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)

Two Galleria Tower
13455 Noel Road, Suite 800
DALLAS, TEXAS 75240
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(Address of principal executive offices) (Zip code)

James D. Dondero
Highland Capital Management, L.P.
Two Galleria Tower
13455 Noel Road, Suite 800
DALLAS, TEXAS 75240
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(Name and address of agent for service)

registrant's telephone number, including area code: (877) 665-1287
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Date of fiscal year end: AUGUST 31
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Date of reporting period: AUGUST 31, 2007
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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, 100 F Street, NE,
Washington, DC 20549. 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
ANNUAL REPORT
AUGUST 31, 2007
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[GRAPHIC OMITTED]

[HIGHLAND FUNDS LOGO]

managed by
Highland Capital Management, L.P.

[LOGO] HIGHLAND FLOATING RATE ADVANTAGE FUND [LOGO]
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TABLE OF CONTENTS

Portfolio Manager's Letter ................................................ 1
Fund Profile .............................................................. 3
Financial Statements ...................................................... 4
Investment Portfolio ................................................... 5
Statement of Assets and Liabilities .................................... 20
Statement of Operations ................................................ 21
Statements of Changes in Net Assets .................................... 22
Statement of Cash Flows ................................................ 24
Financial Highlights ................................................... 25
Notes to Financial Statements .......................................... 29
Report of Independent Registered Public Accounting Firm ................ 36
Additional Information ................................................. 37
Important Information About This Report ................................... 41

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

PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST.

PORTFOLIO MANAGERS' LETTER
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OCTOBER 24, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

DEAR SHAREHOLDERS:

Q: HOW HAS THE FUND PERFORMED?

A: For the 12-month period ending August 31, 2007, the Fund's Class A shares
returned 3.10%. That was greater than the return of the Fund's benchmark, the
Credit Suisse ("CS") Leveraged Loan Index, which was 2.99% for the period, and
the Lipper Loan Participation Loan Category average, which was 2.37% for the
period. During this same time period, the Standard & Poor's ("S&P") 500 index
returned 15.13% and the Lehman Aggregate Bond Index returned 5.26%.

Within the portfolio there were a number of positions that performed well during
the period. The Fund's strongest performers included Calpine Corporation Term
Loan (2nd Lien), OpBiz New Term Loan A, Mirant Corporation common stock, Autocam
Revolver and Leap Wireless International common stock. The weakest performers
during the period included Le-Nature's Tranche B Term Loan, Environmental
Systems Products Holdings Second Lien, Western Refining Term Loan and IPC
Systems Tranche B Term Loans (2nd Lien).

Q: WHAT WAS THE INVESTMENT ENVIRONMENT LIKE FOR LEVERAGED LOANS DURING THE
PERIOD?

A: During most of the reporting period, loan spreads tightened while interest
rates remained flat. The Credit Suisse Leveraged Loan Index's spread fell from
255 bps in October of 2006 to a low this year of 244 bps by the end of May 2007.

According to Standard and Poor's Leveraged Commentary and Data ("LCD") Leveraged
Lending Review, much of the leveraged loan activity in 2007 has been driven by
leveraged buy out ("LBO") transactions, which reached a volume of $248 billion
in the first half of 2007, or 64% of the market. 1 Inflows into collateralized
loan obligation ("CLOs"), hedge funds and other non-traditional accounts more
than met the market's liquidity requirements during most of the first half of
the year.

However, July was the worst month for loan performance on record as measured by
the S&P/Loan Syndication Trading Association ("LSTA") index. Weak technical
conditions drove the S&P/LSTA index down to 95.27 by the end of July. 2 The
index posted a record loss, of 3.35% in July, leaving year-to-date loan returns
for the index at -.03%. 3 During August, the market appeared to plateau with the
S&P/LSTA index posting a modest gain of .23%. 4

The leveraged loan market's performance during July and August was, in our
opinion, technical in nature and impacted by the contagion from the consumer
sub-prime mortgage market. For most of the year the leveraged loan market had
been unaffected by the negative sentiment in the sub-prime market. However,
starting in July some of the levered entities holding sub-prime assets were
forced into liquidation to meet margin calls on their highly levered holdings.
This caused a general repricing of other structured products and took enough
liquidity out of the market to shut down the new issue CLO market, which is a
major source of liquidity in the loan market. That lack of loan demand, coupled
with the large new issue supply, caused a repricing of corporate loans.

In our opinion market performance is being driven by the above mentioned
technical factors. Further reinforcing the technical versus fundamental nature
of the recent repricing is the current default rate. During this summer's
repricing the lagging 12-month default rate remained near an all-time low of
..42% by principal amount, well below the index's historical average of 3.17%. 5
These low default rates are an indication of just how strong the fundamentals
remain across the credit markets.

Q: HOW IS THE FUND CURRENTLY POSITIONED?

A: The Fund is approximately 98.17% loans, 1.61% equities and .22% other
corporate debt, as a percentage of investments. With regards to diversification,
the Fund is currently invested in approximately 45 industries and 438 issuers.

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1 S&P Leverage Loan Commentary and Data - 2nd Qtr 2007 Review, p. 2.

2 S&P LCD Weekly Wrap, August 16 2007 p.16

3 S&P LCD Loan Stats, August 2007 p.2.

4 S&P LCD Weekly Wrap, September 6 2007 p.18.

5 S&P LCD Weekly Wrap, September 13 2007 p.19.

Annual Report | 1

PORTFOLIO MANAGERS' LETTER
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OCTOBER 24, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

Q: WHAT IS YOUR OUTLOOK?

A: With the large forward calendar needing to be placed and the state of the CLO
market still in flux, it is difficult to see a quick snap back in spreads.

Some LBO transactions are being delayed while others are offered with larger
than anticipated original issue discount ("OID") and with higher spreads than
initially expected in order to clear the market. We are also seeing covenants
being added to deals. We believe the digestion process will take at least six
months to clear the backlog of underwritten deals.

By extension, loans in the secondary market traded down through August, but have
shown signs of stabilization, at least temporarily, in September. Our analysts
see some good buying opportunities in this price correction during the second
half of the calendar year. In our opinion, repricing of the broader market was
overdone from a fundamental standpoint. For example, the Credit Suisse Leveraged
Loan Index traded at a monthly average of 100.09 during the first ten months of
the performance year but during July and August traded down to 95.87 and 95.37,
respectively. Given the fairly benign fundamental backdrop (i.e., low default
rates, cash flow growth, etc.) we expect a gradual increase in pricing and
tightening of spreads. However, in our opinion, this could take as long as six
months due in part to the large supply of loans on the calendar.

In our fundamental monitoring of our credit portfolios, we do not foresee a
material increase in default rates until after 2008, but an increase from here
is probable simply due to the extraordinary low numbers today. However, the Fund
holds a well diversified portfolio which should help insulate it against an
increase in default rates. The inevitable market correction could be viewed as a
positive for the Fund by creating some good buying opportunities.

We thank you for your investment in the Fund.

/s/ MARK OKADA /s/ JOE DOUGHERTY

MARK OKADA JOE DOUGHERTY
Portfolio Manager Portfolio Manager

Mark Okada and Joe Dougherty have been portfolio managers of the Highland
Floating Rate Advantage Fund since April 15, 2004.

Just like any other investment, floating rate loan investments present financial
risks. Defaults on the loans in the portfolio could reduce the Fund's net asset
value and its distributions, as could nonpayment of scheduled interest and
principal. Prepayment of principal by a borrower could mean the Fund's managers
have to replace the loan with a lower-yielding security, which could affect the
valuation of the portfolio's holdings.

The Fund is a continuously offered, closed-end management investment company and
provides limited liquidity through a quarterly tender offer for between 5% and
25% of outstanding shares. Each quarter, the Fund's trustees must approve the
actual tender. Please read the prospectus carefully for more details.

The Fund may invest a high percentage of assets in a limited number of loans, so
the default of any individual holdings can have a greater impact on the Fund's
net asset value than could a default in a more diversified portfolio.

Floating rate loans are not covered by FDIC insurance or other guarantees
relating to timely payment of principal and interest.

Since economic and market conditions change frequently, there can be no
assurance that the trends described here will continue or that the forecasts
will come to pass. The opinions expressed are those of the contributors and are
subject to change.

