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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
      (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition
    period          to   Commission file number:
    001-33032
      Highland Distressed
    Opportunities, Inc.
 (Exact Name of Registrant as
    Specified in Charter)
      Delaware(State or Jurisdiction of
    Incorporation or Organization)

680309666(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)
      Securities registered pursuant to Section 12(b) of the
    Act:
  Common Stock, par value $.001
    per share

New York Stock
    Exchange(Title of class)

(Name of exchange on which registered)   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
    Large accelerated filer
    o

Accelerated filer
    o

Non-accelerated
    filer þ
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
    Form 10-K Form 10-K.




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##### 





Highland
    Distressed Opportunities, Inc.
  Table
    of Contents
   
 PagePART IItem 1

Business


3Item 1A

Risk Factors


15Item 1B

Unresolved Staff Comments


31Item 2

Properties


31Item 3

Legal Proceedings


32Item 4

Submission of Matters to a Vote of Security
    Holders


32PART IIItem 5

Market for Registrants Common Equity and
    Related Stockholder Matters


32Item 6

Selected Financial Data


36Item 7

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


36Item 7A

Quantitative and Qualitative Disclosures about
    Market Risk


41Item 8

Financial Statements and Supplementary Data


42Item 9

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


64Item 9A

Controls and Procedures


64Item 9B

Other Information


64PART IIIItem 10

Directors, Executive Officers and Corporate
    Governance


64Item 11

Executive Compensation


64Item 12

Security Ownership of Certain Beneficial Owners
    and Management


64Item 13

Certain Relationships and Related Transactions


64Item 14

Principal Accountant Fees and Services


64PART IVItem 15

Exhibits, Financial Statement Schedules


65   2




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PART I  Item 1.
    Business  Forward-Looking
    Statements
    
    our future operating results;
    our business prospects and the prospects of our portfolio
    companies;
    the impact of investments that we expect to make;
    our contractual arrangements and relationships with third
    parties;
    the dependence of our future success on the general economy and
    its impact on the industries in which we invest;
    our expected financings and investments;
    the adequacy of our cash resources and working capital;
    the timing of cash flows, if any from the operations of our
    portfolio companies; and
    the ability of our investment adviser to locate suitable
    investments for us and to monitor and administer our investments.  Form 10-K, Form 10-Q Form 8-K.
  Overview
     3




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Our
    Investment Adviser
      bottom-up
  Our
    Administrator
    Our
    Executive Offices
  (877) 247-1888.
  Operating
    and Regulatory Structure
  Business Development Company.
  Regulated Investment Company.
   4




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and/or
     5




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##### Table of Contents



Investments
    

Aerospace and Defense



Financial



Manufacturing

Airlines



Food/Tobacco



Metals/Minerals

Broadcasting



Forest Products



Retail

Cable



Gaming/Leisure



Service

Consumer Non-Durables



Healthcare



Telecommunications

Diversified Media



Housing



Transportation

Energy



Information Technology



Utilities
   Market
    Opportunity
  Growing Supply of Distressed Investment
    Opportunities.
   6




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Middle-Market and Unlisted Opportunities.
  Inefficient Distressed Markets.
  
    Non-Economic Selling.  Many investors
    are unwilling or unable to purchase or hold distressed debt,
    leading to forced selling and artificially low pricing.
    Additionally, regulatory or capital restrictions at many
    institutions prevent the holding, leveraging or actively
    managing of defaulted securities and often force the divestment
    of such positions.
    Complexity of Analysis.  The analysis of
    distressed investment opportunities is significantly more
    complex and challenging than that of traditional par
    investments. Investors often overestimate the long-term impact
    of a given companys distress on fundamental value or
    become intimidated by the complexities of the restructuring
    process, leading to significant selling pressure and resulting
    in inefficient pricing.
    Lack of Middle-Market and Unlisted
    Demand.  Middle-market and unlisted investment
    opportunities are often overlooked by distressed debt analysts
    because of lower trading volume and the lack of third party
    research coverage of such securities. As a result, middle-market
    and unlisted investments are generally characterized by less
    competition than larger, more-liquid, listed opportunities and
    typically offer more attractive valuations.
    Barriers to Entry.  Successful
    distressed investing requires a specialized skill set that
    includes: (i) the capacity to accurately value a
    companys assets and analyze its capital structure;
    (ii) a sophisticated knowledge of the complex legal
    environment in which such investing occurs, particularly
    bankruptcy, securities, corporate and indenture law;
    (iii) the experience necessary to determine accurately the
    financial interests and legal rights of the debtor and each of
    its creditor constituencies; and (iv) refined negotiating
    skills. 7




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Lower Risk, Higher Relative-Reward
    Strategy.
  Competitive
    Advantages
    Investment Expertise.
  Operating Expertise.
  Versatile Transaction Structuring.
  Longer investment horizon with attractive publicly-traded
    model.
 8




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Investment
    Policies and Portfolio Composition
      and/or
   9




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Portfolio
    Company Characteristics
    Liquidation Value of Assets.
  Strong Competitive Position in Industry.
  Exit Strategy. and/or
  Experienced Management.
  Value Orientation/Positive Cash Flow. start-up
  The
    Investment Process
     10




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Deal Sourcing.
  Early-Mover Advantage.
  First-Look Investment
    Opportunities.
  Network of Relationships.
  Due Diligence.
  Key Procedures.
  
    review of historical and prospective financial information;
    review of public information;
    on-site
    visits;
    interviews with management, employees, customers and vendors of
    the potential portfolio company;
    review of financing documents and other material contracts;
    background checks; and
    research relating to the companys management, industry,
    markets, products, services and competitors. 11




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Timing Considerations.
  Managerial
    Assistance
    Competition
    Investment
    Advisory and Management Agreement
     12




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Catch-up Catch-Up
       13




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Staffing
    Leverage
    Sarbanes-Oxley
    Act of 2002
    
    Pursuant to
    Rule 13a-14
    under the Securities Exchange Act of 1934 (the
    1934 Act), our Principal Executive Officer and
    Principal Financial Officer must certify the accuracy of the
    financial statements contained in our periodic reports;
    Pursuant to Item 307 of
    Regulation S-K,
    our periodic reports must disclose our conclusions about the
    effectiveness of our disclosure controls and procedures;
    Pursuant to Item 308 of
    Regulation S-K
    and
    Rule 13a-15
    under the 1934 Act, our periodic reports must disclose
    whether there were significant changes in our internal controls
    or in other factors that could significantly affect these
    controls subsequent to the date of their evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.    Privacy
    Policy
    Collection of Information.
  
