UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY

Highland Credit Strategies Fund

(Exact name of registrant as specified in charter)

NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

R. Joseph Dougherty
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240

(Name and address of agent for service)

Registrant’s telephone number, including area code: (877) 665-1287

Date of fiscal year end: December 31

Date of reporting period: March 31, 2010

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 

Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.

INVESTMENT PORTFOLIO (unaudited)

As of March 31, 2010		Highland Credit Strategies Fund

Principal Amount ($)						Value ($)
US Senior Loans (a) - 74.2%
AEROSPACE - 4.3%
				AWAS Capital, Inc.
	1,571,772			Second Lien Priority Term Facility, 6.31%, 03/15/13			1,237,770
				Continental Airlines, Inc.
	571,429			Tranche A-1 Term Loan, 3.63%, 06/01/11			559,183
	1,428,571			Tranche A-2 Term Loan, 3.63%, 06/01/11			1,397,957
				Delta Air Lines, Inc.
	1,994,872			Second Lien Term Loan, 04/30/14 (b)			1,834,574
	4,179,000			Term Loan, 8.75%, 09/27/13			4,249,521
	5,504,975			Term Loan Equipment Notes, 3.79%, 09/29/12			5,009,527
				Hawker Beechcraft Acquisition Co. LLC
	28,001			Letter of Credit Facility Deposit, 03/26/14 (b)			23,632
	470,786			Term Loan, 03/26/14 (b)			397,331
				IAP Worldwide Services, Inc.
	2,209,671			Second Lien Term Loan, PIK, 11.50%, 06/28/13			1,902,527
				US Airways Group, Inc.
	4,931,507			Term Loan, 2.75%, 03/21/14			4,062,329
							20,674,351
BROADCASTING - 9.1%
				ComCorp Broadcasting, Inc.
	3,584,549			Revolving Loan, 9.00%, 10/03/12 (c) (d)			3,146,517
	35,860,392			Term Loan, PIK, 9.00%, 04/03/13 (c) (d)			31,478,252
				Cumulus Media, Inc.
	4,760,846			Replacement Term Loan, 4.24%, 06/11/14 (b)			4,299,640
				Entercom Radio, LLC
	338,633			Term A Loan, 06/29/12 (b)			323,112
				TWCC Holding Corp.
	2,067,024			Replacement Term Loans, 5.00%, 09/14/15			2,093,678
				Univision Communications, Inc.
	3,000,000			Initial Term Loan, 2.54%, 09/29/14			2,682,630
							44,023,829
CABLE/WIRELESS VIDEO - 3.3%
				Broadstripe, LLC
	1,107,409			DIP Revolver, 7.25%, 12/31/10 (d) (e)			1,107,188
	14,151,376			First Lien Term Loan, PIK, 06/30/11 (d) (f)			11,622,524
	1,428,203			Revolver, 06/30/11 (d) (f)			1,172,983
				WideOpenWest Finance, LLC.
	1,800,000			Series A New Term Loan, 6.76%, 06/30/14			1,812,375
							15,715,070
CHEMICALS - 2.3%
				Lyondell Chemical Co.
	20,574			Dutch Revolving Credit Loan, 12/20/13 (b) (f)			16,136
	45,284			Dutch Tranche A Dollar Term Loan, 12/20/13 (b) (f)			35,516
	59,065			German Tranche B-1 Euro Term Loan, 12/22/14 (b) (f)			46,325
	59,065			German Tranche B-2 Euro Term Loan, 12/22/14 (b) (f)			46,325
	59,065			German Tranche B-3 Euro Term Loan, 12/22/14 (b) (f)			46,325
	77,151			Primary Revolving Credit Loan, 12/20/13 (b) (f)			60,510
	3,396,261			Roll-Up Loan, DIP, 5.80%, 06/03/10 (b)			3,621,263
	146,995			U.S. Tranche A Dollar Term Loan, 12/20/13 (b) (f)			115,289
	256,299			U.S. Tranche B-1 Dollar Term Loan, 12/22/14 (b) (f)			201,017
	256,299			U.S. Tranche B-2 Dollar Term Loan, 12/22/14 (b) (f)			201,017
	256,299			U.S. Tranche B-3 Dollar Term Loan, 12/22/14 (b) (f)			201,017
				Solutia, Inc.
	750,000			Term Loan, 4.75%, 03/01/17			758,381
				TPC Group LLC
	1,318,543			Incremental Term Loan B, 2.81%, 06/27/13			1,246,023
	4,596,823			Term B Loan, 2.81%, 06/27/13			4,343,998
							10,939,142
CONSUMER NON-DURABLES - 0.9%
				KIK Custom Products, Inc.
	575,823			First Lien Canadian Term Loan, 2.50%, 06/02/14 (b)			493,048
	3,358,969			First Lien U.S. Term Loan, 2.50%, 06/02/14 (b)			2,876,118
	2,000,000			Second Lien Term Loan, 5.25%, 12/01/14			1,191,000
							4,560,166
DIVERSIFIED MEDIA - 5.5%
				Cengage Learning Acquisitions, Inc.
	3,473,282			Term Loan, 2.79%, 07/03/14			3,072,587
				Cydcor, Inc.
	6,029,022			First Lien Tranche B Term Loan, 9.00%, 02/05/13			5,644,672
	3,000,000			Second Lien Tranche B Term Loan, 12.00%, 02/05/14 (d)			2,876,700

See accompanying Notes to Investment Portfolio.

