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

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-21306
------------

FRANKLIN MUTUAL RECOVERY FUND
--------------------------------------------------
(Exact name of registrant as specified in charter)

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

CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
---------------------------------------------------------------
(Name and address of agent for service)

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

Date of fiscal year end: 03/31
-----

Date of reporting period: 03/31/08
--------

ITEM 1. REPORTS TO STOCKHOLDERS.

[PHOTO]

MARCH 31, 2008

ANNUAL REPORT AND SHAREHOLDER LETTER VALUE

WANT TO RECEIVE THIS DOCUMENT
FASTER VIA EMAIL?

Eligible shareholders can
FRANKLIN sign up for eDelivery at
MUTUAL RECOVERY FUND franklintempleton.com.
See inside for details.

[PHOTO]

FRANKLIN TEMPLETON
INVESTMENTS

Franklin-Templeton-Mutual Series

Annual Report

Franklin Mutual Recovery Fund

YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Mutual Recovery Fund's goal is
capital appreciation. The Fund seeks to achieve superior risk-adjusted returns
with a moderate correlation to U.S. equity markets by investing in distressed
companies, merger arbitrage securities and special situation/undervalued
securities. The Fund may take long and short positions, with the latter
typically utilized in connection with the merger arbitrage strategy.

ASSET ALLOCATION

Based on Total Net Assets as of 3/31/08

[PIE CHART]

Equity 80.1%*
Debt Instruments 10.2%
Short-Term Investments & Other Net Assets 9.7%

- ----------
* Net of short positions.

Performance data represent past performance, which does not guarantee future
results. Investment return and principal value will fluctuate, and you may have
a gain or loss when you sell your shares. Current performance may differ from
figures shown. Please visit FRANKLINTEMPLETON.COM or call 1-800/342-5236 for
most recent month-end performance.

This annual report for Franklin Mutual Recovery Fund covers the fiscal year
ended March 31, 2008.

PERFORMANCE OVERVIEW

For the 12 months under review, Franklin Mutual Recovery Fund - Class A had a
- -14.04% cumulative total return. The Fund underperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a -5.08% total return of for
the same period. (1) The Fund also underperformed the +13.51%

- ---------

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

THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 23.

6 | Annual Report

total return of the Bloomberg/EFFAS U.S. Government 3-5 Years Total Return
Index. (2) The performance of the Fund relative to the Bloomberg index is used
as the basis for calculating the performance adjustment to the base management
fee paid to the Fund's adviser. You can find more of the Fund's performance data
in the Performance Summary beginning on page 11.

ECONOMIC AND MARKET OVERVIEW

During the 12 months ended March 31, 2008, the U.S. economy slowed. Gross
domestic product (GDP) grew at annualized rates of 3.8% and 4.9% in the second
and third quarters of 2007, despite a struggling housing market and the abrupt
unraveling of the subprime mortgage market. Increased federal defense spending,
accelerating exports, declining imports, nonresidential construction and
greater business inventory investment supported growth. However, the housing
downturn negatively affected the overall economy by fourth quarter 2007 as
credit conditions worsened and the pace of consumer spending declined. GDP
growth fell to a 0.6% annualized rate in the fourth quarter largely due to
decelerating inventory investment, exports and federal government spending. For
the overall 12-month period, however, a weaker U.S. dollar compared with many
foreign currencies contributed to increased exports. First quarter 2008 GDP
growth remained at a 0.6% estimated annualized rate due to the effects of the
troubled housing market and subsequent credit market tightening.

The unemployment rate increased from 4.4% at the beginning of the period to 5.1%
in March 2008. (3) Consumer confidence declined and hit a five-year low in March
amid rising mortgage and fuel costs, falling home prices and a weaker job
market. Volatile oil prices reached a historical high in March, topping $110 per
barrel, before retreating somewhat to $102 by period-end. For the 12 months
ended March 31, 2008, the core Consumer Price Index (CPI), which excludes food
and energy costs, rose 2.4%, which was higher than its 10-year average rate. (3)

Faced with a deepening housing contraction and stressed financial markets, the
Federal Reserve Board made several cuts to the federal funds target rate during
the period, including 200 basis points so far in 2008. Overall, the federal
funds target rate fell 300 basis points from 5.25% to 2.25%. As investors fled
riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year
Treasury note yield fell from 4.65% at the beginning of the period to 3.45% on
March 31, 2008.

- ---------

(2) Source: Bloomberg LP. The Bloomberg/EFFAS U.S. Government 3-5 Years Total
Return Index is designed as a transparent benchmark for the U.S.
government bond market. The index is unmanaged and includes price
appreciation/depreciation only. One cannot invest directly in an index,
nor is an index representative of the Fund's portfolio. Please see Notes
to Financial Statements for more information about the performance-based
management fee.

(3) Source: Bureau of Labor Statistics.

Annual Report | 7

TOP 10 HOLDINGS
3/31/08

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

Fortis 3.4%
Diversified Financial Services, Belgium
Groupe Eurotunnel SA 2.9%
Transportation Infrastructure, France
Weyerhaeuser Co. 2.6%
Paper & Forest Products, U.S.
CVS Caremark Corp. 2.6%
Food & Staples Retailing, U.S.
KT&G Corp. 2.2%
Tobacco, South Korea
News Corp., A 2.0%
Media, U.S.
Sycamore Networks Inc. 2.0%
Communications Equipment, U.S.
Siemens AG 2.0%
Industrial Conglomerates, Germany
Cadbury Schweppes PLC 1.9%
Food Products, U.K.
Japan Tobacco Inc. 1.9%
Tobacco, Japan

Stock markets were volatile during the period partly due to investor concerns
about slowing economic growth. Overall, the blue chip stocks of the Dow Jones
Industrial Average had a 12-month total return of +1.59%, while the broader S&P
500 had a -5.08% return, and the technology-heavy NASDAQ Composite Index had a
- -5.19% return. (4) The energy, consumer staples and materials sectors performed
relatively well. Large-capitalization stocks generally outperformed small caps,
and growth stocks fared better than their value counterparts.

INVESTMENT STRATEGY

We follow a distinctive investment approach and can seek investments in
distressed companies, merger arbitrage and special situations/undervalued
stocks. The availability of investments at attractive prices in each of these
categories varies with market cycles. Therefore, the percentage of the Fund's
assets invested in each of these areas will fluctuate as we attempt to take
advantage of opportunities afforded by cyclical changes. We employ rigorous,
fundamental analysis to find investment opportunities. In choosing investments,
we look at the market price of an individual company's securities relative to
our evaluation of its asset value based on such factors as book value, cash flow
potential, long-term earnings and earnings multiples. We may invest in
distressed companies if we believe the market overreacted to adverse
developments or failed to appreciate positive changes.

MANAGER'S DISCUSSION

During the year ended March 31, 2008, the Fund's top-performing investments
included the bank debt of Groupe Eurotunnel, shares of KT&G Corp. and shares of
CVS Caremark. Eurotunnel, which operates the rail link between England and
France, in 2007 completed a comprehensive debt restructuring resulting in a
material reduction in the company's debt outstanding, largely through a
conversion of its existing debt into smaller amounts via new convertible debt
instruments. The Fund's adviser was actively involved in the restructuring
process and served as a member of the ad hoc committee of creditors that
negotiated the transaction.

The Fund's position in KT&G, a South Korean tobacco and ginseng company, also
performed well during the period. The company's share price benefited from
strong performance within its tobacco operations and its rapidly growing

- ---------

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

8 | Annual Report

ginseng business, as well as its continued return of cash to shareholders
through dividends and share buybacks.

The Fund also benefited from its ownership position in CVS Caremark, which
operates one of America's largest retail pharmacy chains. In March 2007, CVS
acquired pharmacy benefits manager Caremark as a means of creating an integrated
pharmaceutical distribution company. The Fund's investment in CVS, which began
during the Caremark acquisition period, benefited from the well-executed merger
integration. Continued market recognition of the inherent value of the newly
combined business, which traded at a discount to certain of its stand-alone
peers, also underpinned CVS's share price appreciation.

Detractors during the fiscal year included Fund holdings SLM (better known as
Sallie Mae, the student loan finance company), Virgin Media and Fortis. In 2007,
SLM agreed to be acquired in a leveraged buyout by JC Flowers, a private equity
firm. However, following the passage of legislation adverse to the student loan
industry and in light of the general deterioration of credit markets since
summer 2007, the buyout agreement was terminated. This resulted in a substantial
decline in SLM's share price and a material loss for the Fund. Following the
termination of the deal, SLM's board of directors brought in a new chairman,
Tony Terracciano, who we believe is the right person to lead the company's
turnaround. As such, we retained the Fund's position in SLM at period-end.

Virgin Media, which provides cable television, broadband, telephony and mobile
phone services in the U.K., announced in June 2007 that it was launching a
process to sell the company, resulting in a sharp increase in its stock price.
However, with the implosion of leveraged credit markets since the summer of
2007, the sale process was halted, resulting in a sharp decline in Virgin
Media's share price. Virgin replaced its CEO with Neal Berkett, an executive in
whom we have high regard, and we believed the company's shares represented a
compelling value at period-end.

Fortis, the Benelux financial services company, was a member of the consortium
(along with Royal Bank of Scotland and Banco Santander) that acquired ABN Amro's
Dutch retail banking, asset management and private banking units in 2007.
Fortis' stock price fell in tandem with other global financial institutions
despite what we believed was a solid capital position and sustainable dividend
yield, which at fiscal year-end exceeded the company's price-to-earnings ratio.
We continued to believe Fortis' share price represented compelling value, and
that the ABN transaction could eventually result in incremental value creation.

TOP 10 SECTORS/INDUSTRIES
3/31/08

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

Media 9.3%
Tobacco 9.2%
Food & Staples Retailing 4.4%
Diversified Financial Services 4.4%
Paper & Forest Products 4.2%
Health Care Providers & Services 4.2%
Industrial Conglomerates 3.4%
Food Products 3.3%
Metals & Mining 3.0%
Airlines 2.7%

Annual Report | 9

Thank you for your interest and participation in Franklin Mutual Recovery Fund.
We look forward to serving your future investment needs.

[PHOTO OF MICHAEL J. EMBLER]
- -s- Michael J. Embler
- -------------------------
Michael J. Embler
Co-Portfolio Manager

[PHOTO OF CHRISTIAN CORREA]
- -s- Christian Correa
- -------------------------
Christian Correa
Co-Portfolio Manager

[PHOTO OF SHAWN M. TUMULTY]
- -s- Shawn M. Tumulty
- -------------------------
Shawn M. Tumulty
Co-Portfolio Manager

Franklin Mutual Recovery Fund

THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.

