Edgar Filing: Highland Credit Strategies Fund

As filed with the Securities and Exchange Commission on [ ], 2007
Securities Act Registration No. 333-142250
and Investment Company Act of 1940 Registration No. 811-21869
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-2

Registration Statement under the Securities Act of 1933 | |

Pre-Effective Amendment No. 1 |x|

Post-Effective Amendment No. | |

Registration Statement under the Investment Company Act of 1940 |_|

Amendment No. 7 |X|

Highland Credit Strategies Fund
(Exact Name of Registrant as Specified in the Declaration of Trust)
Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Address of Principal Executive Offices)
(877) 665-1287
(Registrant's telephone number, including area code)
James D. Dondero, President
Highland Credit Strategies Fund
Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Name and Address of Agent for Service)
____________________________________________
Copies to:

Richard T. Prins, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
____________________________________________
Approximate date of proposed public offering:

From time to time after the effective date of this Registration Statement
____________________________________________

If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with dividend or interest
reinvestment plans, check the following box.........|x|

It is proposed that this filing will become effective (check appropriate box):
|X| when declared effective pursuant to section 8(c)

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=============================================================================================================================
Proposed Maximum Proposed Maximum
Amount Being Offering Aggregate Amount of
Title of Securities Being Registered Registered Price per Unit Offering Price (1) Registration Fee

Preferred Shares, $0.001 par value 1,000 $20 $20,000 $6.14
Common Shares, $0.001 par value 1,000 $20 $20,000 $6.14
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.

The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.

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HIGHLAND CREDIT STRATEGIES FUND

CROSS REFERENCE SHEET

Part A -- Prospectus

Items in Part A of Form N-2 Location in Prospectus
--------------- ------------------------------------------------------- ----------------------------------------------

Item 1. Outside Front Cover Cover Page
Item 2. Cover Pages; Other Offering Information Cover Page
Item 3. Fee Table and Synopsis Prospectus Summary; Summary of Trust Expenses
Item 4. Financial Highlights Financial Highlights
Item 5. Plan of Distribution Cover Page; Prospectus Summary; Underwriters
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds; Prospectus Summary; The
Trust's Investments
Item 8. General Description of the Registrant The Trust; The Trust's Investments; Risks;
Description of Capital Structure;
Anti-Takeover Provisions in the Agreement
and Declaration of Trust; Closed-End Trust
Structure;
Item 9. Management Management of the Trust; Custodian and
Transfer Agent; Trust Expenses
Item 10. Capital Stock, Long-Term Debt, and Other Securities Description of Capital Structure;
Distributions; Dividend Reinvestment Plan;
Anti-Takeover Provisions in the Agreement
and Declaration of Trust; Tax Matters
Item 11. Defaults and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Not Applicable
Item 13. Table of Contents of the Statement of Additional Table of Contents for the Statement of
Information Additional Information

Part B -- Statement of Additional Information

Item 14. Cover Page Cover Page
Item 15. Table of Contents Cover Page
Item 16. General Information and History Not Applicable
Item 17. Investment Objective and Policies Investment Objectives and Restrictions;
Investment Policies and Techniques; Other
Investment Policies and Techniques;
Portfolio Transactions
Item 18. Management Management of the Trust; Portfolio
Transactions and Brokerage
Item 19. Control Persons and Principal Holders of Securities Not Applicable
Item 20. Investment Advisory and Other Services Management of the Trust for the Prospectus
and Statement of Additional Information;
Experts
Item 21. Portfolio Managers Management of the Trust
Item 22. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
Item 23. Tax Status Tax Matters; Distributions
Item 24. Financial Statements Financial Statements; Independent Auditors'
Report

Part C -- Other Information

Items 25-34 have been answered in Part C of this Registration Statement

We have not authorized any dealer, salesman or other person to give any
information or to make any representation other than those contained in this
prospectus or any prospectus supplement, if any, or any pricing supplement, if
any, to this prospectus. You must not rely upon any information or
representation not contained in this prospectus or any such supplements as if
we had authorized it. This prospectus and any such supplements do not
constitute an offer to sell or a solicitation of any offer to buy any security
other than the registered securities to which they relate, nor do they
constitute an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in such jurisdiction. The information contained
in this prospectus and any such supplements is accurate as of the dates on
their covers; however, the prospectus and any supplements will be updated to
reflect any material changes.

PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED [ ], 2007

[ ] Shares
Highland Credit Strategies Fund
COMMON STOCK
PREFERRED STOCK

Highland Credit Strategies Fund (the "Trust") is a non-diversified,
closed-end management investment company registered under the Investment Company
Act of 1940. The Trust's investment objectives are to provide both current
income and capital appreciation. The Trust will pursue its objectives by
investing primarily in the following categories of securities and instruments of
corporations and other business entities: (i) secured and unsecured floating and
fixed rate loans; (ii) bonds and other debt obligations; (iii) debt obligations
of stressed, distressed and bankrupt issuers; (iv) structured products,
including but not limited to, mortgage-backed and other asset-backed securities
and collateralized debt obligations; and (v) equities. Additionally, within the
categories of obligations and securities in which the Trust may invest, Highland
Capital Management, L.P., the Trust's investment adviser ("Highland" or the
"Investment Adviser"), may employ various trading strategies, including capital
structure arbitrage, pair trades and shorting. The Trust may also invest in
these categories of obligations and securities through the use of derivatives.
Highland will seek to achieve its capital appreciation objective by investing in
category (iii) and (v) obligations and securities, and to a lesser extent, in
category (i), (ii), and (iv) obligations.

Under normal market conditions, at least 80% of the Trust's assets
will be invested in one or more of these principal investment categories.
Subject only to this general guideline, Highland has broad discretion to
allocate the Trust's assets among these investment categories and to change
allocations as conditions warrant. The Investment Adviser has full discretion
regarding the capital markets from which it can access investment
opportunities in accordance with the investment limitations set forth in this
prospectus. A significant portion of the Trust's assets may be invested in
securities rated below investment grade, which are commonly referred to as
"junk securities." The Investment Adviser does not anticipate a high
correlation between the performance of the Trust's portfolio and the
performance of the corporate bond and equity markets. There can be no
assurance that the Trust's investment objectives will be achieved.

The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

We may offer, from time to time, up to $[ ] in aggregate initial offering
price of our common stock ($0.001 par value per share (the "Common Shares") or
preferred stock ($0.001 par value per share), with a

iii

liquidation preference as specified in a prospectus supplement (the "Preferred
Shares"), which we refer to in this prospectus collectively as our securities,
in one or more offerings. Please carefully read this prospectus and any such
supplements together with the additional information described under "Where
You Can Find Additional Information" in the "Prospectus Summary" and "Risk
Factors" sections before you make an investment decision.

We may offer our securities directly to one or more purchasers, through
agents that we designate from time to time, or through underwriters or
dealers. The prospectus supplement relating to the particular offering will
identify any agents or underwriters involved in the sale of our securities,
and will set forth any applicable purchase price, fee, commission or discount
arrangement between us and our agents or underwriters or among our
underwriters or the basis upon which such amount may be calculated. We may not
sell any of our securities through agents, underwriters or dealers without the
delivery of a prospectus supplement.

_____________________

We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may request a
free copy of the prospectus, prospectus supplement, if any, or, request the
Trust's annual and semi-annual reports, request information about the Trust
and make shareholder inquiries by calling 1-877-665-1287 or by writing to the
Trust at Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas, Texas 75240
or by contacting or by visiting the Trust's web site
(http://www.highlandfunds.com). The SEC also maintains a website at
www.sec.gov that contains such information.

You should review the information set forth under "Risk Factors" on page
22 of this prospectus before investing in our securities.

Our common stock is listed on the New York Stock Exchange under the
symbol "HCF." As of [ ], 2007, the last reported -- sale price for our common
stock was $[ ].

_____________________

TABLE OF CONTENTS

Page
----

Prospectus Summary..........................................................1
Summary of Trust Expenses...................................................18
Financial Highlights........................................................20
Market and Net Asset Value Information......................................20
Use of Proceeds.............................................................22
The Trust's Investments.....................................................22
Principal Risks of the Trust................................................37
Management of the Trust.....................................................53
Net Asset Value.............................................................54
Distributions...............................................................56
Dividend Reinvestment Plan..................................................57

Description of Capital Structure............................................59

Anti-Takeover Provisions in the Agreement and Declaration of Trust..........67
Closed-End Fund Structure...................................................68
Repurchase of Common Shares.................................................69
Tax Matters.................................................................69
Custodian and Transfer Agent................................................70
Legal Opinions..............................................................70
Privacy Principles of the Trust.............................................70
Table of Contents for the Statement of Additional Information...............B-2

Use of Proceeds.............................................................B-3

Investment Restrictions.....................................................B-3
Investment Policies and Techniques..........................................B-4
Other Investment Policies and Techniques....................................B-12
Management of the Trust.....................................................B-14
Portfolio Transactions and Brokerage........................................B-21
Repurchase of Common Shares.................................................B-21
Tax Matters.................................................................B-22
Experts.....................................................................B-26
Additional Information......................................................B-26

Appendix A..................................................................A-1
Appendix B..................................................................B-1

You should rely only on the information contained or incorporated by reference
in this prospectus. We have not authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an
offer to sell these securities in any jurisdiction where the offer or sale is
not permitted.

PROSPECTUS SUMMARY

This is only a summary. This summary may not contain all of the
information that you should consider before investing in our common shares.
You should review the more detailed information contained in this prospectus
and in the Statement of Additional Information.

The Trust

Highland Credit Strategies Fund is a non-diversified, closed-end
management investment company. The Trust commenced operations in June of 2006
following our initial public offering. Throughout this prospectus, we refer to
Highland Credit Strategies Fund simply as the "Trust" or as "we," "us" or
"our." See "The Trust."

Investment Objective

The Trust's investment objectives are to provide both current income and
capital appreciation by investing at least 80% of its assets in the following
categories of securities and instruments of corporations and other business
entities: (i) secured and unsecured floating and fixed rate loans; (ii) bonds
and other debt obligations; (iii) debt obligations of stressed, distressed and
bankrupt issuers; (iv) structured products, including but not limited to,
mortgage-backed and other asset-backed securities and collateralized debt
obligations; and (v) equities. Additionally, within the categories of
obligations and securities in which the Trust invests, Highland Capital
Management, L.P., the Trust's investment adviser ("Highland" or the
"Investment Adviser"), employs various trading strategies, including but not
limited to, capital structure arbitrage, pair trades and shorting. The Trust
may also invest in these categories of obligations and securities through the
use of derivatives. Highland will seek to achieve its capital appreciation
objective by investing in category (iii) and (v) obligations and securities,
and to a lesser extent, in category (i), (ii), and (iv) obligations. Under
normal market conditions, at least 80% of the Trust's assets are invested in
one or more of these principal investment categories. Subject only to this
general guideline, the Investment Adviser, has broad discretion to allocate
the Trust's assets among these investment categories and to change allocations
as conditions warrant. The Investment Adviser has full discretion regarding
the capital markets from which it can access investment opportunities in
accordance with the investment limitations set forth in this prospectus. A
significant portion of the Trust's assets may be invested in securities rated
below investment grade, which are commonly referred to as "junk securities."
The Investment Adviser does not anticipate a high correlation between the
performance of the Trust's portfolio and the performance of the corporate bond
and equity markets. The investment objectives may be changed without
shareholder approval. There can be no assurance that the Trust's investment
objectives will be achieved. See "The Trust's Investments-Investment
Objectives and Policies."

Investment Policies and Strategies

Under normal market conditions, the Investment Adviser invests across
various markets in which the Investment Adviser holds significant investment
experience: primarily the leveraged loan, high yield, structured products and
stressed and distressed markets. Highland makes investment decisions based on
quantitative analysis, which employs sophisticated, data-intensive models to
drive the investment process. The Investment Adviser has full discretion
regarding the capital markets from which it can access investment
opportunities in accordance with the investment limitations set forth in this
prospectus.

The Investment Adviser uses trading strategies to exploit pricing
inefficiencies across the credit markets, or debt markets, and within an
individual issuer's capital structure. The Trust varies its investments by
strategy, industry, security type and credit market, but reserves the right to
re-position its portfolio among these criteria depending on market dynamics,
and thus the Trust may experience high portfolio turnover. The Investment
Adviser manages interest rate, default, currency and systemic risks through a
variety of trading methods and market tools, including derivative hedging
instruments, as it deems appropriate.

changing conditions. The Investment Adviser focuses primarily on the U.S.
marketplace, but may pursue opportunities in the non-U.S. credit or securities
markets by investing up to 20% of the Trust's assets in non-U.S. credit or
securities market investments.

The Trust benefits from Highland's industry-focused investment staff and
specialist trading skills as well as its years of investment experience (since
1993) in leveraged loan, high yield, structured products and stressed and
distressed markets. In finding opportunities, the Investment Adviser looks to
utilize its investment staff of approximately seventy-nine (79) credit
investment professionals who actively monitor approximately 1,200 companies.
Their monitoring of the market and existing positions assists the Investment
Adviser in obtaining timely and high-quality information on prospective
investments. Additionally, the Investment Adviser has senior professionals
that focus on individual credit markets, such as the stressed and distressed
or structured products segments. This broad staff of industry, product and
market specialists differentiates the Investment Adviser from numerous other
funds' other investment advisers that rely on a limited number of investment
professionals working in a more generalist capacity. The Investment Adviser
believes that credit investing is a due-diligence intensive process that
requires long-term committed resources to industry, product and market
specialization so that investment decisions are proactive as opposed to
reactive in nature.

The Trust invests and trades in listed and unlisted, public and private,
rated and unrated, debt and equity instruments and other obligations,
including structured debt and equity instruments as well as financial
derivatives. Investments may include investments in stressed and distressed
positions, which may include publicly-traded debt and equity securities,
obligations which were privately placed with banks, insurance companies and
other lending institutions, trade claims, accounts receivable and any other
form of obligation recognized as a claim in a bankruptcy or workout process.
The Trust may invest in securities traded in foreign countries and denominated
in foreign currencies.

As part of its investment program, the Trust may invest, from time to
time, in debt or synthetic instruments that are sold in direct placement
transactions between their issuers and their purchasers and that are neither
listed on an exchange, nor traded over the counter. The Trust may also receive
equity or equity-related securities in connection with a workout transaction
or may invest directly in equity securities.

The Trust may employ currency hedges (either in the forward or options
markets) in certain circumstances to reduce currency risk and may engage in
other derivative transactions for hedging purposes or to enhance total return.
The Trust may also lend securities and engage in short sales of securities.
The Trust is currently leveraged through the use of a credit facility and may
continue to use leverage in the future through borrowings or the issuance of
Preferred Shares. In addition, the Trust may invest in the securities of
companies whose capital structures are highly leveraged.

From time to time, the Investment Adviser may also invest a portion of
the Trust's assets in short-term U.S. Government obligations, certificates of
deposit, commercial paper and other money market instruments, including
repurchase agreements with respect to such obligations to enable the Trust to
make investments quickly and to serve as collateral with respect to certain of
its investments. A greater percentage of Trust assets may be invested in such
obligations if the Investment Adviser believes that a defensive position is
appropriate because of the outlook for security prices or in order to respond
to adverse market, economic, business or political conditions. From time to
time cash balances in the Trust's brokerage account may be placed in a money
market fund. See "The Trust's Investments--Investment Objectives and Policies"
and "The Trust's Investments--Investment Philosophy."

Investment Adviser and Administrator

Highland is the investment adviser and administrator. As of January 31,
2007, Highland managed approximately $34.2 billion in assets on behalf of
investors around the world. In return for its advisory services, the
Investment Adviser will receive an annual fee, payable monthly, in an amount
equal to 1.00% of the average weekly value of the Trust's Managed Assets (the
"Advisory Fee"). In return for its administration services, Highland will
receive an annual fee, payable monthly, in an amount equal to 0.20% of the
average weekly value of Managed Assets. The Trust's "Managed Assets" means the
total assets of the Trust, including any form of investment leverage, minus
all accrued expenses incurred in the normal course of operations, but not
excluding any liabilities or obligations attributable to investment leverage
obtained through (i) indebtedness of any type (including, without

limitation, borrowing through a credit facility or the issuance of debt
securities), (ii) the issuance of preferred stock or other similar preference
securities, (iii) the reinvestment of collateral received for securities
loaned in accordance with the Trust's investment objectives and policies,
and/or (iv) any other means. Highland, at its own expense, has the authority
to engage both a sub-adviser and a sub-administrator, each of which may be an
affiliate of Highland. See "Management of the Trust--Investment Adviser" and
"Management of the Trust--Administrator/Sub-Administrator."

Under current SEC regulations, the Trust may be prohibited from
co-investing with any unregistered fund managed now or in the future by the
Investment Adviser in certain private placements in which the Investment
Adviser negotiates non-pricing terms. The Company may file for exemptive
relief from the SEC to enable it to co-invest in these situations with other
unregistered funds managed by the Investment Adviser.

Potential Conflicts of Interest. If the Trust continues to employ
leverage, the Investment Adviser will benefit because the Trust's Managed
Assets will increase with leverage. Furthermore, the Investment Adviser will
also benefit to the extent that the Trust's Managed Assets are derived from
the reinvested collateral received on portfolio securities loaned. See
"Management of the Trust -- Investment Adviser."

Offerings

The Trust may offer shares using one or more of the following methods: (i)
through an underwriting syndicate; (ii) at-the-market transactions through one
or more broker-dealers that have entered into a selected dealer agreement with
the Trust or its underwriters; or (iii) through privately negotiated
transactions between the Trust and specific investors.

Distribution Through Underwriting Syndicates. In order to limit the impact
on the market price of the Trust's Common Shares, underwriting syndicate will
market and price the offering on an expedited basis (e.g., overnight or
similarly abbreviated offering period). The Trust will launch a syndicated
offering on a day, and upon terms, mutually agreed upon between the Trust and
the underwriting syndicate.

The Trust will offer its shares at a price equal to a specified discount
of up to [ ] % from the closing market price of the Trust's Common Shares on
the day prior to the offering date. The applicable discount will be chosen by
the Trust in consultation with the underwriting syndicate on a
transaction-by-transaction basis. The Trust will compensate the underwriting
syndicate out of the proceeds of the offering based upon a sales load of up to
[ ]% of the gross per share offering price. The minimum net proceeds per share
to the Trust will not be less than the greater of (i) the Trust's latest net
asset value per Common Share or (ii) [ ]% of the closing market price of the
Trust's Common Shares on the day prior to the offering date

Distribution Through At-the-Market Transactions. The Trust from time to
time may offer its Common Shares to certain broker-dealers that have entered
into selected dealer agreements with the Trust. Common Shares will only be
sold on such days as agreed upon by the Trust and the underwriting syndicate.
Common Shares will be sold at market prices, which shall be determined with
reference to trades on the NYSE, subject to a minimum price to be established
each day by the Trust. The minimum price on any day will not be less than the
current net asset value per share plus the per share amount of the commission
to be paid to the underwriting syndicate. The Trust will suspend the sale of
Common Shares if the per share price of the shares is less than the minimum
price.

The Trust will compensate the underwriting syndicate with respect to sales
of the Common Shares at a fixed commission rate of up to [ ] of the gross
sales price per share of Common Shares sold. The underwriting syndicate will
compensate broker-dealers participating in the offering at a fixed rate of up
to [ ]% of the gross sales price per share of Common Shares sold by the
broker-dealer. Settlements of Common Share sales will occur on the third
business day following the date of sale.

Distribution Through Privately Negotiated Transactions. The Trust from
time to time may sell directly to, and solicit offers from, institutional and
other sophisticated investors, who may be deemed to be underwriters as defined
in the 1933 Act for any resale of Common Shares

The terms of such privately negotiated transactions will be subject to the
discretion of the management of the Trust. In determining whether to sell
Common Shares through a privately negotiated transaction, the Trust will
consider relevant factors including, but not limited to, the attractiveness of
obtaining additional funds through the sale of Common Shares, the purchase
price to apply to any such sale of Common Shares and the investor seeking to
purchase the Common Shares

Common Shares issued by the Trust through privately negotiated
transactions will be issued at a price equal to the greater of (i) the net
asset value per Common Share of the Trust's Common Shares or (ii) at a
discount ranging from 0% to [ ]% of the average daily closing market price of
the Trust's Common Shares at the close of business on the [ ] business days
preceding the date upon which Common Shares are sold pursuant to the privately
negotiated transaction. The applicable discount will be determined by the
Trust on a transaction-by-transaction basis. The Trust will not pay any
commissions with regard to privately negotiated transactions, but an investor
may be subject to a front-end sales charge of up to [ ]% paid to or retained
by a third party broker-dealer through which such transaction may be effected.

Preferred Shares and Borrowings

As provided in the 1940 Act and subject to certain exceptions, the Fund may
issue debt or preferred shares with the condition that immediately after
issuance the value of its total assets, less certain ordinary course
liabilities, exceed 300% of the amount of the debt outstanding and exceed 200%
of the sum of the amount of debt and preferred shares outstanding.

The Trust, as of , 2007, is leveraged through borrowings from a
credit facility in the amount of $ and may use additional leverage
through borrowings or the issuance of Preferred Shares of up to 30% of the
Trust's total assets (including the proceeds of all such leverage). Thereafter
total leverage of the Trust is expected to range between 20% and 50% of the
Trust's total assets. The Trust will tend to use leverage to achieve a desired
leverage ratio where as the rate of return, net of applicable Trust expenses, on
the Trust's portfolio investments purchased with leverage exceeds the Preferred
Share dividend rate, or the interest rate on any borrowings. The Trust's asset
coverage ratio as of June 18, 2007 was 367%. See "Principal Risks of the
Trust--Leverage Risk" for a brief description of the Trust's credit facility
agreement with Scotia Capital.

Following an additional offering of Common Shares from time to time, the
Trust may offer Preferred Shares or engage in additional borrowings in order to
maintain the Trust's desired leverage ratio. Should the Trust offer Preferred
Shares, all costs of offering and servicing such Preferred Shares, including
dividend and interest payments, will be borne entirely by holders of the Trust's
Common Shares. Any Preferred Shares issued by the Trust will pay dividends based
on short-term interest rates, either at a fixed rate or at rates that will be
reset frequently. Leverage creates a greater risk of loss, as well as a
potential for more gain, for the common shares than if leverage is not used.
Borrowings may be at a fixed or floating rate and generally will be based on
short-term rates. So long as the rate of return, net of applicable Trust
expenses, on the Trust's portfolio investments purchased with leverage exceeds
the Preferred Share dividend rate, or the interest rate on any borrowings, the
Trust will generate more return or income than will be needed to pay such
dividends or interest payments. In this event, the excess will be available to
pay higher dividends to holders of common shares. Conversely, if the Trust's
return on such assets is less than the cost of leverage and other Trust
expenses, the return to the holders of the common shares will diminish. Where
leverage is employed, net asset value and market price of the common shares and
the yield to holders of common shares will be more volatile. The Trust's
leveraging strategy may not be successful. See "Principal Risks of the
Trust--Leverage Risk."

Distributions

If the Trust issues Preferred Shares, it will pay dividends to the
holders of the Preferred Shares based on short-term interest rates at either a
fixed rate or at a rate that will be reset frequently, as described in a
prospectus supplement accompanying each Preferred Share offering, of its
investment company taxable income.

Subject to market conditions and the right of owners of Preferred Shares
to receive a dividend preference, we also expect to declare the initial
monthly dividend on the Trust's common shares within approximately 45 days
after completion of this offering and to pay that initial monthly dividend
approximately 60 to 90 days after completion of

this offering. The Trust expects to pay common shareholders annually at least
90% of its investment company taxable income. The Trust intends to pay any
capital gain distributions annually.

So long as shares of preferred stock are outstanding, holders of shares
of common stock will not be entitled to receive any distributions from us
unless we have paid all scheduled accumulated dividends on preferred stock,
and unless asset coverage (as defined in the 1940 Act) with respect to
preferred stock would be at least 200% after giving effect to such
distributions.

Various factors will affect the level of the Trust's current income and
current gains, such as its asset mix and the Trust's use of options. To permit
the Trust to maintain more stable monthly dividends and annual distributions,
the Trust may from time to time distribute less than the entire amount of income
and gains earned in the relevant month or year, respectively. The undistributed
income and gains would be available to supplement future distributions. As a
result, the distributions paid by the Trust for any particular period may be
more or less than the amount of income and gains actually earned by the Trust
during the applicable period. Undistributed income and gains will add to the
Trust's net asset value and, correspondingly, distributions from undistributed
income and gains and from capital, if any, will be deducted from the Trust's net
asset value. See "Distributions." Shareholders will automatically have all
dividends and distributions reinvested in common shares issued by the Trust or
common shares of the Trust purchased in the open market in accordance with the
Trust's Dividend Reinvestment Plan unless an election is made to receive cash.
Each participant in the Trust's Dividend Reinvestment Plan will pay a pro rata
portion of brokerage commissions incurred in connection with open market
purchases, and participants requesting a sale of securities through the plan
agent of the Trust's Dividend Reinvestment Plan are subject to a sales fee and a
brokerage commission. See "Dividend Reinvestment Plan" and "Distributions."

Listing

The Trust's common shares are listed on the New York Stock Exchange,
under the symbol "HCF."

Custodian and Transfer Agent

PFPC Trust Company, located at 8800 Tinicum Blvd., 4th Floor,
Philadelphia, PA 19153, will serve as custodian for the Trust for both the
Preferred Shares and the Common Shares, and in such capacity, will maintain
certain financial and accounting books and records pursuant to an agreement
with the Trust. PFPC, Inc., located at 301 Bellevue Parkway, Wilmington,
Delaware 19809, will serve as the Trust's transfer agent. See "Custodian and
Transfer Agent."

Market Price of Shares

Our common shares have traded at a premium to their net asset value in
the past, but the Trust cannot assure you that its common shares will trade at
a price higher than or equal to net asset value in the future. The Trust's net
asset value will be reduced immediately following this offering by the sales
load and the amount of the offering costs paid by the Trust. See "Use of
Proceeds." In addition to net asset value, the market price of the Trust's
common shares may be affected by such factors as dividend levels, which are in
turn affected by expenses, dividend stability, liquidity and market supply and
demand. See "Principal Risks of the Trust" and "Description of Capital
Structure" in this prospectus and "Repurchase of Common Shares" in the
Statement of Additional Information. The common shares are designed primarily
for long-term investors, and you should not purchase common shares of the
Trust if you intend to sell them shortly after purchase.

Principal Risks of the Trust

Our net asset value, or ability to make distributions, our ability to
service preferred stock, and our ability to meet asset coverage requirements
depends on the performance of our investment portfolio. The performance of our
investment portfolio is subject to a number of risks, including those detailed
below. Investors should also refer to "Principal Risks of the Trust" in this
prospectus for a more detailed explanation of the risks associated with
investing in the Trust's Common Shares and Preferred Shares.

Investment and Market Discount Risk. An investment in the Trust's common
shares and preferred shares subject to investment risk, including the possible
loss of the entire amount that you invest. As with any stock, the price of the
Trust's shares will fluctuate with market conditions and other factors. If
shares are sold, the price received may be more or less than the original
investment. Net asset value will be reduced immediately following this
offering by [ ]% (the amount of the sales load) and offering expenses paid by
the Trust. Common shares are designed for long-term investors and should not
be treated as trading vehicles.

Risks of Non-Diversification and Other Focused Strategies. While the
Investment Adviser will invest in a number of fixed-income and equity
instruments issued by different issuers and plans to employ multiple investment
strategies with respect to the Trust's portfolio, it is possible that a
significant amount of the Trust's investments could be invested in the
instruments of only a few companies or other issuers or that at any particular
point in time one investment strategy could be more heavily weighted than the
others. The focus of the Trust's portfolio in any one issuer would subject the
Trust to a greater degree of risk with respect to defaults by such issuer or
other adverse events affecting that issuer, and the focus of the portfolio in
any one industry or group of industries (but not to the extent of 25% of the
Trust's total assets) would subject the Trust to a greater degree of risk with
respect to economic downturns relating to such industry. The focus of the
Trust's portfolio in any one investment strategy would subject the Trust to a
greater degree of risk than if the Trust's portfolio were varied in its
investments with respect to several investment strategies.

Illiquidity of Investments. The investments made by the Trust may be very
illiquid, and consequently, the Trust may not be able to sell such investments
at prices that reflect the Investment Adviser's assessment of their fair value
or the amount paid for such investments by the Trust. Illiquidity may result
from the absence of an established market for the investments as well as
legal, contractual or other restrictions on their resale by the Trust and
other factors. Furthermore, the nature of the Trust's investments, especially
those in financially stressed and distressed companies, may require a long
holding period prior to being able to determine whether the investment will be
profitable or not. There is no limit on the amount of the Trust's portfolio
that can be invested in illiquid securities.

Risks of Investing in Senior Loans. Senior loans, such as bank loans, are
typically at the most senior level of the capital structure, and are sometimes
secured by specific collateral, including, but not limited to, trademarks,
patents, accounts receivable, inventory, equipment, buildings, real estate,
franchises and common and preferred stock of the obligor or its affiliates. A
portion of the Trust's investments may consist of loans and participations
therein originated by banks and other financial institutions, typically
referred to as "bank loans." The Trust's investments may include loans of a
type generally incurred by borrowers in connection with highly leveraged
transactions, often to finance internal growth, acquisitions, mergers or stock
purchases, or for other reasons. As a result of the additional debt incurred
by the borrower in the course of the transaction, the borrower's
creditworthiness is often judged by the rating agencies to be below investment
grade. Such loans are typically private corporate loans which are negotiated
by one or more commercial banks or financial institutions and syndicated among
a group of commercial banks and financial institutions. In order to induce the
lenders to extend credit and to offer a favorable interest rate, the borrower
often provides the lenders with extensive information about its business which
is not generally available to the public.

Bank loans often contain restrictive covenants designed to limit the
activities of the borrower in an effort to protect the right of lenders to
receive timely payments of principal and interest. Such covenants may include
restrictions on dividend payments, specific mandatory minimum financial
ratios, limits on total debt and other financial tests. Bank loans usually
have shorter terms than subordinated obligations and may require mandatory
prepayments from excess cash flow, asset dispositions and offerings of debt
and/or equity securities. The bank loans and other debt obligations to be
acquired by the Trust are likely to be below investment grade.

The Trust may acquire interests in bank loans and other debt obligations
either directly (by way of sale or assignment) or indirectly (by way of
participation). The purchaser of an assignment typically succeeds to all the
rights and obligations of the assigning institution and becomes a lender under
the credit agreement with respect to the debt obligation; however, its rights
can be more restricted than those of the assigning institution, and, in any
event, the Trust may not be able unilaterally to enforce all rights and
remedies under the loan and any associated collateral. A participation
interest in a portion of a debt obligation typically results in a contractual
relationship only with the institution participating out the interest, not
with the borrower. In purchasing participations, the Trust generally will have
no right to enforce compliance by the borrower with neither the terms of the
loan agreement nor

any rights of setoff against the borrower, and the Trust may not directly
benefit from the collateral supporting the debt obligation in which it has
purchased the participation. As a result, the Trust will be exposed to the
credit risk of both the borrower and the institution selling the participation.

Purchasers of bank loans are predominantly commercial banks, investment
trusts and investment banks. As secondary market trading volumes increase, new
bank loans frequently adopt standardized documentation to facilitate loan
trading which should improve market liquidity. There can be no assurance,
however, that future levels of supply and demand in bank loan trading will
provide an adequate degree of liquidity or that the current level of liquidity
will continue. Because of the provision to holders of such loans of
confidential information relating to the borrower, the unique and customized
nature of the loan agreement, the limited universe of eligible purchasers and
the private syndication of the loan, bank loans are not as easily purchased or
sold as a publicly traded security, and historically the trading volume in the
bank loan market has been small relative to the high-yield debt market.

Second Lien Loans Risk. Second lien loans are subject to the same risks
associated with investment in senior loans and non-investment grade
securities. See "Non-Investment Grade Securities Risk." However, second lien
loans are second in right of payment to senior loans and therefore are subject
to additional risk that the cash flow of the borrower and any property
securing the loan may be insufficient to meet scheduled payments after giving
effect to the senior secured obligations of the borrower. Second lien loans
are expected to have greater price volatility than senior loans and may be
less liquid. There is also a possibility that originators will not be able to
sell participations in second lien loans, which would create greater credit
risk exposure.

Other Secured Loans Risk. Secured loans other than senior loans and
second lien loans are subject to the same risks associated with investment in
senior loans, second lien loans and non-investment grade securities. However,
such loans may rank lower in right of payment than any outstanding senior
loans and second lien loans of the borrower and therefore are subject to
additional risk that the cash flow of the borrower and any property securing
the loan may be insufficient to meet scheduled payments after giving effect to
the higher ranking secured obligations of the borrower. Lower ranking secured
loans are expected to have greater price volatility than senior loans and
second lien loans and may be less liquid. There is also a possibility that
originators will not be able to sell participations in lower ranking secured
loans, which would create greater credit risk exposure.

Unsecured Loans Risk. Unsecured loans are subject to the same risks
associated with investment in senior loans, second lien loans, other secured
loans and non-investment grade securities. However, because unsecured loans
have lower priority in right of payment to any higher ranking obligations of
the borrower and are not backed by a security interest in any specific
collateral, they are subject to additional risk that the cash flow of the
borrower and available assets may be insufficient to meet scheduled payments
after giving effect to any higher ranking obligations of the borrower.
Unsecured loans are expected to have greater price volatility than senior
loans, second lien loans and other secured loans and may be less liquid. There
is also a possibility that originators will not be able to sell participations
in unsecured loans, which would create greater credit risk exposure.

Risks of Investing in Obligations of Stressed, Distressed and Bankrupt
Issuers. The Trust is authorized to invest in the securities and other
obligations of stressed, distressed and bankrupt issuers, including debt
obligations that are in covenant or payment default. There is no limit on the
amount of the Trust's portfolio that can be invested in stressed, distressed
or bankrupt issuers, and the Trust may invest for purposes of control. Such
investments generally trade significantly below par and are considered
speculative. The repayment of defaulted obligations is subject to significant
uncertainties. Defaulted obligations might be repaid only after lengthy
workout or bankruptcy proceedings, during which the issuer might not make any
interest or other payments. Typically such workout or bankruptcy proceedings
result in only partial recovery of cash payments or an exchange of the
defaulted obligation for other debt or equity securities of the issuer or its
affiliates, which may in turn be illiquid or speculative.

equal the liquidation value that was believed to exist at the time of the
investment. Third, the duration of a bankruptcy proceeding is difficult to
predict. A creditor's return on investment can be adversely affected by delays
while the plan of reorganization is being negotiated, approved by the creditors
and confirmed by the bankruptcy court and until it ultimately becomes effective.
Fourth, the administrative costs in connection with a bankruptcy proceeding are
frequently high and would be paid out of the debtor's estate prior to any return
to creditors. For example, if a proceeding involves protracted or difficult
litigation, or turns into a liquidation, substantial assets may be devoted to
administrative costs. Fifth, bankruptcy law permits the classification of
"substantially similar" claims in determining the classification of claims in a
reorganization. Because the standard for classification is vague, there exists
the risk that the Trust's influence with respect to the class of securities or
other obligations it owns can be lost by increases in the number and amount of
claims in that class or by different classification and treatment. Sixth, in
the early stages of the bankruptcy process it is often difficult to estimate
the extent of, or even to identify, any contingent claims that might be made.
Seventh, especially in the case of investments made prior to the commencement
of bankruptcy proceedings, creditors can lose their ranking and priority if
they exercise "domination and control" over a debtor and other creditors can
demonstrate that they have been harmed by such actions. Eighth, certain claims
that have priority by law (for example, claims for taxes) may be substantial.

In any investment involving stressed and distressed debt obligations,
there exists the risk that the transaction involving such debt obligations
will be unsuccessful, take considerable time or will result in a distribution
of cash or a new security or obligation in exchange for the stressed and
distressed debt obligations, the value of which may be less than the Trust's
purchase price of such debt obligations. Furthermore, if an anticipated
transaction does not occur, the Trust may be required to sell its investment
at a loss. Given the substantial uncertainties concerning transactions
involving stressed and distressed debt obligations in which the Trust invests,
there is a potential risk of loss by the Trust of its entire investment in any
particular investment.

Investments in companies operating in workout modes or under Chapter 11
of the Bankruptcy Code are also, in certain circumstances, subject to certain
additional liabilities which may exceed the value of the Trust's original
investment in a company. For example, under certain circumstances, creditors
who have inappropriately exercised control over the management and policies of
a debtor may have their claims subordinated or disallowed or may be found
liable for damages suffered by parties as a result of such actions. The
Investment Adviser's active management style may present a greater risk in
this area than would a more passive approach. In addition, under certain
circumstances, payments to the Trust and distributions by the Trust or
payments on the debt may be reclaimed if any such payment is later determined
to have been a fraudulent conveyance or a preferential payment.

The Investment Adviser on behalf of the Trust may participate on
committees formed by creditors to negotiate with the management of financially
troubled companies that may or may not be in bankruptcy or may negotiate
directly with debtors with respect to restructuring issues. If the Trust does
choose to join a committee, the Trust would likely be only one of many
participants, all of whom would be interested in obtaining an outcome that is
in their individual best interests. There can be no assurance that the Trust
would be successful in obtaining results most favorable to it in such
proceedings, although the Trust may incur significant legal and other expenses
in attempting to do so. As a result of participation by the Trust on such
committees, the Trust may be deemed to have duties to other creditors
represented by the committees, which might thereby expose the Trust to
liability to such other creditors who disagree with the Trust's actions.
Participation by the Trust on such committees may cause the Trust to be
subject to certain restrictions on its ability to trade in a particular
investment and may also make the Trust an "insider" or an "underwriter" for
purposes of the federal securities laws. Either circumstance will restrict the
Trust's ability to trade in or acquire additional positions in a particular
investment when it might otherwise desire to do so.

Risks of Investing in High-Yield Securities. A portion of the Trust's
investments will consist of investments that may generally be characterized as
"high-yield securities" or "junk securities." Such securities are typically
rated below investment grade by one or more nationally recognized statistical
rating organizations or are unrated but of comparable credit quality to
obligations rated below investment grade, and have greater credit and
liquidity risk than more highly rated obligations. High-yield securities are
generally unsecured and may be subordinate to other obligations of the
obligor. The lower rating of high-yield securities reflects a greater
possibility that adverse changes in the financial condition of the issuer or
in general economic conditions (including, for example, a substantial period
of rising interest rates or declining earnings) or both may impair the ability
of the issuer to make payment of principal and interest. Many issuers of
high-yield securities are highly leveraged, and their relatively high debt to
equity ratios create increased risks that their operations might not generate
sufficient cash flow to service their

obligations. Overall declines in the below investment grade bond and other
markets may adversely affect such issuers by inhibiting their ability to
refinance their obligations at maturity.

High-yield securities are often issued in connection with leveraged
acquisitions or recapitalizations in which the issuers incur a substantially
higher amount of indebtedness than the level at which they had previously
operated. High-yield securities that are debt instruments have historically
experienced greater default rates than has been the case for investment grade
securities. The Trust may also invest in equity securities issued by entities
whose obligations are unrated or are rated below investment grade.

The Trust is authorized to invest in obligations of issuers which are
generally trading at significantly higher yields than had been historically
typical of the applicable issuer's obligations. Such investments may include
debt obligations that have a heightened probability of being in covenant or
payment default in the future. Such investments generally are considered
speculative. The repayment of defaulted obligations is subject to significant
uncertainties. Defaulted obligations might be repaid only after lengthy
workout or bankruptcy proceedings, during which the issuer might not make any
interest or other payments. Typically such workout or bankruptcy proceedings
result in only partial recovery of cash payments or an exchange of the
defaulted security for other debt or equity securities of the issuer or its
affiliates, which may in turn be illiquid or speculative.

High-yield securities purchased by the Trust will be subject to certain
additional risks to the extent that such obligations may be unsecured and
subordinated to substantial amounts of senior indebtedness, all or a
significant portion of which may be secured. Moreover, such obligations
purchased by the Trust may not be protected by financial covenants or
limitations upon additional indebtedness and are unlikely to be secured by
collateral.

Insolvency Considerations with Respect to Issuers of Debt Obligations.
Various laws enacted for the protection of creditors may apply to the debt
obligations held by the Trust. The information in this paragraph is applicable
with respect to U.S. issuers subject to United States bankruptcy laws.
Insolvency considerations may differ with respect to other issuers. If a court
in a lawsuit brought by an unpaid creditor or representative of creditors of
an issuer of a debt obligation, such as a trustee in bankruptcy, were to find
that the issuer did not receive fair consideration or reasonably equivalent
value for incurring the indebtedness constituting the debt obligation and,
after giving effect to such indebtedness, the issuer (i) was insolvent, (ii)
was engaged in a business for which the remaining assets of such issuer
constituted unreasonably small capital or (iii) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they
mature, such court could determine to invalidate, in whole or in part, such
indebtedness as a fraudulent conveyance, to subordinate such indebtedness to
existing or future creditors of such issuer, or to recover amounts previously
paid by such issuer in satisfaction of such indebtedness. The measure of
insolvency for purposes of the foregoing will vary. Generally, an issuer would
be considered insolvent at a particular time if the sum of its debts were then
greater than all of its property at a fair valuation, or if the present fair
saleable value of its assets was then less than the amount that would be
required to pay its probable liabilities on its existing debts as they became
absolute and matured. There can be no assurance as to what standard a court
would apply in order to determine whether the issuer was "insolvent" after
giving effect to the incurrence of the indebtedness constituting the debt
obligation or that, regardless of the method of valuation, a court would not
determine that the issuer was "insolvent" upon giving effect to such
incurrence. In addition, in the event of the insolvency of an issuer of a debt
obligation, payments made on such debt obligation could be subject to
avoidance as a "preference" if made within a certain period of time (which may
be as long as one year) before insolvency. Similarly, a court might apply the
doctrine of equitable subordination to subordinate the claim of a lending
institution against an issuer, to claims of other creditors of the borrower,
when the lending institution, another investor, or any of their transferees,
is found to have engaged in unfair, inequitable, or fraudulent conduct. In
general, if payments on a debt obligation are avoidable, whether as fraudulent
conveyances or preferences, such payments can be recaptured either from the
initial recipient (such as the Trust) or from subsequent transferees of such
payments (such as the investors in the Trust). To the extent that any such
payments are recaptured from the Trust the resulting loss will be borne by the
investors. However, a court in a bankruptcy or insolvency proceeding would be
able to direct the recapture of any such payment from such a recipient or
transferee only to the extent that such court has jurisdiction over such
recipient or transferee or its assets. Moreover, it is likely that avoidable
payments could not be recaptured directly from any such recipient or
transferee that has given value in exchange for its note, in good faith and
without knowledge that the payments were avoidable. Although the Investment
Adviser will seek to avoid conduct that would form the basis for a successful
cause of action based upon fraudulent conveyance, preference or equitable
subordination, these determinations are made in hindsight, and, in any event,

there can be no assurance as to whether any lending institution or other
investor from which the Trust acquired the debt obligations engaged in any
such conduct (or any other conduct that would subject the debt obligations and
the issuer to insolvency laws) and, if it did, as to whether such creditor
claims could be asserted in a U.S. court (or in the courts of any other
country) against the Trust.

