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Mutual Shares Fund

VALUE

JUNE 30, 2011

SEMIANNUAL REPORTAND SHAREHOLDER LETTER

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Franklin Templeton InvestmentsGain From Our Perspective®

Franklin Templeton’s distinct multi-manager structure combines thespecialized expertise of three world-class investment management groups—Franklin, Templeton and Mutual Series.

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 investingand 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, withoffices 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.

Because our management groups work independently and adhere to differentinvestment approaches, Franklin, Templeton and Mutual Series funds typicallyhave distinct portfolios. That’s why our funds can be used to build trulydiversified allocation plans covering every major asset class.

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 trustednames in financial services.

TRUE DIVERSIFICATION

RELIABILITY YOU CAN TRUST

SPECIALIZED EXPERTISE

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

Not part of the semiannual report

Not part of the semiannual report | 1

Semiannual Report

Mutual Shares Fund . . . . . . . . . . . . . . . . . . 5

Performance Summary . . . . . . . . . . . . . . . . 12

Your Fund’s Expenses . . . . . . . . . . . . . . . . . . 15

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

Financial Statements . . . . . . . . . . . . . . . . . 32

Notes to Financial Statements . . . . . . . . . . 36

Shareholder Information . . . . . . . . . . . . . . . . 54

Shareholder Letter . . . . . . . . . . . . . . . . . . 1

Contents

Shareholder LetterDear Mutual Shares Fund Shareholder:

The first half of 2011 brought a continuation of the major economic challengeswe have seen over the past several years. Equity markets began the year on anoptimistic note in the wake of the Federal Reserve’s (Fed’s) second round ofquantitative easing, or “QE2,” a bond purchase program that began in earlyautumn of 2010. However, concerns about sovereign debt fears in Europe,U.S. debt limits and slowing economic growth domestically stalled the rallyand contributed to sell-offs in March and June. For the six months endedJune 30, 2011, Mutual Shares Fund – Class Z appreciated 5.63% while theStandard & Poor’s 500 Index (S&P 500) rose 6.02%.1

U.S. and European economic fundamentals improved, albeit at a slightlyslower rate than at the end of 2010. U.S. unemployment trended lower,although not as quickly as many hoped for and predicted. Corporate profitswere generally strong as cost cutting drove margins higher against a backdropof marginally recovering sales. Corporations and households continued toreduce debt, potentially freeing funds for future spending. This is the “glasshalf full” perspective, but there were plenty of reasons to view the economicbackdrop as a “glass half empty.”

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstarand/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete ortimely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use ofthis information. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S.equity market performance. STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’sFinancial Services LLC. Standard & Poor’s does not sponsor, endorse, sell or promote any S&P index-based product. Theindex is unmanaged and includes reinvested dividends. One cannot invest directly in an index, and an index is not rep-resentative of the Fund’s portfolio.

Average Annual Total Return

Class Z 6/30/11

1-Year +23.64%

5-Year +1.74%

10-Year +4.47%

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,

as well as information and

commentaries regarding current

market conditions.

2 | Not part of the semiannual report

The sovereign debt crisis reached another flash point in Greece, Italy andSpain. While the debate raged about the effect of a Greek default, the countryand authorities worked to craft solutions to Greece’s problems that wouldnot severely disrupt the markets or increase speculation that other European countries might default. Despite these efforts, market concerns continued tospread, including to Italy. In addition to the efforts of eurozone decision mak-ers, each country’s domestic politics remained important as the market woulddemand austerity measures and strong political commitment before believingsolutions were viable and deliverable.

The pace of the economic recovery raised questions about its sustainability.Growth in the U.S. remained below expectations and the largely “joblessrecovery” showed no immediate sign of changing materially. The domestichousing market remained soft despite low mortgage rates as governmentincentives to buy faded and the significant backlog of foreclosed homesweighed on home prices. Housing starts remained anemic, a particularlyimportant factor as housing construction has significant impact on theemployment market. In Europe, the northern countries, including Germany,remained globally competitive, but lingering effects from the debt and prop-erty bubble and uncompetitive labor forces hindered regional growth. Asiangrowth was hit by the Japanese earthquake and tsunami, Chinese monetarytightening and weak global markets for exports.

The global banking sector exhibited a similarly erratic recovery from the crisis.Many banks struggled to show profitable loan growth while cutting costs,rebuilding their capital bases, and putting legal and regulatory issues behindthem. A number of smaller U.S. banks failed, with 48 FDIC-insured institu-tions failing in the first half of 2011 after 157 failed in 2010 and 140 in 2009.2

Some European banks raised capital, even in excess of anticipated regulatoryrequirements, to show strength in a skeptical market. In China, monetarytightening, credit quality concerns and significant debt at local and regionalgovernments hampered banks.

The Fed’s QE2 program ended coincident with the close of the first half of theyear, leaving markets worried about the potential effect of the removal of sucha significant monetary stimulus. All in all, more than enough macroeconomicnegatives persisted to cloud the near-term and intermediate outlook.

2. Source: Federal Deposit Insurance Corporation.

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At Mutual Series we have certainly taken account of the overall backdropwhile remaining focused on the company-specific fundamentals that drive ourinvestment efforts to buy and own companies at a significant discount to theirintrinsic value. We have found interesting opportunities recently in sectorssuch as pharmaceuticals, where in our view the market has been unwilling togive companies like Merck any substantial credit for its research and develop-ment pipeline.3 Merck has a long record of innovation and a strong financialposition, with almost no net debt, healthy earnings and cash flow used to funda substantial dividend, and a robust research and development program. Webelieve that at our purchase prices, we were paying very little for any potentialpipeline success from one of the highest quality organizations in the pharma-ceutical industry.

Merger and acquisition (M&A) activity seemed as volatile as the rest of themarkets. The larger definitive deals generally offered very modest returns,reflecting the deals’ relative safety and the extremely unattractive return ofholding cash with yields close to zero. A variety of unsolicited transactionswere present in the market, but many of those deals failed to reach a positiveconclusion. While we continue to believe the economy’s ongoing strength andthe accumulation of cash on corporate balance sheets suggest significantpotential for M&A, decision makers seemed wary of larger economic issuesand somewhat reluctant to pursue deals.

Distressed debt opportunities in the first half of 2011 were also limited. Theleveraged buyouts (LBO) transacted in 2005 to 2007 have been the focusof “amend and extend” efforts, where current debt holders receive value inexchange for extending loan maturities. Combined with very strong creditmarkets, this environment has afforded more time for LBO equity holders toreduce debt and/or hope for an improvement in business fundamentals and areturn of optimism to equity markets.

We remain in the thick of the aftermath of the Great Recession. In the U.S.,persistently high unemployment and significant budget deficits at every level ofgovernment are troubling. In the U.S. and Europe, markets, citizens and politi-cians are all struggling with the need for austerity and fiscal contraction whileeconomic growth remains soft. In Asia, growth continues but at an uncertain

3. Mutual Shares Fund’s holdings are based on total net assets as of 6/30/11: Merck 1.7%.

pace, with Chinese authorities attempting to keep growth on track withoutoverheating the economy or allowing a slowdown to turn into a recession.Beyond China, the implications of changes in developed world monetary pol-icy and exchange rates are rippling through Asian markets. In the midst ofthese cross-currents we continue to look for the company-specific opportuni-ties that have always been our bread and butter.

We thank you for your trust and your support.

Sincerely,

Peter A. LangermanChairman, President and Chief Executive OfficerFranklin Mutual Advisers, LLC

This letter reflects our analysis, opinions and portfolio holdings as of June 30, 2011, the end of the reportingperiod. The way we implement our main investment strategies and the resulting portfolio holdings may changedepending on factors such as market and economic conditions. These opinions may not be relied upon as invest-ment advice or an offer for a particular security. The information is not a complete analysis of every aspect ofany market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, butthe investment manager makes no representation or warranty as to their completeness or accuracy. Althoughhistorical performance is no guarantee of future results, these insights may help you understand our investmentmanagement philosophy.

4 | Not part of the semiannual report

Semiannual Report | 5

Semiannual Report

Mutual Shares FundYour 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 man-

agers believe are at prices below their intrinsic value. The Fund may invest up to 35% of its assets in foreign

securities.

This semiannual report for Mutual Shares Fund covers the period ended June 30, 2011.

Performance Overview

Mutual Shares Fund – Class Z delivered a +5.63% cumulative total returnfor the six months ended June 30, 2011. The Fund underperformed the+6.02% total return of its benchmark, the Standard & Poor’s 500 Index (S&P 500), which is a broad measure of U.S. stock performance.1 You canfind the Fund’s long-term performance data in the Performance Summarybeginning on page 12.

Economic and Market Overview

The global economy expanded despite geopolitical and inflationary pressuresduring the six-month period ended June 30, 2011. In the U.S., business activ-ity increased and consumer spending stayed above pre-recession levels. TheU.S. was a key engine in a sustained global manufacturing expansion as inter-national trade volume continued to increase, albeit at a moderate pace. TheU.S. financial system appeared closer to a full recovery, although the countrystill faced challenges dealing with persistent unemployment, housing marketweakness and massive debt. During the period, signs emerged of a global eco-nomic slowdown. Officials at the U.S. Federal Reserve Board (Fed) cut theirgrowth forecast for the world’s largest economy, and manufacturing growthslowed in most major regions of the world. Japan’s earthquake, an earlysurge in commodity prices and a fading inventory restocking cycle were allblamed for declining economic leading indicators. Some monetary policy

1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstarand/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete ortimely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use ofthis information. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, andan 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’sStatement of Investments (SOI). The SOI begins on page 22.

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.

tightening in most parts of the world was also thought to inhibit growth andcool the commodities rally.

Inflation at the consumer, producer and trade levels rose across much of theworld, but in the U.S. it remained relatively contained. As a result, the Fedmaintained its accommodative monetary policy while ending its second roundof quantitative easing on June 30. The Fed said, however, it would continueto purchase Treasuries with proceeds from maturing debt in an effort to sup-port economic growth. This move deviated from many other central banksaround the world that raised interest rates to dampen inflation pressures.

Continued corporate profit strength and still favorable economic growthprospects in some regions of the world supported equities. Global stockmarkets made gains in the first half of 2011, though the positive momen-tum from the previous year waned as investors weathered internationalevents that included revolutions and civil unrest across the Middle Eastand North Africa, the multiple crises triggered by Japan’s earthquake andtsunami, and sovereign debt worries and credit downgrades in Europe. Thedollar declined during the period against most currencies, however, broadlyreflecting divergent interest rate and/or economic growth expectations.

Investment Strategy

At Mutual Series, we are committed to our distinctive value approach toinvesting, which we believe can generate above-average risk-adjusted returnsover time for our shareholders. Our major investment strategy is investing inundervalued stocks. When selecting undervalued equities, we are alwaysattracted to fundamentally strong companies with healthy balance sheets,high-quality assets, substantial free cash flow and shareholder-oriented man-agement teams and whose stocks are trading at discounts to our assessmentof the companies’ intrinsic or business value. We also look for asset rich com-panies whose shares may be trading at depressed levels due to concerns overshort-term earnings disappointments, litigation, management strategy orother perceived negatives. This strict value approach is not only intended toimprove the likelihood of upside potential, but it is also intended to reducethe risk of substantial declines. While the vast majority of our undervaluedequity investments are made in publicly traded companies globally, we mayinvest 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 quiteprofitable during certain periods over the years. Distressed investing is

6 | Semiannual Report


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 financiallydistressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially strongercompany.

The other piece of our investment strategy is participating in arbitrage situa-tions, another highly specialized field. When companies announce proposedmergers or takeovers, commonly referred to as “deals,” the target companymay trade at a discount to the bid it ultimately accepts. One form of arbitrageinvolves purchasing the target company’s stock when it is trading below thevalue we believe it would receive in a deal. In keeping with our commitment toa relatively conservative investment approach, we typically focus our arbitrageefforts on announced deals, and eschew rumored deals or other situations weconsider relatively risky.

In addition, it is our practice to hedge the Fund’s currency exposure when wedeem it advantageous for our shareholders.

Manager’s Discussion

As stock markets advanced unevenly in the first half of 2011, several Fundinvestments increased in value. Three particularly strong performers wereUnitedHealth Group, a U.S. managed health care provider; Marathon Oil, aU.S.-based oil and gas exploration and production company with interestsworldwide; and U.K.-based British American Tobacco (BAT).

Shares of UnitedHealth rose sharply in value during the first half of 2011.In January, its share price was fueled by a combination of the company’sannouncement of better-than-expected fourth quarter 2010 earnings and,more significantly, its higher revenue guidance for 2011. Other positive cata-lysts included the company’s ongoing efforts to increase shareholder valuethrough share buybacks and dividends. In our view, UnitedHealth’s long-termearnings growth is supported by a diversified business mix and a growing per-centage of earnings generated by its increasingly successful health careservices business. Although there was no specific catalyst for the continuedincrease in the company’s stock price in the second quarter, we believe manyinvestors may have recognized the low earnings multiple at which the com-pany’s shares had been trading. In addition, investors seemed to become morecomfortable with the implications of pending U.S. health care reforms on thecompany’s business model.

Geographic BreakdownBased on Total Net Assets as of 6/30/11

U.S.

U.K.

France

Germany

Spain

Denmark

Switzerland

0

10

20

30

40

50

60

70

64.4%

11.1%

2.5%

4.9%

3.7%

3.2%

1.1%

8.1%

1.0%

Other

Short-Term Investments & Other Net Assets


The value of our investment in Marathon Oil surged in early 2011, initiallydriven by management’s announced plans to spin off its downstream operations(refining and selling) to shareholders to become a pure-play exploration andproduction company. Investors pushed Marathon shares higher as they beganto recognize the value of the underlying businesses. The share price showedcontinuing strength in the spring as the July spin-off date approached, oil pricesrose, and refining margins improved considerably, driven primarily by thecompany’s strong Midwestern refining system, which benefited from recentinvestments and widening crude oil price differentials in a land-locked market.

