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
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FRANKLIN MUTUAL SERIES FUNDS
-------------------------------------
(Exact name of registrant as specified in charter)

101 John F. Kennedy Parkway, Short Hills, NJ 07078-2705
--------------------------------------------------------
(Address of principal executive offices) (Zip code)

Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
----------------------------------------------------------------
(Name and address of agent for service)

Registrant's telephone number, including area code: (210) 912-2100
--------------

Date of fiscal year end: 12/31
-----

Date of reporting period: 12/31/09
--------

Item 1. Reports to Stockholders.

DECEMBER 31, 2009

ANNUAL REPORT
AND SHAREHOLDER LETTER

(GRAPHIC)

VALUE

MUTUAL SHARES FUND

(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)

Franklin - Templeton - MUTUAL SERIES

Franklin Templeton Investments

GAIN FROM OUR PERSPECTIVE(R)

Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.

SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.

FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.

TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.

MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as
arbitrage situations and distressed securities.

TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be
used to build truly diversified allocation plans
covering every major asset class.

RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek 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 us become one of the most trusted names in
financial services.

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

(GRAPHIC)

Not part of the annual report

Contents

SHAREHOLDER LETTER ....................................................... 1
ANNUAL REPORT
Mutual Shares Fund ....................................................... 4
Performance Summary ...................................................... 11
Your Fund's Expenses ..................................................... 16
Financial Highlights and Statement of Investments ........................ 18
Financial Statements ..................................................... 34
Notes to Financial Statements ............................................ 38
Report of Independent Registered Public Accounting Firm .................. 58
Tax Designation .......................................................... 59
Board Members and Officers ............................................... 60
Shareholder Information .................................................. 65

Shareholder Letter

Dear Mutual Shares Fund Shareholder:

During 2009 we celebrated the 60th anniversary of the first fund in the Mutual
Series family. Every year has its share of investment surprises, highlights and
disappointments, which is what makes the business so fascinating and humbling.
While none of us who are currently involved with the Funds were here 60 years
ago, we think it's safe to conclude that 2009 was a year like no other in our
history.

What made 2009 so remarkable was the extent of the stress imposed on and
absorbed by the global economic infrastructure -- and the dramatic global market
rebound from its lows. Until they hit bottom in March, world markets plunged to
levels not reached in a decade, down a further 24% from year-end 2008 and 60%
from the October 2007 peak.(1) The global banking system's survival came into
question, home prices continued to drop and economic paralysis spread. As rumors
swirled about the demise of the next financial giant, they threatened to become
self-fulfilling prophecies.

The equity and credit market rebound was driven not by a single event but a
sequence of factors. Initially, the banking system's mere survival was enough to
halt the declines and start the market upward. The results of government "stress
tests" of major financial institutions were generally positive, enabling many of
those institutions to raise capital in the public sector and avoid a worst-case
scenario of government takeovers and/or failures of major banks. These capital
infusions lowered risk by enabling banks to absorb legacy losses, avoid
fire-sale asset liquidations and generate new business at attractive

(1.) As measured by the Morgan Stanley Capital International (MSCI) All Country
World Index. Source: (C) 2009 Morningstar. All Rights Reserved. The
information contained herein: (1) is proprietary to Morningstar and/or its
content providers; (2) may not be copied or distributed; and (3) is not
warranted to be accurate, complete or timely. Neither Morningstar nor its
content providers are responsible for any damages or losses arising from
any use of this information. Past performance is no guarantee of future
results. The MSCI All Country World Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market performance
in global developed and emerging markets.

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

Not part of the annual report | 1

spreads. Investors began to grasp the "green shoots" of a recovery as
aggressively as they had looked for protection in a proverbial bunker a month or
two before.

The rally was sustained by signs of stabilization in the U.S. housing market,
thawing credit markets and resumption of economic activity. Home price declines
slowed due to lower interest rates, a first-time homebuyer tax credit program
and prices dipping to levels low enough to lure bargain hunters. Stable home
prices helped restore confidence in homeowners and their bank creditors, and
businesses began restocking depleted inventories. Although it may have seemed
improbable a scant six to nine months ago, by year-end the U.S. economy was
expanding at its fastest pace in six years as the recovery gained traction.

The Fund began the year with a relatively high level of cash. One of the first
places we began to find new compelling opportunities was in distressed debt,
specifically in the senior secured loans of companies that had borrowed
considerable capital in the preceding few years when credit markets were awash
in liquidity. A number of these positions appreciated dramatically over the year
as market spreads declined and capital flowed back into credit. Overall, the
market recovery forestalled the widespread supply of distressed securities that
many anticipated, but the day of reckoning may yet come for some of the "extend
and pretend" debt that is present in today's market.

Given the dramatic nature of the equity market sell-off in 2008, we also found
good opportunity throughout the year in undervalued equities. We had mentioned
in our letter of a year ago that we thought we would find opportunity in some
commodity-oriented companies, and this year some of our best performing stocks
were mining companies, paper and forest products companies, and deepwater,
offshore petroleum drillers. We also mentioned economically defensive industries
with strong market positions, high barriers to entry, and reasonably predictable
earnings and cash flows, and likewise, they too were some of our best performing
companies this year. Looking forward, the normalization of global markets has
made restructurings, which rely on the availability of capital and the
willingness of investors to look past near-term profit disruptions, feasible
again.

We also found very attractive opportunities in merger arbitrage situations this
past year, taking positions in large strategic deals such as those occurring in
the pharmaceuticals industry. These positions performed as expected, producing a
positive return. Merger and acquisition activity increased over the latter part
of the year, and we expect it to accelerate further. Large strategic acquirers
have access to significant amounts of capital at very reasonable rates, and

2 | Not part of the annual report

they are also generally facing significant obstacles to organic growth from
still-cautious consumers.

Formidable headwinds remain. The reserve currency status of the U.S. dollar
continues to be questioned and the Federal Reserve Board will have to navigate
its withdrawal of monetary stimulus without slowing the economic recovery. While
the banking sector is no longer on life support, commercial real estate
represents a significant overhang and the residential sector remains weak.
However, imbalances and temporary upheavals often generate mispriced securities,
and that volatility can help us find value for our shareholders. We thank you
for your patience and support over the past year and look forward to serving you
in the future.

Sincerely,

/s/ Peter A. Langerman

Peter A. Langerman
Chairman, President and
Chief Executive Officer
Franklin Mutual Advisers, LLC

THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2009. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.

Not part of the annual report | 3

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 primarily 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.

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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.

We are pleased to bring you Mutual Shares Fund's annual report for the fiscal
year ended December 31, 2009.

PERFORMANCE OVERVIEW

Mutual Shares Fund - Class Z delivered a +28.20% cumulative total return for the
12 months ended December 31, 2009. The Fund - Class Z outperformed its
benchmark, the Standard & Poor's 500 Index (S&P 500), which had a +26.46% total
return for the same period.(1) You can find the Fund's long-term performance
data in the Performance Summary beginning on page 11.

ECONOMIC AND MARKET OVERVIEW

The U.S. economy ended 2009 in much better shape than it began. After several
quarters of contraction, economic activity expanded in the third and fourth
quarters. In the year's second half, corporate profit growth was higher than
earlier estimates, which may allow businesses to build inventory following a
long period of inventory drawdowns. Economic challenges remain, such as stalled
consumer confidence and job prospects for the unemployed as stimulus measures
wind down. However, several reports pointed to improving economic conditions.

(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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, and an index is not 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 23.

4 | Annual Report

for an eventual tightening of monetary policy. Late in the period, the labor
market improved somewhat as the economy lost fewer jobs than expected and the
unemployment rate fell slightly, dropping from a period high of 10.2% in October
to 10.0% at period-end.(2)

Globally, equity markets entered 2009 largely pricing in a possible economic
depression and systemic solvency crisis, scenarios that were ultimately averted
by one of the most aggressive global policy responses in financial history. As
government monetary and fiscal intervention began to gain traction toward the
end of the first quarter, equities bottomed and largely reversed their decline,
economic growth stabilized and rebounded, and confidence was rekindled as
investors began to believe the global financial system was finally on the mend.
Emerging market economies fueled the global recovery as governments aggressively
incentivized lending and consumption, resulting in a dramatic recovery that laid
the groundwork for the developing world's equity rally. Growing demand from
emerging markets supported commodity prices, which also posted record gains
during the year. For most of the year, the fading U.S. dollar also helped
underpin the rally in hard assets, while continued euro and yen strength created
headwinds for regional recoveries.

For the 12 months under review, the blue chip stocks of the Dow Jones Industrial
Average delivered a total return of +22.68%, while the broader S&P 500 posted a
+26.46% total return and the technology-heavy NASDAQ Composite Index returned
+45.32%.(3) Global developed and emerging markets, as measured by the Morgan
Stanley Capital International (MSCI) All Country World Index, delivered a
+35.41% total return.(4)

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 com-

GEOGRAPHIC BREAKDOWN

Based on Total Net Assets as of 12/31/09

(BAR CHART)

U.S. 54.5%
U.K. 11.8%
Germany 5.3%
France 4.2%
Switzerland 3.5%
Norway 1.7%
Denmark 1.4%
Netherlands 1.3%
Japan 1.1%
Other 2.9%
Short-Term Investments & Other Net Assets 12.3%

(2.) Source: Bureau of Labor Statistics.

(3.) Source: (C) 2009 Morningstar. 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 common type stocks listed on The NASDAQ Stock
Market.

(4.) Source: (C) 2009 Morningstar. The MSCI All Country World Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global developed and emerging markets.

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES

Based on Equity Securities as of 12/31/09

% OF TOTAL
NET ASSETS
----------

Tobacco 8.1%
Insurance 6.2%
Food Products 5.3%
Food & Staples Retailing 4.6%
Beverages 4.4%
Oil, Gas & Consumable Fuels 3.9%
Industrial Conglomerates 3.9%
Paper & Forest Products 3.7%
Media 3.4%
Health Care Providers & Services 3.2%

panies 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.

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 we believe 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, it is our practice to hedge the Fund's currency exposure when we
deem it advantageous for our shareholders.

MANAGER'S DISCUSSION

As the stock market broadly rebounded in 2009, most of the Fund's investments
increased in value. Our equity portfolio was the strongest contributor to
performance during the year under review. Three of our top-performing holdings
were software giant Microsoft, U.K.-based communications services provider
Virgin Media (VMED), and International Paper, the world's largest forest
products company.

6 | Annual Report

In 2009, Microsoft posted significant positive returns as prudent, unexpected
cost discipline throughout the company protected earnings during the downturn
and helped position the company well for the rebound. Early in 2009, Microsoft
shares fell as the economic slowdown adversely affected information technology
budgets and hurt revenue in divisions tied to PC sales. In response, Microsoft
laid off employees for the first time in the company's history, protecting
earnings while positioning itself to expand margins in the event of economic
recovery. As 2009 progressed, the economy stabilized and demand began to return
just as Microsoft launched new products, including the well-reviewed Windows 7.
Our investment appreciated substantially as the market began to anticipate the
resumption of growth and the stabilization of earnings.

VMED is a cable operator providing broadband, telephony and video services to
consumers and small businesses. VMED's leveraged balance sheet and operating
exposure to reduced consumer spending heightened investor concerns in late 2008
and early 2009. In 2009's second quarter, VMED management took advantage of
better credit conditions to refinance $1.6 billion of its near-term maturities.
In addition, the company's second quarter 2009 earnings reflected continued
improvement in subscriber metrics and earnings growth. The company took
advantage of new product introductions and improvements in service to pass along
subscriber price increases in May. In the meantime, consolidation among U.K.
broadband providers led to a more benign competitive environment while
regulatory rulings regarding the wholesale distribution of premium content
appeared to favor VMED, potentially improving the video component of its bundled
offer. At year-end, we believed VMED management's focus on driving efficiencies
while differentiating its product portfolio to attract new customers could
continue to bear fruit in 2010.

International Paper (IP) is North America's largest producer of cardboard boxes
and the second-largest producer of copy paper. Our investment in IP appreciated
considerably, despite dramatic share price drops in 2008 and early 2009. Facing
lower demand and significant curtailments in production, which raised unit
costs, the company expanded margins partly through productivity initiatives,
among other things, helping it deliver strong operating results and free cash
flow (much of which was used to pay down debt). IP also successfully integrated
the Weyerhaeuser box business that it purchased in August 2008.

TOP 10 HOLDINGS

12/31/09

COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------

CVS Caremark Corp. 2.4%
FOOD & STAPLES RETAILING, U.S.
Microsoft Corp. 2.1%
SOFTWARE, U.S.
British American Tobacco PLC, ord. & ADR 2.1%
TOBACCO, U.K.
News Corp., A 2.0%
MEDIA, U.S.
Imperial Tobacco Group PLC 1.9%
TOBACCO, U.K.
Berkshire Hathaway Inc., A & B 1.8%
INSURANCE, U.S.
Weyerhaeuser Co. 1.7%
PAPER & FOREST PRODUCTS, U.S.
Altria Group Inc. 1.7%
TOBACCO, U.S.
Nestle SA 1.7%
FOOD PRODUCTS, SWITZERLAND
White Mountains Insurance Group Ltd. 1.6%
INSURANCE, U.S.

Annual Report | 7

amassed debt in the preceding few years when credit was widely available. A
number of these positions appreciated significantly over 2009 as capital flowed
back into credit and yield spreads tightened considerably.

Although the Fund performed well during 2009, it had some disappointments. Three
investments that declined in value were Eastman Kodak, Kroger and Deutsche Post.

Photographic equipment company Eastman Kodak's stock depreciated as operational
losses and revaluation of post-retirement assets and liabilities significantly
eroded its book value in 2009's first quarter. Kodak's weak cash flow
performance also weighed on its share price, largely due to an unprofitable
consumer inkjet business and operating earnings declines among its traditional
businesses. In September, to alleviate potential bankruptcy concerns, the
company entered into a number of capital markets transactions, including the
issuance of expensive, high-coupon debt to Kohlberg Kravis Roberts as well as
dilutive warrants.

Kroger operates 2,469 supermarkets, 773 convenience stores and more than 100
supercenters in 31 states. Supermarket stocks in general, including Kroger, did
not perform well in 2009 as food price deflation in the second half of the year
contributed to lower-than-expected operating earnings.

The Fund's shares of German mail and express mail carrier Deutsche Post declined
in value during the time we held them, primarily due to concerns about the
negative outlook for global growth. In addition, concerns grew about Deutsche
Bank's ability to close the Postbank sale and evidence of Deutsche Post's
exposure to a Postbank rights issue. Lastly, rumors swirled that the company
might cut its dividend. The Fund sold its position prior to the dividend cut
announcement in early 2009.

Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was weaker compared with most foreign currencies during 2009,
our hedging strategy negatively impacted performance.

8 | Annual Report

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

(PHOTO OF PETER A. LANGERMAN)

/s/ Peter A. Langerman

Peter A. Langerman
Co-Portfolio Manager

(PHOTO OF F. DAVID SEGAL)

/s/ F. David Segal

F. David Segal, CFA
Co-Portfolio Manager

(PHOTO OF DEBBIE A. TURNER)

/s/ Debbie A. Turner

Debbie A. Turner, CFA
Assistant Portfolio Manager

Mutual Shares Fund

THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2009, 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 INVESTMENT MANAGER 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.

Annual Report | 9

PETER LANGERMAN has been portfolio manager for Mutual Shares Fund since 2005. He
joined Franklin Templeton Investments in 1996, serving in various capacities,
including President and Chief Executive Officer of Franklin Mutual Advisers and
member of the management team of the Funds, including Mutual Shares Fund. From
2002 to 2005, he served 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 Fund's former manager.

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

DEBBIE TURNER has been 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 Fund's former
manager.

10 | Annual Report

Performance Summary as of 12/31/09

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

CLASS Z (SYMBOL: MUTHX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$3.87 $19.19 $15.32
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.4262

CLASS A (SYMBOL: TESIX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$3.84 $19.06 $15.22
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.3748

CLASS B (SYMBOL: FMUBX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$3.76 $18.70 $14.94
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.2420

CLASS C (SYMBOL: TEMTX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$3.79 $18.89 $15.10
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.2546

CLASS R (SYMBOL: TESRX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$3.80 $18.95 $15.15
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.3462

Annual Report | 11

Performance Summary (CONTINUED)

PERFORMANCE

CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z/R: NO SALES
CHARGES; 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 Z(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- -------

Cumulative Total Return(2) +28.20% +7.42% +67.07%
Average Annual Total Return(3) +28.20% +1.44% +5.27%
Value of $10,000 Investment(4) $12,820 $10,742 $16,707
Total Annual Operating Expenses(5) 0.79%

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

Cumulative Total Return(2) +27.84% +5.72% +61.55%
Average Annual Total Return(3) +20.48% -0.07% +4.30%
Value of $10,000 Investment(4) $12,048 $9,964 $15,229
Total Annual Operating Expenses(5) 1.08%

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

Cumulative Total Return(2) +26.92% +2.20% +53.29%
Average Annual Total Return(3) +22.92% +0.11% +4.36%
Value of $10,000 Investment(4) $12,292 $10,054 $15,329
Total Annual Operating Expenses(5) 1.79%

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

Cumulative Total Return(2) +26.92% +2.20% +51.18%
Average Annual Total Return(3) +25.92% +0.44% +4.22%
Value of $10,000 Investment(4) $12,592 $10,220 $15,118
Total Annual Operating Expenses(5) 1.77%

CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------------------

Cumulative Total Return(2) +27.51% +4.78% +32.87%
Average Annual Total Return(3) +27.51% +0.94% +3.62%
Value of $10,000 Investment(4) $12,751 $10,478 $13,287
Total Annual Operating Expenses(5) 1.29%

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, GO TO
franklintempleton.com OR CALL (800) 342-5236.

12 | Annual Report

Performance Summary (CONTINUED)

TOTAL RETURN INDEX COMPARISON FOR A 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 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.

CLASS Z (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

DATE MUTUAL SHARES FUND - CLASS Z S&P 500 INDEX
- ---- ---------------------------- -------------

1/1/2000 $10,000 $10,000
1/31/2000 $ 9,672 $ 9,498
2/29/2000 $ 9,276 $ 9,318
3/31/2000 $10,235 $10,229
4/30/2000 $10,127 $ 9,922
5/31/2000 $10,255 $ 9,718
6/30/2000 $10,075 $ 9,958
7/31/2000 $10,356 $ 9,802
8/31/2000 $10,880 $10,411
9/30/2000 $10,869 $ 9,861
10/31/2000 $11,128 $ 9,819
11/30/2000 $10,779 $ 9,045
12/31/2000 $11,383 $ 9,090
1/31/2001 $12,056 $ 9,412
2/28/2001 $12,062 $ 8,554
3/31/2001 $11,757 $ 8,012
4/30/2001 $12,234 $ 8,635
5/31/2001 $12,660 $ 8,692
6/30/2001 $12,738 $ 8,481
7/31/2001 $12,732 $ 8,397
8/31/2001 $12,441 $ 7,872
9/30/2001 $11,345 $ 7,236
10/31/2001 $11,298 $ 7,374
11/30/2001 $11,772 $ 7,940
12/31/2001 $12,103 $ 8,009
1/31/2002 $11,991 $ 7,892
2/28/2002 $12,047 $ 7,740
3/31/2002 $12,408 $ 8,031
4/30/2002 $12,483 $ 7,544
5/31/2002 $12,489 $ 7,489
6/30/2002 $11,679 $ 6,955
7/31/2002 $10,977 $ 6,413
8/31/2002 $11,091 $ 6,455
9/30/2002 $10,490 $ 5,754
10/31/2002 $10,655 $ 6,260
11/30/2002 $10,870 $ 6,629
12/31/2002 $10,785 $ 6,239
1/31/2003 $10,696 $ 6,076
2/28/2003 $10,523 $ 5,985
3/31/2003 $10,548 $ 6,043
4/30/2003 $11,169 $ 6,540
5/31/2003 $11,739 $ 6,885
6/30/2003 $11,917 $ 6,973
7/31/2003 $11,988 $ 7,096
8/31/2003 $12,272 $ 7,234
9/30/2003 $12,220 $ 7,157
10/31/2003 $12,672 $ 7,562
11/30/2003 $13,079 $ 7,629
12/31/2003 $13,657 $ 8,029
1/31/2004 $13,767 $ 8,176
2/29/2004 $14,125 $ 8,290
3/31/2004 $14,106 $ 8,165
4/30/2004 $13,871 $ 8,037
5/31/2004 $13,891 $ 8,147
6/30/2004 $14,122 $ 8,305
7/31/2004 $13,907 $ 8,030
8/31/2004 $14,031 $ 8,063
9/30/2004 $14,214 $ 8,150
10/31/2004 $14,384 $ 8,275
11/30/2004 $15,083 $ 8,610
12/31/2004 $15,553 $ 8,902
1/31/2005 $15,250 $ 8,685
2/28/2005 $15,715 $ 8,868
3/31/2005 $15,601 $ 8,711
4/30/2005 $15,452 $ 8,546
5/31/2005 $15,783 $ 8,818
6/30/2005 $15,961 $ 8,830
7/31/2005 $16,374 $ 9,159
8/31/2005 $16,442 $ 9,075
9/30/2005 $16,692 $ 9,149
10/31/2005 $16,360 $ 8,996
11/30/2005 $16,773 $ 9,337
12/31/2005 $17,169 $ 9,340
1/31/2006 $17,599 $ 9,587
2/28/2006 $17,713 $ 9,613
3/31/2006 $18,265 $ 9,733
4/30/2006 $18,394 $ 9,863
5/31/2006 $18,093 $ 9,580
6/30/2006 $18,104 $ 9,593
7/31/2006 $18,162 $ 9,652
8/31/2006 $18,678 $ 9,881
9/30/2006 $18,817 $10,136
10/31/2006 $19,492 $10,466
11/30/2006 $19,812 $10,665
12/31/2006 $20,322 $10,815
1/31/2007 $20,774 $10,978
2/28/2007 $20,579 $10,764
3/31/2007 $20,968 $10,884
4/30/2007 $21,623 $11,366
5/31/2007 $22,386 $11,763
6/30/2007 $22,253 $11,567
7/31/2007 $21,269 $11,209
8/31/2007 $21,136 $11,377
9/30/2007 $21,495 $11,802
10/31/2007 $21,956 $11,990
11/30/2007 $21,323 $11,489
12/31/2007 $20,993 $11,409
1/31/2008 $19,784 $10,725
2/29/2008 $19,403 $10,376
3/31/2008 $19,063 $10,332
4/30/2008 $19,717 $10,835
5/31/2008 $20,016 $10,975
6/30/2008 $17,969 $10,050
7/31/2008 $18,102 $ 9,965
8/31/2008 $18,284 $10,109
9/30/2008 $16,751 $ 9,209
10/31/2008 $13,895 $ 7,662
11/30/2008 $12,747 $ 7,112
12/31/2008 $13,032 $ 7,188
1/31/2009 $12,241 $ 6,582
2/28/2009 $11,246 $ 5,881
3/31/2009 $11,731 $ 6,396
4/30/2009 $13,058 $ 7,009
5/31/2009 $13,679 $ 7,401
6/30/2009 $13,738 $ 7,415
7/31/2009 $14,751 $ 7,976
8/31/2009 $15,355 $ 8,264
9/30/2009 $15,930 $ 8,573
10/31/2009 $15,758 $ 8,413
11/30/2009 $16,085 $ 8,918
12/31/2009 $16,707 $ 9,090

AVERAGE ANNUAL TOTAL RETURN

CLASS Z(1) 12/31/09
- ---------- --------

1-Year +28.20%
5-Year +1.44%
10-Year +5.27%

CLASS A (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

DATE MUTUAL SHARES FUND - CLASS A S&P 500 INDEX
- ---- ---------------------------- -------------

1/1/2000 $ 9,426 $10,000
1/31/2000 $ 9,112 $ 9,498
2/29/2000 $ 8,737 $ 9,318
3/31/2000 $ 9,639 $10,229
4/30/2000 $ 9,533 $ 9,922
5/31/2000 $ 9,653 $ 9,718
6/30/2000 $ 9,479 $ 9,958
7/31/2000 $ 9,739 $ 9,802
8/31/2000 $10,229 $10,411
9/30/2000 $10,214 $ 9,861
10/31/2000 $10,459 $ 9,819
11/30/2000 $10,124 $ 9,045
12/31/2000 $10,691 $ 9,090
1/31/2001 $11,320 $ 9,412
2/28/2001 $11,320 $ 8,554
3/31/2001 $11,027 $ 8,012
4/30/2001 $11,477 $ 8,635
5/31/2001 $11,873 $ 8,692
6/30/2001 $11,943 $ 8,481
7/31/2001 $11,937 $ 8,397
8/31/2001 $11,658 $ 7,872
9/30/2001 $10,626 $ 7,236
10/31/2001 $10,581 $ 7,374
11/30/2001 $11,016 $ 7,940
12/31/2001 $11,326 $ 8,009
1/31/2002 $11,221 $ 7,892
2/28/2002 $11,268 $ 7,740
3/31/2002 $11,601 $ 8,031
4/30/2002 $11,666 $ 7,544
5/31/2002 $11,671 $ 7,489
6/30/2002 $10,908 $ 6,955
7/31/2002 $10,254 $ 6,413
8/31/2002 $10,355 $ 6,455
9/30/2002 $ 9,797 $ 5,754
10/31/2002 $ 9,940 $ 6,260
11/30/2002 $10,142 $ 6,629
12/31/2002 $10,058 $ 6,239
1/31/2003 $ 9,974 $ 6,076
2/28/2003 $ 9,806 $ 5,985
3/31/2003 $ 9,830 $ 6,043
4/30/2003 $10,406 $ 6,540
5/31/2003 $10,933 $ 6,885
6/30/2003 $11,091 $ 6,973
7/31/2003 $11,157 $ 7,096
8/31/2003 $11,417 $ 7,234
9/30/2003 $11,362 $ 7,157
10/31/2003 $11,785 $ 7,562
11/30/2003 $12,153 $ 7,629
12/31/2003 $12,691 $ 8,029
1/31/2004 $12,789 $ 8,176
2/29/2004 $13,123 $ 8,290
3/31/2004 $13,098 $ 8,165
4/30/2004 $12,880 $ 8,037
5/31/2004 $12,892 $ 8,147
6/30/2004 $13,104 $ 8,305
7/31/2004 $12,897 $ 8,030
8/31/2004 $13,007 $ 8,063
9/30/2004 $13,177 $ 8,150
10/31/2004 $13,330 $ 8,275
11/30/2004 $13,970 $ 8,610
12/31/2004 $14,404 $ 8,902
1/31/2005 $14,115 $ 8,685
2/28/2005 $14,542 $ 8,868
3/31/2005 $14,429 $ 8,711
4/30/2005 $14,291 $ 8,546
5/31/2005 $14,599 $ 8,818
6/30/2005 $14,755 $ 8,830
7/31/2005 $15,132 $ 9,159
8/31/2005 $15,189 $ 9,075
9/30/2005 $15,422 $ 9,149
10/31/2005 $15,107 $ 8,996
11/30/2005 $15,485 $ 9,337
12/31/2005 $15,842 $ 9,340
1/31/2006 $16,235 $ 9,587
2/28/2006 $16,341 $ 9,613
3/31/2006 $16,840 $ 9,733
4/30/2006 $16,953 $ 9,863
5/31/2006 $16,674 $ 9,580
6/30/2006 $16,680 $ 9,593
7/31/2006 $16,727 $ 9,652
8/31/2006 $17,206 $ 9,881
9/30/2006 $17,327 $10,136
10/31/2006 $17,941 $10,466
11/30/2006 $18,231 $10,665
12/31/2006 $18,690 $10,815
1/31/2007 $19,101 $10,978
2/28/2007 $18,921 $10,764
3/31/2007 $19,267 $10,884
4/30/2007 $19,859 $11,366
5/31/2007 $20,566 $11,763
6/30/2007 $20,430 $11,567
7/31/2007 $19,526 $11,209
8/31/2007 $19,396 $11,377
9/30/2007 $19,722 $11,802
10/31/2007 $20,141 $11,990
11/30/2007 $19,555 $11,489
12/31/2007 $19,245 $11,409
1/31/2008 $18,128 $10,725
2/29/2008 $17,784 $10,376
3/31/2008 $17,462 $10,332
4/30/2008 $18,059 $10,835
5/31/2008 $18,327 $10,975
6/30/2008 $16,452 $10,050
7/31/2008 $16,567 $ 9,965
8/31/2008 $16,735 $10,109
9/30/2008 $15,330 $ 9,209
10/31/2008 $12,708 $ 7,662
11/30/2008 $11,656 $ 7,112
12/31/2008 $11,912 $ 7,188
1/31/2009 $11,184 $ 6,582
2/28/2009 $10,276 $ 5,881
3/31/2009 $10,715 $ 6,396
4/30/2009 $11,920 $ 7,009
5/31/2009 $12,491 $ 7,401
6/30/2009 $12,538 $ 7,415
7/31/2009 $13,462 $ 7,976
8/31/2009 $14,010 $ 8,264
9/30/2009 $14,532 $ 8,573
10/31/2009 $14,373 $ 8,413
11/30/2009 $14,666 $ 8,918
12/31/2009 $15,229 $ 9,090

AVERAGE ANNUAL TOTAL RETURN

CLASS A(1) 12/31/09
- ---------- --------

1-Year +20.48%
5-Year -0.07%
10-Year +4.30%

Annual Report | 13

Performance Summary (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

CLASS B(1) 12/31/09
- ---------- --------

1-Year +22.92%
5-Year +0.11%
10-Year +4.36%

CLASS B (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

DATE MUTUAL SHARES FUND - CLASS B S&P 500 INDEX
- ---- ---------------------------- -------------

1/1/2000 $10,000 $10,000
1/31/2000 $ 9,664 $ 9,498
2/29/2000 $ 9,260 $ 9,318
3/31/2000 $10,207 $10,229
4/30/2000 $10,094 $ 9,922
5/31/2000 $10,212 $ 9,718
6/30/2000 $10,025 $ 9,958
7/31/2000 $10,297 $ 9,802
8/31/2000 $10,809 $10,411
9/30/2000 $10,788 $ 9,861
10/31/2000 $11,033 $ 9,819
11/30/2000 $10,681 $ 9,045
12/31/2000 $11,269 $ 9,090
1/31/2001 $11,926 $ 9,412
2/28/2001 $11,920 $ 8,554
3/31/2001 $11,609 $ 8,012
4/30/2001 $12,076 $ 8,635
5/31/2001 $12,479 $ 8,692
6/30/2001 $12,545 $ 8,481
7/31/2001 $12,533 $ 8,397
8/31/2001 $12,230 $ 7,872
9/30/2001 $11,150 $ 7,236
10/31/2001 $11,091 $ 7,374
11/30/2001 $11,548 $ 7,940
12/31/2001 $11,862 $ 8,009
1/31/2002 $11,744 $ 7,892
2/28/2002 $11,787 $ 7,740
3/31/2002 $12,128 $ 8,031
4/30/2002 $12,190 $ 7,544
5/31/2002 $12,190 $ 7,489
6/30/2002 $11,390 $ 6,955
7/31/2002 $10,697 $ 6,413
8/31/2002 $10,797 $ 6,455
9/30/2002 $10,205 $ 5,754
10/31/2002 $10,350 $ 6,260
11/30/2002 $10,558 $ 6,629
12/31/2002 $10,462 $ 6,239
1/31/2003 $10,367 $ 6,076
2/28/2003 $10,196 $ 5,985
3/31/2003 $10,208 $ 6,043
4/30/2003 $10,804 $ 6,540
5/31/2003 $11,342 $ 6,885
6/30/2003 $11,504 $ 6,973
7/31/2003 $11,567 $ 7,096
8/31/2003 $11,829 $ 7,234
9/30/2003 $11,765 $ 7,157
10/31/2003 $12,199 $ 7,562
11/30/2003 $12,575 $ 7,629
12/31/2003 $13,120 $ 8,029
1/31/2004 $13,216 $ 8,176
2/29/2004 $13,555 $ 8,290
3/31/2004 $13,516 $ 8,165
4/30/2004 $13,280 $ 8,037
5/31/2004 $13,286 $ 8,147
6/30/2004 $13,497 $ 8,305
7/31/2004 $13,279 $ 8,030
8/31/2004 $13,388 $ 8,063
9/30/2004 $13,554 $ 8,150
10/31/2004 $13,702 $ 8,275
11/30/2004 $14,356 $ 8,610
12/31/2004 $14,786 $ 8,902
1/31/2005 $14,490 $ 8,685
2/28/2005 $14,918 $ 8,868
3/31/2005 $14,793 $ 8,711
4/30/2005 $14,648 $ 8,546
5/31/2005 $14,951 $ 8,818
6/30/2005 $15,105 $ 8,830
7/31/2005 $15,480 $ 9,159
8/31/2005 $15,533 $ 9,075
9/30/2005 $15,757 $ 9,149
10/31/2005 $15,428 $ 8,996
11/30/2005 $15,803 $ 9,337
12/31/2005 $16,163 $ 9,340
1/31/2006 $16,551 $ 9,587
2/28/2006 $16,655 $ 9,613
3/31/2006 $17,153 $ 9,733
4/30/2006 $17,257 $ 9,863
5/31/2006 $16,967 $ 9,580
6/30/2006 $16,962 $ 9,593
7/31/2006 $17,004 $ 9,652
8/31/2006 $17,475 $ 9,881
9/30/2006 $17,587 $10,136
10/31/2006 $18,204 $10,466
11/30/2006 $18,485 $10,665
12/31/2006 $18,945 $10,815
1/31/2007 $19,348 $10,978
2/28/2007 $19,154 $10,764
3/31/2007 $19,498 $10,884
4/30/2007 $20,088 $11,366
5/31/2007 $20,783 $11,763
6/30/2007 $20,638 $11,567
7/31/2007 $19,717 $11,209
8/31/2007 $19,568 $11,377
9/30/2007 $19,890 $11,802
10/31/2007 $20,294 $11,990
11/30/2007 $19,695 $11,489
12/31/2007 $19,372 $11,409
1/31/2008 $18,247 $10,725
2/29/2008 $17,901 $10,376
3/31/2008 $17,577 $10,332
4/30/2008 $18,178 $10,835
5/31/2008 $18,448 $10,975
6/30/2008 $16,561 $10,050
7/31/2008 $16,676 $ 9,965
8/31/2008 $16,846 $10,109
9/30/2008 $15,430 $ 9,209
10/31/2008 $12,791 $ 7,662
11/30/2008 $11,732 $ 7,112
12/31/2008 $11,991 $ 7,188
1/31/2009 $11,258 $ 6,582
2/28/2009 $10,344 $ 5,881
3/31/2009 $10,785 $ 6,396
4/30/2009 $11,999 $ 7,009
5/31/2009 $12,574 $ 7,401
6/30/2009 $12,621 $ 7,415
7/31/2009 $13,551 $ 7,976
8/31/2009 $14,102 $ 8,264
9/30/2009 $14,627 $ 8,573
10/31/2009 $14,468 $ 8,413
11/30/2009 $14,763 $ 8,918
12/31/2009 $15,329 $ 9,090

AVERAGE ANNUAL TOTAL RETURN

CLASS C(1) 12/31/09
- ---------- --------

1-Year +25.92%
5-Year +0.44%
10-Year +4.22%

CLASS C (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

DATE MUTUAL SHARES FUND - CLASS C S&P 500 INDEX
- ---- ---------------------------- -------------

1/1/2000 $10,000 $10,000
1/31/2000 $ 9,660 $ 9,498
2/29/2000 $ 9,256 $ 9,318
3/31/2000 $10,207 $10,229
4/30/2000 $10,094 $ 9,922
5/31/2000 $10,212 $ 9,718
6/30/2000 $10,024 $ 9,958
7/31/2000 $10,296 $ 9,802
8/31/2000 $10,807 $10,411
9/30/2000 $10,785 $ 9,861
10/31/2000 $11,030 $ 9,819
11/30/2000 $10,679 $ 9,045
12/31/2000 $11,268 $ 9,090
1/31/2001 $11,922 $ 9,412
2/28/2001 $11,917 $ 8,554
3/31/2001 $11,607 $ 8,012
4/30/2001 $12,072 $ 8,635
5/31/2001 $12,479 $ 8,692
6/30/2001 $12,547 $ 8,481
7/31/2001 $12,530 $ 8,397
8/31/2001 $12,234 $ 7,872
9/30/2001 $11,147 $ 7,236
10/31/2001 $11,093 $ 7,374
11/30/2001 $11,543 $ 7,940
12/31/2001 $11,861 $ 8,009
1/31/2002 $11,744 $ 7,892
2/28/2002 $11,787 $ 7,740
3/31/2002 $12,131 $ 8,031
4/30/2002 $12,193 $ 7,544
5/31/2002 $12,193 $ 7,489
6/30/2002 $11,389 $ 6,955
7/31/2002 $10,701 $ 6,413
8/31/2002 $10,795 $ 6,455
9/30/2002 $10,208 $ 5,754
10/31/2002 $10,351 $ 6,260
11/30/2002 $10,558 $ 6,629
12/31/2002 $10,463 $ 6,239
1/31/2003 $10,369 $ 6,076
2/28/2003 $10,193 $ 5,985
3/31/2003 $10,212 $ 6,043
4/30/2003 $10,802 $ 6,540
5/31/2003 $11,347 $ 6,885
6/30/2003 $11,506 $ 6,973
7/31/2003 $11,563 $ 7,096
8/31/2003 $11,829 $ 7,234
9/30/2003 $11,765 $ 7,157
10/31/2003 $12,195 $ 7,562
11/30/2003 $12,574 $ 7,629
12/31/2003 $13,117 $ 8,029
1/31/2004 $13,212 $ 8,176
2/29/2004 $13,554 $ 8,290
3/31/2004 $13,522 $ 8,165
4/30/2004 $13,282 $ 8,037
5/31/2004 $13,288 $ 8,147
6/30/2004 $13,502 $ 8,305
7/31/2004 $13,280 $ 8,030
8/31/2004 $13,388 $ 8,063
9/30/2004 $13,559 $ 8,150
10/31/2004 $13,705 $ 8,275
11/30/2004 $14,359 $ 8,610
12/31/2004 $14,793 $ 8,902
1/31/2005 $14,494 $ 8,685
2/28/2005 $14,923 $ 8,868
3/31/2005 $14,799 $ 8,711
4/30/2005 $14,650 $ 8,546
5/31/2005 $14,955 $ 8,818
6/30/2005 $15,109 $ 8,830
7/31/2005 $15,480 $ 9,159
8/31/2005 $15,538 $ 9,075
9/30/2005 $15,760 $ 9,149
10/31/2005 $15,428 $ 8,996
11/30/2005 $15,806 $ 9,337
12/31/2005 $16,165 $ 9,340
1/31/2006 $16,557 $ 9,587
2/28/2006 $16,654 $ 9,613
3/31/2006 $17,157 $ 9,733
4/30/2006 $17,267 $ 9,863
5/31/2006 $16,971 $ 9,580
6/30/2006 $16,963 $ 9,593
7/31/2006 $17,004 $ 9,652
8/31/2006 $17,477 $ 9,881
9/30/2006 $17,588 $10,136
10/31/2006 $18,206 $10,466
11/30/2006 $18,490 $10,665
12/31/2006 $18,942 $10,815
1/31/2007 $19,356 $10,978
2/28/2007 $19,157 $10,764
3/31/2007 $19,504 $10,884
4/30/2007 $20,088 $11,366
5/31/2007 $20,790 $11,763
6/30/2007 $20,641 $11,567
7/31/2007 $19,715 $11,209
8/31/2007 $19,575 $11,377
9/30/2007 $19,893 $11,802
10/31/2007 $20,300 $11,990
11/30/2007 $19,701 $11,489
12/31/2007 $19,378 $11,409
1/31/2008 $18,248 $10,725
2/29/2008 $17,882 $10,376
3/31/2008 $17,555 $10,332
4/30/2008 $18,139 $10,835
5/31/2008 $18,404 $10,975
6/30/2008 $16,511 $10,050
7/31/2008 $16,612 $ 9,965
8/31/2008 $16,768 $10,109
9/30/2008 $15,349 $ 9,209
10/31/2008 $12,720 $ 7,662
11/30/2008 $11,657 $ 7,112
12/31/2008 $11,912 $ 7,188
1/31/2009 $11,178 $ 6,582
2/28/2009 $10,263 $ 5,881
3/31/2009 $10,697 $ 6,396
4/30/2009 $11,896 $ 7,009
5/31/2009 $12,448 $ 7,401
6/30/2009 $12,496 $ 7,415
7/31/2009 $13,403 $ 7,976
8/31/2009 $13,947 $ 8,264
9/30/2009 $14,457 $ 8,573
10/31/2009 $14,289 $ 8,413
11/30/2009 $14,569 $ 8,918
12/31/2009 $15,118 $ 9,090

14 | Annual Report

PERFORMANCE SUMMARY (CONTINUED)

CLASS R (1/1/02-12/31/09)

(PERFORMANCE GRAPH)

DATE MUTUAL SHARES FUND - CLASS R S&P 500 INDEX
- ---- ---------------------------- -------------

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 $10,027
4/30/2002 $10,315 $ 9,420
5/31/2002 $10,320 $ 9,350
6/30/2002 $ 9,643 $ 8,684
7/31/2002 $ 9,065 $ 8,007
8/31/2002 $ 9,150 $ 8,060
9/30/2002 $ 8,657 $ 7,184
10/31/2002 $ 8,782 $ 7,816
11/30/2002 $ 8,956 $ 8,276
12/31/2002 $ 8,880 $ 7,790
1/31/2003 $ 8,805 $ 7,586
2/28/2003 $ 8,662 $ 7,472
3/31/2003 $ 8,678 $ 7,545
4/30/2003 $ 9,182 $ 8,166
5/31/2003 $ 9,648 $ 8,596
6/30/2003 $ 9,792 $ 8,706
7/31/2003 $ 9,846 $ 8,859
8/31/2003 $10,076 $ 9,032
9/30/2003 $10,022 $ 8,936
10/31/2003 $10,391 $ 9,442
11/30/2003 $10,717 $ 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 $11,545 $10,194
4/30/2004 $11,351 $10,034
5/31/2004 $11,362 $10,172
6/30/2004 $11,544 $10,370
7/31/2004 $11,360 $10,026
8/31/2004 $11,457 $10,067
9/30/2004 $11,608 $10,176
10/31/2004 $11,738 $10,332
11/30/2004 $12,304 $10,750
12/31/2004 $12,680 $11,115
1/31/2005 $12,431 $10,844
2/28/2005 $12,803 $11,073
3/31/2005 $12,703 $10,877
4/30/2005 $12,581 $10,670
5/31/2005 $12,847 $11,010
6/30/2005 $12,984 $11,025
7/31/2005 $13,312 $11,435
8/31/2005 $13,362 $11,331
9/30/2005 $13,562 $11,423
10/31/2005 $13,284 $11,232
11/30/2005 $13,618 $11,657
12/31/2005 $13,934 $11,661
1/31/2006 $14,275 $11,970
2/28/2006 $14,362 $12,003
3/31/2006 $14,803 $12,152
4/30/2006 $14,898 $12,315
5/31/2006 $14,651 $11,961
6/30/2006 $14,649 $11,977
7/31/2006 $14,690 $12,051
8/31/2006 $15,106 $12,338
9/30/2006 $15,214 $12,655
10/31/2006 $15,750 $13,068
11/30/2006 $16,000 $13,316
12/31/2006 $16,405 $13,503
1/31/2007 $16,767 $13,707
2/28/2007 $16,603 $13,439
3/31/2007 $16,908 $13,590
4/30/2007 $17,423 $14,192
5/31/2007 $18,041 $14,687
6/30/2007 $17,920 $14,443
7/31/2007 $17,122 $13,995
8/31/2007 $17,007 $14,205
9/30/2007 $17,288 $14,736
10/31/2007 $17,652 $14,970
11/30/2007 $17,135 $14,345
12/31/2007 $16,860 $14,245
1/31/2008 $15,882 $13,391
2/29/2008 $15,578 $12,956
3/31/2008 $15,295 $12,900
4/30/2008 $15,814 $13,528
5/31/2008 $16,043 $13,703
6/30/2008 $14,399 $12,548
7/31/2008 $14,499 $12,442
8/31/2008 $14,641 $12,622
9/30/2008 $13,406 $11,498
10/31/2008 $11,117 $ 9,567
11/30/2008 $10,190 $ 8,880
12/31/2008 $10,420 $ 8,975
1/31/2009 $ 9,780 $ 8,218
2/28/2009 $ 8,983 $ 7,343
3/31/2009 $ 9,368 $ 7,986
4/30/2009 $10,420 $ 8,751
5/31/2009 $10,908 $ 9,240
6/30/2009 $10,950 $ 9,259
7/31/2009 $11,755 $ 9,959
8/31/2009 $12,236 $10,318
9/30/2009 $12,687 $10,703
10/31/2009 $12,548 $10,505
11/30/2009 $12,799 $11,135
12/31/2009 $13,287 $11,350

AVERAGE ANNUAL TOTAL RETURN

CLASS R 12/31/09
- ------- --------

1-Year +27.51%
5-Year +0.94%
Since Inception (1/1/02) +3.62%

ENDNOTES

VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN FOREIGN SECURITIES INVOLVE SPECIAL RISKS
INCLUDING CURRENCY FLUCTUATIONS, AND ECONOMIC AND POLITICAL UNCERTAINTIES. THE
FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN MERGERS, REORGANIZATIONS OR
LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS AS PENDING DEALS MAY NOT BE COMPLETED
ON TIME OR ON FAVORABLE TERMS, 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 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.