Risks of Investing in Stressed, Distressed or Bankrupt Companies. The Trust
may invest in companies that are stressed, in distress, or bankrupt. As such,
they are subject to a multitude of legal, industry, market, economic and
governmental forces that make analysis of these companies inherently difficult.
Further, the Investment Adviser relies on company management, outside experts,
market participants and personal experience to analyze potential investments for
the Trust. There can be no assurance that any of these sources will prove
credible, or that the Investment Adviser's analysis will produce conclusions
that lead to profitable investments.

Leverage Risk. The Trust is currently leveraged through borrowings from a
credit facility and may continue to use leverage in the future through
borrowings or the issuance of preferred shares. The use of leverage, which can
be described as exposure to changes in price at a ratio greater than the
amount of equity invested, either through the issuance of preferred shares,
borrowing or other forms of market exposure, magnifies both the favorable and
unfavorable effects of price movements in the investments made by the Trust.
Insofar as the Trust continues to employ leverage in its investment
operations, the Trust will be subject to substantial risks of loss.

o Preferred Share Risk. Preferred Share risk is the risk associated
with the issuance of the Preferred Shares to leverage the common
shares. The issuance of Preferred Shares causes the net asset
value and market value of the common shares to become more
volatile, and the yield to the holders of common shares will tend
to fluctuate with changes in the shorter-term dividend rates on
the Preferred Shares. If the dividend rate on the Preferred
Shares approaches the net rate of return on the Trust's
investment portfolio, the benefit of leverage to the holders of
the common shares would be reduced. If the dividend rate on the
Preferred Shares exceeds the net rate of return on the Trust's
portfolio, the leverage will result in a lower rate of return to
the holders of common shares than if the Trust had not issued
Preferred Shares.

In addition, the Trust would pay (and the holders of common
shares will bear) all costs and expenses relating to the issuance
and ongoing maintenance of the Preferred Shares, including higher
advisory fees. Accordingly, the Trust cannot assure you that the
issuance of Preferred Shares will result in a higher yield or
return to the holders of the common shares.

Any decline in the net asset value of the Trust's investments
would be borne entirely by the holders of common shares.
Therefore, if the market value of the Trust's portfolio declines,
the leverage will result in a greater decrease in net asset value
to the holders of common shares than if the Trust were not
leveraged. This greater net asset value decrease will also tend
to cause a greater decline in the market price for the common
shares. The Trust might be in danger of failing to maintain the
required asset coverage of the Preferred Shares or of losing its
ratings on the Preferred Shares or, in an extreme case, the
Trust's current investment income might not be sufficient to meet
the dividend requirements on the Preferred Shares. In order to
counteract such an event, the Trust might need to liquidate
investments in order to fund a redemption of some or all of the
Preferred Shares. Liquidation at times of low municipal bond
prices may result in capital loss and may reduce returns to the
holders of common shares.

Section 13(a) of the Investment Company Act, including, among other
things, changes in the Trust's subclassification as a closed-end
investment company or changes in its fundamental investment
restrictions.

o Portfolio Guidelines of Rating Agencies for Preferred Share
and/or Credit Facility. In order to obtain and maintain the
required ratings of loans from a credit facility, the Trust must
comply with investment quality, diversification and other
guidelines established by Moody's and/or S&P or the credit
facility, respectively. The Trust does not anticipate that such
guidelines would have a material adverse effect on the Trust's
holders of common shares or its ability to achieve its investment
objectives. The Trust anticipates that any Preferred Shares that
it issues would be initially given the highest ratings by Moody's
("Aaa") or by S&P ("AAA"), but no assurance can be given that
such ratings will be obtained. No minimum rating is required for
the issuance of Preferred Shares by the Trust. Moody's and S&P
receive fees in connection with their ratings issuances.

The Trust is currently leveraged through borrowings from a credit
facility and may issue preferred shares in the future. The use of leverage,
which can be described as exposure to changes in price at a ratio greater than
the amount of equity invested, either through borrowing or other forms of
market exposure, magnifies both the favorable and unfavorable effects of price
movements in the investments made by the Trust. Insofar as the Trust employs
leverage in its investment operations, the Trust will be subject to
substantial risks of loss.

o Credit Facility. The Trust is currently using leverage through
borrowings from a credit facility. The Trust has entered into a
definitive secured loan agreement with Scotia Capital ("Scotia") to
borrow up to $290,000,000 (the "Loan Agreement"). Such borrowings
constitute financial leverage. The Loan Agreement contains
covenants that may limit the Trust's ability to: (i) pay dividends
in certain circumstances, (ii) incur additional debt and (iii)
change its fundamental investment policies and engage in certain
transactions, including mergers and consolidations. For instance,
the Trust agreed not to purchase assets not contemplated by the
Investment Policies and Restrictions in the Prospectus in effect
when the Loan Agreement became effective. Furthermore, the Trust
may not incur additional debt from any other party, except for in
limited circumstances (e.g. in the ordinary course of business). In
addition, the Loan Agreement contains a covenant requiring asset
coverage ratios that may be more stringent than those required by
the Investment Company Act. Any senior security representing
indebtedness, as defined in Section 18(g) of the 1940 Act, must
have asset coverage of at least 300%.

Common Stock Risk. The Trust will have exposure to common stocks.
Although common stocks have historically generated higher average total
returns than fixed income securities over the long-term, common stocks also
have experienced significantly more volatility in those returns and in recent
years have significantly under-performed relative to debt securities.
Therefore, the Trust's exposure to common stocks could result in worse
performance than would be the case had the Trust been invested solely in debt
securities. An adverse event, such as an unfavorable earnings report, may
depress the value of a particular common stock held by the Trust. Also, the
price of common stocks is sensitive to general movements in the stock market
and a drop in the stock market may depress the price of common stocks to which
the Trust has exposure. Common stock prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when
political or economic events affecting the issuers occur. In addition, common
stock prices may be particularly sensitive to rising interest rates, as the
cost of capital rises and borrowing costs increase.

Dividend Risk. Dividends on common stock are not fixed but are declared
at the discretion of an issuer's board of directors. There is no guarantee
that the issuers of the common stocks in which the Trust invests will declare
dividends in the future or that if declared they will remain at current levels
or increase over time. See "Principal Risks of the Trust--Dividend Risk."

Small and Mid-Cap Securities Risk. The Trust may invest in companies with
small or medium capitalizations. Securities issued by smaller and medium
companies can be more volatile than, and perform differently from, larger
company securities. There may be less trading in a smaller or medium company's
securities, which means that buy and sell transactions in those securities
could have a larger impact on the security's price than is the case with
larger company securities. Smaller and medium companies may have fewer
business lines; changes in any one line of

business, therefore, may have a greater impact on a smaller or medium company's
security price than is the case for a larger company. In addition, smaller or
medium company securities may not be well known to the investing public.

Non-U.S. Securities Risk. The Trust may invest up to 20% of its total
assets in non-U.S. securities, including emerging market securities. Investing
in non-U.S. securities involves certain risks not involved in domestic
investments, including, but not limited to: (i) fluctuations in foreign
exchange rates; (ii) future foreign economic, financial, political and social
developments; (iii) different legal systems; (iv) the possible imposition of
exchange controls or other foreign governmental laws or restrictions; (v)
lower trading volume; (vi) much greater price volatility and illiquidity of
certain non-U.S. securities markets; (vii) different trading and settlement
practices; (viii) less governmental supervision; (ix) changes in currency
exchange rates; (x) high and volatile rates of inflation; (xi) fluctuating
interest rates; (xii) less publicly available information; and (xiii)
different accounting, auditing and financial recordkeeping standards and
requirements.

Certain countries in which the Trust may invest, especially emerging
market countries, historically have experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty and instability. These risks are
especially evident in the Middle East and West Africa. The cost of servicing
external debt will generally be adversely affected by rising international
interest rates because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. In addition, with
respect to certain foreign countries, there is a risk of: (i) the possibility
of expropriation or nationalization of assets; (ii) confiscatory taxation;
(iii) difficulty in obtaining or enforcing a court judgment; (iv) economic,
political or social instability; and (v) diplomatic developments that could
affect investments in those countries.

Because the Trust will invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the Trust and the unrealized
appreciation or depreciation of investments. Currencies of certain countries
may be volatile and therefore may affect the value of securities denominated
in such currencies, which means that the Trust's net asset value or current
income could decline as a result of changes in the exchange rates between
foreign currencies and the U.S. dollar. Certain investments in non-U.S.
securities also may be subject to foreign withholding taxes. These risks often
are heightened for investments in smaller, emerging capital markets. In
addition, individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as: (i) growth of gross domestic
product; (ii) rates of inflation; (iii) capital reinvestment; (iv) resources;
(v) self-sufficiency; and (vi) balance of payments position.

As a result of these potential risks, Highland may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Trust may
invest in countries in which foreign investors, including Highland, have had
no or limited prior experience.

Emerging Markets Risk. The Trust may invest up to 20% of its total assets
in securities of issuers based in emerging markets. Investing in securities of
issuers based in underdeveloped emerging markets entails all of the risks of
investing in securities of non-U.S. issuers to a heightened degree. Emerging
market countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most countries located in
Western Europe. These heightened risks include: (i) greater risks of
expropriation, confiscatory taxation, nationalization, and less social,
political and economic stability; (ii) the smaller size of the markets for
such securities and a lower volume of trading, resulting in lack of liquidity
and in price volatility; and (iii) certain national policies which may
restrict the Trust's investment opportunities including restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests.

Foreign Currency Risk. Because the Trust may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the value of securities owned by
the Trust, the unrealized appreciation or depreciation of investments and
gains on and income from investments. Currencies of certain countries may be
volatile and therefore may affect the value of securities denominated in such
currencies, which means that the Trust's net asset value could decline as a
result of changes in the exchange rates between foreign currencies and the
U.S. dollar. In addition, the Trust may enter into foreign currency
transactions in an attempt to enhance total return which may further expose
the Trust to the risks of foreign currency movements and other risks.

Investments in Unseasoned Companies. The Trust may invest in the
securities of smaller, less seasoned companies. These investments may present
greater opportunities for growth, but also involve greater risks than
customarily are associated with investments in securities of more established
companies. Some of the companies in which the Trust may invest will be
start-up companies which may have insubstantial operational or earnings
history or may have limited products, markets, financial resources or
management depth. Some may also be emerging companies at the research and
development stage with no products or technologies to market or approved for
marketing. Securities of emerging companies may lack an active secondary
market and may be subject to more abrupt or erratic price movements than
securities of larger, more established companies or stock market averages in
general. Competitors of certain companies may have substantially greater
financial resources than many of the companies in which the Trust may invest.

Initial Public Offerings (IPOs) Risk. The Trust may invest in shares of
companies through IPOs. IPOs and companies that have recently gone public have
the potential to produce substantial gains for the Trust, subject to the
Trust's option writing strategy. However, there is no assurance that the Trust
will have access to profitable IPOs. The investment performance of the Trust
during periods when it is unable to invest significantly or at all in IPOs may
be lower than during periods when the Trust is able to do so. Securities
issued in IPOs are subject to many of the same risks as investing in companies
with smaller market capitalizations. Securities issued in IPOs have no trading
history, and information about the companies may be available for limited
periods of time. In addition, the prices of securities sold in IPOs may be
highly volatile or may decline shortly after the IPO.

Securities Lending Risk. The Trust may lend its portfolio securities (up to
a maximum of one-third of its total assets) to banks or dealers which meet the
creditworthiness standards established by the board of trustees of the Trust.
Securities lending is subject to the risk that loaned securities may not be
available to the Trust on a timely basis and the Trust may, therefore, lose the
opportunity to sell the securities at a desirable price. Any loss in the market
price of securities loaned by the Trust that occurs during the term of the loan
would be borne by the Trust and would adversely affect the Trust's performance.
Also, there may be delays in recovery, or no recovery, of securities loaned or
even a loss of rights in the collateral should the borrower of the securities
fail financially while the loan is outstanding. Although the Trust generally has
the ability to recall loaned securities pursuant to a securities lending
arrangement in the event that a shareholder vote is held, there is a risk that
any delay in recovery of such security will result in the holder of such
security being unable to vote. All of the aforementioned risks may be greater
for non-U.S. securities.

Risks Associated with Options on Securities. There are several risks
associated with transactions in options on securities. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when and
how to use options involves the exercise of skill and judgment, and even a
well conceived transaction may be unsuccessful to some degree because of
market behavior or unexpected events.

As the writer of a covered call option, the Trust foregoes, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the call option above the sum of the premium and the
strike price of the call, but has retained the risk of loss should the price
of the underlying security decline. As the Trust writes covered calls over
more of its portfolio, its ability to benefit from capital appreciation
becomes more limited. The writer of an option has no control over the time
when it may be required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise price.

When the Trust writes covered put options, it bears the risk of loss if
the value of the underlying stock declines below the exercise price minus the
put premium. If the option is exercised, the Trust could incur a loss if it is
required to purchase the stock underlying the put option at a price greater
than the market price of the stock at the time of exercise plus the put
premium the Trust received when it wrote the option. While the Trust's
potential gain in writing a covered put option is limited to distributions
earned on the liquid assets securing the put option plus the premium received
from the purchaser of the put option, the Trust risks a loss equal to the
entire exercise price of the option minus the put premium.

Exchange-Listed Option Risks. There can be no assurance that a liquid
market will exist when the Trust seeks to close out an option position on an

options exchange. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or the
Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options). If trading
were discontinued, the secondary market on that exchange (or in that class or
series of options) would cease to exist. However, outstanding options on that
exchange that had been issued by the Options Clearing Corporation as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms. If the Trust were unable to close out a covered call option that
it had written on a security, it would not be able to sell the underlying
security unless the option expired without exercise.

The hours of trading for options on an exchange may not conform to the
hours during which the underlying securities are traded. To the extent that
the options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. Call options are marked to
market daily and their value will be affected by changes in the value and
dividend rates of the underlying common stocks, an increase in interest rates,
changes in the actual or perceived volatility of the stock market and the
underlying common stocks and the remaining time to the options' expiration.
Additionally, the exercise price of an option may be adjusted downward before
the option's expiration as a result of the occurrence of certain corporate
events affecting the underlying equity security, such as extraordinary
dividends, stock splits, merger or other extraordinary distributions or
events. A reduction in the exercise price of an option would reduce the
Trust's capital appreciation potential on the underlying security.

Over-the-Counter Option Risk. The Trust may write (sell) unlisted ("OTC"
or "over-the-counter") options, and options written by the Trust with respect
to non-U.S. securities, indices or sectors generally will be OTC options. OTC
options differ from exchange-listed options in that they are two-party
contracts, with exercise price, premium and other terms negotiated between
buyer and seller, and generally do not have as much market liquidity as
exchange-listed options. The counterparties to these transactions typically
will be major international banks, broker-dealers and financial institutions.
The Trust may be required to treat as illiquid securities being used to cover
certain written OTC options. The OTC options written by the Trust will not be
issued, guaranteed or cleared by the Options Clearing Corporation. In
addition, the Trust's ability to terminate the OTC options may be more limited
than with exchange-traded options. Banks, broker-dealers or other financial
institutions participating in such transaction may fail to settle a
transaction in accordance with the terms of the option as written. In the
event of default or insolvency of the counterparty, the Trust may be unable to
liquidate an OTC option position.

Index Option Risk. The Trust may sell index put and call options from
time to time. The purchaser of an index put option has the right to any
depreciation in the value of the index below the exercise price of the option
on or before the expiration date. The purchaser of an index call option has
the right to any appreciation in the value of the index over the exercise
price of the option on or before the expiration date. Because the exercise of
an index option is settled in cash, sellers of index call options, such as the
Trust, cannot provide in advance for their potential settlement obligations by
acquiring and holding the underlying securities. The Trust will lose money if
it is required to pay the purchaser of an index option the difference between
the cash value of the index on which the option was written and the exercise
price and such difference is greater than the premium received by the Trust
for writing the option. The value of index options written by the Trust, which
will be priced daily, will be affected by changes in the value and dividend
rates of the underlying common stocks in the respective index, changes in the
actual or perceived volatility of the stock market and the remaining time to
the options' expiration. The value of the index options also may be adversely
affected if the market for the index options becomes less liquid or smaller.
Distributions paid by the Trust on its common shares may be derived in part
from the net index option premiums it receives from selling index put and call
options, less the cost of paying settlement amounts to purchasers of the
options that exercise their options. Net index option premiums can vary widely
over the short term and long term.

Interest Rate Risk. Interest rate risk is the risk that debt securities,
and the Trust's net assets, may decline in value because of changes in
interest rates. Generally, debt securities will decrease in value when
interest rates rise and increase in value when interest rates decline. This
means that the net asset value of the common shares will fluctuate with
interest rate changes and the corresponding changes in the value of the
Trust's debt security holdings.

Prepayment Risk. If interest rates fall, the principal on bonds held by
the Trust may be paid earlier than expected. If this happens, the proceeds
from a prepaid security may be reinvested by the Trust in securities bearing
lower interest rates, resulting in a possible decline in the Trust's income
and distributions to shareholders. The Trust may invest in pools of mortgages
or other assets issued or guaranteed by private issuers or U.S. government
agencies and instrumentalities. Mortgage-related securities are especially
sensitive to prepayment risk because borrowers often refinance their mortgages
when interest rates drop.

Asset-Backed Securities Risk. Payment of interest and repayment of principal
on asset-backed securities may be largely dependent upon the cash flows
generated by the assets backing the securities and, in certain cases, supported
by letters of credit, surety bonds or other credit enhancements. Asset-backed
security values may also be affected by the creditworthiness of the servicing
agent for the pool, the originator of the loans or receivables or the entities
providing the credit enhancement. In addition, the underlying assets are subject
to prepayments that shorten the securities' weighted average maturity and may
lower their return.

Mortgage-Backed Securities Risk. A mortgage-backed security, which
represents an interest in a pool of assets such as mortgage loans, will mature
when all the mortgages in the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed maturity, and their expected
maturities may vary when interest rates rise or fall.

When interest rates fall, homeowners are more likely to prepay their
mortgage loans. An increased rate of prepayments on the fund's mortgage-backed
securities will result in an unforeseen loss of interest income to the Trust
as the Trust may be required to reinvest assets at a lower interest rate.
Because prepayments increase when interest rates fall, the price of
mortgage-backed securities does not increase as much as other fixed income
securities when interest rates fall.

When interest rates rise, homeowners are less likely to prepay their
mortgage loans. A decreased rate of prepayments lengthens the expected
maturity of a mortgage-backed security. Therefore, the prices of
mortgage-backed securities may decrease more than prices of other fixed income
securities when interest rates rise.

Non-Investment Grade Securities Risk. There is no limit on the amount of
the Trust's portfolio that may be invested in below investment grade
securities. Non-investment grade securities are commonly referred to as "junk
securities." Investments in lower grade securities will expose the Trust to
greater risks than if the Trust owned only higher grade debt securities.
Because of the substantial risks associated with lower grade securities, you
could lose money on your investment in common shares of the Trust, both in the
short-term and the long-term. Lower grade securities, though high yielding,
are characterized by high risk. They may be subject to certain risks with
respect to the issuing entity and to greater market fluctuations than certain
lower yielding, higher rated securities. The retail secondary market for lower
grade debt securities may be less liquid than that of higher rated debt
securities. Adverse conditions could make it difficult at times for the Trust
to sell certain securities or could result in lower prices than those used in
calculating the Trust's net asset value.

Derivatives Risk. Derivative transactions in which the Trust may engage
for hedging and speculative purposes or to enhance total return, including
engaging in transactions such as options, futures, swaps, foreign currency
transactions including forward foreign currency contracts, currency swaps or
options on currency and currency futures and other derivatives transactions
("Derivative Transactions"), also involve certain risks and special
considerations. Derivative Transactions have risks, including the imperfect
correlation between the value of such instruments and the underlying assets,
the possible default of the other party to the transaction or illiquidity of
the derivative instruments. Furthermore, the ability to successfully use
Derivative Transactions depends on the Investment Adviser's ability to predict
pertinent market movements, which cannot be assured. Thus, the use of
Derivative Transactions may result in losses greater than if they had not been
used, may require the Trust to sell or purchase portfolio securities at
inopportune times or for prices other than current market values, may limit
the amount of appreciation the Trust can realize on an investment or may cause
the Trust to hold a security that it might otherwise sell. The use of foreign
currency transactions can result in the Trust's incurring losses as a result
of the imposition of exchange controls, suspension of settlements or the
inability of the Trust to deliver or receive a specified currency.
Additionally, amounts paid by the Trust as premiums and cash or other assets
held in margin accounts with respect to Derivative Transactions are not
otherwise available to the Trust for investment purposes.

To the extent that the Trust purchases options pursuant to a hedging
strategy, the Trust will be subject to the following additional risks. If a
put or call option purchased by the Trust is not sold when it has remaining
value, and if the market price of the underlying security remains equal to or
greater than the exercise price (in the case of a put), or remains less than
or equal to the exercise price (in the case of a call), the Trust will lose
its entire investment in the option.

Also, where a put or call option on a particular security is purchased to
hedge against price movements in a related security, the price of the put or
call option may move more or less than the price of the related security. If
restrictions on exercise were imposed, the Trust might be unable to exercise
an option it had purchased. If the Trust were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option may expire worthless.

Market Risk Generally. The profitability of a significant portion of the
Trust's investment program depends to a great extent upon correctly assessing
the future course of the price movements of securities and other investments
and the movements of interest rates. There can be no assurance that the
Investment Adviser will be able to predict accurately these price and interest
rate movements. With respect to the investment strategies the Trust may
utilize, there will be a high degree of market risk.

Reinvestment Risk. The Trust reinvests the cash flows received from a
security. The additional income from such reinvestment, sometimes called
interest-on-interest, is reliant on the prevailing interest rate levels at the
time of reinvestment. There is a risk that the interest rate at which interim
cash flows can be reinvested will fall. Reinvestment risk is greater for
longer holding periods and for securities with large, early cash flows such as
high-coupon bonds. Reinvestment risk also applies generally to the
reinvestment of the proceeds the Trust receives upon the maturity or sale of a
portfolio security.

Timing Risk. Many agency, corporate and municipal bonds, and most
mortgage-backed securities, contain a provision that allows the issuer to
"call" all or part of the issue before the bond's maturity date often after 5
or 10 years. The issuer usually retains the right to refinance the bond in the
future if market interest rates decline below the coupon rate. There are three
disadvantages to the call provision. First, the cash flow pattern of a
callable bond is not known with certainty. Second, because an issuer is more
likely to call the bonds when interest rates have dropped, the Trust is
exposed to reinvestment rate risk, i.e., the Trust may have to reinvest at
lower interest rates the proceeds received when the bond is called. Finally,
the capital appreciation potential of a bond will be reduced because the price
of a callable bond may not rise much above the price at which the issuer may
call the bond.

Inflation Risk. Inflation risk results from the variation in the value of cash
flows from a security due to inflation, as measured in terms of purchasing
power. For example, if the Trust purchases a bond in which it can realize a
coupon rate of 5%, but the rate of inflation increases from 2% to 6%, then the
purchasing power of the cash flow has declined. For all but adjustable bonds
or floating rate bonds, the Trust is exposed to inflation risk because the
interest rate the issuer promises to make is fixed for the life of the
security. To the extent that interest rates reflect the expected inflation
rate, floating rate bonds have a lower level of inflation risk. In addition,
during any periods of rising inflation, dividend rates of any variable rate
preferred stock issued by the Fund would likely increase, which would tend to
further reduce returns to common shareholders.

Arbitrage Risks. The Trust will engage in capital structure arbitrage and
other arbitrage strategies. Arbitrage strategies entail various risks
including the risk that external events, regulatory approvals and other
factors will impact the consummation of announced corporate events and/or the
prices of certain positions. In addition, hedging is an important feature of
capital structure arbitrage. There is no guarantee that the Investment Adviser
will be able to hedge the Trust's portfolio in the manner necessary to employ
successfully the Trust's strategy.

Short Sales Risk. Short sales by the Trust that are not made "against the
box" theoretically involve unlimited loss potential since the market price of
securities sold short may continuously increase. Short selling involves
selling securities which may or may not be owned and borrowing the same
securities for delivery to the purchaser, with an obligation to replace the
borrowed securities at a later date. Short selling allows the Trust to profit
from declines in market prices to the extent such decline exceeds the
transaction costs and the costs of borrowing the securities. However, since
the borrowed securities must be replaced by purchases at market prices in
order to close out the short position, any appreciation in the price of the
borrowed securities would result in a loss. There can be no

assurance that the securities necessary to cover a short position will be
available for purchase. Purchasing securities to close out the short position
can itself cause the price of the securities to rise further, thereby
exacerbating the loss. The Trust may mitigate such losses by replacing the
securities sold short before the market price has increased significantly. Under
adverse market conditions, the Trust might have difficulty purchasing securities
to meet its short sale delivery obligations, and might have to sell portfolio
securities to raise the capital necessary to meet its short sale obligations at
a time when fundamental investment considerations would not favor such sales.

Risks of Investing in Structured Finance Securities. A portion of the
Trust's investments may consist of equipment trust certificates,
collateralized mortgage obligations, collateralized bond obligations,
collateralized loan obligations or similar instruments. Structured finance
securities may present risks similar to those of the other types of debt
obligations in which the Trust may invest and, in fact, such risks may be of
greater significance in the case of structured finance securities. Moreover,
investing in structured finance securities may entail a variety of unique
risks. Among other risks, structured finance securities may be subject to
prepayment risk. In addition, the performance of a structured finance security
will be affected by a variety of factors, including its priority in the
capital structure of the issuer thereof, and the availability of any credit
enhancement, the level and timing of payments and recoveries on and the
characteristics of the underlying receivables, loans or other assets that are
being securitized, remoteness of those assets from the originator or
transferor, the adequacy of and ability to realize upon any related collateral
and the capability of the servicer of the securitized assets.

Risks of Investing in Preferred Securities. There are special risks
associated with investing in preferred securities, including:

o Deferral. Preferred securities may include provisions that
permit the issuer, at its discretion, to defer distributions
for a stated period without any adverse consequences to the
issuer. If the Trust owns a preferred security that is
deferring its distributions, the Trust may be required to
report income for tax purposes although it has not yet
received such income.

o Subordination. Preferred securities are subordinated to bonds
and other debt instruments in a company's capital structure
in terms of priority to corporate income and liquidation
payments, and therefore will be subject to greater credit
risk than more senior debt instruments.

o Liquidity. Preferred securities may be substantially less
liquid than many other securities, such as common stocks or
U.S. government securities.

o Limited Voting Rights. Generally, preferred security holders
have no voting rights with respect to the issuing company
unless preferred dividends have been in arrears for a
specified number of periods, at which time the preferred
security holders may elect a number of trustees to the
issuer's board. Generally, once all the arrearages have been
paid, the preferred security holders no longer have voting
rights.

Risks of Investing in Synthetic Securities. In addition to credit risks
associated with holding non-investment grade loans and high-yield debt
securities, with respect to synthetic securities the Trust will usually have a
contractual relationship only with the counterparty of such synthetic
securities, and not the Reference Obligor (as defined below) on the Reference
Obligation (as defined below). The Trust generally will have no right to
directly enforce compliance by the Reference Obligor with the terms of the
Reference Obligation nor any rights of set-off against the Reference Obligor,
nor have any voting rights with respect to the Reference Obligation. The Trust
will not benefit directly from any collateral supporting the Reference
Obligation or have the benefit of the remedies on default that would normally
be available to a holder of such Reference Obligation. In addition, in the
event of insolvency of its counterparty, the Trust will be treated as a
general creditor of such counterparty and will not have any claim with respect
to the credit risk of the counterparty as well as that of the Reference
Obligor. As a result, an overabundance of synthetic securities with any one
counterparty subjects the notes to an additional degree of risk with respect
to defaults by such counterparty as well as by the Reference Obligor. The
Investment Adviser may not perform independent credit analyses of the
counterparties, any such counterparty, or an entity guaranteeing such
counterparty, individually or in the aggregate. A "Reference Obligation" is
the debt security or other obligation upon which the synthetic security is
based. A "Reference Obligor" is the obligor on a Reference Obligation. There
is no maximum amount of Trust's assets that may be invested in these
securities.

Valuation Risk. Fair value is defined as the amount for which assets
could be sold in an orderly disposition over a reasonable period of time,
taking into account the nature of the asset. Fair value pricing, however,
involves judgments that are inherently subjective and inexact, since fair
valuation procedures are used only when it is not possible to be sure what
value should be attributed to a particular asset or when an event will affect
the market price of an asset and to what extent. As a result, there can be no
assurance that fair value pricing will reflect actual market value and it is
possible that the fair value determined for a security will be materially
different from the value that actually could be or is realized upon the sale
of that asset.

Exemptive Relief Consideration. The Investment Adviser expects to apply to
the Commission for exemptive relief to enable the registered investment
companies advised by the Investment Adviser, including the Trust, to co-invest
with other accounts and funds managed by the Investment Adviser and its
affiliates in certain privately placed securities and other situations. There
are no assurances that the Investment Adviser will receive the requested relief.
If such relief is not obtained and until it is obtained, the Investment Adviser
may be required to allocate some investments solely to the Trust and/or other
registered funds and others solely to one or more accounts that are not
registered investment companies. This could preclude the Trust from investing in
certain securities it would otherwise be interested in and could adversely
affect the speed at which the Trust is able to invest its assets and,
consequently, the performance of the Trust.

Market Disruption and Geopolitical Risk. The aftermath of the war in Iraq
and the continuing occupation of Iraq, instability in the Middle East and
terrorist attacks in the United States and around the world may have resulted
in market volatility and may have long-term effects on the U.S. and worldwide
financial markets and may cause further economic uncertainties in the United
States and worldwide. The Investment Adviser does not know how long the
securities markets will continue to be affected by these events and cannot
predict the effects of the occupation or similar events in the future on the
U.S. economy and securities markets. Given the risks described above, an
investment in the common shares may not be appropriate for all investors. You
should carefully consider your ability to assume these risks before making an
investment in the Trust.

Risks of Investing in a Trust with Anti-Takeover Provisions. The Trust's
Agreement and Declaration of Trust includes provisions that could limit the
ability of other entities or persons to acquire control of the Trust or
convert the Trust to open-end status. These provisions could deprive the
holders of common shares of opportunities to sell their common shares at a
premium over the then current market price of the common shares or at net
asset value.

Key Adviser Personnel Risk. The Trust's ability to identify and invest in
attractive opportunities is dependent upon Highland, its investment adviser.
If one or more key individuals leaves Highland, Highland may not be able to
hire qualified replacements or may require an extended time to do so. This
situation could prevent the Trust from achieving its investment objectives.

SUMMARY OF TRUST EXPENSES

The following table shows Trust expenses that the common stockholders
will bear directly or indirectly. In accordance with SEC requirements, the
table below shows our expenses, including leverage costs, as a percentage of
average net assets, and not as a percentage of gross assets or Managed Assets.
By showing expenses as a percentage of our average net assets, expenses are
not expressed as a percentage of all the assets we invest.

Percentage of
Offering
Price
-------------
Shareholder Transaction Expenses

Sales load............................................................................ (1)
Offering expenses borne by holders of common shares, excluding Preferred Share
offeringexpenses..................................................................... (1)
Dividend reinvestment and cash purchase plan fees..................................... (2)
Preferred Share offering expense borne by holders of common shares.................... [ ]%

Percentage of Net Assets
Attributable to Common
Shares(3)
------------------------

Annual Expenses
Management fees................................................................... [ ]%*
Interest payments on borrowed funds............................................... [ ]%
Other expenses (including cost of issuing Preferred Shares)....................... [ ]%(4)
Total annual expenses............................................................. [ ]%
Dividends on Preferred Shares..................................................... [ ]%
Total annual expenses and dividends on Preferred Shares........................... [ ]%

The purpose of the table above and the example below is to help investors
understand the fees and expenses that they, as common stockholders would bear
directly or indirectly.

EXAMPLE

The following example illustrates the expenses that you would pay on a $1,000
investment in the common shares (including the total sales load of $[ ]
payable on an investment of that size, the other estimated costs of this
offering to be borne by the Trust, which correspond to $2.00 on an investment
of that size, and the estimated costs of issuing Preferred Shares, which
correspond to $[ ] on an investment of that size), before considering
dividends paid on the Preferred Shares, assuming that the Trust issues
approximately $[ ] million liquidation value of Preferred Shares in the
Preferred Share offering.

Example 1 Year 3 Years 5 Years 10 Years

Total expenses incurred $ $ $ $

If dividends on Preferred Shares are included, the total expenses incurred
for 1, 3, 5 and 10 years will be $ , $ , $ and $ , respectively.

____________________

* Management fees are both the investment advisory and administrative
services fees paid to Highland.

(1) If the securities to which this prospectus relates are sold to or through
underwriters, the prospectus supplement will set forth any applicable
sales load and the estimated offering expenses borne by us.

(2) Common shareholders will be charged a $2.50 service charge and pay a
brokerage commission of $0.05 per share sold if they direct the Plan
Agent (as defined below) to sell common shares held in a dividend
reinvestment account. Each participant in the Trust's Dividend
Reinvestment Plan will pay a pro rata share of brokerage commissions
incurred when dividend reinvestment occurs in open-market purchases
because the Trust will purchase its shares in the open market when the net
asset value per common share is greater than the market value per common
share.

(3) The costs of one or more Preferred Share offerings (including
underwriting discounts, commissions and legal expenses), will be borne
immediately by the Trust's common shareholders and result in a reduction
of the net asset value of the common shares.

(4) "Other Expenses" includes costs associated with the Trust's short sales
on securities, including dividend expenses in securities sold short. When
a cash dividend is declared on a security for which the Trust holds a
short position, the Trust incurs the obligation to pay an amount equal to
that dividend to the lender of the shorted security. Thus, the estimate
for dividend expenses paid is also based on the dividend yields of stocks

that would be sold short as part of anticipated trading practices (which
may involve avoiding dividend expenses with respect to certain short sale
transactions by closing out the position prior to the underlying issuer's
ex-dividend date). The Trust did not have any actual dividend expenses
with respect to short sale transactions in the past fiscal year, but may
incur such expenses in current fiscal year. "Other Expenses" includes the
dividend expense that the Trust is expected to incur during the current
fiscal year.

FINANCIAL HIGHLIGHTS

Information contained in the table below under the heading "Per Common
Share Data" and "Supplemental Data and Ratios" shows our per common share
operating performance. Except when noted, the information in this table is
derived from our financial statements audited by PricewaterhouseCoopers LLP,
whose report on such financial statements is contained in our 2006 Annual
Report and incorporated by reference into the statement of additional
information, both of which are available from us.

For the Period
Common Shares Per Share Operating Performance Ended 12/30/06(a)
--------------------------------------------- -----------------

Net Asset Value, Beginning of Period $19.06
----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net Investment Income 0.71
Net realized and unrealized gain on investments 0.91

Total from investment operations applicable to common shareholders 1.62

Less Distributions Declared to Common Shareholders
From net investment income (0.60)
----------------------------------------------------------------------------------------------------------------------
Net Asset Value End of Period $20.08
Market Value, End of Period $21.16
Market Value Total Return(c) 9.06%
----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
Common Share Information at End of Period:
Ratios based on net assets of common shares
Net assets, end of period (in 000's) $692,964
Net operating expenses 1.31%
Interest expenses 0.89%
Net expenses 2.20%
Net Investment income 6.33%
Portfolio turnover rate 45.95%
----------------------------------------------------------------------------------------------------------------------

--------------------------
(a) Highland Credit Strategies Fund commenced investment operations on June
29, 2006

(b) Not annualized.

(c) Based on market value per share Dividends and distributions, if any, are
assumed for purposes of this calculation to be reinvested at prices
obtained under the Fund's reinvestment plan.

MARKET AND NET ASSET VALUE INFORMATION

Our common stock is listed on the NYSE under the symbol "HCF." Shares of
our common stock commenced trading on the NYSE in June 2006. Our common stock
has a limited trading history and has traded only at a premium in relation to
NAV. We cannot predict whether our shares will trade in the future at a
premium or discount to NAV. The provisions of the 1940 Act generally require
that the public offering price of common stock and exclusive of any
underwriting commissions and discounts must equal or exceed the NAV per share
of the company's common stock (calculated within 48 hours of pricing).
Issuance of common stock may have an adverse effect on prices in the secondary
market for our common stock by increasing the number of shares of common stock
available, which may put downward pressure on the market price for our common
stock.

The following table sets forth for each of the periods indicated the high
and low closing market prices for our shares of common stock on the NYSE, the
NAV per share and the premium to NAV per share at which our shares of common
stock were trading. NAV is generally determined on the last business day of
each calendar month. See "Net Asset Value" for information as to the
determination of our NAV.

Quarter Market Price(1) Net Asset Value ("NAV") per Premium/(Discount) as a %
share (2) of NAV
High Low High Low High Low

1st Quarter 2007 21.69 20.37 20.87 21.10 6.63% 0.18%
2nd Quarter 2006 20.60 20.18 19.07 19.06 8.02% 5.87%
3rd Quarter 2006 21.30 19.82 20.58 20.60 11.40% 3.62%
4th Quarter 2006 21.48 20.10 21.16 20.18 7.28% 3.12%

(1) Based on high and low closing market price for the respective quarter.

(2) Based on the NAV calculated on the close of business of each day.

THE TRUST

The Trust is a non-diversified, closed-end management investment company
registered under the Investment Company Act. The Trust was organized as a
Delaware statutory trust on March 10, 2006, pursuant to an Agreement and
Declaration of Trust governed by the laws of the State of Delaware. The Trust
completed an initial public offering of 30,000,000 common shares on June 23,
2006 and sold an additional 4,500,000 common shares to its underwriters on
July 27, 2006 pursuant to an overallotment option. The Trust's principal
office is located at Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas,
Texas 75240 and its telephone number is (877) 665-1287.

USE OF PROCEEDS

Unless otherwise specified in a prospectus supplement, the Trust will
invest the net proceeds of any sales of securities in accordance with the
Trust's investment objectives and policies as stated below. We currently
anticipate that the Trust will be able to invest primarily in securities and
other investments that meet the Trust's investment objectives and policies
within approximately three months after the completion of any offering.

THE TRUST'S INVESTMENTS

Investment Objectives and Policies

The Trust's investment objectives are to provide both current income and
capital appreciation. The Trust pursues its objectives by investing primarily in
the following categories of securities and instruments of corporations and other
business entities: (i) secured and unsecured floating and fixed rate loans; (ii)
bonds and other debt obligations; (iii) debt obligations of stressed, distressed
and bankrupt issuers; (iv) structured products, including but not limited to,
mortgage-backed and other asset-backed securities and collateralized debt
obligations; and (v) equities. Additionally, within the categories of
obligations and securities in which the Trust may invest, Highland may employ
various trading strategies, including capital structure arbitrage, pair trades,
and shorting. The Trust may also invest in these categories of obligations and
securities through the use of derivatives. Highland will seek to achieve its
capital appreciation objective by investing in category (iii) and (v)
obligations and securities, and to a lesser extent, in category (i), (ii), and
(iv) obligations. Under normal market conditions, at least 80% of the Trust's
assets are invested in one or more of these principal investment categories.
Subject only to this general guideline, the Investment Adviser has broad
discretion to allocate the Trust's assets among these investment categories and
to change allocations as conditions warrant. The Investment Adviser has full
discretion regarding the capital markets from which it can access investment
opportunities in accordance with the investment limitations set forth in this
prospectus. A significant portion of the Trust's assets may be invested in
securities rated below investment grade, which are commonly referred to as "junk
securities." The Investment Adviser does not anticipate a high correlation
between the performance of the Trust's portfolio and the performance of the
corporate bond and equity markets. The investment objectives may be changed
without shareholder approval. There can be no assurance that the Trust's
investment objectives will be achieved.

The Investment Adviser may select investments from a wide range of
trading strategies and credit markets in order to vary the Trust's investments
and to optimize the risk-reward parameters of the Trust. Highland does not
intend to invest the Trust's assets according to pre-determined allocations.
The investment team and other Highland personnel uses a wide range of
resources to identify attractive individual investments and promising
investment strategies for consideration in connection with investments by the
Trust. The following is a description of the general types of securities in
which the Trust may invest. This description is merely a summary, and the
Investment Adviser has discretion to cause the Trust to invest in other types
of securities and to follow other investment criteria and guidelines as
described herein. See "Portfolio Composition" below for a more complete
description of the types of securities and investments the Trust intends to
make.

The Trust may invest and trade in listed and unlisted, public and
private, rated and unrated, debt and equity instruments and other obligations,
including structured debt and equity instruments as well as financial
derivatives. Investments may include investments in stressed and distressed
positions, which may include publicly-traded debt and equity securities,
obligations that were privately placed with banks, insurance companies and
other lending institutions, trade claims, accounts receivable and any other
form of obligation recognized as a claim in a bankruptcy

or workout process. The Trust may invest in securities traded in foreign
countries and denominated in foreign currencies.

As part of its investment program, the Trust may invest, from time to
time, in debt or synthetic instruments that are sold in direct placement
transactions between their issuers and their purchasers and that are neither
listed on an exchange, nor traded over the counter. The Trust may also receive
equity or equity-related securities from time to time in connection with a
workout transaction or may invest directly in equity securities.

The Trust may employ currency hedges (either in the forward or options
markets) in certain circumstances to reduce currency risk and may engage in
other derivative transactions for hedging purposes or to enhance total return.
The Trust may also lend securities and engage in short sales of securities.
The Trust may employ leverage beyond the issuance of Preferred Shares, by
borrowing from a credit facility, and the Trust may invest in the securities
of companies whose capital structures are highly leveraged.

From time to time, the Investment Adviser may also invest a portion of
the Trust's assets in short-term U.S. Government obligations, certificates of
deposit, commercial paper and other money market instruments, including
repurchase agreements with respect to such obligations to enable the Trust to
make investments quickly and to serve as collateral with respect to certain of
its investments. A greater percentage of Trust assets may be invested in such
obligations if the Investment Adviser believes that a defensive position is
appropriate because of the outlook for security prices or in order to respond
to adverse market, economic business or political conditions. From time to
time cash balances in the Trust's brokerage account may be placed in a money
market fund.

For a more complete discussion of the Trust's portfolio composition, see
"Portfolio Composition" below.

Investment Philosophy

Under normal market conditions, the Investment Adviser employs, on behalf
of the Trust, investment strategies across various markets in which the
Investment Adviser holds significant investment experience: primarily the
leveraged loan, high yield, structured products and stressed and distressed
markets. Highland makes investment decisions based on quantitative analysis,
which employs sophisticated, data-intensive models to drive the investment
process. The Investment Adviser has full discretion regarding the capital
markets from which it can access investment opportunities in accordance with
the investment limitations set forth in this prospectus.

The Investment Adviser implements selected trading strategies to exploit
pricing inefficiencies across the credit markets and within an individual
issuer's capital structure. The Trust seeks to vary its investments by
strategy, industry, security type and credit market, but reserves the right to
re-position its portfolio among these criteria depending on market dynamics,
and thus the Investment Adviser anticipates that the Trust will experience
high portfolio turnover. Highland manages interest rate, default, currency and
systemic risks through a variety of trading methods and market tools,
including derivative hedging instruments, as it deems appropriate.

