e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period to

Commission file number: 814-00729

Highland Distressed Opportunities, Inc.

(Exact Name of Registrant as Specified in Charter)


Delaware		205423854
(State or Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Address of Principal Executive Offices)
(877) 247-1888
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

On May 5, 2008, there were 17,716,771 shares outstanding of the Registrant’s common stock, $0.001 par value per share.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SCHEDULE OF INVESTMENTS



As of March 31, 2008 (unaudited)		Highland Distressed Opportunities, Inc.


	Principal ($)		Cost ($)		Value ($)
Senior Loans (a) - 92.6%

AEROSPACE — AEROSPACE/DEFENSE - 2.7%

IAP Worldwide Services, Inc.
First Lien Term Loan, 11.50%, 12/30/12		4,936,869		4,947,844		4,017,377


BROADCASTING - 13.2%
Comcorp Broadcasting, Inc.
Revolving Loan, 8.97%, 10/02/12 (b) (c)		1,288,051		1,288,051		1,238,590
Term Loan, 8.75%, 04/02/13 (b)		18,849,521		18,471,568		18,125,699

				19,759,619		19,364,289


CABLE — US CABLE - 3.1%
CellNet Group, Inc.
Second Lien, 6.86%, 10/22/11		1,000,000		1,000,000		882,500
WideOpen West Finance, LLC
Second Lien Term Loan, 11.45%, 06/29/15		5,000,000		4,909,255		3,625,000

				5,909,255		4,507,500


DIVERSIFIED MEDIA - 1.0%
Penton Media, Inc.
Second Lien Term Loan, 8.27%, 02/01/14		2,000,000		2,040,934		1,530,000


ENERGY — EXPLORATION & PRODUCTION - 3.2%
TARH E&P Holdings, L.P.
First Lien Term Loan, 9.83%, 06/29/12		5,000,000		5,000,000		4,625,000


ENERGY — OTHER ENERGY - 4.6%
Resolute Aneth, LLC
Second Lien Term Loan, 9.51%, 06/26/13		7,500,000		7,500,000		6,787,500


FINANCIAL - 9.4%
Emerson Reinsurance Ltd.
Tranche C Term Loan, 10.85%, 12/15/11		1,500,000		1,493,784		1,387,500
Flatiron Re Ltd.
Closing Date Term Loan, 9.49%, 12/29/10		383,291		386,914		367,959
Delayed Draw Term Loan, 9.49%, 12/29/10		185,657		187,412		178,230
Kepler Holdings Ltd.
Term Loan, 10.70%, 06/30/09		5,000,000		5,017,590		4,800,000
Penhall International Corp.
Term Loan, 12.82%, 04/01/12		7,938,145		7,816,833		7,064,949

				14,902,533		13,798,638


FOREST PRODUCTS — PACKAGING - 0.3%
Tegrant Corp.
Second Lien Term Loan, 10.35%, 03/07/15		1,000,000		1,000,000		455,000

See accompanying Notes to Financial Statements.

SCHEDULE OF INVESTMENTS



As of March 31, 2008 (unaudited) (continued)		Highland Distressed Opportunities, Inc.


	Principal ($)		Cost ($)		Value ($)
Senior Loans (continued)

GAMING/LEISURE — OTHER LEISURE - 13.0%
Fontainebleau Florida Hotel, LLC
Tranche C Term Loan, 11.11%, 06/06/12		10,000,000		10,000,000		8,150,000
Lake at Las Vegas Joint Venture, LLC
Revolving Loan Credit-Linked Deposit, 10.20%, 12/22/14 (d)		3,611,111		3,611,111		1,238,611
Term Loan, 17.31%, 12/22/14 (d)		28,104,031		28,104,031		9,639,683

				41,715,142		19,028,294


HEALTHCARE — ACUTE CARE - 0.6%
LifeCare Holdings, Inc.
Term Loan, 6.95%, 08/11/12		987,342		965,393		852,076


HEALTHCARE — MEDICAL PRODUCTS - 1.1%
Graceway Pharmaceuticals, LLC
Mezzanine Loan, 13.45%, 11/01/13		2,000,000		1,658,088		1,540,000


HOUSING — REAL ESTATE DEVELOPMENT - 15.6%
MetroFlag BP, LLC / Metroflag Cable, LLC
Second Lien Term Loan, 11.56%, 07/06/08		5,000,000		5,000,000		4,600,000
MPH Mezzanine II, LLC
Mezzanine 2B, 7.48%, 02/09/08 (b) (d)		10,000,000		10,000,000		9,540,000
MPH Mezzanine III, LLC
Mezzanine 3, 8.48%, 02/09/08 (d)		4,000,000		4,000,000		3,800,000
Pacific Clarion, LLC
Term Loan, 15.00%, 01/23/09 (b) (e)		4,950,573		4,884,441		4,869,052

				23,884,441		22,809,052


INFORMATION TECHNOLOGY - 0.3%
Metrologic Instruments, Inc.
Second Lien Term Loan, 8.95%, 12/21/13		500,000		507,541		470,000


MANUFACTURING - 1.0%
Latham Manufacturing Corp.
New Term Loan, 8.75%, 06/30/12		1,926,486		1,924,554		1,387,070


RETAIL - 2.9%
Totes Isotoner Corp.
Second Lien Term Loan, 8.63%, 01/31/14		4,877,228		4,918,842		4,267,574


SERVICE — ENVIRONMENTAL SERVICES - 6.2%
LVI Services, Inc.
Tranche B Term Loan, 7.46%, 11/16/11		10,060,609		9,978,892		9,104,851


SERVICE — OTHER SERVICES - 1.1%
NES Rentals Holdings, Inc.
Permanent Term Loan, 10.63%, 07/20/13		2,000,000		2,032,469		1,645,000

See accompanying Notes to Financial Statements.

SCHEDULE OF INVESTMENTS



As of March 31, 2008 (unaudited) (continued)		Highland Distressed Opportunities, Inc.


	Principal ($)		Cost ($)		Value ($)
Senior Loans (continued)

TRANSPORTATION — AUTO - 5.4%
BST Safety Textiles Acquisition GmbH
Second Lien Facility, 10.03%, 06/30/09		665,500		666,656		582,312
Gainey Corp.
Term Loan, 10.04%, 04/20/12		964,521		630,713		443,680
Motor Coach Industries International, Inc.
PIK Second Lien, 13.64%, 12/01/08		7,713,301		7,815,845		6,826,272

				9,113,214		7,852,264


UTILITIES - 4.9%
Entegra Power Group, LLC
PIK Third Lien Term Loan, 8.70%, 10/19/15		8,491,114		8,418,464		7,123,366


WIRELESS COMMUNICATIONS - 3.0%
Clearwire Corp.
Term Loan, 11.15%, 07/03/12		4,975,000		4,975,000		4,378,000

Total Senior Loans				171,152,225		135,542,851


Corporate Notes and Bonds - 75.2%

BROADCASTING - 0.9%
Young Broadcasting, Inc.
10.00%, 03/01/11		2,000,000		1,992,415		1,265,000


CONSUMER NON-DURABLES - 4.1%
Solo Cup Co.
8.50%, 02/15/14		7,000,000		6,143,543		5,950,000


DIVERSIFIED MEDIA - 5.1%
Baker & Taylor, Inc.
11.50%, 07/01/13 (f)		8,300,000		8,756,504		7,521,875


ENERGY — EXPLORATION & PRODUCTION - 10.8%
Energy XXI Gulf Coast, Inc.
10.00%, 06/15/13		12,200,000		10,896,741		10,187,000
Helix Energy Solutions Group, Inc.
9.50%, 01/15/16 (f)		2,500,000		2,500,000		2,512,500
McMoran Exploration Co.
11.88%, 11/15/14		3,000,000		3,000,000		3,045,000

				16,396,741		15,744,500


FOOD/TOBACCO — BEVERAGES & BOTTLING - 3.8%
Pinnacle Foods Group, Inc.
10.63%, 04/01/17		6,500,000		6,561,250		5,557,500

See accompanying Notes to Financial Statements.