(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.

(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.

(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.

Annual Report | 15

Your Fund's Expenses

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

- - Transaction costs, including sales charges (loads) on Fund purchases; and

- - 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 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.

16 | 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.
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
VALUE 7/1/09 VALUE 12/31/09 PERIOD* 7/1/09-12/31/09
----------------- -------------- -----------------------

CLASS Z
Actual $1,000 $1,216.10 $ 4.80
Hypothetical (5% return before expenses) $1,000 $1,020.87 $ 4.38
CLASS A
Actual $1,000 $1,214.60 $ 6.53
Hypothetical (5% return before expenses) $1,000 $1,019.31 $ 5.96
CLASS B
Actual $1,000 $1,210.10 $10.31
Hypothetical (5% return before expenses) $1,000 $1,015.88 $ 9.40
CLASS C
Actual $1,000 $1,209.90 $10.36
Hypothetical (5% return before expenses) $1,000 $1,015.83 $ 9.45
CLASS R
Actual $1,000 $1,213.40 $ 7.59
Hypothetical (5% return before expenses) $1,000 $1,018.35 $ 6.92

* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (Z: 0.86%; A: 1.17%; B:
1.85%; C: 1.86%; and R: 1.36%), multiplied by the average account value
over the period, multiplied by 184/365 to reflect the one-half year period.

Annual Report | 17

Mutual Shares Fund

FINANCIAL HIGHLIGHTS

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
CLASS Z 2009 2008 2007 2006 2005
- ------- ---------- ---------- ----------- ----------- ----------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 15.32 $ 25.33 $ 26.08 $ 23.95 $ 23.05
---------- ---------- ----------- ----------- ----------
Income from investment operations(a):
Net investment income(b) ............................. 0.24(c) 0.45 0.70 0.42 0.47
Net realized and unrealized gains (losses) ........... 4.06 (9.99) 0.17 3.90 1.92
---------- ---------- ----------- ----------- ----------
Total from investment operations ........................ 4.30 (9.54) 0.87 4.32 2.39
---------- ---------- ----------- ----------- ----------
Less distributions from:
Net investment income ................................ (0.43) (0.27) (0.75) (0.52) (0.29)
Net realized gains ................................... -- (0.20) (0.87) (1.67) (1.20)
---------- ---------- ----------- ----------- ----------
Total distributions ..................................... (0.43) (0.47) (1.62) (2.19) (1.49)
---------- ---------- ----------- ----------- ----------
Redemption fees(d) ...................................... -- --(e) --(e) --(e) --(e)
---------- ---------- ----------- ----------- ----------
Net asset value, end of year ............................ $ 19.19 $ 15.32 $ 25.33 $ 26.08 $ 23.95
========== ========== =========== =========== ==========
Total return ............................................ 28.20% (37.92)% 3.30% 18.37% 10.39%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates(f, g) ..................................... 0.90% 0.79% 0.75% 0.84% 0.81%
Expenses net of waiver and payments by
affiliates(f, g) ..................................... 0.88% 0.79% 0.75% 0.84% 0.81%
Ratios to average net assets, excluding dividend expense
on securities sold short:
Expenses before waiver and payments by
affiliates(f) ..................................... 0.85% 0.78% 0.74% 0.76% 0.76%
Expenses net of waiver and payments by
affiliates(f) ..................................... 0.83% 0.78% 0.74% 0.76% 0.76%
Net investment income ................................... 1.48%(c) 2.14% 2.57% 1.63% 1.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $8,472,347 $7,236,112 $13,262,561 $11,577,506 $8,951,080
Portfolio turnover rate ................................. 47.87% 37.97% 40.57% 33.40% 21.57%

(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.

(b) Based on average daily shares outstanding.

(c) Net investment income per share includes approximately ($0.08) per share
related to an adjustment for uncollectible interest as disclosed on the
Statement of Operations. Excluding the effect of this adjustment, the ratio
of net investment income to average net assets would have been 1.95%. See
Note 8.

(d) Effective September 1, 2008, the redemption fee was eliminated.

(e) Amount rounds to less than $0.01 per share.

(f) Benefit of expense reduction rounds to less than 0.01%.

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

The accompanying notes are an integral part of these financial statements.

18 | Annual Report

Mutual Shares Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
CLASS A 2009 2008 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 15.22 $ 25.14 $ 25.90 $ 23.82 $ 22.94
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ............................. 0.19(c) 0.39 0.61 0.32 0.39
Net realized and unrealized gains (losses) ........... 4.02 (9.90) 0.17 3.88 1.91
---------- ---------- ---------- ---------- ----------
Total from investment operations ........................ 4.21 (9.51) 0.78 4.20 2.30
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ................................ (0.37) (0.21) (0.67) (0.45) (0.22)
Net realized gains ................................... -- (0.20) (0.87) (1.67) (1.20)
---------- ---------- ---------- ---------- ----------
Total distributions ..................................... (0.37) (0.41) (1.54) (2.12) (1.42)
---------- ---------- ---------- ---------- ----------
Redemption fees(d) ...................................... -- --(e) --(e) --(e) --(e)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ............................ $ 19.06 $ 15.22 $ 25.14 $ 25.90 $ 23.82
========== ========== ========== ========== ==========
Total return(f) ......................................... 27.84% (38.10)% 2.97% 17.98% 9.98%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates(g, h) ..................................... 1.20% 1.08% 1.07% 1.18% 1.16%
Expenses net of waiver and payments by
affiliates(g, h) ..................................... 1.18% 1.08% 1.07% 1.18% 1.16%
Ratios to average net assets, excluding dividend expense
on securities sold short:
Expenses before waiver and payments by
affiliates(g) ..................................... 1.15% 1.07% 1.06% 1.10% 1.11%
Expenses net of waiver and payments by
affiliates(g) ..................................... 1.13% 1.07% 1.06% 1.10% 1.11%
Net investment income ................................... 1.18%(c) 1.85% 2.25% 1.29% 1.64%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $5,100,309 $4,624,696 $8,469,264 $6,761,779 $4,211,238
Portfolio turnover rate ................................. 47.87% 37.97% 40.57% 33.40% 21.57%

(b) Based on average daily shares outstanding.

(d) Effective September 1, 2008, the redemption fee was eliminated.

(e) Amount rounds to less than $0.01 per share.

(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.

(g) Benefit of expense reduction rounds to less than 0.01%.

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

The accompanying notes are an integral part of these financial statements.

Annual Report | 19

Mutual Shares Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED DECEMBER 31,
---------------------------------------------------------
CLASS B 2009 2008 2007 2006 2005
- ------- -------- -------- -------- -------- --------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 14.94 $ 24.60 $ 25.35 $ 23.35 $ 22.50
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ............................. 0.08(c) 0.23 0.41 0.16 0.23
Net realized and unrealized gains (losses) ........... 3.92 (9.65) 0.18 3.78 1.88
-------- -------- -------- -------- --------
Total from investment operations ........................ 4.00 (9.42) 0.59 3.94 2.11
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ................................ (0.24) (0.04) (0.47) (0.27) (0.06)
Net realized gains ................................... -- (0.20) (0.87) (1.67) (1.20)
-------- -------- -------- -------- --------
Total distributions ..................................... (0.24) (0.24) (1.34) (1.94) (1.26)
-------- -------- -------- -------- --------
Redemption fees(d) ...................................... -- --(e) --(e) --(e) --(e)
-------- -------- -------- -------- --------
Net asset value, end of year ............................ $ 18.70 $ 14.94 $ 24.60 $ 25.35 $ 23.35
======== ======== ======== ======== ========
Total return(f) ......................................... 26.92% (38.54)% 2.25% 17.21% 9.31%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates(g, h) ..................................... 1.89% 1.79% 1.75% 1.84% 1.81%
Expenses net of waiver and payments by
affiliates(g, h) ..................................... 1.87% 1.79% 1.75% 1.84% 1.81%
Ratios to average net assets, excluding dividend expense
on securities sold short:
Expenses before waiver and payments by
affiliates(g) ..................................... 1.84% 1.78% 1.74% 1.76% 1.76%
Expenses net of waiver and payments by
affiliates(g) ..................................... 1.82% 1.78% 1.74% 1.76% 1.76%
Net investment income ................................... 0.49%(c) 1.14% 1.57% 0.63% 0.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $242,799 $272,750 $586,289 $659,186 $612,007
Portfolio turnover rate ................................. 47.87% 37.97% 40.57% 33.40% 21.57%

(b) Based on average daily shares outstanding.

(d) Effective September 1, 2008, the redemption fee was eliminated.

(e) Amount rounds to less than $0.01 per share.

(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.

(g) Benefit of expense reduction rounds to less than 0.01%.

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

The accompanying notes are an integral part of these financial statements.

20 | Annual Report

Mutual Shares Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
CLASS C 2009 2008 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 15.10 $ 24.86 $ 25.63 $ 23.48 $ 22.76
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ............................. 0.08(c) 0.24 0.42 0.16 0.23
Net realized and unrealized gains (losses) ........... 3.96 (9.75) 0.17 3.82 1.89
---------- ---------- ---------- ---------- ----------
Total from investment operations ........................ 4.04 (9.51) 0.59 3.98 2.12
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ................................ (0.25) (0.05) (0.49) (0.16) (0.20)
Net realized gains ................................... -- (0.20) (0.87) (1.67) (1.20)
---------- ---------- ---------- ---------- ----------
Total distributions ..................................... (0.25) (0.25) (1.36) (1.83) (1.40)
---------- ---------- ---------- ---------- ----------
Redemption fees(d) ...................................... -- --(e) --(e) --(e) --(e)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ............................ $ 18.89 $ 15.10 $ 24.86 $ 25.63 $ 23.48
========== ========== ========== ========== ==========
Total return(f) ......................................... 26.92% (38.53)% 2.30% 17.18% 9.27%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates(g, h) ..................................... 1.90% 1.77% 1.75% 1.84% 1.81%
Expenses net of waiver and payments by
affiliates(g, h) ..................................... 1.88% 1.77% 1.75% 1.84% 1.81%
Ratios to average net assets, excluding dividend expense
on securities sold short:
Expenses before waiver and payments by
affiliates(g) ..................................... 1.85% 1.76% 1.74% 1.76% 1.76%
Expenses net of waiver and payments by
affiliates(g) .................................... 1.83% 1.76% 1.74% 1.76% 1.76%
Net investment income ................................... 0.48%(c) 1.16% 1.57% 0.63% 0.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $1,355,155 $1,296,171 $2,617,083 $2,387,517 $1,834,009
Portfolio turnover rate ................................. 47.87% 37.97% 40.57% 33.40% 21.57%

(b) Based on average daily shares outstanding.

(d) Effective September 1, 2008, the redemption fee was eliminated.

(e) Amount rounds to less than $0.01 per share.

(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.

(g) Benefit of expense reduction rounds to less than 0.01%.

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

The accompanying notes are an integral part of these financial statements.

Annual Report | 21

Mutual Shares Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED DECEMBER 31,
----------------------------------------------------------
CLASS R 2009 2008 2007 2006 2005
- ------- -------- --------- -------- -------- --------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 15.15 $ 25.00 $ 25.77 $ 23.72 $ 22.85
-------- --------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ............................. 0.16(c) 0.34 0.55 0.28 0.35
Net realized and unrealized gains (losses) ........... 3.99 (9.83) 0.18 3.86 1.91
-------- --------- -------- -------- --------
Total from investment operations ........................ 4.15 (9.49) 0.73 4.14 2.26
-------- --------- -------- -------- --------
Less distributions from:
Net investment income ................................ (0.35) (0.16) (0.63) (0.42) (0.19)
Net realized gains ................................... -- (0.20) (0.87) (1.67) (1.20)
-------- --------- -------- -------- --------
Total distributions ..................................... (0.35) (0.36) (1.50) (2.09) (1.39)
-------- --------- -------- -------- --------
Redemption fees(d) ...................................... -- --(e) --(e) --(e) --(e)
-------- --------- -------- -------- --------
Net asset value, end of year ............................ $ 18.95 $ 15.15 $ 25.00 $ 25.77 $ 23.72
======== ========= ======== ======== ========
Total return(f) ......................................... 27.51% (38.19)% 2.77% 17.73% 9.88%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates(g, h) ..................................... 1.40% 1.29% 1.25% 1.34% 1.31%
Expenses net of waiver and payments by
affiliates(g, h) ..................................... 1.38% 1.29% 1.25% 1.34% 1.31%
Ratios to average net assets, excluding dividend expense
on securities sold short:
Expenses before waiver and payments by
affiliates(g)...................................... 1.35% 1.28% 1.24% 1.26% 1.26%
Expenses net of waiver and payments by
affiliates(g)...................................... 1.33% 1.28% 1.24% 1.26% 1.26%
Net investment income ................................... 0.98%(c) 1.64% 2.07% 1.13% 1.49%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $227,649 $ 173,496 $297,777 $188,646 $109,305
Portfolio turnover rate ................................. 47.87% 37.97% 40.57% 33.40% 21.57%

(b) Based on average daily shares outstanding.

(d) Effective September 1, 2008, the redemption fee was eliminated.

(e) Amount rounds to less than $0.01 per share.

(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.

(g) Benefit of expense reduction rounds to less than 0.01%.

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

The accompanying notes are an integral part of these financial statements.

22 | Annual Report

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009

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

COMMON STOCKS AND OTHER EQUITY INTERESTS 82.8%
AEROSPACE & DEFENSE 0.1%
(a) GenCorp Inc. ................................................ United States 2,073,770 $ 14,516,390
---------------
AIR FREIGHT & LOGISTICS 0.4%
TNT NV ...................................................... Netherlands 2,255,958 69,429,762
---------------
AIRLINES 0.0%(b)
(a, c) Northwest Airlines Corp., Contingent Distribution ........... United States 111,348,000 70,149
---------------
AUTO COMPONENTS 0.2%
(a, c, d) Collins & Aikman Products Co., Contingent Distribution ...... United States 3,845,673 38,457
(a, c, d) Dana Holding Corp., Contingent Distribution ................. United States 45,477,000 --
(a, e, f) IACNA Investor LLC .......................................... United States 678,719 6,787
(a, e, f, g) International Automotive Components Group Brazil LLC ........ Brazil 7,234,813 8,113,264
(a, e, f, g) International Automotive Components Group Japan LLC ......... Japan 1,104,272 4,229,321
(a, e, f, g) International Automotive Components Group LLC ............... Luxembourg 25,796,752 17,587,194
(a, e, f, g) International Automotive Components Group NA LLC, A ......... United States 19,434,979 5,915,036
---------------
35,890,059
---------------
AUTOMOBILES 0.5%
Daimler AG .................................................. Germany 1,413,460 75,205,965
---------------
BEVERAGES 4.4%
Brown-Forman Corp., A ....................................... United States 125,460 7,069,671
Brown-Forman Corp., B ....................................... United States 788,910 42,261,909
Carlsberg AS, B ............................................. Denmark 984,186 72,701,419
Dr. Pepper Snapple Group Inc. ............................... United States 7,190,008 203,477,226
Pepsi Bottling Group Inc. ................................... United States 3,454,220 129,533,250
PepsiAmericas Inc. .......................................... United States 1,274,500 37,291,870
Pernod Ricard SA ............................................ France 2,186,962 187,549,868
---------------
679,885,213
---------------
BUILDING PRODUCTS 0.5%
(a) Owens Corning Inc. .......................................... United States 3,320,705 85,142,876
---------------
CAPITAL MARKETS 1.5%
Deutsche Bank AG (EUR Traded) ............................... Germany 1,038,664 73,715,329
Deutsche Bank AG (USD Traded) ............................... Germany 60,700 4,304,237
Morgan Stanley .............................................. United States 2,615,370 77,414,952
(a) UBS AG ...................................................... Switzerland 4,413,494 68,431,221
---------------
223,865,739
---------------
CHEMICALS 1.0%
(a, c, d) Dow Corning Corp., Contingent Distribution .................. United States 21,830,547 3,157,637
Linde AG .................................................... Germany 1,221,550 147,161,152
---------------
150,318,789
---------------
COMMERCIAL BANKS 2.0%
Barclays PLC ................................................ United Kingdom 29,662,777 132,119,550
(a, e, f) Elephant Capital Holdings Ltd. .............................. Japan 64,834 --
(a, f) Guaranty Bancorp ............................................ United States 5,731,834 7,566,021
(a) Intesa Sanpaolo SpA ......................................... Italy 15,273,862 68,870,878
(a, e) NCB Warrant Holdings Ltd., A ................................ Japan 301,530 --

Annual Report | 23

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
Societe Generale, A ......................................... France 501,730 $ 35,155,961
(a, e) State Bank and Trust Co. .................................... United States 1,467,000 20,904,750
Wells Fargo & Co. ........................................... United States 1,501,100 40,514,689
(a, e) West Coast Bancorp, wts., C, 10/23/16 ....................... United States 43,036 --
(a, e) West Coast Bancorp, wts., D, 3/01/10 ........................ United States 23,917 --
---------------
305,131,849
---------------
COMMERCIAL SERVICES & SUPPLIES 0.0%(b)
(a) Comdisco Holding Co. Inc. ................................... United States 2,122 21,220
(a, c, d) Comdisco Holding Co. Inc., Contingent Distribution .......... United States 86,205,000 --
---------------
21,220
---------------
COMMUNICATIONS EQUIPMENT 0.9%
(a) Motorola Inc. ............................................... United States 14,770,779 114,621,245
Tandberg ASA ................................................ Norway 597,611 17,011,561
---------------
131,632,806
---------------
COMPUTERS & PERIPHERALS 1.5%
(a, e, f) DecisionOne Corp. ........................................... United States 1,879,100 3,119,306
(a, e, f) DecisionOne Corp., wts., 6/08/17 ............................ United States 1,031,766 --
(a) Dell Inc. ................................................... United States 11,036,192 158,479,717
(a) Sun Microsystems Inc. ....................................... United States 7,297,180 68,374,577
---------------
229,973,600
---------------
CONSUMER FINANCE 1.0%
(a, e) Cerberus CG Investor I LLC .................................. United States 56,116,385 11,784,441
(a, e) Cerberus CG Investor II LLC ................................. United States 56,116,385 11,784,441
(a, e) Cerberus CG Investor III LLC ................................ United States 28,058,192 5,892,220
(a, e) GMAC Inc. ................................................... United States 10,725 118,219,822
---------------
147,680,924
---------------
DIVERSIFIED CONSUMER SERVICES 0.3%
H&R Block Inc. .............................................. United States 1,169,461 26,453,208
Hillenbrand Inc. ............................................ United States 1,462,406 27,551,729
---------------
54,004,937
---------------
DIVERSIFIED FINANCIAL SERVICES 1.6%
Bank of America Corp. ....................................... United States 5,865,530 88,334,882
(a, e, f) Bond Street Holdings LLC, A, 144A ........................... United States 1,024,900 20,498,000
(a) CIT Group Inc. .............................................. United States 1,350,607 37,290,259
Deutsche Boerse AG .......................................... Germany 1,223,170 101,552,594
(a, c, d) Marconi Corp., Contingent Distribution ...................... United Kingdom 77,739,439 --
---------------
247,675,735
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.0%
(a, e, f) AboveNet Inc. ............................................... United States 1,685,069 109,596,888
(a, e, f) AboveNet Inc., stock grant, grant price $10.475, expiration
date 9/09/13 ............................................. United States 1,065 232,447
(a, e, f) AboveNet Inc., stock grant, grant price $30, expiration date
9/07/18 .................................................. United States 229 32,096

24 | Annual Report

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
(a, e, f) AboveNet Inc., wts., 9/08/10 ................................ United States 34,449 $ 3,444,900
Cable & Wireless PLC ........................................ United Kingdom 59,349,323 135,551,690
(a, c, d) Global Crossing Holdings Ltd., Contingent Distribution ...... United States 105,649,309 --
Koninklijke KPN NV .......................................... Netherlands 7,746,406 131,288,946
Telefonica SA ............................................... Spain 2,989,441 83,530,678
---------------
463,677,645
---------------
ELECTRIC UTILITIES 2.8%
(a, c, d) Calpine Corp., Contingent Distribution ...................... United States 18,710,000 --
E.ON AG ..................................................... Germany 5,251,033 218,807,981
Entergy Corp. ............................................... United States 821,510 67,232,378
Exelon Corp. ................................................ United States 2,046,010 99,988,509
Prime Infrastructure Group .................................. Australia 14,234,065 52,752,234
---------------
438,781,102
---------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENT 0.5%
Tyco Electronics Ltd. ....................................... United States 2,849,094 69,945,258
---------------
ENERGY EQUIPMENT & SERVICES 2.4%
Baker Hughes Inc. ........................................... United States 1,006,840 40,756,883
(a) Exterran Holding Inc. ....................................... United States 2,387,650 51,215,093
(a) Pride International Inc. .................................... United States 1,850,030 59,034,457
(a) Transocean Ltd. ............................................. United States 2,571,652 212,932,786
---------------
363,939,219
---------------
FOOD & STAPLES RETAILING 4.6%
Carrefour SA ................................................ France 1,570,699 75,455,539
CVS Caremark Corp. .......................................... United States 11,346,889 365,483,295
Kroger Co. .................................................. United States 7,343,068 150,753,186
SUPERVALU Inc. .............................................. United States 2,583,667 32,838,407
Wal-Mart Stores Inc. ........................................ United States 1,504,460 80,413,387
---------------
704,943,814
---------------
FOOD PRODUCTS 5.3%
Cadbury PLC ................................................. United Kingdom 17,093,587 219,778,918
Danone ...................................................... France 671,550 41,172,063
General Mills Inc. .......................................... United States 1,515,370 107,303,350
Kraft Foods Inc., A ......................................... United States 7,077,922 192,377,920
Nestle SA ................................................... Switzerland 5,337,790 258,858,193
---------------
819,490,444
---------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.6%
Becton, Dickinson and Co. ................................... United States 1,167,888 92,099,648
---------------
HEALTH CARE PROVIDERS & SERVICES 3.2%
(a, f) Community Health Systems Inc. ............................... United States 4,806,000 171,093,600
(a) Kindred Healthcare Inc. ..................................... United States 1,441,599 26,611,917
(a, f) Tenet Healthcare Corp. ...................................... United States 25,881,411 139,500,805
UnitedHealth Group Inc. ..................................... United States 5,140,570 156,684,574
---------------
493,890,896
---------------

Annual Report | 25

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HOTELS, RESTAURANTS & LEISURE 0.1%
(a, e, f) GLCP Harrah's Investment LP ................................. United States 22,185,100 $ --
Thomas Cook Group PLC ....................................... United Kingdom 4,811,987 17,993,481
---------------
17,993,481
---------------
HOUSEHOLD DURABLES 0.0%(b)
Black & Decker Corp. ........................................ United States 23,502 1,523,635
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.3%
NRG Energy Inc. ............................................. United States 1,989,598 46,974,409
---------------
INDUSTRIAL CONGLOMERATES 3.9%
Keppel Corp. Ltd. ........................................... Singapore 12,863,380 75,322,388
Orkla ASA ................................................... Norway 24,350,543 238,825,542
Siemens AG .................................................. Germany 2,072,525 190,967,513
Tyco International Ltd. ..................................... United States 2,651,794 94,616,010
---------------
599,731,453
---------------
INSURANCE 6.2%
ACE Ltd. .................................................... United States 2,345,100 118,193,040
(a) Alleghany Corp. ............................................. United States 362,736 100,115,136
(a) Berkshire Hathaway Inc., A .................................. United States 1,590 157,728,000
(a) Berkshire Hathaway Inc., B .................................. United States 34,578 113,623,308
(a) Conseco Inc. ................................................ United States 3,530,090 17,650,450
Old Republic International Corp. ............................ United States 6,101,302 61,257,072
(a, e) Olympus Re Holdings Ltd. .................................... United States 202,380 432,284
The Travelers Cos. Inc. ..................................... United States 1,385,982 69,105,062
(f) White Mountains Insurance Group Ltd. ........................ United States 729,457 242,661,165
Zurich Financial Services AG ................................ Switzerland 352,340 77,095,117
---------------
957,860,634
---------------
IT SERVICES 0.5%
(a) Affiliated Computer Services Inc., A ........................ United States 1,396,370 83,349,325
---------------
LEISURE EQUIPMENT & PRODUCTS 1.6%
(a) Eastman Kodak Co. ........................................... United States 8,494,150 35,845,313
Mattel Inc. ................................................. United States 10,792,980 215,643,740
---------------
251,489,053
---------------
LIFE SCIENCES TOOLS & SERVICES 0.2%
(a) MDS Inc. .................................................... Canada 3,411,468 26,580,339
---------------
MACHINERY 0.1%
(f) Federal Signal Corp. ........................................ United States 3,360,800 20,232,016
(a, e, f, g) MCII Holdings Inc. .......................................... United States 11,211 --
---------------
20,232,016
---------------
MARINE 0.9%
A P Moller - Maersk AS ...................................... Denmark 20,138 141,785,528
---------------
MEDIA 3.4%
(a) Adelphia Recovery Trust ..................................... United States 99,967,609 3,198,964
(a, c) Adelphia Recovery Trust, Arahova Contingent Value Vehicle,
Contingent Distribution .................................. United States 12,005,115 2,491,061

26 | Annual Report

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA (CONTINUED)
(a, c, d) Century Communications Corp., Contingent Distribution ....... United States 33,138,000 $ --
News Corp., A ............................................... United States 22,460,462 307,483,725
Time Warner Cable Inc. ...................................... United States 1,267,452 52,459,838
(a, d, f) TVMAX Holdings Inc. ......................................... United States 257,217 --
Virgin Media Inc. ........................................... United Kingdom 9,249,452 155,668,277
---------------
521,301,865
---------------
METALS & MINING 0.8%
(a) Anglo American PLC .......................................... United Kingdom 2,699,914 118,184,080
---------------
MULTI-UTILITIES 0.5%
GDF Suez .................................................... France 1,830,119 79,338,341
---------------
OFFICE ELECTRONICS 0.7%
Xerox Corp. ................................................. United States 12,083,810 102,229,033
---------------
OIL, GAS & CONSUMABLE FUELS 3.9%
(a, d) Apco Oil Corp., Liquidating Trust ........................... United States 9,200 --
Marathon Oil Corp. .......................................... United States 5,387,400 168,194,628
Noble Energy Inc. ........................................... United States 596,875 42,509,437
Royal Dutch Shell PLC, A .................................... United Kingdom 5,993,596 181,028,156
Total SA, B ................................................. France 1,523,752 98,163,777
XTO Energy Inc. ............................................. United States 2,456,560 114,303,737
---------------
604,199,735
---------------
PAPER & FOREST PRODUCTS 3.7%
(a) Domtar Corp. ................................................ United States 1,285,784 71,245,292
International Paper Co. ..................................... United States 4,465,209 119,578,297
MeadWestvaco Corp. .......................................... United States 4,116,457 117,854,164
Weyerhaeuser Co. ............................................ United States 6,165,330 265,972,336
---------------
574,650,089
---------------
PERSONAL PRODUCTS 0.3%
L'Oreal SA .................................................. France 369,690 41,277,037
---------------
PHARMACEUTICALS 0.9%
Novartis AG ................................................. Switzerland 2,427,900 132,518,331
---------------
REAL ESTATE INVESTMENT TRUSTS (REITS) 1.1%
(a, f) Alexander's Inc. ............................................ United States 326,675 99,446,404
The Link REIT ............................................... Hong Kong 26,757,775 68,398,197
---------------
167,844,601
---------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.9%
(a, d) Canary Wharf Group PLC ...................................... United Kingdom 14,262,931 75,647,541
(a) Forestar Group Inc. ......................................... United States 1,473,566 32,388,981
(a) The St. Joe Co. ............................................. United States 1,100,535 31,794,456
---------------
139,830,978
---------------
ROAD & RAIL 0.6%
Burlington Northern Santa Fe Corp. .......................... United States 917,600 90,493,712
---------------

Annual Report | 27

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.6%
(a) LSI Corp. ................................................... United States 24,355,334 $ 146,375,557
Maxim Integrated Products Inc. .............................. United States 4,615,600 93,696,680
---------------
240,072,237
---------------
SOFTWARE 2.6%
Microsoft Corp. ............................................. United States 10,623,070 323,897,404
Nintendo Co. Ltd. ........................................... Japan 325,040 77,047,555
---------------
400,944,959
---------------
TOBACCO 8.1%
Altria Group Inc. ........................................... United States 13,513,104 265,262,231
British American Tobacco PLC ................................ United Kingdom 9,776,426 318,433,024
British American Tobacco PLC, ADR ........................... United Kingdom 70,550 4,561,763
Imperial Tobacco Group PLC .................................. United Kingdom 9,119,163 288,260,783
Japan Tobacco Inc. .......................................... Japan 26,009 87,554,496
KT&G Corp. .................................................. South Korea 1,121,477 61,936,941
Lorillard Inc. .............................................. United States 545,400 43,757,442
Philip Morris International Inc. ............................ United States 1,599,950 77,101,590
Reynolds American Inc. ...................................... United States 1,824,190 96,627,344
---------------
1,243,495,614
---------------
TRANSPORTATION INFRASTRUCTURE 0.5%
Groupe Eurotunnel SA ........................................ France 8,999,205 84,247,709
---------------
WIRELESS TELECOMMUNICATION SERVICES 1.1%
Vodafone Group PLC .......................................... United Kingdom 72,156,200 167,307,961
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $12,324,590,640) ...................................... 12,752,670,194
---------------
PREFERRED STOCKS 0.8%
COMMERCIAL BANKS 0.1%
(a, e) West Coast Bancorp, cvt. pfd., A ............................ United States 146,924 13,112,967
(a, e) West Coast Bancorp, cvt. pfd., B ............................ United States 7,558 674,552
---------------
13,787,519
---------------
DIVERSIFIED FINANCIAL SERVICES 0.4%
(a) Bank of America Corp., pfd. ................................. United States 4,275,300 63,787,476
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(b)
(a, e) PTV Inc., 10.00%, pfd., A ................................... United Kingdom 199,566 33,028
---------------
MACHINERY 0.3%
(e, f, g, l) MCII Holdings Inc., PIK, pfd., A ............................ United States 84,885 39,451,293
---------------
TOTAL PREFERRED STOCKS (COST $163,683,147) .................. 117,059,316
---------------

28 | Annual Report

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

PRINCIPAL
COUNTRY AMOUNT(h) VALUE
-------------- ------------- ---------------

CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE
INTERESTS 4.9%
American General Finance Corp., senior note, J, 6.90%,
12/15/17 ................................................. United States 18,266,000 $ 12,700,459
(i) Boston Generating LLC, FRN,
Revolver, 0.126%, 12/21/13 ............................... United States 750,254 583,457
Synthetic Letter of Credit, 0.126%, 12/21/13 ............. United States 2,679,425 2,083,733
Term Loan B, 2.501%, 12/21/13 ............................ United States 11,747,856 9,136,061
(e, j) Cerberus CG Investor I LLC, 12.00%, 7/31/14 ................. United States 49,252,400 10,343,004
(e, j) Cerberus CG Investor II LLC, 12.00%, 7/31/14 ................ United States 49,252,400 10,343,004
(e, j) Cerberus CG Investor III LLC, 12.00%, 7/31/14 ............... United States 24,626,200 5,171,502
(i) Charter Communications Operating LLC, FRN,
Incremental Term Loan, 7.25%, 3/06/14 .................... United States 16,651,252 17,013,417
Term Loan B, 2.26%, 3/06/14 .............................. United States 97,144,997 91,275,788
CIT Group Inc.,
(i) New Term Loan Tranche 1B, FRN, 13.00%, 1/20/12 ........ United States 23,056,900 23,957,572
senior secured sub. bond, 7.00%, 5/01/13 ................. United States 6,877,510 6,464,859
senior secured sub. bond, 7.00%, 5/01/14 ................. United States 10,316,266 9,607,023
senior secured sub. bond, 7.00%, 5/01/15 ................. United States 10,316,266 9,284,639
senior secured sub. bond, 7.00%, 5/01/16 ................. United States 17,193,779 15,216,494
senior secured sub. bond, 7.00%, 5/01/17 ................. United States 24,071,293 21,002,203
(i) Term Loan Tranche 2A, FRN, 9.50%, 1/20/12 ............. United States 48,538,000 49,872,795
(f) DecisionOne Corp.,
(e) senior secured note, 15.00%, 11/30/13 ................. United States 2,496,549 2,496,549
(d) Term Loan B, 15.00%, 8/29/13 .......................... United States 436,664 436,664
Exterran Holding Inc., senior note, cvt., 4.25%, 6/15/14 .... United States 15,483,000 18,192,525
(i) First Data Corp., Term Loan, FRN,
B-1, 2.982%, 9/24/14 ..................................... United States 90,212,762 80,289,358
B-2, 2.999%, 9/24/14 ..................................... United States 22,416,642 20,001,249
B-3, 2.999%, 9/24/14 ..................................... United States 5,616,972 4,992,085
(d, f, g, i) International Automotive Components Group NA Inc., Revolver,
FRN, 6.25%, 1/18/14 ...................................... United States 3,854,095 3,854,095
(e, f, g, j) International Automotive Components Group NA LLC, 9.00%,
4/01/17 .................................................. United States 5,851,000 5,864,053
Realogy Corp.,
(i, k) Delayed Draw Term B Loan, FRN, 3.287%, 10/10/13 .... United States 61,656,880 54,977,405
(i, k) Initial Term Loan B, FRN, 3.287%, 10/10/13 ......... United States 94,643,415 84,390,410
Second Lien Tranche A Term Loan, 13.50%, 10/15/17 ........ United States 5,364,000 5,690,308
(i, k) Synthetic Letter of Credit, FRN, 0.094%, 10/10/13 .. United States 25,480,901 22,720,479
(i) Spectrum Brands Inc., FRN,
Dollar Term Loan B, 8.00%, 6/30/12 ....................... United States 3,285,762 3,260,094
Euro Term Loan, 8.50%, 6/30/12 ........................... United States 10,335,058 EUR 14,322,779
Letter of Credit Commitment, FRN, 1.50%, 6/30/12 ......... United States 168,642 167,153
(i) Texas Competitive Electric Holdings Co. LLC, FRN,
(k) Delayed Draw Term Loan, 3.735%, 10/10/14 .............. United States 50,607,295 40,764,176
Initial Tranche B-1 Term Loan, 3.775%, 10/10/14 .......... United States 71,873,896 58,577,226
Tranche B-2 Term Loan, 3.735%, 10/10/14 .................. United States 11,190,499 9,141,239
Tranche B-3 Term Loan, 3.735%, 10/10/14 .................. United States 33,069,087 26,769,426

Annual Report | 29

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

PRINCIPAL
COUNTRY AMOUNT(h) VALUE
-------------- ------------- ---------------

CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE
INTERESTS (CONTINUED)
(d, f, l) TVMAX Holdings Inc., PIK,
11.50%, 3/31/10 .......................................... United States 1,426,677 $ 316,762
14.00%, 3/31/10 .......................................... United States 2,116,875 420,317
---------------
TOTAL CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE
INTERESTS (COST $767,840,894) 751,700,362
---------------
CORPORATE BONDS AND NOTES IN REORGANIZATION 0.0%(b)
(d, j) Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ..... United States 85,000 425
(g, j) Wimar OPCO LLC/Finance Corp., senior sub. note, 9.625%,
12/15/14 ................................................. United States 76,355,000 429,497
---------------
TOTAL CORPORATE BONDS AND NOTES IN REORGANIZATION
(COST $50,395,033) ....................................... 429,922
---------------

SHARES/
PRINCIPAL
AMOUNT(h)
-------------

COMPANIES IN LIQUIDATION 0.0%
(a, e, f, g) CB FIM Coinvestors LLC ...................................... United States 43,105,703 --
(a, e) FIM Coinvestor Holdings I, LLC .............................. United States 53,924,666 --
(d) Peregrine Investments Holdings Ltd.,
6.70%, 1/15/98 ........................................... Hong Kong 95,000,000 JPY --
6.70%, 6/30/00 ........................................... Hong Kong 250,000,000 JPY --
zero cpn., 1/22/98 ....................................... Hong Kong 500,000 --
(d) PIV Investment Finance (Cayman) Ltd., 4.50%, 12/01/00 ....... Hong Kong 22,710,000 --
---------------
TOTAL COMPANIES IN LIQUIDATION (COST $--) ................... --
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $13,306,509,714) ................................... 13,621,859,794
---------------

PRINCIPAL
AMOUNT(h)
-------------

SHORT TERM INVESTMENTS 10.1%
SENIOR FLOATING RATE INTERESTS (COST $2,096,768) 0.0%(b)
(i, m) Lyondell Chemical Co., DIP Delayed Draw Term Loan, FRN,
13.00%, 4/06/10 .......................................... United States 2,109,486 2,205,995
---------------
U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $1,560,604,251) 10.1%
(n, o) U.S. Treasury Bills, 1/07/10 - 6/17/10 ...................... United States 1,561,200,000 1,560,874,192
---------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $14,869,210,733) ................................... 15,186,939,981
---------------

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

MONEY MARKET FUNDS (COST $131,829) 0.0%(b)
(a) Bank of New York Institutional Cash Reserve Fund, Series B .. United States 131,829 105,463
---------------
TOTAL INVESTMENTS (COST $14,869,342,562) 98.6% .............. 15,185,045,444
SECURITIES SOLD SHORT (0.8)% ................................ (118,897,925)
OTHER ASSETS, LESS LIABILITIES 2.2% ......................... 332,112,274
---------------
NET ASSETS 100.0% ........................................... $15,398,259,793
===============

30 | Annual Report

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

(p) SECURITIES SOLD SHORT (PROCEEDS $120,448,809) (0.8)%
OIL, GAS & CONSUMABLE FUELS (0.8)%
Exxon Mobil Corp. United States 1,743,627 $ (118,897,925)
---------------

(a) Non-income producing.

