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
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HIGHLAND FLOATING RATE ADVANTAGE FUND
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(Exact name of registrant as specified in charter)

13455 Noel Road, Suite 1300
DALLAS, TEXAS 75240
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(Address of principal executive offices) (Zip code)

James D. Dondero
Highland Capital Management, L.P.
13455 Noel Road, Suite 1300
DALLAS, TEXAS 75240
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(Name and address of agent for service)

registrant's telephone number, including area code: (877) 532-2834
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Date of fiscal year end: AUGUST 31
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Date of reporting period: FEBRUARY 28, 2005
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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, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.

ITEM 1. REPORTS TO STOCKHOLDERS.

The Report to Shareholders is attached herewith.

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HIGHLAND FLOATING RATE ADVANTAGE FUND

TABLE OF CONTENTS

Fund Profile ............................................................. 1

Financial Statements ..................................................... 2

Investment Portfolio .................................................. 3

Statement of Assets and Liabilities ................................... 10

Statement of Operations ............................................... 11

Statements of Changes in Net Assets ................................... 12

Statement of Cash Flows ............................................... 14

Financial Highlights .................................................. 15

Notes to Financial Statements ......................................... 19

Important Information About This Report .................................. 25

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
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HIGHLAND FLOATING RATE ADVANTAGE FUND

OBJECTIVE
To provide a high level of current
income, consistent with preservation
of capital.

TOTAL NET ASSETS
(AS OF 02/28/05)
$788.8 million

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

QUALITY BREAKDOWN AS OF 02/28/05 (%)

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Ba 24.3
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B 54.5
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Caa 5.6
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NR 15.4
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Other 0.2
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TOP 5 SECTORS AS OF 02/28/05 (%)

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Cable & Satellite Television 12.4
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Health Care 8.5
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Utilities 7.3
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Telecommunications/Wireless 7.0
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Business Equipment & Services 6.7
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TOP 10 HOLDINGS AS OF 02/28/05 (%)

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General Growth Properties, Inc., Tranche B Term Loan 2.6
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OpBiz LLC, Term Loan A 2.3
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Cricket Communications, Inc., Term Loan B 1.9
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Century Cable Holdings LLC, Discretionary Term Loan 1.7
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LNR Property Corp., Tranche B Term Loan 1.7
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Allied Waste North America, Inc.* Tranche A 1.7
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Blockbuster Entertainment Corp., Term Loan B 1.4
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Acterna Corp., Term Loan 1.3
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Consolidated Communications, Inc., Term Loan C 1.3
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Texas Genco LLC, Delayed Draw Term Loan 1.3
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Quality is calculated as a percentage of total investments. Sectors and holdings
are calculated as a percentage of net assets.

FINANCIAL STATEMENTS
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FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

A GUIDE TO UNDERSTANDING YOUR FUND'S FINANCIAL STATEMENTS

INVESTMENT PORTFOLIO The Investment Portfolio details all of the Fund's holdings and their
market 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 share price for each class is calculated by
dividing net assets for that 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 This statement demonstrates how the Fund's net assets were affected by its
operating results, distributions to shareholders and shareholder
transactions (e.g., subscriptions, redemptions and dividend reinvestments)
during the reporting period. The Statements of Changes in Net Assets also
details changes in the number of shares outstanding.

STATEMENT OF CASH FLOWS The Statement of Cash Flows reports net cash provided or used by operating,
investing and financing activities and the net effect of those flows on
cash and cash equivalents during the period.

NOTES TO FINANCIAL STATEMENTS These notes disclose the organizational background of the Fund, 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.

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 table also discloses the classes' performance and certain key
ratios (e.g., class expenses and net investment income as a percentage of
average net assets).

INVESTMENT PORTFOLIO (UNAUDITED)

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

VARIABLE RATE SENIOR LOAN NOTES (A) - 127.4%

AEROSPACE/DEFENSE - 1.9%
4,962,500 CACI International, Inc.
Term Loan, 4.59%, 05/03/11 .................... 5,036,938
Decrane Aircraft Holdings, Inc.
2,178,433 Term Loan B, 8.06%, 06/30/08 .................. 2,178,432
1,118,362 Term Loan D, 8.06%, 06/30/08 .................. 1,118,362
3,491,250 GenCorp, Inc.
Credit Linked Certificate of Deposit,
5.72%, 12/06/10 ............................... 3,529,060
3,000,000 Vought Aircraft Industries, Inc.
Term Loan, 5.17%, 12/22/11 .................... 3,048,750
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14,911,542
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AIR TRANSPORT - 1.2%
5,000,000 American Airlines, Inc.
Revolver, 12/15/05 (b) ........................ 5,007,800
4,482,788 United Airlines, Inc.
Tranche B, 7.50%, 06/30/05 .................... 4,530,395
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9,538,195
-------------

AUTOMOTIVE - 4.8%
Exide Technologies
2,000,000 European Borrower Dollar
Term Loan,
6.11%, 05/05/10 ............................... 2,015,000
2,000,000 US Borrower Term Loan,
6.11%, 05/05/10 ............................... 2,015,000
Federal-Mogul Corp.
392,157 Letter of Credit, 12/09/05 (b) ................ 398,039
1,575,457 Supplemental Revolver,
6.15%, 12/09/05 (c) ........................... 1,548,351
3,607,843 Term Loan, 12/09/11 (b) ....................... 3,440,980
5,000,000 Tranche B Term Loan,
5.17%, 06/30/05 ............................... 4,765,000
573,404 Tranche C Term Loan,
6.42%, 12/09/05 ............................... 576,988
5,605,611 Hayes Lemmerz International, Inc.
Term Loan, 6.24%, 06/03/09 .................... 5,734,092
3,750,000 Key Automotive Group
Term Loan C, 8.43%, 06/25/11 .................. 3,785,175
4,755,637 Key Plastics Holdings, Inc
Term Loan B, 5.70%, 06/29/10 .................. 4,844,852
1,883,408 Keystone Automotive Industries, Inc.
Term Loan, 5.61%, 10/30/09 .................... 1,904,597
1,360,345 Plastech, Inc.
Term Loan B, 5.31%, 03/31/10 .................. 1,357,515
2,000,000 RJ Tower Corp.
Tranche B Dip Term Loan,
02/07/12 (b) .................................. 2,051,240
Tenneco Automotive, Inc.
1,779,338 Tranche B Term Loan,
12/12/10 (b) .................................. 1,779,338
907,701 Tranche B-1 Credit Linked Deposit,
12/12/10 (b) .................................. 907,701
773,333 United Components, Inc.
Tranche C, 5.29%, 06/30/10 .................... 785,413
-------------
37,909,281
-------------

BEVERAGE & TOBACCO - 2.9%
2,887,500 Caribbean Restaurant LLC
Tranche B, 5.34%, 06/30/09 .................... 2,935,317
1,788,364 Commonwealth Brands, Inc.
Term Loan, 5.94%, 08/28/07 .................... 1,826,367

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

BEVERAGE & TOBACCO (CONTINUED)
2,180,694 Constellation Brands, Inc.
Tranche B Term Loan,
4.40%, 11/30/11 ............................... 2,214,190
4,078,328 Dr. Pepper Bottling Company of
Texas
Term Loan B, 4.48%, 12/19/10 .................. 4,155,817
3,278,521 DS Waters Enterprises LP
Term Loan, 6.85%, 11/07/09 .................... 3,049,025
3,753,270 Keystone Foods Holdings LLC
Term Loan, 4.76%, 06/16/11 .................... 3,795,495
Sunny Delight Beverage Co.
2,000,000 First Lien Term Loan,
6.79%, 08/20/10 ............................... 1,995,000
3,000,000 Second Lien Term Loan,
10.04%, 08/20/10 .............................. 2,865,000
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22,836,211
-------------

BROADCAST RADIO & TELEVISION - 2.0%
6,000,000 Freedom Communications, Inc.
Tranche B Term Loan,
4.29%, 05/18/12 ............................... 6,096,600
1,896,307 GT Brands LLC
Term Loan, 10.50%, 09/30/07 ................... 512,003
4,331,250 Spanish Broadcasting Systems, Inc.
Term Loan B, 5.92%, 10/30/09 .................. 4,412,461
4,950,000 Warner Music Group
Term Loan B, 5.34%, 02/28/11 .................. 5,035,041
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16,056,105
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BUILDING & DEVELOPMENT PRODUCTS - 3.4%
4,000,000 Atrium Cos., Inc.
Term Loan, 5.28%, 12/28/11 .................... 4,061,680
2,776,169 CB Richard Ellis Services, Inc.
Term Loan, 4.54%, 03/31/10 .................... 2,803,931
2,000,153 Lake at Las Vegas Joint Venture
First Lien Term Loan,
5.32%, 11/01/09 ............................... 2,029,955
LNR Property Corp.
2,000,000 Tranche A Term Loan,
0.50%, 02/03/08 (c) ........................... 1,961,360
13,500,000 Tranche B Term Loan,
5.59%, 02/03/08 ............................... 13,698,315
NATG Holdings LLC
131,418 Credit Linked Certificate of Deposit,
0.85%, 01/23/09 ............................... 110,390
121,350 Term Loan A, 7.09%, 01/23/09 .................. 22,450
88,538 Term Loan B1, 7.69%, 01/23/10 ................. 23,020
9,144 Term Loan B2, 7.69%, 01/23/10 ................. 7,681
995,000 Nortek Holdings, Inc.
Term Loan, 4.78%, 08/27/11 .................... 1,011,666
990,000 St. Mary's Cement, Inc.
Term Loan B, 4.56%, 12/04/09 .................. 1,002,375
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26,732,823
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BUSINESS EQUIPMENT & SERVICES - 6.7%
10,009,865 Acterna Corp.
Term Loan, 09/30/07 (b) ....................... 10,109,964
Acterna LLC
2,145,110 Pre-petition Term Loan,
09/30/07 (b) .................................. 2,016,404
354,890 Term Loan, 03/31/06 (b) ....................... 354,890

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3

INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)