    Account applications and other forms, which may include
    your name, address and social security number, written and
    electronic correspondence and telephone contacts; 14




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
    Website information, including any information captured
    through our use of cookies; and
    Account history, including information about the
    transactions and balances in your accounts with us or our
    affiliates.  Disclosure of Information.
  Confidentiality and Security of
    Information.
  Available
    Information
  http://www.highlandhcd.com. Form 10-K, Form 10-Q, Form 8-K,
  Item 1A.
    Risk
    Factors  Before you invest in shares of our common stock, you should
    be aware of various risks, including those described below. You
    should carefully consider these risks, together with all of the
    other information included in this annual report on
    Form 10-K,
    including our consolidated financial statements and the related
    notes thereto, before you decide whether to make an investment
    in shares of our common stock. The risks set out below are not
    the only risks we face. Additional risks and uncertainties not
    currently known to us or that we currently deem to be immaterial
    also may materially adversely affect our business, financial
    condition
    and/or
    operating results. If any of the following events occur, our
    business, financial condition and results of operations could be
    materially adversely affected. In such case, our net asset value
    and the trading price of our common stock could decline, and you
    may lose all or part of your investment.
  Risks
    Related to Our Business and Structure
  We are
    a relatively new company with limited operating
    history.
    We
    operate in a highly competitive market for investment
    opportunities.
   15




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The
    Investment Advisers key personnel had no experience
    managing a BDC prior to our IPO and we cannot assure you that
    their past experience will be sufficient to manage our Company
    as a BDC.
    Key
    personnel of the Investment Adviser provide services to other
    clients, which could reduce the amount of time and effort they
    devote to us and thus negatively impact our
    performance.
    Key
    personnel of the Investment Adviser provide advisory services to
    other investment vehicles that may have common investment
    objectives with ours and may face conflicts of interest in
    allocating investments.
    Our
    success is dependent upon the members of the Investment
    Advisers senior professionals, and the loss of any of them
    could severely and detrimentally affect our
    operations.
   16




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Because
    we use leverage, you will be exposed to additional risks,
    including the risk that our use of leverage can magnify the
    effect of any losses we incur.
    
    We would not be permitted to pay distributions on the Shares if
    dividends on the preferred stock
    and/or
    interest on borrowings have not been paid or set aside for
    payment.
    Under the provisions of the 1940 Act, we are permitted, as a
    BDC, to issue debt or preferred stock or other senior securities
    only in amounts such that our asset coverage, as defined in the
    1940 Act, equals at least 200% after each issuance of senior
    securities. If the value of our assets declines below that level
    we will be prohibited from paying distributions on the Shares.
    If that happens, in order to maintain our tax qualification we
    may be required to sell a portion of our investments and repay a
    portion of our leverage at a time when such sales
    and/or
    repayments may be disadvantageous.
    It is likely that any debt we incur will be governed by an
    indenture or other instrument containing covenants that may
    restrict our operating flexibility or our ability to pay
    distributions on Shares in certain instances.
    Any debt that we issue or incur may be secured by a lien on our
    assets, which, in the event of a default under the instrument
    governing the debt, would subject such collateral to liquidation
    by the lenders at a time when such sales may be disadvantageous.
    We and, indirectly, our stockholders will bear the cost of
    issuing and servicing our leverage.
    Any leverage instruments that we issue in the future will have
    rights, preferences and privileges over our income and against
    our assets in liquidation that are more favorable than those of
    our Shares.
    There will likely be greater volatility of net asset value and
    market price of our Shares than for a comparable company that
    does not use leverage.
    When we use leverage, the base management fee payable to our
    Investment Adviser will be higher than if we did not use
    leverage.
    We may be subject to certain restrictions on investments imposed
    by guidelines of one or more rating agencies, which may issue
    ratings for the leverage instruments issued by us.
    The 1940 Act provides certain rights and protections for
    preferred stockholders which may adversely affect the interests
    of our common stockholders, including rights that could delay or
    prevent a transaction or a change in control to the detriment of
    the holders of our Shares.  Regulations
    governing our operation as a BDC affect the investments we may
    make and our ability to, and the way in which we, raise
    additional capital.
   17




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If
    certain of our investments are deemed not to be qualifying
    assets, we could be precluded from investing in the manner
    described in our prospectus, or deemed to be in violation of the
    1940 Act, in which case we may not qualify to be treated as a
    BDC.
    Certain
    of our portfolio investments are recorded at fair value as
    determined in good faith pursuant to policies and procedures
    approved by our Board and, as a result, there will be
    uncertainty as to the value of our portfolio
    investments.
    The
    lack of liquidity in our investments may adversely affect our
    business.
   18




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We pay
    the Investment Adviser a base management fee based on our
    Managed Assets, which may create an incentive for the Investment
    Adviser to cause us to incur more leverage than is prudent in
    order to maximize its compensation.
    We pay
    the Investment Adviser incentive compensation based on our net
    investment income and realized capital gains, which may create
    an incentive for the Investment Adviser to cause us to incur
    more leverage than is prudent in order to maximize its
    compensation.
    Risks
    Related to Our Investments
  Investments
    in middle-market and unlisted companies present certain
    challenges, including the lack of available information about
    such companies, a dependence on the talents and efforts of only
    a few key portfolio company personnel and a greater
    vulnerability to economic downturns.
    
