,521 --
---------------
TOTAL COMPANIES IN LIQUIDATION (COST $--)....................... 176,878
---------------

GOVERNMENT AGENCIES 3.7%
(n) Federal Home Loan Bank, 0.00% - 3.35%, 1/03/06 - 7/02/07 ....... United States 151,084,000 149,108,965
Federal Home Loan Mortgage Corp., 2.50%, 5/19/06 ............... United States 10,000,000 9,922,420
Federal National Mortgage Association, 2.15% - 2.20%,
12/18/06 - 12/29/06 ......................................... United States 20,000,000 19,515,700
---------------
TOTAL GOVERNMENT AGENCIES (COST $180,048,679)................... 178,547,085
---------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $3,338,253,249)........................................ 4,761,343,675
---------------
REPURCHASE AGREEMENTS 0.0%(f)
(o),(p) Bank of America LLC, 4.32%, 1/03/06 (Maturity Value $38,023)
Collateralized by U.S. Government Agency Securities,
5.00-5.50%, 9/01/33-10/01/35 ................................ United States 38,005 38,005
(o),(p) Bear Stearns & Co. Inc., 4.25%, 1/03/06 (Maturity Value $38,022)
Collateralized by U.S. Government Agency Securities,
3.282-7.155%, 3/01/17-9/01/45 ............................... United States 38,004 38,004
(o),(p) Citigroup Global Markets Inc., 4.26%, 1/03/06 (Maturity Value
$35,021) Collateralized by U.S. Government Agency Securities
and (n)U.S. Treasury Bills, 0.00-14.00%, 1/03/06-8/06/38 .... United States 35,004 35,004
(o),(p) J.P. Morgan Securities, 4.31%, 1/03/06 (Maturity Value $31,019)
Collateralized by U.S. Government Agency Securities,
3.614-5.625%, 12/01/11-9/01/35 .............................. United States 31,004 31,004
(o),(p) Merrill Lynch GSI, 4.25%, 1/03/06 (Maturity Value $36,021)
Collateralized by U.S. Government Agency Securities, 5.00%,
6/01/35-7/01/35 ............................................. United States 36,004 36,004
(o),(p) Morgan Stanley & Co. Inc., 4.31%, 1/03/06 (Maturity Value
$28,016) Collateralized by U.S. Government Agency Securities,
5.00%, 6/01/35-7/01/35 ...................................... United States 28,003 28,003
---------------
TOTAL REPURCHASE AGREEMENTS (COST $206,024)..................... 206,024
---------------
TOTAL INVESTMENTS (COST $3,338,459,273) 98.2%................... 4,761,549,699
OPTIONS WRITTEN 0.0%(f)......................................... (4,000)
SECURITIES SOLD SHORT (0.8)% ................................... (39,027,843)
NET UNREALIZED GAIN ON FORWARD EXCHANGE
CONTRACTS 0.7%............................................... 31,632,232
OTHER ASSETS, LESS LIABILITIES 1.9% ............................ 93,865,020
---------------
NET ASSETS 100.0%............................................... $ 4,848,015,108
===============

-----------------
CONTRACTS
-----------------
(q) OPTIONS WRITTEN (PREMIUMS RECEIVED $16,799) 0.00%(f)
PHARMACEUTICALS 0.0%(f)
Pfizer Inc., Jan. 22.50 Puts, 1/21/06 .......................... United States 200 $ 4,000
---------------

Annual Report | 27

MUTUAL QUALIFIED FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

(r) SECURITIES SOLD SHORT 0.8%
COMMERCIAL BANKS 0.4%
Bank of America Corp. .......................................... United States 409,900 $ 18,916,885
---------------
FOOD PRODUCTS 0.3%
Kraft Foods Inc., A ............................................ United States 527,089 14,832,284
---------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.1%
Alcon Inc. ..................................................... Switzerland 25,000 3,240,000
---------------
PHARMACEUTICALS 0.0%(f)
Teva Pharmaceutical Industries Ltd., ADR ....................... Israel 47,400 2,038,674
---------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $41,535,207).............. $ 39,027,843
---------------

CURRENCY ABBREVIATIONS

CAD - Canadian Dollar
EUR - Euro
GBP - British Pound

SELECTED PORTFOLIO ABBREVIATIONS

ADR - American Depository Receipt
FRN - Floating Rate Note
GDR - Global Depository Receipt
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
PIK - Payment In Kind

(a) Non-income producing.

(d) See Note 11 regarding restricted and illiquid securities.

(e) See Note 13 regarding Holdings of 5% Voting Securities.

(f) Rounds to less than 0.05% of net assets.

(g) See Note 14 regarding other considerations.

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

(i) The coupon rate shown represents the rate at period end.

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

(k) See Note 12 regarding unfunded loan commitments

(l) See Note 10 regarding defaulted securities.

(m) A portion or all of the security is on loan as of December 31, 2005. See
Note 1(i).

(n) A portion of the security is traded on a discount basis with no stated
coupon rate.

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

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

(q) See Note 1(f) regarding written options.

(r) See Note 1(g) regarding securities sold short.

28 | See notes to financial statements. | Annual Report

MUTUAL QUALIFIED FUND

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005

Investments in securities:
Cost - Unaffiliated issuers ............................................................................ $ 3,160,208,522
Cost - Non-controlled affiliated issuers (Note 13) ..................................................... 178,044,727
Cost - Repurchase agreements ........................................................................... 206,024
---------------
Total cost of investments .............................................................................. $ 3,338,459,273
===============
Value - Unaffiliated issuers (includes securities segregated with broker for securities sold short
in the amount of $210,421,500) ....................................................................... $ 4,510,670,164
Value - Non-controlled affiliated issuers (Note 13) .................................................... 250,673,511
Value - Repurchase agreements .......................................................................... 206,024
---------------
Total value of investments ............................................................................. 4,761,549,699
Cash .................................................................................................... 11,929
Foreign currency, at value (cost $38,870,005) ........................................................... 38,651,771
Receivables:
Investment securities sold ............................................................................. 13,420,259
Capital shares sold .................................................................................... 4,215,376
Dividends and interest ................................................................................. 11,278,554
Unrealized gain on forward exchange contracts (Note 8) .................................................. 37,992,807
Unrealized gain on unfunded loan commitments (Note 12) .................................................. 581,056
Cash on deposits with brokers for securities sold short ................................................. 44,266,057
Due from broker - synthetic equity swaps ................................................................ 6,481,108
---------------
Total assets ....................................................................................... 4,918,448,616
---------------
Liabilities:
Payables:
Investment securities purchased ........................................................................ 7,428,877
Capital shares redeemed ................................................................................ 11,990,296
Affiliates ............................................................................................. 4,423,784
Options written, at value (premiums received $16,799) ................................................... 4,000
Securities sold short, at value (proceeds $41,535,207) .................................................. 39,027,843
Payable upon return of securities loaned ................................................................ 206,024
Deferred tax ............................................................................................ 145,034
Unrealized loss on forward exchange contracts (Note 8) .................................................. 6,360,575
Accrued expenses and other liabilities .................................................................. 847,075
---------------
Total liabilities .................................................................................. 70,433,508
---------------
Net assets, at value ............................................................................. $ 4,848,015,108
===============
Net assets consist of:
Paid-in capital ......................................................................................... $ 3,360,563,755
Undistributed net investment income ..................................................................... 372,372
Net unrealized appreciation (depreciation) .............................................................. 1,458,798,540
Accumulated net realized gain (loss) .................................................................... 28,280,441
---------------
Net assets, at value ............................................................................. $ 4,848,015,108
===============

Annual Report | See notes to financial statements. | 29

MUTUAL QUALIFIED FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2005

CLASS Z:
Net assets, at value .................................................................................... $ 3,646,592,696
===============
Shares outstanding ...................................................................................... 184,095,955
===============
Net asset value and maximum offering price per share(a) ................................................. $ 19.81
===============
CLASS A:
Net assets, at value .................................................................................... $ 794,789,086
===============
Shares outstanding ...................................................................................... 40,321,938
===============
Net asset value per share(a) ............................................................................ $ 19.71
===============
Maximum offering price per share (net asset value per share / 94.25%) ................................... $ 20.91
===============
CLASS B:
Net assets, at value .................................................................................... $ 69,847,022
===============
Shares outstanding ...................................................................................... 3,610,690
===============
Net asset value and maximum offering price per share(a) ................................................. $ 19.34
===============
CLASS C:
Net assets, at value .................................................................................... $ 336,786,304
===============
Shares outstanding ...................................................................................... 17,204,433
===============
Net asset value and maximum offering price per share(a) ................................................. $ 19.58
===============

(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 QUALIFIED FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended December 31, 2005

Investment income:
Dividends
Unaffiliated issuers ................................................................................... $ 96,042,922
Non-controlled affiliated issuers (Note 13) ............................................................ 9,797,477
Interest
Unaffiliated issuers ................................................................................... 26,994,694
Non-controlled affiliated issuers (Note 13) ............................................................ 49,586
Other income (Note 15) .................................................................................. 189,854
---------------
Total investment income............................................................................. 133,074,533
---------------
Expenses:
Management fees (Note 3a) ............................................................................... 27,629,949
Administrative fees (Note 3b) ........................................................................... 3,539,026
Distribution fees (Note 3c)
Class A ................................................................................................ 2,577,370
Class B ................................................................................................ 677,516
Class C ................................................................................................ 3,145,515
Transfer agent fees (Note 3e) ........................................................................... 4,367,150
Custodian fees (Note 4) ................................................................................. 746,500
Reports to shareholders ................................................................................. 361,910
Registration and filing fees ............................................................................ 304,300
Professional fees ....................................................................................... 255,921
Directors' fees and expenses ............................................................................ 125,300
Dividends on securities sold short ...................................................................... 1,860,659
Other ................................................................................................... 165,644
---------------
Total expenses ..................................................................................... 45,756,760
Expense reductions (Note 4) ........................................................................ (33,578)
---------------
Net expenses ..................................................................................... 45,723,182
---------------
Net investment income .......................................................................... 87,351,351
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers .................................................................................. 271,386,358
Non-controlled affiliated issuers (Note 13) ........................................................... 9,838,691
Written options ........................................................................................ 327,368
Foreign currency transactions .......................................................................... 25,931,564
Securities sold short .................................................................................. (1,870,646)
---------------
Net realized gain (loss) ........................................................................... 305,613,335
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................................................... 33,935,610
Translation of assets and liabilities denominated in foreign currencies ............................... 64,399,116
Change in deferred taxes on unrealized appreciation ..................................................... (139,151)
---------------
Net change in unrealized appreciation (depreciation) ............................................... 98,195,575
---------------
Net realized and unrealized gain (loss) .................................................................. 403,808,910
---------------
Net increase (decrease) in net assets resulting from operations .......................................... $ 491,160,261
===============

Annual Report | See notes to financial statements. | 31

MUTUAL QUALIFIED FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS

-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
2005 2004
-------------------------------

Increase (decrease) in net assets:
Operations:
Net investment income ....................................................................... $ 87,351,351 $ 76,958,090
Net realized gain (loss) from investments, written options, securities sold short,
and foreign currency transactions .......................................................... 305,613,335 254,342,080
Net change in unrealized appreciation (depreciation) on investments, translation of assets
and liabilities denominated in foreign currencies, and deferred taxes ...................... 98,195,575 311,468,670
-------------------------------
Net increase (decrease) in net assets resulting from operations ........................... 491,160,261 642,768,840
-------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ..................................................................................... (71,711,158) (64,408,817)
Class A ..................................................................................... (13,135,480) (10,952,485)
Class B ..................................................................................... (738,983) (717,882)
Class C ..................................................................................... (3,553,228) (3,064,752)
Net realized gains:
Class Z ..................................................................................... (247,747,070) (154,113,777)
Class A ..................................................................................... (54,231,833) (31,509,731)
Class B ..................................................................................... (4,898,744) (3,127,895)
Class C ..................................................................................... (23,121,799) (14,229,787)
-------------------------------
Total distributions to shareholders............................................................ (419,138,295) (282,125,126)
Capital share transactions: (Note 2)
Class Z ..................................................................................... 170,136,182 40,783,518
Class A ..................................................................................... 91,917,900 13,145,836
Class B ..................................................................................... 1,140,288 8,909,619
Class C ..................................................................................... 21,731,076 544,813
-------------------------------
Total capital share transactions .............................................................. 284,925,446 63,383,786
-------------------------------

Redemption fees ............................................................................... 16,510 1,353
-------------------------------
Net increase (decrease) in net assets ..................................................... 356,963,922 424,028,853
Net assets:
Beginning of year ............................................................................. 4,491,051,186 4,067,022,333
-------------------------------
End of year ................................................................................... $4,848,015,108 $4,491,051,186
===============================
Undistributed net investment income/distributions in excess of net investment
income included in net assets:
End of year ................................................................................... $ 372,372 $ (1,816,447)
===============================

32 | See notes to financial statements. | Annual Report

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mutual Qualified Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund Inc. (the Series Fund), consisting of six separate series.
The Series Fund 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 following summarizes the Funds' significant accounting policies.

A. SECURITY VALUATION

Annual Report | 33

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION

C. REPURCHASE AGREEMENTS

D. FOREIGN CURRENCY CONTRACTS

34 | Annual Report

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. FOREIGN CURRENCY CONTRACTS (CONTINUED)

E. SYNTHETIC EQUITY SWAPS

F. OPTIONS

Annual Report | 35

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

G. SECURITIES SOLD SHORT

H. 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 receives interest income 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.

I. INCOME AND DEFERRED TAXES

36 | Annual Report

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J. 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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Such distributions
are reinvested in additional shares of the Fund. Distributable earnings
determined on a tax basis may differ from earnings recorded in accordance with
generally accepted accounting principles. These differences may be permanent or
temporary. Permanent differences are reclassified among capital accounts to
reflect their tax character. These reclassifications have no impact on net
assets or the results of operations. Temporary differences are not reclassified,
as they may reverse in subsequent periods.

K. ACCOUNTING ESTIMATES

L. REDEMPTION FEES

Annual Report | 37

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M. GUARANTEES AND INDEMNIFICATIONS

Under the Series Fund's organizational documents, its officers and Directors are
indemnified by the Fund against certain liabilities 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

At December 31, 2005, there were 1.00 billion shares authorized ($0.001 par
value) of which 500 million shares were designated as Class Z, 200 million
shares as Class A, 100 million shares as Class B and 200 million shares as Class
C. Transactions in the Fund's shares were as follows:

--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
CLASS Z SHARES:

Shares sold .................... 8,224,844 $ 164,565,279 7,659,738 $ 141,932,586
Shares issued in reinvestment of
distributions ................. 15,292,237 304,242,087 10,886,980 207,607,638
Shares redeemed ................ (14,850,176) (298,671,184) (16,670,287) (308,756,706)
--------------------------------------------------------------
Net increase (decrease) ........ 8,666,905 $ 170,136,182 1,876,431 $ 40,783,518
==============================================================
CLASS A SHARES:

Shares sold .................... 9,309,485 $ 185,621,526 6,141,435 $ 113,698,317
Shares issued in reinvestment of
distributions ................. 3,259,149 64,510,221 2,136,124 40,591,446
Shares redeemed ................ (7,920,762) (158,213,847) (7,698,298) (141,143,927)
--------------------------------------------------------------
Net increase (decrease) ........ 4,647,872 $ 91,917,900 579,261 $ 13,145,836
==============================================================

38 | Annual Report

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. CAPITAL STOCK (CONTINUED)

CLASS B SHARES:
Shares sold .................... 270,527 $ 5,213,646 606,427 $ 11,012,963
Shares issued in reinvestment of
distributions ................ 271,363 5,272,612 191,893 3,585,999
Shares redeemed ................ (479,421) (9,345,970) (314,344) (5,689,343)
--------------------------------------------------------------
Net increase (decrease) ........ 62,469 $ 1,140,288 483,976 $ 8,909,619
==============================================================
CLASS C SHARES:
Shares sold .................... 2,410,025 $ 47,732,679 1,768,138 $ 32,469,438
Shares issued in reinvestment of
distributions ................ 1,253,716 24,647,883 848,386 16,032,272
Shares redeemed ................ (2,578,585) (50,649,486) (2,620,734) (47,956,897)
--------------------------------------------------------------
Net increase (decrease) ........ 1,085,156 $ 21,731,076 (4,210) $ 544,813
==============================================================

3. TRANSACTIONS WITH AFFILIATES

- -----------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- -----------------------------------------------------------------------------------------

Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Investment Management Limitied (FTIML) 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

The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:

Effective March 1, 2005, under a subadvisory agreement, FTIML, an affiliate of
Franklin Mutual, provides subadvisory services to the Fund and receives from
Franklin Mutual fees based on the average daily net assets of the Fund.

Annual Report | 39

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

B. ADMINISTRATIVE FEES

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

- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $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% In excess of $1.2 billion

C. DISTRIBUTION FEES

The Funds' Board of Directors has adopted distribution plans for each share
class, with the exception of Class Z shares, pursuant to Rule 12b-1 under the
1940 Act. Under the Fund's Class A reimbursement distribution plans, the Fund
reimburse Distributors up to 0.35% per year of Class A's average daily net
assets for costs incurred in connection with the sale and distribution of the
Fund's shares. Under the Class A reimbursement distribution plans, costs
exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.