Prior investment returns are not indicative of future results.

2 | Annual Report

FUND PROFILE
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HIGHLAND FLOATING RATE ADVANTAGE FUND

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

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Net Assets as of August 31, 2007
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$2,696.1 million

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Portfolio Data as of August 31, 2007
- --------------------------------------------------------------------------------

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

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QUALITY BREAKDOWN AS OF 08/31/07 (%)*
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A 0.1
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Baa 0.1
Ba 24.9
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B 43.3
Caa 3.4
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N/R 28.2
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TOP 5 SECTORS AS OF 08/31/07 (%)*
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Telecommunications 10.0
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Diversified Media 9.2
Housing -- Real Estate Development 8.9
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Healthcare -- Medical Products 8.4
Retail 7.7
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TOP 10 HOLDINGS AS OF 08/31/07 (%)*
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Lake at Las Vegas Joint Venture 3.4
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Univision Communications, Inc. 2.5
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HCA, Inc. 2.3
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Tribune Co. 2.1
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Fontainebleu Florida Hotel LLC 2.0
----------------------------------------------------
MetroPCS Wireless, Inc. 1.9
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Level 3 Financing, Inc. 1.9
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Ford Motor Co. 1.8
----------------------------------------------------
Sabre, Inc. 1.7
----------------------------------------------------
CCS Medical, Inc. 1.6
----------------------------------------------------

* Quality is calculated as a percentage of total notes and bonds. Sectors and
holdings are calculated as a percentage of net assets.

Annual Report | 3

FINANCIAL STATEMENTS
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AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

A GUIDE TO UNDERSTANDING THE FUND'S FINANCIAL STATEMENTS

INVESTMENT PORTFOLIO The Investment Portfolio details all of the Fund's holdings and their 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 net asset value per share 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 These statements demonstrate how the Fund's net assets were affected by its operating
results, distributions to shareholders and shareholder transactions (e.g., subscriptions,
redemptions and dividend reinvestments) during the reporting period. The Statements of
Changes in Net Assets also detail changes in the number of shares outstanding.

STATEMENT OF CASH FLOWS This statement reports net cash and foreign currency provided or used by operating, investing
and financing activities and the net effect of those flows on cash and foreign currency
during the period.

FINANCIAL HIGHLIGHTS The Financial Highlights demonstrate how the Fund's net asset value per share was affected by
the Fund's operating results. The Financial Highlights also disclose the classes' performance
and certain key ratios (e.g., class expenses and net investment income as a percentage of
average net assets).

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

4 | Annual Report

INVESTMENT PORTFOLIO
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AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

AEROSPACE - AEROSPACE/DEFENSE - 2.7%
AWAS Capital, Inc.
10,818,931 First Lien Term Loan,
7.13%, 03/15/13 ............................... 10,332,079
6,550,321 Second Lien Term Loan,
11.38%, 03/15/13 .............................. 6,452,066
DeCrane Aircraft Holdings, Inc.
6,421,499 First Lien Term Loan,
8.11%, 02/21/13 ............................... 6,228,854
62,251 First Lien Term Loan,
8.10%, 02/21/13 ............................... 60,383
1,903,900 Forgings International Holdings
Term D (USD), 9.36%, 03/22/15 ................. 1,782,526
Forgings International Ltd.
2,224,862 Term B2 (UK), 7.61%, 09/11/14 ................. 2,119,181
2,363,766 Term C2 (UK), 7.86%, 09/11/15 ................. 2,251,488
Hawker Beechcraft Acquisition Co. LLC
193,954 Letter of Credit Facility Deposit,
5.26%, 03/26/14 ............................... 186,599
2,286,454 Term Loan, 7.36%, 03/26/14 .................... 2,199,751
IAP Worldwide Services, Inc.
2,964,949 First Lien Term Loan,
9.69%, 12/30/12 ............................... 2,572,094
3,500,000 Second Lien Term Loan,
15.19%, 06/20/13 .............................. 2,476,250
Travelport LLC
7,800,000 Delayed Draw Term Loan,
7.75%, 08/23/13 ............................... 7,507,500
15,000,000 Letter of Credit, 8.00%, 05/23/14 ............. 14,437,500
1,193,527 Synthetic Letter of Credit,
7.86%, 08/23/13 ............................... 1,148,769
7,310,430 Tranche B Dollar Term Loan,
7.75%, 08/23/13 ............................... 7,036,289
2,929,412 Vought Aircraft Industries, Inc.
Term Loan, 7.83%, 12/22/11 .................... 2,848,853
Wesco Aircraft Hardware Corp.
2,954,082 First Lien Term Loan,
7.61%, 09/30/13 ............................... 2,876,537
1,000,000 Second Lien Term Loan,
11.11%, 03/28/14 .............................. 990,000
------------
73,506,719
------------

AEROSPACE - AIRLINES - 2.5%
Continental Airlines, Inc.
1,714,286 Tranche A-1 Term Loan,
8.74%, 06/01/11 ............................... 1,690,714
4,285,714 Tranche A-2 Term Loan,
8.74%, 06/01/11 ............................... 4,226,786
Delta Air Lines, Inc.
945,000 Credit-Linked Deposit Loan,
7.36%, 04/30/12 ............................... 907,795
9,000,000 Second Lien Term Loan,
8.61%, 04/30/14 ............................... 8,676,540
5,372,629 Term Loan Equipment Notes,
8.86%, 09/29/12 ............................... 5,379,345
9,900,000 Northwest Airlines, Inc.
Term Loan, DIP, 7.51%, 08/21/08 ............... 9,343,125
40,500,000 US Airways, Inc.
Term Loan, 7.86%, 03/23/14 .................... 38,318,670
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68,542,975
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BROADCASTING - 3.8%
4,874,517 All3Media Intermediate Ltd.
UK Term Loan B, 7.80%, 08/31/14 ............... 4,630,791

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PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
BROADCASTING (CONTINUED)
2,481,250 Barrington Broadcasting Group LLC
Term Loan, 7.75%, 08/11/13 .................... 2,414,554
10,000,000 Clarke American Corp.
Tranche B Term Loan,
7.86%, 06/30/14 ............................... 9,160,000
5,248,571 CMP Susquehanna Corp.
Term Loan, 7.45%, 05/06/13 .................... 4,994,016
Comcorp Broadcasting, Inc.
43,647 CCB PIK Revolver, 06/04/14 (b) (c) ............ 47,172
196,684 CCB PIK Term Loan, 06/04/14 (b) (c) ........... 212,569
350,503 CCB Revolver, 06/04/14 (b) (c) ................ 378,810
1,684,317 CCB Term Loan, 06/04/14 (b) (c) ............... 1,820,347
78,965 WK PIK Term Loan, 06/04/14 (b) (c) ............ 85,343
677,065 WK Term Loan, 06/04/14 (b) (c) ................ 731,747
Hargray Acquisition Co.,/DPC
Acquisition LLC/HCP Acquisition LLC
2,000,000 First Lien Term Loan,
7.60%, 06/27/14 ............................... 1,960,000
2,000,000 Second Lien Term Loan,
10.85%, 01/29/15 .............................. 1,970,000
Millennium Digital Media Systems, LLC
850,142 Revolver, 9.00%, 06/30/11 (b) (d) ............. 850,142
31,207,338 Term Facility, 9.36%, 06/30/11 ................ 30,817,246
NextMedia Operating, Inc.
684,882 Delay Draw Term Loan,
7.32%, 11/15/12 ............................... 650,638
1,540,984 Initial Term Loan (First Lien),
7.57%, 11/15/12 ............................... 1,463,935
11,000,000 Paxson Communications Corp.
First Lien Term Loan,
8.61%, 01/15/12 ............................... 10,725,000
2,000,000 Persona Communications Corp.
Second Lien Term Loan,
11.32%, 04/12/14 .............................. 2,015,000
28,119,447 Young Broadcasting, Inc.
Term Loan, 7.88%, 11/03/12 .................... 26,291,683
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101,218,993
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CABLE - INTERNATIONAL CABLE - 1.0%
805,000 San Juan Cable, LLC
Second Lien Term Loan,
10.86%, 10/31/13 .............................. 784,875
18,261,250 UPC Financing Partnership
Facility N1, 7.08%, 12/31/14 .................. 17,199,906
8,000,000 Virgin Media Inc.
B4 Facility, 7.36%, 07/30/12 .................. 7,749,280
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25,734,061
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CABLE - US CABLE - 5.9%
7,825,000 Bresnan Communications LLC
Tranche B Term Loan,
7.36%, 09/29/13 ............................... 7,590,250
4,000,000 CCO Holdings, LLC
Incremental Loan, 7.85%, 09/06/14 ............. 3,865,000
Cequel Communications LLC
4,275,000 Second Lien Tranche A Term Loan,
9.86%, 05/04/14 ............................... 4,157,437
24,951,250 Term Loan, 7.36%, 11/05/13 (e) ................ 23,603,882
Charter Communications Operating, LLC
8,666,667 Existing Term Loan,
7.36%, 04/28/13 ............................... 8,233,333
23,500,000 New Term Loan, 7.36%, 03/06/14 ................ 22,325,000
42,000,000 Term Facility, 7.36%, 04/28/13 ................ 39,900,000