BAT is the world’s second-largest publicly traded tobacco company, with apresence in more than 180 countries. During the period under review, thestock performed well. In February, the company reported full-year 2010operating results that exceeded market expectations. In addition, BAT man-agement reported it had delivered on its five-year goal to realize £800 millionin cost savings two years ahead of schedule. In May, the company held aninvestor relations day during which its top executives discussed further cost-cutting opportunities. Management believes it can continue to grow operatingmargins for the next six to seven years aided by price increases and cost-cuttingprograms. Management explained that cost savings will come from myriadopportunities including simplifying its business structure, improvements inprocurement, a reduction in logistics costs, further rationalization of manu-facturing facilities, and the standardization and consolidation of back-officecenters and processes. The company also reaffirmed its goal to grow medium-term earnings per share in the high single-digit range, although managementalso mentioned it would likely exceed that goal in 2011. BAT is a long-termportfolio holding, and the shares have generated nearly 700% in total share-holder returns over the past 10 years. At period-end, we continued to believeBAT was an attractive investment due to the industry’s pricing power, thecompany’s additional cost savings opportunities and a shareholder friendlymanagement team that often has returned excess cash to shareholders throughdividends and share buybacks.

In contrast, some of the Fund’s investments lost value. Key detractors includedCommunity Health Systems, a U.S. hospital management company operatingin small cities and rural areas; Japanese video game software and console makerNintendo; and U.S. network equipment provider Cisco Systems.

Community Health Systems reported earnings above expectations and reaf-firmed its 2011 earnings-per-share forecasts. However, rival hospital operatorTenet Healthcare filed a lawsuit during the period alleging that Community

Top 10 Sectors/IndustriesBased on Equity Securities as of 6/30/11

% of TotalNet Assets

Tobacco 7.8%

Insurance 6.2%

Pharmaceuticals 6.1%

Media 5.6%

Oil, Gas & Consumable Fuels 4.8%

Food Products 4.4%

Food & Staples Retailing 4.2%

Commercial Banks 3.7%

Beverages 3.7%

Health Care Providers & Services 3.5%


Health had engaged in inappropriate patient admissions practices and hadtherefore made false statements in proxy documents relating to the company’sproposed offer to acquire Tenet Healthcare. The disclosure of the lawsuit, com-bined with subsequent government investigations, led to a significant decline inCommunity Health shares that continued for the rest of the reporting period.Community Health had announced an unsolicited offer to acquire TenetHealthcare in late 2010 but chose to withdraw its proposal in May 2011.

Nintendo’s share price deteriorated after the company reported sales of its newhandheld console, the Nintendo 3DS, that were slower than anticipated. Inparticular, sales of this new gaming device were weak in its home market ofJapan, where the March 11 earthquake and tsunami hurt consumer sentiment,and in other parts of the world due to a lack of compelling software titles atlaunch date and the console’s relatively high initial sales price. At period-end,cash accounted for more than 50% of Nintendo’s market capitalization, andwe believe the company can successfully leverage its software intellectual prop-erty in the next gaming console cycle. With this in mind, we continued to holdNintendo in the portfolio at period-end.

Cisco Systems is a relatively new addition to the portfolio, initiated in early2011. Early in the first quarter, Cisco issued lower-than-expected earningsguidance citing economic pressures such as subdued spending by governmentagencies, a key revenue stream, and missteps in its consumer-focused businesses.In mid-May, Cisco shares declined further when the company confirmed it hadcompleted another disappointing quarter. However, management announcedsignificant cost realignment and an exit from certain consumer markets, bothof which we believe should improve financial results. Cisco’s competitiveposition remained strong, its balance sheet appeared overcapitalized to us atperiod-end, and the company announced it would begin paying a dividendas well as continuing to buy back stock. For these reasons, along with manage-ment’s commitment to repair the company’s current cost structure, we foundCisco’s valuation appealing.

Finally, investors should note that we maintained our currency hedging pos-ture of being more hedged than not to the U.S. dollar, largely through the useof forward currency exchange contracts. Certain currencies strengthened inrelation to the U.S. dollar in the first six months of 2011, and so our hedgingstrategy hindered Fund performance during the reporting period.

Top 10 Holdings6/30/11

Company % of TotalSector/Industry, Country Net Assets

British American Tobacco PLC, ord. & ADR 2.5%Tobacco, U.K.

CVS Caremark Corp. 2.3%Food & Staples Retailing, U.S.

Marathon Oil Corp. 2.0%Oil, Gas & Consumable Fuels, U.S.

Kraft Foods Inc., A 2.0%Food Products, U.S.

White Mountains Insurance Group Ltd. 1.9%Insurance, U.S.

Pfizer Inc. 1.8%Pharmaceuticals, U.S.

Microsoft Corp. 1.8%Software, U.S.

Nestle SA 1.7%Food Products, Switzerland

Imperial Tobacco Group PLC 1.7%Tobacco, U.K.

Merck & Co. Inc. 1.7%Pharmaceuticals, U.S.


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

Peter A. LangermanCo-Portfolio Manager

F. David Segal, CFACo-Portfolio Manager

Debbie A. Turner, CFAAssistant Portfolio Manager

Mutual Shares Fund

CFA® is a trademark owned by CFA Institute.

The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2011, the end of thereporting period. The way we implement our main investment strategies and the resulting portfolio holdings maychange depending on factors such as market and economic conditions. These opinions may not be relied upon asinvestment advice or an offer for a particular security. The information is not a complete analysis of every aspect ofany market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but theinvestment manager makes no representation or warranty as to their completeness or accuracy. Although historicalperformance is no guarantee of future results, these insights may help you understand our investment managementphilosophy.


Peter Langerman has been portfolio manager for Mutual Shares Fund since 2005. He has

been portfolio manager of Mutual Global Discovery Fund since 2009. 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.


Performance Summary as of 6/30/11

Price Information

Class Z (Symbol: MUTHX) Change 6/30/11 12/31/10

Net Asset Value (NAV) +$1.17 $21.97 $20.80

Class A (Symbol: TESIX) Change 6/30/11 12/31/10


Class B (Symbol: FMUBX) Change 6/30/11 12/31/10


Class C (Symbol: TEMTX) Change 6/30/11 12/31/10


Class R (Symbol: TESRX) Change 6/30/11 12/31/10


Your dividend income will vary depending on dividends or interest paid by securities in the Fund’sportfolio, adjusted for operating expenses of each class. Capital gain distributions are net profitsrealized from the sale of portfolio securities. The performance table does not reflect any taxes thata shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gainson the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capitalgain distributions, if any, and any unrealized gains or losses.


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: contingentdeferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; Class C: 1% CDSC infirst year only.

Class Z 6-Month 1-Year 5-Year 10-Year

Cumulative Total Return1 +5.63% +23.64% +8.98% +54.90%

Average Annual Total Return2 +5.63% +23.64% +1.74% +4.47%

Value of $10,000 Investment3 $10,563 $12,364 $10,898 $15,490

Total Annual Operating Expenses4 0.85%

Class A 6-Month 1-Year 5-Year 10-Year


Average Annual Total Return2 -0.55% +16.16% +0.23% +3.52%



Class B 6-Month 1-Year 5-Year 10-Year





Class C 6-Month 1-Year 5-Year 10-Year





Class R 6-Month 1-Year 5-Year Inception (1/1/02)





Performance data represent past performance, which does not guarantee future results. Investment return and principalvalue 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.


Performance Summary (continued)

Endnotes

Value securities may not increase in price as anticipated or may decline further in value. The Fund’s investments in foreign securities involvespecial risks including currency fluctuations, and economic and political uncertainties. The Fund may also invest in companies engaged in merg-ers, reorganizations or liquidations, which involve special risks as pending deals may not be completed on time or on favorable terms, as well aslower rated bonds, which entail higher credit risk. The manager applies various techniques and analyses in making investment decisions for theFund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description ofthe 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 havehigher 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 thanClass A shares.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has notbeen annualized.

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

4. 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.


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 otherFund 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 understandthese costs and compare them with those of other mutual funds. The table assumes a $1,000investment 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 andexpenses. The “Ending Account Value” is derived from the Fund’s actual return, which includesthe 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 compareongoing costs of investing in the Fund with those of other mutual funds. This information maynot 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 andan assumed 5% annual rate of return before expenses, which does not represent the Fund’s actualreturn. The figure under the heading “Expenses Paid During Period” shows the hypothetical expensesyour 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.


Your Fund’s Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflectany transaction costs, such as sales charges. Therefore, the second line for each class is useful incomparing 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 referto the Fund prospectus for additional information on operating expenses.

Beginning Account Ending Account Expenses Paid During Class Z Value 1/1/11 Value 6/30/11 Period* 1/1/11–6/30/11

Actual $1,000 $1,056.30 $4.33

Hypothetical (5% return before expenses) $1,000 $1,020.58 $4.26

Class A

Actual $1,000 $1,055.20 $5.86


Class B

Actual $1,000 $1,051.20 $9.41


Class C

Actual $1,000 $1,051.30 $9.41


Class R

Actual $1,000 $1,054.10 $6.88


*Expenses are calculated using the most recent six-month expense ratio, annualized for each class (Z: 0.85%; A: 1.15%; B: 1.85%; C: 1.85%; andR: 1.35%) multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.

Mutual Shares FundFinancial Highlights

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 17

Six Months EndedJune 30, 2011 Year Ended December 31,

Class Z (unaudited) 2010 2009 2008 2007 2006

Per share operating performance(for a share outstanding throughout

the period)

Net asset value, beginning of period . . . . $20.80 $19.19 $15.32 $25.33 $26.08 $23.95

Income from investment operationsa:

Net investment incomeb . . . . . . . . . . . . 0.29c 0.56d 0.24e 0.45 0.70 0.42

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . 0.88 1.68 4.06 (9.99) 0.17 3.90

Total from investment operations . . . . . . . 1.17 2.24 4.30 (9.54) 0.87 4.32

Less distributions from:

Net investment income . . . . . . . . . . . . — (0.63) (0.43) (0.27) (0.75) (0.52)

Net realized gains . . . . . . . . . . . . . . . . — — — (0.20) (0.87) (1.67)

Total distributions . . . . . . . . . . . . . . . . . — (0.63) (0.43) (0.47) (1.62) (2.19)

Redemption feesf . . . . . . . . . . . . . . . . . . — — — —g —g —g

Net asset value, end of period . . . . . . . . $21.97 $20.80 $19.19 $15.32 $25.33 $26.08

Total returnh . . . . . . . . . . . . . . . . . . . . . 5.63% 11.75% 28.20% (37.92)% 3.30% 18.37%

Ratios to average net assetsi

Expenses before waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . 0.85% 0.85% 0.90%k 0.79%k 0.75%k 0.84%k

Expenses net of waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . 0.85% 0.85%l 0.88%k 0.79%k 0.75%k 0.84%k

Expenses incurred in connection with securities sold short . . . . . . . . . . . . . . . —% 0.02% 0.05% 0.01% 0.01% 0.07%

Net investment income . . . . . . . . . . . . . 2.74%c 2.83%d 1.48%e 2.14% 2.57% 1.63%

Supplemental data

Net assets, end of period (000’s) . . . . . . $8,766,756 $8,635,954 $8,472,347 $7,236,112 $13,262,561 $11,577,506

Portfolio turnover rate . . . . . . . . . . . . . . 14.80% 28.25% 47.87% 37.97% 40.57% 33.40%

aThe 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 ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.07 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount,the ratio of net investment income to average net assets would have been 2.05%.dNet investment income per share includes approximately $0.21 per share received in the form of a special dividend paid in connection with a corporate real estate investment trust(REIT) conversion. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been 1.73%.eNet investment income per share includes approximately $(0.08) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 1.95%.fEffective September 1, 2008, the redemption fee was eliminated.gAmount rounds to less than $0.01 per share.hTotal return is not annualized for periods less than one year.iRatios are annualized for periods less than one year.jIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).kBenefit of expense reduction rounds to less than 0.01%.lBenefit of waiver and payments by affiliates rounds to less than 0.01%.

Mutual Shares FundFinancial Highlights (continued)

18 | The accompanying notes are an integral part of these financial statements. | Semiannual Report


Class A (unaudited) 2010 2009 2008 2007 2006

Per share operating performance(for a share outstanding throughout the period)

Net asset value, beginning of period . . . . . $20.64 $19.06 $15.22 $25.14 $25.90 $23.82


Net investment incomeb . . . . . . . . . . . . . 0.26c 0.49d 0.19e 0.39 0.61 0.32

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . 0.88 1.66 4.02 (9.90) 0.17 3.88

Total from investment operations . . . . . . . . 1.14 2.15 4.21 (9.51) 0.78 4.20


Net investment income . . . . . . . . . . . . . . — (0.57) (0.37) (0.21) (0.67) (0.45)

Net realized gains . . . . . . . . . . . . . . . . . — — — (0.20) (0.87) (1.67)

Total distributions . . . . . . . . . . . . . . . . . . — (0.57) (0.37) (0.41) (1.54) (2.12)

Redemption feesf . . . . . . . . . . . . . . . . . . . — — — —g —g —g

Net asset value, end of period . . . . . . . . . $21.78 $20.64 $19.06 $15.22 $25.14 $25.90

Total returnh . . . . . . . . . . . . . . . . . . . . . . 5.52% 11.41% 27.84% (38.10)% 2.97% 17.98%


Expenses before waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . . 1.15% 1.15% 1.20%k 1.08%k 1.07%k 1.18%k

Expenses net of waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . . 1.15% 1.15%l 1.18%k 1.08%k 1.07%k 1.18%k

Expenses incurred in connection with securities sold short . . . . . . . . . . . . . . . . —% 0.02% 0.05% 0.01% 0.01% 0.07%

Net investment income . . . . . . . . . . . . . . . 2.44%c 2.53%d 1.18%e 1.85% 2.25% 1.29%

Supplemental data

Net assets, end of period (000’s) . . . . . . . . $5,435,762 $5,368,887 $5,100,309 $4,624,696 $8,469,264 $6,761,779

Portfolio turnover rate . . . . . . . . . . . . . . . . 14.80% 28.25% 47.87% 37.97% 40.57% 33.40%

aThe 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 ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.07 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount,the ratio of net investment income to average net assets would have been 1.75%.dNet investment income per share includes approximately $0.21 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 1.43%.eNet investment income per share includes approximately $(0.08) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 1.65%.fEffective September 1, 2008, the redemption fee was eliminated.gAmount rounds to less than $0.01 per share.hTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.iRatios are annualized for periods less than one year.jIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).kBenefit of expense reduction rounds to less than 0.01%.lBenefit of waiver and payments by affiliates rounds to less than 0.01%.