INVESTMENT PORTFOLIO (unaudited) (continued)

As of March 31, 2010		Highland Credit Strategies Fund

Principal Amount ($)						Value ($)
US Senior Loans (continued)
DIVERSIFIED MEDIA (continued)
				DTN, Inc.
	1,357,447			Tranche C Term Loan, 5.52%, 03/10/13			1,342,175
				Endurance Business Media, Inc.
	3,000,000			Second Lien Term Loan, 01/26/14 (f)			1,053,750
				Harland Clarke Holdings Corp.
	4,919,516			Tranche B Term Loan, 2.78%, 06/30/14			4,509,966
				Metro-Goldwyn-Mayer, Inc.
	14,144,530			Tranche B Term Loan, 04/09/12 (b) (f)			6,840,789
	2,917,500			Tranche B-1 Term Loan, 04/09/12 (f)			1,411,005
							26,751,644
ENERGY - 3.9%
				Alon USA Energy, Inc.
	213,889			Edington Facility, 2.50%, 08/05/13			172,448
	1,711,111			Paramount Facility, 2.50%, 08/05/13			1,379,583
				ATP Oil & Gas Corp.
	1,157,230			Tranche B-1 Term Loan, 11.25%, 07/15/14			1,174,051
	163,795			Tranche B-2 Term Loan, 12.25%, 01/15/11			166,176
				Big West Oil, LLC
	2,600,000			Term Loan, 01/30/15 (b)			2,641,158
				Calumet Lubricants Co., LP
	197,380			Credit-Linked Letter of Credit, 4.10%, 01/03/15			183,688
	1,461,688			Term Loan, 4.25%, 01/03/15			1,360,290
				Coffeyville Resources, LLC
	2,762,173			Tranche D Term Loan, 8.50%, 12/30/13			2,805,097
				Venoco, Inc.
	9,340,080			Second Lien Term Loan, 4.25%, 05/07/14			8,890,635
							18,773,126
FINANCIAL - 1.5%
				HUB International Ltd.
	2,982,506			Additional Term Loan, 6.75%, 06/13/14			2,982,506
				Nuveen Investments, Inc.
	3,000,000			First Lien Term Loan, 3.29%, 11/13/14			2,760,000
	1,500,000			Second Lien Term Loan, 12.50%, 07/31/15 (b) (g)			1,610,625
							7,353,131
FOOD AND DRUG - 0.4%
				Rite Aid Corp.
	982,521			Tranche 3 Term Loan, 6.00%, 06/04/14			964,836
	750,000			Tranche 4 Term Loan, 9.50%, 06/10/15			785,936
							1,750,772
FOOD/TOBACCO - 2.6%
				DS Waters of America, Inc.
	1,823,889			Term Loan, 2.49%, 10/29/12			1,703,056
				DSW Holdings, Inc.
	7,000,000			Term Loan, 4.24%, 03/02/12			6,620,845
				PBM Holdings, Inc.
	1,745,382			Term Loan, 2.50%, 09/28/12			1,736,655
				Pierre Foods, Inc.
	1,050,000			Term Loan, 7.00%, 03/03/16			1,056,773
				WM. Bolthouse Farms, Inc.
	500,000			First Lien Term Loan, 5.50%, 02/11/16			503,935
	1,000,000			Second Lien Term Loan, 9.50%, 08/11/16			1,009,845
							12,631,109
FOREST PRODUCTS/CONTAINERS - 2.0%
				Consolidated Container Co., LLC
	4,000,000			Second Lien Term Loan, 5.75%, 09/28/14 (b)			3,560,000
				Newark Group, Inc.
	204,186			Credit-Link Letter of Credit, 6.73%, 03/09/13			191,935
	1,632,325			Term Loan, 10.75%, 03/09/13			1,534,386
				Smurfit-Stone Container Enterprises, Inc.
	3,500,000			Exit Term Loan, 02/22/16 (b)			3,513,125
				Tegrant Corp.
	1,000,000			Second Lien Term Loan, 5.80%, 03/08/15			725,000
							9,524,446
GAMING/LEISURE - 6.5%
	6,041,285			Drake Hotel Acquisition B Note 1, 04/01/10 (d) (f)			—
				Fontainebleau Florida Hotel, LLC
	18,500,000			Tranche C Term Loan, 06/06/12 (f)			6,475,000
				Ginn LA Conduit Lender, Inc.
	3,937,249			First Lien Tranche A Credit-Linked Deposit, 06/08/11 (f)			329,745
	8,438,203			First Lien Tranche B Term Loan, 06/08/11 (f)			717,247
				Green Valley Ranch Gaming, LLC
	1,000,000			Second Lien Term Loan, 08/16/14 (f)			72,500
	159,286			Lake at Las Vegas Joint Venture Mezzanine, 06/20/12 (f)			5,575
	8,162,813			Revolving Loan Credit-Linked Deposit Account, 06/20/12 (f)			20,448
	34,125,359			Term Loan, DIP, 4.66%, 04/30/10			10,237,608
	92,368,651			Term Loan, PIK, 06/20/12 (f)			160,884