BUSINESS EQUIPMENT & SERVICES (CONTINUED)
3,262,286 American Achievement Corp.
Term Loan B, 5.31%, 03/25/11 .................. 3,315,331
4,666,667 Brickman Group Holdings, Inc.
Term Loan, 7.97%, 11/15/09 .................... 4,655,000
CCC Information Services Group, Inc.
1,994,781 Term Loan, 5.67%, 08/20/10 .................... 2,019,716
2,388,908 Term Loan B, 5.67%, 08/20/10 .................. 2,418,770
3,930,250 Global Imaging Systems, Inc.
First Additional Term Loan,
4.70%, 05/10/10 ............................... 3,980,636
5,706,875 Hillman Group, Inc.
Term Loan B, 5.50%, 03/30/11 .................. 5,792,364
6,917,647 Knoll, Inc.
Initial Term Loan,
5.59%, 09/30/11 ............................... 6,986,824
2,694,716 OfficeMax, Inc.
Tranche B Term Loan,
4.94%, 10/28/11 ............................... 2,744,245
2,026,011 Outsourcing Solutions Inc.
Term Loan, 7.59%, 12/03/08 .................... 2,026,011
5,000,000 Rural/Metro Corp.
Term Loan, 9.63%, 12/31/06 .................... 5,000,000
727,451 URS Corp.
Term Loan B, 4.71%, 08/22/08 .................. 731,772
1,000,000 WestCom Corp.
Term Loan C2,
9.66%, 06/17/11 ............................... 1,040,000
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53,191,927
-------------

CABLE & SATELLITE TELEVISION - 12.4%
5,000,000 Adelphia Communications Corp.
Tranche B DIP Term Loan,
03/31/06 (b) .................................. 5,025,000
4,000,000 Atlantic Broadband Finance LLC
Term Loan B, 5.19%, 09/01/11 .................. 4,068,720
6,965,000 Bragg Communications, Inc.
Term Loan B, 5.39%, 08/31/11 .................. 7,060,769
3,500,000 Bresnan Communications LLC
Term Loan B, 6.04%, 09/30/10 .................. 3,552,080
6,451,250 Cebridge Connections, Inc.
Second Lien Term Loan,
8.76%, 02/23/10 ............................... 6,398,866
Century Cable Holdings LLC
13,833,333 Discretionary Term Loan,
7.50%, 06/30/09 ............................... 13,784,591
1,000,000 Discretionary Term Loan,
7.50%, 12/31/09 ............................... 996,250
Charter Communications Operating
LLC
2,000,000 Tranche A Term Loan, 04/27/10 (b) ............. 1,998,280
3,000,000 Tranche A Term Loan,
5.73%, 04/27/10 ............................... 2,997,420
9,950,000 Tranche B Term Loan,
5.98%, 04/27/11 ............................... 9,993,880
3,000,169 DirecTV Holdings LLC
Term Loan B, 4.59%, 03/06/10 .................. 3,042,831
3,482,500 Mediacom Broadband Group LLC
Term Loan B, 5.17%, 09/30/10 .................. 3,542,747
2,000,000 Mediacom Communications Corp.
Term Loan B, 4.88%, 03/31/13 .................. 2,035,000
1,000,000 Millennium Digital Media Capital Corp.
Term Loan C, 10/31/08 (b) ..................... 997,500
Olympus Cable Holdings LLC
6,000,000 Term Loan A, 6.75%, 06/30/10 .................. 5,921,760

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

CABLE & SATELLITE TELEVISION (CONTINUED)
7,000,000 Term Loan B, 7.50%, 09/30/10 .................. 6,967,170
2,000,000 Rainbow National Services LLC
Term Loan B, 5.69%, 03/31/12 .................. 2,021,000
4,000,000 Susquehanna Media Co.
Term Loan B, 4.19%, 03/31/12 .................. 4,067,520
6,965,000 UPC Financing Partnership
Term Loan C2, 5.98%, 03/31/09 ................. 7,073,793
6,449,924 WideOpenWest LLC
Term Loan B, 7.11%, 06/22/11 ............... 6,490,237
-------------
98,035,414
-------------

CHEMICALS/PLASTICS - 5.3%
3,500,000 Brenntag AG
Term Loan B2, 5.88%, 02/27/12 ................. 3,564,190
Celenese
958,035 Delayed Draw Term Loan C,
0.75%, 04/06/11 (c) ........................... 974,801
5,541,965 Dollar Term Loan B,
5.10%, 04/06/11 ............................... 5,662,004
4,987,437 Coffeyville, Inc.
Term Loan, 7.56%, 05/10/10 .................... 5,062,249
7,000,000 Huntsman Co. LLC
Term Loan B, 6.15%, 03/31/10 .................. 7,092,960
3,974,215 Kraton Polymers Group of Cos.
Term Loan, 5.34%, 12/23/10 .................... 4,040,028
Nalco Co.
2,945,674 Term Loan A, 5.18%, 11/04/09 .................. 2,987,656
2,061,824 Term Loan B, 4.67%, 11/04/10 .................. 2,091,209
1,870,000 Polypore, Inc.
Term Loan, 4.92%, 11/12/11 .................... 1,893,375
4,500,000 Rockwood Specialties Group, Inc.
Tranche B Term Loan, 07/30/12 (b) ............. 4,564,215
4,365,000 Waddington North America, Inc.
Term Loan B, 5.32%, 04/07/11 .................. 4,232,697
-------------
42,165,384
-------------

CLOTHING/TEXTILES - 1.2%
2,992,424 Levi Strauss & Co.
Tranche A, 9.64%, 09/29/09 .................... 3,199,650
6,568,333 Polymer Group, Inc.
First Lien Term Loan,
5.78%, 04/27/10 ............................... 6,643,278
-------------
9,842,928
-------------

CONGLOMERATE - 1.2%
3,482,500 Appleton Papers, Inc.
Term Loan, 4.56%, 06/11/10 .................... 3,526,588
1,253,178 Jason, Inc.
Term Loan B, 7.14%, 06/30/07 .................. 1,262,828
1,890,154 Mueller Group, Inc.
New Term Loan,
6.04%, 04/23/11 ............................... 1,912,609
2,985,000 Youth & Family Centered Services, Inc.
Term Loan B, 6.77%, 05/28/11 .................. 2,992,463
-------------
9,694,488
-------------

CONTAINER/GLASS PRODUCTS - 4.3%
3,482,500 Consolidated Container Co. LLC
Term Loan, 5.13%, 12/15/08 .................... 3,526,031
7,500,000 Graham Packaging International, Inc.
Term Loan B, 5.09%, 10/07/11 .................. 7,635,300

4 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)

CONTAINER/GLASS PRODUCTS (CONTINUED)
3,650,194 Graphic Packaging International, Inc.
Term Loan C, 5.14%, 08/09/10 .................. 3,716,336
1,990,000 Kranson Industries, Inc.
Term Loan, 5.31%, 07/30/11 .................... 2,002,438
740,625 Reddy Ice Group, Inc.
Supplemental Term Loan,
5.17%, 08/14/09 ............................... 746,179
Smurfit-Stone Container Corp.
654,975 Credit Linked Certificate of Deposit,
2.49%, 11/01/10 ............................... 665,206
5,234,431 Tranche B, 4.60%, 11/01/11 .................... 5,315,146
1,610,594 Tranche C, 4.50%, 11/01/11 .................... 1,631,725
1,203,125 Sola International, Inc.
Term Loan, 5.17%, 12/11/09 .................... 1,218,164
6,930,000 Solo Cup, Inc.
Term Loan, 5.06%, 02/27/11 .................... 7,053,008
-------------
33,509,533
-------------

COSMETICS/TOILETRIES - 1.5%
2,381,165 Church & Dwight Co., Inc
Tranche B, 4.40%, 05/30/11 .................... 2,415,406
3,825,666 Johnson Diversey, Inc.
Term Loan B, 4.99%, 11/03/09 .................. 3,890,244
2,250,000 Marietta Intermediate Holdings
First Lien Term Loan B,
7.75%, 12/17/10 ............................... 2,266,875
1,000,000 MD Beauty, Inc.
Second Lien Term Loan,
02/18/13 (b) .................................. 1,015,000
2,000,000 Revlon Consumer Products Corp.
Term Loan, 8.59%, 07/09/10 .................... 2,090,000
-------------
11,677,525
-------------

DIVERSIFIED MANUFACTURING - 0.1%
1,000,000 GenTek, Inc.
Second Lien Term Loan,
02/01/12 (b) .................................. 1,025,000
-------------

ECOLOGICAL SERVICE & EQUIPMENT - 2.7%
Allied Waste North America, Inc.
12,933,700 Tranche A, 5.43%, 01/15/10 .................... 13,076,488
3,732,609 Tranche C, 5.26%, 01/15/10 .................... 3,751,010
4,500,000 Environmental Systems Products
Holdings
Second Lien, 12.72%, 12/12/10 ................. 4,651,875
-------------
21,479,373
-------------

ELECTRONIC/ELECTRIC - 4.3%
987,500 AMI Semiconductor, Inc.
Term Loan, 5.17%, 09/26/08 .................... 999,843
2,500,000 Amkor Technology, Inc.
Second Lien Term Loan,
7.37%, 10/27/10 ............................... 2,618,750
1,000,000 Camp Acquisition Co.
Second Lien Term Loan B,
8.63%, 06/30/12 ............................... 1,002,500
3,000,000 Comsys Information Technology
Services, Inc.
Second Lien Term Loan,
10.00%, 04/30/10 .............................. 3,000,000

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

ELECTRONIC/ELECTRIC (CONTINUED)
3,000,000 Corel Corp.
Second Lien Term Loan,
10.59%, 08/15/10 .............................. 3,015,000
8,500,000 ON Semiconductor Corp.
Tranche G Term Loan,
5.56%, 12/15/11 ............................... 8,515,980
3,138,464 Transaction Network Services, Inc.
Term Loan, 4.41%, 12/31/08 .................... 3,130,617
2,250,000 Transfirst Holdings, Inc.
Second Lien Term Loan,
10.06%, 03/31/11 .............................. 2,300,625
2,985,000 UGS Corp.
Term Loan B, 6.50%, 05/27/11 .................. 3,037,238
1,000,000 Verifone, Inc.
Second Lien Term Loan,
8.73%, 12/31/11 ............................... 1,031,880
5,000,000 Viasystems, Inc.
Tranche B Term Loan,
6.49%, 09/30/09 ............................... 5,057,800
-------------
33,710,233
-------------

EQUIPMENT LEASING - 1.5%
National Equipment Service, Inc.
1,160,000 First Lien Term Loan,
5.48%, 08/17/09 ............................... 1,165,800
666,667 Revolver, 0.38%, 08/17/09 (c) ................. 665,608
4,500,000 Neff Rental, Inc.
Initial Term Loan, 7.25%, 05/01/08 ............ 4,455,000
United Rentals, Inc.
3,142,917 Delayed Draw Term Loan B,
4.92%, 02/14/11 ............................... 3,199,866
2,723,333 Term Loan C2, 2.25%, 02/14/11 ................. 2,680,223
-------------
12,166,497
-------------