This multi-strategy investment program allows the Investment Adviser to
assess what it considers to be the best opportunities across multiple markets
and to adjust quickly the Trust's trading strategies and market focus to
changing conditions. The Investment Adviser intends to focus primarily on the
U.S. marketplace, but may pursue opportunities in the non-U.S. credit or
securities markets by investing up to 20% of the Trust's assets in non-U.S.
credit or securities market investments.

in a more generalist capacity. The Investment Adviser believes that credit
investing is a due-diligence intensive process that requires long-term
committed resources to industry, product and market specialization so that
investment decisions are proactive as opposed to reactive in nature.

Portfolio Composition

The Trust invests primarily in the following categories of securities and
instruments of corporations and other business entities: (i) secured and
unsecured floating and fixed rate loans; (ii) bonds and other debt obligations;
(iii) debt obligations of stressed, distressed and bankrupt issuers; (iv)
structured products, including but not limited to, mortgage-backed and other
asset-backed securities and collateralized debt obligations; and (v) equities.
Additionally, within the categories of obligations and securities in which the
Trust may invest, Highland may employ various trading strategies, including
capital structure arbitrage, pair trades, and shorting. The Trust may also
invest in these categories of obligations and securities through the use of
derivatives. Highland will seek to achieve its capital appreciation objective by
investing in category (iii) and (v) obligations and securities, and to a lesser
extent, in category (i), (ii), and (iv) obligations.

Under normal market conditions, at least 80% of the Trust's assets will
be invested in one or more of these principal investment categories. Subject
only to this general guideline, the Investment Adviser has broad discretion to
allocate the Trust's assets among these investment categories and to change
allocations as conditions warrant. The Investment Adviser has full discretion
regarding the capital markets from which it can access investment
opportunities in accordance with the investment limitations set forth in this
prospectus. In order to pursue most effectively its opportunistic investment
strategy, the Trust will not maintain fixed duration, maturity or credit
quality policies. The Trust may invest in debt obligations of any credit
quality. The Trust may invest without limitation in securities and obligations
of domestic issuers, but may invest only up to 20% of the assets in non-U.S.
obligors.

The Trust's portfolio will be composed principally of the following
investments. Additional information relating to the Trust's investment
policies and restrictions and the Trust's portfolio investments is contained
in the Statement of Additional Information.

Senior Loans. Senior loans hold the most senior position in the capital
structure of a business entity, are typically secured with specific collateral
and have a claim on the general assets of the borrower that is senior to that
held by subordinated debtholders and stockholders of the borrower. The
proceeds of senior loans primarily are used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes. Senior
loans typically have rates of interest which are redetermined either daily,
monthly, quarterly or semi-annually by reference to a base lending rate, plus
a premium. These base lending rates generally are LIBOR, the prime rate
offered by one or more major United States banks (Prime Rate) or the
certificate of deposit (CD) rate or other base lending rates used by
commercial lenders.

The Trust also may purchase unsecured loans, other floating rate debt
securities such as notes, bonds and asset-backed securities (such as
securities issued by special purpose funds investing in bank loans),
investment grade and below investment grade fixed income debt obligations and
money market instruments, such as commercial paper. The Trust also may
purchase obligations issued in connection with a restructuring pursuant to
Chapter 11 of the U.S. Bankruptcy Code. While these investments are not a
primary focus of the Trust, the Trust does not have a policy limiting such
investments to a specific percentage of the Trust's assets.

Loans and other corporate debt obligations are subject to the risk of
non-payment of scheduled interest or principal. Such non-payment would result
in a reduction of income to the Trust, a reduction in the value of the
investment and a potential decrease in the net asset value of the Trust. There
can be no assurance that the liquidation

of any collateral securing a senior loan would satisfy a borrower's obligation
in the event of non-payment of scheduled interest or principal payments, or
that such collateral could be readily liquidated. In the event of bankruptcy
of a borrower, the Trust could experience delays or limitations with respect
to its ability to realize the benefits of the collateral securing a senior
loan. To the extent that a senior loan is collateralized by stock in the
borrower or its subsidiaries, such stock may lose all or substantially all of
its value in the event of the bankruptcy of a borrower. Some senior loans are
subject to the risk that a court, pursuant to fraudulent conveyance or other
similar laws, could subordinate senior loans to presently existing or future
indebtedness of the borrower or take other action detrimental to the holders
of senior loans including, in certain circumstances, invalidating such senior
loans or causing interest previously paid to be refunded to the borrower. If
interest were required to be refunded, it could negatively affect the Trust's
performance. To the extent a senior loan is subordinated in the capital
structure, it will have characteristics similar to other subordinated
debtholders, including a greater risk of nonpayment of interest or principal.

Many loans in which the Investment Adviser anticipates the Trust will
invest, and the issuers of such loan, may not be rated by a rating agency,
will not be registered with the Securities and Exchange Commission or any
state securities commission and will not be listed on any national securities
exchange. The amount of public information available with respect to issuers
of senior loans will generally be less extensive than that available for
issuers of registered or exchange listed securities. In evaluating the
creditworthiness of borrowers, the Investment Adviser will consider, and may
rely in part, on analyses performed by others. The Investment Adviser does not
view ratings as the determinative factor in its investment decisions and
relies more upon its credit analysis abilities than upon ratings. Borrowers
may have outstanding debt obligations that are rated below investment grade by
a rating agency. A high percentage of senior loans held by the Trust may be
rated, if at all, below investment grade by independent rating agencies. In
the event senior loans are not rated, they are likely to be the equivalent of
below investment grade quality. Debt securities which are unsecured and rated
below investment grade (i.e., Ba and below by Moody's Investors Service, Inc.
("Moody's") or BB and below by Standard & Poor's Ratings Group, a division of
The McGraw-Hill Companies, Inc. ("S&P")) and comparable unrated bonds, are
viewed by the rating agencies as having speculative characteristics and are
commonly known as "junk bonds." A description of the ratings of corporate
bonds by Moody's and S&P included as Appendix A to the Statement of Additional
Information. Because senior loans are senior in a borrower's capital structure
and are often secured by specific collateral, the Investment Adviser believes
that senior loans have more favorable loss recovery rates as compared to most
other types of below investment grade debt obligations. However, there can be
no assurance that the Trust's actual loss recovery experience will be
consistent with the Investment Adviser's prior experience or that the Trust's
senior loans will achieve any specific loss recovery rates.

No active trading market may exist for many senior loans, and some senior
loans may be subject to restrictions on resale. The Trust is not limited in
the percentage of its assets that may be invested in senior loans and other
securities deemed to be illiquid. A secondary market may be subject to
irregular trading activity, wide bid/ask spreads and extended trade settlement
periods, which may impair the ability to realize full value on the disposition
of an illiquid senior loan, and cause a material decline in the Trust's net
asset value.

Use of Agents. Senior loans generally are arranged through private
negotiations between a borrower and a group of financial institutions
initially represented by an agent who is usually one of the originating
lenders. In larger transactions, it is common to have several agents.
Generally, however, only one such agent has primary responsibility for ongoing
administration of a senior loan. Agents are typically paid fees by the
borrower for their services. The agent is primarily responsible for
negotiating the credit agreement which establishes the terms and conditions of
the senior loan and the rights of the borrower and the lenders. The agent is
also responsible for monitoring collateral and for exercising remedies
available to the lenders such as foreclosure upon collateral.

Credit agreements may provide for the termination of the agent's status
in the event that it fails to act as required under the relevant credit
agreement, becomes insolvent, enters FDIC receivership or, if not FDIC
insured, enters into bankruptcy. Should such an agent, lender or assignor with
respect to an assignment inter-positioned between the Trust and the borrower
become insolvent or enter FDIC receivership or bankruptcy, any interest in the
senior loan of such person and any loan payment held by such person for the
benefit of the Trust should not be included in such person's or entity's
bankruptcy estate. If, however, any such amount were included in such person's
or entity's bankruptcy estate, the Trust would incur certain costs and delays
in realizing payment or could suffer a loss of principal or interest. In this
event, the Trust could experience a decrease in net asset value.

Form of Investment. The Trust's investments in senior loans may take one
of several forms, including acting as one of the group of lenders originating
a senior loan, purchasing an assignment of a portion of a senior loan from a
third party or acquiring a participation in a senior loan. When the Trust is a
member of the originating syndicate for a senior loan, it may share in a fee
paid to the syndicate. When the Trust acquires a participation in, or an
assignment of, a senior loan, it may pay a fee to, or forego a portion of
interest payments from, the lender selling the participation or assignment.
The Trust will act as lender, or purchase an assignment or participation, with
respect to a senior loan only if the agent is determined by the Investment
Adviser to be creditworthy.

Original Lender. When the Trust is one of the original lenders, it will
have a direct contractual relationship with the borrower and can enforce
compliance by the borrower with terms of the credit agreement. It also may
have negotiated rights with respect to any funds acquired by other lenders
through set-off. Original lenders also negotiate voting and consent rights
under the credit agreement. Actions subject to lender vote or consent
generally require the vote or consent of the majority of the holders of some
specified percentage of the outstanding principal amount of the senior loan.
Certain decisions, such as reducing the interest rate, or extending the
maturity of a senior loan, or releasing collateral securing a senior loan,
among others, frequently require the unanimous vote or consent of all lenders
affected.

Assignments. When the Trust is a purchaser of an assignment, it typically
succeeds to all the rights and obligations under the credit agreement of the
assigning lender and becomes a lender under the credit agreement with the same
rights and obligations as the assigning lender. Assignments are, however,
arranged through private negotiations between potential assignees and
potential assignors, and the rights and obligations acquired by the purchaser
of an assignment may be more limited than those held by the assigning lender.

Participations. The Trust may also invest in participations in senior
loans. The rights of the Trust when it acquires a participation are likely to
be more limited than the rights of an original lender or an investor who
acquired an assignment. Participation by the Trust in a lender's portion of a
senior loan typically means that the Trust has only a contractual relationship
with the lender, not with the borrower. This means that the Trust has the
right to receive payments of principal, interest and any fees to which it is
entitled only from the lender selling the participation and only upon receipt
by the lender of payments from the borrower.

With a participation, the Trust will have no rights to enforce compliance
by the borrower with the terms of the credit agreement or any rights with
respect to any funds acquired by other lenders through setoff against the
borrower. In addition, the Trust may not directly benefit from the collateral
supporting the senior loan because it may be treated as a general creditor of
the lender instead of a senior secured creditor of the borrower. As a result,
the Trust may be subject to delays, expenses and risks that are greater than
those that exist when the Trust is the original lender or holds an assignment.
This means the Trust must assume the credit risk of both the borrower and the
lender selling the participation. The Trust will consider a purchase of
participations only in those situations where the Investment Adviser considers
the participating lender to be creditworthy.

In the event of a bankruptcy or insolvency of a borrower, the obligation
of the borrower to repay the senior loan may be subject to certain defenses
that can be asserted by such borrower against the Trust as a result of
improper conduct of the lender selling the participation. A participation in a
senior loan will be deemed to be a senior loan for the purposes of the Trust's
investment objectives and policies.

Investing in senior loans involves investment risk. Some borrowers
default on their senior loan payments. The Trust attempts to manage this
credit risk through multiple different investments within the portfolio and
ongoing analysis and monitoring of borrowers. The Trust also is subject to
market, liquidity, interest rate and other risks. See "Principal Risks of the
Trust."

Second Lien Loans. Second lien loans are loans made by public and private
corporations and other non-governmental entities and issuers for a variety of
purposes. Second lien loans are second in right of payment to one or more
senior loans of the related borrower. Second lien loans typically are secured
by a second priority security interest or lien to or on specified collateral
securing the borrower's obligation under the loan and typically have similar
protections and rights as senior loans. Second lien loans are not (and by
their terms cannot) become subordinate in right of payment to any obligation
of the related borrower other than senior loans of such borrower. Second lien
loans, like senior loans, typically have adjustable floating rate interest
payments. Because second lien

loans are second to senior loans, they present a greater degree of investment
risk but often pay interest at higher rates reflecting this additional risk.
Such investments generally are of below investment grade quality. Other than
their subordinated status, second lien loans have many characteristics and
risks similar to senior loans discussed above. In addition, second lien loans
of below investment grade quality share many of the risk characteristics of
non-investment grade securities. As in the case of senior loans, the Trust may
purchase interests in second lien loans through assignments or participations.

Second lien loans are subject to the same risks associated with
investment in senior loans and non-investment grade securities. Because second
lien loans are second in right of payment to one or more senior loans of the
related borrower, they therefore are subject to additional risk that the cash
flow of the borrower and any property securing the loan may be insufficient to
meet scheduled payments after giving effect to the senior secured obligations
of the borrower. Second lien loans are also expected to have greater price
volatility than senior loans and may be less liquid. There is also a
possibility that originators will not be able to sell participations in second
lien loans, which would create greater credit risk exposure.

Other Secured Loans. Secured loans other than senior loans and second
lien loans are made by public and private corporations and other
non-governmental entities and issuers for a variety of purposes. Such secured
loans may rank lower in right of payment to one or more senior loans and
second lien loans of the borrower. Such secured loans typically are secured by
a lower priority security interest or lien to or on specified collateral
securing the borrower's obligation under the loan, and typically have more
subordinated protections and rights than senior loans and second lien loans.
Secured loans may become subordinated in right of payment to more senior
obligations of the borrower issued in the future. Such secured loans may have
fixed or adjustable floating rate interest payments. Because such secured
loans may rank lower as to right of payment than senior loans and second lien
loans of the borrower, they may present a greater degree of investment risk
than senior loans and second lien loans but often pay interest at higher rates
reflecting this additional risk. Such investments generally are of below
investment grade quality. Other than their more subordinated status, such
investments have many characteristics and risks similar to senior loans and
second lien loans discussed above. In addition, secured loans of below
investment grade quality share many of the risk characteristics of
non-investment grade securities. As in the case of senior loans and second
lien loans, the Trust may purchase interests in other secured loans through
assignments or participations. Other secured loans are subject to the same
risks associated with investment in senior loans, second lien loans and
non-investment grade securities. Because such loans, however, may rank lower
in right of payment to senior loans and second lien loans of the borrower,
they may be subject to additional risk that the cash flow of the borrower and
any property securing the loan may be insufficient to repay the scheduled
payments after giving effect to more senior secured obligations of the
borrower. Such secured loans are also expected to have greater price
volatility than senior loans and second lien loans and may be less liquid.
There is also a possibility that originators will not be able to sell
participations in other secured loans, which would create greater credit risk
exposure.

Unsecured Loans. Unsecured loans are loans made by public and private
corporations and other non-governmental entities and issuers for a variety of
purposes. Unsecured loans generally have lower priority in right of payment
compared to holders of secured debt of the borrower. Unsecured loans are not
secured by a security interest or lien to or on specified collateral securing
the borrower's obligation under the loan. Unsecured loans by their terms may
be or may become subordinate in right of payment to other obligations of the
borrower, including senior loans, second lien loans and other secured loans.
Unsecured loans may have fixed or adjustable floating rate interest payments.
Because unsecured loans are subordinate to the secured debt of the borrower,
they present a greater degree of investment risk but often pay interest at
higher rates reflecting this additional risk. Such investments generally are
of non-investment grade quality. Other than their subordinated and unsecured
status, such investments have many characteristics and risks similar to senior
loans, second lien loans and other secured loans discussed above. In addition,
unsecured loans of non-investment grade quality share many of the risk
characteristics of non-investment grade securities. As in the case of secured
loans, the Trust may purchase interests in unsecured loans through assignments
or participations.

Unsecured loans are subject to the same risks associated with investment
in senior loans, second lien loans, other secured loans and non-investment
grade securities. However, because unsecured loans rank lower in right of
payment to any secured obligations of the borrower, they may be subject to
additional risk that the cash flow of the borrower and available assets may be
insufficient to meet scheduled payments after giving effect to the secured
obligations of the borrower. Unsecured loans are also expected to have greater
price volatility than secured loans

and may be less liquid. There is also a possibility that loan originators will
not be able to sell participations in unsecured loans, which would create
greater credit risk exposure.

Investment Grade Securities. The Trust may invest in a wide variety of
bonds that are rated or determined by the Investment Adviser to be of
investment grade quality of varying maturities issued by U.S. corporations and
other business entities. Bonds are fixed or variable rate debt obligations,
including bills, notes, debentures, money market instruments and similar
instruments and securities. Bonds generally are used by corporations and other
issuers to borrow money from investors for a variety of business purposes. The
issuer pays the investor a fixed or variable rate of interest and normally
must repay the amount borrowed on or before maturity. Certain bonds are
"perpetual" in that they have no maturity date. Some investment grade
securities, such as zero coupon bonds, do not pay current interest, but are
sold at a discount from their face values. Although more creditworthy and
generally less risky than non-investment grade securities, investment grade
securities are still subject to market and credit risk. Market risk relates to
changes in a security's value as a result of interest rate changes generally.
Investment grade securities have varying levels of sensitivity to changes in
interest rates and varying degrees of credit quality. In general, bond prices
rise when interest rates fall, and fall when interest rates rise. Longer-term
bonds and zero coupon bonds are generally more sensitive to interest rate
changes. Credit risk relates to the ability of the issuer to make payments of
principal and interest. The values of investment grade securities like those
of other debt securities may be affected by changes in the credit rating or
financial condition of an issuer. Investment grade securities are generally
considered medium-and high-quality securities. Some, however, may possess
speculative characteristics, and may be more sensitive to economic changes and
to changes in the financial condition of issuers. The market prices of
investment grade securities in the lowest investment grade categories may
fluctuate more than higher-quality securities and may decline significantly in
periods of general or regional economic difficulty. Like non-investment grade
securities, such investment grade securities in the lowest investment grade
categories may be thinly traded, making them difficult to sell promptly at an
acceptable price.

Other Fixed Income Securities. The Trust also may purchase unsecured
loans, other floating rate or fixed rate debt securities such as notes, bonds
and asset-backed securities (such as securities issued by special purpose
funds investing in bank loans), investment grade and below investment grade
fixed income debt obligations and money market instruments, such as commercial
paper. The high yield securities in which the Trust invests are rated Ba or
lower by Moody's or BB or lower by S&P or are unrated but determined by the
Investment Adviser to be of comparable quality. Debt securities rated below
investment grade are commonly referred to as "junk securities" and are
considered speculative with respect to the issuer's capacity to pay interest
and repay principal. Below investment grade debt securities involve greater
risk of loss, are subject to greater price volatility and are less liquid,
especially during periods of economic uncertainty or change, than higher rated
debt securities. The Trust's fixed-income securities may have fixed or
variable principal payments and all types of interest rate and dividend
payment and reset terms, including fixed rate, adjustable rate, zero coupon,
contingent, deferred, payment in kind and auction rate features. The Trust may
invest in fixed-income securities with a broad range of maturities.

The Trust may invest in zero coupon bonds, deferred interest bonds and
bonds or preferred stocks on which the interest is payable-in-kind (PIK
bonds). To the extent the Trust invests in such instruments, they will not
contribute to the Trust's goal of current income. Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant discount
from face value. While zero coupon bonds do not require the periodic payment
of interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations that
provide that the issuer thereof may, at its option, pay interest on such bonds
in cash or in the form of additional debt obligations. Such investments may
experience greater volatility in market value due to changes in interest
rates. The Trust may be required to accrue income on these investments for
federal income tax purposes and is required to distribute its net income each
year in order to qualify for the favorable federal income tax treatment
potentially available to regulated investment companies. The Trust may be
required to sell securities to obtain cash needed for income distributions.

Non-Investment Grade Securities. The Trust may invest in securities rated
below investment grade, such as those rated Ba or lower by Moody's and BB or
lower by S&P or securities comparably rated by other rating agencies or in
unrated securities determined by Highland to be of comparable quality.
Securities rated Ba by Moody's are judged to have speculative elements, their
future cannot be considered as well assured and often the protection of
interest and principal payments may be very moderate. Securities rated BB by
S&P are regarded as having predominantly speculative characteristics and,
while such obligations have less near-term vulnerability to

default than other speculative grade debt, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Securities rated C are regarded as having extremely poor
prospects of ever attaining any real investment standing. Securities rated D
are in default and the payment of interest and/or repayment of principal is in
arrears. The Trust may purchase securities rated as low as D or unrated
securities deemed by Highland to be of comparable quality. When Highland
believes it to be in the best interests of the Trust's shareholders, the Trust
will reduce its investment in lower grade securities.

Lower grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
securities. The secondary market for lower grade securities may be less liquid
than that of higher rated securities. Adverse conditions could make it
difficult at times for the Trust to sell certain securities or could result in
lower prices than those used in calculating the Trust's net asset value.

The prices of debt securities generally are inversely related to interest
rate changes; however, the price volatility caused by fluctuating interest
rates of securities also is inversely related to the coupon of such
securities. Accordingly, lower grade securities may be relatively less
sensitive to interest rate changes than higher quality securities of
comparable maturity, because of their higher coupon. This higher coupon is
what the investor receives in return for bearing greater credit risk. The
higher credit risk associated with lower grade securities potentially can have
a greater effect on the value of such securities than may be the case with
higher quality issues of comparable maturity, and will be a substantial factor
in the Trust's relative share price volatility.

Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.

The ratings of Moody's and S&P and the other rating agencies represent
their opinions as to the quality of the obligations which they undertake to
rate. Ratings are relative and subjective and, although ratings may be useful
in evaluating the safety of interest and principal payments, they do not
evaluate the market value risk of such obligations. Although these ratings may
be an initial criterion for selection of portfolio investments, Highland also
will independently evaluate these securities and the ability of the issuers of
such securities to pay interest and principal. To the extent that the Trust
invests in lower grade securities that have not been rated by a rating agency,
the Trust's ability to achieve its investment objectives will be more
dependent on Highland's credit analysis than would be the case when the Trust
invests in rated securities.

Asset-Backed Securities. The Trust may invest a portion of its assets in
asset-backed securities. Asset-backed securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
Credit card receivables are generally unsecured, and the debtors are entitled
to the protection of a number of state and federal consumer credit laws which
give debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders
of the related automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables
may not have an effective security interest in all of the obligations backing
such receivables. Therefore, there is a possibility that recoveries on
repossessed collateral may not, in some cases, be able to support payments on
these securities.

Second Lien Loans and Debt Obligations. The Trust may invest in loans and
other debt securities that have the same characteristics as senior loans
except that such loans are second in lien property rather than first. Such
"second lien" loans and securities, like senior loans, typically have
adjustable floating rate interest payments. Accordingly, the risks associated
with "second lien" loans are higher than the risk of loans with first priority
over the collateral. In the event of default on a "second lien" loan, the
first priority lien holder has first claim to the

underlying collateral of the loan. It is possible that no collateral value
would remain for the second priority lien holder and therefore result in a
loss of investment to the Trust.

Collateralized Loan Obligations and Bond Obligations. The Trust may
invest in certain asset-backed securities that are securitizing certain
financial assets by issuing securities in the form of negotiable paper that
are issued by a financing company (generally called a Special Purpose Vehicle
or "SPV"). These securitized assets are, as a rule, corporate financial assets
brought into a pool according to specific diversification rules. The SPV is a
company founded solely for the purpose of securitizing these claims and its
only asset is the diversified asset pool. On this basis, marketable securities
are issued which, due to the diversification of the underlying risk, generally
represent a lower level of risk than the original assets. The redemption of
the securities issued by the SPV takes place at maturity out of the cash flow
generated by the collected claims.

A collateralized loan obligation ("CLO") is a structured debt security
issued by an SPV that was created to reapportion the risk and return
characteristics of a pool of assets. The assets, typically senior loans, are
used as collateral supporting the various debt tranches issued by the SPV. The
key feature of the CLO structure is the prioritization of the cash flows from
a pool of debt securities among the several classes of securities issued by a
CLO.

The Trust may also invest in collateralized bond obligations ("CBOs"),
which are structured debt securities backed by a diversified pool of high
yield, public or private fixed income securities. These may be fixed pools or
may be "market value" (or managed) pools of collateral. The CBO issues debt
securities that are typically separated into tranches representing different
degrees of credit quality. The top tranche of securities has the greatest
collateralization and pays the lowest interest rate. Lower CBO tranches have a
lesser degree of collateralization quality and pay higher interest rates
intended to compensate for the attendant risks. The bottom tranche
specifically receives the residual interest payments (i.e., money that is left
over after the higher tranches have been paid) rather than a fixed interest
rate. The return on the lower tranches of CBOs is especially sensitive to the
rate of defaults in the collateral pool. Under normal market conditions, the
Trust expects to invest in the lower tranches of CBOs.

Distressed Debt. The Trust is authorized to invest in the securities and
other obligations of distressed and bankrupt issuers, including debt
obligations that are in covenant or payment default. Such investments
generally trade significantly below par and are considered speculative. The
repayment of defaulted obligations is subject to significant uncertainties.
Defaulted obligations might be repaid only after lengthy workout or bankruptcy
proceedings, during which the issuer might not make any interest or other
payments. Typically such workout or bankruptcy proceedings result in only
partial recovery of cash payments or an exchange of the defaulted obligation
for other debt or equity securities of the issuer or its affiliates, which may
in turn be illiquid or speculative. The Trust may invest in securities of a
company for purposes of gaining control.

Stressed Debt. The Trust is authorized to invest in securities and other
obligations of stressed issuers. Stressed issuers are issuers that are not yet
deemed distressed or bankrupt and whose debt securities are trading at a
discount to par, but not yet at distressed levels. An example would be an
issuer that is in technical default of its credit agreement, or undergoing
strategic or operational changes, which results in market pricing uncertainty.

Credit Default Swaps. To the extent consistent with Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), the Trust may enter
into credit default swap agreements. The "buyer" in a credit default contract
is obligated to pay the "seller" a periodic stream of payments over the term
of the contract provided that no event of default on an underlying reference
obligation has occurred. If an event of default occurs, the seller must pay
the buyer the "par value" (full notional value) of the reference obligation in
exchange for the reference obligation. The Trust may be either the buyer or
seller in the transaction. If the Trust is a buyer and no event of default
occurs, the Trust loses its investment and recovers nothing. However, if an
event of default occurs, the buyer receives full notional value for a
reference obligation that may have little or no value. As a seller, the Trust
receives income throughout the term of the contract, which typically is
between six months and three years, provided that there is no default event.

Credit default swaps involve greater risks than if the Trust had invested
in the reference obligation directly. In addition to general market risks,
credit default swaps are subject to illiquidity risk, counterparty risk and
credit risks. The Trust will enter into swap agreements only with
counterparties that are rated investment grade quality by at least

one nationally recognized statistical rating organization at the time of
entering into such transaction or whose creditworthiness is believed by the
Investment Adviser to be equivalent to such rating. A buyer also will lose its
investment and recover nothing should no event of default occur. If an event
of default were to occur, the value of the reference obligation received by
the seller, coupled with the periodic payments previously received, may be
less than the full notional value it pays to the buyer, resulting in a loss of
value to the seller. When the Trust acts as a seller of a credit default swap
agreement it is exposed to many of the same risks of leverage described under
"Principal Risks of the Trust -- Leverage Risk" in this prospectus since if an
event of default occurs the seller must pay the buyer the full notional value
of the reference obligation.

Senior Loan Based Derivatives. The Trust may obtain exposure to senior
loans and baskets of senior loans through the use of derivative instruments.
Such derivative instruments have recently become increasingly available. The
Investment Adviser reserves the right to utilize these instruments and similar
instruments that may be available in the future. For example, the Trust may
invest in a derivative instrument known as the Select Aggregate Market Index
("SAMI"), which provides investors with exposure to a reference basket of
senior loans. SAMIs are structured as floating rate instruments. SAMIs consist
of a basket of credit default swaps whose underlying reference securities are
senior loans. While investing in SAMIs will increase the universe of floating
rate debt securities to which the Trust is exposed, such investments entail
risks that are not typically associated with investments in other floating
rate debt securities. The liquidity of the market for SAMIs will be subject to
liquidity in the secured loan and credit derivatives markets. Investment in
SAMIs involves many of the risks associated with investments in derivative
instruments discussed generally below. The Trust may also be subject to the
risk that the counterparty in a derivative transaction will default on its
obligations. Derivative transactions generally involve the risk of loss due to
unanticipated adverse changes in securities prices, interest rates, the
inability to close out a position, imperfect correlation between a position
and the desired hedge, tax constraints on closing out positions and portfolio
management constraints on securities subject to such transactions. The
potential loss on derivative instruments may be substantially greater than the
initial investment therein.

Credit-Linked Notes. The Trust may invest in credit-linked notes ("CLNs")
for risk management purposes and to vary its portfolio. A CLN is a derivative
instrument. It is a synthetic obligation between two or more parties where the
payment of principal and/or interest is based on the performance of some
obligation (a reference obligation). In addition to credit risk of the
reference obligations and interest rate risk, the buyer/seller of the CLN is
subject to counterparty risk.

Common Stocks. The Trust may acquire an interest in common stocks in
various ways, including upon the default of a senior loan secured by such
common stock or by acquiring common stock for investment. The Trust may also
acquire warrants or other rights to purchase a borrower's common stock in
connection with the making of a senior loan. Common stocks are shares of a
corporation or other entity that entitle the holder to a pro rata share of the
profits, if any, of the corporation without preference over any other
shareholder or class of shareholders, including holders of such entity's
preferred stock and other senior equity securities. Common stock usually
carries with it the right to vote and frequently an exclusive right to do so.
In selecting common stocks for investment, the Trust generally expects to
focus primarily on the security's dividend paying capacity rather than on its
potential for capital appreciation.

Preferred Securities. The Trust may invest in preferred securities.
Preferred securities are equity securities, but they have many characteristics
of fixed income securities, such as a fixed dividend payment rate and/or a
liquidity preference over the issuer's common shares. However, because
preferred shares are equity securities, they may be more susceptible to risks
traditionally associated with equity investments than the Trust's fixed income
securities.

Fixed rate preferred stocks have fixed dividend rates. They can be
perpetual, with no mandatory redemption date, or issued with a fixed mandatory
redemption date. Certain issues of preferred stock are convertible into other
equity securities. Perpetual preferred stocks provide a fixed dividend
throughout the life of the issue, with no mandatory retirement provisions, but
may be callable. Sinking fund preferred stocks provide for the redemption of a
portion of the issue on a regularly scheduled basis with, in most cases, the
entire issue being retired at a future date. The value of fixed rate preferred
stocks can be expected to vary inversely with interest rates.

Adjustable rate preferred stocks have a variable dividend rate which is
determined periodically, typically quarterly, according to a formula based on
a specified premium or discount to the yield on particular U.S. Treasury

securities, typically the highest base-rate yield of one of three U.S.
Treasury securities: the 90-day Treasury bill; the 10-year Treasury note; and
either the 20-year or 30-year Treasury bond or other index. The premium or
discount to be added to or subtracted from this base-rate yield is fixed at
the time of issuance and cannot be changed without the approval of the holders
of the adjustable rate preferred stock. Some adjustable rate preferred stocks
have a maximum and a minimum rate and in some cases are convertible into
common stock.

Auction rate preferred stocks pay dividends that adjust based on periodic
auctions. Such preferred stocks are similar to short-term corporate money
market instruments in that an auction rate preferred stockholder has the
opportunity to sell the preferred stock at par in an auction, normally
conducted at least every 49 days, through which buyers set the dividend rate
in a bidding process for the next period. The dividend rate set in the auction
depends on market conditions and the credit quality of the particular issuer.
Typically, the auction rate preferred stock's dividend rate is limited to a
specified maximum percentage of an external commercial paper index as of the
auction date. Further, the terms of the auction rate preferred stocks
generally provide that they are redeemable by the issuer at certain times or
under certain conditions.

Convertible Securities. The Trust's investment in fixed income securities
may include bonds and preferred stocks that are convertible into the equity
securities of the issuer or a related company. Depending on the relationship
of the conversion price to the market value of the underlying securities,
convertible securities may trade more like equity securities than debt
instruments.

Money Market Instruments. Money market instruments include short-term
U.S. government securities, U.S. dollar-denominated, high quality commercial
paper (unsecured promissory notes issued by corporations to finance their
short-term credit needs), certificates of deposit, bankers' acceptances and
repurchase agreements relating to any of the foregoing. U.S. government
securities include Treasury notes, bonds and bills, which are direct
obligations of the U.S. government backed by the full faith and credit of the
United States and securities issued by agencies and instrumentalities of the
U.S. government, which may be guaranteed by the U.S. Treasury, may be
supported by the issuer's right to borrow from the U.S. Treasury or may be
backed only by the credit of the federal agency or instrumentality itself.

U.S. Government Securities. U.S. government securities in which the Trust
invests include debt obligations of varying maturities issued by the U.S.
Treasury or issued or guaranteed by an agency or instrumentality of the U.S.
government, including the Federal Housing Administration, Federal Financing
Bank, Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, Government National Mortgage Association
(GNMA), General Services Administration, Central Bank for Cooperatives,
Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation (FHLMC), Federal National Mortgage Association (FNMA), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board,
Student Loan Marketing Association, Resolution Trust Corporation and various
institutions that previously were or currently are part of the Farm Credit
System (which has been undergoing reorganization since 1987). Some U.S.
government securities, such as U.S. Treasury bills, Treasury notes and
Treasury bonds, which differ only in their interest rates, maturities and
times of issuance, are supported by the full faith and credit of the United
States government. Others are supported by (i) the right of the issuer to
borrow from the U.S. Treasury, such as securities of the Federal Home Loan
Banks; (ii) the discretionary authority of the U.S. government to purchase the
agency's obligations, such as securities of the FNMA; or (iii) only the credit
of the issuer. No assurance can be given that the U.S. government will provide
financial support in the future to U.S. government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States. Securities guaranteed as to principal and interest by the U.S.
government, its agencies, authorities or instrumentalities include (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. government or any of its
agencies, authorities or instrumentalities; and (ii) participations in loans
made to non-U.S. governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and therefore
may be regarded as illiquid.

Other Investment Companies. The Trust may invest in the securities of
other investment companies to the extent that such investments are consistent
with the Trust's investment objectives and principal investment strategies and
permissible under the Investment Company Act. Under one provision of the
Investment Company Act, the Trust may not acquire the securities of other
investment companies if, as a result, (i) more than 10% of the Trust's total
assets would be invested in securities of other investment companies, (ii)
such purchase would result in more than

3% of the total outstanding voting securities of any one investment company
being held by the Trust or (iii) more than 5% of the Trust's total assets
would be invested in any one investment company. Other provisions of the
Investment Company Act are less restrictive provided that the Trust is able to
meet certain conditions. These limitations do not apply to the acquisition of
shares of any investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all of the assets of another
investment company.

The Trust, as a holder of the securities of other investment companies,
will bear its pro rata portion of the other investment companies' expenses,
including advisory fees. These expenses will be in addition to the direct
expenses incurred by the Trust.

Exchange Traded Funds. Subject to the limitations on investment in other
investment companies, the Trust may invest in exchange traded funds ("ETFs").
ETFs, such as SPDRs, NASDAQ 100 Index Trading Stock (QQQs), iShares and
various country index funds, are funds whose shares are traded on a national
exchange or the National Association of Securities Dealers' Automatic
Quotation System (NASDAQ). ETFs may be based on underlying equity or fixed
income securities. SPDRs, for example, seek to provide investment results that
generally correspond to the performance of the component common stocks of the
S&P 500. ETFs do not sell individual shares directly to investors and only
issue their shares in large blocks known as "creation units." The investor
purchasing a creation unit may sell the individual shares on a secondary
market. Therefore, the liquidity of ETFs depends on the adequacy of the
secondary market. There can be no assurance that an ETF's investment objective
will be achieved. ETFs based on an index may not replicate and maintain
exactly the composition and relative weightings of securities in the index.
ETFs are subject to the risks of investing in the underlying securities. The
Trust, as a holder of the securities of the ETF, will bear its pro rata
portion of the ETF's expenses, including advisory fees. These expenses are in
addition to the direct expenses of the Trust's own operations.

Zero Coupon Securities. The securities in which the Trust invests may
include zero coupon securities, which are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service but generally require a higher rate of return to attract investors who
are willing to defer receipt of cash. These investments may experience greater
volatility in market value than securities that make regular payments of
interest. The Trust accrues income on these investments for tax and accounting
purposes, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Trust's distribution obligations, in which
case the Trust will forego the purchase of additional income producing assets
with these funds.

Derivative Transactions. In addition to the credit default swaps and
senior loan bond derivatives discussed above the Trust may, but is not
required to, use various Derivative Transactions described below to earn
income, facilitate portfolio management and mitigate risks. Such Derivative
Transactions are generally accepted under modern portfolio management and are
regularly used by many mutual funds and other institutional investors.
Although the Investment Adviser seeks to use the practices to further the
Trust's investment objectives, no assurance can be given that these practices
will achieve this result. While the Trust reserves the ability to use these
Derivative Transactions, the Investment Adviser does not anticipate that
Derivative Transactions other than senior loan bond derivatives will initially
be a significant part of the Trust's investment approach. With changes in the
market or the Investment Adviser's strategy, it is possible that these
instruments may be a more significant part of the Trust's investment approach
in the future.

The Trust may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity, fixed-income and interest rate indices, and other
financial instruments, purchase and sell financial futures contracts and
options thereon, enter into various interest rate transactions such as swaps,
caps, floors or collars and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currency or currency futures or credit transactions and credit
default swaps. The Trust also may purchase derivative instruments that combine
features of these instruments. The Trust generally seeks to use Derivative
Transactions as a portfolio management or hedging technique to seek to protect
against possible adverse changes in the market value of senior loans or other
securities held in or to be purchased for the Trust's portfolio, protect the
value of the Trust's portfolio, facilitate the sale of

certain securities for investment purposes, manage the effective interest rate
exposure of the Trust, protect against changes in currency exchange rates,
manage the effective maturity or duration of the Trust's portfolio, or
establish positions in the derivatives markets as a temporary substitute for
purchasing or selling particular securities.

Derivative Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transaction or illiquidity of the derivative
instruments. Furthermore, the ability to use successfully Derivative
Transactions depends on the Investment Adviser's ability to predict pertinent
market movements, which cannot be assured. Thus, the use of Derivative
Transactions may result in losses greater than if they had not been used, may
require the Trust to sell or purchase portfolio securities at inopportune
times or for prices other than current market values, may limit the amount of
appreciation the Trust can realize on an investment, or may cause the Trust to
hold a security that it might otherwise sell. The use of currency transactions
can result in the Trust incurring losses as a result of the imposition of
exchange controls, suspension of settlements or the inability of the Trust to
deliver or receive a specified currency. Additionally, amounts paid by the
Trust as premiums and cash or other assets held in margin accounts with
respect to Derivative Transactions are not otherwise available to the Trust
for investment purposes.

A more complete discussion of Derivative Transactions and their risks is
contained in the Statement of Additional Information.

Swaps. Swap contracts may be purchased or sold to obtain investment
exposure and/or to hedge against fluctuations in securities prices,
currencies, interest rates or market conditions, to change the duration of the
overall portfolio or to mitigate default risk. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) on different currencies, securities, baskets of currencies or
securities, indices or other instruments, which returns are calculated with
respect to a "notional value," i.e., the designated reference amount of
exposure to the underlying instruments. The Trust intends to enter into swaps
primarily on a net basis, i.e., the two payment streams are netted out, with
the Trust receiving or paying, as the case may be, only the net amount of the
two payments. If the other party to a swap contract defaults, the Trust's risk
of loss will consist of the net amount of payments that the Trust is
contractually entitled to receive. The net amount of the excess, if any, of
the Trust's obligations over its entitlements will be maintained in a
segregated account by the Trust's custodian. The Trust will not enter into a
swap agreement unless the claims-paying ability of the other party thereto is
considered to be investment grade by the Investment Adviser. If there is a
default by the other party to such a transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction.
Swap instruments are not exchange-listed securities and may be traded only in
the over-the-counter market.

Interest Rate Swaps. Interest rate swaps involve the exchange by the
Trust with another party of their respective commitments to pay or receive
interest (e.g., an exchange of fixed rate payments for floating rate
payments). The Trust may use interest rate swaps for risk management purposes
and as a speculative investment.

Total Return Swaps. Total return swaps are contracts in which one party
agrees to make payments of the total return from the designated underlying
asset(s), which may include securities, baskets of securities, or securities
indices, during the specified period, in return for receiving payments equal
to a fixed or floating rate of interest or the total return from the other
designated underlying asset(s). The Trust may use total return swaps for risk
management purposes and as a speculative investment.

Currency Swaps. Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a
notional amount of two different currencies (e.g., an exchange of payments
with respect to fluctuations in the value of the U.S. dollar relative to the
Japanese yen). The Trust may enter into currency swap contracts and baskets
thereof for risk management purposes and as a speculative investment.

Short Sales. The Trust intends to attempt to limit exposure to a possible
market decline in the value of its portfolio securities through short sales of
securities that Highland believes possess volatility characteristics similar
to those being hedged. In addition, the Trust intends to use short sales for
non-hedging purposes to pursue its investment objectives. Subject to the
requirements of the Investment Company Act and the Code, the Trust will not
make a short sale if, after giving effect to such sale, the market value of
all securities sold short by the Trust exceeds 25% of the value of its total
assets.

A short sale is a transaction in which the Trust sells a security it does
not own in anticipation that the market price of that security will decline.
When the Trust makes a short sale, it must borrow the security sold short from
a broker-dealer and deliver it to the buyer upon conclusion of the sale. The
Trust may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.

The Trust's obligation to replace the borrowed security will be secured
by collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other liquid securities. The Trust will also be required to
designate on its books and records similar collateral with its custodian to
the extent, if any, necessary so that the aggregate collateral value is at all
times at least equal to the current market value of the security sold short.
Depending on arrangements made with the broker-dealer from which it borrowed
the security regarding payment over of any payments received by the Trust on
such security, the Trust may not receive any payments (including interest) on
its collateral deposited with such broker-dealer.

If the price of the security sold short increases between the time of the
short sale and the time the Trust replaces the borrowed security, the Trust
will incur a loss; conversely, if the price declines, the Trust will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Trust's gain is limited to the price at
which it sold the security short, its potential loss is unlimited.

The Trust may also sell a security short if it owns at least an equal
amount of the security sold short or another security convertible or
exchangeable for an equal amount of the security sold short without payment of
further compensation (a short sale against-the-box). In a short sale
against-the-box, the short seller is exposed to the risk of being forced to
deliver stock that it holds to close the position if the borrowed stock is
called in by the lender, which would cause gain or loss to be recognized on
the delivered stock. The Trust expects normally to close its short sales
against-the-box by delivering newly acquired stock.

Purchasing securities to close out the short position can itself cause
the price of the securities to rise further, thereby exacerbating the loss.
Short-selling exposes the Trust to unlimited risk with respect to that
security due to the lack of an upper limit on the price to which an instrument
can rise. Although the Trust reserves the right to utilize short sales, and
currently intends to utilize short sales, Highland is under no obligation to
utilize short sales at all.