10 | Annual Report

Performance Summary as of 3/31/08

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

PRICE AND DISTRIBUTION INFORMATION

CLASS A (SYMBOL: FMRAX) CHANGE 3/31/08 3/31/07
- ----------------------- -------- ------- -------

Net Asset Value (NAV) -$ 3.06 $ 11.98 $ 15.04
DISTRIBUTIONS (4/1/07 - 3/31/08)
Dividend Income $ 0.2944
Short-Term Capital Gain $ 0.4956
Long-Term Capital Gain $ 0.2983
TOTAL $ 1.0883

CLASS B (SYMBOL: N/A) CHANGE 3/31/08 3/31/07
- ----------------------- -------- ------- -------

Net Asset Value (NAV) -$ 3.02 $ 11.76 $ 14.78
DISTRIBUTIONS (4/1/07 - 3/31/08)
Dividend Income $ 0.1968
Short-Term Capital Gain $ 0.4956
Long-Term Capital Gain $ 0.2983
TOTAL $ 0.9907

CLASS C (SYMBOL: FCMRX) CHANGE 3/31/08 3/31/07
- ----------------------- -------- ------- -------

Net Asset Value (NAV) -$ 3.03 $ 11.75 $ 14.78
DISTRIBUTIONS (4/1/07 - 3/31/08)
Dividend Income $ 0.2096
Short-Term Capital Gain $ 0.4956
Long-Term Capital Gain $ 0.2983
TOTAL $ 1.0035

ADVISOR CLASS (SYMBOL: FMRVX) CHANGE 3/31/08 3/31/07
- ----------------------------- -------- ------- -------

Net Asset Value (NAV) -$ 3.08 $ 12.10 $ 15.18
DISTRIBUTIONS (4/1/07 - 3/31/08)
Dividend Income $ 0.3389
Short-Term Capital Gain $ 0.4956
Long-Term Capital Gain $ 0.2983
TOTAL $ 1.1328

Annual Report | 11

Performance Summary (continued)

PERFORMANCE

Cumulative total return excludes sales charges. Average annual total return and
value of $10,000 investment include maximum sales charges. CLASS A: 5.75%
maximum initial sales charge; CLASS B: contingent deferred sales charge (CDSC)
declining from 4% to 1% over six years, and eliminated thereafter; CLASS C: 1%
CDSC in first year only; ADVISOR CLASS: no sales charges. The Fund may charge a
2% fee on redemptions made within seven days of purchase.

CLASS A 1-YEAR 3-YEAR INCEPTION (11/3/03)
- -------- -------- -------- -------------------

Cumulative Total Return(1) -14.04% +14.84% +38.98%
Average Annual Total Return(2) -18.98% +2.67% +6.31%
Value of $10,000 Investment(3) $ 8,102 $ 10,823 $ 13,099
Total Annual Operating
Expenses(4) 3.36%

CLASS B 1-YEAR 3-YEAR INCEPTION (11/3/03)
- -------- -------- -------- -------------------

Cumulative Total Return(1) -14.67% +12.56% +35.20%
Average Annual Total Return(2) -17.85% +3.15% +6.72%
Value of $10,000 Investment(3) $ 8,215 $ 10,975 $ 13,320
Total Annual Operating
Expenses(4) 4.01%

CLASS C 1-YEAR 3-YEAR INCEPTION (11/3/03)
- -------- -------- -------- -------------------

Cumulative Total Return(1) -14.66% +12.56% +35.18%
Average Annual Total Return(2) -15.46% +4.02% +7.08%
Value of $10,000 Investment(3) $ 8,454 $ 11,256 $ 13,518
Total Annual Operating
Expenses(4) 3.99%

ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (6/2/03)
- -------- -------- -------- -------------------

Cumulative Total Return(1) -13.83% +15.99% +56.56%
Average Annual Total Return(2) -13.83% +5.07% +9.73%
Value of $10,000 Investment(3) $ 8,617 $ 11,599 $ 15,656
Total Annual Operating
Expenses(4) 3.01%

Performance data represent past performance, which does not guarantee future
results. Investment return and principal value will fluctuate, and you may have
a gain or loss when you sell your shares. Current performance may differ from
figures shown. For most recent month-end performance, see "Funds and
Performance" at FRANKLINTEMPLETON.COM or call 1-800/342-5236.

12 | Annual Report

Performance Summary (continued)

TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT

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

FRANKLIN MUTUAL
RECOVERY FUND - S&P 500
DATE CLASS A INDEX
- ---------- --------------- ----------

11/3/2003 $ 9,422 $ 10,000
11/30/2003 $ 9,651 $ 10,088
12/31/2003 $ 10,009 $ 10,617
1/31/2004 $ 10,154 $ 10,812
2/29/2004 $ 10,282 $ 10,962
3/31/2004 $ 10,188 $ 10,797
4/30/2004 $ 10,094 $ 10,627
5/31/2004 $ 10,069 $ 10,773
6/30/2004 $ 10,265 $ 10,983
7/31/2004 $ 10,111 $ 10,619
8/31/2004 $ 10,247 $ 10,662
9/30/2004 $ 10,325 $ 10,778
10/31/2004 $ 10,341 $ 10,942
11/30/2004 $ 10,972 $ 11,385
12/31/2004 $ 11,322 $ 11,772
1/31/2005 $ 11,150 $ 11,485
2/28/2005 $ 11,312 $ 11,727
3/31/2005 $ 11,403 $ 11,519
4/30/2005 $ 11,340 $ 11,301
5/31/2005 $ 11,628 $ 11,661
6/30/2005 $ 11,789 $ 11,677
7/31/2005 $ 11,993 $ 12,111
8/31/2005 $ 12,040 $ 12,001
9/30/2005 $ 12,031 $ 12,098
10/31/2005 $ 11,593 $ 11,896
11/30/2005 $ 11,825 $ 12,346
12/31/2005 $ 12,084 $ 12,351
1/31/2006 $ 12,505 $ 12,678
2/28/2006 $ 12,562 $ 12,712
3/31/2006 $ 12,829 $ 12,870
4/30/2006 $ 12,782 $ 13,043
5/31/2006 $ 12,896 $ 12,668
6/30/2006 $ 12,919 $ 12,685
7/31/2006 $ 12,978 $ 12,763
8/31/2006 $ 13,301 $ 13,067
9/30/2006 $ 13,438 $ 13,404
10/31/2006 $ 13,880 $ 13,840
11/30/2006 $ 14,027 $ 14,104
12/31/2006 $ 14,333 $ 14,301
1/31/2007 $ 14,779 $ 14,518
2/28/2007 $ 14,829 $ 14,234
3/31/2007 $ 15,235 $ 14,393
4/30/2007 $ 15,569 $ 15,030
5/31/2007 $ 16,086 $ 15,555
6/30/2007 $ 15,949 $ 15,296
7/31/2007 $ 15,449 $ 14,822
8/31/2007 $ 15,251 $ 15,044
9/30/2007 $ 15,345 $ 15,607
10/31/2007 $ 15,543 $ 15,855
11/30/2007 $ 14,887 $ 15,192
12/31/2007 $ 14,474 $ 15,087
1/31/2008 $ 13,665 $ 14,182
2/29/2008 $ 13,380 $ 13,721
3/31/2008 $ 13,099 $ 13,662

Total Returns 30.99% 36.62%

AVERAGE ANNUAL TOTAL RETURN

CLASS A 3/31/08
- ------------------------- ---------

1-Year -18.98%
3-Year +2.67%
Since Inception (11/3/03) +6.31%

FRANKLIN MUTUAL
RECOVERY FUND - S&P 500
DATE CLASS B INDEX
- ---------- --------------- ----------

11/3/2003 $ 10,000 $ 10,000
11/30/2003 $ 10,243 $ 10,088
12/31/2003 $ 10,619 $ 10,617
1/31/2004 $ 10,764 $ 10,812
2/29/2004 $ 10,890 $ 10,962
3/31/2004 $ 10,791 $ 10,797
4/30/2004 $ 10,692 $ 10,627
5/31/2004 $ 10,656 $ 10,773
6/30/2004 $ 10,855 $ 10,983
7/31/2004 $ 10,692 $ 10,619
8/31/2004 $ 10,828 $ 10,662
9/30/2004 $ 10,909 $ 10,778
10/31/2004 $ 10,918 $ 10,942
11/30/2004 $ 11,569 $ 11,385
12/31/2004 $ 11,944 $ 11,772
1/31/2005 $ 11,753 $ 11,485
2/28/2005 $ 11,916 $ 11,727
3/31/2005 $ 12,011 $ 11,519
4/30/2005 $ 11,934 $ 11,301
5/31/2005 $ 12,231 $ 11,661
6/30/2005 $ 12,387 $ 11,677
7/31/2005 $ 12,603 $ 12,111
8/31/2005 $ 12,643 $ 12,001
9/30/2005 $ 12,623 $ 12,098
10/31/2005 $ 12,160 $ 11,896
11/30/2005 $ 12,397 $ 12,346
12/31/2005 $ 12,659 $ 12,351
1/31/2006 $ 13,094 $ 12,678
2/28/2006 $ 13,144 $ 12,712
3/31/2006 $ 13,427 $ 12,870
4/30/2006 $ 13,366 $ 13,043
5/31/2006 $ 13,478 $ 12,668
6/30/2006 $ 13,491 $ 12,685
7/31/2006 $ 13,553 $ 12,763
8/31/2006 $ 13,874 $ 13,067
9/30/2006 $ 14,009 $ 13,404
10/31/2006 $ 14,465 $ 13,840
11/30/2006 $ 14,611 $ 14,104
12/31/2006 $ 14,923 $ 14,301
1/31/2007 $ 15,374 $ 14,518
2/28/2007 $ 15,427 $ 14,234
3/31/2007 $ 15,846 $ 14,393
4/30/2007 $ 16,178 $ 15,030
5/31/2007 $ 16,703 $ 15,555
6/30/2007 $ 16,554 $ 15,296
7/31/2007 $ 16,025 $ 14,822
8/31/2007 $ 15,805 $ 15,044
9/30/2007 $ 15,904 $ 15,607
10/31/2007 $ 16,092 $ 15,855
11/30/2007 $ 15,398 $ 15,192
12/31/2007 $ 14,981 $ 15,087
1/31/2008 $ 14,131 $ 14,182
2/29/2008 $ 13,820 $ 13,721
3/31/2008 $ 13,320 $ 13,662

Total Returns 33.20% 36.62%

AVERAGE ANNUAL TOTAL RETURN

CLASS B 3/31/08
- --------------------------- -------

1-Year -17.85%
3-Year +3.15%
Since Inception (11/3/03) +6.72%

Annual Report | 13

Performance Summary (continued)

AVERAGE ANNUAL TOTAL RETURN

CLASS C 3/31/08
- ------------------------- -------

1-Year -15.46%
3-Year +4.02%
Since Inception (11/3/03) +7.08%

FRANKLIN MUTUAL
RECOVERY FUND - S&P 500
DATE CLASS C INDEX
- ---------- --------------- ----------

11/3/2003 $ 10,000 $ 10,000
11/30/2003 $ 10,243 $ 10,088
12/31/2003 $ 10,618 $ 10,617
1/31/2004 $ 10,772 $ 10,812
2/29/2004 $ 10,899 $ 10,962
3/31/2004 $ 10,798 $ 10,797
4/30/2004 $ 10,691 $ 10,627
5/31/2004 $ 10,654 $ 10,773
6/30/2004 $ 10,852 $ 10,983
7/31/2004 $ 10,691 $ 10,619
8/31/2004 $ 10,826 $ 10,662
9/30/2004 $ 10,907 $ 10,778
10/31/2004 $ 10,916 $ 10,942
11/30/2004 $ 11,567 $ 11,385
12/31/2004 $ 11,942 $ 11,772
1/31/2005 $ 11,751 $ 11,485
2/28/2005 $ 11,914 $ 11,727
3/31/2005 $ 12,009 $ 11,519
4/30/2005 $ 11,933 $ 11,301
5/31/2005 $ 12,229 $ 11,661
6/30/2005 $ 12,385 $ 11,677
7/31/2005 $ 12,601 $ 12,111
8/31/2005 $ 12,641 $ 12,001
9/30/2005 $ 12,620 $ 12,098
10/31/2005 $ 12,158 $ 11,896
11/30/2005 $ 12,395 $ 12,346
12/31/2005 $ 12,657 $ 12,351
1/31/2006 $ 13,102 $ 12,678
2/28/2006 $ 13,142 $ 12,712
3/31/2006 $ 13,424 $ 12,870
4/30/2006 $ 13,364 $ 13,043
5/31/2006 $ 13,475 $ 12,668
6/30/2006 $ 13,488 $ 12,685
7/31/2006 $ 13,550 $ 12,763
8/31/2006 $ 13,882 $ 13,067
9/30/2006 $ 14,018 $ 13,404
10/31/2006 $ 14,463 $ 13,840
11/30/2006 $ 14,619 $ 14,104
12/31/2006 $ 14,921 $ 14,301
1/31/2007 $ 15,371 $ 14,518
2/28/2007 $ 15,435 $ 14,234
3/31/2007 $ 15,842 $ 14,393
4/30/2007 $ 16,185 $ 15,030
5/31/2007 $ 16,700 $ 15,555
6/30/2007 $ 16,555 $ 15,296
7/31/2007 $ 16,027 $ 14,822
8/31/2007 $ 15,807 $ 15,044
9/30/2007 $ 15,906 $ 15,607
10/31/2007 $ 16,093 $ 15,855
11/30/2007 $ 15,400 $ 15,192
12/31/2007 $ 14,980 $ 15,087
1/31/2008 $ 14,129 $ 14,182
2/29/2008 $ 13,819 $ 13,721
3/31/2008 $ 13,518 $ 13,662