SCHEDULE OF INVESTMENTS



As of March 31, 2008 (unaudited) (continued)		Highland Distressed Opportunities, Inc.


	Principal ($)		Cost ($)		Value ($)
Corporate Notes and Bonds (continued)

GAMING/LEISURE — OTHER LEISURE - 5.0%
Six Flags, Inc.
4.50%, 05/15/15		1,727,000		1,924,875		928,262
Tropicana Entertainment Resorts Holdings, L.P.
9.63%, 12/15/14		12,199,000		10,266,880		6,389,226

				12,191,755		7,317,488


HEALTHCARE — ACUTE CARE - 8.2%
Argatroban Royalty Sub, LLC
18.50%, 09/21/14		4,131,674		4,131,674		4,152,332
Azithromycin Royalty Sub, LLC
16.00%, 05/15/19		5,000,000		4,976,863		5,025,000
HCA, Inc.
7.69%, 06/15/25		1,800,000		1,465,225		1,435,583
Tenet Healthcare Corp.
9.88%, 07/01/14		1,500,000		1,513,826		1,458,750

				12,087,588		12,071,665


HEALTHCARE — ALTERNATE SITE SERVICES - 1.1%
Select Medical Corp.
8.45%, 09/15/15 (g)		2,000,000		1,647,000		1,570,000


HEALTHCARE — MEDICAL PRODUCTS - 10.9%
Angiotech Pharmaceuticals, Inc.
7.75%, 04/01/14		5,000,000		4,573,541		3,075,000
Celtic Pharma Phinco B.V.
17.00%, 06/15/12		8,999,999		8,506,941		9,044,999
Encysive Pharmaceuticals, Inc.
2.50%, 03/15/12		4,000,000		2,733,997		3,865,000

				15,814,479		15,984,999


HOUSING — BUILDING MATERIALS - 0.5%
Masonite Corp.
11.00%, 04/06/15		1,000,000		1,000,000		695,000


HOUSING — REAL ESTATE DEVELOPMENT - 11.2%
Realogy Corp.
10.50%, 04/15/14		5,000,000		4,960,574		3,387,500
12.38%, 04/15/15		29,000,000		20,956,790		13,050,000

				25,917,364		16,437,500


INFORMATION TECHNOLOGY - 4.8%
Freescale Semiconductor, Inc.
9.13%, 12/15/14 (f)		3,000,000		2,998,161		2,205,000
10.13%, 12/15/16		7,000,000		7,000,000		4,760,000

				9,998,161		6,965,000

See accompanying Notes to Financial Statements.

SCHEDULE OF INVESTMENTS



As of March 31, 2008 (unaudited) (continued)		Highland Distressed Opportunities, Inc.


	Principal ($)		Cost ($)		Value ($)
Corporate Notes and Bonds (continued)

RETAIL - 3.7%
Dollar General Corp.
10.63%, 07/15/15		3,000,000		2,780,672		2,910,000
Rite Aid Corp.
9.38%, 12/15/15		1,250,000		1,233,055		987,500
9.50%, 06/15/17		2,000,000		1,969,699		1,580,000

				5,983,426		5,477,500


SERVICE — OTHER SERVICES - 0.6%
Neff Corp.
10.00%, 06/01/15		2,000,000		957,500		960,000


TRANSPORTATION — AUTO - 4.5%
Delphi Corp.
6.50%, 05/01/09 (d)		2,500,000		1,850,000		825,000
6.50%, 08/15/13 (d)		2,667,000		1,861,483		853,440
6.55%, 06/15/16 (d)		1,500,000		1,151,250		480,000
7.13%, 05/01/29 (d)		3,500,000		2,565,250		1,120,000
Motor Coach Industries International, Inc.
11.25%, 05/01/09		12,000,000		10,740,977		3,300,000

				18,168,960		6,578,440

Total Corporate Notes and Bonds				143,616,686		110,096,467


Claims - 0.9%

AEROSPACE — AIRLINES - 0.7%
Northwest Airlines, Inc.
ALPA Trade Claim, 08/21/13		3,000,000		659,420		99,360
Bell Atlantic Trade Claim, 08/21/13		2,500,000		735,130		82,800
EDC Trade Claims, 08/21/13		2,500,000		772,468		82,800
Flight Attendant Claim, 08/21/13		5,326,500		1,144,392		176,414
GE Trade Claim, 08/21/13		1,500,000		460,536		49,680
IAM Trade Claim, 08/21/13		4,728,134		1,088,341		156,596
Lambert Leasing Trade Claim, 08/21/13 (h)		3,433,116		896,468		113,705
Pinnacle Trade Claim, 08/21/13		5,000,000		1,401,190		165,600
Retiree Claim, 08/21/13		3,512,250		754,602		116,326

				7,912,547		1,043,281


CABLE — US CABLE - 0.2%
Adelphia Communications Corp.
06/15/11		4,056,000		64,490		324,480

Total Claims				7,977,037		1,367,761

See accompanying Notes to Financial Statements.

SCHEDULE OF INVESTMENTS



As of March 31, 2008 (unaudited) (continued)		Highland Distressed Opportunities, Inc.


	Shares		Cost ($)		Value ($)
Common Stocks - 17.5%

AEROSPACE — AIRLINES - 0.9%
Northwest Airlines, Inc. (i)		145,984		1,190,444		1,312,398


CABLE — US CABLE - 0.9%
Time Warner Cable, Inc. (i)		51,127		1,900,532		1,277,159


FOREST PRODUCTS — PAPER - 0.5%
Temple-Inland, Inc.		52,500		1,839,716		667,800


METALS/MINERALS — OTHER METALS/MINERALS - 7.0%
Alcoa, Inc		208,439		8,240,259		7,516,310
RTI International Metals, Inc. (i)		62,112		5,129,522		2,808,084

				13,369,781		10,324,394


TELECOMMUNICATIONS - 5.5%
Communications Corp. of America (b) (i)		1,256,635		7,187,203		8,017,331


UTILITIES - 2.7%
Entegra TC, LLC (i)		136,750		6,346,675		3,931,563

Total Common Stocks				31,834,351		25,530,645


Total Investments - 186.2%				354,580,299		272,537,724


Other Assets & Liabilities, Net — (86.2)%						(126,203,212	)


Net Assets - 100.0%						146,334,512


(a)		Senior loans in which Highland Distressed Opportunities, Inc. (the “Company”) invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium. (Unless otherwise identified by footnote (e), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at March 31, 2008. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

(b)		Represents fair value as determined by the Company’s investment adviser, in good faith, pursuant to the policies and procedures approved by the Company’s Board of Directors. Securities with a total aggregate market value of $41,790,672, or 28.6% of net assets, were valued under fair value by the Company’s investment adviser as of March 31, 2008.

(c)		Senior loan has additional unfunded loan commitment. See Note 6.

(d)		The issuer is in default of certain debt covenants. Income is not being accrued.

(e)		Fixed rate senior loan.

(f)		Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At March 31, 2008, these securities amounted to $12,239,375 or 8.4% of net assets.

(g)		Floating rate note. The interest rate shown reflects the rate in effect at March 31, 2008.

(h)		All or a portion of this position has not settled. Contract rates do not take effect until settlement date.

(i)		Non-income producing security.

PIK Payment-in-Kind

See accompanying Notes to Financial Statements.

STATEMENT OF ASSETS AND LIABILITIES

Highland Distressed Opportunities, Inc.