Under the Funds' compensation distribution plans, the Fund pays Distributors for
costs incurred in connection with the sale and distribution of each Fund's
shares up to a certain percentage per year of their average daily net assets of
each class as follows:

Class B............................................... 1.00%
Class C............................................... 1.00%

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 charge received(a).......................... $411,335
Contingent deferred sales charges retained............ $119,924

(a) Net of commissions paid to unaffiliated broker/dealers.

E. TRANSFER AGENT FEES

The Fund paid transfer agent fees of $4,367,150, of which $3,190,443 was
retained by Investor Services.

40 | Annual Report

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 , the custodian fees were
reduced as noted in the Statement of Operations.

5. INCOME TAXES

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

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of wash sales, foreign currency
transactions, bond discounts and premiums and certain dividends on securities
sold short.

Cost of investments .................................. $3,353,524,606
==============

Unrealized appreciation .............................. $1,549,271,622
Unrealized depreciation .............................. (141,246,529)
--------------
Net unrealized appreciation (depreciation) ........... $1,408,025,093
==============

Undistributed ordinary income......................... $ 16,009,203
Undistributed long term capital gains................. 59,169,703
--------------
Distributable earnings................................ $ 75,178,906
==============

The tax character of distributions paid during the years ended December 31, 2005
and 2004, was as follows:

-----------------------------
2005 2004
-----------------------------
Distributions paid from:
Ordinary income ................... $140,988,207 $106,282,089
Long term capital gain............. 278,150,088 175,843,037
-----------------------------
$419,138,295 $282,125,126
=============================

Annual Report | 41

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2005, aggregated
$1,496,739,392 and $920,844,252, respectively.

Transactions in options written during the year ended December 31, 2005, were as
follows:

---------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------------------
Options outstanding at
December 31, 2004......................... 1,062 $ 146,018
Options written............................ 4,239 437,906
Options expired............................ (1,911) (166,121)
Options exercised.......................... (2,857) (342,571)
Options closed............................. (333) (58,433)
---------------------
Options outstanding at
December 31, 2005......................... 200 $ 16,799
=====================

7. SYNTHETIC EQUITY SWAPS

As of December 31, 2005, the Fund had the following synthetic equity swaps
outstanding:

Christian Dior SA (46.76 - 54.99 EUR)..... 67,145 $ 5,969,670 $ 2,092,041
O2 PLC (1.96 - 1.97 GBP).................. 7,463,459 25,424,205 180,340
-----------
Total contracts to buy....................................................... 2,272,381
-----------

LVMH Moet Hennessy Louis Vuitton
(54.61 - 61.76 EUR)........................ 67,024 $ 5,954,945 $(1,325,709)
-----------
Total contracts to sell...................................................... (1,325,709)
-----------

Net unrealized gain (loss)................................................... $ 946,692
===========

8. FORWARD EXCHANGE CONTRACTS

At December 31, 2005, the Fund had outstanding forward exchange contracts as set
out below.

- ---------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT(a) DATE GAIN/(LOSS)
- ---------------------------------------------------------------------------------------------

6,250,000 Euro........................... 7,410,188 1/17/06 $ 3,574
85,470,059 Euro........................... 105,492,987 1/23/06 4,171,526
28,347,992 Swiss Franc.................... 22,750,000 2/02/06 1,095,671
22,275,000 British Pound.................. 39,883,678 2/15/06 1,565,609
1,271,410 Canadian Dollar................ 1,105,704 2/15/06 10,304
61,800,000 Euro........................... 74,993,163 2/27/06 1,591,716
64,519,025 Norwegian Krone................ 9,601,045 3/06/06 6,824
15,100,000 Euro........................... 18,007,050 3/15/06 80,890
179,173,815 Swedish Krona.................. 22,935,778 3/15/06 262,006
218,764,156 Danish Krone................... 38,996,517 3/17/06 4,136,444

42 | Annual Report

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS (CONTINUED)

2,846,506 British Pound.................. 5,127,126 3/21/06 230,051
23,175,000 British Pound.................. 40,813,859 4/04/06 940,465
69,006,954 Euro........................... 87,400,085 4/25/06 5,172,033
25,250,000 British Pound.................. 44,003,175 5/15/06 540,008
85,182,989 Euro........................... 106,270,956 5/23/06 4,606,121
144,947,000 Taiwan Dollar.................. 4,450,000 5/30/06 34,446
13,086,400 Norwegian Krone................ 2,000,000 6/06/06 43,828
21,300,000 Euro........................... 25,880,118 6/15/06 425,551
3,361,262,513 Japanese Yen................... 30,679,051 6/28/06 1,538,104
12,000,000 Euro........................... 14,376,150 7/17/06 10,229
30,417,876 British Pound.................. 53,088,297 8/14/06 669,623
60,477,285 Euro........................... 75,361,023 8/23/06 2,815,326
35,256,706 British Pound.................. 61,358,996 9/08/06 580,329
93,181,780 Euro........................... 117,722,533 9/13/06 5,819,125
69,652,665 Euro........................... 85,441,183 10/18/06 1,643,004
-----------

Unrealized gain on forward exchange contracts.......................... $37,992,807
===========

16,126,130,000 Korean Won..................... 15,690,000 1/18/06 $ (319,103)
86,367,103 Canadian Dollar................ 72,024,997 1/23/06 (2,336,066)
142,446,671 Norwegian Krone................ 21,134,521 2/06/06 (15,125)
37,781,630 Canadian Dollar................ 32,329,436 2/15/06 (221,820)
12,844,608 South African Rand............. 1,975,000 2/15/06 (47,864)
123,500,000 Norwegian Krone................ 18,344,127 3/06/06 (20,786)
33,750,000 Euro........................... 39,764,250 3/15/06 (358,140)
90,856,310,000 Korean Won..................... 87,895,000 3/22/06 (2,370,672)
164,079,202 Taiwan Dollar.................. 4,962,563 5/30/06 (35,820)
133,000,000 Norwegian Krone................ 19,835,943 6/06/06 (45,070)
40,501,882 Swiss Franc.................... 31,227,347 6/06/06 (80,349)
816,954,400 Japanese Yen................... 7,060,000 6/28/06 (22,703)
57,241,683 Euro........................... 68,040,401 7/17/06 (487,057)
-----------
Unrealized loss on forward exchange contracts......................... (6,360,575)
-----------
Net unrealized gain on forward exchange contracts.................... $31,632,232
===========

(a) In U.S. Dollar unless otherwise indicated.

9. CONCENTRATION OF RISK

Annual Report | 43

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. DEFAULTED SECURITIES

The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. The risks of purchasing these securities are that the issuer is
unable to meet its obligation and any subsequent bankruptcy proceeding may
result in unfavorable consequences to the Fund. At December 31, 2005, the value
of these securities was $64,174,781, representing 1.32% of the Fund's net
assets. For information as to specific securities, see the accompanying
Statement of Investments.

11. RESTRICTED AND ILLIQUID SECURITIES

- ---------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATE COST VALUE
- ---------------------------------------------------------------------------------------------------------

365,293 AboveNet Inc............................... 10/02/01 $16,953,496 $ 8,753,662
11,991 AboveNet Inc., wts., 9/08/08............... 10/02/01 1,490,986 47,964
14,107 AboveNet Inc., wts., 9/08/10............... 10/02/01 1,600,719 11,286
1,008,199 DecisionOne Corp........................... 3/12/99 700,978 718,846
1,094,401 DecisionOne Corp., 144A, 12.00%, 4/15/10 .. 3/12/99 3,837,361 1,094,401
11,087 Elephant Capital Holdings Ltd.............. 8/29/03 -- 15,798,424
22,360 Esmark Inc., Series A, 10.00%, cvt. pfd.... 11/08/04 22,360,000 23,447,591
1,497,000 Florida East Coast Industries Inc.......... 11/16/87 31,051,609 60,256,495
2,814,856 Imagine Group Holdings Ltd................. 8/31/04 28,828,348 28,828,432
1,208,060 Kindred Healthcare Inc..................... 4/28/99 12,589,374 29,563,644
582 Kindred Healthcare Inc., Jan. 9.07 Calls,
1/01/13.................................. 1/1/04 -- 8,961
288 Kindred Healthcare Inc., Jan. 25.99 Calls,
1/01/14.................................. 1/1/05 -- --
876 Kindred Healthcare Inc., Jan. 26.00 Calls,
1/01/12.................................. 1/13/03 -- --
3,876 Kindred Healthcare Inc., Jul. 23.75 Calls,
7/17/11.................................. 7/17/02 -- 2,798

44 | Annual Report

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. RESTRICTED AND ILLIQUID SECURITIES (CONTINUED)

104,567 Kindred Healthcare Inc., wts., Series A,
4/20/06.................................. 4/24/01 941,099 2,022,535
261,416 Kindred Healthcare Inc., wts., Series B,
4/20/06.................................. 4/24/01 2,091,332 4,296,372
4 Lancer Industries Inc., B.................. 8/11/89 -- 7,641,080
53,490 NCB Warrant Holdings Ltd., A .............. 12/16/05 -- 8,641,850
97,300 Olympus Re Holdings Ltd.................... 12/19/01 9,730,000 1,800,050
17,603 Security Capital European Realty........... 4/08/98 964,314 127,930
394,800 Symetra Financial.......................... 7/27/04 39,480,000 45,402,000
2,364,120 Time Warner Inc............................ 8/02/05 46,713,081 46,221,441
------------
TOTAL RESTRICTED AND ILLIQUID SECURITIES (5.87% of Net Assets)........ $284,685,762
============

12. UNFUNDED LOAN COMMITMENTS

The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion.

At December 31, 2005, unfunded commitments were as follows:

- ------------------------------------------------------------------------------------------------------
BORROWER UNFUNDED COMMITMENT
- ------------------------------------------------------------------------------------------------------

Entegra/Union Power, LOC Facility, FRN, 6/01/12............................... $1,628,289
Entegra/Union Power, Working Capital Facility, FRN 6/01/12.................... 244,243
Mirant Corp, 4 Year Revolver, 7/17/05......................................... 236,759
Owens Corning, Revolver, 6/26/02.............................................. 781,820
TVMAX Holdings Inc., PIK, 14.00%, 1/16/06..................................... 26
----------
$2,891,137
==========

Unfunded loan commitments are marked to market daily and any unrealized gain or
loss is included in the Statement of Assets and Liabilities and Statement of
Operations.

Annual Report | 45

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

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

NON-CONTROLLED AFFILIATES
DecisionOne Corp ............. -- 1,008,199 -- 1,008,199 $ 718,846 $ -- $ --
DecisionOne Corp., 144A
12.00%, 4/15/10 ............. -- 1,271,929 177,528 1,094,401 1,094,401 49,586 (708,358)
Elephant Capital Holdings Ltd. 11,087 -- -- 11,087 15,798,424 (1,390,451) 12,244,256
Esmark Inc., Series A,
10.00%, cvt., pfd. .......... 14,950 7,410 -- 22,360 23,447,591 2,187,134 --
FHC Delaware Inc. ............ 452,571 -- -- 452,571 --(a) -- --
Generale de Sante ............ 1,984,113 26,337 -- 2,010,450 69,260,074 530,212 --
Imagine Group Holdings Ltd. .. 2,814,856 -- -- 2,814,856 28,828,432 -- --
Insun ENT Co. Ltd. ........... 408,527 279,426 -- 687,953 9,218,229 -- --
ITLA Capital Corp. ........... 445,796 -- -- 445,796 21,777,135 -- --
KKR Financial Corp., 144A .... 5,163,200 -- 2,581,600 2,581,600 --(a) 2,504,152 --
Lancer Industries Inc., B .... 4 -- -- 4 7,641,080 -- --
MBOP Liquidating Trust ....... 412,418 -- -- 412,418 54 -- --
Nippon Investment, LLC ....... 9,112,000 -- 9,112,000 -- -- -- (1,681,347)
Pig Iron LLC ................. -- 1,872,000 1,872,000 -- -- -- (15,405)
Saxon Capital Inc. ........... 2,663,585 -- -- 2,663,585 30,178,418 5,966,430 --
State National
Bancshares Inc. ............. 1,375,000 -- -- 1,375,000 34,876,875 -- --
Union Acceptance Corp., A .... 3,595,994 -- 3,595,994 -- -- -- --
White River Capital Inc. ..... -- 549,752 1 549,751 7,833,952 -- (455)
-------------------------------------------
TOTAL NON-CONTROLLED
AFFILIATES (5.17% of Net Assets) $ 250,673,511 $ 9,847,063 $ 9,838,691
===========================================

(a) As of December 31, 2005, no longer an affiliate.

14. OTHER CONSIDERATIONS

46 | Annual Report

MUTUAL QUALIFIED FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. REGULATORY MATTERS

Annual Report | 47

MUTUAL QUALIFIED FUND

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying statement of assets and liabilities of the
Mutual Qualified Fund (one of the portfolio constituting the Franklin Mutual
Series Fund Inc.) (the "Fund"), including the statement of investments, as of
December 31, 2005, 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.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Qualified Fund of the Franklin Mutual Series Fund Inc. at December 31,
2005, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.

/s/ Ernst & young LLP

Boston, Massachusetts
February 10, 2006

48 | Annual Report

MUTUAL QUALIFIED FUND

TAX DESIGNATION (UNAUDITED)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $304,782,242 as a
capital gain dividend for the fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $79,592,218 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2005. 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 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $16,167,879 as interest-related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $58,876,721 as a short-term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates 23.44% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2005.

Annual Report | 49

MUTUAL QUALIFIED FUND

BOARD MEMBERS AND OFFICERS

INDEPENDENT BOARD MEMBERS

EDWARD I. ALTMAN, PH.D. Director Since 1987 7 Director, A.T.D. Inc.(financial
(1941) technology and investment company).
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center; editor and author
of numerous financial publications; financial consultant; and serves on the Investment Advisory Committee of the New York State
Common Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM Corporation
101 John F. Kennedy Parkway (Sallie Mae) and Allied Capital
Short Hills, NJ 07078-2789 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 (man- ager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Director Since 2002 13 Director, Fiduciary Emerging Markets
101 John F. Kennedy Parkway Bond Fund PLC and Fiduciary
Short Hills, NJ 07078-2789 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 (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------

50 | Annual Report

INTERESTED BOARD MEMBERS AND OFFICERS

**WILLIAM J. LIPPMAN (1925) Director Since 1996 14 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the
case may be, of five of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**ANNE M. TATLOCK (1939) Director Since 2002 7 Director, Fortune Brands, Inc.
600 Fifth Avenue, 7th Floor (consumer products) and Merck & Co.
New York, NY 10020-2302 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.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 51

MICHAEL J. EMBLER (1964) Senior Vice Since May 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies
in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President, and Since May 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------

52 | Annual Report

STEVEN J. GRAY (1955) Secretary Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer of 33 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Legal Counsel, Atlas Advisers, Inc. (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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, LLC,
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 47 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 (1937) Vice Since 2002 Not Applicable Not Applicable
600 Fifth Avenue President -
Rockefeller Center AML
New York, NY 10020-2302 Compliance
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton
Institutional Suisse S.A., 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 45 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since December Not Applicable Not Applicable
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 53

54 | Annual Report

MUTUAL QUALIFIED FUND

SHAREHOLDER INFORMATION

PROXY VOTING POLICIES AND PROCEDURES

QUARTERLY STATEMENT OF INVESTMENTS

Annual Report | 55

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 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

BLEND

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

SECTOR

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(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(4)
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(4)
Templeton Global Bond Fund
Templeton Income Fund

TAX-FREE INCOME(5)

NATIONAL FUNDS

Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(6)

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

INSURANCE FUNDS

Franklin Templeton Variable Insurance Products
Trust(8)

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

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

(6) Portfolio of insured municipal securities.

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

09/05 Not part of the annual report

[LOGO](R)
FRANKLIN TEMPLETON 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 QUALIFIED FUND

INVESTMENT MANAGER

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

DISTRIBUTOR

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

SHARE HOLDER SERVICES

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

475 A2005 02/06

MUTUAL SHARES FUND

[GRAPHIC OMITTED]

- --------------------------------------------------------------------------------
DECEMBER 31, 2005
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER | VALUE
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?

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

[LOGO](R)
FRANKLIN TEMPLETON
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 what we
believe are undervalued stocks, as well as
arbitrage situations and distressed securities.
Franklin is a recognized leader in fixed income
investing and also brings expertise in growth-
and value-style U.S. equity investing.
Templeton pioneered international investing
and, with offices in over 25 countries, offers
investors a truly global perspective.

TRUE DIVERSIFICATION Because these management groups work
independently and adhere to different
investment approaches, Franklin, Templeton and
Mutual Series funds typically have distinct
portfolios. That's why the funds can be used to
build truly diversified allocation plans
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, accurate and personal
service that has helped the firm become one of
the most trusted names in financial services.

[GRAPHIC OMITTED]

Not part of the annual report

CONTENTS

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

ANNUAL REPORT

Mutual Shares Fund ........................................................ 4

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

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

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

Financial Statements ...................................................... 32

Notes to Financial Statements ............................................. 36

Report of Independent Registered Public Accounting Firm ................... 52

Tax Designation ........................................................... 53

Board Members and Officers ................................................ 54

Shareholder Information ................................................... 59

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

ANNUAL REPORT

MUTUAL SHARES FUND

YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Shares Fund seeks capital
appreciation, with income as a secondary goal, by investing mainly in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to 35% of its assets in foreign
securities.

We are pleased to bring you Mutual Shares Fund's annual report for the fiscal
year ended December 31, 2005.