INVESTMENT PORTFOLIO (unaudited) (continued)

As of March 31, 2010		Highland Credit Strategies Fund

Principal Amount ($)						Value ($)
US Senior Loans (continued)
GAMING/LEISURE (continued)
				Las Vegas Sands, LLC
	1,390,920			Delayed Draw I Term Loan, 2.05%, 05/23/14			1,276,364
	6,883,814			Tranche B Term Loan, 2.05%, 05/23/14			6,316,863
				MGM Mirage, Inc.
	291,555			Class A-2, 12/21/14 (b)			241,262
	108,445			Class C, 12/21/14 (b)			89,738
	2,000,000			Class D Loan, 6.00%, 10/03/11 (b)			1,952,270
				VML US Finance, LLC
	1,111,793			Term B Delayed Draw Project Loan, 4.80%, 05/25/12			1,081,497
	1,924,805			Term B Funded Project Loan, 4.80%, 05/27/13			1,872,354
				WAICCS Las Vegas 3 LLC
	7,000,000			Second Lien Term Loan (f)			708,750
							31,558,105
HEALTHCARE - 2.1%
				Aveta, Inc.
	2,053,401			MMM Original Term Loan, 5.50%, 08/22/11			2,022,600
	305,042			NAMM New Term Loan, 5.50%, 08/22/11			300,467
	549,672			NAMM Original Term Loan, 5.50%, 08/22/11			541,427
	1,682,809			PHMC Acquisition Term Loan, 5.50%, 08/22/11			1,657,567
	5,338,661			LifeCare Holdings Term Loan, 4.50%, 08/10/12			4,898,222
				MultiPlan, Inc.
	800,000			Incremental Term D Loan, 6.00%, 04/12/13			802,664
							10,222,947
HOUSING - 3.0%
				Custom Building Products, Inc.
	4,300,000			Term Loan, 5.75%, 03/19/15			4,324,209
				LBREP/L-Suncal Master I, LLC
	3,190,581			First Lien Term Loan, 01/18/10 (f)			15,953
				Pacific Clarion, LLC
	24,752,866			Term Loan (d) (f)			3,804,342
				Roofing Supply Group, LLC
	3,059,067			Term Loan, 7.25%, 08/24/13			2,921,409
				Westgate Investments, LLC
	8,272,736			Senior Secured Loan, 09/25/10 (f)			2,493,576
	2,336,387			Senior Unsecured Loan, 09/25/12 (f)			561,578
	3,743,195			Third Lien Term Loan, 06/30/15 (f)			540,304
							14,661,371
INFORMATION TECHNOLOGY - 2.0%
				CDW Corp.
	6,888,913			Term Loan, 4.23%, 10/10/14			6,057,938
				RedPrairie Corp.
	1,350,000			Term Loan, 03/24/16			1,354,495
				Verint Systems, Inc.
	2,480,867			Term Loan, 3.54%, 05/25/14			2,360,955
							9,773,388
MANUFACTURING - 2.9%
				Acument Global Technologies, Inc.
	6,473,315			Term Loan, PIK, 14.00%, 08/11/13			5,874,533
				Brand Energy & Infrastructure Services, Inc.
	3,000,000			Second Lien Term Loan, 6.27%, 02/07/15			2,707,500
				Dana Holding Corp.
	2,549,257			Term Advance, 4.50%, 01/30/15			2,513,006
				Gentek Holding, LLC
	1,496,250			Tranche B Term Loan, 7.00%, 10/29/14			1,510,681
				United Central Industrial Supply Co., LLC
	1,265,867			Term Loan, 2.52%, 03/31/12			1,227,891
							13,833,611
METALS/MINERALS - 0.5%
				Euramax International, Inc.
	1,454,449			Domestic Term Loan (Cash Pay), 10.00%, 06/29/13			1,229,009
	1,489,905			Domestic Term Loan, PIK, 14.00%, 06/29/13			1,258,970
							2,487,979
RETAIL - 4.3%
				Burlington Coat Factory Warehouse Corp.
	5,953,488			Term Loan, 2.50%, 05/28/13			5,714,932
				Guitar Center, Inc.
	4,334,043			Term Loan, 3.75%, 10/09/14			4,060,478
				Michaels Stores, Inc.
	3,926,400			B-1 Term Loan, 2.54%, 10/31/13 (b)			3,744,805
	2,074,063			B-2 Term Loan, 4.79%, 07/31/16			2,025,239
				Spirit Finance Corp.
	6,500,000			Term Loan, 3.25%, 08/01/13			5,135,000
							20,680,454

See accompanying Notes to Investment Portfolio.