(b) Rounds to less than 0.1% 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) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2009, the aggregate value of these
securities was $83,871,899, representing 0.54% of net assets.

(e) See Note 9 regarding restricted securities.

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

(g) See Note 15 regarding other considerations.

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

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

(j) See Note 8 regarding credit risk and defaulted securities.

(k) A portion or all of the security purchased on a delayed delivery basis. See
Note 1(c).

(l) Income may be received in additional securities and/or cash.

(m) See Note 10 regarding unfunded loan commitments.

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

(o) Security or a portion of the security has been segregated as collateral for
securities sold short. At December 31, 2009, the value of these securities
and cash pledged amounted to $179,462,367.

(p) See Note 1(e) regarding securities sold short.

At December 31, 2009, the Fund had the following forward exchange contracts
outstanding. See Note 1(d).

CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY COUNTERPARTY TYPE QUANTITY AMOUNT DATE APPRECIATION DEPRECIATION
- -------- ------------ ---- -------------- ------------ ---------- ------------ ------------

British Pound........ BANT Sell 3,580,000 $ 5,745,542 1/13/10 $ -- $ (36,624)
British Pound........ DBFX Sell 2,640,815 4,232,417 1/13/10 -- (32,843)
British Pound........ SSBT Sell 201,667 321,677 1/13/10 -- (4,041)
British Pound........ BANT Sell 54,138,137 90,362,177 1/13/10 2,922,038 --
British Pound........ SSBT Sell 19,567,249 32,421,895 1/13/10 818,241 --
British Pound........ DBFX Sell 35,706,541 58,782,528 1/13/10 1,111,815 --
Euro................. SSBT Buy 1,856,148 2,759,072 1/14/10 -- (102,147)
Euro................. DBFX Sell 143,182,426 211,560,151 1/14/10 6,606,229 --
Euro................. BBU Sell 22,880,000 33,762,099 1/14/10 1,011,252 --
Euro................. SSBT Sell 295,201,002 432,294,229 1/14/10 9,738,160 --
Euro................. HSBC Sell 2,750,000 4,127,805 1/14/10 191,405 --
South Korean Won..... BANT Sell 16,352,898,000 13,930,000 1/15/10 -- (86,670)
South Korean Won..... DBFX Sell 6,772,837,500 5,850,000 1/15/10 44,752 --
South Korean Won..... BANT Sell 22,994,905,000 19,835,000 1/15/10 125,222 --
Australian Dollar.... BANT Buy 12,200,000 11,076,590 1/19/10 -- (150,653)
Australian Dollar.... DBFX Buy 6,150,000 5,610,243 1/19/10 -- (102,496)
Australian Dollar.... BANT Sell 1,800,000 1,610,280 1/19/10 -- (1,743)

Annual Report | 31

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

Australian Dollar.... DBFX Sell 36,100,000 $ 33,356,400 1/19/10 $ 1,026,374 $ --
Canadian Dollar...... DBFX Sell 4,273,324 3,993,015 1/29/10 -- (72,393)
Canadian Dollar...... BANT Buy 4,273,324 4,027,259 1/29/10 38,149 --
Euro................. DBFX Sell 50,000,000 71,162,500 1/29/10 -- (406,696)
Euro................. BBU Sell 212,800,000 313,965,120 1/29/10 9,366,622 --
British Pound........ BBU Sell 12,400,000 20,459,077 2/10/10 434,733 --
British Pound........ BONY Sell 72,053,495 120,041,122 2/10/10 3,684,353 --
British Pound........ DBFX Sell 168,820,000 278,885,488 2/10/10 6,263,739 --
British Pound........ SSBT Sell 1,075,752 1,761,845 2/10/10 24,649 --
British Pound........ BANT Sell 1,310,000 2,172,635 2/10/10 57,160 --
Euro................. DBFX Sell 106,000,000 159,243,800 2/16/10 7,522,330 --
Euro................. BBU Sell 106,000,000 159,318,000 2/16/10 7,596,530 --
Euro................. SSBT Sell 42,900,000 64,607,400 2/16/10 3,203,145 --
Norwegian Krone...... HAND Sell 37,398,038 6,460,000 2/16/10 -- (74,322)
Norwegian Krone...... DBFX Sell 488,000,000 86,376,268 2/16/10 2,362,245 --
Norwegian Krone...... SSBT Sell 248,703,530 44,005,083 2/16/10 1,188,313 --
Norwegian Krone...... BBU Sell 488,000,000 86,345,701 2/16/10 2,331,679 --
Norwegian Krone...... BANT Sell 27,266,634 4,870,000 2/16/10 175,780 --
Norwegian Krone...... HAND Sell 14,505,855 2,600,000 2/16/10 102,674 --
Euro................. DBFX Sell 73,743,439 111,080,004 2/26/10 5,530,506 --
Euro................. BBU Sell 57,200,000 86,131,760 2/26/10 4,261,002 --
British Pound........ BANT Sell 84,000,000 135,156,000 3/15/10 -- (464,836)
British Pound........ BBU Sell 84,262,387 135,603,459 3/15/10 -- (441,010)
British Pound........ SSBT Sell 100,000,000 166,530,000 3/15/10 5,076,623 --
Euro................. BBU Sell 109,295,359 164,052,335 3/15/10 7,623,340 --
Singapore Dollar..... SSBT Sell 64,837,485 45,856,544 3/24/10 -- (235,049)
Singapore Dollar..... BANT Sell 2,193,172 1,555,000 3/24/10 -- (4,079)
Singapore Dollar..... SSBT Buy 2,460,000 1,750,084 3/24/10 -- (1,322)
Singapore Dollar..... SSBT Buy 7,239,400 5,142,811 3/24/10 11,696 --
British Pound........ DBFX Sell 93,750,000 156,562,500 4/12/10 5,225,771 --
Japanese Yen......... SSBT Buy 1,242,870,000 13,608,264 4/20/10 -- (231,735)
Japanese Yen......... HAND Buy 213,483,240 2,360,000 4/20/10 -- (62,362)
Japanese Yen......... DBFX Buy 104,415,400 1,150,000 4/20/10 -- (26,217)
Japanese Yen......... DBFX Sell 6,352,766,528 69,828,838 4/20/10 1,456,466 --
Japanese Yen......... SSBT Sell 740,248,065 8,235,352 4/20/10 268,348 --
Japanese Yen......... BANT Sell 71,488,980 810,000 4/20/10 40,592 --
Danish Krone......... HAND Buy 8,639,560 1,720,000 4/23/10 -- (60,250)
Danish Krone......... SSBT Sell 128,000,000 25,695,846 4/23/10 1,105,711 --
Danish Krone......... HAND Sell 199,343,161 40,055,536 4/23/10 1,759,637 --
Danish Krone......... BANT Sell 5,932,200 1,200,000 4/23/10 60,363 --
Danish Krone......... DBFX Sell 6,076,741 1,210,000 4/23/10 42,595 --
Swiss Franc.......... DBFX Sell 106,500,000 100,235,294 5/10/10 -- (2,745,669)
Swiss Franc.......... SSBT Sell 100,900,000 95,009,416 5/10/10 -- (2,556,585)
Swiss Franc.......... BBU Sell 60,208,186 56,698,546 5/10/10 -- (1,520,205)
Swiss Franc.......... BANT Sell 43,079,443 40,657,861 5/10/10 -- (998,125)
Swiss Franc.......... SSBT Buy 19,272,900 18,962,899 5/10/10 -- (326,826)
Swiss Franc.......... AESX Sell 372,848 360,000 5/10/10 -- (528)
Swiss Franc.......... DBFX Sell 8,137,062 8,030,000 5/10/10 161,808 --

32 | Annual Report

Mutual Shares Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

Swiss Franc.......... BBU Sell 5,167,807 $ 5,070,000 5/10/10 $ 72,951 $ --
Swiss Franc.......... BANT Sell 4,934,878 4,890,000 5/10/10 118,183 --
Swiss Franc.......... HSBC Sell 2,578,050 2,550,000 5/10/10 57,135 --
Swiss Franc.......... SSBT Sell 18,747,654 18,437,897 5/10/10 309,715 --
British Pound........ DBFX Sell 56,250,000 94,033,125 5/12/10 3,246,070 --
------------ ------------
Unrealized appreciation (depreciation).......................................... 104,376,101 (10,745,426)
------------ ------------
Net unrealized appreciation (depreciation)................................... $ 93,630,675
============

See Abbreviations on page 57.

The accompanying notes are an integral part of these financial statements.

Annual Report | 33

Mutual Shares Fund

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2009

Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................... $13,983,515,533
Cost - Controlled affiliated issuers (Note 13) ................ 96,845,914
Cost - Non-controlled affiliated issuers (Note 13) ............ 788,981,115
---------------
Total cost of investments ..................................... $14,869,342,562
---------------
Value - Unaffiliated issuers .................................. $14,278,930,461
Value - Controlled affiliated issuers (Note 13) ............... 39,451,293
Value - Non-controlled affiliated issuers (Note 13) ........... 866,663,690
---------------
Total value of investments .................................... 15,185,045,444
Cash ............................................................. 1,858,948
Foreign currency, at value (cost $136,491,944) ................... 136,362,166
Receivables:
Investment securities sold .................................... 27,699,379
Capital shares sold ........................................... 13,738,067
Dividends and interest ........................................ 31,647,197
Due from brokers .............................................. 114,822,839
Unrealized appreciation on forward exchange contracts ............ 104,376,101
Unrealized appreciation on unfunded loan commitments (Note 10) ... 5,422,021
Other assets ..................................................... 2,127
---------------
Total assets ............................................... 15,620,974,289
---------------
Liabilities:
Payables:
Investment securities purchased ............................... 36,008,742
Capital shares redeemed ....................................... 29,278,719
Affiliates .................................................... 14,954,459
Allocator Funds (Note 14) ..................................... 486,947
Securities sold short, at value (proceeds $120,448,809) .......... 118,897,925
Unrealized depreciation on forward exchange contracts ............ 10,745,426
Accrued expenses and other liabilities ........................... 12,342,278
---------------
Total liabilities .......................................... 222,714,496
---------------
Net assets, at value .................................... $15,398,259,793
---------------
Net assets consist of:
Paid-in capital ............................................... $17,483,251,802
Undistributed net investment income ........................... 51,394,550
Net unrealized appreciation (depreciation) .................... 416,448,169
Accumulated net realized gain (loss) .......................... (2,552,834,728)
---------------
Net assets, at value .................................... $15,398,259,793
===============

The accompanying notes are an integral part of these financial statements.

34 | Annual Report

Mutual Shares Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2009

CLASS Z:
Net assets, at value ............................................. $ 8,472,347,320
===============
Shares outstanding ............................................... 441,484,199
===============
Net asset value and maximum offering price per share ............. $ 19.19
===============
CLASS A:
Net assets, at value ............................................. $ 5,100,309,152
===============
Shares outstanding ............................................... 267,648,184
===============
Net asset value per share(a) ..................................... $ 19.06
===============
Maximum offering price per share (net asset value
per share / 94.25%) ........................................... $ 20.22
===============
CLASS B:
Net assets, at value ............................................. $ 242,799,177
===============
Shares outstanding ............................................... 12,981,175
===============
Net asset value and maximum offering price per share(a) .......... $ 18.70
===============
CLASS C:
Net assets, at value ............................................. $ 1,355,154,904
===============
Shares outstanding ............................................... 71,734,503
===============
Net asset value and maximum offering price per share(a) .......... $ 18.89
===============
CLASS R:
Net assets, at value ............................................. $ 227,649,240
===============
Shares outstanding ............................................... 12,012,500
===============
Net asset value and maximum offering price per share ............. $ 18.95
===============

(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.

The accompanying notes are an integral part of these financial statements.

Annual Report | 35

Mutual Shares Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended December 31, 2009

Investment income:
Dividends: (net of foreign taxes of $15,082,568)
Unaffiliated issuers .......................................... $ 289,527,935
Controlled affiliated issuers (Note 13) ....................... 3,509,575
Non-controlled affiliated issuers (Note 13) ................... 1,536,049
Interest:
Unaffiliated issuers .......................................... 91,519,030
Adjustment for uncollectible interest (Note 8) ................ (64,185,406)
Non-controlled affiliated issuers (Note 13) ................... 1,025,530
Income from securities loaned .................................... 26,396
---------------
Total investment income .................................... 322,959,109
---------------
Expenses:
Management fees (Note 3a) ........................................ 78,604,362
Administrative fees (Note 3b) .................................... 10,459,048
Distribution fees: (Note 3c)
Class A ....................................................... 13,717,303
Class B ....................................................... 2,441,089
Class C ....................................................... 12,374,555
Class R ....................................................... 941,541
Transfer agent fees (Note 3e) .................................... 18,578,898
Special servicing agreement fees (Note 14) ....................... 4,097,255
Custodian fees (Note 4) .......................................... 1,045,926
Reports to shareholders .......................................... 1,065,402
Registration and filing fees ..................................... 177,654
Professional fees ................................................ 740,146
Trustees' fees and expenses ...................................... 464,293
Dividends on securities sold short ............................... 6,938,633
Other ............................................................ 459,911
---------------
Total expenses ............................................. 152,106,016
Expense reductions (Note 4) ................................ (75,211)
Expenses waived/paid by affiliates (Note 3f) ............... (2,170,810)
---------------
Net expenses ............................................ 149,859,995
---------------
Net investment income ................................ 173,099,114
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers .......................................... (1,386,735,707)
Non-controlled affiliated issuers (Note 13) ................... 4,172,126
Written options .................................................. 1,180,566
Foreign currency transactions .................................... (150,464,341)
Securities sold short ............................................ (16,116,980)
---------------
Net realized gain (loss) ................................ (1,547,964,336)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................... 4,756,150,193
Translation of other assets and liabilities denominated in
foreign currencies ......................................... 5,430,851
---------------
Net change in unrealized appreciation (depreciation) .... 4,761,581,044
---------------
Net realized and unrealized gain (loss) ............................. 3,213,616,708
---------------
Net increase (decrease) in net assets resulting from operations ..... $ 3,386,715,822
===============

The accompanying notes are an integral part of these financial statements.

36 | Annual Report

Mutual Shares Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS

YEAR ENDED DECEMBER 31,
----------------------------------
2009 2008
--------------- ----------------

Increase (decrease) in net assets:
Operations:
Net investment income ......................................... $ 173,099,114 $ 384,719,913
Net realized gain (loss) from investments, written options,
securities sold short, and foreign currency transactions ... (1,547,964,336) (1,012,654,333)
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and liabilities
denominated in foreign currencies .......................... 4,761,581,044 (8,435,202,719)
--------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 3,386,715,822 (9,063,137,139)
--------------- ----------------
Distributions to shareholders from:
Net investment income:
Class Z .................................................... (188,144,825) (127,105,081)
Class A .................................................... (100,642,328) (62,555,645)
Class B .................................................... (3,482,528) (699,702)
Class C .................................................... (18,827,931) (3,935,667)
Class R .................................................... (4,005,071) (1,844,206)
Net realized gains:
Class Z .................................................... -- (99,640,941)
Class A .................................................... -- (64,633,914)
Class B .................................................... -- (4,094,496)
Class C .................................................... -- (18,867,642)
Class R .................................................... -- (2,513,154)
--------------- ----------------
Total distributions to shareholders .............................. (315,102,683) (385,890,448)
--------------- ----------------
Capital share transactions: (Note 2)
Class Z .................................................... (455,073,677) (1,040,714,353)
Class A .................................................... (535,481,624) (637,960,764)
Class B .................................................... (82,809,947) (110,710,385)
Class C .................................................... (213,582,598) (384,748,179)
Class R .................................................... 10,369,752 (6,628,985)
--------------- ----------------
Total capital share transactions ................................. (1,276,578,094) (2,180,762,666)
--------------- ----------------
Redemption fees .................................................. -- 41,515
--------------- ----------------
Net increase (decrease) in net assets ................... 1,795,035,045 (11,629,748,738)
Net assets:
Beginning of year ................................................ 13,603,224,748 25,232,973,486
--------------- ----------------
End of year ...................................................... $15,398,259,793 $ 13,603,224,748
=============== ================
Undistributed net investment income included in net assets:
End of year ...................................................... $ 51,394,550 $ 185,022,528
=============== ================

The accompanying notes are an integral part of these financial statements.

Annual Report | 37

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of seven separate funds. The Mutual Shares Fund (Fund) is included in
this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers five classes of shares: Class Z, Class A,
Class B, Class C, and Class R. 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.

The following summarizes the Fund's significant accounting policies.

A. SECURITY VALUATION

Equity and other 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. Certain equity securities are valued based upon
fundamental characteristics or relationships to similar securities.

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. Debt securities denominated in a foreign currency
are converted into their U.S. dollar equivalent at the foreign exchange rate in
effect at the close of the NYSE on the date that the values of the foreign debt
securities are determined.

Senior secured corporate loans with floating or variable interest rates
generally trade in the over-the-counter market rather than on a securities
exchange. The Fund may utilize independent pricing services, quotations from
loan dealers and other financial institutions, 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 use independent market quotations
from loan dealers or financial institutions and may incorporate valuation
methodologies that consider multiple bond characteristics such as dealer quotes,
issuer type, coupon, maturity, weighted average maturity, interest rate spreads
and yield curves, cash flow and credit risk/quality analysis, to determine
current value.

38 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A. SECURITY VALUATION (CONTINUED)

Foreign equity 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 equity 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 security is determined.

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 based upon the underlying investment book value,
anticipated future cash flows, market changes in comparable or similar
securities, 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. The investment manager monitors price movements following the
close of trading in foreign stock markets through a series of country specific
market proxies (such as baskets of American Depository Receipts, futures
contracts and exchange traded funds). These price movements are measured against
established trigger thresholds for each specific market proxy to assist in
determining if an event has occurred. 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 Trustees.

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. The Fund may enter
into foreign currency exchange contracts to facilitate transactions denominated
in a foreign currency. 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 Trustees.

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.

Annual Report | 39

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION (CONTINUED)

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. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS

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

D. DERIVATIVE FINANCIAL INSTRUMENTS

The Fund may invest in derivative financial instruments (derivatives) in order
to manage risk or gain exposure to various other investments or markets.
Derivatives are financial contracts based on an underlying or notional amount,
require no initial investment or an initial net investment that is smaller than
would normally be required to have a similar response to changes in market
factors, and require or permit net settlement. Derivatives may contain various
risks including the potential inability of the counterparty to fulfill their
obligations under the terms of the contract, the potential for an illiquid
secondary market, and the potential for market movements which may expose the
Fund to gains or losses in excess of the amounts shown on the Statement of
Assets and Liabilities.

Derivatives are marked to market daily based upon quotations from market makers
or the Fund's independent pricing services and the Fund's net benefit or
obligation under the contract, as measured by the fair market value of the
contract, is included in net assets. Realized gain and loss and unrealized
appreciation and depreciation on these contracts for the period are included in
the Statement of Operations.

The Fund generally enters into forward exchange contracts in order to hedge
against fluctuations in foreign exchange rates. A forward exchange contract is
an agreement between the Fund and a counterparty to buy or sell a foreign
currency for a specific exchange rate on a future date. Pursuant to the terms of
the forward exchange contracts, cash or securities may be required to be
deposited as collateral.

40 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

The Fund generally purchases or writes option contracts in order to manage or
gain exposure to equity price risk. An option is a contract entitling the holder
to purchase or sell a specific amount of shares or units of a particular
security, currency or index, or notional amount of a swap (swaption), at a
specified price. Options purchased are recorded as an asset while options
written are recorded as a liability. Upon exercise of an option, the acquisition
cost or sales proceeds of the security is adjusted by any premium paid or
received. Upon expiration of an option, any premium paid or received is recorded
as a realized loss or gain. Upon closing an option other than through expiration
or exercise, the difference between the premium and the cost to close the
position is recorded as a realized gain or loss.

See Note 12 regarding other derivative information.

E. 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/or 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 or interest is recorded as an expense to the Fund.

F. SECURITIES LENDING

The Fund participates in an agency based security lending program. The Fund
receives cash collateral against the loaned securities in an amount equal to at
least 102% of the market value of the loaned securities. Collateral is
maintained over the life of the loan in an amount not less than 100% of the
market value of loaned securities, as determined at the close of Fund business
each day; any additional collateral required due to changes in security values
is delivered to the Fund on the next business day. The collateral is invested in
a non-registered money fund (Bank of New York Institutional Cash Reserve Fund or
ICRF) managed by the Fund's custodian on the Fund's behalf. The Fund receives
income from the investment of cash collateral, in addition to lending fees and
rebates paid by the borrower. The Fund bears the market risk with respect to the
collateral investment, securities loaned, and the risk that the agent may
default on its obligations to the Fund. The securities lending agent has agreed
to indemnify the Fund in the event of default by a third party borrower. At
December 31, 2009, the Fund had no securities on loan.

Annual Report | 41

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

F. SECURITIES LENDING (CONTINUED)

In September of 2008, the Bank of New York Mellon advised the Fund that the ICRF
had exposure to certain defaulted debt obligations of Lehman Brothers Holdings,
Inc. and that they had created a separate sleeve (Series B) of the ICRF to hold
these securities apart from the main investments. Each investor in the ICRF was
allocated its pro-rata portion of Series B. The Fund's position in Series B is
disclosed on the Statement of Investments at fair value and any unrealized loss
attributable to the position is included in net assets.

G. INCOME TAXES

No provision has been made for U.S. income taxes because it is the Fund's policy
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.

The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of December 31, 2009, and has
determined that no provision for income tax is required in the Fund's financial
statements.

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

H. 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 accounting principles generally accepted in the United States of
America. 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.

Common expenses incurred by the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.

42 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)

Realized and unrealized gains and losses and net investment income, not
including class specific expenses, are allocated daily to each class of shares
based upon the relative proportion of net assets of each class. Differences in
per share distributions, by class, are generally due to differences in class
specific expenses.

I. 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.

J. REDEMPTION FEES

A short term trading redemption fee was imposed, with some exceptions, on any
Fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Fund and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.

K. GUARANTEES AND INDEMNIFICATIONS

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

2. SHARES OF BENEFICIAL INTEREST

At December 31, 2009, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2009 2008
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------------- ----------- ---------------

CLASS Z SHARES:
Shares sold .................... 23,405,112 $ 385,423,323 21,247,862 $ 433,408,039
Shares issued in reinvestment of
distributions ............... 9,467,532 173,151,528 11,801,196 209,921,901
Shares redeemed ................ (63,671,841) (1,013,648,528) (84,323,664) (1,684,044,293)
----------- --------------- ----------- ---------------
Net increase (decrease) ........ (30,799,197) $ (455,073,677) (51,274,606) $(1,040,714,353)
=========== =============== =========== ===============

Annual Report | 43

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SHARES OF BENEFICIAL INTEREST (CONTINUED)

YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2009 2008
----------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------------- ------------ ---------------

CLASS A SHARES:
Shares sold .................... 47,993,394 $ 783,278,694 76,308,129 $ 1,522,769,665
Shares issued in reinvestment of
distributions ............... 5,021,401 90,685,761 6,333,689 114,388,652
Shares redeemed ................ (89,190,532) (1,409,446,079) (115,667,539) (2,275,119,081)
----------- --------------- ------------ ---------------
Net increase (decrease) ........ (36,175,737) $ (535,481,624) (33,025,721) $ (637,960,764)
=========== =============== ============ ===============
CLASS B SHARES:
Shares sold .................... 271,883 $ 4,243,645 362,646 $ 7,153,214
Shares issued in reinvestment of
distributions ............... 187,729 3,244,440 225,906 4,479,374
Shares redeemed ................ (5,731,040) (90,298,032) (6,173,610) (122,342,973)
----------- --------------- ------------ ---------------
Net increase (decrease) ........ (5,271,428) $ (82,809,947) (5,585,058) $ (110,710,385)
=========== =============== ============ ===============
CLASS C SHARES:
Shares sold .................... 6,092,431 $ 98,311,995 10,732,376 $ 210,664,085
Shares issued in reinvestment of
distributions ............... 960,730 16,839,334 1,032,282 20,495,376
Shares redeemed ................ (21,149,658) (328,733,927) (31,195,589) (615,907,640)
----------- --------------- ------------ ---------------
Net increase (decrease) ........ (14,096,497) $ (213,582,598) (19,430,931) $ (384,748,179)
=========== =============== ============ ===============
CLASS R SHARES:
Shares sold .................... 3,289,119 $ 53,583,802 3,686,186 $ 79,355,666
Shares issued in reinvestment of
distributions ............... 222,091 3,976,407 235,917 4,330,719
Shares redeemed ................ (2,953,233) (47,190,457) (4,379,473) (90,315,370)
----------- --------------- ------------ ---------------
Net increase (decrease) ........ 557,977 $ 10,369,752 (457,370) $ (6,628,985)
=========== =============== ============ ===============

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
trustees of the Trust are also officers and /or directors of the following
subsidiaries:

SUBSIDIARY 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

44 | Annual Report

Mutual Shares 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
- ------------------- -------------------------------------------------

0.600% 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% Over $20 billion, up to and including $25 billion
0.490% Over $25 billion, up to and including $30 billion
0.480% Over $30 billion, up to and including $35 billion
0.470% In excess of $35 billion

B. ADMINISTRATIVE FEES

The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust'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 Trustees 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 for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.

In addition, under the Fund's Class B, C, and R compensation distribution plans,
the Fund pays Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate
for each class.

The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:

Class A ........... 0.35%
Class B ........... 1.00%
Class C ........... 1.00%
Class R ........... 0.50%

Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.

Annual Report | 45

Mutual Shares 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:

Sales charges retained net of commissions paid to
unaffiliated broker/dealers ............................... $2,275,436
Contingent deferred sales charges retained ................... $ 127,960

E. TRANSFER AGENT FEES

For the year ended December 31, 2009, the Fund paid transfer agent fees of
$18,578,898, of which $10,963,263 was retained by Investor Services.

F. WAIVER AND EXPENSE REIMBURSEMENTS

FT Services has voluntarily agreed to limit the increase in the Fund's net
annual operating expense ratio that results from the implementation of the
Special Servicing Agreement (SSA) at 0.02% through April 30, 2010. See Note 14
regarding the SSA.

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, 2009, the
custodian fees were reduced as noted in the Statement of Operations.

5. INDEPENDENT TRUSTEES' RETIREMENT PLAN

On January 1, 1993, the Trust adopted an Independent Trustees' Retirement Plan
("Plan"). The Plan is an unfunded defined benefit plan that provides benefit
payments to Trustees whose length of service and retirement age meets the
eligibility requirements of the Plan. Benefits under the plan are based on years
of service and fees paid to each trustee at the time of retirement. Effective in
December 1996, the Plan was closed to new participants.

During the year ended December 31, 2009, the Fund's projected benefit obligation
and benefit payments under the plan were as follows:

(a) Projected benefit obligation at December 31, 2009 ........ $498,163
(b) Increase in projected benefit obligation ................. $ 40,654
Benefit payments made to retired trustees ................ $ 20,800

(a) The projected benefit obligation is included in accrued expenses and other
liabilities in the Statement of Assets and Liabilities.

(b) The increase in projected benefit obligation is included in trustees' fees
and expenses in the Statement of Operations.

46 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES

For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At December 31, 2009, the capital loss carryforwards were as
follows:

Capital loss carryforwards expiring in:

2016............... $ 246,029,893
2017............... 2,195,445,343
--------------
$2,441,475,236
==============

The tax character of distributions paid during the years ended December 31, 2009
and 2008, was as follows:

2009 2008
------------ ------------

Distributions paid from:
Ordinary income .............. $315,102,683 $352,311,047
Long term capital gain ....... -- 33,579,401
------------ ------------
$315,102,683 $385,890,448
============ ============

At December 31, 2009, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:

Cost of investments ........................................ $14,964,218,485
===============
Unrealized appreciation .................................... $ 2,416,727,751
Unrealized depreciation .................................... (2,195,900,792)
---------------
Net unrealized appreciation (depreciation) ................. $ 220,826,959
===============
Distributable earnings - undistributed ordinary income ..... $ 126,350,686
===============

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, payments-in-kind,
bond discounts and premiums, accrued pension expense, partnership distributions,
and recognition of partnership income.

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares, payments-in-kind, bond
discounts and premiums, partnership distributions, recognition of partnership
income, and index options.

Annual Report | 47

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2009, aggregated
$5,813,392,636 and $6,429,562,081 respectively.

Transactions in options written during the year ended December 31, 2009, were as
follows:

NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- -----------

Options outstanding at December 31, 2008 ............. 7,354 $ 1,185,782
Options written ...................................... 26,064 3,271,322
Options expired ...................................... (7,329) (1,180,566)
Options exercised .................................... (26,089) (3,276,538)
Options closed ....................................... -- --
-------- -----------
Options outstanding at December 31, 2009 ............. -- $ --
======== ===========

8. CREDIT RISK AND 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. Risks associated with
purchasing these securities include the possibility that the bankruptcy or other
restructuring process takes longer than expected, or that distributions in
restructuring are less than anticipated, either or both of which may result in
unfavorable consequences to the Fund. If it becomes probable that income on debt
securities, including those of distressed companies, will not be collected, the
Fund discontinues accruing income and recognizes an adjustment for uncollectible
interest. For the year ended December 31, 2009, the Fund recorded an adjustment
for uncollectible interest of $64,185,406, as noted in the Statement of
Operations.

At December 31, 2009, the aggregate value of distressed company securities and
securities for which interest has been discontinued was $32,151,485,
representing 0.21% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.

9. RESTRICTED SECURITIES

The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.

48 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. RESTRICTED SECURITIES (CONTINUED)

At December 31, 2009, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Trustees as reflecting fair value, as
follows:

PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ----------------- ---------------------------------------- ------------------ ------------ ------------

1,685,069 AboveNet Inc. .......................... 10/02/01 - 9/08/09 $ 44,630,142 $109,596,888
1,065 AboveNet Inc., stock grant, grant price
$10.475, expiration date 9/09/13 .... 4/17/06 - 9/08/06 -- 232,447
229 AboveNet Inc., stock grant, grant price
$30, expiration date 9/07/18 ........ 9/08/09 -- 32,096
34,449 AboveNet Inc., wts., 9/08/10 ........... 10/02/01- 9/07/07 3,603,181 3,444,900
1,024,900 Bond Street Holdings LLC, A, 144A ...... 11/04/09 20,498,000 20,498,000
43,105,703 CB FIM Coinvestors LLC ................. 1/15/09 - 6/02/09 -- --
56,116,385 Cerberus CG Investor I LLC ............. 7/26/07 - 6/17/08 55,924,193 11,784,441
49,252,400 Cerberus CG Investor I LLC, 12.00%,
7/31/14 ............................. 7/26/07 49,252,400 10,343,004
56,116,385 Cerberus CG Investor II LLC ............ 7/26/07 - 6/17/08 55,924,193 11,784,441
49,252,400 Cerberus CG Investor II LLC, 12.00%,
7/31/14 ............................. 7/26/07 49,252,400 10,343,004
28,058,192 Cerberus CG Investor III LLC ........... 7/26/07 - 6/17/08 27,962,097 5,892,220
24,626,200 Cerberus CG Investor III LLC, 12.00%,
7/31/14 ............................. 7/26/07 24,626,200 5,171,502
1,879,100 (a) DecisionOne Corp. .................. 3/12/99 - 7/18/00 1,313,385 3,119,306
2,496,549 (a) DecisionOne Corp., senior secured
note, 15.00%, 11/30/13 .............. 6/01/09 - 10/15/09 2,496,549 2,496,549
1,031,766 (a) DecisionOne Corp., wts., 6/08/17 ... 7/09/07 -- --
64,834 Elephant Capital Holdings Ltd. ......... 8/29/03 - 3/10/08 10,025,406 --
53,924,666 FIM Coinvestor Holdings I, LLC ......... 11/20/06 - 6/02/09 -- --
22,185,100 GLCP Harrah's Investment LP ............ 1/15/08 22,199,516 --
10,725 GMAC Inc. .............................. 11/13/09 253,897,100 118,219,822
678,719 IACNA Investor LLC ..................... 7/24/08 246,248 6,787
7,234,813 International Automotive Components
Group Brazil LLC .................... 4/13/06 - 12/26/08 4,811,544 8,113,264
1,104,272 International Automotive Components
Group Japan LLC ..................... 9/26/06 - 3/27/07 9,586,103 4,229,321
25,796,752 International Automotive Components
Group LLC ........................... 1/12/06 - 10/16/06 25,800,935 17,587,194
5,851,000 (b) International Automotive Components
Group NA LLC, 9.00%, 4/01/17 ........ 3/30/07 5,938,765 5,864,053
19,434,979 (b) International Automotive Components
Group NA LLC, A ..................... 3/30/07 - 10/10/07 20,679,582 5,915,036
11,211 MCII Holdings Inc. ..................... 4/17/09 12,907,338 --
84,885 MCII Holdings Inc., PIK, pfd., A ....... 4/17/09 - 10/01/09 83,938,576 39,451,293
301,530 NCB Warrant Holdings Ltd., A ........... 12/16/05 - 3/10/08 2,839,451 --
202,380 Olympus Re Holdings Ltd. ............... 12/19/01 19,570,491 432,284
199,566 PTV Inc., 10.00%, pfd., A .............. 12/07/01 - 3/06/02 125,727 33,028
1,467,000 State Bank and Trust Co. ............... 7/24/09 14,670,000 20,904,750
146,924 West Coast Bancorp, cvt. pfd., A ....... 10/23/09 14,692,400 13,112,967

Annual Report | 49

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. RESTRICTED SECURITIES (CONTINUED)

PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ----------------- ---------------------------------------- ------------------ ------------ ------------

7,558 West Coast Bancorp, cvt. pfd., B ....... 10/23/09 $ 755,800 $ 674,552
43,036 West Coast Bancorp, wts., C, 10/23/16 .. 10/23/09 -- --
23,917 West Coast Bancorp, wts., D, 3/01/10 ... 10/23/09 -- --
------------
TOTAL RESTRICTED SECURITIES (2.79% of
Net Assets) ......................... $429,283,149
============

(a) The Fund also invests in unrestricted securities of the issuer, valued at
$436,664 as of December 31, 2009.

(b) The Fund also invests in unrestricted securities of the issuer, valued at
$3,854,095 as of December 31, 2009.

10. 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. Funded portions of credit agreements are presented on the
Statement of Investments.

At December 31, 2009, unfunded commitments were as follows:

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

Lyondell Chemical Co., DIP Delayed Draw Term Loan,
FRN, 13.00%, 4/06/10 .................................... $ 1,054,256
Realogy Corp., FRN, Revolver, 2.504%, 4/10/13 .............. 45,678,400
-----------
$46,732,656
===========

Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized appreciation or depreciation is included in the
Statement of Assets and Liabilities and Statement of Operations.

11. UNFUNDED CAPITAL COMMITMENTS

The Fund may enter into certain capital commitments and may be obligated to
perform on such agreements at a future date. Unfunded capital commitments
requiring recognition are monitored for impairment and any unrealized
deprecation is included in the Statement of Assets and Liabilities and the
Statement of Operations. At December 31, 2009, the Fund had aggregate unfunded
capital commitments of $29,600,154 for which no depreciation has been
recognized.

50 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. OTHER DERIVATIVE INFORMATION

At December 31, 2009, the Fund has invested in derivative contracts which are
reflected on the Statement of Assets and Liabilities as follows:

ASSET DERIVATIVES LIABILITY DERIVATIVES
DERIVATIVE CONTRACTS ----------------------------------------- -------------------------------------------
NOT ACCOUNTED FOR AS STATEMENT OF ASSETS AND FAIR VALUE STATEMENT OF ASSETS AND FAIR VALUE
HEDGING INSTRUMENTS LIABILITIES LOCATION AMOUNT LIABILITIES LOCATION AMOUNT
- -------------------- -------------------------- ------------ ----------------------------- -----------

Foreign exchange Unrealized appreciation on Unrealized depreciation
contracts ....... forward exchange contracts $104,376,101 on forward exchange contracts $10,745,426

For the year ended December 31, 2009, the effect of derivative contracts on the
Fund's Statement of Operations was as follows:

CHANGE IN
UNREALIZED
APPRECIATION
REALIZED GAIN (DEPRECIATION) AVERAGE
(LOSS) FOR THE FOR THE AMOUNT
DERIVATIVE CONTRACTS YEAR ENDED YEAR ENDED OUTSTANDING
NOT ACCOUNTED FOR AS DECEMBER 31, DECEMBER 31, DURING THE
HEDGING INSTRUMENTS STATEMENT OF OPERATIONS LOCATIONS 2009 2009 YEAR(a)
- -------------------- ----------------------------------------- -------------- -------------- -------------

Equity contracts ... Net realized gain (loss) from investments
and written options/Net change in
unrealized appreciation (depreciation)
on investments (44,501,158) (853,414) 9,786

(a) Represents the average number of option contracts or notional amount for
other derivative contracts outstanding during the period. For derivative
contracts denominated in foreign currencies, notional amounts are converted
into U.S. dollars.

See Note 1(d) regarding derivative financial instruments.

Annual Report | 51

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

The 1940 Act 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 for the year ended December
31, 2009, were as shown below.