    Such companies may have limited financial resources and may be
    unable to meet their obligations under their debt securities
    that we hold, which may be accompanied by a deterioration in the
    value of any collateral.
    Such companies typically have shorter operating histories,
    narrower product lines and smaller market shares than larger or
    listed businesses, which tend to render them more vulnerable to
    competitors actions and market conditions, as well as
    general economic downturns.
    Such companies are more likely to depend on the management
    talents and efforts of a small group of persons; therefore, the
    death, disability, resignation or termination of one or more of
    these persons could have a material adverse impact on the
    portfolio company and, in turn, on us.
    Such companies generally have less predictable operating
    results, may from time to time be parties to litigation, may be
    engaged in rapidly changing businesses with products subject to
    a substantial risk of obsolescence, and may require substantial
    additional capital to support their operations, finance
    expansion or maintain their competitive position.
    Such companies may cease to be treated as unlisted companies for
    purposes of the regulatory restrictions applicable to us, in
    which case we might not be able to invest additional amounts in
    them. 19




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Economic
    recessions or downturns could impair our portfolio companies and
    harm our operating results.
      Investments
    in lower credit quality obligations present certain challenges,
    including higher risks of default, increased adverse effects
    caused by economic downturns and lack of
    liquidity.
      
    increased price sensitivity to a deteriorating economic
    environment;
    greater risk of loss due to default or declining credit quality;
    adverse company specific events are more likely to render the
    issuer unable to make interest
    and/or
    principal payments; and
    if a negative perception of the lower grade debt market
    develops, the price and liquidity of lower grade securities may
    be depressed. This negative perception could last for a
    significant period of time.   20




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Our
    investments in debt securities of distressed or bankrupt
    companies may subject us to certain risks, including lack of
    income, extraordinary expenses, uncertainty with respect to
    satisfaction of debt,
    lower-than-expected
    investment values or income potentials and resale
    restrictions.
    Investments
    in obligations of distressed or bankrupt issuers present certain
    challenges inherent in the bankruptcy process or in
    participation on creditor committees.
   21




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22




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Investments
    in debt obligations pose certain risks in U.S. courts with
    respect to insolvency considerations.
    Our
    portfolio companies may incur additional debt that ranks equally
    with, or senior to, our investments in such
    companies.
   23




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Investments
    in senior loans, second lien loans, other secured loans and
    unsecured loans present certain challenges, such as restrictive
    covenants, low trading volume and risks related to
    rank.
  Senior Loans.
  and/or
      Second Lien Loans.
 24




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Other Secured Loans.
  Unsecured Loans.
  The
    debt securities in which we invest are subject to prepayment
    risk.
    Inflation
    may cause the real value of our investments to
    decline.
    The
    Companys reinvestment of its cash flow subjects it to
    risks posed by fluctuating interest rates.
  interest-on-interest,
  Issuers
    rights to call all or part of certain securities
    subject the Company to timing risks.
   25




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Common
    stock investments may be volatile and may fluctuate
    substantially.
    Distributions
    on common stock investments are not guaranteed and are declared
    at the discretion of the issuers board of
    directors.
    Investments
    in small and mid-cap company securities pose risks due to their
    relatively smaller size, including low volatility and trading
    volumes.
    Investments
    in preferred stocks present certain challenges, including
    deferred distributions, subordination to other debt instruments,
    lack of liquidity and limited voting rights.
    Deferral.
  Subordination.
  Liquidity.
  Limited Voting Rights.
  Lending
    of the Companys securities may lead to the risk of lost
    opportunities due to the securities
    unavailability.
   26




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non-U.S. securities.
  Our
    use of certain instruments, such as options, structured finance
    securities and derivatives, may result in losses greater than if
    they had not been used.
    Risks Associated with Options.
      Risks of Investing in Structured Finance
    Securities.
  Asset-Backed Securities Risk.
  Mortgage-Backed Securities Risk.
 27




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Derivative Risk.
        Counterparty Risk.
  Synthetic Securities.
 28




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Non-diversification
    of the Companys assets or the use of other focused
    strategies may present more risks than if the Company were
    diversified or used broad strategies.
    Prospective
    investments in small, unseasoned companies may be
    risky.
  start-up
  Our
    investments in foreign securities may involve significant risks
    in addition to the risks inherent in U.S.
    investments.
     29




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Our
    investments in emerging markets may involve significant risks in
    addition to the risks inherent in developed
    markets.
  non-U.S. issuers
  Terrorist
    attacks and acts of war may affect any market for our Shares,
    impact the businesses in which we invest and harm our business,
    operating results and financial condition.
  four-day
  There
    can be no assurance that the Investment Adviser will be able to
    predict accurately the future course of the price movements of
    securities and other investments and the movements of interest
    rates.
    Risks
    Related to an Investment in Our Common Stock
  We may
    experience fluctuations in our net asset value.
    We may
    be subject to U.S. federal income tax if we are unable to
    qualify as a regulated investment company.
   30




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Our
    recognition of income before or without receiving cash
    representing such income may lead to difficulties in making
    distributions.
        Changes
    in the laws or regulations governing our portfolio companies
    could have a material adverse affect on our
    business.
    Our
    certificate of incorporation and bylaws could deter takeover
    attempts and have an adverse impact on the price of our
    Shares.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties   31




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Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Price
    Range of Common Stock
    Sales Price


DistributionsYear Ending December 31, 2007

High


Low


DeclaredFirst Quarter (period from January 18, 2007* to
    March 31, 2007)