Total Returns 35.18% 36.62%

AVERAGE ANNUAL TOTAL RETURN

ADVISOR CLASS 3/31/08
- ------------------------- -------

1-Year -13.83%
3-Year +5.07%
Since Inception (6/2/03) +9.73%

FRANKLIN MUTUAL
RECOVERY FUND - S&P 500
DATE ADVISOR CLASS INDEX
- ---------- --------------- ---------

6/2/2003 $ 10,000 $ 10,000
6/30/2003 $ 10,120 $ 10,128
7/31/2003 $ 10,190 $ 10,306
8/31/2003 $ 10,340 $ 10,507
9/30/2003 $ 10,630 $ 10,396
10/31/2003 $ 11,070 $ 10,984
11/30/2003 $ 11,370 $ 11,080
12/31/2003 $ 11,795 $ 11,661
1/31/2004 $ 11,976 $ 11,875
2/29/2004 $ 12,127 $ 12,040
3/31/2004 $ 12,016 $ 11,859
4/30/2004 $ 11,906 $ 11,673
5/31/2004 $ 11,886 $ 11,833
6/30/2004 $ 12,117 $ 12,063
7/31/2004 $ 11,946 $ 11,664
8/31/2004 $ 12,107 $ 11,711
9/30/2004 $ 12,207 $ 11,838
10/31/2004 $ 12,217 $ 12,019
11/30/2004 $ 12,961 $ 12,505
12/31/2004 $ 13,391 $ 12,930
1/31/2005 $ 13,188 $ 12,615
2/28/2005 $ 13,380 $ 12,881
3/31/2005 $ 13,498 $ 12,653
4/30/2005 $ 13,423 $ 12,413
5/31/2005 $ 13,775 $ 12,808
6/30/2005 $ 13,963 $ 12,826
7/31/2005 $ 14,216 $ 13,303
8/31/2005 $ 14,271 $ 13,181
9/30/2005 $ 14,260 $ 13,288
10/31/2005 $ 13,753 $ 13,067
11/30/2005 $ 14,029 $ 13,561
12/31/2005 $ 14,333 $ 13,565
1/31/2006 $ 14,853 $ 13,925
2/28/2006 $ 14,909 $ 13,962
3/31/2006 $ 15,236 $ 14,136
4/30/2006 $ 15,191 $ 14,326
5/31/2006 $ 15,327 $ 13,914
6/30/2006 $ 15,351 $ 13,933
7/31/2006 $ 15,432 $ 14,019
8/31/2006 $ 15,814 $ 14,352
9/30/2006 $ 15,988 $ 14,722
10/31/2006 $ 16,509 $ 15,202
11/30/2006 $ 16,706 $ 15,491
12/31/2006 $ 17,067 $ 15,708
1/31/2007 $ 17,594 $ 15,946
2/28/2007 $ 17,678 $ 15,634
3/31/2007 $ 18,169 $ 15,809
4/30/2007 $ 18,564 $ 16,509
5/31/2007 $ 19,186 $ 17,085
6/30/2007 $ 19,023 $ 16,801
7/31/2007 $ 18,433 $ 16,280
8/31/2007 $ 18,199 $ 16,524
9/30/2007 $ 18,334 $ 17,142
10/31/2007 $ 18,568 $ 17,415
11/30/2007 $ 17,781 $ 16,687
12/31/2007 $ 17,299 $ 16,571
1/31/2008 $ 16,342 $ 15,577
2/29/2008 $ 15,993 $ 15,071
3/31/2008 $ 15,656 $ 15,006

Total Returns 56.56% 50.06%

14 | Annual Report

Performance Summary (continued)

ENDNOTES

THE FUND MAY INVEST IN COMPANIES ENGAGED IN MERGERS, REORGANIZATIONS OR
LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS, AS PENDING DEALS MAY NOT BE COMPLETED
ON TIME OR ON FAVORABLE TERMS, AS WELL AS LOWER-RATED BONDS, WHICH ENTAIL HIGHER
CREDIT RISK. THE FUND IS A NONDIVERSIFIED FUND AND MAY EXPERIENCE INCREASED
SUSCEPTIBILITY TO ADVERSE ECONOMIC OR REGULATORY DEVELOPMENTS AFFECTING SIMILAR
ISSUERS OR SECURITIES. THE FUND MAY INVEST IN FOREIGN SECURITIES WHOSE RISKS
INCLUDE CURRENCY FLUCTUATIONS, AND ECONOMIC AND POLITICAL UNCERTAINTIES. THE
FUND IS STRUCTURED AS A CONTINUOUSLY OFFERED, CLOSED-END FUND AND DOES NOT OFFER
DAILY REDEMPTIONS. INSTEAD, THE FUND HAS A POLICY TO PROVIDE INVESTORS ACCESS TO
THEIR MONEY BY MAKING QUARTERLY TENDER OFFERS FOR 5% TO 25% OF THE FUND'S
OUTSTANDING SHARES. THE FUND MAY SUSPEND OR POSTPONE A TENDER OFFER SUBJECT TO
APPROVAL BY THE FUND'S BOARD. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION
OF THE MAIN INVESTMENT RISKS.

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

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

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

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.

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.

5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.

Annual Report | 15

Your Fund's Expenses

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

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

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

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

ACTUAL FUND EXPENSES

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

You can estimate the expenses you paid during the period by following these
steps. Of course, your account value and expenses will differ from those in this
illustration:

1. Divide your account value by $1,000.
If an account had an $8,600 value, then $8,600 / $1,000 = 8.6.

2. Multiply the result by the number under the heading "Expenses Paid During
Period."
If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

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

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS

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

16 | Annual Report

Your Fund's Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing
costs and do not reflect any transaction costs, such as sales charges or
redemption fees. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.

BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08
- ---------------------------------------- ----------------- -------------- -------------------------

Actual $ 1,000 $ 859.60 $ 9.34
Hypothetical (5% return before expenses) $ 1,000 $ 1,014.95 $ 10.13

CLASS B
Actual $ 1,000 $ 853.30 $ 12.37
Hypothetical (5% return before expenses) $ 1,000 $ 1,011.65 $ 13.43

CLASS C
Actual $ 1,000 $ 853.40 $ 12.33
Hypothetical (5% return before expenses) $ 1,000 $ 1,011.70 $ 13.38

ADVISOR CLASS
Actual $ 1,000 $ 866.20 $ 7.74
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.70 $ 8.37

- ----------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 2.01%; B: 2.67%; C: 2.66%; and Advisor:
1.66%), multiplied by the average account value over the period,
multiplied by 183/366 to reflect the one-half year period.

Annual Report | 17

The Fund's Repurchase Offers

The Fund will make quarterly repurchase offers for a portion of its shares. With
any repurchase offer, shareholders may elect to tender (have the Fund
repurchase) all, a portion or none of their shares. With each repurchase offer,
shareholders will be notified in writing about the offer, how to request that
the Fund repurchase their shares and the deadline for submitting repurchase
requests.

Each quarter the Board of Trustees will set the amount of the repurchase offer,
as a percentage of outstanding shares. This amount is known as the repurchase
offer amount and will generally be between 5% and 25% of the Fund's outstanding
shares. If repurchase requests exceed the repurchase offer amount, the Fund will
prorate requests. The Fund may, however, first accept any requests to repurchase
all of a shareholder's shares if the shareholder owns less than 100 shares. The
Board will also determine the date by which the Fund must receive shareholders'
repurchase requests, which is known as the repurchase request deadline. The
Board will base these decisions on investment management considerations, market
conditions, liquidity of the Fund's assets, shareholder servicing and
administrative considerations and other factors it deems appropriate. Each
repurchase request deadline will occur within the period that begins 21 days
before, and ends 21 days after, the end of the quarterly interval. The
repurchase price of the shares will be the net asset value as of the close of
the NYSE on the date the Board sets as the repurchase pricing date. The maximum
number of days between the repurchase request deadline and the repurchase
pricing date is 14 days.

SUMMARY OF REPURCHASE OFFERS - 4/1/07 THROUGH 3/31/08

REPURCHASE REPURCHASE % OF SHARES NUMBER OF
REQUEST DEADLINE OFFER ACCOUNT TENDERED * SHARES TENDERED *
- ---------------------------------------- ------------- ----------- -----------------

4/20/07 10% 1.592% 499,996.164
6/29/07 10% 1.482% 543,831.604
10/1/07 10% 4.564% 1,864,311.049
1/2/08 10% 7.493% 3,223,016.131

- ----------

* In connection with the repurchase offers, due to the limited number of shares
tendered, the Fund did not have to consider whether to repurchase an
additional amount of shares, not in excess of 2% of the shares outstanding,
and did not need to repurchase any shares on a pro rata basis as described
in the Prospectus and Repurchase Offer/Request Form.

Franklin Mutual Recovery Fund

FINANCIAL HIGHLIGHTS

YEAR ENDED MARCH 31,
CLASS A 2008 2007 2006 2005 2004(f)
-------- -------- --------- -------- -----------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
year)
Net asset value, beginning of year ....... $ 15.04 $ 13.43 $ 12.64 $ 11.91 $ 11.10
-------- -------- --------- -------- -----------
Income from investment operations (a):
Net investment income (loss) (b) ...... 0.09 0.16 (0.02) 0.02 (0.04)
Net realized and unrealized gains
(losses) .............................. (2.07) 2.27 1.52 1.43 0.90
-------- -------- --------- -------- -----------
Total from investment operations ......... (1.98) 2.43 1.50 1.45 0.86
-------- -------- --------- -------- -----------
Less distributions from:
Net investment income ................. (0.29) -- (0.01) (0.04) (0.01)
Net realized gains .................... (0.79) (0.82) (0.70) (0.68) (0.04)
-------- -------- --------- -------- -----------
Total distributions ...................... (1.08) (0.82) (0.71) (0.72) (0.05)
-------- -------- --------- -------- -----------
Net asset value, end of year ............. $ 11.98 $ 15.04 $ 13.43 $ 12.64 $ 11.91
======== ======== ========= ======== ===========

Total return (c) ......................... (14.04)% 18.73% 12.51% 12.48% 7.77%

RATIOS TO AVERAGE NET ASSETS (d)

Expenses before waiver and payments by
affiliates and expense reduction (e) ..... 2.49% 3.36% 3.53% 3.15% 3.45%
Expenses net of waiver and payments by
affiliates (e) ........................... 2.49% 3.36% 3.53% 3.05% 3.45%
Expenses net of waiver and payments by
affiliates and expense reduction (e) ..... 2.48% 3.36% 3.52% 3.05% 3.45%
Ratios to average net assets, excluding
dividend expense on securities sold
short:
Expenses before waiver and payments
by affiliates and
expense reduction ................... 2.46% 3.16% 3.34% 3.11% 3.36%
Expenses net of waiver and payments
by affiliates ....................... 2.46% 3.16% 3.34% 3.02% 3.36%
Expenses net of waiver and payments
by affiliates and
expense reduction ................... 2.45% 3.16% 3.33% 3.02% 3.36%
Net investment income (loss) ............. 0.60% 1.11% (0.19)% 0.17% (0.89)%

SUPPLEMENTAL DATA

Net assets, end of year (000's) .......... $238,020 $209,897 $ 104,694 $ 57,709 $ 24,225
Portfolio turnover rate .................. 89.18% 85.63% 69.20% 87.68% 129.60%

- ---------

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

(b) Based on average daily shares outstanding.