	As of
	March 31, 2008			As of
	(unaudited)			December 31, 2007
	($)			($)
Assets:
Investments, at value (cost $354,580,299 and $372,026,014, respectively)		272,537,724			311,986,151
Cash		—			4,291,098
Foreign currency (cost $4,284)		4,578			—
Receivable for:
Receivable for investments sold		1,368,739			24,628,173
Dividend and interest receivable		7,506,900			5,951,790
Other assets		46,798			66,712

Total assets		281,464,739			346,923,924


Liabilities:
Short-term bank borrowings		2,827,451			—
Notes payable (Note 4)		124,000,000			142,000,000
Net discount and unrealized depreciation on unfunded transactions		22,921			16,228
Payables for:
Investments purchased		5,084,942			19,387,884
Investment advisory fee payable (Note 3)		1,484,399			1,812,285
Administration fee payable (Note 3)		259,770			317,150
Incentive fee (Note 3)		870,369			383,951
Interest expense payable (Note 4)		375,291			759,465
Directors’ fees (Note 3)		7,453			592
Accrued expenses and other liabilities		197,631			231,317

Total liabilities		135,130,227			164,908,872

Stockholders’ equity (net assets)		146,334,512			182,015,052


Composition of stockholders’ equity (net assets):
Common Stock, par value $.001 per share: 550,000,000 common stock authorized, 17,716,771 common stock outstanding		17,717			17,717
Paid-in capital		253,163,644			253,163,644
Undistributed net investment income		2,250,970			3,420,147
Accumulated net realized gain/(loss) on investments, total return swaps and foreign currency transactions		(27,035,788	)		(14,547,689	)
Net unrealized appreciation/(depreciation) on investments and translation of assets and liabilities in foreign currency		(82,062,031	)		(60,038,767	)

Stockholders’ equity (net assets)		146,334,512			182,015,052


Net Asset Value Per Share (Net Assets/Common Stock Outstanding)		8.26			10.27

See accompanying Notes to Financial Statements.

STATEMENT OF OPERATIONS

Highland Distressed Opportunities, Inc.


	For the Quarter Ended
	March 31, 2008			For the Period Ended
	(unaudited)			March 31, 2007^(a)
	($)			($)
Investment Income:
Interest income		7,852,055			1,098,592
Dividends (net of foreign taxes withheld)		40,685			554,657

Total investment income		7,892,740			1,653,249


Expenses:
Investment advisory fees (Note 3)		1,484,400			452,896
Incentive fees (Note 3)		870,369			—
Administration fees (Note 3)		259,770			79,257
Accounting service fees		37,288			13,607
Transfer agent fees		7,583			2,938
Professional fees		93,859			26,219
Directors’ fees		6,915			3,707
Custody fees		11,073			2,243
Registration fees		6,041			—
Reports to Stockholders		3,804			10,216
Delaware franchise tax expense		14,918			5,425
Organization expense (Note 3)		—			170,383
Rating agency fees		20,749			—
Other expense		159,893			7,249

Total operating expenses		2,976,662			774,140
Interest expense (Note 4)		1,434,603			42,258

Total expenses		4,411,265			816,398
Fees and expenses waived or reimbursed by Investment Adviser (Note 3)		—			(452,896	)

Net expenses		4,411,265			363,502

Net investment income		3,481,475			1,289,747


Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on investments		(12,488,132	)		72,375
Net realized gain/(loss) on foreign currency transactions		33			—
Net change in unrealized appreciation/(depreciation) on investments		(22,002,712	)		(995,496	)
Net change in unrealized appreciation/(depreciation) on unfunded transactions		(22,921	)		1,825
Net change in unrealized appreciation/(depreciation) on total return swaps		—			(12,611	)
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency		2,369			—

Net realized and unrealized gain/(loss) on investments		(34,511,363	)		(933,907	)

Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations		(31,029,888	)		355,840


^(a)		Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007.

See accompanying Notes to Financial Statements.

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (NET ASSETS)



For the Quarter Ended March 31, 2008^(a) (unaudited)		Highland Distressed Opportunities, Inc.


																	Total
								Undistributed			Undistributed			Net Unrealized			Stockholders’
	Common Stock				Paid-in Capital			Net Investment			Net Realized			Appreciation/			Equity
	Shares		Amount		in Excess of Par			Income			Gain/(Loss)			(Depreciation)			(Net Assets)

Balance at January 18, 2007		—	$	—	$	—		$	—		$	—		$	—		$	—
Issuance of common stock, 01/18/07		333,333		333		4,999,667			—			—			—			5,000,000
Issuance of common stock		17,284,300		17,285		247,965,312			—			—			—			247,982,597
Distributions reinvested		99,138		99		1,328,558			—			—			—			1,328,657
Capital contribution, 02/20/07 (b)		—		—		87,596			—			—			—			87,596
Distributions declared		—		—		—			(13,915,795	)		—			—			(13,915,795	)
Offering cost		—		—		(1,217,489	)		—			—			—			(1,217,489	)
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations		—		—		—			17,335,942			(14,547,689	)		(60,038,767	)		(57,250,514	)

Balance at December 31, 2007		17,716,771	$	17,717	$	253,163,644		$	3,420,147		$	(14,547,689	)	$	(60,038,767	)	$	182,015,052

Distributions declared		—		—		—			(4,650,652	)		—			—			(4,650,652	)
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations		—		—		—			3,481,475			(12,488,099	)		(22,023,264	)		(31,029,888	)

Balance at March 31, 2008		17,716,771	$	17,717	$	253,163,644		$	2,250,970		$	(27,035,788	)	$	(82,062,031	)	$	146,334,512


^(a)		Highland Distressed Opportunities, Inc. (the “Company”) commenced operations on January 18, 2007.

^(b)		On February 20, 2007, the Company’s investment adviser contributed an additional $87,596 in capital to the Company prior to the offering. No additional shares were issued in conjunction with this transaction.

See accompanying Notes to Financial Statements.

STATEMENT OF CASH FLOWS

Highland Distressed Opportunities, Inc.


	For the
	Quarter Ended			For the
	March 31, 2008			Period Ended
	(unaudited)			March 31, 2007^(a)
	($)			($)
Cash Flow Provided by (Used in) Operating Activates:
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations		(31,029,888	)		355,840
Adjustments to reconcile net increase/(decrease) in stockholders’ equity (net assets) resulting from operations:
Net realized (gain)/loss on investments, total return swaps and foreign currency transactions		12,488,099			(72,375	)
Net change in unrealized (appreciation)/depreciation on investments and translation of assets and liabilities denominated in foreign currency		22,023,264			1,006,282
Purchase of investment securities		(28,193,997	)		(562,463,960	)
Proceeds from disposition of investment securities, total return swaps and foreign currency transactions		33,745,357			52,192,775
(Increase)/Decrease in restricted cash		—			(9,129,485	)
(Increase)/Decrease in dividends, interest and fees receivable		(1,555,110	)		(3,334,110	)
(Increase)/Decrease in receivable for investments sold		23,259,434			(26,987,848	)
(Increase)/Decrease in other assets		19,914			(1,271	)
Net amortization/(accretion) of premium/(discount)		(593,777	)		(31,011	)
Increase/(Decrease) in short-term bank borrowings		2,827,451			—
Increase/(Decrease) in payable for investments purchased		(14,302,942	)		294,882,141
Increase/(Decrease) in payables to related parties		108,013			79,257
Net realized and change in unrealized gain/(loss) on unfunded transactions		(22,921	)		—
Net realized and change in unrealized gain/(loss) on foreign currency		2,402			—
Increase/(Decrease) in interest payable		(384,174	)		—
Increase/(Decrease) in other liabilities		(26,993	)		1,651,061

Net cash flow provided by (used in) operating activities		18,364,132			(251,852,704	)


Cash Flows Provided by (Used in) Financing Activities:
Net proceeds from issuance of common stock		—			251,852,704
Increase/(Decrease) in notes payable (b)		(18,000,000	)		—
Distributions paid in cash		(4,650,652	)		—

Net cash flow provided by (used in) financing activities		(22,650,652	)		251,852,704

Net increase/(decrease) in cash and foreign currency		(4,286,520	)		—


Cash and Foreign Currency:
Beginning of the period		4,291,098			—
End of the period		4,578			—


Supplemental Information:
Interest paid during the period		1,818,777			—


^(a)		Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007.

^(b)		During the period, $4 million was borrowed from an affiliate and repaid. See Note 8 for details.

See accompanying Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS (unaudited)


March 31, 2008		Highland Distressed Opportunities, Inc.

