Highland Floating Rate Advantage Fund (XSFRX) N-CSRS Certified semi-annual shareholder report (management investment company)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES

Investment Company Act file number 811-09709

Highland Floating Rate Advantage Fund

(Exact name of registrant as specified in charter)

NexBank Tower
13455 Noel Road, Suite 900
Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

R. Joseph Dougherty
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 900
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: August 31

Date of reporting period: February 28, 2010

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR 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 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. Reports to Stockholders.

The Report to Shareholders is attached herewith.

Highland Floating Rate Advantage Fund Semi-Annual Report February 28, 2010

Highland Floating Rate Advantage Fund

TABLE OF CONTENTS

Fund Profile	1
Financial Statements	2
Investment Portfolio	3
Statement of Assets and Liabilities	11
Statement of Operations	12
Statements of Changes in Net Assets	13
Statement of Cash Flows	15
Financial Highlights	16
Notes to Financial Statements	20
Additional Information	29
Important Information About This Report	31

Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.

A prospectus must precede or accompany this report. Please read the prospectus carefully before you invest.

FUND PROFILE

Highland Floating Rate Advantage Fund

Objective

The Fund seeks to provide a high level of current income, consistent with preservation of capital.

Net Assets as of February 28, 2010

$635.6 million

Portfolio Data as of February 28, 2010

The information below provides a snapshot of the Fund at the end of the reporting period. The Fund is actively managed and the composition of its investment portfolio will change over time.

Quality Breakdown as of 02/28/10 (%)*
A	0.8
Baa	5.3
Ba	21.0
B	58.1
Caa or lower	11.5
NR	3.3

Top 5 Sectors as of 02/28/10 (%)*
Healthcare	8.7
Cable/Wireless Video	8.6
Broadcasting	8.1
Financial	7.3
Diversified Media	6.9

Top 10 Holdings as of 02/28/10 (%)*
Broadstripe, LLC (Senior Loans)	5.0
CCS Medical, Inc. (Senior Loans)	3.5
Young Broadcasting, Inc. (Senior Loans)	2.8
Fontainebleau Florida Hotel, LLC (Senior Loans)	2.3
Sacher Funding Ltd. (Foreign Denominated Senior Loans)	2.1
SMG H5 Pty., Ltd. (Foreign Denominated Senior Loans)	2.0
Value Creation, Inc. (Senior Loans)	1.9
Travelport LLC (Senior Loans)	1.8
Spirit Finance Corp. (Senior Loans)	1.7
Texas Competitive Electric Holdings Co., LLC (Senior Loans)	1.6

* Quality is calculated as a percentage of total senior loans and asset-backed securities. Sectors and holdings are calculated as a percentage of total assets.

Semi-Annual Report | 1

FINANCIAL STATEMENTS

February 28, 2010 Highland Floating Rate Advantage Fund

	A guide to understanding the Fund’s financial statements
Investment Portfolio	The Investment Portfolio details all of the Fund’s holdings and their value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification.
Statement of Assets and Liabilities	This statement details the Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all the Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and non-investment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period.
Statement of Operations	This statement details income earned by the Fund and the expenses accrued by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period, as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund’s net increase or decrease in net assets from operations.
Statements of Changes in Net Assets	These statements demonstrate how the Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distributions reinvestments) during the reporting period. The Statements of Changes in Net Assets also detail changes in the number of shares outstanding.
Statement of Cash Flows	This statement reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency during the period.
Financial Highlights	The Financial Highlights demonstrate how the Fund’s net asset value per share was affected by the Fund’s operating results. The Financial Highlights also disclose the classes’ performance and certain key ratios (e.g., class expenses and net investment income as a percentage of average net assets).
Notes to Financial Statements	These notes disclose the organizational background of the Fund, certain of its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies.

2 | Semi-Annual Report

INVESTMENT PORTFOLIO (unaudited)

February 28, 2010 Highland Floating Rate Advantage Fund

Principal Amount ($)			Value ($)
US Senior Loans (a) - 96.5%
AEROSPACE - 5.9%
		AWAS Capital, Inc.
	4,998,941	Second Priority Term Loan, 6.25%, 03/15/13		3,886,677
		Continental Airlines, Inc.
	1,714,286	Tranche A-1 Term Loan, 3.63%, 06/01/11		1,664,143
	4,285,714	Tranche A-2 Term Loan, 3.63%, 06/01/11		4,160,357
		Delta Air Lines, Inc.
	980,000	Credit-Linked Deposit Loan, 2.17%, 04/30/12		919,294
	6,785,204	Second Lien Term Loan, 3.50%, 04/30/14		5,814,547
	2,693,250	Term Loan, 8.75%, 09/27/13		2,720,519
	3,473,726	Term Loan Equipment Notes, 3.75%, 09/29/12		3,074,248
		IAP Worldwide Services, Inc.
	3,814,476	Second Lien Term Loan, PIK, 11.50%, 06/28/13		3,115,168
		US Airways Group, Inc.
	16,077,329	Term Loan, 2.73%, 03/21/14		12,294,092
				37,649,045
BROADCASTING - 6.7%
		All3Media Intermediate Ltd.
	4,874,517	Facility B1, 2.63%, 08/31/14		4,143,339
		ComCorp Broadcasting, Inc.
	271,635	Revolving Loan, 9.00%, 10/03/12 (b) (c)		225,349
	2,717,483	Term Loan, 9.00%, 04/03/13 (b) (c)		2,254,424
		Cumulus Media, Inc.
	3,253,876	Replacement Term Loan, 4.24%, 06/11/14 (f)		2,814,602
		Univision Communications, Inc.
	11,581,410	Initial Term Loan, 2.50%, 09/29/14		10,030,138
		Young Broadcasting, Inc.
	60,060	Term Loan, 9.00%, 04/15/10 (b)		60,060
	27,689,047	Term Loan, 11/03/12 (d)		22,791,547
				42,319,459
CABLE/WIRELESS VIDEO - 10.6%
		Broadstripe, LLC
	49,805,220	First Lien Term Loan, PIK, 06/30/11 (b) (d)		40,521,527
	1,428,203	Revolver, 06/30/11 (b) (d)		1,161,986
	3,641,732	Revolver, DIP, 06/30/11 (b) (e)		3,638,091
		Charter Communications Operating, LLC
	11,656,101	New Term Loan, 2.23%, 03/06/14 (f)		10,905,681
		Northland Cable Television, Inc.
	4,800,000	First Lien Term Loan B, 4.23%, 12/22/12		4,476,000
	6,000,000	Second Lien Term Loan, 8.23%, 06/22/13		4,740,000
		WideOpenWest Finance, LLC.
	1,850,000	Series A New Term Loan, 6.74%, 06/30/14		1,857,705
				67,300,990
CHEMICALS - 2.4%
		Lyondell Chemical Co.
	9,276	Dutch Revolving Credit Loan, 12/20/13 (d) (f)		6,542	��
	20,997	Dutch Tranche A Dollar Term Loan, 12/20/13 (d) (f)		14,808
		German Tranche B-1 Euro
	26,630	Term Loan, 12/22/14 (d) (f)		18,782
	26,630	German Tranche B-2 Term Loan, 12/22/14 (d) (f)		18,782
		German Tranche B-3 Euro
	26,630	Term Loan, 12/22/14 (d) (f)		18,782
	34,785	Primary Revolving Credit Loan, 12/20/13 (d) (f)		24,533
	2,400,000	Roll-Up Loan, DIP, 04/06/10 (f)		2,532,600
	66,275	U.S. Tranche A Dollar Term Loan, 12/20/13 (d) (f)		46,742
	115,557	U.S. Tranche B-1 Dollar Term Loan, 12/22/14 (d) (f)		81,499
	115,557	U.S. Tranche B-2 Dollar Term Loan, 12/22/14 (d) (f)		81,499
	115,557	U.S. Tranche B-3 Dollar Term Loan, 12/22/14 (d) (f)		81,499
		TPC Group LLC
	1,756,770	Incremental Term Loan B, 2.81%, 06/27/13		1,638,188
	5,204,758	Term Loan B, 2.81%, 06/27/13		4,853,437
		W.R. Grace & Co.
	1,664,286	5 Year Revolver (d) (f)		2,895,857
	1,664,286	Revolving Credit Loan (d) (f)		2,895,857
				15,209,407
CONSUMER NON-DURABLES - 1.5%
		KIK Custom Products, Inc.
	508,162	Canadian First Lien Term Loan, 06/02/14 (f)		428,551
	1,000,000	Second Lien Term Loan, 12/01/14 (f)		590,000
	2,964,279	U.S. First Lien Term Loan, 06/02/14 (f)		2,499,880
		Revlon Consumer Products Corp.
	6,000,000	Term Loan, 4.26%, 01/15/12		5,956,590
				9,475,021
DIVERSIFIED MEDIA - 4.5%
		Cengage Learning Acquisitions, Inc.
	2,984,733	Term Loan, 2.75%, 07/03/14		2,610,716
		Cydcor, Inc.
	4,644,046	First Lien Tranche B Term Loan, 9.00%, 02/05/13		4,347,988
		DTN, Inc.
	4,745,973	Tranche C Term Loan, 5.25%, 03/10/13		4,615,459
		Endurance Business Media, Inc.
	2,725,784	Term Loan, 07/26/13 (d)		817,735

See accompanying Notes to Financial Statements. | 3

INVESTMENT PORTFOLIO (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Principal Amount ($)			Value ($)
US Senior Loans (continued)
DIVERSIFIED MEDIA (continued)
		Harland Clarke Holdings Corp.
	4,765,306	Tranche B Term Loan, 2.75%, 06/30/14		4,195,447
		Metro-Goldwyn-Mayer, Inc.
	15,340,091	Tranche B Term Loan, 04/09/12 (d)		9,317,571
	126,821	Tranche B-1 Term Loan, 04/09/12 (d)		77,031
		Nielsen Finance LLC
	858,107	Class A Dollar Term Loan, 2.23%, 08/09/13		810,147
	1,987,487	Class B Dollar Term Loan, 3.98%, 05/01/16		1,934,074
				28,726,168
ENERGY - 6.1%
		Alon USA Energy, Inc.
	194,648	Edgington Facility, 2.48%, 08/05/13		164,153
	1,557,183	Paramount Facility, 2.49%, 08/05/13		1,313,227
		ATP Oil & Gas Corp.
	1,160,175	Tranche B-1 Term Loan, 11.25%, 07/15/14		1,166,863
	163,795	Tranche B-2 Term Loan, 12.25%, 01/15/11		164,739
		Big West Oil, LLC
	4,700,000	Term Loan, 5.49%, 01/30/15 (f)		4,741,125
		Calumet Lubricants Co., L.P.
	197,380	Credit Linked, 4.10%, 01/03/15		180,849
	1,465,487	Term Loan, 4.25%, 01/03/15		1,342,753
		Coffeyville Resources, LLC
	4,005,459	Tranche D Term Loan, 8.50%, 12/30/13		4,054,806
		Monitor US Finco, Inc.
	919,772	Second Lien Term Loan, 01/11/15 (b) (d)		—
		Value Creation, Inc.
	14,528,894	Term Loan, 12.50%, 03/31/10		15,146,372
		Venoco, Inc.
	10,966,913	Second Lien Term Loan, 4.25%, 05/07/14		10,195,829
				38,470,716
FINANCIAL - 1.8%
		American General Finance Corp.
	2,500,000	Term Loan, 07/09/10 (f)		2,427,075
		Checksmart Financial Co.
	2,500,000	Second Lien Term Loan, 05/01/13 (d)		312,500
		HUB International Ltd.
	565,748	Delayed Draw Term Loan, 2.75%, 06/13/14		522,078
	3,701,885	Initial Term Loan, 2.75%, 06/13/14		3,416,136
		Nuveen Investments, Inc.
	3,000,000	First Lien Term Loan, 3.29%, 11/13/14		2,626,680
	1,500,000	Second Lien Term Loan, 12.50%, 07/31/15 (h)		1,577,812
		Online Resources Corp.
	573,529	Term Loan, 2.73%, 02/21/12		476,029
				11,358,310
FOOD AND DRUG - 0.7%
		Dole Food Company, Inc.
	294,118	Tranche B-1 Term Loan, 02/01/17 (f)		294,946
		Rite Aid Corp.
	1,989,873	Tranche 2 Term Loan, 1.98%, 06/04/14		1,777,216
	985,015	Tranche 3 Term Loan, 6.00%, 06/04/14		942,905
	750,000	Tranche 4 Term Loan, 9.50%, 06/10/15		784,155
		Solvest, Ltd.
	701,294	Tranche C-1 Term Loan, 02/01/17 (f)		702,171
				4,501,393
FOOD/TOBACCO - 1.9%
		DS Waters of America, Inc.
	2,743,333	Term Loan, 2.50%, 10/29/12		2,561,587
		DSW Holdings, Inc.
	2,500,000	Term Loan, 03/02/12 (f)		2,325,000
		Pierre Foods, Inc.
	513,000	Term Loan B, 8.50%, 09/30/14		513,000
		Sturm Foods, Inc.
	4,401,111	Initial First Lien Term Loan, 4.75%, 01/31/14		4,401,111
	1,562,500	Initial Second Lien Term Loan, 8.25%, 07/31/14		1,553,383
		WM. Bolthouse Farms, Inc.
	500,000	First Lien Term Loan, 5.50%, 02/11/16		501,095
				11,855,176
FOREST PRODUCTS/CONTAINERS - 0.7%
		Consolidated Container Company LLC
	2,000,000	Second Lien Term Loan, 09/28/14 (f)		1,730,000
		Smurfit-Stone Container Enterprises, Inc.
	2,750,000	Exit Term Loan, 02/22/16 (f)		2,743,111
				4,473,111
GAMING/LEISURE - 7.6%
		Drake Hotel Acquisition
	6,041,285	B Note 1 (b) (d)		—
		Fontainebleau Florida Hotel, LLC
	57,500,000	Tranche C Term Loan, 06/06/12 (d)		18,975,000
		Ginn LA Conduit Lender, Inc.
	14,595,267	First Lien Tranche A Credit-Linked Deposit, 06/08/11(d)		1,222,354
	31,288,508	First Lien Tranche B Term Loan, 06/08/11 (d)		2,659,523
	7,000,000	Second Lien Term Loan, 06/08/12 (d)		140,000
		Green Valley Ranch Gaming LLC
	4,560,000	Second Lien Term Loan, 08/16/14 (d)		425,608