FARMING/AGRICULTURE - 0.8%
6,427,167 AGCO Corp.
Term Loan, 4.48%, 01/31/06 .................... 6,545,683
-------------

FINANCIAL INTERMEDIARIES - 0.9%
4,000,000 Marina District Finance Co., Inc.
Term Loan, 3.93%, 10/20/11 .................... 4,042,480
3,000,000 Metris Cos., Inc.
Term Loan, 12.09%, 05/06/07 ................... 3,168,750
-------------
7,211,230
-------------

FOOD PRODUCTS - 3.3%
1,995,000 Doane Pet Care Co.
Term Loan, 6.43%, 11/05/09 .................... 2,031,149
7,500,000 Interstate Bakeries Corp.
Revolver, 0.50%, 09/22/06 (c) ................. 7,448,475
Interstate Brands Corp.
935,696 Term Loan B, 6.73%, 07/19/07 .................. 923,027
2,895,340 Term Loan C, 6.77%, 07/19/07 .................. 2,836,217
625,000 Tranche A, 6.80%, 07/19/06 .................... 616,662
4,183,393 Luigino's, Inc.
Term Loan B, 5.53%, 04/02/11 .................. 4,195,190
703,764 Merisant Co.
Term Loan B, 5.48%, 01/11/10 .................. 705,088
7,146,000 Pinnacle Foods Holding Corp.
Delayed Draw Term Loan,
5.81%, 11/25/10 ............................... 7,195,164
-------------
25,950,972
-------------

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 5

INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)

FOOD SERVICES - 1.3%
332,798 AFC Enterprises, Inc.
Term Loan A, 7.25%, 09/23/08 .................. 336,125
3,246,603 Buffets, Inc.
Term Loan, 6.27%, 06/28/09 .................... 3,273,680
3,000,000 Captain D's Inc., LLC
First Lien Term Loan,
6.42%, 12/27/10 ............................... 3,022,500
2,000,000 Captain D's LLC
Second Lien Term Loan,
8.67%, 06/27/11 ............................... 1,990,000
782,961 Domino's, Inc.
New Term Loan, 4.31%, 06/25/10 ................ 793,562
1,000,000 Landry's Restaurants, Inc.
Term Loan, 4.53%, 12/28/10 .................... 1,015,620
-------------
10,431,487
-------------

FOOD/DRUG RETAIL - 1.6%
4,980,000 Jean Coutu Group, Inc.
Term Loan B, 5.00%, 07/30/11 .................. 5,071,532
Michael Foods, Inc.
3,000,000 Floater Term Loan,
6.59%, 11/20/11 ............................... 3,090,000
4,596,465 Term Loan, 5.07%, 11/21/10 .................... 4,674,605
-------------
12,836,137
-------------

FOREST PRODUCTS - 0.1%
SP Newsprint Co.
345,556 Term Loan, 5.67%, 01/08/10 .................... 351,388
644,444 Term Loan B Letter of Credit,
2.59%, 01/09/08 ............................... 655,322
-------------
1,006,710
-------------

HEALTH CARE - 8.3%
3,687,500 Alliance Imaging, Inc.
Tranche C Term Loan,
4.97%, 12/29/11 ............................... 3,737,060
6,964,103 Alpharma Operating Corp.
Term Loan B, 5.81%, 10/05/08 .................. 7,003,241
3,000,000 American Medical Response, Inc.
Term Loan, 02/10/12 (b) ....................... 3,058,140
3,211,600 Ameripath, Inc.
Term Loan, 5.92%, 03/27/10 .................... 3,239,702
1,995,000 Ardent Health Services
Term Loan, 4.80%, 08/12/11 .................... 2,022,431
2,938,229 Davita, Inc.
Term Loan B, 4.58%, 03/31/09 .................. 2,953,126
712,500 dj Orthopedics LLC
Term Loan, 4.88%, 05/15/09 .................... 724,969
2,056,876 Eye Care Centers of America
Term Loan A, 8.75%, 12/23/05 .................. 2,062,018
FHC Health Systems, Inc.
1,500,000 Third Lien Term Loan, 02/07/11 (b) ............ 1,530,000
5,000,000 Third Lien Term Loan,
11.77%, 01/14/11 .............................. 5,100,000
1,984,924 Hanger Orthopedic Group, Inc.
Term Loan B, 6.06%, 09/30/09 .................. 1,994,848
4,000,000 InSight Health Services Corp.
Tranche B, 6.31%, 10/17/08 .................... 4,022,480
1,350,921 Kinetic Concepts, Inc.
Term Loan B1, 4.31%, 08/11/10 ................. 1,360,216
7,703,704 Knowledge Learning Corp.
Term Loan, 5.15%, 01/07/12 .................... 7,771,188

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

HEALTH CARE (CONTINUED)
1,987,506 Leiner Health Products Group, Inc.
Term Loan B, 5.56%, 05/27/11 .................. 2,017,319
MedAssets, Inc.
500,000 Second Lien Term Loan,
12.56%, 06/16/08 .............................. 510,000
727,968 Senior Term Loan,
7.31%, 03/16/09 ............................... 737,977
1,970,000 Medex, Inc.
Term Loan, 5.60%, 05/30/09 .................... 1,987,237
1,221,023 Orthofix International N.V.
Term Loan B, 4.55%, 12/30/08 .................. 1,238,581
1,517,564 PerkinElmer, Inc.
Term Loan B, 4.59%, 12/26/08 .................. 1,537,778
Select Medical Corp.
2,000,000 Revolver, 02/24/11 (b) ........................ 1,998,760
3,000,000 Tranche B Term Loan, 02/24/12 (b) ............. 3,039,390
3,235,623 Skilled Healthcare LLC
First Lien Term Loan,
5.34%, 07/31/10 ............................... 3,272,024
2,481,250 VCA Antech, Inc.
Term Loan E, 4.44%, 06/30/09 .................. 2,512,265
-------------
65,430,750
-------------

HOME FURNISHINGS - 1.2%
4,369,419 Holmes Group, Inc.
First Lien Term Loan,
5.91%, 11/08/10 ............................... 4,418,575
2,630,455 Juno Lighting, Inc.
First Lien Term Loan,
5.20%, 11/21/10 ............................... 2,683,064
2,491,071 Sealy Mattress Co.
Term Loan C, 4.80%, 08/06/12 .................. 2,533,121
-------------
9,634,760
-------------

INDUSTRIAL EQUIPMENT - 0.9%
1,758,662 Copperweld Corp.
Term Loan, 7.17%, 12/17/11 .................... 1,763,058
988,655 Dresser, Inc.
Term Loan C, 5.17%, 04/10/09 .................. 1,002,872
Terex Corp.
605,193 Incremental Term Loan,
5.39%, 12/31/09 ............................... 612,002
3,535,682 Term Loan, 4.89%, 07/03/09 .................... 3,579,877
-------------
6,957,809
-------------

INSURANCE - 1.5%
8,640,000 Conseco, Inc.
Term Loan, 6.17%, 06/22/10 .................... 8,820,922
2,985,000 Mitchell International, Inc.
Second Lien Term Loan,
8.80%, 08/15/12 ............................... 3,003,656
-------------
11,824,578
-------------

LEISURE GOODS/ACTIVITIES/MOVIES - 5.4%
3,216,949 AMF Bowling Worldwide, Inc.
Term Loan B, 5.39%, 08/27/09 .................. 3,240,046
1,990,000 Amscan Holdings, Inc.
Term Loan B, 5.60%, 04/30/12 .................. 1,997,463
10,750,000 Blockbuster Entertainment Corp.
Term Loan B, 5.32%, 08/20/11 .................. 10,817,188
2,483,759 Boyd Gaming Corp.
Term Loan B, 4.23%, 06/30/11 .................. 2,520,618

6 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)

LEISURE GOODS/ACTIVITIES/MOVIES (CONTINUED)
1,989,975 Cinemark USA, Inc.
Term Loan, 4.35%, 03/31/11 .................... 2,014,850
CNL Hospitality Partners LP
5,000,000 First Lien Term Loan,
5.23%, 09/09/06 ............................... 5,000,000
4,000,000 Term Loan, 5.09%, 10/13/06 .................... 4,080,000
4,987,500 Metro-Goldwyn-Mayer Studios, Inc.
Term Loan B, 5.06%, 04/30/11 .................. 5,007,749
2,386,979 MTS, Inc.
Term Loan, 15.25%, 04/01/05 ................... 2,291,499
2,887,047 Regal Cinemas, Inc.
Term Loan, 4.56%, 11/10/10 .................... 2,932,893
2,477,518 Six Flags Theme Parks, Inc.
Term Loan B, 5.09%, 06/30/09 .................. 2,506,406
-------------
42,408,712
-------------

LODGING & CASINOS - 6.6%
692,600 Ameristar Casinos, Inc.
Term Loan B1, 4.63%, 12/20/06 ................. 704,720
4,677,885 Global Cash Access LLC
Term Loan, 5.42%, 03/10/10 .................... 4,712,969
3,970,000 Green Valley Ranch Gaming LLC
Term Loan B, 4.50%, 12/22/10 .................. 4,024,588
2,500,000 Mississippi Band of Chocktaw Indians
Term Loan, 5.02%, 11/04/11 .................... 2,540,625
OpBiz LLC
17,918,616 Term Loan A, 5.56%, 08/31/10 .................. 17,836,549
42,127 Term Loan B, 6.56%, 08/31/10 .................. 41,934
Venetian Casino Resort LLC
341,880 Delayed DrawTerm Loan B,
06/15/11 (b) .................................. 346,369
1,658,120 Term Loan B, 06/15/11 (b) ..................... 1,686,623
Wyndham International, Inc.
9,860,000 IRL Tranche II, 06/30/06 (b) .................. 9,914,230
6,237,208 Term Loan I, 7.38%, 06/30/06 .................. 6,263,404
4,000,000 Wynn Las Vegas LLC
Delayed Draw Term Loan,
2.88%, 12/14/11 (c) ........................... 4,070,000
-------------
52,142,011
-------------