Note 1. Organization

Highland Distressed Opportunities, Inc. (the “Company”), is a non-diversified closed-end company that has filed an election to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). The Company was incorporated under the laws of Delaware on August 22, 2006. In addition, for tax purposes, the Company intends to elect to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986 (the “Code”). The Company’s investment objective is total return generated by both capital appreciation and current income. The Company intends to invest primarily in financially-troubled or distressed companies that are either middle-market companies or unlisted companies by investing in senior secured debt, mezzanine debt and unsecured debt, each of which may include an equity component, and in equity investments.

The Company commenced operations on January 18, 2007. On February 27, 2007, the Company closed its initial public offering (“IPO” or the “Offering”) and sold 17,000,000 shares of its common stock at a price of $15.00 per share, less an underwriting discount and commissions totaling $0.675 per share. The Company received $243,525,000 in total net proceeds from the Offering, before expenses.

On March 23, 2007, the Company issued 284,300 shares of common stock to cover the underwriters’ partial exercise of the over-allotment option on the Offering and received approximately $4,072,698 in net proceeds after deducting underwriting discounts and commissions.

Note 2. Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. In management’s opinion, the audited financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such financial statements.

The following are significant accounting policies consistently followed by the Company in preparation of its financial statements:

(a) Investments in financial instruments

Investment transactions are recorded on the trade date.

The Company will use the following valuation methods to determine either current market value for investments for which market quotations are available, or if not available, then fair value, as determined in good faith pursuant to policies and procedures approved by the Company’s Board of Directors (the “Board”):

Market Quotations Available

The market value of each security listed or traded on any recognized securities exchange or automated quotation system will be the last reported sale price at the relevant valuation date on the composite tape or on the principal exchange on which such security is traded. If no sale is reported on that date, the Company utilizes, when available, pricing quotations from principal market makers. Such quotations may be obtained from third-party pricing services or directly from investment brokers and dealers in the secondary market. Generally, the Company’s loan and bond positions are not traded on exchanges and consequently are valued based on market prices received from third-party pricing services or broker-dealer sources. The valuation of certain securities for which there is no market may take into account appraisal reports from independent valuation firms. Short-term debt securities having a remaining maturity of 60 days or less when purchased and debt securities originally purchased with maturities in excess of 60 days but which currently have maturities of 60 days or less may be valued at cost adjusted for amortization of premiums and accretion of discounts.

Market Quotations Not Available

The Company will take the following steps each time it determines its net asset value in order to determine the value of its securities for which market quotations are not readily available, as determined in good faith pursuant to policies and procedures approved by the Board:

	1.		The valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment.

	2.		Preliminary valuation conclusions will then be documented and discussed with Highland Capital Management, L.P.’s (the “Investment Adviser”) senior management.

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


March 31, 2008		Highland Distressed Opportunities, Inc.

	3.		The valuation committee, comprised of the Investment Adviser’s investment professionals, will then review these preliminary valuations. An independent valuation firm engaged by the Company’s Board will review some or all of these preliminary valuations at least annually.

	4.		Finally, the Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith, pursuant to policies and procedures approved by the Board, based on the input of the valuation committee and an independent valuation firm.

Determination of fair values is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures.

Adoption of Statement of Financial Accounting Standards No. 157 “Fair Value Measurement” (“FAS 157”):

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 157, “Fair Value Measurement,” which is effective for financial statements issued for fiscal years beginning after November 15, 2007. FAS 157 defines how fair value should be determined for financial reporting purposes, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about the use of fair value measurements, but is not expected to result in any changes to the fair value measurements of the Company’s investments. FAS 157 requires companies to provide expanded information about the assets and liabilities measured at fair value and the potential effect of these fair valuations on net assets for the reportable periods as contained in the Company’s periodic filings.

The Company has adopted FAS 157 as of January 1, 2008. The Company has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. Based on this assessment, the adoption of FAS 157 did not have any material effect on the Company’s net asset value. However, the adoption of FAS 157 does require the Company to provide additional disclosures about the inputs used to develop the measurements and the effect of certain measurements The three levels of the fair value hierarchy established under FAS 157 are described below:

	•		Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement;

	•		Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

	•		Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Company’s assets as of March 31, 2008 as follows:


Assets at Fair Value	Total		Level 1		Level 2		Level 3
Portfolio Investments	$	272,537,724	$	13,581,751	$	217,165,301	$	41,790,672
Cash and foreign currency		4,578		4,578		—		—

Total	$	272,542,302	$	13,586,329	$	217,165,301	$	41,790,672

The Company did not have any liabilities that were measured at fair value on a recurring basis at March 31, 2008.

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


March 31, 2008		Highland Distressed Opportunities, Inc.

The following table presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2007 and at March 31, 2008.


Assets at Fair Value Using Unobservable Inputs (Level 3)	Portfolio Investments
Balance as of December 31, 2007	$	37,888,863
Transfers in/(out) of Level 3		—
Net amortization/(accretion) of premium/(discount)		33,757
Net realized gains/(losses)		—
Net unrealized gains/(losses)		(1,252,327	)
Net purchases and sales *		5,120,379

Balance as of March 31, 2008	$	41,790,672


*		Includes any applicable borrowings and/or paydowns made on revolving credit facilities held in the Company’s investment portfolio.

The $1,252,327 of unrealized losses, net, presented in the table above relate to investments that are still held at March 31, 2008, and the Company presents these unrealized losses on the Statement of Operations as Net change in unrealized appreciation/(depreciation) on investments.

(b) Net asset value per share

The net asset value per share disclosed on the Statement of Assets and Liabilities is calculated by dividing the net assets attributable to the shares of the Company’s common stock by the number of such shares outstanding at period-end.

All securities transactions are accounted for on a trade-date basis. Gains or losses on the sale of investments are calculated by using the specific identification method.

(d) Interest income

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income. Payment-in-Kind (“PIK”) interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of distributions, even though the Company has not yet collected cash. For the quarter ended March 31, 2008, approximately $0.5 million of PIK interest income was recorded.

(e) Taxation — general

The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes. However, depending on the level of taxable income earned in a year, the Company may choose to carry forward taxable income in excess of distributions and pay the 4% excise tax on the difference. Additionally, the Company is subject to franchise taxes in the state of Delaware.

In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FIN 48 provides guidance on how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authorities. Tax positions not deemed to satisfy the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. FASB required adoption of FIN 48 for fiscal years beginning after December 15, 2006, and FIN 48 is to be applied to all open tax years as of the effective date. However, on December 22, 2006, the Securities and Exchange Commission (“SEC”) delayed the required implementation date of FIN 48 for business development companies until March 31, 2007. As of December 31, 2007, the Company adopted FIN 48 for all subsequent reporting periods and management has determined that there is no material impact on the financial statements.

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


March 31, 2008		Highland Distressed Opportunities, Inc.

(f) Taxation of distributions

Book and tax basis differences relating to stockholder distributions and other permanent book and tax differences are reclassified to paid-in capital. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.

(g) Payment of distributions

Distributions to common stockholders are recorded as of the date of declaration. The amount to be paid out as a distribution is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually.

(h) Foreign currency

The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company’s investments in foreign securities may involve certain risks such as foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company.

(i) Forward contracts

The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled.

(j) Investment in swap agreements

Swap agreements are recorded at fair value as estimated by management in good faith. The net unrealized gain or loss on swap agreements is recorded as an asset or liability on the Statement of Assets and Liabilities. The change in unrealized gain or loss is recorded in the Statement of Operations. Cash paid or received on net settlements is recorded as realized gain or loss in the Statement of Operations.

(k) Cash and cash equivalents

Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at cost which approximates fair value as of March 31, 2008.

(l) Restricted cash

Restricted cash consists of cash held by the Company’s custodian as collateral with respect to certain transactions. The Company earns interest on the restricted cash, which is recorded on the accrual basis.

(m) Registration expenses

The Company records registration expenses related to shelf filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with Section 8.24 of the AICPA Audit and Accounting Guide for Investment Companies.