4 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Principal Amount ($)			Value ($)
US Senior Loans (continued)
GAMING/LEISURE (continued)
	325,418	Lake at Las Vegas Joint Venture Mezzanine (d)		11,390
	15,790,009	Revolving Loan Credit-Linked Deposit Account, 06/20/12 (d)		276,325
	172,030,708	Term Loan, 06/20/12 (d)		2,161,208
	29,991,997	Term Loan, DIP, PIK, 9.75%, 04/30/10		8,997,599
		Las Vegas Sands, LLC
	278,721	Delayed Draw I Term Loan 2.01%, 05/23/14		245,658
	1,379,457	Tranche B Term Loan, 2.01%, 05/23/14		1,215,819
		MGM Mirage, Inc.
	3,539,331	Advance Term Loan, 6.00%, 10/03/11 (f)		3,412,924
	1,000,000	Revolver, 10/03/11 (f)		908,750
		Nevada Land Group, LLC
	244,665	First Lien Initial Loan, PIK, 40.23%, 11/10/13		244,665
	729,927	Second Lien Initial Loan, 10.00%, 11/12/13 (h)		729,927
		Tamarack Resort, LLC
	332,579	Term Loan (d)		249,434
		VML US Finance, LLC
	1,381,153	Term B Delayed Draw Project Loan, 4.76%, 05/25/12		1,318,020
	4,294,182	Term B Funded Project Loan, 4.76%, 05/27/13		4,097,895
		WAICCS Las Vegas 3 LLC
	13,000,000	Second Lien Term Loan (d)		1,316,250
				48,608,349
HEALTHCARE - 10.2%
		Aveta, Inc.
	1,967,271	MMM Original Term Loan, 5.48%, 08/22/11		1,936,119
	292,247	NAMM New Term Loan, 5.48%, 08/22/11		287,620
	526,616	NAMM Original Term Loan, 5.48%, 08/22/11		518,277
	1,612,224	PHMC Acquisition Term Loan, 5.48%, 08/22/11		1,586,694
		CCS Medical, Inc.
	42,791,289	First Lien Term Loan, 09/28/12 (d)		28,598,916
	4,750,000	Second Lien Term Loan, 03/29/13 (d)		490,841
	1,740,187	Term Loan (DIP), 15.00%, 03/26/10		1,714,084
		Graceway Pharmaceuticals, LLC
	6,500,000	Mezzanine Loan, 8.48%, 11/01/13		2,681,250
		HCA, Inc.
	693,651	Tranche A-1 Term Loan, 1.75%, 11/16/12		656,600
	2,927,956	Tranche B-1 Term Loan, 2.50%, 11/18/13		2,781,953
		IM US Holdings, LLC
	1,000,000	Second Lien Term Loan, 4.50%, 06/26/15		973,960
		LifeCare Holdings
	11,275,903	Term Loan, 4.50%, 08/10/12		10,007,364
		Physiotherapy Associates, Inc./Benchmark Medical, Inc.
	1,500,000	Second Lien Term Loan, 12.00%, 12/31/13		798,750
		Rehabcare Group, Inc.
	1,500,000	Term Loan B, 6.00%, 11/24/15		1,500,938
		Select Medical Corp.
	2,221,598	Additional Tranche B-1 Term Loan, 4.00%, 08/22/14		2,181,342
	8,328,630	Tranche B-1 Term Loan, 4.00%, 02/22/14		8,177,715
				64,892,423
HOUSING - 2.5%
		Custom Building Products, Inc.
	1,793,814	First Lien Term Loan, 8.00%, 10/29/11		1,798,298
		EH/Transeastern, LLC/TE TOUSA
	4,000,000	Term Loan (b) (d)		—
		Kyle Acquisition Group LLC
	1,692,857	Facility B (d)		126,964
	1,307,143	Facility C, 07/20/11 (d)		98,036
		LBREP/L-Suncal Master I, LLC
	4,848,813	First Lien Term Loan (d)		145,464
		November 2005 Land Investors, LLC
	1,556,102	First Lien New Term Loan, 03/31/10 (d)		245,086
		Pacific Clarion, LLC
	10,891,261	Term Loan (b) (d)		1,673,987
		Roofing Supply Group, LLC
	2,358,557	Term Loan, 7.25%, 08/24/13		2,255,370
		Westgate Investments, LLC
	18,333,988	Senior Secured Loan, 09/25/10 (d) (h)		5,584,928
	5,750,295	Third Lien Term Loan, 06/30/15 (d) (h)		831,773
		Withers Preserve MB-I
	4,237,189	B-Note (b) (d)		1,624,962
		Woodlands Commercial Properties Co., LP
		Comercial Company Secured
	400,000	Term Loan, 2.43%, 08/29/10		249,160
		Woodlands Land Development Co., LP
	1,600,000	Secured Term Loan, 2.43%, 08/29/10 (b)		996,640
				15,630,668
INFORMATION TECHNOLOGY - 4.0%
		Applied Systems, Inc.
	1,304,111	Term Loan, 2.73%, 09/26/13		1,247,597
		Infor Enterprise Solutions Holdings, Inc.
	4,982,116	Delayed Draw Term Loan, 3.98%, 07/30/12		4,661,841
	9,549,056	Initial U.S. Term Loan, 3.98%, 07/30/12		8,935,195
		Kronos, Inc.
	3,000,000	Second Lien Term Loan, 6.00%, 06/11/15		2,827,500
		SCS Holdings II, Inc.
	1,700,410	First Lien Term Loan, 3.00%, 11/30/12		1,697,570

See accompanying Notes to Financial Statements. | 5

INVESTMENT PORTFOLIO (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Principal Amount ($)			Value ($)
US Senior Loans (continued)
INFORMATION TECHNOLOGY (continued)
	2,000,000	Second Lien Term Loan, 6.25%, 05/30/13		1,880,000
		SunGard Data Systems, Inc.
	3,950,000	Incremental Term Loan, 6.75%, 02/28/14		3,988,690
				25,238,393
MANUFACTURING - 2.5%
		Acument Global Technologies, Inc.
	1,479,091	Term Loan, PIK, 14.00%, 08/11/13		1,168,482
		Brand Energy & Infrastructure Services, Inc.
	2,917,500	First Lien Term B Loan, 2.56%, 02/07/14		2,726,054
	1,850,000	Second Lien Term Loan, 6.28%, 02/07/15		1,623,375
		Bucyrus International, Inc.
	1,500,000	Tranche C U.S. Dollar Term Loan, 4.50%, 02/19/16		1,512,645
		Dana Holdings Corp.
	4,829,541	Term Advance, 4.82%, 01/30/15 (f)		4,724,910
		Hillman Group, Inc.
	2,069,109	Term Loan B-1, 3.01%, 03/31/11		2,058,764
		United Central Industrial Supply Co., LLC
	2,351,628	Term Loan, 2.48%, 03/31/12		2,275,201
				16,089,431
MEDIA/TELECOMMUNICATIONS - 0.4%
		Entravision Communications Corp.
	2,712,547	Term Loan, 5.51%, 03/29/13		2,708,315
METALS/MINERALS - 0.6%
		Euramax International, Inc.
	2,075,117	Domestic Term Loan (Cash Pay), 10.00%, 06/29/13		1,748,286
	2,125,701	Domestic Term Loan, PIK, 14.00%, 06/29/13		1,790,903
				3,539,189
RETAIL - 3.9%
		Burlington Coat Factory Warehouse Corp.
	2,125,218	Term Loan, 2.50%, 05/28/13		1,960,992
		Dollar General Corp.
	4,268,478	Tranche B-2 Term Loan, 2.98%, 07/07/14		4,120,255
		Guitar Center, Inc.
	3,069,603	Term Loan, 3.73%, 10/09/14		2,729,383
		Michaels Stores, Inc.
	1,095,609	B-1 Term Loan, 2.52%, 10/31/13		991,937
	1,474,442	B-2 Term Loan, 4.77%, 07/31/16		1,410,348
		Spirit Finance Corp.
	17,500,000	Term Loan, 3.25%, 08/01/13		13,825,000
				25,037,915
SERVICE - 6.5%
		Audio Visual Services Group, Inc.
	4,308,159	Second Lien Term Loan, 5.76%, 08/28/14		969,336
		CCS Inc.
	5,931,356	Term Loan, 3.23%, 11/14/14 (f)		5,041,652
		First Data Corp.
	5,754,876	Initial Tranche B-1 Term Loan, 2.98%, 09/24/14		5,052,839
		IMS Health, Inc.
	1,900,000	Tranche B Dollar Term Loan, 02/26/16 (f)		1,911,030
		Penhall Holding Co.
	3,330,429	Term Loan, 9.63%, 04/01/12		416,304
		Sabre, Inc.
	10,857,789	Initial Term Loan, 2.49%, 09/30/14 (f)		9,571,901
		Safety-Kleen Systems, Inc.
	693,226	Synthetic Letter of Credit Term Loan, 2.75%, 08/02/13		656,832
	2,966,542	Term B Loan, 2.75%, 08/02/13		2,810,798
		Total Safety U.S., Inc.
	1,000,000	Second Lien Term Loan, 6.74%, 12/08/13		820,000
		Travelport LLC
	15,000,000	Letter of Credit, 2.78%, 08/23/13		14,155,275
				41,405,967
TELECOMMUNICATIONS - 3.7%
		Avaya, Inc.
	2,984,632	Term B-1 Loan, 3.00%, 10/24/14		2,619,835
		Digicel International Finance, Ltd.
	1,000,000	Tranche A — T&T, 2.81%, 09/30/12		967,500
	9,333,400	Tranche A Term Loan, 2.81%, 03/30/12		9,030,064
		Integra Telecom Holdings, Inc.
	3,746,173	First Lien Term Loan, 10.50%, 08/31/13 (f)		3,762,582
		Knowledgepoint360 Group, LLC
	1,000,000	Second Lien Term Loan, 7.25%, 04/13/15		650,000
		Level 3 Financing, Inc.
	3,513,071	Tranche A Term Loan, 2.50%, 03/13/14		3,187,392
	1,000,000	Tranche B Term Loan, 11.50%, 03/13/14		1,084,500
		U.S. Telepacific Corp.
	2,000,000	Term Loan Advance, 9.25%, 08/17/15		2,003,750
				23,305,623
TRANSPORTATION — AUTOMOTIVE - 4.3%
		Federal-Mogul Corp.
	3,865,814	Tranche B Term Loan, 2.17%, 12/29/14		3,409,513
	2,118,919	Tranche C Term Loan, 2.17%, 12/28/15		1,868,812
		Ford Motor Co.
	5,976,955	Tranche B-1 Term Loan, 3.26%, 12/15/13		5,624,434
		Key Safety Systems, Inc.
	15,643,401	First Lien Term Loan, 2.48%, 03/08/14		12,449,488

