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: 03/31/10
-----------

ITEM 1. REPORTS TO STOCKHOLDERS.

MARCH 31, 2010

ANNUAL REPORT AND SHAREHOLDER LETTER

(GRAPHIC)

VALUE

FRANKLIN
MUTUAL RECOVERY FUND

(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
Franklin - Templeton - MUTUAL SERIES

Franklin Templeton Investments

GAIN FROM OUR PERSPECTIVE(R)

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

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

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

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

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

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

RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.

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

(GRAPHIC)

Not part of the annual report

Contents

SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Franklin Mutual Recovery Fund ............................................. 4
Performance Summary ....................................................... 11
Your Fund's Expenses ...................................................... 16
The Fund's Repurchase Offers .............................................. 18
Financial Highlights and Statement of Investments ......................... 19
Financial Statements ...................................................... 30
Notes to Financial Statements ............................................. 35
Report of Independent Registered Public Accounting Firm ................... 50
Tax Designation ........................................................... 51
Board Members and Officers ................................................ 53
Shareholder Information ................................................... 58

Shareholder Letter
AVERAGE ANNUAL TOTAL RETURN

CLASS A 3/31/10
- ------- -------

1-Year +31.82%
5-Year -1.76%
Since Inception (6/2/03) +1.61%

PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.

Dear Shareholder:

Franklin Mutual Recovery Fund's fiscal year-end on March 31, 2010, marked just
over one year from the dramatic equity market lows of March 2009. Over this
period, the markets moved remarkably and consistently upward. Downturns lasted
only a few weeks and declined less than 10% for major indexes. During this
tremendous run, the Fund's Class A shares' +39.86% total return (not including
the sales charge) for the 12 months under review lagged the Standard & Poor's
500 Index's (S&P 500's) +49.77% return.(1)

The consistency of the market's rise belied the complex sequence of events that
drove it. As discussed in our semiannual report last fall, the Fund's fiscal
year began with the markets recovering from lows set while the survival of the
banking system was in doubt. The rally was sustained by signs of stabilization
in the U.S. housing market, thawing credit markets and resumption of economic
activity. As the year progressed, corporate earnings showed steady progress,
with inventory restocking slowly giving way to optimism about a sustainable
economic recovery. U.S. gross domestic product turned to growth in the third
quarter of 2009 and accelerated to its fastest pace in six years as the year
ended.

Financial markets moved with, and in anticipation of, improving economic
conditions. Credit markets were buoyant, with high-quality companies able to
borrow significant amounts at very low interest rate spreads relative to
Treasuries. Securitization markets even returned to life, and credit card
companies completed securitizations without government guarantees for the first
time since the 2008 financial crisis. By fiscal year-end, financial markets were

(1.) Source: (C) 2010 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The S&P 500 consists of 500 stocks chosen for market
size, liquidity and industry group representation. Each stock's weight in
the index is proportionate to its market value. The S&P 500 is one of the
most widely used benchmarks of U.S. equity performance. The index is
unmanaged and includes reinvested dividends. One cannot invest directly in
an index, and an index is not representative of the Fund's portfolio.

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

Not part of the annual report | 1

stable enough that the Federal Reserve Board was able to stop its massive
purchases of mortgage-backed securities without a visible tremor in the market.
Overall, we think markets and economic activity look "normal" again.

The Fund is intended to give investors substantial exposure to each of the three
strategies generally employed by Franklin Mutual Advisers: merger arbi-trage,
distressed debt, and special situations and undervalued securities. As we
entered this fiscal year, we were more heavily weighted in equities, followed by
debt and lastly merger arbitrage. Over the course of the fiscal year, the Fund
reduced its exposure to equities and generally added to merger arbi-trage.
Heading forward in 2010, we expect to see opportunities across all three
strategies.

The Fund found what we believed to be attractive opportunities in merger
arbitrage situations this past year, taking positions in large strategic deals
such as those occurring in the pharmaceuticals industry in mid-2009 and in
technology and energy more recently. Although Fund performance in this area was
positive during this period, it did lag the appreciation experienced more
broadly in the equity markets. Merger and acquisition activity increased over
the latter part of the year, and we expect further acceleration. Large strategic
acquirers who may be facing significant obstacles to organic growth have access
to considerable amounts of capital at very reasonable rates, and we think they
are likely to see the advantages of consolidation and restructuring.

We also found opportunities in distressed debt. Gone were the extreme distressed
prices on senior loans that emerged in late 2008 and early 2009, but the Fund
found opportunities in debt of over-leveraged entities and in the securities of
companies emerging from reorganization. Near fiscal year-end, we continued to
find smaller opportunities in those areas and anticipate an increase in
financial distress as the leveraged buyouts of 2005 to 2008 reach maturity of
their debt.

As the year progressed and equities continued to climb, the Fund generally was a
seller of equities, which allowed the Fund to have a greater degree of balance
between its core strategies of distressed debt, event-driven equities and merger
arbitrage. We reinvested in some new event-driven equities, in both the U.S. and
Europe.

Despite the market advance, headwinds remain as we close this fiscal year.
Financial market conditions are more normal and volatility continues to drop,
potentially reducing future returns. Credit markets are no longer generally
under stress, and returns for taking credit risk are generally reduced. Equities
look fairly valued on some long-term measures and no longer reflect extreme

2 | Not part of the annual report

economic stress. Underlying economic conditions will likely face the continued
withdrawal of government support and possibly even a drag from measures that may
be required to address significant fiscal imbalances in many countries including
the U.S. We will continue to focus on security specific analysis to find
undervalued securities and attractive opportunities in these uncertain markets.
We thank you for your support over the past year and look forward to serving you
in the future.

Sincerely,

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

THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF MARCH 31, 2010. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.

Not part of the annual report | 3

Annual Report

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.

PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 3/31/10

(PIE CHART)

Equity ................................................................ 43.7%
Debt Instruments & Reorganization ..................................... 28.6%
Arbitrage ............................................................. 24.2%
Short-Term Investments & Other Net Assets ............................. 3.5%*

* Net of short positions.

This annual report for Franklin Mutual Recovery Fund covers the fiscal year
ended March 31, 2010.

PERFORMANCE OVERVIEW

For the 12 months under review, Franklin Mutual Recovery Fund - Class A had a
+39.86% cumulative total return. The Fund underperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a +49.77%

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

4 | Annual Report

total return for the same period.(1) The Fund outperformed the +0.61% 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

The U.S. economy ended the fiscal year under review in much better shape than it
began and showed signs of broad-based improvements. In the latter half of the
period, U.S. industrial output, manufacturing and exports posted steady gains,
consumer spending and confidence rebounded from recessionary lows, and the
services sector expanded for the first time in more than two years. However,
challenges remained as mixed economic reports, elevated debt concerns
surrounding the U.S. budget deficit, and a lack of job prospects for the
unemployed hindered the economy's advance. Fourth quarter 2009 and first quarter
2010 corporate profit growth largely surpassed consensus estimates, which
allowed businesses to begin restocking inventories that were depleted during the
recession. New-home prices rose in most regions due to lower interest rates, a
first-time homebuyer tax credit program, and prices dipping to levels that lured
bargain hunters. Unfortunately, the housing sector overall remained weak as
existing-home prices were essentially unchanged while the pace of home sales and
housing starts failed to gain traction.

The U.S. economy expanded at its fastest pace in six years during 2009's fourth
quarter, led by large inventory adjustments, government spending, a revival of
business investment and rising exports. U.S. economic output as measured by
gross domestic product (GDP) grew at an annualized rate of 5.6% in the fourth
quarter, followed by an estimated annualized 3.2% advance in 2010's first
quarter.(3) As renewed signs of a demand-led recovery emerged, oil prices jumped
from $50 per barrel to a 17-month peak of $84 during the year under review but
remained below 2008's record level. The March 2010 inflation rate

(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, and an index is
not 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 Economic Analysis.

Annual Report | 5

ASSET ALLOCATION
Based on Total Net Assets as of 3/31/10

(BAR CHART)

Equity 63.3%*
Debt Instruments 21.3%
Short-Term Investments & Other Net Assets 15.4%

* Net of short positions.

was an annualized 2.3%.(4) Core inflation, which excludes food and energy costs,
rose at a 1.1% annualized rate(4) and was below the Fed's informal target range
of 1.5% to 2.0%.

Given few inflationary pressures and uncertainty surrounding the economic
recovery, the Federal Open Market Committee (FOMC) announced it intended to hold
the federal funds target rate in the 0% to 0.25% range "for an extended period"
as it laid the groundwork for an eventual tightening of monetary policy. During
the period, it began withdrawing more of the extraordinary support policies it
had provided in response to the 2008 financial crisis. Late in the period, the
labor market improved somewhat as the economy began to add jobs, and the
unemployment rate subsided from a 26-year high of 10.1% in October 2009 to 9.7%,
a level sustained through the first three months of 2010.(4)

As investor confidence improved amid encouraging economic data, equity markets
generally rallied, though the advance was uneven. For the 12 months under
review, the blue chip stocks of the Dow Jones Industrial Average delivered a
+46.93% total return, while the broader S&P 500 posted a +49.77% total return
and the technology-heavy NASDAQ Composite Index returned +58.32%.(5) All major
industry groups posted gains for the period, with the strongest returns from the
cyclical financials, industrials and consumer discretionary sectors.

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.

(4.) Source: Bureau of Labor Statistics.

(5.) Source: (C) 2010 Morningstar. The Dow Jones Industrial Average is price
weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international common type stocks listed on The NASDAQ Stock
Market. The index is market valued weighted and includes over 3,000
companies.

6 | Annual Report

MANAGER'S DISCUSSION

The year ended March 31, 2010, featured strong performances from many of the
Fund's holdings. Leaders included Virgin Media, a U.K.-based broadband and media
company; Groupe Eurotunnel, a French infrastructure company that operates the
31-mile Channel Tunnel and rail system under the English Channel; and
Weyerhaeuser, one of the top U.S. forest products companies.

Virgin Media shares surged over the past year as restructuring and investment
measures bore fruit. The company was able to extend the maturities on its debt,
strengthening its balance sheet. Furthermore, cost-cutting steps taken during
2008 and throughout 2009 drove the company's incremental operating margins
higher. Investments made to upgrade its network, infrastructure and customer
service reduced customer turnover, enabled further growth in the number of
services taken by customers and allowed the company to impose two price
increases, one in May 2009 and another in 2010. Toward period-end, Virgin Media
was the beneficiary of a regulatory ruling that lowered the cost of access to
premium content, potentially facilitating future video revenues.

The bulk of Groupe Eurotunnel's operational efforts in 2009 were aimed at
regaining lost market share stemming from damages wrought by a September 2008
tunnel fire. Market share of all cross-channel traffic was 28% at its lowest
point following the fire. By year-end 2009, however, market share had recovered
to 32% and the company projected its market share would rise to 38% in 2010, in
line with expectations for a gradual restoration of lost traffic. The tunnel's
primary competition, ferry operators, continued to discount prices, but
Eurotunnel remained disciplined and did not chase what it deemed to be
unprofitable businesses. Eurotunnel's equity capital base expanded in 2009
through conversions of NRS (notes redeemable in shares) debt, warrants and
preferred stock, leading to considerably increased share liquidity. In addition,
Eurotunnel was added to the Morgan Stanley Capital International (MSCI) World
Index, increasing its visibility and market interest in the company.(6)

Weyerhaeuser is one of the world's largest forest products companies. The
company was negatively impacted in 2008 and into 2009 by the dramatic slowdown
in housing and the general economy which reduced demand for construction
materials. In response, its management team undertook a series of actions that
recalibrated production to more accurately meet demand and reduced the amount of
working capital the business needed to operate. The benefits of these actions
began to become apparent in 2009's final quarter. In addition, management
announced its intention to convert Weyerhaeuser's

TOP 10 SECTORS/INDUSTRIES
3/31/10

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

Media 5.2%
Diversified Telecommunication Services 4.7%
Beverages 4.7%
Insurance 4.3%
Consumer Finance 3.9%
Semiconductors & Semiconductor
Equipment 3.6%
Food & Staples Retailing 3.6%
Paper & Forest Products 3.0%
Office Electronics 2.9%
Health Care Providers & Services 2.7%

(6.) The MSCI World Index is a free float adjusted, market
capitalization-weighted index designed to measure equity market performance
in global developed markets.