See accompanying Notes to Financial Statements. | 5

INVESTMENT PORTFOLIO (CONTINUED)
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AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

CABLE - US CABLE (CONTINUED)
3,687,046 CSC Holdings, Inc.
Incremental Term Loan,
7.07%, 03/29/13 ............................... 3,540,855
12,500,000 Knology, Inc.
Term Loan, 7.59%, 06/30/12 .................... 12,250,000
Mediacom Broadband Group
995,000 Tranche D-1 Term Loan,
7.12%, 01/31/15 ............................... 941,519
995,000 Tranche D-2 Term Loan,
7.16%, 01/31/15 ............................... 962,662
995,000 Mediacom Illinois, LLC
Tranche C Term Loan,
7.12%, 03/31/15 ............................... 933,648
Northland Cable Television, Inc.
4,925,000 First Lien Term Loan B,
9.36%, 12/22/12 ............................... 4,912,688
6,000,000 Second Lien Term Loan,
13.36%, 06/22/13 .............................. 6,000,000
5,000,000 RCN Corp.
Initial Term Loan, 7.69%, 04/25/14 ............ 4,750,000
WideOpenWest Finance LLC
7,000,000 First Lien Term Loan,
7.91%, 06/30/14 ............................... 6,597,500
10,000,000 Second Lien Term Loan,
11.61%, 06/29/15 .............................. 9,100,000
------------
159,663,774
------------

CHEMICALS - COMMODITY & FERTILIZER - 0.6%
6,982,500 Celanese US Holdings, LLC
Term Loan, 7.11%, 04/02/14 .................... 6,774,422
5,000,000 Cognis GMBH
Facility C, 7.36%, 09/15/13 ................... 4,604,200
5,717,903 Ferro Corp.
Term Loan, 7.40%, 06/06/12 .................... 5,660,724
------------
17,039,346
------------

CHEMICALS - SPECIALTY CHEMICALS - 0.8%
Berry Plastics Holding Corp.
997,500 Term C Loan, 7.36%, 04/03/15 (f) .............. 957,600
3,990,000 Term Loan B , 7.12%, 09/20/13 ................. 3,830,400
Brenntag Holding GMBH & Co.
294,545 Acquisition Facility,
7.37%, 01/17/14 ............................... 282,764
1,205,364 Facility B2 Term Loan,
7.39%, 01/17/14 ............................... 1,151,424
1,000,000 Second Lien Dollar Facility,
9.39%, 01/17/16 ............................... 967,500
1,654,319 Ineos U S Finance LLC
Term Loan A4 Facility,
7.58%, 12/14/12 ............................... 1,580,702
3,874,985 Kraton Polymers Group of Cos.
Term Loan, 7.38%, 05/13/13 .................... 3,657,017
Lucite International US Finco LLC
733,053 Term B-1 Advance, 7.61%, 07/07/13 ............. 716,560
259,542 Term B-2 Advance, 7.61%, 07/07/13 ............. 253,702
5,000,000 Panda Hereford Ethanol, L.P.
Tranche A Term Loan,
9.29%, 07/28/13 ............................... 4,887,500
3,372,503 Rockwood Specialties Group, Inc.
Tranche E Term Loan,
6.86%, 07/30/12 ............................... 3,293,114
------------
21,578,283
------------

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PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 0.3%
3,538,667 Rexair LLC
First Lien Term Loan,
9.61%, 06/30/10 ............................... 3,503,280
5,000,000 Water PIK, Inc.
First Lien Term Loan,
8.61%, 06/15/13 ............................... 4,900,000
------------
8,403,280
------------

CONSUMER NON-DURABLES - 2.4%
1,961,172 American Achievement Corp.
Tranche B Term Loan,
7.72%, 03/25/11 ............................... 1,912,142
6,982,500 Amscan Holdings, Inc.
Term Loan, 7.63%, 05/27/13 .................... 6,624,647
1,231,733 Bare Escentuals Beauty, Inc.
First Lien Term Loan,
7.80%, 02/18/12 ............................... 1,216,336
4,982,222 BioTech Research Labs/Philosophy
Merger Sub, Inc.
First Lien Term Loan,
7.36%, 03/16/14 (e) ........................... 4,558,733
1,111,111 Camelbak Products, Inc.
Second Lien Term Loan,
12.91%, 02/04/12 .............................. 1,027,778
2,985,000 DS Waters of America, Inc.
Term Loan , 7.69%, 10/27/12 ................... 2,835,750
1,778,147 Eastman Kodak Co.
Term B-1 Advance, 10/18/12 (e) ................ 1,782,592
3,704,286 Hanesbrands, Inc.
Term B Loan, 7.13%, 09/05/13 .................. 3,609,826
5,564,419 Hillman Group, Inc.
Term Loan B, 8.56%, 07/22/13 .................. 5,425,308
3,740,625 Iconix Brand Group, Inc.
Term Loan, 7.61%, 05/02/13 .................... 3,591,000
769,951 Jarden Corp.
Term Loan B1, 7.11%, 01/24/12 ................. 740,308
887,500 Owens-Brockway Glass Container Inc.
Tranche B Term Loan,
6.86%, 06/14/13 ............................... 857,174
2,632,214 Prestige Brands Holdings, Inc.
Tranche B Term Loan,
7.76%, 04/06/11 ............................... 2,579,570
Solo Cup Co.
11,129,496 Term B1 Loan, 8.92%, 02/27/11 ................. 10,974,128
4,808,963 Term B1 Loan, 9.01%, 02/27/11 ................. 4,741,830
Spectrum Brands, Inc.
1,739,831 Dollar Term B II Loan,
9.32%, 03/30/13 ............................... 1,652,839
9,776,883 Dollar Term B Loan,
9.37%, 03/30/13 ............................... 9,532,461
483,286 Letter of Credit, 5.17%, 03/30/13 ............. 472,412
Technical Concepts, LLC
757,474 U. S. Dollar Term Loan A,
8.82%, 01/01/11 ............................... 759,367
807,360 U. S. Dollar Term Loan B,
9.07%, 01/01/13 ............................... 809,378
------------
65,703,579
------------

DIVERSIFIED MEDIA - 8.2%
4,500,000 Advanstar Communications
First Lien Term Loan,
7.57%, 05/31/14 ............................... 4,185,000
185,111 Black Press Group Ltd.
Term B-2 Tranche Loan,
7.36%, 08/02/13 ............................... 181,524