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

CONTROLLED AFFILIATES(a)
CB FIM Coinvestors LLC .............. -- 43,105,703 -- 43,105,703 $ -- $ -- $ --
MCII Holdings Inc. .................. -- 11,211 -- 11,211 -- -- --
MCII Holdings Inc., PIK,
pfd., A .......................... -- 84,885 -- 84,885 39,451,293 3,509,575 --
------------ ---------- ---------
TOTAL CONTROLLED AFFILIATES ......... $ 39,451,293 $3,509,575 $ --
============ ========== =========
NON-CONTROLLED AFFILIATES
AboveNet Inc. ....................... 842,420 842,649 -- 1,685,069 $109,596,888 $ -- $ --
AboveNet Inc., stock grant,
grant price $10.475,
expiration date 9/09/13 .......... 1,065 -- -- 1,065 232,447 -- --
AboveNet Inc., stock grant,
grant price $30,
expiration date 9/07/18 .......... -- 229 -- 229 32,096 -- --
AboveNet Inc., wts., 9/08/10 ........ 34,449 -- -- 34,449 3,444,900 -- --
Alexander's Inc. .................... 326,675 -- -- 326,675 99,446,404 -- --
Bond Street Holdings LLC, A, 144A ... -- 1,024,900 -- 1,024,900 20,498,000 -- --
Community Health Systems Inc. ....... 4,806,000 -- -- 4,806,000 171,093,600 -- --
DecisionOne Corp. ................... 1,879,100 -- -- 1,879,100 3,119,306 -- --
DecisionOne Corp., 12.00%, 4/15/10 .. 2,418,729 49,159 2,467,888 -- -- 145,865 (642,512)
DecisionOne Corp., senior secured
note, 15.00%, 11/30/13 ........... -- 2,496,549 -- 2,496,549 2,496,549 219,025 --
DecisionOne Corp., Term Loan B,
15.00%, 8/29/13 .................. 433,342 3,322 -- 436,664 436,664 47,782 --
DecisionOne Corp., wts., 6/08/17 .... 1,031,766 -- -- 1,031,766 -- -- --
Elephant Capital Holdings Ltd. ...... 64,834 -- -- 64,834 -- -- --
Federal Signal Corp. ................ 3,360,800 -- -- 3,360,800 20,232,016 806,592 --
GLCP Harrah's Investment LP ......... 22,185,100 -- -- 22,185,100 -- -- --
Guaranty Bancorp .................... 5,731,834 -- -- 5,731,834 7,566,021 -- --
IACNA Investor LLC .................. 678,719 -- -- 678,719 6,787 -- --
International Automotive
Components Group Brazil LLC ...... 7,234,813 -- -- 7,234,813 8,113,264 -- --
International Automotive
Components Group Japan LLC ....... 1,104,272 -- -- 1,104,272 4,229,321 -- --
International Automotive
Components Group LLC ............. 25,796,752 -- -- 25,796,752 17,587,194 -- --
International Automotive
Components Group NA Inc.,
Revolver, FRN, 6.25%, 1/18/14 .... -- 3,854,095 -- 3,854,095 3,854,095 197,554 --
International Automotive
Components Group NA LLC,
9.00%, 4/01/17 ................... 5,851,000 -- -- 5,851,000 5,864,053 -- --

52 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONTINUED)

NON-CONTROLLED AFFILIATES (CONTINUED)
International Automotive
Components Group NA LLC, A........ 19,434,979 -- -- 19,434,979 $ 5,915,036 $ -- $ --
Kindred Healthcare Inc............... 2,883,197 -- 1,441,598 1,441,599 --(b) -- 4,814,638
Tenet Healthcare Corp................ 25,881,411 -- -- 25,881,411 139,500,805 -- --
TVMAX Holdings Inc................... 257,217 -- -- 257,217 -- -- --
TVMAX Holdings Inc.,
PIK, 11.50%, 3/31/10.............. 978,922 447,755 -- 1,426,677 316,762 136,716 --
TVMAX Holdings Inc.,
PIK, 14.00%, 3/31/10.............. 1,838,287 278,588 -- 2,116,875 420,317 278,588 --
White Mountains Insurance Group
Ltd............................... 729,457 -- -- 729,457 242,661,165 729,457 --
------------ ---------- ---------
TOTAL NON-CONTROLLED
AFFILIATES..................... $866,663,690 $2,561,579 $4,172,126
============ ========== ==========
TOTAL AFFILIATED SECURITIES
(5.88% of Net Assets)....... $906,114,983 $6,071,154 $4,172,126
============ ========== ==========

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

(b) As of December 31, 2009, no longer an affiliate.

14. SPECIAL SERVICING AGREEMENT

On May 1, 2009, the Fund, which is an eligible underlying investment of one or
more of the Franklin Templeton Fund Allocator Series Funds (Allocator Funds),
entered into a Special Servicing Agreement (SSA) with the Allocator Funds and
certain service providers of the Fund and the Allocator Funds. Under the SSA,
the Fund may pay a portion of the Allocator Funds' expenses (other than any
asset allocation, administrative, and distribution fees) to the extent such
payments are less than the amount of the benefits realized or expected to be
realized by the Fund (e.g., due to reduced costs associated with servicing
accounts) from the investment in the Fund by the Allocator Funds. The Allocator
Funds are either managed by Franklin Advisers, Inc. or administered by FT
Services, affiliates of Franklin Mutual.

For the year ended December 31, 2009, the Fund was held by one or more of the
Allocator Funds and was allocated expenses as noted in the Statement of
Operations. At December 31, 2009, 20.98% of the Fund's outstanding shares was
held by one or more of the Allocator Funds.

15. OTHER CONSIDERATIONS

Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of bondholders' steering committees, official
creditors' committees, or boards of directors of companies in which the Fund
invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.

Annual Report | 53

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. CREDIT FACILITY

The Fund, together with other U.S. registered and foreign investment funds
(collectively "Borrowers"), managed by Franklin Templeton Investments, are
borrowers in a joint syndicated senior unsecured credit facility totaling $725
million (Global Credit Facility) to provide a source of funds to the Borrowers
for temporary and emergency purposes, including the ability to meet future
unanticipated or unusually large redemption requests. Effective January 22,
2010, the Fund renewed the Global Credit Facility, for a total of $750 million,
maturing January 21, 2011.

Under the terms of the Global Credit Facility, the Fund shall, in addition to
interest charged on any borrowings made by the Fund and other costs incurred by
the Fund, pay its share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee of 0.10% based upon the unused portion of the Global
Credit Facility, which is reflected in other expenses on the Statements of
Operations. During the year ended December 31, 2009, the Fund did not utilize
the Global Credit Facility.

17. FAIR VALUE MEASUREMENTS

The Fund follows a fair value hierarchy that distinguishes between market data
obtained from independent sources (observable inputs) and the Fund's own market
assumptions (unobservable inputs). These inputs are used in determining the
value of the Fund's investments and are summarized in the following fair value
hierarchy:

- Level 1 - quoted prices in active markets for identical securities

- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)

- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.

The following is a summary of the inputs used as of December 31, 2009, in
valuing the Fund's assets and liabilities carried at fair value:

LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------- ------------ ------------ ---------------

ASSETS:
Investments in Securities:
Equity Investments:(a)
Airlines............................. $ -- $ 70,149 $ -- $ 70,149
Auto Components...................... -- -- 35,890,059(b) 35,890,059
Chemicals............................ 147,161,152 -- 3,157,637 150,318,789
Commercial Banks..................... 284,227,099 20,904,750 13,787,519(b) 318,919,368
Computers & Peripherals.............. 226,854,294 -- 3,119,306(b) 229,973,600

54 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

17. FAIR VALUE MEASUREMENTS (CONTINUED)

LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------- ------------ ------------ ---------------

ASSETS: (CONTINUED)
Investments in Securities: (CONTINUED)
Equity Investments:(a) (CONTINUED)
Consumer Finance .................... $ -- $ -- $147,680,924 $ 147,680,924
Diversified Financial Services ...... 290,965,211 -- 20,498,000 311,463,211
Diversified Telecommunication
Services ......................... 460,232,745 3,477,928 --(b) 463,710,673
Hotels, Restaurants & Leisure ....... 17,993,481 -- --(b) 17,993,481
Insurance ........................... 957,428,350 -- 432,284 957,860,634
Machinery ........................... 20,232,016 -- 39,451,293(b) 59,683,309
Media ............................... 515,611,840 5,690,025 -- 521,301,865
Real Estate Management &
Development ...................... 64,183,437 -- 75,647,541 139,830,978
All Other Equity Investments(c) ..... 9,515,032,470 -- --(b) 9,515,032,470
Corporate Bonds, Notes and Senior
Floating Rate Interests .......... -- 712,454,412 39,245,950 751,700,362
Corporate Bonds and Notes in
Reorganization ...................... -- 429,497 425 429,922
Companies in Liquidation ............ -- -- --(b) --
Short Term Investments .............. 1,560,874,192 2,311,458 -- 1,563,185,650
--------------- ------------ ------------ ---------------
Total Investments in Securities ........... $14,060,796,287 $745,338,219 $378,910,938 $15,185,045,444
=============== ============ ============ ===============
Forward Exchange Contracts ................... $ -- $104,376,101 $ -- $ 104,376,101
Unfunded Loan Commitments .................... -- 5,422,021 -- 5,422,021
LIABILITIES:
Securities Sold Short ........................ 118,897,925 -- -- 118,897,925
Forward Exchange Contracts ................... -- 10,745,426 -- 10,745,426

(a) Includes common and preferred stocks as well as other equity investments.

(b) Includes securities determined to have no value at December 31, 2009.

At December 31, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair value, is as
follows:

NET CHANGE
NET CHANGE IN UNREALIZED
IN APPRECIATION
BALANCE AT NET UNREALIZED NET TRANSFER BALANCE AT (DEPRECIATION)
BEGINNING OF REALIZED APPRECIATION PURCHASES IN (OUT) OF END OF ON ASSETS HELD
YEAR GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 YEAR AT YEAR END
------------ ------------ -------------- ------------- ------------- ------------ --------------

ASSETS:
Investment in Securities:
Equity Investments:(a)
Auto Components .... $ 14,546,880 $ 11,621 $ 20,681,394 $ 650,164 $ -- $ 35,890,059(b) $ 20,681,394
Chemicals .......... 3,157,637 -- -- -- -- 3,157,637 --
Commercial Banks ... -- -- (3,810,178) 17,597,696 -- 13,787,519(b) (3,810,178)
Computers &
Peripherals ..... -- -- 3,119,306 -- -- 3,119,306(b) 3,119,306
Consumer Finance ... 73,128,607 -- 31,210,178 43,342,139 -- 147,680,924 (91,855,422)

Annual Report | 55

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

17. FAIR VALUE MEASUREMENTS (CONTINUED)

ASSETS: (CONTINUED)
Investment in Securities:
(CONTINUED)
Equity Investments:(a)
(CONTINUED)
Diversified
Financial
Services ........ $ -- $ -- $ -- $ 20,498,000 $ -- $ 20,498,000 $ --
Diversified
Telecommunication
Services ........ 42,261,192 -- 25,259,361 -- (67,520,553) --(b) --
Health Care
Providers &
Services ........ 35,662,264 -- 4,926,786 -- (40,589,050) -- --
Hotels, Restaurants
& Leisure ....... 6,655,530 -- (6,669,946) 14,416 -- --(b) (6,669,946)
Insurance .......... 475,107 -- (42,823) -- -- 432,284 (42,823)
Machinery .......... -- -- (57,394,621) 96,845,914 -- 39,451,293 (57,394,621)
Multi-Utilities .... -- 1,539,761 38,015 (1,577,776) -- -- --
Real Estate
Management &
Development ..... 54,978,930 -- 20,668,611 -- -- 75,647,541 20,668,611
Corporate Bonds,
Notes & Senior
Floating Rate
Interests .......... 213,219,870 (35,845,560) 73,839,898 (211,968,258) -- 39,245,950 2,313,400
Corporate Bonds &
Notes in
Reorganization ..... 1,858,494 (55,153,784) 66,203,053 (12,907,338) -- 425 --
Companies in
Liquidation ........ -- -- -- -- -- --(b) --
------------ ------------ ------------ ------------- ------------- ------------ -------------
Total..................... $445,944,511 $(89,447,962) $178,029,034 $ (47,505,042) $(108,109,603) $378,910,938 $(112,990,279)
============ ============ ============ ============= ============= ============ =============

(a) Includes common and preferred stocks as well as other equity investments.

(b) Includes securities determined to have no value at December 31, 2009.

18. NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update (ASU) No. 2010-6, FAIR VALUE MEASUREMENTS AND DISCLOSURES
(TOPIC 820): IMPROVING DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS. ASU No. 2010-6
enhances and clarifies existing fair value measurement disclosure requirements
and is effective for interim and annual periods beginning after December 15,
2009. The Fund is currently evaluating the impact, if any, of applying the
provisions of ASU No. 2010-6.

19. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through February 18, 2010, the issuance
date of the financial statements and determined that no events have occurred
that require disclosure.

56 | Annual Report

Mutual Shares Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

ABBREVIATIONS

COUNTERPARTY

AESX - Credit Suisse International
BANT - Bank of America N.A.
BBU - Barclays Bank
BONY - Bank of New York Mellon
DBFX - Deutsche Bank AG
HAND - Svenska Handelsbanken
HSBC - HSBC Bank USA
SSBT - State Street Bank and Trust Co.

CURRENCY

EUR - Euro
JPY - Japanese Yen
USD - U.S. Dollar

SELECTED PORTFOLIO

ADR - American Depository Receipt
DIP - Debtor-In-Possession
FRN - Floating Rate Note
PIK - Payment-In-Kind

Annual Report | 57

Mutual Shares Fund

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS 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 Funds constituting the Franklin Mutual Series
Funds) (the "Fund"), including the statement of investments, as of December 31,
2009, 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, 2009, 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 Shares Fund of the Franklin Mutual Series Funds at December 31, 2009, 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.

(ERNST & YOUNG LLP)

Boston, Massachusetts
February 18, 2010

58 | Annual Report

Mutual Shares Fund

TAX DESIGNATION (UNAUDITED)

Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
45.39% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 2009.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $289,670,183 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2009. Distributions, including qualified dividend income, paid
during calendar year 2009 will be reported to shareholders on Form 1099-DIV in
January 2010. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.

Annual Report | 59

Mutual Shares 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. Generally, each board member
serves until that person's successor is elected and qualified.

INDEPENDENT BOARD MEMBERS

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

EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 8 None
c/o Franklin Mutual Advisers, LLC
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, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; an adviser to
numerous financial and publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New
York University.

ANN TORRE BATES (1958) Trustee Since 1995 31 SLM Corporation (Sallie Mae) and
c/o Franklin Mutual Advisers, LLC Allied Capital Corporation (financial
101 John F. Kennedy Parkway services).
Short Hills, NJ 07078-2789

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) Trustee Since 2002 15 Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway Fiduciary International Ireland Limited.
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY,
Chairman, Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and
Director, Merit Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation;
Governor, Investment Company Institute and Chairman, ICI Public Information Committee.

KEITH E. MITCHELL (1954) Trustee Since 2009 8 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Principal, Mitchell Advisers LLC (advisory firm); director of various boards of asset management firms; and FORMERLY, Managing
Director, Putman Lovell NBF.

60 | Annual Report

CHARLES RUBENS II (1930) Trustee Since 1998 15 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Private investor.

LARRY D. THOMPSON (1945) Trustee Since 2009 141 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow
of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney
General, U.S. Department of Justice (2001-2003).

JAN HOPKINS TRACHTMAN (1947) Trustee Since 2009 8 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

President and Founder, The Jan Hopkins Group (communications consulting firm); President, Economic Club of New York; serves on
Advisory Board of Knight Bagehot Fellowship; and FORMERLY, Anchor/Correspondent, CNN Financial News (until 2003); Managing
Director and Head of Client Communications, Citigroup Private Bank (until 2005); Off-air Reporter, ABC News' World News Tonight
and Editor, CBS Network News.

ROBERT E. WADE (1946) Trustee and Trustee 38 El Oro Ltd. (investments).
c/o Franklin Mutual Advisers, LLC Chairman since 1993 and
101 John F. Kennedy Parkway of the Board Chairman of the
Short Hills, NJ 07078-2789 Board since 2005

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Attorney at law.

INTERESTED BOARD MEMBERS AND OFFICERS

**GREGORY E. JOHNSON (1961) Trustee Since 2007 89 None
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; and officer
and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the
investment companies in Franklin Templeton Investments.

Annual Report | 61

**PETER A. LANGERMAN (1955) Trustee, Trustee 8 None
c/o Franklin Mutual Advisers, LLC President since 2007,
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the
case may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's
Division of Investment.

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; officer of two of the investment companies in Franklin Templeton Investments;
and FORMERLY, Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav).

JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since 2006
Compliance

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin
Resources, Inc. (1994-2001).

LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Executive
San Mateo, CA 94403-1906 Officer -
Finance and
Administration

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant
Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin
Templeton Services, LLC (1997-2003).

ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).

62 | Annual Report

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 Templeton Investments; 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.

STEVEN J. GRAY (1955) Secretary and Secretary since Not Applicable Not Applicable
One Franklin Parkway Vice President 2005 and Vice
San Mateo, CA 94403-1906 President since
August 2009

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and
officer of 45 of the investment companies in Franklin Templeton Investments.

MATTHEW T. HINKLE (1971) Treasurer, Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Chief Financial
San Mateo, CA 94403-1906 Officer and
Chief
Accounting
Officer

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Director, Fund Accounting, Franklin Templeton Investments; and officer of four of the investment companies in Franklin Templeton
Investments.

ROBERT C. ROSSELOT (1960) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. August 2009
Suite 2100
Fort Lauderdale, FL 33394-3091

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President
and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of
the South; and officer of 45 of the investment companies in Franklin Templeton Investments.

KAREN L. SKIDMORE (1952) Vice President Since Not Applicable Not Applicable
One Franklin Parkway August 2009
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin
Templeton Investments.

Annual Report | 63

CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 45 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).

* 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 manager or
affiliated investment managers.

** Gregory E. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to his position as an officer and
director of Franklin Resources, Inc., which is the parent company of the
Fund's investment manager and distributor. Peter A. Langerman is considered
to be an interested person of the Fund under the federal securities laws
due to his position as an officer of Franklin Mutual Advisers, LLC, which
is the parent company of the Fund's investment manager.

Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.

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 (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.

64 | Annual Report

Mutual Shares Fund

SHAREHOLDER INFORMATION

PROXY VOTING POLICIES AND PROCEDURES

The Fund's investment manager 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 (954) 527-7678 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 (800)
SEC-0330.

Annual Report | 65

This page intentionally left blank.

Franklin Templeton Funds

LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL
BEN/(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.

VALUE

Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Quest Fund(2)
Mutual Recovery Fund(3)
Mutual Shares Fund

BLEND

Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund

GROWTH

Franklin DynaTech Fund
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund

SECTOR

Franklin Biotechnology Discovery Fund
Franklin Global Real Estate Fund
Franklin Gold & Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund

GLOBAL

Mutual Global Discovery Fund(4)
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund

INTERNATIONAL

Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Mutual International Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Frontier Markets Fund

HYBRID

Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund

ASSET ALLOCATION

Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund

FIXED INCOME

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

TAX-FREE INCOME(6)

NATIONAL

Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)

LIMITED-/INTERMEDIATE-TERM

California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund

STATE-SPECIFIC

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

INSURANCE FUNDS

Franklin Templeton Variable Insurance Products Trust(10)

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

(2.) Effective 5/1/09, Mutual Qualified Fund changed its name to Mutual Quest
Fund. The fund's investment goal and strategy remained unchanged.

(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.) Effective 5/1/09, Mutual Discovery Fund changed its name to Mutual Global
Discovery Fund. The fund's investment goal and strategy remained unchanged.

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

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

(7.) The fund invests primarily in insured municipal securities.

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

(9.) The Board of Trustees approved the elimination of the non-fundamental
policy requiring the fund to invest at least 80% of net assets in insured
municipal securities and the removal of the word "Insured" from the fund
name. The changes became effective 2/15/09.

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

01/10 Not part of the annual report

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

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.
(800) DIAL BEN(R)
franklintempleton.com

SHAREHOLDER SERVICES
(800) 632-2301 - (Class A, B, C & R)
(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.

474 A2009 02/10

DECEMBER 31, 2009 (GRAPHIC)

ANNUAL REPORT
AND SHAREHOLDER LETTER

INTERNATIONAL

MUTUAL INTERNATIONAL FUND

(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)

Franklin - Templeton - MUTUAL SERIES

Franklin Templeton Investments

GAIN FROM OUR PERSPECTIVE(R)

Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.

SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.

FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.

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

(GRAPHIC)

Not part of the annual report

Contents

SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual International Fund ................................................. 4
Performance Summary ....................................................... 10
Your Fund's Expenses ...................................................... 15
Financial Highlights and Statement of Investments ......................... 17
Financial Statements ...................................................... 26
Notes to Financial Statements ............................................. 30
Report of Independent Registered Public Accounting Firm ................... 41
Tax Designation ........................................................... 42
Board Members and Officers ................................................ 44
Shareholder Information ................................................... 49

Shareholder Letter

Dear Mutual International Fund Shareholder:

(1.) As measured by the Morgan Stanley Capital International (MSCI) All Country
World Index. Source: (C) 2009 Morningstar. All Rights Reserved. The
information contained herein: (1) is proprietary to Morningstar and/or its
content providers; (2) may not be copied or distributed; and (3) is not
warranted to be accurate, complete or timely. Neither Morningstar nor its
content providers are responsible for any damages or losses arising from
any use of this information. Past performance is no guarantee of future
results. The MSCI All Country World Index is a free float-adjusted,
market-capitalization weighted index designed to measure equity market
performance in global developed and emerging markets.

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

Not part of the annual report | 1

These capital infusions lowered risk by enabling banks to absorb legacy losses,
avoid fire-sale asset liquidations and generate new business at attractive
spreads. Investors began to grasp the "green shoots" of a recovery as
aggressively as they had looked for protection in a proverbial bunker a month or
two before.

Asia's increased reliance on trading within the region served countries there
well as China's continued development drove regional growth. Partially as a
consequence of the Asian financial crisis in the late 1990s, balance sheets in
the region are generally less leveraged, which also helped them through this
mostly western crisis.

The Fund saw significant inflows relative to its size and as a result we
generally had high levels of cash. One of our challenges was to find new
investments as the market rallied and as our existing positions moved towards
price targets. Notwithstanding this challenge, we were pleased with the Fund's
performance.

Most of our portfolio was invested in what we believe to be undervalued
equities. We focused on economically defensive industries with strong market
positions, high barriers to entry, and reasonably predictable earnings and cash
flows. In Asia, we invested in companies that are, in our analysis, well placed
to become regional market leaders but are, as yet, undiscovered by the market.
Many of these are in China's emerging industries such as advertising and gaming.

We were able to find some opportunities in merger arbitrage and distressed debt,
but opportunities were limited because the market was into a recovery phase when
the Fund launched in May.

Equity outperformance on the scale achieved in 2009 does not look sustainable
into a second year. Formidable headwinds remain. The reserve currency status of
the U.S. dollar continues to be questioned, and the European Central Bank will
have to navigate its withdrawal of monetary stimulus without slowing economic
recovery. Although the banking sector is no longer on life support, prospects
for economic growth in the European region remain uncertain, over and beyond the
welcome but temporary effects of restocking. Asian economic health looks more
robust, but uncertainty surrounds China's monetary policy and challenges ahead
for the developing country. However,

2 | Not part of the annual report

imbalances and temporary upheavals often generate mispriced securities, and that
volatility can help us find value for our shareholders. We thank you for your
patience and support since the Fund's launch, and look forward to serving you in
the future.

Sincerely,

/s/ Peter A. Langerman

Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC

Not part of the annual report | 3

Annual Report

Mutual International Fund

YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual International Fund seeks capital
appreciation, which may occasionally be short term, with income as a secondary
goal. The Fund normally invests at least 80% of its net assets in securities of
non-U.S. issuers that the manager believes are available at prices less than
their intrinsic value. The Fund invests, to a lesser extent, in risk arbitrage
securities and distressed companies.

We are pleased to bring you Mutual International Fund's inaugural annual report
for the period from inception on May 1, 2009, through December 31, 2009.

PERFORMANCE OVERVIEW

Mutual International Fund - Class Z delivered a +28.27% cumulative total return
from inception on May 1, 2009, through period-end on December 31, 2009. The Fund
outperformed its benchmark, the Morgan Stanley Capital International (MSCI)
Europe, Australasia, Far East (EAFE) Index Net Return (Local Currency), which
had a +24.49% total return for the same period.1 You can find other Fund
performance data in the Performance Summary beginning on page 10.

ECONOMIC AND MARKET OVERVIEW

Equity markets entered 2009 largely pricing in a possible economic depression
and systemic solvency crisis, scenarios that were ultimately averted by one of
the most aggressive global policy responses in financial history. As government
monetary and fiscal intervention began to gain traction toward the end of the
first quarter, equities bottomed and largely reversed their decline, economic
growth stabilized and rebounded, and confidence was rekindled as investors began
to believe the global financial system was finally

(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The MSCI EAFE Index Net Return (Local Currency) is a free
float-adjusted, market capitalization weighted index designed to measure
equity market performance of global developed markets excluding the U.S.
and Canada. The unmanaged index is calculated in local currency and
includes reinvested daily net dividends. One cannot invest directly in an
index, and an index is not 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 21.

4 | Annual Report

on the mend. Global equities rallied from their March lows, led by the riskier,
lower quality stocks that had been most vulnerable to a systemic meltdown or
funding collapse. Emerging market economies fueled the recovery as governments
aggressively incentivized lending and consumption, resulting in a dramatic
statistical recovery that laid the groundwork for the developing world's best
annual equity rally on record. Growing demand from emerging markets supported
commodity prices, which also posted record gains during the year. For most of
the year, the fading U.S. dollar also helped underpin the rally in hard assets,
while continued euro and yen strength created headwinds for regional recoveries.

Nonetheless, developed economies technically recovered by year-end, with Germany
and France leading the eurozone out of a recession and both Japan and the U.S.
exiting their longest recessions since World War II. Credit spreads narrowed as
access to capital expanded and the private sector significantly reduced debt,
though largely by transferring its liabilities to the public balance sheet. The
growing indebtedness of sovereign governments exposed structural weaknesses in
places like Dubai, Greece and Ireland, temporarily roiling markets toward the
end of the year. Policymakers remained firmly committed to stimulus throughout
the period, indicating that deflation worries persisted despite signs of
economic stabilization. The U.S. Federal Reserve Board announced its intention
to keep the benchmark lending rate "exceptionally low" for an extended period;
the new Japanese administration trumpeted its fight against deflation; and even
China restated its commitment to "moderately loose" policy. Still, policymakers
began discussing exit strategies by period-end as interest rates remained at
record lows and economic indicators rebounded.

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 in Asia and Europe. We have the ability to invest in emerging
markets, although this is unlikely to be a significant focus of our strategy.
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

GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/09

(BAR CHART)

U.K 16.2%
France 10.5%
Germany 9.7%
China 6.1%
Hong Kong 5.3%
Australia 5.0%
Japan 5.0%
Switzerland 4.8%
Denmark 3.9%
South Korea 3.0%
Italy 2.7%
Netherlands 2.4%
Singapore 2.1%
Ireland 1.4%
Bermuda 1.1%
Other 2.4%
Short-Term Investments & Other Net Assets 18.4%

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/09

% OF TOTAL
NET ASSETS
----------

Insurance 8.2%
Food Products 6.1%
Commercial Banks 5.9%
Food & Staples Retailing 4.5%
Capital Markets 4.3%
Media 4.2%
Diversified Financial Services 3.1%
Diversified Telecommunication Services 3.1%
Multi-Utilities 2.8%
Wireless Telecommunication Services 2.8%

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 internationally, we may invest
occasionally in privately held companies as well.

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, 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 arbi-trage
involves purchasing the target company's stock when it is trading below the
value we believe 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, it is our practice to hedge the Fund's currency exposure when we
deem it advantageous for our shareholders.

MANAGER'S DISCUSSION

During the period under review, the Fund outperformed its benchmark index with
the help of several investments. Three of the largest contributors during the
period were Chinese economy hotel operator Home Inns & Hotels Management;
CNinsure, an independent Chinese insurance agency and brokerage firm; and
VisionChina Media, which operates a vast advertising network of digital
television displays primarily within China's bus and subway transportation
systems.

Home Inns & Hotels is China's leading business hotel chain. We saw value
embedded in the company's portfolio of newly built hotels, many of whose
businesses had yet to mature. Given an abundant number of owners of large

6 | Annual Report

and small businesses increasingly traveling around China in an effort to expand
their franchises, Home Inns & Hotels was able to grow rapidly by bringing newly
built hotels to profitability quickly. When investors recognized this situation,
the company's stock price rose sharply, allowing us to sell our holdings at an
attractive valuation.

CNinsure operates in China, where the emerging middle class increasingly needs
to protect life and property. While closely monitoring the underwriting
standards in this nascent market, we accumulated CNinsure stock as it traded
closer to the value of the cash it held on its balance sheet. This was a signal
to us that its earnings were being ignored by other investors, as company sales
and earnings continued to climb. Eventually, other investors showed interest and
the value of our holding increased significantly.

VisionChina Media provides content for televisions mounted in Chinese mass
transit services in about 20 major cities. It pays local TV networks for
exclusive rights to stream that content into its network of more than 81,000
TVs, and then charges advertisers for space, just as a TV network would.
Fast-moving consumer goods companies have found this advertising to be very
successful as it catches the consumer en route, closer to the point of sale. As
the advertisements are streaming, they can also be used to promote special sale
items instantly, unlike traditional outdoor advertising billboards. After the
2008 Beijing Olympics, VisionChina's stock reacted positively to its resilient
2009 earnings. In our view, however, its share price does not yet reflect the
potential increase in advertising demand that could result from either the
Shanghai World Trade Fair or the company's acquisition of a major competitor.

Among the top detractors from the Fund's performance during the period were
China Digital TV Holding (CDTV), Swiss asset manager UBS and German sports car
manufacturer Porsche Holding.

CDTV controls over 50% of China's Conditional Access Card (CAC) market. CACs
provide the encryption that allows set-top boxes to talk to the cable companies
that provide televised content. In our view, CDTV is an investment in China's
growing population of TV viewers and the government- mandated switch to an
all-digital signal from analog by 2015. The business suffered from uncertainty
surrounding consolidation of China's fragmented cable industry, causing CAC
shipments to stagnate. However, as 2015 approaches, we see the inevitable need
for CACs and believe CDTV is one of the companies best positioned to benefit
from the trend.

We began accumulating shares of UBS in the summer of 2009 and continued to
selectively do so as its share price weakened through year-end. With its

TOP 10 HOLDINGS
12/31/09

COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------

Sinomedia Holding Ltd. 1.7%
MEDIA, CHINA
Vodafone Group PLC 1.6%
WIRELESS TELECOMMUNICATION SERVICES,
U.K.
Jyske Bank AS 1.5%
COMMERCIAL BANKS, DENMARK
Cable & Wireless PLC 1.4%
DIVERSIFIED TELECOMMUNICATION SERVICES,
U.K.
ISIS Asset Management PLC 1.4%
CAPITAL MARKETS, U.K.
A.P. Moller-Maersk AS 1.4%
MARINE, DENMARK
Siemens AG 1.3%
INDUSTRIAL CONGLOMERATES, GERMANY
British American Tobacco Group PLC 1.3%
TOBACCO, U.K.
Nintendo Co. Ltd. 1.3%
SOFTWARE, JAPAN
Berkeley Group Holdings PLC 1.3%
HOUSEHOLD DURABLES, U.K.

Annual Report | 7

leading global wealth management platform, UBS could be a big beneficiary of
customers' willingness to convert savings to investments. In addition, we think
the earnings from UBS's wealth management division could offset any slippage
that might come from the investment bank, as it underperformed its peers during
2009's robust fixed income market advance.

Our investment in Porsche experienced a high level of volatility in 2009 as
supporters and detractors fought to gain the upper hand in Porsche's
longstanding attempt to first gain control of Volkswagen and then negotiate a
merger of its automobile manufacturing operations. In addition, a longstanding
reluctance by Porsche management to communicate with investors led to a
seemingly never-ending stream of rumors. Despite all of this, we are of the
opinion that the announced merger between the two German companies' car
operations carries a strong industrial logic that we think should ultimately
benefit Porsche shareholders.

Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was weaker compared with most foreign currencies between May
and year-end 2009, our hedging strategy negatively impacted performance.

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

(PHOTO OF PHILIPPE BRUGERE-TRELAT)

/s/ Philippe Brugere-Trelat

Philippe Brugere-Trelat
Co-Portfolio Manager

(PHOTO OF ANDREW SLEEMAN)

/s/ Andrew Sleeman

Andrew Sleeman, CFA
Co-Portfolio Manager

Mutual International Fund

8 | Annual Report

PHILIPPE BRUGERE-TRELAT has been a co-portfolio manager for Mutual International
Fund since its May 2009 inception. Mr. Brugere-Trelat has also served as lead
portfolio manager for Mutual European Fund since 2005 and assumed portfolio
manager responsibilities for Mutual Global Discovery Fund in December 2009. 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.

ANDREW SLEEMAN has been a co-portfolio manager for Mutual International Fund
since its May 2009 inception. He joined Franklin Templeton Investments in 2007.
Previously, he was with Fox-Pitt, Kelton, a financials specialist firm, where he
focused on international financial equities. Prior to that, he worked in
international equities at BNP Paribas. He also worked in Australia in the fixed
income division of JP Morgan Investment Management.

Annual Report | 9

Performance Summary as of 12/31/09

PRICE AND DISTRIBUTION INFORMATION

CLASS Z (SYMBOL: N/A) CHANGE 12/31/09 5/1/09
- --------------------- ------ -------- ------

Net Asset Value (NAV) +$2.59 $12.59 $10.00
DISTRIBUTIONS (5/2/09-12/31/09)
Dividend Income $0.1733
Short-Term Capital Gain $0.0575
TOTAL $0.2308

CLASS A (SYMBOL: N/A) CHANGE 12/31/09 5/1/09
- --------------------- ------ -------- ------

Net Asset Value (NAV) +$2.58 $12.58 $10.00
DISTRIBUTIONS (5/2/09-12/31/09)
Dividend Income $0.1618
Short-Term Capital Gain $0.0575
TOTAL $0.2193

CLASS C (SYMBOL: N/A) CHANGE 12/31/09 5/1/09
- --------------------- ------ -------- ------

Net Asset Value (NAV) +$2.54 $12.54 $10.00
DISTRIBUTIONS (5/2/09-12/31/09)
Dividend Income $0.1383
Short-Term Capital Gain $0.0575
TOTAL $0.1958

CLASS R (SYMBOL: N/A) CHANGE 12/31/09 5/1/09
- --------------------- ------ -------- ------

Net Asset Value (NAV) +$2.58 $12.58 $10.00
DISTRIBUTIONS (5/2/09-12/31/09)
Dividend Income $0.1463
Short-Term Capital Gain $0.0575
TOTAL $0.2038

10 | Annual Report

Performance Summary (CONTINUED)

PERFORMANCE(1)

CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE TOTAL RETURN AND VALUE
OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z/R: NO SALES
CHARGES; CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT
DEFERRED SALES CHARGE IN FIRST YEAR ONLY.

CLASS Z INCEPTION (5/1/09)
- ------- ------------------

Cumulative Total Return(2) +28.27%
Aggregate Total Return(3) +28.27%
Value of $10,000 Investment(4) $12,827
Total Annual Operating Expenses(5)
Without Waiver 1.61%
With Waiver 1.17%

CLASS A INCEPTION (5/1/09)
- ------- ------------------

Cumulative Total Return(2) +28.05%
Aggregate Total Return(3) +20.69%
Value of $10,000 Investment(4) $12,069
Total Annual Operating Expenses(5)
Without Waiver 1.91%
With Waiver 1.47%

CLASS C INCEPTION (5/1/09)
- ------- ------------------

Cumulative Total Return(2) +27.41%
Aggregate Total Return(3) +26.41%
Value of $10,000 Investment(4) $12,641
Total Annual Operating Expenses(5)
Without Waiver 2.61%
With Waiver 2.17%

CLASS R INCEPTION (5/1/09)
- ------- ------------------

Cumulative Total Return(2) +27.89%
Aggregate Total Return(3) +27.89%
Value of $10,000 Investment(4) $12,789
Total Annual Operating Expenses(5)
Without Waiver 2.11%
With Waiver 1.67%

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, GO TO
franklintempleton.com OR CALL (800) 342-5236.

THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR
LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF
INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT
EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF
THE FUND DO NOT EXCEED 1.17% (OTHER THAN CERTAIN NONROUTINE EXPENSES OR COSTS,
INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND
LIQUIDATIONS) UNTIL 4/30/10.

Annual Report | 11

Performance Summary (CONTINUED)

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

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

AGGREGATE TOTAL RETURN

CLASS Z 12/31/09
- ------- --------

Since Inception (5/1/09) +28.27%

CLASS Z (5/1/09-12/31/09)

(PERFORMANCE GRAPH)

Mutual MSCI EAFE
International Index Net
Fund Return(5)
------------- ---------

5/1/09 10000 10000
5/31/09 10520 10528
6/30/09 10530 10492
7/31/09 11320 11295
8/31/09 11940 11793
9/30/09 12760 12048
10/31/09 12300 11774
11/30/09 12450 11795
12/31/09 12827 12449

AGGREGATE TOTAL RETURN

CLASS A 12/31/09
- ------- --------

Since Inception (5/1/09) +20.69%

CLASS A (5/1/09-12/31/09)

(PERFORMANCE GRAPH)

Mutual MSCI EAFE
International Index Net
Fund Return(5)
------------- ---------

5/1/09 9425 10000
5/31/09 9915 10528
6/30/09 9925 10492
7/31/09 10660 11295
8/31/09 11254 11793
9/30/09 12017 12048
10/31/09 11583 11774
11/30/09 11715 11795
12/31/09 12069 12449

12 | Annual Report

Performance Summary (CONTINUED)

AGGREGATE TOTAL RETURN

CLASS C 12/31/09
- ------- --------

Since Inception (5/1/09) +26.41%

CLASS C (5/1/09-12/31/09)

(PERFORMANCE GRAPH)

Mutual MSCI EAFE
International Index Net
Fund Return(5)
------------- ---------

5/1/09 10000 10000
5/31/09 10510 10528
6/30/09 10510 10492
7/31/09 11290 11295
8/31/09 11910 11793
9/30/09 12710 12048
10/31/09 12240 11774
11/30/09 12380 11795
12/31/09 12641 12449

AGGREGATE TOTAL RETURN

CLASS R 12/31/09
- ------- --------

Since Inception (5/1/09) +27.89%

CLASS R (5/1/09-12/31/09)

(PERFORMANCE GRAPH)

Mutual MSCI EAFE
International Index Net
Fund Return(5)
------------- ---------

5/1/09 10000 10000
5/31/09 10510 10528
6/30/09 10530 10492
7/31/09 11310 11295
8/31/09 11930 11793
9/30/09 12740 12048
10/31/09 12270 11774
11/30/09 12420 11795
12/31/09 12789 12449

Annual Report | 13

Performance Summary (CONTINUED)

ENDNOTES

VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING
CURRENCY FLUCTUATIONS, ECONOMIC INSTABILITY ANDPOLITICAL DEVELOPMENTS.
INVESTMENTS IN EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME
FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THESE MARKETS' SMALLER SIZE AND
LESSER LIQUIDITY. THE FUND'S INVESTMENTS IN COMPANIES ENGAGED IN MERGERS,
REORGANIZATIONS OR LIQUIDATIONS ALSO INVOLVE SPECIAL RISKS AS PENDING DEALS MAY
NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS. THE FUND MAY INVEST IN 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 C: 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.) If the manager and administrator had not waived fees, the Fund's total
returns would have been lower.

(2.) Cumulative total return represents the change in value of an investment
over the period indicated.

(3.) Aggregate total return represents the change in value of an investment over
the period indicated. Because the Fund has existed for less than one year,
average annual total returns are not available.

(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the period indicated.

(6.) Source: (C) 2009 Morningstar. The MSCI EAFE Index Net Return (Local
Currency) is a free float-adjusted, market capitalization-weighted indeX
designed to measure equity market performance of global developed markets
excluding the U.S. and Canada. The index is calculated in local currency
and includes reinvested daily net dividends.

14 | Annual Report

Your Fund's Expenses

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

- - Transaction costs, including sales charges (loads) on Fund purchases; and

- - 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
VALUE 7/1/09 VALUE 12/31/09 PERIOD* 7/1/09-12/31/09
----------------- -------------- -----------------------

CLASS Z
Actual $1,000 $1,218.10 $ 6.49
Hypothetical (5% return before expenses) $1,000 $1,019.36 $ 5.90
CLASS A
Actual $1,000 $1,216.00 $ 8.04
Hypothetical (5% return before expenses) $1,000 $1,017.95 $ 7.32
CLASS C
Actual $1,000 $1,212.30 $12.04
Hypothetical (5% return before expenses) $1,000 $1,014.32 $10.97
CLASS R
Actual $1,000 $1,214.50 $ 9.27
Hypothetical (5% return before expenses) $1,000 $1,016.85 $ 8.44

* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (Z: 1.16%; A: 1.44%; C:
2.16%; and R: 1.66%), multiplied by the average account value over the
period, multiplied by 184/365 to reflect the one-half year period.

16 | Annual Report

Mutual International Fund

FINANCIAL HIGHLIGHTS

PERIOD ENDED
DECEMBER 31,
CLASS Z 2009(a)
- ------- ------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $10.00
------
Income from investment operations(b):
Net investment income(c) ............................... 0.14
Net realized and unrealized gains (losses) ............. 2.68
------
Total from investment operations .......................... 2.82
------
Less distributions from:
Net investment income .................................. (0.17)
Net realized gains ..................................... (0.06)
------
Total distributions ....................................... (0.23)
------
Net asset value, end of period ............................ $12.59
======
Total return(d) ........................................... 28.27%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates(f,g) .... 4.42%
Expenses net of waiver and payments by affiliates(f,g) .... 1.17%
Ratios to average net assets, excluding dividend expense on
securities sold short:
Expenses before waiver and payments by affiliates(g) ... 4.41%
Expenses net of waiver and payments by affiliates(g) ... 1.16%
Net investment income ..................................... 1.91%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ......................... $4,320
Portfolio turnover rate ................................... 33.93%

(a) For the period May 1, 2009 (commencement of operations) to December 31,
2009.