$
15.25


$
14.06


$
Second Quarter

$
15.05


$
13.84


$
0.2625Third Quarter

$
14.48


$
9.75


$
0.2625Fourth Quarter

$
13.20


$
8.38


$
0.2625     *
    
    Commencement of operations  Holders
    Distributions
      Date Declared

Record Date

Payment Date

AmountMarch 9, 2007

June 19, 2007

June 29, 2007

$
0.2625August 3, 2007

September 18, 2007

September 28, 2007

$
0.2625November 6, 2007

December 21, 2007

December 31, 2007

$
0.2625Total declared during 2007





$
0.7875      32




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(877) 665-1287.
  Recent
    Sales of Unregistered Securities
  Form N-2 No. 333-137435),
     33




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Issuer
    Purchases of Equity Securities
   34




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Stock
    Performance Graph
  (2) (3)
  COMPARISON
    OF CUMULATIVE TOTAL RETURN AMONG HIGHLAND
    DISTRESSED
 OPPORTUNITIES, INC., S&P 500 AND BDC PEER
    GROUP(1)
  
    (1)
    
    Source: SNL Financial,
    LC©2008

(2)
    
    The S&P 500 Index is an
    unmanaged, capitalization-weighted index generally
    representative of the U.S. market for large capitalization
    stocks. This information shows how our performance compares with
    the returns of one of the most widely used U.S. equity indexes.
    The S&P 500 Index cannot be invested in directly.(3)
    
    The BDC Peer Group consists of the
    following closed-end companies that have elected to be regulated
    as business development companies under the 1940 Act:  Allied Capital Corporation
    American Capital Strategies, Ltd.
    Apollo Investment Corporation
    Ares Capital Corporation
    Capital Southwest Corporation
    Equus Total Return, Inc.
    Gladstone Capital Corporation
    Gladstone Investment Corporation

Harris & Harris Group, Inc.
    Hercules Technology Growth Capital, Inc.
    Kayne Anderson Energy Development Co.
    Kohlberg Capital Corporation
    MCG Capital Corporation
    Medallion Financial Corporation
    MVC Capital, Inc.

NGP Capital Resources Company
    Patriot Capital Funding, Inc.
    Prospect Capital Corporation
    TICC Capital Corporation
    Tortoise Capital Resources Corp.
    Triangle Capital Corporation
    Utek Corporation   Period Ending2/26/07

04/30/07

06/30/07

08/31/07

10/30/07

12/31/07Highland Distressed Opportunities, Inc.


100.00



97.89



95.78



83.88



75.92



60.62BDC Peer Group


100.00



100.85



98.02



93.99



93.89



78.66S&P 500


100.00



102.54



104.35



102.63



106.88



102.92  35




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Form 10-K
  Item 6.
    Selected
    Financial Data    Period Ended December 31, 2007(a)Total investment income

$
31,329,721Net expenses

$
14,240,203Net investment income

$
17,089,518Net realized and unrealized gain/(loss) on investments

$
(74,340,032
)Net increase/(decrease) in stockholders equity (net
    assets) resulting from operations

$
(57,250,514
)Balance Sheet Data:Total assets

$
346,923,924Borrowings outstanding

$
142,000,000Stockholders equity (net assets)

$
182,015,052     (a)
    
    Highland Distressed Opportunities, Inc. commenced operations on
    January 18, 2007.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The
    information contained in this section should be read in
    conjunction with the Selected Financial and Other Data and our
    financial statements and notes thereto appearing elsewhere in
    this Annual Report.
  Overview
       36




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Critical
    Accounting Policies
    Valuation
    of Investments
    Market
    Quotations Available
    Market
    Quotations Not Available
           37




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Revenue
    Recognition
  and/or Payment-in-kind
  Net
    Realized Gains or Losses and Net Change in Unrealized
    Appreciation or Depreciation
      Portfolio
    and Investment Activity
        Comcorp
    Broadcasting, Inc.
  No. 06-50410).
  Entegra
    Power Group, LLC
   38




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Fontainebleau
    Florida Hotel, LLC
  22-acre
  Freescale
    Semiconductor, Inc.
    Lake at
    Las Vegas Joint Venture, LLC
    LVI
    Services, Inc.
    Motor
    Coach Industries International, Inc.
    MPH
    Mezzanine II, LLC/MPH Mezzanine III, LLC
    Northwest
    Airlines, Inc.
  05-17930,
  Realogy
    Corporation
  ® ® ® ® ® ® ®
 39




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Results
    of Operations
    Investment
    Income
    Operating
    Expenses
      Net
    Investment Income
    Net
    Unrealized Depreciation on Investments
    Net
    Realized Losses
    Net
    Decrease in Stockholders Equity (Net Assets) from
    Operations
    Financial
    Condition, Liquidity and Capital Resources
   40




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Distributions
        Subsequent
    Events
    Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk         41




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##### 



Item 8.
    Financial
    Statements and Supplementary Data  Index
    to Financial Statements
   
 PageReport of Independent Registered Public
    Accounting Firm


43Schedule of Investments  As of
    December 31, 2007


44Statement of Assets and Liabilities 
    As of December 31, 2007


51Statement of Operations  For the
    period January 18, 2007* through December 31, 2007


52Statement of Changes in Stockholders Equity
    (Net Assets)  For the period January 18, 2007*
    through December 31, 2007


53Statement of Cash Flows  For the
    period January 18, 2007* through December 31, 2007


54      *
    
    Commencement of operations 42




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Report of
    Independent Registered Public Accounting Firm      
    43




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  SCHEDULE OF
    INVESTMENTS
 As of
    December 31, 2007
  Principal ($)




Value ($)Senior Loans(a)  82.9%AEROSPACE  AEROSPACE/DEFENSE  2.4%IAP Worldwide Services, Inc.4,949,495