(n) Incentive fee expense recognition

The realized capital gain component of the incentive fee (the “Capital Gains Fee”), is payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement, as of the termination date.) The Capital Gains Fee is estimated as of the end of the each calendar quarter based on the Company’s realized capital gains, if any, net of all realized capital losses, unrealized capital depreciation and fees paid on such net capital gains, computed on a cumulative basis. To the extent that Capital Gains Fees are earned by the Investment Adviser, an accrual is made in the amount of the estimated Capital Gains Fee. Because unrealized losses may fluctuate from quarter to quarter, the accrual, if any, may fluctuate as well. There were no Capital Gains Fees paid or accrued for the quarter ended March 31, 2008. (See Note 3 for additional information.)

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


March 31, 2008		Highland Distressed Opportunities, Inc.

Note 3. Agreements

The Company has entered into an Investment Advisory and Management Agreement with the Investment Adviser, under which the Investment Adviser, subject to the overall supervision of the Company’s Board, manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Investment Adviser receives a base management fee and an incentive fee from the Company.

The base management fee is equal to 2.00% per annum of the Company’s Managed Assets. Managed Assets are the value of total assets of the Company less all accrued liabilities of the Company (other than the aggregate amount of any outstanding borrowings, preferred stock issuances, or other instruments or obligations constituting financial leverage). The base management fee is payable quarterly in arrears; however, the Investment Adviser contractually agreed to waive or reimburse the Company for all base management fees during the first three months of the Company’s operations and half of all the base management fees during the next three months of the Company’s operations. This contractual waiver expired on August 31, 2007.

The incentive fee consists of two components: (1) the Pre-Incentive Fee Net Investment Income and (2) the Capital Gains Fee. Pre-Incentive Fee Net Investment Income is calculated and payable quarterly in arrears. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the base management fee, any expenses payable under the administration agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as market discount, debt instruments with PIK interest, preferred stock with PIK dividends and zero coupon securities), accrued income that we have not yet received in cash. The Investment Adviser is not under any obligation to reimburse the Company for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by an entity on an obligation that resulted in the accrual of such income. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized and unrealized capital losses or unrealized capital appreciation or depreciation.

Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding calendar quarter, is compared to the “hurdle rate” of 1.75% per quarter (7.00% annualized) (the “Hurdle Rate”). The Company will pay the Investment Adviser an incentive fee with respect to the Company’s Pre-Incentive Fee Net Investment Income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which Pre-Incentive Fee Net Investment Income does not exceed the Hurdle Rate; (2) 100% of Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the Hurdle Rate but is less than 2.1875% in any calendar quarter (8.75% annualized) (the “Catch-up Provision”); and (3) 20% of the amount of Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized). With respect to the Company’s Pre-Incentive Fee Net Investment Income from the Company’s commencement of operations until December 31, 2007, the Investment Adviser voluntarily has agreed to waive or reimburse the Catch-Up Provision, provided, however, that for such period the Company will pay the Investment Adviser 20% of Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the Hurdle Rate, but is less than 2.1875% in any calendar quarter (8.75% annualized). For the three months ended March 31, 2008, the Investment Adviser earned net investment income based incentive fees of approximately $0.9 million.

These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the relevant quarter.

The second part of the incentive fee (the “Capital Gains Fee”) is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory and Management Agreement), beginning on December 31, 2007, and is calculated at the end of each applicable year by subtracting (A) the sum of the Company’s cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (B) the Company’s cumulative aggregate realized capital gains, in each case calculated from the date of the IPO of the Company’s shares. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee paid for such year. For the three months ended March 31, 2008, no capital gains incentive fees were earned by the Investment Adviser.

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


March 31, 2008		Highland Distressed Opportunities, Inc.

Pursuant to a separate administration agreement, the Investment Adviser furnishes the Company with office facilities, equipment and clerical, bookkeeping and recordkeeping services at such facilities. Under the administration agreement, the Investment Adviser also will perform, or oversee the performance of, the Company’s required administrative services, which include, among other things, being responsible for the financial records that the Company is required to maintain, monitoring portfolio and regulatory compliance matters and preparing reports to the Company’s stockholders and reports filed with the SEC. In addition, the Investment Adviser will assist the Company in determining, and arranging for the publishing of, the Company’s net asset value, overseeing the preparation and filing of tax returns and the printing and disseminating of reports to stockholders, and generally overseeing the payment of expenses and the performance of administrative and professional services rendered to the Company by others. For providing these services, the Investment Adviser will receive an annual administration fee, payable quarterly in arrears at an annual rate of 0.35% of the Company’s Managed Assets. Under a separate sub-administration agreement, the Investment Adviser has delegated certain administrative functions to PFPC Inc. The administration agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party. For the three months ended March 31, 2008, the Investment Adviser earned administration fees of approximately $0.3 million.

The Investment Adviser paid to the underwriters an additional sales load of $0.15 per share, for a total sales load of $0.825 per share. The Company will pay this amount to the Investment Adviser, together with an interest factor, pursuant to an Agreement Regarding Payment of Sales Load (i) if during either the period commencing with the date of the IPO through the end of the Company’s first fiscal year or during the period of the Company’s second fiscal year (each a “Measuring Period”), the sum of (a) the Company’s aggregate distributions to its stockholders plus (b) the change in the Company’s net assets, equals or exceeds 7.00% of the net assets of the Company at the beginning of such Measuring Period (but after adjusting, if necessary, the net assets of the Company at the end of such Measuring Period as follows: by subtracting the net proceeds of any of the Company’s stock issuances, and by adding the amount of any of the Company’s stock repurchases, that occurred during such Measuring Period) and without taking into account any accrual for the total payment amount; or (ii) upon the Company’s liquidation. If neither (i) nor (ii) above has occurred by the conclusion of the second Measuring Period, then the Agreement Regarding Payment of Sales Load shall terminate on such date, without the Company having any payment obligation to the Investment Adviser. As of March 31, 2008, the Company was under no obligation to make a payment to the Investment Adviser.

Note 4. Credit Facility

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. On April 25, 2007, the Company entered into a $265 million Revolving Credit Agreement (the “Credit Agreement” or the “Facility”), with Barton Capital LLC, the lender party thereto and Société Générale, as agent.

The Credit Agreement is a 364-day revolving credit facility with a stated maturity date of April 25, 2012 and is secured by substantially all of the assets in the Company’s portfolio, including cash and cash equivalents. Pricing is set at 0.325% over LIBOR. Additionally, there is a commitment fee of 0.17% on the unused portion of the Credit Agreement. Borrowings under the Credit Agreement are subject to compliance with a borrowing base that applies different advance rates to different types of assets in the Company’s portfolio. The Company continues to be in compliance with all of the limitations and requirements of the Facility.

At March 31, 2008, the Company had borrowings outstanding under the Facility of $124.0 million. The interest rate charged on this loan as of March 31, 2008 was approximately 3.14%. The average daily loan balance was approximately $125.4 million at a weighted average interest rate of approximately 4.18%. Interest expense incurred during the quarter ended March 31, 2008 was approximately $1.4 million.

Note 5. Net Asset Value Per Share

At March 31, 2008, the Company’s total net assets and net asset value per share were $146,334,512 and $8.26, respectively.

Note 6. Unfunded Loan Commitments

As of March 31, 2008, the Company’s portfolio had unfunded loan commitments of approximately $0.6 million. Unfunded loan commitments are marked to fair value along with the funded portion of the respective loans, in accordance with the Company’s valuation policy discussed in Note 2(a).


Borrower	Unfunded Loan Commitment
Comcorp Broadcasting, Inc.	$	596,901

	$	596,901

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


March 31, 2008		Highland Distressed Opportunities, Inc.

Note 7. Portfolio Information

For the three months ended March 31, 2008, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were approximately $28,193,997 and $33,745,357, respectively.

Note 8. Affiliated Transactions

On January 18, 2007, the Company issued a promissory note payable to the Investment Adviser in the amount of $4 million with interest at 4.87% per annum, compounded semi-annually. The promissory note was paid off on March 8, 2007. The average daily balance on the promissory note for the time it was held was $4 million at a weighted average interest rate of 5.00%. Interest expense for this promissory note was approximately $25,929, and is recorded on the Statement of Operations.