6 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Principal Amount ($)			Value ($)
US Senior Loans (continued)
TRANSPORTATION — AUTOMOTIVE (continued)
	2,000,000	Second Lien Term Loan, 5.24%, 09/08/14		700,000
		Motor Coach Industries International, Inc.
	2,108,274	Second Lien Tranche A, 11.75%, 06/30/12 (b)		1,224,064
	1,298,915	Second Lien Tranche B, 11.75%, 06/30/12 (b)		754,150
		Remy International, Inc.
	1,663,208	First Lien Tranche B Term Loan, 5.75%, 12/06/13		1,581,436
				27,611,897
TRANSPORTATION — LAND TRANSPORTATION - 0.3%
		JHT Holdings, Inc
	18,963	Second Lien Term Loan, PIK, 12.50%, 10/24/13 (b)		351
		SIRVA Worldwide, Inc.
	815,612	Revolving Credit Loan (Exit Finance), 6.16%, 05/12/12 (e)		411,884
	3,879,838	Second Lien Term Loan, 12.00%, 05/12/15		581,976
	1,720,133	Term Loan (Exit Finance),12.84%, 05/12/12		860,066
				1,854,277
UTILITY - 6.9%
		Bosque Power Co., LLC
	9,406,528	Term Loan, 5.49%, 01/16/15		7,125,445
		Calpine Corp.
	1,000,000	First Priority Term Loan, 3.14%, 03/29/14 (f)		942,445
		Coleto Creek Power, LP
	307,686	First Lien Synthetic Letter of Credit, 3.00%, 06/28/13		279,610
	4,956,056	First Lien Term Loan, 3.00%, 06/28/13		4,499,702
	5,790,000	Second Lien Term Loan, 4.23%, 06/28/13		4,740,562
		Dynegy Holdings, Inc.
	4,625,724	Letter of Credit Facility Term Loan, 3.98%, 04/02/13		4,528,029
	372,371	Tranche B Term Loan, 3.98%, 04/02/13		364,506
		EBG Holdings LLC
	3,952,187	Term Loan, PIK, 7.23%, 12/20/16		88,233
		Entegra TC LLC
	6,086,679	Third Lien Term Loan, PIK, 6.25%, 10/19/15		3,195,506
		GBGH, LLC
	1,762,115	First Lien Term Loan, 4.00%, 06/09/13 (b)		1,464,846
	564,971	Second Lien Term Loan, PIK, 12.00%, 06/09/14 (b)		401,920
		Texas Competitive Electric Holdings Co., LLC
	15,713,574	Initial Tranche B-2 Term Loan, 3.73%, 10/10/14		12,715,345
		TPF Generation Holdings, LLC
	4,000,000	Second Lien Term Loan, 4.48%, 12/15/14		3,540,000
				43,886,149
WIRELESS COMMUNICATIONS - 0.3%
		MetroPCS Wireless, Inc.
	2,251,813	Tranche B Term Loan, 2.50%, 11/03/13		2,177,875
		Total US Senior Loans (Cost $994,618,448)		613,325,267

Principal Amount
Foreign Denominated Senior Loans (a) - 17.6%
AUSTRALIA - 4.3%
AUD
		PBL Media Group Ltd.
	2,790,881	Facility A Term Loan, 6.30%, 12/31/12	2,069,075
	12,545,336	Facility B, Tranche 1,6.55%, 02/07/13	9,535,196
		SMG H5 Pty., Ltd.
	19,318,086	Facility A Term Loan, 6.21%, 12/24/12	15,828,972
			27,433,243
AUSTRIA - 2.7%
EUR
		Sacher Funding Ltd.
	34,450,576	Euro Term Loan,  05/14/14 (d)	17,060,682
FRANCE - 0.3%
EUR
		Vivarte
	1,772,420	Acquisition Facility, 1.27%, 03/08/16 (e)	1,862,497
GERMANY - 1.7%
EUR
		CBR Fashion GmbH
	2,250,000	Second Lien Facility, 4.42%, 10/19/16	2,287,584
		Lavena Holding 3 GmbH
	6,781,978	Facility D, 4.71%, 09/02/16	5,102,032
	6,929,797	Mezzanine Facility, PIK, 4.46%, 03/06/17	3,485,610
		Schieder Mobel Holding, GmbH
	381,674	Delayed Draw Term Loan (b) (d)	101,883
			10,977,109
ITALY - 0.6%
EUR
		Wind Telecomunicazioni S.p.A.
	1,500,000	B1 Term Loan Facility, 3.67%, 05/27/13 (g)	1,979,246
	1,500,000	C1 Term Loan Facility, 4.67%, 05/26/14 (g)	1,989,482
			3,968,728
SPAIN - 0.9%
EUR
		Grupo Gasmedi, S.L.
	1,666,667	Second Lien Tranche E Term Loan, 5.45%, 02/11/16	1,705,879
	1,610,342	Tranche B Term Loan, 3.20%, 08/11/14	1,867,994

See accompanying Notes to Financial Statements. | 7

INVESTMENT PORTFOLIO (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Principal Amount			Value ($)
Foreign Denominated Senior Loans (continued)
SPAIN (continued)
	1,610,342	Tranche C Term Loan, 3.70%, 08/11/15		1,867,994
		Maxi PIX Sarl
	2,847,259	Euro Term Loan, PIK, 8.66%, 05/31/16		330,281
				5,772,148
UNITED KINGDOM - 6.0%
GBP
		All3Media Intermediate Ltd.
	663,243	Facility B1, 3.29%, 08/31/14		875,930
	4,281,271	Facility C, 3.52%, 08/31/15		5,654,175
	3,000,000	Facility D, 5.66%, 02/29/16		3,311,207
	4,148,119	Mezzanine Loan, PIK, 4.65%, 08/31/16		4,578,427
		Ansco UK Finance Co. Ltd.
	710,946	Tranche B Term Loan, 3.02%, 03/08/12		979,518
		Henson No. 4 Ltd.
	1,875,035	Facility B, 4.54%, 10/30/13		2,447,770
	1,875,035	Facility C, 5.04%, 02/13/15		2,462,043
		Highland Acquisitions Ltd.
	1,000,000	Facility B, 3.39%, 12/31/14		1,368,252
	1,000,000	Facility C, 3.89%, 12/31/15		1,375,864
	1,179,088	Mezzanine Facility, PIK, 5.64%, 12/29/16		1,495,867
		Towergate Partnership Ltd.
	3,125,000	Facility A, 3.12%, 10/31/12		4,329,308
	3,125,000	Facility B, 3.62%, 10/31/13		4,329,308
		United Biscuits Holdco Ltd.
	1,383,459	Facility B1, 3.23%, 12/15/14		1,988,866
		Virgin Media Investment Holdings Ltd.
	1,750,000	C Facility, 3.57%, 03/04/13		2,510,759
				37,707,294
UNITED STATES - 1.1%
GBP
		Aramark Corp.
	1,212,500	U.K. Term Loan, 2.73%, 01/26/14		1,730,534
		Knowledgepoint360 Group, LLC
	1,586,913	U.K. First Lien Term Loan, 3.90%, 04/13/14		1,932,725
		PlayPower, Inc.
	2,393,411	Tranche B Sterling Term Loan, 5.62%, 06/30/12		3,443,311
				7,106,570
		Total Foreign Denominated Senior Loans (Cost $178,668,295)		111,888,271
Asset-Backed Securities (i) - 3.4%
		ACA CLO, Ltd.
	1,000,000	Series 2007-1A, Class D, 2.60%, 06/15/22 (j)		630,000
		ACAS CLO, Ltd.
	1,500,000	Series 2007-1A, Class D, 4.50%, 04/20/21 (j)		592,500
		Apidos CDO
	1,000,000	Series 2007-5A, Class C, 1.70%, 04/15/21 (j)		575,000
	3,000,000	Series 2007-CA, Class B, 1.05%, 05/14/20 (j)		1,965,000
		Babson CLO, Ltd.
	1,000,000	Series 2007-1A, Class C, 1.50%, 01/18/21 (j)		524,400
	1,000,000	Series 2007-2A, Class D, 1.95%, 04/15/21 (j)		550,000
	1,000,000	Series 2007-2A, Class E, 3.90%, 04/15/21		310,000
		Bluemountain CLO, Ltd.
	1,000,000	Series 2007-3A, Class D, 1.65%, 03/17/21 (b) (j)		615,653
	1,000,000	Series 2007-3A, Class E, 3.80%, 03/17/21 (j)		432,500
		Cent CDO, Ltd.
	2,000,000	Series 2007-15A, Class C, 2.51%, 03/11/21 (j)		1,150,000
		Commercial Industrial Finance Corp.
	962,970	Series 2006-2A, Class B2L, 4.26%, 03/01/21 (j)		385,188
		Goldman Sachs Asset
	2,000,000	Management CLO, PLC, Series 2007-1A, Class D, 3.00%, 08/01/22 (j)		1,160,000
	948,815	Series 2007-1A, Class E, 5.25%, 08/01/22 (j)		246,692
		Greywolf CLO, Ltd
	814,466	Series 2007-1A, Class E, 4.20%, 02/18/21 (j)		358,365
		GSC Partners CDO Fund, Ltd.,
	1,000,000	Series 2007-8A, Class C, 1.76%, 04/17/21 (j)		263,600
		ING Investment Management
	6,000,000	Series 2007-5A, Class B, 1.35%, 05/01/22 (j)		3,990,000
		Inwood Park CDO, Ltd.
	1,000,000	Series 2006-1A, Class E, 3.75%, 01/20/21 (j)		610,000
		Landmark CDO
	1,000,000	Series 2007-9A, Class E, 3.75%, 04/15/21 (j)		500,000
		Madison Park Funding I Ltd.
	1,000,000	Series 2007-5A, Class D, 3.75%, 02/26/21 (j)		456,900
		Ocean Trails CLO
	2,500,000	Series 2007-2A, Class C, 2.60%, 06/27/22 (j)		1,350,000
		PPM Grayhawk CLO, Ltd.
	826,734	Series 2007-1A, Class D, 3.85%, 04/18/21 (j)		382,282
		Stanfield Daytona CLO, Ltd.
	1,000,000	Series 2007-1A, Class B1L, 1.60%, 04/27/21 (j)		480,000
		Stanfield McLaren CLO, Ltd.
	3,000,000	Series 2007-1A, Class B1L, 2.65%, 02/27/21 (j)		1,620,000
	953,499	Series 2007-1A, Class B2L, 4.75%, 02/27/21 (j)		425,737

8 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Principal Amount ($)			Value ($)
Asset-Backed Securities (continued)
		Stone Tower CLO, Ltd.
	4,000,000	Series 2007-6A, Class C, 1.60%, 04/17/21 (j)		2,000,000
		Total Asset-Backed Securities (Cost $28,641,943)		21,573,817
Claims (b) (k) - 0.0%
RETAIL - 0.0%
	33,860,860	Home Interiors & Gifts, Inc. (d)		50,791
UTILITY - 0.0%
		Mirant Corp.
	9,000,000	03 Revolver		90,000
	2,000,000	364 Day Revolver		20,000
	7,000,000	California Claim Loan		70,000
	2,500,000	Cleco Trade Claim		25,000
				205,000
		Total Claims (Cost $30,974,101)		255,791