Annual Report | 7

TOP 10 HOLDINGS
3/31/10

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

XTO Energy Inc. 4.5%
OIL, GAS & CONSUMABLE FUELS, U.S.
Smith International Inc. 4.4%
ENERGY EQUIPMENT & SERVICES, U.S.
Coca-Cola Enterprises Inc. 4.2%
BEVERAGES, U.S.
Symetra Financial Corp. 3.3%
INSURANCE, U.S.
GMAC Inc. 3.0%
CONSUMER FINANCE, U.S.
Weyerhaeuser Co. 3.0%
PAPER & FOREST PRODUCTS, U.S.
CVS Caremark Corp. 3.0%
FOOD & STAPLES RETAILING, U.S.
Xerox Corp. 2.9%
OFFICE ELECTRONICS, U.S.
Virgin Media Inc. 2.7%
MEDIA, U.K.
Community Health Systems Inc. 2.7%
HEALTH CARE PROVIDERS & SERVICES, U.S.

corporate structure from a corporation to a real estate investment trust (REIT),
which is a change that we at Franklin Mutual Advisers had advocated. We believe
the REIT conversion will provide the company with a more efficient tax structure
as well as position it to be more competitive with other large timber owners,
the overwhelming majority of which also hold their timber in a REIT structure.
Additionally, improving housing dynamics, firming wood pulp prices and continued
strength in lumber pricing helped drive improved performance toward period-end.
According to our analysis, the anticipated benefits from REIT conversion,
restructuring actions and continued improvement in end-market dynamics situates
Weyerhaeuser well for the future, which we think could help the stock close the
gap between our view of intrinsic value and market value.

This annual report covers a period of broad-based, positive stock market
performance and few of the Fund's positions declined in value. Nonetheless,
there were some detractors, including Motor Coach Industries International
(MCII) Holdings, a coach manufacturer; the debt of Indianapolis Downs, a gaming
operator; and shares in RRI Energy, an independent power producer.

MCII Holdings is the largest manufacturer of commuter coaches in the U.S. Since
the company emerged from bankruptcy in early 2009, the difficult economy coupled
with widespread municipal budget deficits crimped orders for new coaches from
independent operators and public transit authorities. The dearth of orders led
to several downward revisions of projected cash flows and weighed heavily on the
enterprise's valuation. During March of this year, the exclusion of the highway
and transportation spending portion of the U.S. government's newly enacted
Hiring Incentives to Restore Employment (HIRE) bill cast a shadow of uncertainty
over the near- to mid-term prospects for a rebound in public sector orders.
Against this backdrop, we continued to work toward a consensual resolution
regarding MCII's leveraged capital structure and sought to maximize the recovery
on the Fund's investment.

Indianapolis Downs operates a "racino," a combination race track and casino, of
which the Fund was a holder of debt. The Indy LIVE! racino

8 | Annual Report

opened its temporary casino in June 2008 while the permanent casino was under
construction. The permanent casino opened in March 2009, at a time when
consumers were closely monitoring and curbing their discretionary spending. The
Indiana market's gaming revenues (excluding the two Indianapolis racinos)
declined 6.2% in 2008 and 3.4% in 2009. While the permanent casino's financial
results improved as the property matured, at period-end it appeared the company
might have a hard time growing into its capital structure. Compounding this
difficulty, the company was unsuccessful in its attempts for legislative relief
on the tax front and in terms of trying to get certain gaming tables approved.
Indianapolis Downs entered 2010 highly leveraged, and we believe it could likely
face a balance sheet restructuring without equity sponsor support. Largely as a
result, the debt held by the Fund lost value in the past year.

The share prices of many independent power producers declined over the period,
and shares of RRI Energy, a merchant power producer, were under pressure as
profitability of its coal-fired generation decreased, a result of falling power
prices, weaker volumes and higher coal costs. Furthermore, a significant portion
of RRI's current cash flows were being consumed by maturing debt and costly
environmental retrofits needed at many existing plants. The company sold its
retail operations in the second quarter of 2009. We initiated the position
expecting consolidation in the sector, and subsequent to year-end, RRI announced
a merger with Mirant, another independent power producer. According to our
analysis, the merger holds the potential to unlock significant synergies and
create value for shareholders of both companies.

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 Christian Correa)

/s/ Christian Correa
Christian Correa, CFA
Portfolio Manager

(PHOTO OF Shawn M. Tumulty)

/s/ Shawn M. Tumulty
Shawn M. Tumulty, CFA
Portfolio Manager

(PHOTO OF Keith Luh)

/s/ Keith Luh
Keith Luh, CFA
Portfolio Manager

Franklin Mutual Recovery Fund

CFA(R) is a trademark owned by CFA Institute.

THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2010, 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 3/31/10

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 3/31/10 3/31/09
- ----------------------- ------ ------- -------

Net Asset Value (NAV) +$2.73 $9.75 $7.02
DISTRIBUTIONS (4/1/09-3/31/10)
Dividend Income $0.1083

CLASS B (SYMBOL: N/A) CHANGE 3/31/10 3/31/09
- --------------------- ------ ------- -------

Net Asset Value (NAV) +$2.69 $9.60 $6.91
DISTRIBUTIONS (4/1/09-3/31/10)
Dividend Income $0.0441

CLASS C (SYMBOL: FCMRX) CHANGE 3/31/10 3/31/09
- ----------------------- ------ ------- -------

Net Asset Value (NAV) +$2.69 $9.60 $6.91
DISTRIBUTIONS (4/1/09-3/31/10)
Dividend Income $0.0465

ADVISOR CLASS (SYMBOL: FMRVX) CHANGE 3/31/10 3/31/09
- ----------------------------- ------ ------- -------

Net Asset Value (NAV) +$2.75 $9.83 $7.08
DISTRIBUTIONS (4/1/09-3/31/10)
Dividend Income $0.1358

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.

CLASS A 1-YEAR 5-YEAR INCEPTION (11/3/03)
- ------- ------- ------ -------------------

Cumulative Total Return(1) +39.86% -2.91% +17.51%
Average Annual Total Return(2) +31.82% -1.76% +1.61%
Value of $10,000 Investment(3) $13,182 $9,151 $11,075
Total Annual Operating Expenses(4) 1.43%

CLASS B 1-YEAR 5-YEAR INCEPTION (11/3/03)
- ------- ------- ------ -------------------

Cumulative Total Return(1) +38.80% -6.22% +12.64%
Average Annual Total Return(2) +34.80% -1.60% +1.88%
Value of $10,000 Investment(3) $13,480 $9,225 $11,264
Total Annual Operating Expenses(4) 2.12%

CLASS C 1-YEAR 5-YEAR INCEPTION (11/3/03)
- ------- ------- ------ -------------------

Cumulative Total Return(1) +38.78% -6.05% +12.83%
Average Annual Total Return(2) +37.78% -1.24% +1.90%
Value of $10,000 Investment(3) $13,778 $9,395 $11,283
Total Annual Operating Expenses(4) 2.09%

ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (6/2/03)
- ------------- ------- ------ -------------------

Cumulative Total Return(1) +40.21% -1.27% +33.26%
Average Annual Total Return(2) +40.21% -0.26% +4.29%
Value of $10,000 Investment(3) $14,021 $9,873 $13,326
Total Annual Operating Expenses(4) 1.13%

PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, GO TO
franklintempleton.com OR CALL (800) 342-5236.

12 | Annual Report

Performance Summary (CONTINUED)

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

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

AVERAGE ANNUAL TOTAL RETURN

CLASS A 3/31/10
- ------- -------

1-Year +31.82%
5-Year -1.76%
Since Inception (11/3/03) +1.61%

CLASS A (11/3/03-3/31/10)

(PERFORMANCE GRAPH)

FRANKLIN MUTUAL RECOVERY
DATE FUND - CLASS A S&P 500(5)
- ------------- ------------------------ ----------

11/3/2003 $ 9,423 $10,000
11/30/2003 $ 9,652 $10,088
12/31/2003 $10,010 $10,617
1/31/2004 $10,155 $10,812
2/29/2004 $10,283 $10,962
3/31/2004 $10,189 $10,797
4/30/2004 $10,095 $10,627
5/31/2004 $10,070 $10,773
6/30/2004 $10,266 $10,983
7/31/2004 $10,112 $10,619
8/31/2004 $10,249 $10,662
9/30/2004 $10,325 $10,778
10/31/2004 $10,342 $10,942
11/30/2004 $10,973 $11,385
12/31/2004 $11,323 $11,772
1/31/2005 $11,151 $11,485
2/28/2005 $11,314 $11,727
3/31/2005 $11,404 $11,519
4/30/2005 $11,341 $11,301
5/31/2005 $11,630 $11,661
6/30/2005 $11,792 $11,677
7/31/2005 $11,997 $12,111
8/31/2005 $12,043 $12,001
9/30/2005 $12,034 $12,098
10/31/2005 $11,596 $11,896
11/30/2005 $11,829 $12,346
12/31/2005 $12,088 $12,351
1/31/2006 $12,508 $12,678
2/28/2006 $12,565 $12,712
3/31/2006 $12,833 $12,870
4/30/2006 $12,785 $13,043
5/31/2006 $12,900 $12,668
6/30/2006 $12,920 $12,685
7/31/2006 $12,979 $12,763
8/31/2006 $13,303 $13,067
9/30/2006 $13,440 $13,404
10/31/2006 $13,882 $13,840
11/30/2006 $14,029 $14,104
12/31/2006 $14,335 $14,301
1/31/2007 $14,781 $14,518
2/28/2007 $14,832 $14,234
3/31/2007 $15,237 $14,393
4/30/2007 $15,572 $15,030
5/31/2007 $16,089 $15,555
6/30/2007 $15,951 $15,296
7/31/2007 $15,452 $14,822
8/31/2007 $15,254 $15,044
9/30/2007 $15,347 $15,607
10/31/2007 $15,545 $15,855
11/30/2007 $14,889 $15,192
12/31/2007 $14,476 $15,087
1/31/2008 $13,667 $14,182
2/29/2008 $13,383 $13,721
3/31/2008 $13,098 $13,662
4/30/2008 $13,623 $14,328
5/31/2008 $13,896 $14,513
6/30/2008 $12,563 $13,290
7/31/2008 $12,442 $13,178
8/31/2008 $12,563 $13,369
9/30/2008 $11,130 $12,177
10/31/2008 $ 8,998 $10,132
11/30/2008 $ 8,277 $ 9,405
12/31/2008 $ 8,445 $ 9,505
1/31/2009 $ 7,963 $ 8,704
2/28/2009 $ 7,458 $ 7,777
3/31/2009 $ 7,918 $ 8,458
4/30/2009 $ 8,535 $ 9,268
5/31/2009 $ 8,972 $ 9,786
6/30/2009 $ 9,073 $ 9,806
7/31/2009 $ 9,500 $10,548
8/31/2009 $ 9,780 $10,928
9/30/2009 $10,173 $11,336
10/31/2009 $10,027 $11,126
11/30/2009 $10,318 $11,793
12/31/2009 $10,768 $12,021
1/31/2010 $10,598 $11,588
2/28/2010 $10,677 $11,947
3/31/2010 $11,075 $12,668