INVESTMENT PORTFOLIO (unaudited) (continued)

As of March 31, 2010		Highland Credit Strategies Fund

Principal Amount ($)						Value ($)
US Senior Loans (continued)
SERVICE - 5.2%
				CCS, Inc.
	4,475,477			Term Loan, 3.25%, 11/14/14 (b)			3,906,354
				First Data Corp.
	1,484,772			Initial Tranche B-1 Term Loan, 3.00%, 09/24/14			1,317,467
				N.E.W. Holdings I, LLC
	900,000			Secured Term Loan, 6.00%, 03/23/16			897,939
				NES Rentals Holdings, Inc.
	3,224,820			Second Lien Permanent Term Loan, 7.09%, 07/20/13			3,168,386
				Penhall Holding Co.
	9,991,289			Term Loan, 9.63%, 04/01/12			1,248,911
				Sabre, Inc.
	7,927,144			Initial Term Loan, 2.25%, 09/30/14			7,404,706
				Safety-Kleen Systems, Inc.
	1,301,695			Synthetic Letter of Credit, 2.75%, 08/02/13			1,239,864
	6,034,576			Term B Loan, 2.75%, 08/02/13
							5,747,934
							24,931,561
TELECOMMUNICATIONS - 4.2%
				Avaya, Inc.
	6,956,405			Term B-1 Loan, 3.00%, 10/24/14			6,217,321
				Digicel International Finance, Ltd.
	2,800,084			Tranche A - T&T, 2.81%, 09/30/12			2,758,083
	3,000,150			Tranche A Term Loan, 2.81%, 03/30/12			2,955,148
				Integra Telecom Holdings, Inc.
	3,638,120			First Lien Term Loan, 10.75%, 08/31/13			3,656,311
				Level 3 Financing, Inc.
	4,000,000			Tranche A Term Loan, 2.50%, 03/13/14			3,728,120
				U.S. Telepacific Corp.
	1,000,000			Term Loan Advance, 9.25%, 08/17/15			1,008,125
							20,323,108
TRANSPORTATION — AUTOMOTIVE - 2.6%
				Federal-Mogul Corp.
	1,976,377			Tranche B Term Loan, 2.17%, 12/29/14			1,832,744
	1,008,356			Tranche C Term Loan, 2.18%, 12/28/15			935,073
				Ford Motor Co.
	3,969,273			Tranche B-1 Term Loan, 3.26%, 12/15/13			3,849,500
				Motor Coach Industries International, Inc.
	5,970,085			Second Lien Tranche A, 11.75%, 06/30/12 (d)			3,650,110
	3,678,191			Second Lien Tranche B, 11.75%, 06/30/12 (d)			2,248,846
							12,516,273
TRANSPORTATION — LAND TRANSPORTATION - 0.8%
				New Century Transportation, Inc.
	1,805,780			Term Loan, 7.23%, 08/14/12			1,643,260
				SIRVA Worldwide, Inc.
	962,539			Revolving Credit Loan Exit Finance, 12.61%, 05/12/12 (e)			577,523
	3,477,514			Second Lien Term Loan, 12.00%, 05/12/15			782,441
	1,624,158			Term Loan (Exit Finance), PIK, 12.81%, 05/12/12			1,055,703
							4,058,927
UTILITY - 3.7%
				Coleto Creek Power, LP
	100,890			First Lien Synthetic Letter of Credit, 3.04%, 06/28/13			92,819
	1,331,432			First Lien Term Loan, 3.03%, 06/28/13			1,257,378
	4,812,500			Second Lien Term Loan, 4.25%, 06/28/13			3,962,276
				Entegra TC LLC
	10,338,015			Third Lien Term Loan, PIK, 6.29%, 10/19/15			5,356,435
				GBGH, LLC
	2,202,643			First Lien Term Loan, 4.00%, 06/09/13 (d)			1,855,286
	727,109			Second Lien Term Loan, PIK, 12.00%, 06/09/14 (d)			540,170
				Texas Competitive Electric Holdings Co., LLC
	5,949,161			Initial Tranche B-2 Term Loan, 3.73%, 10/10/14			4,901,633
							17,965,997
WIRELESS COMMUNICATIONS - 0.6%
				MetroPCS Wireless, Inc.
	2,976,864			Tranche B Term Loan, 2.50%, 11/03/13			2,917,475
				Total US Senior Loans (Cost $539,080,182)			358,627,982

Principal Amount
Foreign Denominated Senior Loans (a) - 4.0%
AUSTRALIA - 4.0%
AUD
				SMG H5 Pty., Ltd.
	22,870,278			Facility A Term Loan, 6.91%, 12/24/12			19,312,208
				Total Foreign Denominated Senior Loans (Cost $18,574,472)			19,312,208

See accompanying Notes to Investment Portfolio.