NONFERROUS METALS/MINING - 2.0%
2,486,702 CII Carbon LLC
Term Loan, 4.76%, 06/25/08 .................... 2,463,377
2,000,000 Consol Energy, Inc.
Tranche B, 5.09%, 06/30/10 .................... 2,003,120
997,500 J W Aluminum Co.
First Lien Term Loan,
5.89%, 10/20/10 ............................... 1,013,709
Murray Energy Corp.
1,000,000 Tranche B Term Loan, 01/28/10 (b) ............. 1,017,500
3,750,000 Tranche B Term Loan,
5.94%, 01/28/10 ............................... 3,815,625
Novelis, Inc.
1,826,923 Canadian Term Loan,
4.50%, 01/07/12 ............................... 1,855,935
3,173,077 United States Term Loan,
4.50%, 01/07/12 ............................... 3,225,433
-------------
15,394,699
-------------

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

OIL/GAS - 5.9%
6,000,000 ALON USA
Term Loan, 10.00%, 01/15/09 ................... 6,150,000
ATP Oil & Gas Corp.
3,958,786 First Lien Term Loan,
8.58%, 03/29/09 ............................... 4,037,961
4,962,500 Second Lien Term Loan,
12.62%, 03/31/09 .............................. 4,987,312
5,000,000 Basic Energy Services, Inc.
Term Loan B, 5.55%, 10/03/09 .................. 5,050,000
4,027,500 Belden & Blake Corp.
Term Loan, 5.69%, 07/07/11 .................... 4,085,416
2,985,000 Dynegy Holdings, Inc.
Term Loan, 6.59%, 05/27/10 .................... 3,040,969
El Paso Corp.
2,500,000 Deposit Accounts, 2.40%, 11/23/09 ............. 2,540,250
3,486,000 Term Loan, 5.44%, 11/23/09 .................... 3,552,234
2,900,000 Getty Petroleum Marketing, Inc.
Term Loan, 5.80%, 05/19/10 .................... 2,958,000
1,843,750 Headwaters, Inc.
Term Loan B, 6.31%, 04/30/11 .................. 1,869,673
1,000,000 Premcor Refining Group
Synthetic Tranche Facility,
4.34%, 04/13/09 ............................... 1,012,080
2,385,000 Pride Offshore, Inc.
Term Advances, 4.34%, 07/07/11 ................ 2,423,756
967,419 Tesoro Petroleum Corp.
Initial Term Loan, 7.99%, 04/15/08 ............ 997,873
1,760,000 Western Refining Co. LP
Term Loan, 6.17%, 08/28/08 .................... 1,786,400
1,846,969 Williams Production RMT Co.
Term Loan C, 4.99%, 05/30/07 .................. 1,878,145
-------------
46,370,069
-------------

PUBLISHING - 3.3%
1,990,000 Adams Outdoor Advertising LP
First Lien Term Loan,
4.92%, 10/15/11 ............................... 2,023,153
5,055,390 Dex Media East LLC
Term Loan A, 4.52%, 11/08/08 .................. 5,125,760
3,900,943 Dex Media West LLC
Term Loan A, 4.72%, 09/09/09 .................. 3,957,741
1,990,000 Herald Media, Inc.
First Lien Term Loan,
5.03%, 07/22/11 ............................... 2,026,696
3,244,014 R.H. Donnelley Corp.
Term Loan D, 4.28%, 06/30/11 .................. 3,294,102
1,300,533 Relizon Co.
Term Loan, 5.78%, 02/20/11 .................... 1,303,784
4,412,500 Transwestern Publishing Co.
First Lien Term Loan,
4.20%, 02/25/11 ............................... 4,439,416
3,880,000 VISANT Corp.
Tranche B, 4.81%, 12/06/11 .................... 3,940,140
-------------
26,110,792
-------------

REAL ESTATE INVESTMENT TRUST - 3.2%
2,000,000 AIMCO Properties, L.P.
Term Loan, 4.75%, 11/02/09 .................... 2,040,000
771,429 Central Parking Corp.
Term Loan B, 4.56%, 03/31/10 .................. 785,176
2,130,585 Crescent Real Estate Equities LP
Term Loan, 4.84%, 01/12/06 .................... 2,149,888

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7

INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)

REAL ESTATE INVESTMENT TRUST (CONTINUED)
20,000,000 General Growth Properties, Inc.
Tranche B Term Loan,
4.84%, 11/12/08 ............................... 20,302,000
-------------
25,277,064
-------------

RETAILERS - 1.2%
2,000,000 Dollarama
Term Loan B, 5.02%, 11/18/11 .................. 2,030,000
4,000,000 Harbor Freight Tools USA
Term Loan, 4.83%, 07/15/10 .................... 4,031,240
2,972,525 Prestige Brands Holdings, Inc.
Tranche B, 5.39%, 04/06/11 .................... 3,011,079
-------------
9,072,319
-------------

STEEL - 0.4%
2,887,500 The Techs Industries, Inc.
Term Loan, 4.81%, 01/14/10 .................... 2,901,938
-------------

SURFACE TRANSPORT - 1.1%
603,922 Pacer International, Inc.
New Term Loan, 4.68%, 06/10/10 ................ 616,755
Quality Distribution, Inc.
1,000,000 PF Letters of Credit,
3.10%, 11/13/09 ............................... 970,000
3,432,117 Term Loan, 5.64%, 11/13/09 .................... 3,345,250
984,848 Term Loan, 5.64%, 11/13/09 (e) ................ 959,921
2,595,963 Transport Industries LP
Term Loan B, 6.56%, 06/13/10 .................. 2,600,844
-------------
8,492,770
-------------

TELECOMMUNICATIONS/CELLULAR - 3.1%
4,975,000 American Tower LP
Term Loan B, 4.23%, 08/31/11 .................. 5,049,227
625,000 Dobson Cellular Systems, Inc.
Revolver, 0.63%, 10/21/09 (c) ................. 599,219
Qwest Corp.
5,000,000 Term Loan A, 7.39%, 06/30/07 .................. 5,209,350
7,000,000 Term Loan B, 6.95%, 06/30/10 .................. 7,275,830
5,970,000 Western Wireless Corp.
Term Loan B, 5.61%, 05/31/11 .................. 6,026,476
-------------
24,160,102
-------------

TELECOMMUNICATIONS/COMBINATION - 3.7%
4,440,075 Centennial Cellular Operating Co.
Term Loan B, 4.46%, 02/09/11 .................. 4,508,897
5,000,000 NTL, Inc.
Tranche B Term Loan B,
5.20%, 04/14/12 ............................... 5,068,750
PanAmSat Corp.
2,500,000 08/20/11 (b) .................................. 2,538,350
1,140,813 Term Loan A-1, 5.09%, 08/20/09 ................ 1,147,942
546,818 Term Loan A-2, 5.09%, 08/20/09 ................ 550,235
4,954,819 Term Loan B, 5.34%, 08/20/11 .................. 5,030,826
1,000,000 Tranche B, 5.34%, 08/20/11 .................... 1,015,340
4,000,000 RCN Corp.
Term Loan, 7.06%, 12/21/11 .................... 4,023,360
5,000,000 Woodlands Commercial Property Co.
Bridge Loan, 4.84%, 08/30/05 .................. 5,037,500
-------------
28,921,200
-------------

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

TELECOMMUNICATIONS/WIRELESS - 6.7%
9,933,333 Consolidated Communications, Inc
Term Loan C, 5.18%, 10/14/11 .................. 10,074,858
Cricket Communications, Inc.
5,000,000 Revolver, 0.75%, 01/10/10 (c) ................. 4,925,000
15,000,000 Term Loan B, 5.09%, 01/10/11 .................. 15,182,850
FairPoint Communications, Inc.
2,500,000 Initial B Term Loan, 02/08/12 (b) ............. 2,541,025
2,500,000 Initial B Term Loan,
4.75%, 02/08/12 ............................... 2,541,025
6,800,000 Nextel Partners Operating Corp.
Term Loan C, 4.94%, 05/31/11 .................. 6,899,824
1,000,000 Primus Telecommunications Group, Inc.
Term Loan, 9.61%, 02/18/11 .................... 1,005,000
1,990,000 SBA Senior Finance, Inc.
Term Loan, 4.86%, 10/31/08 .................... 2,024,825
2,000,000 Triton PCS Holdings, Inc.
Term Loan, 5.87%, 11/18/09 .................... 2,032,920
5,994,105 WilTel Communications Group, Inc.
Term Loan, 7.00%, 04/01/10 .................... 5,814,282
-------------
53,041,609
-------------

TELECOMMUNICATIONS/WIRELINE - 0.5%
4,000,000 Valor Telecommunications
Enterprises LLC
Tranche B Term Loan,
5.99%, 02/14/12 ............................... 4,061,000
-------------

UTILITIES - 7.0%
2,605,732 Allegheny Energy, Inc.
Term Advances, 4.80%, 03/08/11 ................ 2,663,371
4,949,749 Calpine Construction Finance Co. LP
Term Loan, 8.58%, 08/26/09 .................... 5,331,820
1,622,170 Calpine Corp.
Second Lien Term Loan B,
8.41%, 07/16/07 ............................... 1,439,676
3,256,555 Infrasource, Inc.
Term Loan, 5.56%, 09/30/10 .................... 3,289,120
Midwest Generations LLC
2,000,000 Term Loan, 0.50%, 04/27/09 (c) ................ 1,965,000
2,801,674 Term Loan, 5.65%, 04/27/11 .................... 2,848,602
Mirant Corp.
5,000,000 Revolver, 07/17/05 (b) ........................ 3,654,200
2,000,000 Revolver, 07/15/08 (b) ........................ 1,466,260
NRG Energy, Inc.
1,750,000 Credit Linked Certificate of
Deposit, 4.33%, 12/24/07 ...................... 1,776,250
2,250,000 Term Loan, 4.52%, 12/24/11 .................... 2,279,520
5,000,000 Reliant Energy, Inc.
Term Loan, 5.06%, 04/30/10 .................... 5,088,400
4,626,288 Riverside Energy Center LLC
Term Loan, 6.98%, 06/24/11 .................... 4,741,945
Rocky Mountain Energy Center LLC
361,073 Credit Linked Certificate of
Deposit, 2.63%, 06/24/11 ...................... 368,295
3,286,536 Term Loan, 6.98%, 06/24/11 .................... 3,368,699
Texas Genco LLC
1,461,538 Delayed Draw Term Loan,
1.25%, 12/14/11 (c) ........................... 1,485,741
9,871,795 Initial Term Loan, 4.48%, 12/14/11 ............ 10,043,762
2,955,000 TNP Enterprises, Inc.
Term Loan, 7.72%, 12/31/06 .................... 2,995,631
-------------
54,806,292
-------------
Total Variable Rate Senior
Loan Notes
(Cost $973,592,701) ......................... 1,005,473,152
-------------