AVERAGE ANNUAL TOTAL RETURN

CLASS B 3/31/10
- ------- -------

1-Year +34.80%
5-Year -1.60%
Since Inception (11/3/03) +1.88%

CLASS B (11/3/03-3/31/10)

(PERFORMANCE GRAPH)

FRANKLIN MUTUAL RECOVERY
DATE FUND - CLASS B S&P 500(5)
- ------------- ------------------------ ----------

11/3/2003 $10,000 $10,000
11/30/2003 $10,243 $10,088
12/31/2003 $10,620 $10,617
1/31/2004 $10,764 $10,812
2/29/2004 $10,891 $10,962
3/31/2004 $10,792 $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 $11,945 $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 $11,935 $11,301
5/31/2005 $12,231 $11,661
6/30/2005 $12,389 $11,677
7/31/2005 $12,606 $12,111
8/31/2005 $12,645 $12,001
9/30/2005 $12,626 $12,098
10/31/2005 $12,163 $11,896
11/30/2005 $12,399 $12,346
12/31/2005 $12,663 $12,351
1/31/2006 $13,098 $12,678
2/28/2006 $13,148 $12,712
3/31/2006 $13,431 $12,870
4/30/2006 $13,370 $13,043
5/31/2006 $13,481 $12,668
6/30/2006 $13,493 $12,685
7/31/2006 $13,555 $12,763
8/31/2006 $13,877 $13,067
9/30/2006 $14,011 $13,404
10/31/2006 $14,468 $13,840
11/30/2006 $14,613 $14,104
12/31/2006 $14,926 $14,301
1/31/2007 $15,376 $14,518
2/28/2007 $15,430 $14,234
3/31/2007 $15,848 $14,393
4/30/2007 $16,180 $15,030
5/31/2007 $16,706 $15,555
6/30/2007 $16,556 $15,296
7/31/2007 $16,028 $14,822
8/31/2007 $15,808 $15,044
9/30/2007 $15,907 $15,607
10/31/2007 $16,094 $15,855
11/30/2007 $15,401 $15,192
12/31/2007 $14,984 $15,087
1/31/2008 $14,133 $14,182
2/29/2008 $13,822 $13,721
3/31/2008 $13,523 $13,662
4/30/2008 $14,064 $14,328
5/31/2008 $14,340 $14,513
6/30/2008 $12,960 $13,290
7/31/2008 $12,811 $13,178
8/31/2008 $12,937 $13,369
9/30/2008 $11,465 $12,177
10/31/2008 $ 9,257 $10,132
11/30/2008 $ 8,510 $ 9,405
12/31/2008 $ 8,679 $ 9,505
1/31/2009 $ 8,176 $ 8,704
2/28/2009 $ 7,663 $ 7,777
3/31/2009 $ 8,118 $ 8,458
4/30/2009 $ 8,749 $ 9,268
5/31/2009 $ 9,193 $ 9,786
6/30/2009 $ 9,286 $ 9,806
7/31/2009 $ 9,718 $10,548
8/31/2009 $10,010 $10,928
9/30/2009 $10,396 $11,336
10/31/2009 $10,232 $11,126
11/30/2009 $10,536 $11,793
12/31/2009 $10,998 $12,021
1/31/2010 $10,798 $11,588
2/28/2010 $10,880 $11,947
3/31/2010 $11,264 $12,668

Annual Report | 13

Performance Summary (CONTINUED)

AVERAGE ANNUAL TOTAL RETURN

CLASS C 3/31/10
- ------- -------

1-Year +37.78%
5-Year -1.24%
Since Inception (11/3/03) +1.90%

CLASS C (11/3/03-3/31/10)

(PERFORMANCE GRAPH)

FRANKLIN MUTUAL RECOVERY
DATE FUND - CLASS C S&P 500(5)
- ------------- ------------------------ ----------

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 $10,898 $10,962
3/31/2004 $10,799 $10,797
4/30/2004 $10,690 $10,627
5/31/2004 $10,654 $10,773
6/30/2004 $10,853 $10,983
7/31/2004 $10,690 $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 $11,568 $11,385
12/31/2004 $11,943 $11,772
1/31/2005 $11,752 $11,485
2/28/2005 $11,914 $11,727
3/31/2005 $12,010 $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 $12,602 $12,111
8/31/2005 $12,641 $12,001
9/30/2005 $12,621 $12,098
10/31/2005 $12,159 $11,896
11/30/2005 $12,395 $12,346
12/31/2005 $12,658 $12,351
1/31/2006 $13,102 $12,678
2/28/2006 $13,142 $12,712
3/31/2006 $13,425 $12,870
4/30/2006 $13,364 $13,043
5/31/2006 $13,475 $12,668
6/30/2006 $13,487 $12,685
7/31/2006 $13,549 $12,763
8/31/2006 $13,881 $13,067
9/30/2006 $14,016 $13,404
10/31/2006 $14,461 $13,840
11/30/2006 $14,617 $14,104
12/31/2006 $14,919 $14,301
1/31/2007 $15,369 $14,518
2/28/2007 $15,433 $14,234
3/31/2007 $15,841 $14,393
4/30/2007 $16,184 $15,030
5/31/2007 $16,698 $15,555
6/30/2007 $16,553 $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 $16,091 $15,855
11/30/2007 $15,398 $15,192
12/31/2007 $14,979 $15,087
1/31/2008 $14,128 $14,182
2/29/2008 $13,817 $13,721
3/31/2008 $13,518 $13,662
4/30/2008 $14,059 $14,328
5/31/2008 $14,335 $14,513
6/30/2008 $12,954 $13,290
7/31/2008 $12,816 $13,178
8/31/2008 $12,943 $13,369
9/30/2008 $11,459 $12,177
10/31/2008 $ 9,261 $10,132
11/30/2008 $ 8,514 $ 9,405
12/31/2008 $ 8,680 $ 9,505
1/31/2009 $ 8,177 $ 8,704
2/28/2009 $ 7,663 $ 7,777
3/31/2009 $ 8,131 $ 8,458
4/30/2009 $ 8,750 $ 9,268
5/31/2009 $ 9,194 $ 9,786
6/30/2009 $ 9,287 $ 9,806
7/31/2009 $ 9,719 $10,548
8/31/2009 $10,011 $10,928
9/30/2009 $10,397 $11,336
10/31/2009 $10,245 $11,126
11/30/2009 $10,537 $11,793
12/31/2009 $11,002 $12,021
1/31/2010 $10,802 $11,588
2/28/2010 $10,884 $11,947
3/31/2010 $11,283 $12,668

AVERAGE ANNUAL TOTAL RETURN

ADVISOR CLASS 3/31/10
- ------------- -------

1-Year +40.21%
5-Year -0.26%
Since Inception (6/2/03) +4.29%

ADVISOR CLASS (6/2/03-3/31/10)

(PERFORMANCE GRAPH)

FRANKLIN MUTUAL RECOVERY
DATE FUND - ADVISOR CLASS S&P 500(5)
- ------------- ------------------------ ----------

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 $13,962 $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
4/30/2008 $16,303 $15,737
5/31/2008 $16,640 $15,941
6/30/2008 $15,048 $14,597
7/31/2008 $14,893 $14,474
8/31/2008 $15,061 $14,683
9/30/2008 $13,340 $13,375
10/31/2008 $10,791 $11,129
11/30/2008 $9,924 $10,330
12/31/2008 $10,132 $10,440
1/31/2009 $ 9,558 $ 9,560
2/28/2009 $ 8,957 $ 8,542
3/31/2009 $ 9,504 $ 9,290
4/30/2009 $10,252 $10,180
5/31/2009 $10,772 $10,749
6/30/2009 $10,893 $10,770
7/31/2009 $11,413 $11,585
8/31/2009 $11,760 $12,003
9/30/2009 $12,214 $12,451
10/31/2009 $12,041 $12,220
11/30/2009 $12,414 $12,953
12/31/2009 $12,961 $13,203
1/31/2010 $12,744 $12,728
2/28/2010 $12,852 $13,122
3/31/2010 $13,326 $13,914

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. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.

(5.) Source: (C) 2010 Morningstar. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance.

Annual Report | 15

YOUR FUND'S EXPENSES

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

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

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

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

ACTUAL FUND EXPENSES

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

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

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

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

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

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

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

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS

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

16 | Annual Report

Your Fund's Expenses (CONTINUED)

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

BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10
----------------- -------------- -----------------------

CLASS A
Actual $1,000 $1,088.70 $14.79
Hypothetical (5% return before expenses) $1,000 $1,010.77 $14.24
CLASS B
Actual $1,000 $1,083.90 $18.39
Hypothetical (5% return before expenses) $1,000 $1,007.28 $17.72
CLASS C
Actual $1,000 $1,085.30 $18.46
Hypothetical (5% return before expenses) $1,000 $1,007.23 $17.77
ADVISOR CLASS
Actual $1,000 $1,091.10 $13.29
Hypothetical (5% return before expenses) $1,000 $1,012.22 $12.79

* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 2.84%; B: 3.54%; C: 3.55%; and Advisor:
2.55%), multiplied by the average account value over the period, multiplied
by 182/365 to reflect the one-half year period. Including a one-time
voluntary waiver related to management fees, the most recent six-month
expense ratio, annualized for each class, would have been 2.38%, 3.07%,
3.08% and 2.08% for classes A, B, C and Advisor, respectively.

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 - 4/1/09 THROUGH 3/31/10

REPURCHASE REPURCHASE % OF SHARES NUMBER OF
REQUEST DEADLINE OFFER AMOUNT TENDERED SHARES TENDERED
- ---------------- ------------ ----------- ---------------

4/24/09 15% 13.651% 3,373,259.347
7/6/09 25% 5.905% 1,286,209.677
10/2/09 15% 9.402% 1,960,338.915
12/31/09 15% 11.598% 2,242,516.944

18 | Annual Report

Franklin Mutual Recovery Fund

FINANCIAL HIGHLIGHTS

YEAR ENDED MARCH 31,
----------------------------------------------------
CLASS A 2010 2009 2008 2007 2006
- ------- ------- ------- -------- -------- --------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 7.02 $ 11.98 $ 15.04 $ 13.43 $ 12.64
------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ................................ --(c) 0.08 0.09 0.16 (0.02)
Net realized and unrealized gains (losses) ..................... 2.84 (4.84) (2.07) 2.27 1.52
------- ------- -------- -------- --------
Total from investment operations .................................. 2.84 (4.76) (1.98) 2.43 1.50
------- ------- -------- -------- --------
Less distributions from:
Net investment income .......................................... (0.11) (0.19) (0.29) -- (0.01)
Net realized gains ............................................. -- (0.01) (0.79) (0.82) (0.70)
------- ------- -------- -------- --------
Total distributions ............................................... (0.11) (0.20) (1.08) (0.82) (0.71)
------- ------- -------- -------- --------
Net asset value, end of year ...................................... $ 9.75 $ 7.02 $ 11.98 $ 15.04 $ 13.43
======= ======= ======== ======== ========
Total return(d) ................................................... 39.86% (39.55)% (14.04)% 18.73% 12.51%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver, payments by affiliates, unaffiliated fee
reimbursement and expense reduction(e) ......................... 3.60% 1.47% 2.49% 3.36% 3.53%
Expenses net of waiver, payments by affiliates and unaffiliated fee
reimbursement(e) ............................................... 3.09%(f) 1.47% 2.49% 3.36% 3.53%
Expenses net of waiver, payments by affiliates, unaffiliated fee
reimbursement and expense reduction(e) ......................... 3.09%(f) 1.47% 2.48% 3.36% 3.52%
Ratios to average net assets, excluding dividend expense on
securities sold short and stock loan fees:
Expenses before waiver, payments by affiliates and expense
reduction ................................................... 2.34% 1.39% 2.46% 3.16% 3.34%
Expenses net of waiver and payments by affiliates .............. 2.08% 1.39% 2.46% 3.16% 3.34%
Expenses net of waiver, payments by affiliates and expense
reduction ................................................... 2.08% 1.39% 2.45% 3.16% 3.33%
Net investment income (loss) ...................................... --%(g) 0.90% 0.60% 1.11% (0.19)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $88,575 $97,975 $238,020 $209,897 $104,694
Portfolio turnover rate ........................................... 117.59% 62.22% 89.18% 85.63% 69.20%

(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
ad/or fluctuating market value of the investments of the Fund.