Class B (unaudited) 2010 2009 2008 2007 2006


Net asset value, beginning of period . . . . . . . . . . $20.30 $18.70 $14.94 $24.60 $25.35 $23.35


Net investment incomeb . . . . . . . . . . . . . . . . . . 0.17c 0.35d 0.08e 0.23 0.41 0.16

Net realized and unrealized gains (losses) . . . . . 0.87 1.63 3.92 (9.65) 0.18 3.78

Total from investment operations . . . . . . . . . . . . . 1.04 1.98 4.00 (9.42) 0.59 3.94


Net investment income . . . . . . . . . . . . . . . . . . — (0.38) (0.24) (0.04) (0.47) (0.27)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . — — — (0.20) (0.87) (1.67)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . — (0.38) (0.24) (0.24) (1.34) (1.94)

Redemption feesf . . . . . . . . . . . . . . . . . . . . . . . . — — — —g —g —g

Net asset value, end of period . . . . . . . . . . . . . . $21.34 $20.30 $18.70 $14.94 $24.60 $25.35

Total returnh . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12% 10.65% 26.92% (38.54)% 2.25% 17.21%


Expenses before waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.85% 1.85% 1.89%k 1.79%k 1.75%k 1.84%k

Expenses net of waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.85% 1.85%l 1.87%k 1.79%k 1.75%k 1.84%k

Expenses incurred in connection with securities sold short . . . . . . . . . . . . . . . . . . . . . —% 0.02% 0.05% 0.01% 0.01% 0.07%

Net investment income . . . . . . . . . . . . . . . . . . . 1.74%c 1.83%d 0.49%e 1.14% 1.57% 0.63%

Supplemental data

Net assets, end of period (000’s) . . . . . . . . . . . . $105,057 $150,580 $242,799 $272,750 $586,289 $659,186

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . 14.80% 28.25% 47.87% 37.97% 40.57% 33.40%





Class C (unaudited) 2010 2009 2008 2007 2006


Net asset value, beginning of period . . . . . . . $20.46 $18.89 $15.10 $24.86 $25.63 $23.48


Net investment incomeb . . . . . . . . . . . . . . . 0.18c 0.35d 0.08e 0.24 0.42 0.16

Net realized and unrealized gains (losses) . . . 0.87 1.65 3.96 (9.75) 0.17 3.82

Total from investment operations . . . . . . . . . . 1.05 2.00 4.04 (9.51) 0.59 3.98


Net investment income . . . . . . . . . . . . . . . — (0.43) (0.25) (0.05) (0.49) (0.16)

Net realized gains . . . . . . . . . . . . . . . . . . . — — — (0.20) (0.87) (1.67)

Total distributions . . . . . . . . . . . . . . . . . . . . — (0.43) (0.25) (0.25) (1.36) (1.83)

Redemption feesf . . . . . . . . . . . . . . . . . . . . . — — — —g —g —g

Net asset value, end of period . . . . . . . . . . . $21.51 $20.46 $18.89 $15.10 $24.86 $25.63

Total returnh . . . . . . . . . . . . . . . . . . . . . . . . 5.13% 10.62% 26.92% (38.53)% 2.30% 17.18%


Expenses before waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . . . 1.85% 1.85% 1.90%k 1.77%k 1.75%k 1.84%k

Expenses net of waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . . . 1.85% 1.85%l 1.88%k 1.77%k 1.75%k 1.84%k

Expenses incurred in connection with securities sold short . . . . . . . . . . . . . . . . . . —% 0.02% 0.05% 0.01% 0.01% 0.07%

Net investment income . . . . . . . . . . . . . . . . 1.74%c 1.83%d 0.48%e 1.16% 1.57% 0.63%

Supplemental data

Net assets, end of period (000’s) . . . . . . . . . $1,258,376 $1,292,711 $1,355,155 $1,296,171 $2,617,083 $2,387,517

Portfolio turnover rate . . . . . . . . . . . . . . . . . 14.80% 28.25% 47.87% 37.97% 40.57% 33.40%

aThe 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 ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.07 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount,the ratio of net investment income to average net assets would have been 1.05%.dNet investment income per share includes approximately $0.21 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 0.73%.eNet investment income per share includes approximately $(0.08) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 0.95%.fEffective September 1, 2008, the redemption fee was eliminated.gAmount rounds to less than $0.01 per share.hTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.iRatios are annualized for periods less than one year.jIncludes dividend expense on securities sold short and borrowing fee, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).kBenefit of expense reduction rounds to less than 0.01%.lBenefit of waiver and payments by affiliates rounds to less than 0.01%.




Class R (unaudited) 2010 2009 2008 2007 2006


Net asset value, beginning of period . . . . . . . . . $20.52 $18.95 $15.15 $25.00 $25.77 $23.72


Net investment incomeb . . . . . . . . . . . . . . . . . 0.24c 0.45d 0.16e 0.34 0.55 0.28

Net realized and unrealized gains (losses) . . . . . 0.87 1.66 3.99 (9.83) 0.18 3.86

Total from investment operations . . . . . . . . . . . . 1.11 2.11 4.15 (9.49) 0.73 4.14


Net investment income . . . . . . . . . . . . . . . . . . — (0.54) (0.35) (0.16) (0.63) (0.42)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . — — — (0.20) (0.87) (1.67)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . — (0.54) (0.35) (0.36) (1.50) (2.09)

Redemption feesf . . . . . . . . . . . . . . . . . . . . . . . — — — —g —g —g

Net asset value, end of period . . . . . . . . . . . . . . $21.63 $20.52 $18.95 $15.15 $25.00 $25.77

Total returnh . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.41% 11.18% 27.51% (38.19)% 2.77% 17.73%


Expenses before waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.35% 1.35% 1.40%k 1.29%k 1.25%k 1.34%k

Expenses net of waiver and payments by affiliatesj . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.35% 1.35%l 1.38%k 1.29%k 1.25%k 1.34%k

Expenses incurred in connection with securities sold short . . . . . . . . . . . . . . . . . . . . . —% 0.02% 0.05% 0.01% 0.01% 0.07%

Net investment income . . . . . . . . . . . . . . . . . . . 2.24%c 2.33%d 0.98%e 1.64% 2.07% 1.13%

Supplemental data

Net assets, end of period (000’s) . . . . . . . . . . . . $273,608 $259,834 $227,649 $173,496 $297,777 $188,646

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . 14.80% 28.25% 47.87% 37.97% 40.57% 33.40%



Mutual Shares FundStatement of Investments, June 30, 2011 (unaudited)

Country Shares/Warrants/Rights Value

Common Stocks and Other Equity Interests 88.7%Aerospace & Defense 0.5%

a GenCorp Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,073,770 $ 13,313,603a Huntington Ingalls Industries Inc. . . . . . . . . . . . . . . . . . . . . . United States 1,735,564 59,876,958

73,190,561

Air Freight & Logistics 0.4%PostNL NV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands 3,538,618 30,029,697TNT Express NV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands 3,538,618 36,700,682

66,730,379

Airlines 0.0%a,b,c Northwest Airlines Corp., Contingent Distribution . . . . . . . . . . . United States 111,348,000 —

Auto Components 0.3%a,b,c Collins & Aikman Products Co., Contingent Distribution . . . . . . United States 3,845,673 38,457a,b,c Dana Holding Corp., Contingent Distribution . . . . . . . . . . . . . . United States 45,477,000 —a,d,e IACNA Investor LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 678,719 6,787a,d,e International Automotive Components Group Brazil LLC . . . . . . Brazil 7,234,813 9,125,559d,e,f International Automotive Components Group North America,

LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 46,695,640 43,654,820

52,825,623

Automobiles 1.3%Daimler AG (EUR Traded) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,413,460 105,950,498

a General Motors Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,368,960 102,281,626

208,232,124

Beverages 3.7%Brown-Forman Corp., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 29,731 2,140,632Coca-Cola Enterprises Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 2,995,300 87,402,854Dr. Pepper Snapple Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . United States 3,020,255 126,639,292Foster’s Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia 9,874,503 54,535,497PepsiCo Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,453,924 102,399,867Pernod Ricard SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 2,186,962 215,561,629

588,679,771

Biotechnology 1.4%a Amgen Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,876,860 167,864,781a Cephalon Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 641,950 51,291,805

219,156,586

Building Products 0.8%a Owens Corning Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,320,705 124,028,332

Capital Markets 1.6%Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,528,110 150,211,811

a UBS AG (CHF Traded) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 5,843,234 106,537,556

256,749,367

Chemicals 1.4%a,b,c Dow Corning Corp., Contingent Distribution . . . . . . . . . . . . . . . United States 21,830,547 3,157,637

Linde AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,221,550 214,165,987

217,323,624


Mutual Shares FundStatement of Investments, June 30, 2011 (unaudited) (continued)


Common Stocks and Other Equity Interests (continued)Commercial Banks 3.7%Barclays PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 29,662,777 $ 122,096,948

a CIT Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,386,732 61,376,758a,d,e Elephant Capital Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . Japan 64,834 —

a,d First Southern Bancorp Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . United States 453,016 5,354,060a,e Guaranty Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,731,834 7,680,658a,d NCB Warrant Holdings Ltd., A . . . . . . . . . . . . . . . . . . . . . . . . . Japan 301,530 —

PNC Financial Services Group Inc. . . . . . . . . . . . . . . . . . . . . . United States 2,619,233 156,132,479a State Bank Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,467,000 24,014,790Wells Fargo & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,508,610 182,631,597

a,e West Coast Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,469,240 24,624,462a,d,e West Coast Bancorp, wts., C, 10/23/16 . . . . . . . . . . . . . . . . . . United States 43,036 4,706,202

588,617,954

Commercial Services & Supplies 0.0%†

a Comdisco Holding Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,122 13,220a,b,c Comdisco Holding Co. Inc., Contingent Distribution . . . . . . . . . United States 86,205,000 —

13,220

Communications Equipment 1.0%Cisco Systems Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,818,080 106,430,229

a Motorola Solutions Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 948,257 43,657,752

150,087,981

Computers & Peripherals 1.0%a,b,c DecisionOne Corp., Contingent Distribution . . . . . . . . . . . . . . . United States 2,910,866 —

Hewlett-Packard Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,361,700 158,765,880

158,765,880

Consumer Finance 0.7%a,d Ally Financial Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,270 70,452,456a,d Cerberus CG Investor I LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 112,372,589 17,136,820a,d Cerberus CG Investor II LLC . . . . . . . . . . . . . . . . . . . . . . . . . . United States 112,370,907 17,136,563a,d Cerberus CG Investor III LLC . . . . . . . . . . . . . . . . . . . . . . . . . . United States 56,193,029 8,569,437

113,295,276

Diversified Financial Services 2.0%Bank of America Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 10,879,280 119,236,909

a,g Bond Street Holdings LLC, A, 144A . . . . . . . . . . . . . . . . . . . . United States 1,593,873 34,268,269Deutsche Boerse AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,223,170 92,946,076

a,b,c Marconi Corp., Contingent Distribution . . . . . . . . . . . . . . . . . . United Kingdom 77,739,439 1,455,440NYSE Euronext . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,162,089 74,094,790

322,001,484

Diversified Telecommunication Services 2.0%e AboveNet Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,756,555 123,766,865Cable & Wireless Communication PLC . . . . . . . . . . . . . . . . . . . United Kingdom 61,055,633 39,685,214

a,b,c Global Crossing Holdings Ltd., Contingent Distribution . . . . . . . United States 105,649,309 —Telefonica SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain 6,337,759 154,955,231

318,407,310




Common Stocks and Other Equity Interests (continued)Electric Utilities 2.5%Brookfield Infrastructure Partners LP . . . . . . . . . . . . . . . . . . . Canada 2,664,391 $ 66,742,995

a,b,c Calpine Corp., Contingent Distribution . . . . . . . . . . . . . . . . . . United States 18,710,000 —E.ON AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 5,251,033 149,516,321Entergy Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 821,510 56,092,703Exelon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,855,950 122,348,898

a,d Prime AET&D Holdings No. 1 Pty. Ltd. . . . . . . . . . . . . . . . . . . Australia 14,234,065 —

394,700,917

Electrical Equipment 0.1%Alstom SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 318,636 19,647,217

Electronic Equipment, Instruments & Components 0.7%TE Connectivity Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,849,094 104,732,695

Energy Equipment & Services 1.7%Ensco PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,076,335 57,368,655

a Exterran Holding Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,387,650 47,347,100Transocean Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,571,652 166,025,853

270,741,608

Food & Staples Retailing 4.2%Carrefour SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 1,260,125 51,751,129CVS Caremark Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,707,200 364,796,576The Kroger Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,608,762 163,897,298Wal-Mart Stores Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,504,460 79,947,004

660,392,007

Food Products 4.4%General Mills Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,030,740 112,804,143Kraft Foods Inc., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 8,765,032 308,792,077Nestle SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 4,347,630 270,175,628

691,771,848

Health Care Equipment & Supplies 1.9%a Boston Scientific Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 11,661,900 80,583,729Medtronic Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,173,585 160,808,230

a Zimmer Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 975,342 61,641,614

303,033,573

Health Care Providers & Services 3.5%a,e Community Health Systems Inc. . . . . . . . . . . . . . . . . . . . . . . United States 4,806,000 123,418,080

a Coventry Health Care Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,661,400 60,591,258a Tenet Healthcare Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 18,442,561 115,081,580UnitedHealth Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,928,934 254,234,416

553,325,334

Hotels, Restaurants & Leisure 0.1%a,d,e GLCP Harrah’s Investment LP . . . . . . . . . . . . . . . . . . . . . . . . United States 22,185,100 5,328,861

Thomas Cook Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 4,811,987 10,275,129

15,603,990



Independent Power Producers & Energy Traders 0.7%a NRG Energy Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,755,658 $ 116,894,074

Industrial Conglomerates 0.9%Koninklijke Philips Electronics NV . . . . . . . . . . . . . . . . . . . . . . Netherlands 2,658,317 68,271,317Orkla ASA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Norway 7,640,793 72,388,995

140,660,312

Insurance 6.2%ACE Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,345,100 154,354,482

a Alleghany Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 377,389 125,712,050American International Group Inc. . . . . . . . . . . . . . . . . . . . . . United States 4,699,430 137,787,288

a CNO Financial Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,530,090 27,923,012MetLife Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,578,410 69,244,847Old Republic International Corp. . . . . . . . . . . . . . . . . . . . . . . United States 6,101,302 71,690,298

a,d Olympus Re Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 202,380 56,241e White Mountains Insurance Group Ltd. . . . . . . . . . . . . . . . . . . United States 729,457 306,488,653Zurich Financial Services AG . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 352,340 89,090,728