6 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

DIVERSIFIED MEDIA (CONTINUED)
304,889 Black Press U S Partnership
Term B-1 Tranche Loan,
7.36%, 08/02/13 ............................... 298,980
8,847,894 Cinemark USA, Inc.
Term Loan, 7.16%, 10/05/13 .................... 8,496,810
2,810,126 Endurance Business Media, Inc.
First Lien Term Loan,
8.32%, 07/26/13 ............................... 2,683,671
5,934,743 HIT Entertainment PLC
Term Facility, 7.34%, 03/20/12 ................ 5,667,679
1,000,000 Knowledgepoint360 Group LLC
Second Lien Term Loan,
12.53%, 04/26/15 .............................. 997,500
3,940,000 Merrill Communications LLC
Combined Term Loan,
7.67%, 12/22/12 ............................... 3,856,275
Metro-Goldwyn-Mayer Holdings II, Inc.
24,732,633 Tranche B Term Loan,
8.60%, 04/08/12 ............................... 23,465,333
1,987,680 Tranche B-1 Term Loan,
8.60%, 04/08/12 ............................... 1,893,265
10,427,494 Nielsen Finance LLC
Dollar Term Loan, 7.36%, 08/09/13 ............. 9,977,861
Panavision, Inc.
3,043,908 First Lien Term Loan,
8.90%, 03/30/11 ............................... 2,937,371
3,500,000 Second Lien Term Loan,
12.86%, 03/30/12 .............................. 3,360,000
Penton Media, Inc.
18,204,375 First Lien Term Loan,
7.61%, 02/01/13 ............................... 17,316,912
8,000,000 Second Lien Term Loan,
10.36%, 02/01/14 .............................. 7,560,000
Readers Digest Association, Inc.
970,000 Revolver, 8.36%, 02/17/13 (d) ................. 902,100
4,987,500 U.S. Term Loan, 7.35%, 03/02/14 ............... 4,650,844
Riverdeep Interactive Learning USA, Inc.
1,927,099 Bridge Facility, 12.06%, 12/21/14 ............. 1,917,464
21,389,614 Term Loan, 8.10%, 12/20/13 .................... 21,104,490
Springer Science+Business Media S.A.
562,496 Tranche B-2, 7.75%, 09/16/11 .................. 543,000
562,496 Tranche C-2, 8.12%, 09/17/12 .................. 543,000
366,301 Tranche E-2, 8.07%, 09/17/12 .................. 353,605
338,124 USD Tranche B-2 Add-on,
7.75%, 07/05/13 ............................... 326,405
338,124 USD Tranche C-2 Add On,
8.12%, 07/05/14 ............................... 326,405
Tribune Co.
62,000,000 Initial Tranche B Advance,
8.36%, 05/19/14 ............................... 56,187,500
33,133,333 Tranche X Advance,
7.86%, 05/18/09 ............................... 32,346,417
1,436,067 Valassis Communications, Inc.
Tranche B Term Loan,
7.11%, 03/02/14 ............................... 1,336,892
2,970,112 West Corp.
Term B-2 Loan, 7.82%, 10/24/13 ................ 2,874,326
4,000,000 Yell Group PLC
Facility B1,
7.57%, 10/27/12 ............................... 3,886,000
------------
220,176,629
------------

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
ENERGY - EXPLORATION & PRODUCTION - 1.9%
ATP Oil & Gas Corp.
11,000,000 First Lien Term Loan,
8.89%, 04/14/10 ............................... 11,261,250
10,926,411 First Lien Term Loan,
8.87%, 04/14/10 ............................... 10,830,914
III Exploration II LP
2,250,000 Delayed Draw Term Loan,
9.11%, 10/29/13 ............................... 2,171,250
12,718,125 Initial Draw Term Loan,
8.86%, 10/29/13 ............................... 12,272,991
2,000,000 Second Lien Loan,
11.84%, 04/29/14 .............................. 1,930,000
Targa Resources, Inc.
1,161,290 Synthetic Letter of Credit,
5.23%, 10/31/12 ............................... 1,117,742
4,754,040 Term Loan, 7.54%, 10/31/12 .................... 4,575,764
2,500,000 TARH E&P Holdings, L.P.
First Lien Term Loan,
9.88%, 06/29/12 ............................... 2,475,000
5,221,822 Trident Exploration
Unsecured Term Loan,
17.51%, 11/24/11 PIK .......................... 5,143,495
------------
51,778,406
------------

ENERGY - OTHER ENERGY - 2.9%
Alon USA Energy, Inc.
877,778 Edgington Facility, 7.74%, 06/22/13 ........... 842,667
7,022,222 Paramount Facility, 7.61%, 06/22/13 ........... 6,741,333
Coffeyville Resources, LLC
1,460,140 Funded Letter of Credit,
5.25%, 12/28/10 (e) ........................... 1,372,532
7,506,385 Tranche D Term Loan,
8.44%, 12/30/13 ............................... 7,239,007
Delphi Acquisition Holding I B.V.
488,759 Facility B1, 7.69%, 01/11/15 .................. 472,571
488,759 Facility C1, 8.19%, 01/11/16 .................. 475,626
1,000,000 El Paso Corp.
Deposit Loan, 5.22%, 07/31/11 ................. 984,170
4,500,000 Endeavour International Holding B.V.
Second Lien Term Loan,
12.36%, 11/01/11 .............................. 4,455,000
18,751,803 Helix Energy Solutions Group, Inc.
Term Loan, 7.41%, 07/01/13 .................... 18,119,117
2,962,500 MEG Energy Corp.
Initial Term Loan, 7.36%, 04/03/13 ............ 2,883,520
Monitor US Finco, Inc.
3,980,000 First Lien Term Loan,
10.85%, 01/11/14 .............................. 3,980,000
3,000,000 Second Lien Term Loan,
17.35%, 01/11/15 .............................. 2,970,000
2,000,000 SandRidge Energy, Inc.
Floating Rate Loan, 8.99%, 04/01/14 ........... 1,985,000
1,000,000 Total Safety U.S., Inc.
Second Lien Term Loan,
11.86%, 12/08/13 .............................. 980,000
13,750,000 Value Creation, Inc.
Term Loan, 12.82%, 07/01/12 ................... 13,337,500
Venoco, Inc.
1,000,000 Second Lien Term Loan,
9.32%, 05/07/14 ............................... 985,000
5,000,000 Second Lien Term Loan,
9.36%, 09/20/11 ............................... 4,925,000
2,975,000 Volnay Acquisition Co. I
Term Loan B1, 7.35%, 01/12/14 ................. 2,891,343

See accompanying Notes to Financial Statements. | 7

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

ENERGY - OTHER ENERGY (CONTINUED)
3,000,000 Willbros USA, Inc.
Syndicate Term Loan,
10.27%, 10/27/09 .............................. 3,015,000
------------
78,654,386
------------

ENERGY - REFINING - 0.7%
846,750 Concho Resources, Inc.
Second Lien Term Loan,
9.74%, 03/27/12 ............................... 834,049
1,000,000 Connacher Finance Corp.
Term Loan, 8.61%, 10/20/13 .................... 997,500
2,992,500 Eagle Rock Energy Partners
Series B Term Loan,
8.11%, 08/31/11 ............................... 2,917,687
3,000,000 Port Barre Investments, LLC
Term B Loan, 7.49%, 09/08/14 .................. 2,895,000
Resolute Aneth, LLC
1,714,286 Second Lien Term Loan,
11.75%, 04/13/12 .............................. 1,667,143
1,500,000 Second Lien Term Loan,
06/26/13 (e) .................................. 1,458,750
7,428,571 Western Refining, Inc.
Term Loan, 9.00%, 05/30/14 .................... 7,087,303
------------
17,857,432
------------
FINANCIAL - 3.3%
1,741,250 AlixPartners, LLP
Tranche C Term Loan,
7.61%, 10/12/13 ............................... 1,697,719
2,604,643 Arias Acquisitions, Inc.
Term Loan, 10.85%, 01/26/12 ................... 2,181,388
1,500,000 Bay Point Re Ltd.
Term Loan, 9.85%, 12/31/10 .................... 1,455,000
Checksmart Financial Co.
1,913,193 First Lien Tranche B Term Loan,
8.11%, 05/01/12 ............................... 1,831,882
2,500,000 Second Lien Term Loan,
10.88%, 05/01/13 .............................. 2,350,000
7,000,000 Concord Re Ltd.
Term Loan, 9.61%, 02/29/12 .................... 6,860,000
7,957,487 Conseco, Inc.
Term Loan, 7.51%, 10/10/13 .................... 7,484,972
2,000,000 Cyrus Reinsurance Ltd.
Term Loan, 9.60%, 12/31/10 .................... 2,002,500
Dollar Financial Corp.
1,998,961 Canadian Borrower Term Loan,
8.11%, 10/30/12 ............................... 1,958,982
1,469,300 Delayed Draw Term Loan,
10.00%, 10/30/12 .............................. 1,439,913
Emerson Reinsurance Ltd.
3,250,000 Series A Loan, 7.11%, 12/15/11 ................ 3,152,500
1,250,000 Series B Loan, 8.36%, 12/15/11 ................ 1,212,500
992,500 First American Payment Systems, L.P.
Term Loan, 8.63%, 10/06/13 .................... 977,613
Flatiron Re Ltd.
4,211,856 Closing Date Term Loan,
9.61%, 12/29/10 ............................... 4,175,086
2,040,118 Delayed Draw Term Loan,
9.61%, 12/29/10 ............................... 2,022,307
3,325,000 FleetCor Technologies Operating Co.,
LLC
Tranche 1 Term Loan,
7.38%, 04/30/13 ............................... 3,208,625