8 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

PAR/
COMMITMENT ($) VALUE ($)
- ---------------- -------------

CORPORATE NOTES AND BONDS (F) - 2.2%

CONTAINER/GLASS PRODUCTS - 0.3%
2,500,000 Constar International, Inc.
Floating Rate Note,
6.15%, 02/15/12 ............................... 2,550,000
-------------

FOOD/DRUG RETAIL - 0.5%
4,000,000 Duane Reade, Inc.
Floating Rate Note,
7.01%, 12/15/10 ............................... 4,020,000
-------------

HEALTH CARE - 0.2%
2,000,000 Elan Finance
Floating Rate Note,
6.49%, 11/15/11 ............................... 1,750,000
-------------

OIL & GAS - 0.6%
4,500,000 Secunda International Ltd.
Floating Rate Note,
10.66%, 09/01/12 .............................. 4,500,000
-------------

TELECOMMUNICATIONS/CELLULAR - 0.3%
2,000,000 Dobson Cellular Systems, Inc.
Floating Rate Note,
7.49%, 11/01/11 ............................... 2,120,000
-------------

UTILITIES - 0.3%
2,000,000 Calpine Construction Finance Co. LP
Floating Rate Note,
11.63%, 08/26/11 .............................. 2,240,000
-------------
Total Corporate Notes and Bonds
(Cost $17,214,311) .......................... 17,180,000
-------------

SHARES
- ----------------

COMMON STOCKS (G) - 0.3%

BUSINESS SERVICES - 0.0%
40,800 NATG Holdings LLC (d) ........................... 0
-------------

HEALTH CARE - 0.0%
43,117 Sun Healthcare Group, Inc. ...................... 294,058
-------------

TELECOMMUNICATIONS/WIRELESS - 0.3%
76,137 Leap Wireless International, Inc. ............... 2,040,471
-------------
Total Common Stocks
(Cost $1,600,216) ........................... 2,334,529
-------------

SHARES VALUE ($)
- ---------------- -------------

PREFERRED STOCKS (D) - 0.0%

DIVERSIFIED MANUFACTURING - 0.0%
14,382 Superior Essex, Inc., Series A .................. 14,382
-------------
Total Preferred Stocks
(Cost $14,382) .............................. 14,382
-------------

UNFUNDED LOAN COMMITMENTS - (2.8)% .............................. (22,336,758)
-------------
TOTAL INVESTMENTS - 127.1% ...................................... 1,002,665,305
-------------
(cost of $992,421,610) (h)

OTHER ASSETS & LIABILITIES, NET - (27.1)% ....................... (213,857,016)
-------------
NET ASSETS - 100.0% ............................................. 788,808,289
=============
__________________
(a) Senior loans in which the Fund invests generally pay interest at rates
which are periodically predetermined by reference to a base lending rate
plus a premium. 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 Inter-Bank
Offered Rate ("LIBOR") and (iii) the certificate of deposit rate. Rate
shown represents the weighted average rate at February 28, 2005. Senior
loans are generally considered to be restricted in that the Fund
ordinarily is contractually obligated to receive approval from the agent
bank and/or borrower prior to the disposition of a senior loan.

(b) Unsettled loan. Interest rate cannot be determined at this time.

(c) Unfunded commitment. As of February 28, 2005, the Portfolio had unfunded
loan commitments of $22,336,758, which could be extended at the option of
the Borrower, pursuant to the following loan agreements:

UNFUNDED
LOAN
BORROWER COMMITMENT
-------- -------------
Celenese $ 958,035
Cricket Communications, Inc. 5,000,000
Dobson Cellular Systems, Inc. 625,000
Federal-Mogul Corp. 125,779
Interstate Bakeries Corp. 7,500,000
LNR Property Corp. 2,000,000
Midwest Generations LLC 2,000,000
National Equipment Service, Inc. 666,406
Texas Genco LLC 1,461,538
Wynn Las Vegas LLC 2,000,000
-------------
$ 22,336,758
=============

(d) Represents fair value as determined in good faith under the direction of
the Board of Trustees.

(e) Loans held on participation.

(f) Securities exempt from registration under Rule 144A of the Securities Act
of 1933, as amended. These securities may only be resold, in transactions
exempt from registration, to qualified institutional buyers. At February
28, 2005, these securities amounted to $17,180,000 or 2.2% of net assets.
These securities have been determined by the Fund's investment adviser to
be liquid securities.

(g) Non-income producing security.

(h) Cost for Federal income tax purposes is $992,869,593.

DIP Debtor in Possession

IRL Increasing Rate Loan

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9

STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------

FEBRUARY 28, 2005 (UNAUDITED) HIGHLAND FLOATING RATE ADVANTAGE FUND

($)
- -------------------------------------------------------------------------------------------------------------

ASSETS:
Investments, at cost .................................................................... 992,421,610
---------------
Investments, at value ................................................................... 1,002,665,305
Cash and cash equivalents ............................................................... 26,589,655
Receivable for:
Investments sold ..................................................................... 19,334,435
Fund shares sold ..................................................................... 7,660,150
Interest and fees .................................................................... 6,577,823
Expense reimbursement due from Investment Adviser ....................................... 36,427
Deferred Trustees' compensation plan (Note 4) ........................................... 5,055
Other assets ............................................................................ 106,225
---------------
Total Assets ...................................................................... 1,062,975,075

LIABILITIES:
Notes payable ........................................................................... 200,000,000
Deferred facility fees .................................................................. 126,935
Payable for:
Investments purchased ................................................................ 71,552,957
Distributions ........................................................................ 1,083,795
Investment advisory fee (Note 4) ..................................................... 327,635
Administration fee (Note 4) .......................................................... 145,616
Trustees' fees (Note 4) .............................................................. 16,667
Distribution and service fees (Note 4) ............................................... 350,721
Interest expense (Note 8) ............................................................ 312,611
Deferred Trustees' fees (Note 4) ........................................................ 5,055
Accrued expenses and other liabilities .................................................. 244,794
---------------
Total Liabilities ................................................................. 274,166,786
---------------
NET ASSETS ................................................................................ 788,808,289
===============

COMPOSITION OF NET ASSETS
Paid-in capital ......................................................................... 781,811,749
Overdistributed net investment income ................................................... (630,311)
Accumulated net realized loss ........................................................... (2,616,844)
Net unrealized appreciation on investments .............................................. 10,243,695
---------------
NET ASSETS ................................................................................ 788,808,289
===============

CLASS A
Net assets .............................................................................. 272,818,084
Shares outstanding ...................................................................... 22,498,968
Net asset value per share (Net assets/Shares outstanding) .............................. 12.13(a)
Maximum offering price per share ($12.13 / 0.9650) ...................................... 12.57(b)

CLASS B
Net assets .............................................................................. 128,072,109
Shares outstanding ...................................................................... 10,561,876
Net asset value and offering price per share (Net assets/Shares outstanding) ........... 12.13(a)

CLASS C
Net assets .............................................................................. 318,228,941
Shares outstanding ...................................................................... 26,242,727
Net asset value and offering price per share (Net assets/Shares outstanding) ........... 12.13(a)

CLASS Z
Net assets .............................................................................. 69,689,155
Shares outstanding ...................................................................... 5,747,122
Net asset value, offering and redemption price per share (Net assets/Shares outstanding) 12.13

____________________________________________________
(a) Redemption price per share is equal to the net asset value per share less
any applicable contingent deferred sales charge.

(b) On sales of $100,000 or more, the offering price is reduced.

10 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

HIGHLAND FLOATING RATE ADVANTAGE FUND

FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED)

($)
- -------------------------------------------------------------------------------------------------------------

INVESTMENT INCOME
Interest ................................................................................ 23,913,192
Facility and other fees ................................................................. 856,634
---------------
Total investment income ........................................................... 24,769,826

EXPENSES
Investment advisory fee (Note 4) ........................................................ 1,947,574
Administration fee (Note 4) ............................................................. 865,902
Distribution fee: (Note 4)
Class A .............................................................................. 124,081
Class B .............................................................................. 284,271
Class C .............................................................................. 885,659
Service fee: (Note 4)
Class A .............................................................................. 310,203
Class B .............................................................................. 157,929
Class C .............................................................................. 369,025
Transfer agent fee (Note 4) ............................................................. 259,750
Professional fees ....................................................................... 203,072
Accounting services fee (Note 4) ........................................................ 178,469
Trustees' fees (Note 4) ................................................................. 61,230
Custody fee (Note 4) .................................................................... 45,493
Other expenses .......................................................................... 609,793
---------------
Total Operating Expenses .......................................................... 6,302,451
Interest expense ........................................................................ 1,453,993
Commitment fee .......................................................................... 206,324
---------------
Total Expenses (Note 8) ........................................................... 7,962,768
Fees and expenses waived or reimbursed by Investment Adviser (Note 4) ................... (531,201)
Custody earnings credit (Note 4) ........................................................ --
---------------
Net Expenses ...................................................................... 7,431,567
---------------
Net Investment Income ................................................................... 17,338,259
---------------

NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments ........................................................ 742,008
Net change in unrealized appreciation on investments .................................... 2,587,344
---------------
Net Gain ................................................................................ 3,329,352
---------------
Net Increase in Net Assets .............................................................. 20,667,611
===============

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11

STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

HIGHLAND FLOATING RATE ADVANTAGE FUND

SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED
2005 AUGUST 31,
(UNAUDITED) 2004
($) ($)
------------- -------------

INCREASE IN NET ASSETS:

OPERATIONS
Net investment income ............................................ 17,338,259 21,146,661
Net realized gain on investments ................................. 742,008 9,871,654
Net change in unrealized appreciation on investments ............. 2,587,344 16,802,971
------------- -------------
Net Increase from Operations ................................... 20,667,611 47,821,286
------------- -------------

DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income:
Class A ........................................................ (6,374,553) (7,362,637)
Class B ........................................................ (2,995,887) (4,785,071)
Class C ........................................................ (6,737,575) (7,927,327)
Class Z ........................................................ (1,645,016) (1,318,999)
------------- -------------
Total Distributions Declared to Shareholders ................... (17,753,031) (21,394,034)
------------- -------------