(b) Based on average daily shares outstanding.

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

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

(f) Includes a one-time unaffiliated fee reimbursement associated with the
stock loan fees. See Note 6.

(g) Rounds to less than 0.01%.

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

Annual Report | 19

Franklin Mutual Recovery Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED MARCH 31,
-----------------------------------------------
CLASS B 2010 2009 2008 2007 2006
- ------- ------- ------- ------- ------ ------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 6.91 $ 11.76 $ 14.78 $13.29 $12.58
------- ------- ------- ------ ------
Income from investment operations(a):
Net investment income (loss)(b) ................................ (0.06) 0.02 (0.01) 0.01 (0.11)
Net realized and unrealized gains (losses) ..................... 2.79 (4.75) (2.02) 2.30 1.52
------- ------- ------- ------ ------
Total from investment operations .................................. 2.73 (4.73) (2.03) 2.31 1.41
------- ------- ------- ------ ------
Less distributions from:
Net investment income .......................................... (0.04) (0.11) (0.20) -- --
Net realized gains ............................................. -- (0.01) (0.79) (0.82) (0.70)
------- ------- ------- ------ ------
Total distributions ............................................... (0.04) (0.12) (0.99) (0.82) (0.70)
------- ------- ------- ------ ------
Net asset value, end of year ...................................... $ 9.60 $ 6.91 $ 11.76 $14.78 $13.29
======= ======= ======= ====== ======
Total return(c) ................................................... 38.80% (39.97)% (14.67)% 18.00% 11.79%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver, payments by affiliates, unaffiliated fee
reimbursement and expense reduction(d) ......................... 4.30% 2.12% 3.14% 4.01% 4.18%
Expenses net of waiver, payments by affiliates and unaffiliated fee
reimbursement(d) ............................................... 3.79%(e) 2.12% 3.14% 4.01% 4.18%
Expenses net of waiver, payments by affiliates, unaffiliated fee
reimbursement and expense reduction(d) ......................... 3.79%(e) 2.12% 3.13% 4.01% 4.17%
Ratios to average net assets, excluding dividend expense on
securities sold short and stock loan fees:
Expenses before waiver, payments by affiliates and expense
reduction ................................................... 3.04% 2.04% 3.11% 3.81% 3.99%
Expenses net of waiver and payments by affiliates .............. 2.78% 2.04% 3.11% 3.81% 3.99%
Expenses net of waiver, payments by affiliates and expense
reduction ................................................... 2.78% 2.04% 3.10% 3.81% 3.98%
Net investment income (loss) ...................................... (0.70)% 0.25% (0.05)% 0.46% (0.84)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $ 1,503 $ 1,704 $ 4,333 $5,024 $4,243
Portfolio turnover rate ........................................... 117.59% 62.22% 89.18% 85.63% 69.20%

(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.

(d) Includes dividend expense on securities sold short and stock loan fees
which vary from period to period. See below for expense ratios that reflect
only operating expenses.

(e) Includes a one-time unaffiliated fee reimbursement associated with the
stock loan fees. See Note 6.

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

20 | Annual Report

Franklin Mutual Recovery Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED MARCH 31,
-------------------------------------------------
CLASS C 2010 2009 2008 2007 2006
- ------- ------- ------- ------- ------- -------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 6.91 $ 11.75 $ 14.78 $ 13.29 $ 12.58
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ................................ (0.07) 0.02 (0.01) 0.04 (0.11)
Net realized and unrealized gains (losses) ..................... 2.81 (4.74) (2.02) 2.27 1.52
------- ------- ------- ------- -------
Total from investment operations .................................. 2.74 (4.72) (2.03) 2.31 1.41
------- ------- ------- ------- -------
Less distributions from:
Net investment income .......................................... (0.05) (0.11) (0.21) -- --
Net realized gains ............................................. -- (0.01) (0.79) (0.82) (0.70)
------- ------- ------- ------- -------
Total distributions ............................................... (0.05) (0.12) (1.00) (0.82) (0.70)
------- ------- ------- ------- -------
Net asset value, end of year ...................................... $ 9.60 $ 6.91 $ 11.75 $ 14.78 $ 13.29
======= ======= ======= ======= =======
Total return(c) ................................................... 38.78% (39.85)% (14.66)% 17.99% 11.79%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver, payments by affiliates, unaffiliated fee
reimbursement and expense reduction(d) ......................... 4.31% 2.09% 3.14% 3.99% 4.18%
Expenses net of waiver, payments by affiliates and unaffiliated fee
reimbursement(d) ............................................... 3.80%(e) 2.09% 3.14% 3.99% 4.18%
Expenses net of waiver, payments by affiliates, unaffiliated fee
reimbursement and expense reduction(d) ......................... 3.80%(e) 2.09% 3.13% 3.99% 4.17%
Ratios to average net assets, excluding dividend expense on
securities sold short and stock loan fees:
Expenses before waiver, payments by affiliates and expense
reduction ................................................... 3.05% 2.01% 3.11% 3.79% 3.99%
Expenses net of waiver and payments by affiliates .............. 2.79% 2.01% 3.11% 3.79% 3.99%
Expenses net of waiver, payments by affiliates and expense
reduction ................................................... 2.79% 2.01% 3.10% 3.79% 3.98%
Net investment income (loss) ...................................... (0.71)% 0.28% (0.05)% 0.48% (0.84)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $38,893 $38,432 $96,131 $87,018 $55,030
Portfolio turnover rate ........................................... 117.59% 62.22% 89.18% 85.63% 69.20%

(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.

(d) Includes dividend expense on securities sold short and stock loan fees
which vary from period to period. See below for expense ratios that reflect
only operating expenses.

(e) Includes a one-time unaffiliated fee reimbursement associated with the
stock loan fees. See Note 6.

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

Annual Report | 21

Franklin Mutual Recovery Fund

FINANCIAL HIGHLIGHTS (CONTINUED)

YEAR ENDED MARCH 31,
---------------------------------------------------
ADVISOR CLASS 2010 2009 2008 2007 2006
- ------------- ------- ------- -------- -------- -------

PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 7.08 $ 12.10 $ 15.18 $ 13.50 $ 12.67
------- ------- -------- -------- -------
Income from investment operations(a):
Net investment income(b) ....................................... 0.02 0.15 0.14 0.21 0.02
Net realized and unrealized gains (losses) ..................... 2.87 (4.93) (2.09) 2.29 1.53
------- ------- -------- -------- -------
Total from investment operations .................................. 2.89 (4.78) (1.95) 2.50 1.55
------- ------- -------- -------- -------
Less distributions from:
Net investment income .......................................... (0.14) (0.23) (0.34) -- (0.02)
Net realized gains ............................................. -- (0.01) (0.79) (0.82) (0.70)
------- ------- -------- -------- -------
Total distributions ............................................... (0.14) (0.24) (1.13) (0.82) (0.72)
------- ------- -------- -------- -------
Net asset value, end of year ...................................... $ 9.83 $ 7.08 $ 12.10 $ 15.18 $ 13.50
======= ======= ======== ======== =======
Total return ...................................................... 40.21% (39.29)% (13.83)% 19.24% 12.88%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver, payments by affiliates, unaffiliated fee
reimbursement and expense reduction(c) ......................... 3.31% 1.13% 2.14% 3.01% 3.18%
Expenses net of waiver, payments by affiliates and unaffiliated fee
reimbursement(c) ............................................... 2.80%(d) 1.13% 2.14% 3.01% 3.18%
Expenses net of waiver, payments by affiliates, unaffiliated fee
reimbursement and expense reduction(c) ........................ 2.80%(d) 1.13% 2.13% 3.01% 3.17%
Ratios to average net assets, excluding dividend expense on
securities sold short and stock loan fees:
Expenses before waiver, payments by affiliates and expense
reduction ................................................... 2.05% 1.05% 2.11% 2.81% 2.99%
Expenses net of waiver and payments by affiliates .............. 1.79% 1.05% 2.11% 2.81% 2.99%
Expenses net of waiver, payments by affiliates and expense
reduction ................................................... 1.79% 1.05% 2.10% 2.81% 2.98%
Net investment income ............................................. 0.29% 1.24% 0.95% 1.46% 0.16%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $39,349 $33,920 $155,570 $152,068 $80,420
Portfolio turnover rate ........................................... 117.59% 62.22% 89.18% 85.63% 69.20%

(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) Includes dividend expense on securities sold short and stock loan fees
which vary from period to period. See below for expense ratios that reflect
only operating expenses.

(d) Includes a one-time unaffiliated fee reimbursement associated with the
stock loan fees. See Note 6.

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

22 | Annual Report

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2010

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

COMMON STOCKS AND OTHER EQUITY INTERESTS 73.3%
AEROSPACE & DEFENSE 1.3%
(a) GenCorp Inc. ................................................... United States 368,880 $ 2,124,749
------------
AIR FREIGHT & LOGISTICS 2.3%
TNT NV ......................................................... Netherlands 137,020 3,930,116
------------
AIRLINES 0.0%
(a, b, c) Northwest Airlines Corp., Contingent Distribution .............. United States 7,455,000 --
------------
AUTO COMPONENTS 0.5%
(a, b, c) Collins & Aikman Products Co., Contingent Distribution ......... United States 53,682 537
(a, b, c) Dana Holding Corp., Contingent Distribution .................... United States 661,000 --
( a, d) IACNA Investor LLC ............................................. United States 10,457 105
(a, d, e) International Automotive Components Group Brazil LLC ........... Brazil 185,241 283,138
(a, d, e) International Automotive Components Group Japan LLC ............ Japan 16,213 110,433
(a, d, e) International Automotive Components Group LLC .................. Luxembourg 660,308 349,019
(a, d, e) International Automotive Components Group NA LLC, A ............ United States 299,438 179,190
------------
922,422
------------
BEVERAGES 5.3%
Carlsberg AS, B ................................................ Denmark 21,639 1,816,651
(f) Coca-Cola Enterprises Inc. ..................................... United States 255,000 7,053,300
------------
8,869,951
------------
CAPITAL MARKETS 0.8%
ISIS Asset Management PLC ...................................... United Kingdom 1,479,454 1,394,924
------------
CHEMICALS 1.0%
Airgas Inc. .................................................... United States 25,320 1,610,858
------------
COMMERCIAL BANKS 1.2%
(a, d) Elephant Capital Holdings Ltd. ................................. Japan 721 --
(a, d) First Chicago Bancorp .......................................... United States 1,055,414 1,108,185
(a, d) First Southern Bancorp Inc. .................................... United States 39,780 839,358
(a, d) NCB Warrant Holdings Ltd., A ................................... Japan 31,928 --
------------
1,947,543
------------
COMMUNICATIONS EQUIPMENT 1.2%
(a) Sycamore Networks Inc. ......................................... United States 21,656 435,502
Tandberg ASA ................................................... Norway 53,257 1,519,068
------------
1,954,570
------------
CONSUMER FINANCE 3.9%
(a, d) Cerberus CG Investor I LLC ..................................... United States 1,874,481 581,089
(a, d) Cerberus CG Investor II LLC .................................... United States 1,874,481 581,089
(a, d) Cerberus CG Investor III LLC ................................... United States 937,240 290,544
(a, d) GMAC Inc. ...................................................... United States 358 5,105,167
------------
6,557,889
------------