PERFORMANCE OVERVIEW

Mutual Shares Fund - Class Z posted a +10.39% cumulative total return for the 12
months ended December 31, 2005. The Fund outperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +4.91% over the same
period.(1) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 10.

ECONOMIC AND MARKET OVERVIEW

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

Oil prices remained high during the period, and natural gas prices rose during
the second half of 2005. Despite these high commodity prices, inflation remained
relatively contained for the 12 months ended December 31, 2005, as measured by
the 2.2% rise for the core Consumer Price Index (CPI).(2) In this environment,
the blue chip stocks of the Dow Jones Industrial Average posted a one-year total
return of +1.72%, while the broader S&P 500 and the technology-heavy NASDAQ
Composite Index returned +4.91% and +2.12%.(3)

INVESTMENT STRATEGY

GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/05

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

U.S. 49.4%
U.K. 9.3%
Canada 4.5%
France 4.2%
Spain 2.3%
Norway 1.8%
Japan 1.5%
South Africa 1.3%
Belgium 1.3%
Ireland 1.2%
Italy 1.2%
Switzerland 1.0%
Other 3.3%
Short-Term Investments & Other Net Assets 17.7%

(2) Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.

(4) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a
free float-adjusted, market capitalization-weighted index designed to
measure equity market performance in global developed and emerging markets
excluding the U.S.

Annual Report | 5

improve the likelihood of upside potential, but it is also intended to reduce
the risk of substantial declines. While the vast majority of our undervalued
equity investments are made in publicly traded companies globally, we may invest
occasionally in privately held companies as well.

MANAGER'S DISCUSSION

While all three parts of our investment strategy contributed to the Fund's
performance during the year under review, the strongest contributor was our
equity portfolio, most notably, the foreign holdings. Three of our best
performing stock investments in 2005 included British American Tobacco (BAT),
OPTI Canada and Anglo American.

6 | Annual Report

global brands, and a further reduction of its cost base. During the year, the
company returned most of its free cash flow to shareholders through dividends
and share buybacks. This caused a number of analysts to raise their earnings
growth projections for BAT.

OPTI Canada (appreciated 96% in local currency) is a Calgary-based company that
is developing projects in Canada's Athabasca oil sands region. Canada's oil
sands are the largest known oil reserve base outside of Saudi Arabia and are
estimated to contain 180 billion barrels of recoverable oil. We were initially
attracted to the company due to the asset value of the recoverable oil on its
land and its proprietary low-cost refining process. The company utilizes a
patented technology to refine the oil sands into synthetic crude oil in a
cost-effective manner. The company's first project in Canada's oil sands is a
fifty-fifty joint venture with Nexen that should begin producing in 2007. OPTI
Canada's stock performed well in 2005 as the project remained on-time and
on-budget, other assets in the region were purchased for large premiums, and oil
prices remained high.

Although many of our investments performed well during the year, some of the
Fund's securities underperformed during the 12 months under review. Three
positions that declined include Washington Post, a U.S. newspaper and publishing
company; Kindred Healthcare, a U.S. health care provider; and White Mountains
Insurance Group, a U.S. insurance company.

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/05

- ---------------------------------------------------
% OF TOTAL
NET ASSETS
- ---------------------------------------------------
Insurance 10.0%
- ---------------------------------------------------
Tobacco 9.4%
- ---------------------------------------------------
Media 6.4%
- ---------------------------------------------------
Commercial Banks 6.2%
- ---------------------------------------------------
Oil, Gas & Consumable Fuels 5.1%
- ---------------------------------------------------
Metals & Mining 4.3%
- ---------------------------------------------------
Food Products 4.2%
- ---------------------------------------------------
Beverages 3.9%
- ---------------------------------------------------
Paper & Forest Products 3.6%
- ---------------------------------------------------
Diversified Telecommunication Services 3.2%
- ---------------------------------------------------

Annual Report | 7

TOP 10 HOLDINGS
12/31/05

- ---------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ---------------------------------------------------
Berkshire Hathaway Inc., A & B 3.7%
INSURANCE, U.S.
- ---------------------------------------------------
British American Tobacco PLC, ord. & ADR 2.9%
TOBACCO, U.K.
- ---------------------------------------------------
Weyerhaeuser Co. 2.6%
PAPER & FOREST PRODUCTS, U.S.
- ---------------------------------------------------
White Mountains Insurance Group Inc. 2.6%
INSURANCE, U.S.
- ---------------------------------------------------
Altadis SA 2.2%
TOBACCO, SPAIN
- ---------------------------------------------------
OPTI Canada 2.0%
OIL, GAS & CONSUMABLE FUELS, CANADA
- ---------------------------------------------------
Orkla ASA 1.7%
FOOD PRODUCTS, NORWAY
- ---------------------------------------------------
Reynolds American Inc. 1.7%
TOBACCO, U.S.
- ---------------------------------------------------
Pernod Ricard SA 1.5%
BEVERAGES, FRANCE
- ---------------------------------------------------
Imperial Tobacco Group PLC 1.3%
TOBACCO, U.K.
- ---------------------------------------------------

White Mountains' shares weakened 12% largely due to the company's exposure to
areas devastated by Hurricane Katrina, which may have caused the largest total
insured loss in history.

Finally, investors should note that we entered 2005 less than fully hedged in
foreign currencies and increased the hedges on foreign currency exposure over
the course of the year.

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

/s/ Peter A. Langerman
[PHOTO OMITTED]
Peter A. Langerman
Portfolio Manager

/s/ Debbie A. Turner
[PHOTO OMITTED]
Debbie A. Turner, CFA
Assistant Portfolio Manager

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

Mutual Shares Fund

(5) A member of Franklin Mutual Advisers, Inc., serves on Kindred's board of
directors.

8 | Annual Report

- --------------------------------------------------------------------------------
PETER LANGERMAN rejoined Franklin Templeton Investments in April 2005 and
assumed the duties of portfolio manager of Mutual Shares Fund in May 2005. He
joined Franklin Templeton in 1996, serving in various capacities, including
President and Chief Executive Officer of Franklin Mutual and member of the
management team of the Funds, including Mutual Shares Fund, before leaving in
2002 and serving as director of New Jersey's Division of Investment, overseeing
employee pension funds. Between 1986 and 1996, Mr. Langerman was employed at
Heine Securities Corporation, the Funds' former manager.

DEBBIE TURNER has been an assistant portfolio manager for Mutual Shares Fund
since 2001. She joined Franklin Templeton Investments in 1996. Between 1993 and
1996, Ms. Turner was employed at Heine Securities Corporation, the Funds' former
manager.

Annual Report | 9

PERFORMANCE SUMMARY AS OF 12/31/05

PRICE AND DISTRIBUTION INFORMATION

- -------------------------------------------------------------------------------------------------
CLASS Z (SYMBOL: MUTHX) CHANGE 12/31/05 12/31/04
- -------------------------------------------------------------------------------------------------

Net Asset Value (NAV) +$0.90 $23.95 $23.05
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- -------------------------------------------------------------------------------------------------
Dividend Income $0.2943
- -------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.2193
- -------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9787
- -------------------------------------------------------------------------------------------------
TOTAL $1.4923
- -------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: TESIX) CHANGE 12/31/05 12/31/04
- -------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.88 $23.82 $22.94
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- -------------------------------------------------------------------------------------------------
Dividend Income $0.2213
- -------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.2193
- -------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9787
- -------------------------------------------------------------------------------------------------
TOTAL $1.4193
- -------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FMUBX) CHANGE 12/31/05 12/31/04
- -------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.85 $23.35 $22.50
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- -------------------------------------------------------------------------------------------------
Dividend Income $0.0575
- -------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.2193
- -------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9787
- -------------------------------------------------------------------------------------------------
TOTAL $1.2555
- -------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: TEMTX) CHANGE 12/31/05 12/31/04
- -------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.72 $23.48 $22.76
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- -------------------------------------------------------------------------------------------------
Dividend Income $0.2034
- -------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.2193
- -------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9787
- -------------------------------------------------------------------------------------------------
TOTAL $1.4014
- -------------------------------------------------------------------------------------------------

10 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

PRICE AND DISTRIBUTION INFORMATION (CONTINUED)

- -------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: TESRX) CHANGE 12/31/05 12/31/04
- -------------------------------------------------------------------------------------------------

Net Asset Value (NAV) +$0.87 $23.72 $22.85
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- -------------------------------------------------------------------------------------------------
Dividend Income $0.1892
- -------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.2193
- -------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9787
- -------------------------------------------------------------------------------------------------
TOTAL $1.3872
- -------------------------------------------------------------------------------------------------

Mutual Shares Fund paid distributions derived from long-term capital gains
totaling 97.87 cents ($0.9787) per share in June and December 2005. The Fund
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852(b)(3)(C).

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) +10.39% +50.82% +202.67%
- --------------------------------------------------------------------------------------------
Average Annual Total Return(3) +10.39% +8.57% +11.71%
- --------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $11,039 $15,082 $30,267
- --------------------------------------------------------------------------------------------
CLASS A(1) 1-YEAR 5-YEAR INCEPTION (11/1/96)
- --------------------------------------------------------------------------------------------
Cumulative Total Return(2) +9.98% +48.18% +158.93%
- --------------------------------------------------------------------------------------------
Average Annual Total Return(3) +3.66% +6.91% +10.22%
- --------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $10,366 $13,968 $24,404
- --------------------------------------------------------------------------------------------
CLASS B(1) 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------------------
Cumulative Total Return(2) +9.31% +43.43% +68.12%
- --------------------------------------------------------------------------------------------
Average Annual Total Return(3) +5.31% +7.18% +9.10%
- --------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $10,531 $14,143 $18,397
- --------------------------------------------------------------------------------------------
CLASS C(1) 1-YEAR 5-YEAR INCEPTION (11/1/96)
- --------------------------------------------------------------------------------------------
Cumulative Total Return(2) +9.27% +43.46% +144.13%
- --------------------------------------------------------------------------------------------
Average Annual Total Return(3) +8.27% +7.48% +10.23%
- --------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $10,827 $14,346 $24,413
- --------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- --------------------------------------------------------------------------------------------
Cumulative Total Return(2) +9.88% +56.93% +39.27%
- --------------------------------------------------------------------------------------------
Average Annual Total Return(3) +8.88% +16.21% +8.64%
- --------------------------------------------------------------------------------------------
Value of $10,000 Investment(4) $10,888 $15,693 $13,927
- --------------------------------------------------------------------------------------------

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

AVERAGE ANNUAL TOTAL RETURN(1)

- -----------------------------------
CLASS Z 12/31/05
- -----------------------------------
1-Year +10.39%
- -----------------------------------
5-Year +8.57%
- -----------------------------------
10-Year +11.71%
- -----------------------------------

CLASS Z (1/1/96-12/31/05)(1)

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

Mutual Shares
Date Fund S&P 500(5)
---------------------------------------------
1/1/1996 $10,000 $10,000
1/31/1996 $10,400 $10,340
2/29/1996 $10,682 $10,436
3/31/1996 $10,760 $10,537
4/30/1996 $10,745 $10,692
5/31/1996 $10,924 $10,967
6/30/1996 $10,819 $11,009
7/31/1996 $10,452 $10,523
8/31/1996 $10,841 $10,745
9/30/1996 $11,190 $11,349
10/31/1996 $11,286 $11,662
11/30/1996 $11,939 $12,543
12/31/1996 $12,075 $12,295
1/31/1997 $12,455 $13,062
2/28/1997 $12,751 $13,165
3/31/1997 $12,582 $12,625
4/30/1997 $12,719 $13,378
5/31/1997 $13,324 $14,192
6/30/1997 $13,733 $14,827
7/31/1997 $14,494 $16,006
8/31/1997 $14,395 $15,110
9/30/1997 $15,052 $15,937
10/31/1997 $14,790 $15,406
11/30/1997 $14,980 $16,118
12/31/1997 $15,260 $16,395
1/31/1998 $15,153 $16,576
2/28/1998 $16,027 $17,771
3/31/1998 $16,565 $18,680
4/30/1998 $16,507 $18,868
5/31/1998 $16,357 $18,544
6/30/1998 $16,285 $19,297
7/31/1998 $15,848 $19,092
8/31/1998 $13,611 $16,334
9/30/1998 $13,524 $17,381
10/31/1998 $14,412 $18,793
11/30/1998 $15,184 $19,932
12/31/1998 $15,329 $21,080
1/31/1999 $15,571 $21,961
2/28/1999 $15,368 $21,278
3/31/1999 $16,081 $22,130
4/30/1999 $17,329 $22,987
5/31/1999 $17,416 $22,445
6/30/1999 $17,910 $23,689
7/31/1999 $17,415 $22,951
8/31/1999 $16,743 $22,837
9/30/1999 $16,312 $22,212
10/31/1999 $16,951 $23,617
11/30/1999 $17,271 $24,097
12/31/1999 $17,628 $25,515
1/31/2000 $17,050 $24,233
2/29/2000 $16,352 $23,775
3/31/2000 $18,043 $26,099
4/30/2000 $17,852 $25,314
5/31/2000 $18,077 $24,796
6/30/2000 $17,760 $25,408
7/31/2000 $18,255 $25,011
8/31/2000 $19,180 $26,564
9/30/2000 $19,161 $25,162
10/31/2000 $19,617 $25,055
11/30/2000 $19,002 $23,081
12/31/2000 $20,067 $23,194
1/31/2001 $21,253 $24,017
2/28/2001 $21,264 $21,828
3/31/2001 $20,726 $20,446
4/30/2001 $21,568 $22,034
5/31/2001 $22,317 $22,181
6/30/2001 $22,454 $21,642
7/31/2001 $22,444 $21,429
8/31/2001 $21,932 $20,089
9/30/2001 $20,000 $18,466
10/31/2001 $19,916 $18,819
11/30/2001 $20,751 $20,262
12/31/2001 $21,335 $20,440
1/31/2002 $21,138 $20,141
2/28/2002 $21,237 $19,753
3/31/2002 $21,873 $20,496
4/30/2002 $22,004 $19,254
5/31/2002 $22,015 $19,113
6/30/2002 $20,588 $17,752
7/31/2002 $19,351 $16,368
8/31/2002 $19,552 $16,475
9/30/2002 $18,493 $14,686
10/31/2002 $18,782 $15,978
11/30/2002 $19,162 $16,917
12/31/2002 $19,012 $15,924
1/31/2003 $18,855 $15,508
2/28/2003 $18,550 $15,275
3/31/2003 $18,595 $15,421
4/30/2003 $19,690 $16,692
5/31/2003 $20,695 $17,571
6/30/2003 $21,008 $17,795
7/31/2003 $21,133 $18,109
8/31/2003 $21,634 $18,462
9/30/2003 $21,543 $18,266
10/31/2003 $22,339 $19,299
11/30/2003 $23,055 $19,469
12/31/2003 $24,075 $20,489
1/31/2004 $24,270 $20,865
2/29/2004 $24,901 $21,155
3/31/2004 $24,866 $20,836
4/30/2004 $24,453 $20,509
5/31/2004 $24,488 $20,790
6/30/2004 $24,896 $21,194
7/31/2004 $24,515 $20,493
8/31/2004 $24,734 $20,575
9/30/2004 $25,057 $20,798
10/31/2004 $25,356 $21,116
11/30/2004 $26,589 $21,970
12/31/2004 $27,418 $22,717
1/31/2005 $26,883 $22,163
2/28/2005 $27,704 $22,629
3/31/2005 $27,502 $22,229
4/30/2005 $27,240 $21,808
5/31/2005 $27,822 $22,501
6/30/2005 $28,136 $22,533
7/31/2005 $28,864 $23,371
8/31/2005 $28,984 $23,158
9/30/2005 $29,425 $23,345
10/31/2005 $28,841 $22,956
11/30/2005 $29,569 $23,823
12/31/2005 $30,267 $23,832

AVERAGE ANNUAL TOTAL RETURN(1)

- -----------------------------------
CLASS A 12/31/05
- -----------------------------------
1-Year +3.66%
- -----------------------------------
5-Year +6.91%
- -----------------------------------
Since Inception (11/1/96) +10.22%
- -----------------------------------

CLASS A (11/1/96-12/31/05)(1)