First Lien Term Loan, 11.50%, 12/30/12


4,439,103BROADCASTING  10.9%Comcorp Broadcasting, Inc.1,036,724


Revolving Loan, 10.84%, 10/02/12(b)(c)


1,036,72418,849,521


Term Loan, 10.44%, 04/02/13(b)


18,849,52119,886,245CABLE  US CABLE  3.6%Bresnan Communications, LLC1,000,000


First Lien Additional Term Loan B, 06/30/13(d)


958,120CellNet Group, Inc.1,000,000


Second Lien, 10.85%, 10/22/11


959,380WideOpen West Finance, LLC5,000,000


Second Lien Term Loan, 11.61%, 06/29/15


4,550,0006,467,500DIVERSIFIED MEDIA  0.9%Penton Media, Inc.2,000,000


Second Lien Term Loan, 10.36%, 02/01/14


1,690,000ENERGY  EXPLORATION &
    PRODUCTION  2.7%TARH E&P Holdings, L.P.5,000,000


First Lien Term Loan, 9.88%, 06/29/12


4,950,000ENERGY  OTHER ENERGY  4.1%Resolute Aneth, LLC7,500,000


Second Lien Term Loan, 9.51%, 06/26/13


7,443,750FINANCIAL  8.7%Emerson Reinsurance Ltd.1,500,000


Tranche C Term Loan, 10.95%, 12/15/11


1,492,500Flatiron Re Ltd.610,748


Closing Date Term Loan, 9.61%, 12/29/10


607,694295,831


Delayed Draw Term Loan, 9.61%, 12/29/10


294,352Kepler Holdings Ltd.5,000,000


Term Loan, 10.70%, 06/30/09


4,975,000Panther Re Holdings Ltd.500,000


Term B Loan, 10.08%, 12/01/10


497,500Penhall International Corp.7,938,145


Senior Unsecured PIK Toggle Term Loan, 12.82%, 04/01/12


7,957,99015,825,036   44




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##### Table of Contents



SCHEDULE OF
    INVESTMENTS  (Continued)
  Principal ($)




Value ($)FOREST PRODUCTS  PACKAGING  0.5%Tegrant Corp.1,000,000


Second Lien Term Loan, 10.35%, 03/07/15


850,000GAMING/LEISURE  OTHER LEISURE  13.0%Fontainebleau Florida Hotel, LLC10,000,000


Tranche C Term Loan, 11.11%, 06/06/12


9,375,000Lake at Las Vegas Joint Venture, LLC27,290,363


PIK Term Loan, 15.31%, 06/20/12(e)


12,690,0193,611,111


Synthetic Revolver, 10.20%, 06/20/12(e)


1,679,16723,744,186HEALTHCARE  ACUTE CARE  0.5%LifeCare Holdings, Inc.989,873


Term Loan, 8.20%, 08/11/12


876,652HEALTHCARE  MEDICAL PRODUCTS  4.1%Graceway Pharmaceuticals, LLC2,000,000


Mezzanine Loan, 13.45%, 11/01/13


1,660,000Rotech Healthcare, Inc.6,413,395


PIK Term Loan, 11.36%, 09/26/11


5,707,9217,367,921HOUSING  REAL ESTATE DEVELOPMENT 
    10.2%Metroflag BP, LLC/Metroflag Cable, LLC5,000,000


Second Lien Term Loan, 13.65%, 07/06/08


4,500,000MPH Mezzanine II, LLC10,000,000


Mezzanine 2B, 7.90%, 02/09/08(b)


9,987,800MPH Mezzanine III, LLC4,000,000


Mezzanine 3, 9.34%, 02/09/08


3,990,00018,477,800INFORMATION TECHNOLOGY  0.3%Metrologic Instruments, Inc.500,000


Second Lien Term Loan, 11.45%, 12/21/13


481,875MANUFACTURING  0.9%Latham Manufacturing Corp.1,931,388


New Term Loan, 8.52%, 06/30/12


1,709,279RETAIL  2.5%Totes Isotoner Corp.4,877,228


Second Lien Term Loan, 10.83%, 01/31/14


4,584,594SERVICE  ENVIRONMENTAL SERVICES 
    5.3%LVI Services, Inc.10,086,339


Tranche B Term Loan, 9.91%, 11/16/11


9,695,493   45




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##### Table of Contents



SCHEDULE OF
    INVESTMENTS  (Continued)
  Principal ($)




Value ($)SERVICE  OTHER SERVICES  1.0%NES Rentals Holdings, Inc.2,000,000


Permanent Term Loan, 12.13%, 07/20/13


1,880,000TRANSPORTATION  AUTO  4.4%BST Safety Textiles Acquisition GmbH665,500


Second Lien Facility, 12.49%, 06/30/09


598,950Motor Coach Industries International, Inc.7,662,162


PIK Second Lien, 13.64%, 12/01/08


7,432,2988,031,248UTILITIES  4.3%Entegra Power Group, LLC8,264,857


PIK Third Lien Term Loan, 10.83%, 10/19/15


7,753,510WIRELESS COMMUNICATIONS  2.6%Clearwire Corp.4,987,500


Term Loan, 11.15%, 07/03/12


4,812,938Total Senior Loans (cost $172,517,898)


150,967,130Corporate Notes and Bonds  59.6%BROADCASTING  0.9%Young Broadcasting, Inc.2,000,000


10.00%, 03/01/11


1,572,500CONSUMER NON-DURABLES  4.0%Ames True Temper, Inc.2,000,000


10.00%, 07/15/12


1,110,000Solo Cup Co.7,000,000


8.50%, 02/15/14


6,055,0007,165,000DIVERSIFIED MEDIA  4.6%Baker & Taylor, Inc.8,300,000


11.50%, 07/01/13(f)


8,258,500ENERGY  EXPLORATION &
    PRODUCTION  7.3%Energy XXI Gulf Coast6,200,000