Annual Report | 23

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2010 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES 4.7%
(a, d) AboveNet Inc. .................................................. United States 55,817 $ 2,831,597
(a, d) AboveNet Inc., stock grant, grant price $10.475,
expiration date 9/09/13 ..................................... United States 55 8,856
(a, d) AboveNet Inc., stock grant, grant price $30, expiration
date 9/07/18 ................................................ United States 11 912
Cable & Wireless Communication PLC ............................. United Kingdom 2,253,057 1,895,132
(a) Cable & Wireless Worldwide PLC ................................. United Kingdom 2,253,057 3,147,151
------------
7,883,648
------------
ELECTRIC UTILITIES 2.0%
(a, b, c) Calpine Corp., Contingent Distribution ......................... United States 424,000 --
FirstEnergy Corp. .............................................. United States 47,624 1,861,622
(a) Prime Infrastructure Group ..................................... Australia 453,470 1,519,028
------------
3,380,650
------------
ENERGY EQUIPMENT & SERVICES 4.4%
Smith International Inc. ....................................... United States 172,600 7,390,732
------------
FOOD & STAPLES RETAILING 3.6%
(a) AWB Ltd. ....................................................... Australia 1,141,333 1,000,323
(f) CVS Caremark Corp. ............................................. United States 137,665 5,033,032
------------
6,033,355
------------
FOOD PRODUCTS 2.1%
Kraft Foods Inc., A ............................................ United States 119,176 3,603,882
------------
HEALTH CARE EQUIPMENT & SUPPLIES 2.5%
Alcon Inc. ..................................................... Switzerland 25,734 4,157,585
------------
HEALTH CARE PROVIDERS & SERVICES 2.7%
(a, f) Community Health Systems Inc. .................................. United States 123,404 4,557,310
------------
HOTELS, RESTAURANTS & LEISURE 0.0%
(a, d) GLCP Harrah's Investment LP .................................... United States 4,502,725 --
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.4%
(a) Mirant Corp. ................................................... United States 27,980 303,863
(a) NRG Energy Inc. ................................................ United States 33,000 689,700
(a, f) RRI Energy Inc. ................................................ United States 831,580 3,068,530
------------
4,062,093
------------
INSURANCE 4.3%
(a, d) Imagine Group Holdings Ltd. .................................... Bermuda 152,041 1,775,155
(a, d) Symetra Financial Corp. ........................................ United States 445,440 5,479,504
------------
7,254,659
------------
IT SERVICES 0.7%
(a, g) Alliance Data Systems Corp. .................................... United States 5,000 319,950
DST Systems Inc. ............................................... United States 19,360 802,472
------------
1,122,422
------------

24 | Annual Report

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2010 (CONTINUED)

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

COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MACHINERY 0.0%
(a, d, e) MCII Holdings Inc. ............................................. United States 574 $ --
------------
MEDIA 5.2%
Sinomedia Holding Ltd. ......................................... China 6,872,000 1,902,927
(f) Time Warner Cable Inc. ......................................... United States 42,574 2,269,620
(f) Virgin Media Inc. .............................................. United Kingdom 265,983 4,590,866
------------
8,763,413
------------
METALS & MINING 1.2%
BHP Billiton PLC, ADR .......................................... United Kingdom 29,950 2,049,478
------------
MULTI-UTILITIES 1.0%
Enia SpA . ..................................................... Italy 218,449 1,756,056
------------
OFFICE ELECTRONICS 2.9%
Xerox Corp. .................................................... United States 510,216 4,974,606
------------
OIL & GAS & CONSUMABLE FUELS 4.5%
(f) XTO Energy Inc. ................................................ United States 160,200 7,558,236
------------
PAPER & FOREST PRODUCTS 3.0%
Weyerhaeuser Co. ............................................... United States 111,870 5,064,355
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.6%
(a) LSI Corp. . .................................................... United States 408,125 2,497,725
Maxim Integrated Products Inc. ................................. United States 140,030 2,715,182
(a) Silicon Storage Technology Inc. ................................ United States 282,730 859,499
------------
6,072,406
------------
SOFTWARE 1.0%
(a) RCG Holdings Ltd. .............................................. Hong Kong 1,552,000 1,755,039
------------
TOBACCO 2.0%
(f) Lorillard Inc. ................................................. United States 44,246 3,329,069
------------
TRANSPORTATION INFRASTRUCTURE 2.0%
Groupe Eurotunnel SA ........................................... France 328,621 3,349,855
------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $ 138,747,932) 123,431,871
------------
PREFERRED STOCKS 1.5%
AUTOMOBILES 0.6%
Volkswagen AG, pfd. ............................................ Germany 12,131 1,112,853
------------
COMMERCIAL BANKS 0.1%
(a, d) First Southern Bancorp Inc., cvt. pfd., C ...................... United States 68 68,000
------------
MACHINERY 0.8%
(d, e, h) MCII Holdings Inc., PIK, pfd., A ............................... United States 4,475 1,252,771
------------
TOTAL PREFERRED STOCKS (COST $5,479,949) 2,433,624
------------

Annual Report | 25

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2010 (CONTINUED)

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

OPTIONS PURCHASED (COST $28,094) 0.0%i
CALL OPTIONS 0.0%i
(a) NRG Energy Inc., Sep. $22.50 Calls, 9/17/10 .................... United States 265 $ 29,150
------------

PRINCIPAL
AMOUNT(j)
----------
CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE INTERESTS
21.3%
(k, l) Avaya Inc., Incremental Term B-2 Loan, FRN, 10.50%, 10/26/14 ... United States 2,000,000 2,043,334
(k) Boston Generating LLC, FRN,
Revolver, 0.165%, 12/21/13 .................................. United States 216,011 182,597
Synthetic Letter of Credit, 0.165%, 12/21/13 ................ United States 771,367 652,047
Term Loan B, 2.54%, 12/21/13 ................................ United States 3,373,471 2,851,639
(d, m) Cerberus CG Investor I LLC, 12.00%, 7/31/14 .................... United States 1,645,200 510,012
(d, m) Cerberus CG Investor II LLC, 12.00%, 7/31/14 ................... United States 1,645,200 510,012
(d, m) Cerberus CG Investor III LLC, 12.00%, 7/31/14 .................. United States 822,600 255,006
(k) Charter Communications Operating LLC, Incremental Term Loan,
FRN, 7.25%, 3/06/14 ......................................... United States 535,586 546,007
CIT Group Inc.,
(k) New Term Loan Tranche 1B, FRN, 13.00%, 1/20/12 ............. United States 512,100 530,877
senior secured sub. bond, 7.00%, 5/01/13 ................... United States 173,991 170,511
senior secured sub. bond, 7.00%, 5/01/14 ................... United States 260,987 247,285
senior secured sub. bond, 7.00%, 5/01/15 ................... United States 260,987 244,023
senior secured sub. bond, 7.00%, 5/01/16 ................... United States 3,188,981 2,949,807
senior secured sub. bond, 7.00%, 5/01/17 ................... United States 1,011,972 936,074
(k) Term Loan Tranche 2A, FRN, 9.50%, 1/20/12 .................. United States 743,400 762,604
Exterran Holding Inc., senior note, cvt., 4.25%, 6/15/14 ....... United States 920,000 1,142,456
(k) First Data Corp., Term Loan, FRN,
B-1, 2.997%, 9/24/14 ....................................... United States 2,006,870 1,782,580
B-2, 3.032%, 9/24/14 ....................................... United States 623,114 552,695
B-3, 3.032%, 9/24/14 ....................................... United States 175,500 155,318
(n) GenCorp Inc., cvt., sub. note, 144A, 3.75%, 12/31/39 ........... United States 1,800,000 1,686,076
Hutchinson Technology Inc., cvt., sub. note, 3.25%,
1/15/26 ..................................................... United States 2,000,000 1,710,000
(n) Indianapolis Downs LLC, senior secured note, 144A, 11.00%,
11/01/12 .................................................... United States 1,000,000 670,000
(c, e, k) International Automotive Components Group NA Inc.,
Revolver, FRN, 5.50%, 1/18/13 ............................... United States 59,381 59,381
(d, e, m) International Automotive Components Group NA LLC, 9.00%,
4/01/17 ..................................................... United States 90,167 92,873
Mirant North America LLC, senior note, 7.375%, 12/31/13 ........ United States 1,231,000 1,234,078
National Semiconductor Corp., senior note, 6.60%, 6/15/17 ...... United States 1,500,000 1,630,197
Powerwave Technologies Inc., sub. note, cvt., 3.875%,
10/01/27 .................................................... United States 3,900,000 2,759,250
Realogy Corp.,
(k) Delayed Draw Term Loan B, FRN, 3.251%, 10/10/13 ............ United States 1,188,224 1,052,707
(k) Initial Term Loan B, 3.251%, FRN, 10/10/13 ................. United States 2,510,412 2,224,100
Second Lien Tranche A Term Loan, 13.50%, 10/15/17 .......... United States 222,000 244,755
(k) Synthetic Letter of Credit, FRN, 0.083%, 10/10/13 .......... United States 675,858 598,776
(k) Spectrum Brands Inc., FRN,
Dollar Term B Loan, 8.00%, 6/30/12 ......................... United States 193,679 193,850
Euro Term Loan, 8.50%, 6/30/12 ............................. United States 609,198 EUR 821,468
Letter of Credit Commitment, 1.50%, 6/30/12 ................ United States 9,966 9,975

26 | Annual Report

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2010 (CONTINUED)

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

CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE INTERESTS
(CONTINUED)
(k) Texas Competitive Electric Holdings Co. LLC, FRN,
Delayed Draw Term Loan, 3.729%, 10/10/14 ................... United States 1,619,661 $ 1,304,389
Initial Tranche B-1 Term Loan, 3.729%, 10/10/14 ............ United States 2,238,659 1,843,397
Tranche B-2 Term Loan, 3.729%, 10/10/14 .................... United States 353,364 291,059
Tranche B-3 Term Loan, 3.729%, 10/10/14 .................... United States 530,841 432,375
------------
TOTAL CORPORATE BONDS, NOTES AND SENIOR FLOATING RATE
INTERESTS (COST $ 36,774,796) ............................... 35,883,590
------------
CORPORATE BONDS AND NOTES IN REORGANIZATION
(COST $8,508,441) 0.0% i
(e, m) Wimar OPCO LLC/Finance Corp., senior sub. note, 9.625%,
12/15/14 .................................................... United States 12,892,000 19,338
------------

SHARES
----------
COMPANIES IN LIQUIDATION 0.4%
(a) Adelphia Recovery Trust ........................................ United States 11,280,134 394,805
(a, b) Adelphia Recovery Trust, Arahova Contingent Value Vehicle,
Contingent Distribution ..................................... United States 1,018,915 249,634
(a, d, e) CB FIM Coinvestors LLC ......................................... United States 1,439,821 --
(a, b, c) Century Communications Corp., Contingent Distribution .......... United States 2,826,000 --
(a, d) FIM Coinvestor Holdings I, LLC ................................. United States 1,801,197 --
------------
TOTAL COMPANIES IN LIQUIDATION (COST $ 1,672,773) .............. 644,439
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $ 191,211,985) ........................................... 162,442,012
------------