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
FINANCIAL (CONTINUED)
HUB International Holdings, Inc.
862,745 Delayed Draw Term Loan,
8.01%, 06/13/14 (d) ........................... 830,931
12,254,902 Initial Term Loan, 7.86%, 06/13/14 ............ 11,802,941
3,942,613 IPayment, Inc.
Term Loan, 7.40%, 05/10/13 .................... 3,725,769
8,000,000 Kepler Holdings, Ltd.
Term Loan, 10.86%, 06/30/09 ................... 7,760,000
1,990,013 LPL Holdings, Inc.
Tranche D Term Loan,
7.36%, 06/28/13 ............................... 1,910,412
1,000,000 Online Resources Corp.
Term Loan A, 8.26%, 02/09/12 .................. 960,000
Panther Re Holdings Ltd.
3,000,000 Term Loan A, 7.61%, 12/01/10 .................. 2,910,000
2,000,000 Term Loan B, 9.86%, 12/01/10 .................. 1,940,000
2,500,000 Penhall Holding Co.
Senior Unsecured PIK Toggle
Term Loan, 12.82%, 04/01/12 ................... 2,506,250
997,500 Riskmetrics Group Holdings, LLC
First Lien Term Loan B,
7.61%, 01/10/14 ............................... 975,056
8,795,676 Wind Acquisition Holdings Finance S.A.
PIK Term Loan,
12.61%, 12/21/11 .............................. 8,729,708
------------
88,062,054
------------

FOOD AND DRUG - 0.5%
4,033,855 Michael Foods, Inc.
Term Loan B-1, 7.36%, 11/21/10 ................ 3,973,347
706,857 Nash Finch Co.
Initial Term Loan, 8.13%, 11/12/10 ............ 675,049
8,000,000 Rite Aid Corp.
Senior Secured Bridge Loan,
10/23/07 (e) .................................. 7,960,000
210,898 Supervalu, Inc.
Term Loan B, 6.86%, 06/02/12 .................. 208,043
1,492,500 Weight Watchers International, Inc.
Term Loan B , 6.88%, 01/26/14 ................. 1,477,575
------------
14,294,014
------------

FOOD/TOBACCO - BEVERAGES & BOTTLING - 0.2%
565,217 B&G Foods, Inc.
Tranche C Term Loan ,
7.51%, 02/26/13 ............................... 556,739
3,922,657 WM. Bolthouse Farms, Inc.
First Lien Term Loan,
7.63%, 12/17/12 ............................... 3,775,558
------------
4,332,297
------------

FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS - 0.6%
6,058,228 Chiquita Brands LLC
Term Loan C, 8.56%, 06/28/12 .................. 5,916,829
Dole Food Co., Inc.
186,258 Credit Linked Deposit,
5.23%, 04/12/13 ............................... 175,898
413,842 Tranche B Term Loan,
7.58%, 04/12/13 ............................... 390,220
LJVH Holdings, Inc.
1,000,000 Second Lien Term Loan,
10.86%, 01/19/15 .............................. 970,000
880,000 Tranche B Term Loan,
7.86%, 07/19/14 ............................... 858,000

8 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS (CONTINUED)
LJVH Holdings, Inc. (continued)
120,000 Tranche C Term Loan,
7.86%, 07/19/14 ............................... 117,000
15,227 Merisant Co.
Tranche B Term Loan,
8.63%, 01/11/10 ............................... 14,770
5,552,671 Michelina's
Term Loan, 8.47%, 04/02/11 .................... 5,441,618
1,379,473 Solvest, Ltd.
Tranche C Term Loan,
7.47%, 04/12/13 ............................... 1,299,574
------------
15,183,909
------------

FOOD/TOBACCO - RESTAURANTS - 1.2%
3,980,000 Aramark Canada Ltd.
Canadian Term Loan,
7.35%, 01/26/14 ............................... 3,820,800
Aramark Corp.
457,338 Letter of Credit Facility,
5.36%, 01/27/14 ............................... 442,145
6,577,860 U.S. Term Loan, 7.36%, 01/27/14 ............... 6,359,344
Buffets Holdings, Inc.
464,248 PF Letter of Credit, 5.26%, 05/01/13 .......... 436,393
1,321,875 Revolver, 10.50%, 11/01/11 (d) ................ 1,201,227
3,496,092 Term Loan, 8.11%, 11/01/13 .................... 3,286,326
2,450,000 Caribbean Restaurant LLC
Tranche B Term Loan,
8.25%, 06/30/09 ............................... 2,413,250
3,903,194 El Pollo Loco, Inc.
Term Loan, 7.86%, 11/18/11 .................... 3,815,372
OSI Restaurant Partners LLC
4,644,157 Incremental Term Loan,
7.63%, 06/14/14 ............................... 4,411,949
355,843 Synthetic Revolver,
5.18%, 06/14/13 ............................... 339,830
5,000,000 Pinnacle Foods Finance LLC
Term Loan, 8.11%, 04/02/14 .................... 4,787,500
------------
31,314,136
------------

FOREST PRODUCTS - PACKAGING - 1.1%
Georgia-Pacific Corp.
5,472,500 Add-on Term Loan B,
7.11%, 12/20/12 ............................... 5,267,281
10,343,366 Term Loan B, 7.12%, 02/14/13 .................. 9,947,215
10,972,500 Graham Packaging Co.
Term Loan B, 7.63%, 10/07/11 .................. 10,679,863
Smurfit Kappa Acquisitions
1,000,000 B1 Term Loan Facility,
7.48%, 12/31/13 ............................... 980,000
1,000,000 C1 Term Loan Facility,
8.11%, 12/31/14 ............................... 980,000
2,992,500 Tegrant Corp.
First Lien Term Loan,
7.61%, 03/08/14 ............................... 2,842,875
------------
30,697,234
------------

FOREST PRODUCTS - PAPER - 0.3%
2,500,000 Appleton Papers, Inc.
Term Loan BB, 7.11%, 06/05/14 ................. 2,393,750
Mauser
1,000,000 Facility B2, 7.88%, 06/30/15 .................. 970,000
1,000,000 Facility C2, 8.13%, 06/13/16 .................. 970,000

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
FOREST PRODUCTS - PAPER (CONTINUED)
1,478,076 NewPage Corp.
New Term Loan, 7.63%, 05/02/11 ................ 1,448,515
2,261,952 Verso Paper Holdings LLC
Term B Loan , 7.13%, 08/01/13 (f) ............. 2,256,297
------------
8,038,562
------------

GAMING/LEISURE - GAMING - 1.3%
3,936,051 CCM Merger, Inc./MotorCity Casino
Term Loan B, 7.39%, 07/13/12 .................. 3,827,810
4,987,500 Copa Casino of Mississippi, LLC
Term Loan, 10.34%, 06/14/12 ................... 4,987,500
1,921,295 DHM Holdings Co., Inc.
Multi Draw Term Loan ,
7.12%, 03/03/08 (d) ........................... 1,916,491
6,041,285 Drake Hotel Acquisition
B Note 1, 8.22%, 10/01/07 (d) ................. 6,041,285
Green Valley Ranch Gaming LLC
4,560,000 Second Lien Term Loan,
8.61%, 08/16/14 ............................... 4,349,100
4,955,645 Term Loan, 7.54%, 02/16/14 .................... 4,732,641
VML U S Finance LLC
1,267,738 Term B Delayed Draw Project Loan,
7.74%, 05/25/12 ............................... 1,223,367
6,732,262 Term B Funded Project Loan,
7.60%, 05/25/13 ............................... 6,496,633
2,000,000 Wynn Las Vegas LLC
Term Loan B, 7.23%, 08/15/13 .................. 1,965,000
------------
35,539,827
------------