Shares
Common Stocks (k) - 0.6%
AEROSPACE - 0.0%
	7,023	Delta Air Lines, Inc.	90,733
BROADCASTING - 0.0%
	152,363	Communications Corp. of America (b) (c)	—
CHEMICALS - 0.2%
	103,200	Panda Hereford Ethanol, L.P. (b)	1,124,880
ENERGY - 0.0%
	691,076	Value Creation, Inc. (b)	—
GAMING/LEISURE - 0.2%
	4	Nevada Land Group, LLC (b)	1,089,655
METALS/MINERALS - 0.1%
	5,542	Euramax International, Inc. (b)	451,895
TRANSPORTATION - LAND TRANSPORTATION - 0.1%
	2,023	JHT Holdings, Inc (b)	—
	20,347	SIRVA Worldwide, Inc. (b)	863,527
			863,527
UTILITY - 0.0%
	153,229	Entegra TC, LLC	111,091
	3,178	GBGH, LLC (b)	—
			111,091
		Total Common Stocks (Cost $5,783,899)	3,731,781

Units			Value ($)
Rights (k) - 0.0%
AEROSPACE - 0.0%
		IAP Worldwide Services, Inc.
	86,304	Series A, expires 06/12/15		—
		IAP Worldwide Services, Inc.
	25,276	Series B, expires 06/12/15		—
		IAP Worldwide Services, Inc.
	12,797	Series C, expires 06/12/15		—
		Total Rights (Cost $—)		—
Total Investments - 118.1% (Cost of $1,238,686,686) (l)				750,774,927
Other Assets & Liabilities, Net — (18.1)%				(115,218,866	)
Net Assets - 100.0%			$	635,556,061

(a)	Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Fund invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread. (Unless otherwise identified by footnote (g), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. The rate shown represents the weighted average rate at February 28, 2010. Senior loans, while exempt from registration under the Securities Act of 1933, (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual maturity may be substantially less than the stated maturity shown.
(b)	Represents fair value as determined by the Fund’s Board of Trustees (the “Board”) or its designees in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate market value of $60,505,641, or 9.5% of net assets, were fair valued as of February 28, 2010.
(c)	Affiliated issuer. See Note 10.
(d)	The issuer is in default of its payment obligation. Income is not being accrued.
(e)	Senior Loan assets have additional unfunded loan commitments. See Note 9.
(f)	All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
(g)	All or portion of the Loan is held on participation. See Note 7.
(h)	Fixed rate senior loan.
(i)	Floating rate asset. The interest rate shown reflects the rate in effect at February 28, 2010.
(j)	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 February 28, 2010, these securities amounted to $21,263,817 or 3.3% of net assets.
(k)	Non-income producing security.
(l)	Cost for U.S. Federal income tax purposes is $1,240,546,516.
AUD	Australian Dollar
EUR	Euro Currency
GBP	Great Britain Pound
CDO	Collateralized Debt Obligation
CLO	Collateralized Loan Obligation
DIP	Debtor-in-Possession
PIK	Payment-in-Kind

See accompanying Notes to Financial Statements. | 9

INVESTMENT PORTFOLIO (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Forward foreign currency contracts outstanding as of February 28, 2010 were as follows:

		Principal
Contracts		Amount				Net
to Buy or		Covered by				Unrealized
to Sell	Currency	Contracts		Expiration		Appreciation*
Sell	EUR		805,000		05/14/10	$	110,488
Sell	EUR		33,936,000		08/04/10		1,134,631
Sell	GBP		13,570,000		05/14/10		1,979,167
Sell	GBP		17,459,600		08/04/10		1,248,070
						$	4,472,356

* The primary risk exposure is foreign exchange contracts (see Notes 2 and 12).

Foreign Denominated Senior Loans
Industry Concentration Table:
(% of Total Net Assets)

Diversified Media	4.3	%
Financial	4.0	%
Broadcasting	3.6	%
Retail	2.1	%
Telecommunications	0.9	%
Healthcare	0.9	%
Food/Tobacco	0.6	%
Consumer Durables	0.6	%
Cable/Wireless Video	0.4	%
Gaming/Leisure	0.2	%
Total	17.6	%

10 | See accompanying Notes to Financial Statements.

STATEMENT OF ASSETS AND LIABILITIES

February 28, 2010 (unaudited) Highland Floating Rate Advantage Fund

	($)
Assets:
Unaffiliated issuers, at value (cost $1,235,725,963)		748,295,154
Affiliated issuers, at value (cost $2,960,723) (Note 10)		2,479,773
Total investments, at value (cost $1,238,686,686)		750,774,927
Cash		31,252,110
Foreign currency (Cost $928,784)		932,346
Net unrealized appreciation on forward foreign currency contracts		4,472,356
Receivable for:
Investments sold		11,857,397
Dividends and interest receivable		6,232,140
Fund shares sold		817,723
Prepaid commitment and administration fee (Note 8)		1,296,164
Prepaid legal fee		362,191
Other assets		109,673
Total assets		808,107,027
Liabilities:
Notes payable (Note 8)		115,000,000
Net discount and unrealized appreciation/(depreciation) on unfunded transactions (Note 9)		4,540,402
Payables for:
Distributions		716,074
Investments purchased		50,864,498
Investment advisory fee payable (Note 4)		395,958
Administration fee (Note 4)		121,833
Trustees’ fees (Note 4)		827
Service and distribution fees (Note 4)		308,681
Interest and commitment fees (Note 8)		279,375
Accrued expenses and other liabilities		323,318
Total liabilities		172,550,966
Net Assets		635,556,061
Composition of Net Assets:
Par value (Note 1)		96,175
Paid-in capital		1,727,216,527
Overdistributed net investment income (Note 3)		(13,546,298	)
Accumulated net realized gain/(loss) from investments, forward foreign currency contracts and foreign currency transactions		(591,960,096	)
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, forward currency contracts, and translation of assets and liabilities denominated in foreign currency		(486,250,247	)
Net Assets		635,556,061
Class A
Net assets		203,025,593
Shares outstanding (unlimited authorization)		30,717,729
Net asset value per share (Net assets/shares outstanding)		6.61	(a)
Maximum offering price per share ( 100 / 96.50 of $6.61)		6.85	(b)
Class B
Net assets		18,386,205
Shares outstanding (unlimited authorization)		2,782,496
Net asset value and offering price per share (Net assets/shares outstanding)		6.61	(a)
Class C
Net assets		350,226,121
Shares outstanding (unlimited authorization)		52,999,216
Net asset value and offering price per share (Net assets/shares outstanding)		6.61	(a)
Class Z
Net assets		63,918,142
Shares outstanding (unlimited authorization)		9,675,623
Net asset value, offering and redemption price per share (Net assets/shares outstanding)		6.61

(a)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.
(b)	On sales of $100,000 or more, the offering price is reduced.

See accompanying Notes to Financial Statements. | 11

STATEMENT OF OPERATIONS

For the Six Months Ended February 28 2010 (unaudited) Highland Floating Rate Advantage Fund

	($)
Investment Income:
Interest from unaffiliated issuers		21,644,308
Interest from affiliated issuers (Note 10)		210,835
Total investment income		21,855,143
Expenses:
Investment advisory fees (Note 4)		2,638,532
Administration fees (Note 4)		811,875
Accounting service fees		127,935
Distribution fee: (Note 4)
Class A		110,136
Class B		45,799
Class C		1,107,476
Service fee: (Note 4)
Class A		275,339
Class B		25,444
Class C		461,449
Transfer agent fee		540,520
Trustees’ fees (Note 4)		118,204
Custodian fees		39,712
Registration fees		29,753
Reports to shareholders		222,159
Audit fees		49,802
Legal fees		710,740
Insurance expense		129,744
Interest expense (Note 8)		1,286,837
Commitment fee expense (Note 8)		1,270,892
Other expenses		25,725
Net expenses		10,028,073
Net investment income		11,827,070
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on investments from unaffiliated issuers		(30,523,360	)
Net realized gain/(loss) on unfunded transactions		1,071,446
Net realized gain/(loss) on forward foreign currency contracts(1)		(749,849	)
Net realized gain/(loss) on foreign currency transactions		421,066
Net change in unrealized appreciation/(depreciation) on investments		90,912,946
Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 9)		1,278,134
Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts(1)		5,844,017
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency		245,046
Net realized and unrealized gain/(loss) on investments		68,499,446
Net increase in net assets from operations		80,326,516

(1) The primary risk exposure is foreign exchange contracts (See Notes 2 and 12).

12 | See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS

Highland Floating Rate Advantage Fund

	Six Months Ended
	February 28, 2010			Year Ended
	(unaudited)			August 31, 2009
	($)			($)
Increase/(Decrease) in Net Assets:
From Operations
Net investment income		11,827,070			70,113,442
Net realized gain/(loss) on investments, forward foreign currency contracts and foreign currency transactions		(29,780,697	)		(395,967,603	)
Net change in unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currency		98,280,143			(179,836,065	)
Net change in net assets from operations		80,326,516			(505,690,226	)
Distributions Declared to Shareholders:
From net investment income
Class A		(4,236,470	)		(38,424,304	)
Class B		(356,865	)		(3,856,745	)
Class C		(6,142,605	)		(52,639,121	)
Class Z		(1,358,746	)		(10,916,101	)
Total distributions declared to shareholders		(12,094,686	)		(105,836,271	)
Share Transactions:
Class A
Subscriptions		12,781,594			27,536,518
Distributions reinvested		2,244,873			22,191,264
Redemptions		(53,372,204	)		(176,202,291	)
Net decrease		(38,345,737	)		(126,474,509	)
Class B
Subscriptions		39,660			54,085
Distributions reinvested		206,029			2,330,287
Redemptions		(4,594,195	)		(17,374,481	)
Net decrease		(4,348,506	)		(14,990,109	)
Class C
Subscriptions		6,632,097			11,353,397
Distributions reinvested		3,579,551			31,107,401
Redemptions		(56,797,375	)		(164,959,277	)
Net decrease		(46,585,727	)		(122,498,479	)
Class Z
Subscriptions		780,557			3,270,163
Distributions reinvested		544,927			4,918,829
Redemptions		(6,812,238	)		(50,887,112	)
Net decrease		(5,486,754	)		(42,698,120	)
Net decrease from share transactions		(94,766,724	)		(306,661,217	)
Total decrease in net assets		(26,534,894	)		(918,187,714	)
Net Assets:
Beginning of period		662,090,955			1,580,278,669
End of period (including overdistributed net investment income of $(13,546,298) and $(13,278,682), respectively)		635,556,061			662,090,955

See accompanying Notes to Financial Statements. | 13

STATEMENTS OF CHANGES IN NET ASSETS (continued)

Highland Floating Rate Advantage Fund

	Six Months Ended
	February 28, 2010			Year Ended
	(unaudited)			August 31, 2009
	($)			($)
Change in Shares:
Class A
Subscriptions		1,995,883			4,229,069
Issued for distributions reinvested		351,703			3,721,012
Redemptions		(8,282,285	)		(29,740,350	)
Net decrease		(5,934,699	)		(21,790,269	)
Class B
Subscriptions		4,997			6,168
Issued for distributions reinvested		32,299			391,848
Redemptions		(712,438	)		(2,968,465	)
Net decrease		(675,142	)		(2,570,449	)
Class C
Subscriptions		1,021,518			1,797,217
Issued for distributions reinvested		561,002			5,238,762
Redemptions		(8,761,810	)		(27,720,975	)
Net decrease		(7,179,290	)		(20,684,996	)
Class Z
Subscriptions		125,612			458,600
Issued for distributions reinvested		85,391			815,793
Redemptions		(1,053,749	)		(8,293,626	)
Net decrease		(842,746	)		(7,019,233	)

14 | See accompanying Notes to Financial Statements.