PRINCIPAL
AMOUNT(j)
----------
SHORT TERM INVESTMENTS 3.0%
SENIOR FLOATING RATE INTERESTS (COST $52,675) 0.1%
(k, o) Lyondell Chemical Co., DIP Delayed Draw Term Loan, FRN,
13.00%, 6/03/10 ............................................. United States 52,941 55,026
------------
U.S. GOVERNMENT AND AGENCY SECURITIES (COST $4,900,000) 2.9%
(p) FHLB, 4/01/10 .................................................. United States 4,900,000 4,900,000
------------
TOTAL INVESTMENTS (COST $196,164,660) 99.5% .................... 167,397,038
OPTIONS WRITTEN (0.1)% ......................................... (89,235)
SECURITIES SOLD SHORT (11.8)% .................................. (19,871,615)
OTHER ASSETS, LESS LIABILITIES 12.4% ........................... 20,883,315
------------
NET ASSETS 100.0% .............................................. $168,319,503
------------

Annual Report | 27

Franklin Mutual Recovery Fund

STATEMENT OF INVESTMENTS, MARCH 31, 2010 (CONTINUED)

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

(q) OPTIONS WRITTEN (0.1)%
CALL OPTIONS (0.0)%i
ENERGY EQUIPMENT & SERVICES (0.0)% i
Exterran Holding Inc., May $25 Calls, 5/22/10 .................. United States 30 $ (2,850)
------------
IT SERVICES (0.0)% i
Alliance Data Systems Corp., Jun. $60 Calls, 6/19/10 ........... United States 50 (30,000)
------------
PUT OPTIONS (0.1)%
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.1)%
NRG Energy Inc., Jun. $22.50 Puts, 6/19/10 ..................... United States 265 (55,385)
------------
OFFICE ELECTRONICS (0.0)% i
Xerox Corp., Apr. $8 Puts, 4/17/10 ............................. United States 1,000 (1,000)
------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $ 185,658) ............ $ (89,235)
------------

SHARES
----------
(r) SECURITIES SOLD SHORT (11.8)%
BEVERAGES (0.6)%
Britvic ........................................................ United Kingdom 143,740 $ (1,012,417)
------------
ELECTRIC UTILITIES (1.0)%
Allegheny Energy Inc. .......................................... United States 71,400 (1,642,200)
------------
ENERGY EQUIPMENT & SERVICES (4.5)%
Schlumberger Ltd. .............................................. United States 120,234 (7,630,050)
------------
METALS & MINING (1.2)%
BHP Billiton Ltd., ADR ......................................... Australia 24,510 (1,968,643)
------------
OIL & GAS & CONSUMABLE FUELS (4.5)%
Exxon Mobil Corp. .............................................. United States 113,740 (7,618,305)
------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $ 18,996,668) ............ $(19,871,615)
------------

(a) Non-income producing.

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

(c) Security has been deemed illiquid because it may not be able to be sold
within seven days. At March 31, 2010, the aggregate value of these
securities was $59,918, representing 0.04% of net assets.

(d) See Note 10 regarding restricted securities.

(e) See Note 14 regarding other considerations.

(f) Security or a portion of the security has been segregated as collateral for
securities sold short and open written options contracts. At March 31,
2010, the aggregate value of these securities and cash pledged amounted to
$39,767,472.

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

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

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

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

28 | Annual Report

FRANKLIN MUTUAL RECOVERY FUND

STATEMENT OF INVESTMENTS, MARCH 31, 2010 (CONTINUED)

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

(l) Security purchased on a delayed delivery basis. See Note 1(c).

(m) See Note 9 regarding credit risk and defaulted securities.

(n) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under the
Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Trustees. At March 31, 2010, the
aggregate value of these securities was $2,356,076, representing 1.40% of
net assets.

(o) See Note 11 regarding unfunded loan commitments.

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

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

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

At March 31, 2010, the Fund had the following forward exchange contracts
outstanding. See Note 1(d).

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

Euro ................................... DBFX Buy 15,000 $ 20,989 4/14/10 $ -- $ (723)
Japanese Yen ........................... SSBT Buy 415,400 4,668 4/20/10 -- (225)
Japanese Yen ........................... DBFX Sell 3,289,100 36,144 4/20/10 968 --
Japanese Yen ........................... BANT Sell 4,150,000 44,854 4/20/10 471 --
Danish Krone ........................... SSBT Buy 2,666,109 485,749 4/23/10 -- (1,992)
Danish Krone ........................... BANT Sell 574,400 103,907 4/23/10 -- (316)
Danish Krone ........................... DBFX Buy 698,600 127,037 4/23/10 -- (278)
Danish Krone ........................... SSBT Sell 11,774,112 2,362,071 4/23/10 225,694 --
British Pound .......................... SSBT Buy 2,486,562 3,995,491 5/12/10 -- (221,109)
British Pound .......................... DBFX Buy 2,434,000 3,839,148 5/12/10 -- (144,551)
British Pound .......................... BANT Buy 332,500 537,958 5/12/10 -- (33,253)
British Pound .......................... BBU Buy 240,000 387,000 5/12/10 -- (22,700)
British Pound .......................... SSBT Sell 190,970 288,864 5/12/10 -- (1,013)
British Pound .......................... SSBT Buy 2,150,729 3,238,121 5/12/10 26,496 --
British Pound .......................... BANT Buy 256,969 384,868 5/12/10 5,189 --
British Pound .......................... BBU Sell 9,790,134 15,792,466 5/12/10 931,904 --
Australian Dollar ...................... SSBT Sell 1,445,287 1,325,588 5/19/10 6,532 --
Euro ................................... SSBT Sell 788,515 1,061,901 7/16/10 -- (3,445)
Euro ................................... BANT Sell 6,375,165 8,714,851 7/16/10 101,501 --
Norwegian Krone ........................ DBFX Sell 7,930,000 1,327,774 8/16/10 2,513 --
---------- ---------
Unrealized appreciation (depreciation) ............................................................. 1,301,268 (429,605)
---------- ---------
Net unrealized appreciation (depreciation) ...................................................... $ 871,663
==========

See Abbreviations on page 50.

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

Annual Report | 29

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

March 31, 2010

Assets:
Investments in securities:
Cost ......................................................... $ 196,164,660
-------------
Value ........................................................ $ 167,397,038
Cash ............................................................ 127,920
Foreign currency, at value (cost $1,257,421) .................... 1,258,750
Receivables:
Investment securities sold ................................... 3,634,108
Capital shares sold .......................................... 12,690
Dividends and interest ....................................... 535,831
Due from brokers ............................................. 20,569,778
Unrealized appreciation on forward exchange contracts ........... 1,301,268
Unrealized appreciation on unfunded loan commitments (Note 11) .. 263,403
-------------
Total assets .............................................. 195,100,786
-------------
Liabilities:
Payables:
Investment securities purchased .............................. 5,115,119
Affiliates ................................................... 436,392
Options written, at value (premiums received $185,658) .......... 89,235
Securities sold short, at value (proceeds $18,996,668) .......... 19,871,615
Unrealized depreciation on forward exchange contracts ........... 429,605
Accrued expenses and other liabilities .......................... 839,317
-------------
Total liabilities ......................................... 26,781,283
-------------
Net assets, at value ................................... $ 168,319,503
-------------
Net assets consist of:
Paid-in capital ................................................. $ 320,337,554
Distributions in excess of net investment income ................ (485,208)
Net unrealized appreciation (depreciation) ...................... (28,413,811)
Accumulated net realized gain (loss) ............................ (123,119,032)
-------------
Net assets, at value ................................... $ 168,319,503
=============

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

30 | Annual Report

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)

March 31, 2010

CLASS A:
Net assets, at value ................................................... $88,575,181
-----------
Shares outstanding ..................................................... 9,081,347
-----------
Net asset value per share(a) ........................................... $ 9.75
-----------
Maximum offering price per share (net asset value per share / 94.25%) .. $ 10.34
-----------
CLASS B:
Net assets, at value ................................................... $ 1,502,887
-----------
Shares outstanding ..................................................... 156,503
-----------
Net asset value and maximum offering price per share(a) ................ $ 9.60
-----------
CLASS C:
Net assets, at value ................................................... $38,892,514
-----------
Shares outstanding ..................................................... 4,049,788
-----------
Net asset value and maximum offering price per share(a) ................ $ 9.60
-----------
ADVISOR CLASS:
Net assets, at value ................................................... $39,348,921
-----------
Shares outstanding ..................................................... 4,001,182
-----------
Net asset value and maximum offering price per share ................... $ 9.83
-----------

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

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

Annual Report | 31

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS
for the year ended March 31, 2010

Investment income:
Dividends ........................................................................ $ 2,110,557
Interest ......................................................................... 3,250,457
------------
Total investment income ....................................................... 5,361,014
------------
Expenses:
Management fees (Note 4a) ........................................................ 2,312,909
Administrative fees (Note 4b) .................................................... 347,153
Distribution fees: (Note 4c)
Class A ....................................................................... 272,306
Class B ....................................................................... 16,117
Class C ....................................................................... 389,249
Transfer agent fees (Note 4e) .................................................... 237,432
Custodian fees (Note 5) .......................................................... 19,005
Reports to shareholders .......................................................... 67,335
Registration and filing fees ..................................................... 83,650
Professional fees ................................................................ 197,331
Trustees' fees and expenses ...................................................... 147,068
Dividends on securities sold short ............................................... 297,924
Stock loan fees .................................................................. 1,888,663
Excise tax (Note 4f) ............................................................. 76,000
Other ............................................................................ 78,189
------------
Total expenses ................................................................ 6,430,331
Expense reductions (Note 5) ................................................... (4,818)
Expenses waived/paid by affiliates (Note 4f) .................................. (454,363)
Unaffiliated fee reimbursement (Note 6) ....................................... (429,586)
------------
Net expenses ............................................................... 5,541,564
------------
Net investment income (loss) ............................................ (180,550)
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................................... (32,826,989)
Written options ............................................................... 41,414
Foreign currency transactions ................................................. (74,830)
Securities sold short ......................................................... (3,590,633)
Swap contracts ................................................................ (536,487)
------------
Net realized gain (loss) ................................................... (36,987,525)
------------
Net change in unrealized appreciation (depreciation) on:
Investments ...................................................................... 95,369,557
Translation of other assets and liabilities denominated in foreign currencies .... 401,257
------------
Net change in unrealized appreciation (depreciation) .......................... 95,770,814
------------
Net realized and unrealized gain (loss) ............................................. 58,783,289
------------
Net increase (decrease) in net assets resulting from operations ..................... $ 58,602,739
============

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

32 | Annual Report

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS

YEAR ENDED MARCH 31,
----------------------------
2010 2009
------------ -------------

Increase (decrease) in net assets:
Operations:
Net investment income (loss) .................................................. $ (180,550) $ 2,626,144
Net realized gain (loss) from investments, written options, foreign
currency transactions, securities sold short and swap contracts ............ (36,987,525) (75,819,797)
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies .... 95,770,814 (68,373,644)
------------ -------------
Net increase (decrease) in net assets resulting from operations ......... 58,602,739 (141,567,297)
------------ -------------
Distributions to shareholders from:
Net investment income:
Class A .................................................................... (1,111,098) (2,726,336)
Class B .................................................................... (7,869) (31,022)
Class C .................................................................... (198,927) (640,105)
Advisor Class .............................................................. (595,163) (1,689,053)
Net realized gains:
Class A .................................................................... -- (126,601)
Class B .................................................................... -- (2,468)
Class C .................................................................... -- (52,179)
Advisor Class .............................................................. -- (62,855)
------------ -------------
Total distributions to shareholders .............................................. (1,913,057) (5,330,619)
------------ -------------
Capital share transactions: (Note 3)
Class A ....................................................................... (40,940,402) (63,776,607)
Class B ....................................................................... (742,588) (1,236,489)
Class C ....................................................................... (12,228,869) (27,110,428)
Advisor Class ................................................................. (6,490,269) (83,000,211)
------------ -------------
Total capital share transactions ................................................. (60,402,128) (175,123,735)
------------ -------------
Net increase (decrease) in net assets ......................................... (3,712,446) (322,021,651)
Net assets:
Beginning of year ................................................................ 172,031,949 494,053,600
------------ -------------
End of year ...................................................................... $168,319,503 $ 172,031,949
------------ -------------
Distributions in excess of net investment income included in net assets:
End of year ...................................................................... $ (485,208) $ (760,646)
============ =============