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

Mutual Shares
Date Fund S&P 500(5)
--------------------------------------------
11/1/1996 $ 9,425 $10,000
11/30/1996 $ 9,968 $10,755
12/31/1996 $10,077 $10,542
1/31/1997 $10,391 $11,200
2/28/1997 $10,635 $11,288
3/31/1997 $10,494 $10,825
4/30/1997 $10,602 $11,471
5/31/1997 $11,102 $12,169
6/30/1997 $11,438 $12,714
7/31/1997 $12,072 $13,725
8/31/1997 $11,989 $12,957
9/30/1997 $12,533 $13,666
10/31/1997 $12,308 $13,210
11/30/1997 $12,462 $13,821
12/31/1997 $12,698 $14,058
1/31/1998 $12,597 $14,213
2/28/1998 $13,325 $15,238
3/31/1998 $13,767 $16,018
4/30/1998 $13,714 $16,179
5/31/1998 $13,582 $15,901
6/30/1998 $13,517 $16,546
7/31/1998 $13,149 $16,371
8/31/1998 $11,293 $14,006
9/30/1998 $11,214 $14,904
10/31/1998 $11,948 $16,115
11/30/1998 $12,585 $17,091
12/31/1998 $12,699 $18,075
1/31/1999 $12,901 $18,831
2/28/1999 $12,726 $18,246
3/31/1999 $13,318 $18,975
4/30/1999 $14,341 $19,710
5/31/1999 $14,407 $19,245
6/30/1999 $14,819 $20,313
7/31/1999 $14,401 $19,679
8/31/1999 $13,837 $19,582
9/30/1999 $13,479 $19,046
10/31/1999 $14,003 $20,251
11/30/1999 $14,262 $20,662
12/31/1999 $14,557 $21,878
1/31/2000 $14,072 $20,779
2/29/2000 $13,493 $20,386
3/31/2000 $14,886 $22,379
4/30/2000 $14,722 $21,706
5/31/2000 $14,907 $21,262
6/30/2000 $14,639 $21,786
7/31/2000 $15,040 $21,446
8/31/2000 $15,797 $22,777
9/30/2000 $15,774 $21,575
10/31/2000 $16,152 $21,484
11/30/2000 $15,635 $19,791
12/31/2000 $16,511 $19,888
1/31/2001 $17,482 $20,593
2/28/2001 $17,482 $18,717
3/31/2001 $17,030 $17,532
4/30/2001 $17,724 $18,893
5/31/2001 $18,335 $19,020
6/30/2001 $18,443 $18,557
7/31/2001 $18,434 $18,374
8/31/2001 $18,004 $17,225
9/30/2001 $16,409 $15,834
10/31/2001 $16,340 $16,137
11/30/2001 $17,012 $17,374
12/31/2001 $17,491 $17,526
1/31/2002 $17,329 $17,271
2/28/2002 $17,401 $16,938
3/31/2002 $17,916 $17,575
4/30/2002 $18,015 $16,510
5/31/2002 $18,024 $16,388
6/30/2002 $16,845 $15,221
7/31/2002 $15,836 $14,035
8/31/2002 $15,992 $14,127
9/30/2002 $15,130 $12,593
10/31/2002 $15,350 $13,701
11/30/2002 $15,662 $14,506
12/31/2002 $15,533 $13,654
1/31/2003 $15,403 $13,297
2/28/2003 $15,144 $13,098
3/31/2003 $15,181 $13,223
4/30/2003 $16,070 $14,313
5/31/2003 $16,884 $15,066
6/30/2003 $17,127 $15,259
7/31/2003 $17,230 $15,528
8/31/2003 $17,631 $15,830
9/30/2003 $17,547 $15,663
10/31/2003 $18,200 $16,548
11/30/2003 $18,768 $16,694
12/31/2003 $19,599 $17,569
1/31/2004 $19,749 $17,891
2/29/2004 $20,266 $18,140
3/31/2004 $20,228 $17,866
4/30/2004 $19,890 $17,586
5/31/2004 $19,909 $17,827
6/30/2004 $20,237 $18,173
7/31/2004 $19,916 $17,572
8/31/2004 $20,086 $17,643
9/30/2004 $20,350 $17,833
10/31/2004 $20,585 $18,106
11/30/2004 $21,575 $18,838
12/31/2004 $22,245 $19,479
1/31/2005 $21,799 $19,004
2/28/2005 $22,458 $19,404
3/31/2005 $22,283 $19,061
4/30/2005 $22,070 $18,699
5/31/2005 $22,545 $19,294
6/30/2005 $22,786 $19,322
7/31/2005 $23,369 $20,040
8/31/2005 $23,457 $19,857
9/30/2005 $23,816 $20,018
10/31/2005 $23,330 $19,684
11/30/2005 $23,914 $20,428
12/31/2005 $24,404 $20,435

12 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

CLASS B (1/1/99-12/31/05)(1)

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

Mutual Shares
Date Fund S&P 500(5)
---------------------------------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,154 $10,418
2/28/1999 $10,005 $10,094
3/31/1999 $10,467 $10,498
4/30/1999 $11,262 $10,905
5/31/1999 $11,313 $10,647
6/30/1999 $11,627 $11,238
7/31/1999 $11,293 $10,887
8/31/1999 $10,844 $10,834
9/30/1999 $10,556 $10,537
10/31/1999 $10,964 $11,203
11/30/1999 $11,157 $11,431
12/31/1999 $11,382 $12,104
1/31/2000 $11,000 $11,496
2/29/2000 $10,539 $11,279
3/31/2000 $11,618 $12,381
4/30/2000 $11,489 $12,009
5/31/2000 $11,624 $11,763
6/30/2000 $11,411 $12,053
7/31/2000 $11,720 $11,865
8/31/2000 $12,303 $12,601
9/30/2000 $12,279 $11,936
10/31/2000 $12,558 $11,886
11/30/2000 $12,157 $10,949
12/31/2000 $12,827 $11,003
1/31/2001 $13,574 $11,393
2/28/2001 $13,568 $10,355
3/31/2001 $13,213 $ 9,699
4/30/2001 $13,745 $10,453
5/31/2001 $14,204 $10,523
6/30/2001 $14,279 $10,267
7/31/2001 $14,265 $10,166
8/31/2001 $13,921 $ 9,530
9/30/2001 $12,691 $ 8,760
10/31/2001 $12,624 $ 8,927
11/30/2001 $13,144 $ 9,612
12/31/2001 $13,501 $ 9,696
1/31/2002 $13,367 $ 9,555
2/28/2002 $13,416 $ 9,371
3/31/2002 $13,805 $ 9,723
4/30/2002 $13,875 $ 9,134
5/31/2002 $13,875 $ 9,067
6/30/2002 $12,964 $ 8,421
7/31/2002 $12,175 $ 7,765
8/31/2002 $12,290 $ 7,816
9/30/2002 $11,616 $ 6,967
10/31/2002 $11,781 $ 7,580
11/30/2002 $12,017 $ 8,025
12/31/2002 $11,908 $ 7,554
1/31/2003 $11,800 $ 7,357
2/28/2003 $11,605 $ 7,246
3/31/2003 $11,619 $ 7,316
4/30/2003 $12,297 $ 7,919
5/31/2003 $12,910 $ 8,335
6/30/2003 $13,093 $ 8,442
7/31/2003 $13,166 $ 8,591
8/31/2003 $13,464 $ 8,758
9/30/2003 $13,391 $ 8,665
10/31/2003 $13,885 $ 9,155
11/30/2003 $14,313 $ 9,236
12/31/2003 $14,934 $ 9,720
1/31/2004 $15,043 $ 9,898
2/29/2004 $15,428 $10,036
3/31/2004 $15,385 $ 9,884
4/30/2004 $15,115 $ 9,729
5/31/2004 $15,123 $ 9,863
6/30/2004 $15,362 $10,054
7/31/2004 $15,114 $ 9,722
8/31/2004 $15,238 $ 9,761
9/30/2004 $15,428 $ 9,866
10/31/2004 $15,596 $10,017
11/30/2004 $16,340 $10,422
12/31/2004 $16,830 $10,777
1/31/2005 $16,493 $10,514
2/28/2005 $16,979 $10,735
3/31/2005 $16,837 $10,545
4/30/2005 $16,673 $10,345
5/31/2005 $17,017 $10,674
6/30/2005 $17,193 $10,690
7/31/2005 $17,620 $11,087
8/31/2005 $17,680 $10,986
9/30/2005 $17,935 $11,075
10/31/2005 $17,560 $10,890
11/30/2005 $17,987 $11,301
12/31/2005 $18,397 $11,305

AVERAGE ANNUAL TOTAL RETURN(1)

- -----------------------------------
CLASS B 12/31/05
- -----------------------------------
1-Year +5.31%
- -----------------------------------
5-Year +7.18%
- -----------------------------------
Since Inception (1/1/99) +9.10%
- -----------------------------------

CLASS C (11/1/96-12/31/05)(1)

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

Mutual Shares
Date Fund S&P 500(5)
---------------------------------------------
11/1/1996 $10,000 $10,000
11/30/1996 $10,573 $10,755
12/31/1996 $10,683 $10,542
1/31/1997 $11,011 $11,200
2/28/1997 $11,266 $11,288
3/31/1997 $11,105 $10,825
4/30/1997 $11,214 $11,471
5/31/1997 $11,738 $12,169
6/30/1997 $12,089 $12,714
7/31/1997 $12,750 $13,725
8/31/1997 $12,652 $12,957
9/30/1997 $13,222 $13,666
10/31/1997 $12,977 $13,210
11/30/1997 $13,135 $13,821
12/31/1997 $13,368 $14,058
1/31/1998 $13,261 $14,213
2/28/1998 $14,018 $15,238
3/31/1998 $14,473 $16,018
4/30/1998 $14,410 $16,179
5/31/1998 $14,265 $15,901
6/30/1998 $14,189 $16,546
7/31/1998 $13,798 $16,371
8/31/1998 $11,838 $14,006
9/30/1998 $11,755 $14,904
10/31/1998 $12,517 $16,115
11/30/1998 $13,177 $17,091
12/31/1998 $13,295 $18,075
1/31/1999 $13,494 $18,831
2/28/1999 $13,302 $18,246
3/31/1999 $13,912 $18,975
4/30/1999 $14,973 $19,710
5/31/1999 $15,042 $19,245
6/30/1999 $15,459 $20,313
7/31/1999 $15,013 $19,679
8/31/1999 $14,421 $19,582
9/30/1999 $14,038 $19,046
10/31/1999 $14,575 $20,251
11/30/1999 $14,839 $20,662
12/31/1999 $15,140 $21,878
1/31/2000 $14,625 $20,779
2/29/2000 $14,013 $20,386
3/31/2000 $15,453 $22,379
4/30/2000 $15,281 $21,706
5/31/2000 $15,461 $21,262
6/30/2000 $15,177 $21,786
7/31/2000 $15,587 $21,446
8/31/2000 $16,361 $22,777
9/30/2000 $16,329 $21,575
10/31/2000 $16,699 $21,484
11/30/2000 $16,167 $19,791
12/31/2000 $17,059 $19,888
1/31/2001 $18,050 $20,593
2/28/2001 $18,041 $18,717
3/31/2001 $17,572 $17,532
4/30/2001 $18,276 $18,893
5/31/2001 $18,893 $19,020
6/30/2001 $18,996 $18,557
7/31/2001 $18,969 $18,374
8/31/2001 $18,522 $17,225
9/30/2001 $16,876 $15,834
10/31/2001 $16,795 $16,137
11/30/2001 $17,475 $17,374
12/31/2001 $17,956 $17,526
1/31/2002 $17,779 $17,271
2/28/2002 $17,845 $16,938
3/31/2002 $18,367 $17,575
4/30/2002 $18,460 $16,510
5/31/2002 $18,460 $16,388
6/30/2002 $17,242 $15,221
7/31/2002 $16,201 $14,035
8/31/2002 $16,343 $14,127
9/30/2002 $15,454 $12,593
10/31/2002 $15,672 $13,701
11/30/2002 $15,984 $14,506
12/31/2002 $15,841 $13,654
1/31/2003 $15,698 $13,297
2/28/2003 $15,432 $13,098
3/31/2003 $15,461 $13,223
4/30/2003 $16,353 $14,313
5/31/2003 $17,180 $15,066
6/30/2003 $17,420 $15,259
7/31/2003 $17,506 $15,528
8/31/2003 $17,908 $15,830
9/30/2003 $17,812 $15,663
10/31/2003 $18,463 $16,548
11/30/2003 $19,036 $16,694
12/31/2003 $19,859 $17,569
1/31/2004 $20,003 $17,891
2/29/2004 $20,520 $18,140
3/31/2004 $20,472 $17,866
4/30/2004 $20,108 $17,586
5/31/2004 $20,118 $17,827
6/30/2004 $20,442 $18,173
7/31/2004 $20,105 $17,572
8/31/2004 $20,269 $17,643
9/30/2004 $20,528 $17,833
10/31/2004 $20,749 $18,106
11/30/2004 $21,739 $18,838
12/31/2004 $22,396 $19,479
1/31/2005 $21,943 $19,004
2/28/2005 $22,593 $19,404
3/31/2005 $22,406 $19,061
4/30/2005 $22,179 $18,699
5/31/2005 $22,642 $19,294
6/30/2005 $22,874 $19,322
7/31/2005 $23,436 $20,040
8/31/2005 $23,525 $19,857
9/30/2005 $23,860 $20,018
10/31/2005 $23,357 $19,684
11/30/2005 $23,929 $20,428
12/31/2005 $24,413 $20,435

AVERAGE ANNUAL TOTAL RETURN(1)

- -----------------------------------
CLASS C 12/31/05
- -----------------------------------
1-Year +8.27%
- -----------------------------------
5-Year +7.48%
- -----------------------------------
Since Inception (11/1/96) +10.23%
- -----------------------------------

Annual Report | 13

PERFORMANCE SUMMARY (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

- -----------------------------------
CLASS R 12/31/05
- -----------------------------------
1-Year +8.88%
- -----------------------------------
3-Year +16.21%
- -----------------------------------
Since Inception (1/1/02) +8.64%
- -----------------------------------

CLASS R (1/1/02-12/31/05)

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

Mutual Shares
Date Fund S&P 500(5)
---------------------------------------------
1/1/2002 $10,000 $10,000
1/31/2002 $ 9,917 $ 9,854
2/28/2002 $ 9,958 $ 9,664
3/31/2002 $10,258 $10,028
4/30/2002 $10,314 $ 9,420
5/31/2002 $10,320 $ 9,351
6/30/2002 $ 9,643 $ 8,685
7/31/2002 $ 9,066 $ 8,008
8/31/2002 $ 9,150 $ 8,061
9/30/2002 $ 8,656 $ 7,185
10/31/2002 $ 8,782 $ 7,817
11/30/2002 $ 8,956 $ 8,277
12/31/2002 $ 8,878 $ 7,791
1/31/2003 $ 8,804 $ 7,587
2/28/2003 $ 8,661 $ 7,473
3/31/2003 $ 8,677 $ 7,545
4/30/2003 $ 9,182 $ 8,167
5/31/2003 $ 9,648 $ 8,596
6/30/2003 $ 9,792 $ 8,706
7/31/2003 $ 9,846 $ 8,860
8/31/2003 $10,075 $ 9,032
9/30/2003 $10,022 $ 8,937
10/31/2003 $10,390 $ 9,442
11/30/2003 $10,716 $ 9,525
12/31/2003 $11,190 $10,024
1/31/2004 $11,276 $10,208
2/29/2004 $11,566 $10,350
3/31/2004 $11,544 $10,194
4/30/2004 $11,351 $10,034
5/31/2004 $11,362 $10,171
6/30/2004 $11,543 $10,369
7/31/2004 $11,360 $10,026
8/31/2004 $11,457 $10,066
9/30/2004 $11,608 $10,175
10/31/2004 $11,737 $10,331
11/30/2004 $12,304 $10,749
12/31/2004 $12,680 $11,114
1/31/2005 $12,430 $10,843
2/28/2005 $12,802 $11,071
3/31/2005 $12,702 $10,876
4/30/2005 $12,580 $10,669
5/31/2005 $12,846 $11,009
6/30/2005 $12,984 $11,024
7/31/2005 $13,312 $11,434
8/31/2005 $13,362 $11,330
9/30/2005 $13,562 $11,422
10/31/2005 $13,284 $11,231
11/30/2005 $13,618 $11,655
12/31/2005 $13,927 $11,660

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, OR
PROPOSED TO BE ENGAGED, IN MERGERS, REORGANIZATIONS OR LIQUIDATIONS, TENDER
OFFERS 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.

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 X $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)

Actual $1,000 $1,075.70 $4.34
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.02 $4.23
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,073.70 $6.71
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.26 $6.01
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,070.10 $9.55
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.98 $9.30
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,069.90 $9.55
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.98 $9.30
- --------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,073.20 $6.95
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.77
- --------------------------------------------------------------------------------------------------------

* Expenses are equal to the annualized expense ratio for each class (Z:
0.83%; A: 1.18%; B:1.83%; C: 1.83%; and R: 1.33%) multiplied by the
average account value over the period, multiplied by 184/365 to reflect
the one-half year period.

16 | Annual Report

MUTUAL SHARES FUND

FINANCIAL HIGHLIGHTS

-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------

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

Net asset value, beginning of year .......... $ 23.05 $ 20.99 $ 16.84 $ 19.44 $ 19.79
-----------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ................. 0.47 0.35 0.24 0.33 0.29

Net realized and unrealized gains
(losses) .............................. 1.92 2.52 4.23 (2.42) 0.95
-----------------------------------------------------------------------------
Total from investment operations ............ 2.39 2.87 4.47 (2.09) 1.24
-----------------------------------------------------------------------------
Less distributions from:

Net investment income .................... (0.29) (0.39) (0.32) (0.25) (0.24)

Net realized gains ....................... (1.20) (0.42) -- (0.26) (1.35)
-----------------------------------------------------------------------------

Total distributions ......................... (1.49) (0.81) (0.32) (0.51) (1.59)
-----------------------------------------------------------------------------

Redemption fees ............................. --(c) --(c) -- -- --
-----------------------------------------------------------------------------
Net asset value, end of year ................ $ 23.95 $ 23.05 $ 20.99 $ 16.84 $ 19.44
=============================================================================

Total return ................................ 10.39% 13.89% 26.62% (10.89)% 6.32%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............. $ 8,951,080 $ 7,240,641 $ 5,782,145 $ 4,585,605 $ 5,465,075

Ratios to average net assets:*

Expenses(b) .............................. 0.81% 0.81% 0.84% 0.79% 0.78%

Net investment income .................... 1.99% 1.62% 1.28% 1.79% 1.40%

Portfolio turnover rate ..................... 21.57% 33.22% 54.65% 51.22% 52.98%

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

Expenses ................................. 0.76% 0.80% 0.81% 0.78% 0.77%

(a) Based on average daily shares outstanding.