Repurchase Agreements. The Trust may invest up to 33 1/3% of its assets
in repurchase agreements. It may enter into repurchase agreements with
broker-dealers, member banks of the Federal Reserve System and other financial
institutions. Repurchase agreements are loans or arrangements under which the
Trust purchases securities and the seller agrees to repurchase the securities
within a specific time and at a specific price. The repurchase price is
generally higher than the Trust's purchase price, with the difference being
income to the Trust. Under the direction of the board of trustees, the
Investment Adviser reviews and monitors the creditworthiness of any
institution which enters into a repurchase agreement with the Trust. The
counterparty's obligations under the repurchase agreement are collateralized
with U.S. Treasury and/or agency obligations with a market value of not less
than 100% of the obligations, valued daily. Collateral is held by the Trust's
custodian in a segregated, safekeeping account for the benefit of the Trust.
Repurchase agreements afford the Trust an opportunity to earn income on
temporarily available cash at low risk. In the event of commencement of
bankruptcy or insolvency proceedings with respect to the seller of the
security before repurchase of the security under a repurchase agreement, the
Trust may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and the
Trust has not perfected a security interest in the security, the Trust may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Trust would be
at risk of losing some or all of the principal and interest involved in the
transaction.

Lending of Assets. The Trust may lend up to 33 1/3% of its assets. It may
lend assets to registered broker-dealers or other institutional investors
deemed by the Investment Adviser to be of good standing under agreements which
require that the loans be secured continuously by collateral in cash, cash
equivalents or U.S. Treasury bills maintained on a current basis at an amount
at least equal to the market value of the securities loaned. The Trust
continues to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned as well as the benefit of an increase and the
detriment of any decrease in the market value of the securities loaned and
would also receive compensation based on investment of the collateral. The
Trust would not, however, have the right to

vote any securities having voting rights during the existence of the loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of consent on a
material matter affecting the investment.

As with other extensions of credit, there are risks of delay in recovery
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Trust will lend portfolio securities only to firms that
have been approved in advance by the board of trustees, which will monitor the
creditworthiness of any such firms.

Non-U.S. Securities. The Trust may invest up to 20% of its total assets
in non-U.S. securities, which may include securities denominated in U.S.
dollars or in non-U.S. currencies or multinational currency units. The Trust
may invest in non-U.S. securities of so-called emerging market issuers. For
purposes of the Trust, a company is deemed to be a non-U.S. company if it
meets the following tests: (i) such company was not organized in the United
States; (ii) such company's primary business office is not in the United
States; (iii) the principal trading market for such company's securities is
not located in the United States; (iv) less than 50% of such company's assets
are located in the United States; or (v) 50% or more of such issuer's revenues
are derived from outside the United States. Non-U.S. securities markets
generally are not as developed or efficient as those in the United States.
Securities of some non-U.S. issuers are less liquid and more volatile than
securities of comparable U.S. issuers. Similarly, volume and liquidity in most
non-U.S. securities markets are less than in the United States and, at times,
volatility of price can be greater than in the United States.

Because evidences of ownership of such securities usually are held
outside the United States, the Trust would be subject to additional risks if
it invested in non-U.S. securities, which include possible adverse political
and economic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions which might adversely affect or restrict
the payment of principal and interest on the non-U.S. securities to investors
located outside the country of the issuer, whether from currency blockage or
otherwise.

Since non-U.S. securities may be purchased with and payable in foreign
currencies, the value of these assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations.

Options. An option on a security is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option at a specified exercise or "strike" price. The writer of
an option on a security has the obligation upon exercise of the option to
deliver the underlying security upon payment of the exercise price or to pay
the exercise price upon delivery of the underlying security. Certain options,
known as "American style" options may be exercised at any time during the term
of the option. Other options, known as "European style" options, may be
exercised only on the expiration date of the option.

If an option written by the Trust expires unexercised, the Trust realizes
on the expiration date a capital gain equal to the premium received by the
Trust at the time the option was written. If an option purchased by the Trust
expires unexercised, the Trust realizes a capital loss equal to the premium
paid. Prior to the earlier of exercise or expiration, an exchange-traded
option may be closed out by an offsetting purchase or sale of an option of the
same series (type, underlying security, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can
be effected when the Trust desires. The Trust may sell put or call options it
has previously purchased, which could result in a net gain or loss depending
on whether the amount realized on the sale is more or less than the premium
and other transaction costs paid on the put or call option when purchased. The
Trust will realize a capital gain from a closing purchase transaction if the
cost of the closing option is less than the premium received from writing the
option, or, if it is more, the Trust will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Trust will realize a capital gain or, if it is
less, the Trust will realize a capital loss.

Short-Term Debt Securities; Temporary Defensive Position; Invest-Up
Period. During the period in which the net proceeds of this offering of common
shares are being invested, during periods in which Highland determines that it
is temporarily unable to follow the Trust's investment strategy or that it is
impractical to do so or pending re-investment of proceeds received in
connection with the sale of a security, the Trust may deviate from its
investment strategy and invest all or any portion of its assets in cash or
cash equivalents. Highland's determination that it is

temporarily unable to follow the Trust's investment strategy or that it is
impractical to do so will generally occur only in situations in which a market
disruption event has occurred and where trading in the securities selected
through application of the Trust's investment strategy is extremely limited or
absent. In such a case, shares of the Trust may be adversely affected and the
Trust may not pursue or achieve its investment objectives.

PRINCIPAL RISKS OF THE TRUST

The net asset value of, and dividends paid on both the common shares will
fluctuate with and be affected by, among other things, the risks more fully
described below. The Preferred Shares may also be affected to some degree by
certain of these risks.

Investment and Market Discount Risk

An investment in the Trust's common shares is subject to investment risk,
including the possible loss of the entire amount that you invest. As with any
stock, the price of the Trust's shares will fluctuate with market conditions
and other factors. If shares are sold, the price received may be more or less
than the original investment. Net asset value will be reduced immediately
following any offering by the amount of the sales load and offering expenses
paid by the Trust for any offering of common shares or Preferred Shares. The
common shares are designed for long-term investors and should not be treated
as trading vehicles. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value. The Trust's shares
may trade at a price that is less than the initial offering price. This risk
may be greater for investors who sell their shares in a relatively short
period of time after completion of the initial offering.

Risks of Non-Diversification and other Focused Strategies

While the Investment Adviser will invest in a number of fixed-income and
equity instruments issued by different issuers and plans to employ multiple
investment strategies with respect to the Trust's portfolio, it is possible
that a significant amount of the Trust's investment could be invested in the
instruments of only a few companies or other issuers or that at any particular
point in time one investment strategy could be more heavily weighted than the
others. The focus of the Trust's portfolio in any one issuer would subject the
Trust to a greater degree of risk with respect to defaults by such issuer or
other adverse events affecting that issuer, and the focus of the portfolio in
any one industry or group of industries (but not to the extent of 25% of the
Trust's assets) would subject the Trust to a greater degree of risk with
respect to economic downturns relating to such industry. The focus of the
Trust's portfolio in any one investment strategy would subject the Trust to a
greater degree of risk than if the Trust's portfolio were varied in its
investments with respect to several investment strategies.

Illiquidity of Investments

The investments made by the Trust may be very illiquid, and consequently,
the Trust may not be able to sell such investments at prices that reflect the
Investment Adviser's assessment of their fair value or the amount paid for
such investments by the Trust. Illiquidity may result from the absence of an
established market for the investments as well as legal, contractual or other
restrictions on their resale by the Trust and other factors. Furthermore, the
nature of the Trust's investments, especially those in financially stressed
and distressed companies, may require a long holding period prior to being
able to determine whether the investment will be profitable or not. There is
no limit on the amount of the Trust's portfolio that can be invested in
illiquid securities.

Risks of Investing in Senior Loans

Bank loans are typically at the most senior level of the capital
structure, and are sometimes secured by specific collateral, including, but
not limited to, trademarks, patents, accounts receivable, inventory,
equipment, buildings, real estate, franchises and common and preferred stock
of the obligor or its affiliates. A portion of the Trust's investments may
consist of loans and participations therein originated by banks and other
financial institutions, typically referred to as "bank loans." The Trust's
investments may include loans of a type generally incurred by borrowers in
connection with highly leveraged transactions, often to finance internal
growth, acquisitions, mergers or stock purchases, or for other reasons. As a
result of the additional debt incurred by the borrower in the course of

the transaction, the borrower's creditworthiness is often judged by the rating
agencies to be below investment grade. Such loans are typically private
corporate loans which are negotiated by one or more commercial banks or
financial institutions and syndicated among a group of commercial banks and
financial institutions. In order to induce the lenders to extend credit and to
offer a favorable interest rate, the borrower often provides the lenders with
extensive information about its business which is not generally available to
the public.

The Trust may acquire interests in bank loans and other debt obligations
either directly (by way of sale or assignment) or indirectly (by way of
participation). The purchaser of an assignment typically succeeds to all the
rights and obligations of the assigning institution and becomes a lender under
the credit agreement with respect to the debt obligation; however, its rights
can be more restricted than those of the assigning institution, and in any
event, the Trust may not be able unilaterally to enforce all rights and
remedies under the loan and any associated collateral. A participation
interest in a portion of a debt obligation typically results in a contractual
relationship only with the institution participating out the interest, not
with the borrower. In purchasing participations, the Trust generally will have
no right to enforce compliance by the borrower with neither the terms of the
loan agreement nor any rights of setoff against the borrower, and the Trust
may not directly benefit from the collateral supporting the debt obligation in
which it has purchased the participation. As a result, the Trust will be
exposed to the credit risk of both the borrower and the institution selling
the participation.

Purchasers of bank loans are predominantly commercial banks, investment
funds and investment banks. As secondary market trading volumes increase, new
bank loans frequently adopt standardized documentation to facilitate loan
trading which should improve market liquidity. There can be no assurance,
however, that future levels of supply and demand in bank loan trading will
provide an adequate degree of liquidity or that the current level of liquidity
will continue. Because of the provision to holders of such loans of
confidential information relating to the borrower, the unique and customized
nature of the loan agreement, the limited universe of eligible purchasers and
the private syndication of the loan, bank loans are not as easily purchased or
sold as a publicly traded security, and historically the trading volume in the
bank loan market has been small relative to the high-yield debt market.

Second Lien Loans Risk

Second lien loans are subject to the same risks associated with
investment in senior loans and non-investment grade securities. However,
second lien loans are second in right of payment to senior loans and therefore
are subject to additional risk that the cash flow of the borrower and any
property securing the loan may be insufficient to meet scheduled payments
after giving effect to the senior secured obligations of the borrower. Second
lien loans are expected to have greater price volatility than senior loans and
may be less liquid. There is also a possibility that originators will not be
able to sell participations in second lien loans, which would create greater
credit risk exposure.

Other Secured Loans Risk

Secured loans other than senior loans and second lien loans are subject
to the same risks associated with investment in senior loans, second lien
loans and non-investment grade securities. However, such loans may rank lower
in right of payment than any outstanding senior loans and second lien loans of
the borrower and therefore are subject to additional risk that the cash flow
of the borrower and any property securing the loan may be insufficient to meet
scheduled payments after giving effect to the higher ranking secured
obligations of the borrower. Lower ranking secured loans are expected to have
greater price volatility than senior loans and second lien loans and may be
less liquid. There is also a possibility that originators will not be able to
sell participations in lower ranking secured loans, which would create greater
credit risk exposure.

Unsecured Loans Risk

Unsecured loans are subject to the same risks associated with investment
in senior loans, second lien loans, other secured loans and non-investment
grade securities. However, because unsecured loans have lower priority in
right of payment to any higher ranking obligations of the borrower and are not
backed by a security interest in any specific collateral, they are subject to
additional risk that the cash flow of the borrower and available assets may be
insufficient to meet scheduled payments after giving effect to any higher
ranking obligations of the borrower. Unsecured loans are expected to have
greater price volatility than senior loans, second lien loans and other
secured loans and may be less liquid. There is also a possibility that
originators will not be able to sell participations in unsecured loans, which
would create greater credit risk exposure.

Risks of Investing in Obligations of Stressed, Distressed and Bankrupt Issuers

The Trust is authorized to invest in the securities and other obligations
of stressed, distressed and bankrupt issuers, including debt obligations that
are in covenant or payment default. There is no limit on the amount of the
Trust's portfolio that can be invested in stressed, distressed or bankrupt
issuers, and the Trust may invest for purposes of control. Such investments
generally trade significantly below par and are considered speculative. The
repayment of defaulted obligations is subject to significant uncertainties.
Defaulted obligations might be repaid only after lengthy workout or bankruptcy
proceedings, during which the issuer might not make any interest or other
payments. Typically such workout or bankruptcy proceedings result in only
partial recovery of cash payments or an exchange of the defaulted obligation
for other debt or equity securities of the issuer or its affiliates, which may
in turn be illiquid or speculative.

There are a number of significant risks inherent in the bankruptcy
process. First, many events in a bankruptcy are the product of contested
matters and adversary proceedings and are beyond the control of the creditors.
While creditors are generally given an opportunity to object to significant
actions, there can be no assurance that a bankruptcy court in the exercise of
its broad powers would not approve actions that would be contrary to the
interests of the Trust. Second, the effect of a bankruptcy filing on an issuer
may adversely and permanently affect the issuer. The issuer may lose its
market position and key employees and otherwise become incapable of restoring
itself as a viable entity. If for this or any other reason the proceeding is
converted to a liquidation, the value of the issuer may not equal the
liquidation value that was believed to exist at the time of the investment.
Third, the duration of a bankruptcy proceeding is difficult to predict. A
creditor's return on investment can be adversely affected by delays while the
plan of reorganization is being negotiated, approved by the creditors and
confirmed by the bankruptcy court and until it ultimately becomes effective.
Fourth, the administrative costs in connection with a bankruptcy proceeding
are frequently high and would be paid out of the debtor's estate prior to any
return to creditors. For example, if a proceeding involves protracted or
difficult litigation, or turns into a liquidation, substantial assets may be
devoted to administrative costs. Fifth, bankruptcy law permits the
classification of "substantially similar" claims in determining the
classification of claims in a reorganization. Because the standard for
classification is vague, there exists the risk that the Trust's influence with
respect to the class of securities or other obligations it owns can be lost by
increases in the number and amount of claims in that class or by different
classification and treatment. Sixth, in the early stages of the bankruptcy
process it is often difficult to estimate the extent of, or even to identify,
any contingent claims that might be made. Seventh, especially in the case of
investments made prior to the commencement of bankruptcy proceedings,
creditors can lose their ranking and priority if they exercise "domination and
control" over a debtor and other creditors can demonstrate that they have been
harmed by such actions. Eighth, certain claims that have priority by law (for
example, claims for taxes) may be substantial.

Risks of Investing in High-Yield Securities

A portion of the Trust's investments will consist of investments that may
generally be characterized as "high-yield securities," or "junk securities."
Such securities are typically rated below investment grade by one or more
nationally recognized statistical rating organizations or are unrated but of
comparable credit quality to obligations rated below investment grade, and
have greater credit and liquidity risk than more highly rated obligations.
High-yield securities are generally unsecured and may be subordinate to other
obligations of the obligor. The lower rating of high-yield securities reflects
a greater possibility that adverse changes in the financial condition of the
issuer or in general economic conditions (including, for example, a
substantial period of rising interest rates or declining earnings) or both may
impair the ability of the issuer to make payment of principal and interest.
Many issuers of high-yield securities are highly leveraged, and their
relatively high debt to equity ratios create increased risks that their
operations might not generate sufficient cash flow to service their
obligations. Overall declines in the below investment grade bond and other
markets may adversely affect such issuers by inhibiting their ability to
refinance their obligations at maturity.

portion of which may be secured. Moreover, such obligations purchased by the
Trust may not be protected by financial covenants or limitations upon
additional indebtedness and are unlikely to be secured by collateral.

Insolvency Considerations with Respect to Issuers of Debt Obligations

Various laws enacted for the protection of creditors may apply to the
debt obligations held by the Trust. The information in this paragraph is
applicable with respect to U.S. issuers subject to United States bankruptcy
laws. Insolvency considerations may differ with respect to other issuers. If a
court in a lawsuit brought by an unpaid creditor or representative of
creditors of an issuer of a debt obligation, such as a trustee in bankruptcy,
were to find that the issuer did not receive fair consideration or reasonably
equivalent value for incurring the indebtedness constituting the debt
obligation and, after giving effect to such indebtedness, the issuer (i) was
insolvent, (ii) was engaged in a business for which the remaining assets of
such issuer constituted unreasonably small capital or (iii) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they mature, such court could determine to invalidate, in whole or in part,
such indebtedness as a fraudulent conveyance, to subordinate such indebtedness
to existing or future creditors of such issuer, or to recover amounts
previously paid by such issuer in satisfaction of such indebtedness. The
measure of insolvency for purposes of the foregoing will vary. Generally, an
issuer would be considered insolvent at a particular time if the sum of its
debts were then greater than all of its property at a fair valuation, or if
the present fair saleable value of its assets was then less than the amount
that would be required to pay its probable liabilities on its existing debts
as they became absolute and matured. There can be no assurance as to what
standard a court would apply in order to determine whether the issuer was
"insolvent" after giving effect to the incurrence of the indebtedness
constituting the debt obligation or that, regardless of the method of
valuation, a court would not determine that the issuer was "insolvent" upon
giving effect to such incurrence. In addition, in the event of the insolvency
of an issuer of a debt obligation, payments made on such debt obligation could
be subject to avoidance as a "preference" if made within a certain period of
time (which may be as long as one year) before insolvency. Similarly, a court
might apply the doctrine of equitable subordination to subordinate the claim
of a lending institution against an issuer, to claims of other creditors of
the borrower, when the lending institution, another investor, or any of their
transferees, is found to have engaged in unfair, inequitable, or fraudulent
conduct. In general, if payments on a debt obligation are avoidable, whether
as fraudulent conveyances or preferences, such payments can be recaptured
either from the initial recipient (such as the Trust) or from subsequent
transferees of such payments (such as the investors in the Trust). To the
extent that any such payments are recaptured from the Trust the resulting loss
will be borne by the investors. However, a court in a bankruptcy or insolvency
proceeding would be able to direct the recapture of any such payment from such
a recipient or transferee only to the extent that such court has jurisdiction
over such recipient or transferee or its assets. Moreover, it is likely that
avoidable payments could not be recaptured directly from any such recipient or
transferee that has given value in exchange for its investment, in good faith
and without knowledge that the payments were avoidable. Although the
Investment Adviser will seek to avoid conduct that would form the basis for a
successful cause of action based upon fraudulent conveyance, preference or
equitable subordination, these determinations are made in hindsight, and in
any event, there can be no assurance as to whether any lending institution or
other investor from which the Trust acquired the debt obligations engaged in
any such conduct (or any other conduct that would subject the debt obligations
and the issuer to insolvency laws) and, if it did, as to whether such creditor
claims could be asserted in a U.S. court (or in the courts of any other
country) against the Trust.

Risks of Investing in Stressed, Distressed or Bankrupt Companies

The Trust may invest in companies that are stressed, in distress, or
bankrupt. As such, they are subject to a multitude of legal, industry, market,
economic and governmental forces that make analysis of these companies
inherently difficult. Further, the Investment Adviser relies on company
management, outside experts, market participants and personal experience to
analyze potential investments for the Trust. There can be no assurance that
any of these sources will prove credible, or that the Investment Adviser's
analysis will produce conclusions that lead to profitable investments.

Leverage Risk

The use of leverage, which can be described as exposure to changes in
price at a ratio greater than the amount of equity invested, either through
the issuance of Preferred Shares, borrowing or other forms of market exposure,
magnifies both the favorable and unfavorable effects of price movements in the
investments made by the Trust.

Subject to applicable margins and other limitations, the Trust may borrow money,
or utilize other transactions, for the purpose of leveraging its investments.
Insofar as the Trust employs leverage in its investment operations, shareholders
will be subject to substantial risks of loss. Interest on borrowings will be a
portfolio expense of the Trust and will affect the operating results of the
Trust. With volatile instruments, downward price swings can result in margin
calls that could require liquidation of securities at inopportune times or at
prices that are not favorable to the Trust and cause significant losses.

In addition, the Trust will pay (and the holders of common shares
will bear) all costs and expenses relating to the issuance and
ongoing maintenance of the Preferred Shares, including higher
advisory fees. Accordingly, the Trust cannot assure you that the
issuance of Preferred Shares will result in a higher yield or
return to the holders of the common shares.

Any decline in the net asset value of the Trust's investments
will be borne entirely by the holders of common shares.
Therefore, if the market value of the Trust's portfolio declines,
the leverage will result in a greater decrease in net asset value
to the holders of common shares than if the Trust were not
leveraged. This greater net asset value decrease will also tend
to cause a greater decline in the market price for the common
shares. The Trust might be in danger of failing to maintain the
required asset coverage of the Preferred Shares or of losing its
ratings on the Preferred Shares or, in an extreme case, the
Trust's current investment income might not be sufficient to meet
the dividend requirements on the Preferred Shares. In order to
counteract such an event, the Trust might need to liquidate
investments in order to fund a redemption of some or all of the
Preferred Shares. Liquidation at times of low municipal bond
prices may result in capital loss and may reduce returns to the
holders of common shares.

o Preferred Shareholders may have Disproportionate Influence over
the Trust. Holders of Preferred Shares may have differing
interests than holders of common shares and holders of Preferred
Shares may at times have disproportionate influence over the
Trust's affairs. Holders of Preferred Shares, voting separately
as a single class, have the right to elect two members of the
board of trustees at all times. The remaining members of the
board of trustees would be elected by holders of common shares
and Preferred Shares, voting as a single class. However, if the
Trust failed to pay dividends on the Preferred Shares for eight
quarters in the aggregate, the holders of Preferred Shares would
be entitled to elect a majority of the board of trustees until
all Preferred Shares dividends were current. The Investment
Company Act of 1940 (the "Investment Company Act") also requires
that, in addition to any approval by shareholders that might
otherwise be required, the approval of the holders of a majority
of any outstanding Preferred Shares, voting separately as a
class, would be required to (i) adopt any plan of reorganization
that would adversely affect the Preferred Shares and (ii) take
any action requiring a vote of security holders under Section
13(a) of the Investment Company Act, including, among other
things, changes in the Trust's subclassification as a closed-end
investment company or changes in its fundamental investment
restrictions.

obtained. No minimum rating is required for the issuance of
Preferred Shares by the Trust. Moody's and S&P receive fees in
connection with their ratings issuances.

o Credit Facility. The Trust is currently using leverage through
borrowings from a credit facility. The Trust has entered into
definitive secured loan agreement with Scotia to borrow up to
$ (the "Loan Agreement"). Such borrowings constitute
financial leverage. The Loan Agreement contains covenants that may
limit the Trust's ability to: (i) pay dividends in certain
circumstances, (ii) incur additional debt and (iii) change its
fundamental investment policies and engage in certain transactions,
including mergers and consolidations. For instance, the Trust
agreed not to purchase assets not contemplated by the Investment
Policies and Restrictions in the Prospectus in effect when the Loan
Agreement became effective. Furthermore, the Trust may not incur
additional debt from any other party, except for in limited
circumstances (e.g. in the ordinary course of business). In
addition, the Loan Agreement contains a covenant requiring asset
coverage ratios that may be more stringent than those required by
the Investment Company Act. Any senior security representing
indebtedness, as defined in Section 18(g) of the 1940 Act, must
have asset coverage of at least 300%.

o Effects of Leverage. The Trust is currently using leverage
through borrowings from a credit facility and may use leverage in
the future through borrowings or the issuance of Preferred
Shares, with the total amount of leverage ranging between 20% and
50% of the Trust's total managed assets. Under the Investment
Company Act, the Trust is not permitted to issue Preferred Shares
unless immediately after such issuance the total asset value of
the Trust's portfolio is at least 200% of the liquidation value
of the outstanding Preferred Shares plus the amount of borrowing
(i.e., such liquidation value and amount of borrowing may not
exceed 50% of the Trust's total assets). In addition, the Trust
is not permitted to declare any cash distribution on its common
shares unless, at the time of such declaration, the net asset
value of the Trust's portfolio (determined after deducting the
amount of such distribution) is at least 200% of such liquidation
value plus amount of any borrowing. The Trust intends, to the
extent possible, to purchase or redeem Preferred Shares, from
time to time, to maintain coverage of any Preferred Shares of at
least 200%. If the Trust issues Preferred Shares resulting in 20%
leverage, there will be an asset coverage of the Preferred Shares
of 500%.

To qualify for federal income taxation as a "regulated investment
company," the Trust must distribute in each taxable year at least
90% of its net investment income (including net interest income
and net short-term capital gain). The Trust is also required to
distribute annually substantially all of its income and capital
gain, if any, to avoid imposition of a nondeductible 4% federal
excise tax. If the Trust is precluded from making distributions
on the common shares because of any applicable asset coverage
requirements, the terms of the Preferred Shares may provide that
any amounts so precluded from being distributed, but required to
be distributed for the Trust to meet the distribution
requirements for qualification as a regulated investment company,
will be paid to the holders of the Preferred Shares as a special
distribution. This distribution can be expected to decrease the
amount that holders of Preferred Shares would be entitled to
receive upon redemption or liquidation of the shares.

Successful use of a leveraging strategy may depend on the
Investment Adviser's ability to predict correctly interest rates
and market movements, and there is no assurance that a leveraging
strategy will be successful during any period in which it is
employed.

Assuming the utilization of leverage in the amount of 30% of the Trust's
total assets and an annual dividend rate on Preferred Shares of 4.85% and an
annual interest rate of 5.13% on borrowings payable on such leverage based on
market rates as of the date of this prospectus, the additional income that the
Trust must earn (net of expenses) in order to cover such dividend payments is
1.48%. The Trust's actual cost of leverage will be based on market rates at
the time the Trust undertakes a leveraging strategy, and such actual costs of
leverage may be higher or lower than that assumed in the previous example.

The following table is designed to illustrate the effect on the return
to a holder of the Trust's common shares of leverage in the amount of
approximately 30% of the Trust's total assets, assuming hypothetical annual
returns of the Trust's portfolio of minus 10% to plus 10%. As the table shows,
leverage generally increases the return to holders of common shares when

portfolio return is positive and greater than the cost of leverage and
decreases the return when the portfolio return is negative or less than the
cost of leverage. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.

Assumed portfolio return (net of expenses)........ (10)% (5)% 0% 5% 10%

Corresponding common share return assuming
30% leverage.................................... (16)% (9)% (2)% 5% 12%

Such leveraging of the common shares cannot be achieved until the
proceeds resulting from the use of leverage have been invested in accordance
with the Trust's investment objectives and policies.

Common Stock Risk

The Trust will have exposure to common stocks. Although common stocks
have historically generated higher average total returns than fixed income
securities over the long-term, common stocks also have experienced
significantly more volatility in those returns and in recent years have
significantly under- performed relative to debt securities. Therefore, the
Trust's exposure to common stocks could result in worse performance than would
be the case had the Trust been invested solely in debt securities. An adverse
event, such as an unfavorable earnings report, may depress the value of a
particular common stock held by the Trust. Also, the price of common stocks is
sensitive to general movements in the stock market and a drop in the stock
market may depress the price of common stocks to which the Trust has exposure.
Common stock prices fluctuate for several reasons, including changes in
investors' perceptions of the financial condition of an issuer or the general
condition of the relevant stock market, or when political or economic events
affecting the issuers occur. In addition, common stock prices may be
particularly sensitive to rising interest rates, as the cost of capital rises
and borrowing costs increase.

Dividend Risk

Dividends on common stock are not fixed but are declared at the
discretion of an issuer's board of directors. There is no guarantee that the
issuers of the common stocks in which the Trust invests will declare dividends
in the future or that if declared they will remain at current levels or
increase over time

Small and Mid-Cap Securities Risk

The Trust may invest in companies with small or medium capitalizations.
Securities issued by smaller and medium companies can be more volatile than,
and perform differently from, larger company securities. There may be less
trading in a smaller or medium company's securities, which means that buy and
sell transactions in those securities could have a larger impact on the
security's price than is the case with larger company securities. Smaller and
medium companies may have fewer business lines; changes in any one line of
business, therefore, may have a greater impact on a smaller or medium
company's security price than is the case for a larger company. In addition,
smaller or medium company securities may not be well known to the investing
public.

Non-U.S. Securities Risk

The Trust may invest up to 20% of its total assets in non-U.S.
securities, including emerging market securities. Investing in non-U.S.
securities involves certain risks not involved in domestic investments,
including, but not limited to: (i) fluctuations in foreign exchange rates;
(ii) future foreign economic, financial, political and social developments;
(iii) different legal systems; (iv) the possible imposition of exchange
controls or other foreign governmental laws or restrictions; (v) lower trading
volume; (vi) much greater price volatility and illiquidity of certain non-U.S.
securities markets; (vii) different trading and settlement practices; (viii)
less governmental supervision; (ix) changes in currency exchange rates; (x)
high and volatile rates of inflation; (xi) fluctuating interest rates; (xii)
less publicly available information; and (xiii) different accounting, auditing
and financial recordkeeping standards and requirements.

by rising international interest rates because many external debt obligations
bear interest at rates which are adjusted based upon international interest
rates. In addition, with respect to certain foreign countries, there is a risk
of: (i) the possibility of expropriation or nationalization of assets; (ii)
confiscatory taxation; (iii) difficulty in obtaining or enforcing a court
judgment; (iv) economic, political or social instability; and (v) diplomatic
developments that could affect investments in those countries.

Because the Trust will invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the Trust and the unrealized
appreciation or depreciation of investments. Currencies of certain countries
may be volatile and therefore may affect the value of securities denominated
in such currencies, which means that the Trust's net asset value or current
income could decline as a result of changes in the exchange rates between
foreign currencies and the U.S. dollar. Certain investments in non-U.S.
securities also may be subject to foreign withholding taxes. Dividend income
from non-U.S. corporations may not be eligible for the reduced rate for
qualified dividend income. These risks often are heightened for investments in
smaller, emerging capital markets. In addition, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as:
(i) growth of gross domestic product; (ii) rates of inflation; (iii) capital
reinvestment; (iv) resources; (v) self- sufficiency; and (vi) balance of
payments position.

Emerging Markets Risk

The Trust may invest up to 20% of its total assets in securities of
issuers based in emerging markets. Investing in securities of issuers based in
underdeveloped emerging markets entails all of the risks of investing in
securities of non-U.S. issuers to a heightened degree. Emerging market
countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most countries located in
Western Europe. These heightened risks include: (i) greater risks of
expropriation, confiscatory taxation, nationalization, and less social,
political and economic stability; (ii) the smaller size of the markets for
such securities and a lower volume of trading, resulting in lack of liquidity
and in price volatility; and (iii) certain national policies which may
restrict the Trust's investment opportunities including restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests.

Foreign Currency Risk

Because the Trust may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities owned by the Trust, the unrealized
appreciation or depreciation of investments and gains on and income from
investments. Currencies of certain countries may be volatile and therefore may
affect the value of securities denominated in such currencies, which means
that the Trust's net asset value could decline as a result of changes in the
exchange rates between foreign currencies and the U.S. dollar. In addition,
the Trust may enter into foreign currency transactions in an attempt to
enhance total return which may further expose the Trust to the risks of
foreign currency movements and other risks. See "Derivatives Risk" below.

Investments In Unseasoned Companies

The Trust may invest in the securities of smaller, less seasoned
companies. These investments may present greater opportunities for growth, but
also involve greater risks than customarily are associated with investments in
securities of more established companies. Some of the companies in which the
Trust may invest will be start-up companies which may have insubstantial
operational or earnings history or may have limited products, markets,
financial resources or management depth. Some may also be emerging companies
at the research and development stage with no products or technologies to
market or approved for marketing. Securities of emerging companies may lack an
active secondary market and may be subject to more abrupt or erratic price
movements than securities of larger, more established companies or stock
market averages in general. Competitors of certain companies may have
substantially greater financial resources than many of the companies in which
the Trust may invest.

Initial Public Offerings (IPOs) Risk

The Trust may invest in shares of companies through IPOs. IPOs and
companies that have recently gone public have the potential to produce
substantial gains for the Trust, subject to the Trust's option writing
strategy. However, there is no assurance that the Trust will have access to
profitable IPOs. The investment performance of the Trust during periods when
it is unable to invest significantly or at all in IPOs may be lower than
during periods when the Trust is able to do so. Securities issued in IPOs are
subject to many of the same risks as investing in companies with smaller
market capitalizations. Securities issued in IPOs have no trading history, and
information about the companies may be available for limited periods of time.
In addition, the prices of securities sold in IPOs may be highly volatile or
may decline shortly after the IPO.

Securities Lending Risk

The Trust may lend its portfolio securities (up to a maximum of one-third
of its total assets) to banks or dealers which meet the creditworthiness
standards established by the board of trustees of the Trust. Securities
lending is subject to the risk that loaned securities may not be available to
the Trust on a timely basis and the Trust may, therefore, lose the opportunity
to sell the securities at a desirable price. Any loss in the market price of
securities loaned by the Trust that occurs during the term of the loan would
be borne by the Trust and would adversely affect the Trust's performance.
Also, there may be delays in recovery, or no recovery, of securities loaned or
even a loss of rights in the collateral should the borrower of the securities
fail financially while the loan is outstanding. These risks may be greater for
non-U.S. securities.

Risks Associated with Options on Securities

There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.

Exchange-Listed Option Risks

There can be no assurance that a liquid market will exist when the Trust
seeks to close out an option position. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons,

decide or be compelled at some future date to discontinue the trading of
options (or a particular class or series of options). If trading were
discontinued, the secondary market on that exchange (or in that class or
series of options) would cease to exist. However, outstanding options on that
exchange that had been issued by the Options Clearing Corporation as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms. If the Trust were unable to close out a covered call option that
it had written on a security, it would not be able to sell the underlying
security unless the option expired without exercise.

Over-the-Counter Option Risk

The Trust may write (sell) unlisted ("OTC" or "over-the-counter")
options, and options written by the Trust with respect to non-U.S. securities,
indices or sectors generally will be OTC options. OTC options differ from
exchange-listed options in that they are two-party contracts, with exercise
price, premium and other terms negotiated between buyer and seller, and
generally do not have as much market liquidity as exchange-listed options. The
counterparties to these transactions typically will be major international
banks, broker-dealers and financial institutions. The Trust may be required to
treat as illiquid securities being used to cover certain written OTC options.
The OTC options written by the Trust will not be issued, guaranteed or cleared
by the Options Clearing Corporation. In addition, the Trust's ability to
terminate the OTC options may be more limited than with exchange-traded
options. Banks, broker-dealers or other financial institutions participating
in such transaction may fail to settle a transaction in accordance with the
terms of the option as written. In the event of default or insolvency of the
counterparty, the Trust may be unable to liquidate an OTC option position.

Index Option Risk

The Trust intends to sell index put and call options from time to time.
The purchaser of an index put option has the right to any depreciation in the
value of the index below the exercise price of the option on or before the
expiration date. The purchaser of an index call option has the right to any
appreciation in the value of the index over the exercise price of the option
on or before the expiration date. Because the exercise of an index option is
settled in cash, sellers of index call options, such as the Trust, cannot
provide in advance for their potential settlement obligations by acquiring and
holding the underlying securities. The Trust will lose money if it is required
to pay the purchaser of an index option the difference between the cash value
of the index on which the option was written and the exercise price and such
difference is greater than the premium received by the Trust for writing the
option. The value of index options written by the Trust, which will be priced
daily, will be affected by changes in the value and dividend rates of the
underlying common stocks in the respective index, changes in the actual or
perceived volatility of the stock market and the remaining time to the
options' expiration. The value of the index options also may be adversely
affected if the market for the index options becomes less liquid or smaller.
Distributions paid by the Trust on its common shares may be derived in part
from the net index option premiums it receives from selling index put and call
options, less the cost of paying settlement amounts to purchasers of the
options that exercise their options. Net index option premiums can vary widely
over the short term and long term.

Interest Rate Risk

Interest rate risk is the risk that debt securities, and the Trust's net
assets, may decline in value because of changes in interest rates. Generally,
debt securities will decrease in value when interest rates rise and increase
in value when interest rates decline. This means that the net asset value of
the common shares will fluctuate with interest rate changes and the
corresponding changes in the value of the Trust's debt security holdings.

Prepayment Risk

If interest rates fall, the principal on debt held by the Trust may be
paid earlier than expected. If this happens, the proceeds from a prepaid
security may be reinvested by the Trust in securities bearing lower interest
rates, resulting in a possible decline in the Trust's income and distributions
to shareholders. The Trust may invest in pools of mortgages and other assets
issued or guaranteed by private issuers or U.S. government agencies and
instrumentalities. Mortgage-related securities are especially sensitive to
prepayment risk because borrowers often refinance their mortgages when
interest rates drop.

Asset-Backed Securities Risk

Payment of interest and repayment of principal on asset-backed securities
may be largely dependent upon the cash flows generated by the assets backing
the securities and, in certain cases, supported by letters of credit, surety
bonds or other credit enhancements. Asset-backed security values may also be
affected by the creditworthiness of the servicing agent for the pool, the
originator of the loans or receivables or the entities providing the credit
enhancement. In addition, the underlying assets are subject to prepayments
that shorten the securities' weighted average maturity and may lower their
return.

Mortgage-Backed Securities Risk

A mortgage-backed security, which represents an interest in a pool of
assets such as mortgage loans, will mature when all the mortgages in the pool
mature or are prepaid. Therefore, mortgage-backed securities do not have a
fixed maturity, and their expected maturities may vary when interest rates
rise or fall.

Non-Investment Grade Securities Risk

There is no limit on the amount of the Trust's portfolio that may be
invested in below investment grade securities. Non-investment grade securities
are commonly referred to as "junk securities." Investments in lower grade
securities will expose the Trust to greater risks than if the Trust owned only
higher grade debt securities. Because of the substantial risks associated with
lower grade securities, you could lose money on your investment in common
shares of the Trust, both in the short-term and the long-term. Lower grade
securities, though high yielding, are characterized by high risk. They may be
subject to certain risks with respect to the issuing entity and to greater
market fluctuations than certain lower yielding, higher rated securities. The
retail secondary market for lower grade debt securities may be less liquid
than that of higher rated debt securities. Adverse conditions could make it
difficult at times for the Trust to sell certain securities or could result in
lower prices than those used in calculating the Trust's net asset value.

Derivatives Risk

Derivative Transactions in which the Trust may engage for hedging and
speculative purposes or to enhance total return, including engaging in
transactions such as options, futures, swaps, foreign currency transactions,
forward foreign currency contracts, currency swaps or options on currency
futures and other derivatives transactions, also involve certain risks and
special considerations. Derivative Transactions have risks, including the
imperfect correlation between the value of such instruments and the underlying
assets, the possible default of the other party to the transaction or
illiquidity of the derivative instruments. Furthermore, the ability to
successfully use Derivative

Transactions depends on the Investment Adviser's ability to predict pertinent
market movements, which cannot be assured. Thus, the use of Derivative
Transactions may result in losses greater than if they had not been used, may
require the Trust to sell or purchase portfolio securities at inopportune
times or for prices other than current market values, may limit the amount of
appreciation the Trust can realize on an investment or may cause the Trust to
hold a security that it might otherwise sell. The use of foreign currency
transactions can result in the Trust's incurring losses as a result of the
imposition of exchange controls, suspension of settlements or the inability of
the Trust to deliver or receive a specified currency. Additionally, amounts
paid by the Trust as premiums and cash or other assets held in margin accounts
with respect to Derivative Transactions are not otherwise available to the
Trust for investment purposes.

Market Risk Generally

The profitability of a significant portion of the Trust's investment
program depends to a great extent upon correctly assessing the future course
of the price movements of securities and other investments and the movements
of interest rates. There can be no assurance that the Investment Adviser will
be able to predict accurately these price and interest rate movements. With
respect to the investment strategies the Trust may utilize, there will be a
high degree of market risk.

Reinvestment Risk

The Trust reinvests the cash flows received from a security. The
additional income from such reinvestment, sometimes called
interest-on-interest, is reliant on the prevailing interest rate levels at the
time of reinvestment. There is a risk that the interest rate at which interim
cash flows can be reinvested will fall. Reinvestment risk is greater for
longer holding periods and for securities with large, early cash flows such as
high-coupon bonds. Reinvestment risk also applies generally to the
reinvestment of the proceeds the Trust receives upon the maturity or sale of a
portfolio security.

Timing Risk

Many agency, corporate and municipal bonds, and most mortgage-backed
securities, contain a provision that allows the issuer to "call" all or part
of the issue before the bond's maturity date, often after 5 or 10 years. The
issuer usually retains the right to refinance the bond in the future if market
interest rates decline below the coupon rate. There are three disadvantages to
the call provision. First, the cash flow pattern of a callable bond is not
known with certainty. Second, because an issuer is more likely to call the
bonds when interest rates have dropped, the Trust is exposed to reinvestment
rate risk, i.e., the Trust may have to reinvest at lower interest rates the
proceeds received when the bond is called. Finally, the capital appreciation
potential of a bond will be reduced because the price of a callable bond may
not rise much above the price at which the issuer may call the bond.

Inflation Risk
Inflation risk results from the variation in the value of cash flows from a
security due to inflation, as measured in terms of purchasing power. For
example, if the Trust purchases a bond in which it can realize a coupon rate
of 5%, but the rate of inflation increases from 2% to 6%, then the purchasing
power of the cash flow has declined. For all but adjustable bonds or floating
rate bonds, the Trust is exposed to inflation risk because the interest rate
the issuer

promises to make is fixed for the life of the security. To the extent that
interest rates reflect the expected inflation rate, floating rate bonds have a
lower level of inflation risk. In addition, during any periods of rising
inflation, dividend rates of any variable rate preferred stock issued by the
Fund would likely increase, which would tend to further reduce returns to
common shareholders.

Arbitrage Risks

The Trust will engage in capital structure arbitrage and other arbitrage
strategies. Arbitrage strategies entail various risks including the risk that
external events, regulatory approvals and other factors will impact the
consummation of announced corporate events and/or the prices of certain
positions. In addition, hedging is an important feature of capital structure
arbitrage. There is no guarantee that the Investment Adviser will be able to
hedge the Trust's portfolio in the manner necessary to employ successfully the
Trust's strategy.

Short Sales Risk

Short sales by the Trust that are not made "against the box" (that is
when the Trust has an offsetting long position in the asset that is selling
short) theoretically involve unlimited loss potential since the market price
of securities sold short may continuously increase. Short selling involves
selling securities which may or may not be owned and borrowing the same
securities for delivery to the purchaser, with an obligation to replace the
borrowed securities at a later date. Short selling allows the Trust to profit
from declines in market prices to the extent such decline exceeds the
transaction costs and the costs of borrowing the securities. However, since
the borrowed securities must be replaced by purchases at market prices in
order to close out the short position, any appreciation in the price of the
borrowed securities would result in a loss. Purchasing securities to close out
the short position can itself cause the price of the securities to rise
further, thereby exacerbating the loss. The Trust may mitigate such losses by
replacing the securities sold short before the market price has increased
significantly. Under adverse market conditions, the Trust might have
difficulty purchasing securities to meet its short sale delivery obligations,
and might have to sell portfolio securities to raise the capital necessary to
meet its short sale obligations at a time when fundamental investment
considerations would not favor such sales.