982,347,599

IT Services 0.0%†

Glodyne Technoserve Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . India 191,666 1,484,198

Leisure Equipment & Products 0.6%Mattel Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,529,409 97,023,453

Machinery 0.7%e Federal Signal Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,360,800 22,046,848Stanley Black & Decker Inc. . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,149,400 82,814,270

104,861,118

Marine 1.1%A.P. Moller - Maersk AS, B . . . . . . . . . . . . . . . . . . . . . . . . . . . Denmark 20,138 173,679,728

Media 5.6%British Sky Broadcasting Group PLC . . . . . . . . . . . . . . . . . . . . United Kingdom 10,271,574 139,585,456News Corp., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 11,013,142 194,932,613Time Warner Cable Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,242,492 175,004,076Time Warner Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,656,550 169,358,724Viacom Inc., B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,370,388 120,889,788Virgin Media Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 3,062,067 91,647,665

891,418,322

Metals & Mining 1.3%ThyssenKrupp AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 4,032,388 208,495,029

Multi-Utilities 0.6%GDF Suez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 2,697,169 98,701,651


Common Stocks and Other Equity Interests (continued)




Common Stocks and Other Equity Interests (continued)Office Electronics 1.6%Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 23,916,645 $ 248,972,274

Oil, Gas & Consumable Fuels 4.8%a,c Apco Oil Corp., Liquidating Trust . . . . . . . . . . . . . . . . . . . . . . . United States 9,200 —

BP PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 10,116,800 74,436,013Marathon Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,891,520 310,365,274Murphy Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,333,670 87,568,772Royal Dutch Shell PLC, A . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 6,291,763 223,355,535The Williams Cos. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,350,597 71,105,559

766,831,153

Paper & Forest Products 2.3%Domtar Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 645,033 61,097,526International Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,787,789 172,591,868MeadWestvaco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,882,628 129,330,338

363,019,732

Pharmaceuticals 6.1%Eli Lilly & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,097,610 228,843,303Merck & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 7,409,560 261,483,373Novartis AG, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 2,034,175 124,308,434Pfizer Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 13,754,285 283,338,271

a Sanofi, Contingent Value rts., 12/31/20 . . . . . . . . . . . . . . . . . France 2,146,370 5,172,752Teva Pharmaceutical Industries Ltd., ADR . . . . . . . . . . . . . . . . Israel 1,238,910 59,740,240

962,886,373

Real Estate Investment Trusts (REITs) 1.8%e Alexander’s Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 326,675 129,689,975Weyerhaeuser Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 7,301,016 159,600,210

289,290,185

Real Estate Management & Development 0.6%c Canary Wharf Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 14,262,931 68,964,274a Forestar Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,431,256 23,515,536

92,479,810

Semiconductors & Semiconductor Equipment 0.9%a LSI Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 19,334,996 137,665,172

Software 2.7%Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 10,623,070 276,199,820Nintendo Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 325,040 60,845,324

a Symantec Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,460,653 87,964,077

425,009,221




Common Stocks and Other Equity Interests (continued)Tobacco 7.8%Altria Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 8,649,673 $ 228,437,864British American Tobacco PLC . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 8,978,496 393,561,867British American Tobacco PLC, ADR . . . . . . . . . . . . . . . . . . . . United Kingdom 70,550 6,208,400Imperial Tobacco Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 8,110,323 269,501,601Japan Tobacco Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 6,483 24,923,775Lorillard Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,006,501 109,577,764Philip Morris International Inc. . . . . . . . . . . . . . . . . . . . . . . . United States 1,599,950 106,828,662Reynolds American Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,570,249 95,227,725

1,234,267,658

Wireless Telecommunication Services 1.5%Vodafone Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 89,158,600 236,600,361

Total Common Stocks and Other Equity Interests(Cost $11,943,661,163) . . . . . . . . . . . . . . . . . . . . . . 14,044,642,084

Preferred Stocks 0.0%†

Commercial Banks 0.0%†

a,d First Southern Bancorp Inc., cvt. pfd., C . . . . . . . . . . . . . . . . . United States 774 3,163,858a,e West Coast Bancorp, cvt. pfd., B . . . . . . . . . . . . . . . . . . . . . . . United States 7,558 1,266,721

Total Preferred Stocks (Cost $1,529,800) . . . . . . . . . 4,430,579

Principal Amount*

Corporate Bonds, Notes and Senior Floating Rate Interests 3.2%

h,i Boston Generating LLC, Revolver, 6.50%, 12/21/13 . . . . . . . . . . . . . . . . . . . . . . . . United States 14,567 4,971Synthetic Letter of Credit, 6.878%, 12/21/13 . . . . . . . . . . . United States 27,284 9,311Term Loan B, 6.50%, 12/21/13 . . . . . . . . . . . . . . . . . . . . . United States 856,452 292,264

d Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 27,172 27,172

h,i CIT Group Inc., Term Loan Tranche 3, 6.25%, 8/11/15 . . . . . . United States 29,673,189 29,906,332Clear Channel Communications Inc., h,i Delayed Draw 2 Term Loan, 3.836%, 1/29/16 . . . . . . . . . . . United States 16,161,000 13,353,026

j senior note, PIK, 11.00%, 8/01/16 . . . . . . . . . . . . . . . . . . . United States 34,134,000 30,379,260h,i Tranche B Term Loan, 3.836%, 1/29/16 . . . . . . . . . . . . . . . United States 94,369,000 79,196,352h,i Tranche C Term Loan, 3.836%, 1/29/16 . . . . . . . . . . . . . . . United States 18,901,582 15,782,821

g OPTI Canada Inc., senior secured note, 144A,9.00%, 12/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada 8,647,000 8,733,470

k 9.75%, 8/15/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada 23,176,000 23,118,060Realogy Corp., h,i Extended First Lien Term Loan, 4.518%, 10/10/16 . . . . . . . . United States 120,608,061 107,642,695

h,i,l Extended Revolver, 3.44%, 4/10/16 . . . . . . . . . . . . . . . . . . . United States 9,144,806 7,944,550h,i Extended Synthetic Letter of Credit, 3.221%, 10/10/16 . . . . . United States 11,041,717 9,854,733

Second Lien Term Loan, 13.50%, 10/15/17 . . . . . . . . . . . . . United States 5,364,000 5,694,782g senior secured note, 144A, 7.875%, 2/15/19 . . . . . . . . . . . . United States 6,778,000 6,744,110



Country Principal Amount* Value

Corporate Bonds, Notes and Senior Floating Rate Interests (continued)

h,i Texas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.69%, 10/10/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 194,177,556 $ 151,978,889

g Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A, 11.50%, 10/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 14,311,000 14,132,112

Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $513,488,919) . . . . . . . . . . . . 504,794,910

Shares

Companies in Liquidation 0.0%†

a Adelphia Recovery Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 99,967,609 9,997a,b Adelphia Recovery Trust, Arahova Contingent Value Vehicle,

Contingent Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 12,005,115 480,204a,d,e,f CB FIM Coinvestors LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 43,105,703 —

a,b,c Century Communications Corp., Contingent Distribution . . . . . . United States 33,138,000 —a,d FIM Coinvestor Holdings I, LLC . . . . . . . . . . . . . . . . . . . . . . . United States 53,924,666 —

a,b,c Tropicana Litigation Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 76,355,000 —

Principal Amount*c,m 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 —

c,m PIV Investment Finance (Cayman) Ltd., 4.50%, 12/01/00 . . . . Hong Kong 22,710,000 —

Total Companies in Liquidation(Cost $12,056,495) . . . . . . . . . . . . . . . . . . . . . . . . . . 490,201

Total Investments before Short Term Investments (Cost $12,470,736,377) . . . . . . . . . . . . . . . . . . . . . . 14,554,357,774

Short Term Investments 7.4%U.S. Government and Agency Securities 7.4%

n FHLB, 7/01/11 - 7/11/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 81,500,000 81,499,906n,o U.S. Treasury Bills, 7/07/11 - 12/22/11 . . . . . . . . . . . . . . . . . United States 1,089,600,000 1,089,517,310

Total U.S. Government and Agency Securities (Cost $1,170,809,926) . . . . . . . . . . . . . . . . . . . . . . . . . 1,171,017,216

Total Investments before Money Market Funds (Cost $13,641,546,303) . . . . . . . . . . . . . . . . . . . . . . 15,725,374,990



Country Shares Value

Short Term Investments (continued)p Investments from Cash Collateral Received for Loaned Securities 0.0%†

Money Market Funds 0.0%†

a BNY Institutional Cash Reserve Fund, Series B . . . . . . . . . . . . . United States 131,829 $ 105,463q BNY Mellon Overnight Government Fund, 0.05% . . . . . . . . . . . United States 1,162,431 1,162,431

Total Money Market Funds (Cost $1,294,260) . . . . . . . . . . . . 1,267,894

Total Investments (Cost $13,642,840,563) 99.3% . . . 15,726,642,884

Other Assets, less Liabilities 0.7% . . . . . . . . . . . . . . . . 112,916,089

Net Assets 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,839,558,973

†Rounds to less than 0.1% of net assets.*The principal amount is stated in U.S. dollars unless otherwise indicated.aNon-income producing.bContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company.cSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2011, the aggregate value of these securities was $73,615,808, representing 0.46% of net assets.dSee Note 9 regarding restricted securities.eSee Note 13 regarding holdings of 5% voting securities.fAt June 30, 2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading this security for a limited or extendedperiod of time due to ownership limits and/or potential possession of material non-public information.gSecurity 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 ina public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2011,the aggregate value of these securities was $86,996,021, representing 0.55% of net assets.hThe coupon rate shown represents the rate at period end.iSee Note 1(f) regarding senior floating rate interests.jIncome may be received in additional securities and/or cash.kA portion or all of the security is on loan at June 30, 2011. See Note 1(e).lSee Note 10 regarding unfunded loan commitments.mSee Note 8 regarding credit risk and defaulted securities.nThe security is traded on a discount basis with no stated coupon rate.oSecurity or a portion of the security has been segregated as collateral for open forward and future contracts. At June 30, 2011, the value of this security amounted to $2,109,077,representing 0.01% of net assets.pSee Note 1(e) regarding securities on loan.qThe rate shown is the annualized seven-day yield at period end.

At June 30, 2011, the Fund had the following futures contracts outstanding. See Note 1(c).

Futures Contracts

Number of Notional Expiration Unrealized UnrealizedDescription Type Contracts Value Date Appreciation Depreciation

EUR/USD . . . . . . . . . . . . . . . Short 272 $49,259,200 9/19/11 $ 314,157 $ —GBP/USD . . . . . . . . . . . . . . . Short 342 34,309,013 9/19/11 703,021 —

Unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,017,178 —

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,017,178



At June 30, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(c).

Forward Exchange Contracts

Settlement Unrealized UnrealizedCurrency Counterparty Type Quantity Contract Amount Date Appreciation Depreciation

British Pound . . . . . . . BANT Sell 97,923,452 $156,775,447 7/15/11 $ — $ (352,027)British Pound . . . . . . . SSBT Sell 100,000,000 162,800,000 7/15/11 2,340,508 —British Pound . . . . . . . DBFX Sell 5,080,300 8,260,365 7/15/11 108,541 —Euro . . . . . . . . . . . . . . BBU Sell 96,436,664 139,325,424 7/15/11 — (463,313)Euro . . . . . . . . . . . . . . BANT Sell 96,436,664 139,331,692 7/15/11 — (457,045)Euro . . . . . . . . . . . . . . DBFX Sell 5,680,000 8,094,260 7/15/11 — (139,123)Euro . . . . . . . . . . . . . . BANT Buy 223,430 314,858 7/15/11 9,013 —Euro . . . . . . . . . . . . . . DBFX Sell 94,320,661 129,785,230 7/29/11 — (6,882,556)Euro . . . . . . . . . . . . . . BBU Sell 92,728,264 130,884,182 7/29/11 — (3,476,269)Euro . . . . . . . . . . . . . . DBFX Buy 37,220,120 52,610,640 7/29/11 1,320,189 —Swiss Franc . . . . . . . . . BBU Sell 73,370,456 83,957,496 8/10/11 — (3,326,628)Swiss Franc . . . . . . . . . DBFX Sell 68,742,772 78,473,484 8/10/11 — (3,305,382)Swiss Franc . . . . . . . . . SSBT Sell 48,391,433 55,367,772 8/10/11 — (2,200,411)Swiss Franc . . . . . . . . . DBFX Buy 3,700,000 4,454,772 8/10/11 — (53,119)Swiss Franc . . . . . . . . . DBFX Buy 2,515,883 2,964,701 8/10/11 28,284 —Swiss Franc . . . . . . . . . BBU Buy 2,782,354 3,290,038 8/10/11 19,950 —British Pound . . . . . . . BANT Buy 4,704,000 7,613,894 8/12/11 — (68,605)British Pound . . . . . . . BBU Sell 98,985,262 161,840,904 8/12/11 3,067,002 —British Pound . . . . . . . DBFX Sell 70,984,173 115,512,545 8/12/11 1,652,826 —British Pound . . . . . . . BANT Sell 59,730,751 97,659,777 8/12/11 1,850,723 —Euro . . . . . . . . . . . . . . SSBT Sell 69,361,323 98,340,483 8/18/11 — (2,098,711)Euro . . . . . . . . . . . . . . HSBC Sell 69,361,323 98,423,717 8/18/11 — (2,015,477)Euro . . . . . . . . . . . . . . DBFX Sell 50,000,000 71,750,000 8/18/11 — (652,883)Euro . . . . . . . . . . . . . . DBFX Buy 3,913,232 5,576,669 8/18/11 89,917 —Euro . . . . . . . . . . . . . . BBU Buy 17,800,000 25,208,467 8/18/11 566,959 —Norwegian Krone . . . . . BBU Sell 634,223,059 113,873,508 8/19/11 — (3,325,327)Norwegian Krone . . . . . HAND Buy 40,391,192 7,507,927 8/19/11 — (43,991)Norwegian Krone . . . . . HAND Buy 108,424,353 19,748,780 8/19/11 287,086 —Norwegian Krone . . . . . DBFX Buy 127,540,000 23,482,784 8/19/11 85,485 —Australian Dollar . . . . . BBU Sell 25,358,643 26,503,299 8/23/11 — (497,738)Australian Dollar . . . . . DBFX Sell 22,069,986 23,066,626 8/23/11 — (432,758)Australian Dollar . . . . . DBFX Buy 192,800 205,563 8/23/11 857 —Euro . . . . . . . . . . . . . . BANT Sell 101,025,263 142,107,186 8/31/11 — (4,124,287)Euro . . . . . . . . . . . . . . BBU Sell 89,478,204 126,607,373 8/31/11 — (2,910,028)Euro . . . . . . . . . . . . . . DBFX Buy 2,717,701 3,954,744 8/31/11 — (20,942)Euro . . . . . . . . . . . . . . BANT Buy 2,348,414 3,416,073 8/31/11 — (16,805)Euro . . . . . . . . . . . . . . DBFX Sell 2,160,000 3,124,570 8/31/11 — (7,312)Euro . . . . . . . . . . . . . . SSBT Buy 263,901 386,331 8/31/11 — (4,340)Euro . . . . . . . . . . . . . . HSBC Sell 73,534,127 105,433,231 9/15/11 — (961,815)Euro . . . . . . . . . . . . . . DBFX Sell 69,538,530 99,725,206 9/15/11 — (888,691)Euro . . . . . . . . . . . . . . BBU Sell 1,660,446 2,405,571 9/15/11 — (988)Euro . . . . . . . . . . . . . . DBFX Buy 1,947,894 2,782,261 9/15/11 36,108 —British Pound . . . . . . . BBU Buy 4,600,000 7,456,600 9/16/11 — (81,309)