INVESTMENT PORTFOLIO (unaudited) (continued)

As of March 31, 2010		Highland Credit Strategies Fund

Principal Amount ($)						Value ($)
Asset-Backed Securities (h) - 7.2%
				AB CLO, Ltd.
	2,000,000			Series 2007-1A, Class C, 2.10%, 04/15/21 (d) (i)			1,218,822
				ACA CLO, Ltd.
	4,000,000			Series 2006-2A, Class B, 0.97%, 01/20/21 (i)			2,300,000
	2,000,000			Series 2007-1A, Class D, 2.60%, 06/15/22 (i)			1,100,000
				Babson CLO, Ltd.
	1,000,000			Series 2007-2A, Class D, 04/15/21 (i)			500,000
				Bluemountain CLO, Ltd.
	1,000,000			Series 2007-3A, Class D, 1.66%, 03/17/21 (d) (i)			563,086
				Cent CDO, Ltd.
	2,000,000			Series 2007-15A, Class C, 2.51%, 03/11/21 (i)			1,055,340
				Columbus Nova CLO, Ltd.
	2,000,000			Series 2007- 1A, Class D, 1.60%, 05/16/19 (i)			1,070,000
				Commercial Industrial Finance Corp.
	1,000,000			Series 2006-1BA, Class B2L, 4.27%, 12/22/20			405,000
	962,970			Series 2006-2A, Class B2L, 4.25%, 03/01/21 (i)			346,669
				Cornerstone CLO, Ltd.
	2,500,000			Series 2007-1A, Class C, 2.65%, 07/15/21 (i)			1,450,000
				Goldman Sachs Asset Management CLO PLC
	4,000,000			Series 2007-1A, Class D, 08/01/22 (i)			1,940,000
	948,815			Series 2007-1A, Class E, 08/01/22 (i)			279,900
				Greywolf CLO, Ltd
	1,000,000			Series 2007-1A, Class D, 1.75%, 02/18/21 (i)			477,500
	814,466			Series 2007-1A, Class E, 4.20%, 02/18/21 (i)			317,642
				GSC Partners CDO Fund, Ltd.
	3,000,000			Series 2007-8A, Class C, 1.73%, 04/17/21 (i)			737,640
				Gulf Stream Sextant CLO, Ltd.
	1,000,000			Series 2007-1A, Class D, 06/17/21 (i)			492,500
				Hillmark Funding
	2,000,000			Series 2006-1A, Class C, 1.95%, 05/21/21 (i)			1,113,333
	612,103			Series 2006-1A, Class D, 3.85%, 05/21/21 (i)			250,962
				Inwood Park CDO, Ltd.
	1,000,000			Series 2006-1A, Class C, 0.95%, 01/20/21 (i)			800,000
	1,000,000			Series 2006-1A, Class D, 1.65%, 01/20/21 (i)			717,500
				Limerock CLO
	2,000,000			Series 2007-1A, Class D, 04/24/23 (i)			720,000
				Madison Park Funding Ltd.
	2,000,000			Series 2007-5A, Class C, 1.70%, 02/26/21 (i)			975,780
	1,500,000			Series 2007-5A, Class D, 3.75%, 02/26/21 (i)			609,045
				Marquette US/European CLO, PLC
	1,000,000			Series 2006-1A, Class D1, 2.00%, 07/15/20 (i)			315,000
				Navigator CDO, Ltd.
	835,038			Series 2006-2A, Class D, 09/20/20 (i)			217,110
				Ocean Trails CLO
	1,000,000			Series 2006-1A, Class D, 4.00%, 10/12/20 (i)			395,000
	2,500,000			Series 2007-2A, Class C, 2.60%, 06/27/22 (i)			1,325,000
				PPM Grayhawk CLO, Ltd.
	1,000,000			Series 2007-1A, Class C, 1.65%, 04/18/21 (i)			490,000
	826,734			Series 2007-1A, Class D, 3.85%, 04/18/21 (i)			339,738
				Primus CLO, Ltd.
	5,000,000			Series 2007-2A, Class D, 07/15/21 (i)			2,700,000
	2,091,094			Series 2007-2A, Class E, 07/15/21 (i)			961,903
				Rampart CLO, Ltd.
	4,000,000			Series 2006-1A, Class C, 1.70%, 04/18/21 (i)			2,260,000
				St. James River CLO, Ltd.
	2,287,217			Series 2007-1A, Class E, 4.56%, 06/11/21 (i)			914,887
				Stanfield Daytona CLO, Ltd.
	1,200,000			Series 2007-1A, Class B1L, 1.60%, 04/27/21 (i)			648,000
				Stanfield McLaren CLO, Ltd.
	4,000,000			Series 2007-1A, Class B1L, 2.65%, 02/27/21 (i)			2,000,000
				Stone Tower CLO, Ltd.
	2,000,000			Series 2007-6A, Class C, 1.60%, 04/17/21 (i)			980,000
				Venture CDO, Ltd.
	2,000,000			Series 2007-9A, Class D, 4.40%, 10/12/21 (i)			1,112,500
				Westbrook CLO, Ltd.
	1,000,000			Series 2006-1A, Class D, 1.97%, 12/20/20 (i)			535,000
				Total Asset-Backed Securities (Cost $49,202,676)			34,634,857

Foreign Asset-Backed Securities (h) - 0.5%

Principal Amount
IRELAND - 0.5%
EUR
				Static Loan Funding
	2,000,000			Series 2007-1X, Class D, 5.47%, 07/31/17 (i)			1,393,700
	2,000,000			Series 2007-1X, Class E, 7.97%, 07/31/17 (i)			1,123,079
				Total Foreign Asset-Backed Securities (Cost $5,675,512)			2,516,779

See accompanying Notes to Investment Portfolio.