STATEMENT OF CASH FLOWS

For the Six Months Ended February 28 2010 (unaudited) Highland Floating Rate Advantage Fund

	($)
Cash Flows Provided by Operating Activities
Net investment income		11,827,070
Adjustments to Reconcile Net Investment Income to Net Cash and Foreign Currency Provided by Operating Activities
Purchase of investment securities		(162,716,685	)
Proceeds from disposition of investment securities		298,260,245
Decrease in receivable for investments sold		19,120,185
Decrease in interest and fees receivable		4,015,581
Increase in other assets		(1,528,611	)
Net amortization/(accretion) of premium/(discount)		(3,356,715	)
Mark-to-market on realized and unrealized gain/(loss) on foreign currency		(83,738	)
Increase in payable for investments purchased		25,800,502
Decrease in payables to related parties		(36,854	)
Decrease in interest payable		(22,848	)
Net realized gain/(loss) on unfunded transactions		1,071,446
Decrease in other expenses and liabilities		(1,286,198	)
Net cash and foreign currency provided by operating activities		191,063,380
Cash Flows Used by Financing Activities
Decrease in notes payable		(66,000,000	)
Proceeds from shares sold		19,622,057
Payment of shares redeemed		(121,576,012	)
Distributions paid in cash		(5,981,978	)
Net cash flow used by financing activities		(173,935,933	)
Net increase in cash and foreign currency		17,127,447
Cash and Foreign Currency
Beginning of the period		15,057,009
End of the period		32,184,456
Supplemental disclosure of cash flow information:
Cash paid during the period for interest and commitment fees		2,580,577

See accompanying Notes to Financial Statements. | 15

FINANCIAL HIGHLIGHTS

Highland Floating Rate Advantage Fund

Selected data for a share outstanding throughout each period is as follows:

	Six Months Ended
	February 28, 2010			Years Ended August 31,
Class A Shares	(unaudited)			2009			2008			2007			2006			2005
Net Asset Value, Beginning of Period	$	5.98		$	9.70		$	11.75		$	12.43		$	12.19		$	12.08
Income from Investment Operations:
Net investment income(a)		0.12			0.51			0.90			1.00			0.96			0.67
Net realized and unrealized gain/(loss) (a)		0.63			(3.50	)		(2.05	)		(0.60	)		0.22			0.11
Total from investment operations		0.75			(2.99	)		(1.15	)		0.40			1.18			0.78
Less Distributions Declared to Shareholders:
From net investment income		(0.12	)		(0.73	)		(0.89	)		(1.01	)		(0.94	)		(0.67	)
From net realized gains		—			—			(0.01	)		(0.07	)		—			—
Total distributions declared to shareholders		(0.12	)		(0.73	)		(0.90	)		(1.08	)		(0.94	)		(0.67	)
Net Asset Value, End of Period	$	6.61		$	5.98		$	9.70		$	11.75		$	12.43		$	12.19
Total return(b)		12.62	%(c)		(30.25	)%		(10.28	)%		3.10	%		10.08	%		6.56	%(d)
Ratios to Average Net Assets/ Supplemental Data:
Net assets, end of period (000’s)	$	203,011		$	219,010		$	567,048		$	1,050,738		$	729,845		$	351,557
Total expenses excluding interest and commitment fee expenses		1.96	%		1.87	%		1.58	%		1.33	%		1.16	%		1.38	%
Interest and commitment fee expenses		0.76	%		1.08	%		1.47	%		1.06	%		1.04	%		0.72	%
Waiver/reimbursement		—	%		(0.01	)%		(0.02	)%		—			(0.04	)%		(0.10	)%
Net expenses including interest and commitment fee expenses(e)		2.72	%		2.94	%		3.03	%		2.39	%		2.16	%		2.00	%
Net investment income		3.75	%		8.09	%		8.28	%		8.05	%		7.78	%		5.60	%
Portfolio turnover rate		21	%(c)		21	%		22	%		70	%		61	%		85	%

(a)	Per share data was calculated using average shares outstanding during the period.
(b)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or contingent deferred sales charge (“CDSC”). For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.
(c)	Not annualized.
(d)	A late audit adjustment was made to net asset value, however, performance was not recalculated using the adjusted net asset value. Rather total return is calculated using the net asset value used for trading at the close of business on August 31, 2005.
(e)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

16 | See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS

Highland Floating Rate Advantage Fund

Selected data for a share outstanding throughout each period is as follows:

	Six Months Ended
	February 28, 2010			Years Ended August 31,
Class B Shares	(unaudited)			2009			2008			2007			2006			2005
Net Asset Value, Beginning of Period	$	5.98		$	9.70		$	11.75		$	12.43		$	12.19		$	12.08
Income from Investment Operations:
Net investment income(a)		0.11			0.49			0.86			0.96			0.92			0.63
Net realized and unrealized gain/(loss) (a)		0.63			(3.50	)		(2.05	)		(0.60	)		0.22			0.11
Total from investment operations		0.74			(3.01	)		(1.19	)		0.36			1.14			0.74
Less Distributions Declared to Shareholders:
From net investment income		(0.11	)		(0.71	)		(0.85	)		(0.97	)		(0.90	)		(0.63	)
From net realized gains		—			—			(0.01	)		(0.07	)		—			—
Total distributions declared to shareholders		(0.11	)		(0.71	)		(0.86	)		(1.04	)		(0.90	)		(0.63	)
Net Asset Value, End of Period	$	6.61		$	5.98		$	9.70		$	11.75		$	12.43		$	12.19
Total return(b)		12.43	%(c)		(30.50	)%		(10.60	)%		2.74	%		9.70	%		6.19	%(d)
Ratios to Average Net Assets/ Supplemental Data:
Net assets, end of period (000’s)	$	18,385		$	20,660		$	58,486		$	95,122		$	115,651		$	124,500
Total expenses excluding interest and commitment fee expenses		2.31	%		2.22	%		1.93	%		1.68	%		1.51	%		1.73	%
Interest and commitment fee expenses		0.76	%		1.08	%		1.47	%		1.06	%		1.04	%		0.72	%
Waiver/reimbursement		—	%		(0.01	)%		(0.02	)%		—			(0.04	)%		(0.10	)%
Net expenses including interest and commitment fee expenses(e)		3.07	%		3.29	%		3.38	%		2.74	%		2.51	%		2.35	%
Net investment income		3.40	%		7.74	%		7.93	%		7.70	%		7.43	%		5.25	%
Portfolio turnover rate		21	%(c)		21	%		22	%		70	%		61	%		85	%

(a)	Per share data was calculated using average shares outstanding during the period.
(b)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.
(c)	Not annualized.
(d)	A late audit adjustment was made to net asset value, however, performance was not recalculated using the adjusted net asset value. Rather total return is calculated using the net asset value used for trading at the close of business on August 31, 2005.
(e)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

See accompanying Notes to Financial Statements. | 17

FINANCIAL HIGHLIGHTS

Highland Floating Rate Advantage Fund

Selected data for a share outstanding throughout each period is as follows:

	Six Months Ended
	February 28, 2010			Years Ended August 31,
Class C Shares	(unaudited)			2009			2008			2007			2006			2005
Net Asset Value, Beginning of Period	$	5.98		$	9.70		$	11.75		$	12.43		$	12.19		$	12.08
Income from Investment Operations:
Net investment income(a)		0.10			0.48			0.84			0.93			0.90			0.61
Net realized and unrealized gain/(loss) (a)		0.63			(3.50	)		(2.04	)		(0.59	)		0.22			0.11
Total from investment operations		0.73			(3.02	)		(1.20	)		0.34			1.12			0.72
Less Distributions Declared to Shareholders:
From net investment income		(0.10	)		(0.70	)		(0.84	)		(0.95	)		(0.88	)		(0.61	)
From net realized gains		—			—			(0.01	)		(0.07	)		—			—
Total distributions declared to shareholders		(0.10	)		(0.70	)		(0.85	)		(1.02	)		(0.88	)		(0.61	)
Net Asset Value, End of Period	$	6.61		$	5.98		$	9.70		$	11.75		$	12.43		$	12.19
Total return(b)		12.35	%(c)		(30.60	)%		(10.73	)%		2.50	%		9.62	%		6.03	%(d)
Ratios to Average Net Assets/ Supplemental Data:
Net assets, end of period (000’s)	$	350,202		$	359,579		$	784,597		$	1,269,850		$	816,720		$	391,455
Total expenses excluding interest and commitment fee expenses		2.46	%		2.37	%		2.08	%		1.83	%		1.66	%		1.88	%
Interest and commitment fee expenses		0.76	%		1.08	%		1.47	%		1.06	%		1.04	%		0.72	%
Waiver/reimbursement		—	%		(0.01	)%		(0.02	)%		—			(0.04	)%		(0.10	)%
Net expenses including interest and commitment fee expenses(e)		3.22	%		3.44	%		3.53	%		2.89	%		2.66	%		2.50	%
Net investment income		3.25	%		7.59	%		7.78	%		7.55	%		7.28	%		5.10	%
Portfolio turnover rate		21	%(c)		21	%		22	%		70	%		61	%		85	%

(a)	Per share data was calculated using average shares outstanding during the period.
(b)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.
(c)	Not annualized.
(d)	A late audit adjustment was made to net asset value, however, performance was not recalculated using the adjusted net asset value. Rather total return is calculated using the net asset value used for trading at the close of business on August 31, 2005.
(e)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

18 | See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS

Highland Floating Rate Advantage Fund

Selected data for a share outstanding throughout each period is as follows:

	Six Months Ended
	February 28, 2010			Years Ended August 31,
Class Z Shares	(unaudited)			2009			2008			2007			2006			2005
Net Asset Value, Beginning of Period	$	5.97		$	9.70		$	11.75		$	12.43		$	12.19		$	12.08
Income from Investment Operations:
Net investment income(a)		0.13			0.54			0.94			1.04			1.00			0.71
Net realized and unrealized gain/ (loss) (a)		0.64			(3.52	)		(2.05	)		(0.60	)		0.22			0.11
Total from investment operations		0.77			(2.98	)		(1.11	)		0.44			1.22			0.82
Less Distributions Declared to Shareholders:
From net investment income		(0.13	)		(0.75	)		(0.93	)		(1.05	)		(0.98	)		(0.71	)
From net realized gains		—			—			(0.01	)		(0.07	)		—			—
Total distributions declared to shareholders		(0.13	)		(0.75	)		(0.94	)		(1.12	)		(0.98	)		(0.71	)
Net Asset Value, End of Period	$	6.61		$	5.97		$	9.70		$	11.75		$	12.43		$	12.19
Total return(b)		13.00	%(c)		(30.12	)%		(9.97	)%		3.46	%		10.47	%		6.93	%(d)
Ratios to Average Net Assets/ Supplemental Data:
Net assets, end of period (000’s)	$	63,914		$	62,842		$	170,147		$	280,383		$	161,996		$	75,293
Total expenses excluding interest and commitment fee expenses		1.61	%		1.52	%		1.23	%		0.98	%		0.81	%		1.03	%
Interest and commitment fee expenses		0.76	%		1.08	%		1.47	%		1.06	%		1.04	%		0.72	%
Waiver/reimbursement		—	%		(0.01	)%		(0.02	)%		—			(0.04	)%		(0.10	)%
Net expenses including interest and commitment fee expenses(e)		2.37	%		2.59	%		2.68	%		2.04	%		1.81	%		1.65	%
Net investment income		4.10	%		8.44	%		8.63	%		8.40	%		8.13	%		5.95	%
Portfolio turnover rate		21	%(c)		21	%		22	%		70	%		61	%		85	%

(a)	Per share data was calculated using average shares outstanding during the period.
(b)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.
(c)	Not annualized.
(d)	A late audit adjustment was made to net asset value, however, performance was not recalculated using the adjusted net asset value. Rather total return is calculated using the net asset value used for trading at the close of business on August 31, 2005.
(e)	Net expense ratio has been calculated after applying any waiver/reimbursement if applicable.

See accompanying Notes to Financial Statements. | 19

NOTES TO FINANCIAL STATEMENTS (unaudited)

February 28, 2010 Highland Floating Rate Advantage Fund

Note 1. Organization

Highland Floating Rate Advantage Fund (the “Fund”) is a Delaware statutory trust that is successor in interest to a Massachusetts business trust of the same name and is registered with the Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), as a continuously offered, non-diversified, closed-end management investment company.

Investment Objective

The Fund seeks to provide a high level of current income, consistent with preservation of capital.