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

Annual Report | See notes to financial statements. | 17

MUTUAL SHARES FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------

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

Net asset value, beginning of year .......... $ 22.94 $ 20.90 $ 16.78 $ 19.37 $ 19.73
-----------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ................. 0.39 0.27 0.17 0.26 0.22

Net realized and unrealized gains
(losses) .............................. 1.91 2.51 4.21 (2.40) 0.95
-----------------------------------------------------------------------------
Total from investment operations ............ 2.30 2.78 4.38 (2.14) 1.17
-----------------------------------------------------------------------------
Less distributions from:

Net investment income .................... (0.22) (0.32) (0.26) (0.19) (0.18)

Net realized gains ....................... (1.20) (0.42) -- (0.26) (1.35)
-----------------------------------------------------------------------------
Total distributions ......................... (1.42) (0.74) (0.26) (0.45) (1.53)
-----------------------------------------------------------------------------
Redemption fees ............................. --(d) --(d) -- -- --
-----------------------------------------------------------------------------
Net asset value, end of year ................ $ 23.82 $ 22.94 $ 20.90 $ 16.78 $ 19.37
=============================================================================

Total return(b) ............................. 9.98% 13.50% 26.18% (11.20)% 5.94%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ............. $ 4,211,238 $ 2,940,029 $ 2,257,336 $ 1,543,833 $ 1,580,046

Ratios to average net assets:*

Expenses(c) .............................. 1.16% 1.16% 1.19% 1.14% 1.13%

Net investment income .................... 1.64% 1.27% 0.93% 1.44% 1.05%

Portfolio turnover rate ..................... 21.57% 33.22% 54.65% 51.22% 52.98%

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

Expenses ................................. 1.11% 1.15% 1.16% 1.13% 1.12%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the sales commissions or the contingent
deferred sales charge.

(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 $0.01 per share.

18 | See notes to financial statements. | Annual Report

MUTUAL SHARES FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2005 2004 2003 2002 2001
---------------------------------------------------------------------------

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

Net asset value, beginning of year .............. $ 22.50 $ 20.54 $ 16.53 $ 19.12 $ 19.56
----------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ..................... 0.23 0.13 0.04 0.15 0.08

Net realized and unrealized gains (losses) ... 1.88 2.44 4.14 (2.36) 0.95
----------------------------------------------------------------------------
Total from investment operations ................ 2.11 2.57 4.18 (2.21) 1.03
----------------------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.06) (0.19) (0.17) (0.12) (0.12)

Net realized gains ........................... (1.20) (0.42) -- (0.26) (1.35)
----------------------------------------------------------------------------
Total distributions ............................. (1.26) (0.61) (0.17) (0.38) (1.47)
----------------------------------------------------------------------------
Redemption fees ................................. --(d) --(d) -- -- --
----------------------------------------------------------------------------
Net asset value, end of year .................... $ 23.35 $ 22.50 $ 20.54 $ 16.53 $ 19.12
============================================================================

Total return(b) ................................. 9.31% 12.70% 25.41% (11.80)% 5.26%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ................. $ 612,007 $ 588,401 $ 444,671 $ 235,470 $ 126,579

Ratios to average net assets:*

Expenses(c) .................................. 1.81% 1.81% 1.84% 1.79% 1.78%

Net investment income ........................ 0.99% 0.62% 0.28% 0.79% 0.37%

Portfolio turnover rate ......................... 21.57% 33.22% 54.65% 51.22% 52.98%

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

Expenses ..................................... 1.76% 1.80% 1.81% 1.78% 1.77%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

Annual Report | See notes to financial statements. | 19

MUTUAL SHARES FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2005 2004 2003 2002 2001
----------------------------------------------------------------------------

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

Net asset value, beginning of year .............. $ 22.76 $ 20.75 $ 16.68 $ 19.26 $ 19.63
----------------------------------------------------------------------------
Income from investment operations:

Net investment income(a) ..................... 0.23 0.13 0.05 0.15 0.08

Net realized and unrealized gains (losses) ... 1.89 2.49 4.17 (2.39) 0.95
----------------------------------------------------------------------------
Total from investment operations ................ 2.12 2.62 4.22 (2.24) 1.03
----------------------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.20) (0.19) (0.15) (0.08) (0.05)

Net realized gains ........................... (1.20) (0.42) -- (0.26) (1.35)
----------------------------------------------------------------------------
Total distributions ............................. (1.40) (0.61) (0.15) (0.34) (1.40)
---------------------------------------------------------------------------
Redemption fees ................................. --(d) --(d) -- -- --
----------------------------------------------------------------------------
Net asset value, end of year .................... $ 23.48 $ 22.76 $ 20.75 $ 16.68 $ 19.26
============================================================================

Total return(b) ................................. 9.27% 12.77% 25.37% (11.78)% 5.26%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ................. $ 1,834,009 $ 1,551,111 $ 1,272,590 $ 866,422 $ 885,658

Ratios to average net assets:*

Expenses(c) .................................. 1.81% 1.81% 1.84% 1.78% 1.78%

Net investment income ........................ 0.99% 0.62% 0.28% 0.80% 0.40%

Portfolio turnover rate ......................... 21.57% 33.22% 54.65% 51.22% 52.98%

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

Expenses ..................................... 1.76% 1.80% 1.81% 1.77% 1.77%

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

20| See notes to financial statements. | Annual Report

MUTUAL SHARES FUND

FINANCIAL HIGHLIGHTS (CONTINUED)

---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS R 2005 2004 2003 2002(e)
---------------------------------------------------------------

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

Net asset value, beginning of year .............. $ 22.85 $ 20.83 $ 16.75 $ 19.36
---------------------------------------------------------------
Income from investment operations:

Net investment income(a) ..................... 0.35 0.24 0.13 0.24

Net realized and unrealized gains (losses) ... 1.91 2.50 4.21 (2.37)
---------------------------------------------------------------
Total from investment operations ................ 2.26 2.74 4.34 (2.13)
---------------------------------------------------------------
Less distributions from:

Net investment income ........................ (0.19) (0.30) (0.26) (0.22)

Net realized gains ........................... (1.20) (0.42) -- (0.26)
---------------------------------------------------------------
Total distributions ............................. (1.39) (0.72) (0.26) (0.48)
---------------------------------------------------------------
Redemption fees ................................. --(d) --(d) -- --
---------------------------------------------------------------
Net asset value, end of year .................... $ 23.72 $ 22.85 $ 20.83 $ 16.75
===============================================================

Total return(b) ................................. 9.88% 13.32% 26.02% (11.26)%

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year (000's) ................. $ 109,305 $ 74,763 $ 46,933 $ 13,392

Ratios to average net assets:*

Expenses(c) .................................. 1.31% 1.31% 1.34% 1.29%(f)

Net investment income ........................ 1.49% 1.12% 0.78% 1.29%(f)

Portfolio turnover rate ......................... 21.57% 33.22% 54.65% 51.22%

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

Expenses ..................................... 1.26% 1.30% 1.31% 1.28%(f)

(a) Based on average daily shares outstanding.

(b) Total return does not reflect the contingent deferred sales charge.

(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 $0.01 per share.

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

(f) Annualized.

Annual Report | See notes to financial statements. | 21

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005

COMMON STOCKS AND OTHER EQUITY INTERESTS 81.2%
AEROSPACE & DEFENSE 0.5%
(a) GenCorp Inc. .................................................... United States 1,148,300 $ 20,382,325
Northrop Grumman Corp. .......................................... United States 891,940 53,614,513
--------------
73,996,838
--------------
AIRLINES 0.5%
(a) ACE Aviation Holdings Inc. ...................................... Canada 2,284,333 74,683,519
(a),(b) ACE Aviation Holdings Inc., A, 144A ............................. Canada 150,465 4,919,272
(a) ACE Aviation Holdings Inc., B ................................... Canada 3,080 100,326
(a),(c) Air Canada Inc., Contingent Distribution ........................ Canada 537,421,436 --
--------------
79,703,117
--------------
AUTO COMPONENTS 0.0%(d)
(a),(e),(f) Lancer Industries Inc., B ....................................... United States 3 6,494,600
--------------
BEVERAGES 3.9%
Brown-Forman Corp., A ........................................... United States 125,460 8,900,132
Brown-Forman Corp., B ........................................... United States 606,036 42,010,416
Coca-Cola Enterprises Inc. ...................................... United States 7,032,260 134,808,424
Diageo PLC ...................................................... United Kingdom 13,878,432 201,164,968
Pernod Ricard SA ................................................ France 1,336,851 233,279,820
--------------
620,163,760
--------------
CAPITAL MARKETS 0.5%
Bear Stearns Cos.Inc. ........................................... United States 656,304 75,822,801
--------------
CHEMICALS 0.0%(d)
Koninklijke DSM NV .............................................. Netherlands 19,300 788,267
--------------
COMMERCIAL BANKS 6.7%
Allied Irish Banks PLC .......................................... Ireland 5,252,030 112,974,079
Banca Intesa SpA ................................................ Italy 34,121,292 180,765,352
Bank of Ireland ................................................. Ireland 5,404,128 85,089,104
BNP Paribas SA .................................................. France 536,357 43,399,942
(a),(f) Centennial Bank Holdings Inc. ................................... United States 3,845,467 47,568,427
Chinatrust Financial Holding Co. Ltd. ........................... Taiwan 99,733,000 78,992,825
Danske Bank ..................................................... Denmark 3,475,500 122,425,305
(a),(e),(f) Elephant Capital Holdings Ltd. .................................. Japan 25,721 36,652,032
ForeningsSparbanken AB, A ....................................... Sweden 4,761,679 129,746,838
(a) Investors Bancorp Inc. .......................................... United States 1,796 19,810
Mitsubishi UFJ Financial Group Inc. ............................. Japan 13,932 188,860,459
(a),(e) NCB Warrant Holdings Ltd., A .................................... Japan 124,040 20,039,915
--------------
1,046,534,088
--------------
COMMERCIAL SERVICES & SUPPLIES 1.3%
Cendant Corp. ................................................... United States 3,062,590 52,829,677
(a) Comdisco Holding Co. Inc. ....................................... United States 790 15,010
(c) Comdisco Holding Co. Inc., Contingent Distribution .............. United States 95,431,240 --
Republic Services Inc. .......................................... United States 3,077,650 115,565,757
(a),(c) Safety Kleen Corp., Contingent Distribution ..................... United States 1,085,000 --
(a) United Stationers Inc. .......................................... United States 725,439 35,183,792
--------------
203,594,236
--------------

22 | Annual Report

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMPUTERS & PERIPHERALS 1.1%
(a),(e),(f) DecisionOne Corp. ............................................... United States 1,879,100 $ 1,339,798
(a) Lexmark International Inc., A ................................... United States 3,062,560 137,294,565
(a) Maxtor Corp. .................................................... United States 5,989,900 41,569,906
--------------
180,204,269
--------------
CONSUMER FINANCE 0.6%
MBNA Corp. ...................................................... United States 3,218,500 87,382,275
--------------
CONTAINERS & PACKAGING 1.1%
Temple-Inland Inc. .............................................. United States 3,700,000 165,945,000
--------------
DIVERSIFIED FINANCIAL SERVICES 2.0%
Fortis Group NV ................................................. Belgium 6,331,992 201,570,904
Leucadia National Corp. ......................................... United States 2,326,843 110,431,969
(a),(c) Marconi Corp., Contingent Distribution .......................... United Kingdom 77,739,439 --
--------------
312,002,873
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.2%
(a),(e),(f),(g) AboveNet Inc. ................................................... United States 763,805 18,303,365
(a),(c),(f),(g) AboveNet Inc., Contingent Distribution .......................... United States 106,869,000 --
(a),(e),(f),(g) AboveNet Inc., wts., 9/08/08 .................................... United States 25,659 102,636
(a),(e),(f),(g) AboveNet Inc., wts., 9/08/10 .................................... United States 30,186 24,149
Chunghwa Telecom Co. Ltd., ADR .................................. Taiwan 363,800 6,675,730
(a),(c) Global Crossing Holdings Ltd., Contingent Distribution .......... United States 105,649,309 --
Koninklijke KPN NV .............................................. Netherlands 3,088,868 30,972,727
MCI Inc. ........................................................ United States 3,815,442 75,278,670
(a) NTL Inc. ........................................................ United Kingdom 1,883,548 128,231,948
Sprint Nextel Corp. ............................................. United States 336,452 7,859,519
(a),(c) Telewest Communications PLC, Contingent Distribution ............ United Kingdom 120,209,615 --
(a),(c) Telewest Finance Ltd., Contingent Distribution .................. United Kingdom 12,987,000 --
(a) Telewest Global Inc. ............................................ United Kingdom 7,073,342 168,487,006
Verizon Communications Inc. ..................................... United States 2,117,100 63,767,052
--------------
499,702,802
--------------
ELECTRIC UTILITIES 0.3%
E.ON AG ......................................................... Germany 454,370 47,045,253
(a),(b) Entegra/Union Power, 144A ....................................... United States 288,690 --
--------------
47,045,253
--------------
FOOD & STAPLES RETAILING 1.3%
Albertson's Inc. ................................................ United States 2,114,150 45,137,102
Carrefour SA .................................................... France 1,480,284 69,361,347
(a) Kroger Co. ...................................................... United States 4,420,770 83,464,138
--------------
197,962,587
--------------
FOOD PRODUCTS 4.5%
Cadbury Schweppes PLC ........................................... United Kingdom 12,700,586 120,069,719
General Mills Inc. .............................................. United States 1,037,600 51,174,432
Groupe Danone ................................................... France 671,351 70,139,237
Nestle SA ....................................................... Switzerland 653,170 195,391,673
Orkla ASA ....................................................... Norway 6,435,750 266,503,515
--------------
703,278,576
--------------

Annual Report | 23

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES 2.2%
Guidant Corp. ................................................... United States 2,321,300 $ 150,304,175
Hillenbrand Industries Inc. ..................................... United States 2,061,300 101,848,833
(a),(e),(f),(g) Kindred Healthcare Inc. ......................................... United States 2,380,966 58,267,000
(a),(e),(f),(g) Kindred Healthcare Inc., Jan.9.07 Calls, 1/01/13 ................ United States 1,146 17,645
(a),(e),(f),(g) Kindred Healthcare Inc., Jan.25.99 Calls, 1/01/14 ............... United States 568 --
(a),(e),(f),(g) Kindred Healthcare Inc., Jan.26.00 Calls, 1/01/12 ............... United States 1,724 --
(a),(e),(f),(g) Kindred Healthcare Inc., Jul.23.75 Calls, 7/17/11 ............... United States 7,640 5,516
(a),(e),(f),(g) Kindred Healthcare Inc., wts., Series A, 4/20/06 ................ United States 211,977 4,100,059
(a),(e),(f),(g) Kindred Healthcare Inc., wts., Series B, 4/20/06 ................ United States 529,943 8,709,613
MDS Inc. ........................................................ Canada 1,030,100 17,822,689
--------------
341,075,530
--------------
HOTELS, RESTAURANTS & LEISURE 0.3%
(a),(f) FHC Delaware Inc. ............................................... United States 784,457 2,726,694
(a),(c) Trump Atlantic, Contingent Distribution ......................... United States 53,232,000 2,006,847
(a) Trump Entertainment Resorts Inc. ................................ United States 1,814,341 36,522,684
--------------
41,256,225
--------------
INDUSTRIAL CONGLOMERATES 1.9%
Siemens AG ...................................................... Germany 1,307,326 112,005,450
Tyco International Ltd. ......................................... United States 6,701,100 193,393,746
--------------
305,399,196
--------------
INSURANCE 10.0%
(a) Alleghany Corp. ................................................. United States 341,815 97,075,460
(a) Berkshire Hathaway Inc., A ...................................... United States 1,590 140,905,800
(a) Berkshire Hathaway Inc., B ...................................... United States 149,920 440,090,160
(a) Conseco Inc. .................................................... United States 3,742,800 86,720,676
Hartford Financial Services Group Inc. .......................... United States 1,221,700 104,931,813
Montpelier Re Holdings Ltd. ..................................... Bermuda 863,889 16,327,502
Nationwide Financial Services Inc., A ........................... United States 1,794,150 78,942,600
Old Republic International Corp. ................................ United States 4,881,042 128,176,163
(a),(e) Olympus Re Holdings Ltd. ........................................ Bermuda 202,380 3,744,030
Prudential Financial Inc. ....................................... United States 948,700 69,435,353
(f) White Mountains Insurance Group Inc. ............................ United States 740,448 413,577,230
--------------
1,579,926,787
--------------
LEISURE EQUIPMENT & PRODUCTS 0.6%
Mattel Inc. ..................................................... United States 5,907,650 93,459,023
--------------
MACHINERY 1.3%
Deere & Co. ..................................................... United States 2,155,880 146,836,987
(f) Federal Signal Corp. ............................................ United States 3,360,800 50,445,608
--------------
197,282,595
--------------
MEDIA 6.4%
(a) Cablevision Systems Corp., A .................................... United States 1,650,900 38,746,623
Clear Channel Communications Inc. ............................... United States 3,336,400 104,929,780
(a) Comcast Corp., A ................................................ United States 2,928,427 75,231,290
E.W.Scripps Co., A .............................................. United States 696,850 33,462,737
(a) EchoStar Communications Corp., A ................................ United States 1,277,791 34,717,581