Risks of Investing in Structured Finance Securities

A portion of the Trust's investments may consist of equipment trust
certificates, collateralized mortgage obligations, collateralized bond
obligations, collateralized loan obligations or similar instruments.
Structured finance securities may present risks similar to those of the other
types of debt obligations in which the Trust may invest and, in fact, such
risks may be of greater significance in the case of structured finance
securities. Moreover, investing in structured finance securities may entail a
variety of unique risks. Among other risks, structured finance securities may
be subject to prepayment risk. In addition, the performance of a structured
finance security will be affected by a variety of factors, including its
priority in the capital structure of the issuer thereof, and the availability
of any credit enhancement, the level and timing of payments and recoveries on
and the characteristics of the underlying receivables, loans or other assets
that are being securitized, remoteness of those assets from the originator or
transferor, the adequacy of and ability to realize upon any related collateral
and the capability of the servicer of the securitized assets.

Risks of Investing in Preferred Securities

There are special risks associated with investing in preferred
securities, including:

o Subordination. Preferred securities are subordinated to
bonds and other debt instruments in a company's capital
structure in terms of priority to corporate income and
liquidation payments, and therefore will be subject to
greater credit risk than more senior debt instruments.

o Liquidity. Preferred securities may be substantially less
liquid than many other securities, such as common stocks or
U.S. government securities.

Risks of Investing in Derivative Instruments

Derivative instruments, or "derivatives," include futures, options,
swaps, structured securities and other instruments and contracts that are
derived from, or the value of which is related to, one or more underlying
securities, financial benchmarks, currencies or indices. Derivatives allow an
investor to hedge or speculate upon the price movements of a particular
security, financial benchmark currency or index at a fraction of the cost of
investing in the underlying asset. The value of a derivative depends largely
upon price movements in the underlying asset. Therefore, many of the risks
applicable to trading the underlying asset are also applicable to derivatives
of such asset. However, there are a number of other risks associated with
derivatives trading. For example, because many derivatives are "leveraged,"
and thus provide significantly more market exposure than the money paid or
deposited when the transaction is entered into, a relatively small adverse
market movement can not only result in the loss of the entire investment, but
may also expose the Trust to the possibility of a loss exceeding the original
amount invested. Derivatives may also expose investors to liquidity risk, as
there may not be a liquid market within which to close or dispose of
outstanding derivatives contracts, and to counterparty risk. The counterparty
risk lies with each party (the "counterparty") with whom the Trust contracts
for the purpose of making derivative investments. In the event of the
counterparty's default, the Trust will only rank as an unsecured creditor and
risks the loss of all or a portion of the amounts it is contractually entitled
to receive.

Risks of Investing in Swaps

Investments in swaps involve the exchange with another party of their
respective commitments. Use of swaps subjects the Trust to risk of default by
the counterparty. If there is a default by the counterparty to such a
transaction, there may be contractual remedies pursuant to the agreements
related to the transaction although contractual remedies may not be sufficient
in the event the counterparty is insolvent. However, the swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid in
comparison with the markets for other similar instruments which are traded in
the interbank market. The Trust may enter into credit default swaps, currency
swaps or other swaps which may be surrogates for other instruments such as
currency forwards or options.

Risks of Investing in Synthetic Securities

In addition to credit risks associated with holding non-investment grade
loans and high-yield debt securities, with respect to synthetic securities the
Trust will usually have a contractual relationship only with the counterparty
of such synthetic securities, and not the Reference Obligor (as defined below)
on the Reference Obligation (as defined below). The Trust generally will have
no right to directly enforce compliance by the Reference Obligor with the
terms of the Reference Obligation nor any rights of set-off against the
Reference Obligor, nor have any voting rights with respect to the Reference
Obligation. The Trust will not benefit directly from any collateral supporting
the Reference Obligation or have the benefit of the remedies on default that
would normally be available to a holder of such Reference Obligation. In
addition, in the event of insolvency of its counterparty, the Trust will be
treated as a general creditor of such counterparty and will not have any claim
with respect to the credit risk of the counterparty as well as that of the
Reference Obligor. As a result, an overabundance of synthetic securities with
any one counterparty subjects the notes to an additional degree of risk with
respect to defaults by such counterparty as well as by the Reference Obligor.
The Investment Adviser may not perform independent credit analyses of the
counterparties, any such counterparty, or an entity guaranteeing such
counterparty, individually or in the aggregate. A "Reference Obligation" is
the debt security or other obligation upon which the synthetic security is
based. A

"Reference Obligor" is the obligor on a Reference Obligation. There
is no maximum amount of Trust's assets that may be invested in these
securities.

Tax Risk

The Trust may invest in derivative instruments, such as swaps, and other
instruments, in order to obtain investment exposure to its principal
investment categories or for other purposes. The Trust intends only to invest
in such instruments to an extent and in a manner consistent with the Trust's
qualification as a regulated investment company for federal income tax
purposes. If the Trust were to fail to qualify as a regulated investment
company in any year, then the Trust would be subject to federal (and state)
income tax on its net income and capital gains at regular corporate income tax
rates (without a deduction for distributions to shareholders). Trust income
distributed to common shareholders would also be taxable to shareholders as
ordinary dividend income to the extent attributable to the Trust's earnings
and profits. Accordingly, in such event, the Trust's ability to achieve its
investment objectives would be adversely affected, and common shareholders
would be subject to the risk of diminished investment returns.

Valuation Risk

Fair value is defined as the amount for which assets could be sold in an
orderly disposition over a reasonable period of time, taking into account the
nature of the asset. Fair value pricing, however, involves judgments that are
inherently subjective and inexact, since fair valuation procedures are used
only when it is not possible to be sure what value should be attributed to a
particular asset or when an event will affect the market price of an asset and
to what extent. As a result, there can be no assurance that fair value pricing
will reflect actual market value and it is possible that the fair value
determined for a security will be materially different from the value that
actually could be or is realized upon the sale of that asset.

Market Disruption and Geopolitical Risk

The aftermath of the war in Iraq and the continuing occupation of Iraq,
instability in the Middle East and terrorist attacks in the United States and
around the world may have resulted in market volatility and may have long-term
effects on the U.S. and worldwide financial markets and may cause further
economic uncertainties in the United States and worldwide. The Investment
Adviser does not know how long the securities markets will continue to be
affected by these events and cannot predict the effects of the occupation or
similar events in the future on the U.S. economy and securities markets. Given
the risks described above, an investment in the common shares may not be
appropriate for all investors. You should carefully consider your ability to
assume these risks before making an investment in the Trust.

Risks of Investing in a Trust with Anti-Takeover Provisions

The Trust's Agreement and Declaration of Trust includes provisions that
could limit the ability of other entities or persons to acquire control of the
Trust or convert the Trust to open-end status. These provisions could deprive
the holders of common shares of opportunities to sell their common shares at a
premium over the then current market price of the common shares or at net
asset value.

Key Adviser Personnel Risk

The Trust's ability to identify and invest in attractive opportunities is
dependent upon Highland, its investment adviser. If one or more key
individuals leaves Highland, Highland may not be able to hire qualified
replacements or may require an extended time to do so. This situation could
prevent the Trust from achieving its investment objectives.

MANAGEMENT OF THE TRUST

Trustees and Officers

The board of trustees is responsible for the overall management of the
Trust, including supervision of the duties performed by Highland. There are
five trustees of the Trust. Four of the trustees are not "interested persons"
(as defined in the Investment Company Act) of the Trust. The name and business
address of the trustees and officers of the Trust and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Trust" in the Statement of Additional Information.

Investment Adviser

Highland acts as the Trust's investment adviser. Highland is located at
Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas, Texas 75240. As of
January 31, 2007, the Investment Adviser managed approximately $34.2 billion
in assets on behalf of investors around the world. Highland is controlled by
James Dondero and Mark Okada, by virtue of their respective share ownership,
and its general partner, Strand Advisors, Inc., of which Mr. Dondero is the
sole stockholder. Messrs. Dondero and Okada have managed portfolios together
since 1990.

Responsibilities. The Investment Adviser provides the following services
to the Trust: (i) furnishes an investment program for the Trust; (ii)
determines, subject to the overall supervision and review of the board of
trustees, the investments to be purchased, held, sold or exchanged by the
Trust and the portion, if any, of the assets of the Trust to be held
uninvested; (iii) makes changes in the investments of the Trust; and (iv)
votes, exercises consents and exercises all other rights pertaining to such
investments. Subject to the foregoing, the Investment Adviser, at its own
expense, will have the authority to engage one or more sub-advisers in
connection with the portfolio management of the Trust, which sub-advisers may
be affiliates of the Adviser; provided, however, that the Adviser shall remain
responsible to the Trust with respect to its duties and obligations set forth
in the investment advisory agreement.

Compensation. In return for its advisory services, the Investment Adviser
will receive an annual fee, payable monthly, in an amount equal to 1.00% of
the average weekly value of the Trust's Managed Assets (the "Advisory Fee").
The accrued fees will be payable monthly as promptly as possible after the end
of each month during which the investment advisory agreement is in effect. The
Investment Adviser may waive a portion of its fees. A discussion regarding the
basis for the approval of the investment advisory agreement by the Trust's
board is available in the Trust's report to shareholders for the period ending
December 31, 2006.

Potential Conflicts of Interest. Since the Trust employs leverage, the
Investment Adviser will benefit because the Trust's Managed Assets will
increase with leverage. Furthermore, the Investment Adviser will also benefit
to the extent that the Trust's Managed Assets are derived from the reinvested
collateral received on portfolio securities loaned.

In addition to the Advisory Fee of Highland, the Trust pays all other
costs and expenses of its operations, including, but not limited to,
compensation of its trustees (other than those affiliated with Highland),
custodian, transfer and dividend disbursing agent expenses, legal fees,
listing fees and expenses, expenses of independent auditors, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and reimbursement of actual
expenses of the Investment Adviser or others for registration and maintenance
of the Trust's registrations with the Commission and other jurisdictions and
taxes, if any.

Administrator/Sub-Administrator

Under an administration agreement dated May 19, 2006, Highland provides
administration services to the Trust, provides executive and other personnel
necessary to administer the Trust and furnishes office space. Highland will
receive an annual fee, payable monthly, in an amount equal to 0.20% of the
average weekly value of the Trust's Managed Assets. The accrued fees will be
payable monthly as promptly as possible after the end of each month during
which this Agreement is in effect. Highland may waive a portion of its fees.
Under a separate sub-

administration agreement, dated May 19, 2006, Highland has delegated certain
administrative functions to PFPC, Inc., at an annual rate, payable by
Highland, of 0.01% of the average weekly value of the Trust's Managed Assets.

Portfolio Managers

The Trust's portfolio managers are James Dondero, Mark Okada and Kurtis
Plumer. Their investment decisions are not subject to the oversight, approval
or ratification of a committee.

Kurtis Plumer, CFA. Mr. Plumer is a Senior Portfolio Manager and co-head
of the Distressed Group at Highland where he is responsible for managing the
sourcing, investing and monitoring process. He has over 14 years of experience
in distressed, high yield bond and leveraged loan products. Prior to joining
Highland in 1999, Mr. Plumer was a distressed high yield bond trader at Lehman
Brothers in New York, where he managed a $250 million portfolio invested in
global distressed securities. While at Lehman, he also traded emerging market
sovereign bonds. Prior to joining Lehman Brothers, Mr. Plumer was a corporate
finance banker at NationsBanc Capital Markets, Inc. (now Bank of America
Capital Markets, Inc.) where he focused on M&A and financing transactions for
the bank's clients. Mr. Plumer earned a BBA in Economics and Finance from
Baylor University and an MBA in Strategy and Finance from the Kellogg School
at Northwestern University. Mr. Plumer is a Chartered Financial Analyst.

James Dondero, CFA, CPA, CMA. Mr. Dondero is a founder and President of
Highland. Formerly, Mr. Dondero served as Chief Investment Officer of
Protective Life's GIC subsidiary and helped grow the business from concept to
over $2 billion between 1989 and 1993. His portfolio management experience
includes mortgage-backed securities, investment grade corporates, leveraged
bank loans, emerging markets, derivatives, preferred stocks and common stocks.
From 1985 to 1989, he managed approximately $1 billion in fixed income funds
for American Express. Prior to American Express, he completed his financial
training at Morgan Guaranty Trust Company. Mr. Dondero is a Beta Gamma Sigma
graduate of the University of Virginia, 1984 with degrees in Accounting and
Finance. Mr. Dondero is a Certified Public Accountant, Chartered Financial
Analyst and a Certified Management Accountant.

Mark Okada, CFA. Mr. Okada is Executive Vice President of Strand and the
funds in the Highland Fund Complex. Mr. Okada is a founder and Chief
Investment Officer of Highland and has served as Chief Investment Officer
since 2000. From 1993 to 2000, Mr. Okada served as Executive Vice President of
Highland. He is responsible for overseeing Highland's investment activities
for its various funds and has over 19 years of experience in the leveraged
finance market. Formerly, Mr. Okada served as Manager of Fixed Income for
Protective Life's GIC subsidiary from 1990 to 1993. He was primarily
responsible for the bank loan portfolio and other risk assets. Protective was
one of the first non-bank entrants into the syndicated loan market. From 1986
to 1990, he served as Vice President for Hibernia National Bank, managing over
$1 billion of high-yield bank loans. Mr. Okada is an honors graduate of the
University of California Los Angeles with degrees in Economics and Psychology.
He completed his credit training at Mitsui and is a Chartered Financial
Analyst. Mr. Okada is also Chairman of the Board of Directors of Common Grace
Ministries Inc.

The Statement of Additional Information provides additional information
about the portfolio managers' compensation, other accounts managed by the
portfolio managers and the portfolio managers' ownership of securities issued
by the Trust.

NET ASSET VALUE

The net asset value of the common shares of the Trust will be computed
based upon the value of the Trust's portfolio securities and other assets. Net
asset value per common share will be determined daily on each day that the New
York Stock Exchange is open for business as of the close of the regular
trading session on the New York Stock Exchange. The Trust calculates net asset
value per common share by subtracting liabilities (including accrued expenses
or dividends) from the total assets of the Trust (the value of the securities
plus cash or other assets, including interest accrued but not yet received)
and dividing the result by the total number of outstanding common shares of
the Trust.

Valuations

The Trust uses the following valuation methods to determine either
current market value for investments for which market quotations are
available, or if not available, the fair value, as determined in good faith
pursuant to policies and procedures approved by the board of trustees:

(i) 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 Investment Adviser 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 Trust'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.

(ii) Dividends declared but not yet received, and rights in respect of
securities which are quoted ex-dividend or ex-rights, will be
recorded at the fair value thereof, as determined by the Investment
Adviser, which may (but need not) be the value so determined on the
day such securities are first quoted ex-dividend or ex-rights.

(iii) Listed options, or over-the-counter options for which representative
brokers' quotations are available, will be valued in the same manner
as listed or over-the-counter securities as hereinabove provided.
Premiums for the sale of such options written by the Trust will be
included in the assets of the Trust, and the market value of such
options shall be included as a liability.

(iv) The Trust's non-marketable investments will generally be valued in
such manner as the Investment Adviser determines in good faith to
reflect their fair values under procedures established by, and under
the general supervision and responsibility of, the Trust's board of
trustees. The pricing of all assets that are fair valued in this
manner will be subsequently reported to and ratified by the Trust's
board of trustees.

When determining the fair value of an asset, the Investment Adviser will
seek to determine the price that the Trust might reasonably expect to receive
from the current sale of that asset in an arm's-length transaction. Fair value
determinations shall be based upon all available factors that the Investment
Adviser deems relevant.

PLAN OF DISTRIBUTION

The Fund may sell the Common and Preferred Shares offered under this
prospectus and any prospectus supplements, through:

o underwriting syndicates;

o at-the-market transactions; and

o privately negotiated transactions.

The Trust will bear the expenses of any offerings, including but not
limited to, the expenses of preparation of the prospectus, any prospectus
supplement and SAI for any offerings and the expense of counsel and auditors
of in connection with any offering. As such, the Trust's common shareholders
will indirectly bear the various expenses to the Trust associated with any
offerings as described herein.

Distribution Through Underwriting Syndicates

The Trust from time to time may issue additional Common Shares through a
syndicated secondary offering. In order to limit the impact on the market
price of the Trust's Common Shares, underwriters will market and price the
offering on an expedited basis (e.g., overnight or similarly abbreviated
offering period). The Trust will launch a

syndicated offering on a day, and upon terms, mutually agreed upon between the
Trust, [ ], one of the Trust's underwriters and the underwriting syndicate.

The Trust will offer its shares at price equal to a specified discount of up
to [ ]% from the closing market price of the Trust's Common Shares on the day
prior to the offering date. The applicable discount will be determined by the
Trust and [ ] in consultation with the underwriting syndicate on a
transaction-by-transaction basis. The Trust will compensate the underwriting
syndicate out of the proceeds of the offering based upon a sales load of up to
[ ]% of the gross per share offering price. The minimum net proceeds per share
to the Trust will not be less than the greater of (i) the Trust's latest net
asset value per Common Share or (ii) [ ]% of the closing market price of the
Trust's Common Shares on the day prior to the offering date.

Distribution Through At-the-Market Transactions

The Trust may enter into a Distribution Agreement with [ ], a form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The summary of the Distribution Agreement contained
herein is qualified by reference to the Distribution Agreement.

Common Shares will only be sold on such days as determined by the Trust
and [ ]. Common Shares will be sold at market prices, which shall be
determined with reference to trades on the NYSE, subject to a minimum price to
be established each day by the Trust. The minimum price on any day will not be
less than the current net asset value per Common Share plus the per share amount
of the commission to be paid to [ ]. The Trust and [ ] will suspend the sale of
Common Shares if the per share price of the shares is less than the minimum
price.

The Trust will compensate [ ] with respect to the sale of the Common Shares
will be at a fixed commission rate of [ %] of the gross sales price per share of
the Common Shares sold. [ ] will compensate broker-dealers participating in the
offering at a fixed rate of [ %] of the gross sales price per share of the
Common Shares sold by that broker-dealer. Dealer reallowance may be changed by [
] from time to time. Settlements of sales of Common Shares will occur on the
third business day following the date on which any such sales are made.
Settlements of sales of Common Shares will occur on the third business day
following the date on which any such sales are made.

The offering of Common Shares pursuant to the Distribution Agreement
will terminate upon the earlier of (i) the sale of all Shares subject thereto
or (ii) termination of the Distribution Agreement. The Trust and [ ] each have
the right to terminate the Distribution Agreement in its discretion at any
time.

Distribution Through Privately Negotiated Transactions

The Trust from time to time may sell directly to, and solicit offers from,
institutional and other sophisticated investors, who may be deemed to be
underwriters as defined in the 1933 Act for any resale of Common Shares.

Common Shares issued by the Trust through privately negotiated transactions
will be issued at a price equal to the greater of (i) the net asset value per
Common Share of the Trust's Common Shares or (ii) at a discount ranging from
0% to [ ]% of the average daily closing market price of the Trust's Common
Shares at the close of business on the [ ] business days preceding the date
upon which Common Shares are sold pursuant to the privately negotiated
transaction. The applicable discount will be determined by the Trust on a
transaction-by-transaction basis. The Trust will not pay any commissions with
regard to privately negotiated transactions, but an investor may be subject to
a front-end sales charge of up to [ %] paid to or retained by a third party
broker-dealer through which such transaction may be effected.

DISTRIBUTIONS

If the Trust issues Preferred Shares, it will pay dividends to the
holders of the Preferred Shares at either fixed or variable short-term
interest rates, as described in a prospectus supplement accompanying each
Preferred Share offering, of its investment company taxable income.

Subject to market conditions and the right of owners of preferred shares
to receive a dividend preference, we also expect to declare the initial
monthly dividend on the Trust's common shares within approximately 45 days
after

completion of this offering and to pay that initial monthly dividend
approximately 60 to 90 days after completion of this offering. The Trust
intends to pay any capital gain distributions annually.

So long as shares of preferred stock are outstanding, holders of shares
of common stock will not be entitled to receive any distributions from us
unless we have paid all accumulated dividends on preferred stock, and unless
asset coverage (as defined in the 1940 Act) with respect to preferred stock
would be at least 200% after giving effect to such distributions. In the event
that the Trust issues preferred stock and fails to pay dividends on the
Preferred Shares for eight quarters in the aggregate, the holders of Preferred
Shares would be entitled to elect a majority of the board of trustees until
all Preferred Share dividends are current.

Various factors will affect the level of the Trust's current income and
current gains, such as its asset mix and the Trust's use of options. To permit
the Trust to maintain more stable monthly dividends and annual distributions,
the Trust may from time to time distribute less than the entire amount of
income and gains earned in the relevant month or year, respectively. The
undistributed income and gains would be available to supplement future
distributions. As a result, the distributions paid by the Trust for any
particular period may be more or less than the amount of income and gains
actually earned by the Trust during the applicable period. Undistributed
income and gains will add to the Trust's net asset value and, correspondingly,
distributions from undistributed income and gains and from capital, if any,
will be deducted from the Trust's net asset value. See "Distributions."
Shareholders will automatically have all dividends and distributions
reinvested in common shares issued by the Trust or common shares of the Trust
purchased in the open market in accordance with the Trust's Dividend
Reinvestment Plan unless an election is made to receive cash. Each participant
in the Trust's Dividend Reinvestment Plan will pay a pro rata portion of
brokerage commissions incurred in connection with open market purchases, and
participants requesting a sale of securities through the plan agent of the
Trust's Dividend Reinvestment Plan are subject to a sales fee and a brokerage
commission. See "Dividend Reinvestment Plan" and "Distributions".

DIVIDEND REINVESTMENT PLAN

Unless the registered owner of common shares elects to receive cash by
contacting the Plan Agent, all dividends declared for the common shares of the
Trust will be automatically paid in the form of or, reinvested by PFPC, Inc.
(the "Plan Agent"), agent for shareholders in administering the Trust's
Dividend Reinvestment Plan (the "Plan") in, additional common shares of the
Trust. If you are a registered owner of common shares and elect not to
participate in the Plan, you will receive all dividends in cash paid by check
mailed directly to you (or, if the shares are held in street or other nominee
name, then to such nominee) by PFPC, Inc., as dividend disbursing agent. You
may elect not to participate in the Plan and to receive all dividends in cash
by sending written instructions or by contacting PFPC, Inc., as dividend
disbursing agent, at the address set forth below. Participation in the Plan is
completely voluntary and may be terminated or resumed at any time without
penalty by contacting the Plan Agent before the dividend record date;
otherwise such termination or resumption will be effective with respect to any
subsequently declared dividend or other distribution. Some brokers may
automatically elect to receive cash on your behalf and may re-invest that cash
in additional shares of the Trust for you.

The Plan Agent will open an account for each shareholder under the Plan
in the same name in which such shareholder's shares are registered. Whenever
the Trust declares a dividend or other distribution (together, a "dividend")
payable in cash, non-participants in the Plan will receive cash and
participants in the Plan will receive the equivalent in common or preferred
shares, as applicable. The common shares will be acquired by the Plan Agent
for the participants' accounts, depending upon the circumstances described
below, either (i) through receipt of additional unissued but authorized shares
from the Trust ("newly issued shares") or (ii) by purchase of outstanding
common shares on the open market ("open-market purchases") on the New York
Stock Exchange or elsewhere.

If, on the payment date for any dividend, the market price per common
share plus estimated brokerage commissions is greater than the net asset value
per common share (such condition being referred to herein as "market
premium"), the Trust will issue common shares, including fractions, to the
participants in the amount of the dividend. The number of newly issued common
shares to be credited to each participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per common
share on the payment date; provided that, if the net asset value per common
share is less than 95% of the market price per common share on the payment
date, the dollar amount of the dividend will be divided by 95% of the market
price per common share on the payment date.

If, on the payment date for any dividend, the net asset value per common
share is greater than the market value per common share plus estimated
brokerage commissions (such condition being referred to herein as "market
discount"), the Plan Agent will invest the dividend amount in common shares
acquired on behalf of the participants in open-market purchases.

In the event of a market discount on the payment date for any dividend,
the Plan Agent will have until the last business day before the next date on
which the common shares trade on an "ex-dividend" basis or 120 days after the
payment date for such dividend, whichever is sooner (the "last purchase
date"), to invest the dividend amount in common shares acquired in open-market
purchases. It is contemplated that the Trust will pay monthly dividends.
Therefore, the period during which open-market purchases can be made will
exist only from the payment date of each dividend through the date before the
"ex-dividend" date of the third month of the quarter. If, before the Plan
Agent has completed its open-market purchases, the market price of a common
share exceeds the net asset value per common share, the average per common
share purchase price paid by the Plan Agent may exceed the net asset value of
the common shares, resulting in the acquisition of fewer common shares than if
the dividend had been paid in newly issued common shares on the dividend
payment date. Because of the foregoing difficulty with respect to open market
purchases, if the Plan Agent is unable to invest the full dividend amount in
open market purchases during the purchase period or if the market discount
shifts to a market premium during the purchase period, the Plan Agent may
cease making open-market purchases and may invest the uninvested portion of
the dividend amount in newly issued common shares at the net asset value per
common share at the close of business on the last purchase date; provided
that, if the net asset value per common share is less than 95% of the market
price per common share on the payment date, the dollar amount of the dividend
will be divided by 95% of the market price per common share on the payment
date.

The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by shareholders for tax records. Common shares in the
account of each Plan participant will be held by the Plan Agent on behalf of
the Plan participant, and each shareholder proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
under the Plan in accordance with the instructions of the participants.

In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of common shares certified from
time to time by the record shareholder's name and held for the account of
beneficial owners who participate in the Plan.

There will be no brokerage charges with respect to common shares issued
directly by the Trust. However, each participant will pay a pro rata share of
brokerage commissions incurred in connection with open-market purchases. The
automatic reinvestment of dividends will not relieve participants of any
federal, state or local income tax that may be payable (or required to be
withheld) on such dividends. Accordingly, any taxable dividend received by a
participant that is reinvested in additional common shares will be subject to
federal (and possibly state and local) income tax even though such participant
will not receive a corresponding amount of cash with which to pay such taxes.
See "Tax Matters." Participants who request a sale of shares through the Plan
Agent are subject to a $2.50 sales fee and pay a brokerage commission of $0.05
per share sold.

The Trust reserves the right to amend or terminate the Plan. There is no
direct service charge to participants in the Plan; however, the Trust reserves
the right to amend the Plan to include a service charge payable by the
participants.

All correspondence concerning the Plan should be directed to the Plan
Agent at PFPC, Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809;
telephone (877) 665-1287.

DESCRIPTION OF CAPITAL STRUCTURE

Common Shares

The Trust is a statutory trust organized under the laws of Delaware
pursuant to an Agreement and Declaration of Trust dated as of March 10, 2006.
The Trust is authorized to issue an unlimited number of common shares of
beneficial interest, par value $0.001 per share. Each common share has one
vote and, when issued and paid for in accordance with the terms of this
offering, will be fully paid and non-assessable, except that the trustees
shall have the power to cause shareholders to pay expenses of the Trust by
setting off charges due from shareholders from declared but unpaid dividends
or distributions owed the shareholders and/or by reducing the number of common
shares owned by each respective shareholder. The Trust currently is not aware
of any expenses that will be paid pursuant to this provision, except to the
extent fees payable under its Dividend Reinvestment Plan are deemed to be paid
pursuant to this provision.

The Trust intends to hold annual meetings of shareholders so long as the
common shares are listed on a national securities exchange and such meetings
are required as a condition to such listing. All common shares are equal as to
dividends, assets and voting privileges and have no conversion, preemptive or
other subscription rights. The Trust will send annual and semi-annual reports,
including financial statements, to all holders of its shares.

The Trust has no present intention of offering any additional shares
other than the Preferred Shares and common shares issued under the Trust's
Dividend Reinvestment Plan. Any additional offerings of shares will require
approval by the Trust's board of trustees. Any additional offering of common
shares will be subject to the requirements of the Investment Company Act,
which provides that shares may not be issued at a price below the then current
net asset value, exclusive of sales load, except in connection with an
offering to existing holders of common shares or with the consent of a
majority of the Trust's outstanding voting securities.

The Trust's common shares are listed on the New York Stock Exchange under
the symbol "HCF."

Unlike open-end funds, closed-end funds like the Trust do not
continuously offer shares and do not provide daily redemptions. Rather, if a
shareholder determines to buy additional common shares or sell shares already
held, the shareholder may do so by trading through a broker on the New York
Stock Exchange or otherwise. Shares of closed-end investment companies
frequently trade on an exchange at prices lower than net asset value. Because
the market value of the common shares may be influenced by such factors as
dividend levels (which are in turn affected by expenses), dividend stability,
net asset value, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors beyond the control of
the Trust, the Trust cannot assure you that common shares will trade at a
price equal to or higher than net asset value in the future. The common shares
are designed primarily for long-term investors and you should not purchase the
common shares if you intend to sell them soon after purchase. See the
Statement of Additional Information under "Repurchase of Common Shares."

Preferred Shares

Currently, an unlimited amount of the Trust's shares have been classified
by the Board of Trustees as preferred shares, par value $0.001 per share. The
terms of such preferred shares may be fixed by the Board of Trustees and would
materially limit and/or qualify the rights of the holders of the Trust's
common shares.

If the Trust issues Preferred Shares, it will pay dividends to the
holders of the Preferred Shares based on short-term interest rates at either a
fixed rate or a rate that will be reset frequently, as described in a
prospectus supplement accompanying each Preferred Share offering, of its
investment company taxable income.

Upon a liquidation, each holder of the Preferred Shares will be entitled
to receive out of the assets of the Trust available for distribution to
shareholders (after payment of claims of the Trust's creditors but before any
distributions with respect to the Trust's common shares or any other shares of
the Trust ranking junior to the

Preferred Shares as to liquidation payments) an amount per share equal to such
share's liquidation preference plus any accumulated but unpaid distributions
(whether or not earned or declared, excluding interest thereon) to the date of
distribution and such shareholders shall be entitled to no further participation
in any distribution or payment in connection with such liquidation. The
Preferred Shares will rank on a parity with any other series of preferred shares
of the Trust as to the payment of distributions and the distribution of assets
upon liquidation, and will be junior to the Trust's obligations with respect to
any outstanding senior securities representing debt. The Preferred Shares carry
one vote per share on all matters on which such shares are entitled to vote. The
Preferred Shares will, upon issuance, be fully paid and nonassessable and will
have no preemptive, exchange or conversion rights. The Board of Trustees may by
resolution classify or reclassify any authorized but unissued capital shares of
the Trust from time to time by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to distributions or
terms or conditions of redemption. The Trust will not issue any class of shares
senior to the Preferred Shares.

Rating Agency Guidelines. Upon issuance, the Preferred Shares will be
rated "Aaa" by Moody's and "AAA" by S&P. The Trust is required under Moody's
and S&P guidelines to maintain assets having in the aggregate a discounted
value at least equal to the Basic Maintenance Amount (as defined below) for
its outstanding preferred shares, with respect to the separate guidelines
Moody's and S&P has each established for determining discounted value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of discounted value (as defined by such rating
agency). The Moody's and S&P guidelines also impose certain diversification
requirements and industry concentration limitations on the Trust's overall
portfolio, and apply specified discounts to securities held by the Trust
(except certain money market securities). The "Basic Maintenance Amount" is
equal to (i) the sum of (a) the aggregate liquidation preference of any
preferred shares then outstanding plus (to the extent not included in the
liquidation preference of such preferred shares) an amount equal to the
aggregate accumulated but unpaid distributions (whether or not earned or
declared) in respect of such preferred shares, (b) the total principal of any
debt (plus accrued and projected interest), (c) certain Trust expenses and (d)
certain other current liabilities (excluding any unmade distributions on the
Trust's common shares) less (ii) the Trust's (a) cash and (b) assets
consisting of indebtedness which (y) mature prior to or on the date of
redemption or repurchase of the preferred shares and are U.S. government
securities or evidences of indebtedness rated at least "Aaa," "P-1", "VMIG-1"
or "MIG-1" by Moody's or "AAA", "SP-1+" or "A-1+" by S&P, and (z) is held by
the Trust for distributions, the redemption or repurchase of preferred shares
or the Trust's liabilities.

If the Trust does not timely cure a failure to maintain a discounted
value of its portfolio equal to the Basic Maintenance Amount in accordance
with the requirements of the applicable rating agency or agencies then rating
the Preferred Shares at the request of the Trust, the Trust may, and in
certain circumstances will be required to, mandatorily redeem preferred
shares, as described below under " -- Redemption."

The Trust may, but is not required to, adopt any modifications to the
rating agency guidelines that may hereafter be established by Moody's and S&P.
Failure to adopt any such modifications, however, may result in a change in
the relevant rating agency's ratings or a withdrawal of such ratings
altogether. In addition, any rating agency providing a rating for the
Preferred Shares at the request of the Trust may, at any time, change or
withdraw any such rating. The Board of Trustees, without further action by the
shareholders, may amend, alter, add to or repeal certain of the definitions
and related provisions that have been adopted by the Trust pursuant to the
rating agency guidelines if the Board of Trustees determines that such
modification is necessary to prevent a reduction in rating of the preferred
shares by Moody's and S&P, as the case may be, is in the best interests of the
holders of common shares and is not adverse to the holders of preferred shares
in view of advice to the Trust by Moody's and S&P (or such other rating agency
then rating the preferred shares at the request of the Trust) that such
modification would not adversely affect, as the case may be, its then current
rating of the Preferred Shares.

The Board of Trustees may amend the Statement of Preferences definition
of "Maximum Rate" (the "maximum rate" as defined below under " --
Distributions on the Preferred Shares -- Maximum Rate") to increase the
percentage amount by which the applicable reference rate is multiplied or to
increase the applicable spread to which the reference rate is added to
determine the maximum rate without the vote or consent of the holders of the
preferred shares other shareholder of the Trust, but only after consultation
with the broker-dealers and with confirmation from each applicable rating
agency that the Trust could meet applicable rating agency asset coverage tests
immediately following any such increase.

As described by Moody's and S&P, the ratings assigned to the Preferred
Shares are assessments of the capacity and willingness of the Trust to pay the
obligations of each of the Preferred Shares. The ratings on the Preferred
Shares are not recommendations to purchase, hold or sell shares of either
series, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor. The rating agency guidelines also do
not address the likelihood that an owner of Preferred Shares will be able to
sell such shares on an exchange, in an auction or otherwise. The ratings are
based on current information furnished to Moody's and S&P by the Trust and the
Investment Adviser and information obtained from other sources. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.

The rating agency guidelines will apply to the Preferred Shares, as the
case may be, only so long as such rating agency is rating such shares at the
request of the Trust. The Trust will pay fees to Moody's and S&P for rating
the Preferred Shares.

Asset Maintenance Requirements. In addition to the requirements
summarized under " -- Rating Agency Guidelines" above, the Trust must also
satisfy asset maintenance requirements under the 1940 Act with respect to its
preferred shares. The 1940 Act requirements are summarized below.

The Trust will be required under the Preferred Shares Statement of
Preferences (the "Statement of Preferences") to determine whether it has, as
of the last business day of each March, June, September and December of each
year, an "asset coverage" (as defined in the 1940 Act) of at least 200% (or
such higher or lower percentage as may be required at the time under the 1940
Act) with respect to all outstanding senior securities of the Trust that are
stock, including any outstanding Preferred Shares. If the Trust fails to
maintain the asset coverage required under the 1940 Act on such dates and such
failure is not cured within 60 calendar days, the Trust may, and in certain
circumstances will be required to, mandatorily redeem the number of preferred
shares sufficient to satisfy such asset coverage. See " -- Redemption" below.

Distributions. Upon the issuance of Preferred Shares in one or more
Preferred Share offerings, an accompanying prospectus supplement would specify
whether dividends on such Preferred Shares will be based on a fixed or
variable rate. If such prospectus supplement specifies that dividends will be
paid at a fixed rate ("Fixed Rate Preferred Stock"), holders of such Preferred
Shares may be entitled to receive, out of funds legally available therefor,
cumulative cash distributions, at the annual rate of % (computed on the basis
of a 360-day year consisting of twelve 30-day months) of the liquidation
preference of $[ ] per share, payable quarterly on [ ], [ ], [ ], and [ ] of
each year or, if any such day is not a business day, the immediately
succeeding business day. Such distributions will accumulate from the date on
which such shares are issued.

In the alternative, the prospectus supplement may state that the holders
of the Preferred Shares are entitled to receive cash distributions stated at
annual rates as a percentage of its $[ ] per share liquidation preference,
that will vary from dividend period to dividend period ("Variable Rate
Preferred Stock"). The dividend rate for the initial dividend period for the
Preferred Shares in one or more offerings will be the rate set out on the
cover of the prospectus supplement. For subsequent dividend periods, the
Preferred Shares will pay distributions based on a rate set at the auction,
normally held weekly, but the rates set at the auction will not exceed the
maximum rate. Dividend periods generally will be seven days, and the dividend
periods generally will begin on the first business day after an auction. In
most instances, distributions are also paid weekly, on the business day
following the end of the dividend period. The Trust, subject to some
limitations, may change the length of the dividend periods, designating them
as "special dividend periods," as described below.

Distribution Payments. Except as described below, the dividend payment
date will be the first business day after the dividend period ends. The
dividend payment dates for special dividend periods of more (or less) than
seven days will be set out in the notice designating a special dividend
period. See " -- Designation of Special Dividend Periods" for a discussion of
payment dates for a special dividend period.

If a dividend payment date is not a business day because the NYSE is
closed for business for more than three consecutive business days due to an
act of God, natural disaster, act of war, civil or military disturbance, act
of terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the dividend payable on such date can not be paid
for any such reason, then:

o the dividend payment date for the affected dividend period
will be the next business day on which the Trust and its
paying agent, if any, are able to cause the distributions to
be paid using their reasonable best efforts;

o the affected dividend period will end on the day it would have
ended had such event not occurred and the dividend payment
date had remained the scheduled date; and

o the next dividend period will begin and end on the dates on
which it would have begun and ended had such event not
occurred and the dividend payment date remained the scheduled
date.

Determination of Dividend Rates. The Trust computes the distributions per
share by multiplying the applicable rate determined at the auction by a
fraction, the numerator of which normally is the number of days in such
dividend period and the denominator of which is 360. This applicable rate is
then multiplied by $[ ] to arrive at the distribution per share.

Maximum Rate. The dividend rate that results from an auction for
Preferred Shares will not be greater than the applicable "maximum rate." The
maximum rate for any standard dividend period will be the greater of the
applicable percentage of the reference rate or the reference rate plus the
applicable spread. The reference rate will be the applicable LIBOR Rate (as
defined below) for a dividend period of fewer than 365 days or the Treasury
Index Rate (as defined below) for a dividend period of 365 days or more. The
applicable percentage and the applicable spread will be determined based on
the lower of the credit ratings assigned to the Preferred Shares by Moody's
and S&P on the auction date for such period (as set forth in the table on the
next page). If Moody's and/or S&P do not make such rating available, the rate
shall be determined by reference to equivalent ratings issued by a substitute
rating agency. In the case of a special dividend period, (1) the Trust will
communicate the maximum applicable rate in a notice of special rate period for
such dividend payment period, (2) the applicable percentage and applicable
spread will be determined on the date two business days before the first day
of such special dividend period and (3) the reference rate will be the
applicable LIBOR Rate for a dividend period of fewer than 365 days or the
Treasury Index Rate for a dividend period of 365 days or more.

The Trust will take all reasonable action necessary to enable Moody's and
S&P to provide ratings for the Preferred Shares. If such ratings are not made
available by Moody's or S&P, the Trust will select one or more other rating
agencies to act as substitute rating agencies.

The "LIBOR Rate," as described in greater detail in the Statement of
Preferences is the applicable London Inter-Bank Offered Rate for deposits in
U.S. dollars for the period most closely approximating the applicable dividend
period for the Preferred Shares.

The "Treasury Index Rate," as described in greater detail in the
Statement of Preferences, is the average yield to maturity for certain U.S.
Treasury securities having substantially the same length to maturity as the
applicable dividend period for the Preferred Shares.

Credit Ratings Applicable Percentage Applicable Spread
Moody's S&P
Aaa AAA 150% 1.50%

Aa3 to Aa1 AA- to AA+ 250% 2.50%

A3 to A1 A- to A+ 350% 3.50%

Baa1 or lower BBB+ or lower 550% 5.50%

Assuming the Trust maintains an "AAA" and "Aaa" rating on the Preferred
Shares, the practical effect of the different methods used to determine the
maximum rate is shown in the table below:

Maximum Applicable Maximum Applicable Method Used to
Rate Using the Rate Using the Determine the Maximum
Reference Rate Applicable Percentage Applicable Spread Applicable Rate

1% 1.50% 2.50% Spread

2% 3.00% 3.50% Spread

3% 4.50% 4.50% Either

4% 6.00% 5.50% Percentage

5% 7.50% 6.50% Percentage

6% 9.00% 7.50% Percentage

There is no minimum dividend rate in respect of any dividend period.

Effect of Failure to Pay Distributions in a Timely Manner. If the Trust
fails to pay the paying agent the full amount of any distribution or
redemption price, as applicable, for the Preferred Shares in a timely manner,
the dividend rate for the Preferred Shares for the dividend period following
such a failure to pay (such period referred to as the default period) and any
subsequent dividend period for which such default is continuing will be the
default rate. In the event the Trust fully pays all default amounts due during
a dividend period, the dividend rate for the remainder of that dividend period
will be, as the case may be, the applicable rate (for the first dividend
period following a dividend default) or the then maximum rate (for any
subsequent dividend period for which such default is continuing).

The default rate is 550% of the applicable LIBOR Rate for a dividend
period of 364 days or fewer and 550% of the applicable Treasury Index Rate for
a dividend period of longer than 364 days.

Designation of Special Dividend Periods. The Trust may instruct the
auction agent to hold auctions more or less frequently than weekly and may
designate dividend periods longer or shorter than one week. The Trust may do
this if, for example, the Trust expects that short-term rates might increase
or market conditions otherwise change, in an effort to optimize the effect of
the Trust's leverage on holders of its common shares. The Trust does not
currently expect to hold auctions and pay distributions less frequently than
weekly or establish dividend periods longer or shorter than one week. If the
Trust designates a special dividend period, changes in interest rates could
affect the price received if Preferred Shares are sold in the secondary
market.

Any designation of a special dividend period for the Preferred Shares
will be effective only if (i) notice thereof has been given as provided for in
the Governing Documents, (ii) any failure to pay in a timely manner to the
auction agent the full amount of any distribution on, or the redemption price
of, the Preferred Shares has been cured as provided for in the Governing
Documents, (iii) the auction immediately preceding the special dividend period
was not a failed auction, (iv) if the Trust has mailed a notice of redemption
with respect to the Preferred Shares, the Trust has deposited with the paying
agent all Trusts necessary for such redemption and (v) the Trust has confirmed
that as of the auction date next preceding the first day of such special
dividend period, it has assets with an aggregate discounted value at least
equal to the Basic Maintenance Amount (as defined below), and the Trust has
provided notice of such designation and a Basic Maintenance Report to each
rating agency then rating the Preferred Shares at the request of the Trust.

The dividend payment date for any such special dividend period will be
set out in the notice designating the special dividend period. In addition,
for special dividend periods of at least 91 days, dividend payment dates will

occur on the first business day of each calendar month within such dividend
period and on the business day following the last day of such dividend period.