SHARE TRANSACTIONS
Class A:
Subscriptions .................................................. 92,724,876 155,278,295
Distributions reinvested ....................................... 4,020,897 4,387,935
Redemptions .................................................... (37,163,899) (41,293,262)
------------- -------------
Net Increase ................................................... 59,581,874 118,372,968
Class B:
Subscriptions .................................................. 7,781,201 55,799,014
Distributions reinvested ....................................... 1,798,764 2,714,846
Redemptions .................................................... (6,576,550) (17,134,851)
------------- -------------
Net Increase ................................................... 3,003,415 41,379,009
Class C:
Subscriptions .................................................. 64,294,246 208,181,539
Distributions reinvested ....................................... 3,867,254 5,151,429
Redemptions .................................................... (29,819,521) (24,993,138)
------------- -------------
Net Increase ................................................... 38,341,979 188,339,830
Class Z:
Subscriptions .................................................. 26,024,674 50,799,735
Distributions reinvested ....................................... 692,827 465,119
Redemptions .................................................... (10,325,407) (4,503,807)
------------- -------------
Net Increase ................................................... 16,392,094 46,761,047
------------- -------------
Net Increase from Share Transactions ........................... 117,319,362 394,852,854
------------- -------------
Total Increase in Net Assets ............................ 120,233,942 421,280,106
------------- -------------

NET ASSETS
Beginning of period .............................................. 668,574,347 247,294,241
End of period (including overdistributed net investment income of
$(630,311) and $(215,539), respectively) ....................... 788,808,289 668,574,347
============= =============

12 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------

HIGHLAND FLOATING RATE ADVANTAGE FUND

SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED
2005 AUGUST 31,
(UNAUDITED) 2004
------------- -------------

CHANGES IN SHARES
Class A:
Subscriptions .................................................. 7,672,476 13,068,545
Issued for distributions reinvested ............................ 332,550 368,106
Redemptions .................................................... (3,070,906) (3,460,892)
------------- -------------
Net Increase ................................................... 4,934,120 9,975,759
Class B:
Subscriptions .................................................. 643,789 4,712,112
Issued for distributions reinvested ............................ 148,779 228,200
Redemptions .................................................... (543,494) (1,433,835)
------------- -------------
Net Increase ................................................... 249,074 3,506,477
Class C:
Subscriptions .................................................. 5,316,024 17,547,735
Issued for distributions reinvested ............................ 370,950 431,547
Redemptions .................................................... (2,515,274) (2,088,151)
------------- -------------
Net Increase ................................................... 3,171,700 15,891,131
Class Z:
Subscriptions .................................................. 2,152,720 4,267,378
Issued for distributions reinvested ............................ 57,287 38,768
Redemptions .................................................... (853,752) (376,712)
------------- -------------
Net Increase ................................................... 1,356,255 3,929,434

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13

STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------

HIGHLAND FLOATING RATE ADVANTAGE FUND

FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED)

($)
- -------------------------------------------------------------------------------------------------------------

INCREASE IN CASH

CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment income ................................................................... 17,338,259

ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH USED FOR OPERATING ACTIVITIES
Purchase of investment securities ....................................................... (661,839,724)
Proceeds from disposition of investment securities ...................................... 372,736,411
Sale of short-term portfolio investments, net ........................................... 47,479,000
Increase in interest and fees receivable ................................................ (2,070,475)
Decrease in receivable for expense reimbursement ........................................ 173,526
Increase in receivable for investments sold ............................................. (19,735,784)
Increase in other assets ................................................................ (106,225)
Decrease in deferred facility fees ...................................................... (126,988)
Increase in payable for accrued expenses ................................................ 30,954
Net amortization of premium (discount) .................................................. (601,801)
Increase in payable for investments purchased ........................................... 71,552,957
Decrease in other liabilities ........................................................... (28,188)
---------------
Net cash flow used for operating activities ....................................... (175,198,078)

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Increase in notes payable ............................................................... 105,000,000
Increase in interest payable ............................................................ 178,519
Proceeds from shares sold ............................................................... 187,601,466
Payment of shares redeemed .............................................................. (83,885,377)
Distributions paid in cash .............................................................. (7,107,631)
---------------
Net cash flow provided by financing activities .................................... 201,786,977
---------------
Net increase in cash .............................................................. 26,588,899

CASH
Cash at beginning of the period ......................................................... 756
---------------
Cash at end of the period ............................................................... 26,589,655
===============

14 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:

YEAR ENDED AUGUST 31,
---------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 2005 AUGUST 31,
CLASS A SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a)
- ------------------------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.09 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.30(b) 0.56(b) 0.81(b) 0.83(b)(c) 1.10(b) 0.64
Net realized and unrealized
gain (loss)
on investments 0.05 0.89 0.74 (1.26)(c) (0.32) 0.07
============= ========= ======== ========= ========= ========
Total from Investment
Operations 0.35 1.45 1.55 (0.43) 0.78 0.71
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
DECLARED TO SHAREHOLDERS:
From net investment income (0.30) (0.59) (0.81) (0.83) (1.13) (0.62)
From net realized gains -- -- -- -- --(d) --
============= ========= ======== ========= ========= ========
Total Distributions
Declared to Shareholders (0.30) (0.59) (0.81) (0.83) (1.13) (0.62)
====================================================================================================================================
NET ASSET VALUE, END
OF PERIOD $ 12.13 $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.09
Total return (e)(f) 2.97%(g) 13.14% 15.55% (3.88)% 6.71% 6.04%(g)
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.40%(i) 1.29%(h) 1.38%(h) 1.38%(h) 1.37%(h) 1.01%(h)(i)
Interest and commitment fee
expenses 0.40%(i) 0.40% 0.73% 0.99% 2.04% 1.91%(i)
Net expenses 1.80%(i) 1.69%(h) 2.11%(h) 2.37%(h) 3.41%(h) 2.92%(h)(i)
Net investment income 4.98%(i) 4.73%(h) 7.67%(h) 7.25%(c)(h) 9.24%(h) 9.49%(h)(i)
Waiver/reimbursement 0.15%(i) 0.18% 0.36% 0.32% 0.32% 1.41%(i)
Portfolio turnover rate 42%(g) 110% 90% 98% 65% 8%(g)
Net assets, end of
period (000's) $ 272,818 $ 212,205 $ 85,166 $ 69,733 $ 108,399 $ 54,402

________________________________________________
(a) The Fund commenced investment operations on January 13, 2000.

(b) Per share data was calculated using average shares outstanding during the
period.

(c) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01.
The impact to the ratio of net investment income to average net assets was
less than 0.01%. Per share data and ratios for periods prior to August 31,
2002 have not been restated to reflect this change in presentation.

(d) Rounds to less than $0.01.

(e) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge ("CDSC").

(f) Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.

(g) Not annualized.

(h) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.

(i) Annualized.

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:

YEAR ENDED AUGUST 31,
----------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 2005 AUGUST 31,
CLASS B SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a)
- ------------------------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.07 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.28(b) 0.53(b) 0.78(b) 0.78(b)(c) 1.05(b) 0.62
Net realized and unrealized gain (loss)
on investments 0.05 0.88 0.73 (1.25)(c) (0.30) 0.05
============= ========= ======== ========= ========= ========
Total from Investment Operations 0.33 1.41 1.51 (0.47) 0.75 0.67
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.28) (0.55) (0.77) (0.79) (1.08) (0.60)
From net realized gains -- -- -- -- --(d) --
============= ========= ======== ========= ========= ========
Total Distributions Declared to
Shareholders (0.28) (0.55) (0.77) (0.79) (1.08) (0.60)
====================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 12.13 $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.07
Total return (e)(f) 2.79%(g) 12.75% 15.16% (4.22)% 6.52% 5.69%(g)
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.75%(i) 1.64%(h) 1.73%(h) 1.73%(h) 1.72%(h) 1.36%(h)(i)
Interest and commitment fee expenses 0.40%(i) 0.40% 0.73% 0.99% 2.04% 1.91%(i)
Net expenses 2.15%(i) 2.04%(h) 2.46%(h) 2.72%(h) 3.76%(h) 3.27%(h)(i)
Net investment income 4.63%(i) 4.50%(h) 7.34%(h) 6.90%(c)(h) 8.89%(h) 9.14%(h)(i)
Waiver/reimbursement 0.15%(i) 0.18% 0.36% 0.32% 0.32% 1.41%(i)
Portfolio turnover rate 42%(g) 110% 90% 98% 65% 8%(g)
Net assets, end of period (000's) $ 128,072 $ 124,589 $ 76,379 $ 68,157 $ 80,609 $ 19,964

____________________________________________________
(a) The Fund commenced investment operations on January 13, 2000.

(b) Per share data was calculated using average shares outstanding during the
period.

(d) Rounds to less than $0.01.

(e) Total return at net asset value assuming all distributions reinvested and
no CDSC.

(f) Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.

(g) Not annualized.

(h) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.

(i) Annualized.

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:

YEAR ENDED AUGUST 31,
----------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 2005 AUGUST 31,
CLASS C SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a)
- ------------------------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.07 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.27(b) 0.50(b) 0.76(b) 0.76(b)(c) 1.03(b) 0.61
Net realized and unrealized gain (loss)
on investments 0.05 0.89 0.74 (1.25)(c) (0.30) 0.05
============= ========= ======== ========= ========= ========
Total from Investment Operations 0.32 1.39 1.50 (0.49) 0.73 0.66
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.27) (0.53) (0.76) (0.77) (1.06) (0.59)
From net realized gains -- -- -- -- --(d) --
============= ========= ======== ========= ========= ========
Total Distributions Declared to
Shareholders (0.27) (0.53) (0.76) (0.77) (1.06) (0.59)
====================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 12.13 $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.07
Total return (e)(f) 2.71%(g) 12.57% 14.99% (4.36)% 6.35% 5.62%(g)
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.90%(i) 1.79%(h) 1.88%(h) 1.88%(h) 1,87%(h) 1.51%(h)(i)
Interest and commitment fee expenses 0.40%(i) 0.40% 0.73% 0.99% 2.04% 1.91%(i)
Net expenses 2.30%(i) 2.19%(h) 2.61%(h) 2.87%(h) 3.91%(h) 3.42%(h)(i)
Net investment income 4.48%(i) 4.19%(h) 7.14%(h) 6.75%(c)(h) 8.74%(h) 8.99%(h)(i)
Waiver/reimbursement 0.15%(i) 0.18% 0.36% 0.32% 0.32% 1.41%(i)
Portfolio turnover rate 42%(g) 110% 90% 98% 65% 8%(i)
Net assets, end of period (000's) $ 318,229 $ 278,731 $ 80,572 $ 61,811 $ 64,074 $ 13,013

_________________________________________________
(a) The Fund commenced investment operations on January 13, 2000.

(b) Per share data was calculated using average shares outstanding during the
period.