Fund Shares

The Fund may issue an unlimited number of shares, with par value $0.001 per share and continuously offers three classes of shares: Class A, Class C and Class Z. The Fund has discontinued selling Class B Shares to new and existing investors, although existing investors may still reinvest distributions in Class B Shares. Class A shares are sold with a front-end sales charge. Class A, B and C shares may be subject to a contingent deferred sales charge (“CDSC”), Class Z shares are sold only to certain eligible investors. Certain share classes have their own sales charge and bear class-specific expenses, which include distribution fees and service fees.

Note 2. Significant Accounting Policies

The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements.

Use of Estimates

The Fund’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Fund Valuation

The net asset value (“NAV”) of the Fund’s Shares is calculated daily in accordance with procedures approved by the Board of Trustees (the “Board” or “Trustees”). The NAV per share of each class of the Fund’s shares is calculated by dividing the value of the Fund’s net assets attributable to each class of shares by the total number of Shares of the class outstanding.

Valuation of Investments

In computing the Fund’s net assets, 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 asked 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 and for which the Fund has determined the price received from a pricing service or broker-dealer is “stale” or otherwise does 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 NAV), 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 NAV will reflect the affected portfolio securities’ fair value as determined in the judgment 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 NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates not easily substantiated.

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.

20 | Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Fair Value Measurement:

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.

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. A summary of the inputs used to value the Fund’s assets as of February 28, 2010 is as follows:

					Level 2		Level 3
			Level 1		Significant		Significant
	Total Value at		Quoted		Observable		Unobservable
Investment in Securities	February 28, 2010		Price		Input		Input
Common Stocks
Aerospace	$	90,733	$	90,733	$	—	$	—
Chemicals		1,124,880		—		—		1,124,880
Gaming/Leisure		1,089,655		—		—		1,089,655
Metals/Minerals		451,895		—		—		451,895
Transportation - Land Transportation		863,527		—		—		863,527
Utility		111,091		—		—		111,091
Debt
Senior Loans		725,213,538		—		391,426,473		333,787,065
Asset-Backed Securities		21,573,817		—		—		21,573,817
Claims		255,791		—		—		255,791
Total	$	750,774,927	$	90,733	$	391,426,473	$	359,257,721
Other Financial Instruments*
Liabilities	$	4,472,356	$	—	$	4,472,356	$	—
Total	$	4,472,356	$	—	$	4,472,356	$	—

* Other financial instruments are derivative instruments not reflected in the Investment Portfolio, such as forwards which are valued at the unrealized appreciation/(depreciation) on the investment.

The Fund did not have any liabilities that were classified as Level 3 at February 28, 2010.

Semi-Annual Report | 21

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

The table below sets forth a summary of changes in the Fund’s Level 3 assets (assets measured at fair value using significant unobservable inputs) for the six months ended February 28, 2010.

						Net
						Amortization		Net			Net						Balance
Assets at Fair Value	Balance as of		Transfers			(Accretion) of		Realized			Unrealized			Net			as of
Using Unobservable	August 31		in/(out)			Premium/		Gains/			Gains/			Purchase/			February 28
Inputs (Level 3)	2009		of Level 3			(Discount)		(Losses)			(Losses)			(Sales)*			2010
Common Stocks
Chemicals	$	1,124,911	$	—		$	—	$	—		$	(31	)	$	—		$	1,124,880
Gaming and Leisure		—		—			—		—			9,363			1,080,292			1,089,655
Metals/Minerals		222,013		—			—		—			229,882			—			451,895
Transportation - Land Transportation		953,664		—			—		—			(90,137	)		—			863,527
Utility		192,288		—			—		(374,347	)		(188,635	)		481,785			111,091
Debt
Senior Loans		404,440,157		(24,276,396	)		943,217		(19,156,603	)		36,978,892			(65,142,202	)		333,787,065
Asset-Backed Securities		8,743,963		—			—		216,913			13,258,479			(645,538	)		21,573,817
Claims		201,290		205,000			—		(6,829,761	)		7,026,273			(347,011	)		255,791
Total	$	415,878,286	$	(24,071,396	)	$	943,217	$	(26,143,798	)	$	57,224,086		$	(64,572,674	)	$	359,257,721

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

The net unrealized gains presented in the table above relate to investments that were held at February 28, 2010. The Fund presents these unrealized gains on the Statement of Operations as net change in unrealized appreciation/(depreciation) on investments.

Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments. As a result, for the six months ended February 28, 2010, a net amount of $24,071,396 was transferred from Level 3 to Level 2. Determination of fair values is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures.

Security Transactions

Security transactions are accounted for on the trade date. Costs and gains/(losses) are determined based upon the specific identification method for both financial statement and federal income tax purposes.

Foreign Currency

Foreign currencies, investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes, are recorded as unrealized foreign currency gains/(losses). Realized gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effect of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.

Forward Foreign Currency Contracts

In order to minimize the movement in NAV 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. Forwards involve is counterparty credit risk to the Fund because the forwards are not exchange traded and there is no clearinghouse to guarantee forwards against default. During the six months ended February 28, 2010, the open and close values of forward foreign currency contracts were EUR 34,741,000 and EUR 36,990,000 and GBP 31,029,600 and GBP 28,786,000, respectively.

22 | Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Income Recognition

Interest income is recorded on an accrual basis and includes accretion of discounts and amortization of premiums. Facility fees received are recorded as a reduction of cost to the loan and amortized through the maturity of the loan. Dividend income is recorded on the ex-dividend date.

Determination of Class Net Asset Values

All income, expenses (other than distribution fees and service fees, which are class-specific expenses, as shown on the Statement of Operations) and realized and unrealized gains/(losses) are allocated to each class of shares of the Fund on a daily basis for purposes of determining the NAV of each class. Income and expenses are allocated to each class based on the settled shares method, while realized and unrealized gains/(losses) are allocated based on the relative net assets of each class.

U.S. Federal Income Tax Status

The Fund intends to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended, and will distribute substantially all of its taxable income and gains, if any, for its tax year, and as such will not be subject to U.S. federal income taxes. In addition, the Fund intends to distribute, in each calendar year, substantially all of its net investment income, capital gains and certain other amounts, if any, such that the Fund should not be subject to federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded.

Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

Distributions to Shareholders

Distributions from net investment income are declared daily and paid monthly. Net realized capital gains, if any, are distributed at least annually.

Cash and Cash Equivalents

The Fund considers liquid assets deposited with a bank, money market funds, and certain short term debt instruments with maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the statement of assets and liabilities. At February 28, 2010, the Fund had $31,252,110 of cash and cash equivalents denominated in foreign currencies, with a cost of $932,346.

Statement of Cash Flows

Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash Flows. The cash and foreign currency amount shown in the Statement of Cash Flows is the amount included within the Fund’s Statement of Assets and Liabilities and includes cash and foreign currency on hand at its custodian bank.

Note 3. U.S. Federal Tax Information

The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. As a result, net investment income/(loss) and net realized gain/(loss) on investment transactions for a reporting period may differ significantly from distributions during such period.

For the six month period ended February 28, 2010, net permanent differences resulting from Section 988 gain/loss reclass, net operating loss, paydown reclass, premium amortization accrued/sold, foreign bond bifurcation and forward foreign currency gain/loss of $(4,539,209) were identified. Reclassifications are made to the Fund’s capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations at year end. If these reclassifications were made for the period ended February 28, 2010, they would be reclassified to the components of the Fund’s net assets as follows:

Undistributed/
(Overdistributed)	Accumulated
Net Investment	Net Realized	Paid-In
Income	Gain (Loss)	Capital
$4,154,132	$385,077	$(4,539,209)

The tax character of distributions paid during the six month period ended February 28, 2010 and the past two tax years ended August 31, 2009 and August 31, 2008, were as follows.

Distributions paid from:	2010		2009		2008
Ordinary income*	$	4,596,599	$	105,836,271	$	174,109,322
Return of capital**		7,498,087		—		—
Long-term capital gains		—		—		1,924,460

*	For tax purposes, short-term capital gain distributions, if any, are considered ordinary income distributions.
**	The final tax character for distributions made this year will be determined at year end. However, based on information as of February 28, 2010, the Fund anticipates a return of capital for tax purposes for the period ending June 30, 2010. Additional information will be distributed on Form 1099 at the end of the tax year.

Semi-Annual Report | 23

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

As of February 28, 2010, the components of distributable earnings on a tax basis were as follows:

Accumulated	Undistributed	Undistributed
Capital and	Ordinary	Long-Term	Net Unrealized
Other Losses	Income	Capital Gains	Depreciation*
$(590,950,027)	$—	$—	$(488,110,077)

* Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sales and premium amortization adjustments.

The accumulated capital losses to offset future gains (capital loss carryforward) for the Fund are $8,394,093, $232,159,979 and $348,410,290 which will expire on August 31, 2016, August 31, 2017 and August 31, 2018, respectively.

Unrealized appreciation and depreciation at February 28, 2010, based on the cost of investments for U.S. federal income tax purposes, and excluding any unrealized appreciation and depreciation from changes in the value of other assets and liabilities resulting from changes in exchange rates was:

Unrealized appreciation	$	11,091,064
Unrealized depreciation		(500,862,653	)
Net unrealized depreciation	$	(489,771,589	)

Post-October Losses

Under current laws, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the six month period ended February 28, 2010, the Fund intends to elect to defer net realized losses incurred from November 1, 2009 through February 28, 2010 of $1,653,785. In addition, the Fund also elected to defer currency losses of $331,880 incurred from November 1, 2009 through February 28, 2010.

Note 4. Advisory, Administration, Service and Distribution and Trustee Fees

Investment Advisory Fee

The Investment Adviser receives a monthly investment advisory fee based on the Fund’s average daily managed assets at the following annual rates:

Average Daily Managed Assets	Annual Fee Rate
First $1 billion		0.65	%
Next $1 billion		0.60	%
Over $2 billion		0.55	%

Average daily managed assets of the Fund means the average daily value of the total assets of the Fund less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage).

For the six months ended February 28, 2010, the Fund’s effective investment advisory fee rate was 0.65%.

Administration Fees

The Investment Adviser provides administrative services to the Fund. For its services, the Investment Adviser receives an annual fee, payable monthly, in an amount equal to 0.20% of the Fund’s average daily managed assets. Under a separate sub-administration agreement, the Investment Adviser has delegated certain administrative functions to PNC Global Investment Servicing (U.S.) Inc. (“PNC”). The Investment Adviser pays PNC directly for these sub-administration services.

Service and Distribution Fees

PFPC Distributors, Inc. (the “Underwriter”) serves as the principal underwriter and distributor of the Fund’s shares. The Underwriter receives the front end sales charge imposed on the sale of Class A Shares and the CDSC imposed on certain redemptions of Class A, Class B and Class C Shares. For the six months ended February 28, 2010, the Underwriter received $1,414 of front end sales charges on Class A Shares and $1,450, and $5,755 of CDSC on Class B and Class C Share redemptions, respectively.

The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the “Plan”), which requires the payment of a monthly service fee to the Underwriter at an annual rate of 0.25% of the average daily net assets attributable to Class A, Class B and Class C Shares of the Fund. The Plan also requires the payment of a monthly distribution fee to the Underwriter at an annual rate of 0.10%, 0.45% and 0.60% of the average daily net assets attributable to Class A, Class B and Class C Shares, respectively.

Fees Paid to Officers and Trustees

Each Trustee who is not an “interested person” of the Fund as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser as of the date of this semi-annual report.

The Fund pays no compensation to its one interested Trustee or any of its officers, all of whom are employees of the Investment Adviser.

Note 5. Fund Information

For the six months ended February 28, 2010, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $162,716,685 and $298,260,245, respectively.

24 | Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Note 6. Periodic Repurchase Offers

The Fund has adopted a policy to offer each fiscal quarter to repurchase a specified percentage (between 5% and 25%) of the shares then outstanding at the Fund’s NAV (“Repurchase Offers”). Repurchase Offers are scheduled to occur on or about the 15th day (or the next business day if the 15th is not a business day) in the months of February, May, August and November. It is anticipated that the date on which the repurchase price of shares will be determined (the “Repurchase Pricing Date”) will be the same date as the deadline for shareholders to provide their repurchase requests to the Distributor (the “Repurchase Request Deadline”), and if so, the Repurchase Request Deadline will be set for a time no later than the close of regular trading on the New York Stock Exchange on such date. The Repurchase Pricing Date will occur no later than the 14th day after the Repurchase Request Deadline, or the next business day if the 14th day is not a business day. Repurchase proceeds will be paid to shareholders no later than seven days after the Repurchase Pricing Date. If shareholders tender for repurchase more than the Repurchase Offer amount for a given Repurchase Offer, the Fund may repurchase an additional amount of shares of up to 2% of the shares outstanding on the Repurchase Request Deadline.