Before the Trust designates a special dividend period: (i) at least seven
business days (or two business days in the event the duration of the dividend
period prior to such special dividend period is less than eight days) and not
more than 30 business days before the first day of the proposed special
dividend period, the Trust will issue a press release stating its intention to
designate a special dividend period and inform the auction agent of the
proposed special dividend period by telephonic or other means and confirm it
in writing promptly thereafter and (ii) the Trust must inform the auction
agent of the proposed special dividend period by 3:00 p.m., New York City time
on the second business day before the first day of the proposed special
dividend period.

Restrictions on Dividends and Other Distributions for the Preferred Shares

So long as any Preferred Shares are outstanding, the Trust may not pay
any dividend or distribution (other than a dividend or distribution paid in
common shares or in options, warrants or rights to subscribe for or purchase
common shares) in respect of the common shares or call for redemption, redeem,
purchase or otherwise acquire for consideration any common shares (except by
conversion into or exchange for shares of the Trust ranking junior to the
Preferred Shares as to the payment of dividends and the distribution of assets
upon liquidation), unless:

o the Trust has declared and paid (or provided to the relevant
dividend paying agent) all cumulative distributions on the
Trust's outstanding preferred shares due on or prior to the date
of such common share dividend or distribution;

o the Trust has redeemed the full number of preferred shares to be
redeemed pursuant to any mandatory redemption provision in the
Trust's Governing Documents; and

o after making the distribution, the Trust meets applicable asset
coverage requirements described under " -- Rating Agency
Guidelines" and " -- Asset Maintenance Requirements."

No full distribution will be declared or made on the Preferred Shares for
any dividend period, or part thereof, unless full cumulative distributions due
through the most recent dividend payment dates therefor for all outstanding
series of preferred shares of the Trust ranking on a parity with the Preferred
Shares as to distributions have been or contemporaneously are declared and
made. If full cumulative distributions due have not been made on all
outstanding preferred shares of the Trust ranking on a parity with the
Preferred Shares as to the payment of distributions, any distributions being
paid on the preferred shares will be paid as nearly pro rata as possible in
proportion to the respective amounts of distributions accumulated but unmade
on each such series of preferred shares on the relevant dividend payment date.
The Trust's obligation to make distributions on the Preferred Shares will be
subordinate to its obligations to pay interest and principal, when due, on any
of the Trust's senior securities representing debt.

Redemption

Mandatory Redemption Relating to Asset Coverage Requirements. The Trust
may, at its option, consistent with its Governing Documents and the 1940 Act,
and in certain circumstances will be required to, mandatorily redeem Preferred
Shares in the event that:

o the Trust fails to maintain the asset coverage requirements
specified under the 1940 Act on a quarterly valuation date and
such failure is not cured on or before 60 days, in the case of
the Fixed Rate Preferred Stock, or 10 business days, in the case
of the Variable Rate Preferred Stock, following such failure; or

o the Trust fails to maintain the asset coverage requirements as
calculated in accordance with the applicable rating agency
guidelines as of any monthly valuation date, and such failure is
not cured on or before 10 business days after such valuation
date.

The redemption price for Preferred Shares subject to mandatory redemption
will be $[ ] per share for Fixed Rate Preferred Stock or $[ ] per share for
Variable Rate Preferred Stock, as stated in the prospectus supplement
accompanying the issuance of such Preferred Shares, plus an amount equal to
any accumulated but unmade distributions (whether or not earned or declared)
to the date fixed for redemption, plus (in the case of Preferred Shares
subject to a variable rate having a dividend period of more than one year) any
applicable redemption premium determined by the Board of Trustees.

The number of Preferred Shares that will be redeemed in the case of a
mandatory redemption will equal the minimum number of outstanding Preferred
Shares, the redemption of which, if such redemption had occurred immediately
prior to the opening of business on the applicable cure date, would have
resulted in the relevant asset coverage requirement having been met or, if the
required asset coverage cannot be so restored, all of the Preferred Shares. In
the event that Preferred Shares are redeemed due to a failure to satisfy the
1940 Act asset coverage requirements, the Trust may, but is not required to,
redeem a sufficient number of Preferred Shares so that the Trust's assets
exceed the asset coverage requirements under the 1940 Act after the redemption
by 10% (that is, 220% asset coverage). In the event that Preferred Shares are
redeemed due to a failure to satisfy applicable rating agency guidelines, the
Trust may, but is not required to, redeem a sufficient number of Preferred
Shares so that the Trust's discounted portfolio value (as determined in
accordance with the applicable rating agency guidelines) after redemption
exceeds the asset coverage requirements of each applicable rating agency by up
to 10% (that is, 110% rating agency asset coverage). In addition, as discussed
under " -- Optional Redemption of the Preferred Shares" below, the Trust
generally may redeem Preferred Shares subject to a variable rate, in whole or
in part, at its option at any time (usually on a dividend or distribution
payment date), other than during a non-call period.

If the Trust does not have fund legally available for the redemption of,
or is otherwise unable to redeem, all the Preferred Shares to be redeemed on
any redemption date, the Trust will redeem on such redemption date that number
of shares for which it has legally available funds, or is otherwise able to
redeem, from the holders whose shares are to be redeemed ratably on the basis
of the redemption price of such shares, and the remainder of those shares to
be redeemed will be redeemed on the earliest practicable date on which the
Trust will have funds legally available for the redemption of, or is otherwise
able to redeem, such shares upon written notice of redemption.

If fewer than all of the Trust's outstanding Preferred Shares are to be
redeemed, the Trust, at its discretion and subject to the limitations of the
Governing Documents and 1940 Act, will select the one or more series of
Preferred Shares from which shares will be redeemed and the amount of
Preferred Shares to be redeemed from each such series. If less than all
Preferred Shares of a series are to be redeemed, such redemption will be made
as among the holders of that series pro rata in accordance with the respective
number of shares of such series held by each such holder on the record date
for such redemption (or by such other equitable method as the Trust may
determine). If fewer than all the Preferred Shares held by any holder are to
be redeemed, the notice of redemption mailed to such holder will specify the
number of shares to be redeemed from such holder, which may be expressed as a
percentage of shares held on the applicable record date.

Optional Redemption of Fixed Rate Preferred Stock. The Preferred Shares
will not be subject to optional redemption by the Trust until [ ], and only if
such redemption is necessary, in the judgment of the Trust, to maintain the
Trust's status as a regulated investment company under the Code. Commencing on
[ ] and thereafter, the Trust may at any time redeem Preferred Shares in whole
or in part for cash at a redemption price per share equal to $[ ] per share
plus accumulated and unmade distributions (whether or not earned or declared)
to the redemption date. Such redemptions are subject to the notice
requirements set forth under " -- Redemption Procedures" and the limitations
of the Governing Documents and 1940 Act.

Optional Redemption of Variable Rate Preferred Stock.. The Trust
generally may redeem Preferred Shares subject to a variable rate, if issued,
in whole or in part, at its option at any time (usually on a dividend or
distribution payment date), other than during a non-call period. The Trust may
designate a non-call period during a dividend period of more than seven days.
In the case of such Preferred Shares having a dividend period of one year or
less, the redemption price per share will equal $[ ] plus an amount equal to
any accumulated but unmade distributions thereon (whether or not earned or
declared) to the redemption date, and in the case of such Preferred Shares
having a dividend period of more than one year, for the redemption price per
share will equal $[ ] plus any redemption premium applicable during such
dividend period. Such redemptions are subject to the notice

requirements set forth under " -- Redemption Procedures" and the limitations
of the Governing Documents and 1940 Act.

Redemption Procedures. A notice of redemption with respect to an optional
redemption will be given to the holders of record of Preferred Shares selected
for redemption not less than 15 days (subject to NYSE requirements), in the
case of the Preferred Shares subject to a fixed rate, and not less than seven
days in the case of the Preferred Shares subject to a variable rate, nor, in
both cases, more than 40 days prior to the date fixed for redemption.
Preferred shareholders may receive shorter notice in the event of a mandatory
redemption. Each notice of redemption will state (i) the redemption date, (ii)
the number or percentage of Preferred Shares to be redeemed (which may be
expressed as a percentage of such shares outstanding), (iii) the CUSIP
number(s) of such shares, (iv) the redemption price (specifying the amount of
accumulated distributions to be included therein), (v) the place or places
where such shares are to be redeemed, (vi) that distributions on the shares to
be redeemed will cease to accumulate on such redemption date, (vii) the
provision of the Statement of Preferences, as applicable, under which the
redemption is being made and (viii) any conditions precedent to such
redemption. No defect in the notice of redemption or in the mailing thereof
will affect the validity of the redemption proceedings, except as required by
applicable law.

The holders of any Preferred Shares, whether subject to a variable or fixed
rate, will not have the right to redeem any of their shares at their option.

The following table provides information about the Trust's outstanding shares
as of December 31, 2006.

Amount
Title of Class Amount Authorized Outstanding

Common Shares Unlimited 34,511,355

Preferred Shares Unlimited 0

Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Trust, the holders of Preferred
Shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per Preferred Share
plus accrued and unpaid dividends, whether or not declared, before any
distribution of assets is made to holders of common shares. After payment of
the full amount of the liquidating distribution to which they are entitled,
the holders of Preferred Shares will not be entitled to any further
participation in any distribution of assets by the Trust.

Voting Rights. The Investment Company Act requires that the holders of
any Preferred Shares, voting separately as a single class, have the right to
elect at least two trustees at all times. The remaining trustees will be
elected by holders of common shares and Preferred Shares, voting together as a
single class. In addition, subject to the prior rights, if any, of the holders
of any other class of senior securities outstanding, the holders of any
Preferred Shares have the right to elect a majority of the trustees of the
Trust at any time two years' dividends on any Preferred Shares are unpaid. The
Investment Company Act also requires that, in addition to any approval by
shareholders that might otherwise be required, the approval of the holders of
a majority of any outstanding Preferred Shares, voting separately as a class,
would be required to (i) adopt any plan of reorganization that would adversely
affect the Preferred Shares, and (ii) take any action requiring a vote of
security holders under Section 13(a) of the Investment Company Act, including,
among other things, changes in the Trust's subclassification as a closed-end
investment company or changes in its fundamental investment restrictions. As a
result of these voting rights, the Trust's ability to take any such actions
may be impeded to the extent that there are any Preferred Shares outstanding.
The board of trustees presently intends that, except as otherwise indicated in
this prospectus and except as otherwise required by applicable law, holders of
Preferred Shares will have equal voting rights with holders of common shares
(one vote per share, unless otherwise required by the Investment Company Act)
and will vote together with holders of common shares as a single class.

The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each
case be in addition to any other vote required to authorize the action in
question.

Redemption, Purchase and Sale of Preferred Shares by the Trust. The terms
of the Preferred Shares are expected to provide that (i) they are redeemable
by the Trust in whole or in part at the original purchase price per share plus
accrued dividends per share, (ii) the Trust may tender for or purchase
Preferred Shares and (iii) the Trust may subsequently resell any shares so
tendered for or purchased. Any redemption or purchase of Preferred Shares by
the Trust will reduce the leverage applicable to the common shares, while any
resale of shares by the Trust will increase that leverage.

Other Shares

The board of trustees (subject to applicable law and the Trust's
Agreement and Declaration of Trust) may authorize an offering, without the
approval of the holders of either common shares or Preferred Shares, of other
classes of shares, or other classes or series of shares, as they determine to
be necessary, desirable or appropriate, having such terms, rights,
preferences, privileges, limitations and restrictions as the board of trustees
see fit. The Trust currently does not expect to issue any other classes of
shares, or series of shares, except for the common shares and the Preferred
Shares.

Credit Facility. The Trust is currently using leverage through borrowings
from a credit facility. The Trust has entered into definitive secured loan
agreements with Scotia to borrow up to $ (the "Loan Agreement"). Such
borrowings constitute financial leverage. The Loan Agreement contains covenants
that may limit the Trust's ability to: (i) pay dividends in certain
circumstances, (ii) incur additional debt and (iii) change its fundamental
investment policies and engage in certain transactions, including mergers and
consolidations. For instance, the Trust agreed not to purchase assets not
contemplated by the Investment Policies and Restrictions in the Prospectus in
effect when the Loan Agreement became effective. Furthermore, the Trust may not
incur additional debt from any other party, except for in limited circumstances
(e.g. in the ordinary course of business). In addition, the Loan Agreement
contains a covenant requiring asset coverage ratios that may be more stringent
than those required by the Investment Company Act. Any senior security
representing indebtedness, as defined in Section 18(g) of the 1940 Act, must
have asset coverage of at least 300%. The Trust may use proceeds from the
Preferred Shares to pay its obligation under the Loan Agreement or the Preferred
Shares may constitute additional leverage.

ANTI-TAKEOVER PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST

The Agreement and Declaration of Trust includes provisions that could
have the effect of limiting the ability of other entities or persons to
acquire control of the Trust or to change the composition of its board of
trustees. This could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control over the Trust. Such
attempts could have the effect of increasing the expenses of the Trust and
disrupting the normal operation of the Trust. The board of trustees is divided
into three classes, with the terms of one class expiring at each annual
meeting of shareholders. At each annual meeting, one class of trustees is
elected to a three-year term. This provision could delay for up to two years
the replacement of a majority of the board of trustees. A trustee may be
removed from office (for cause, and not without cause) by the action of a
majority of the remaining trustees followed by a vote of the holders of at
least 75% of the shares then entitled to vote for the election of the
respective trustee.

In addition, the Trust's Agreement and Declaration of Trust requires the
favorable vote of a majority of the Trust's board of trustees followed by the
favorable vote of the holders of at least 75% of the outstanding shares of
each affected class or series of the Trust, voting separately as a class or
series, to approve, adopt or authorize certain transactions with 5% or greater
holders of a class or series of shares and their associates, unless the
transaction has been approved by at least 80% of the trustees, in which case
"a majority of the outstanding voting securities" (as defined in the
Investment Company Act) of the Trust shall be required. For purposes of these
provisions, a 5% or greater holder of a class or series of shares (a
"Principal Shareholder") refers to any person who, whether directly or

indirectly and whether alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding shares of all outstanding
classes or series of shares of beneficial interest of the Trust.

The 5% holder transactions subject to these special approval requirements
are: the merger or consolidation of the Trust or any subsidiary of the Trust
with or into any Principal Shareholder; the issuance of any securities of the
Trust to any Principal Shareholder for cash, except pursuant to any automatic
dividend reinvestment plan; the sale, lease or exchange of all or any
substantial part of the assets of the Trust to any Principal Shareholder,
except assets having an aggregate fair market value of less than 2% of the
total assets of the Trust, aggregating for the purpose of such computation all
assets sold, leased or exchanged in any series of similar transactions within
a twelve-month period; or the sale, lease or exchange to the Trust or any
subsidiary of the Trust, in exchange for securities of the Trust, of any
assets of any Principal Shareholder, except assets having an aggregate fair
market value of less than 2% of the total assets of the Trust, aggregating for
purposes of such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period.

To convert the Trust to an open-end investment company, the Trust's
Agreement and Declaration of Trust requires the favorable vote of a majority
of the board of the trustees followed by the favorable vote of the holders of
at least 75% of the outstanding shares of each affected class or series of
shares of the Trust, voting separately as a class or series, unless such
amendment has been approved by at least 80% of the trustees, in which case "a
majority of the outstanding voting securities" (as defined in the Investment
Company Act) of the Trust shall be required. The foregoing vote would satisfy
a separate requirement in the Investment Company Act that any conversion of
the Trust to an open-end investment company be approved by the shareholders.
If approved in the foregoing manner, conversion of the Trust to an open-end
investment company could not occur until 90 days after the shareholders'
meeting at which such conversion was approved and would also require at least
30 days' prior notice to all shareholders. Following any such conversion, it
is possible that certain of the Trust's investment policies and strategies
would have to be modified to assure sufficient portfolio liquidity. In the
event of conversion, the common shares would cease to be listed on the New
York Stock Exchange or other national securities exchanges or market systems.
Shareholders of an open-end investment company may require the company to
redeem their shares at any time, except in certain circumstances as authorized
by or under the Investment Company Act, at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption.
The Trust expects to pay all such redemption requests in cash, but reserves
the right to pay redemption requests in a combination of cash or securities.
If such partial payment in securities were made, investors may incur brokerage
costs in converting such securities to cash. If the Trust were converted to an
open-end fund, it is likely that new shares would be sold at net asset value
plus a sales load. The board of trustees believes, however, that the
closed-end structure is desirable in light of the Trust's investment
objectives and policies. Therefore, you should assume that it is not likely
that the board of trustees would vote to convert the Trust to an open-end
fund.

For the purposes of calculating "a majority of the outstanding voting
securities" under the Trust's Agreement and Declaration of Trust, each class
and series of the Trust shall vote together as a single class, except to the
extent required by the Investment Company Act or the Trust's Agreement and
Declaration of Trust, with respect to any class or series of shares. If a
separate class vote is required, the applicable proportion of shares of the
class or series, voting as a separate class or series, also will be required.

The Declaration of Trust also provides that the Trust may be liquidated
upon the approval of 80% of the trustees.

The board of trustees has determined that provisions with respect to the
board of trustees and the shareholder voting requirements described above,
which voting requirements are greater than the minimum requirements under
Delaware law or the Investment Company Act, are in the best interest of
shareholders generally. Reference should be made to the Trust's Agreement and
Declaration of Trust, on file with the Commission for the full text of these
provisions.

CLOSED-END FUND STRUCTURE

The Trust is a non-diversified, closed-end management investment company
(commonly referred to as a closed-end fund). Closed-end funds differ from
open-end funds (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange
and do not redeem their shares at the

request of the shareholder. This means that if you wish to sell your shares of a
closed-end fund you must trade them on the market like any other stock at the
prevailing market price at that time. In a mutual fund, if the shareholder
wishes to sell shares of the fund, the mutual fund will redeem or buy back the
shares at "net asset value" (less a redemption fee, if applicable, or contingent
deferred sales charge, if applicable). Also, mutual funds generally offer new
shares on a continuous basis to new investors, and closed-end funds generally do
not. The continuous inflows and outflows of assets in a mutual fund can make it
difficult to manage a mutual fund's investments. By comparison, closed-end funds
are generally able to stay more fully invested in securities that are consistent
with their investment objective and also have greater flexibility to make
certain types of investments and to use certain investment strategies, such as
financial leverage and investments in illiquid securities.

Shares of closed-end funds frequently trade at a discount to their net
asset value. Because of this possibility and the recognition that any such
discount may not be in the interest of shareholders, the Trust's board of
trustees might consider from time to time engaging in open-market repurchases,
tender offers for shares or other programs intended to reduce the discount. We
cannot guarantee or assure, however, that the Trust's board of trustees will
decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in the shares trading
at a price equal or close to net asset value per share. The board of trustees
might also consider converting the Trust to an open-end mutual fund, which
would also require a vote of the shareholders of the Trust.

REPURCHASE OF COMMON SHARES

Shares of closed-end investment companies often trade at a discount to
their net asset value, and the Trust's common shares may also trade at a
discount to their net asset value, although it is possible that they may trade
at a premium above net asset value. The market price of the Trust's common
shares will be determined by such factors as relative demand for and supply of
such common shares in the market, the Trust's net asset value, general market
and economic conditions and other factors beyond the control of the Trust. See
"Net Asset Value." Although the Trust's common shareholders will not have the
right to redeem their common shares, the Trust may take action to repurchase
common shares in the open market or make tender offers for its common shares.
This may have the effect of reducing any market discount from net asset value.

There is no assurance that, if action is undertaken to repurchase or
tender for common shares, such action will result in the common shares trading
at a price which approximates their net asset value. Although share
repurchases and tenders could have a favorable effect on the market price of
the Trust's common shares, you should be aware that the acquisition of common
shares by the Trust will decrease the capital of the Trust and, therefore, may
have the effect of increasing the Trust's expense ratio and decreasing the
asset coverage with respect to any Preferred Shares outstanding or borrowings.
Any share repurchases or tender offers will be made in accordance with
requirements of the Securities Exchange Act of 1934, as amended, the
Investment Company Act and the principal stock exchange on which the common
shares are traded.

TAX MATTERS

The following discussion summarizes certain U.S. federal income tax
considerations affecting the Trust and its shareholders that are U.S. persons
as defined for U.S. federal income tax purposes. For more information, please
see the Statement of Additional Information, under "Tax Matters." Because each
shareholder's tax situation is unique, ask your tax professional about the tax
consequences to you of an investment in the Trust.

The Trust intends to qualify annually as a regulated investment company
under the Internal Revenue Code. Accordingly, the Trust generally will not be
subject to U.S. federal income tax on its net investment income and net
realized capital gains that the Trust distributes to its shareholders. The
Trust expects to pay its shareholders annually at least 90% of such income.

Distributions paid to both common and preferred shareholders by the Trust
from its net realized long-term capital gains, if any, that the Trust
designates as capital gains dividends ("capital gain dividends") are taxable
as long-term capital gains, regardless of how long you have held your shares.
All other dividends paid to you by the Trust (including dividends from
short-term capital gains) from its current or accumulated earnings and profits
("ordinary income dividends") are generally subject to tax as ordinary income.

In general, the Trust does not expect that a significant portion of its
ordinary income dividends will be treated as qualified dividend income, which
is eligible for taxation at the rates applicable to long-term capital gains in
the case of individual shareholders, or that a corporate shareholder will be
able to claim a dividends received reduction with respect to any significant
portion of Trust distributions.

Dividends and other taxable distributions are taxable to you even if they
are reinvested in additional Common Shares of the Trust. Dividends and other
distributions paid by the Trust are generally treated as received by you at
the time the dividend or distribution is made. If, however, the Trust pays you
a dividend in January that was declared in the previous October, November or
December and you were the shareholder of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Trust and received by you on December 31 of the year in which the
dividend was declared.

The price of Common or Preferred Shares purchased at any time may reflect
the amount of a forthcoming distribution. If you purchase Common Shares just
prior to a distribution, you will receive a distribution that will be taxable
to you even though it represents in part a return of your invested capital.

The Trust will send you information after the end of each year setting
forth the amount and tax status of any distributions paid to you by the Trust.
Ordinary income dividends and capital gain dividends may also be subject to
state and local taxes.

If you sell or otherwise dispose of Common or Preferred Shares of the
Trust (including exchange them for Common or Preferred Shares of another
fund), you will generally recognize a gain or loss in an amount equal to the
difference between your tax basis in such shares of the Trust and the amount
you receive in exchange for such shares. If you hold your Common or Preferred
Shares as capital assets, any such gain or loss generally will be long-term
capital gain or loss if you have held such shares for more than one year at
the time of sale.

The Trust may be required to withhold, for U.S. federal backup
withholding tax purposes, a portion of the dividends, distributions and
redemption proceeds payable to a non-corporate shareholder who fails to
provide the Trust (or its agent) with the shareholder's correct taxpayer
identification number (in the case of an individual, generally, such
individual's social security number) or to make the required certification, or
who has been notified by the Internal Revenue Service that such shareholder is
subject to backup withholding. Certain shareholders are exempt from backup
withholding. Backup withholding is not an additional tax and any amount
withheld may be refunded or credited against your U.S. federal income tax
liability, if any, provided that you furnish the required information to the
IRS.

The discussions set forth herein and in the Statement of Additional
Information do not constitute tax advice, and you are urged to consult your
own tax advisor to determine the specific U.S. federal, state, local and
foreign tax consequences to you of investing in the Trust.

CUSTODIAN AND TRANSFER AGENT

The Custodian of the assets of the Trust will be PFPC Trust Company (8800
Tinicum Blvd., 4th Floor, Philadelphia, PA 19153; telephone (877) 665-1287).
The Custodian will perform custodial, fund accounting and portfolio accounting
services. PFPC, Inc. (301 Bellevue Parkway, Wilmington, Delaware 19809;
telephone (877) 665-1287) will serve as the Trust's transfer agent with
respect to its common shares.

LEGAL OPINIONS

Certain legal matters in connection with the common shares will be passed
upon for the Trust by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York.

PRIVACY PRINCIPLES OF THE TRUST

The Trust is committed to maintaining the privacy of its shareholders and
to safeguarding their non-public personal information. The following
information is provided to help you understand what personal information the

Trust collects, how the Trust protects that information and why, in certain
cases, the Trust may share information with select other parties.

Generally, the Trust does not receive any non-public personal information
relating to its shareholders, although certain non-public personal information
of its shareholders may become available to the Trust. The Trust does not
disclose any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third
party administrator).

The Trust restricts access to non-public personal information about its
shareholders to employees of the Trust's Investment Adviser and its affiliates
with a legitimate business need for the information. The Trust maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its shareholders.

TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION

Page
----

Use of Proceeds.............................................................B-3
Investment Restrictions.....................................................B-3
Investment Policies and Techniques..........................................B-4
Other Investment Policies and Techniques....................................B-12

Management of the Trust.....................................................B-15

Portfolio Transactions and Brokerage........................................B-21
Repurchase of Common Shares.................................................B-21
Tax Matters.................................................................B-22
Experts.....................................................................B-26
Additional Information......................................................B-26

Appendix A..................................................................A-1
Appendix B..................................................................B-1

Highland Credit Strategies Fund

Statement of Additional Information
Dated [ ], 2007

Highland Credit
Strategies Fund

Statement of Additional Information

Highland Credit Strategies Fund (the "Trust") is a non-diversified,
closed-end management investment company registered under the Investment
Company Act with no operating history. This Statement of Additional
Information registered under the Investment Company Act does not constitute a
prospectus, but should be read in conjunction with the prospectus relating
thereto dated [ ], 2007. This Statement of Additional Information does not
include all information that a prospective investor should consider before
purchasing common shares, and investors should obtain and read the prospectus
prior to purchasing such shares. A copy of the prospectus may be obtained
without charge by calling 1-877-665-1287. You may also obtain a copy of the
prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the
prospectus.

TABLE OF CONTENTS

Page
----

Use of Proceeds.............................................................B-2
Investment Restrictions.....................................................B-2

Investment Policies and Techniques..........................................B-4
Other Investment Policies and Techniques....................................B-12
Management of the Trust.....................................................B-15
Portfolio Transactions and Brokerage........................................B-21
Repurchase of Common Shares.................................................B-21
Tax Matters.................................................................B-22
Experts.....................................................................B-26
Additional Information......................................................B-26
Appendix A..................................................................A-1
Appendix B..................................................................B-1

This Statement of Additional Information is dated [ ], 2007

B-2

USE OF PROCEEDS

Pending investment in securities that meet the Trust's investment
objectives and policies, the net proceeds of this offering will be invested in
short-term debt securities of the type described under "Investment Policies
and Techniques -- Short-Term Debt Securities." We currently anticipate that
the Trust will be able to invest primarily in securities that meet the Trust's
investment objectives and policies within approximately three months after the
completion of this offering.

INVESTMENT RESTRICTIONS

Except as described below, the Trust, as a fundamental policy, may not,
without the approval of the holders of a "majority of the outstanding"(1)
common shares and any Preferred Shares, if any, voting together as a single
class, and of the holders of a majority of the outstanding Preferred Shares,
if any, voting as a separate class:

(1) invest 25% or more of the value of its total assets in any
single industry or group of industries;

(2) issue senior securities or borrow money other than as
permitted by the Investment Company Act or pledge its assets other
than to secure such issuances or in connection with hedging
transactions, short sales, securities lending, when issued and
forward commitment transactions and similar investment strategies;

(3) make loans of money or property to any person, except
through loans of portfolio securities up to a maximum of 33 1/3% of
the Trust's total assets, the purchase of debt securities, including
bank loans (senior loans) and participations therein, or the entry
into repurchase agreements up to a maximum of 33 1/3% of the Trust's
total assets;

(4) underwrite the securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities or the sale of its own securities, the Trust may be deemed
to be an underwriter;

(5) purchase or sell real estate, except that the Trust may
invest in securities of companies that deal in real estate or are
engaged in the real estate business, including real estate investment
trusts and real estate operating companies, and instruments secured
by real estate or interests therein and the Trust may acquire, hold
and sell real estate acquired through default, liquidation, or other
distributions of an interest in real estate as a result of the
Trust's ownership of such other assets; or

(6) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by applicable law
without the Trust becoming subject to registration with the Commodity
Futures Trading Commission (the "CFTC") as a commodity pool.

As currently relevant to the Trust, the Investment Company Act requires
an asset coverage of 200% for a closed-end fund issuing Preferred Shares and
for borrowings exceeding 5% of the Trust's assets (excluding temporary
borrowings).

(1) When used with respect to shares of the Trust, "majority of the
outstanding" shares means (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is
less.

B-3

The Trust is also subject to the following non-fundamental restrictions
and policies, which may be changed by the board of trustees and without
shareholder approval. The Trust may not:

(1) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless after giving effect
to such sale, the market value of all securities sold short does not
exceed 25% of the value of the Trust's total assets and the Trust's
aggregate short sales of a particular class of securities of an
issuer does not exceed 25% of the then outstanding securities of that
class. The Trust may also make short sales "against the box" without
respect to such limitations. In this type of short sale, at the time
of the sale, the Trust owns or has the immediate and unconditional
right to acquire at no additional cost the identical security; and

(2) purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company Act or any
exemptive relief obtained thereunder. Under the Investment Company
Act, the Trust may invest up to 10% of its total assets in the
aggregate in shares of other investment companies and up to 5% of its
total assets in any one investment company, provided the investment
does not represent more than 3% of the voting stock of the acquired
investment company at the time such shares are purchased. As a
shareholder in any investment company, the Trust will bear its
ratable share of that investment company's expenses, and will remain
subject to payment of the Advisory Fees and other expenses with
respect to assets so invested. Holders of common shares will
therefore be subject to duplicative expenses to the extent the Trust
invests in other investment companies. In addition, the securities of
other investment companies may be leveraged and will therefore be
subject to the risks of leverage. The net asset value and market
value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by
unleveraged shares.

In addition, to comply with the federal tax requirements for
qualification as a registered investment company, the Trust's investments must
meet certain diversification requirements. See "Tax Matters."

The percentage limitations applicable to the Trust's portfolio described
in the prospectus and this Statement of Additional Information apply only at
the time of investment, except that the percentage limitation with respect to
borrowing applies at all times, and the Trust will not be required to sell
securities due to subsequent changes in the value of securities it owns.

INVESTMENT POLICIES AND TECHNIQUES

The following information supplements the discussion of the Trust's
investment objectives, policies and techniques that are described in the
prospectus.

Short-Term Debt Securities

(1) For temporary defensive purposes or to keep cash on hand, the Trust may
invest up to 100% of its total assets in cash equivalents and short-term debt
securities. Short-term debt investments are defined to include, without
limitation, the following: U.S. Government securities, including bills, notes
and bonds differing as to maturity and rates of interest that are either issued
or guaranteed by the U.S. Treasury or by U.S. Government agencies or
instrumentalities. U.S. Government securities include securities issued by (a)
the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, and Government
National Mortgage Association, whose securities are supported by the full faith
and credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and Tennessee Valley Authority, whose securities are
supported by the right of the agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association, whose securities are supported by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its credit. While the U.S.
Government provides financial support to such U.S. Government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do so since
it is

B-4

not so obligated by law. The U.S. Government, its agencies and
instrumentalities do not guarantee the market value of their securities.
Consequently, the value of such securities may fluctuate.

(2) Certificates of deposit issued against funds deposited in a bank or a
savings and loan association. Such certificates are for a definite period of
time, earn a specified rate of return, and are normally negotiable. The issuer
of a certificate of deposit agrees to pay the amount deposited plus interest
to the bearer of the certificate on the date specified thereon. Certificates
of deposit purchased by the Trust may not be fully insured by the Federal
Deposit Insurance Corporation.

(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Trust purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and
redeliver such securities to the seller, who also simultaneously
agrees to buy back the securities at a fixed price and time. This
assures a predetermined yield for the Trust during its holding
period, since the resale price is always greater than the purchase
price and reflects an agreed-upon market rate. Such actions afford an
opportunity for the Trust to invest temporarily available cash. The
Trust may enter into repurchase agreements only with respect to
obligations of the U.S. Government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances
in which the Trust may invest. Repurchase agreements may be
considered loans to the seller, collateralized by the underlying
securities. The risk to the Trust is limited to the ability of the
seller to pay the agreed-upon sum on the repurchase date; in the
event of default, the repurchase agreement provides that the Trust is
entitled to sell the underlying collateral. If the value of the
collateral declines after the agreement is entered into, and if the
seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Trust
could incur a loss of both principal and interest. Highland monitors
the value of the collateral at the time the action is entered into
and at all times during the term of the repurchase agreement.
Highland does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon repurchase price
to be paid to the Trust. If the seller were to be subject to a
federal bankruptcy proceeding, the ability of the Trust to liquidate
the collateral could be delayed or impaired because of certain
provisions of the bankruptcy laws.

(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued
by corporations to finance their current operations. Master demand
notes are direct lending arrangements between the Trust and a
corporation. There is no secondary market for such notes. However,
they are redeemable by the Trust at any time. Highland will consider
the financial condition of the corporation (e.g., earning power, cash
flow and other liquidity ratios) and will continually monitor the
corporation's ability to meet all of its financial obligations,
because the Trust's liquidity might be impaired if the corporation
were unable to pay principal and interest on demand. Investments in
commercial paper will be limited to commercial paper rated in the
highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate
of interest.

Equity Securities

The Trust may invest in equity securities including preferred stocks,
convertible securities, warrants and depository receipts.

B-5

Preferred Stock. Preferred stock has a preference over common stock in
liquidation (and generally dividends as well) but is subordinated to the
liabilities of the issuer in all respects. As a general rule, the market value
of preferred stock with a fixed dividend rate and no conversion element varies
inversely with interest rates and perceived credit risk, while the market
price of convertible preferred stock generally also reflects some element of
conversion value. Because preferred stock is junior to debt securities and
other obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in a
more senior debt security with similar stated yield characteristics. Unlike
interest payments on debt securities, preferred stock dividends are payable
only if declared by the issuer's board of directors. Preferred stock also may
be subject to optional or mandatory redemption provisions.

B-4

Convertible Securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock or other equity security of
the same or a different issuer within a particular period of time at a
specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible income securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common
stocks of the same or similar issuers, but lower yields than comparable
nonconvertible securities. The value of a convertible security is influenced
by changes in interest rates, with investment value declining as interest
rates increase and increasing as interest rates decline. The credit standing
of the issuer and other factors also may have an effect on the convertible
security's investment value. Convertible securities rank senior to common
stock in a corporation's capital structure but are usually subordinated to
comparable nonconvertible securities. Convertible securities may be subject to
redemption at the option of the issuer at a price established in the
convertible security's governing instrument.

Warrants. Warrants, which are privileges issued by corporations enabling
the owners to subscribe to and purchase a specified number of shares of the
corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The
purchase of warrants involves the risk that the Trust could lose the purchase
value of a right or warrant if the right to subscribe to additional shares is
not exercised prior to the warrants' expiration. Also, the purchase of
warrants involves the risk that the effective price paid for the warrant added
to the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security.

Depository Receipts. The Trust may invest in both sponsored and
unsponsored American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar
global instruments. ADRs typically are issued by an American bank or trust
company and evidence ownership of underlying securities issued by a non-U.S.
corporation. EDRs, which are sometimes referred to as Continental Depository
Receipts, are receipts issued in Europe, typically by non-U.S. banks and trust
companies, that evidence ownership of either non-U.S. or U.S. underlying
securities. GDRs are depository receipts structured like global debt issues to
facilitate trading on an international basis. Unsponsored ADR, EDR and GDR
programs are organized independently and without the cooperation of the issuer
of the underlying securities. As a result, available information concerning
the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the
prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such
instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs
may present additional investment considerations of non-U.S. securities.

Variable and Floating Rate Instruments

The Trust may purchase rated and unrated variable and floating rate
instruments. These instruments may include variable amount master demand notes
that permit the indebtedness thereunder to vary in addition to providing for
periodic adjustments in the interest rate. The Trust may invest in leveraged
inverse floating rate debt instruments ("Inverse Floaters"). The interest rate
of an Inverse Floater resets in the opposite direction from the market rate of
interest to which it is indexed. An Inverse Floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
degree of leverage inherent in Inverse Floaters is associated with greater
volatility in their market values. Issuers of unrated variable and floating
rate instruments must satisfy the same criteria as set forth above for the
Trust. The absence of an active secondary market with respect to particular
variable and floating rate instruments, however,

B-6

could make it difficult for the Trust to dispose of a variable or floating rate
instrument if the issuer defaulted on its payment obligation or during periods
when the Trust is not entitled to exercise its demand rights.

With respect to purchasable variable and floating rate instruments,
Highland will consider the earning power, cash flows and liquidity ratios of
the issuers and guarantors of such instruments and, if the instruments are
subject to a demand feature, will monitor their financial status to meet
payment on demand. Such instruments may include variable amount master demand
notes that permit the indebtedness thereunder to vary in addition to providing
for periodic adjustments in the interest rate. The absence of an active
secondary market with respect to particular variable and floating rate
instruments could make it difficult for the Trust to dispose of a variable or
floating rate note if the issuer defaulted on its payment obligation or during
periods that the Trust is not entitled to exercise its demand rights, and the
Trust could, for these or other reasons, suffer a loss, with respect to such
instruments. In

B-5

determining average-weighted portfolio maturity, an instrument
will be deemed to have a maturity equal to either the period remaining until
the next interest rate adjustment or the time the Trust involved can recover
payment of principal as specified in the instrument, depending on the type of
instrument involved.

Derivative Transactions and Risk Management

Consistent with its investment objectives and policies set forth in the
prospectus and in addition to its option strategy, the Trust may also enter
into certain risk management transactions. In particular, the Trust may
purchase and sell futures contracts, exchange listed and over-the-counter put
and call options on securities, equity and other indices and futures
contracts, forward foreign currency contracts, and may enter into various
interest rate transactions. Derivative Transactions may be used to attempt to
protect against possible changes in the market value of the Trust's portfolio
resulting from fluctuations in the securities markets and changes in interest
rates, to protect the Trust's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes
and to establish a position in the securities markets as a temporary
substitute for purchasing particular securities. Any or all of these
Derivative Transactions may be used at any time. There is no particular
strategy that requires use of one technique rather than another. Use of any
Derivative Transaction is a function of market conditions. The ability of the
Trust to manage them successfully will depend on Highland's ability to predict
pertinent market movements as well as sufficient correlation among the
instruments, which cannot be assured. The Derivative Transactions that the
Trust may use are described below. Although the Trust recognizes it is not
likely that it will use certain of these strategies in light of its investment
policies, it nevertheless describes them here because the Trust may seek to
use these strategies in certain circumstances.

Futures Contracts and Options on Futures Contracts. In connection with
its Derivative Transactions and other risk management strategies, the Trust
may also enter into contracts for the purchase or sale for future delivery
("futures contracts") of securities, aggregates of securities or indices or
prices thereof, other financial indices and U.S. government debt securities or
options on the above. The Trust will engage in such transactions only for bona
fide risk management and other portfolio management purposes.

Forward Foreign Currency Contracts. The Trust may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed amount
of U.S. dollars or another foreign currency. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the forward
currency contract agreed upon by the parties, at a price set at the time the
forward currency contract is entered into. Forward currency contracts are
traded directly between currency traders (usually large commercial banks) and
their customers.

The Trust may engage in various forward currency contract strategies:

o The Trust may purchase a forward currency contract to lock in
the U.S. dollar price of a security denominated in a foreign
currency that the Trust intends to acquire. The Trust may sell
a forward currency contract to lock in the U.S. dollar
equivalent of the proceeds from the anticipated sale of a
security or a dividend or interest payment denominated in a
foreign currency.

o The Trust may also use forward currency contracts to shift the
Trust's exposure to foreign currency exchange rate changes
from one currency to another. For example, if the Trust owns
securities denominated in a foreign currency and Highland
believes that currency will decline relative to another

B-7

currency, the Trust might enter into a forward currency
contract to sell the appropriate amount of the first foreign
currency with payment to be made in the second currency.

o The Trust may also purchase forward currency contracts to
enhance income when Highland anticipates that the foreign
currency will appreciate in value but securities denominated
in that currency do not present attractive investment
opportunities.

o The Trust may also use forward currency contracts to offset
against a decline in the value of existing investments
denominated in a foreign currency. Such a transaction would
tend to offset both positive

B-6

and negative currency
fluctuations, but would not offset changes in security values
caused by other factors.

o The Trust could also enter into a forward currency contract to
sell another currency expected to perform similarly to the
currency in which the Trust's existing investments are
denominated. This type of transaction could offer advantages
in terms of cost, yield or efficiency, but may not offset
currency exposure as effectively as a simple forward currency
transaction to sell U.S. dollars. This type of transaction may
result in losses if the currency sold does not perform
similarly to the currency in which the Trust's existing
investments are denominated.

o The Trust may also use forward currency contracts in one
currency or a basket of currencies to attempt to offset
against fluctuations in the value of securities denominated in
a different currency if Highland anticipates that there will
be a correlation between the two currencies.

o The cost to the Trust of engaging in forward currency
contracts varies with factors such as the currency involved,
the length of the contract period and the market conditions
then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or
commissions are involved.

o When the Trust enters into a forward currency contract, it
relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract. Failure
by the counterparty to do so would result in the loss of some
or all of any expected benefit of the transaction. Secondary
markets generally do not exist for forward currency contracts,
with the result that closing transactions generally can be
made for forward currency contracts only by negotiating
directly with the counterparty. Thus, there can be no
assurance that the Trust will in fact be able to close out a
forward currency contract at a favorable price prior to
maturity. In addition, in the event of insolvency of the
counterparty, the Trust might be unable to close out a forward
currency contract. In either event, the Trust would continue
to be subject to market risk with respect to the position, and
would continue to be required to maintain a position in
securities denominated in the foreign currency or to maintain
cash or liquid assets in a segregated account. The precise
matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because
the value of such securities, measured in the foreign
currency, will change after the forward currency contract has
been established. Thus, the Trust might need to purchase or
sell foreign currencies in the spot (cash) market to the
extent such foreign currencies are not covered by forward
currency contracts. The projection of short-term currency
market movements is extremely difficult, and the successful
execution of a short-term strategy is highly uncertain.

Calls on Securities, Indices and Futures Contracts. In addition to its
option strategy, in order to enhance income or reduce fluctuations on net
asset value, the Trust may sell or purchase call options ("calls") on
securities and indices based upon the prices of futures contracts and debt or
equity securities that are traded on U.S. and non-U.S. securities exchanges
and in the over-the-counter markets. A call option gives the purchaser of the
option the right to buy, and obligates the seller to sell, the underlying
security, futures contract or index at the exercise price at any time or at a
specified time during the option period. All such calls sold by the Trust must
be "covered" as long as the call is outstanding (i.e., the Trust must own the
instrument subject to the call or other securities or assets acceptable for
applicable segregation and coverage requirements). A call sold by the Trust
exposes the Trust during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security, index or futures contract and may require the Trust to hold an
instrument which it might otherwise have sold. The purchase of a call gives
the Trust the right to buy a security, futures contract or index at a fixed
price. Calls

B-8

on futures on securities must also be covered by assets or instruments
acceptable under applicable segregation and coverage requirements.