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

Annual Report | 33

Franklin Mutual Recovery Fund

FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF CASH FLOWS
for the year ended March 31, 2010

Cash flow from operating activities:
Dividends, interest and other income received .................................... $ 3,085,175
Operating expenses paid .......................................................... (4,796,044)
Purchases of long-term investments ............................................... (196,335,584)
Cash on deposit with brokers ..................................................... (2,186,491)
Realized loss on foreign currency transactions ................................... (74,830)
Sales and maturities of long-term investments .................................... 241,653,171
Net sales of short-term investments .............................................. 20,608,899
-------------
Cash provided - operating activities .......................................... 61,954,296
-------------
Cash flow from financing activities:
Proceeds from subscriptions of Fund shares ....................................... 14,804,558
Payments on redemptions of Fund shares ........................................... (76,637,989)
Distributions to shareholders .................................................... (401,239)
-------------
Cash used - financing activities .............................................. (62,234,670)
-------------
Net increase (decrease) in cash ..................................................... (280,374)
Cash at beginning of year ........................................................... 1,667,044
-------------
Cash at end of year ................................................................. $ 1,386,670
-------------
RECONCILIATION OF NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATING
ACTIVITIES TO NET CASH PROVIDED IN OPERATING ACTIVITIES FOR THE YEAR ENDED
MARCH 31, 2010
Net increase (decrease) in net assets resulting from operating activities ........... $ 58,602,739
Adjustments to reconcile net increase (decrease) in net assets resulting from
operating activities to net cash provided by operating activities:
Decrease in dividends and interest receivable and other assets ............. 99,444
Increase in payable to affiliates, accrued expenses and other liabilities .. 745,520
Increase in cash on deposit with brokers ................................... (2,186,491)
Decrease in receivables for investments sold ............................... 115,785
Increase in payable for investments purchased .............................. 3,750,096
Decrease in cost of investments ............................................ 96,614,693
Net change in unrealized appreciation ...................................... (95,787,490)
-------------
Net cash provided in operating activities ........................................... $ 61,954,296
=============
Noncash financing activities - reinvestment of dividends ............................ $ 1,511,818

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

34 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

The Franklin Mutual Recovery Fund (Fund) is registered under the Investment
Company Act of 1940, as amended, (1940 Act) as a 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

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

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

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

Foreign equity securities are valued as of the close of trading on the foreign
stock exchange on which the security is primarily traded, or the NYSE, whichever
is earlier. If no sale is reported at that time, the foreign equity security
will be valued within the range of the most recent quoted bid

Annual Report | 35

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A. SECURITY VALUATION (CONTINUED)

and ask prices. The value is then converted into its U.S. dollar equivalent at
the foreign exchange rate in effect at the close of the NYSE on the day that the
value of the security is determined.

The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis based upon the underlying investment book value,
anticipated future cash flows, market changes in comparable or similar
securities, matrix pricing, discounts from market prices of similar securities,
or discounts applied due to the nature and duration of restrictions on the
disposition of the securities. Due to the inherent uncertainty of valuations of
such securities, the fair values may differ significantly from the values that
would have been used had a ready market for such investments existed.
Occasionally, events occur between the time at which trading in a security is
completed and the close of the NYSE that might call into question the
availability (including the reliability) of the value of a portfolio security
held by the Fund. The investment manager monitors price movements following the
close of trading in foreign stock markets through a series of country specific
market proxies (such as baskets of American Depository Receipts, futures
contracts and exchange traded funds). These price movements are measured against
established trigger thresholds for each specific market proxy to assist in
determining if an event has occurred. If such an event occurs, the securities
may be valued using fair value procedures, which may include the use of
independent pricing services. All security valuation procedures are approved by
the Fund's Board of Trustees.

B. FOREIGN CURRENCY TRANSLATION

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

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

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

36 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. FOREIGN CURRENCY TRANSLATION (CONTINUED)

and losses arise from changes in foreign exchange rates on foreign denominated
assets and liabilities other than investments in securities held at the end of
the reporting period.

C. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS

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

D. DERIVATIVE FINANCIAL INSTRUMENTS

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

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

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

The Fund generally enters into total return swap contracts in order to manage or
gain exposure to equity price movements of an underlying asset. A total return
swap is an agreement between the Fund and a counterparty to exchange a market
linked return for a floating rate payment, both based upon a notional principal
amount. Over the term of the contract, contractually required payments to be
paid or received are accrued daily and recorded as unrealized depreciation or
appreciation until the payments are made, at which time they are realized.
Payments received or paid to recognize changes in the value of the underlying
asset are recorded as realized gain or loss.

The Fund generally purchases or writes option contracts in order to manage or
gain exposure to equity price risk. An option is a contract entitling the holder
to purchase or sell a specific amount

Annual Report | 37

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

of shares or units of a particular security, currency or index, or notional
amount of a swap (swaption), at a specified price. Options purchased are
recorded as an asset while options written are recorded as a liability. Upon
exercise of an option, the acquisition cost or sales proceeds of the security is
adjusted by any premium paid or received. Upon expiration of an option, any
premium paid or received is recorded as a realized loss or gain. Upon closing an
option other than through expiration or exercise, the difference between the
premium and the cost to close the position is recorded as a realized gain or
loss.

See Note 13 regarding other derivative information.

E. SECURITIES SOLD SHORT

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

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

F. INCOME TAXES

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. As a result, no provision for federal
income taxes is required. The Fund files U.S. income tax returns as well as tax
returns in certain other jurisdictions. As of March 31, 2010, and for all open
tax years, the Fund has determined that no provision for income tax is required
in the Fund's financial statements. Open tax years are those that remain subject
to examination by such taxing authorities, which in the case of the U.S. is
three years after the filing of a fund's tax return.

G. 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

38 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

H. 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.

I. 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.

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.

Annual Report | 39

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. SHARES OF BENEFICIAL INTEREST

At March 31, 2010, 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,
------------------------------------------------------
2010 2009
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ---------- ------------

CLASS A SHARES:
Shares sold ................. 787,896 $ 6,691,796 1,823,855 $ 18,054,631
Shares issued in reinvestment
of distributions ......... 96,072 889,624 299,696 2,250,714
Shares redeemed ............. (5,768,179) (48,521,822) (8,031,959) (84,081,952)
---------- ------------ ---------- ------------
Net increase (decrease) ..... (4,884,211) $(40,940,402) (5,908,408) $(63,776,607)
========== ============ ========== ============
CLASS B SHARES:
Shares sold ................. 3,709 $ 32,558 5,602 $ 43,189
Shares issued in reinvestment
of distributions ......... 696 6,366 3,897 28,877
Shares redeemed ............. (94,516) (781,512) (131,283) (1,308,555)
---------- ------------ ---------- ------------
Net increase (decrease) ..... (90,111) $ (742,588) (121,784) $ (1,236,489)
========== ============ ========== ============
CLASS C SHARES:
Shares sold ................. 168,533 $ 1,459,029 382,579 $ 3,705,723
Shares issued in reinvestment
of distributions ......... 16,524 151,031 74,989 555,668
Shares redeemed ............. (1,694,799) (13,838,929) (3,077,030) (31,371,819)
---------- ------------ ---------- ------------
Net increase (decrease) ..... (1,509,742) $(12,228,869) (2,619,462) $(27,110,428)
========== ============ ========== ============
ADVISOR CLASS SHARES:
Shares sold ................. 718,876 $ 6,540,660 1,152,923 $ 13,065,712
Shares issued in reinvestment
of distributions ......... 49,817 464,797 166,656 1,261,586
Shares redeemed ............. (1,561,105) (13,495,726) (9,378,602) (97,327,509)
---------- ------------ ---------- ------------
Net increase (decrease) ..... (792,412) $ (6,490,269) (8,059,023) $(83,000,211)
========== ============ ========== ============

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

40 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. TRANSACTIONS WITH AFFILIATES (CONTINUED)

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 (Fund performance differential), over the preceding twelve-month
period (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 1.33%
of the average daily net assets of the Fund.

B. ADMINISTRATIVE FEES

The Fund 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 Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.

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

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

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

Annual Report | 41

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. TRANSACTIONS WITH AFFILIATES (CONTINUED)

C. DISTRIBUTION FEES (CONTINUED)

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

D. SALES CHARGES/UNDERWRITING AGREEMENTS

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

Sales charges retained net of commissions paid to
unaffiliated broker/dealers .................. $8,548
Contingent deferred sales charges retained ....... $3,579

E. TRANSFER AGENT FEES

For the year ended March 31, 2010, the Fund paid transfer agent fees of
$237,432, of which $140,683 was retained by Investor Services.

F. WAIVER AND EXPENSE REIMBURSEMENTS

For the year ended March 31, 2010, the investment manager agreed to waive
management fees of $396,863. Additionally, the Fund paid excise taxes of
$76,000, of which $57,500 was voluntarily reimbursed by an affiliate of the
investment manager. Such amounts are noted in the Statement of Operations.

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, 2010, the
custodian fees were reduced as noted in the Statement of Operations.

6. UNAFFILIATED FEE REIMBURSEMENTS

Pursuant to an agreement reached between the Fund and a broker in connection
with a security sold short, the broker agreed to reimburse the Fund for certain
stock loan fees related to a specific short sale transaction. Such amounts are
noted in the Statement of Operations.

42 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES

For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At March 31, 2010, the capital loss carryforwards were as
follows:

Capital loss carryforwards expiring in:
2017 .................................... $ 44,141,197
2018 .................................... 72,696,499
------------
$116,837,696
============

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, 2010, the Fund deferred realized
capital losses and realized currency losses of $4,361,933 and $40,878,
respectively.

The tax character of distributions paid during the years ended March 31, 2010
and 2009, was as follows:

2010 2009
---------- ----------

Distributions paid from:
Ordinary income .......... $1,913,057 $5,318,333
Long term capital gain ... -- 12,286
---------- ----------
$1,913,057 $5,330,619
========== ==========

At March 31, 2010, the cost of investments, net unrealized appreciation
(depreciation) and undistributed ordinary income for income tax purposes were as
follows:

Cost of investments ...................................... $200,931,178
============
Unrealized appreciation .................................. $ 12,199,950
Unrealized depreciation .................................. (45,734,090)
------------
Net unrealized appreciation (depreciation) ............... $(33,534,140)
============
Distributable earnings - undistributed ordinary income ... $ 3,154,694
============

Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, payments-in-kind, bond
discounts and premiums, certain dividends on securities sold short, swaps, tax
straddles, certain corporate action adjustments, non-deductible expenses,
partnership distributions and recognition of partnership income.

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares, payments-in-kind, bond
discounts and premiums, swaps, tax straddles, certain corporate action
adjustments, certain dividends on securities sold short, partnership
distributions and recognition of partnership income.

Annual Report | 43

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended March 31, 2010, aggregated
$183,516,099 and $204,507,398, respectively.

Transactions in options written during the year ended March 31, 2010, were as
follows:

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

Options outstanding at March 31, 2009 ................ 1,585 $ 121,417
Options written ...................................... 13,196 1,217,354
Options expired ...................................... (3,935) (215,535)
Options exercised .................................... (6,748) (532,547)
Options closed ....................................... (2,753) (405,031)
------- ----------
Options outstanding at March 31, 2010 ................ 1,345 $ 185,658
======= ==========

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. Risks associated with
purchasing these securities include the possibility that the bankruptcy or other
restructuring process takes longer than expected, or that distributions in
restructuring are less than anticipated, either or both of which may result in
unfavorable consequences to the Fund. If it becomes probable that income on debt
securities, including those of distressed companies, will not be collected, the
Fund discontinues accruing income and recognizes an adjustment for uncollectible
interest.