INVESTMENT PORTFOLIO (unaudited) (continued)

As of March 31, 2010		Highland Credit Strategies Fund

Principal Amount ($)						Value ($)
Corporate Notes and Bonds - 26.6%
AEROSPACE - 0.5%
				Delta Air Lines, Inc.
	5,000,000			06/30/23 (f)			102,500
	7,000,000			12/15/29 (f)			157,500
	1,000,000			9.50%, 09/15/14 (i)			1,056,250
				Northwest Airlines Corp.
	2,500,000			12/30/27 (f)			21,250
				Northwest Airlines, Inc.
	1,468,977			9.06%, 05/20/12			1,307,390
							2,644,890
BROADCASTING - 0.8%
				LBI Escrow Corp.
	3,500,000			8.00%, 11/01/17 (i)			3,635,625
				Young Broadcasting, Inc.
	3,065,000			03/01/11 (f) (j)			21,455
							3,657,080
CHEMICALS - 0.6%
				Berry Plastics Holding Corp.
	3,000,000			8.88%, 09/15/14			2,943,750
DIVERSIFIED MEDIA - 0.9%
				Baker & Taylor, Inc.
	8,300,000			11.50%, 07/01/13 (i)			4,440,500
FINANCIAL - 0.6%
				Penhall International Corp.
	3,500,000			12.00%, 08/01/14 (i)			2,651,250
FOOD AND DRUG - 0.4%
				Rite Aid Corp.
	2,000,000			10.38%, 07/15/16			2,125,000
FOREST PRODUCTS/CONTAINERS - 0.0%
				NewPage Holding Corp., PIK
	341,479			7.56%, 11/01/13 (h)			90,492
GAMING/LEISURE - 0.4%
				MGM Mirage, Inc.
	2,000,000			6.75%, 04/01/13			1,820,000
HEALTHCARE - 14.7%
				Argatroban Royalty Sub LLC
	6,765,681			18.50%, 09/21/14 (i)			6,089,113
				Azithromycin Royalty Sub LLC
	15,000,000			16.00%, 05/15/19 (i)			11,550,000
				Celtic Pharma Phinco B.V., PIK
	52,617,143			17.00%, 06/15/12 (i)			31,570,286
				Cinacalcet Royalty Sub LLC
	131,949			8.00%, 03/30/17 (i)			139,865
				Dfine, Inc.
	791,675			6.00%, 06/30/10 (d)			791,675
				Fosamprenavir Pharma
	3,609,385			15.50%, 06/15/18 (i)			3,320,634
				Molecular Insight Pharmaceuticals, Inc., PIK
	4,038,224			8.25%, 11/01/12 (h) (i)			1,817,201
				Pharma IV (Eszopiclone)
	2,099,484			12.00%, 06/30/14 (i)			1,826,551
				Pharma V (Duloxetine)
	560,000			13.00%, 10/15/13 (i)			537,600
				TCD Pharma
	15,500,000			16.00%, 04/15/24 (i)			13,640,000
							71,282,925
INFORMATION TECHNOLOGY - 1.2%
				Freescale Semiconductor, Inc.
	5,000,000			10.13%, 03/15/18 (i)			5,406,250
				New Holding, Inc.
	477,689			03/12/13 (d) (f)			173,401
							5,579,651
METALS/MINERALS - 0.6%
				Appleton Papers, Inc.
	3,000,000			10.50%, 06/15/15 (i)			3,000,000
RETAIL - 0.2%
				Autonation, Inc.
	500,000			6.75%, 04/15/18			495,625
				Burlington Coat Factory Warehouse Corp.
	500,000			11.13%, 04/15/14 (j)			531,250
							1,026,875
TRANSPORTATION — AUTOMOTIVE - 2.3%
				American Tire Distributors Holdings, Inc.
	11,500,000			6.50%, 04/01/12 (h)			10,421,875
				Delphi Corp.
	3,750,000			05/01/10 (f)			140,625
	3,933,000			06/15/10 (f)			147,488
	8,334,000			05/01/29 (f) (j)			312,525
							11,022,513
UTILITY - 0.4%
				Kiowa Power
	2,000,000			5.74%, 03/30/21 (i)			1,862,848
WIRELESS COMMUNICATIONS - 3.0%
				Digicel Group, Ltd., PIK
	14,492,000			9.13%, 01/15/15 (i) (j)			14,455,770
				Total Corporate Notes and Bonds (Cost $167,792,671)			128,603,544
Claims (k) - 0.1%
FINANCIAL - 0.1%
				Lehman Brothers Holding, Inc.
	1,198,046			Trade Claims LBSF			525,146
RETAIL - 0.0%
				Home Interiors & Gifts, Inc.
	6,933,961			Proof of Claims (d)			11,788
				Total Claims (Cost $5,595,198)
							536,934

See accompanying Notes to Investment Portfolio.