Forward Exchange Contracts (continued)

Settlement Unrealized UnrealizedCurrency Counterparty Type Quantity Contract Amount Date Appreciation DepreciationBritish Pound . . . . . . . SSBT Sell 227,932,219 $371,210,412 9/16/11 $ 5,761,195 $ —Japanese Yen . . . . . . . BANT Sell 4,467,928,203 54,306,141 10/20/11 — (1,234,934)Japanese Yen . . . . . . . DBFX Sell 1,192,751,815 14,515,000 10/20/11 — (312,167)Japanese Yen . . . . . . . HSBC Sell 393,438,470 4,760,000 10/20/11 — (130,856)Japanese Yen . . . . . . . BBU Sell 225,027,560 2,710,000 10/20/11 — (87,331)Japanese Yen . . . . . . . DBFX Buy 575,602,222 7,169,855 10/20/11 — (19,729)Japanese Yen . . . . . . . BANT Buy 203,371,842 2,537,989 10/20/11 — (9,861)Japanese Yen . . . . . . . BBU Buy 116,897,356 1,457,671 10/20/11 — (4,512)Japanese Yen . . . . . . . BANT Buy 830,683,237 10,160,906 10/20/11 165,365 —Japanese Yen . . . . . . . DBFX Buy 478,643,340 5,916,960 10/20/11 33,083 —Japanese Yen . . . . . . . SSBT Buy 90,375,881 1,121,248 10/20/11 2,219 —Japanese Yen . . . . . . . BBU Buy 79,700,000 986,288 10/20/11 4,466 —

Unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,429,776 (40,607,270)

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(23,177,494)

See Abbreviations on page 53.


Mutual Shares FundFinancial Statements

Statement of Assets and LiabilitiesJune 30, 2011 (unaudited)

Assets:Investments in securities:

Cost - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,064,444,878Cost - Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578,395,685

Total cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,642,840,563

Value - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,924,838,393Value - Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801,804,491

Total value of investments (includes securities loaned in the amount of $1,217,948) . . . . . . . . . . . . . . . . . . . . 15,726,642,884Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,591,061Foreign currency, at value (cost $92,414,045) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,420,104Receivables:

Investment securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,885,532Capital shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,400,928Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,876,300

Unrealized appreciation on forward exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,429,776Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,349,765

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,944,596,350

Liabilities:Payables:

Investment securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,946,990Capital shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,398,434Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,489,581Allocator Funds (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362,490Variation margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347,388

Payable upon return of securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,294,260Unrealized depreciation on forward exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,607,270Unrealized depreciation on unfunded loan commitments (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,606,958Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,984,006

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,037,377

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,839,558,973

Net assets consist of:Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,828,340,970Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,051,881Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,060,314,161Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,295,148,039)

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,839,558,973


Mutual Shares FundFinancial Statements (continued)

Statement of Assets and Liabilities (continued)June 30, 2011 (unaudited)

Class Z:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,766,756,124

Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398,952,589

Net asset value and maximum offering price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.97

Class A:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,435,762,091


Net asset value per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.78

Maximum offering price per share (net asset value per share ÷ 94.25%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23.11

Class B:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,057,265


Net asset value and maximum offering price per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.34

Class C:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,258,375,699


Net asset value and maximum offering price per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.51

Class R:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 273,607,794


Net asset value and maximum offering price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.63

aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.



Statement of Operationsfor the six months ended June 30, 2011 (unaudited)

Investment income:Dividends: (net of foreign taxes of $8,722,075)

Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,777,905Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,898,329

Interest:Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,819,115Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,237

Income from securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,157

Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,854,743

Expenses:Management fees (Note 3a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,586,291Administrative fees (Note 3b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,092,018Distribution fees: (Note 3c)

Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,200,677Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654,639Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,440,750Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 681,750

Transfer agent fees (Note 3e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,793,393Special servicing agreement fees (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,174,332Custodian fees (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,287Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514,182Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,309Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,485,192Trustees’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,236Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,770

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,653,826

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,200,917

Realized and unrealized gains (losses):Net realized gain (loss) from:Investments:

Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302,121,884Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,126,451)

Foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (195,506,034)Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,507,083)

Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,982,316

Net change in unrealized appreciation (depreciation) on:Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555,911,632Translation of other assets and liabilities denominated in foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,775,170

Net change in unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,686,802

Net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668,669,118

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 869,870,035



Statements of Changes in Net Assets

Six Months EndedJune 30, 2011 Year Ended

(unaudited) December 31, 2010Increase (decrease) in net assets:

Operations:Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201,200,917 $ 398,084,731Net realized gain (loss) from investments, foreign currency transactions, futures contracts

and securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,982,316 192,724,911Net change in unrealized appreciation (depreciation) on investments and translation of

other assets and liabilities denominated in foreign currencies . . . . . . . . . . . . . . . . . . . 568,686,802 1,075,179,190

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . 869,870,035 1,665,988,832

Distributions to shareholders from:Net investment income:

Class Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (259,495,372)Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (147,315,312)Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (3,112,852)Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (27,179,300)Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (6,711,456)

Total distributions to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (443,814,292)

Capital share transactions: (Note 2)Class Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (356,891,246) (511,083,358)Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (228,035,685) (143,984,520)Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,778,974) (106,195,718)Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,085,957) (163,853,670)Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (485,422) 12,649,155

Total capital share transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (738,277,284) (912,468,111)

Net increase (decrease) in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,592,751 309,706,429Net assets:

Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,707,966,222 15,398,259,793

End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,839,558,973 $15,707,966,222

Undistributed net investment income included in net assets:End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 246,051,881 $ 44,850,964


Mutual Shares FundNotes to Financial Statements (unaudited)

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 theremaining 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 salesload, 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. Financial Instrument Valuation

The Fund’s investments in securities and other financial instruments are carried at fair valuedaily. Fair value is the price that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants on the measurement date. Under proce-dures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricingservices, quotations from securities and financial instrument dealers, and other market sourcesto determine fair value.

Equity securities and derivative financial instruments (derivatives) listed on an exchange or onthe NASDAQ National Market System are valued at the last quoted sale price or the officialclosing price of the day, respectively. Foreign equity securities are valued as of the close oftrading on the foreign stock exchange on which the security is primarily traded, or the NYSE,whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreignexchange rate in effect at the close of the NYSE on the day that the value of the security isdetermined. Over-the-counter securities are valued within the range of the most recent quotedbid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valuedaccording to the broadest and most representative market. Certain equity securities are valuedbased upon fundamental characteristics or relationships to similar securities. Investments innon-registered money market funds are valued at the closing net asset value.

Debt securities generally trade in the over-the-counter market rather than on a securities exchange.The Fund’s pricing services use multiple valuation techniques to determine fair value. In instanceswhere sufficient market activity exists, the pricing services may utilize a market-based approachthrough which quotes from market makers are used to determine fair value. In instances wheresufficient market activity may not exist or is limited, the pricing services also utilize proprietaryvaluation models which may consider market characteristics such as benchmark yield curves,option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timingof principal repayments, underlying collateral, and other unique security features in order toestimate the relevant cash flows, which are then discounted to calculate the fair value. Securitiesdenominated in a foreign currency are converted into their U.S. dollar equivalent at the foreignexchange rate in effect at the close of the NYSE on the date that the values of the foreign debtsecurities are determined.


Mutual Shares FundNotes to Financial Statements (unaudited) (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

a. Financial Instrument Valuation (continued)

Certain derivatives trade in the over-the-counter market. The Fund’s pricing services use varioustechniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit orobligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.

The Fund has procedures to determine the fair value of securities and other financial instrumentsfor which market prices are not readily available or which may not be reliably priced. Underthese procedures, the Fund primarily employs a market-based approach which may use relatedor comparable assets or liabilities, recent transactions, market multiples, book values, and otherrelevant information for the investment to determine the fair value of the investment. The Fundmay also use an income-based valuation approach in which the anticipated future cash flows ofthe investment are discounted to calculate fair value. Discounts may also be applied due to thenature or duration of any restrictions on the disposition of the investments. Due to the inherentuncertainty of valuations of such investments, the fair values may differ significantly from thevalues that would have been used had an active market existed.

Trading in securities on foreign securities stock exchanges and over-the-counter markets may becompleted before the daily close of business on the NYSE. Occasionally, events occur betweenthe time at which trading in a foreign security is completed and the close of the NYSE thatmight call into question the reliability of the value of a portfolio security held by the Fund. As aresult, differences may arise between the value of the Fund’s portfolio securities as determined atthe foreign market close and the latest indications of value at the close of the NYSE. In order tominimize the potential for these differences, the investment manager monitors price movementsfollowing the close of trading in foreign stock markets through a series of country specific mar-ket proxies (such as baskets of American Depository Receipts, futures contracts and exchangetraded funds). These price movements are measured against established trigger thresholds foreach specific market proxy to assist in determining if an event has occurred that may call intoquestion the reliability of the values of the foreign securities held by the Fund. If such an eventoccurs, the securities may be valued using fair value procedures, which may include the use ofindependent pricing services.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translatedinto U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date ofvaluation. The Fund may enter into foreign currency exchange contracts to facilitate transactionsdenominated in a foreign currency. Purchases and sales of securities, income and expense itemsdenominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect onthe transaction date. Portfolio securities and assets and liabilities denominated in foreign currenciescontain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally,




b. Foreign Currency Translation (continued)

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 fairvalue using procedures established and approved by the Trust’s Board of Trustees.

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

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

c. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various otherinvestments or markets. Derivatives are financial contracts based on an underlying or notionalamount, require no initial investment or an initial net investment that is smaller than would nor-mally be required to have a similar response to changes in market factors, and require or permitnet settlement. Derivatives contain various risks including the potential inability of the counter-party to fulfill their obligations under the terms of the contract, the potential for an illiquidsecondary market, and/or the potential for market movements which expose the Fund to gainsor losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realizedgain and loss and unrealized appreciation and depreciation on these contracts for the period areincluded in the Statement of Operations.

The Fund entered into futures contracts primarily to manage foreign exchange rate risk. Afutures contract is an agreement between the Fund and a counterparty to buy or sell an asset for aspecified price on a future date. Required initial margin deposits of cash or securities are pledgedby the Fund. Subsequent payments, known as variation margin, are made or received by theFund, depending on fluctuations in the value of the underlying security. Such variation marginis accounted for as unrealized appreciation or depreciation until the contract is closed, at whichtime the gains or losses are realized.

The Fund entered into forward exchange contracts primarily to manage exposure to certainforeign currencies. A forward exchange contract is an agreement between the Fund and a coun-terparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant




c. Derivative Financial Instruments (continued)

to the terms of the forward exchange contracts, cash or securities may be required to be depositedas collateral. Unrestricted cash may be invested according to the Fund’s investment objectives.

See Note 12 regarding other derivative information.

d. Securities Sold Short

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

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

e. Securities Lending

The Fund participates in an agency based security lending program. The Fund receives cash col-lateral against the loaned securities in an amount equal to at least 102% of the market value ofthe 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 businesseach day; any additional collateral required due to changes in security values is delivered to theFund on the next business day. The collateral is invested in a non-registered money fund managedby the Fund’s custodian on the Fund’s behalf. The Fund receives income from the investment ofcash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears themarket risk with respect to the collateral investment, securities loaned, and the risk that theagent may default on its obligations to the Fund. The securities lending agent has agreed toindemnify the Fund in the event of default by a third party borrower.

f. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodi-cally reset by reference to a base lending rate plus a spread. These base lending rates are generallythe prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR).Senior secured corporate loans often require prepayment of principal from excess cash flows orat the discretion of the borrower. As a result, actual maturity may be substantially less than thestated maturity.




f. Senior Floating Rate Interests (continued)

Senior secured corporate loans in which the Fund invests are generally readily marketable, butmay be subject to some restrictions on resale.

g. Income Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal RevenueCode. The Fund intends to distribute to shareholders substantially all of its taxable income andnet realized gains to relieve it from federal income and excise taxes. As a result, no provision forU.S. federal income taxes is required. The Fund files U.S. income tax returns as well as taxreturns in certain other jurisdictions. The Fund records a provision for taxes in its financialstatements including penalties and interest, if any, for a tax position taken on a tax return (orexpected to be taken) when it fails to meet the more likely than not (a greater than 50% proba-bility) threshold and based on the technical merits, the tax position may not be sustained uponexamination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fundhas determined that no provision for income tax is required in the Fund’s financial statements.Open tax years are those that remain subject to examination and are based on each tax jurisdic-tion statute of limitation.