(d) Rounds to less than $0.01.

(e) Total return at net asset value assuming all distributions reinvested and
no CDSC.

(f) Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.

(g) Not annualized.

(h) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.

(i) Annualized.

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:

YEAR ENDED AUGUST 31,
----------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 2005 AUGUST 31,
CLASS Z SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a)
- ------------------------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.08 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.32(b) 0.59(b) 0.78(b) 0.86(b)(c) 1.14(b) 0.67
Net realized and unrealized gain (loss)
on investments 0.06 0.90 0.81 (1.25)(c) (0.31) 0.05
============= ========= ======== ========= ========= ========
Total from Investment Operations 0.38 1.49 1.59 (0.39) 0.83 0.72
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.33) (0.63) (0.85) (0.87) (1.17) (0.64)
From net realized gains -- -- -- -- --(d) --
============= ========= ======== ========= ========= ========
Total Distributions Declared to
Shareholders (0.33) (0.63) (0.85) (0.87) (1.17) (0.64)
====================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 12.13 $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.08
Total return (e)(f) 3.14%(g) 13.52% 15.95% (3.53)% 7.17% 6.11%(g)
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.05%(i) 0.94%(h) 1.03%(h) 1.03%(h) 1.02%(h) 0.66%(h)(i)
Interest and commitment fee expenses 0.40%(i) 0.40% 0.73% 0.99% 2.04% 1.91%(i)
Net expenses 1.45%(i) 1.34%(h) 1.76%(h) 2.02%(h) 3.06%(h) 2.57%(h)(i)
Net investment income 5.33%(i) 4.93%(h) 7.21%(h) 7.60%(c)(h) 9.59%(h) 9.84%(h)(i)
Waiver/reimbursement 0.15%(i) 0.18% 0.36% 0.32% 0.32% 1.41%(i)
Portfolio turnover rate 42%(g) 110% 90% 98% 65% 8%(g)
Net assets, end of period (000's) $ 69,689 $ 53,049 $ 5,178 $ 140 $ 2,850 $ 2,656

____________________________________________________
(a) The Fund commenced investment operations on January 13, 2000.

(b) Per share data was calculated using average shares outstanding during the
period.

(d) Rounds to less than $0.01.

(e) Total return at net asset value assuming all distributions reinvested.

(f) Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.

(g) Not annualized.

(h) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.

(i) Annualized.

18 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

NOTE 1. ORGANIZATION

Highland Floating Rate Advantage Fund (the "Fund") is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a nondiversified, closed-end management investment company. Effective
October 18, 2004, Columbia Floating Rate Advantage Fund was renamed Highland
Floating Rate Advantage Fund.

INVESTMENT GOAL

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 and continuously offers four
classes of shares: Class A, Class B, Class C and Class Z. Certain share classes
have their own sales charge and bear class specific expenses, which include
distribution fees and service fees.

Class A shares are subject to a maximum front-end sales charge of 3.50% based on
the amount of initial investment. Class A shares purchased without an initial
sales charge by accounts aggregating $1 million to $25 million are subject to a
1.00% contingent deferred sales charge ("CDSC") on shares sold within eighteen
months. Class B shares are subject to a maximum CDSC of 3.25% based upon the
holding period after purchase. Class B shares will convert to Class A shares
eight years after purchase. Class C shares are subject to a 1.00% CDSC on shares
sold within one year after purchase. Class Z shares are not subject to a CDSC.
There are certain restrictions on the purchase of Class Z shares, as described
in the Fund's prospectus.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported 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. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.

SECURITY VALUATION

The value of the Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, the Fund
uses those quotations for pricing. When portfolio securities are traded on the
relevant day of valuation, the valuation will be the last reported sale price on
that day. If there are no such sales on that day, the security will be valued at
the mean between the most recently quoted bid and asked prices from principal
market makers. Securities without a sale price or bid and ask quotations on the
valuation day will be priced by an independent pricing service. If securities do
not have readily available market quotations or pricing service prices,
including circumstances under which such are determined not to be accurate or
current (including when events materially affect the value of securities
occurring between the time when market price is determined and calculation of
the Fund's net asset value), such securities are valued at their fair value, as
determined in good faith in accordance with procedures approved by the Fund's
Board of Trustees. Using a fair value pricing methodology to price securities
may result in a value that is different from a security's most recent sale price
and from the prices used by other investment companies to calculate their net
asset values. 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.

SECURITY TRANSACTIONS

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

REPURCHASE AGREEMENTS

The Fund may engage in repurchase agreement transactions with institutions that
the Fund's investment adviser has determined are creditworthy. The Fund, through
its custodian, receives delivery of underlying securities collateralizing a
repurchase agreement. Collateral is at least equal, at all times, to the value
of the repurchase obligation including interest. A repurchase agreement
transaction involves certain risks in the event of default or insolvency of the
counterparty. These risks include possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities and a possible decline in
the value of the underlying securities during the period while the Fund seeks to
assert its rights.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

INCOME RECOGNITION

Interest income is recorded on the accrual basis and includes accretion of
discounts and amortization of premiums. Facility fees received are treated as
market discounts. Unamortized facility fees are reflected as deferred fees on
the Statement of Assets and Liabilities.

DETERMINATION OF CLASS NET ASSET VALUES

All income, expenses (other than class-specific expenses of distribution fees
and service fees, as shown on the Statement of Operations) and realized and
unrealized gains (losses) are allocated to each class of the Fund on a daily
basis for purposes of determining the net asset value 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.

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 (the "Code"), and
will distribute substantially all of its taxable income, if any, for its tax
year, and as such will not be subject to federal income taxes.

DISTRIBUTIONS TO SHAREHOLDERS

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

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 amount shown in the Statement of Cash Flows is the amount included within
the Fund's Statement of Assets and Liabilities and includes cash on hand at its
custodian bank and does not include any short-term investments.

NOTE 3. 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.

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.

The tax character of distributions paid during the years ended August 31, 2004
and August 31, 2003 was as follows:

- --------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------------------
Distributions paid from:
- --------------------------------------------------------------------------------
Ordinary income* $21,394,034 $14,189,172
- --------------------------------------------------------------------------------
Long-term capital gains -- --
- --------------------------------------------------------------------------------

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

As of August 31, 2004, the components of distributable earnings on a tax basis
were as follows:

- --------------------------------------------------------------------------------
Undistributed Undistributed
Ordinary Long-Term Net Unrealized
Income Capital Gains Appreciation*
- --------------------------------------------------------------------------------
$843,934 $-- $7,295,223
- --------------------------------------------------------------------------------

* The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to deferral of losses from
wash sales.

These amounts are as of the most recent tax year end.

Unrealized appreciation and depreciation at February 28, 2005, based on cost of
investments for federal income tax purposes was:

- --------------------------------------------------------------------------------
Unrealized appreciation $ 14,307,791
- --------------------------------------------------------------------------------
Unrealized depreciation $ (4,512,079)
------------

Net unrealized appreciation $ 9,795,712
- --------------------------------------------------------------------------------

The following capital loss carryforwards may be available to reduce taxable
income arising from future net realized gains on investments, if any, to the
extent permitted by the Code:

- --------------------------------------------------------------------------------
Year of Capital Loss
Expiration Carryforward
- --------------------------------------------------------------------------------
2011 $ 3,234,575
- --------------------------------------------------------------------------------

Capital loss carryforwards of $2,420,026 were utilized during the Fund's fiscal
year ended August 31, 2004.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, TRUSTEE, AND OTHER
FEES

INVESTMENT ADVISORY FEE

Effective April 15, 2004, Highland Capital Management, L.P. ("Highland") is the
investment adviser to the Fund. Highland receives a monthly investment advisory
fee based on the Fund's average daily managed net assets at the following annual
rates:

- --------------------------------------------------------------------------------
Average Daily Managed Net Assets Annual Fee Rate
- --------------------------------------------------------------------------------
First $1billion 0.45%
- --------------------------------------------------------------------------------
Next $1billion 0.40%
- --------------------------------------------------------------------------------
Over $2 billion 0.35%
- --------------------------------------------------------------------------------

Average daily managed net 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 borrowing constituting financial
leverage).

For the six months ended February 28, 2005, the Portfolio's effective investment
advisory fee rate was 0.45%.

Prior to April 15, 2004, Columbia Management Advisors, Inc. ("Columbia
Management") was the investment adviser to the Fund. Columbia Management was an
indirect, wholly owned subsidiary of FleetBoston Financial Corporation
("FleetBoston"). Effective April 1, 2004, FleetBoston, including Columbia
Management and the Fund's transfer agent and distributor, was acquired by Bank
of America Corporation.

ADMINISTRATION FEES

Effective October 18, 2004, Highland provides administrative services to the
Fund for a monthly administration fee at the annual rate of 0.20% of the Fund's
average daily managed net assets. Under a separate sub-administration agreement,
Highland has delegated certain administrative functions to PFPC Inc. ("PFPC").
For the period ended February 28, 2005, Highland received $661,985 in
administrative fees, and paid PFPC $33,099 for their services. This amount is
included in the "Administration fees" on the Statement of Operations of the
Fund.

Prior to October 18, 2004, Columbia Management provided administrative and other
services to the Fund for a monthly administration fee at the annual rate of
0.20% of the Fund's average daily managed net assets managed daily. For the
period September 1, 2004 through October 17, 2004, Columbia Management received
$203,917 in administration fees, which are included in the "Administration fee"
on the Statement of Operations of the Fund.

ACCOUNTING SERVICES FEES

Effective October 18, 2004, the Fund entered into an accounting services
agreement with PFPC. For the period October 18, 2004 through February 28, 2005,
PFPC received $94,651 for this service. This fee is included in the "Accounting
services fee" on the Statement of Operations.

Prior to October 18, 2004, Columbia Management was responsible for providing
pricing and bookkeeping services to the Fund under a pricing and bookkeeping
agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia
Management delegated those functions to State Street Bank and Trust Company
("State Street"). As a result, Columbia Management paid the total fees collected
under the Outsourcing Agreement to State Street.

Under its pricing and bookkeeping agreement with the Fund, Columbia Management
received from the Fund an annual flat fee of $10,000 paid monthly, and in any
month that the Fund's average daily net assets exceeded $50 million, an
additional monthly fee. The additional fee rate was calculated by taking into
account the fees payable to State Street under the Outsourcing Agreement. This
rate was applied to the average daily net assets of the Fund for that month. The
Fund also paid additional fees for pricing services based on the number of
securities held by the Fund. For the period September 1, 2004 through October
17, 2004, Columbia Management received $24,100 of pricing and bookkeeping fees.
This fee is included in the "Accounting services fee" on the Statement of
Operations of the Fund.