24 | Annual Report

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA (CONTINUED)
Hollinger International Inc. .................................... United States 1,929,706 $ 16,425,661
Knight Ridder Inc. .............................................. United States 336,100 21,275,130
(a) Liberty Media Corp., A .......................................... United States 14,398,624 113,317,171
News Corp., A ................................................... United States 12,748,322 198,236,407
Omnicom Group Inc. .............................................. United States 432,800 36,844,264
(e) Time Warner Inc. ................................................ United States 2,833,800 48,433,043
(e) Time Warner Inc., Jan.10.00 Calls, 1/21/06 ...................... United States 59,140 43,467,900
(a),(f) TVMAX Holdings Inc. ............................................. United States 257,217 257,217
Viacom Inc., B .................................................. United States 1,884,600 61,437,960
Washington Post Co., B .......................................... United States 238,238 182,252,070
--------------
1,009,034,834
--------------
METALS & MINING 4.0%
Anglo American PLC .............................................. South Africa 5,759,845 196,109,499
Anglo American PLC, ADR ......................................... South Africa 2,300 79,994
Barrick Gold Corp. .............................................. Canada 398,200 11,097,834
Dofasco Inc. .................................................... Canada 1,209,736 67,631,976
Falconbridge Ltd. ............................................... Canada 505,003 14,989,765
Freeport-McMoRan Copper & Gold Inc., B .......................... United States 447,300 24,064,740
(a) Glamis Gold Ltd. ................................................ Canada 1,306,700 35,941,839
Gold Fields Ltd. ................................................ South Africa 642,754 11,356,760
Goldcorp Inc. ................................................... Canada 998,079 22,239,564
(a) Goldcorp Inc., wts., 5/30/07 .................................... Canada 1,819,489 7,592,292
(a) Harmony Gold Mining Co. Ltd., ADR ............................... South Africa 933,000 12,175,650
Newmont Mining Corp. ............................................ United States 2,968,110 158,497,074
Placer Dome Inc. ................................................ Canada 2,923,875 66,965,114
--------------
628,742,101
--------------
MULTI-UTILITIES & UNREGULATED POWER 0.4%
NorthWestern Corp. .............................................. United States 711,831 22,116,589
(a),(c) NorthWestern Corp., Contingent Distribution ..................... United States 21,590,000 1,835,150
Suez SA ......................................................... France 1,349,071 42,003,670
--------------
65,955,409
--------------
OIL, GAS & CONSUMABLE FUELS 5.7%
(a) Anchor Resources LLC ............................................ United States 123,013 --
(a) Apco Oil Corp. .................................................. United States 9,200 --
BP PLC .......................................................... United Kingdom 5,707,068 60,777,906
BP PLC, ADR ..................................................... United Kingdom 46,400 2,979,808
Burlington Resources Inc. ....................................... United States 1,523,500 131,325,700
Oil & Natural Gas Corp. Ltd. .................................... India 2,308,558 60,283,148
(a) OPTI Canada ..................................................... Canada 9,481,276 311,365,659
Pogo Producing Co. .............................................. United States 1,332,500 66,371,825
Statoil ASA ..................................................... Norway 1,593,324 36,589,608
Suncor Energy Inc. .............................................. Canada 1,389,492 87,651,685
Total SA, B ..................................................... France 380,938 95,696,567
Vintage Petroleum Inc. .......................................... United States 897,550 47,866,342
--------------
900,908,248
--------------

Annual Report | 25

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PAPER & FOREST PRODUCTS 3.6%
Abitibi-Consolidated Inc. ....................................... Canada 538,387 $ 2,158,551
International Paper Co. ......................................... United States 4,270,400 143,528,144
Potlatch Corp. .................................................. United States 233,800 11,919,124
Weyerhaeuser Co. ................................................ United States 6,235,207 413,643,632
--------------
571,249,451
--------------
PHARMACEUTICALS 3.0%
Bristol-Myers Squibb Co. ........................................ United States 3,308,740 76,034,845
(a) IVAX Corp. ...................................................... United States 330,800 10,363,964
Merck & Co. Inc. ................................................ United States 1,123,000 35,722,630
Pfizer Inc. ..................................................... United States 7,671,040 178,888,653
Sanofi-Aventis .................................................. France 689,026 60,362,054
Valeant Pharmaceuticals International ........................... United States 3,520,835 63,656,697
Wyeth ........................................................... United States 890,500 41,025,335
--------------
466,054,178
--------------
REAL ESTATE 1.8%
(a),(f) Alexander's Inc. ................................................ United States 326,675 80,198,713
Canary Wharf Group PLC .......................................... United Kingdom 14,262,931 58,892,781
Fieldstone Investment Corp. ..................................... United States 2,365,900 28,059,574
(a),(e) Security Capital European Realty ................................ Luxembourg 28,412 206,484
Shurgard Storage Centers Inc., A ................................ United States 299,900 17,007,329
St.Joe Co. ...................................................... United States 1,052,935 70,778,291
Ventas Inc. ..................................................... United States 1,072,765 34,349,935
--------------
289,493,107
--------------
ROAD & RAIL 1.1%
(e) Florida East Coast Industries Inc. .............................. United States 4,423,071 178,035,242
--------------
SOFTWARE 0.7%
Microsoft Corp. ................................................. United States 4,439,759 116,099,698
--------------
TEXTILES APPAREL & LUXURY GOODS 0.2%
Reebok International Ltd. ....................................... United States 524,300 30,529,989
--------------
THRIFTS & MORTGAGE FINANCE 1.1%
Hudson City Bancorp Inc. ........................................ United States 4,121,569 49,953,416
Sovereign Bancorp Inc. .......................................... United States 5,828,890 126,020,602
--------------
175,974,018
--------------
TOBACCO 9.4%
Altadis SA ...................................................... Spain 7,776,607 352,786,807
Altria Group Inc. ............................................... United States 2,479,677 185,281,466
British American Tobacco PLC .................................... United Kingdom 20,437,626 457,104,861
British American Tobacco PLC, ADR ............................... United Kingdom 70,550 3,177,572
Imperial Tobacco Group PLC ...................................... United Kingdom 6,933,289 207,195,902
Reynolds American Inc. .......................................... United States 2,778,000 264,826,740
--------------
1,470,373,348
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $9,220,498,558) ........................................ 12,761,470,321
--------------

26 | Annual Report

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

PREFERRED STOCKS 0.4%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(d)
PTV Inc., 10.00%, pfd., A ...................................... United Kingdom 199,565 $ 419,086
---------------
ELECTRIC UTILITIES 0.0%(d)
(a) Montana Power Co., 8.45%, pfd. ................................. United States 109,220 901,065
---------------
METALS & MINING 0.4%
(e),(f),(g) Esmark Inc., Series A, 10.00%, cvt. pfd. ....................... United States 60,419 63,357,780
Falconbridge Ltd., 6.00%, cvt. pfd., 1 ......................... Canada 46,262 1,168,115
Falconbridge Ltd., 6.25%, cvt. pfd., 2 ......................... Canada 46,262 1,168,116
Falconbridge Ltd., 6.50%, cvt. pfd., 3 ......................... Canada 23,131 586,371
---------------
66,280,382
---------------
TOTAL PREFERRED STOCKS (COST $67,167,005) ...................... 67,600,533
---------------

-----------------
PRINCIPAL
AMOUNT(j)
-----------------
CORPORATE BONDS & NOTES 1.7%
(b) ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ......... Canada 5,190,000CAD 4,375,979
(h) Collins & Aikman Products Co.,
Revolver, FRN, 10.75%, 8/31/09 .............................. United States 1,157,404 1,122,682
Tranche B1 Term Loan, FRN, 10.75%, 8/31/11 .................. United States 2,711,000 2,629,670
Dana Corp.,
5.85%, 1/15/15 .............................................. United States 13,032,000 9,317,880
7.00%, 3/01/29 .............................................. United States 1,834,000 1,325,065
(e),(f) DecisionOne Corp., 144A, 12.00%, 4/15/10 ....................... United States 2,039,765 2,039,765
Entegra/Union Power,
Term Loan A, 4.00%, 6/01/12 ................................. United States 14,706,857 12,647,897
Term Loan B, 9.00%, 6/01/20 ................................. United States 14,162,158 12,179,456
Eurotunnel PLC,
Participating Loan Note, 1.00%, 4/30/40 ..................... United Kingdom 1,482,000GBP 242,222
(b),(h) Senior Tranche G2 Term Loan A, 144A, FRN, 5.618%,
12/15/12 .................................................... United Kingdom 1,627,232GBP 2,694,587
(h) Tier 2, FRN, 5.796%, 12/31/18 ............................... United Kingdom 13,617,682GBP 19,914,259
(h) Tier 3, FRN, 5.796%, 12/31/25 ............................... United Kingdom 53,591,168GBP 43,334,433
Eurotunnel SA,
Senior Tranche H1 Term Loan (KfW Advance), 8.78%, 12/15/12 .. France 1,427,326EUR 1,605,253
(h) Tier 2 (PIBOR), FRN, 3.393%, 12/31/18 ....................... France 1,393,972EUR 1,402,715
(h) Tier 2 (LIBOR), FRN, 3.393%, 12/31/18 ....................... France 3,151,383EUR 3,171,150
(h) Tier 3 (PIBOR), FRN, 3.393%, 12/31/25 ....................... France 13,502,354EUR 7,512,838
(h) Tier 3 (LIBOR), FRN, 3.393%, 12/31/25 ....................... France 77,744,116EUR 43,257,565
(h) Motor Coach Industries International Inc., FRN, 17.406%,
12/01/08 .................................................... United States 58,046,343 55,144,026
Trump Entertaiment Resorts Inc., 8.50%, 5/20/15 ................ United States 36,590,212 35,858,408
(f) TVMAX Holdings Inc., PIK,
11.50%, 1/16/06 ............................................. United States 433,314 433,314
(i) 14.00%, 1/16/06 ............................................. United States 1,203,322 1,203,322
---------------
TOTAL CORPORATE BONDS & NOTES (COST $286,520,729) .............. 261,412,486
---------------

Annual Report | 27

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
SHARES/PRINCIPAL
COUNTRY AMOUNT(j) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

CORPORATE BONDS & NOTES IN REORGANIZATION 1.0%
(k) Adelphia Communications Corp.,
9.25%, 10/01/02 ............................................. United States 11,465,000 $ 6,420,400
8.125%, 7/15/03 ............................................. United States 1,442,000 821,940
7.50%, 1/15/04 .............................................. United States 3,750,000 2,137,500
10.50%, 7/15/04 ............................................. United States 6,320,000 3,602,400
9.875%, 3/01/05 ............................................. United States 2,564,000 1,455,070
10.25%, 11/01/06 ............................................ United States 11,760,000 6,585,600
9.875%, 3/01/07 ............................................. United States 1,090,000 621,300
8.375%, 2/01/08 ............................................. United States 9,037,000 5,151,090
7.75%, 1/15/09 .............................................. United States 19,364,000 10,940,660
7.875%, 5/01/09 ............................................. United States 7,952,000 4,413,360
9.375%, 11/15/09 ............................................ United States 9,522,000 5,617,980
10.875%, 10/01/10 ........................................... United States 8,130,000 4,593,450
10.25%, 6/15/11 ............................................. United States 9,783,000 5,918,715
(k) Armstrong World Industries Inc.,
6.35%, 8/15/03 .............................................. United States 23,041,000 16,589,520
6.50%, 8/15/05 .............................................. United States 1,835,000 1,302,850
9.75%, 4/15/08 .............................................. United States 5,498,000 4,068,520
7.45%, 5/15/29 .............................................. United States 3,239,000 2,396,860
Revolver, 10/29/03 .......................................... United States 4,049,775 2,839,905
Trade Claim ................................................. United States 10,859,300 7,560,788
(k) Century Communications Corp.,
(l) 8.875%, 1/15/07 ............................................. United States 559,000 536,640
8.75%, 10/01/07 ............................................. United States 5,509,000 5,178,460
8.375%, 12/15/07 ............................................ United States 875,000 840,000
senior note, 9.50%, 3/01/05 ................................. United States 1,578,000 1,530,660
Series B, zero cpn., 1/15/08 ................................ United States 8,769,000 4,866,795
zero cpn., 3/15/03 .......................................... United States 15,848,000 13,470,800
(i),(k) Owens Corning, Revolver, 6/26/02 ............................... United States 29,722,681 41,611,754
(k) Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ........ United States 85,000 42
---------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $159,262,219) ......................................... 161,073,059
---------------

COMPANIES IN LIQUIDATION 0.0%(d)
(a) City Investing Co. Liquidating Trust ........................... United States 4,373,476 481,082
(a) MBOP Liquidating Trust ......................................... United States 574,712 75
(a) Peregrine Investments Holdings Ltd.,
6.70%, 1/15/98 .............................................. Hong Kong 95,000,000JPY 24,147
6.70%, 6/30/00 .............................................. Hong Kong 250,000,000JPY 63,543
zero cpn., 1/22/98 .......................................... Hong Kong 500,000 15,000
(a) PIV Investment Finance (Cayman) Ltd. ........................... Hong Kong 22,710,000 1,362,600
(a) United Cos. Financial Corp., Bank Claim ........................ United States 179,680 --
---------------
TOTAL COMPANIES IN LIQUIDATION (COST $--) ...................... 1,946,447
---------------

28 | Annual Report

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
COUNTRY AMOUNT(o) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------

GOVERNMENT AGENCIES 14.2%
(m),(n) Federal Home Loan Bank, 0.00% - 3.60%, 1/23/06 - 7/02/07 ....... United States 2,184,005,000 $ 2,160,350,484
Federal Home Loan Mortgage Corp., 2.50%, 05/19/06 .............. United States 25,000,000 24,806,050
Federal National Mortgage Association, 2.15% - 2.20%,
12/18/06 - 12/29/06 ......................................... United States 30,000,000 29,280,080
(m),(n) U.S. Treasury Bills, 2/02/06 - 2/16/06 ......................... United States 20,000,000 19,914,185
---------------
TOTAL GOVERNMENT AGENCIES (COST $2,240,042,154) ................ 2,234,350,799
---------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $11,973,490,665) ...................................... 15,487,853,645
---------------
REPURCHASE AGREEMENTS 0.0%(d)
(o),(p) Bank of America LLC, 4.32%, 1/03/06
(Maturity Value $92,055)
Collateralized by U.S. Government Agency Securities,
5.00-5.50%, 9/01/33-10/01/35 ................................ 92,011 92,011
(o),(p) Bear Stearns & Co. Inc., 4.25%, 1/03/06
(Maturity Value $78,046)
Collateralized by U.S. Government Agency Securities,
3.22-7.155%, 3/01/17-9/01/45 ................................ 78,009 78,009
(o),(p) Merrill Lynch GSI, 4.25%, 1/03/06
(Maturity Value $378,224)
Collateralized by U.S. Government Agency Securities,
3.99-5.83%, 11/01/27-8/01/35 ................................ 378,045 378,045
---------------
TOTAL REPURCHASE AGREEMENTS (COST $548,065) .................... 548,065
---------------
TOTAL INVESTMENTS (COST $11,974,038,730) 98.5% ................. 15,488,401,710
OPTIONS WRITTEN 0.0%(d) ........................................ (27,500)
SECURITIES SOLD SHORT (2.0)% ................................... (314,673,194)
NET UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS 0.4% ......... 58,900,240
OTHER ASSETS, LESS LIABILITIES 3.1% ............................ 485,037,741
---------------
NET ASSETS 100.0% .............................................. $15,717,638,997
===============

------------
CONTRACTS
------------
(q) OPTIONS WRITTEN 0.0%(d)
MEDIA 0.0%(d)
Cablevision Systems Corp., Jan. 22.50 Puts, 1/21/06 ............ United States 300 $ 13,500
---------------
PHARMACEUTICALS 0.0%(d)
Pfizer Inc., Jan. 22.50 Puts, 1/21/06 .......................... United States 700 14,000
---------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $80,997) .............. 27,500
---------------

Annual Report | 29

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

(r) SECURITIES SOLD SHORT 2.0%
COMMERCIAL BANKS 0.5%
Bank of America Corp. .......................................... United States 1,611,360 $ 74,364,264
---------------
COMPUTERS & PERIPHERALS 0.3%
Seagate Technology ............................................. United States 2,216,300 44,303,837
---------------
FOOD PRODUCTS 0.3%
Kraft Foods Inc., A ............................................ United States 1,623,881 45,696,011
---------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.1%
Alcon Inc. ..................................................... Switzerland 173,200 22,446,720
---------------
HEALTH CARE PROVIDERS & SERVICES 0.0%(d)
UnitedHealth Group Inc. ........................................ United States 1,060 65,869
WellPoint Inc. ................................................. United States 214 17,075
---------------
82,944
---------------
METALS & MINING 0.1%
Inco Ltd. ...................................................... Canada 264,342 11,485,220
---------------
OIL, GAS & CONSUMER FUELS 0.6%
ConocoPhillips ................................................. United States 1,099,140 63,947,965
Occidental Petroleum Corp. ..................................... United States 376,900 30,106,772
---------------
94,054,737
---------------
PHARMACEUTICALS 0.0%(d)
Teva Pharmaceutical Industries Ltd., ADR ....................... Israel 140,200 6,030,002
---------------
REAL ESTATE 0.1%
Public Storage Inc. ............................................ United States 239,360 16,209,459
---------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $319,254,070) ............ $ 314,673,194
---------------

30 | See notes to financial statements. | Annual Report

MUTUAL SHARES FUND

STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)

CURRENCY ABBREVIATIONS

CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen

SELECTED PORTFOLIO ABBREVIATIONS

ADR - American Depository Receipt
FRN - Floating Rate Note
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
PIK - Payment-In-Kind

(a) Non-income producing.