Puts on Securities, Indices and Futures Contracts. In addition to its
option strategy, the Trust may purchase put options ("puts") that relate to
securities (whether or not it holds such securities in its portfolio), indices
or futures contracts. For the same purposes, the Trust may also sell puts on
securities, indices or futures contracts on such securities if the Trust's
contingent obligations on such puts are secured by segregated assets
consisting of cash or liquid debt securities having a value not less than the
exercise price. In selling puts, there is a risk that the Trust may be
required to buy the underlying security at a price higher than the current
market price.

Interest Rate Transactions. Among the Derivative Transactions in which
the Trust may enter into are interest rate swaps and the purchase or sale of
interest rate caps and floors. The Trust expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio as a duration management technique or
to protect against any increase in the price of securities the Trust
anticipates purchasing at a later date. The Trust intends to use these
transactions for risk management purposes and not as a speculative investment.
The Trust will not sell interest rate caps or floors that it does not own.
Interest rate swaps involve the exchange by the Trust with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest
rate floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate floor.

The Trust may enter into interest rate swaps, caps and floors on either
an asset based or liability-based basis, depending on whether it is offsetting
volatility with respect to its assets or liabilities, and will usually enter
into interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Trust receiving or paying, as the case may be, only the
net amount of the two payments on the payment dates. Inasmuch as these
Derivative Transactions are incurred into for good faith risk management
purposes. Highland and the Trust believe such obligations do not constitute
senior securities, and, accordingly will not treat them as being subject to
its borrowing restrictions. The Trust will accrue the net amount of the
excess, if any, of the Trust's obligations over its entitlements with respect
to each interest rate swap on a daily basis and will designate on its books
and records with a custodian an amount of cash or liquid high grade securities
having an aggregate net asset value at all times at least equal to the accrued
excess. The Trust will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims paying ability of
the other party thereto is rated in the highest rating category of at least
one nationally recognized statistical rating organization at the time of
entering into such transaction. If there is a default by the other party to
such a transaction, the Trust will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. Caps and floors are more recent innovations for which
standardized documentation has not yet been developed and, accordingly, they
are less liquid than swaps.

Credit Derivatives. The Trust may engage in credit derivative
transactions. There are two broad categories of credit derivatives: default
price risk derivatives and market spread derivatives. Default price risk
derivatives are linked to the price of reference securities or loans after a
default by the issuer or borrower, respectively. Market spread derivatives are
based on the risk that changes in market factors, such as credit spreads, can
cause a decline in the value of a security, loan or index.

There are three basic transactional forms for credit derivatives: swaps,
options and structured instruments. The use of credit derivatives is a highly
specialized activity which involves strategies and risks different from those
associated with ordinary portfolio security transactions. If Highland is
incorrect in its forecasts of default risks, market spreads or other
applicable factors, the investment performance of the Trust would diminish
compared with what it would have been if these techniques were not used.
Moreover, even if Highland is correct in its forecasts, there is a risk that a
credit derivative position may correlate imperfectly with the price of the
asset or liability being purchased. There is no limit on the amount of credit
derivative transactions that may be entered into by the Trust. The Trust's
risk of loss in a credit derivative transaction varies with the form of the
transaction. For example, if the

B-9

Trust purchases a default option on a security, and if no default occurs with
respect to the security, the Trust's loss is limited to the premium it paid for
the default option. In contrast, if there is a default by the grantor of a
default option, the Trust's loss will include both the premium that it paid for
the option and the decline in value of the underlying security that the default
option protects.

Below under "General Characteristics of Risks of Derivative Transactions"
is further information about the characteristics, risks and possible benefits
of Derivative Transactions and the Trust's other policies and limitations
(which are not fundamental policies) relating to investment in futures
contracts and options. The principal risks relating to the use of futures
contracts and other Derivative Transactions are: (i) less than perfect
correlation between the prices of the instrument and the market value of the
securities in the Trust's portfolio; (ii) possible lack of a liquid secondary
market for closing out a position in such instruments; (iii) losses resulting
from interest rate or other market movements not anticipated by Highland; and
(iv) the obligation to meet additional variation margin or other payment
requirements, all of which could result in the Trust being in a worse position
than if such techniques had not been used.

Certain provisions of the Code may restrict or affect the ability of the
Trust to engage in Derivative Transactions. See "Tax Matters."

General Characteristics and Risks of Derivative Transactions

In order to manage the risk of its securities portfolio, or to enhance
income or gain as described in the prospectus, the Trust will engage in
Derivative Transactions. The Trust will engage in such activities in the
Investment Adviser's discretion, and may not necessarily be engaging in such
activities when movements in interest rates that could affect the value of the
assets of the Trust occur. The Trust's ability to pursue certain of these
strategies may be limited by applicable regulations of the CFTC. Certain
Derivative Transactions may give rise to taxable income.

Put and Call Options on Securities and Indices

The Trust may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The Trust may also purchase and sell options on
securities indices ("index options"). Index options are similar to options on
securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option
gives the holder the right to receive cash upon exercise of the option if the
level of the securities index upon which the option is based is greater, in
the case of a call, or less, in the case of a put, than the exercise price of
the option. The purchase of a put option on a security could protect the
Trust's holdings in a security or a number of securities against a substantial
decline in the market value. A call option gives the purchaser of the option
the right to buy and the seller the obligation to sell the underlying security
or index at the exercise price during the option period or for a specified
period prior to a fixed date. The purchase of a call option on a security
could protect the Trust against an increase in the price of a security that it
intended to purchase in the future. In the case of either put or call options
that it has purchased, if the option expires without being sold or exercised,
the Trust will experience a loss in the amount of the option premium plus any
related commissions. When the Trust sells put and call options, it receives a
premium as the seller of the option. The premium that the Trust receives for
selling the option will serve as a partial offset, in the amount of the option
premium, against changes in the value of the securities in its portfolio.
During the term of the option, however, a covered call seller has, in return
for the premium on the option, given up the opportunity for capital
appreciation above the exercise price of the option if the value of the
underlying security increases, but has retained the risk of loss should the
price of the underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium received on
the sale of the option. The Trust is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC Options") which are
privately negotiated with the counterparty. Listed options are issued by the
Options Clearing Corporation ("OCC") which guarantees the performance of the
obligations of the parties to such options.

The Trust's ability to close out its position as a purchaser or seller of
an exchange listed put or call option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for
the

B-10

absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
listed by the OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC Options are
purchased from or sold to dealers, financial institutions or other
counterparties which have entered into direct agreements with the Trust. With
OTC Options, such variables as expiration date, exercise price and premium will
be agreed upon between the Trust and the counterparty, without the
intermediation of a third party such as the OCC. If the counterparty fails to
make or take delivery of the securities underlying an option it has written, or
otherwise settle the transaction in accordance with the terms of that option as
written, the Trust would lose the premium paid for the option as well as any
anticipated benefit of the transaction.

The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that
the option markets close before the markets for the underlying securities,
significant price movements can take place in the underlying markets that
cannot be reflected in the option markets.

Futures Contracts and Related Options

Characteristics. The Trust may sell financial futures contracts or
purchase put and call options on such futures as an offset against anticipated
market movements. The sale of a futures contract creates an obligation by the
Trust, as seller, to deliver the specific type of financial instrument called
for in the contract at a specified future time for a specified price. Options
on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put).

Margin Requirements. At the time a futures contract is purchased or sold,
the Trust must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Trust will pay may
range from approximately 1% to approximately 5% of the value of the securities
or commodities underlying the contract. In certain circumstances, however,
such as periods of high volatility, the Trust may be required by an exchange
to increase the level of its initial margin payment. Additionally, initial
margin requirements may be increased generally in the future by regulatory
action. An outstanding futures contract is valued daily and the payment in
case of "variation margin" may be required, a process known as "marking to the
market." Transactions in listed options and futures are usually settled by
entering into an offsetting transaction, and are subject to the risk that the
position may not be able to be closed if no offsetting transaction can be
arranged.

Limitations on Use of Futures and Options on Futures. The Trust's use of
futures and options on futures will in all cases be consistent with applicable
regulatory requirements and in particular the rules and regulations of the
CFTC. The Trust currently may enter into such transactions without limit for
bona fide strategic purposes, including risk management and duration
management and other portfolio strategies. The Trust may also engage in
transactions in futures contracts or related options for non-strategic
purposes to enhance income or gain provided that the Trust will not enter into
a futures contract or related option (except for closing transactions) for
purposes other than bona fide strategic purposes, or risk management including
duration management if, immediately thereafter, the sum of the amount of its
initial deposits and premiums on open contracts and options would exceed 5% of
the Trust's liquidation value, i.e., net assets (taken at current value);
provided, however, that in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating
the 5% limitation. The above policies are non-fundamental and may be changed
by the Trust's board of trustees at any time. Also, when required, an account
of cash equivalents designated on the books and records will be maintained and
marked to market on a daily basis in an amount equal to the market value of
the contract.

Segregation and Cover Requirements. Futures contracts, interest rate
swaps, caps, floors and collars, short sales, reverse repurchase agreements
and dollar rolls, and listed or OTC options on securities, indices and futures
contracts sold by the Trust are generally subject to earmarking and coverage
requirements of either the CFTC or the SEC, with the result that, if the Trust
does not hold the security or futures contract underlying the instrument, the

B-11

Trust will be required to designate on its books and records an ongoing basis,
cash, U.S. government securities, or other liquid high grade debt obligations
in an amount at least equal to the Trust's obligations with respect to such
instruments.

Such Amounts Fluctuate as the Obligations Increase or Decrease. The
earmarking requirement can result in the Trust maintaining securities
positions it would otherwise liquidate, segregating assets at a time when it
might be disadvantageous to do so or otherwise restrict portfolio management.

Derivative Transactions Present Certain Risks. With respect to Derivative
Transactions and risk management, the variable degree of correlation between
price movements of strategic instruments and price movements in the
position being offset create the possibility that losses using the strategy
may be greater than gains in the value of the Trust's position. The same is
true for such instruments entered into for income or gain. In addition,
certain instruments and markets may not be liquid in all circumstances. As a
result, in volatile markets, the Trust may not be able to close out a
transaction without incurring losses substantially greater than the initial
deposit. Although the contemplated use of these instruments predominantly for
Derivative Transactions should tend to minimize the risk of loss due to a
decline in the value of the position, at the same time they tend to limit any
potential gain which might result from an increase in the value of such
position. The ability of the Trust to successfully utilize Derivative
Transactions will depend on the Investment Adviser's and the sub-adviser's
ability to predict pertinent market movements and sufficient correlations,
which cannot be assured. Finally, the daily deposit requirements in futures
contracts that the Trust has sold create an on going greater potential
financial risk than do options transactions, where the exposure is limited to
the cost of the initial premium. Losses due to the use of Derivative
Transactions will reduce net asset value.

Regulatory Considerations. The Trust has claimed an exclusion from the
term "commodity pool operator" under the Commodity Exchange Act and,
therefore, is not subject to registration or regulation as a commodity pool
operator under the Commodity Exchange Act.

OTHER INVESTMENT POLICIES AND TECHNIQUES

Restricted and Illiquid Securities

Certain of the Trust's investments may be illiquid. Illiquid securities
are subject to legal or contractual restrictions on disposition or lack an
established secondary trading market. The sale of restricted and illiquid
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of securities
eligible for trading on national securities exchanges or in the
over-the-counter markets. Restricted securities may sell at a price lower than
similar securities that are not subject to restrictions on resale.

When-Issued and Forward Commitment Securities

The Trust may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to
acquire the security or to offset against anticipated changes in interest
rates and prices. When such transactions are negotiated, the price, which is
generally expressed in yield terms, is fixed at the time the commitment is
made, but delivery and payment for the securities take place at a later date.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Trust will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. If the Trust disposes of the right to acquire
a when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it might incur a gain or
loss. At the time the Trust enters into a transaction on a when-issued or
forward commitment basis, it will designate on its books and records cash or
liquid debt securities equal to at least the value of the when-issued or
forward commitment securities. The value of these assets will be monitored
daily to ensure that their marked to market value will at all times equal or
exceed the corresponding obligations of the Trust. There is always a risk that
the securities may not be delivered and that the Trust may incur a loss.
Settlements in the ordinary course, which may take substantially more than
five business days, are not treated by the Trust as when-issued or forward
commitment transactions and accordingly are not subject to the foregoing
restrictions.

B-12

Pay-in-kind Bonds

The Trust may invest in Pay-in-kind, or "PIK" bonds. PIK bonds are bonds
which pay interest through the issuance of additional debt or equity securities.
Similar to zero coupon obligations, PIK bonds also carry additional risk as
holders of these types of securities realize no cash until the cash payment date
unless a portion of such securities is sold and, if the issuer defaults, the
Trust may obtain no return at all on its investment. The market price of PIK
bonds is affected by interest rate changes to a greater extent, and therefore
tends to be more volatile, than that of securities which pay interest in cash.
Additionally, current federal tax law requires the holder of certain PIK bonds
to accrue income with respect to these securities prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
avoid liability for federal income and excise taxes, the Trust may be required
to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.

Brady Bonds

The Trust's emerging market debt securities may include emerging market
governmental debt obligations commonly referred to as Brady Bonds. Brady Bonds
are debt securities, generally denominated in U.S. dollars, issued under the
framework of the Brady Plan, an initiative announced by U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations
(primarily emerging market countries) to restructure their outstanding
external indebtedness (generally, commercial bank debt). Brady Bonds are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring. A
significant amount of the Brady Bonds that the Trust may purchase have no or
limited collateralization, and the Trust will be relying for payment of
interest and (except in the case of principal collateralized Brady Bonds)
principal primarily on the willingness and ability of the foreign government
to make payment in accordance with the terms of the Brady Bonds. A substantial
portion of the Brady Bonds and other sovereign debt securities in which the
Trust may invest are likely to be acquired at a discount.

Mezzanine Investments

The Trust may invest in certain high yield securities known as mezzanine
investments, which are subordinated debt securities which are generally issued
in private placements in connection with an equity security (e.g., with
attached warrants). Such mezzanine investments may be issued with or without
registration rights. Similar to other high yield securities, maturities of
mezzanine investments are typically seven to ten years, but the expected
average life is significantly shorter at three to five years. Mezzanine
investments are usually unsecured and subordinate to other obligations of the
issuer.

Loan Participations and Assignments

The Trust may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a corporation or foreign government and
one or more financial institutions ("Lenders"). The Trust's investments in
Loans are expected in most instances to be in the form of participations in
Loans ("Participations") and assignments of all or a portion of Loans
("Assignments") from third parties. Participations typically will result in
the Trust having a contractual relationship only with the Lender not the
borrower. The Trust will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and the Trust and only upon receipt by the Lender of the
payments by the borrower. In connection with purchasing Participations, the
Trust generally has no direct right to enforce compliance by the borrower with
the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the borrower, and the Trust may not directly benefit from any
collateral supporting the Loan in which is has purchased the Participation. As
a result the Trust will assume the credit risk of both the borrower and the
Lender that is selling the Participation. In the event of the insolvency of
the Lender selling a Participation, the Trust may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. The Trust will acquire Participations only if the Lender
interpositioned between the Trust and the borrower is determined by Highland
to be creditworthy. When the Trust purchases Assignments from Lenders, the
Trust will acquire direct rights against the borrower on the Loan. However,
since Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Trust as
the purchaser of an Assignment may differ from, and be more limited than,
those held by the assigning Lender.

B-13

The Trust may have difficulty disposing of Assignments and
Participations. Because there is no liquid market for such securities, the
Trust anticipates that such securities could be sold only to a limited number
of institutional investors. The lack of a liquid secondary market will have an
adverse impact on the value of such securities and on the Trust's ability to
dispose of particular Assignments or Participations when necessary to meet the
Trust's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for the Trust to assign a value to those securities for purposes of
valuing the Trust's portfolio and calculating its net asset value.

Structured Investments

The Trust may invest a portion of its assets in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of securities. This type of restructuring involves the deposit
with or purchase by an entity, such as a corporation or a trust, of specified
instruments and the issuance by that entity of one or more classes of
securities ("Structured Investments") backed by, or representing interests in
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Investments is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Investments of the type
in which the Trust anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments.

The Trust is permitted to invest in a class of Structured Investments
that is either subordinated or not subordinated to the right of payment of
another class. Subordinated Structured Investments typically have higher
yields and present greater risks than unsubordinated Structured Investments.

Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the Investment Company Act. As a result, the Trust's
investment in these Structured Investments may be limited by the restrictions
contained in the Investment Company Act. Structured Investments are typically
sold in private placement transaction, and there currently is no active
trading market for Structured Investments.

Project Loans

The Trust may invest in project loans, which are fixed income securities
of issuers whose revenues are primarily derived from mortgage loans to
multi-family, nursing home and other real estate development projects. The
principal payments on these mortgage loans will be insured by agencies and
authorities of the U.S. Government.

Zero Coupons and Deferred Payment Obligations

The Trust may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest
payments. Additionally, current federal tax law requires the holder of certain
zero-coupon bonds to accrue income with respect to these securities prior to
the receipt of cash payments. To maintain its qualification as a regulated
investment company and to potentially avoid liability for federal income and
excise taxes, the Trust may be required to distribute income accrued with
respect to these securities and may have to dispose of Trust securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.

The Trust may invest in Deferred Payment Securities. Deferred Payment
Securities are securities that remain Zero-Coupon Securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Deferred Payment Securities are
subject to greater fluctuations in value and may have lesser liquidity in the
event of adverse market conditions than comparably rated securities paying
cash interest at regular interest payment periods.

B-14

MANAGEMENT OF THE TRUST

Trustees

The board of trustees provides broad oversight over the operations and
affairs of the Trust and protects the interests of shareholders. The board of
trustees has overall responsibility to manage and control the business affairs
of the Trust, including the complete and exclusive authority to establish
policies regarding the management, conduct and operation of the Trust's
business. The names and ages of the trustees and officers of the Trust, the year
each was first elected or appointed to office, their principal business
occupations during the last five years, the number of funds overseen by each
trustee and other directorships or trusteeships they hold are shown below. The
business address of the Trust, Highland and their board members and officers is
Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas, Texas 75240, unless
otherwise specified below.

Number of
Portfolios in
Highland Fund Other
Term of Office Complex Directorships/
Position and Length of Principal Occupation(s) Overseen by Trusteeships
Name and Age with Trust Time Served(1) During Past Five Years Trustee(2) Held
----------------- ---------------- ------------------- ---------------------------- ---------------- ---------------
INDEPENDENT TRUSTEES
Bryan A. Ward

(Age 51)........ Trustee 3 years and Senior Manager, Accenture, 12 None
Trustee since LLP since January 2002;
May 19, 2006 Special Projects Advisor,
Accenture, LLP with
focus on the oil and
gas industry, September
1998 to December 2001.
Scott Kavanaugh
(Age 45)........ Trustee 3 years and Private Investor since 12 None
Trustee since February 2004. Sales
May 19, 2006 Representative at Round Hill
Securities from March 2003
to January 2004; Executive
at Provident Funding
Mortgage Corporation,
February 2003 to July 2003;
Executive Vice President.
Director and CAO, Commercial
Capital Bank, January 2000
to February 2003;
Managing Principal and
Chief Operating
Officer, Financial
Institutional Partners
Mortgage Company and
the Managing Principal
and President of
Financial Institutional
Partners, LLC, (an
investment banking
firm), April 1998 to
February 2003.
James F. Leary
(Age 76)........ Trustee 3 years and Managing Director, Benefit 12 Board Member
Trustee since Capital Southwest, Inc., (a of Capstone
May 19, 2006 financial consulting firm) Series Fund,
since January 1999. Inc. (3
portfolios);
Pacesetter/MVHC
Inc. (small
business
investment
company)
Timothy Hui
(Age 58)....... Trustee 3 years and Assistant Provost for 12 None
Trustee since Graduate Education since
May 19, 2006 July 2004; Assistant Provost
for Educational Resources,
July 2001 to June 2004,
Philadelphia Biblical
University.

INTERESTED TRUSTEE

R. Joseph Dougherty None
(Age 36)........ Trustee 3 years and Senior Portfolio Manager of 12
and Senior Trustee since the Investment Adviser since
Vice March 10, 2000.

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President 2006

OFFICERS(3)

Term of Office and Principal Occupation(s) During Past Five
Name and Age Position with Trust Length of Time Served Years
-------------------- ------------------------- ------------------------- -----------------------------------------

James D. Dondero

(Age 43)........ Chief Executive Indefinite Term and President and Director of Strand Advisors,
Officer and Officer since May 19, Inc., the General Partner of the
and President 2006 Investment Adviser.
Mark Okada

(Age 44)........ Executive Vice Indefinite Term and Officer of Strand Advisors, Inc., the
President Officer since May 19, General Partner of the Investment Adviser;
2006 Chief Investment Officer of the Investment
Adviser.
R. Joseph Dougherty
(Age 36)........ Senior Vice Indefinite Term and Senior Portfolio Manager of the Investment
President Officer since May 19, Adviser since 2000.
2006
M. Jason Blackburn
(Age 31)........ Chief Financial Indefinite Term and Assistant Controller of the Investment
Officer (Principal Officer since May 19, Adviser since November 2001; Accountant,
Accounting 2006 KPMG LLP, September 1999 to October 2001.
Officer), Treasurer
and Secretary
Michael S. Minces
(Age 31)........ Chief Compliance Indefinite Term and Chief Compliance Officer of the Investment
Officer Officer since May 19, Adviser since August 2004; Associate, Akin
2006 Gump Strauss Hauer & Feld LLP (law firm),
October 2003 to August 2004; Associate,
Skadden, Arps, Slate, Meagher & Flom LLP
(law firm), October 2000 to March 2003.

----------
(1) After a Trustee's initial term, each Trustee is expected to serve a
three-year term concurrent with the class of Trustees for which he
serves. Messrs. Leary and Ward, as Class I Trustees, are expected to
stand for re-election in 2007; Messrs. Hui and Kavanaugh, as Class II
Trustees, are expected to stand for re-election in 2008; and Mr.
Dougherty, the sole Class III Trustee, is expected to stand for
re-election in 2009.

(2) The Highland Fund Complex consists of the following funds: Highland
Distressed Opportunities, Inc., Highland Credit Strategies Fund, Highland
Floating Rate Limited Liability Company, Highland Floating Rate Fund,
Highland Floating Rate Advantage Fund, Highland Corporate Opportunities
Fund, Restoration Opportunities Fund, Prospect Street High Income
Portfolio Inc., Prospect Street Income Shares Inc., Highland Equity
Opportunities Fund, Highland High Income Fund and Highland Income Fund
(each a "Highland Fund" and collectively the "Highland Funds").

(3) Each officer serves in the same capacity for each of the Highland Funds.

Compensation of Trustees

The fees and expenses of the Independent Trustees of the Trust are paid
by the Trust. The trustees who are members of the Highland organization
receive no compensation from the Trust. It is estimated that the Independent
Trustees will receive from the Trust the amounts set forth below for the
Trust's calendar year ending December 31, 2007.

Aggregate Total Compensation from
Compensation the Trust
from the and Highland Fund
Trust Complex(1)
------------- ------------------------
Name of Trustee
Interested Trustee
None.
Independent Trustees

Bryan A. Ward............................................................. $ 7,500 $ 97,500
Scott F. Kavanaugh........................................................ $ 7,500 $ 97,500
James F. Leary............................................................ $ 7,500 $ 97,500
Timothy K. Hui............................................................ $ 7,500 $ 97,500
R. Joseph Dougherty....................................................... $ 0 $ 0
----------
(1) Estimates the total compensation to be earned by that person during the
calendar year ending December 31, 2007 from the registered investment
companies advised by Highland.

Name of Trustee Dollar Range Aggregate Dollar Range of

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Equity Securities
Overseen by Trustees in
of Equity the Family of
Securities Registered Investment
in the Trust Companies
------------- ------------------------

Independent Trustees
R. Joseph Dougherty................................................. $0 $100,001 - 500,000

Bryan A. Ward....................................................... $0 $1 - 10,000
Scott F. Kavanaugh.................................................. $0 $50,001 - 100,000
James F. Leary...................................................... $0 $10,001 - 50,000
Timothy K. Hui...................................................... $0 $1 - 10,0000
----------

Committees

In connection with the board of trustee's responsibility for the overall
management and supervision of the Trust's affairs, the trustees meet
periodically throughout the year to oversee the Trust's activities, review
contractual arrangements with service providers for the Trust and review the
Trust's performance. To fulfill these duties, the Trust has four committees:
an Audit Committee, a Nominating Committee, a Litigation Committee and a
Qualified Legal Compliance Committee.

The Audit Committee consists of Bryan Ward, Scott Kavanaugh, James Leary
and Timothy Hui. The Audit Committee acts according to the Audit Committee
charter. Scott Kavanaugh has been appointed as Chairman of the Audit
Committee. The Audit Committee is responsible for (i) oversight of the Trust's
accounting and financial reporting processes and the audits of the Trust's
financial statements and (ii) providing assistance to the board of trustees of
the Trust in connection with its oversight of the integrity of the Trust's
financial statements, the Trust's compliance with legal and regulatory
requirements and the independent registered public accounting firm's
qualifications, independence and performance. The board of trustees of the
Trust has determined that the Trust has one audit committee financial expert
serving on its Audit Committee, Mr. Leary, who is independent for the purpose
of the definition of audit committee financial expert as applicable to the
Trust.

The Nominating Committee's function is to canvass, recruit, interview,
solicit and nominate trustees. The Nominating Committee considers
recommendations for nominees from shareholders sent to the Secretary of the
Trust, Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas, Texas 75240. A
nomination submission must include all information relating to the recommended
nominee that is required to be disclosed in solicitations or proxy statements
for the election of trustees, as well as information sufficient to evaluate
the factors listed above. Nomination submissions must be accompanied by a
written consent of the individual to stand for election if nominated by the
Board of trustees and to serve if elected by the shareholders, and such
additional information must be provided regarding the recommended nominee as
reasonably requested by the Nominating Committee. The Nominating Committee is
comprised of Messrs. Ward, Kavanaugh, Leary and Hui.

The Litigation Committee's function is to seek to address any potential
conflicts of interest between or among the Trust and the Investment Adviser in
connection with any potential or existing litigation or other legal proceeding
relating to securities held by the Trust and the Investment Adviser or another
client of the Investment Adviser. The Litigation Committee is comprised of
Messrs. Ward, Kavanaugh, Leary and Hui.

The Qualified Legal Compliance Committee (the "QLCC") is charged with
compliance with Rules 205.2(k) and 205.3(c) of the Code of Federal Regulations
regarding alternative reporting procedures for attorneys representing the
Trust who appear and practice before the Commission on behalf of the Trust.
The QLCC is comprised of Messrs. Ward, Kavanaugh, Leary and Hui.

The Audit Committee met three times during its first full fiscal year of
operation.

Proxy Voting Policies and Procedures

The board of trustees of the Trust has delegated the voting of proxies
for Trust securities to Highland pursuant to Highland's proxy voting policies
and procedures. Under these policies and procedures, Highland will vote
proxies

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related to Trust securities in the best interests of the Trust and its
shareholders. A copy of Highland's proxy voting policies and procedures is
attached as Appendix B to this Statement of Additional Information. The Fund's
proxy voting record for the most recent 12-month period ending December 31
will be available (i) without charge, upon request, by calling 1-877-665-1287
and (ii) on the Commission's web site (http://www.sec.gov).

Codes of Ethics

The Trust and the Investment Adviser have adopted codes of ethics under
Rule 17j-1 of the Investment Company Act. These codes permit personnel subject
to the codes to invest in securities, including securities that may be purchased
or held by the Trust. These codes can be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-202-551-8090. The codes of ethics are available on the EDGAR Database on the
Commission's web site (http://www.sec.gov), and copies of these codes may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov, or by writing the Commission's Public
Reference Section, Washington, D.C. 20549-0102.

Administration Services

Pursuant to the Trust's administration services agreement, Highland will
perform the following services: (i) prepare monthly security transaction
listings; (ii) supply various normal and customary Trust statistical data as
requested on an ongoing basis; (iii) prepare for execution and file the
Trust's federal and state tax returns; prepare a fiscal tax provision in
coordination with the annual audit; prepare an excise tax provision; and
prepare all relevant 1099 calculations; (iv) coordinate contractual
relationships and communications between the Trust and its contractual service
providers; (v) coordinate printing of the Trust's annual and semi-annual
shareholder reports; (vi) prepare income and capital gain distributions; (vii)
prepare the semiannual and annual financial statements; (viii) monitor the
Trust's compliance with Internal Revenue Code, Commission and prospectus
requirements; (ix) prepare, coordinate with the Trust's counsel and coordinate
the filing with the Commission: semi-annual reports on Form N-SAR and Form
N-CSR; Form N-Q; and Form N-PX based upon information provided by the Trust,
assist in the preparation of Forms 3, 4 and 5 pursuant to Section 16 of the
Securities Exchange Act of 1934, as amended, and Section 30(f) of the
Investment Company Act for the officers and trustees of the Trust, such
filings to be based on information provided by those persons; (x) assist in
the preparation of notices of meetings of shareholders; (xi) assist in
obtaining the fidelity bond and trustees' and officers'/errors and omissions
insurance policies for the Trust in accordance with the requirements of Rule
17g-1 and 17d-1(d)(7) under the Investment Company Act as such bond and
policies are approved by the Trust's board of trustees; (xii) monitor the
Trust's assets to assure adequate fidelity bond coverage is maintained; (xiii)
draft agendas and resolutions for quarterly and special board meetings; (xiv)
coordinate the preparation, assembly and distribution of board materials; (xv)
attend board meetings and draft minutes thereof; (xvi) maintain the Trust's
calendar to assure compliance with various filing and board approval
deadlines; (xvii) furnish the Trust office space in the offices of Highland,
or in such other place or places as may be agreed upon from time to time, and
all necessary office facilities, simple business equipment, supplies,
utilities and telephone service for managing the affairs and investments of
the Trust; (xviii) assist the Trust in the handling of SEC examinations and
responses thereto; (xix) perform clerical, bookkeeping and all other
administrative services not provided by the Trust's other service providers;
(xx) determine or oversee the determination and publication of the Trust's net
asset value in accordance with the Trust's policy as adopted from time to time
by the Board of Trustees; (xxi) oversee the maintenance by the Trust's
custodian and transfer agent and dividend disbursing agent of certain books
and records of the Trust as required under Rule 31a-1(b)(2)(iv) of the
Investment Company Act and maintain (or oversee maintenance by such other
persons as approved by the board of trustees) such other books and records
required by law or for the proper operation of the Trust; (xxii) prepare such
information and reports as may be required by any stock exchange or exchanges
on which the Trust's shares are listed; (xxiii) determine the amounts
available for distribution as dividends and distributions to be paid by the
Trust to its shareholders; prepare and arrange for the printing of dividend
notices to shareholders; and provide the Trust's dividend disbursing agent and
custodian with such information as is required for such parties to effect the
payment of dividends and distributions and to implement the Trust's dividend
reinvestment plan; (xxiv) serve as liaison between the Trust and each of its
service providers; and (xxv) perform such additional administrative duties
relating to the administration of the Trust as may subsequently be agreed upon
in writing between the Trust and Highland. Highland shall have the authority
to engage a sub-administrator in connection with the administrative services
of the Trust, which sub-

B-18

administrator may be an affiliate of Highland; provided, however, that Highland
shall remain responsible to the Trust with respect to its duties and obligations
set forth in the administration services agreement.

Portfolio Managers

The portfolio managers of the Trust are Kurtis Plumer, James Dondero and
Mark Okada.

As of February 28, 2007, Kurtis Plumer managed the following client
accounts:

Number Number of Assets
of Assets of Accounts Subject to a
Type of Account Accounts Accounts Subject to a Performance
--------------- --------- -------------

B-17

Performance Fee
Fee ---------------
-------------

Registered Investment Companies.............................. 2 $ 1,084 million 1 $ 79 million
Other Pooled Investment Vehicles............................. 5 $ 4,314 million 3 $ 3,762 million
Other Accounts............................................... 0 $ 0 0 $ 0

As of February 28, 2007, James Dondero managed the following client
accounts:

Number of
Accounts Assets
Number Subject to a Subject to a
of Assets of Performance Performance
Type of Account Accounts Accounts Fee Fee
--------------- --------- ------------- ------------- ---------------

Registered Investment Companies.............................. 3 $ 1,090million 1 $ 79 million
Other Pooled Investment Vehicles............................. 10 $ 9,159million 9 $9,109 million
Other Accounts............................................... 0 $ 0 0 $ 0

As of February 28, 2007, Mark Okada managed the following client
accounts:

Registered Investment Companies.............................. 11 $8,063 million 0 $ 0 million
Other Pooled Investment Vehicles............................. 29 $20,564 million 23 $18,764 million
Other Accounts............................................... 0 $ 0 0 $ 0

The Investment Adviser has built a professional working environment, a
firm-wide compliance culture and compliance procedures and systems designed to
protect against potential incentives that may favor one account over another.
The Investment Adviser has adopted policies and procedures that address the
allocation of investment opportunities, execution of portfolio transactions,
personal trading by employees and other potential conflicts of interest that
are designed to ensure that all client accounts are treated equitably over
time. Nevertheless, the Investment Adviser furnishes advisory services to
numerous clients in addition to the Trust, and the Investment Adviser may,
consistent with applicable law, make investment recommendations to other
clients or accounts (including accounts which are hedge funds or have
performance or higher fees paid to the Investment Adviser, or in which
portfolio managers have a personal interest in the receipt of such fees),
which may be the same as or different from those made to the Trust. In
addition, the Investment Adviser, its affiliates and any officer, director,
stockholder or employee may or may not have an interest in the securities
whose purchase and sale the Investment Adviser recommends to the Trust.
Actions with respect to securities of the same kind may be the same as or
different from the action which the Investment Adviser, or any of its
affiliates, or any officer, director, stockholder, employee or any member of
their families may take with respect to the same securities. Moreover, the
Investment Adviser may refrain from rendering any advice or services
concerning securities of companies of which any of the Investment Adviser's
(or its affiliates') officers, directors or employees are directors or
officers, or companies as to which the Investment Adviser or any of its
affiliates or the officers, directors and employees of any of them has any
substantial economic interest or possesses material non-public information. In
addition to its various policies and procedures

B-19

designed to address these issues, the Investment Adviser includes disclosure
regarding these matters to its clients in both its Form ADV and investment
advisory agreements.

The Investment Adviser, its affiliates or their officers and employees
serve or may serve as officers, directors or principals of entities that
operate in the same or related lines of business or of investment funds
managed by affiliates of the Investment Adviser. Accordingly, these
individuals may have obligations to investors in those entities or funds or to
other clients, the fulfillment of which might not be in the best interests of
the Trust. As a result, the Investment Adviser will face conflicts in the
allocation of investment opportunities to the Trust and other funds and
clients. In order to enable such affiliates to fulfill their fiduciary duties
to each of the clients for which they have responsibility, the Investment
Adviser will endeavor to allocate investment opportunities in a fair and
equitable manner which may, subject to applicable regulatory constraints,
involve pro rata co-investment by the Trust and such other clients or may
involve a rotation of opportunities among the Trust and such other clients.

While the Investment Adviser does not believe there will be frequent
conflicts of interest, if any, the Investment Adviser and its affiliates have
both subjective and objective procedures and policies in place designed to
manage the potential conflicts of interest between the Investment Adviser's
fiduciary obligations to the Trust and their similar fiduciary obligations to
other clients so that, for example, investment opportunities are allocated in
a fair and equitable manner among the Trust and such other clients. An
investment opportunity that is suitable for multiple clients of the Investment
Adviser and its affiliates may not be capable of being shared among some or
all of such clients due to the limited scale of the opportunity or other
factors, including regulatory restrictions imposed by the Investment Company
Act. There can be no assurance that the Investment Adviser's or its
affiliates' efforts to allocate any particular investment opportunity fairly
among all clients for whom such opportunity is appropriate will result in an
allocation of all or part of such opportunity to the Trust. Not all conflicts
of interest can be expected to be resolved in favor of the Trust.

Under current Commission regulations, the Trust may be prohibited from
co-investing with any unregistered fund managed now or in the future by the
Investment Adviser in certain private placements in which the Investment
Adviser negotiates non-pricing terms. The Trust intends to file for exemptive
relief from the Commission to enable it to co-invest with other unregistered
funds managed by the Investment Adviser.

Compensation

The Investment Adviser's financial arrangements with its portfolio
managers, its competitive compensation and its career path emphasis at all
levels reflect the value senior management places on key resources.
Compensation may include a variety of components and may vary from year to
year based on a number of factors including the relative performance of a
portfolio managers' underlying account, the combined performance of the
portfolio managers underlying accounts, and the relative performance of the
portfolio managers underlying accounts measured against other employees. The
principal components of compensation include a base salary, a discretionary
bonus, various retirement benefits and one or more of the incentive
compensation programs established by the Investment Adviser such as Option It
Plan and the Long-Term Incentive Plan.

Base Compensation

Generally, portfolio managers receive base compensation based on their
seniority and/or their position with the firm, which may include the amount of
assets supervised and other management roles within the firm.

Discretionary Compensation

In addition to base compensation, portfolio managers may receive
discretionary compensation, which can be a substantial portion of total
compensation. Discretionary compensation can include a discretionary cash
bonus as well as one or more of the following:

Option It Plan. The purpose of this plan is to attract and retain the
highest quality employees for positions of substantial responsibility, and to
provide additional incentives to a select group of management or highly
compensated employees of Highland so as to promote the success of the
Highland.

B-20

Long Term Incentive Plan. The purpose of this plan is to create positive
morale and teamwork, to attract and retain key talent, and to encourage the
achievement of common goals. This plan seeks to reward participating employees
based on the increased value of Highland through the use of Long-Term
Incentive Units.

Senior portfolio managers who perform additional management functions may
receive additional compensation in these other capacities. Compensation is
structured such that key professionals benefit from remaining with the firm.

Securities Ownership of Portfolio Managers

The Trust is a newly organized investment company. Accordingly, as of the
date of this Statement of Additional Information, none of the portfolio
managers beneficially owns any securities issued by the Trust.

PORTFOLIO TRANSACTIONS AND BROKERAGE

In placing portfolio transactions for the Trust, the Investment Adviser
will give primary consideration to securing the most favorable price and
efficient execution. Consistent with this policy, the Investment Adviser may
consider the financial responsibility, research and investment information and
other services provided by brokers or dealers who may effect or be a party to
any such transaction or other transactions to which other clients of the
Investment Adviser may be a party. Neither the Trust nor the Investment
Adviser has adopted a formula for allocation of the Trust's investment
transaction business. The Investment Adviser has access to supplemental
investment and market research and security and economic analysis provided by
brokers who may execute brokerage transactions at a higher cost to the Trust
than would otherwise result when allocating brokerage transactions to other
brokers on the basis of seeking the most favorable price and efficient
execution. The Investment Adviser, therefore, is authorized to place orders
for the purchase and sale of securities for the Trust with such brokers,
subject to review by the Trust's board of trustees from time to time with
respect to the extent and continuation of this practice. The services provided
by such brokers may be useful or beneficial to the Investment Adviser in
connection with its services to other clients.

On occasions when the Investment Adviser deems the purchase or sale of a
security to be in the best interest of the Trust as well as other clients, the
Investment Adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities to be so sold or purchased in order to obtain the most favorable
price or lower brokerage commissions and efficient execution. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Investment Adviser in the
manner it considers to be the most equitable and consistent with its fiduciary
obligations to the Trust and to such other clients.

REPURCHASE OF COMMON SHARES

The Trust is a closed-end management investment company and as such its
shareholders will not have the right to cause the Trust to redeem their
shares. Instead, the Trust's common shares will trade in the open market at a
price that will be a function of several factors, including dividend levels
(which are in turn affected by expenses), net asset value, call protection,
dividend stability, relative demand for and supply of such shares in the
market, general market and economic conditions and other factors. Because
shares of a closed-end investment company may frequently trade at prices lower
than net asset value, the Trust's board of trustees may consider action that
might be taken to reduce or eliminate any material discount from net asset
value in respect of common shares, which may include the repurchase of such
shares in the open market or in private transactions, the making of a tender
offer for such shares, or the conversion of the Trust to an open-end
investment company. The board of trustees may decide not to take any of these
actions. In addition, there can be no assurance that share repurchases or
tender offers, if undertaken, will reduce market discount.

Notwithstanding the foregoing, at any time when the Trust's Preferred
Shares are outstanding or there are outstanding borrowings, the Trust may not
purchase, redeem or otherwise acquire any of its common shares unless (i) all
accrued Preferred Shares dividends have been paid and (ii) at the time of such
purchase, redemption or acquisition, the net asset value of the Trust's
portfolio (determined after deducting the acquisition price of the

B-21

common shares) is at least 200% of the liquidation value of the outstanding
Preferred Shares (expected to equal the original purchase price per share plus
any accrued and unpaid dividends thereon). Any service fees incurred in
connection with any tender offer made by the Trust will be borne by the Trust
and will not reduce the stated consideration to be paid to tendering
shareholders.

Subject to its investment restrictions, the Trust may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the
Trust in anticipation of share repurchases or tenders will reduce the Trust's
net income. Any share repurchase, tender offer or borrowing that might be
approved by the Trust's board of trustees would have to comply with the
Securities Exchange Act of 1934, as amended, the Investment Company Act and
the rules and regulations thereunder.

Although the decision to take action in response to a discount from net
asset value will be made by the board of trustees at the time it considers such
issue, it is the board's present policy, which may be changed by the board of
trustees, not to authorize repurchases of common shares or a tender offer for
such shares if: (1) such transactions, if consummated, would (a) result in the
delisting of the common shares from the New York Stock Exchange, or (b) impair
the Trust's status as a regulated investment company under the Code (which would
make the Trust a taxable entity, causing the Trust's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Trust), or as a registered closed-end investment company
under the Investment Company Act; (2) the Trust would not be able to liquidate
portfolio securities in an orderly manner and consistent with the Trust's
investment objectives and policies in order to repurchase shares; or (3) there
is, in the board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Trust, (b) general suspension of or limitation on prices
for trading securities on the New York Stock Exchange, (c) declaration of a
banking moratorium by federal or state authorities or any suspension of payment
by United States or New York banks, (d) material limitation affecting the Trust
or the issuers of its portfolio securities by federal or state authorities on
the extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Trust or its shareholders if shares were
repurchased. The board of trustees may in the future modify these conditions in
light of experience.

The repurchase by the Trust of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tender offers at or below net asset value will result in the Trust's shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Trust's shares may be the subject of repurchase or tender offers from time
to time, or that the Trust may be converted to an open-end investment company,
may reduce any spread between market price and net asset value that might
otherwise exist.

Before deciding whether to take any action if the common shares trade
below net asset value, the Trust's board of trustees would likely consider all
relevant factors, including the extent and duration of the discount, the
liquidity of the Trust's portfolio, the impact of any action that might be
taken on the Trust or its shareholders and market considerations. Based on
these considerations, even if the Trust's shares should trade at a discount,
the board of trustees may determine that, in the interest of the Trust and its
shareholders, no action should be taken.