The Fund may be subject to foreign taxation related to income received, capital gains on the saleof securities and certain foreign currency transactions in the foreign jurisdictions in which it invests.Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreignmarkets in which the Fund invests. When a capital gain tax is determined to apply the Fundrecords an estimated deferred tax liability for unrealized gains on these securities in an amountthat would be payable if the securities were disposed of on the valuation date.

h. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on securitytransactions are determined on a specific identification basis. Interest income and estimatedexpenses are accrued daily. Amortization of premium and accretion of discount on debt securitiesare included in interest income. Dividend income and dividends declared on securities sold shortare recorded on the ex-dividend date except that certain dividends from foreign securities arerecognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholdersare 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 recordedin accordance with accounting principles generally accepted in the United States of America.These differences may be permanent or temporary. Permanent differences are reclassified amongcapital accounts to reflect their tax character. These reclassifications have no impact on net assetsor the results of operations. Temporary differences are not reclassified, as they may reverse insubsequent periods.




h. Security Transactions, Investment Income, Expenses and Distributions (continued)

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

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

i. Accounting Estimates

The preparation of financial statements in accordance with accounting principles generallyaccepted in the United States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of the financial statements andthe amounts of income and expenses during the reporting period. Actual results could differ fromthose estimates.

j. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trustagainst 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 serviceproviders that contain general indemnification clauses. The Trust’s maximum exposure underthese arrangements is unknown as this would involve future claims that may be made againstthe Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

2. SHARES OF BENEFICIAL INTEREST

At June 30, 2011, there were an unlimited number of shares authorized (without par value).Transactions in the Fund’s shares were as follows:

Six Months Ended Year Ended June 30, 2011 December 31, 2010

Shares Amount Shares Amount

Class Z Shares:Shares sold . . . . . . . . . . . . . . . . . 15,375,131 $ 334,157,348 23,236,989 $ 460,445,074Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . — — 11,821,586 238,747,579 Shares redeemed . . . . . . . . . . . . . (31,711,926) (691,048,594) (61,253,390) (1,210,276,011)

Net increase (decrease) . . . . . . . . . (16,336,795) $(356,891,246) (26,194,815) $ (511,083,358)



2. SHARES OF BENEFICIAL INTEREST (continued)

Six Months Ended Year Ended June 30, 2011 December 31, 2010

Shares Amount Shares Amount

Class A Shares:Shares sold . . . . . . . . . . . . . . . . . 19,490,234 $ 419,498,824 46,266,753 $ 904,194,368Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . — — 6,612,501 132,219,195Shares redeemed . . . . . . . . . . . . . (30,012,872) (647,534,509) (60,429,644) (1,180,398,083)


Class B Shares:Shares sold . . . . . . . . . . . . . . . . . 32,829 $ 693,641 162,668 $ 3,114,423Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . — — 146,464 2,831,855Shares redeemed . . . . . . . . . . . . . (2,529,372) (53,472,615) (5,871,345) (112,141,996)

Net increase (decrease) . . . . . . . . . (2,496,543) $ (52,778,974) (5,562,213) $ (106,195,718)

Class C Shares:Shares sold . . . . . . . . . . . . . . . . . 2,122,676 $ 45,173,745 5,208,265 $ 101,061,987Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . — — 1,238,768 24,318,738Shares redeemed . . . . . . . . . . . . . (6,812,554) (145,259,702) (14,999,396) (289,234,395)


Class R Shares:Shares sold . . . . . . . . . . . . . . . . . 1,666,424 $ 35,469,834 3,268,708 $ 63,370,612Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . — — 335,900 6,667,969Shares redeemed . . . . . . . . . . . . . (1,679,496) (35,955,256) (2,954,304) (57,389,426)

Net increase (decrease) . . . . . . . . . (13,072) $ (485,422) 650,304 $ 12,649,155

3. TRANSACTIONS WITH AFFILIATES

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

Subsidiary Affiliation

Franklin Mutual Advisers, LLC (Franklin Mutual) Investment managerFranklin Templeton Services, LLC (FT Services) Administrative managerFranklin Templeton Distributors, Inc. (Distributors) Principal underwriterFranklin Templeton Investor Services, LLC (Investor Services) Transfer agent



3. TRANSACTIONS WITH AFFILIATES (continued)

a. Management Fees

The Fund pays an investment management fee to Franklin Mutual based on the average dailynet assets of the Fund as follows:

Annualized Fee Rate Net Assets

0.600% Up to and including $5 billion0.570% Over $5 billion, up to and including $10 billion0.550% Over $10 billion, up to and including $15 billion0.530% Over $15 billion, up to and including $20 billion0.510% Over $20 billion, up to and including $25 billion0.490% Over $25 billion, up to and including $30 billion0.480% Over $30 billion, up to and including $35 billion0.470% 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’saggregate average daily net assets as follows:

Annualized Fee Rate Net Assets

0.150% Up to and including $200 million0.135% Over $200 million, up to and including $700 million0.100% Over $700 million, up to and including $1.2 billion0.075% In excess of $1.2 billion

c. Distribution Fees

The Trust’s Board of Trustees has adopted distribution plans for each share class, with theexception of Class Z shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’sClass A reimbursement distribution plan, the Fund reimburses Distributors for costs incurredin connection with the servicing, sale and distribution of the Fund’s shares up to the maximumannual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maxi-mum 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 paysDistributors for costs incurred in connection with the servicing, sale and distribution of the Fund’sshares 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%



3. TRANSACTIONS WITH AFFILIATES (continued)

c. Distribution Fees (continued)

The Board of Trustees has set the current rate at 0.30% per year for Class A shares until furthernotice and approval by the Board.

d. Sales Charges/Underwriting Agreements

Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expensesof the Fund. These charges are deducted from the proceeds of sales of Fund shares prior toinvestment or from redemption proceeds prior to remittance, as applicable. Distributors hasadvised the Fund of the following commission transactions related to the sales and redemptionsof the Fund’s shares for the period:

Sales charges retained net of commissions paid to unaffiliated broker/dealers . . . . . . . . . . . . . . . . . . . . . . $1,556,155

CDSC retained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,934

e. Transfer Agent Fees

For the period ended June 30, 2011, the Fund paid transfer agent fees of $8,793,393, of which$4,886,290 was retained by Investor Services.

4. EXPENSE OFFSET ARRANGEMENT

The Fund has entered into an arrangement with its custodian whereby credits realized as a resultof uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. Duringthe period ended June 30, 2011, there were no credits earned.

5. INDEPENDENT TRUSTEES’ RETIREMENT PLAN

On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). ThePlan is an unfunded defined benefit plan that provides benefit payments to Trustees whoselength of service and retirement age meets the eligibility requirements of the Plan. Benefits underthe 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 period ended June 30, 2011, the Fund’s projected benefit obligation and benefit payments under the Plan were as follows:

aProjected benefit obligation at June 30, 2011 . . . . . . . . . . . . . $533,933bIncrease in projected benefit obligation . . . . . . . . . . . . . . . . . . $ 21,805

Benefit payments made to retired trustees . . . . . . . . . . . . . . . . $ 9,688

aThe projected benefit obligation is included in accrued expenses and other liabilities in the Statement of Assets and Liabilities.bThe 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. AtDecember 31, 2010, the capital loss carryforwards were as follows:

Capital loss carryforwards expiring in:2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,945,382 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,182,143,963

$2,337,089,345

Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permit-ted to carry forward capital losses incurred in taxable years beginning after December 22, 2010for an unlimited period. Post-enactment capital loss carryforwards will retain their character aseither short-term or long-term capital losses rather than being considered short-term as underprevious law. Any post-enactment capital losses generated will be required to be utilized prior tothe losses incurred in pre-enactment tax years.

For tax purposes, realized capital losses occurring subsequent to October 31 may be deferredand treated as occurring on the first day of the following fiscal year. At December 31, 2010, theFund deferred realized capital losses of $5,254,831.

At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) forincome tax purposes were as follows:

Cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,823,953,540

Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,158,016,400 Unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . (1,255,327,056)

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . $ 1,902,689,344

Net investment income differs for financial statement and tax purposes primarily due to differ-ing treatments of defaulted securities, foreign currency transactions, passive foreign investmentcompany shares, bond discounts and premiums, recognition of partnership income, and certaincorporate action adjustments.

Net realized gains (losses) differ for financial statement and tax purposes primarily due to differ-ing treatments of wash sales, foreign currency transactions, passive foreign investment companyshares, bond discounts and premiums, recognition of partnership income, certain corporateaction adjustments, defaulted securities, and gain from constructive sale.

7. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities) for the period ended June 30,2011, aggregated $2,187,914,907 and $2,712,146,637, respectively.



8. CREDIT RISK AND DEFAULTED SECURITIES

The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressedcompanies are financially troubled and are about to be or are already involved in financialrestructuring or bankruptcy. Risks associated with purchasing these securities include the possi-bility that the bankruptcy or other restructuring process takes longer than expected, or thatdistributions in restructuring are less than anticipated, either or both of which may result inunfavorable consequences to the Fund. If it becomes probable that the income on debt securities,including those of distressed companies, will not be collected, the Fund discontinues accruingincome and recognizes an adjustment for uncollectible interest.

At June 30, 2011, the aggregate value of distressed company securities for which interest recogni-tion has been discontinued was $0. For information as to specific securities, see the accompanyingStatement of Investments.

9. RESTRICTED SECURITIES

The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) orwhich are subject to legal, contractual, or other agreed upon restrictions on resale. Restrictedsecurities are often purchased in private placement transactions, and cannot be sold withoutprior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal ofthese securities may require greater effort and expense, and prompt sale at an acceptable pricemay be difficult. The Fund may have registration rights for restricted securities. The issuergenerally incurs all registration costs.

At June 30, 2011, the Fund held investments in restricted securities, excluding certain securitiesexempt from registration under the 1933 Act deemed to be liquid, as follows:

Principal Amount/Shares/ AcquisitionWarrants Issuer Dates Cost Value

9,270 Ally Financial Inc. . . . . . . . . . . . . . . . . 11/20/06 - 6/02/09 $43,786,210 $ 70,452,456 27,172 Broadband Ventures III LLC, secured

promissory note, 5.00%, 2/01/12 . . . 7/01/10 27,172 27,172 43,105,703 CB FIM Coinvestors LLC . . . . . . . . . . . 1/15/09 - 6/02/09 — —

112,372,589 Cerberus CG Investor I LLC . . . . . . . . . 7/26/07 - 4/28/10 57,252,009 17,136,820 112,370,907 Cerberus CG Investor II LLC . . . . . . . . . 7/26/07 - 4/28/10 57,251,064 17,136,563

56,193,029 Cerberus CG Investor III LLC . . . . . . . . 7/26/07 - 4/28/10 28,629,789 8,569,437 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 — —453,016 First Southern Bancorp Inc. . . . . . . . . . 1/27/10 - 7/07/10 9,558,638 5,354,060

774 First Southern Bancorp Inc., cvt. pfd., C . . . . . . . . . . . . . . . . . . . . . . . . . . . 1/27/10 -7/07/10 774,000 3,163,858

22,185,100 GLCP Harrah's Investment LP . . . . . . . 1/15/08 22,194,402 5,328,861 678,719 IACNA Investor LLC . . . . . . . . . . . . . . 7/24/08 252,870 6,787

7,234,813 International Automotive Components Group Brazil LLC . . . . . . . . . . . . . . . 4/13/06 - 12/26/08 4,804,678 9,125,559



9. RESTRICTED SECURITIES (continued)

Principal Amount/Shares/ AcquisitionWarrants Issuer Dates Cost Value

46,695,640 International Automotive Components Group North America, LLC . . . . . . . . . 1/12/06 - 10/10/07 $ 57,136,878 $ 43,654,820

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 19,148,906 56,241

14,234,065 Prime AET&D Holdings No. 1 Pty. Ltd. . . 10/13/10 — —43,036 aWest Coast Bancorp, wts., C,

10/23/16 . . . . . . . . . . . . . . . . . . . . . 10/23/09 — 4,706,202

Total Restricted Securities (1.17% of Net Assets) . . . . . . . . . . . . . . . . . . $184,718,836

aThe Fund also invests in unrestricted securities or other investments in the issuer, valued at $25,891,183 as of June 30, 2011.

10. UNFUNDED LOAN COMMITMENTS

The Fund enters into certain credit agreements, all or a portion of which may be unfunded. TheFund is obligated to fund these loan commitments at the borrowers’ discretion. Funded portionsof credit agreements are presented on the Statement of Investments.

At June 30, 2011, unfunded commitments were as follows:

UnfundedBorrower Commitment

Realogy Corp., Extended Revolver, 3.44%, 4/10/16 . . . $23,972,034

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

11. UNFUNDED CAPITAL COMMITMENTS

The Fund enters into certain capital commitments and may be obligated to perform on suchagreements at a future date. The Fund monitors these commitments and assesses the probabilityof required performance. For any agreements whose probability of performance is determinedto be greater than remote, the Fund assesses the fair value of the commitment. In instances wherethe probability of performance is greater than remote and the performance under the commitmentwould result in an unrealized loss, the Fund recognizes such losses on the Statement of Assets andLiabilities and the Statement of Operations.

At June 30, 2011, the Fund had aggregate unfunded capital commitments of $2,264,775, forwhich no depreciation has been recognized.



12. OTHER DERIVATIVE INFORMATION

At June 30, 2011, the Fund has invested in derivative contracts which are reflected on theStatement 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 ValueHedging Instruments Liabilities Location Amount Liabilities Location Amount

Foreign exchange contracts . . . . . . . Unrealized appreciation on $18,446,954a Unrealized depreciation on $40,607,270

forward exchange contracts / forward exchange contractsNet assets consists of – netunrealized appreciation(depreciation)

aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day's variation margin is reported within the Statement of Assets and Liabilities.

For the period ended June 30, 2011, the effect of derivative contracts on the Fund’s Statement ofOperations was as follows:

Change in Unrealized

Derivative Contracts Appreciation Not Accounted for as Statement of Realized Gain (Loss) (Depreciation) Hedging Instruments Operations Locations for the Period for the Period

Foreign exchange contracts . . . . . . . . Net realized gain (loss) from foreign currency $(194,884,518) $12,104,488

transactions and futures contracts / Net changein unrealized appreciation (depreciation) ontranslation of other assets and liabilitiesdenominated in foreign currencies

For the period ended June 30, 2011, the average month end market value of derivatives represented0.55% of average month end net assets. The average month end number of open derivative con-tracts for the period was 112.

See Note 1(c) regarding derivative financial instruments.



13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

The 1940 Act defines “affiliated companies” to include investments in portfolio companies inwhich a fund owns 5% or more of the outstanding voting securities. Investments in “affiliatedcompanies” for the Fund for the period ended June 30, 2011, were as shown below.