(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.

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

(e) Ratios are annualized for periods less than one year.

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

(g) Benefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

Annual Report | 17

Mutual International Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

PERIOD ENDED
DECEMBER 31,
CLASS A 2009(a)
- ------- ------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $10.00
------
Income from investment operations(b):
Net investment income(c) ............................... 0.13
Net realized and unrealized gains (losses) ............. 2.67
------
Total from investment operations .......................... 2.80
------
Less distributions from:
Net investment income .................................. (0.16)
Net realized gains ..................................... (0.06)
------
Total distributions ....................................... (0.22)
------
Net asset value, end of period ............................ $12.58
======
Total return(d) ........................................... 28.05%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates(f,g) .... 4.70%
Expenses net of waiver and payments by affiliates(f,g) .... 1.45%
Ratios to average net assets, excluding dividend expense on
securities sold short:
Expenses before waiver and payments by affiliates(g) ... 4.69%
Expenses net of waiver and payments by affiliates(g) ... 1.44%
Net investment income ..................................... 1.63%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ......................... $4,784
Portfolio turnover rate ................................... 33.93%

(a) For the period May 1, 2009 (commencement of operations) to December 31,
2009.

(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.

(e) Ratios are annualized for periods less than one year.

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

(g) Benefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

18 | Annual Report

Mutual International Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

PERIOD ENDED
DECEMBER 31,
CLASS C 2009(a)
- ------- ------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $10.00
------
Income from investment operations(b):
Net investment income(c) ............................... 0.08
Net realized and unrealized gains (losses) ............. 2.66
------
Total from investment operations .......................... 2.74
------
Less distributions from:
Net investment income .................................. (0.14)
Net realized gains ..................................... (0.06)
------
Total distributions ....................................... (0.20)
------
Net asset value, end of period ............................ $12.54
======
Total return(d) ........................................... 27.41%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates(f,g) .... 5.42%
Expenses net of waiver and payments by affiliates(f,g) .... 2.17%
Ratios to average net assets, excluding dividend expense on
securities sold short:
Expenses before waiver and payments by affiliates(g) ... 5.41%
Expenses net of waiver and payments by affiliates(g) ... 2.16%
Net investment income ..................................... 0.91%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ......................... $ 999
Portfolio turnover rate ................................... 33.93%

(a) For the period May 1, 2009 (commencement of operations) to December 31,
2009.

(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.

(e) Ratios are annualized for periods less than one year.

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

(g) Benefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

Annual Report | 19

Mutual International Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

PERIOD ENDED
DECEMBER 31,
CLASS R 2009(a)
- ------- ------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $10.00
------
Income from investment operations(b):
Net investment income(c) ............................... 0.11
Net realized and unrealized gains (losses) ............. 2.68
------
Total from investment operations .......................... 2.79
------
Less distributions from:
Net investment income .................................. (0.15)
Net realized gains ..................................... (0.06)
------
Total distributions ....................................... (0.21)
------
Net asset value, end of period ............................ $12.58
======
Total return(d) ........................................... 27.89%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates(f,g) .... 4.92%
Expenses net of waiver and payments by affiliates(f,g) .... 1.67%
Ratios to average net assets, excluding dividend expense on
securities sold short:
Expenses before waiver and payments by affiliates(g) ... 4.91%
Expenses net of waiver and payments by affiliates(g) ... 1.66%
Net investment income ..................................... 1.41%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ......................... $ 13
Portfolio turnover rate ................................... 33.93%

(a) For the period May 1, 2009 (commencement of operations) to December 31,
2009.

(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.

(e) Ratios are annualized for periods less than one year.

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

(g) Benefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

20 | Annual Report

Mutual International Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009

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

COMMON STOCKS 79.1%
AIR FREIGHT & LOGISTICS 1.6%
Sinotrans Ltd., H .................................. China 416,000 $ 109,450
TNT NV ............................................. Netherlands 1,702 52,381
------------
161,831
------------
AUTOMOBILES 1.1%
Daimler AG ......................................... Germany 2,140 113,863
------------
BEVERAGES 1.9%
Carlsberg AS, B .................................... Denmark 1,308 96,622
Pernod Ricard SA ................................... France 1,140 97,764
------------
194,386
------------
CAPITAL MARKETS 4.3%
Deutsche Bank AG (EUR Traded) ...................... Germany 1,279 90,772
Deutsche Bank AG (USD Traded) ...................... Germany 200 14,182
ISIS Asset Management PLC .......................... United Kingdom 119,090 145,424
Man Group PLC ...................................... United Kingdom 13,820 68,710
(a) UBS AG ............................................. Switzerland 7,380 114,427
------------
433,515
------------
CHEMICALS 1.4%
Linde AG ........................................... Germany 591 71,198
Symrise AG ......................................... Germany 3,318 71,149
------------
142,347
------------
COMMERCIAL BANKS 5.9%
Barclays PLC ....................................... United Kingdom 22,264 99,165
Barclays PLC, ADR .................................. United Kingdom 385 6,776
BNP Paribas ........................................ France 1,365 109,225
(a) Intesa Sanpaolo SpA ................................ Italy 13,922 62,775
Intesa Sanpaolo SpA, di Risp ....................... Italy 14,895 49,999
(a) Jyske Bank AS ...................................... Denmark 3,998 155,741
Societe Generale, A ................................ France 1,576 110,429
------------
594,110
------------
COMMUNICATIONS EQUIPMENT 0.5%
Tandberg ASA ....................................... Norway 1,790 50,954
------------
COMPUTERS & PERIPHERALS 0.6%
China Digital TV Holding Co., ADR .................. China 10,410 63,397
------------
CONSTRUCTION & ENGINEERING 0.9%
(a) Boart Longyear Group ............................... Australia 280,253 89,277
------------
CONSTRUCTION MATERIALS 2.1%
CRH PLC ............................................ Ireland 4,167 113,392
SA des Ciments Vicat ............................... France 1,143 96,205
------------
209,597
------------
CONTAINERS & PACKAGING 0.3%
Rexam PLC .......................................... United Kingdom 7,310 34,230
------------

Annual Report | 21

Mutual International Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES 3.1%
Deutsche Boerse AG ................................. Germany 1,317 $ 109,343
First Pacific Co. Ltd. ............................. Hong Kong 184,042 112,508
Guoco Group Ltd. ................................... Hong Kong 9,000 96,051
------------
317,902
------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.1%
Cable & Wireless PLC ............................... United Kingdom 64,032 146,247
Koninklijke KPN NV ................................. Netherlands 4,935 83,640
Telefonica SA ...................................... Spain 3,105 86,760
------------
316,647
------------
ELECTRIC UTILITIES 2.3%
E.ON AG ............................................ Germany 2,157 89,881
Iride SpA .......................................... Italy 13,939 26,538
Prime Infrastructure Group ......................... Australia 30,822 114,228
------------
230,647
------------
ELECTRICAL EQUIPMENT 0.8%
Alstom SA .......................................... France 1,214 85,255
------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENT 0.9%
(a) Hollysys Automation Technologies Ltd. .............. United States 7,960 95,600
------------
FOOD & STAPLES RETAILING 4.5%
(a) AWB Ltd. ........................................... Australia 90,046 91,307
Familymart Co. Ltd. ................................ Japan 2,700 79,711
Koninklijke Ahold NV ............................... Netherlands 8,119 107,619
Lawson Inc. ........................................ Japan 1,600 70,553
Shinsegae Food System Co. Ltd. ..................... South Korea 1,533 102,149
------------
451,339
------------
FOOD PRODUCTS 6.1%
Cadbury PLC ........................................ United Kingdom 9,325 119,895
(a) China Fishery Group Ltd. ........................... China 109,900 107,906
Danone ............................................. France 1,037 63,577
Lotte Confectionery Co. Ltd. ....................... South Korea 70 77,379
Nestle SA .......................................... Switzerland 2,466 119,590
Nong Shim Co. Ltd. ................................. South Korea 582 124,279
------------
612,626
------------
HOTELS, RESTAURANTS & LEISURE 2.4%
Accor SA ........................................... France 2,304 126,151
REXLot Holdings Ltd., fgn .......................... Bermuda 1,025,000 115,009
------------
241,160
------------
HOUSEHOLD DURABLES 1.3%
(a) Berkeley Group Holdings PLC ........................ United Kingdom 9,459 126,660
------------
INDUSTRIAL CONGLOMERATES 2.1%
Jardine Matheson Holdings Ltd. ..................... Hong Kong 1,200 36,216
Jardine Strategic Holdings Ltd. .................... Hong Kong 2,200 38,720
Siemens AG ......................................... Germany 1,448 133,422
------------
208,358
------------

22 | Annual Report

Mutual International Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS (CONTINUED)
INSURANCE 8.2%
Austbrokers Holdings Ltd. .......................... Australia 12,831 $ 61,599
AXA SA ............................................. France 3,666 86,797
Brit Insurance Holdings NV ......................... United Kingdom 22,272 70,403
Catlin Group Ltd. .................................. United Kingdom 20,336 111,912
CNinsure Inc., ADR ................................. China 2,840 57,027
Hiscox Ltd. ........................................ United Kingdom 15,512 79,477
Lancashire Holdings Ltd. ........................... United Kingdom 12,141 86,974
(a) Resolution Ltd. .................................... United Kingdom 57,350 83,093
(a) Tower Australia Group Ltd. ......................... Australia 34,880 89,517
Zurich Financial Services AG ....................... Switzerland 493 107,873
------------
834,672
------------
MACHINERY 1.9%
Demag Cranes AG .................................... Germany 2,346 78,313
Schindler Holding AG, PC ........................... Switzerland 1,444 111,109
------------
189,422
------------
MARINE 1.4%
A P Moller - Maersk AS ............................. Denmark 20 140,814
------------
MEDIA 4.2%
Eutelsat Communications ............................ France 2,184 70,216
Seven Network Ltd. ................................. Australia 13,240 82,097
Sinomedia Holding Ltd. ............................. China 541,800 169,101
(a) VisionChina Media Inc., ADR ........................ China 9,860 107,671
------------
429,085
------------
METALS & MINING 0.2%
(b) BHP Billiton PLC, ADR .............................. United Kingdom 380 24,263
------------
MULTI-UTILITIES 2.8%
Enia SpA ........................................... Italy 6,815 51,606
GDF Suez ........................................... France 2,592 112,367
RWE AG ............................................. Germany 1,221 119,252
------------
283,225
------------
OIL, GAS & CONSUMABLE FUELS 2.8%
Eni SpA ............................................ Italy 3,276 83,472
Royal Dutch Shell PLC, A ........................... United Kingdom 3,100 93,631
Total SA, B ........................................ France 1,623 104,558
------------
281,661
------------
PHARMACEUTICALS 0.3%
Novartis AG ........................................ Switzerland 639 34,878
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) 1.0%
The Link REIT ...................................... Hong Kong 38,000 97,136
------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 1.8%
Parkway Life REIT .................................. Singapore 108,000 93,746
Wheelock Properties Ltd. ........................... Hong Kong 130,000 85,005
------------
178,751
------------

Annual Report | 23

Mutual International Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS (CONTINUED)
SOFTWARE 2.0%
Nintendo Co. Ltd. .................................. Japan 551 $ 130,609
(a) RCG Holdings Ltd. .................................. Hong Kong 53,000 70,268
------------
200,877
------------
THRIFTS & MORTGAGE FINANCE 0.2%
Paragon Group Cos. PLC ............................. United Kingdom 7,998 16,949
------------
TOBACCO 2.3%
British American Tobacco PLC ....................... United Kingdom 4,033 131,361
Japan Tobacco Inc. ................................. Japan 30 100,989
------------
232,350
------------
WIRELESS TELECOMMUNICATION SERVICES 2.8%
MobileOne Ltd. ..................................... Singapore 91,000 122,369
Vodafone Group PLC ................................. United Kingdom 69,291 160,665
------------
283,034
------------
TOTAL COMMON STOCKS (COST $7,072,336) .............. 8,000,818
------------
PREFERRED STOCKS (COST $103,442) 0.9%
AUTOMOBILES 0.9%
Porsche Automobile Holding SE, pfd. ................ Germany 1,457 90,307
------------

PRINCIPAL
AMOUNT(c)
----------

CORPORATE BONDS AND NOTES 1.8%
(d) Aiful Corp., senior note, 144A, 4.45%, 2/16/10 ..... Japan 125,000 120,000
(e,f) Bank of Ireland Holdings PLC, sub. note, FRN, 7.40%,
Perpetual ....................................... United Kingdom 46,000 EUR 37,204
(e) Chess Capital Securities, 4.83%, Perpetual ......... Ireland 50,000 EUR 25,587
------------
TOTAL CORPORATE BONDS AND NOTES (COST $170,361) .... 182,791
------------
TOTAL INVESTMENTS (COST $7,346,139) 81.8% .......... 8,273,916
SECURITIES SOLD SHORT (0.2)% ....................... (24,506)
OTHER ASSETS, LESS LIABILITIES 18.4% ............... 1,866,745
------------
NET ASSETS 100.0% .................................. $ 10,116,155
------------

SHARES
----------

(g) SECURITIES SOLD SHORT (PROCEEDS $21,220) (0.2)%
METALS & MINING (0.2)%
BHP Billiton Ltd., ADR ............................. Australia 320 $ (24,506)
------------

(a) Non-income producing.

(b) Security or a portion of the security has been segregated as collateral for
securities sold short. At December 31, 2009, the aggregate value of this
security and cash pledged amounted to $75,079.

(d) 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. This security has been deemed liquid under
guidelines approved by the Fund's Board of Trustees. At December 31, 2009,
the value of this security was $120,000, representing 1.19% of net assets.

(e) Perpetual security with no stated maturity date.

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

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

24 | Annual Report

Mutual International Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

At December 31, 2009, the Fund had the following forward exchange contracts
outstanding. See Note 1(c).

British Pound........... SSBT Sell 90,000 $ 143,532 1/13/10 $ -- $ (1,830)
British Pound........... BANT Sell 517,800 863,690 1/13/10 27,376 --
British Pound........... SSBT Sell 100,000 165,240 1/13/10 3,727 --
Euro.................... SSBT Buy 145,000 214,021 1/14/10 -- (6,466)
Euro.................... SSBT Sell 71,500 101,821 1/14/10 -- (525)
Euro.................... SSBT Sell 1,674,760 2,476,348 1/14/10 79,066 --
South Korean Won........ BANT Sell 193,320,000 164,994 1/15/10 -- (708)
South Korean Won........ BANT Sell 71,610,000 62,000 1/15/10 620 --
Australian Dollar....... SSBT Buy 47,455 43,200 1/19/10 -- (701)
Australian Dollar....... BANT Buy 10,660 9,630 1/19/10 -- (83)
Australian Dollar....... SSBT Buy 259,287 229,606 1/19/10 2,603 --
Australian Dollar....... SSBT Sell 317,402 293,756 1/19/10 9,500 --
Singapore Dollar........ SSBT Sell 208,000 147,109 3/24/10 -- (754)
Singapore Dollar........ SSBT Sell 140,000 100,734 3/24/10 1,211 --
Japanese Yen............ DBFX Sell 11,800,000 129,670 4/20/10 2,671 --
Japanese Yen............ SSBT Sell 6,700,000 75,843 4/20/10 3,734 --
Danish Krone............ SSBT Sell 1,037,300 206,620 4/23/10 7,344 --
Danish Krone............ BANT Sell 270,000 51,933 4/23/10 63 --
Swiss Franc............. SSBT Sell 234,000 221,621 5/10/10 -- (4,647)
Swiss Franc............. BANT Sell 106,000 99,554 5/10/10 -- (2,944)
Swiss Franc............. SSBT Buy 900 870 5/10/10 5 --
Swiss Franc............. BANT Sell 104,000 101,000 5/10/10 437 --
-------- --------
Unrealized appreciation (depreciation).............................................. 138,357 (18,658)
-------- --------
Net unrealized appreciation (depreciation)....................................... $119,699
========

See Abbreviations on page 40.

The accompanying notes are an integral part of these financial statements.

Annual Report | 25

Mutual International Fund

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2009

Assets:
Investments in securities:
Cost ........................................................... $ 7,346,139
-----------
Value .......................................................... $ 8,273,916
Cash .............................................................. 1,617,172
Foreign currency, at value (cost $88,982) ......................... 88,993
Receivables:
Investment securities sold ..................................... 130
Capital shares sold ............................................ 72,513
Dividends and interest ......................................... 32,148
Affiliates ..................................................... 89,920
Due from brokers ............................................... 50,816
Offering costs .................................................... 28,611
Unrealized appreciation on forward exchange contracts ............. 138,357
-----------
Total assets ................................................ 10,392,576
-----------
Liabilities:
Payables:
Investment securities purchased ................................ 134,302
Capital shares redeemed ........................................ 45,942
Professional fees .............................................. 36,633
Securities sold short, at value (proceeds $21,220) ................ 24,506
Unrealized depreciation on forward exchange contracts ............. 18,658
Accrued expenses and other liabilities ............................ 16,380
-----------
Total liabilities ........................................... 276,421
-----------
Net assets, at value ..................................... $10,116,155
-----------
Net assets consist of:
Paid-in capital ................................................... $ 9,037,113
Distributions in excess of net investment income .................. (37,307)
Net unrealized appreciation (depreciation) ........................ 1,043,056
Accumulated net realized gain (loss) .............................. 73,293
-----------
Net assets, at value ..................................... $10,116,155
===========

The accompanying notes are an integral part of these financial statements.

26 | Annual Report

Mutual International Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2009

CLASS Z:
Net assets, at value ........................................................ $4,319,820
----------
Shares outstanding .......................................................... 343,207
----------
Net asset value and maximum offering price per share ........................ $ 12.59
----------
CLASS A:
Net assets, at value ........................................................ $4,784,296
----------
Shares outstanding .......................................................... 380,328
----------
Net asset value per share(a) ................................................ $ 12.58
----------
Maximum offering price per share (net asset value per share / 94.25%) ....... $ 13.35
----------
CLASS C:
Net assets, at value ........................................................ $ 999,463
----------
Shares outstanding .......................................................... 79,710
----------
Net asset value and maximum offering price per share(a) ..................... $ 12.54
----------
CLASS R:
Net assets, at value ........................................................ $ 12,576
----------
Shares outstanding .......................................................... 1,000
----------
Net asset value and maximum offering price per share(a) ..................... $ 12.58
----------

(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.

The accompanying notes are an integral part of these financial statements.

Annual Report | 27

Mutual International Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the period ended December 31, 2009(a)

Investment income:
Dividends (net of foreign taxes of $6,937) .................. $ 87,984
Interest .................................................... 33,753
----------
Total investment income ............................... 121,737
----------
Expenses:
Management fees (Note 3a) ................................... 31,664
Administrative fees (Note 3b) ............................... 3,032
Distribution fees: (Note 3c)
Class A .................................................. 6,014
Class C .................................................. 3,086
Class R .................................................. 40
Transfer agent fees (Note 3e) ............................... 4,799
Custodian fees (Note 4) ..................................... 1,316
Reports to shareholders ..................................... 20,076
Registration and filing fees ................................ 2,397
Professional fees ........................................... 48,909
Amortization of offering costs .............................. 57,694
Dividends on securities sold short .......................... 262
Other ....................................................... 4,779
----------
Total expenses ........................................ 184,068
Expense reductions .................................... (8)
Expenses waived/paid by affiliates (Note 3f) .......... (128,609)
----------
Net expenses ....................................... 55,451
----------
Net investment income ........................... 66,286
----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .............................................. 334,665
Foreign currency transactions ............................ (225,077)
----------
Net realized gain (loss) ........................ 109,588
----------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................. 924,491
Translation of other assets and liabilities denominated
in foreign currencies ................................. 118,565
----------
Net change in unrealized appreciation
(depreciation) ............................... 1,043,056
----------
Net realized and unrealized gain (loss) ........................ 1,152,644
----------
Net increase (decrease) in net assets resulting from
operations .................................................. $1,218,930
==========

(a) For the period May 1, 2009 (commencement of operations) to December 31,
2009.

The accompanying notes are an integral part of these financial statements.

28 | Annual Report

Mutual International Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF CHANGES IN NET ASSETS

PERIOD ENDED
DECEMBER 31,
2009(a)
------------

Increase (decrease) in net assets:
Operations:
Net investment income ................................................ $ 66,286
Net realized gain (loss) from investments and foreign
currency transactions ............................................. 109,588
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and
liabilities denominated in foreign currencies ..................... 1,043,056
-----------
Net increase (decrease) in net assets resulting from operations ... 1,218,930
-----------
Distributions to shareholders from:
Net investment income:
Class Z ........................................................... (51,175)
Class A ........................................................... (57,867)
Class C ........................................................... (10,633)
Class R ........................................................... (146)
Net realized gains:
Class Z ........................................................... (16,979)
Class A ........................................................... (20,565)
Class C ........................................................... (4,421)
Class R ........................................................... (58)
-----------
Total distributions to shareholders ..................................... (161,844)
-----------
Capital share transactions: (Note 2)
Class Z ........................................................... 3,939,526
Class A ........................................................... 4,172,385
Class C ........................................................... 937,158
Class R ........................................................... 10,000
-----------
Total capital share transactions ........................................ 9,059,069
-----------
Net increase (decrease) in net assets .......................... 10,116,155
-----------
Net Assets:
End of period ........................................................... $10,116,155
-----------
Distributions in excess of net investment income included in net assets:
End of period ........................................................... $ (37,307)
===========

(a) For the period May 1, 2009 (commencement of operations) to December 31,
2009.

The accompanying notes are an integral part of these financial statements.

Annual Report | 29

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of seven separate funds. The Mutual International Fund (Fund) is
included in this report. The financial statements of the remaining funds in the
Trust are presented separately. Effective May 1, 2009, the Fund commenced
operations offering four classes of shares: Class Z, Class A, Class C, and Class
R. 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.

The following summarizes the Fund's significant accounting policies.

A. SECURITY VALUATION

Corporate debt 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. Debt
securities denominated in a foreign currency are converted into their U.S.
dollar equivalent at the foreign exchange rate in effect at the close of the
NYSE on the date that the values of the foreign debt securities are determined.

30 | Annual Report

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A. SECURITY VALUATION (CONTINUED)

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. The
investment manager monitors price movements following the close of trading in
foreign stock markets through a series of country specific market proxies (such
as baskets of American Depository Receipts, futures contracts and exchange
traded funds). These price movements are measured against established trigger
thresholds for each specific market proxy to assist in determining if an event
has occurred. 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 Trustees.

B. FOREIGN CURRENCY TRANSLATION

Annual Report | 31

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

C. DERIVATIVE FINANCIAL INSTRUMENTS

See Note 8 regarding other derivative information.

D. SECURITIES SOLD SHORT

32 | Annual Report

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

E. INCOME TAXES

The Fund has reviewed the tax position as of December 31, 2009, and has
determined that no provision for income tax is required in the Fund's financial
statements.

F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS

G. OFFERING COSTS

Offering costs are amortized on a straight line basis over twelve months.

Annual Report | 33

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. ACCOUNTING ESTIMATES

I. GUARANTEES AND INDEMNIFICATIONS

2. SHARES OF BENEFICIAL INTEREST

At December 31, 2009, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:

PERIOD ENDED
DECEMBER 31, 2009(a)
--------------------
SHARES AMOUNT
------- ----------

CLASS Z SHARES:
Shares sold ........................ 396,980 $4,604,523
Shares issued in reinvestment of
distributions ................... 5,214 63,970
Shares redeemed .................... (58,987) (728,967)
------- ----------
Net increase (decrease) ............ 343,207 $3,939,526
======= ==========
CLASS A SHARES:
Shares sold ........................ 416,707 $4,584,910
Shares issued in reinvestment of
distributions ................... 2,639 32,379
Shares redeemed .................... (39,018) (444,904)
------- ----------
Net increase (decrease) ............ 380,328 $4,172,385
======= ==========
CLASS C SHARES:
Shares sold ........................ 78,763 $ 925,620
Shares issued in reinvestment of
distributions ................... 1,181 14,439
Shares redeemed .................... (234) (2,901)
------- ----------
Net increase (decrease) ............ 79,710 $ 937,158
======= ==========

34 | Annual Report

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SHARES OF BENEFICIAL INTEREST (CONTINUED)

PERIOD ENDED
DECEMBER 31, 2009(a)
--------------------
SHARES AMOUNT
-------- -------

CLASS R SHARES:
Shares sold............... 1,000 $10,000
----- -------
Net increase (decrease)... 1,000 $10,000
===== =======

(a) For the period May 1, 2009 (commencement of operations) to December 31,
2009.

3. TRANSACTIONS WITH AFFILIATES

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

A. MANAGEMENT FEES

The Fund pays an investment management fee to Franklin Mutual of 0.80% per year
of the average daily net assets of the Fund.

B. ADMINISTRATIVE FEES

The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust'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

Annual Report | 35

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

C. DISTRIBUTION FEES (CONTINUED)

In addition, under the Fund's Class C and R compensation distribution plans, the
Fund pays Distributors for costs incurred in connection with the servicing, sale
and distribution of the Fund's shares up to the maximum annual plan rate for
each class.

The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:

Class A .... 0.35%
Class C .... 1.00%
Class R .... 0.50%

Prior to the Fund's commencement of operations, the Board of Trustees has set
the current rate at 0.30% per year for Class A shares until further notice and
approval by the Board.

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:

Sales charges retained net of commissions paid to
unaffiliated broker/dealers .................. $3,628
Contingent deferred sales charges retained ...... $ 15

E. TRANSFER AGENT FEES

For the period ended December 31, 2009, the Fund paid transfer agent fees of
$4,799, of which $3,398 was retained by Investor Services.

F. WAIVER AND EXPENSE REIMBURSEMENTS

Franklin Mutual and FT Services have contractually agreed in advance to waive or
limit their respective fees and to assume as their own expense certain expenses
otherwise payable by the fund so that the common expenses (i.e. a combination of
management fees, administrative fees, and other expenses, but excluding
distribution fees, and acquired fund fees and expenses) for each class of the
Fund do not exceed 1.17% (other than certain non-routine expenses or costs,
including those relating to litigation, indemnification, reorganizations, and
liquidations) until April 30, 2010.

G. OTHER AFFILIATED TRANSACTIONS

At December 31, 2009, Franklin Advisers Inc., an affiliate of the Investment
Manager, owned 24.9% of the Fund's outstanding shares.

36 | Annual Report

Mutual International 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 December 31, 2009, the
custodian fees were reduced as noted in the Statement of Operations.

5. INCOME TAXES

The tax character of distributions paid during the period ended December 31,
2009, was as follows:

2009
--------

Distributions paid from ordinary income ... $161,844
--------

At December 31, 2009, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:

Cost of investments ..................................... $7,441,443
==========
Unrealized appreciation ................................. $ 947,048
Unrealized depreciation ................................. (114,575)
----------
Net unrealized appreciation (depreciation) .............. $ 832,473
==========
Distributable earnings - undistributed ordinary income .. $ 243,125
==========

Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares, non-deductible expenses and offering costs.

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and passive foreign investment company shares.

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments and securities sold short (excluding short
term securities) for the period ended December 31, 2009, aggregated $8,839,846
and $1,856,223, respectively.

7. 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.

Annual Report | 37

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. OTHER DERIVATIVE INFORMATION

At December 31, 2009, the Fund has invested in derivative contracts which are
reflected on the Statement of Assets and Liabilities as follows:

ASSET DERIVATIVES LIABILITY DERIVATIVES
DERIVATIVE CONTRACTS --------------------------------------- -------------------------------------
NOT ACCOUNTED FOR AS STATEMENT OF ASSETS AND FAIR VALUE STATEMENT OF ASSETS AND FAIR VALUE
HEDGING INSTRUMENTS LIABILITIES LOCATION AMOUNT LIABILITIES LOCATION AMOUNT
- -------------------- -------------------------- ---------- ----------------------- -----------

Foreign exchange
contracts........ Unrealized appreciation on Unrealized depreciation
forward exchange contracts $138,357 on forward exchange $18,658
contracts

For the period ended December 31, 2009, the effect of derivative contracts on
the Fund's Statement of Operations was as follows:

CHANGE IN
UNREALIZED
APPRECIATION
REALIZED GAIN (DEPRECIATION) AVERAGE
(LOSS) FOR THE FOR THE AMOUNT
DERIVATIVE CONTRACTS PERIOD ENDED PERIOD ENDED OUTSTANDING
NOT ACCOUNTED FOR AS STATEMENT OF DECEMBER 31, DECEMBER 31, DURING THE
HEDGING INSTRUMENTS OPERATIONS LOCATIONS 2009 2009 PERIOD(A)
- -------------------- -------------------------------------- -------------- -------------- -----------

Foreign exchange
contracts........... Net realized gain (loss) from foreign
currency transactions/Net change in
unrealized appreciation (depreciation)
on translation of other assets and
liabilities denominated in foreign
currencies $(210,326) $119,699 3,410,245

(a) Represents the notional amount for deriative contracts outstanding during
the period. For derivative contracts denominated in foreign currencies,
notional amounts are converted into U.S. dollars.

See Note 1(c) regarding derivative financial instruments.

9. CREDIT FACILITY

On January 22, 2010, the Fund, together with other U.S. registered and foreign
investment funds (collectively "Borrowers"), managed by Franklin Templeton
Investments, entered into a 364-day joint syndicated senior unsecured credit
facility totaling $750 million (Global Credit Facility) to provide a source of
funds to the Borrowers for temporary and emergency purposes, including the
ability to meet future unanticipated or unusually large redemption requests.

38 | Annual Report

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. CREDIT FACILITY (CONTINUED)

10. FAIR VALUE MEASUREMENTS

- Level 1 - quoted prices in active markets for identical securities

- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)

- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.

The following is a summary of the inputs used as of December 31, 2009, in
valuing the Fund's assets and liabilities carried at fair value:

LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------- ---------- ------- ----------

ASSETS:
Investments in Securities:
Equity Investments(a,b)................. $8,091,125 $ -- $ -- $8,091,125
Corporate Bonds & Notes................. -- 182,791 -- 182,791
---------- ---------- ---- ----------
Total Investments in Securities...... $8,091,125 $ 182,791 $ -- $8,273,916
---------- ---------- ---- ----------
Forward Exchange Contracts................. $ -- $ 138,357 $ -- $ 138,357
LIABILITIES:
Securities Sold Short...................... 24,506 -- -- 24,506
Forward Exchange Contracts................. -- 18,658 -- 18,658

(a) Includes common and preferred stock as well as other equity investments.

(b) For detailed industry descriptions, see the accompanying Statement of
Investments.

Annual Report | 39

Mutual International Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update (ASU) No. 2010-6, FAIR VALUE MEASUREMENTS AND DISCLOSURE (TOPIC
820): IMPROVING DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS. ASU No. 2010-6
enhances and clarifies existing fair value measurement disclosure requirements
and is effective for interim and annual periods beginning after December 15,
2009. The Fund is currently evaluating the impact, if any, of applying the
provisions of ASU No. 2010-6.

12. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through February 18, 2010, the issuance
date of the financial statements and determined that no events have occurred
that require disclosure.

ABBREVIATIONS

COUNTERPARTY
BANT - Bank of America N.A.
DBFX - Deutsche Bank AG
SSBT - State Street Bank and Trust Co.

CURRENCY
EUR - Euro
USD - U.S. Dollar

SELECTED PORTFOLIO
ADR - American Depository Receipt
FRN - Floating Rate Note
PC - Participation Certificate

40 | Annual Report

Mutual International Fund

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS AND SHAREHOLDERS OF THE
MUTUAL INTERNATIONAL FUND:

We have audited the accompanying statement of assets and liabilities of the
Mutual International Fund (one of the Funds constituting the Franklin Mutual
Series Funds) (the "Fund"), including the statement of investments, as of
December 31, 2009, and the related statements of operations, the changes in net
assets, and the financial highlights for the period from May 1, 2009
(commencement of operations) to December 31, 2009. 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 audit.

We conducted our audit 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 audit 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, 2009, 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 audit provides 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 International Fund of the Franklin Mutual Series Funds at December 31,
2009, the results of its operations, the changes in its net assets, and the
financial highlights for the period from May 1, 2009 (commencement of
operations) to December 31, 2009, in conformity with U.S. generally accepted
accounting principles.

(ERNST & YOUNG LLP)

Boston, Massachusetts
February 18, 2010

Annual Report | 41

Mutual International Fund

TAX DESIGNATION (UNAUDITED)

Under Section 871(k)(2)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $42,023 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, 2009.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $58,922 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2009. Distributions, including qualified dividend income, paid
during calendar year 2009 will be reported to shareholders on Form 1099-DIV in
January 2010. 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 $335 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, 2009.

At December 31, 2009, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from income 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, pursuant to Section 853 of the Code. This designation will allow
shareholders of record on December 17, 2009, 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 table provides a detailed analysis of foreign tax paid, foreign
source income, and foreign qualified dividends as designated by the Fund, to
Class Z, Class A, Class C, and Class R shareholders of record.

Record Date: 12/17/09

TOTAL FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
CLASS PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- ----- ----------------- ---------------- -------------------

Class Z .. 0.0095 0.1521 0.0703
Class A .. 0.0095 0.1451 0.0670
Class C .. 0.0095 0.1316 0.0608
Class R .. 0.0095 0.1381 0.0646

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.

42 | Annual Report

Mutual International Fund

TAX DESIGNATION (UNAUDITED) (CONTINUED)

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 2010, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2009. 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 2009 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 | 43

Mutual International Fund

BOARD MEMBERS AND OFFICERS

INDEPENDENT BOARD MEMBERS

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

EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 8 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

KEITH E. MITCHELL (1954) Trustee Since 2009 8 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Principal, Mitchell Advisers LLC (advisory firm); director of various boards of asset management firms; and FORMERLY, Managing
Director, Putman Lovell NBF.

44 | Annual Report

CHARLES RUBENS II (1930) Trustee Since 1998 15 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Private investor.

LARRY D. THOMPSON (1945) Trustee Since 2009 141 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

JAN HOPKINS TRACHTMAN (1947) Trustee Since 2009 8 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Attorney at law.

INTERESTED BOARD MEMBERS AND OFFICERS

**GREGORY E. JOHNSON (1961) Trustee Since 2007 89 None
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Annual Report | 45

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Not Applicable
101 John F. Kennedy Parkway Applicable
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

JAMES M. DAVIS (1952) Chief Chief Compliance Not Not Applicable
One Franklin Parkway Compliance Officer since 2004 Applicable
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since 2006
Compliance

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

LAURA F. FERGERSON (1962) Chief Since March 2009 Not Not Applicable
One Franklin Parkway Executive Applicable
San Mateo, CA 94403-1906 Officer -
Finance and
Administration

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

ALIYA S. GORDON (1973) Vice President Since March 2009 Not Not Applicable
One Franklin Parkway Applicable
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

46 | Annual Report

DAVID P. GOSS (1947) Vice President Since 2000 Not Not Applicable
One Franklin Parkway Applicable
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

STEVEN J. GRAY (1955) Secretary and Secretary since Not Not Applicable
One Franklin Parkway Vice President 2005 and Vice Applicable
San Mateo, CA 94403-1906 President since
August 2009

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

MATTHEW T. HINKLE (1971) Treasurer, Since March 2009 Not Not Applicable
One Franklin Parkway Chief Applicable
San Mateo, CA 94403-1906 Financial
Officer and
Chief
Accounting
Officer

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Director, Fund Accounting, Franklin Templeton Investments; and officer of four of the investment companies in Franklin
Templeton Investments.

ROBERT C. ROSSELOT (1960) Vice President Since Not Not Applicable
500 East Broward Blvd. August 2009 Applicable
Suite 2100
Fort Lauderdale, FL 33394-3091

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

KAREN L. SKIDMORE (1952) Vice President Since Not Not Applicable
One Franklin Parkway August 2009 Applicable
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin
Templeton Investments.

Annual Report | 47

CRAIG S. TYLE (1960) Vice President Since 2005 Not Not Applicable
One Franklin Parkway Applicable
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.

THE FUND'S BOARD OF TRUSTEES 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.

48 | Annual Report

Mutual International Fund

SHAREHOLDER INFORMATION

PROXY VOTING POLICIES AND PROCEDURES

QUARTERLY STATEMENT OF INVESTMENTS

Annual Report | 49

This page intentionally left blank.

Franklin Templeton Funds

LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL
BEN/(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.

VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Quest Fund(2)
Mutual Recovery Fund(3)
Mutual Shares Fund

BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund

GROWTH
Franklin DynaTech Fund
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund

SECTOR
Franklin Biotechnology Discovery Fund
Franklin Global Real Estate Fund
Franklin Gold & Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund

GLOBAL
Mutual Global Discovery Fund(4)
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund

INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Mutual International Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Frontier Markets Fund

HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund

ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation FunD
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund

FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio Franklin
Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund

TAX-FREE INCOME(6)
NATIONAL Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)

LIMITED-/INTERMEDIATE-TERM
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund

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

INSURANCE FUNDS
Franklin Templeton Variable Insurance
Products Trust(10)

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

(2.) Effective 5/1/09, Mutual Qualified Fund changed its name to Mutual Quest
Fund. The fund's investment goal and strategy remained unchanged.

(4.) Effective 5/1/09, Mutual Discovery Fund changed its name to Mutual Global
Discovery Fund. The fund's investment goal and strategy remained unchanged.

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

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

(7.) The fund invests primarily in insured municipal securities.

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

01/10 Not part of the annual report

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

ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL INTERNATIONAL FUND

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

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

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

373 A2009 02/10

DECEMBER 31, 2009

ANNUAL REPORT
AND SHAREHOLDER LETTER

(GRAPHIC)

VALUE

MUTUAL QUEST FUND
(FORMERLY, MUTUAL QUALIFIED FUND)

(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)

Franklin - Templeton - MUTUAL SERIES

Franklin Templeton Investments

GAIN FROM OUR PERSPECTIVE(R)

Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.

SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.

FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.

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

(GRAPHIC)

Not part of the annual report

Contents

SHAREHOLDER LETTER ....................................... 1
ANNUAL REPORT
Mutual Quest 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 .. 54
Tax Designation .......................................... 55
Board Members and Officers ............................... 56
Shareholder Information .................................. 61

Shareholder Letter

Dear Mutual Quest Fund Shareholder:

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

Not part of the annual report | 1

spreads. Investors began to grasp the "green shoots" of a recovery as
aggressively as they had looked for protection in a proverbial bunker a month or
two before.

2 | Not part of the annual report

they are also generally facing significant obstacles to organic growth from
still-cautious consumers.

Sincerely,

/s/ Peter A. Langerman

Peter A. Langerman

Chairman, President and Chief
Executive Officer Franklin Mutual
Advisers, LLC

Not part of the annual report | 3

Annual Report

Mutual Quest Fund
(formerly, Mutual Qualified Fund)

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

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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.

This annual report for Mutual Quest Fund covers the fiscal year ended December
31, 2009. The Fund's goal and strategy have not changed; however, we renamed the
Fund to avoid any misinterpretation that Mutual Qualified Fund was for qualified
investors only.

PERFORMANCE OVERVIEW

Mutual Quest Fund - Class Z delivered a +20.61% cumulative total return for the
12 months ended December 31, 2009. The Fund underperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a +26.46% total return 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 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

Throughout the year, the Federal Open Market Committee kept U.S. monetary policy
unchanged, announcing it intends to hold the federal funds target rate in the 0%
to 0.25% range "for an extended period" as it lays the groundwork for an
eventual tightening of monetary policy. Late in the period, the labor market
improved somewhat as the economy lost fewer jobs than expected and the
unemployment rate fell slightly, dropping from a period high of 10.2% in October
to 10.0% at period-end.(2)

GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/09

(PERFORMANCE GRAPH)

U.S. 31.4%
U.K. 11.6%
France 9.4%
Germany 4.0%
Switzerland 4.0%
Norway 3.0%
Bermuda 2.4%
Finland 2.4%
South Korea 2.1%
Netherlands 1.7%
Japan 1.7%
Hong Kong 1.0%
Other 2.4%
Short-Term Investments & Other Net Assets 22.9%

INVESTMENT STRATEGY

(2.) Source: Bureau of Labor Statistics.

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/09

% OF TOTAL
NET ASSETS
----------

Tobacco 13.8%
Food Products 9.4%
Insurance 6.0%
Energy Equipment & Services 4.7%
Food & Staples Retailing 3.7%
Software 3.0%
Machinery 2.7%
Oil, Gas & Consumable Fuels 2.5%
Commercial Banks 2.4%
Beverages 2.4%

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.