GAMING/LEISURE - OTHER LEISURE - 3.8%
Alpha Topco Ltd.
5,714,286 Facility B1, 7.92%, 12/31/13 .................. 5,542,857
4,285,714 Facility B2, 7.92%, 12/31/13 .................. 4,157,143
4,500,000 Second Lien Facility D ,
9.04%, 06/30/14 ............................... 4,342,500
2,000,000 AMF Bowling Worldwide, Inc.
Term B Loan, 7.85%, 06/07/13 .................. 1,920,000
57,500,000 Fontainebleu Florida Hotel LLC
Tranche C Term Loan,
11.36%, 06/06/12 .............................. 53,690,625
4,666,667 Fontainebleu Las Vegas LLC
Term Loan, 8.61%, 05/17/14 .................... 4,357,500
995,000 Greenwood Racing Inc.
Term Loan, 7.80%, 11/28/11 .................... 957,687
10,164,918 Kuilima Resort Co.
First Lien Term Loan,
12.00%, 09/30/10 .............................. 9,491,492
4,960,012 Regal Cinemas Corp.
Term Loan, 6.86%, 10/27/13 .................... 4,755,412
997,500 Town Sports International LLC
Term Loan, 7.38%, 02/27/14 .................... 927,675
Trump Entertainment Resorts
Holdings, L.P.
4,684,716 Term C-1 Facility, 7.90%, 05/20/12 ............ 4,614,445
4,684,716 Term C-2 Facility, 7.86%, 05/20/12 ............ 4,614,445
3,597,286 Yellowstone Mountain Club, LLC
First Lien Term Loan,
7.88%, 09/30/10 ............................... 3,483,360
------------
102,855,141
------------

HEALTHCARE - ACUTE CARE - 3.0%
3,082,832 Alliance Imaging, Inc.
Tranche C1 Term Loan,
7.90%, 12/29/11 ............................... 3,030,825

See accompanying Notes to Financial Statements. | 9

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

HEALTHCARE - ACUTE CARE (CONTINUED)
HCA, Inc.
979,545 Tranche A Term Loan,
7.36%, 11/19/12 ............................... 937,601
63,680,000 Tranche B Term Loan,
7.61%, 11/18/13 ............................... 61,461,389
MultiPlan, Inc.
1,823,602 Term Loan B, 8.07%, 04/12/13 .................. 1,768,894
839,419 Term Loan C, 8.07%, 04/12/13 .................. 813,187
National Mentor Holdings, Inc.
56,000 Institutional Letter of Credit Facility,
5.32%, 06/29/13 ............................... 52,640
934,560 Tranche B Term Loan,
7.43%, 06/29/13 ............................... 878,486
Stiefel Laboratories, Inc.
5,616,666 Delayed Draw Term Loan,
7.61%, 12/28/13 ............................... 5,455,187
7,343,271 First Lien Initial Term Loan,
7.61%, 12/28/13 ............................... 7,132,152
------------
81,530,361
------------

HEALTHCARE - ALTERNATE SITE SERVICES - 3.8%
1,426,568 American HomePatient, Inc.
Secured Promissory Note,
6.79%, 08/01/09 (g) ........................... 1,426,568
CHG Cos. Medical Staffing, Inc.
3,184,000 First Lien Term Loan B,
7.85%, 12/20/12 ............................... 3,056,640
800,000 Synthetic Letter of Credit,
7.85%, 12/20/12 ............................... 768,000
CHS/ Community Health Systems, Inc.
309,358 Delayed Draw Term Loan,
07/25/14 (d) (e) .............................. 298,283
30,020,108 Funded Term Loan, 07/13/14 (e) ................ 28,945,388
6,972,437 CRC Health Corp.
Term Loan, 7.61%, 02/06/13 .................... 6,806,842
Danish Holdco A/S
3,365,689 Facility B5, 7.84%, 05/01/15 .................. 3,302,582
2,500,000 Second Lien Term Facility,
9.84%, 11/01/16 ............................... 2,400,000
FHC Health Systems, Inc.
1,500,000 Third Lien Additional Term Loan,
15.11%, 02/09/11 .............................. 1,515,000
5,000,000 Third Lien Term Loan,
15.11%, 02/09/11 .............................. 5,050,000
Gambro Holding AB
1,000,000 Facility B2, 7.87%, 06/05/14 .................. 965,830
1,000,000 Facility C2, 8.37%, 06/05/15 .................. 971,250
16,587,716 LifeCare Holdings
Term Loan, 8.36%, 08/15/12 (e) ................ 15,343,638
Physiotherapy Associates, Inc./
Benchmark Medical, Inc.
1,000,000 Second Lien Term Loan,
13.75%, 12/31/13 .............................. 995,000
5,000,000 Term Loan, 10.25%, 06/28/13 ................... 4,900,000
3,107,177 Renal Advantage, Inc.
Tranche B Term Loan,
7.86%, 10/06/12 ............................... 2,986,774
Rural/Metro Operating Co. LLC
720,588 Letter of Credit Term Loan,
5.19%, 03/04/11 ............................... 689,963
1,914,706 Term 1 Loan, 7.61%, 03/04/11 .................. 1,833,331
16,247,062 Select Medical Corp.
Tranche B Term Loan,
7.36%, 02/24/12 ............................... 15,434,709

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
HEALTHCARE - ALTERNATE SITE SERVICES (CONTINUED)
1,960,000 Skilled Healthcare LLC
First Lien Term Loan,
7.57%, 06/15/12 ............................... 1,950,200
3,000,000 TLC Vision (USA) Corp.
Term Advance, 7.96%, 06/20/13 ................. 2,947,500
------------
102,587,498
------------

HEALTHCARE - MEDICAL PRODUCTS - 8.4%
6,251,369 American Medical Systems, Inc.
Term Loan, 7.58%, 07/20/12 .................... 6,110,714
CB Diagnostics AB
2,849,009 Facility B2, 7.48%, 03/09/15 .................. 2,742,171
8,433,296 Facility C2, 7.73%, 03/09/16 .................. 8,159,214
CCS Medical, Inc.
8,846,619 First Lien Term Loan,
8.57%, 09/30/12 (f) ........................... 8,741,522
44,896,156 First Lien Term Loan,
8.82%, 09/30/12 ............................... 44,362,790
4,750,000 Second Lien Term Loan,
13.57%, 03/30/13 .............................. 4,785,625
2,683,534 CompBenefits Corp.
Tranche B Term Loan,
8.57%, 04/12/12 ............................... 2,660,053
8,415,000 DSI Renal, Inc.
Term Facility, 7.63%, 03/31/13 ................ 8,015,288
2,977,500 Encore Medical IHC, Inc.
Term Loan, 7.87%, 11/04/13 .................... 2,917,950
Fenwal, Inc.
1,464,286 First Lien Delayed Draw Term Loan,
02/28/14 (d) (e) .............................. 1,358,125
15,603,750 Initial First Lien Term Loan,
7.61%, 02/28/14 ............................... 14,472,478
Golden Gate National Senior Care LLC
4,566,071 First Lien Term Loan,
8.07%, 03/14/11 ............................... 4,543,241
1,000,000 Second Lien Term Loan,
13.07%, 09/14/11 .............................. 990,000
Graceway Pharmaceuticals LLC
3,966,667 First Lien Term B Loan,
8.07%, 05/03/12 ............................... 3,783,208
4,500,000 Mezzanine Loan,
13.61%, 11/03/13 .............................. 3,735,000
4,987,500 Health Management Associates, Inc.
Term B Loan, 7.10%, 02/28/14 .................. 4,693,437
HealthSouth Corp.
7,428,477 Term Loan, 7.89%, 03/10/13 .................... 7,174,721
9,177,378 Term Loan, 7.86%, 03/10/13 .................... 8,863,879
IM US Holdings LLC
15,000,000 First Lien Term Loan,
7.34%, 06/26/14 (e) ........................... 14,475,000
1,000,000 Second Lien Term Loan,
11.50%, 06/26/15 .............................. 985,000
Nyco Holdings 3 ApS
9,250,000 Facility B2, 7.86%, 12/29/14 .................. 8,567,905
9,250,000 Facility C2, 8.36%, 12/29/15 .................. 8,660,313
Patheon, Inc.
1,197,000 Tranche PB Loan,
7.88%, 04/27/14 ............................... 1,161,090
798,000 Tranche USB Loan,
7.88%, 04/27/14 ............................... 774,060
3,950,000 Pharmaceutical Holdings Corp.
Term Loan, 8.76%, 01/30/12 .................... 3,831,500
2,498,368 Psychiatric Solutions, Inc.
Term Loan, 7.14%, 07/01/12 .................... 2,404,680