(d) Rounds to less than 0.05% of net assets.

(e) See Note 11 regarding restricted and illiquid securities.

(f) See Note 13 regarding holdings of 5% voting securities.

(g) See Note 14 regarding other considerations.

(h) The coupon rate shown represents the rate at period end.

(i) See Note 12 regarding unfunded loan commitments.

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

(k) See Note 10 regarding defaulted securities.

(l) A portion or all of the security is on loan as of December 31, 2005. See
Note 1(i).

(m) See Note 1(g) regarding securities segregated with broker for securities
sold short.

(n) A portion or all of the security is traded on a discount basis with no
stated coupon rate.

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

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

(q) See Note 1(f) regarding written options.

(r) See Note 1(g) regarding securities sold short.

Annual Report | 31

MUTUAL SHARES FUND

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005

Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................................... $11,342,483,729
Cost - Non-controlled affiliated issuers (Note 13) ........................ 631,006,936
Cost - Repurchase agreements .............................................. 548,065
---------------
Total cost of investments ................................................. $11,974,038,730
===============
Value - Unaffiliated issuers (includes securities segregated with
broker for securities sold short in the amount of $213,322,802) ....... $14,202,147,047
Value - Non-controlled affiliated issuers (Note 13) ....................... 1,285,706,598
Value - Repurchase agreements ............................................. 548,065
---------------
Total value of investments ................................................ 15,488,401,710
Cash ......................................................................... 2,800,084
Foreign currency, at value (cost $134,438,633) ............................... 134,880,008
Receivables:
Investment securities sold ................................................ 58,390,840
Capital shares sold ....................................................... 30,076,066
Dividends and interest .................................................... 26,657,885
Unrealized gain on forward exchange contracts (Note 8) ....................... 81,846,110
Unrealized gains on unfunded loan commitments (Note 12) ...................... 1,260,314
Cash on deposits with brokers for securities sold short ...................... 333,351,680
Due from broker - synthetic equity swaps ..................................... 24,443,705
---------------
Total assets ........................................................... 16,182,108,402
---------------

Liabilities:
Payables:
Investment securities purchased ........................................... 87,230,579
Capital shares redeemed ................................................... 20,706,731
Affiliates ................................................................ 16,106,297
Options written, at value (premiums received $80,997) ........................ 27,500
Securities sold short, at value (proceeds $319,254,070) ...................... 314,673,194
Payable upon return of securities loaned ..................................... 548,065
Deferred tax ................................................................. 431,279
Unrealized loss on forward exchange contracts (Note 8) ....................... 22,945,870
Accrued expenses and other liabilities ....................................... 1,799,890
---------------
Total liabilities ...................................................... 464,469,405
---------------
Net assets, at value ................................................ $15,717,638,997
===============

Net assets consist of:
Paid-in capital .............................................................. $11,992,736,589
Undistributed net investment income .......................................... 72,585,668
Net unrealized appreciation (depreciation) ................................... 3,583,199,810
Accumulated net realized gain (loss) ......................................... 69,116,930
---------------
Net assets, at value ................................................ $15,717,638,997
===============

32 | See notes to financial statements. | Annual Report

MUTUAL SHARES FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2005

CLASS Z:
Net assets, at value ....................................................... $8,951,079,511
==============
Shares outstanding ......................................................... 373,683,325
==============
Net asset value and maximum offering price per share(a) .................... $ 23.95
==============
CLASS A:
Net assets, at value ....................................................... $4,211,238,126
==============
Shares outstanding ......................................................... 176,814,791
==============
Net asset value per share(a) ............................................... $ 23.82
==============
Maximum offering price per share (net asset value per share / 94.25%) ...... $ 25.27
==============
CLASS B:
Net assets, at value ....................................................... $ 612,006,662
==============
Shares outstanding ......................................................... 26,215,051
==============
Net asset value and maximum offering price per share(a) .................... $ 23.35
==============
CLASS C:
Net assets, at value ....................................................... $1,834,009,291
==============
Shares outstanding ......................................................... 78,115,113
==============
Net asset value and maximum offering price per share(a) .................... $ 23.48
==============
CLASS R:
Net assets, at value ....................................................... $ 109,305,407
==============
Shares outstanding ......................................................... 4,608,220
==============
Net asset value and maximum offering price per share(a) .................... $ 23.72
==============

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

Annual Report | See notes to financial statements. | 33

MUTUAL SHARES FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended December 31, 2005

Investment income:
Dividends
Unaffiliated issuers ........................................................ $ 250,945,243
Non-controlled affiliated issuers (Note 13) ................................. 10,413,317
Interest
Unaffiliated issuers ........................................................ 124,018,913
Non-controlled affiliated issuers (Note 13) ................................. 347,004
Income from securities loaned - net ............................................ 21,209
Other income (Note 15) ......................................................... 471,068
---------------
Total investment income ................................................ 386,216,754
---------------
Expenses:
Management fees (Note 3a) ...................................................... 79,196,080
Administrative fees (Note 3b) .................................................. 10,578,037
Distribution fees (Note 3c)
Class A ..................................................................... 12,018,793
Class B ..................................................................... 5,937,243
Class C ..................................................................... 16,651,011
Class R ..................................................................... 452,529
Transfer agent fees (Note 3e) .................................................. 11,856,300
Custodian fees (Note 4) ........................................................ 1,345,783
Reports to shareholders ........................................................ 826,700
Registration and filing fees ................................................... 524,500
Professional fees .............................................................. 629,721
Directors' fees and expenses ................................................... 361,200
Dividends on securities sold short ............................................. 6,255,734
Other .......................................................................... 457,495
---------------
Total expenses ......................................................... 147,091,126
Expense reductions (Note 4) ............................................ (113,876)
---------------
Net expenses ........................................................ 146,977,250
---------------
Net investment income ............................................ 239,239,504
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers ..................................................... 537,991,986
Controlled affiliate issuers (Note 13) ................................... (3,491,624)
Non-controlled affiliated issuers (Note 13) .............................. 168,964,508
Written options ............................................................. 1,201,296
Foreign currency transactions ............................................... 54,556,077
Securities sold short ....................................................... (4,809,078)
---------------
Net realized gain (loss) ............................................... 754,413,165
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................. 256,294,033
Translation of assets and liabilities denominated in foreign currencies ..... 134,601,496
Change in deferred taxes on unrealized appreciation ............................ (415,208)
---------------
Net change in unrealized appreciation (depreciation) ................... 390,480,321
---------------
Net realized and unrealized gain (loss) ........................................... 1,144,893,486
---------------
Net increase (decrease) in net assets resulting from operations ................... $ 1,384,132,990
===============

34 | See notes to financial statements. | Annual Report

MUTUAL SHARES FUND

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS

------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
2005 2004
------------------------------------

Increase (decrease) in net assets:
Operations:
Net investment income .............................................................. $ 239,239,504 $ 146,639,688
Net realized gain (loss) from investments, written options, securities sold
short, and foreign currency transactions ........................................ 754,413,165 320,840,913
Net change in unrealized appreciation (depreciation) on investments, translation
of assets and liabilities denominated in foreign currencies and deferred taxes .. 390,480,321 970,977,637
------------------------------------
Net increase (decrease) in net assets resulting from operations .............. 1,384,132,990 1,438,458,238
------------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ......................................................................... (103,197,432) (118,691,555)
Class A ......................................................................... (35,896,189) (39,459,758)
Class B ......................................................................... (1,459,350) (4,845,646)
Class C ......................................................................... (14,954,125) (12,290,974)
Class R ......................................................................... (802,093) (913,976)
Net realized gains:
Class Z ......................................................................... (423,357,278) (128,945,088)
Class A ......................................................................... (199,279,526) (52,647,915)
Class B ......................................................................... (30,001,973) (10,792,182)
Class C ......................................................................... (88,516,570) (28,220,750)
Class R ......................................................................... (5,204,999) (1,342,860)
------------------------------------
Total distributions to shareholders ................................................... (902,669,535) (398,150,704)
------------------------------------
Capital share transactions: (Note 2)
Class Z ......................................................................... 1,416,100,652 847,945,959
Class A ......................................................................... 1,158,479,828 438,813,545
Class B ......................................................................... 1,693,456 95,341,685
Class C ......................................................................... 233,434,044 146,965,374
Class R ......................................................................... 31,485,467 21,886,122
------------------------------------
Total capital share transactions ...................................................... 2,841,193,447 1,550,952,685
------------------------------------

Redemption fees ....................................................................... 37,371 9,352
------------------------------------
Net increase (decrease) in net assets ........................................ 3,322,694,273 2,591,269,571
Net assets:
Beginning of year .................................................................. 12,394,944,724 9,803,675,153
------------------------------------
End of year ........................................................................ $ 15,717,638,997 $ 12,394,944,724
====================================
Undistributed net investment income/distributions in excess of net investment
income included in net assets:
End of year ........................................................................ $ 72,585,668 $ (5,984,486)
====================================

Annual Report | See notes to financial statements. | 35

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mutual Shares Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund Inc. (the Series Fund), consisting of six separate series.
The Series Fund 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 following summarizes the Fund's significant accounting policies.

A. SECURITY VALUATION

36 | Annual Report

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION

C. REPURCHASE AGREEMENTS

D. FOREIGN CURRENCY CONTRACTS

Annual Report | 37

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. FOREIGN CURRENCY CONTRACTS (CONTINUED)

E. SYNTHETIC EQUITY SWAPS

F. OPTIONS

38 | Annual Report

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

G. SECURITIES SOLD SHORT

H. SECURITIES LENDING

I. INCOME AND DEFERRED TAXES

Annual Report | 39

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J. 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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Such distributions
are reinvested in additional shares of the Fund. Distributable earnings
determined on a tax basis may differ from earnings recorded in accordance with
generally accepted accounting principles. These differences may be permanent or
temporary. Permanent differences are reclassified among capital accounts to
reflect their tax character. These reclassifications have no impact on net
assets or the results of operations. Temporary differences are not reclassified,
as they may reverse in subsequent periods.

K. ACCOUNTING ESTIMATES

L. REDEMPTION FEES

40| Annual Report

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M. GUARANTEES AND INDEMNIFICATIONS

2. CAPITAL STOCK

At December 31, 2005, there were 1.9 billion shares authorized ($0.001 par
value) of which 1 billion shares were designated as Class Z, 250 million shares
as Class A, 200 million shares as Class B, 250 million shares as Class C and 200
million shares as Class R. Transactions in the Fund's shares were as follows:

--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT

CLASS Z SHARES:
Shares sold ...................................... 58,317,629 $ 1,382,140,067 50,806,616 $ 1,104,922,147
Shares issued in reinvestment of distributions ... 19,934,438 478,389,881 9,758,882 219,303,487
Shares redeemed .................................. (18,728,837) (444,429,296) (21,921,975) (476,279,675)
--------------------------------------------------------------
Net increase (decrease) .......................... 59,523,230 $ 1,416,100,652 38,643,523 $ 847,945,959
==============================================================
CLASS A SHARES:
Shares sold ...................................... 62,183,806 $ 1,476,618,967 37,809,209 $ 815,970,082
Shares issued in reinvestment of distributions ... 9,031,555 215,572,318 3,786,200 84,685,091
Shares redeemed .................................. (22,579,055) (533,711,457) (21,439,414) (461,841,628)
--------------------------------------------------------------
Net increase (decrease) .......................... 48,636,306 $ 1,158,479,828 20,155,995 $ 438,813,545
==============================================================
CLASS B SHARES:
Shares sold ...................................... 1,344,083 $ 30,694,786 6,156,400 $ 129,929,525
Shares issued in reinvestment of distributions ... 1,266,719 29,636,484 670,932 14,717,392
Shares redeemed .................................. (2,541,813) (58,637,814) (2,332,950) (49,305,232)
--------------------------------------------------------------
Net increase (decrease) .......................... 68,989 $ 1,693,456 4,494,382 $ 95,341,685
==============================================================

Annual Report | 41

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. CAPITAL STOCK (CONTINUED)

--------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------

CLASS C SHARES:
Shares sold ........................................ 15,473,104 $ 361,085,892 13,913,529 $ 297,054,287
Shares issued in reinvestment of distributions ..... 4,035,616 94,971,880 1,682,221 37,310,819
Shares redeemed .................................... (9,546,635) (222,623,728) (8,770,041) (187,399,732)
--------------------------------------------------------
Net increase (decrease) ............................ 9,962,085 $ 233,434,044 6,825,709 $ 146,965,374
========================================================
CLASS R SHARES:
Shares sold ........................................ 2,060,687 $ 48,448,915 1,573,958 $ 33,763,040
Shares issued in reinvestment of distributions ..... 251,253 5,971,962 100,387 2,237,745
Shares redeemed .................................... (975,186) (22,935,410) (656,261) (14,114,663)
--------------------------------------------------------
Net increase (decrease) ............................ 1,336,754 $ 31,485,467 1,018,084 $ 21,886,122
========================================================

3. TRANSACTIONS WITH AFFILIATES

- ----------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ----------------------------------------------------------------------------------------

A. MANAGEMENT FEES

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% Up to and including $5 billion
0.570% Over $5 billion, up to and including $10 billion
0.550% Over $10 billion, up to and including $15 billion
0.530% Over $15 billion, up to and including $20 billion
0.510% In excess of $20 billion

42 | Annual Report

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

B. ADMINISTRATIVE FEES

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

- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $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% In excess of $1.2 billion

C. DISTRIBUTION FEES

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 charge received(a) ...................................... $5,088,424
Contingent deferred sales charges retained ........................ $1,051,595

(a) Net of commissions paid to unaffiliated broker/dealers.

E. TRANSFER AGENT FEES

The Fund paid transfer agent fees of $11,856,300, of which $8,017,740 was
retained by Investor Services.

Annual Report | 43

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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, the custodian fees were
reduced as noted in the Statement of Operations.

5. INCOME TAXES

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

Cost of investments ........................................ $ 12,007,500,996
================

Unrealized appreciation .................................... $ 3,799,681,538
Unrealized depreciation .................................... (318,780,824)
----------------
Net unrealized appreciation (depreciation) ................. $ 3,480,900,714
================

Undistributed ordinary income .............................. $ 82,659,865
Undistributed long term capital gains ...................... 146,277,137
----------------
Distributable earnings ..................................... $ 228,937,002
================

The tax character of distributions paid during the years ended December 31, 2005
and 2004, was as follows:

--------------------------------
2005 2004
--------------------------------
Distributions paid from:
Ordinary income ......................... $ 293,157,500 $ 176,201,909
Long term capital gain .................. 609,512,035 221,948,795
--------------------------------
$ 902,669,535 $ 398,150,704
================================

44 | Annual Report

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2005, aggregated
$5,683,294,847 and $2,424,071,919, respectively.

Transactions in options written during the year ended December 31, 2005, were as
follows:

---------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------------------------------
Options outstanding at
December 31, 2004 ....................... 2,826 $ 392,341
Options written ............................ 281,658 1,803,696
Options expired ............................ (269,352) (701,526)
Options exercised .......................... (2,360) (292,955)
Options closed ............................. (11,772) (1,120,559)
---------------------------------
Options outstanding at December 31, 2005 ... 1,000 $ 80,997
=================================

7. SYNTHETIC EQUITY SWAPS

As of December 31, 2005, the Fund had the following synthetic equity swaps
outstanding:

- --------------------------------------------------------------------------------
NUMBER OF NOTIONAL UNREALIZED
CONTRACTS TO BUY CONTRACTS VALUE GAIN (LOSS)
- --------------------------------------------------------------------------------
Christian Dior SA (47.22 - 54.99 EUR ... 164,222 $ 14,600,508 $5,116,867
O2 PLC (1.96 -1.97 GBP) ................ 32,170,426 109,588,263 835,161
-----------
Total contracts to buy ........................................... 5,952,028
-----------

- --------------------------------------------------------------------------------
NUMBER OF NOTIONAL UNREALIZED
CONTRACTS TO SELL CONTRACTS VALUE GAIN (LOSS)
- --------------------------------------------------------------------------------
LVMH Moet Hennessy Louis Vuitton
(54.61 - 61.76 EUR) ................. 163,903 $ 14,562,444 $(3,256,934)
-----------
Total contracts to sell .......................................... (3,256,934)
-----------
Net unrealized gain .............................................. $ 2,695,094
===========

8. FORWARD EXCHANGE CONTRACTS

At December 31, 2005, the Fund had outstanding forward exchange contracts as set
out below.