10.00%, 06/15/13


5,719,500Helix Energy Solutions Group, Inc.2,500,000


9.50%, 01/15/16(f)


2,556,250McMoran Exploration Co.5,000,000


11.88%, 11/15/14


5,043,75013,319,500FOOD/TOBACCO  FOOD/TOBACCO PRODUCERS 
    3.1%Pinnacle Foods Group, Inc.6,500,000


10.63%, 04/01/17(f)


5,622,500   46




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##### Table of Contents



SCHEDULE OF
    INVESTMENTS  (Continued)
  Principal ($)




Value ($)GAMING/LEISURE  OTHER LEISURE  5.2%Six Flags, Inc.2,267,000


4.50%, 05/15/15


1,646,409Tropicana Entertainment Resorts Holdings, L.P.12,199,000


9.63%, 12/15/14


7,807,3609,453,769HEALTHCARE  ACUTE CARE  4.0%Argatroban Royalty Sub, LLC4,389,424


18.50%, 09/21/14


4,411,371HCA, Inc.1,800,000


7.69%, 06/15/25


1,499,222Tenet Healthcare Corp.1,500,000


9.88%, 07/01/14


1,436,2507,346,843HEALTHCARE  MEDICAL PRODUCTS  3.4%Angiotech Pharmaceuticals, Inc.5,000,000


7.75%, 04/01/14


4,212,500Encysive Pharmaceuticals, Inc.4,000,000


2.50%, 03/15/12


1,995,0006,207,500HOUSING  BUILDING MATERIALS  0.4%Masonite Corp.1,000,000


11.00%, 04/06/15


785,000HOUSING  REAL ESTATE DEVELOPMENT 
    9.5%Realogy Corp.5,000,000


10.50%, 04/15/14(f)


3,750,00021,500,000


12.38%, 04/15/15(f)


13,598,75017,348,750INFORMATION TECHNOLOGY  4.6%Freescale Semiconductor, Inc.3,000,000


9.13%, 12/15/14(f)


2,565,0007,000,000


10.13%, 12/15/16


5,810,0008,375,000RETAIL  3.0%Dollar General Corp.3,000,000


10.63%, 07/15/15(f)


2,767,500Rite Aid Corp.1,250,000


9.38%, 12/15/15


1,043,7502,000,000


9.50%, 06/15/17


1,665,0005,476,250   47




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##### Table of Contents



SCHEDULE OF
    INVESTMENTS  (Continued)
  Principal ($)




Value ($)TELECOMMUNICATIONS  2.8%Intelsat Bermuda, Ltd.5,000,000


10.83%, 06/15/13(g)


5,150,000TRANSPORTATION  AUTO  6.8%Delphi Corp.1,500,000


6.55%, 06/15/06(e)


900,0002,500,000


6.50%, 05/01/09(e)


1,512,5002,667,000


6.50%, 08/15/13(e)


1,560,1953,500,000


7.13%, 05/01/29(e)


2,152,500Motor Coach Industries International, Inc.12,000,000


11.25%, 05/01/09


6,300,00012,425,195Total Corporate Notes and Bonds (cost $128,342,264)


108,506,307Claims  0.9%AEROSPACE  AIRLINES  0.6%Northwest Airlines, Inc.3,000,000


ALPA Trade Claim, 08/21/13


108,7502,500,000


Bell Atlantic Trade Claim, 08/21/13


90,6252,500,000


EDC Trade Claims, 08/21/13


90,6255,326,500


Flight Attendant Claim, 08/21/13


193,0861,500,000


GE Trade Claim, 08/21/13


54,3754,728,134


IAM Trade Claim, 08/21/13


171,3953,433,116


Lambert Leasing Trade Claim, 08/21/13(d)


124,4505,000,000


Pinnacle Trade Claim, 08/21/13


181,2503,512,250


Retiree Claim, 08/21/13


127,3191,141,875CABLE  US CABLE  0.3%4,056,000


Adelphia Communications, 06/15/11


441,090Total Claims (cost $9,506,305)


1,582,965SharesCommon Stocks  28.0%AEROSPACE  AIRLINES  6.3%787,799


Northwest Airlines, Inc.(h)


11,430,959CABLE  US CABLE  0.8%50,336


Time Warner Cable, Inc.(h)


1,389,264DIVERSIFIED MEDIA  0.7%35,000


Gannett Co., Inc.


1,365,000FINANCIAL  0.2%17,500


Guaranty Financial Group, Inc.(h)


280,0007,731


Jer Investors Trust, Inc., REIT


83,263363,263   48




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##### Table of Contents



SCHEDULE OF
    INVESTMENTS  (Continued)
  Principal ($)




Value ($)FOREST PRODUCTS  PAPER  0.6%52,500


Temple-Inland, Inc.


1,094,625GAMING/LEISURE  OTHER LEISURE  0.7%26,923


Starwood Hotels & Resorts Worldwide, Inc.


1,185,420HEALTHCARE  MEDICAL PRODUCTS  3.3%221,600


PDL BioPharma, Inc.(h)


3,882,432636,900


TLC Vision Corp.(h)


2,120,8776,003,309HOUSING  BUILDING MATERIALS  0.1%13,125


Owens Corning, Inc.(h)


265,388HOUSING  REAL ESTATE DEVELOPMENT 
    0.2%17,500


Forestar Real Estate Group, Inc.(h)


412,825SharesMETALS/MINERALS  OTHER METALS/MINERALS 
    6.5%208,439


Alcoa, Inc


7,618,44662,112


RTI International Metals, Inc.(h)


4,281,38011,899,826TELECOMMUNICATIONS  4.4%1,256,635


Communications Corp. of America(b)(h)


8,014,818TRANSPORTATION  AUTO  1.7%107,852


The Goodyear Tire & Rubber Co.(h)


3,043,583UTILITIES  2.5%136,750


Entegra TC, LLC(h)