In addition, it is our practice to hedge the Fund's currency exposure when we
deem it advantageous for our shareholders.

MANAGER'S DISCUSSION

During 2009, Mutual Quest's best performing investments included Seadrill, a
Norwegian deepwater contract driller; Kone, a Finnish engineering and service
company specializing in elevator and escalator installation and servicing; and
Lorillard, the third-largest U.S. tobacco company.

6 | Annual Report

Seadrill, one the world's largest offshore drilling companies, owns a fleet of
nine ultra-deepwater assets, with three additional units scheduled for 2011
delivery. The company benefited from increased demand for rigs capable of
drilling in deep water basins including the Santos Basin near Brazil (Tupi oil
field), U.S. Gulf of Mexico, and offshore West Africa. Seadrill has entered into
long-term contracts for much of its deepwater fleet, with three contracts that
extend beyond 2014. This long order book gives the company and investors a
higher degree of visibility in forecasting future results. Seadrill's stock
price gained strength as the company restructured its balance sheet and as oil
prices more than doubled from first quarter lows.

The shares of escalator and elevator manufacturer Kone increased in value during
2009 as investors began to recognize the strong, stable earnings coming from the
company's aftermarket business. Kone also gained market share during the year,
which helped offset a decline in elevator and escalator sales stemming from a
decrease in non-residential construction. In addition, prospects improved in the
Chinese construction market, raising expectations for new orders and the
company's future earnings.

Coming into 2009, as the administration changed hands in Washington, DC,
investors were cautious about Lorillard and the tobacco industry as a whole, due
in part to the uncertainty surrounding the impact higher federal excise taxes
would have on industry profitability. On April 1, 2009, these taxes were
increased by nearly 160%, causing sales volumes to tumble across the industry.
However, as the year progressed, manufacturers, including Lorillard, reported
better-than-expected operating earnings and its stock price responded
positively.

In addition to those companies cited above, one of the best performing areas of
the portfolio was the Fund's investments in distressed securities. At the end of
2008 and the beginning of 2009, as fear was gripping the credit markets and
yield spreads were widening to historically high levels, we found compelling
opportunities in distressed debt -- specifically in the debt of companies that
had amassed debt in the preceding few years when credit was widely available. A
number of these positions appreciated significantly over 2009 as capital flowed
back into credit and yield spreads tightened considerably.

Although most of the Fund's positions made significant positive contributions
during 2009, it also had some underachievers. Three investments that failed to
meet our expectations during the period were South Korean tobacco and ginseng
product manufacturer KT&G; Japanese video game and handheld device maker
Nintendo; and Lotte Confectionery, a South Korean snack food manufacturer.

TOP 10 HOLDINGS

12/31/09

COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------

British American Tobacco PLC 3.5%
TOBACCO, U.K
Lorillard Inc. 2.5%
TOBACCO, U.S.
Danone 2.5%
FOOD PRODUCTS, FRANCE
Kone OYJ, B 2.4%
MACHINERY, FINLAND
Nestle SA 2.3%
FOOD PRODUCTS, SWITZERLAND
White Mountains Insurance Group Ltd. 2.3%
INSURANCE, U.S.
Seadrill Ltd. 2.0%
Energy Equipment & Services, Bermuda
Microsoft Corp. 1.9%
SOFTWARE, U.S.
Cadbury PLC 1.9%
FOOD PRODUCTS, U.K
Reynolds American Inc. 1.8%
TOBACCO, U.S.

Annual Report | 7

For the most part, KT&G shares performed weakly in 2009 as the company lost
market share to other competitors within its domestic tobacco market.

Nintendo is one of the world's largest producers of entertainment hardware and
software. During 2009, its share price was negatively impacted by
lower-than-expected sales of Wii gaming consoles. In addition to lower Wii
sales, stronger-than-expected currency appreciation of the Japanese yen versus
the U.S. dollar during Nintendo's fiscal first half (ended September 30, 2009)
caused the company to lower its sales and profit estimates. We began purchasing
Nintendo shares in 2008 as we believed the company was trading at a significant
discount to its intrinsic value at that time. Nintendo retains the leading
market share in console-based and portable gaming devices, and its software
business has produced many of the top selling games of all time. The company's
balance sheet is strong, with net cash and equivalents making up over 30% of its
market capitalization. At period-end, we believed the stock stood to further
benefit from the already large, installed base of Nintendo-branded devices.

Lotte Confectionery enjoyed robust sales growth in 2009 as the company
significantly raised prices of its ice cream and other confectionery products.
Unfortunately, evidence of the price hikes did not show up in its earnings
results, as it suffered from the detrimental currency effects of the devaluation
of the South Korean won and the corresponding increase in the cost of raw
materials. A recent rebound in the won, however, somewhat alleviated these
margin pressures. Outside of its primary operations, Lotte also owns stakes in
various other businesses, the most significant of which is Lotte Shopping. The
Lotte Shopping subsidiary rallied nicely in 2009 and by year-end made up about
half of the company's overall value.

8 | Annual Report

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

(PHOTO OF SHAWN M. TUMULTY)

/s/ Shawn M. Tumulty

Shawn M. Tumulty, CFA
Portfolio Manager
Mutual Quest Fund

SHAWN TUMULTY has been a portfolio manager for Mutual Quest 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.

Annual Report | 9

Performance Summary as of 12/31/09

PRICE AND DISTRIBUTION INFORMATION

CLASS Z (SYMBOL: MQIFX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$2.65 $17.24 $14.59
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.3343
Long-Term Capital Gain $0.0164
TOTAL $0.3507

CLASS A (SYMBOL: TEQIX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$2.62 $17.12 $14.50
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.2876
Long-Term Capital Gain $0.0164
TOTAL $0.3040

CLASS B (SYMBOL: TEBQX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$2.58 $16.77 $14.19
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.1577
Long-Term Capital Gain $0.0164
TOTAL $0.1741

CLASS C (SYMBOL: TEMQX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$2.59 $16.97 $14.38
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.1786
Long-Term Capital Gain $0.0164
TOTAL $0.1950

CLASS R (SYMBOL: N/A) CHANGE 12/31/09 5/1/09
- --------------------- ------ -------- --------

Net Asset Value (NAV) +$2.43 $17.07 $14.64
DISTRIBUTIONS (5/2/09-12/31/09)
Dividend Income $0.3144
Long-Term Capital Gain $0.0164
TOTAL $0.3308

10 | Annual Report

Performance Summary (CONTINUED)

PERFORMANCE

CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE AND AVERAGE ANNUAL
TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
CLASS Z/R: NO SALES CHARGES; 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 Z(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- -------

Cumulative Total Return(2) +20.61% +30.41% +114.24%
Average Annual Total Return(3) +20.61% +5.45% +7.92%
Value of $10,000 Investment(4) $12,061 $13,041 $21,424
Total Annual Operating Expenses(5) 0.81%

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

Cumulative Total Return(2) +20.20% +28.28% +107.03%
Average Annual Total Return(3) +13.32% +3.87% +6.91%
Value of $10,000 Investment(4) $11,332 $12,092 $19,512
Total Annual Operating Expenses(5) 1.11%

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

Cumulative Total Return(2) +19.43% +24.09% +96.65%
Average Annual Total Return(3) +15.43% +4.11% +7.00%
Value of $10,000 Investment(4) $11,543 $12,233 $19,665
Total Annual Operating Expenses(5) 1.81%

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

Cumulative Total Return(2) +19.39% +24.03% +93.95%
Average Annual Total Return(3) +18.39% +4.40% +6.85%
Value of $10,000 Investment(4) $11,839 $12,403 $19,395
Total Annual Operating Expenses(5) 1.80%

INCEPTION
CLASS R (5/1/09)
- ------- ---------

Cumulative Total Return(2) +18.89%
Aggregate Total Return(6) +18.89%
Value of $10,000 Investment(4) $11,889
Total Annual Operating Expenses(5) 1.31%

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, GO TO
franklintempleton.com OR CALL (800) 342-5236.

Annual Report | 11

Performance Summary (CONTINUED)

TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT

AVERAGE ANNUAL TOTAL RETURN

CLASS Z(1) 12/31/09
- ---------- --------

1-Year +20.61%
5-Year +5.45%
10-Year +7.92%

CLASS Z (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

DATE MUTUAL QUEST FUND - CLASS Z S&P 500 INDEX
- ---------- --------------------------- -------------

1/1/2000 $10,000 $10,000
1/31/2000 $ 9,722 $ 9,498
2/29/2000 $ 9,279 $ 9,318
3/31/2000 $10,290 $10,229
4/30/2000 $10,302 $ 9,922
5/31/2000 $10,526 $ 9,718
6/30/2000 $10,359 $ 9,958
7/31/2000 $10,673 $ 9,802
8/31/2000 $11,147 $10,411
9/30/2000 $11,179 $ 9,861
10/31/2000 $11,275 $ 9,819
11/30/2000 $10,923 $ 9,045
12/31/2000 $11,425 $ 9,090
1/31/2001 $12,037 $ 9,412
2/28/2001 $12,017 $ 8,554
3/31/2001 $11,755 $ 8,012
4/30/2001 $12,312 $ 8,635
5/31/2001 $12,753 $ 8,692
6/30/2001 $12,952 $ 8,481
7/31/2001 $13,008 $ 8,397
8/31/2001 $12,782 $ 7,872
9/30/2001 $11,595 $ 7,236
10/31/2001 $11,510 $ 7,374
11/30/2001 $11,998 $ 7,940
12/31/2001 $12,363 $ 8,009
1/31/2002 $12,311 $ 7,892
2/28/2002 $12,371 $ 7,740
3/31/2002 $12,798 $ 8,031
4/30/2002 $12,888 $ 7,544
5/31/2002 $12,888 $ 7,489
6/30/2002 $12,011 $ 6,955
7/31/2002 $11,164 $ 6,413
8/31/2002 $11,263 $ 6,455
9/30/2002 $10,531 $ 5,754
10/31/2002 $10,676 $ 6,260
11/30/2002 $10,943 $ 6,629
12/31/2002 $10,793 $ 6,239
1/31/2003 $10,708 $ 6,076
2/28/2003 $10,484 $ 5,985
3/31/2003 $10,507 $ 6,043
4/30/2003 $11,226 $ 6,540
5/31/2003 $11,853 $ 6,885
6/30/2003 $12,048 $ 6,973
7/31/2003 $12,228 $ 7,096
8/31/2003 $12,531 $ 7,234
9/30/2003 $12,469 $ 7,157
10/31/2003 $12,999 $ 7,562
11/30/2003 $13,435 $ 7,629
12/31/2003 $14,085 $ 8,029
1/31/2004 $14,219 $ 8,176
2/29/2004 $14,565 $ 8,290
3/31/2004 $14,565 $ 8,165
4/30/2004 $14,140 $ 8,037
5/31/2004 $14,258 $ 8,147
6/30/2004 $14,527 $ 8,305
7/31/2004 $14,306 $ 8,030
8/31/2004 $14,495 $ 8,063
9/30/2004 $14,843 $ 8,150
10/31/2004 $15,009 $ 8,275
11/30/2004 $15,940 $ 8,610
12/31/2004 $16,428 $ 8,902
1/31/2005 $16,066 $ 8,685
2/28/2005 $16,512 $ 8,868
3/31/2005 $16,377 $ 8,711
4/30/2005 $16,243 $ 8,546
5/31/2005 $16,647 $ 8,818
6/30/2005 $16,988 $ 8,830
7/31/2005 $17,543 $ 9,159
8/31/2005 $17,518 $ 9,075
9/30/2005 $17,799 $ 9,149
10/31/2005 $17,338 $ 8,996
11/30/2005 $17,859 $ 9,337
12/31/2005 $18,278 $ 9,340
1/31/2006 $18,711 $ 9,587
2/28/2006 $18,970 $ 9,613
3/31/2006 $19,680 $ 9,733
4/30/2006 $19,800 $ 9,863
5/31/2006 $19,514 $ 9,580
6/30/2006 $19,489 $ 9,593
7/31/2006 $19,611 $ 9,652
8/31/2006 $20,163 $ 9,881
9/30/2006 $20,247 $10,136
10/31/2006 $20,930 $10,466
11/30/2006 $21,407 $10,665
12/31/2006 $21,804 $10,815
1/31/2007 $22,382 $10,978
2/28/2007 $22,382 $10,764
3/31/2007 $22,950 $10,884
4/30/2007 $23,648 $11,366
5/31/2007 $24,495 $11,763
6/30/2007 $24,455 $11,567
7/31/2007 $23,864 $11,209
8/31/2007 $23,664 $11,377
9/30/2007 $23,954 $11,802
10/31/2007 $24,335 $11,990
11/30/2007 $23,984 $11,489
12/31/2007 $23,793 $11,409
1/31/2008 $22,704 $10,725
2/29/2008 $22,541 $10,376
3/31/2008 $22,475 $10,332
4/30/2008 $22,791 $10,835
5/31/2008 $23,140 $10,975
6/30/2008 $21,648 $10,050
7/31/2008 $21,463 $ 9,965
8/31/2008 $21,561 $10,109
9/30/2008 $20,579 $ 9,209
10/31/2008 $18,388 $ 7,662
11/30/2008 $17,533 $ 7,112
12/31/2008 $17,763 $ 7,188
1/31/2009 $17,423 $ 6,582
2/28/2009 $16,729 $ 5,881
3/31/2009 $17,179 $ 6,396
4/30/2009 $17,910 $ 7,009
5/31/2009 $18,652 $ 7,401
6/30/2009 $18,725 $ 7,415
7/31/2009 $19,578 $ 7,976
8/31/2009 $19,943 $ 8,264
9/30/2009 $20,560 $ 8,573
10/31/2009 $20,523 $ 8,413
11/30/2009 $20,755 $ 8,918
12/31/2009 $21,424 $ 9,090

AVERAGE ANNUAL TOTAL RETURN

CLASS A(1) 12/31/09
- ---------- --------

1-Year +13.32%
5-Year +3.87%
10-Year +6.91%

CLASS A (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

DATE MUTUAL QUEST FUND - CLASS A S&P 500 INDEX
- ---------- --------------------------- -------------

1/1/2000 $ 9,425 $10,000
1/31/2000 $ 9,162 $ 9,498
2/29/2000 $ 8,737 $ 9,318
3/31/2000 $ 9,687 $10,229
4/30/2000 $ 9,693 $ 9,922
5/31/2000 $ 9,905 $ 9,718
6/30/2000 $ 9,749 $ 9,958
7/31/2000 $10,040 $ 9,802
8/31/2000 $10,475 $10,411
9/30/2000 $10,505 $ 9,861
10/31/2000 $10,590 $ 9,819
11/30/2000 $10,257 $ 9,045
12/31/2000 $10,726 $ 9,090
1/31/2001 $11,296 $ 9,412
2/28/2001 $11,277 $ 8,554
3/31/2001 $11,024 $ 8,012
4/30/2001 $11,549 $ 8,635
5/31/2001 $11,957 $ 8,692
6/30/2001 $12,135 $ 8,481
7/31/2001 $12,188 $ 8,397
8/31/2001 $11,969 $ 7,872
9/30/2001 $10,858 $ 7,236
10/31/2001 $10,778 $ 7,374
11/30/2001 $11,230 $ 7,940
12/31/2001 $11,568 $ 8,009
1/31/2002 $11,512 $ 7,892
2/28/2002 $11,568 $ 7,740
3/31/2002 $11,962 $ 8,031
4/30/2002 $12,040 $ 7,544
5/31/2002 $12,040 $ 7,489
6/30/2002 $11,213 $ 6,955
7/31/2002 $10,426 $ 6,413
8/31/2002 $10,512 $ 6,455
9/30/2002 $ 9,832 $ 5,754
10/31/2002 $ 9,961 $ 6,260
11/30/2002 $10,204 $ 6,629
12/31/2002 $10,065 $ 6,239
1/31/2003 $ 9,985 $ 6,076
2/28/2003 $ 9,775 $ 5,985
3/31/2003 $ 9,782 $ 6,043
4/30/2003 $10,455 $ 6,540
5/31/2003 $11,034 $ 6,885
6/30/2003 $11,214 $ 6,973
7/31/2003 $11,374 $ 7,096
8/31/2003 $11,651 $ 7,234
9/30/2003 $11,600 $ 7,157
10/31/2003 $12,080 $ 7,562
11/30/2003 $12,488 $ 7,629
12/31/2003 $13,082 $ 8,029
1/31/2004 $13,207 $ 8,176
2/29/2004 $13,523 $ 8,290
3/31/2004 $13,523 $ 8,165
4/30/2004 $13,119 $ 8,037
5/31/2004 $13,229 $ 8,147
6/30/2004 $13,476 $ 8,305
7/31/2004 $13,263 $ 8,030
8/31/2004 $13,432 $ 8,063
9/30/2004 $13,756 $ 8,150
10/31/2004 $13,903 $ 8,275
11/30/2004 $14,764 $ 8,610
12/31/2004 $15,211 $ 8,902
1/31/2005 $14,866 $ 8,685
2/28/2005 $15,281 $ 8,868
3/31/2005 $15,148 $ 8,711
4/30/2005 $15,023 $ 8,546
5/31/2005 $15,391 $ 8,818
6/30/2005 $15,696 $ 8,830
7/31/2005 $16,204 $ 9,159
8/31/2005 $16,180 $ 9,075
9/30/2005 $16,442 $ 9,149
10/31/2005 $16,006 $ 8,996
11/30/2005 $16,482 $ 9,337
12/31/2005 $16,861 $ 9,340
1/31/2006 $17,263 $ 9,587
2/28/2006 $17,494 $ 9,613
3/31/2006 $18,135 $ 9,733
4/30/2006 $18,246 $ 9,863
5/31/2006 $17,981 $ 9,580
6/30/2006 $17,953 $ 9,593
7/31/2006 $18,066 $ 9,652
8/31/2006 $18,560 $ 9,881
9/30/2006 $18,629 $10,136
10/31/2006 $19,254 $10,466
11/30/2006 $19,687 $10,665
12/31/2006 $20,054 $10,815
1/31/2007 $20,580 $10,978
2/28/2007 $20,580 $10,764
3/31/2007 $21,096 $10,884
4/30/2007 $21,722 $11,366
5/31/2007 $22,496 $11,763
6/30/2007 $22,454 $11,567
7/31/2007 $21,899 $11,209
8/31/2007 $21,714 $11,377
9/30/2007 $21,973 $11,802
10/31/2007 $22,325 $11,990
11/30/2007 $21,992 $11,489
12/31/2007 $21,804 $11,409
1/31/2008 $20,810 $10,725
2/29/2008 $20,649 $10,376
3/31/2008 $20,589 $10,332
4/30/2008 $20,870 $10,835
5/31/2008 $21,181 $10,975
6/30/2008 $19,815 $10,050
7/31/2008 $19,635 $ 9,965
8/31/2008 $19,725 $10,109
9/30/2008 $18,824 $ 9,209
10/31/2008 $16,803 $ 7,662
11/30/2008 $16,025 $ 7,112
12/31/2008 $16,233 $ 7,188
1/31/2009 $15,919 $ 6,582
2/28/2009 $15,281 $ 5,881
3/31/2009 $15,684 $ 6,396
4/30/2009 $16,345 $ 7,009
5/31/2009 $17,016 $ 7,401
6/30/2009 $17,084 $ 7,415
7/31/2009 $17,856 $ 7,976
8/31/2009 $18,181 $ 8,264
9/30/2009 $18,748 $ 8,573
10/31/2009 $18,703 $ 8,413
11/30/2009 $18,916 $ 8,918
12/31/2009 $19,512 $ 9,090

12 | Annual Report

Performance Summary (CONTINUED)

CLASS B (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

DATE MUTUAL QUEST FUND - CLASS B S&P 500 INDEX
- ---------- --------------------------- -------------

1/1/2000 $10,000 $10,000
1/31/2000 $ 9,714 $ 9,498
2/29/2000 $ 9,261 $ 9,318
3/31/2000 $10,262 $10,229
4/30/2000 $10,268 $ 9,922
5/31/2000 $10,489 $ 9,718
6/30/2000 $10,311 $ 9,958
7/31/2000 $10,614 $ 9,802
8/31/2000 $11,072 $10,411
9/30/2000 $11,098 $ 9,861
10/31/2000 $11,182 $ 9,819
11/30/2000 $10,827 $ 9,045
12/31/2000 $11,312 $ 9,090
1/31/2001 $11,910 $ 9,412
2/28/2001 $11,876 $ 8,554
3/31/2001 $11,608 $ 8,012
4/30/2001 $12,151 $ 8,635
5/31/2001 $12,578 $ 8,692
6/30/2001 $12,757 $ 8,481
7/31/2001 $12,806 $ 8,397
8/31/2001 $12,573 $ 7,872
9/30/2001 $11,400 $ 7,236
10/31/2001 $11,301 $ 7,374
11/30/2001 $11,774 $ 7,940
12/31/2001 $12,123 $ 8,009
1/31/2002 $12,056 $ 7,892
2/28/2002 $12,108 $ 7,740
3/31/2002 $12,518 $ 8,031
4/30/2002 $12,593 $ 7,544
5/31/2002 $12,586 $ 7,489
6/30/2002 $11,714 $ 6,955
7/31/2002 $10,887 $ 6,413
8/31/2002 $10,963 $ 6,455
9/30/2002 $10,249 $ 5,754
10/31/2002 $10,378 $ 6,260
11/30/2002 $10,629 $ 6,629
12/31/2002 $10,477 $ 6,239
1/31/2003 $10,385 $ 6,076
2/28/2003 $10,164 $ 5,985
3/31/2003 $10,172 $ 6,043
4/30/2003 $10,859 $ 6,540
5/31/2003 $11,462 $ 6,885
6/30/2003 $11,638 $ 6,973
7/31/2003 $11,800 $ 7,096
8/31/2003 $12,084 $ 7,234
9/30/2003 $12,015 $ 7,157
10/31/2003 $12,506 $ 7,562
11/30/2003 $12,921 $ 7,629
12/31/2003 $13,538 $ 8,029
1/31/2004 $13,654 $ 8,176
2/29/2004 $13,978 $ 8,290
3/31/2004 $13,963 $ 8,165
4/30/2004 $13,546 $ 8,037
5/31/2004 $13,646 $ 8,147
6/30/2004 $13,891 $ 8,305
7/31/2004 $13,667 $ 8,030
8/31/2004 $13,837 $ 8,063
9/30/2004 $14,161 $ 8,150
10/31/2004 $14,308 $ 8,275
11/30/2004 $15,181 $ 8,610
12/31/2004 $15,632 $ 8,902
1/31/2005 $15,272 $ 8,685
2/28/2005 $15,689 $ 8,868
3/31/2005 $15,550 $ 8,711
4/30/2005 $15,403 $ 8,546
5/31/2005 $15,780 $ 8,818
6/30/2005 $16,081 $ 8,830
7/31/2005 $16,596 $ 9,159
8/31/2005 $16,554 $ 9,075
9/30/2005 $16,811 $ 9,149
10/31/2005 $16,355 $ 8,996
11/30/2005 $16,836 $ 9,337
12/31/2005 $17,215 $ 9,340
1/31/2006 $17,615 $ 9,587
2/28/2006 $17,847 $ 9,613
3/31/2006 $18,496 $ 9,733
4/30/2006 $18,594 $ 9,863
5/31/2006 $18,309 $ 9,580
6/30/2006 $18,269 $ 9,593
7/31/2006 $18,368 $ 9,652
8/31/2006 $18,874 $ 9,881
9/30/2006 $18,937 $10,136
10/31/2006 $19,550 $10,466
11/30/2006 $19,983 $10,665
12/31/2006 $20,340 $10,815
1/31/2007 $20,855 $10,978
2/28/2007 $20,846 $10,764
3/31/2007 $21,361 $10,884
4/30/2007 $21,981 $11,366
5/31/2007 $22,763 $11,763
6/30/2007 $22,697 $11,567
7/31/2007 $22,132 $11,209
8/31/2007 $21,931 $11,377
9/30/2007 $22,180 $11,802
10/31/2007 $22,515 $11,990
11/30/2007 $22,171 $11,489
12/31/2007 $21,975 $11,409
1/31/2008 $20,973 $10,725
2/29/2008 $20,811 $10,376
3/31/2008 $20,750 $10,332
4/30/2008 $21,034 $10,835
5/31/2008 $21,347 $10,975
6/30/2008 $19,971 $10,050
7/31/2008 $19,789 $ 9,965
8/31/2008 $19,880 $10,109
9/30/2008 $18,972 $ 9,209
10/31/2008 $16,935 $ 7,662
11/30/2008 $16,151 $ 7,112
12/31/2008 $16,360 $ 7,188
1/31/2009 $16,044 $ 6,582
2/28/2009 $15,401 $ 5,881
3/31/2009 $15,807 $ 6,396
4/30/2009 $16,473 $ 7,009
5/31/2009 $17,150 $ 7,401
6/30/2009 $17,218 $ 7,415
7/31/2009 $17,996 $ 7,976
8/31/2009 $18,323 $ 8,264
9/30/2009 $18,895 $ 8,573
10/31/2009 $18,850 $ 8,413
11/30/2009 $19,065 $ 8,918
12/31/2009 $19,665 $ 9,090

AVERAGE ANNUAL TOTAL RETURN

CLASS B(1) 12/31/09
- ---------- --------

1-Year +15.43%
5-Year +4.11%
10-Year +7.00%

CLASS C (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

DATE MUTUAL QUEST FUND - CLASS C S&P 500 INDEX
- ---------- --------------------------- -------------

1/1/2000 $10,000 $10,000
1/31/2000 $ 9,714 $ 9,498
2/29/2000 $ 9,262 $ 9,318
3/31/2000 $10,262 $10,229
4/30/2000 $10,268 $ 9,922
5/31/2000 $10,488 $ 9,718
6/30/2000 $10,309 $ 9,958
7/31/2000 $10,612 $ 9,802
8/31/2000 $11,075 $10,411
9/30/2000 $11,101 $ 9,861
10/31/2000 $11,178 $ 9,819
11/30/2000 $10,824 $ 9,045
12/31/2000 $11,311 $ 9,090
1/31/2001 $11,908 $ 9,412
2/28/2001 $11,881 $ 8,554
3/31/2001 $11,613 $ 8,012
4/30/2001 $12,148 $ 8,635
5/31/2001 $12,580 $ 8,692
6/30/2001 $12,763 $ 8,481
7/31/2001 $12,805 $ 8,397
8/31/2001 $12,572 $ 7,872
9/30/2001 $11,396 $ 7,236
10/31/2001 $11,305 $ 7,374
11/30/2001 $11,777 $ 7,940
12/31/2001 $12,121 $ 8,009
1/31/2002 $12,062 $ 7,892
2/28/2002 $12,113 $ 7,740
3/31/2002 $12,514 $ 8,031
4/30/2002 $12,588 $ 7,544
5/31/2002 $12,580 $ 7,489
6/30/2002 $11,718 $ 6,955
7/31/2002 $10,882 $ 6,413
8/31/2002 $10,965 $ 6,455
9/30/2002 $10,250 $ 5,754
10/31/2002 $10,378 $ 6,260
11/30/2002 $10,634 $ 6,629
12/31/2002 $10,481 $ 6,239
1/31/2003 $10,390 $ 6,076
2/28/2003 $10,163 $ 5,985
3/31/2003 $10,170 $ 6,043
4/30/2003 $10,859 $ 6,540
5/31/2003 $11,457 $ 6,885
6/30/2003 $11,639 $ 6,973
7/31/2003 $11,799 $ 7,096
8/31/2003 $12,081 $ 7,234
9/30/2003 $12,020 $ 7,157
10/31/2003 $12,514 $ 7,562
11/30/2003 $12,926 $ 7,629
12/31/2003 $13,537 $ 8,029
1/31/2004 $13,651 $ 8,176
2/29/2004 $13,980 $ 8,290
3/31/2004 $13,965 $ 8,165
4/30/2004 $13,544 $ 8,037
5/31/2004 $13,644 $ 8,147
6/30/2004 $13,892 $ 8,305
7/31/2004 $13,671 $ 8,030
8/31/2004 $13,839 $ 8,063
9/30/2004 $14,160 $ 8,150
10/31/2004 $14,305 $ 8,275
11/30/2004 $15,178 $ 8,610
12/31/2004 $15,637 $ 8,902
1/31/2005 $15,273 $ 8,685
2/28/2005 $15,694 $ 8,868
3/31/2005 $15,548 $ 8,711
4/30/2005 $15,402 $ 8,546
5/31/2005 $15,775 $ 8,818
6/30/2005 $16,081 $ 8,830
7/31/2005 $16,598 $ 9,159
8/31/2005 $16,557 $ 9,075
9/30/2005 $16,811 $ 9,149
10/31/2005 $16,360 $ 8,996
11/30/2005 $16,836 $ 9,337
12/31/2005 $17,214 $ 9,340
1/31/2006 $17,618 $ 9,587
2/28/2006 $17,847 $ 9,613
3/31/2006 $18,489 $ 9,733
4/30/2006 $18,594 $ 9,863
5/31/2006 $18,304 $ 9,580
6/30/2006 $18,274 $ 9,593
7/31/2006 $18,372 $ 9,652
8/31/2006 $18,871 $ 9,881
9/30/2006 $18,934 $10,136
10/31/2006 $19,549 $10,466
11/30/2006 $19,985 $10,665
12/31/2006 $20,339 $10,815
1/31/2007 $20,858 $10,978
2/28/2007 $20,848 $10,764
3/31/2007 $21,357 $10,884
4/30/2007 $21,979 $11,366
5/31/2007 $22,761 $11,763
6/30/2007 $22,698 $11,567
7/31/2007 $22,131 $11,209
8/31/2007 $21,922 $11,377
9/30/2007 $22,178 $11,802
10/31/2007 $22,518 $11,990
11/30/2007 $22,168 $11,489
12/31/2007 $21,970 $11,409
1/31/2008 $20,949 $10,725
2/29/2008 $20,785 $10,376
3/31/2008 $20,703 $10,332
4/30/2008 $20,979 $10,835
5/31/2008 $21,286 $10,975
6/30/2008 $19,897 $10,050
7/31/2008 $19,703 $ 9,965
8/31/2008 $19,784 $10,109
9/30/2008 $18,867 $ 9,209
10/31/2008 $16,833 $ 7,662
11/30/2008 $16,042 $ 7,112
12/31/2008 $16,245 $ 7,188
1/31/2009 $15,917 $ 6,582
2/28/2009 $15,273 $ 5,881
3/31/2009 $15,668 $ 6,396
4/30/2009 $16,324 $ 7,009
5/31/2009 $16,979 $ 7,401
6/30/2009 $17,035 $ 7,415
7/31/2009 $17,792 $ 7,976
8/31/2009 $18,108 $ 8,264
9/30/2009 $18,659 $ 8,573
10/31/2009 $18,613 $ 8,413
11/30/2009 $18,806 $ 8,918
12/31/2009 $19,395 $ 9,090

AVERAGE ANNUAL TOTAL RETURN

CLASS C(1) 12/31/09
- ---------- --------

1-Year +18.39%
5-Year +4.40%
10-Year +6.85%

Annual Report | 13

Performance Summary (CONTINUED)

AGGREGATE TOTAL RETURN

CLASS R(1) 12/31/09
- ---------- --------

Since Inception (5/1/09) +18.89%

Class R (5/1/09-12/31/09)

(PERFORMANCE GRAPH)

DATE MUTUAL QUEST FUND - CLASS R S&P 500 INDEX
---- --------------------------- -------------

5/1/2009 $10,000 $10,000
5/31/2009 $10,383 $10,559
6/30/2009 $10,424 $10,580
7/31/2009 $10,895 $11,381
8/31/2009 $11,087 $11,791
9/30/2009 $11,433 $12,231
10/31/2009 $11,406 $12,004
11/30/2009 $11,529 $12,724
12/31/2009 $11,889 $12,970

ENDNOTES

VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS AND FOREIGN
SECURITIES INVOLVE SPECIAL RISKS. SMALLER-COMPANY STOCKS HAVE EXHIBITED GREATER
PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM.
FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS, AND ECONOMIC AND
POLITICAL UNCERTAINTIES. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS, AS
PENDING DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS, 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 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 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.

(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.

(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.

(6.) Aggregate total return represents the change in value of an investment over
the period shown. Since Class R shares have existed for less than one year,
average annual total returns are not available.

(7.) Source: (C) 2009 Morningstar. 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.

14 | Annual Report

Your Fund's Expenses

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

- - Transaction costs, including sales charges (loads) on Fund purchases; and

- - 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 7/1/09 VALUE 12/31/09 PERIOD* 7/1/09-12/31/09
- ------- ----------------- -------------- -----------------------

Actual $1,000 $1,144.10 $ 4.81
Hypothetical (5% return before expenses) $1,000 $1,020.72 $ 4.53
CLASS A
Actual $1,000 $1,142.10 $ 6.43
Hypothetical (5% return before expenses) $1,000 $1,019.21 $ 6.06
CLASS B
Actual $1,000 $1,138.20 $10.13
Hypothetical (5% return before expenses) $1,000 $1,015.73 $ 9.55
CLASS C
Actual $1,000 $1,138.50 $10.19
Hypothetical (5% return before expenses) $1,000 $1,015.68 $ 9.60
CLASS R
Actual $1,000 $1,140.60 $ 7.50
Hypothetical (5% return before expenses) $1,000 $1,018.20 $ 7.07

* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 0.89%; A: 1.19%; B: 1.88%; C: 1.89%; and R:
1.39%) multiplied by the average account value over the period, multiplied
by 184/365 to reflect the one-half year period.

16 | Annual Report

Mutual Quest Fund

FINANCIAL HIGHLIGHTS

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
CLASS Z 2009 2008 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.59 $ 21.84 $ 21.88 $ 19.81 $ 19.49
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ...................... 0.16(c) 0.38 0.61 0.38 0.41
Net realized and unrealized gains (losses) .... 2.84 (5.90) 1.37 3.39 1.77
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. 3.00 (5.52) 1.98 3.77 2.18
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ......................... (0.33) (0.32) (0.71) (0.40) (0.42)
Net realized gains ............................ (0.02) (1.41) (1.31) (1.30) (1.44)
---------- ---------- ---------- ---------- ----------
Total distributions .............................. (0.35) (1.73) (2.02) (1.70) (1.86)
---------- ---------- ---------- ---------- ----------
Redemption fees(d) ............................... -- --(e) --(e) --(e) --(e)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 17.24 $ 14.59 $ 21.84 $ 21.88 $ 19.81
========== ========== ========== ========== ==========
Total return ..................................... 20.61% (25.34)% 9.12% 19.29% 11.26%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) ................................... 0.90% 0.81% 0.80% 0.83% 0.85%
Expenses - excluding dividend expense on
securities sold short(g) ...................... 0.81% 0.81% 0.79% 0.81% 0.81%
Net investment income ............................ 1.00%(c) 1.97% 2.58% 1.77% 2.04%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $3,584,302 $3,071,302 $4,421,592 $4,200,899 $3,646,593
Portfolio turnover rate .......................... 37.10% 25.52% 26.25% 23.64% 20.98%

(b) Based on average daily shares outstanding.

(c) Net investment income per share includes approximately ($0.05) per share
related to an adjustment for uncollectible interest as disclosed on the
Statement of Operations. Excluding the effect of this adjustment, the ratio
of net investment income to average net assets would have been 1.34%. See
Note 8.

(d) Effective September 1, 2008, the redemption fee was eliminated.

(e) Amount rounds to less than $0.01 per share.

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

(g) Benefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

Annual Report | 17

Mutual Quest Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
CLASS A 2009 2008 2007 2006 2005
- ------- ---------- -------- ---------- -------- --------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.50 $ 21.70 $ 21.75 $ 19.71 $ 19.41
---------- -------- ---------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.11(c) 0.32 0.52 0.31 0.34
Net realized and unrealized gains (losses) .... 2.82 (5.85) 1.38 3.36 1.75
---------- -------- ---------- -------- ----------
Total from investment operations ................. 2.93 (5.53) 1.90 3.67 2.09
---------- -------- ---------- -------- ----------
Less distributions from:
Net investment income ......................... (0.29) (0.26) (0.64) (0.33) (0.35)
Net realized gains ............................ (0.02) (1.41) (1.31) (1.30) (1.44)
---------- -------- ---------- -------- --------
Total distributions .............................. (0.31) (1.67) (1.95) (1.63) (1.79)
---------- -------- ---------- -------- --------
Redemption fees(d) ............................... -- --(e) --(e) --(e) --(e)
---------- -------- ---------- -------- --------
Net asset value, end of year ..................... $ 17.12 $ 14.50 $ 21.70 $ 21.75 $ 19.71
========== ======== ========== ======== ========
Total return(f) .................................. 20.20% (25.25)% 8.73% 18.94% 10.85%
RATIOS TO AVERAGE NET ASSETS
Expenses(g, h) ................................... 1.21% 1.11% 1.14% 1.15% 1.20%
Expenses - excluding dividend expense on
securities sold short(h) ...................... 1.12% 1.11% 1.13% 1.13% 1.16%
Net investment income ............................ 0.69%(c) 1.67% 2.24% 1.45% 1.69%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $1,101,463 $883,955 $1,290,899 $993,364 $794,789
Portfolio turnover rate .......................... 37.10% 25.52% 26.25% 23.64% 20.98%

(b) Based on average daily shares outstanding.

(d) Effective September 1, 2008, the redemption fee was eliminated.

(e) Amount rounds to less than $0.01 per share.

(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.

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

(h) Benefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

18 | Annual Report

Mutual Quest Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED DECEMBER 31,
------------------------------------------------------
CLASS B 2009 2008 2007 2006 2005
- ------- ------- ------- ------- ------- -------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.19 $ 21.24 $ 21.32 $ 19.34 $ 19.08
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ...................... --(c, d) 0.19 0.36 0.16 0.20
Net realized and unrealized gains (losses) .... 2.76 (5.72) 1.34 3.31 1.72
------- ------- ------- ------- -------
Total from investment operations ................. 2.76 (5.53) 1.70 3.47 1.92
------- ------- ------- ------- -------
Less distributions from:
Net investment income ......................... (0.16) (0.11) (0.47) (0.19) (0.22)
Net realized gains ............................ (0.02) (1.41) (1.31) (1.30) (1.44)
------- ------- ------- ------- -------
Total distributions .............................. (0.18) (1.52) (1.78) (1.49) (1.66)
------- ------- ------- ------- -------
Redemption fees(e) ............................... -- --(d) --(d) --(d) --(d)
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 16.77 $ 14.19 $ 21.24 $ 21.32 $ 19.34
======= ======= ======= ======= =======
Total return(f) .................................. 19.43% (26.09)% 8.04% 18.16% 10.12%
RATIOS TO AVERAGE NET ASSETS
Expenses(g, h) ................................... 1.89% 1.81% 1.80% 1.82% 1.85%
Expenses - excluding dividend expense on
securities sold short(h) ...................... 1.80% 1.81% 1.79% 1.80% 1.81%
Net investment income ............................ 0.01%(c) 0.97% 1.58% 0.78% 1.04%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $34,803 $41,704 $70,266 $74,470 $69,847
Portfolio turnover rate .......................... 37.10% 25.52% 26.25% 23.64% 20.98%

(b) Based on average daily shares outstanding.

(d) Amount rounds to less than $0.01 per share.

(e) Effective September 1, 2008, the redemption fee was eliminated.

(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.

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

(h) Benefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

Annual Report | 19

Mutual Quest Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
CLASS C 2009 2008 2007 2006 2005
- ------- -------- -------- -------- -------- --------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.38 $ 21.50 $ 21.58 $ 19.58 $ 19.30
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... --(c, d) 0.19 0.36 0.16 0.20
Net realized and unrealized gains (losses) .... 2.79 (5.78) 1.36 3.34 1.74
-------- -------- -------- -------- --------
Total from investment operations ................. 2.79 (5.59) 1.72 3.50 1.94
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.18) (0.12) (0.49) (0.20) (0.22)
Net realized gains ............................ (0.02) (1.41) (1.31) (1.30) (1.44)
-------- -------- -------- -------- --------
Total distributions .............................. (0.20) (1.53) (1.80) (1.50) (1.66)
-------- -------- -------- -------- --------
Redemption fees(e) ............................... -- --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 16.97 $ 14.38 $ 21.50 $ 21.58 $ 19.58
======== ======== ======== ======== ========
Total return(f) .................................. 19.39% (26.06)% 8.02% 18.16% 10.08%
RATIOS TO AVERAGE NET ASSETS
Expenses(g, h) ................................... 1.90% 1.80% 1.80% 1.83% 1.85%
Expenses - excluding dividend expense on
securities sold short(h) ...................... 1.81% 1.80% 1.79% 1.81% 1.81%
Net investment income ............................ --%(c, i) 0.98% 1.58% 0.77% 1.04%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $388,875 $337,583 $504,802 $420,806 $336,786
Portfolio turnover rate .......................... 37.10% 25.52% 26.25% 23.64% 20.98%

(b) Based on average daily shares outstanding.