Note 9. Financial Highlights

The following is a schedule of financial highlights for the three months ended March 31, 2008 and the period ended December 31, 2007:


	Quarter Ended March 31, 2008			Period Ended December 31, 2007^(a)
Net asset value, beginning of period	$	10.27		$	14.33	(b)

Net investment income		0.19			0.97
Net realized and unrealized loss on investments		(1.94	)		(4.43	)

Total from investment operations		(1.75	)		(3.46	)
Common Stock Offering Cost		—			(0.07	)
Capital Contribution		—			0.26	(c)
Distributions Paid		(0.26	)		(0.79	)

Net asset value, end of period	$	8.26		$	10.27

Market price per share, beginning of period	$	8.57		$	15.00
Market price per share, end of period	$	7.00		$	8.57

Total investment return (d)
Based on net asset value per share		(16.73	)%(e)		(23.30	)%(e)
Based on market price per share		(15.43	)%(e)		(38.85	)%(e)

Net assets, end of period (f)	$	146,335		$	182,015
Ratios to Average Net Assets/Supplemental Data:
Total operating expenses		7.23	%		5.74	%(g)
Interest expense		3.49	%		3.80	%(g)
Waiver/reimbursement		—			2.24	%(g)
Net expense (h)		10.72	%		7.30	%(g)
Net investment income		8.46	%		8.77	%(g)
Portfolio turnover rate		10	%(e)		224	%(e)


(a)		The Company commenced operations on January 18, 2007.

(b)		Net asset value at the beginning of the period reflects the deduction of the one-time initial sales load in connection with the offering.

(c)		On February 20, 2007, the Investment Adviser contributed an additional $87,596 in capital to the Company prior to the Offering. No additional shares were issued in the transaction. The contribution per share is based on the pre-offering share amount of 333,333.33

(d)		Total investment return based on market value may result in substantially different returns than investment return based on net asset value, because market value can be significantly greater or less than the net asset value. Investment return assumes reinvestment of distributions.

(e)		Not annualized.

(f)		Dollars in thousands.

(g)		Ratios to average net assets are calculated using the net assets for the period starting from the Offering on February 27, 2007 through December 31, 2007.

(h)		Net expense ratio has been calculated after applying any waiver/reimbursement.

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


March 31, 2008		Highland Distressed Opportunities, Inc.

Note 10. Income Tax Information and Distributions to Stockholders

On March 7, 2008, the Company’s Board declared a first quarter distribution of $0.2625 per share, which was paid on March 31, 2008 to common stockholders of record on March 20, 2008.

Reclassifications are made to the Company’s capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations.

The tax character of distributions paid during the period ended December 31, 2007, the most recent tax year, were as follows:


Distributions paid from:	2007
Ordinary income *	$	13,915,795
Long-term capital gains	$	—


*		For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions.

As of December 31, 2007, the most recent tax year end, the components of distributable earnings on a tax basis were as follows:


Capital loss carryforward *	$	(9,946,969	)
Undistributed ordinary income	$	3,525,488
Undistributed long-term capital gains	$	—
Net unrealized appreciation/(depreciation)	$	(60,038,767	)


*		The accumulated losses of $9,946,969 to offset future capital gains, if any, expire on December 31, 2015.

For the period ended December 31, 2007, the Company elected to defer capital losses of $4,600,720 attributable to post-October losses.

Unrealized appreciation and depreciation at March 31, 2008, based on cost of investments for U.S. federal income tax purposes and excluding any unrealized appreciation and depreciation from changes in the value of other assets and liabilities resulting from changes in exchange rates was:


Unrealized appreciation	$	3,139,257
Unrealized depreciation		(85,181,832	)

Net unrealized depreciation	$	(82,042,575	)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Some of the statements in this report constitute forward-looking statements, which relate to future events or the future performance or financial condition of Highland Distressed Opportunities, Inc. (the “Company,” “we,” “us” and “our”). The forward-looking statements contained in this report involve risks and uncertainties, including statements as to:

o		our future operating results;

o		our business prospects and the prospects of our portfolio companies;

o		the impact of investments that we expect to make;

o		our contractual arrangements and relationships with third parties;

o		the dependence of our future success on the general economy and its impact on the industries in which we invest;

o		our expected financings and investments;

o		the adequacy of our cash resources and working capital;

o		the timing of cash flows, if any from the operations of our portfolio companies; and

o		the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments.

We may use words such as “anticipates,” “believes,” “expects,” “intends,” “will,” “should,” “may,” “plans,” “could,” “estimates,” “potential,” “continue,” “target,” or the negative of these terms or other similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason. We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

We were incorporated in Delaware on August 22, 2006 and initially funded on January 18, 2007. We commenced material operations on February 27, 2007. Our investment objective is total return generated by both capital appreciation and current income. We will seek to achieve this objective by investing in financially-troubled or distressed companies that are either middle-market companies or unlisted companies by investing in senior secured debt, mezzanine debt and unsecured debt, each of which may include an equity component, and in equity investments.

Generally, distressed companies are those that (i) are facing financial or other difficulties and (ii) are or have been operating under the provisions of the U.S. Bankruptcy Code or other similar laws or, in the near future, may become subject to such provisions or otherwise be involved in a restructuring of their capital structure. We use the term “middle-market” to refer to companies with annual revenues between $50 million and $1 billion. We use the term “unlisted” to refer to companies not listed on a national securities exchange (for example, companies whose securities are quoted on the over-the-counter bulletin board or through Pink Sheets LLC would not be “listed” on a national securities exchange, although they may be considered “public” companies).

We have elected to be treated as a business development company (a “BDC”) under the Investment Company Act of 1940 (the “1940 Act”). As a BDC, we are required to comply with certain regulatory requirements. For instance, we are generally prohibited from acquiring assets other than “qualifying assets” unless, after giving effect to the acquisition, at least 70% of our total assets are qualifying assets. Qualifying assets generally include securities of “eligible portfolio companies” (as defined in the 1940 Act), cash, cash equivalents, U.S. government securities and high-quality debt instruments maturing in one year or less from the time of investment. Additionally, we will elect to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986 (the “Code”).

On February 26, 2007, the Company closed its initial public offering (“IPO” or the “Offering”) and sold 17,000,000 shares of its common stock at a price of $15.00 per share, less an underwriting discount and commissions totaling $0.675 per share. We commenced material operations on February 27, 2007 as we received $243,525,000 in total net proceeds from the IPO. On March 23, 2007, the Company issued 284,300 shares of common stock to cover the underwriters’ partial exercise of the over-allotment option on the Offering and received approximately $4,072,698 in net proceeds after deducting underwriting discounts and commissions.

Portfolio and Investment Activity

At March 31, 2008, our portfolio investments, exclusive of cash and cash equivalents, consisted of approximately 49.7% in senior loans, 40.4% in corporate notes and bonds, 0.5% in claims and 9.4% in equity interests as of that date. In comparison, at March 31, 2007, our portfolio investments, exclusive of cash and cash equivalents, consisted of approximately 76.7% in senior loans, 21.1% in corporate notes and bonds, 0.8% in claims and 1.4% in equity interests as of that date.

Bank debt typically accrues interest at variable rates determined by reference to a base lending rate, such as LIBOR or prime rate, and typically will have maturities of 3 to 5 years. Corporate notes and bonds will typically accrue interest at fixed rates and have stated maturities at origination that range from 5 to 10 years. At March 31, 2008, the weighted average cost yield of our portfolio investments, exclusive of cash and cash equivalents, was approximately 8.0%. At March 31, 2008, the weighted average cost yield of our investments in senior loans and corporate notes and bonds was approximately 9.5%. Yields are computed assuming a fully settled portfolio; using interest rates as of the report date and include amortization of senior loan discount points, original issue discount and market premium or discount; weighted by their respective costs when averaged.