10 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

HEALTHCARE - MEDICAL PRODUCTS (CONTINUED)
Reliant Pharmaceuticals, Inc.
1,252,674 Delayed Draw Term Loan,
8.61%, 03/31/12 ............................... 1,196,304
4,732,325 Initial Term Loan,
8.61%, 03/31/12 ............................... 4,519,371
Sun Healthcare Group, Inc.
80,460 Delayed Draw Term Loan,
7.36%, 04/19/14 (d) ........................... 78,046
160,920 Synthetic Letter of Credit,
5.26%, 04/19/14 ............................... 156,092
712,644 Term Loan, 7.36%, 04/19/14 .................... 691,264
Talecris Biotherapeutics Holdings Corp.
18,412,487 First Lien Term Loan,
8.86%, 12/06/13 ............................... 18,239,962
7,500,000 Second Lien Term Loan,
11.86%, 12/08/14 .............................. 7,514,100
3,890,841 Triumph Healthcare Second Holdings LLC
First Lien Term Loan,
8.83%, 07/28/13 ............................... 3,793,570
8,717,576 Warner Chilcott Co., Inc.
Tranche B Acquisition Date
Term Loan, 7.36%, 01/18/12 .................... 8,461,454
2,421,909 Warner Chilcott Corp.
Tranche C Acquisition Date
Term Loan, 7.36%, 01/18/12 .................... 2,350,754
------------
225,969,881
------------

HOUSING - BUILDING MATERIALS - 4.0%
Atrium Cos., Inc.
8,870,574 Closing Date Term Facility,
8.61%, 05/31/12 ............................... 8,027,869
890,343 Term Loan B, 06/09/12 (e) ..................... 805,761
985,557 Contech Construction Products
Term Loan, 7.40%, 01/31/13 .................... 946,133
2,858,919 Custom Building Products, Inc.
First Lien Term Loan,
7.76%, 10/20/11 ............................... 2,687,384
Jacuzzi Brands Corp.
3,668,378 First Lien Term Loan B,
7.64%, 02/07/14 (f) ........................... 3,324,468
324,324 Pre-Funded Letter of Credit,
5.25%, 02/07/14 (f) ........................... 295,135
15,666,243 Nortek, Inc.
Term Loan, 7.61%, 08/27/11 .................... 15,020,010
1,485,092 PGT Industries, Inc.
First Lien Tranche A-2 Term Loan,
8.62%, 02/14/12 ............................... 1,451,678
3,433,420 Pivotal Group Promontory
First Lien Term Loan,
8.26%, 08/31/10 ............................... 3,235,998
Realogy Corp.
13,563,824 Initial Term B Loan,
8.36%, 10/10/13 (e) (f) ....................... 12,355,830
2,935,902 Synthetic Letter of Credit,
8.32%, 10/10/13 (e) (f) ....................... 2,674,431
2,977,500 Roofing Supply Group LLC
First Lien Term Loan,
9.35%, 08/31/13 ............................... 2,858,400
15,000,000 Spirit Finance Corp.
Term Loan, 8.36%, 08/01/13 .................... 13,725,000
1,000,000 Standard Pacific Corp.
Term Loan B, 7.02%, 05/05/13 .................. 920,000
4,903,669 Stile Acquisition Corp.
Canadian Term Loan,
7.36%, 04/06/13 ............................... 4,554,283

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
HOUSING - BUILDING MATERIALS (CONTINUED)
4,230,746 Stile U.S. Acquisition Corp.
U.S. Term Loan, 7.36%, 04/06/13 ............... 3,940,940
WAICCS Las Vegas 3 LLC
13,000,000 First Lien Term Loan,
8.83%, 07/30/08 ............................... 12,870,000
13,000,000 Second Lien Term Loan,
14.33%, 07/30/08 .............................. 12,870,000
5,000,000 Withers Preserve MB-I
B-Note, 9.82%, 12/14/07 ....................... 4,975,000
------------
107,538,320
------------

HOUSING - REAL ESTATE DEVELOPMENT - 8.9%
1,000,000 Crescent Resources LLC
Term Loan, 8.59%, 09/07/12 .................... 957,500
Ginn LA Conduit Lender, Inc.
13,355,517 First Lien Tranche A Credit-Linked
Deposit, 5.98%, 06/08/11 (e) .................. 11,686,078
30,239,211 First Lien Tranche B Term Loan,
8.86%, 06/08/11 (e) ........................... 26,459,310
6,000,000 Second Lien Term Loan,
06/08/12 (e) .................................. 4,350,000
2,143,382 Giraffe Intermediate, LLC
Mezzanine Note A-1,
7.07%, 08/09/10 ............................... 2,143,382
Kyle Acquisition Group LLC
1,142,857 Facility B, 9.13%, 07/20/09 ................... 1,062,857
857,143 Facility C, 9.13%, 07/20/11 ................... 797,143
Lake at Las Vegas Joint Venture
13,842,593 Synthetic Revolver,
15.46%, 06/20/12 .............................. 13,704,167
101,157,407 Term Loan, 15.46%, 06/20/12 ................... 92,559,028
4,929,950 LBREP/L-Suncal Master I LLC
First Lien Term Loan,
8.61%, 01/19/10 ............................... 4,634,153
11,992,500 LNR Property Corp.
Initial Tranche B Term Loan,
8.11%, 07/12/11 ............................... 11,602,744
3,283,813 Morningside Assisted Living
Senior Mortgage Loan,
8.40%, 10/12/08 ............................... 3,292,022
4,500,000 MPH Mezzanine II, LLC
Mezzanine 2B, 8.85%, 02/09/08 ................ 4,488,750
2,850,000 MPH Mezzanine III, LLC
Mezanine 3, 9.85%, 02/09/08 ................... 2,842,875
20,000,000 MPH Mezzanine IV, LLC
Mezzanine 4, 02/09/08 (e) ..................... 19,950,000
606,618 MPO Intermediate LLC
Mezzanine Note A-1,
7.07%, 08/09/10 ............................... 606,618
2,024,740 November 2005 Land Investors, LLC
First Lien Term Loan,
8.32%, 05/09/11 ............................... 1,872,885
Tamarack Resort LLC
3,196,689 Tranche A Credit-Linked Deposit,
5.26%, 05/19/11 ............................... 3,180,705
4,735,095 Tranche B Term Loan,
8.60%, 05/19/11 ............................... 4,379,963
17,098,651 Westgate Investments, LLC
Senior Secured Loan,
13.00%, 09/25/10 (g) .......................... 17,782,597
4,000,000 Weststate Land Partners LLC
First Lien Term Loan,
8.61%, 11/01/07 ............................... 3,940,000
Woodlands Commercial Properties
Co., LP
4,946,667 Bridge Loan, 8.11%, 02/28/08 .................. 4,952,850

See accompanying Notes to Financial Statements. | 11

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

HOUSING - REAL ESTATE DEVELOPMENT (CONTINUED)
Woodlands Commercial Properties
Co., LP (continued)
400,000 Secured Term Loan,
7.31%, 08/29/09 ............................... 400,500
1,600,000 Woodlands Land Development Co., LP
Secured Term Loan,
7.31%, 08/29/09 ............................... 1,602,000
------------
239,248,127
------------