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

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

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

(f) For the period November 3, 2003 (effective date) to March 2004.

Annual Report | The accompanying notes are an integral part of these
financial statements. | 19

Franklin Mutual Recovery Fund

FINANCIAL HIGHLIGHTS (continued)

YEAR ENDED MARCH 31,
CLASS B 2008 2007 2006 2005 2004(f)
-------- -------- --------- -------- -----------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
year)
Net asset value, beginning of year ....... $ 14.78 $ 13.29 $ 12.58 $ 11.89 $ 11.10
-------- -------- --------- -------- -----------
Income from investment operations (a):
Net investment income (loss) (b) ...... (0.01) 0.01 (0.11) (0.06) (0.07)
Net realized and unrealized gains
(losses) .............................. (2.02) 2.30 1.52 1.43 0.91
-------- -------- --------- -------- -----------
Total from investment operations ......... (2.03) 2.31 1.41 1.37 0.84
-------- -------- --------- -------- -----------
Less distributions from:
Net investment income ................. (0.20) -- -- -- (0.01)
Net realized gains .................... (0.79) (0.82) (0.70) (0.68) (0.04)
-------- -------- --------- -------- -----------
Total distributions ...................... (0.99) (0.82) (0.70) (0.68) (0.05)
-------- -------- --------- -------- -----------
Net asset value, end of year ............. $ 11.76 $ 14.78 $ 13.29 $ 12.58 $ 11.89
======== ======== ========= ======== ===========

Total return (c) ......................... (14.67)% 18.00% 11.79% 11.77% 7.55%

RATIOS TO AVERAGE NET ASSETS (d)

Expenses before waiver and payments by
affiliates and expense reduction (e) ..... 3.14% 4.01% 4.18% 3.79% 4.10%
Expenses net of waiver and payments by
affiliates (e) ........................... 3.14% 4.01% 4.18% 3.69% 4.10%
Expenses net of waiver and payments by
affiliates and
expense reduction (e) ................. 3.13% 4.01% 4.17% 3.69% 4.10%
Ratios to average net assets, excluding
dividend expense on securities sold
short:
Expenses before waiver and payments
by affiliates and expense reduction ... 3.11% 3.81% 3.99% 3.75% 4.00%
Expenses net of waiver and payments
by affiliates ......................... 3.11% 3.81% 3.99% 3.65% 4.00%
Expenses net of waiver and payments
by affiliates and expense reduction ... 3.10% 3.81% 3.98% 3.65% 4.00%
Net investment income (loss) ............. (0.05)% 0.46% (0.84)% (0.47)% (1.47)%

SUPPLEMENTAL DATA

Net assets, end of year (000's) .......... $ 4,333 $ 5,024 $ 4,243 $ 3,246 $ 1,892
Portfolio turnover rate .................. 89.18% 85.63% 69.20% 87.68% 129.60%

- ---------

(b) Based on average daily shares outstanding.

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

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

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

(f) For the period November 3, 2003 (effective date) to March 31, 2004.

20| The accompanying notes are an integral part of these financial
statements. | Annual Report

Franklin Mutual Recovery Fund

FINANCIAL HIGHLIGHTS (continued)

YEAR ENDED MARCH 31,
CLASS C 2008 2007 2006 2005 2004(f)
--------- -------- -------- -------- ----------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 14.78 $ 13.29 $ 12.58 $ 11.89 $ 11.10
--------- -------- -------- -------- ----------
Income from investment operations (a):
Net investment income (loss) (b) .......................... (0.01) 0.04 (0.11) (0.06) (0.07)
Net realized and unrealized gains (losses) ................ (2.02) 2.27 1.52 1.43 0.91
--------- -------- -------- -------- ----------
Total from investment operations ............................. (2.03) 2.31 1.41 1.37 0.84
--------- -------- -------- -------- ----------
Less distributions from:
Net investment income ..................................... (0.21) -- -- -- (0.01)
Net realized gains ........................................ (0.79) (0.82) (0.70) (0.68) (0.04)
--------- -------- -------- -------- ----------
Total distributions .......................................... (1.00) (0.82) (0.70) (0.68) (0.05)
--------- -------- -------- -------- ----------
Net asset value, end of year ................................. $ 11.75 $ 14.78 $ 13.29 $ 12.58 $ 11.89
========= ======== ======== ======== ==========

Total return (c) ............................................. (14.66)% 17.99% 11.79% 11.77% 7.54%

RATIOS TO AVERAGE NET ASSETS (d)

Expenses before waiver and payments by affiliates and
expense reduction (e) ........................................ 3.14% 3.99% 4.18% 3.78% 4.10%
Expenses net of waiver and payments by affiliates (e) ........ 3.14% 3.99% 4.18% 3.68% 4.10%
Expenses net of waiver and payments by affiliates and
expense reduction (e) ........................................ 3.13% 3.99% 4.17% 3.68% 4.10%
Ratios to average net assets, excluding dividend expense on
securities sold short:
Expenses before waiver and payments by affiliates and
expense reduction ......................................... 3.11% 3.79% 3.99% 3.74% 4.02%
Expenses net of waiver and payments by affiliates ......... 3.11% 3.79% 3.99% 3.64% 4.02%
Expenses net of waiver and payments by affiliates and
expense reduction ......................................... 3.10% 3.79% 3.98% 3.64% 4.02%
Net investment income (loss) ................................. (0.05)% 0.48% (0.84)% (0.46)% (1.52)%

SUPPLEMENTAL DATA

Net assets, end of year (000's) .............................. $ 96,131 $ 87,018 $ 55,030 $ 29,991 $ 16,887
Portfolio turnover rate ...................................... 89.18% 85.63% 69.20% 87.68% 129.60%

- ---------

(b) Based on average daily shares outstanding.

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

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

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

(f) For the period November 3, 2003 (effective date) to March 31, 2004.

Annual Report | The accompanying notes are an integral part of these
financial statements. | 21

Franklin Mutual Recovery Fund

FINANCIAL HIGHLIGHTS (continued)

YEAR ENDED MARCH 31,
ADVISOR CLASS 2008 2007 2006 2005 2004(f)
--------- -------- -------- -------- ----------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 15.18 $ 13.50 $ 12.67 $ 11.92 $ 10.00
Income from investment operations (a):
Net investment income (loss) (b)........................... 0.14 0.21 0.02 0.06 (0.09)
Net realized and unrealized gains (losses) ................ (2.09) 2.29 1.53 1.44 2.06
--------- -------- -------- -------- ----------
Total from investment operations ............................. (1.95) 2.50 1.55 1.50 1.97
--------- -------- -------- -------- ----------
Less distributions from:
Net investment income ..................................... (0.34) -- (0.02) (0.07) (0.01)
Net realized gains ........................................ (0.79) (0.82) (0.70) (0.68) (0.04)
--------- -------- -------- -------- ----------
Total distributions .......................................... (1.13) (0.82) (0.72) (0.75) (0.05)
--------- -------- -------- -------- ----------
Net asset value, end of year ................................. $ 12.10 $ 15.18 $ 13.50 $ 12.67 $ 11.92
========= ======== ======== ======== ==========
Total return (c) ............................................. (13.83)% 19.24% 12.88% 12.88% 19.76%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses before waiver and payments by affiliates and
expense reduction (e) ..................................... 2.14% 3.01% 3.18% 2.80% 3.10%
Expenses net of waiver and payments by affiliates (e) ........ 2.14% 3.01% 3.18% 2.70% 3.10%
Expenses net of waiver and payments by affiliates and
expense reduction (e) .................................... 2.13% 3.01% 3.17% 2.70% 3.10%
Ratios to average net assets, excluding dividend expense on
securities sold short:
Expenses before waiver and payments by affiliates and
expense reduction ....................................... 2.11% 2.81% 2.99% 2.76% 3.01%
Expenses net of waiver and payments by affiliates ......... 2.11% 2.81% 2.99% 2.66% 3.01%
Expenses net of waiver and payments by affiliates and
expense reduction ....................................... 2.10% 2.81% 2.98% 2.66% 3.10%
Net investment income (loss) ................................. 0.95% 1.46% 0.16% 0.52% (1.01)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $ 155,570 $152,068 $ 80,420 $ 71,586 $ 45,854
Portfolio turnover rate ...................................... 89.18% 85.63% 69.20% 87.68% 129.60%

- ---------

(b) Based on average daily shares outstanding.

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

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

(f) For the period June 3, 2003 (commencement of operations) to March 31, 2004.

22| The accompanying notes are an integral part of these financial
statements. | Annual Report

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2008

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

LONG TERM INVESTMENTS 91.2%
COMMON STOCKS AND OTHER EQUITY INTERESTS 80.0%
AIRLINES 2.7%

(a) ACE Aviation Holdings Inc., A . . . . . . . . . . . . . Canada 191,032 $ 3,917,794
(a),(b) ACE Aviation Holdings Inc., A, 144A . . . . . . . . . . Canada 10,020 205,496
(a) Continental Airlines Inc., B . . . . . . . . . . . . . . United States 102,970 1,980,113
(a) Delta Air Lines Inc. . . . . . . . . . . . . . . . . . . United States 312,320 2,685,952
(a) Northwest Airlines Corp. . . . . . . . . . . . . . . . . United States 319,575 2,872,979
(a),(c) Northwest Airlines Corp., Contingent Distribution . . . United States 7,455,000 149,100
UAL Corp. . . . . . . . . . . . . . . . . . . . . . . . United States 72,460 1,560,064
---------------
13,371,498
---------------
AUTOCOMPONENTS 1.1%

(a),(c),(d) Collins & Aikman Products Co., Contingent
Distribution . . . . . . . . . . . . . . . . . . . . . . United States 53,748 2,687
(a) Dana Holding Corp. . . . . . . . . . . . . . . . . . . . United States 23,135 231,350
(a),(c) Dana Holding Corp., Contingent Distribution . . . . . . United States 661,000 52,880
(a) Goodyear Tire & Rubber Co. . . . . . . . . . . . . . . . United States 198,608 5,124,087
---------------
5,411,004
---------------
AUTOMOBILES 1.2%
General Motors Corp. . . . . . . . . . . . . . . . . . . United States 226,608 4,316,883
(a),(e),(f) International Automotive Components Group Brazil LLC . . Brazil 155,394 581,487
(a),(e),(f) International Automotive Components Group Japan LLC . . Japan 16,213 137,903
(a),(e),(f) International Automotive Components Group LLC . . . . . Luxembourg 660,308 706,001
(a),(e),(f) International Automotive Components Group NA LLC . . . . United States 299,438 299,064
---------------
6,041,338
---------------

BEVERAGES 2.4%
Carlsberg AS, B . . . . . . . . . . . . . . . . . . . . Denmark 42,030 5,372,667
Pernod Ricard SA . . . . . . . . . . . . . . . . . . . . France 61,886 6,364,482
---------------
11,737,149
---------------
BUILDING PRODUCTS 0.4%
Armstrong World Industries Inc. . . . . . . . . . . . . United States 252 8,986
(a),(c) Armstrong World Industries Inc., Contingent
Distribution . . . . . . . . . . . . . . . . . . . . . United States 59,000 295
Trane Inc. . . . . . . . . . . . . . . . . . . . . . . United States 44,000 2,019,600
---------------
2,028,881
---------------
CHEMICALS 2.4%
Huntsman Corp. . . . . . . . . . . . . . . . . . . . . United States 211,390 4,978,234
Koninklijke DSM NV . . . . . . . . . . . . . . . . . . Netherlands 140,320 6,765,819
---------------
11,744,053
---------------
COMMERCIAL BANKS 1.9%
(a),(e) Elephant Capital Holdings Ltd. . . . . . . . . . . . . Japan 721 185,987
(a),(e) First Chicago Bancorp . . . . . . . . . . . . . . . . . United States 410,714 5,749,996
(a),(e) NCB Warrant Holdings Ltd., A . . . . . . . . . . . . . Japan 31,928 744,130
---------------
(a) Societe Generale . . . . . . . . . . . . . . . . . . . France 5,174 499,114
---------------