As of March 31, 2008, approximately 46.1% of our portfolio consisted of investments in 10 issuers. Additional information regarding these specific investments has been outlined below. This additional information is limited to publicly available information, and does not address the creditworthiness or financial viability of the issuer, or the future plans of the Company as it relates to a specific investment. Furthermore, while the objective of the Company is to invest primarily in financially-troubled or distressed companies, the Company can and does invest in issuers that are not financially-troubled or distressed at the time of investment. The Company may have sold some, or all, of the positions outlined below subsequent to March 31, 2008.

Celtic Pharma Phinco B.V.

Celtic Pharmaceuticals (“Celtic Pharma”) is a private investment fund with a mandate to purchase a diversified portfolio of novel pharmaceutical products in the later stages of development that have already demonstrated initial proof of principle efficacy in human clinical trials. Celtic Pharma has $250 million of equity commitments in addition to raising $156 million of high-yield bonds. Celtic Pharma has invested in nine drug programs since its 2004 inception. More information can be found at www.celticpharma.com.

Comcorp Broadcasting, Inc.

Comcorp Broadcasting, Inc. (“ComCorp”) is a privately-held regional broadcasting company based in Lafayette, LA. ComCorp operates 23 TV stations in 10 markets in Texas, Louisiana, and Indiana. ComCorp filed for bankruptcy in June 2006 after it was unable to meet its ongoing debt obligations. ComCorp, and its direct and indirect subsidiaries, exited bankruptcy with an effective date of October 4, 2007 under Plans filed with the United States Bankruptcy Court in the Western District of Louisiana (Case No. 06-50410). Copies of the Plans and the Confirmation Orders may be downloaded, without cost, at www.kccllc.net/cca, or be requested free of charge by calling Kurtzman Carson Consultants LLC at 1-866-381-9100.

Energy XXI Gulf Coast, Inc.

Energy XXI Gulf Coast, Inc. (“Energy XXI”), a wholly-owned subsidiary of Energy XXI (Bermuda) Limited, is an independent oil and natural gas exploration and production company whose growth strategy emphasizes acquisitions, enhanced by a value-added organic drilling program. Their properties are primarily located in the U.S. Gulf of Mexico waters and the Gulf Coast onshore. At June 30, 2007, total proved reserves were 55.6 MMBoe. Energy XXI operated or had an interest in 338 producing wells on 131,235 net developed acres, including interests in 60 producing fields, with approximately 76 percent of proved reserves being offshore. More information can be found at www.energyxxi.com.

Entegra Power Group, LLC

Entegra Power Group, LLC (“Entegra”) was formed June 1, 2005. Entegra owns and operates two of the largest independent power plants in the United States. Both plants, similar in size and design, are natural gas fired combined cycle facilities, each capable of producing approximately 2,200 MW of power and have been in commercial operation since 2003. The Gila River Power Station is located just south of Phoenix, Arizona and the Union Power Station is located in southern Arkansas. More information can be found at www.entegrapower.com.

Fontainebleau Florida Hotel, LLC

Fontainebleau Resorts, Inc. (“Fontainebleau”) is led by Chairman Jeffrey Soffer, who also serves as Chief Executive Officer of Turnberry, Ltd., a creator of luxury condominium and condominium-hotel developments, and President and Chief Financial Officer Glenn Schaeffer, a former Chief Executive Officer of Mandalay Resort Group. Fontainebleau Miami Beach is a resort located in Miami Beach, Florida. Fontainebleau plans to renovate and expand this property into a 22-acre destination resort. More information can be found at www.bleaumiamibeach.com.

Lake at Las Vegas Joint Venture, LLC

Lake at Las Vegas Joint Venture, LLC is a 3,592-acre resort and destination community and is one of the larger master-planned communities in Las Vegas, NV. The development is located approximately 17 miles from the Las Vegas strip. More information can be found at www.lakelasvegas.com.

LVI Services, Inc.

LVI Services, Inc. (“LVI”) is a remediation and facility services firm serving commercial, industrial, retail, government, healthcare and education end markets. From a nationwide branch network, LVI provides asbestos abatement, soft and structural demolition, mold remediation, emergency response, fireproofing, decontamination and decommissioning, lead-based paint abatement and infection control. More information can be found at www.lviservices.com.

Motor Coach Industries International, Inc.

Motor Coach Industries International, Inc. (“MCII”) designs, manufactures, assembles and markets intercity coaches, transit buses and their replacement parts. MCII’s coaches are used for intercity regularly scheduled passenger service, tour and charter operations and suburban commuting. More information can be found at www.mcicoach.com.

MPH Mezzanine II, LLC / MPH Mezzanine III, LLC

In February, 2007, Equity Office Properties (“EOP”), and one or more affiliates, merged with affiliates of Blackstone Real Estate Partners (“Blackstone”). Macklowe Properties purchased all but one of EOP’s Manhattan, NY holdings, through an agreement with Blackstone. More information can be found at www.macklowe.com.

Realogy Corporation

Realogy Corporation (“Realogy”) is a leading global provider of real estate and relocation services including real estate franchising, brokerage, relocation and title. Realogy’s brands and business units include Better Homes and Gardens Real Estate^®, CENTURY 21^®, Coldwell Banker^®, Coldwell Banker Commercial^®, The Corcoran Group^®, ERA^®, Sotheby’s International Realty^®, NRT LLC, Cartus and Title Resource Group. More information can be found at www.realogy.com.

Results of Operations

As we initially funded on January 18, 2007, comparisons of results to the period January 18, 2007 (commencement of operations) through March 31, 2007 may not necessarily be meaningful.

Operating results for the quarter ended March 31, 2008 are as follows:


	Quarter Ended March 31, 2008
Total investment income	$	7,892,740
Net expenses	$	4,411,265
Net investment income	$	3,481,475
Net realized and unrealized gain/(loss) on investments	$	(34,511,363	)
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations	$	(31,029,888	)

Investment Income

We primarily generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and capital gains or losses on any debt or equity securities that we acquire and subsequently sell. We also may acquire investments, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. Investment income for the quarter ended March 31, 2008 was approximately $7.9 million, with approximately $0.2 million of income attributable to invested cash and cash equivalents and approximately $7.7 million attributable to investments in equity interests, bank debt/senior secured debt, and corporate notes/subordinated debt. Of the approximately $7.7 million in investment income from investments other than cash and cash equivalents, approximately $0.5 million of PIK interest income was recorded. This compares to investment income for the period January 18, 2007 (commencement of operations) through March 31, 2007 of approximately $1.7 million, with approximately $0.6 million of income attributable to invested cash and cash equivalents and approximately $1.1 million attributable to investments in equity interests, bank debt/senior secured debt and corporate notes/subordinated debt.

Operating Expenses

Operating expenses for the quarter ended March 31, 2008 were approximately $3.0 million. This amount consisted of advisory fees of approximately $1.5 million, incentive fees of approximately $0.9 million, and administrative fees, accounting fees, professional fees, directors’ fees, taxes and other expenses of approximately $0.6 million. In comparison, operating expenses for the period January 18, 2007 (commencement of operations) through March 31, 2007 were approximately $0.8 million.

Net Investment Income

The Company’s net investment income for the quarter ended March 31, 2008 was approximately $3.5 million, compared to net investment income of approximately $1.3 million for the period January 18, 2007 (commencement of operations) through March 31, 2007.

Net Unrealized Depreciation on Investments

For the quarter ended March 31, 2008, the Company’s investments had net unrealized depreciation of approximately $22.0 million, compared to net unrealized depreciation of approximately $1.0 million for the period January 18, 2007 (commencement of operations) through March 31, 2007. The decrease was attributable to net unrealized depreciation on senior loans and corporate notes/subordinated debt of approximately $25.5 million and $1.0 million, respectively and net unrealized appreciation on, and claims and equity interests of approximately $4.5 million.

Net Realized Losses

For the quarter ended March 31, 2008, the Company had net realized losses on investments of approximately $12.5 million, compared to net realized gains on investments of approximately $0.1 million for the period January 18, 2007 (commencement of operations) through March 31, 2007.