(d) Amount rounds to less than $0.01 per share.

(e) Effective September 1, 2008, the redemption fee was eliminated.

(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.

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

(h) Benefit of expense reduction rounds to less than 0.01%.

(i) Rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

20 | Annual Report

Mutual Quest Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

PERIOD ENDED
CLASS R DECEMBER 31, 2009(a)
- ------- --------------------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............................... $14.64
------
Income from investment operations(b):
Net investment income(c) ........................................ 0.05
Net realized and unrealized gains (losses) ...................... 2.71
------
Total from investment operations ................................... 2.76
------
Less distributions from:
Net investment income ........................................... (0.31)
Net realized gains .............................................. (0.02)
------
Total distributions ................................................ (0.33)
------
Net asset value, end of period ..................................... $17.07
======
Total return(d) .................................................... 18.89%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses(f, g) ..................................................... 1.40%
Expenses - excluding dividend expense on securities sold short(g) .. 1.31%
Net investment income .............................................. 0.50%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................................. $ 99
Portfolio turnover rate ............................................ 37.10%

(a) For the period May 1, 2009 (effective date) to December 31, 2009.

(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.

(e) Ratios are annualized for periods less than one year.

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

(g) Benefit of expense reduction rounds to less than 0.01%.

The accompanying notes are an integral part of these financial statements.

Annual Report | 21

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009

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

COMMON STOCKS AND OTHER EQUITY INTERESTS 74.7%
AIRLINES 0.0%(a)
(b, c) Northwest Airlines Corp., Contingent Distribution ........... United States 28,232,000 $ 17,786
--------------
AUTO COMPONENTS 0.2%
(b, c, d) Collins & Aikman Products Co., Contingent Distribution ...... United States 1,217,404 12,174
(b, c, d) Dana Holding Corp., Contingent Distribution ................. United States 13,598,000 --
(b, e) IACNA Investor LLC .......................................... United States 180,986 1,810
(b, e, f) International Automotive Components Group Brazil LLC ........ Brazil 2,363,058 2,649,980
(b, e, f) International Automotive Components Group Japan LLC ......... Japan 307,801 1,178,867
(b, e, f) International Automotive Components Group LLC ............... Luxembourg 8,425,843 5,744,403
(b, e, f) International Automotive Components Group NA LLC, A ......... United States 5,182,488 1,577,290
--------------
11,164,524
--------------
BEVERAGES 2.4%
Brown-Forman Corp., A ....................................... United States 79,200 4,462,920
Brown-Forman Corp., B ....................................... United States 19,800 1,060,686
Carlsberg AS, B ............................................. Denmark 250,882 18,532,551
Dr. Pepper Snapple Group Inc. ............................... United States 842,909 23,854,325
Pernod Ricard SA ............................................ France 853,338 73,180,709
--------------
121,091,191
--------------
BUILDING PRODUCTS 0.1%
(b) Owens Corning Inc. .......................................... United States 279,965 7,178,303
--------------
CAPITAL MARKETS 0.9%
Deutsche Bank AG (EUR Traded) ............................... Germany 173,130 12,287,260
Deutsche Bank AG (USD Traded) ............................... Germany 10,000 709,100
Man Group PLC ............................................... United Kingdom 3,164,930 15,735,208
(b) UBS AG ...................................................... Switzerland 1,201,999 18,636,994
--------------
47,368,562
--------------
CHEMICALS 0.1%
(b, c, d) Dow Corning Corp., Contingent Distribution .................. United States 20,809,194 3,022,299
--------------
COMMERCIAL BANKS 2.4%
Barclays PLC ................................................ United Kingdom 3,800,407 16,927,210
BNP Paribas ................................................. France 458,872 36,718,047
(b, e, g) Elephant Capital Holdings Ltd. .............................. Japan 27,946 --
(b, e) First Chicago Bancorp ....................................... United States 659,105 689,755
(b) Guaranty Bancorp ............................................ United States 1,735,639 2,291,044
(b) Intesa Sanpaolo SpA ......................................... Italy 3,547,880 15,997,631
(b, e) NCB Warrant Holdings Ltd., A ................................ Japan 129,974 --
Societe Generale, A ......................................... France 166,370 11,657,460
SunTrust Banks Inc. ......................................... United States 76,700 1,556,243
Svenska Handelsbanken AB, A ................................. Sweden 452,960 12,918,758
Wells Fargo & Co. ........................................... United States 828,500 22,361,215
--------------
121,117,363
--------------
COMMERCIAL SERVICES & SUPPLIES 0.1%
(b) Comdisco Holding Co. Inc. ................................... United States 997 9,970
(b, c, d) Comdisco Holding Co. Inc., Contingent Distribution .......... United States 40,189,000 --
(b) Insun ENT Co. Ltd. .......................................... South Korea 1,448,946 6,461,436
--------------
6,471,406
--------------

22 | Annual Report

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMUNICATIONS EQUIPMENT 0.4%
Tandberg ASA ................................................ Norway 772,196 $ 21,981,288
--------------
COMPUTERS & PERIPHERALS 1.8%
(b, e, g) DecisionOne Corp. ........................................... United States 1,008,199 1,673,610
(b, e, g) DecisionOne Corp., wts., 6/08/17 ............................ United States 553,576 --
(b) Dell Inc. ................................................... United States 281,549 4,043,044
(b) Sun Microsystems Inc. ....................................... United States 9,237,858 86,558,729
--------------
92,275,383
--------------
CONSUMER FINANCE 0.3%
(b, e) Cerberus CG Investor I LLC .................................. United States 7,519,799 1,579,158
(b, e) Cerberus CG Investor II LLC ................................. United States 7,519,799 1,579,158
(b, e) Cerberus CG Investor III LLC ................................ United States 3,759,899 789,579
(b, e) GMAC Inc. ................................................... United States 438 4,830,027
(g) White River Capital Inc. .................................... United States 549,751 6,179,201
--------------
14,957,123
--------------
DIVERSIFIED FINANCIAL SERVICES 0.6%
(b) CIT Group Inc. .............................................. United States 292,377 8,072,529
Deutsche Boerse AG .......................................... Germany 254,247 21,108,629
(b, c, d) Marconi Corp., Contingent Distribution ...................... United Kingdom 34,293,500 --
--------------
29,181,158
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 2.3%
(b, e) AboveNet Inc. ............................................... United States 805,153 52,367,151
(b, e) AboveNet Inc., stock grant, grant price $10.475, expiration
date 9/09/13 ............................................. United States 510 111,313
(b, e) AboveNet Inc., stock grant, grant price $30, expiration date
9/07/18 .................................................. United States 109 15,277
(b, e) AboveNet Inc., wts., 9/08/10 ................................ United States 16,099 1,609,900
Cable & Wireless PLC ........................................ United Kingdom 9,615,684 21,961,872
(b, c, d) Global Crossing Holdings Ltd., Contingent Distribution ...... United States 49,411,586 --
(h) Koninklijke KPN NV .......................................... Netherlands 2,351,320 39,851,039
--------------
115,916,552
--------------
ELECTRIC UTILITIES 2.3%
(b, c, d) Calpine Corp., Contingent Distribution ...................... United States 4,742,000 --
E.ON AG ..................................................... Germany 1,192,640 49,696,726
Exelon Corp. ................................................ United States 1,035,100 50,585,337
Prime Infrastructure Group .................................. Australia 4,749,317 17,601,232
--------------
117,883,295
--------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENT 0.4%
Tyco Electronics Ltd. ....................................... United States 769,500 18,891,225
--------------
ENERGY EQUIPMENT & SERVICES 4.7%
Bourbon SA .................................................. France 637,519 24,046,394
(b) BW Offshore Ltd. ............................................ Norway 2,813,120 4,125,236
(b, h) Pride International Inc. .................................... United States 1,692,880 54,019,801
Seadrill Ltd. ............................................... Bermuda 4,055,672 103,553,836
(b) Transocean Ltd. ............................................. United States 677,655 56,109,834
--------------
241,855,101
--------------

Annual Report | 23

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
FOOD & STAPLES RETAILING 3.7%
Carrefour SA ................................................ France 1,178,243 $ 56,602,163
CVS Caremark Corp. .......................................... United States 2,480,510 79,897,227
Kroger Co. .................................................. United States 2,531,010 51,961,635
--------------
188,461,025
--------------
FOOD PRODUCTS 9.6%
Cadbury PLC ................................................. United Kingdom 7,689,966 98,872,894
CSM NV ...................................................... Netherlands 2,000,055 52,607,237
(h) Danone ...................................................... France 2,101,498 128,840,755
Lotte Confectionery Co. Ltd. ................................ South Korea 30,405 33,610,227
(b, i) Marine Harvest .............................................. Norway 48,980,183 35,752,390
Nestle SA ................................................... Switzerland 2,410,451 116,895,754
Nong Shim Co. Ltd. .......................................... South Korea 81,743 17,455,144
(b) Premier Foods PLC ........................................... United Kingdom 11,387,003 6,575,446
--------------
490,609,847
--------------
HEALTH CARE PROVIDERS & SERVICES 1.5%
Rhoen-Klinikum AG ........................................... Germany 3,085,456 75,613,497
--------------
HOUSEHOLD DURABLES 0.1%
Black & Decker Corp. ........................................ United States 101,600 6,586,728
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.8%
(b) RRI Energy Inc. ............................................. United States 6,814,563 38,979,300
--------------
INDUSTRIAL CONGLOMERATES 2.3%
Keppel Corp. Ltd. ........................................... Singapore 4,335,278 25,385,513
Orkla ASA ................................................... Norway 9,599,083 94,145,999
--------------
119,531,512
--------------
INSURANCE 6.0%
ACE Ltd. .................................................... United States 96,280 4,852,512
(b) Alleghany Corp. ............................................. United States 149,605 41,290,980
(b) Berkshire Hathaway Inc., A .................................. United States 468 46,425,600
(b) Berkshire Hathaway Inc., B .................................. United States 8,174 26,859,764
(b, e, g) Imagine Group Holdings Ltd. ................................. Bermuda 1,491,021 16,068,882
Old Republic International Corp. ............................ United States 1,096,314 11,006,993
(b, e) Olympus Re Holdings Ltd. .................................... United States 97,300 207,833
(b, e) Symetra Financial ........................................... United States 3,434,760 44,651,880
White Mountains Insurance Group Ltd. ........................ United States 346,730 115,343,202
--------------
306,707,646
--------------
IT SERVICES 0.1%
(b) Affiliated Computer Services Inc., A ........................ United States 76,700 4,578,223
--------------
MACHINERY 2.4%
Kone OYJ, B ................................................. Finland 2,877,200 123,392,302
(b, e, f, g) MCII Holdings Inc. .......................................... United States 4,285 --
--------------
123,392,302
--------------
MARINE 0.1%
A P Moller - Maersk AS ...................................... Denmark 1,134 7,984,149
--------------

24 | Annual Report

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA 0.2%
(b) Adelphia Recovery Trust ..................................... United States 38,254,708 $ 1,224,151
(b, c) Adelphia Recovery Trust, Arahova Contingent Value Vehicle,
Contingent Distribution ..................................... United States 4,899,492 1,016,645
(b, c, d) Century Communications Corp., Contingent Distribution ....... United States 13,497,000 --
CJ CGV Co. Ltd. ............................................. South Korea 512,866 9,676,094
(b, d) TVMAX Holdings Inc. ......................................... United States 111,391 --
--------------
11,916,890
--------------
MULTI-UTILITIES 0.4%
GDF Suez .................................................... France 503,432 21,824,515
--------------
OFFICE ELECTRONICS 0.2%
Xerox Corp. ................................................. United States 1,054,550 8,921,493
--------------
OIL, GAS & CONSUMABLE FUELS 3.7%
BP PLC ...................................................... United Kingdom 411,700 3,994,646
Eni SpA ..................................................... Italy 523,870 13,348,109
(h) Royal Dutch Shell PLC, A .................................... United Kingdom 1,331,071 40,203,131
(h) Total SA, B ................................................. France 1,244,472 80,171,886
XTO Energy Inc. ............................................. United States 1,084,040 50,440,381
--------------
188,158,153
--------------
PAPER & FOREST PRODUCTS 0.6%
Weyerhaeuser Co. ............................................ United States 686,788 29,628,034
--------------
PERSONAL PRODUCTS 0.3%
L'Oreal SA .................................................. France 150,620 16,817,191
--------------
REAL ESTATE INVESTMENT TRUSTS (REITS) 1.4%
(b) Alexander's Inc. ............................................ United States 108,590 33,056,968
The Link REIT ............................................... Hong Kong 15,207,140 38,872,476
--------------
71,929,444
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 1.7%
(b, d) Canary Wharf Group PLC ...................................... United Kingdom 8,298,072 44,011,202
Swire Pacific Ltd., B ....................................... Hong Kong 4,506,381 9,880,248
(b) Swiss Prime Site AG ......................................... Switzerland 596,680 33,432,295
--------------
87,323,745
--------------
ROAD & RAIL 1.0%
Burlington Northern Santa Fe Corp. .......................... United States 513,110 50,602,908
--------------
SOFTWARE 3.0%
(h) Microsoft Corp. ............................................. United States 3,266,054 99,581,987
(j) Nintendo Co. Ltd. ........................................... Japan 227,156 53,845,109
--------------
153,427,096
--------------
TOBACCO 13.9%
Altria Group Inc. ........................................... United States 3,759,637 73,801,674
(h) British American Tobacco PLC ................................ United Kingdom 5,552,004 180,837,192
(h) Imperial Tobacco Group PLC .................................. United Kingdom 2,943,678 93,050,966
Japan Tobacco Inc. .......................................... Japan 9,642 32,458,012
KT&G Corp. .................................................. South Korea 737,519 40,731,705

Annual Report | 25

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TOBACCO (CONTINUED)
Lorillard Inc. .............................................. United States 1,568,281 $ 125,823,185
Philip Morris International Inc. ............................ United States 1,488,277 71,720,069
Reynolds American Inc. ...................................... United States 1,781,680 94,375,590
--------------
712,798,393
--------------
TRADING COMPANIES & DISTRIBUTORS 0.9%
(b) Kloeckner & Co. SE .......................................... Germany 1,727,701 44,268,807
--------------
TRANSPORTATION INFRASTRUCTURE 0.8%
Groupe Eurotunnel SA ........................................ France 4,300,792 40,262,653
--------------
WIRELESS TELECOMMUNICATION SERVICES 1.0%
Vodafone Group PLC .......................................... United Kingdom 21,223,893 49,211,658
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $2,969,596,671) 3,819,907,768
--------------
PREFERRED STOCKS 0.7%
DIVERSIFIED FINANCIAL SERVICES 0.4%
(b) Bank of America Corp., pfd. ................................. United States 1,273,700 19,003,604
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(a)
(b, e) PTV Inc., 10.00%, pfd., A ................................... United Kingdom 92,938 15,381
--------------
MACHINERY 0.3%
(e, f, g, o) MCII Holdings Inc., PIK, pfd., A ............................ United States 32,450 15,081,244
--------------
TOTAL PREFERRED STOCKS (COST $51,251,674) 34,100,229
--------------
OPTIONS PURCHASED 0.0%(a)
PUT OPTIONS 0.0%(a)
(b) Dow Jones EUROSTOXX 50, exercise price $2,350, expiration
date 3/19/10 ............................................. United States 9,690 127,236
(b) Dow Jones EUROSTOXX 50, exercise price $2,350, expiration
date 3/19/10 ............................................. United States 15,134 196,325
(b) S&P 500 Index, exercise price $875, expiration date
3/19/10 .................................................. United States 545 223,450
--------------
TOTAL OPTIONS PURCHASED (COST $5,817,550) ................... 547,011
--------------

PRINCIPAL
AMOUNT(k)
-----------

CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE INTERESTS 3.3%
American General Finance Corp., senior note, J, 6.90%,
12/15/17 ................................................. United States 2,207,000 1,534,540
(l) BP Capital Markets PLC, FRN, 1.253%, 3/17/11 ................ United Kingdom 30,000,000 30,379,920
(e, m) Cerberus CG Investor I LLC, 12.00%, 7/31/14 ................. United States 6,600,000 1,386,000
(e, m) Cerberus CG Investor II LLC, 12.00%, 7/31/14 ................ United States 6,600,000 1,386,000
(e, m) Cerberus CG Investor III LLC, 12.00%, 7/31/14 ............... United States 3,300,000 693,000
(l) Charter Communications Operating LLC, Term Loan B, FRN,
2.26%, 3/06/14 ........................................... United States 11,485,097 10,791,203
CIT Group Inc.,
(l) New Term Loan Tranche 1B, FRN, 13.00%, 1/20/12 .............. United States 1,545,000 1,605,352
senior secured sub. bond, 7.00%, 5/01/13 .................... United States 477,223 448,590
senior secured sub. bond, 7.00%, 5/01/14 .................... United States 715,837 666,623

26 | Annual Report

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE
INTERESTS (CONTINUED)
CIT Group Inc., (continued)
senior secured sub. bond, 7.00%, 5/01/15 ................. United States 715,837 $ 644,253
senior secured sub. bond, 7.00%, 5/01/16 ................. United States 1,193,063 1,055,861
senior secured sub. bond, 7.00%, 5/01/17 ................. United States 1,670,288 1,457,326
(l) Term Loan Tranche 2A, FRN, 9.50%, 1/20/12 ............... United States 8,914,000 9,159,135
(g) DecisionOne Corp.,
(e) senior secured note, 15.00%, 11/30/13 ................ United States 1,339,481 1,339,481
(d) Term Loan B, 15.00%, 8/29/13 ......................... United States 234,285 234,285
(l) First Data Corp., Term Loan B-1, FRN, 2.982%, 9/24/14 ....... United States 16,773,935 14,928,802
(n) Indianapolis Downs LLC, 144A,
senior secured note, 11.00%, 11/01/12 .................... United States 2,950,000 1,932,250
(o) senior secured sub. note, PIK, 15.50%, 11/01/13 ......... United States 13,552,165 4,556,915
(d, f, l) International Automotive Components Group NA Inc., Revolver,
FRN, 6.25%, 1/18/14 ...................................... United States 1,027,725 1,027,725
(e, f, m) International Automotive Components Group NA LLC, 9.00%,
4/01/17 .................................................. United States 1,560,200 1,563,681
(l, n) Roche Holdings Inc., 144A, FRN, 1.262%, 2/25/10 ............. Switzerland 32,901,000 32,908,501
Seadrill Ltd., cvt., senior note, 3.625%, 11/08/12 .......... Bermuda 5,000,000 5,052,500
(j, l) Texas Competitive Electric Holdings Co. LLC, Delayed Draw
Term Loan, FRN, 3.735%, 10/10/14 ......................... United States 51,843,673 41,760,079
(d, o) TVMAX Holdings Inc., PIK,
11.50%, 3/31/10 .......................................... United States 712,515 158,198
14.00%, 3/31/10 .......................................... United States 961,786 190,968
--------------
TOTAL CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE
INTERESTS (COST $180,947,572) 166,861,188
--------------
CORPORATE BONDS AND NOTES IN REORGANIZATION
(COST $1,203) 0.0%(a)
(d, m) Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ..... United States 40,000 200
--------------

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

COMPANIES IN LIQUIDATION (COST $--) 0.0%
(b, e) FIM Coinvestor Holdings I, LLC .............................. United States 16,133,491 --
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $3,207,614,670) .................................... 4,021,416,396
--------------

PRINCIPAL
AMOUNT(k)
-----------

SHORT TERM INVESTMENTS 21.0%
SENIOR FLOATING RATE INTERESTS (COST $722,662) 0.0%(a)
(l, p) Lyondell Chemical Co., DIP Delayed Draw Term Loan, FRN,
13.00%, 4/06/10 .......................................... United States 727,045 760,308
--------------
U.S. GOVERNMENT AND AGENCY SECURITIES 20.9%
(q) U.S. Treasury Bills,
(r) 1/07/10 - 5/13/10 ....................................... United States 524,000,000 573,940,827
5/06/10 .................................................. United States 125,000,000 124,956,750
5/20/10 .................................................. United States 75,000,000 74,961,750
5/27/10 .................................................. United States 75,000,000 74,955,300
(r) 6/03/10 ................................................. United States 75,000,000 74,949,375

Annual Report | 27

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

SHORT TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
(q) U.S. Treasury Bills, (continued)
6/10/10 .................................................. United States 75,000,000 $ 74,943,750
(r) 6/17/10 - 7/01/10 .................................... United States 70,000,000 69,941,700
--------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $1,068,382,986) .................................... $1,068,649,452
--------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $4,276,720,318) .................................... 5,090,826,156
--------------
(s) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.1%

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

MONEY MARKET FUNDS 0.1%
Bank of New York Institutional Cash Reserve Fund,
(t) Series A, 0.01% ...................................... United States 3,842,000 3,842,000
(b) Series B ............................................. United States 26,656 21,325
--------------
TOTAL FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES (COST $3,868,656) ............................. 3,863,325
--------------
TOTAL INVESTMENTS (COST $4,280,588,974) 99.7% ............... 5,094,689,481
OPTIONS WRITTEN (0.5)% ...................................... (23,602,596)
SECURITIES SOLD SHORT (1.1)% ................................ (57,200,100)
OTHER ASSETS, LESS LIABILITIES 1.9% ......................... 95,655,292
--------------
NET ASSETS 100.0% ........................................... $5,109,542,077
==============

CONTRACTS
-----------

(u) OPTIONS WRITTEN (0.5)%
CALL OPTIONS (0.5)%
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1)%
Koninklijke KPN NV, Jun. 10 EUR Calls, 6/18/10 .............. Netherlands 1,500,000 $ (3,613,438)
--------------
ENERGY EQUIPMENT & SERVICES (0.0)%(a)
Pride International Inc., Apr. $30 Calls, 4/16/10 ........... United States 6,500 (2,437,500)
--------------
FOOD PRODUCTS (0.1)%
Danone, Jun. 37.74 EUR Calls, 6/18/10 ....................... France 450,000 (3,415,748)
--------------
OIL, GAS & CONSUMABLE FUELS (0.2)%
Royal Dutch Shell PLC, A, Jun. 19 GBP Calls, 6/18/10 ........ United Kingdom 1,000,000 (3,184,404)
Total SA, B, Jun. 40 EUR Calls, 6/18/10 ..................... France 290,000 (2,277,932)
Total SA, B, Jun. 40 EUR Calls, 6/18/10 ..................... France 289,000 (2,303,198)
--------------
(7,765,534)
--------------
SOFTWARE (0.0)%(a)
Microsoft Corp., Jan. $26 Calls, 1/16/10 .................... United States 969 (440,895)
--------------
TOBACCO (0.1)%
British American Tobacco PLC, Mar. 18 GBP Calls, 3/19/10 .... United Kingdom 640,000 (1,781,417)
British American Tobacco PLC, Mar. 18 GBP Calls, 3/19/10 .... United Kingdom 635,000 (1,746,698)
Imperial Tobacco Group PLC, Mar. 17 GBP Calls, 3/19/10 ...... United Kingdom 680,000 (2,401,366)
--------------
(5,929,481)
--------------

28 | Annual Report

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

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

TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $18,277,235) .......................... $ (23,602,596)
--------------
(v) SECURITIES SOLD SHORT (1.1)%
FOOD PRODUCTS (0.1)%
Kraft Foods Inc., A ......................................... United States 174,068 $ (4,731,168)
--------------
OIL & GAS & CONSUMABLE FUELS (1.0)%
Exxon Mobil Corp. ........................................... United States 769,452 (52,468,932)
--------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $57,383,649) .......... $ (57,200,100)
--------------

(a) Rounds to less than 0.1% of net assets.

(b) Non-income producing.

(d) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2009, the aggregate value of these
securities was $48,657,051, representing 0.95% of net assets.

(e) See Note 9 regarding restricted securities.

(f) See Note 14 regarding other considerations.

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

(h) A portion or all of the security is held in connection with written option
contracts open at year end.

(i) A portion or all of the security is on loan at December 31, 2009. See Note
1(f).

(j) A portion or all of the security purchased on a delayed delivery basis. See
Note 1(c).

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

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

(m) See Note 8 regarding credit risk and defaulted securities.

(n) 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 Trustees. At December 31, 2009,
the aggregate value of these securities was $39,397,666, representing 0.77%
of net assets.

(o) Income may be received in additional securities and/or cash.

(p) See Note 10 regarding unfunded loan commitments.

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

(r) Security or a portion of the security has been segregated as collateral for
securities sold short and open written option contracts. At December 31,
2009, the aggregate value of these securities and cash pledged amounted to
$110,857,827.

(s) See Note 1(f) regarding securities on loan.

(t) The rate shown is the annualized seven-day yield at period end.

(u) See Note 1(d) regarding written options.

(v) See Note 1(e) regarding securities sold short.

At December 31, 2009, the Fund had the following forward exchange contracts
outstanding. See Note 1(d).

British Pound .. DBFX Sell 15,102,124 $24,281,979 1/13/10 $ -- $(109,917)
British Pound .. SSBT Sell 2,197,130 3,505,284 1/13/10 -- (43,367)
British Pound .. BANT Sell 2,760,000 4,429,524 1/13/10 -- (28,235)
British Pound .. BANT Sell 37,240,515 61,898,328 1/13/10 1,750,049 --
British Pound .. DBFX Sell 13,839,084 22,622,555 1/13/10 270,632 --
British Pound .. SSBT Sell 7,053,977 11,430,523 1/13/10 43,566 --

Annual Report | 29

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

SETTLEMENT UNREALIZED UNREALIZED
CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT DATE APPRECIATION DEPRECIATION
- -------- ------------ ---- -------------- --------------- ---------- ------------ ------------

Euro ................ SSBT Sell 130,091,633 $191,006,344 1/14/10 $ 4,790,821 $ --
Euro ................ BBU Sell 8,620,000 12,708,936 1/14/10 370,111 --
Euro ................ DBFX Sell 5,810,000 8,692,229 1/14/10 375,690 --
Euro ................ HSBC Sell 1,200,000 1,801,224 1/14/10 83,522 --
South Korean Won .... BANT Sell 26,397,858,000 22,480,000 1/15/10 -- (146,574)
South Korean Won .... DBFX Sell 9,088,337,500 7,850,000 1/15/10 60,052 --
South Korean Won .... BANT Sell 39,160,105,000 33,805,000 1/15/10 239,435 --
Australian Dollar ... BANT Buy 4,030,000 3,658,806 1/19/10 -- (49,665)
Australian Dollar ... DBFX Buy 2,020,000 1,842,674 1/19/10 -- (33,626)
Australian Dollar ... BANT Sell 500,000 447,300 1/19/10 -- (484)
Australian Dollar ... DBFX Sell 12,000,000 11,088,000 1/19/10 341,177 --
Swedish Krona ....... HAND Buy 42,793,000 6,014,649 1/19/10 -- (37,102)
Swedish Krona ....... SSBT Buy 9,459,362 1,328,045 1/19/10 -- (6,712)
Swedish Krona ....... HAND Sell 104,396,174 15,055,704 1/19/10 473,106 --
Swedish Krona ....... SSBT Sell 30,536,000 4,466,093 1/19/10 200,667 --
Canadian Dollar ..... DBFX Sell 2,115,631 1,976,856 1/29/10 -- (35,840)
Canadian Dollar ..... SSBT Buy 352,950 334,654 1/29/10 1,123 --
Canadian Dollar ..... BANT Buy 1,762,681 1,661,183 1/29/10 15,736 --
Euro ................ DBFX Sell 87,200,000 128,654,880 1/29/10 3,838,202 --
Euro ................ SSBT Sell 1,215,700 1,804,220 1/29/10 64,087 --
British Pound ....... DBFX Sell 59,760,000 98,742,430 2/10/10 2,238,013 --
British Pound ....... BBU Sell 4,160,000 6,869,961 2/10/10 152,116 --
British Pound ....... BANT Sell 1,040,000 1,724,840 2/10/10 45,379 --
Euro ................ DBFX Sell 51,600,000 77,518,680 2/16/10 3,661,814 --
Euro ................ BBU Sell 51,600,000 77,554,800 2/16/10 3,697,934 --
Euro ................ BANT Sell 1,800,000 2,700,180 2/16/10 123,778 --
Euro ................ SSBT Sell 41,700,000 62,800,200 2/16/10 3,113,546 --
Norwegian Krone ..... HAND Sell 22,577,763 3,900,000 2/16/10 -- (44,869)
Norwegian Krone ..... DBFX Sell 328,837,969 58,097,037 2/16/10 1,484,331 --
Norwegian Krone ..... BBU Sell 268,000,000 47,419,361 2/16/10 1,280,512 --
Norwegian Krone ..... SSBT Sell 137,113,884 24,260,210 2/16/10 654,700 --
Norwegian Krone ..... HAND Sell 8,424,554 1,510,000 2/16/10 59,630 --
Norwegian Krone ..... BANT Sell 8,452,980 1,510,000 2/16/10 54,736 --
Euro ................ DBFX Sell 66,924,280 100,789,553 2/26/10 5,000,365 --
Euro ................ BANT Sell 6,400,000 9,652,608 2/26/10 492,243 --
Euro ................ HSBC Sell 3,200,000 4,839,744 2/26/10 259,562 --
Euro ................ BBU Sell 55,600,000 83,722,480 2/26/10 4,141,813 --
Euro ................ SSBT Sell 1,020,749 1,487,466 2/26/10 26,461 --
British Pound ....... BANT Buy 7,170,000 11,806,192 3/15/10 -- (229,984)
British Pound ....... BANT Sell 35,000,000 56,315,000 3/15/10 -- (193,682)
British Pound ....... BBU Sell 34,267,469 55,146,638 3/15/10 -- (179,348)
British Pound ....... DBFX Buy 5,730,000 9,392,616 3/15/10 -- (141,338)
British Pound ....... SSBT Buy 4,240,359 6,971,294 3/15/10 -- (125,091)
Euro ................ BBU Sell 52,902,637 79,406,858 3/15/10 3,689,954 --
Singapore Dollar .... SSBT Sell 21,826,293 15,436,724 3/24/10 -- (79,125)
Singapore Dollar .... BANT Sell 733,408 520,000 3/24/10 -- (1,364)
Singapore Dollar .... SSBT Buy 810,000 576,248 3/24/10 -- (436)
Singapore Dollar .... SSBT Buy 2,427,500 1,724,529 3/24/10 3,899 --

30 | Annual Report

Mutual Quest Fund

STATEMENT OF INVESTMENTS, DECEMBER 31, 2009 (CONTINUED)

British Pound ....... DBFX Sell 62,500,000 $104,375,000 4/12/10 $ 3,483,848 $ --
Japanese Yen ........ HAND Buy 82,317,690 910,000 4/20/10 -- (24,047)
Japanese Yen ........ DBFX Buy 45,398,000 500,000 4/20/10 -- (11,399)
Japanese Yen ........ BANT Buy 83,788,250 910,000 4/20/10 -- (8,219)
Japanese Yen ........ DBFX Sell 2,031,074,083 22,339,822 4/20/10 480,156 --
Japanese Yen ........ SSBT Sell 351,473,480 3,844,872 4/20/10 62,098 --
Japanese Yen ........ BANT Sell 95,318,640 1,080,000 4/20/10 54,122 --
Danish Krone ........ HAND Buy 1,255,750 250,000 4/23/10 -- (8,757)
Danish Krone ........ SSBT Buy 3,000,000 577,921 4/23/10 -- (1,590)
Danish Krone ........ SSBT Sell 38,861,935 7,781,602 4/23/10 315,820 --
Danish Krone ........ HAND Sell 54,348,562 10,921,558 4/23/10 480,633 --
Danish Krone ........ BANT Sell 1,730,225 350,000 4/23/10 17,606 --
Danish Krone ........ DBFX Sell 1,707,514 340,000 4/23/10 11,969 --
Swiss Franc ......... DBFX Sell 38,500,000 36,235,294 5/10/10 -- (992,566)
Swiss Franc ......... SSBT Sell 36,617,500 34,479,755 5/10/10 -- (927,807)
Swiss Franc ......... BBU Sell 22,484,714 21,174,041 5/10/10 -- (567,720)
Swiss Franc ......... BANT Sell 11,541,505 10,892,734 5/10/10 -- (267,410)
Swiss Franc ......... SSBT Buy 9,963,230 9,713,685 5/10/10 -- (79,666)
Swiss Franc ......... BANT Buy 2,093,377 2,026,365 5/10/10 -- (2,159)
Swiss Franc ......... AESX Sell 538,558 520,000 5/10/10 -- (762)
Swiss Franc ......... SSBT Buy 4,444,970 4,287,550 5/10/10 26,893 --
Swiss Franc ......... DBFX Sell 3,836,871 3,770,000 5/10/10 59,910 --
Swiss Franc ......... BBU Sell 1,758,471 1,720,000 5/10/10 19,633 --
Swiss Franc ......... BANT Sell 1,194,357 1,180,000 5/10/10 25,108 --
Swiss Franc ......... HSBC Sell 1,425,510 1,410,000 5/10/10 31,593 --
Swiss Franc ......... SSBT Sell 1,927,207 1,892,666 5/10/10 29,139 --
British Pound ....... DBFX Sell 37,500,000 62,688,750 5/12/10 2,164,047 --
----------- -----------
Unrealized appreciation (depreciation) ................................................. 50,361,337 (4,378,861)
----------- -----------
Net unrealized appreciation (depreciation) .......................................... $45,982,476
===========

See Abbreviations on page 53.

The accompanying notes are an integral part of these financial statements.

Annual Report | 31

Mutual Quest Fund

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
December 31, 2009

Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................................................... $4,198,584,198
Cost - Non-controlled affiliated issuers (Note 13) ................................... 82,004,776
--------------
Total cost of investments ............................................................ $4,280,588,974
==============
Value - Unaffiliated issuers ......................................................... $5,054,112,778
Value - Non-controlled affiliated issuers (Note 13) .................................. 40,576,703
--------------
Total value of investments (includes securities loaned in the amount of $3,529,605) .. 5,094,689,481
Cash .................................................................................... 276,075
Foreign currency, at value (cost $39,872,716) ........................................... 39,840,482
Receivables:
Investment securities sold ........................................................... 15,124,133
Capital shares sold .................................................................. 4,597,049
Dividends and interest ............................................................... 7,115,732
Due from brokers ..................................................................... 49,136,315
Unrealized appreciation on forward exchange contracts ................................... 50,361,337
Unrealized appreciation on unfunded loan commitments (Note 10) .......................... 3,991
Other assets ............................................................................ 675
--------------
Total assets ......................................................................... 5,261,145,270
--------------
Liabilities:
Payables:
Investment securities purchased ...................................................... 50,664,169
Capital shares redeemed ............................................................. 6,465,407
Affiliates ........................................................................... 4,412,913
Options written, at value (premiums received $18,277,235) ............................... 23,602,596
Securities sold short, at value (proceeds $57,383,649) .................................. 57,200,100
Payable upon return of securities loaned ................................................ 3,868,656
Unrealized depreciation on forward exchange contracts ................................... 4,378,861
Accrued expenses and other liabilities .................................................. 1,010,491
--------------
Total liabilities ................................................................. 151,603,193
--------------
Net assets, at value ........................................................... $5,109,542,077
Net assets consist of: ==============
Paid-in capital ......................................................................... $4,401,317,955
Distributions in excess of net investment income ........................................ (34,514,828)
Net unrealized appreciation (depreciation) .............................................. 854,982,645
Accumulated net realized gain (loss) .................................................... (112,243,695)
--------------
Net assets, at value ........................................................... $5,109,542,077
==============

The accompanying notes are an integral part of these financial statements.

32 | Annual Report

Mutual Quest Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2009

CLASS Z:
Net assets, at value ........................................................ $3,584,302,310
--------------
Shares outstanding .......................................................... 207,924,854
--------------
Net asset value and maximum offering price per share ........................ $ 17.24
CLASS A: --------------
Net assets, at value ........................................................ $1,101,462,722
--------------
Shares outstanding .......................................................... 64,330,452
--------------
Net asset value per share(a) ................................................ $ 17.12
--------------
Maximum offering price per share (net asset value per share / 94.25%) ....... $ 18.16
--------------
CLASS B:
Net assets, at value ........................................................ $ 34,803,415
--------------
Shares outstanding .......................................................... 2,075,736
--------------
Net asset value and maximum offering price per share(a) ..................... $ 16.77
--------------
CLASS C:
Net assets, at value ........................................................ $ 388,874,583
--------------
Shares outstanding .......................................................... 22,919,473
--------------
Net asset value and maximum offering price per share(a) ..................... $ 16.97
--------------
CLASS R:
Net assets, at value ........................................................ $ 99,047
--------------
Shares outstanding .......................................................... 5,801
--------------
Net asset value and maximum offering price per share ........................ $ 17.07
--------------

(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.

The accompanying notes are an integral part of these financial statements.

Annual Report | 33

Mutual Quest Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended December 31, 2009

Investment income:
Dividends: (net of foreign taxes of $5,010,436)
Unaffiliated issuers ............................................................... $ 81,923,742
Non-controlled affiliated issuers (Note 13) ........................................ 1,341,623
Interest:
Unaffiliated issuers ............................................................... 19,083,507
Adjustment for uncollectible interest (Note 8) ..................................... (15,465,651)
Non-controlled affiliated issuers (Note 13) ........................................ 208,724
Income from securities loaned ......................................................... 99,818
------------
Total investment income ...................................................... 87,191,763
------------
Expenses:
Management fees (Note 3a) ............................................................. 27,609,613
Administrative fees (Note 3b) ......................................................... 3,524,487
Distribution fees: (Note 3c)
Class A ............................................................................ 2,963,083
Class B ............................................................................ 374,301
Class C ............................................................................ 3,546,363
Class R ............................................................................ 93
Transfer agent fees (Note 3e) ......................................................... 4,457,727
Custodian fees (Note 4) ............................................................... 388,650
Reports to shareholders ............................................................... 362,505
Registration and filing fees .......................................................... 178,113
Professional fees ..................................................................... 336,173
Trustees' fees and expenses ........................................................... 151,933
Dividends on securities sold short .................................................... 4,208,252
Other ................................................................................. 360,258
------------
Total expenses ............................................................... 48,461,551
Expense reductions (Note 4) .................................................. (202,391)
------------
Net expenses .............................................................. 48,259,160
------------
Net investment income .................................................. 38,932,603
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ............................................................ 77,798,971
Non-controlled affiliated issuers (Note 13) ..................................... (6,115,574)
Written options .................................................................... (3,065,187)
Foreign currency transactions ...................................................... (97,028,048)
Securities sold short .............................................................. (17,209,205)
------------
Net realized gain (loss) .................................................. (45,619,043)
------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................................ 851,907,910
Translation of other assets and liabilities denominated in foreign currencies ...... 29,505,400
------------
Net change in unrealized appreciation (depreciation) ...................... 881,413,310
------------
Net realized and unrealized gain (loss) ............................................... 835,794,267
------------
Net increase (decrease) in net assets resulting from operations ....................... $874,726,870
============

The accompanying notes are an integral part of these financial statements.

34 | Annual Report

Mutual Quest Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS

YEAR ENDED DECEMBER 31,
--------------------------------
2009 2008
-------------- ---------------

Increase (decrease) in net assets:
Operations:
Net investment income ................................................... $ 38,932,603 $ 98,408,076
Net realized gain (loss) from investments, written options, securities
sold short and foreign currency transactions ......................... (45,619,043) 325,690,431
Net change in unrealized appreciation (depreciation) on investments
and translation of other assets and liabilities denominated in foreign
currencies ........................................................... 881,413,310 (1,971,227,628)
-------------- ---------------
Net increase (decrease) in net assets resulting from operations ... 874,726,870 (1,547,129,121)
-------------- ---------------
Distributions to shareholders from:
Net investment income:
Class Z .............................................................. (68,388,579) (61,395,078)
Class A .............................................................. (18,237,454) (14,205,288)
Class B .............................................................. (334,164) (308,286)
Class C .............................................................. (4,063,244) (2,613,022)
Class R .............................................................. (1,441) --
Net realized gains:
Class Z .............................................................. (3,388,060) (269,629,983)
Class A .............................................................. (1,046,049) (76,838,699)
Class B .............................................................. (38,374) (3,820,054)
Class C .............................................................. (380,978) (30,141,995)
Class R .............................................................. (10) --
-------------- ---------------
Total distributions to shareholders ........................................ (95,878,353) (458,952,405)
-------------- ---------------
Capital share transactions: (Note 2)
Class Z .............................................................. (34,648,029) 70,935,652
Class A .............................................................. 52,087,287 (1,449,463)
Class B .............................................................. (13,012,623) (7,916,883)
Class C .............................................................. (8,374,024) (8,518,953)
Class R .............................................................. 97,402 --
-------------- ---------------
Total capital share transactions ........................................... (3,849,987) 53,050,353
-------------- ---------------
Redemption fees ............................................................ -- 15,547
-------------- ---------------
Net increase (decrease) in net assets ............................. 774,998,530 (1,953,015,626)
Net assets:
Beginning of year .......................................................... 4,334,543,547 6,287,559,173
-------------- ---------------
End of year ................................................................ $5,109,542,077 $ 4,334,543,547
-------------- ---------------
Distributions in excess of net investment income included in net assets:
End of year ................................................................ $ (34,514,828) $ (1,346,885)
============== ===============

The accompanying notes are an integral part of these financial statements.