Annual Report | 23

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2008 (continued)

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

LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
SOCIETE GENERALE, A. ........................................ France 20,380 $ 1,994,920
THE TORONTO-DOMINION BANK. .................................. Canada 1 61
------------
9,174,208
------------

COMMUNICATIONS EQUIPMENT 2.0%
(a) Sycamore Networks Inc.. ..................................... United States 2,711,630 9,924,566
------------

COMPUTERS & PERIPHERALS 1.8%
DIEBOLD Inc.. ............................................... United States 94,410 3,545,096
(a) EMC Corp. ................................................... United States 382,860 5,490,212
------------
9,035,308
------------

CONSUMER FINANCE 1.8%
(a),(e) Cerberus CG Investor I LLC. ................................. United States 1,645,200 1,162,578
(a),(e) Cerberus CG Investor II LLC. ................................ United States 1,645,200 1,162,578
(a),(e) Cerberus CG Investor III LLC. ............................... United States 822,600 581,289
(a),(e) Cerberus FIM Investors Auto Finance LLC. .................... United States 518,940 235,045
(a),(e) Cerberus FIM Investors Commercial Finance LLC. .............. United States 43,226 19,579
(a),(e) Cerberus FIM Investors Commercial Mortgage LLC. ............. United States 81,021 36,697
(a),(e) Cerberus FIM Investors Insurance LLC. ....................... United States 396,277 179,487
(a),(e) Cerberus FIM Investors Rescap LLC. .......................... United States 737,786 334,168
(a) SLM Corp.. .................................................. United States 340,550 5,227,443
------------
8,938,864
------------

CONTAINERS & PACKAGING 0.8%
Temple-Inland Inc. .......................................... United States 302,510 3,847,927
------------

DIVERSIFIED FINANCIAL SERVICES 4.7%
Fortis ...................................................... Belgium 635,600 15,990,490
(a) Fortis VVPR Strip ........................................... Belgium 135,820 2,144
(a),(e) GLCP Harrah's Investment LP ................................. United States 4,502,725 4,502,725
Nymex Holdings Inc. ......................................... United States 26,800 2,428,884
------------
22,924,243
------------

DIVERSIFIED TELECOMMUNICATION SERVICES 0.4%
(a),(e),(f) AboveNet Inc. ............................................... United States 41,859 2,092,950
(a),(e),(f) AboveNet Inc., stock grants, grant price $20.95,
EXPIRATION date 9/09/13. .................................... United States 55 1,972
------------
2,094,922
------------

ELECTRIC UTILITIES 0.4%
IBERDROLA SA, BR ............................................ Spain 132,774 2,057,852
------------

ENERGY EQUIPMENT & SERVICES 0.5%
(a) Exterran Holding Inc. ....................................... United States 36,590 2,361,519
------------

24 | Annual Report

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2008 (continued)

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

LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
FOOD & STAPLES RETAILING 4.4%
Carrefour SA ................................................ France 115,370 $ 8,898,664
CVS Caremark Corp. .......................................... United States 311,199 12,606,671
------------
21,505,335
------------

FOOD PRODUCTS 3.3%
Cadbury Schweppes PLC ....................................... United Kingdom 865,800 9,510,126
CSM NV. ..................................................... Netherlands 201,500 6,878,934
------------
16,389,060
------------

HEALTH CARE PROVIDERS & SERVICES 4.2%
(a) Assisted Living Concepts Inc. ............................... United States 1,034,710 6,094,442
(a) Community Health Systems Inc. ............................... United States 179,834 6,037,027
(a),(e),(f) Kindred Healthcare Inc.. .................................... United States 103,800 2,156,601
(a),(e),(f) Kindred Healthcare Inc., stock grants:
grant price $18.15, expiration date 7/17/11 ................. United States 217 570
grant price $19.87, expiration date 1/01/12. ................ United States 66 60
grant price $6.94, expiration date 1/01/13 .................. United States 93 1,287
grant price $19.87, expiration date 1/01/14 ................. United States 120 109
grant price $21.33, expiration date 1/10/15 ................. United States 72 --
grant price $22.08, expiration date 1/10/16 ................. United States 44 --
grant price $19.40, expiration date 1/10/17 ................. United States 22 30
Omnicare Inc. ............................................... United States 103,250 1,875,020
(a) Tenet Healthcare Corp. ...................................... United States 766,804 4,340,110
------------
20,505,256
------------

HOTELS, RESTAURANTS & LEISURE 0.3%
(a) Penn National Gaming Inc. ................................... United States 23,490 1,027,218
(a) Trump Entertainment Resorts Inc. ............................ United States 153,564 552,830
------------
1,580,048
------------

HOUSEHOLD DURABLES 0.4%
(a) Tele Atlas NV ............................................... Netherlands 52,000 2,069,846
------------

INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.6%
Constellation Energy Group .................................. United States 92,350 8,151,734
------------

INDUSTRIAL CONGLOMERATES 3.4%
(f) Orkla ASA ................................................... Norway 554,089 7,017,917
Siemens AG .................................................. Germany 89,260 9,747,422
------------
16,765,339
------------

INSURANCE 1.9%
(a),(e) Imagine Group Holdings Ltd. ................................. Bermuda 287,034 3,283,669
(e) Symetra Financial ........................................... United States 445,440 6,191,616
------------
9,475,285
------------

Annual Report | 25

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2008 (continued)

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

LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INTERNET SOFTWARE & SERVICES 0.7%
(a) Yahoo! Inc. ................................................. United States 120,650 $ 3,490,404
------------

IT SERVICES 1.3%
(a) Alliance Data Systems Corp. ................................. United States 140,120 6,657,101
------------

MACHINERY 0.0% (g)
(a),(e) Motor Coach Industries International Inc., wts., 5/27/09 ......... United States 1 --
------------

MEDIA 9.3%
(a) Adelphia Recovery Trust ..................................... United States 11,280,134 789,609
(a),(c) Adelphia Recovery Trust, Arahova Contingent
Value Vehicle, Contingent Distribution ...................... United States 1,018,915 519,647
(a),(c) Century Communications Corp., Contingent Distribution ....... United States 2,826,000 --
Clear Channel Communications Inc. ........................... United States 74,960 2,190,331
(a) Eutelsat Communications ..................................... France 231,735 6,327,429
News Corp., A ............................................... United States 530,750 9,951,563
(a) Time Warner Cable Inc., A ................................... United States 357,954 8,941,691
(h) Time Warner Inc. ............................................ United States 582,593 8,167,954
Virgin Media Inc. ........................................... United Kingdom 636,162 8,950,799
------------
45,839,023
------------

METALS & MINING 3.0%
Alcoa Inc. .................................................. United States 143,930 5,190,116
(a),(e) Esmark Inc. ................................................. United States 685,051 6,966,969
Rio Tinto PLC, ADR .......................................... United Kingdom 6,290 2,590,473
------------
14,747,558
------------

MULTI-UTILITIES 1.6%
Energy East Corp. ........................................... United States 214,760 5,180,011
(a),(c) NorthWestern Corp., Contingent Distribution ................. United States 1,020 2
Puget Energy Inc. ........................................... United States 103,070 2,666,421
------------
7,846,434
------------

PAPER & FOREST PRODUCTS 4.2%
(a) Domtar Corp. ................................................ United States 824,676 5,632,537
MeadWestvaco Corp. .......................................... United States 97,800 2,662,116
Weyerhaeuser Co. ............................................ United States 195,052 12,686,182
------------
20,980,835
------------

REAL ESTATE 1.5%
Link REIT ................................................... Hong Kong 3,307,970 7,334,801
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.0%
(a) LSI Corp. ................................................... United States 1,113,749 5,513,058
Maxim Integrated Products Inc. .............................. United States 204,100 4,161,599
------------
9,674,657
------------

26| Annual Report

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2008 (continued)

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

LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
SOFTWARE 3.2%
(a) BEA Systems Inc. ............................................ United States 378,660 $ 7,251,339
(a) NAVTEQ Corp. ................................................ United States 51,880 3,527,840
(a),(i) Take-Two Interactive Software Inc. .......................... United States 197,630 5,043,518
------------
15,822,697
------------

TOBACCO 9.2%
(a) Alliance One International Inc. ............................. United States 1,103,110 6,662,784
Altria Group Inc. ........................................... United States 167,460 3,717,612
Imperial Tobacco Group PLC .................................. United Kingdom 142,232 6,542,773
Japan Tobacco Inc. .......................................... Japan 1,883 9,420,191
KT&G Corp. .................................................. South Korea 135,733 10,635,514
(a) Philip Morris International Inc. ............................ United States 167,460 8,470,127
------------
45,449,001
------------

TRANSPORTATION INFRASTRUCTURE 0.0% (g)
(a) Groupe Eurotunnel SA, wts., 12/30/11 ........................ France 27,397 8,648
------------

TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $445,668,670) ......................................... 394,986,394
------------

PREFERRED STOCK (COST $237,700) 0.0%g
AUTO COMPONENTS 0.0%g
(e) Dana Holding Corp., 4.00%, cvt., pfd., B .................... United States 2,377 216,406
------------

OPTIONS PURCHASED 1.0%
CALL OPTIONS 0.1%
(a) Fortis, exercise price $16.00, expiration date
12/21/12, contracts ....................................... Belgium 1,000 591,862
------------

PUT OPTIONS 0.9%
(a) S&P 500 Index, exercise price $1,250.00, expiration
date 12/20/08, contracts. ................................. United States 188 1,477,680
(a) S&P 500 Index, exercise price $1,300.00, expiration
date 12/20/08, contracts. ................................. United States 288 2,787,840
------------
4,265,520
------------
TOTAL OPTIONS PURCHASED (COST $ 3,940,833) 4,857,382
------------

PRINCIPAL AMOUNT
------------------------------------------------------

CORPORATE BONDS & NOTES 10.2%
(b) ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ............. Canada 430,000 CAD 418,731
(e) Cerberus CG Investor I LLC, 12.00%, 7/31/14 ........................ United States 1,645,200 1,162,578
(e) Cerberus CG Investor II LLC, 12.00%, 7/31/14 ....................... United States 1,645,200 1,162,578
(e) Cerberus CG Investor III LLC, 12.00%, 7/31/14 ...................... United States 822,600 581,289
(e) Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 .......... United States 1,555,760 704,656
(e) Cerberus FIM Investors Commercial Finance LLC, 12.00%, 11/22/13 .... United States 129,678 58,736
(e) Cerberus FIM Investors Commercial Mortgage LLC, 12.00%, 11/22/13 ... United States 243,062 110,091

Annual Report | 27

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2008 (continued)