INVESTMENT PORTFOLIO (unaudited) (continued)

As of March 31, 2010		Highland Credit Strategies Fund

Shares						Value ($)
Common Stocks (k) - 10.1%
AEROSPACE - 0.0%
	3,719			Delta Air Lines, Inc.			54,260
BROADCASTING - 0.0%
	2,010,616			Communications Corp. of America (c) (d)			—
	57,757			Gray Television, Inc., Class A			141,505
							141,505
DIVERSIFIED MEDIA - 0.1%
	46,601			American Banknote Corp. (d)			399,836
HEALTHCARE - 8.4%
	24,000,000			Genesys Ventures IA, LP (c) (d)			40,800,000
HOUSING - 0.0%
	8			Westgate Investments LLC, Class B-1 (d)			—
INFORMATION TECHNOLOGY - 0.1%
	385,679			Magnachip Semiconductor (d) (j)			401,106
	9,342			New Holding, Inc. (d)			—
							401,106
METALS/MINERALS - 0.3%
	7,579			Euramax International, Inc. (d)			1,158,526
RETAIL - 0.2%
	105,092			Sally Beauty Holdings, Inc.			937,421
SERVICE - 0.3%
	200,964			Safety-Kleen Systems, Inc.			1,431,871
TRANSPORTATION - LAND TRANSPORTATION - 0.1%
	18,022			SIRVA Worldwide, Inc. (d)			599,412
UTILITY - 0.0%
	81,194			Entegra TC LLC			58,866
	4,365			GBGH LLC (d)			—
							58,866
WIRELESS COMMUNICATIONS - 0.6%
	2,260,530			ICO Global Communications Holding Ltd.			2,712,635
				Total Common Stocks (Cost $70,923,536)			48,695,438
Preferred Stocks (k) - 2.1%
	1,000,000			Adelphia Recovery Trust			5,000
	2,150,537			Dfine, Inc., Series D (d)			10,365,588
				Total Preferred Stocks (Cost $10,934,997)			10,370,588

Units
Warrants (k) - 0.1%
	20,000			Clearwire Corp., expires 08/15/10			1,600
	1,271			GBGH LLC, expires 06/09/14 (d)			—
	1,000			Grande Communications, expires 04/01/11 (d)			—
	49,317			IAP Worldwide Services, Inc., Series A, expires 06/12/15 (d)			—
	14,444			IAP Worldwide Services, Inc., Series B, expires 06/12/15 (d)			—
	7,312			IAP Worldwide Services, Inc., Series C, expires 06/12/15 (d)			—
	643,777			Microvision, Inc., expires 07/23/13			733,906
				Total Warrants (Cost $10)			735,506
Total Investments - 124.9% (Cost of $867,779,254) (l)							604,033,836
Other Assets & Liabilities, Net - (24.9)%							(120,594,704)
Net Assets applicable to Common Shareholders - 100.0%						$	483,439,132

The amount of $1,965,135 in cash was segregated with the brokers and/or custodian to cover investments sold short outstanding as of March 31, 2010 and is included in “Other Assets & Liabilities, Net”:

Short Sales - 0.2%

EQUITY SECURITY - 0.2%

Shares
RETAIL - 0.2%
	55,622			Ethan Allen Interiors, Inc.			1,147,482
Total Investments sold short (Proceeds $759,245)						$	1,147,482

See accompanying Notes to Investment Portfolio.

INVESTMENT PORTFOLIO (unaudited) (continued)

As of March 31, 2010		Highland Credit Strategies Fund

(c)

Affiliated issuer. Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as “affiliated” if a Fund owns five percent or more of its voting stock. The Fund held at least five percent of the outstanding voting stock of the following companies during the period ended March 31, 2010.

		Par Value
		at				Shares at				Market Value
		03/31/10				03/31/10				12/31/09				03/31/10
ComCorp Broadcasting, Inc. (Senior Loans) *		$	39,444,941				—			$	29,524,538			$	34,624,769
Communications Corp of America (Common Stock)			—				2,010,616				—				—
Genesys Ventures IA, LP (Common Stock)			—				24,000,000				38,160,000				40,800,000
		$	39,444,941				26,010,616			$	67,684,538			$	75,424,769

*		Company is a wholly owned subsidiary of Communications Corp. of America.
(d)		Represents fair value as determined by the Fund’s Board of Trustees (the “Board”) or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate market value of $119,986,158, or 24.8% of net assets, were fair valued under the fair value procedures as of March 31, 2010.
(e)		Senior Loan assets have additional unfunded loan commitments. As of March 31, 2010, the Fund had unfunded loan commitments, which could be extended at the option of the Borrower, pursuant to the following loan agreements:

		Unfunded Loan
Borrower		Commitment
Mobileserv Ltd.		GBP	3,436,588
Broadstripe, LLC		$	1,211,229
Sirva Worldwide, Inc.			1,481,188
Sorenson Communications, Inc.			2,000,000
		$	4,692,417

(f)		The issuer is in default of its payment obligation. Income is not being accrued.
(g)		Fixed rate senior loan.
(h)		Floating rate asset. The interest rate shown reflects the rate in effect at March 31, 2010.
(i)		Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At March 31, 2010, these securities amounted to $143,746,379 or 29.7% of net assets.
(j)		Securities (or a portion of securities) on loan. As of March 31, 2010, the market value of securities loaned was $1,320,143. The loaned securities were secured with cash collateral of $1,395,906.
(k)		Non-income producing security.
(l)		Cost for U.S. federal income tax purposes is identical to book basis. Unrealized appreciation and depreciation on investments are as follows:

Gross unrealized appreciation		$	29,335,003
Gross unrealized depreciation			(293,080,421	)
Net unrealized depreciation		$	(263,745,418	)

Foreign Denominated Senior Loans &
Asset Backed Securities
Industry Concentration Table:
(% of Net Assets)

Diversified Media			4.0	%
Financial			0.5	%
Total			4.5	%

Forward foreign currency contracts outstanding as of March 31, 2010 were as follows:

Principal

Contracts

Amount

Net

to Buy or

Covered by

Unrealized

to Sell

Currency

Contracts

Expiration

Appreciation *

Sell

EUR

1,665,000

05/14/10

246,500

Sell

GBP

2,583,500

05/14/10

394,600

Sell

GBP

824,800

08/04/10

64,596

$

705,696

See accompanying Notes to Investment Portfolio.

NOTES TO INVESTMENT PORTFOLIO

As of March 31, 2010 (unaudited)		Highland Credit Strategies Fund

Security Valuation

In computing the Fund’s net assets attributable to common shares, securities with readily available market quotations use those quotations for valuation. Securities where there are no readily available market quotations will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that Highland Capital Management, L.P. (the “Investment Adviser”) has determined generally has the capability to provide appropriate pricing services and has been approved by the Trustees.

Securities for which market quotations are not readily available, for which the Fund has determined the price received from a pricing service or broker-dealer is “stale” or otherwise do not represent fair value (including when events materially affect the value of securities that occur between the time when market price is determined and calculation of the Fund’s net asset value), will be valued by the Fund at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Fund’s net asset value will reflect the affected portfolio securities’ fair value as determined in the judgement of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their net asset values. Determination of fair value is uncertain because it involves subjective judgements and estimates not easily substantiated by auditing procedures.

There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Short-term debt investments, that is, those with a remaining maturity of 60 days or less, are valued at cost adjusted for amortization of premium and accretion of discounts. Repurchase agreements are valued at cost plus accrued interest. Foreign price quotations are converted to U.S. dollar equivalents using the 4:00 PM London Time Spot Rate.

Forward Foreign Currency Contracts

In order to minimize the movement in net asset value resulting from a decline or appreciation in the value of a particular foreign currency against the U.S. dollar or another foreign currency or for other reasons, the Fund is authorized to enter into forward currency exchange contracts. These contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Fund to establish a rate of exchange for a future point in time.

The Fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use futures contracts to gain exposure to, or hedge against changes in the value of foreign currencies. Upon entering into such contracts, daily fluctuations in the value of the contract are recorded for financial statement purposes as unrealized gains or losses by the Fund. At the expiration of the contracts the Fund realizes the gain or loss. Upon entering into such contracts, the Fund bears the risk of exchange rates moving unexpectedly, in which case, the Fund may not achieve the anticipated benefits of the forward contracts and may realize a loss. With forwards, there is counterparty credit risk to the Fund since the forwards are not exchange traded, and there is not a clearinghouse that guarantees the forwards against default. During the three months ended March 31, 2010, the open value of forward foreign currency contracts was GBP 824,800 and the close value was EUR 35,000 and GBP 384,000.

Fair Value Measurements:

The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:

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

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and

Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

NOTES TO INVESTMENT PORTFOLIO (continued)

As of March 31, 2010 (unaudited)		Highland Credit Strategies Fund

At the end of each calender quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value the Fund’s assets as of March 31, 2010 are as follows:

										Level 2				Level 3
		Total Value at				Level 1				Significant				Significant
		March				Quoted				Observable				Unobservable
Investments in Securities:		31, 2010				Price				Input				Input
Common Stocks
Aerospace		$	54,260			$	—			$	54,260			$	—
Broadcasting			141,505				—				141,505				—
Diversified Media			399,836				—				—				399,836
Healthcare			40,800,000				—				—				40,800,000
Information Technology			401,106				—				—				401,106
Metals/Minerals			1,158,526				—				—				1,158,526
Retail			937,421				—				937,421				—
Service			1,431,871				—				—				1,431,871
Transportation — Land Transportation			599,412				—				—				599,412
Utility			58,866				—				—				58,866
Wireless Communication			2,712,635				2,712,635				—				—
Preferred Stocks			10,370,588				—				5,000				10,365,588
Warrants			735,506				733,906				—				1,600
Debt
Senior Loans			377,940,190				—				267,127,254				110,812,936
Asset-Backed Securities			37,151,636				—				—				37,151,636
Corporate Debt			128,603,544				—				57,320,618				71,282,926
Claims			536,934				—				525,146				11,788
Total Investments		$	604,033,836			$	3,446,541			$	326,111,204			$	274,476,091
Other Financial Instruments*
Short Sales
Retail		$	(1,147,482	)		$	—			$	(1,147,482	)		$	—
Assets			705,696				—				705,696				—
Total Other Financial Instruments		$	(441,786	)		$	—			$	(441,786	)		$	—