For the six months ended February 28, 2010, there were two Repurchase Offers. In the November 2009 and February 2010 Repurchase Offers, the Fund offered to repurchase 12% and 10%, respectively, of its outstanding shares. In the November 2009 and February 2010 Repurchase Offers, 8.1% and 8.8%, respectively, of shares outstanding were repurchased.

Note 7. Senior Loan Participation Commitments

The Fund invests, under normal conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in adjustable rate senior loans (“Senior Loans”), the interest rates of which float or vary periodically based upon a benchmark indicator of prevailing interest rates to domestic or foreign corporations, partnerships and other entities that operate in a variety of industries or geographic regions (“Borrowers”). If the lead lender in a typical lending syndicate becomes insolvent, enters Federal Deposit Insurance Corporation (“FDIC”) receivership or, if not FDIC insured enters into bankruptcy, the Fund may incur certain costs and delays in receiving payment or may suffer a loss of principal and/or interest. When the Fund purchases a participation of a Senior Loan interest, the Fund typically enters into a contractual agreement with the lender or other third party selling the participation, not with the Borrower directly.

As such, the Fund assumes the credit risk of the Borrowers, as well as of the selling participants or other persons interpositioned between the Fund and the Borrowers. The ability of Borrowers, selling participants or other persons interpositioned between the Fund and the Borrowers to meet their obligations may be affected by a number off actors, including economic developments in a specific industry.

At February 28, 2010, the following sets forth the selling participants with respect to interests in Senior Loans purchased by the Fund on a participation basis.

	Principal
Selling Participant	Amount		Value
Merrill Lynch, London Branch:
Wind Telecomunicazioni S.p.A.
B1 Term Loan Facility	EUR	1,500,000	$	1,979,246
Merrill Lynch, London Branch:
Wind Telecomunicazioni S.p.A.
C1 Term Loan Facility		1,500,000		1,989,482
			$	3,968,728

Note 8. Credit Agreement

Effective November 4, 2009, the Fund entered into a $170,000,000 Credit Agreement (the “Credit Agreement”) with The Bank of Nova Scotia. The Credit Agreement replaced a prior credit agreement and has a maturity date of November 3, 2010. Effective January 31, 2010, the commitment was reduced to $145,000,000. Concurrent with entering into the Credit Agreement, the Fund agreed to pay a $1,700,000 upfront fee. This fee is amortized over the remaining term of the Credit Agreement and $603,836 of upfront fee expense is included in commitment fee expense on the Statement of Operations.

At February 28, 2010, the Fund had outstanding borrowings under the Credit Agreement, totaling $115,000,000 secured by substantially all of the assets in the Fund’s portfolio, including cash and cash equivalents. Interest is charged at a rate equal to the Adjusted LIBO Rate plus 2.50% per annum based on the outstanding borrowings. In addition, the Fund has agreed to pay a commitment fee on the unutilized commitment amount of 2.00% per annum. The average daily loan balance was $138,071,823 at a weighted average interest rate of 1.92%, excluding any commitment fee, for the six months ended February 28, 2010. With respect to these borrowings, interest and commitment fees of $2,557,729 is included in the Statement of Operations.

The Fund is required to maintain 400% asset coverage with respect to amounts outstanding under the Credit Agreement. Prior to entering the Credit Agreement, the Fund was required to maintain 300% asset coverage under Section 18(a) of the 1940 Act. Asset coverage is calculated by subtracting the Fund’s total liabilities, not including any amount representing bank loans and senior securities, from the

Semi-Annual Report | 25

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Fund’s total assets and dividing the result by the principal amount of the borrowings outstanding. As of the dates indicated below, the Fund’s debt outstanding and asset coverage was as follows:

			% of
			Asset
			Coverage
	Total Amount		of
Date	Outstanding		Indebtedness
02/28/2010	$	115,000,000		649.9	%
08/31/2009		181,000,000		465.8
08/31/2008		511,000,000		409.3
08/31/2007		960,000,000		400.5
08/31/2006		335,000,000		729.2
08/31/2005		250,000,000		512.9
08/31/2004		95,000,000		803.8

See “Subsequent Events” section for more information about the Fund’s credit facility.

Note 9. Unfunded Loan Commitments

As of February 28, 2010, the Fund had unfunded loan commitments of $8,774,581, GBP 2,500,000 and EUR 3,203,330, which could be extended at the option of the borrower, pursuant to loan agreements with the following borrowers:

	Unfunded
	Loan
Borrower	Commitment
Broadstripe, LLC	$	3,983,145
SIRVA Worldwide, Inc.		1,791,436
Sorrenson Communications, Inc.		2,000,000
Water PIK, Inc.		1,000,000
Vivarte	EUR	3,203,330
Mobileserv Ltd.	GBP	2,500,000

Unfunded loan commitments are marked to market on the relevant day of valuation in accordance with the Fund’s valuation policies. Any applicable unrealized gain/(loss) and unrealized appreciation/(depreciation) on unfunded loan commitments are recorded on the Statement of Assets and Liabilities and the Statement of Operations, respectively. As of February 28, 2010, the Fund recognized net discount and unrealized depreciation on unfunded transactions of $4,540,402. The net change in unrealized depreciation on unfunded transactions of $1,278,134 is recorded in the Statement of Operations.

Note 10. Affiliated Issuers

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 six months ended February 28, 2010:

	Par Value at		Shares at		Market Value
	February 28,		February 28,		August 31,		February 28,
	2010		2010		2009		2010
ComCorp Broadcasting, Inc.* (Senior Loans)	$	2,989,118		—	$	1,736,584	$	2,479,773
Communications Corp of America (Common Stock)		—		152,363		—		—
	$	2,989,118		152,363	$	1,736,584	$	2,479,773

* Company is a wholly owned subsidiary of Communications Corporation of America.

Note 11. Indemnification

The Fund has a variety of indemnification obligations under contracts with its service providers and certain counterparties. The Fund’s maximum exposure under these arrangements is unknown. The Board has approved the advancement of certain expenses to a service provider in connection with pending litigation subject to appropriate documentation and safeguards.

Note 12. Disclosure of Significant Risks and Contingencies

Non-Diversified and Industry Concentration Risk

The Fund may focus its investments in instruments of only a few issuers. Additionally, the Fund will concentrate its investments in the financial services industry. The concentration of the Fund’s portfolio in a limited number of issuers would subject the Fund to a greater degree or risk with respect to defaults by such issuers, and the concentration of the portfolio in the financial services industry subjects the Fund to a greater degree of risk with respect to economic downturns relating to such industry.

Non-Payment Risk

Corporate debt obligations, including Senior Loans, are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Fund, a reduction in the value of the Senior Loan experiencing non-payment and a potential decrease in the NAV of the Fund.

Credit Risk

The Fund invest all or substantially all of its assets in Senior Loans of other securities that are rated below investment grade and unrated Senior Loans of comparable quality. Investments rated below investment grade are commonly referred to as “high yield securities” or “junk securities”. They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet principal and interest payments. Investments in high-yield securities may result in greater NAV fluctuation than if the Fund did not make such investments.

26 | Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Leverage Risk

The Fund currently uses leverage through borrowings from a credit facility. The use of leverage for investment purposes creates opportunities for greater total returns, but at the same time involves risks. Any investment income or gains earned with respect to the amounts borrowed that is in excess of the interest that is due on the borrowing will augment the Fund’s income. Conversely, if the investment performance with respect to the amounts borrowed fails to cover the interest on such borrowings, the value of the Fund’s shares may decrease more quickly than would otherwise be the case, and dividends on the shares could be reduced or eliminated. Interest payments and fees incurred in connection with such borrowings will reduce the amount of net income available for payment to shareholders.

Currency Risk

A portion of the Fund’s assets may be quoted or denominated in non-U.S. currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control regulations. The Fund’s investment performance may be negatively affected by a devaluation of a currency in which the Fund’s investments are quoted or denominated. Further, the Fund’s investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities quoted or denominated in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar.

Non-U.S. Securities Risk

Investment in securities of non-U.S. issuers may involve special risks compared to investing in securities of U.S. issuers. These risks are more pronounced to the extent that the Fund invests a significant portion of its non-U.S. investments in one region or in the securities of emerging market issuers. These risks may include: (i) non-U.S. issuers may be subject to less rigorous disclosure, accounting standards and regulatory requirements; (ii) many non-U.S. markets are smaller, less liquid and more volatile and the Adviser may not be able to sell the Fund’s investments at times, in amounts and at prices it considers reasonable; and (iii) the economies of non-U.S. issuers may grow at slower rates than expected or may experience more severe downturns or recessions. Additionally, certain investments in non-U.S. issuers also may be subject to foreign withholding or other taxes on dividends, interest or capital gain.

Forward Currency Contracts Risk

The Fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use forward contracts to gain exposure to, or hedge against, changes in the value of foreign currencies. A forward contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. 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. Forwards involve counterparty credit risk to the Fund because forwards are not exchange traded and there is no clearing house to guarantee the forwards against default.

Derivatives Risk

Derivative transactions in which the Fund 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 derivative transactions, involve certain risks and considerations. These risks include 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. The use of derivative transactions may result in losses greater than if they had not been used, may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market value, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund to hold a security that it might otherwise sell. The successful use of derivative transactions depends on the Adviser’s ability to predict correctly the direction and extent of movements in interest rates.

Counterparty Credit Risk

Counterparty credit risk is the potential loss the Fund may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Counterparty credit risk is measured as the loss the Fund would record if its counterparties failed to perform pursuant to the terms of their obligations to the Fund. Because the Fund may enter into over-the-counter forwards, options, swaps and other derivative financial instruments, the Fund is exposed to the credit risk of its counterparties. To limit the counterparty credit risk associated with such transactions, the Fund conducts business only with financial institutions judged by the Investment Adviser to present acceptable credit risk.

Note 13. Legal Matters

The Fund is one of numerous defendants (“Lenders”) that have been named in an adversary proceeding pending in the Bankruptcy Court of the Southern District of Florida (the “Court”). The action, entitled In re Tousa Inc., et al., was filed on July 15, 2008, by the Official Committee of Unsecured

Semi-Annual Report | 27

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

Creditors of TOUSA, Inc. and its affiliates (the “Plaintiff “), which are home building companies to which the Lenders loaned money through different lending facilities. An amended complaint was filed on October 17, 2008. Plaintiff alleges that monies used to repay the Lenders should be voided as fraudulent and preferential transfers under the bankruptcy laws. More specifically, Plaintiff alleges that subsidiaries of the home building companies were forced to become co-borrowers and guarantors of the monies used to repay the Lenders, and that the subsidiaries did not receive fair consideration or reasonably equivalent value when they transferred the proceeds to repay the Lenders. Plaintiff seeks to void the transfers and other equitable relief. The Fund and other Funds and accounts managed by the Investment Adviser and the other Lenders are named as defendants in two separate lending capacities; first, as lenders in a credit agreement (the “Credit Lenders”); and second, as lenders in a term loan (the “Term Loan Lenders”). The Fund, as Term Loan Lender, moved to dismiss the amended complaint. The Court denied the motion to dismiss on December 4, 2008. The Fund and the other Lenders filed a motion for leave to appeal the dismissal, which was denied on February 23, 2009. Plaintiff thereafter filed a Second Amended Complaint and a Third Amended Complaint two answers to the Third Amended Complaint in its capacity as a Term Loan Lender. The case went to trial, which concluded in August 2009.

On October 13, 2009, the court ruled for the Plaintiff in the action and ordered the defendants to return the proceeds received from the pay off of the term loan at par on July 31, 2007. The proceeds received by the Fund totaled $4,000,000. Additionally, the court ordered the defendants to pay simple interest on the amount returned at an annual rate of 9%. In November 2009, the Fund and other defendants filed an appeal to the decision. On December 22, 2009, the Fund posted $5,310,479 with the Court.