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

LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES (CONTINUED)
(e) Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ............... United States 1,188,832 $ 538,462
(e) Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ................... United States 2,213,359 1,002,505
Eurotunnel Group UK PLC, cvt., sub. bond, NRS II,
6.00%, 7/28/10 ....................................................... United Kingdom 2,012,900 EUR 4,426,524
6.00%, 7/28/10 ....................................................... United Kingdom 1,018,703 GBP 2,797,597
Groupe Eurotunnel SA, cvt.,
NRS I, T2, 3.00%, 6/28/09 ............................................. France 1,100 EUR 3,242
NRS I, T2, 3.00%, 6/28/09 ............................................. France 1,773 GBP 6,553
NRS I, T3, 3.00%, 7/28/10 ............................................. France 1,561,200 EUR 4,439,240
NRS I, T3, 3.00%, 7/28/10 ............................................. France 805,919 GBP 2,866,047
NRS II, 6.00%, 7/28/10 ............................................... France 1,875,100 EUR 3,901,061
NRS II, 6.00%, 7/28/10 ............................................... France 922,541 GBP 2,396,237
sub. bond, NRS I, T1, 3.00%, 7/28/08 ................................. France 1,100 EUR 3,502
sub. bond, NRS I, T1, 3.00%, 7/28/08 ................................. France 1,773 GBP 7,081
(b) Indianapolis Downs LLC,
senior secured note, 144A, 11.00%, 11/01/12 ........................... United States 1,000,000 875,000
senior secured sub. note, 144A, PIK, 15.50%, 11/01/13 ................. United States 3,500,000 3,342,500
(e),(f) International Automotive Components Group NA LLC, 9.00%, 4/01/17 ..... United States 90,167 90,167
(e),(k) Motor Coach Industries International Inc., FRN, 16.085%, 12/01/08 ..... United States 3,417,165 3,246,306
(e),(k) Pontus I LLC, junior note, 144A, FRN,
5.349%, 7/24/09 ....................................................... United States 613,822 490,118
5.575%, 7/24/09 ....................................................... United States 554,500 580,061
6.901%, 7/24/09 ....................................................... United States 613,000 511,935
(e),(k) Pontus II Trust, junior note, 144A, FRN, 6.901%, 6/25/09 ... ......... United States 306,400 255,884
(e),(k) Revel Entertainment Group LLC,
first lien loan, FRN, 7.10%, 5/30/08 ................................. United States 3,000,000 2,985,000
Second lien loan, FRN, 10.10%, 5/30/08 ............................... United States 3,000,000 2,970,000
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 ..................... United States 2,801,691 1,905,150
Wimar OPCO LLC/Finance Corp., senior sub. note, 9.625%, 12/15/14 ..... United States 12,892,000 6,752,185
------------

TOTAL CORPORATE BONDS & NOTES (COST $ 56,180,854) ..................... 50,591,016
------------

TOTAL LONG TERM INVESTMENTS (COST $ 506,028,057) ..................... 450,651,198
------------

SHORT TERM INVESTMENTS 6.9%
U.S. GOVERNMENT AND AGENCY SECURITIES 6.9%
(l) FHLB,
4/01/08 ............................................... ............. United States 24,900,000 24,900,000
(h) 5/02/08 - 9/10/08 ................... ............................... United States 9,156,000 9,111,718
------------

TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $ 34,007,665) ......................................... ....... 34,011,718
------------

TOTAL INVESTMENTS (COST $540,035,722) 98.1% ......................... 484,662,916
OPTIONS WRITTEN 0.0%(g) ............................................. (15,000)
SECURITIES SOLD SHORT (0.9)% ......................................... (4,651,523)
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS (0.8)% ............. (3,815,909)
OTHER ASSETS, LESS LIABILITIES 3.6% ................................. 17,873,116
------------

NET ASSETS 100.0% $494,053,600
------------

28 | Annual Report

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2008 (continued)

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

(m) OPTIONS WRITTEN (PREMIUMS RECEIVED $ 24,500)
CALL OPTION 0.0%g
SOFTWARE 0.0%g
Take-Two Interactive Software Inc., Apr. 27.50 Calls, 4/19/08 ........ United States 500 $ 15,000
-----------

(n) SECURITIES SOLD SHORT 0.9%

DIVERSIFIED FINANCIAL SERVICES 0.3%
CME Group Inc. ....................................................... United States 3,545 1,662,960
-----------

MACHINERY 0.1%
Ingersoll-Rand Co. Ltd., A ............................................ United States 10,039 447,539
-----------

SOFTWARE 0.5%
VMware Inc., A ....................................................... United States 59,342 2,541,024
-----------

TOTAL SECURITIES SOLD SHORT (PROCEEDS $ 7,999,388) ................... $ 4,651,523
-----------

CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound

SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust

- ------------
(a) Non-income producing for the twelve months ended March 31, 2008.

(b) Security was purchased pursuant to Rule 144A under the Securities
Act of 1933 and may be sold in transactions exempt from registration only
to qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Trustees. At March 31, 2008,
the aggregate value of these securities was $4,841,727, representing 0.98%
of net assets.

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

(d) Security has been deemed illiquid because it may not be able to be sold
within seven days. At March 31, 2008, the aggregate value of these
securities was $2,687, representing less than 0.01% of net assets.

(e) See Note 10 regarding restricted securities.

(f) See Note 12 regarding other considerations.

(g) Rounds to less than 0.1% of net assets.

(h) Security or a portion of the security has been segregated as collateral
for securities sold short. At March 31, 2008, the value of securities and
or cash pledged amounted to $6,798,001.

(i) A portion or all of the security is held in connection with written option
contracts open at year end.

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

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

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

(m) See Note 1(e) regarding written options.

(n) See Note 1(f) regarding securities sold short.

Annual Report | The accompanying notes are an integral
part of these financial statements. | 29

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

March 31, 2008

Assets:

Investments in securities:

Cost ............................................................................... $ 540,035,722
---------------
Value .............................................................................. $ 484,662,916
Cash ................................................................................. 2,851,788
Cash on deposit with brokers for securities sold short ............................... 10,123,433
Foreign currency, at value (cost $ 480,908) ................................. ........ 479,937
Receivables:
Investment securities sold ............................................. ........... 2,144,085
Capital shares sold .................................................... ........... 911,081
Dividends and interest ................................................. ........... 3,609,624
Unrealized gain on forward exchange contracts (Note 8). .................. ........... 509,317
---------------
Total assets ........................................................ ........... 505,292,181
---------------
Liabilities:
Payables:

Investment securities purchased ........................................ ........... 1,493,771
Capital shares redeemed ................................................ ........... 3,733
Affiliates ............................................................. ........... 587,706
Options written, at value (premiums received $24,500) .................... ........... 15,000
Securities sold short, at value (proceeds $7,999,388) .................... ........... 4,651,523
Unrealized loss on forward exchange contracts (Note 8) ................... 4,325,226
Accrued expenses and other liabilities ................................... ........... 161,622
---------------
Total liabilities ................................................... ........... 11,238,581
---------------
Net assets, at value .............................................. ........... $ 494,053,600
---------------
Net assets consist of:
Paid-in capital .......................................................... ........... $ 556,017,065
Undistributed net investment income .................................................. 1,170,047
Net unrealized appreciation (depreciation) ........................................... (55,810,981)
Accumulated net realized gain (loss) ................................................. (7,322,531)
---------------
Net assets, at value .......................................................... $ 494,053,600
===============

30| The accompanying notes are an integral
part of these financial statements. | Annual Report

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS (continued)

STATEMENT OF ASSETS AND LIABILITIES (continued)
March 31, 2008

CLASS A:
Net assets, at value .................................................................. $ 238,020,341
==============
Shares outstanding .................................................................... 19,873,966
==============
Net asset value per share(a) .......................................................... $ 11.98
==============
Maximum offering price per share (net asset value per share / 94.25%) ................. $ 12.71
==============

CLASS B:
Net assets, at value .................................................................. $ 4,332,643
==============
Shares outstanding .................................................................... 368,398
==============
Net asset value and maximum offering price per share(a) ............................... $ 11.76
==============

CLASS C:
Net assets, at value .................................................................. $ 96,130,505
==============
Shares outstanding .................................................................... 8,178,992
==============
Net asset value and maximum offering price per share(a) ............................... $ 11.75
==============

ADVISOR CLASS:
Net assets, at value .................................................................. $ 155,570,111
==============
Shares outstanding 12,852,617
==============
Net asset value and maximum offering price per share(a) ............................... $ 12.10
==============

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

Annual Report | The accompanying notes are an integral
part of these financial statements. | 31

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS (continued)

STATEMENT OF OPERATIONS
for the year ended March 31, 2008

Investment income:
Dividends (net of foreign taxes withheld of $422,266) ................................ $ 10,893,475
Interest ............................................................................. 5,772,800
Income from securities loaned ........................................................ 821
---------------
Total investment income ......................................................... 16,667,096
---------------
Expenses:
Management fees (Note 4a) ............................................................ 9,115,216
Administrative fees (Note 4b) ........................................................ 1,078,996
Distribution fees: (Note 4c)
Class A ............................................................................ 909,059
Class B ............................................................................ 49,568
Class C ............................................................................ 1,047,369
Transfer agent fees (Note 4e) ........................................................... 451,655
Custodian fees (Note 5) .............................................................. 67,412
Reports to shareholders .............................................................. 70,146
Registration and filing fees ......................................................... 133,945
Professional fees .................................................................... 228,185
Trustees' fees and expenses .......................................................... 112,799
Dividends for securities sold short .................................................. 156,887
Other ................................................................................ 115,075
---------------
Total expenses .................................................................. 13,536,312
Expense reductions (Note 5) ..................................................... (29,561)
---------------
Net expenses .................................................................. 13,506,751
---------------
Net investment income ...................................................... 3,160,345
---------------
Realized and unrealized losses:

Net realized gain (loss) from:

Investments ........................................................................ 26,758,546
Written options (Note 7) ........................................................... 140,991
Foreign currency transactions ...................................................... (14,192,348)
Securities sold short .............................................................. 4,742,769
Synthetic equity swaps ............................................................. 759,913
---------------
Net realized gain (loss) ........................................................ 18,209,871
---------------

Net change in unrealized appreciation (depreciation) on:
Investments ........................................................................ (102,833,420)
Translation of assets and liabilities denominated in foreign currencies ............ (2,848,663)
---------------
Net change in unrealized appreciation (depreciation) ............................ (105,682,083)
---------------
Net realized and unrealized gain (loss) ................................................. (87,472,212)
---------------
Net increase (decrease) in net assets resulting from operations ......................... $ (84,311,867)
===============

32| The accompanying notes are an integral
part of these financial statements. | Annual Report

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS (continued)

STATEMENTS OF CHANGES IN NET ASSETS

YEAR ENDED MARCH 31,
2008 2007
-------------- --------------

Increase (decrease) in net assets:
Operations:
Net investment income ................................................. $ 3,160,345 $ 3,233,685
Net realized gain (loss) from investments, written options, foreign
currency transactions, securities sold short, and synthetic equity
swaps ................................................................. 18,209,871 21,763,483
Net change in unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in foreign
currencies ............................................................ (105,682,083) 30,029,601
-------------- --------------
Net increase (decrease) in net assets resulting from operations .. (84,311,867) 55,026,769
-------------- --------------
Distributions to shareholders from:
Net investment income:
Class A ............................................................ (5,371,498) --
Class B ............................................................ (68,665) --
Class C ............................................................ (1,530,791) --
Advisor Class ...................................................... (4,040,562) --
Net realized gains:

Class A ............................................................ (14,781,623) (7,635,415)
Class B ............................................................ (279,358) (259,091)
Class C ............................................................ (6,008,422) (3,766,825)
Advisor Class ...................................................... (9,549,411) (5,590,468)
-------------- --------------
Total distributions to shareholders ..................................... (41,630,330) (17,251,799)
-------------- --------------
Capital share transactions: (Note 3)
Class A ............................................................ 89,194,298 87,953,011
Class B ............................................................ 403,096 295,466
Class C ............................................................ 33,827,758 24,428,460
Advisor Class ...................................................... 42,564,143 59,167,599
-------------- --------------

Total capital share transactions ........................................ 165,989,295 171,844,536
-------------- --------------
Net increase (decrease) in net assets ............................ 40,047,098 209,619,506
Net assets:

Beginning of year ....................................................... 454,006,502 244,386,996
-------------- --------------
End of year ............................................................. $ 494,053,600 $ 454,006,502
============== ==============
Undistributed net investment income included in net assets:

End of year ............................................................. $ 1,170,047 $ 3,556,965
============== ==============

Annual Report | The accompanying notes are an integral
part of these financial statements. | 33

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS (continued)

STATEMENT OF CASH FLOWS
for the year ended March 31, 2008

Cash flow from operating activities:

Dividends, interest and other income received .................................... $ 13,029,830
Operating expenses paid .......................................................... (14,083,733)
Purchases of long-term investments ............................................... (655,829,361)
Sales and maturities of long-term investments .................................... 500,219,551
Net sales of short-term investments .............................................. 35,263,491
Cash on deposit with brokers for securities sold short ........................... 6,796,052
Cash on deposit held in escrow ................................................... 81,100
Due from broker - synthetic equity swaps ......................................... 1,297,817
Realized loss on forward contracts ............................................... (14,192,348)
----------------
Cash used - operating activities ............................................ (127,417,601)
----------------
Cash flow from financing activities:

Proceeds from shares sold ........................................................ 242,799,343
Payment of shares redeemed ....................................................... (107,147,560)
Distributions to shareholders .................................................... (6,877,427)
----------------
Cash used - financing activities ............................................ 128,774,356
----------------
Net increase (decrease) in cash ....................................................... 1,356,755
Cash at beginning of year ............................................................. 1,974,970
----------------
Cash at end of year ................................................................... $ 3,331,725
================

Reconciliation of Net Increase (Decrease) in Net Assets Resulting from Operating
Activities to Net Cash Used in Operating Activities for the year ended
March 31, 2008

Net increase (decrease) in net assets resulting from operating activities ............. $ (84,311,867)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operating activities to net used by operating activities:

Decrease in cash on deposit with brokers for securities sold short ............ 6,796,051
Decrease in cash on deposit held in escrow .................................... 81,100
Increase in receivables for investments sold .................................. (364,805)
Decrease in due from broker - synthetic equity swaps .......................... 1,297,817
Increase in dividends and interest receivable and other assets ................ (2,201,409)
Decrease in payable for investments purchased ................................. (2,001,358)
Decrease in affiliates, accrued expenses and other liabilities ................ (576,982)
Increase in cost of investments ............................................... (151,814,271)
Net change in unrealized appreciation/depreciation on investments ............. 105,678,123
----------------
Net cash used in operating activities ................................................. $ (127,417,601)
================

Noncash financing activities - reinvestment of dividends .............................. $ 34,752,903

34| The accompanying notes are an integral
part of these financial statements. | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Mutual Recovery (Fund) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as a non-diversified, closed-end, continuously
offered investment company. The Fund offers four classes of shares: Class A,
Class B, Class C, and Advisor Class. Each class of shares differs by its initial
sales load, contingent deferred sales charges, distribution fees, voting rights
on matters affecting a single class and its exchange privilege.

The following summarizes the Fund's significant accounting policies.

A. SECURITY VALUATION

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

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

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

The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment

Annual Report | 35

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

A. SECURITY VALUATION (continued)

manager monitors price movements following the close of trading in foreign stock
markets through a series of country specific market proxies (such as baskets of
American Depository Receipts, futures contracts and exchange traded funds).
These price movements are measured against established trigger thresholds for
each specific market proxy to assist in determining if an event has occurred. If
such an event occurs, the securities may be valued using fair value procedures,
which may include the use of independent pricing services. All security
valuation procedures are approved by the Fund's Board of Trustees.

B. FOREIGN CURRENCY TRANSLATION

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

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

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

C. FOREIGN CURRENCY CONTRACTS

When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.

The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized gains or losses on the contracts, as measured by the
difference between the contractual forward foreign

36| Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

C. FOREIGN CURRENCY CONTRACTS (continued)

exchange rates and the forward rates at the reporting date, are included in the
Statement of Assets and Liabilities. Realized and unrealized gains and losses on
these contracts are included in the Statement of Operations.

The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.

D. SYNTHETIC EQUITY SWAPS

The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, the Fund is
required to pledge to the broker an amount of cash and/or other assets equal to
a certain percentage of the contract amount (margin account). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized gains or losses on the contracts (as measured by the
difference between the contract amount plus or minus cash received or paid and
the market value of the underlying securities) are recorded in the Statement of
Operations. The margin account and any net unrealized gains or losses on open
synthetic equity swaps are included in the Statement of Assets and Liabilities.
The risks of entering into synthetic equity swaps include unfavorable price
movements in the underlying securities or the inability of the counterparties to
fulfill their obligations under the contract.

E. OPTIONS

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

Annual Report | 37

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

F. SECURITIES SOLD SHORT

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

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

G. SECURITIES LENDING

The Fund may loan securities to certain brokers through a securities lending
agent for which it receives initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of Fund business each day; any additional collateral required due to
changes in security values is delivered to the Fund on the next business day.
The Fund receives interest income from the investment of cash collateral,
adjusted by lender fees and broker rebates. The Fund bears the risk of loss with
respect to the investment of the collateral and the securities loaned. The
securities lending agent has agreed to indemnify the Fund in the case of default
of any securities borrower. At March 31, 2008, the Fund had no securities on
loan.

H. INCOME TAXES

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

The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of March 31, 2008, and has
determined that no provision for income tax is required in the Fund's financial
statements.

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

38| Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

I. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS

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

Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in per share
distributions, by class, are generally due to differences in class specific
expenses.

J. ACCOUNTING ESTIMATES

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

K. REDEMPTION FEES

A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the fund and accounted for as an addition to paid-in
capital. There were no redemption fees for the year ended March 31, 2008.

L. GUARANTEES AND INDEMNIFICATIONS

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

Annual Report | 39

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

2. TENDER SHARES

On a quarterly basis, the Fund may make tender offers, the amount of which is
determined by the Board of Trustees, for the repurchase of at least 5% but not
more than 25% of the shares outstanding. The repurchase price is the net asset
value on the repurchase pricing date.

3. SHARES OF BENEFICIAL INTEREST

At March 31, 2008, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:

YEAR ENDED MARCH 31,
-------------------------------------------------------
2008 2007
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------

CLASS A SHARES:
Shares sold .................. 8,791,429 $ 129,341,636 6,675,831 $ 94,860,308
Shares issued in reinvestment
of distributions ........... 1,165,011 16,333,602 448,937 6,116,415
Shares redeemed .............. (4,042,152) (56,480,940) (962,664) (13,023,712)
---------- ------------- ---------- -------------
Net increase (decrease) ...... 5,914,288 $ 89,194,298 6,162,104 $ 87,953,011
========== ============= ========== =============
CLASS B SHARES:
Shares sold .................. 30,640 $ 442,201 27,269 $ 381,827
Shares issued in reinvestment
of distributions ........... 21,159 293,557 15,952 213,608
Shares redeemed .............. (23,404) (332,662) (22,423) (299,969)
---------- ------------- ---------- -------------
Net increase (decrease) ...... 28,395 $ 403,096 20,798 $ 295,466
========== ============= ========== =============
CLASS C SHARES:
Shares sold .................. 2,688,252 $ 39,181,413 1,825,124 $ 25,470,660
Shares issued in reinvestment
of distributions ........... 471,058 6,505,843 231,665 3,115,666
Shares redeemed .............. (867,478) (11,859,498) (309,733) (4,157,866)
---------- ------------- ---------- -------------
Net increase (decrease) ...... 2,291,832 $ 33,827,758 1,747,056 $ 24,428,460
========== ============= ========== =============
ADVISOR CLASS SHARES:
Shares sold .................. 4,697,630 $ 69,422,412 5,034,423 $ 72,565,514
Shares issued in reinvestment
of distributions ........... 818,746 11,619,901 357,448 4,925,584
Shares redeemed .............. (2,682,845) (38,478,170) (1,330,720) (18,323,499)
---------- ------------- ---------- -------------
Net increase (decrease) ...... 2,833,531 $ 42,564,143 4,061,151 $ 59,167,599
========== ============= ========== =============

40 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

4. TRANSACTIONS WITH AFFILIATES

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

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

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

A. MANAGEMENT FEES

The Fund pays Franklin Mutual an investment management fee comprised of a "base
fee" and a "performance adjustment". The base fee is calculated at the beginning
of each month using an annual rate of 1.50% of the prior month's average daily
net assets. The performance adjustment is calculated at the beginning of each
month based on how much the Fund's total return exceeded or lagged its
performance fee index, the Bloomberg/EFFAS U.S. Government 3-5 Years Total
Return Index, (the "Fund performance differential"), over the preceding
twelve-month period (the performance period). A performance adjustment is
applicable if the Fund performance differential exceeds 1.00%, either upwards
(an increase to the base fee) or downwards (a decrease to the base fee). The
performance adjustment rate is equal to 0.01% for each additional 0.05% that the
Fund performance differential exceeds 1.00%. The performance adjustment amount
is determined by multiplying the performance adjustment rate by the average
daily net assets of the performance period. The performance adjustment rate may
not exceed 1.00% annualized, either upwards or downwards. At the end of each
month, an annualized investment management fee ratio is calculated (total
investment management fees divided by fiscal year to date average daily net
assets). In accordance with the Investment Management Agreement, the investment
management fee ratio may not exceed 2.50% or fall below 0.50% for the fiscal
year. For the period, the total annualized management fee rate, including the
performance adjustment, was 1.69% of the average daily net assets of the Fund.

B. ADMINISTRATIVE FEES

The Funds pays an administrative fee to FT Services of 0.20% per year of the
average daily net assets of the Fund.

C. DISTRIBUTION FEES

The Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Funds' Class A, B and C compensation distribution plans,
the Fund reimburses Distributors for costs incurred in connection with the
servicing, sale and distribution of the Fund's shares up to the maximum annual
plan rate for each class.

Annual Report | 41

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

4. TRANSACTIONS WITH AFFILIATES (continued)

C. DISTRIBUTION FEES (continued)

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%

D. SALES CHARGES/UNDERWRITING AGREEMENTS

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

Sales charges retained net of commissions paid to
unaffiliated broker/dealers ................... $144,453
Contingent deferred sales charges retained ....... $ 35,703

E. TRANSFER AGENT FEES

For the year ended March 31, 2008, the Fund paid transfer agent fees of
$451,655, of which $289,844 was retained by Investor Services.

5. EXPENSE OFFSET ARRANGEMENT

The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended March 31, 2008, the
custodian fees were reduced as noted in the Statements of Operations.

6. INCOME TAXES

For tax purposes, realized capital losses and realized currency losses occurring
subsequent to October 31, may be deferred and treated as occurring on the first
day of the following fiscal year. At March 31, 2008, the Fund deferred realized
capital losses and realized currency losses of $2,417,892 and $256,166,
respectively.

The tax character of distributions paid during the years ended March 31, 2008
and 2007, was as follows:

2008 2007
----------- -----------

Distributions paid from:
Ordinary income ........... $30,697,918 $11,346,562
Long term capital gain .... 10,932,412 5,905,237
----------- -----------
$41,630,330 $17,251,799
=========== ===========

42 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

6. INCOME TAXES (continued)

At March 31, 2008, the cost of investments and net unrealized appreciation
(depreciation), undistributed ordinary income for income tax purposes were as
follows:

Cost of investments ........................................ $ 548,402,351
=============

Unrealized appreciation .................................... $ 31,505,723
Unrealized depreciation .................................... (95,245,158)
-------------
Net unrealized appreciation (depreciation) ................. $ (63,739,435)
=============

Distributable earnings - undistributed ordinary income ..... $ 766,426
=============

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

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of pass-through entity income, synthetic
equity swaps, wash sales and foreign currency transactions.

7. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended March 31, 2008, aggregated
$624,368,643 and $438,431,812, respectively.

Transactions in options written during the year ended March 31, 2008, were
as follows:

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

Options outstanding at March 31, 2007 .. 1,974 $ 1,351,726
Options written ........................ 2,670 271,463
Options expired ........................ (1,495) (140,991)
Options exercised ...................... (2,649) (1,457,698)
Options closed ......................... -- --
--------- -----------
Options outstanding at March 31, 2008 .. 500 $ 24,500
========= ===========

Annual Report | 43

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

8. FORWARD EXCHANGE CONTRACTS

At March 31, 2008, the Fund had the following forward exchange contracts
outstanding:

CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
----------- ---------- ---------- -----------

CONTRACTS TO BUY

3,500,000 Danish Krone ................ $ 690,985 4/23/08 $ 49,080 $ --

CONTRACTS TO SELL

11,831,007 British Pound ............... 23,710,877 4/10/08 249,217 --
24,675,750 Danish Krone ................ 4,688,355 4/23/08 -- (529,269)
27,698,459 Euro ........................ 42,291,669 5/13/08 -- (1,349,886)
32,887,648 Norwegian Krone ............. 6,063,984 5/19/08 -- (366,324)
21,246,191 Euro ........................ 31,370,004 5/28/08 -- (2,078,783)
687,156,484 Japanese Yen ................ 7,126,109 9/19/08 180,094 --
371,773,750 South Korean Won ............ 375,000 9/29/08 -- (964)
246,850,000 South Korean Won ............ 250,000 9/29/08 368 --
4,032,601 Canadian Dollar ............. 3,943,093 10/27/08 30,558 --
---------- ------------

UNREALIZED GAIN (LOSS) ON FORWARD EXCHANGE CONTRACTS ................ $ 509,317 $ (4,325,226)
---------- ------------

NET UNREALIZED GAIN (LOSS) ON FORWARD EXCHANGE CONTRACTS ...... $ (3,815,909)
============

9. CREDIT RISK AND DEFAULTED SECURITIES

The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
March 31, 2008, the Fund had no holdings of these securities.

10. RESTRICTED SECURITIES

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

44 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

10. RESTRICTED SECURITIES (continued)

At March 31, 2008, the Fund held investments in restricted securities, excluding
144A securities deemed to be liquid, valued in accordance with procedures
approved by the Fund's Board of Trustees as reflecting fair value, as follows:

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

41,859 AboveNet Inc. ............................ 9/03/03 - 12/12/07 $ 1,625,260 $2,092,950
55 AboveNet Inc., stock grant, grant price
$20.95, expiration date 9/09/13 ........ 4/17/06 - 9/08/06 -- 1,972
1,645,200 Cerberus CG Investor I LLC................ 7/26/07 1,645,200 1,162,578
1,645,200 Cerberus CG Investor I LLC, 12.00%,
7/31/14 ................................ 7/26/07 1,645,200 1,162,578
1,645,200 Cerberus CG Investor II LLC .............. 7/26/07 1,645,200 1,162,578
1,645,200 Cerberus CG Investor II LLC, 12.00%,
7/31/14 ................................ 7/26/07 1,645,200 1,162,578
822,600 Cerberus CG Investor III LLC ............. 7/26/07 822,600 581,289
822,600 Cerberus CG Investor III LLC, 12.00%,
7/31/14 ................................ 7/26/07 822,600 581,289
518,940 Cerberus FIM Investors Auto Finance LLC .. 11/20/07 518,940 235,045
1,555,760 Cerberus FIM Investors Auto Finance
LLC, 12.00%, 11/22/13 .................. 11/21/07 1,555,760 704,656
43,226 Cerberus FIM Investors Commercial
Finance LLC ............................ 11/20/07 43,226 19,579
129,678 Cerberus FIM Investors Commercial
Finance LLC, 12.00%, 11/22/13 .......... 11/20/07 129,678 58,736
81,021 Cerberus FIM Investors Commercial
Mortgage LLC ........................... 11/20/07 81,021 36,697
243,062 Cerberus FIM Investors Commercial
Mortgage LLC, 12.00%, 11/22/13 ......... 11/20/07 243,062 110,091
396,277 Cerberus FIM Investors Insurance LLC ..... 11/20/07 396,277 179,487
1,188,832 Cerberus FIM Investors Insurance
LLC, 12.00%, 11/22/13 .................. 11/20/07 1,188,832 538,462
737,786 Cerberus FIM Investors Rescap LLC ........ 11/20/07 737,786 334,168
2,213,359 Cerberus FIM Investors Rescap LLC,
12.00%, 11/22/13 ....................... 11/20/07 2,213,359 1,002,505
2,377 aDana Holding Corp., 4.00%, cvt.,
pfd., B ................................ 12/27/07 237,700 216,406
721 Elephant Capital Holdings Ltd. ........... 10/22/03 - 3/11/08 94,466 185,987
685,051 Esmark Inc. .............................. 11/08/04 - 11/28/07 12,688,485 6,966,969
410,714 First Chicago Bancorp .................... 11/16/06 5,749,996 5,749,996
4,502,725 GLCP Harrah's Investment LP .............. 1/15/08 4,502,725 4,502,725
287,034 Imagine Group Holdings Ltd. .............. 8/31/04 2,939,659 3,283,669
155,394 International Automotive Components
Group Brazil LLC ....................... 4/13/06 - 8/21/06 93,193 581,487
16,213 International Automotive Components
Group Japan LLC ........................ 9/26/06 - 3/27/07 140,865 137,903

Annual Report | 45

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

10. RESTRICTED SECURITIES (continued)

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

660,308 International Automotive Components
Group LLC .............................. 1/12/06 - 10/16/06 $ 660,632 $ 706,001
299,438 International Automotive Components
Group NA LLC ........................... 3/30/07 - 10/10/07 298,930 299,064
90,167 International Automotive Components
Group NA LLC, 9.00%, 4/01/17 ........... 3/30/07 91,520 90,167
103,800 Kindred Healthcare Inc., ................. 3/10/04 2,004,412 2,156,601
Kindred Healthcare Inc., stock grants:
217 grant price $18.15, expiration date
7/17/11 ................................ 7/17/04 - 7/17/05 -- 570
66 grant price $19.87, expiration date
1/01/12 ................................ 1/01/05 - 1/01/06 -- 60
93 grant price $6.94, expiration date
1/01/13 ................................ 1/01/05 - 1/03/07 -- 1,287
120 grant price $19.87, expiration date
1/01/14 ................................ 1/01/05 - 1/01/08 -- 109
72 grant price $21.33, expiration date
1/10/15 ................................ 1/06/06 - 1/10/08 -- --
44 grant price $22.08, expiration date
1/10/16 ................................ 1/09/07 - 1/10/08 -- --
22 grant price $19.40, expiration date
1/10/17 ................................ 1/10/08 -- 30
3,417,165 Motor Coach Industries International
Inc., FRN, 16.085%, 12/01/08 ........... 5/27/04 - 2/29/08 3,417,164 3,246,306
1 Motor Coach Industries International
Inc., wts., 5/27/09 .................... 3/30/07 -- --
31,928 NCB Warrant Holdings Ltd., A ............. 12/16/05 - 3/11/08 2,310,345 744,130
613,822 Pontus I LLC, junior note, 144A, FRN,
5.349%, 7/24/09 ........................ 1/22/08 613,822 490,118
613,000 Pontus I LLC, junior note, 144A, FRN,
6.901%, 7/24/09 ........................ 2/12/08 613,000 511,935
554,500 Pontus I LLC, junior note, 144A, FRN,
5.575%, 7/24/09 ........................ 2/25/08 554,500 580,061
306,400 Pontus II Trust, junior note, 144A,
FRN, 6.901%, 6/25/09 ................... 2/29/08 306,400 255,884
3,000,000 Revel Entertainment Group LLC, first
lien loan, FRN, 7.10%, 5/30/08 ......... 12/20/07 3,000,000 2,985,000
3,000,000 Revel Entertainment Group LLC, second
lien loan, FRN, 10.10%, 5/30/08 ........ 12/20/07 3,000,000 2,970,000
445,440 Symetra Financial ........................ 7/27/04 5,120,000 6,191,616
-----------
TOTAL RESTRICTED SECURITIES
(10.93% of Net Assets) ................. $53,981,319
===========

- ----------
(a) The Fund also invests in unrestricted securities of the issuer, valued at
$284,230 as of March 31, 2008.

46 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

11. UNFUNDED CAPITAL COMMITMENTS

At March 31, 2008, the Fund had aggregate unfunded capital commitments to
investments of $11,747,357.

12. OTHER CONSIDERATIONS

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

13. CREDIT FACILITY

The Fund participates in a $30 million senior unsecured revolving credit
facility to fund shareholder redemptions or meet unfunded loan commitments.
Renewal of the facility agreement, which ends on May 31, 2008, has been
negotiated by the Fund subject to approval by the Fund's Board of Trustees. The
Fund may borrow, at its election, at the Federal Funds Rate plus 0.70%, the
London InterBank Rate (LIBOR) plus 0.70%, or, an "Alternative Base Rate" which
is the greater of (i) the prime rate and (ii) 1/2 of 1% plus the Federal Funds
Rate. Annual commitment fees of 0.20% per annum are charged on the unused
portion of the facility.

During the year ended March 31, 2008, the Fund did not utilize the facility.

14. REGULATORY AND LITIGATION MATTERS

As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the U.S. Securities and Exchange
Commission (SEC), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares (marketing support), Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the Company), entered into
settlements with certain of those regulators and governmental entities.
Specifically, the Company entered into settlements with the SEC, among others,
concerning market timing and marketing support.

On May 9, 2008, the SEC approved a final plan of distribution for the Company's
market timing settlement. Disbursements of settlement monies will be made
promptly to individuals who were shareholders of the designated funds during the
relevant period, in accordance with the terms and conditions of the settlement
and plan.

Annual Report | 47

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (continued)

14. REGULATORY AND LITIGATION MATTERS (continued)

In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above.

The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.

15. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The Fund
believes the adoption of SFAS 157 will have no material impact on its financial
statements.

In March 2008, FASB issued FASB Statement No. 161, "Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133" (SFAS 161), which expands disclosures about derivative
instruments and hedging activities. SFAS 161 is effective for fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years. The Fund believes the adoption of SFAS 161 will have no material impact
on its financial statements.

48 | Annual Report

Franklin Mutual Recovery Fund

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE FRANKLIN MUTUAL RECOVERY FUND:

We have audited the accompanying statement of assets and liabilities of Franklin
Mutual Recovery Fund(the "Fund"), including the statement of investments, as of
March 31, 2008, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of March 31, 2008, by correspondence with the custodian and
brokersor by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Mutual Recovery Fund at March 31, 2008, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
indicated therein, in conformity with U.S. generally accepted accounting
principles.

[ERNST & YOUNG LLP]

Boston, Massachusetts
May 16, 2008

Annual Report | 49

Franklin Mutual Recovery Fund

TAX DESIGNATION (UNAUDITED)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $3,041,211 as a long
term capital gain dividend for the fiscal year ended March 31, 2008.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than the $8,693,351 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
March 31, 2008. In January 2009, shareholders will receive Form 1099-DIV which
will include their share of qualified dividends distributed during the calendar
year 2008. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.

Under Section 871(k)(2)(c) of the Code, the Fund designates the maximum amount
allowable but no less than $17,443,703 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended March 31, 2008.

Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than the $2,980,839 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended March 31, 2008.

Under Section 854(b)(2) of the Code, the Fund designates 20.71% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended March 31, 2008.

50| Annual Report

Franklin Mutual Recovery Fund

BOARD MEMBERS AND OFFICERS

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

INDEPENDENT BOARD MEMBERS

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

EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 2003 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789