4,461,469Total Common Stocks (cost $61,659,547)


50,929,749Total Investments  171.4%


311,986,151(cost of $372,026,014)(i)Other Assets & Liabilities, Net 
    (71.4)%


(129,971,099
)Net Assets  100.0%


182,015,052     (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, 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 December 31, 2007. 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.   49




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##### Table of Contents



SCHEDULE OF
    INVESTMENTS  (Continued)
   (b)
    
    Represents fair value as determined by the 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 $37,888,863, or 20.8% of net
    assets, were valued under fair value by the Investment Adviser
    as of December 31, 2007.(c)
    
    Senior Loan has additional unfunded loan commitment. See
    Note 6.(d)
    
    All or a portion of this position has not settled. Contract
    rates do not take effect until settlement date.(e)
    
    The issuer is in default of certain debt covenants. Income is
    not being accrued.(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 December 31, 2007, these
    securities amounted to $39,118,500 or 21.5% of net assets. These
    securities have been determined by the Companys investment
    adviser to be liquid securities.(g)
    
    Floating rate note. The interest rate shown reflects the rate in
    effect at December 31, 2007.(h)
    
    Non-income producing security.(i)
    
    Cost for U.S. federal income tax purposes is $372,026,014.  PIK
    
    Payment in KindREIT
    
    Real Estate Investment Trust   50




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  STATEMENT
    OF ASSETS AND LIABILITIES
 As of
    December 31, 2007
  ($)ASSETS:Investments, at value (cost $372,026,014)


311,986,151Cash


4,291,098Receivable for:Receivable for investments sold


24,628,173Dividend and interest receivable


5,951,790Other assets


66,712Total assets


346,923,924LIABILITIES:Notes payable (Note 4)


142,000,000Net discount and unrealized depreciation on unfunded transactions


16,228Payables for:Investments purchased


19,387,884Investment advisory fee payable (Note 3)


1,812,285Administration fee payable (Note 3)


317,150Incentive fee (Note 3)


383,951Interest expense payable (Note 4)


759,465Directors fees (Note 3)


592Accrued expenses and other liabilities


231,317Total liabilities


164,908,872Stockholders equity (net assets)


182,015,052Composition of stockholders equity (net assets):Common Stock, par value $.001 per share: 550,000,000 common
    stock authorized, 17,716,771 common stock outstanding


17,717Paid-in capital


253,163,644Undistributed net investment income


3,420,147Accumulated net realized gain/(loss) on investments, total
    return swaps and foreign currency transactions


(14,547,689
)Net unrealized appreciation/(depreciation) on investments and
    translation of assets and liabilities in foreign currency


(60,038,767
)Stockholders equity (net assets)


182,015,052Net Asset Value Per Share (Net Assets/Common Stock
    Outstanding)


10.27    51




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  STATEMENT
    OF OPERATIONS
  For the Period EndedDecember 31, 2007(a)($)Investment Income:Interest Income


30,536,959Dividends (net of foreign taxes withheld)


792,762Total investment income


31,329,721Expenses:Investment advisory fees (Note 3)


6,306,869Incentive fees (Note 3)


2,475,541Administration fees (Note 3)


1,103,702Accounting service fees


123,913Transfer agent fees


24,500Professional fees


523,596Directors fees


35,441Custody fees


50,956Registration fees


20,247Delaware franchise tax expense


119,367Organization expense (Note 3)


170,383Rating agency fees


57,003Other expense


181,109Total operating expenses


11,192,627Interest expense (Note 4)


7,407,511Total expenses


18,600,138Fees and expenses waived or reimbursed by Investment Adviser
    (Note 3)


(4,359,935
)Net expenses


14,240,203Net investment income


17,089,518Net Realized and Unrealized Gain/(Loss) on Investments:Net realized gain/(loss) on investments


(14,507,557
)Net realized gain/(loss) on total return swaps


172,955Net realized gain/(loss) on foreign currency transactions


33,337Net change in unrealized appreciation/(depreciation) on
    investments


(60,039,863
)Net change in unrealized appreciation/(depreciation) on
    translation of assets and liabilities denominated in foreign
    currency


1,096Net realized and unrealized gain/(loss) on investments


(74,340,032
)Net decrease in stockholders equity (net assets) resulting
    from operations


(57,250,514
)     (a)
    
    Highland Distressed Opportunities, Inc. commenced operations on
    January 18, 2007.   52




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  STATEMENT
    OF CHANGES IN STOCKHOLDERS EQUITY (NET ASSETS)
 For
    the Period Ended December 31, 2007(a)
  TotalUndistributed


Undistributed


Net Unrealized


StockholdersCommon Stock


Paid-in Capital


Net Investment


Net Realized


Appreciation/


EquityShares


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















5,000,000Issuance of common stock


17,284,300



17,285



247,965,312















247,982,597Distributions reinvested


99,138



99



1,328,558















1,328,657Capital contribution, 02/20/07(b)










87,596















87,596Distributions 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     (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.   53




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  STATEMENT
    OF CASH FLOWS
 For
    the Period Ended December 31, 2007(a)
  ($)Cash Flow Used in Operating Activates:Net decrease in stockholders equity (net assets) resulting
    from operations


(57,250,514
)Adjustments to reconcile net decrease in stockholders
    equity (net assets) resulting from operations:Net realized gain/(loss) on investments, total return swaps and
    foreign currency transactions


14,301,265Net change in unrealized appreciation/(depreciation) on
    investments and translation of assets and liabilities
    denominated in foreign currency


60,038,767Purchase of investment securities


(1,255,368,821
)Proceeds from disposition of investment securities, total return
    swaps and foreign currency transactions


870,095,540Increase in dividends, interest and fees receivable


(5,951,790
)Increase in receivable for investments sold


(24,628,173
)Increase in other assets


(66,712
)Net amortization/(accretion) of premium/(discount)