At March 31, 2010, the aggregate value of distressed company securities for
which interest recognition has been discontinued was $1,387,241, representing
0.82% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.

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, 2010, the Fund held investments in restricted securities, excluding
144A securities deemed to be liquid, as follows:

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

55,817 AboveNet Inc. .............................. 9/03/03 - 9/08/09 $1,042,578 $ 2,831,597
55 AboveNet Inc., stock grant, grant price
$10.475, expiration date 9/09/13 ........ 4/17/06 - 9/08/06 -- 8,856
11 AboveNet Inc., stock grant, grant price
$30, expiration date 9/07/18 ............ 9/08/09 -- 912
1,439,821 CB FIM Coinvestors LLC ..................... 1/15/09 - 6/02/09 -- --
1,874,481 Cerberus CG Investor I LLC ................. 7/26/07 - 6/17/08 1,868,061 581,089
1,645,200 Cerberus CG Investor I LLC, 12.00%,
7/31/14 ................................. 7/26/07 1,645,200 510,012
1,874,481 Cerberus CG Investor II LLC ................ 7/26/07 - 6/17/08 1,868,061 581,089
1,645,200 Cerberus CG Investor II LLC, 12.00%,
7/31/14 ................................. 7/26/07 1,645,200 510,012
937,240 Cerberus CG Investor III LLC ............... 7/26/07 - 6/17/08 934,030 290,544
822,600 Cerberus CG Investor III LLC, 12.00%,
7/31/14 ................................. 7/26/07 822,600 255,006
721 Elephant Capital Holdings Ltd. ............. 10/22/03 - 3/11/08 111,536 --
1,801,197 FIM Coinvestor Holdings I, LLC ............. 11/20/06 - 6/02/09 -- --
1,055,414 First Chicago Bancorp ...................... 11/16/06 - 9/28/09 6,555,871 1,108,185
39,780 First Southern Bancorp Inc. ................ 1/27/10 839,358 839,358
68 First Southern Bancorp Inc., cvt. pfd., C .. 1/27/10 68,000 68,000
4,502,725 GLCP Harrah's Investment LP ................ 1/15/08 4,505,648 --
358 GMAC Inc. .................................. 11/20/06 - 6/02/09 8,480,694 5,105,167
10,457 IACNA Investor LLC ......................... 7/24/08 3,790 105
152,041 Imagine Group Holdings Ltd. ................ 8/31/04 1,557,128 1,775,155
185,241 International Automotive Components
Group Brazil LLC ........................ 4/13/06 - 12/26/08 123,192 283,138
16,213 International Automotive Components
Group Japan LLC ......................... 9/26/06 - 3/27/07 140,743 110,433
660,308 International Automotive Components
Group LLC ............................... 3/15/06 - 4/04/08 660,415 349,019
90,167 (a) International Automotive Components
Group NA LLC, 9.00%, 4/01/17 ............ 3/30/07 91,520 92,873
299,438 (a) International Automotive Components
Group NA LLC, A ......................... 3/30/07 - 10/10/07 318,612 179,190
574 MCII Holdings Inc. ......................... 4/17/09 660,852 --
4,475 MCII Holdings Inc., PIK, pfd., A ........... 4/17/09 - 1/01/10 4,357,231 1,252,771
31,928 NCB Warrant Holdings Ltd., A ............... 12/16/05 - 3/11/08 2,118,474 --
445,440 Symetra Financial Corp. .................... 7/27/04 5,120,000 5,479,504
-----------
TOTAL RESTRICTED SECURITIES (13.20% of Net Assets) ........................ $22,212,015
===========

(a) The Fund also invests in unrestricted securities or other investments in
the issuer, valued at $59,381 as of March 31, 2010.

Annual Report | 45

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. UNFUNDED LOAN COMMITMENTS

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

At March 31, 2010, unfunded commitments were as follows:

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

Lyondell Chemical Co., DIP Delayed Draw Term Loan,
FRN, 13.00%, 6/03/10 ........................................... $ 26,459
Realogy Corp., Revolver, FRN, 2.504%, 4/10/13 ..................... 3,019,400
----------
$3,045,859
==========

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

12. UNFUNDED CAPITAL COMMITMENTS

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

At March 31, 2010, the Fund had unfunded capital commitments of $660,698 and had
determined that the probability of performance under these agreements was
remote. Therefore, no loss had been recognized. Subsequent to March 31, 2010,
the Fund was required to perform on a portion of its obligations in relation to
an unfunded capital commitment. Concurrent with this performance, the Fund
recognized an unrealized loss of approximately $374,000.

46 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. OTHER DERIVATIVE INFORMATION

At March 31, 2010, the Fund has invested in derivative contracts which are
reflected on the Statement of Assets and Liabilities as follows:

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

Foreign exchange
contracts ....... Unrealized appreciation on Unrealized depreciation on
forward exchange contracts $1,301,268 forward exchange contracts $429,605

Equity contracts ... Investments in securites,
Value 29,150 Options written, at value 89,235

For the year ended March 31, 2010, the effect of derivative contracts on the
Fund's Statement of Operations was as follows:

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

Foreign exchange
contracts ....... Net realized gain (loss) from
foreign currency transactions/Net
change in unrealized appreciation
(depreciation) on translation of
other assets and liabilities
denominated in foreign
currencies $ (172,314) $417,993 35,117,761

Equity contracts ... Net realized gain (loss) from
investments, written options
and swap contracts/Net change
in unrealized appreciation
(depreciation) on investments (1,980,404) 60,327 300,563

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

See Note 1(d) regarding derivative financial instruments.

14. OTHER CONSIDERATIONS

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

Annual Report | 47

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. CREDIT FACILITY

The Fund participates in a $20 million senior unsecured revolving credit
facility to fund shareholder redemptions or meet unfunded loan commitments.
Under the terms of the current credit facility, which expires on May 28, 2010,
and may or may not be extended for subsequent periods on the same or different
terms, the Fund shall, in addition to interest charged on any borrowings made by
the Fund, pay an annual commitment fee based upon the unused portion of the
credit facility. During the period, the Fund incurred commitment fees of
$50,611, which is reflected in other expenses on the Statement of Operations.

During the year ended March 31, 2010, the Fund did not utilize the facility.

16. FAIR VALUE MEASUREMENTS

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

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

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

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

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

The following is a summary of the inputs used as of March 31, 2010, in valuing
the Fund's assets and liabilities carried at fair value:

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

ASSETS:
Investments in Securities:
Equity Investments(a):
Auto Components .............................. $ -- $ -- $ 922,422(b) $ 922,422
Commercial Banks ............................. -- -- 2,015,543(b) 2,015,543
Consumer Finance ............................. -- -- 6,557,889 6,557,889
Insurance .................................... -- -- 7,254,659 7,254,659
Machinery .................................... -- -- 1,252,771(b) 1,252,771
All Other Equity
Investments(c) ............................ 107,862,211 -- --(b) 107,862,211
Options Purchased ............................... 29,150 -- -- 29,150
Corporate Bonds, Notes and
Senior Floating Rate Interests ............... -- 34,456,306 1,427,284 35,883,590
Corporate Bonds and Notes in Reorganization ..... -- 19,338 -- 19,338

48 | Annual Report

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. FAIR VALUE MEASUREMENTS (CONTINUED)

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

ASSETS: (CONTINUED)
Investments in Securities: (CONTINUED)
Equity Investments(a): (CONTINUED)
Companies in Liquidation ..................... $ -- $ 644,439 $ --(b) $ 644,439
Short Term Investments ....................... 4,900,000 55,026 -- 4,955,026
------------ ----------- ----------- ------------
Total Investments in
Securities ................................ $112,791,361 $35,175,109 $19,430,568 $167,397,038
============ =========== =========== ============
Forward Exchange Contracts ................... $ -- $ 1,301,268 $ -- $ 1,301,268
Unfunded Loan Commitments .................... -- 263,403 -- 263,403
LIABILITIES:
Options Written .............................. 89,235 -- -- 89,235
Securities Sold Short ........................ 19,871,615 -- -- 19,871,615
Forward Exchange Contracts ................... -- 429,605 -- 429,605

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

(b) Includes securities determined to have no value at March 31, 2010.

At March 31, 2010, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair value, is as
follows:

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

ASSETS:
Investments in Securities:
Equity Investments:(a)
Auto Components ............. $ 144,267 $ (204,186) $ 1,005,698 $ (23,357) $ -- $ 922,422(b) $ 790,580
Commercial Banks ............ 1,624,930 -- (1,314,756) 1,705,369 -- 2,015,543(b) (1,314,756)
Consumer Finance ............ 4,538,823 -- 2,078,537 (59,471) -- 6,557,889 (4,531,849)
Diversified Telecommunication
Services ................. 2,099,978 -- 1,167,240 -- (3,267,218) -- --
Health Care Providers &
Services ................. 1,483,224 (122,486) 6,345 (291,129) (1,075,954) -- --
Hotels, Restaurants &
Leisure .................. -- -- (2,923) 2,923 -- -- (2,923)
Insurance ................... 9,125,951 (73,381) (488,761) (1,309,150) 7,254,659 (765,699)
Machinery ................... -- -- (3,765,312) 5,018,083 -- 1,252,771(b) (3,765,312)
Corporate Bonds, Notes and
Senior Floating Rate
Interests ................ 8,157,618 (815,286) 2,419,242 (8,334,290) -- 1,427,284 557,992

Annual Report | 49

Franklin Mutual Recovery Fund

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. FAIR VALUE MEASUREMENTS (CONTINUED)

ASSETS: (CONTINUED)
Investments in Securities:
(CONTINUED)
Equity Investments:(a)
(CONTINUED)
Corporate Bonds and Notes in
Reorganization ........... $ 380,381 $(2,823,446) $ 3,295,449 $ (660,852) $ (191,532) $ -- $ --
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total .......................... $27,555,172 $(4,038,785) $ 4,400,759 $(3,951,874) $(4,534,704) $19,430,568 $ (9,031,967)
=========== =========== =========== =========== =========== =========== ============

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

(b) Includes securities determined to have no value at March 31, 2010.

17. NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board issued an Accounting
Standards Update which enhances and clarifies existing fair value measurement
disclosure requirements and is effective for interim and annual periods
beginning after December 15, 2009. The Fund believes the adoption of this
Accounting Standards Update will not have a material impact on its financial
statements.

18. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through the issuance of the financial
statements and determined that no events have occurred that require disclosure
other than those already disclosed in the financial statements.

ABBREVIATIONS

COUNTERPARTY

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

CURRENCY

EUR - Euro

SELEC-TED PORTFOLIO

ADR - American Depository Receipt
DIP - Debtor-In-Posession
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind

50 | 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, 2010, and the related statements of operations and cash flows for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of March 31, 2010, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Mutual Recovery Fund at March 31, 2010, the results of its operations
and cash flows for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.

(ERNEST & YOUNG LLP)

Boston, Massachusetts
May 19, 2010

Annual Report | 51

Franklin Mutual Recovery Fund

TAX DESIGNATION (UNAUDITED)

Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
94.70% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended March 31, 2010.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $2,240,822 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended March
31, 2010. In January 2011, shareholders will receive Form 1099-DIV which will
include their share of qualified dividends distributed during the calendar year
2010. Shareholders are advised to check with their tax advisors for information
on the treatment of these amounts on their individual income tax returns.

52 | 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 Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.

INDEPENDENT BOARD MEMBERS

NUMBER OF PORTFOLIOS IN
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 8 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789