42,476,972 Canadian Dollars .......... 36,060,503 1/23/06 $ 511,672
11,798,280,000 Korean Won ................ 11,700,000 3/22/06 21,582
-----------
$ 533,254
-----------

Annual Report | 45

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS (CONTINUED)

13,500,000 Euro ..................... 16,006,005 1/17/06 $ 7,719
122,195,000 Euro ..................... 150,829,788 1/23/06 5,972,324
115,295,729 Swiss Franc .............. 92,500,000 2/02/06 4,428,449
118,125,000 British Pound ............ 211,814,165 2/15/06 8,612,288
49,697,172 Canadian Dollar .......... 43,043,439 2/15/06 226,192
100,900,000 Euro ..................... 122,447,819 2/27/06 2,606,298
175,287,475 Norwegian Krone .......... 26,084,446 3/06/06 18,541
105,954,175 Euro ..................... 126,252,963 3/15/06 449,573
888,192,791 Swedish Krona ............ 113,694,103 3/15/06 1,296,648
619,712,909 Danish Krone ............. 106,926,254 3/17/06 8,174,989
22,758,361 British Pound ............ 40,992,361 3/21/06 1,839,299
5,277,495,500 Korean Won ............... 5,230,422 3/22/06 4,808
78,775,000 British Pound ............ 138,924,310 4/04/06 3,389,182
121,782,398 Euro ..................... 153,911,725 4/25/06 8,796,939
211,035,600 Norwegian Krone .......... 32,805,161 5/08/06 1,310,483
97,000,000 British Pound ............ 169,041,900 5/15/06 2,074,487
192,046,975 Euro ..................... 238,560,315 5/23/06 9,354,645
541,790,000 Taiwan Dollar ............ 16,600,000 5/30/06 95,324
37,950,560 Norwegian Krone .......... 5,800,000 6/06/06 127,101
35,500,000 Euro ..................... 43,126,453 6/15/06 702,175
8,629,956,115 Japanese Yen ............. 84,126,723 6/28/06 4,008,082
20,000,000 Euro ..................... 23,960,144 7/17/06 16,943
116,251,078 British Pound ............ 202,891,875 8/14/06 2,558,121
85,305,373 Euro ..................... 106,417,966 8/23/06 4,089,665
80,507,500 British Pound ............ 140,117,496 9/08/06 1,331,461
97,734,103 Euro ..................... 123,775,540 9/13/06 6,405,178
146,373,611 Euro ..................... 179,516,052 10/18/06 3,415,942
-----------
81,312,856
-----------
Unrealized gain on forward exchange contracts ............................. $81,846,110
===========

2,638,747,750 Korean Won ............... 2,620,925 3/22/06 $ (8,119)
-----------

46 | Annual Report

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. FORWARD EXCHANGE CONTRACTS (CONTINUED)

- ---------------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT(a) DATE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------

621,051,346 Canadian Dollars ............. 515,465,161 1/23/06 $ (19,252,767)
416,719,071 Norwegian Krone .............. 61,827,755 2/06/06 (44,247)
106,607,713 Canadian Dollars ............. 90,769,402 2/15/06 (1,079,864)
56,104,513 South African Rand ........... 8,625,000 2/15/06 (210,755)
364,000,000 Norwegian Krone .............. 54,066,900 3/06/06 (61,264)
50,000,000 Euro ......................... 58,910,000 3/15/06 (530,579)
9,159,532,250 Korean Won ................... 8,862,000 3/22/06 (237,988)
599,098,077 Taiwan Dollar ................ 18,119,609 5/30/06 (130,856)
392,000,000 Norwegian Krone .............. 58,463,833 6/06/06 (132,837)
1,819,200,500 Japanese Yen ................. 15,720,000 6/28/06 (51,819)
120,302,450 Euro ......................... 142,912,110 7/17/06 (1,109,179)
--------------
(22,842,155)
--------------
Net unrealized loss on offsetting forward exchange contracts ..................... (95,596)
--------------
Unrealized loss on forward exchange contracts ................................. (22,945,870)
==============
Net unrealized gain on forward exchange contracts .......................... $ 58,900,240
==============

(a) In U.S. Dollar unless other wise indicated.

9. CONCENTRATION OF RISK

10. DEFAULTED SECURITIES

The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. The risks of purchasing these securities are that the issuer is
unable to meet its obligation and any subsequent bankruptcy proceeding may
result in unfavorable consequences to the Fund. At December 31, 2005, the value
of these securities was $161,073,059, representing 1.02% of the Fund's net
assets. For information as to specific securities, see the accompanying
Statement of Investments.

Annual Report | 47

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. RESTRICTED AND ILLIQUID SECURITIES

- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATE COST VALUE
- -------------------------------------------------------------------------------------------------------------------

763,805 AboveNet Inc. ................................ 10/02/01 $ 38,348,164 $ 18,303,365
25,659 AboveNet Inc., wts., 9/08/08 ................. 10/02/01 3,196,155 102,636
30,186 AboveNet Inc., wts., 9/08/10 ................. 10/02/01 3,430,956 24,149
1,879,100 DecisionOne Corp. ............................ 3/12/99 1,313,384 1,339,798
2,039,765 DecisionOne Corp., 144A, 12.00%,
4/15/10 ................................... 3/12/99 7,177,316 2,039,765
25,721 Elephant Capital Holdings Ltd. ............... 8/29/03 -- 36,652,032
60,419 Esmark Inc., Series A, 10.00%, cvt. pfd. ..... 11/08/04 60,419,000 63,357,780
4,423,071 Florida East Coast Industries Inc. ........... 10/03/75 108,943,491 178,035,242
2,380,966 Kindred Healthcare Inc. ...................... 12/12/01 24,899,635 58,267,000
1,146 Kindred Healthcare Inc., Jan. 9.07 Calls,
1/01/13 ................................... 1/01/05 -- 17,645
568 Kindred Healthcare Inc., Jan. 25.99 Calls,
1/01/14 ................................... 1/01/05 -- --
1,724 Kindred Healthcare Inc., Jan. 26.00 Calls,
1/01/12 ................................... 1/01/05 -- --
7,640 Kindred Healthcare Inc., Jul. 23.75 Calls,
7/17/11 ................................... 7/17/05 -- 5,516
211,977 Kindred Healthcare Inc., wts., Series A,
4/20/06 ................................... 4/24/01 1,907,794 4,100,059
529,943 Kindred Healthcare Inc., wts., Series B,
4/20/06 ................................... 4/24/01 4,239,543 8,709,613
3 Lancer Industries Inc., B .................... 8/11/89 -- 6,494,600
124,040 NCB Warrant Holdings Ltd., A ................. 12/16/05 -- 20,039,915
202,380 Olympus Re Holdings Ltd. ..................... 12/19/01 20,238,000 3,744,030
28,412 Security Capital European Realty ............. 4/08/98 1,556,398 206,484
2,833,800 Time Warner Inc. ............................. 8/02/05 48,945,601 48,433,043
59,140 Time Warner Inc., Jan. 10.00 calls, 1/21/06 .. 8/17/05 49,640,524 43,467,900
----------------
TOTAL RESTRICTED AND ILLIQUID SECURITIES (3.14% of Net Assets) ............. $ 493,340,572
================

48 | Annual Report

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. UNFUNDED LOAN COMMITMENTS

The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion.

At December 31, 2005, unfunded commitments were as follows:

- --------------------------------------------------------------------------------
BORROWER UNFUNDED COMMITMENT
- --------------------------------------------------------------------------------
Entegra/Union Power, LOC Facility, FRN, 6/01/12 .......... $ 4,044,371
Entegra/Union Power, Working Capital Facility,
FRN 6/01/12 ........................................... 606,656
Mirant Corp, 4 Year Revolver, 7/17/05 .................... 543,268
Owens Corning, Revolver, 6/26/02 ......................... 1,697,673
TVMAX Holdings, PIK, 14.00%, 1/16/06 ..................... 57
-----------
$ 6,892,025
===========

Unfunded loan commitments are marked to market daily and any unrealized gain or
loss is included in the Statement of Assets and Liabilities and Statement of
Operations.

13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

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

CONTROLLED AFFILIATES(a)
Nippon Investment LLC .......... 18,938,000 -- 18,938,000 -- $ -- $ -- $(3,491,624)
---------------------------------------
NON-CONTROLLED AFFILIATES
AboveNet Inc. .................. 763,805 -- -- 763,805 $18,303,365 $ -- $ --
AboveNet Inc., Contingent
Distribution ................ 106,869,000 -- -- 106,869,000 -- -- --
AboveNet Inc., wts., 9/08/08.... 25,659 -- -- 25,659 102,636 -- --
AboveNet Inc., wts., 9/08/10.... 30,186 -- -- 30,186 24,149 -- --
Alexander's Inc. ............... 326,675 -- -- 326,675 80,198,713 -- --
Anchor Resources LLC ........ 123,013 -- -- 123,013 -- -- --
Anchor Resources LLC, 12.00%,
12/17/06 .................... 57,551 -- 57,551 -- -- 6,887 --
Centennial Bank Holdings Inc. .. 3,845,467 -- -- 3,845,467 47,568,427 -- --
City Investing Company
Liquidating Trust ........... 4,373,476 -- -- 4,373,476 481,082 -- 8,065,663
DecisionOne Corp. .............. 457,492 1,421,608 -- 1,879,100 1,339,798 -- --
DecisionOne Corp., Term Loan.... 13,775,874 -- 13,775,874 -- -- -- --
DecisionOne Corp., 12.00%,
4/15/10, 144A ............... -- 2,370,645 330,880 2,039,765 2,039,765 141,743 (1,311,378)
Elephant Capital Holdings
Ltd.......................... 25,721 -- -- 25,721 36,652,032 (3,225,820) 28,406,431
Esmark Inc., Series A,
10.00%, cvt. pfd. ........... 40,396 20,023 -- 60,419 63,357,780 5,909,847
Federal Signal Corp. ........... 2,899,000 461,800 -- 3,360,800 50,445,608 788,400

Annual Report | 49

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONTINUED)

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

NON-CONTROLLED AFFILIATES
(CONTINUED)
FHC Delaware Inc. ........... 784,457 -- -- 784,457 2,726,694 -- --
Florida East Coast Industries
Inc. ..................... 4,423,071 -- -- 4,423,071 178,035,242 1,017,306 --
International Steel Group ... 6,143,191 -- 6,143,191 -- -- -- 132,258,167
Kindred Healthcare Inc. ..... 2,380,966 -- -- 2,380,966 58,267,000 -- --
Kindred Healthcare Inc., Jan.
9.07 Calls, 1/01/13 ...... 578 568 -- 1,146 17,645 -- --
Kindred Healthcare Inc., Jan.
25.99 Calls, 1/01/14 ..... -- 568 -- 568 -- -- --
Kindred Healthcare Inc., Jan.
26.00 Calls, 1/01/12 ..... 1,156 568 -- 1,724 -- -- --
Kindred Healthcare Inc., Jul.
23.75 Calls, 7/17/11 ..... 5,748 1,892 -- 7,640 5,516 -- --
Kindred Healthcare Inc., wts
Series A, 4/20/06 ........ 211,977 -- -- 211,977 4,100,059 -- --
Kindred Healthcare Inc., wts
Series B, 4/20/06 ........ 529,943 -- -- 529,943 8,709,613 -- --
Lancer Industries Inc., B ... 3 -- -- 3 6,494,600 -- --
MBOP Liquidating Trust ...... 574,712 -- -- 574,712 75 -- --
OPTI Canada ................. 9,695,676 -- 214,400 9,481,276 311,365,659 -- 1,545,625
TVMAX Holdings Inc. ......... 257,217 -- -- 257,217 257,217 -- --
TVMAX Holdings Inc., PIK,
11.50%, 6/30/05 .......... 264,487 168,827 -- 433,314 433,314 42,182 --
TVMAX Holdings Inc., PIK,
14.00%, 6/30/05 .......... 1,045,014 158,365 -- 1,203,379 1,203,379 156,192 --
White Mountains Insurance
Group Inc. ............... 740,448 -- -- 740,448 413,577,230 5,923,584 --
-------------------------------------------
TOTAL NON-CONTROLLED AFFILIATES ................................................. $1,285,706,598 $10,760,321 $168,964,508
-------------------------------------------
TOTAL AFFILIATED SECURITIES (8.18% of Net Assets) ............................... $1,285,706,598 $10,760,321 $165,472,884
===========================================

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

14. OTHER CONSIDERATIONS

50 | Annual Report

MUTUAL SHARES FUND

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. REGULATORY MATTERS

Annual Report | 51

MUTUAL SHARES FUND

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying statement of assets and liabilities of the
Mutual Shares Fund (one of the portfolio constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2005, 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 Shares Fund of the Franklin Mutual Series Fund Inc. at December 31, 2005,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein, in conformity with U.S.
generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 10, 2006

52 | Annual Report

MUTUAL SHARES FUND

TAX DESIGNATION (UNAUDITED)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $747,515,744 as a
capital gain dividend for the fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $225,510,729 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2005. 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 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $100,418,191 as interest-related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $136,848,311 as a short-term capital gain dividend
for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.

Under Section 854(b)(2) of the Code, the Fund designates 36.40% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2005.

Annual Report | 53

MUTUAL SHARES FUND

BOARD MEMBERS AND OFFICERS

INDEPENDENT BOARD MEMBERS

EDWARD I. ALTMAN, PH.D. Director Since 1987 7 Director, A.T.D. Inc.(financial
(1941) technology and investment company).
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center; editor and author of
numerous financial publications; financial consultant; and serves on the Investment Advisory Committee of the New York State Common
Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM Corporation
101 John F. Kennedy Parkway (Sallie Mae) and Allied Capital
Short Hills, NJ 07078-2789 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 (1929) Director Since 2002 13 Director, Fiduciary Emerging Markets
101 John F. Kennedy Parkway Bond Fund PLC and Fiduciary
Short Hills, NJ 07078-2789 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 (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------

54 | Annual Report

INTERESTED BOARD MEMBERS AND OFFICERS

**WILLIAM J. LIPPMAN (1925) Director Since 1996 14 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case
may be, of five of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**ANNE M. TATLOCK (1939) Director Since 2002 7 Director, Fortune Brands, Inc.
600 Fifth Avenue, 7th Floor (consumer products) and Merck & Co.
New York, NY 10020-2302 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.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 55

MICHAEL J. EMBLER (1964) Senior Vice Since May 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President, Since May 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway and Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and 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 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------

56 | Annual Report

Annual Report | 57

GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL 33394-3091 Chief
Accounting
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------

58 | Annual Report

MUTUAL SHARES FUND

SHAREHOLDER INFORMATION

PROXY VOTING POLICIES AND PROCEDURES

QUARTERLY STATEMENT OF INVESTMENTS

Annual Report | 59

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 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

BLEND

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

SECTOR

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(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(4)
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(4)
Templeton Global Bond Fund
Templeton Income Fund

TAX-FREE INCOME(5)

NATIONAL FUNDS

Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(6)

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

INSURANCE FUNDS

Franklin Templeton Variable Insurance Products
Trust(8)

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

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

(6) Portfolio of insured municipal securities.

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

09/05 Not part of the annual report

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

|_| 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 SHARES FUND

INVESTMENT MANAGER

Franklin Mutual Advisers, LLC
101 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 & R)
1-800/448-FUND - (Class Z)

474 A2005 02/06

ITEM 2. CODE OF ETHICS.

(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.

(d) N/A

(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

(a)(1) The registrant has an audit committee financial expert serving on its
audit committee.

(2) The audit committee financial expert is Ann Torre Bates, and she is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a) Audit Fees

The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $355,000 for the fiscal year ended December 31, 2005 and $298,000 for the
fiscal year ended December 31, 2004.

(b) Audit-Related Fees

There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.

There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.

There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.

The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $25,000 for the fiscal year ended
December 31, 2005 and $50,000 for the fiscal year ended December 31, 2004. The
services for which these fees were paid included tax compliance and advice.

(d) All Other Fees

There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant, other than the services
reported in paragraphs (a)-(c) of Item 4.

The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $199,802 for the fiscal year ended December
31, 2005 and $0 for the fiscal year ended December 31, 2004. The services for
which these fees were paid included financial due diligence.

(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:

(i) pre-approval of all audit and audit related services;

(ii) pre-approval of all non-audit related services to be
provided to the Fund by the auditors;

(iii) pre-approval of all non-audit related services to be
provided to the registrant by the auditors to the registrant's investment
adviser or to any entity that controls, is controlled by or is under common
control with the registrant's investment adviser and that provides ongoing
services to the registrant where the non-audit services relate directly to the
operations or financial reporting of the registrant; and

(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.

(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.

(f) No disclosures are required by this Item 4(f).

(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $224,802 for the fiscal year ended December 31, 2005 and $50,000
for the fiscal year ended December 31, 2004.

(h) The registrant's audit committee of the board of trustees has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A

ITEM 6. SCHEDULE OF INVESTMENTS. N/A

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. N/A

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Directors that would require disclosure
herein.

ITEM 11. CONTROLS AND PROCEDURES.

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.

Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.

(b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes
in the Registrant's internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of their
evaluation in connection with the preparation of this Shareholder Report on Form
N-CSR.

ITEM 12. EXHIBITS.

(a)(1) Code of Ethics

(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

FRANKLIN MUTUAL SERIES FUND INC.

By /s/JIMMY D. GAMBILL
----------------------
Jimmy D. Gambill

Chief Executive Officer - Finance and Administration
Date February 21, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

By /s/JIMMY D. GAMBILL
----------------------
Jimmy D. Gambill

Chief Executive Officer - Finance and Administration
Date February 21, 2006

By /s/GALEN G. VETTER
---------------------
Galen G. Vetter
Chief Financial Officer
Date February 21, 2006