(1,260,290
)Increase in payable for investments purchased


19,387,884Increase in payables to related parties


2,513,978Net realized gain/(loss) on total return swaps


172,955Net realized and change in unrealized gain/(loss) on foreign
    currency


34,433Increase in interest payable


759,465Increase in other liabilities


247,545Net cash flow used in operating activities


(376,974,468
)Cash Flows Provided by Financing Activities:Net proceeds from issuance of common stock


251,852,704Increase in notes payable(b)


142,000,000Distributions paid in cash


(12,587,138
)Net cash flow provided by financing activities


381,265,566Net increase in cash


4,291,098Cash:Beginning of the period


End of the period


4,291,098Supplemental Information:Interest paid during the period


6,648,046     (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 9 for details.   54




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS
 December 31, 2007
  Note 1.
    Organization        Note 2.
    Significant
    Accounting Policies      (a)
    Investments
    in financial instruments      Market
    Quotations Available
   55




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Market
    Quotations Not Available
              (b)
    Net
    asset value per share    (c)
    Securities
    transactions    (d)
    Interest
    income  and/or Payment-in-kind
  (e)
    Taxation 
    general   56




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      (f)
    Taxation
    of distributions    (g)
    Payment
    of distributions    (h)
    Foreign
    currency  and/or
  (i)
    Forward
    contracts    (j)
    Investment
    in swap agreements   57




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  (k)
    Cash
    and cash equivalents    (l)
    Restricted
    cash    (m)
    Registration
    expenses    (n)
    Incentive
    fee expense recognition    Note 3.
    Agreements       58




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Catch-up Catch-Up
       59




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Note 4.
    Credit
    Facility    364-day
    Note 5.
    Net Asset
    Value Per Share    Note 6.
    Unfunded
    Loan Commitments    Borrower

Unfunded Loan
    CommitmentComcorp Broadcasting, Inc.

$
848,228$
848,228  60




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 7.
    Portfolio
    Information    Note 8.
    Certain
    Transactions    Note 9.
    Affiliated
    Transactions     61




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 10.
    Financial
    Highlights    Period Ended December 31, 2007(a)Net asset value, beginning of period

$
14.33
(b)Net investment income


0.97Net realized and unrealized loss on investments


(4.43
)Total from investment operations


(3.46
)Common Stock Offering Cost


(0.07
)Capital Contribution


0.26
(c)Distributions Paid


(0.79
)Net asset value, end of period

$
10.27Market price per share, beginning of period

$
15.00Market price per share, end of period

$
8.57Total investment return(d)Based on net asset value per share


(23.30
)%(e)Based on market price per share


(38.85
)%(e)Net assets, end of period(f)

$
182,015Ratios to Average Net Assets/Supplemental Data(g):Total operating expenses


5.74
%Interest expense


3.80
%Waiver/reimbursement


2.24
%Net expense(h)


7.30
%Net investment income


8.77
%Portfolio turnover rate


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. 62




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##### Table of Contents



Highland
    Distressed Opportunities, Inc.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Note 11.
    Income
    Tax Information and Distributions to Stockholders        Undistributed Net Investment Income

$
246,424Accumulated Net Realized Loss

$
(246,424
)     Distributions Paid from:

2007Ordinary income*

$
13,915,795Long-term capital gains

$
     *
    
    For tax purposes short-term capital gains distributions, if any,
    are considered ordinary income distributions.    Capital loss carryforward*

$
(9,946,969
)Undistributed ordinary income

$
3,525,488Undistributed 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.      Unrealized appreciation

$
2,429,611Unrealized depreciation


(62,469,474
)Net unrealized depreciation

$
(60,039,863
)     Note 12.
    Impact of
    New Accounting Standards    Note 13.
    Subsequent
    Event   63




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Rule 13a-15
     Item 9B.  Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and
    Management    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   64




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##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules            Exhibit No.

Description3
.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 Custodian Services Agreement between Company and PFPC
    Inc.(1)10
.3

Form of Administration Services Agreement between Company and
    PFPC Inc.(2)10
.4

Form of Transfer Agency Services Agreement between Company and
    PFPC Inc.(1)10
.5

Form of Accounting Services Agreement.(1)10
.6

Form of Structuring Fee Agreement between the Investment Adviser
    and Citigroup Global Markets Inc.(2)10
.7

Form of Structuring Fee Agreement between the Investment Adviser
    and Merrill Lynch & Co.(2)10
.8

Form of Structuring Fee Agreement between the Investment Adviser
    and Wachovia Capital Markets, LLC.(2)10
.9

Form of Agreement Regarding Payment of Sales Load.(2)10
.10

Form of Fee Waiver Agreement.(2)10
.11

Confirmation Agreement between the Company and the Bank Nova
    Scotia.(2)24
.1

Power of Attorney.(3)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. 65




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##### Table of Contents



SIGNATURES
    HIGHLAND DISTRESSED OPPORTUNITIES, INC.
   Signature:
    /s/  James
    D. Dondero   Title:
    President (Principal Executive Officer)      /s/  James
    D. DonderoJames
    D. Dondero

President
    (Principal Executive Officer)/s/  M.
    Jason BlackburnM.
    Jason Blackburn

Secretary and Treasurer (Principal Financial and Accounting
    Officer)/s/  R.
    Joseph DoughertyR.
    Joseph Dougherty

Director, Chairman of the Board and Senior Vice President*Timothy K.
    HuiTimothy
    K. Hui

Director*Scott F.
    KavanaughScott
    F. Kavanaugh

Director*James F.
    LearyJames
    F. Leary

Director*Bryan A.
    WardBryan
    A. Ward

DirectorBy*

/s/  M.
    Jason BlackburnM.
    Jason Blackburn
    Attorney-in-Fact    66