TAX MATTERS

The following discussion summarizes certain U.S. federal income tax
considerations affecting the Trust and the purchase, ownership and disposition
of the Trust's Common and Preferred Shares by shareholders that are U.S.
persons, as defined for U.S. federal income tax purposes. This discussion is
based upon current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the regulations promulgated thereunder and judicial and
administrative authorities, all of which are subject to change or differing
interpretations by the courts or the Internal Revenue Service (the "IRS"),
possibly with retroactive effect. No attempt is made to present a detailed
explanation of all U.S. federal tax concerns affecting the Trust and its
shareholders (including non-U.S. Shareholders owning large positions in the
Trust and others subject to special treatment under U.S. federal income tax
law).

B-22

The discussions set forth herein and in the prospectus do not constitute
tax advice, and you are urged to consult with your own tax advisor to
determine the specific U.S. federal, state, local and foreign tax consequences
to you of investing in the Trust.

Taxation of the Trust

The Trust intends to elect to be treated and to qualify annually as a
regulated investment company under Subchapter M of the Code. Accordingly, the
Trust must, among other things, meet the following requirements regarding the
source of its income and the diversification of its assets:

(i) The Trust must derive in each taxable year at least 90% of its gross
income from the following sources: (a) dividends, interest (including
tax-exempt interest), payments with respect to certain securities loans, gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including but not limited to gains from options, futures and
forward contracts) derived with respect to its business of investing in such
stock, securities or foreign currencies; and (b) interests in "qualified
publicly traded partnerships" (as defined in the Code).

B-21

(ii) The Trust must diversify its holdings so that, at the end of each
quarter of each taxable year: (a) at least 50% of the market value of the
Trust's total assets is represented by cash and cash items, U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer,
to an amount not greater than 5% of the value of the Trust's total assets and
not more than 10% of the outstanding voting securities of such issuer and (b)
not more than 25% of the value of the Trust's total assets is invested in the
securities (other than U.S. government securities and the securities of other
regulated investment companies) of: (I) any one issuer, (II) any two or more
issuers that the Trust controls (by owning 20% or more of their voting power)
and that are determined to be engaged in the same business or similar or
related trades or businesses or (III) any one or more "qualified publicly
traded partnerships" (as defined in the Code).

As a regulated investment company, the Trust generally will not be
subject to U.S. federal income tax on income and gains that the Trust
distributes to its shareholders, provided that it distributes each taxable
year at least the sum of: (i) 90% of the Trust's investment company taxable
income (which includes, among other items, dividends, interest and the excess
of any net short-term capital gain over net long-term capital loss and other
taxable income, other than any net long-term capital gain, reduced by
deductible expenses) determined without regard to the deduction for dividends
paid and (ii) 90% of the Trust's net tax-exempt interest (the excess of its
gross tax-exempt interest over certain disallowed deductions). The Trust
intends to distribute substantially all of such income each year. The Trust
will be subject to income tax at regular corporate rates on any taxable income
or gains that it does not distribute to its shareholders.

The Code imposes a 4% nondeductible excise tax on the Trust to the extent
the Trust does not distribute by the end of any calendar year at least the sum
of: (i) 98% of its ordinary income (not taking into account any capital gain
or loss) for the calendar year and (ii) 98% of its capital gain in excess of
its capital loss (adjusted for certain ordinary losses) for a one-year period
generally ending on October 31 of the calendar year (unless an election is
made to use the Trust's fiscal year). In addition, the minimum amounts that
must be distributed in any year to avoid the excise tax will be increased or
decreased to reflect any under-distribution or over-distribution, as the case
may be, from the previous year. While the Trust intends to distribute any
income and capital gain in the manner necessary to minimize imposition of the
4% excise tax, there can be no assurance that sufficient amounts of the
Trust's taxable income and capital gain will be distributed to avoid entirely
the imposition of the excise tax. In that event, the Trust will be liable for
the excise tax only on the amount by which it does not meet the foregoing
distribution requirement.

If, for any taxable year, the Trust does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Trust's current or
accumulated earnings and profits. Provided that shareholders satisfy certain
holding period and other requirements with respect to their common shares,
such dividends would be eligible (i) to be treated as qualified dividend
income in the case of shareholders taxed as individuals and (ii) for the
dividends-received deduction in the case of shareholders taxed as
corporations. The Trust could be required to recognize unrealized gains, pay
taxes and make distributions (which could be subject to interest charges)
before requalifying for taxation as a regulated investment company. If the
Trust fails to qualify as a regulated investment company in any year, it

B-23

must pay out its earnings and profits accumulated in that year in order to
qualify again as a regulated investment company. If the Trust fails to qualify
as a regulated investment company for a period greater than one taxable year,
the Trust may be required to recognize and pay tax on any net built-in gains
with respect to certain of its assets (i.e., the excess of the aggregate gains,
including items of income, over aggregate losses that would have been realized
with respect to such assets if the Trust had been liquidated) or, alternatively,
to elect to be subject to taxation on such built-in gain recognized for a period
of ten years, in order to qualify as a regulated investment company in a
subsequent year.

Taxation of the Trust's Investments

Certain of the Trust's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things: (i)
treat dividends that would otherwise constitute qualified dividend income as
non-qualified dividend income, (ii) treat dividends that would otherwise be
eligible for the corporate dividends-received deduction as ineligible for such
treatment, (iii) disallow, suspend or otherwise limit the allowance of certain
losses or deductions, (iv) convert lower-taxed, long-term capital gain into
higher-taxed, short-term capital gain or ordinary income, (v) convert an
ordinary loss or deduction into a capital loss (the deductibility

B-22

of which is more limited), (vi) cause the Trust to recognize income or gain
without a corresponding receipt of cash, (vii) adversely affect the time as to
when a purchase or sale of stock or securities is deemed to occur or (viii)
adversely alter the characterization of certain complex financial
transactions.

If the Trust purchases shares in certain foreign investment entities,
called passive foreign investment companies ("PFICs"), the Trust may be
subject to U.S. federal income tax on a portion of any "excess distribution"
or gain from the disposition of such common shares even if such income is
distributed as a taxable dividend by the Trust to the shareholders. Additional
charges in the nature of interest may be imposed on the Trust in respect of
deferred taxes arising from such distributions or gains. Elections may be
available to the Trust to mitigate the effect of this tax, but such elections
generally accelerate the recognition of income without the receipt of cash.
Dividends paid by PFICs will not be qualified dividend income.

If the Trust invests in the shares of a PFIC, or any other investment
that produces income that is not matched by a corresponding cash distribution
to the Trust, such as investments in debt securities that have original issue
discount, the Trust could be required to recognize income that it has not yet
received. Any such income would be treated as income earned by the Trust and
therefore would be subject to the distribution requirements of the Code. This
might prevent the Trust from distributing 90% of its net investment income as
is required in order to avoid Trust-level U.S. federal income taxation on all
of its income, or might prevent the Trust from distributing enough ordinary
income and capital gain net income to avoid completely the imposition of the
excise tax. To avoid this result, the Trust may be required to borrow money or
dispose of securities to be able to make required distributions to the
shareholders.

Dividend, interest and other income received by the Trust from
investments outside the United States may be subject to withholding and other
taxes imposed by foreign countries. Tax treaties between the United States and
other countries may reduce or eliminate such taxes. The Trust does not expect
that it will be eligible to elect to treat any foreign taxes it pays as paid
by its shareholders, who therefore will not be entitled to credits for such
taxes on their own tax returns. Foreign taxes paid by a Trust will reduce the
return from the Trust's investments.

Taxation of Shareholders

The Trust will determine either to distribute or to retain for
reinvestment all or part of its net capital gain. If any such gain is
retained, the Trust will be subject to corporate income tax (currently at a
maximum rate of 35%) on such retained amount. In that event, the Trust expects
to designate the retained amount as undistributed capital gain in a notice to
its shareholders, each of whom: (i) will be required to include in income for
U.S. federal tax purposes as long-term capital gain its share of such
undistributed amounts, (ii) will be entitled to credit its proportionate share
of the tax paid by the Trust against its U.S. federal income tax liability and
to claim refunds to the extent that the credit exceeds such liability and
(iii) will increase its basis in its common shares of the Trust by an amount
equal to 65% of the amount of undistributed capital gain included in such
shareholder's gross income.

Distributions paid to you by the Trust from its net realized long-term
capital gains, if any, that the Trust designates as capital gains dividends
("capital gain dividends") are taxable as long-term capital gains, regardless
of

B-24

how long you have held your Common and Preferred Shares. All other
dividends paid to you by the Trust (including dividends from short-term
capital gains) from its current or accumulated earnings and profits ("ordinary
income dividends") are generally subject to tax as ordinary income. The Trust
does not expect that a corporate shareholder will be able to claim a dividends
received deduction with respect to any significant portion of the Trust
distributions.

Special rules apply, however, to ordinary income dividends paid to
individuals with respect to taxable years beginning on or before December 31,
2010. If you are an individual, any such ordinary income dividend that you
receive from the Trust generally will be eligible for taxation at the rates
applicable to long-term capital gains to the extent that: (i) the ordinary
income dividend is attributable to "qualified dividend income" (i.e., generally
dividends paid by U.S. corporations and certain foreign corporations) received
by the Trust, (ii) the Trust satisfies certain holding period and other
requirements with respect to the stock on which such qualified dividend income
was paid and (iii) you satisfy certain holding period and other requirements
with respect to your Common and Preferred Shares. Ordinary income dividends
subject to these special rules are not actually treated as capital gains,
however, and thus will not be included in the computation of your net capital
gain and generally cannot be used to offset any capital losses. In general, you
may include as qualified dividend income only that portion of the dividends that
may be and are so designated by the Trust as qualified dividend income; however,
the Trust does not expect that a significant portion of its ordinary income
dividends will be treated as qualified dividend income.

Any distributions that you receive that are in excess of the Trust's
current or accumulated earnings and profits will be treated as a tax-free
return of capital to the extent of your adjusted tax basis in your Common and
Preferred Shares, and thereafter as capital gain from the sale of Common and
Preferred Shares. The amount of any Trust distribution that is treated as a
tax-free return of capital will reduce your adjusted tax basis in your Common
and Preferred Shares, thereby increasing your potential gain or reducing your
potential loss on any subsequent sale or other disposition of your Common and
Preferred Shares.

For holders of Common Shares that participate in the Trust's Automatic
Dividend Reinvestment Plan, dividends and other taxable distributions are
taxable to you even if they are reinvested in additional Common Shares of the
Trust. Dividends and other distributions paid by the Trust are generally
treated under the Code as received by you at the time the dividend or
distribution is made. If, however, the Trust pays you a dividend in January
that was declared in the previous October, November or December and you were
the shareholder of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Trust and
received by you on December 31 of the year in which the dividend was declared.

For holders of the Trust's Preferred Shares, the Trust believes that its
Preferred Shares will constitute equity for federal income tax purposes, and
thus distributions with respect to its Preferred Shares (other than
distributions in redemption of such shares subject to Section 302(b) of the
Code) will generally constitute dividends to the extent of our current or
accumulated earnings and profits allocable to such shares, as calculated for
federal income tax purposes. During any taxable year in which Preferred Shares
are outstanding, the Trust intends to allocate in such year capital gain
dividends, dividends qualifying for the dividends received deduction and
dividends derived from qualified dividend income, if any, between its Common
Shares and Preferred Shares in proportion to the total dividends paid out of
earnings or profits to each class with respect to such year.

The price of Common and Preferred Shares purchased at any time may
reflect the amount of a forthcoming distribution. If you purchase Common and
Preferred Shares just prior to a distribution, you will receive a distribution
that will be taxable to you even though it represents in part a return of your
invested capital.

If you sell or otherwise dispose of Common and Preferred Shares of the
Trust (including by exchanging them for Common and Preferred Shares of another
fund), you will generally recognize a gain or loss in an amount equal to the
difference between your tax basis in such common shares of the Trust and the
amount you receive upon disposition of such Common and Preferred Shares. If
you hold your common shares as capital assets, any such gain or loss will be
long-term capital gain or loss if you have held such common shares for more
than one year at the time of sale. Any loss upon the sale or exchange of
common shares held for six months or less will be treated as long-

B-25

term capital loss to the extent of any capital gain dividends received
(including amounts credited as an undistributed capital gain dividend) by you
with respect to such Common and Preferred Shares. Any loss you realize on a sale
or exchange of common shares will be disallowed if you acquire other Common and
Preferred Shares (whether through the automatic reinvestment of dividends or
otherwise) within a 61-day period beginning 30 days before and ending 30 days
after your sale or exchange of the Common and Preferred Shares. In such case,
your tax basis in the Common and Preferred Shares acquired will be adjusted to
reflect the disallowed loss.

Current federal income tax laws tax both long-term and short-term capital
gain of corporations at the rates applicable to ordinary income. For
non-corporate taxpayers, short-term capital gain is currently taxed at rates
applicable to ordinary income (currently at a maximum of 35%) while long-term
capital gain generally is taxed at a maximum rate of 15% with respect to
taxable years beginning on or before December 31, 2010 (20% thereafter, unless
changed by future legislation).

Shareholders may be entitled to offset their capital gain dividends with
capital loss. The Code contains a number of statutory provisions affecting the
circumstances under which capital loss may be offset against capital gain and
limiting the use of loss from certain investments and activities. Accordingly,
shareholders that have capital losses are urged to consult their tax advisors.

The Trust may be required to withhold, for U.S. federal backup
withholding tax purposes, a portion of the dividends, distributions and
redemption proceeds payable to a shareholder who fails to provide the Trust
(or its agent) with the shareholder's correct taxpayer identification number
(in the case of an individual, generally, such individual's social security
number) or to make the required certification, or who has been notified by the
IRS that such shareholder is subject to backup withholding. Corporate
shareholders and certain other shareholders are exempt from backup
withholding. Backup withholding is not an additional tax and any amount
withheld may be refunded or credited against your U.S. federal income tax
liability, if any, provided that you furnish the required information to the
IRS.

EXPERTS

The Statement of Assets and Liabilities of the Trust as of [ ], 2007 and
related Statement of Operations and Statement of Changes in Net Assets for the
period June 1, 2006 (commencement of operations) to [ ], 2007 appearing in
this Statement of Additional Information have been audited by
PricewaterhouseCoopers LLP, independent registered public accounting firm, as
set forth in their report thereon appearing elsewhere herein, and is included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing. PricewaterhouseCoopers LLP, located at 2001 Ross
Avenue, Suite 1800, Dallas, Texas 75201 provides accounting and auditing
services to the Trust.

ADDITIONAL INFORMATION

A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Trust with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. The
prospectus and this Statement of Additional Information do not contain all of
the information set forth in the Registration Statement, including any
exhibits and schedules thereto. For further information with respect to the
Trust and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in the prospectus and this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment
of certain fees prescribed by the Commission.

B-26

FINANCIAL STATEMENTS

The Financial Statements and the independent registered public accounting
firms reports thereon, appearing in the Trust's quarterly shareholder report for
the period ended March 31, 2007 are incorporated by reference in this SAI. The
Trusts annual and semi-annual (unaudited) shareholder reports are available upon
request and without charge by writing to the Trust at Two Galleria Tower, 13455
Noel Road, Suite 800, Dallas, Texas 75240 or by calling (877) 665-1287.

F-1

APPENDIX A

RATINGS OF INVESTMENTS

Standard & Poor's Corporation--A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by S&P) follows:

ISSUE CREDIT RATING DEFINITIONS

A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium-term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes
into account the currency in which the obligation is denominated. The issue
credit rating is not a recommendation to purchase, sell, or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.

Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.

Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in
the relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days, including commercial paper, are
considered short-term. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the short-term rating
addresses the put feature, in addition to the usual long-term rating.
Medium-term notes are assigned long-term ratings.

Long-Term Issue Credit Ratings

Issue credit ratings are based, in varying degrees, on the following
considerations:

o Likelihood of payment--capacity and willingness of the
obligor to meet its financial commitment on an obligation in
accordance with the terms of the obligation;

o Nature of and provisions of the obligation; and

o Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.

The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority
in bankruptcy, as noted above. (Such differentiation applies when an entity
has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
Accordingly, in the case of junior debt, the rating may not conform exactly
with the category definition.

AAA

An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.

A-1

An obligation rated "AA" differs from the highest-rated obligations only
to a small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
in higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.

BBB

An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

BB, B, CCC, CC, and C

Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.

CCC

An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

An obligation rated "CC" is currently highly vulnerable to nonpayment.

A subordinated debt or preferred stock obligation rated "C" is currently
highly vulnerable to nonpayment. The "C" rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A "C" also will be
assigned to a preferred stock issue in arrears on dividends or sinking fund
payments, but that is currently paying.

A-2

An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.

Plus (+) or minus (--)

The ratings from "AA" to "CCC" may be modified by the addition of a plus
(+) or minus (--) sign to show relative standing within the major rating
categories.

This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.

Short-Term Issue Credit Ratings

A-1

A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2

A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.

A-3

A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.

A short-term obligation rated "B" is regarded as having significant
speculative characteristics. Ratings of "B-1", "B-2", and "B-3" may be
assigned to indicate finer distinctions within the "B" category. The obligor
currently has the capacity to meet its financial commitment on the obligation;
however, it faces major ongoing uncertainties which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

B-1

A short-term obligation rated "B-1" is regarded as having significant
speculative characteristics, but the obligor has a relatively stronger
capacity to meet its financial commitments over the short-term compared to
other speculative-grade obligors.

A-3

B-2

A short-term obligation rated "B-2" is regarded as having significant
speculative characteristics, and the obligor has an average speculative-grade
capacity to meet its financial commitments over the short-term compared to
other speculative-grade obligors.

B-3

A short-term obligation rated "B-3" is regarded as having significant
speculative characteristics, and the obligor has a relatively weaker capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors.

A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.

A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.

Active Qualifiers (Currently applied and/or outstanding)

This subscript is used for issues in which the credit factors, terms, or
both, that determine the likelihood of receipt of payment of interest are
different from the credit factors, terms or both that determine the likelihood
of receipt of principal on the obligation. The "i" subscript indicates that
the rating addresses the interest portion of the obligation only. The "i"
subscript will always be used in conjunction with the "p" subscript, which
addresses likelihood of receipt of principal. For example, a rated obligation
could be assigned ratings of "AAAp NRi" indicating that the principal portion
is rated "AAA" and the interest portion of the obligation is not rated.

Ratings qualified with "L" apply only to amounts invested up to federal
deposit insurance limits.

This subscript is used for issues in which the credit factors, the terms,
or both, that determine the likelihood of receipt of payment of principal are
different from the credit factors, terms or both that determine the likelihood
of receipt of interest on the obligation. The "p" subscript indicates that the
rating addresses the principal portion of the obligation only. The "p"
subscript will always be used in conjunction with the "i" subscript, which
addresses likelihood of receipt of interest. For example, a rated obligation
could be assigned ratings of "AAAp N.R.i" indicating that the principal
portion is rated "AAA" and the interest portion of the obligation is not
rated.

Ratings with a "pi" subscript are based on an analysis of an issuer's
published financial information, as well as additional information in the
public domain. They do not, however, reflect in-depth meetings with an
issuer's management and are therefore based on less comprehensive information
than ratings without a "pi" subscript. Ratings with a "pi" subscript are
reviewed annually based on a new year's financial statements, but may be
reviewed on an interim basis if a major event occurs that may affect the
issuer's credit quality.

A-4

The letters "pr" indicate that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.

Preliminary

Preliminary ratings are assigned to issues, including financial programs,
in the following circumstances.

o Preliminary ratings may be assigned to obligations, most
commonly structured and project finance issues, pending receipt
of final documentation and legal opinions. Assignment of a final
rating is conditional on the receipt and approval by Standard &
Poor's of appropriate documentation. Changes in the information
provided to Standard & Poor's could result in the assignment of
a different rating. In addition, Standard & Poor `s reserves the
right not to issue a final rating.

o Preliminary ratings are assigned to Rule 415 Shelf
Registrations. As specific issues, with defined terms, are
offered from the master registration, a final rating may be
assigned to them in accordance with Standard & Poor's policies.
The final rating may differ from the preliminary rating.

This symbol indicates termination structures that are designed to honor
their contracts to full maturity or, should certain events occur, to terminate
and cash settle all their contracts before their final maturity date.

Inactive Qualifiers (No longer applied or outstanding)

This symbol indicated continuance of the ratings is contingent upon
Standard & Poor `s receipt of an executed copy of the escrow agreement or
closing documentation confirming investments and cash flows. Discontinued use
in August 1998.

This qualifier was used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if the
long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable. Discontinued use in January
2001.

A "q" subscript indicates that the rating is based solely on quantitative
analysis of publicly available information. Discontinued use in April 2001.

The "r" modifier was assigned to securities containing extraordinary
risks, particularly market risks, that are not covered in the credit rating.
The absence of an "r" modifier should not be taken as an indication that an
obligation will not exhibit extraordinary non-credit related risks. Standard &
Poor's discontinued the use of the "r" modifier for most obligations in June
2000 and for the balance of obligations (mainly structured finance
transactions) in November 2002.

A-5

Moody's Investors Service, Inc.--A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:

Long-Term Obligation Ratings

Moody's long-term obligation ratings are opinions of the relative credit
risk of a fixed income obligations with an original maturity of one year or
more. They address the possibility that a financial obligation will not be
honored as promised. Such ratings reflect both the likelihood of default and
any financial loss suffered in the event of default.

Moody's Long-Term Rating Definitions:

Aaa

Obligations rated Aaa are judged to be of the highest quality, with
minimal credit risk.

Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.

Obligations rated A are considered upper medium-grade and are subject to
low credit risk.

Baa

Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.

Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.

Obligations rated B are considered speculative and are subject to high
credit risk.

Caa

Obligations rated Caa are judged to be of poor standing and are subject
to very high credit risk.

Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.

Obligations rated C are the lowest rated class of bonds and are typically
in default, with little prospect for recovery of principal or interest.

Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.

A-6

Medium-Term Note Ratings

Moody's assigns long-term ratings to individual debt securities issued
from medium-term note (MTN) programs, in addition to indicating ratings to MTN
programs themselves. Notes issued under MTN programs with such indicated
ratings are rated at issuance at the rating applicable to all pari passu notes
issued under the same program, at the program's relevant indicated rating,
provided such notes do not exhibit any of the characteristics listed below:

o Notes containing features that link interest or principal to
the credit performance of any third party or parties (i.e.,
credit-linked notes);

o Notes allowing for negative coupons, or negative principal

o Notes containing any provision that could obligate the
investor to make any additional payments

o Notes containing provisions that subordinate the claim.

For notes with any of these characteristics, the rating of the individual
note may differ from the indicated rating of the program.

For credit-linked securities, Moody's policy is to "look through" to the
credit risk of the underlying obligor. Moody's policy with respect to
non-credit linked obligations is to rate the issuer's ability to meet the
contract as stated, regardless of potential losses to investors as a result of
non-credit developments. In other words, as long as the obligation has debt
standing in the event of bankruptcy, we will assign the appropriate debt class
level rating to the instrument.

Market participants must determine whether any particular note is rated,
and if so, at what rating level. Moody's encourages market participants to
contact Moody's Ratings Desks or visit www.moodys.com directly if they have
questions regarding ratings for specific notes issued under a medium-term note
program. Unrated notes issued under an MTN program may be assigned an NR (not
rated) symbol.

Short-Term Ratings:

Moody's short-term ratings are opinions of the ability of issuers to
honor short-term financial obligations. Ratings may be assigned to issuers,
short-term programs or to individual short-term debt instruments. Such
obligations generally have an original maturity not exceeding thirteen months,
unless explicitly noted.

Moody's employs the following designations to indicate the relative
repayment ability of rated issuers:

P-1

Issuers (or supporting institutions) rated Prime-1 have a superior
ability to repay short-term debt obligations.

P-2

Issuers (or supporting institutions) rated Prime-2 have a strong ability
to repay short-term debt obligations.

P-3

Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.

Issuers (or supporting institutions) rated Not Prime do not fall within
any of the Prime rating categories.

A-7

Note: Canadian issuers rated P-1 or P-2 have their short-term ratings
enhanced by the senior most long-term rating of the issuer, its guarantor or
support provider.

A-8

APPENDIX B

PROXY VOTING POLICIES AND PROCEDURES

B-1

HIGHLAND CAPITAL MANAGEMENT, L.P.

PROXY VOTING POLICY

1. Application; General Principles

1.1 This proxy voting policy (the "Policy") applies to securities held in
Client accounts as to which the above-captioned investment adviser (the
"Company") has voting authority, directly or indirectly. Indirect voting
authority exists where the Company's voting authority is implied by a general
delegation of investment authority without reservation of proxy voting
authority.

1.2 The Company shall vote proxies in respect of securities owned by or
on behalf of a Client in the Client's best economic interests and without
regard to the interests of the Company or any other Client of the Company.

2. Voting; Procedures

2.1 Monitoring. A settlement designee of the Company shall have
responsibility for monitoring portfolios managed by the Company for securities
subject to a proxy vote. Upon the receipt of a proxy notice related to a
security held in a portfolio managed by the Company, the settlement designee
shall forward all relevant information to the portfolio manager(s) with
responsibility for the security.

2.2 Voting.

2.2.1. Upon receipt of notice from the settlement designee, the
portfolio manager(s) with responsibility for purchasing the security subject to
a proxy vote shall evaluate the subject matter of the proxy and cause the proxy
to be voted on behalf of the Client. In determining how to vote a particular
proxy, the portfolio manager(s) shall consider, among other things, the
interests of each Client account as it relates to the subject matter of the
proxy, any potential conflict of interest the Company may have in voting the
proxy on behalf of the Client and the procedures set forth in this Policy.

2.2.2 If a proxy relates to a security held in a registered
investment company or business development company ("Retail Fund") portfolio,
the portfolio manager(s) shall notify the Compliance Department and a designee
from the Retail Funds group. Proxies for securities held in the Retail Funds
will be voted by the designee from the Retail Funds group in a manner consistent
with the best interests of the applicable Retail Fund and a record of each vote
will be reported to the Retail Fund's Board of Directors in accordance with the
procedures set forth in Section 4 of this Policy.

2.3 Conflicts of Interest. If the portfolio manager(s) determine that the
Company may have a potential material conflict of interest (as defined in
Section 3 of this Policy) in voting a particular proxy, the portfolio manager(s)
shall contact the Company's Compliance Department prior to causing the proxy to
be voted.

2.3.1. For a security held by Retail Fund, the Company shall
disclose the conflict and the determination of the manner in which it proposes
to vote to the Retail Fund's Board of Directors. The Company's determination
shall take into account only the interests of the Retail Fund, and the
Compliance Department shall document the basis for the decision and furnish the
documentation to the Board of Directors.

2.3.2 For a security held by an unregistered investment company,
such as a hedge fund and structured products ("Non-Retail Funds"), where a
material conflict of interest has been identified the Company may resolve the
conflict by following the recommendation of a disinterested third party or by
abstaining from voting.

B-2

2.4 Non-Votes. The Company may determine not to vote proxies in respect
of securities of any issuer if it determines it would be in its Client's overall
best interests not to vote. Such determination may apply in respect of all
Client holdings of the securities or only certain specified Clients, as the
Company deems appropriate under the circumstances. As examples, the portfolio
manager(s) may determine: (a) not to recall securities on loan if, in its
judgment, the negative consequences to Clients of disrupting the securities
lending program would outweigh the benefits of voting in the particular instance
or (b) not to vote certain foreign securities positions if, in its judgment, the
expense and administrative inconvenience outweighs the benefits to Clients of
voting the securities.

2.5 Recordkeeping. Following the submission of a proxy vote, the
applicable portfolio manager(s) shall submit a report of the vote to a
settlement designee of the Company. Records of proxy votes by the Company shall
be maintained in accordance with Section 4 of this Policy.

2.6 Certification. On a quarterly basis, each portfolio manager shall
certify to the Compliance Department that they have complied with this Policy in
connection with proxy votes during the period.

3. Conflicts of Interest

3.1 Voting the securities of an issuer where the following relationships
or circumstances exist are deemed to give rise to a material conflict of
interest for purposes of this Policy:

3.1.1 The issuer is a Client of the Company accounting for more
than 5% of the Company's annual revenues.

3.1.2 The issuer is an entity that reasonably could be expected to
pay the Company more than $1 million through the end of the Company's next two
full fiscal years.

3.1.3 The issuer is an entity which a "Covered Person" (as defined
in the Retail Funds' and the Company's Policies and Procedures Designed to
Detect and Prevent Insider Trading and to Comply with Rule17j-1 of the
Investment Company Act of 1940, as amended (each, a "Code of Ethics")) has a
beneficial interest contrary to the position held by the Company on behalf of
Clients.

3.1.4 The issuer is an entity in which an officer or partner of
the Company or a relative(1) of any such person is or was an officer, director
or employee, or such person or relative otherwise has received more than
$150,000 in fees, compensation and other payment from the issuer during the
Company's last three fiscal years; provided, however, that the Compliance
Department may deem such a relationship not to be a material conflict of
interest if the Company representative serves as an officer or director of the
issuer at the direction of the Company for purposes of seeking control over the
issuer.

3.1.5 The matter under consideration could reasonably be expected
to result in a material financial benefit to the Company through the end of the
Company's next two full fiscal years (for example, a vote to increase an
investment advisory fee for a Retail Fund advised by the Company or an
affiliate).

3.1.6 Another Client or prospective Client of the Company,
directly or indirectly, conditions future engagement of the Company on voting
proxies in respect of any Client's securities on a particular matter in a
particular way.

3.1.7 The Company holds various classes and types of equity and
debt securities of the same issuer contemporaneously in different Client
portfolios.

--------

(1) For the purposes of this Policy, "relative" includes the following family
members: spouse, minor children or stepchildren or children or stepchildren
sharing the person's home.

B-3

3.1.8 Any other circumstance where the Company's duty to serve its
Clients' interests, typically referred to as its "duty of loyalty," could be
compromised.

3.2 Notwithstanding the foregoing, a conflict of interest described in
Section 3.1 shall not be considered material for the purposes of this Policy in
respect of a specific vote or circumstance if:

3.2.1 The securities in respect of which the Company has the power
to vote account for less than 1% of the issuer's outstanding voting securities,
but only if: (i) such securities do not represent one of the 10 largest holdings
of such issuer's outstanding voting securities and (ii) such securities do not
represent more than 2% of the Client's holdings with the Company.

3.2.2 The matter to be voted on relates to a restructuring of the
terms of existing securities or the issuance of new securities or a similar
matter arising out of the holding of securities, other than common equity, in
the context of a bankruptcy or threatened bankruptcy of the issuer.

4. Recordkeeping and Retention

4.1 The Company shall retain records relating to the voting of proxies,
including:

4.1.1 Copies of this Policy and any amendments thereto.

4.1.2 A copy of each proxy statement that the Company receives
regarding Client securities.

4.1.3 Records of each vote cast by the Company on behalf of
Clients.

4.1.4 A copy of any documents created by the Company that were
material to making a decision how to vote or that memorializes the basis for
that decision.

4.1.5 A copy of each written request for information on how the
Company voted proxies on behalf of the Client, and a copy of any written
response by the Company to any (oral or written) request for information on how
the Company voted.

4.2 These records shall be maintained and preserved in an easily
accessible place for a period of not less than five years from the end of the
Company's fiscal year during which the last entry was made in the records, the
first two years in an appropriate office of the Company.

4.3 The Company may rely on proxy statements filed on the SEC's EDGAR
system or on proxy statements and records of votes cast by the Company
maintained by a third party, such as a proxy voting service (provided the
Company had obtained an undertaking from the third party to provide a copy of
the proxy statement or record promptly on request).

4.4 Records relating to the voting of proxies for securities held by the
Retail Funds will be reported periodically to the Retail Funds' Boards of
Directors and, with respect to Retail Funds other than business development
companies, to the SEC on an annual basis pursuant to Form N-PX.

Revised: February 22, 2007

B-4

Part C

Other Information

Item 25. Financial Statements And Exhibits

Financial Statements

Part A -- Financial Highlights. (Incorporated by reference from the Trust's
Quarterly Report for the period ended March 31, 2007).

Part B -- Report of Independent Registered Public Accountants. (Incorporated
by reference from the Trust's Quarterly Report for the period ended March 31,
2007).

EXHIBITS

(a) Agreement and Declaration of Trust(1)

(b) By-Laws(1)

(d) Form of Specimen Certificate(1)

(e) Form of Dividend Reinvestment Plan(1)

(f) Not applicable

(g) Form of Investment Advisory Agreement(1)

(h) Form of Underwriting Agreement(1)

(i) Not applicable

(j) Form of Custodian Services Agreement(1)

(k)(1) Form of Transfer Agency Services Agreement(1)

(k)(2) Form of Administration Services Agreement(1)

(k)(3) Form of Sub-Administration Services Agreement(1)

(k)(4) Form of Accounting Services Agreement(1)

(k)(5) Form of Marketing and Structuring Fee Agreement(1)

(l) Opinion and Consent of Counsel to the Trust

(m) Not applicable

(n) Independent Registered Public Accounting Firm Consent

(o) Not applicable

(p) Subscription Agreement(1)

(q) Not applicable

(r)(1) Code of Ethics of the Trust(1)

(r)(2) Code of Ethics of the Investment Adviser(1)

(s) Powers of Attorney(2)

(1) Incorporated by reference from the final Pre-Effective Amendment No. 6 to
the Trust's Registration Statement on Form N-2, filed on June 21, 2006.

(2) Filed herewith.

Item 26. Marketing Arrangements

Not applicable.

Item 27. Other Expenses Of Issuance And Distribution

Not applicable.

Item 28. Persons Controlled By Or under Common Control With The Registrant

None.

Item 29. Number Of Holders Of Shares

As of December 31, 2006

Number Of

Title Of Class Record Holders

Preferred Shares of Beneficial Interest
0

Common Shares of Beneficial Interest 34,511,355

Item 30. Indemnification

Article V of the Registrant's Agreement and Declaration of Trust provides as
follows:

5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder
of the Trust shall be subject in such capacity to any personal liability
whatsoever to any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust. Shareholders shall have the same
limitation of personal liability as is extended to stockholders of a
private corporation for profit incorporated under the Delaware General
Corporation Law. No trustee or officer of the Trust shall be subject in
such capacity to any personal liability whatsoever to any Person, save
only liability to the Trust or its Shareholders arising from bad faith,
willful misfeasance, gross negligence or reckless disregard for his duty
to such Person; and, subject to the foregoing exception, all such Persons
shall look solely to the Trust Property for satisfaction of claims of any
nature arising in connection with the affairs of the Trust. If any
Shareholder, trustee or officer, as such, of the Trust, is made a party to
any suit or proceeding to enforce any such liability, subject to the
foregoing exception, he shall not, on account thereof, be held to any
personal liability. Any repeal or modification of this Section 5.1 shall
not adversely affect any right or protection of a trustee or officer of
the Trust existing at the time of such repeal or modification with respect
to acts or omissions occurring prior to such repeal or modification.

5.2 Mandatory Indemnification. (a) The Trust hereby agrees to indemnify
each person who at any time serves as a trustee or officer of the Trust
(each such person being an "indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and reasonable counsel fees
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in
which he may be or may have been involved as a party or otherwise or with
which he may be or may have been threatened, while acting in any capacity
set forth in this Article V by reason of his having acted in any such
capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the
best interest of the Trust or, in the case of any criminal proceeding, as
to which he shall have had reasonable cause to believe that the conduct
was unlawful, provided, however, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of such
indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith,
(iii) gross negligence, or (iv) reckless disregard of the duties involved
in the conduct of his position (the conduct referred to in such clauses
(i) through (iv) being sometimes referred to herein as "disabling
conduct"). Notwithstanding the foregoing, with respect to any action, suit
or other proceeding voluntarily prosecuted by any indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of such action,
suit or other proceeding by such indemnitee (1) was authorized by a
majority of the trustees or (2) was instituted by the indemnitee to
enforce his or her rights to indemnification hereunder in a case in which
the indemnitee is found to be entitled to such indemnification. The rights
to indemnification set forth in this Declaration shall continue as to a
person who has ceased to be a trustee or officer of the Trust and shall
inure to the benefit of his or her heirs, executors and personal and legal
representatives. No amendment or restatement of this Declaration or repeal
of any of its provisions shall limit or eliminate any of the benefits
provided to any person who at any time is or was a trustee or officer of
the Trust or otherwise entitled to indemnification hereunder in respect of
any act or omission that occurred prior to such amendment, restatement or
repeal.

(b) Notwithstanding the foregoing, no indemnification shall be made
hereunder unless there has been a determination (i) by a final decision on
the merits by a court or other body of competent jurisdiction before whom
the issue of entitlement to indemnification hereunder was brought that
such indemnitee is entitled to indemnification hereunder or, (ii) in the
absence of such a decision, by (1) a majority vote of a quorum of those
trustees who are neither "interested persons" of the Trust (as defined in
Section 2(a)(19) of the Investment Company Act) nor parties to the
proceeding ("Disinterested Non-Party Trustees"), that the indemnitee is
entitled to indemnification hereunder, or (2) if such quorum is not
obtainable or even if obtainable, if such majority so directs, independent
legal counsel in a written opinion concludes that the indemnitee should be
entitled to indemnification hereunder. All determinations to make advance
payments in connection with the expense of defending any proceeding shall
be authorized and made in accordance with the immediately succeeding
paragraph (c) below.

(c) The Trust shall make advance payments in connection with the expenses
of defending any action with respect to which indemnification might be
sought hereunder if the Trust receives a written affirmation by the
indemnitee of the indemnitee's good faith belief that the standards of
conduct necessary for indemnification have been met and a written
undertaking to reimburse the Trust unless it is subsequently determined
that the indemnitee is entitled to such indemnification and if a majority
of the trustees determine that the applicable standards of conduct
necessary for indemnification appear to have been met. In addition, at
least one of the following conditions must be met: (i) the indemnitee
shall provide adequate security for his undertaking, (ii) the Trust shall
be insured against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of the Disinterested Non-Party Trustees, or
if a majority vote of such quorum so direct, independent legal counsel in
a written opinion, shall conclude, based on a review of readily available
facts (as opposed to a full trial-type inquiry), that there is substantial
reason to believe that the indemnitee ultimately will be found entitled to
indemnification.

(d) The rights accruing to any indemnitee under these provisions shall not
exclude any other right which any person may have or hereafter acquire
under this Declaration, the By-Laws of the Trust, any statute, agreement,
vote of stockholders or trustees who are "disinterested persons" (as
defined in Section 2(a)(19) of the Investment Company Act) or any other
right to which he or she may be lawfully entitled.

(e) Subject to any limitations provided by the Investment Company Act and
this Declaration, the Trust shall have the power and authority to
indemnify and provide for the advance payment of expenses to employees,
agents and other Persons providing services to the Trust or serving in any
capacity at the request of the Trust to the full extent corporations
organized under the Delaware General Corporation Law may indemnify or
provide for the advance payment of expenses for such Persons, provided
that such indemnification has been approved by a majority of the trustees.

5.3 No Bond Required of Trustees. No trustee shall, as such, be obligated
to give any bond or other security for the performance of any of his
duties hereunder.

5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the
trustees or with any officer, employee or agent of the Trust shall be
bound to make any inquiry concerning the validity of any transaction
purporting to be made by the trustees or by said officer, employee or
agent or be liable for the application of money or property paid, loaned,
or delivered to or on the order of the trustees or of said officer,
employee or agent. Every obligation, contract, undertaking, instrument,

certificate, Share, other security of the Trust, and every other act or
thing whatsoever executed in connection with the Trust shall be
conclusively taken to have been executed or done by the executors thereof
only in their capacity as trustees under this Declaration or in their
capacity as officers, employees or agents of the Trust. The trustees may
maintain insurance for the protection of the Trust Property, its
Shareholders, trustees, officers, employees and agents in such amount as
the trustees shall deem adequate to cover possible tort liability, and
such other insurance as the trustees in their sole judgment shall deem
advisable or is required by the Investment Company Act.

5.5 Reliance on Experts, etc. Each trustee and officer or employee of the
Trust shall, in the performance of its duties, be fully and completely
justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other
records of the Trust, upon an opinion of counsel, or upon reports made to
the Trust by any of the Trust's officers or employees or by any advisor,
administrator, manager, distributor, selected dealer, accountant,
appraiser or other expert or consultant selected with reasonable care by
the trustees, officers or employees of the Trust, regardless of whether
such counsel or expert may also be a trustee.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, may be permitted to trustees, officers and controlling
persons of the Trust, pursuant to the foregoing provisions or otherwise,
the Trust has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the Trust of expenses incurred or paid by a trustee, officer or
controlling person of the Trust in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, the Trust will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue. Reference is made to Section 8 of the
underwriting agreement attached as Exhibit (h), which is incorporated
herein by reference and discusses the rights, responsibilities and
limitations with respect to indemnity and contribution.

Item 31. Business And Other Connections Of Investment Advisor

Highland Capital Management, L.P. has not engaged in any other substantial
business since January 1, 2003 other than that disclosed under "Management of
the Trust" in each of the prospectus and the Statement of Additional
Information. Information as to other businesses, professions, vocations or
employment of a substantial nature engaged in by each partner and executive
officer of Highland Capital Management, L.P. is set forth in its Form ADV, as
filed on the Commission's website (File No. 801-54874) and is incorporated
herein by reference.

Item 32. Location Of Accounts And Records

The Trust's accounts, books and other documents are currently located at the
offices of the Registrant, c/o Highland Capital Management, L.P., Two Galleria
Tower, 13455 Noel Road, Suite 800, Dallas, Texas 75240 and at the offices of
the Registrant's Custodian and Transfer Agent.

Item 33. Management Services

Not Applicable.

Item 34. Undertakings

(1) The Trust hereby undertakes to suspend the offering of its units until it
amends its prospectus if (a) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(b) the net asset value increases to an amount greater than its net proceeds
as stated in the prospectus.

(2) Not applicable.

(3) Not applicable.

(4) The Registrant hereby undertakes:

(a) to file, during any period in which offers or sales are made, a post-
effective amendment to the registration statement:

(i) to include any prospectus required by Section 10(a)(3) of the
1933 Act;

(ii) to reflect in the prospectus any facts or events after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.

(b) that, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of those
securities at that time shall be deemed to be the initial bona fide offering
thereof; and

(c) to remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(5) (a) For the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
a registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant under Rule 497 (h) under the Securities
Act of 1933 shall be deemed to be part of the Registration Statement as of the
time it was declared effective.

(b) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.

(6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery within two business days of receipt
of a written or oral request, any Statement of Additional Information.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, and State of Texas, on the 19th day of
June, 2007.

/s/ James D. Dondero*

James D. Dondero

Chief Executive Officer and President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities set forth
below on the day of June 19, 2007.

Name Title

/s/ R. Joseph Dougherty* Trustee
R. Joseph Dougherty

/s/ Timothy Hui* Trustee
Timothy Hui

/s/ Scott Kavanaugh* Trustee
Scott Kavanaugh

/s/ James Leary* Trustee
James Leary

/s/ Bryan Ward* Trustee
Bryan Ward

/s/ James D. Dondero* Chief Executive Officer
James D. Dondero and President

/s/ M. Jason Blackburn Chief Financial Officer
M. Jason Blackburn (Principal Accounting Officer),
Treasurer and Secretary

*By: /s/ M. Jason Blackburn

M. Jason Blackburn
Attorney-in-Fact
June 19, 2007