Number of Shares/ Number of Shares/Warrants/Principal Warrants/Principal Value at Realized

Amount Held at Gross Gross Amount Held at End of Investment CapitalName of Issuer Beginning of Period Additions Reductions End of Period Period Income Gain (Loss)

Controlled Affiliatesa

CB FIM Coinvestors LLC . . . . . . . 43,105,703 —- — 43,105,703 $ — $ — $ —

Non-Controlled AffiliatesAboveNet Inc. . . . . . . . . . . . 1,756,555 — — 1,756,555 $123,766,865 $ — $ —Alexander's Inc. . . . . . . . . . . 326,675 — — 326,675 129,689,975 1,960,050 —Community Health Systems

Inc. . . . . . . . . . . . . . . . . . 4,806,000 — — 4,806,000 123,418,080 — —Elephant Capital Holdings

Ltd. . . . . . . . . . . . . . . . . . 64,834 — — 64,834 — — —Federal Signal Corp. . . . . . . 3,360,800 — — 3,360,800 22,046,848 — —GLCP Harrah's Investment

LP . . . . . . . . . . . . . . . . . . 22,185,100 — — 22,185,100 5,328,861 — —Guaranty Bancorp . . . . . . . . 5,731,834 — — 5,731,834 7,680,658 — —IACNA Investor LLC . . . . . . . 678,719 — — 678,719 6,787 — —International Automotive

Components Group Brazil LLC . . . . . . . . . . . . . . . . . 7,234,813 — — 7,234,813 9,125,559 — —

International Automotive Components Group North America, LLC . . . . . . . . . . 46,695,640 — — 46,695,640 43,654,820 11,208,822 —

International Automotive Components Group North America, LLC, 11.00%, 11/12/14 . . . . . . . . . . . . . 5,851,000 — 5,851,000 — — 296,237 —

Tenet Healthcare Corp. . . . . . 25,881,411 — 7,438,850 18,442,561 —b — (5,126,451)West Coast Bancorp . . . . . . . 7,346,200 — 5,876,960c 1,469,240 24,624,462 — —West Coast Bancorp, cvt.

pfd., B . . . . . . . . . . . . . . . 7,558 — — 7,558 1,266,721 — —West Coast Bancorp, wts., C,

10/23/16 . . . . . . . . . . . . . 43,036 — — 43,036 4,706,202 — —White Mountains Insurance

Group Ltd. . . . . . . . . . . . . 729,457 — — 729,457 306,488,653 729,457 —

Total Non-Controlled Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $801,804,491 $14,194,566 $(5,126,451)

Total Affiliated Securities (5.06% of Net Assets) . . . . . . . . . . . . . . . . . . . . . . . $801,804,491 $14,194,566 $(5,126,451)

aIssuer in which the Fund owns 25% or more of the outstanding voting securities.bAs of June 30, 2011, no longer an affiliate.cReflects a 1:5 reverse stock split during the period. Balance as of May 20, 2011, was 7,346,200.

14. SPECIAL SERVICING AGREEMENT

The Fund, which is an eligible underlying investment of one or more of the Franklin TempletonFund Allocator Series Funds (Allocator Funds), participates in a Special Servicing Agreement(SSA) with the Allocator Funds and certain service providers of the Fund and the AllocatorFunds. 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 areless than the amount of the benefits realized or expected to be realized by the Fund (e.g., dueto reduced costs associated with servicing accounts) from the investment in the Fund by theAllocator Funds. The Allocator Funds are either managed by Franklin Advisers, Inc. or administered by FT Services, affiliates of Franklin Mutual. For the period ended June 30, 2011,the Fund was held by one or more of the Allocator Funds and the amount of expenses borneby the Fund is noted in the Statement of Operations. At June 30, 2011, 18.08% of the Fund’soutstanding shares was held by one or more of the Allocator Funds.

15. 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 syndicatedsenior unsecured credit facility totaling $750 million (Global Credit Facility) which matureson January 20, 2012. This Global Credit Facility provides a source of funds to the Borrowersfor temporary and emergency purposes, including the ability to meet future unanticipated orunusually large redemption requests.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged onany borrowings made by the Fund and other costs incurred by the Fund, pay its share of feesand expenses incurred in connection with the implementation and maintenance of the GlobalCredit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers,including an annual commitment fee of 0.08% based upon the unused portion of the GlobalCredit Facility, which is reflected in other expenses on the Statement of Operations. During theperiod ended June 30, 2011, the Fund did not use the Global Credit Facility.

16. FAIR VALUE MEASUREMENTS

The Fund follows a fair value hierarchy that distinguishes between market data obtained fromindependent sources (observable inputs) and the Fund’s own market assumptions (unobservableinputs). These inputs are used in determining the value of the Fund’s investments and are sum-marized 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)





16. FAIR VALUE MEASUREMENTS (continued)

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

For movements between the levels within the fair value hierarchy, the Fund has adopted a policyof recognizing the transfers as of the date of the underlying event which caused the movement.

The following is a summary of the inputs used as of June 30, 2011, in valuing the Fund’s assetsand liabilities carried at fair value:

Level 1 Level 2 Level 3 Total

Assets:

Investments in Securities:

Equity Investments:a

Auto Components . . . . . . . . . . $ — $ — $ 52,825,623b $ 52,825,623

Chemicals . . . . . . . . . . . . . . . 214,165,987 — 3,157,637 217,323,624

Commercial Banks . . . . . . . . . 578,557,692 1,266,721 13,224,120b 593,048,533

Commercial Services & Supplies . . . . . . . . . . . . . . . — 13,220 —b 13,220

Consumer Finance . . . . . . . . . — — 113,295,276 113,295,276

Diversified Financial Services . . . . . . . . . . . . . . . 286,277,775 34,268,269 1,455,440 322,001,484

Hotels, Restaurants & Leisure . . . . . . . . . . . . . . . . 10,275,129 — 5,328,861 15,603,990

Insurance . . . . . . . . . . . . . . . 982,291,358 — 56,241 982,347,599

Real Estate Management & Development . . . . . . . . . . . . 23,515,536 — 68,964,274 92,479,810

All Other Equity Investmentsc . . . . . . . . . . . . 11,660,133,504 — —b 11,660,133,504

Corporate Bonds, Notes and Senior Floating Rate Interests . . — 504,767,738 27,172 504,794,910

Companies in Liquidation . . . . . — 490,201 —b 490,201

Short Term Investments . . . . . . . 1,089,517,310 82,767,800 — 1,172,285,110

Total Investments in Securities . . $14,844,734,291 $623,573,949 $258,334,644 $15,726,642,884

Forward Exchange Contracts . . . . $ — $ 17,429,776 $ — $ 17,429,776

Futures Contracts . . . . . . . . . . . 1,017,178 — — 1,017,178

Liabilities:

Forward Exchange Contracts . . . . — 40,607,270 — 40,607,270

Unfunded Loan Commitments . . . . . . . . . . . . . — 2,606,958 — 2,606,958

alncludes common and preferred stocks as well as other equity investments.blncludes securities determined to have no value at June 30, 2011.cFor detailed industry descriptions, see the accompanying Statement of Investments.



16. FAIR VALUE MEASUREMENTS (continued)

At June 30, 2011, the reconciliation of assets in which significant unobservable inputs (Level 3)were used in determining fair value, is as follows:

Net Changein Unrealized

Balance Net Net Balance Appreciationat Transfers Transfers Realized Unrealized at (Depreciation)

Beginning Into Out of Cost Basis Gain Gain End of on Assets Heldof Period Purchases Sales Level 3 Level 3a Adjustmentsb (Loss) (Loss) Period at Period End

Assets:Investments in Securities:

Equity Investments:c

Auto Components . . . . . . . . . . . . . . $ 72,028,563d $ — $ — $ — $ — $ (112,338) $ 112,338 $(19,202,940) $ 52,825,623d $(19,202,940)

Chemicals . . . . . . . . . . . . . . . . . . . 3,157,637 — — — — — — — 3,157,637 —

Commercial Banks . . . . . . . . . . . . . 12,661,515d — — — (1,142,769) — — 1,705,374 13,224,120d 1,521,715

Consumer Finance . . . . . . . . . . . . . 193,639,901 — — — — (14,192,183) — (66,152,442) 113,295,276 (66,152,442)

Diversified Financial Services . . . . —d — — — — — — 1,455,440 1,455,440 1,455,440

Diversified Telecommunication Services . . . . . . . . . . . . . . . . . . . . —d — — — — (2,330) 2,330 — —d —

Electric Utilities . . . . . . . . . . . . . . . 71,910,497d — (67,697,357) — — — — (4,213,140) —d —

Hotels Restaurants & Leisure . . . . 9,446,415 — — — — — — (4,117,554) 5,328,861 (4,117,554)

Insurance . . . . . . . . . . . . . . . . . . . . 76,905 — — — — — — (20,664) 56,241 (20,664)

IT Services . . . . . . . . . . . . . . . . . . . 1,655,498 — — — (1,481,048) — — (174,450) — —

Real Estate Management & Development . . . . . . . . . . . . . . . . 61,839,843 — — — — — — 7,124,431 68,964,274 7,124,431

Corporate Bonds, Notes and Senior Floating Rate Interests . . . . . . . . . 105,634,660 — (129,002,378) — — — — 23,394,890 27,172 —

Companies in Liquidation . . . . . . . . . —d — — — — (130,461) 130,461 — —d —

Total . . . . . . . . . . . . . . . . . . . . . . $532,051,434 $ — $(196,699,735) $ — $(2,623,817) $(14,437,312) $245,129 $(60,201,055) $258,334,644 $(79,392,014)

aThe investments were transferred out of level 3 as a result of the availability of a quoted price in an active market for identical securities.bMay include accretion, amortization, partnership adjustments, and/or other cost adjustments.cIncludes common and preferred stocks as well as other equity investments.dIncludes securities determined to have no value.

17. NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amend-ments in the ASU will improve the comparability of fair value measurements presented and disclosed in financialstatements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value meas-urement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning afterDecember 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.



18. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through the issuance of the financial statements anddetermined that no events have occurred that require disclosure.

ABBREVIATIONS

Counterparty

BANT - Bank of America N.A.BBU - Barclays Bank PLCDBFX - Deutsche Bank AGHAND - Svenska HandelsbankenHSBC - HSBC Bank USA, N.A.SSBT - State Street Bank and Trust Co, N.A.

Selected Portfolio

ADR - American Depository ReceiptFHLB - Federal Home Loan BankPIK - Payment-In-Kind

Currency

CHF - Swiss FrancEUR - EuroGBP - British PoundJPY - Japanese YenUSD - United States Dollar


Mutual Shares FundShareholder Information

Board Review of Investment Management Agreement

The Board of Trustees (Board), including the independent trustees, at a Board meeting held onMay 17, 2011, unanimously approved renewal of the Fund’s investment management agree-ment, as well as the Fund’s administrative services agreement. Prior to a meeting of all of thetrustees for the purpose of considering such renewals, the independent trustees held three meet-ings dedicated to the renewal process (those trustees unable to attend in person were present bytelephonic conference means). Throughout the process, the independent trustees received assis-tance and advice from and met separately with independent counsel. The independent trusteesmet with and interviewed officers of the investment manager (including portfolio managers), thetransfer agent and shareholder services group and the distributor. In approving the renewal ofthe investment management agreement and the administrative services agreement for the Fund,the Board, including the independent trustees, determined that the existing investment manage-ment fee structure was fair and reasonable and that continuance of the agreements was in thebest interests of the Fund and its shareholders.

In reaching their decision on the investment management agreement (as well as the administrativeservices agreement), the trustees took into account information furnished throughout the yearat regular Board meetings, as well as information specifically requested and furnished for therenewal process, which culminated in the meetings referred to above for the specific purpose ofconsidering such agreements. Information furnished throughout the year included, among others,reports on the Fund’s investment performance, expenses, portfolio composition, portfolio broker-age execution, client commission arrangements, derivatives, securities lending, portfolio turnover,Rule 12b-1 plans, distribution, shareholder servicing, compliance, pricing of securities and salesand redemptions, along with related financial statements and other information about the scopeand quality of services provided by the investment manager and its affiliates and enhancements tosuch services over the past year. In addition, the trustees received periodic reports throughout theyear and during the renewal process relating to compliance with the Fund’s investment policiesand restrictions. During the renewal process, the independent trustees considered the investmentmanager’s methods of operation within the Franklin Templeton group and its activities on behalfof other clients.

The information obtained by the trustees during the renewal process also included a specialreport prepared by Lipper, Inc. (Lipper), an independent third-party analyst, comparing theFund’s investment performance and expenses with those of other mutual funds deemed compa-rable to the Fund as selected by Lipper (Lipper Section 15(c) Report). The trustees reviewed theLipper Section 15(c) Report and its usefulness in the renewal process with respect to matterssuch as comparative fees, expenses, expense ratios, performance and volatility. They concludedthat the report continues to be a reliable resource in the performance of their duties.


Mutual Shares FundShareholder Information (continued)

Board Review of Investment Management Agreement (continued)

In addition, the trustees received a Profitability Study (Profitability Study) prepared by manage-ment discussing the profitability to Franklin Templeton Investments from its overall U.S. Fundoperations, as well as on an individual fund-by-fund basis. Over the past year, the Board andcounsel to the independent trustees continued to receive reports on management’s handling ofrecent regulatory actions and pending legal actions against the investment manager and its affili-ates. The independent trustees were satisfied with the actions taken to date by management inresponse to such regulatory and legal proceedings.

Particular attention was given to management’s diligent risk management procedures, includingcontinuous monitoring of counterparty credit risk and attention given to derivatives and othercomplex instruments. The Board also took into account, among other things, management’sefforts in establishing a global credit facility for the benefit of the Fund and other accountsmanaged by Franklin Templeton Investments to provide a source of cash for temporary andemergency purposes or to meet unusual redemption requests as well as the strong financialposition of the investment manager’s parent company and its commitment to the mutual fundbusiness. In addition, the Board received presentations from management on the Dodd-FrankWall Street Reform and Consumer Protection Act in 2010, which was enacted July 21, 2010,and discussed with management the potential implications of the act on the Fund, the invest-ment manager (and its parent) and the mutual fund industry.

In addition to the above and other matters considered by the trustees throughout the course of theyear, the following discussion relates to certain primary factors relevant to the Board’s decision.This discussion of the information and factors considered by the Board (as well as the discussionabove) is not intended to be exhaustive, but rather summarizes certain factors considered by theBoard. In view of the wide variety of factors considered, the Board did not, unless otherwise noted,find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addi-tion, individual trustees may have assigned different weights to various factors.

NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extentand quality of the services provided by the investment manager. In this regard, they reviewed theFund’s investment approach and concluded that, in their view, it continues to differentiate the Fundfrom typical core investment products in the mutual fund field. The trustees cited the investmentmanager’s ability to implement the Fund’s disciplined value investment approach and its long-termrelationship with the Fund as reasons that shareholders choose to invest, and remain invested, inthe Fund. The trustees reviewed the Fund’s portfolio management team, including its performance,staffing, skills and compensation program. With respect to portfolio manager compensation, man-agement assured the trustees that the Fund’s long-term performance is a significant component ofincentive-based compensation and noted that a portion of a portfolio manager’s incentive-basedcompensation is paid in shares of predesignated funds from the portfolio manager’s fund managementarea. The trustees noted that the portfolio manager compensation program aligned the interests ofthe portfolio managers with that of Fund shareholders. The trustees discussed with management




various other products, portfolios and entities that are advised by the investment manager and theallocation of assets and expenses among and within them, as well as their relative fees and reasonsfor differences with respect thereto and any potential conflicts.

During regular Board meetings and the aforementioned meetings of the independent trustees, thetrustees received reports and presentations on the investment manager’s best execution tradingpolicies. The trustees considered periodic reports provided to them showing that the investmentmanager complied with the investment policies and restrictions of the Fund as well as other reportsperiodically furnished to the Board covering matters such as the compliance of portfolio managersand other management personnel with the code of ethics covering the investment management per-sonnel, the adherence to fair value pricing procedures established by the Board and the accuracy ofnet asset value calculations. The Board noted the extent of the benefits provided to Fund sharehold-ers from being part of the Franklin Templeton group, including the right to exchange investmentsbetween funds (same class) without a sales charge, the ability to reinvest Fund dividends into otherfunds and the right to combine holdings of other funds to obtain reduced sales charges. The trusteesconsidered the significant recent efforts to develop, test and implement compliance proceduresestablished in accordance with SEC requirements.

The trustees also reviewed the nature, extent and quality of the Fund’s other service agreementsto determine that, on an overall basis, Fund shareholders were well served. In this connection, theBoard also took into account administrative and transfer agent and shareholder services providedto Fund shareholders by an affiliate of the investment manager, noting continuing expenditures bymanagement to increase and improve the scope of such services and favorable periodic reports onshareholder services conducted by independent third parties. While such considerations directlyaffected the trustees’ decision in renewing the Fund’s administrative services and transfer agent andshareholder services agreement, the Board also considered these commitments as incidental benefitsto Fund shareholders deriving from the investment management relationship.

Based on their review, the trustees were satisfied with the nature and quality of the overall servicesprovided by the investment manager and its affiliates to the Fund and its shareholders and wereconfident in the abilities of the management team to continue the disciplined value investmentapproach of the Fund and to provide quality services to the Fund and its shareholders.

INVESTMENT PERFORMANCE. The trustees reviewed and placed significant emphasis onthe investment performance of the Fund over the one-, three-, five- and 10-year periods endedDecember 31, 2010. They considered the history of successful performance of the Fund relativeto various benchmarks. As part of their review, they inquired of management regarding bench-marks, style drift and restrictions on permitted investments. Consideration was also givento performance in the context of available levels of cash during the periods. The trustees hadmeetings during the year, including the meetings referred to above held in connection with the




renewal process, with the Fund’s portfolio managers to discuss performance and the managementof the Fund. In addition, particular attention in assessing performance was given to the LipperSection 15(c) Report. That report showed the investment performance of the Fund (Class Ashares) in comparison to other funds determined comparable by Lipper.

The comparable funds to the Fund, as chosen by Lipper, included all retail and institutional multi-cap value funds. The Fund had total returns in the lowest performing quintile for the one-yearperiod ended December 31, 2010, and had annualized total returns for the three-, five- and 10-yearperiods in the middle performing quintile. The Board discussed with the investment manager thereasons for the relative underperformance for the one-year period ended December 31, 2010, whilenoting that the Fund’s total return during such period exceeded 11%, as shown in the LipperSection 15(c) Report. While noting such discussions, the Board, overall, found the comparativeperformance of the Fund to be acceptable.

The trustees also compared Fund performance to other industry benchmarks, including measuresof risk-adjusted performance of a fund, as part of their evaluation of investment performance.The trustees concluded that the Fund had continued to perform well in comparison to its variousbenchmarks and in the context of the Fund’s objectives.

COMPARATIVE EXPENSES AND MANAGEMENT PROFITABILITY. The trustees consideredthe cost of the services provided and to be provided and the profits realized by the investmentmanager and its affiliates from their respective relationships with the Fund. As part of the approvalprocess, they explored with management the trends in expense ratios over the past three fiscal yearsand the reasons for any increases in the Fund’s expense ratios. In considering the appropriateness ofthe management fee and other expenses charged to the Fund, the Board took into account variousfactors including investment performance and matters relating to Fund operations, including, butnot limited to, the quality and experience of its portfolio managers and research staff. Considerationwas also given to a comparative analysis in the Lipper Section 15(c) Report of the investment man-agement fee and total expense ratio of the Fund in comparison with those of a group of other fundsselected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon infor-mation taken from the Fund’s most recent annual report, which reflects historical asset levels thatmay be quite different from those currently existing, particularly in a period of market volatility.While recognizing such inherent limitation and the fact that expense ratios generally increase asassets decline and decrease as assets grow, the Board believed the independent analysis conductedby Lipper to be an appropriate measure of comparative expenses.

In reviewing comparative costs, emphasis was given to the Fund’s contractual management feein comparison with the contractual management fee that would have been charged by otherfunds within its Lipper expense group assuming they were similar in size to the Fund, as well asthe actual total expenses of the Fund in comparison with those of its Lipper expense group. TheLipper contractual management fee analysis includes administrative charges as being part of the




management fee, and total expenses, for comparative consistency, are shown by Lipper for FundClass A shares.

The Fund’s contractual management fee rate was in the middle quintile of its Lipper expense groupand its total expenses were also in the middle quintile of such group. The Board was satisfied withsuch comparative expenses.

The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources,Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment managerand its affiliates, from providing investment management and other services to the Fund during the12-month period ended September 30, 2010, the most recent fiscal year-end of Franklin Resources,Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocationmethodology utilized in the Profitability Study, it being recognized that allocation methodologiesmay each be reasonable while producing different results. In this respect, the Board noted that thereasonableness of the cost allocation methodologies were reviewed by independent accountants onan every other year basis.

The independent trustees met with management to discuss the Profitability Study. This included,among other things, a comparison of investment management income with investment managementexpenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship ofinvestment management and underwriting expenses; shareholder servicing profitability; economies ofscale; and the relative contribution of the Fund to the profitability of the investment manager and itsparent. In discussing the Profitability Study with the Board, the investment manager stated its beliefthat the costs incurred in establishing the infrastructure necessary to operate the type of mutual fundoperations conducted by it and its affiliates may not be fully reflected in the expenses allocated to theFund in determining its profitability.

The trustees considered an additional Lipper study analyzing the profitability of the parent of theinvestment manager as compared to other publicly held investment managers, which also aided thetrustees in considering profitability excluding distribution costs. The Board also took into accountmanagement’s expenditures in improving shareholder services provided to the Fund, as well asthe need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. The trustees also considered theextent to which the investment manager may derive ancillary benefits from Fund operations,including those derived from economies of scale, discussed below, the allocation of Fund brokerageand the use of commission dollars to pay for research and other similar services.

Based upon their consideration of all these factors, the trustees determined that the level of profitsrealized by the manager and its affiliates in providing services to the Fund was not excessive in viewof the nature, quality and extent of services provided.




ECONOMIES OF SCALE. The trustees considered economies of scale realized by the investmentmanager and its affiliates as the Fund grows larger and the extent to which they are shared withFund shareholders, as for example, in the level of the investment management fee charged, in thequality and efficiency of services rendered and in increased capital commitments benefiting theFund directly or indirectly. While recognizing that any precise determination is inherently subjec-tive, the trustees noted that, based upon the Profitability Study, as some funds increase in size, atsome point economies of scale may result in the investment manager realizing a larger profit mar-gin on investment management services provided such a fund. The trustees also noted that benefitsof economies of scale will be shared with Fund shareholders due to the decline in the effectiveinvestment management fee rate as breakpoints are achieved by the Fund.

The trustees noted that breakpoints had been instituted as part of the Fund’s investment manage-ment fee in 2004, with additional breakpoints being added as deemed appropriate by the Board.The trustees assessed the savings to shareholders resulting from such breakpoints and believed theywere, and continue to be, appropriate and they agreed to continue to monitor the appropriatenessof the breakpoints. The trustees also considered the effects an increase in assets under managementwould have on the investment management fee and expense ratios of the Fund. To the extent fur-ther economies of scale may be realized by the investment manager and its affiliates, the Boardbelieved the investment management and administrative fees provide a sharing of benefits with theFund and its shareholders.

Proxy Voting Policies and Procedures

The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) thatthe Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders mayview the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders mayrequest copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 orby sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, FortLauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are alsomade available online at franklintempleton.com and posted on the U.S. Securities and ExchangeCommission’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 Commissionfor the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filedForm N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed andcopied at the Commission’s Public Reference Room in Washington, DC. Information regarding theoperations of the Public Reference Room may be obtained by calling (800) SEC-0330.

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Franklin Templeton FundsLiterature Request. To receive a summary prospectus and/or prospectus, please call us at (800) DIAL BEN/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 a 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.

VALUEFranklin All Cap Value FundFranklin Balance Sheet Investment FundFranklin Large Cap Value FundFranklin MicroCap Value Fund1

Franklin MidCap Value FundFranklin Small Cap Value FundMutual Beacon FundMutual Quest FundMutual Recovery Fund2

Mutual Shares Fund

BLENDFranklin Focused Core Equity FundFranklin Large Cap Equity FundFranklin Rising Dividends Fund

GROWTHFranklin DynaTech FundFranklin Flex Cap Growth FundFranklin Growth FundFranklin Growth Opportunities FundFranklin Small Cap Growth FundFranklin Small-Mid Cap Growth Fund

SECTORFranklin Biotechnology Discovery FundFranklin Global Real Estate FundFranklin Gold & Precious Metals FundFranklin Natural Resources FundFranklin Real Estate Securities FundFranklin Utilities FundMutual Financial Services Fund

GLOBALFranklin World Perspectives FundMutual Global Discovery FundTempleton Global Opportunities TrustTempleton Global Smaller Companies FundTempleton Growth FundTempleton World Fund

1. The fund is closed to new investors. Existing shareholders and select retirement plans cancontinue adding to their accounts.2. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; thereis no daily redemption. However, each quarter, pending board approval, the fund will authorizethe repurchase of 5%–25% of the outstanding number of shares. Investors may tender all ora portion of their shares during the tender period.3. Effective 7/1/11, Templeton Income Fund changed its name to Templeton Global BalancedFund. Additionally, the fund changed its goal and pricing structure. Under normalcircumstances, the fund will invest: at least 25% of its assets in fixed income senior securities

and at least 25% of its assets in equity securities; at least 40% of its assets in non-U.S.investments; and, in issuers located in at least three different countries (including the U.S.).4. An investment in the fund is neither insured nor guaranteed by the U.S. government or byany other entity or institution.5. For investors subject to the alternative minimum tax, a small portion of fund dividends maybe taxable. Distributions of capital gains are generally taxable.6. The fund invests primarily in insured municipal securities.7. The funds of the Franklin Templeton Variable Insurance Products Trust are generally availableonly through insurance company variable contracts.

AlabamaArizonaCalifornia (4 funds)ColoradoConnecticutFloridaGeorgiaKentuckyLouisianaMarylandMassachusettsMichigan

MinnesotaMissouriNew JerseyNew York (2 funds)North CarolinaOhioOregonPennsylvaniaTennesseeVirginia

INSURANCE FUNDSFranklin Templeton Variable Insurance Products Trust7

07/11 Not part of the semiannual report

INTERNATIONALFranklin India Growth FundFranklin International Growth FundFranklin International Small Cap Growth FundMutual European FundMutual International FundTempleton Asian Growth FundTempleton BRIC FundTempleton China World FundTempleton Developing Markets TrustTempleton Emerging Markets Small Cap FundTempleton Foreign FundTempleton Foreign Smaller Companies FundTempleton Frontier Markets Fund

HYBRIDFranklin Balanced FundFranklin Convertible Securities FundFranklin Equity Income FundFranklin Income FundTempleton Global Balanced Fund3

ASSET ALLOCATIONFranklin Templeton Corefolio® Allocation FundFranklin Templeton Founding Funds Allocation FundFranklin Templeton Conservative Allocation FundFranklin Templeton Growth Allocation FundFranklin Templeton Moderate Allocation FundFranklin Templeton 2015 Retirement Target FundFranklin Templeton 2025 Retirement Target FundFranklin Templeton 2035 Retirement Target FundFranklin Templeton 2045 Retirement Target Fund

FIXED INCOMEFranklin Adjustable U.S. Government Securities Fund4

Franklin Floating Rate Daily Access FundFranklin High Income FundFranklin Limited Maturity U.S. GovernmentSecurities Fund4

Franklin Low Duration Total Return FundFranklin Real Return FundFranklin Strategic Income FundFranklin Strategic Mortgage PortfolioFranklin Templeton Hard Currency FundFranklin Total Return FundFranklin U.S. Government Securities Fund4

Templeton Global Bond FundTempleton Global Total Return FundTempleton International Bond Fund

TAX-FREE INCOME5

NationalDouble Tax-Free Income FundFederal Tax-Free Income FundHigh Yield Tax-Free Income FundInsured Tax-Free Income Fund6

Limited-/ Intermediate-TermCalifornia Intermediate-Term Tax-Free Income FundFederal Intermediate-Term Tax-Free Income FundFederal Limited-Term Tax-Free Income FundNew York Intermediate-Term Tax-Free Income Fund

State-Specific

< GAIN FROM OUR PERSPECTIVE® >

VALUE BLEND GROWTH SECTOR GLOBAL INTERNAT IONAL HYBRID ASSET ALLOCAT ION F IXED INCOME TAX-FREE INCOME

© 2011 Franklin Templeton Investments. All rights reserved. 474 S 08/11

Semiannual Report and Shareholder Letter

Mutual Shares Fund

Investment ManagerFranklin Mutual Advisers, LLC

DistributorFranklin Templeton Distributors, Inc.(800) DIAL BEN®/342-5236franklintempleton.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 summary prospectus and/or prospectus.Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A 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.

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