Net Decrease in Stockholders’ Equity (Net Assets) from Operations

For the quarter ended March 31, 2008, the Company had a net decrease in stockholders’ equity (net assets) resulting from operations of approximately $31.0 million, compared to a net increase in stockholders’ equity (net assets) resulting from operations of approximately $0.4 million for the period January 18, 2007 (commencement of operations) through March 31, 2007. The decrease was primarily attributable to net unrealized depreciation on investments for the quarter ended March 31, 2008, as discussed above.

We remain committed to our total return investment objective by pursuing risk-adjusted returns across market cycles and will continue to focus on positioning our portfolio to benefit in weakened credit markets. In light of the broader market dislocation, we are encouraged by prospects in the current market environment that we believe may allow us to increase both the overall investment yield on our investments and the opportunity for capital appreciation. To that end, the Investment Adviser is comfortable with the state of our investment portfolio and its ability to manage the individual investments.

Financial Condition, Liquidity and Capital Resources

During the quarter ended March 31, 2008, liquidity and capital resources were generated primarily from cash flows from operations, including investment sales and prepayments and income earned from investments and cash equivalents. We may also fund our investments and operations through borrowings under the credit facility entered into in April 2007. At March 31, 2008, the Company had $124.0 million in borrowings outstanding and had $141.0 million available for its use. The primary use of funds will be investments in portfolio companies, to provide additional liquidity, to seek to meet our investment objective and strategies, to make cash distributions to holders of our common stock and to pay fees and our operating expenses.

Off-Balance Sheet Arrangements

At March 31, 2008, we did not have any off-balance sheet liabilities or other contractual obligations that are reasonably likely to have a current or future material effect on our financial condition, other than the investment advisory and management agreement and the administration agreement described above.

Distributions

We intend to elect to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986. In order to maintain our status as a regulated investment company, we are required to meet specified source-of-income and asset diversification requirements and must distribute annually at least 90% of our investment company taxable income. Additionally, we must distribute at least 98% of our income (both ordinary income and net capital gains) to avoid an excise tax. We intend to make distributions to our stockholders on a quarterly basis of substantially all of our net operating income. We also intend to make distributions of net realized capital gains, if any, at least annually.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings when applicable to us as a business development company under the Investment Company Act of 1940 and due to provisions in our credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

On March 7, 2008, the Company’s Board declared a first quarter distribution of $0.2625 per share ($4,650,652), which was paid on March 31, 2008 to common stockholders of record on March 20, 2008. The Company has established an “opt out” dividend reinvestment plan (the “Plan”) for its common stockholders. As a result, if the Company declares a cash distribution in future periods, a stockholder’s cash distribution will be automatically reinvested in additional shares of the Company’s common stock unless the stockholder specifically “opts out” of the Plan and elects to receive cash distributions. For the first quarter 2008 distribution, holders of 1,563,384 shares participated in the Plan. As a result, of the $4,650,652 total amount distributed, $410,388 was used by the Plan agent to purchase shares in the open market, including fractions, on behalf of the Plan participants. For the period January 18, 2007 (commencement of operations) through December 31, 2007, distributions paid to stockholders totaled $0.7875 per share ($13,915,795). Tax characteristics of all distributions will be reported to stockholders on Form 1099-DIV after the end of the calendar year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio.

As of March 31, 2008, approximately 90.1% of our portfolio, exclusive of cash and cash equivalents, was invested in debt securities. This exposes the Company to a great degree of default risk with respect to the issuers in our portfolio. Although defaults were at historic lows during 2007, defaults may increase in the future. New derivative products are available to hedge against default risk; however, the Company did not hedge its exposure during the quarter ended March 31, 2008.

As of March 31, 2008, approximately 48.5% and 41.6% of our portfolio, exclusive of cash and cash equivalents, was invested in securities that paid floating and fixed rates of interest, respectively. Increases or decreases in market interest rates may potentially affect the Company’s net asset value. When interest rates decline, the value of fixed rate securities in the Company’s portfolio may be expected to rise. Conversely, when interest rates rise, the value of fixed rate portfolio securities may decline. The sensitivity of the Company’s net asset value to changes in interest rates will increase to the extent that it holds a higher percentage of its portfolio in fixed rate investments.

Increases or decreases in market interest rates may also affect the Company’s distributions. While the Company does not disclose whether it will be able to maintain historic distribution levels in the future, it is clear that for a portfolio holding a large percentage of floating rate investments, a decrease in market interest rates may have a negative impact on yield. There tends to be a lag in the effect a decline in market interest rates has on the yield of floating rate investments. This is due to the resetting of the base rate underlying the individual investment, which typically happens every sixty to ninety days depending on the terms. As of March 31, 2008 the average days for the underlying senior loans in the Company’s portfolio base rate to reset was approximately 47.5 days.

There have been no material changes from the information provided in Item 7A of the Company’s Annual Report on Form 10-K for the period ended December 31, 2007.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them of material information relating to the Company that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 6. Exhibits and Financial Statement Schedules

(a) Exhibits


Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation of the Company.(2)

3.2		Bylaws of the Company.(1)

4.1		Form of Specimen Certificate.(2)

10.1		Form of Investment Advisory and Management Agreement between Company and Highland Capital Management, L.P.(1)

10.2		Form of Administration Services Agreement between Company and Highland Capital Management, L.P.(2)

10.3		Form of Sub-Administration Services Agreement between Highland Capital Management, L.P. and PFPC Inc.(1)

10.4		Form of Custodian Services Agreement between Company and PFPC Inc.(1)

10.5		Form of Transfer Agency Services Agreement between Company and PFPC Inc.(1)

10.6		Form of Accounting Services Agreement.(1)

10.7		Form of Structuring Fee Agreement between the Investment Adviser and Citigroup Global Markets Inc.(2)

10.8		Form of Structuring Fee Agreement between the Investment Adviser and Merrill Lynch & Co.(2)

10.9		Form of Structuring Fee Agreement between the Investment Adviser and Wachovia Capital Markets, LLC.(2)

10.10		Form of Agreement Regarding Payment of Sales Load.(2)

31.1		Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a)(3).(3)

31.2		Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a)(3).(3)

32.1		Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350.(3)


(1)		Previously filed in Pre-Effective Amendment No. 1 to the Company’s Initial Registration Statement on Form N-2, File No. 333-137435, filed on January 18, 2007.

(2)		Previously filed in Pre-Effective Amendment No. 3 to the Company’s Initial Registration Statement on Form N-2, File No. 333-137435, filed on February 16, 2007.

(3)		Filed herewith.


	Page
PART I Financial Information
Item 1. Financial Statements		3
Schedule of Investments—As of March 31, 2008 (unaudited)		3
Statement of Assets and Liabilities—As of March 31, 2008 (unaudited) and December 31, 2007		9
Statement of Operations (unaudited)—For the quarter ended March 31, 2008 and for the period January 18, 2007* through March 31, 2007		10
Statement of Changes in Stockholders’ Equity (Net Assets) (unaudited)—For the quarter ended March 31, 2008 and for the period January 18, 2007* through December 31, 2007		11
Statement of Cash Flows (unaudited)—For the quarter ended March 31, 2008 and for the period January 18, 2007* through March 31, 2007		12
Notes to Financial Statements (unaudited)		13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		25
Item 4. Controls and Procedures		25
PART II Other Information
Item 1. Legal Proceedings		26
Item 1A. Risk Factors		26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3. Defaults Upon Senior Securities		26
Item 4. Submission of Matters to a Vote of Security Holders		26
Item 5. Other Information		26
Item 6. Exhibits		27
Signatures		28
Rule 13a-14(a) Certification of CEO
Rule 13a-14(a) Certification of CFO
Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350


Dated: May 5, 2008		/s/ James D. Dondero

		James D. Dondero
		President (Principal Executive Officer)

		/s/ M. Jason Blackburn

		M. Jason Blackburn
	Secretary and Treasurer (Principal Financial and Accounting Officer)

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*		Commencement of operations