Matters Relating to the Fund’s Investment in Broadstripe, LLC. The Fund, the Adviser, other accounts managed by the Adviser, and an unaffiliated investment manager are defendants in a lawsuit filed in Delaware Superior Court on November 17, 2008 (and subsequently amended to include the Trust as a party) by WaveDivision Holdings, LLC and an affiliate, alleging causes of action stemming from the plaintiffs’ 2006 agreements with Millennium Digital Media Systems, LLC (“Millennium”) (now known as Broadstripe, LLC), pursuant to which Millennium had agreed, subject to certain conditions, to sell certain cable television systems to the plaintiffs. During the relevant period, the Fund and other defendants managed by the Adviser held debt obligations of Millennium. As of August 31, 2009, the Fund attributed total value to the Fund’s investment in the Millennium revolving credit agreement and term loan, each of which is secured by a first lien, of an aggregate of approximately $44.5 million. The complaint alleges that the Adviser and an unaffiliated investment manager caused Millennium to terminate the contracts to sell the cable systems to the plaintiffs. The amended complaint seeks compensatory and punitive damages in an unspecified amount to be presented at trial, thus, the Fund cannot predict the amount of a judgment, if any. The Fund and other accounts managed by the Adviser have filed a motion to dismiss the lawsuit. The Adviser and the Fund intend to continue to defend this action vigorously.

In addition, the Fund and other funds managed by the Adviser that held certain debt issued by Millennium are defendants in a complaint filed on May 8, 2009 by the official committee of unsecured creditors of Millennium and its affiliated debtors (collectively, the “Debtors”) in the United States Bankruptcy Court for the District of Delaware. The complaint alleges various causes of action against the Fund, the Adviser and certain other funds managed by the Adviser and seeks various relief, including recharacterization and equitable subordination of the debt held by the Fund and the other funds and recovery of certain payments made by the Debtors to the Fund and the other funds. The Fund and other defendants managed by the Adviser have filed a motion for summary judgment on all of the claims in the complaint. The Adviser and the Fund intend to continue to defend this action vigorously. The Fund believes that the resolution of the matters described in this subsection are unlikely to have a material adverse effect on the Fund. If the Debtors were to succeed in their causes of action, all or a portion of the Fund’s investment in Millennium may not be recoverable.

Note 14. Subsequent Events

Effective March 31, 2010, the Fund entered into a $150,000,000 Credit Agreement with certain lenders and The Bank of Nova Scotia as administrative agent (the “2010 Credit Agreement”). The 2010 Credit Agreement replaced the prior credit agreement dated November 4, 2009 and has a scheduled termination date of November 3, 2010. The Fund is required to maintain 400% asset coverage with respect to amounts outstanding under the 2010 Credit Agreement.

On March 22, 2010, the Fund’s Board voted to change the Fund’s fiscal year end from August 31 to June 30.

28 | Semi-Annual Report

ADDITIONAL INFORMATION (unaudited)

February 28, 2010 Highland Floating Rate Advantage Fund

Additional Portfolio Information

The Investment Adviser and its affiliates manage other accounts, including registered and private funds and individual accounts. Although investment decisions for the Fund are made independently from those of such other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Fund, including investments in different levels of the capital structure of a company, such as equity versus senior loans, or that take contrary positions in multiple levels of the capital structure. 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, this may create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When the Fund and one or more of such other accounts is prepared to invest in, or desires to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to be equitable to the Fund and such other accounts. The Investment Adviser also may aggregate orders to purchase and sell securities for the Fund and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all accounts including the Fund, in some cases these activities may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund.

Approval of Investment Advisory Agreement

The Fund has retained the Investment Adviser to manage its assets pursuant to an Investment Advisory Agreement with the Investment Adviser (the “Advisory Agreement”), which has been approved by the Fund’s Board of Trustees, including a majority of the Trustees who are not “interested persons” (as defined in the 1940 Act) of the Fund (the “Independent Trustees”).

Following an initial term of two years, the Advisory Agreement continues in effect from year-to-year provided such continuance is specifically approved at least annually by the vote of holders of at least a majority of the outstanding shares of the Fund, or by the Board of Trustees, and, in either event, by a majority of the Independent Trustees of the Fund casting votes in person at a meeting called for such purpose.

At a meeting held on December 17-18, 2009, the Board, as requested through Fund counsel and the Independent Trustees’ independent legal counsel, received from the Investment Adviser written and oral information including: (i) information confirming the financial condition of the Investment Adviser; (ii) information regarding the total fees and payments received by the Investment Advisor from the Funds and whether such fees are appropriate given economies of scale and other considerations; (iii) information on the advisory and compliance personnel of the Investment Adviser; (iv) information on the internal compliance procedures of the Investment Adviser; (v) information regarding brokerage and portfolio transactions; (vi) information on any legal proceedings or regulatory audits or investigations affecting the Investment Adviser; and (vii) comparative information showing (a) the fees payable under the Advisory Agreement versus the investment advisory fees of certain registered investment companies that follow investment strategies similar to those of the Fund, (b) the expense ratio of the Fund versus the expense ratio of certain other registered investment companies and private pooled vehicles that follow investment strategies similar to those of the Fund, (c) the Fund’s performance versus (1) other registered investment companies and private pooled vehicles that follow investment strategies similar to those of the Fund and (2) certain indices, and (d) the profitability of the Fund versus the other registered investment companies and private pooled investment vehicles managed by the Investment Adviser that follow investment strategies similar to those of the Fund. The Trustees reviewed various factors discussed in the legal memorandum from the Independent Trustees’ independent counsel, the detailed information provided by the Investment Adviser and other relevant information and factors.

The Trustees’ conclusion as to the continuation of the Advisory Agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. The fee arrangements for the Fund are the result of review and discussion between the Independent Trustees and the Investment Adviser since the Fund’s inception. Certain aspects of such arrangements may receive greater scrutiny in some years than in others, and the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.

The Nature, Extent, and Quality of the Services Provided by the Investment Adviser

The Trustees considered the portfolio management services provided by the Investment Adviser and the activities related to portfolio management, including use of technology, research capabilities, and investment management staff. They discussed the relevant experience and qualifications of the personnel providing advisory services, including the back-

Semi-Annual Report | 29

ADDITIONAL INFORMATION (unaudited) (continued)

February 28, 2010 Highland Floating Rate Advantage Fund

ground and experience of the members of the Fund’s portfolio management team. The Trustees reviewed the management structure, assets under management and investment philosophies and processes of the Investment Adviser. They also reviewed and discussed the Investment Adviser’s compliance policies and procedures. The Trustees concluded that the Investment Adviser has the quality and depth of personnel and investment methods essential to performing its duties under the Advisory Agreement and that the nature and quality of such advisory services are satisfactory.

The Investment Adviser’s Historical Performance in Managing the Fund

The Trustees reviewed the Investment Adviser’s historical performance in managing the Fund over various time periods and reflected on previous discussions regarding matters bearing on the Investment Adviser’s performance at their meetings throughout the year. The Trustees discussed relative performance and contrasted the Fund’s performance versus that of the Fund’s peers, as represented by certain other registered investment companies that follow investment strategies similar to the Fund, the Credit Suisse Leveraged Loan Index and the S&P/LSTA All Loans Index. After reviewing these and related factors, the Trustees concluded that they were satisfied with the Investment Adviser’s responses and efforts relating to performance.

The Costs of the Services to be Provided by the Investment Adviser and the Profits Realized by the Investment Adviser and its Affiliates from the Relationship with the Fund.

The Trustees also gave substantial consideration to the fees payable under the Advisory Agreement, including: (i) the annual fee as a portion of the Fund’s Average Daily Managed Assets paid to the Investment Adviser under the Advisory Agreement and the Administration Agreement between the Fund; (ii) the expenses the Investment Adviser incurs in providing advisory services; (iii) the profitability of the Fund compared to the profitability of Highland Floating Rate Fund, a registered investment company managed by the Investment Adviser; and (iv) a comparison of the fees payable to the Investment Adviser under the Advisory Agreement to fees payable to other investment advisers serving other registered investment companies that follow investment strategies similar to those of the Fund. The Trustees also considered the Investment Adviser’s Administration Agreement with the Fund and the annual fees as a portion of the Fund’s average daily managed assets paid to the Investment Adviser under the Administration Agreement. After reviewing these and related factors, the Trustees determined that the fees payable to the Investment Adviser under the Advisory Agreement represent reasonable compensation in light of the services being provided by the Investment Adviser to the Fund.

The Extent to which Economies of Scale would be Realized as the Fund Grows and Whether Fee Levels Reflect these Economies of Scale for the Benefit of Shareholders

The Trustees considered the asset level of the Fund, the information provided by the Investment Adviser relating to its costs and information comparing the fee rates charged by the Investment Adviser with fee rates charged by other unaffiliated investment advisers to their clients. The Trustees noted that the Fund currently uses breakpoints in determining its advisory fees. The Trustees concluded that the fee structure of the Fund, with current breakpoints is reasonable and appropriately should result in a sharing of economies of scale in view of the information provided by the Investment Adviser.

Following a further discussion of the factors deemed material, including those described above, and the merits of the Advisory Agreement and its various provisions, the Board of Trustees, including all of the Independent Trustees, determined that the Advisory Agreement, including the advisory fee paid to the Investment Adviser under the Advisory Agreement, is fair and reasonable to the Fund and approved the continuation, for a period of one year commencing December 31, 2009, of the Advisory Agreement.

30 | Semi-Annual Report

IMPORTANT INFORMATION ABOUT THIS REPORT

Investment Adviser
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 800
Dallas, TX 75240

Transfer Agent
PNC Global Investment Servicing (U.S.) Inc.
101 Sabin Street
Pawtucket, RI 02860

Underwriter
PFPC Distributors, Inc.
760 Moore Road
King of Prussia, PA 19406

Custodian
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153

Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
2001 Ross Avenue, Suite 1800
Dallas, TX 75201

Fund Counsel
Ropes & Gray LLP
One International Place
Boston, MA 02110-2624

This report has been prepared for shareholders of Highland Floating Rate Advantage Fund.

The Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-877-665-1287 to request that additional reports be sent to you.

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities, and the Fund’s proxy voting record for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the SEC’s website at http://www.sec.gov.

The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at http://www.sec.gov and also may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. Shareholders may obtain the Form N-Q by visiting the Fund’s website at www.highlandfunds.com.

The Statement of Additional Information includes information about Fund Trustees and is available upon request without charge by calling 1-877-665-1287.

Semi-Annual Report | 31

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Highland Floating Rate Advantage Fund Semi-Annual Report, February 28, 2010 www.highlandfunds.com HLC-ADV-SEMI-02/10

Item 2. Code of Ethics.

Not applicable.

Item 3. Audit Committee Financial Expert.

Not applicable.

Item 4. Principal Accountant Fees and Services.

Not applicable.

Item 5. Audit Committee of Listed registrants.

Not applicable.

Item 6. Investments.

(a)	Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form.
(b)	Not applicable.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

There has been no change, as of the date of this filing, in any of the portfolio managers identified in response to paragraph (a)(1) of this Item in the registrant’s most recently filed annual report on Form N-CSR.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of directors.

Item 11. Controls and Procedures.

(a)

The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 12. Exhibits.

(a)(1)	Not applicable.
(a)(2)	Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3)	Not applicable.
(b)	Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(registrant) Highland Floating Rate Advantage Fund

By (Signature and Title)*	/s/ R. Joseph Dougherty
	R. Joseph Dougherty, Chief Executive Officer and President
	(principal executive officer)

Date 5/4/10

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By (Signature and Title)*	/s/ R. Joseph Dougherty
	R. Joseph Dougherty, Chief Executive Officer and President
	(principal executive officer)

Date 5/4/10

By (Signature and Title)*	/s/ M. Jason Blackburn
	M. Jason Blackburn, Chief Financial Officer, Treasurer and
	Secretary
	(principal financial officer)

Date 5/4/10

^* Print the name and title of each signing officer under his or her signature.