Annual Report | 35

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of seven separate funds. The Mutual Quest Fund (Fund) is included in
this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers five classes of shares: Class Z, Class A,
Class B, Class C, and Class R. Effective May 1, 2009, the Fund began offering a
new class of shares, Class R. 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.

Effective May 1, 2009, the Mutual Qualified Fund was renamed the Mutual Quest
Fund.

The following summarizes the Fund's significant accounting policies.

A. SECURITY VALUATION

36 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A. SECURITY VALUATION (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION

Annual Report | 37

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION (CONTINUED)

C. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS

D. DERIVATIVE FINANCIAL INSTRUMENTS

38 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

See Note 12 regarding other derivative information.

E. SECURITIES SOLD SHORT

F. SECURITIES LENDING

Annual Report | 39

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

F. SECURITIES LENDING (CONTINUED)

G. INCOME TAXES

H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS

40 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

I. ACCOUNTING ESTIMATES

J. REDEMPTION FEES

K. GUARANTEES AND INDEMNIFICATIONS

2. SHARES OF BENEFICIAL INTEREST

At December 31, 2009, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:

YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2009(a) 2008
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------

CLASS Z SHARES:
Shares sold .................... 13,436,135 $ 207,109,895 11,122,574 $ 209,614,477
Shares issued in reinvestment of
distributions ............... 3,994,734 67,853,470 21,179,571 311,672,139
Shares redeemed ................ (19,981,382) (309,611,394) (24,315,473) (450,350,964)
----------- ------------- ----------- -------------
Net increase (decrease) ........ (2,550,513) $ (34,648,029) 7,986,672 $ 70,935,652
=========== ============= =========== =============
CLASS A SHARES:
Shares sold .................... 20,676,068 $ 315,814,401 18,274,974 $ 333,446,293
Shares issued in reinvestment of
distributions ............... 1,091,213 18,397,218 5,851,226 85,559,773
Shares redeemed ................ (18,396,309) (282,124,332) (22,653,674) (420,455,529)
----------- ------------- ----------- -------------
Net increase (decrease) ........ 3,370,972 $ 52,087,287 1,472,526 $ (1,449,463)
=========== ============= =========== =============

Annual Report | 41

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SHARES OF BENEFICIAL INTEREST (CONTINUED)

YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2009(a) 2008
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- --------------

CLASS B SHARES:
Shares sold .................... 133,415 $ 1,962,402 186,946 $ 3,373,974
Shares issued in reinvestment of
distributions ............... 20,990 345,760 267,986 3,835,934
Shares redeemed ................ (1,016,953) (15,320,785) (825,352) (15,126,791)
---------- ------------ ---------- --------------
Net increase (decrease) ........ (862,548) $(13,012,623) (370,420) $ (7,916,883)
========== ============ ========== ==============
CLASS C SHARES:
Shares sold .................... 4,255,443 $ 64,119,026 4,076,156 $ 73,178,814
Shares issued in reinvestment of
distributions ............... 244,770 4,082,762 2,049,328 29,714,490
Shares redeemed ................ (5,057,737) (76,575,812) (6,127,082) (111,412,257)
---------- ------------ ---------- --------------
Net increase (decrease) ........ (557,524) $ (8,374,024) (1,598) $ (8,518,953)
========== ============ ========== ==============
CLASS R SHARES:
Shares sold .................... 5,722 $ 96,064
Shares issued in reinvestment of
distributions ............... 79 1,338
---------- ------------
Net increase (decrease) ........ 5,801 $ 97,402
========== ============

(a) For the period May 1, 2009 (effective date) to December 31, 2009 for Class
R.

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 $7 billion
0.550% Over $7 billion, up to and including $10 billion
0.540% In excess of $10 billion

42 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

A. MANAGEMENT FEES (CONTINUED)

Effective December 7, 2009, Franklin Templeton Investment Management Limited, an
affiliate of Franklin Mutual, no longer provides subadvisory services to the
Fund.

B. ADMINISTRATIVE FEES

The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust'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 Trustees 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 for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the max- imum
for the current plan year cannot be reimbursed in subsequent periods.

The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:

Class A ........... 0.35%
Class B ........... 1.00%
Class C ........... 1.00%
Class R ........... 0.50%

Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.

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:

Sales charges retained net of commissions paid to
unaffiliated broker/dealers .................. $719,941
Contingent deferred sales charges retained ...... $ 42,117

Annual Report | 43

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. TRANSACTIONS WITH AFFILIATES (CONTINUED)

E. TRANSFER AGENT FEES

For the year ended December 31, 2009, the Fund paid transfer agent fees of
$4,457,727, of which $3,087,406 was retained by Investor Services.

4. EXPENSE OFFSET ARRANGEMENT

5. INDEPENDENT TRUSTEES' RETIREMENT PLAN

During the year ended December 31, 2009, the Fund's projected benefit obligation
and benefit payments under the plan were as follows:

(a) Projected benefit obligation at December 31, 2009 ........ $164,992
(b) Increase in projected benefit obligation ................. $ 13,609
Benefit payments made to retired trustees ................ $ 7,002

(a) The projected benefit obligation is included in accrued expenses and other
liabilities in the Statement of Assets and Liabilities.

(b) The increase in projected benefit obligation is included in trustees' fees
and expenses in the Statement of Operations.

6. INCOME TAXES

For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At December 31, 2009, the Fund had tax basis capital losses of
$47,730,183 expiring in 2017.

The tax character of distributions paid during the years ended December 31, 2009
and 2008, was as follows:

2009 2008
----------- ------------

Distributions paid from:
Ordinary income ............... $91,050,958 $324,732,262
Long term capital gain ........ 4,827,395 134,220,143
----------- ------------
$95,878,353 $458,952,405
=========== ============

44 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES (CONTINUED)

At December 31, 2009, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:

Cost of investments .......................................... $4,323,867,184
==============
Unrealized appreciation ...................................... $1,093,796,433
Unrealized depreciation ...................................... (322,974,136)
--------------
Net unrealized appreciation (depreciation) ................... $ 770,822,297
==============
Distributable earnings - undistributed ordinary income ....... $ 1,219,429
==============

Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, payments-in-kind,
bond discounts and premiums, accrued pension expense, certain dividends on
securities sold short, partnership distributions, recognition of partnership
income and certain corporate action adjustments.

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares, payments-in-kind, bond
discounts and premiums, tax straddles, certain dividends on securities sold
short, partnership distributions, recognition of partnership income, index
options and certain corporate action adjustments.

7. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2009, aggregated
$2,034,994,918 and $1,122,836,140, respectively. Transactions in options written
during the year ended December 31, 2009, were as follows:

NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------- ------------

Options outstanding at December 31, 2008 13,858 $ 8,642,578
Options written 13,012,490 37,425,854
Options expired (15,166) (10,432,127)
Options exercised (3,709,744) (8,159,102)
Options closed (3,809,969) (9,199,968)
---------- ------------
Options outstanding at December 31, 2009 5,491,469 $ 18,277,235
========== ============

Annual Report | 45

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. CREDIT RISK AND 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. Risks associated with
purchasing these securities include the possibility that the bankruptcy or other
restructuring process takes longer than expected, or that distributions in
restructuring are less than anticipated, either or both of which may result in
unfavorable consequences to the Fund. If it becomes probable that income on debt
securities, including those of distressed companies, will not be collected, the
Fund discontinues accruing income and recognizes an adjustment for uncollectible
interest. For the year ended December 31, 2009, the Fund recorded an adjustment
for uncollectible interest of $15,465,651, as noted in the Statement of
Operations.

At December 31, 2009, the aggregate value of distressed company securities and
securities for which interest has been discontinued was $5,028,881, representing
0.10% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.

9. RESTRICTED SECURITIES

PRINCIPAL AMOUNT/
SHARES/WARRANTS/
- ------------------- ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- --------- ------ ------------------ ----------- ------------

805,153 AboveNet Inc. ............................ 10/02/01 - 9/08/09 $21,247,943 $ 52,367,151
510 AboveNet Inc., stock grant, grant price
$10.475, expiration date 9/09/13 ......... 4/17/06 - 9/08/06 -- 111,313
109 AboveNet Inc., stock grant, grant price
$30, expiration date 9/07/18 ............. 9/08/09 -- 15,277
16,099 AboveNet Inc., wts., 9/08/10 ............. 10/02/01 - 9/07/07 1,681,196 1,609,900
7,519,799 Cerberus CG Investor I LLC ............... 7/26/07 - 6/17/08 7,494,044 1,579,158
6,600,000 Cerberus CG Investor I LLC, 12.00%,
7/31/14 .................................. 7/26/07 6,600,000 1,386,000
7,519,799 Cerberus CG Investor II LLC .............. 7/26/07 - 6/17/08 7,494,044 1,579,158
6,600,000 Cerberus CG Investor II LLC, 12.00%,
7/31/14 .................................. 7/26/07 6,600,000 1,386,000
3,759,899 Cerberus CG Investor III LLC ............. 7/26/07 - 6/17/08 3,747,022 789,579

46 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. RESTRICTED SECURITIES (CONTINUED)

PRINCIPAL AMOUNT/
SHARES/WARRANTS/
------------------ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
--------- ------ ------------------ ----------- ------------

3,300,000 Cerberus CG Investor III LLC, 12.00%,
7/31/14 .................................. 7/26/07 $ 3,300,000 $ 693,000
1,008,199 (a) DecisionOne Corp. 3/12/99 - 7/18/00 700,978 1,673,610
1,339,481 (a) DecisionOne Corp., senior secured note,
15.00%, 11/30/13 ......................... 6/01/09 - 10/15/09 1,339,481 1,339,481
553,576 (a) DecisionOne Corp., wts., 6/08/17 ......... 7/09/07 -- --
27,946 Elephant Capital Holdings Ltd. ........... 8/29/03 - 3/10/08 4,321,333 --
16,133,491 FIM Coinvestor Holdings I, LLC ........... 11/20/06 - 6/02/09 -- --
659,105 First Chicago Bancorp .................... 11/16/06 9,227,470 689,755
438 GMAC Inc. ................................ 11/13/09 63,065,780 4,830,027
180,986 IACNA Investor LLC ....................... 7/24/08 65,591 1,810
1,491,021 Imagine Group Holdings Ltd. .............. 8/31/04 15,270,292 16,068,882
2,363,058 International Automotive Components
Group Brazil LLC ......................... 4/13/06 - 12/26/08 1,571,561 2,649,980
307,801 International Automotive Components
Group Japan LLC .......................... 9/26/06 - 3/27/07 2,672,054 1,178,867
8,425,843 International Automotive Components
Group LLC ................................ 1/12/06 - 10/16/06 8,427,208 5,744,403
1,560,200 (b) International Automotive Components
Group NA LLC, 9.00%, 4/01/17 ............. 3/30/07 1,583,603 1,563,681
5,182,488 (b) International Automotive Components
Group NA LLC, A .......................... 3/30/07 - 10/10/07 5,514,368 1,577,290
4,285 MCII Holdings Inc. ....................... 4/17/09 4,933,364 --
32,450 MCII Holdings Inc., PIK, pfd., A ......... 4/17/09 - 10/01/09 32,087,623 15,081,244
129,974 NCB Warrant Holdings Ltd., A ............. 12/16/05 - 3/10/08 1,223,890 --
97,300 Olympus Re Holdings Ltd. ................. 12/19/01 9,409,076 207,833
92,938 PTV Inc., 10.00%, pfd., A ................ 12/07/01 - 3/06/02 58,551 15,381
3,434,760 Symetra Financial ........................ 7/27/04 39,480,000 44,651,880
------------
TOTAL RESTRICTED SECURITIES
(3.11% of Net Assets) ................. $158,790,660
============

(a) The Fund also invests in unrestricted securities of the issuer, valued at
$234,285 as of December 31, 2009.

(b) The Fund also invests in unrestricted securities of the issuer, valued at
$1,027,725 as of December 31, 2009.

10. UNFUNDED LOAN COMMITMENTS

Annual Report | 47

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. UNFUNDED LOAN COMMITMENTS (CONTINUED)

At December 31, 2009, unfunded commitments were as follows:

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

Lyondell Chemical Co., DIP Delayed Draw Term Loan,
FRN, 13.00%, 4/06/10 .............................. $363,355
========

11. UNFUNDED CAPITAL COMMITMENTS

The Fund may enter into certain capital commitments and may be obligated to
perform on such agreements at a future date. Unfunded capital commitments
requiring recognition are monitored for impairment and any unrealized
deprecation is included in the Statement of Assets and Liabilities and the
Statement of Operations. At December 31, 2009, the Fund had aggregate unfunded
capital commitments of $2,650,503, for which no depreciation has been
recognized.

12. OTHER DERIVATIVE INFORMATION

At December 31, 2009, the Fund has invested in derivative contracts which are
reflected on the Statement of Assets and Liabilities as follows:

ASSET DERIVATIVES LIABILITY DERIVATIVES
DERIVATIVE CONTRACTS ------------------------------------- -----------------------------------------
NOT ACCOUNTED FOR AS STATEMENT OF ASSETS AND FAIR VALUE STATEMENT OF ASSETS AND FAIR VALUE
HEDGING INSTRUMENTS LIABILITIES LOCATION AMOUNT LIABILITIES LOCATION AMOUNT
- ----------------------------- ----------------------- ----------- --------------------------- -----------

Foreign exchange contracts .. Unrealized appreciation
on forward exchange Unrealized depreciation on
contracts $50,361,337 forward exchange contracts $ 4,378,861
Equity contracts ............ Value - Unaffiliated
issuers 547,011 Options written, at value 23,602,596

48 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. OTHER DERIVATIVE INFORMATION (CONTINUED)

For the year ended December 31, 2009, the effect of derivative contracts on the
Fund's Statement of Operations was as follows:

CHANGE IN
UNREALIZED
APPRECIATION
REALIZED GAIN (DEPRECIATION) AVERAGE
(LOSS) FOR THE FOR THE YEAR AMOUNT
DERIVATIVE CONTRACTS YEAR ENDED ENDED OUTSTANDING
NOT ACCOUNTED FOR AS DECEMBER 31, DECEMBER 31, DURING THE
HEDGING INSTRUMENTS STATEMENT OF OPERATIONS LOCATIONS 2009 2009 YEAR(a)
- ----------------------------- -------------------------------------- -------------- -------------- -------------

Foreign exchange contracts .. Net realized gain (loss) from foreign
currency transactions/Net change in
unrealized appreciation (depreciation)
on translation of other assets and
liabilities denominated in foreign
currencies $(96,455,624) $29,341,886 1,439,694,186
Equity contracts ............ Net realized gain (loss) from
investments and written options/Net
change in unrealized appreciation
(depreciation) on investments (6,845,380) (9,318,886) 5,009,552

See Note 1(d) regarding derivative financial instruments.

13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

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

DecisionOne Corp. ........... 1,008,199 -- -- 1,008,199 $ 1,673,610 $ -- $ --
DecisionOne Corp., 12.00%,
4/15/10 .................. 1,297,728 26,375 1,324,103 -- -- 64,815 (343,994)
DecisionOne Corp., senior
secured note, 15.00%,
11/30/13 ................. -- 1,339,481 -- 1,339,481 1,339,481 118,191 --
DecisionOne Corp., Term Loan
B, 15.00%, 8/29/13 ....... 232,502 1,783 -- 234,285 234,285 25,718 --
DecisionOne Corp., wts.,
6/08/17 .................. 553,576 -- -- 553,576 -- -- --
Elephant Capital Holdings
Ltd. ..................... 27,946 -- -- 27,946 -- -- --
First Chicago Bancorp ....... 659,105 -- -- 659,105 --(a) -- --
Imagine Group Holdings
Ltd. ..................... 2,814,856 -- 1,323,835 1,491,021 16,068,882 -- (719,621)
Imperial Capital Bancorp
Inc. ..................... 445,796 -- 445,796 -- -- -- (5,051,959)
MCII Holdings Inc. .......... -- 4,285 -- 4,285 -- -- --
MCII Holdings Inc., PIK,
pfd., A .................. -- 32,450 -- 32,450 15,081,244 1,341,623 --
White River Capital Inc. .... 549,751 -- -- 549,751 6,179,201 -- --
----------- ---------- -----------
TOTAL AFFILIATED
SECURITIES (0.79% of
NET ASSETS) ...................................................................... $40,576,703 $1,550,347 $(6,115,574)
=========== ========== ===========

(a) As of December 31, 2009, no longer an affiliate.

Annual Report | 49

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

14. OTHER CONSIDERATIONS

15. CREDIT FACILITY

Under the terms of the Global Credit Facility, the Fund shall, in addition to
interest charged on any borrowings made by the Fund and other costs incurred by
the Fund, pay its share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee of 0.10% based upon the unused portion of the Global
Credit Facility, which is reflected in other expenses on the Statement of
Operations. During the year ended December 31, 2009, the Fund did not utilize
the Global Credit Facility.

16. FAIR VALUE MEASUREMENTS

- Level 1 - quoted prices in active markets for identical securities

- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)

- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.

50 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. FAIR VALUE MEASUREMENTS (CONTINUED)

The following is a summary of the inputs used as of December 31, 2009, in
valuing the Fund's assets and liabilities carried at fair value:

LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ------------ ------------ --------------

ASSETS:
Investments in Securities:
Equity Investments:(a)
Airlines ........................ $ -- $ 17,786 $ -- $ 17,786
Auto Components ................. -- -- 11,164,524(b) 11,164,524
Chemicals ....................... -- -- 3,022,299 3,022,299
Commercial Banks ................ 120,427,608 -- 689,755(b) 121,117,363
Computers & Peripherals ......... 90,601,773 -- 1,673,610(b) 92,275,383
Consumer Finance ................ 6,179,201 -- 8,777,922 14,957,123
Diversified Telecommunication
Services ..................... 114,306,652 1,625,281 --(b) 115,931,933
Insurance ....................... 245,779,051 -- 60,928,595 306,707,646
Machinery ....................... 123,392,302 -- 15,081,244(b) 138,473,546
Media ........................... 9,676,094 2,240,796 --(b) 11,916,890
Real Estate Management &
Development .................. 43,312,543 -- 44,011,202 87,323,745
All Other Equity
Investments(c) ............... 2,951,099,759 -- --(b) 2,951,099,759
Options Purchased .................. 223,450 323,561 -- 547,011
Corporate Bonds, Notes and
Senior Floating Rate
Interests .................... -- 158,881,850 7,979,338 166,861,188
Corporate Bonds and Notes
in Reorganization ............... -- -- 200 200
Companies in Liquidation ........... -- -- --(b) --
Short Term Investments ............. 1,068,649,452 4,623,633 -- 1,073,273,085
-------------- ------------ ------------ --------------
Total Investments in Securities ....... $4,773,647,885 $167,712,907 $153,328,689 $5,094,689,481
============== ============ ============ ==============
Forward Exchange Contracts ............ $ -- $ 50,361,337 $ -- $ 50,361,337
Unfunded Loan Commitments ............. -- 3,991 -- 3,991
LIABILITIES:
Options Written ....................... 2,878,395 20,724,201 -- 23,602,596
Securities Sold Short ................. 57,200,100 -- -- 57,200,100
Forward Exchange Contracts ............ -- 4,378,861 -- 4,378,861

(a) Includes common and preferred stocks as well as other equity investments.

(b) Includes securities determined to have no value at December 31, 2009.

Annual Report | 51

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. FAIR VALUE MEASUREMENTS (CONTINUED)

At December 31, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair value, is as
follows:

NET CHANGE
NET CHANGE IN UNREALIZED
IN APPRECIATION
BALANCE AT NET UNREALIZED NET TRANSFER BALANCE AT (DEPRECIATION)
BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF END OF ON ASSETS HELD
OF YEAR GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 YEAR AT YEAR END
------------ ------------ -------------- ------------ ------------ --------------- --------------

ASSETS
Investments in Securities:
Equity Investments:(a)
Auto Components ...... $ 4,503,678 $ 3,679 $ 6,501,280 $ 155,887 $ -- $ 11,164,524(b) $ 6,501,280
Chemicals ............ 3,022,299 -- -- -- -- 3,022,299 --
Commercial Banks ..... 4,998,809 -- (5,235,569) 926,515 -- 689,755(b) (5,235,569)
Computers &
Peripherals ....... -- -- 1,673,610 -- -- 1,673,610(b) 1,673,610
Consumer Finance ..... 17,244,325 -- (8,605,670) 139,267 -- 8,777,922 (46,240,368)
Diversified
Telecommunication
Services .......... 20,191,643 -- 12,050,247 -- (32,241,890) --(b) --
Food Products ........ 9,578 -- (1,860) -- (7,718) -- --
Health Care Providers
& Services ........ 18,010,662 -- 857,650 -- (18,868,312) -- --
Insurance ............ 68,930,052 (719,621) 5,556,599 (12,838,435) -- 60,928,595 2,840,752
Machinery ............ -- -- (21,939,743) 37,020,987 -- 15,081,244(b) (21,939,743)
Multi-Utilities ...... -- 663,291 16,378 (679,669) -- -- --
Real Estate Management
& Development ..... 31,986,351 -- 12,024,851 -- -- 44,011,202 12,024,851
Corporate Bonds, Notes and
Senior Floating Rate
Interests ............... 27,699,967 (9,104,623) 15,952,910 (26,568,916) -- 7,979,338 48,636
Corporate Bonds and Notes
in Reorganization ....... 710,485 (21,084,384) 25,307,463 (4,933,364) -- 200 --
Companies in Liquidation ... -- -- -- -- -- --(b) --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total ...................... $197,307,849 $(30,241,658) $ 44,158,146 $ (6,777,728) $(51,117,920) $153,328,689 $(50,326,551)
============ ============ ============ ============ ============ ============ ============

(a) Includes common and preferred stocks as well as other equity investments.

(b) Includes securities determined to have no value at December 31, 2009.

17. NEW ACCOUNTING PRONOUNCEMENTS

52 | Annual Report

Mutual Quest Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

18. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through February 18, 2010, the issuance
date of the financial statements and determined that no events have occurred
that require disclosure.

ABBREVIATIONS

COUNTERPARTY

AESX - Credit Suisse International
BANT - Bank of America N.A.
BBU - Barclays Bank
DBFX - Deutsche Bank AG
HAND - Svenska Handelsbanken
HSBC - HSBC Bank USA
SSBT - State Street Bank and Trust Co.

CURRENCY

EUR - Euro
GBP - British Pound
USD - U.S. Dollar

SELECTED PORTFOLIO

DIP - Debtor-In-Possession
FRN - Floating Rate Note
PIK - Payment-In-Kind

Annual Report | 53

Mutual Quest Fund

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS AND SHAREHOLDERS OF THE
MUTUAL QUEST FUND:

We have audited the accompanying statement of assets and liabilities of the
Mutual Quest Fund (formerly the Mutual Qualified Fund, one of the Funds
constituting the Franklin Mutual Series Funds) (the "Fund"), including the
statement of investments, as of December 31, 2009, 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 Quest Fund of the Franklin Mutual Series Funds at December 31, 2009, 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.

(ERNST & YOUNG LLP)

Boston, Massachusetts
February 18, 2010

54 | Annual Report

Mutual Quest 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 $4,827,395 as a long
term capital gain dividend for the fiscal year ended December 31, 2009.

Under Section 854(b)(2) of the Code, the Fund designates 29.59% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2009.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $72,480,038 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2009. Distributions, including qualified dividend income, paid
during calendar year 2009 will be reported to shareholders on Form 1099-DIV in
January 2010. 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 $9,788,942 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, 2009.

Annual Report | 55

Mutual Quest Fund

BOARD MEMBERS AND OFFICERS

INDEPENDENT BOARD MEMBERS

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

EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 8 None
c/o Franklin Mutual Advisers, LLC
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, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; an adviser to numerous
financial and publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.

KEITH E. MITCHELL (1954) Trustee Since 2009 8 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Principal, Mitchell Advisers LLC (advisory firm); director of various boards of asset management firms; and FORMERLY, Managing
Director, Putman Lovell NBF.

56 | Annual Report

CHARLES RUBENS II (1930) Trustee Since 1998 15 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Private investor.

LARRY D. THOMPSON (1945) Trustee Since 2009 141 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).

JAN HOPKINS TRACHTMAN (1947) Trustee Since 2009 8 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

President and Founder, The Jan Hopkins Group (communications consulting firm); President, Economic Club of New York; serves on
Advisory Board of Knight Bagehot Fellowship; and FORMERLY, Anchor/Correspondent, CNN Financial News (until 2003); Managing Director
and Head of Client Communications, Citigroup Private Bank (until 2005); Off-air Reporter, ABC News' World News Tonight and Editor,
CBS Network News.

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Attorney at law.

INTERESTED BOARD MEMBERS AND OFFICERS

**GREGORY E. JOHNSON (1961) Trustee Since 2007 89 None
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; and officer and/or
director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment
companies in Franklin Templeton Investments.

Annual Report | 57

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.

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; officer of two of the investment companies in Franklin Templeton Investments; and
FORMERLY, Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav).

JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and Vice President
and Vice - AML Compliance
President since 2006
- AML
Compliance

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).

LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Executive
San Mateo, CA 94403-1906 Officer -
Finance and
Administration

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

58 | Annual Report

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 Templeton Investments; 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.

STEVEN J. GRAY (1955) Secretary and Secretary since Not Applicable Not Applicable
One Franklin Parkway Vice President 2005 and Vice
San Mateo, CA 94403-1906 President since
August 2009

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

MATTHEW T. HINKLE (1971) Treasurer, Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Chief
San Mateo, CA 94403-1906 Financial
Officer and
Chief
Accounting
Officer

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Director, Fund Accounting, Franklin Templeton Investments; and officer of four of the investment companies in Franklin Templeton
Investments.

ROBERT C. ROSSELOT (1960) Vice President Since August 2009 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the
South; and officer of 45 of the investment companies in Franklin Templeton Investments.

KAREN L. SKIDMORE (1952) Vice President Since August 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin
Templeton Investments.

Annual Report | 59

CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906

PRINCIPAL OCCUPATION DURING PAST 5 YEARS:

General Counsel and Executive Vice President, Franklin Resources, Inc.; officer
of some of the other subsidiaries of Franklin Resources, Inc. and of 45 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).

Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.

60 | Annual Report

Mutual Quest Fund

SHAREHOLDER INFORMATION

PROXY VOTING POLICIES AND PROCEDURES

QUARTERLY STATEMENT OF INVESTMENTS

Annual Report | 61

This page intentionally left blank.

Franklin Templeton Funds

VALUE

BLEND

Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund

GROWTH

Franklin DynaTech Fund
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund

SECTOR

GLOBAL

Mutual Global Discovery Fund(4)
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund

INTERNATIONAL

HYBRID

Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund

ASSET ALLOCATION

FIXED INCOME

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

TAX-FREE INCOME(6)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)

LIMITED-/INTERMEDIATE-TERM

California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund

STATE-SPECIFIC

INSURANCE FUNDS

Franklin Templeton Variable Insurance
Products Trust(10)

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

(2.) Effective 5/1/09, Mutual Qualified Fund changed its name to Mutual Quest
Fund. The fund's investment goal and strategy remained unchanged.

(4.) Effective 5/1/09, Mutual Discovery Fund changed its name to Mutual Global
Discovery Fund. The fund's investment goal and strategy remained unchanged.

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

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

(7.) The fund invests primarily in insured municipal securities.

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

01/10

Not part of the annual report

(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)

One Franklin Parkway
San Mateo, CA 94403-1906

ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL QUEST FUND
(FORMERLY, MUTUAL QUALIFIED FUND)
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078

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

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

475 A2009 02/10

DECEMBER 31, 2009

ANNUAL REPORT AND SHAREHOLDER LETTER

(GRAPHIC)

VALUE

MUTUAL BEACON FUND

(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)

Franklin - Templeton - MUTUAL SERIES

Franklin Templeton Investments

GAIN FROM OUR PRESPECTIVE(R)

Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.

SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.

FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.

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

(GRAPHIC)

Not part of the annual report

Contents

SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual Beacon Fund ........................................................ 4
Performance Summary ....................................................... 11
Your Fund's Expenses ...................................................... 16
Financial Highlights and Statement of Investments ......................... 18
Financial Statements ...................................................... 33
Notes to Financial Statements ............................................. 37
Report of Independent Registered Public Accounting Firm ................... 56
Tax Designation ........................................................... 57
Board Members and Officers ................................................ 58
Shareholder Information ................................................... 63

Shareholder Letter

Dear Mutual Beacon Fund Shareholder:

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

Not part of the annual report | 1

spreads. Investors began to grasp the "green shoots" of a recovery as
aggressively as they had looked for protection in a proverbial bunker a month or
two before.

2 | Not part of the annual report

rates, and they are also generally facing significant obstacles to organic
growth from still-cautious consumers.

Sincerely,

/s/ Peter A. Langerman

Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC

Not part of the annual report | 3

Annual Report

Mutual Beacon Fund

YOUR FUND's GOALS AND MAIN INVESTMENTS: Mutual Beacon Fund seeks capital
appreciation, with income as a secondary goal, by investing primarily in 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 Beacon Fund's annual report for the fiscal
year ended December 31, 2009.

PERFORMANCE OVERVIEW

Mutual Beacon Fund -- Class Z delivered a +29.81% cumulative total return for
the 12 months ended December 31, 2009. The Fund outperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a +26.46% total return for the
same period.(1) You can find the Fund's long-term performance data in the
Performance Summary beginning on page 11.

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 23.

4 | Annual Report

GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/09

(BAR CHART)

U.S. 57.7%
U.K. 11.3%
Germany 4.4%
Switzerland 4.3%
Norway 2.5%
Denmark 1.9%
Japan 1.5%
Netherlands 1.0%
Spain 1.0%
Other 2.9%
Short-Term Investments & Other Net Assets 11.5%

INVESTMENT STRATEGY

(2.) Source: Bureau of Labor Statistics.

Annual Report | 5

TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/09

% OF TOTAL
NET ASSETS
----------

Tobacco 8.3%
Insurance 7.4%
Media 5.4%
Food Products 4.9%
Diversified Telecommunication Services 4.6%
Paper & Forest Products 4.6%
Beverages 4.0%
Health Care Providers & Services 4.0%
Food & Staples Retailing 4.0%
IT Services 3.3%

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.

In addition, it is our practice to hedge the Fund's currency exposure when we
deem it advantageous for our shareholders.

MANAGER'S DISCUSSION

During 2009, Mutual Beacon's best performing investments included software giant
Microsoft, U.K.-based communications services provider Virgin Media (VMED), and
Domtar, North America's largest producer of copy paper.

6 | Annual Report

TOP 10 HOLDINGS
12/31/09

COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------

News Corp., A 3.1%
MEDIA, U.S.
CVS Caremark Corp. 3.0%
FOOD & STAPLES RETAILING, U.S.
White Mountains Insurance Group Ltd. 2.7%
INSURANCE, U.S.
Imperial Tobacco Group PLC 2.4%
TOBACCO, U.K.
Weyerhaeuser Co. 2.4%
PAPER & FOREST PRODUCTS, U.S.
Microsoft Corp. 2.4%
SOFTWARE, U.S.
Altria Group Inc. 2.0%
TOBACCO, U.S.
Transocean Ltd. 1.9%
ENERGY EQUIPMENT & SERVICES, U.S.
British American Tobacco PLC 1.8%
TOBACCO, U.K.
Nestle SA 1.8%
FOOD PRODUCTS, SWITZERLAND

Microsoft shares fell as the economic slowdown adversely affected information
technology budgets and hurt revenue in divisions tied to PC sales. In response,
Microsoft laid off employees for the first time in the company's history,
protecting earnings while positioning itself to expand margins in the event of
economic recovery. As 2009 progressed, the economy stabilized and demand began
to return just as Microsoft launched new products, including the well-reviewed
Windows 7. Our investment appreciated substantially as the market began to
anticipate the resumption of growth and the stabilization of earnings.

Domtar shares rebounded strongly since March 2009 as a new CEO focused on
improving operations and cash flow by methodically evaluating company
operations. In the face of recession-dampened demand, the company closed
facilities and reduced output to match supply with demand. As a result, and
despite lower sales, Domtar expanded margins via productivity and efficiency
initiatives, and it generated strong free cash flow while reducing debt, thereby
strengthening its balance sheet. Although 2009 was a challenging year for
Domtar, we continued to hold shares at year-end because we believed management's
actions positioned the company well for the future.

In addition to those companies cited above, one of the best performing areas of
the portfolio was the Fund's investments in distressed securities. At the end of
2008 and the beginning of 2009, as fear was gripping the credit markets and
yield spreads were widening to historically high levels, we found compelling
opportunities in distressed debt -- specifically of companies that had amassed
debt in the preceding few years when credit was widely available. A number of
these positions appreciated significantly over 2009 as capital flowed back into
credit and yield spreads tightened considerably.

Annual Report | 7

Although the Fund performed well in 2009, it had some disappointments. Three
investments that declined in value were Eastman Kodak, Exelon and Comcast.

Shares of Exelon, the largest nuclear plant operator in the U.S., declined as
investors became concerned that its unregulated merchant generation assets would
be less profitable in the substantially weaker commodity pricing environment
that prevailed throughout much of 2009's first half. The company has
historically derived a majority of its earnings and cash flow from this merchant
business. In addition to its power generation business, the company also owns
and operates two regulated utilities, ComEd and PECO. We continued to hold
Exelon in the Fund's portfolio at year-end and believed the company's share
price reflected unrecognized value within its merchant power and regulated
utility businesses.

Comcast is the largest cable systems operator in the U.S., offering video, high
speed data and telephony services. While the company continued to post ARPU
(average revenue per user) and RGU (revenue generating unit) growth by
increasing the number of services purchased per subscriber, the total number of
subscribers declined. The overriding question has been: How much of the decline
in subscribers can be attributed to the contraction in the housing market, how
much to competition from telephony operators, and how much to maturation of the
end market? At the same time, rising marketing and programming expenses limited
Comcast's operating leverage while management's focus on driving efficiencies
and reducing capital expenditures -- a result of slower subscriber growth --
drove free cash flow. Comcast's low leverage and management's continued
reluctance to increase shareholder returns reintroduced longstanding investor
fears of a potentially dilutive acquisition. In the fourth quarter of 2009,
Comcast announced its intention to acquire NBC Universal from General Electric.
Although the terms of the transaction appeared attractive to Comcast and its
shareholders, and the company increased its shareholder remuneration policy
commensurately, the market's immediate reaction was negative.

Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S.

8 | Annual Report

holdings. Since the dollar was weaker compared with most foreign currencies
during 2009, our hedging strategy negatively impacted performance.

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

(PHOTO OF CHRISTIAN CORREA)

/s/ Christian Correa

Christian Correa, CFA
Portfolio Manager

(PHOTO OF MANDANA HORMOZI)

/s/ Mandana Hormozi

Mandana Hormozi
Assistant Portfolio Manager

Mutual Beacon Fund

Annual Report | 9

CHRISTIAN CORREA has been portfolio manager for Mutual Beacon Fund since 2007.
He joined Franklin Templeton Investments in 2003 and serves as Director of
Research for Franklin Mutual Advisors. Previously, he covered merger arbitrage
and special situations at Lehman Brothers Holdings Inc.

MANDANA HORMOZI has been assistant portfolio manager for Mutual Beacon Fund
since May 2009. Before that, she was assistant portfolio manager for Mutual
Discovery Fund since 2007. She has been an analyst for Franklin Mutual Advisers
since 2003, when she joined Franklin Templeton Investments. Previously, she was
a senior vice president in the equity research department at Lazard Freres.
Also, she was an economic research analyst at Mitsubishi Bank.

10 | Annual Report

Performance Summary as of 12/31/09

PRICE AND DISTRIBUTION INFORMATION

CLASS Z (SYMBOL: BEGRX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$2.42 $11.49 $9.07
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.2651

CLASS A (SYMBOL: TEBIX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$2.41 $11.40 $8.99
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.2093

CLASS B (SYMBOL: TEBBX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$2.45 $11.13 $8.68
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.0237

CLASS C (SYMBOL: TEMEX) CHANGE 12/31/09 12/31/08
- ----------------------- ------ -------- --------

Net Asset Value (NAV) +$2.45 $11.29 $8.84
DISTRIBUTIONS (1/1/09-12/31/09)
Dividend Income $0.0664

CLASS R (SYMBOL: N/A) CHANGE 12/31/09 10/30/09
- --------------------- ------ -------- --------

Net Asset Value (NAV) +$0.60 $11.38 $10.78
DISTRIBUTIONS (10/31/09-12/31/09)
Dividend Income $0.0708

Annual Report | 11

Performance Summary (CONTINUED)

PERFORMANCE

CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL AND AGGREGATE
TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
CLASS Z/R: NO SALES CHARGES; 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 Z(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- ---------

Cumulative Total Return(2) +29.81% +5.42% +68.64%
Average Annual Total Return(3) +29.81% +1.06% + 5.36%
Value of $10,000 Investment(4) $12,981 $10,542 $16,864
Total Annual Operating Expenses(5) 0.84%

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

Cumulative Total Return(2) +29.30% +3.81% +63.11%
Average Annual Total Return(3) +21.85% -0.44% + 4.40%
Value of $10,000 Investment(4) $12,185 $ 9,783 $15,376
Total Annual Operating Expenses(5) 1.13%

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

Cumulative Total Return(2) +28.51% +0.42% +54.84%
Average Annual Total Return(3) +24.51% -0.20% + 4.47%
Value of $10,000 Investment(4) $12,451 $ 9,899 $15,484
Total Annual Operating Expenses(5) 1.84%

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

Cumulative Total Return(2) +28.51% +0.34% +52.73%
Average Annual Total Return(3) +27.51% +0.07% + 4.33%
Value of $10,000 Investment(4) $12,751 $10,034 $15,273
Total Annual Operating Expenses(5) 1.84%

INCEPTION
CLASS R (10/30/09)
- ---------- ----------

Cumulative Total Return(2) +6.23%
Aggregate Total Return(6) +6.23%
Value of $10,000 Investment(4) $10,623
Total Annual Operating Expenses(5) 1.34%

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, GO TO
franklintempleton.com OR CALL (800) 342-5236.

12 | Annual Report

Performance Summary (CONTINUED)

TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT

CLASS Z (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

(PLOT POINTS TO COME)

AVERAGE ANNUAL TOTAL RETURN

CLASS Z(1) 12/31/09
- ---------- --------

1-Year +29.81%
5-Year +1.06%
10-Year +5.36%

CLASS A (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

(PLOT POINTS TO COME)

AVERAGE ANNUAL TOTAL RETURN

CLASS A(1) 12/31/09
- ---------- --------

1-Year +21.85%
5-Year -0.44%
10-Year +4.40%

Annual Report | 13

Performance Summary (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

CLASS B(1) 12/31/09
- ---------- --------

1-Year +24.51%
5-Year -0.20%
10-Year +4.47%

CLASS B (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

(PLOT POINTS TO COME)

AVERAGE ANNUAL TOTAL RETURN

CLASS C(1) 12/31/09
- ---------- --------

1-Year +27.51%
5-Year +0.07%
10-Year +4.33%

CLASS C (1/1/00-12/31/09)(1)

(PERFORMANCE GRAPH)

(PLOT POINTS TO COME)

14 | Annual Report

Performance Summary (CONTINUED)

ENDNOTES

VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND's INVESTMENTS IN SMALLER COMPANY STOCKS AND FOREIGN
SECURITIES INVOLVE SPECIAL RISKS. SMALLER COMPANY STOCKS HAVE EXHIBITED GREATER
PRICE VOLATILITY THAN LARGER COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM.
FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS AND ECONOMIC AND
POLITICAL UNCERTAINTIES. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS AS PENDING
DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS, AS WELL AS LOWER RATED
BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND's PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.