TRANSFER AGENT FEE

Effective October 18, 2004, PFPC provides shareholder services to the Fund. For
the period October 18, 2004 through February 28, 2005, PFPC received $135,156
for this service. This fee is included in the "Transfer agent fee" on the
Statement of Operations.

Prior to October 18, 2004, Columbia Funds Services, Inc. ("Columbia Services"),
an affiliate of Columbia Management, provided shareholder services to the Fund.
For such services, Columbia Services received a fee, paid monthly, at the annual
rate of $34 per open account.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

Columbia Services also received reimbursement for certain out-of-pocket
expenses. For the period September 1, 2004 through October 17, 2004, Columbia
Services received $86,380 for transfer agent services, excluding out-of-pocket
expenses. This amount is included in the "Transfer agent fee" on the Statement
of Operations of the Fund.

SERVICE AND DISTRIBUTION FEES

Effective April 15, 2004, PFPC Distributors, Inc. (the "Distributor") serves as
the principal underwriter and distributor of the Fund's shares. Prior to April
15, 2004, Columbia Funds Distributor, Inc., an affiliate of Columbia Management,
served as the principal underwriter of the Fund. The Distributor is paid a CDSC
on certain redemptions of Class A, Class B and Class C Shares. For the six
months ended February 28, 2005, the Distributor received $27,020, $120,354 and
$76,324 of CDSC on Class A, 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 Distributor
at the 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 Distributor not exceeding, on an
annual basis, 0.10% for Class A shares and 0.75% for Class B and Class C shares.
As of February 28, 2005 the distribution fees paid to the Distributor, on an
annual basis, were 0.10%, 0.45% and 0.60% of the average daily net assets
attributable to Class A, Class B and Class C shares, respectively.

The CDSC and the fees received from the Plan are usedprincipally as repayment
for amounts paid to dealers who sold such shares.

EXPENSE LIMITS AND FEE REIMBURSEMENTS

Highland has voluntarily agreed to waive fees and reimburse certain expenses to
the extent that total expenses (exclusive of investment advisory fees,
administration fees, distribution and service fees, brokerage commissions,
interest, facility fees, taxes and extraordinary expenses, if any) exceed 0.15%
annually of the Fund's average daily managed net assets. This arrangement may be
revised or discontinued by Highland at any time.

CUSTODY

Effective October 18, 2004, PFPC Trust Company ("PFPC Trust") is the custodian
to the Fund. For the period October 18, 2004 through February 28, 2005, PFPC
Trust received $41,078 for this service. This fee is included in the "Custody
fee" on the Statement of Operations.

For the period September 1, 2004 through October 17, 2004, the Fund had an
agreement with its prior custodian bank, State Street, under which custody fees
could have been reduced by balance credits. The Fund could have invested a
portion of the assets utilized in connection with the expense offset arrangement
in an income-producing asset if it had not entered into such an agreement.

FEES PAID TO OFFICERS AND TRUSTEES

The Fund pays no compensation to its officers, all of whom are employees of
Highland.

The Fund pays Trustees who are not interested persons (as defined in the 1940
Act) each an annual retainer of $25,000 for services provided as Trustees of the
Fund.

Prior to July 30, 2004, the previous Trustees of the Fund participated in a
deferred compensation plan. Any continuing obligations of the plan will be paid
solely out of the Fund's assets.

NOTE 5. PORTFOLIO INFORMATION

For the six months ended February 28, 2005, the cost of purchases and proceeds
from sales of securities, excluding short-term obligations, were $661,839,724
and $372,736,411, respectively.

NOTE 6. PERIODIC REPURCHASE OFFERS

The Fund has adopted a fundamental policy to offer each calendar quarter to
repurchase a specified percentage (between 5% and 25%) of the shares then
outstanding at 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 normally 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

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

trading on the NYSE 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.

For the six months ended February 28, 2005, there were two Repurchase Offers.
For each Repurchase Offer, the Fund offered to repurchase 10% of its shares. In
the November and February Repurchase Offers 5.03% and 5.61%, respectively, of
shares outstanding were repurchased.

NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS

The Fund invests 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 foreign corporations,
partnerships and other entities ("Borrowers"). If the lead lender in a typical
lending syndicate becomes insolvent, enters 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 Borrower, selling participant or other persons
interpositioned between the Fund and the Borrower. The ability of Borrowers to
meet their obligations may be affected by economic developments in a specific
industry.

At February 28, 2005, 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
- --------------------------------------------------------------------------------
CSFB:
Quality Distributions, Inc.
PFLetters of Credit $984,848 $959,921
- --------------------------------------------------------------------------------

NOTE 8. LOAN AGREEMENT

Effective October 18, 2004, the Fund entered into a new $300,000,000 secured
loan agreement replacing a previous agreement. The Fund is required to maintain
certain asset coverage with respect to amounts outstanding under the agreement.

At February 28, 2005, the Fund had one term loan outstanding with Citicorp North
America, Inc. ("Citicorp"), totaling $200,000,000, which bears interest at 2.60%
per annum, expiring on October 14, 2005. The average daily loan balance was
$136,602,210 at a weighted average interest rate of 2.09%. The Fund was required
to maintain certain asset coverage with respect to the loan.

For the period September 1, 2004 through October 17, 2004, the Fund had a loan
agreement with Citicorp, under which the Fund could borrow up to $150,000,000.

NOTE 9. LOAN AGREEMENT ASSET COVERAGE REQUIREMENTS

- --------------------------------------------------------------------------------
Asset
Coverage per
Total Amount $1,000 of
Date Outstanding Indebtedness
- --------------------------------------------------------------------------------
02/28/2005 $200,000,000 $5,302
- --------------------------------------------------------------------------------
08/31/2004 95,000,000 8,038
- --------------------------------------------------------------------------------
08/31/2003 59,500,000 5,156
- --------------------------------------------------------------------------------
08/31/2002 74,000,000 3,701
- --------------------------------------------------------------------------------
08/31/2001 88,000,000 3,908
- --------------------------------------------------------------------------------
08/31/2000 19,000,000 6,739
- --------------------------------------------------------------------------------

NOTE 10. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES

INDUSTRY FOCUS

The Fund may focus its investments in the financial services industry,
subjecting it to greater risk than a fund that is more diversified.

NON-PAYMENT RISK

Senior Loans, like other corporate debt obligations, 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 net asset value of the
Fund.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

FEBRUARY 28, 2005 HIGHLAND FLOATING RATE ADVANTAGE FUND

CREDIT RISK

Investments rated below investment grade are commonly referred to as high-yield,
high risk or "junk debt." They are regarded as predominantly speculative with
respect to the issuing company's continuing ability to meet principal and/or
interest payments. Investments in high yield Senior Loans may result in greater
net asset value fluctuation than if the Fund did not make such investments.

LEGAL PROCEEDINGS

Prior to April 15, 2004, the Fund was advised by Columbia Management and was
part of the Columbia funds complex (the "Columbia Funds"). Several Columbia
Funds are defendants in civil lawsuits that have been transferred and
consolidated for pretrial proceedings in the United States District Court for
the District of Maryland in the Special Multi-District Litigation proceeding
(Index No. 04-MO-15863) created for actions involving market timing issues
against mutual fund complexes. The lawsuits have been commenced as putative
class actions on behalf of investors who purchased, held or redeemed shares of
the Funds during specified periods or as derivative actions on behalf of the
Funds. The lawsuits seek, among other things, unspecified compensatory damages
plus interest and, in some cases, punitive damages, the rescission of investment
advisory contracts, the return of fees paid under those contracts, and
restitution. The consolidated amended class action complaint against
Columbia-affiliated defendants was filed on September 29, 2004 and does not name
the Fund as a defendant or nominal defendant. The consolidated amended fund
derivative complaint against Columbia-affiliated defendants was also filed on
September 29, 2004 and names the Columbia Funds, collectively, as nominal
defendants.

On March 2, 2005, four civil revenue sharing actions alleging, among other
things, that various mutual funds advised by Columbia Management and Columbia
Wanger Asset Management L.P. inappropriately used fund assets to pay brokers to
promote the funds by directing fund brokerage transactions to such brokers and
did not fully disclose such arrangements to shareholders, and charged excessive
12b-1 fees, were consolidated into a single action in the United States District
Court for Massachusetts (IN RE COLUMBIA ENTITIES LITIGATION, Civil Action No.
04-11704-REK). The consolidated complaint has not yet been filed. The Fund was
named as a nominal defendant in each of the four revenue sharing actions.

NOTE 11. SUBSEQUENT EVENT

On March 4, 2005, the Board of Trustees of the Fund approved the closing of the
Fund's Class B shares to purchases by new and existing shareholders. The Fund's
Class B shares will not accept purchases by new and existing investors after the
close of business on May 2, 2005. Existing investors may still reinvest
distributions in Class B shares.

IMPORTANT INFORMATION ABOUT THIS REPORT
- --------------------------------------------------------------------------------

TRANSFER AGENT

PFPC Inc.
760 Moore Road
King of Prussia, PA 19406
877.665.1287

DISTRIBUTOR

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

INVESTMENT ADVISER

Highland Capital Management, L.P.
13455 Noel Rd. Suite 1300
Dallas, TX 75240

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP
125 High Street
Boston, MA 02110

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
and additional reports will be sent to you.

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

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
Securities and Exchange Commission's website at http://www.sec.gov.

The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q, beginning with the fiscal quarter ending November 30,
2004. The Fund's Forms N-Q are available on the Commission'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.

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

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. SCHEDULE OF INVESTMENTS

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.

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.

Not yet applicable.

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, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.

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/ JAMES D. DONDERO
-------------------------------------------------------
James D. Dondero, Chief Executive Officer
(principal executive officer)

Date MAY 9, 2005
----------------------------------------------------------------------------

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/ JAMES D. DONDERO
-------------------------------------------------------
James D. Dondero, Chief Executive Officer
(principal executive officer)

Date MAY 9, 2005
----------------------------------------------------------------------------

By (Signature and Title)* /S/ M. JASON BLACKBURN
-------------------------------------------------------
M. Jason Blackburn, Chief Financial Officer
(principal financial officer)

Date MAY 9, 2005
----------------------------------------------------------------------------

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