INFORMATION TECHNOLOGY - 5.8%
9,750,390 Applied Systems, Inc.
Term Loan, 7.85%, 09/26/13 .................... 9,555,382
Aspect Software, Inc.
2,545,000 Second Lien Term Loan,
12.44%, 07/11/12 .............................. 2,405,025
1,985,000 Tranche A-1 Term Loan,
8.38%, 07/11/11 ............................... 1,875,825
1,875,000 Billing Services Group North
America, Inc.
U.S. Term Loan, 7.94%, 05/05/12 ............... 1,877,344
Caritor, Inc.
11,162,791 Closing Date Term Loan,
7.61%, 06/04/13 ............................... 10,213,953
837,209 Synthetic Letter of Credit Loan,
7.61%, 06/04/13 ............................... 766,047
1,975,075 Corel Corp.
Term Loan, 9.50%, 05/02/12 .................... 1,935,573
987,450 Deltek Systems, Inc.
Term Loan, 7.75%, 04/22/11 .................... 952,889
6,975,019 DTN, Inc.
Tranche C Term Loan,
8.37%, 03/10/13 ............................... 6,870,393
20,150,000 Freescale Semiconductor, Inc.
(Citibank LOC)
7.11%, 11/29/13 (e) ........................... 18,921,253
GXS Corp.
1,873,333 First Lien Term Loan,
10.35%, 07/29/11 .............................. 1,901,433
2,000,000 Second Lien Term Loan,
14.61%, 01/29/12 .............................. 1,990,000
Infor Enterprise Solutions
Holdings, Inc.
4,085,134 Delayed Draw Term Loan,
9.11%, 07/28/12 ............................... 3,840,026
7,829,841 Initial U.S. Term Facility,
9.11%, 07/28/12 ............................... 7,320,901
Intergraph Corp.
10,581,619 First Lien Term Loan,
7.45%, 05/29/14 (e) ........................... 10,204,702
2,000,000 Second Lien Term Loan,
11.51%, 11/28/14 .............................. 1,982,500
IPC Systems, Inc.
1,000,000 Second Lien Tranche B Term Loan,
10.61%, 06/01/15 .............................. 876,250
12,250,000 Tranche B-1 Term Loan,
7.61%, 06/02/14 ............................... 10,810,625
2,000,000 Metrologic Instruments, Inc.
Second Lien Add-on Term Loan,
11.59%, 04/10/15 .............................. 1,907,500
12,000,000 NameMedia, Inc.
Term Loan, 11.33%, 09/07/08 ................... 11,820,000
2,747,311 Open Text Corp.
Term Loan, 8.01%, 10/02/13 .................... 2,678,628

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY (CONTINUED)
2,000,000 Quantum Corp.
Term Loan, 8.82%, 07/14/14 .................... 1,970,000
2,683,282 Ridgefield Midco Sarl
Facility A2, 13.11%, 09/30/16 ................. 2,558,268
SCS Holdings II Inc.
(Sirius Computer Solutions)
3,672,308 First Lien Term Loan,
8.10%, 11/30/12 ............................... 3,598,862
2,000,000 Second Lien Term Loan,
11.35%, 05/30/13 .............................. 1,960,000
135,088 Secure Computing Corp.
Term Loan, 8.60%, 08/31/13 .................... 133,737
5,152,500 Serena Software, Inc.
Term Loan, 7.34%, 03/11/13 .................... 5,030,128
1,946,921 Sitel, LLC
U.S. Term Loan, 7.85%, 01/30/14 ............... 1,854,442
10,143,464 SunGard Data Systems, Inc.
Term Loan B, 7.36%, 02/28/13 .................. 9,867,765
7,231,875 Vangent, Inc.
Term Loan, 7.62%, 02/14/13 .................... 6,888,361
8,446,154 Verint Systems, Inc.
Term Loan, 8.11%, 05/27/14 .................... 8,171,654
997,500 Vertafore, Inc.
Term Loan, 8.01%, 01/31/12 .................... 957,600
X-Rite, Inc.
879,015 First Lien Initial Term Loan,
7.62%, 06/29/12 ............................... 861,435
1,000,000 Second Lien Term Loan,
10.35%, 06/28/13 .............................. 980,000
------------
155,538,501
------------

MANUFACTURING - 1.7%
1,985,000 Acument Global Technologies, Inc.
Term Loan, 8.85%, 08/11/13 .................... 1,965,150
888,889 CI Acquisition, Inc.
Term Loan B, 7.39%, 10/17/12 .................. 871,111
1,490,921 Coinmach Corp.
Tranche B-1 Term Loan,
7.97%, 12/19/12 ............................... 1,464,830
Doncasters Group Ltd.
2,660,953 Facility B2, 7.82%, 04/03/15 .................. 2,574,472
2,660,953 Facility C2, 8.32%, 04/03/16 .................. 2,587,777
Elster Group GmbH
868,082 USD Term Loan B1,
7.38%, 08/01/13 ............................... 837,699
868,082 USD Term Loan C1,
7.88%, 08/01/14 ............................... 842,039
FCI International S.A.S.
509,496 Term Loan B2A, 7.76%, 03/10/14 ................ 494,634
509,496 Tranche B3C, 7.76%, 11/03/13 .................. 494,634
FCI SA
490,504 Term Loan B2B, 7.76%, 03/10/14 ................ 476,196
490,503 Tranche B4B, 7.76%, 11/03/13 .................. 476,863
FCI USA, Inc.
1,000,000 Facility B1, 7.76%, 03/10/14 .................. 970,830
1,000,000 Tranche B5B, 7.76%, 11/03/13 .................. 970,830
2,382,353 Foamex L.P.
First Lien Term Loan,
7.76%, 02/12/13 ............................... 2,197,721
2,992,500 FR Brand Acquisition Corp.
First Lien Term Loan
B, 7.63%, 02/07/14 ............................ 2,797,988
1,250,000 Generac Acquisition Corp.
First Lien Term Loan,
7.86%, 11/10/13 ............................... 1,114,575

12 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

MANUFACTURING (CONTINUED)
4,950,000 Global Petroleum Inc.
Term Loan, 9.90%, 09/18/13 .................... 4,801,500
5,000,000 Jason, Inc.
Term Loan, 8.03%, 04/30/10 .................... 4,800,000
Matinvest 2 SAS / Butterfly Wendal
US, Inc.
2,250,000 B-2 Facility, 7.83%, 06/22/14 ................. 2,131,875
2,250,000 C-2 Facility, 8.14%, 06/22/15 ................. 2,143,125
1,888,113 Mueller Water Products, Inc.
Term Loan B, 7.19%, 05/26/14 .................. 1,846,235
Neggio Holding 4 GMBH
500,000 US Term Loan B, 7.58%, 12/23/14 ............... 476,875
500,000 USD Term Loan C, 7.83%, 12/23/15 .............. 479,375
5,000,000 Polypore, Inc.
US Term Loan, 7.58%, 07/03/14 ................. 4,781,250
3,009,035 United Central Industrial Supply Co., LLC
Term Loan, 8.09%, 03/31/12 .................... 2,858,584
------------
45,456,168
------------

METALS/MINERALS - OTHER METALS/MINERALS - 1.3%
3,000,000 Algoma Steel, Inc.
Term Loan, 7.86%, 06/20/13 .................... 2,872,500
1,488,750 CST Industries, Inc.
Term Loan, 8.11%, 08/09/13 .................... 1,419,866
1,657,895 Euramax International Holdings B.V.
Second Lien European Loan,
13.36%, 06/29/13 .............................. 1,541,842
Euramax International, Inc.
4,094,017 Domestic Term Loan,
8.38%, 06/29/12 ............................... 3,773,292
3,342,105 Second Lien Domestic Term Loan,
13.36%, 06/29/13 .............................. 3,058,026
3,000,000 JW Aluminum Co.
Second Lien Term Loan,
11.78%, 12/16/13 .............................. 3,030,000
5,000,000 Kaiser Aluminum & Fabricated
Products, LLC Term Loan,
9.58%, 07/06/11 ............................... 4,975,000
9,666,564 Murray Energy Corp.
Tranche B Term Loan,
8.54%, 01/28/10 ............................... 9,618,231
763,307 Oglebay Norton Co.
Tranche B Term Loan,
7.61%, 07/31/12 ............................... 748,041
2,925,463 Universal Buildings Products, Inc.
Term Loan, 8.63%, 04/28/12 .................... 2,910,836
------------
33,947,634
------------

METALS/MINERALS - STEEL - 0.2%
Almatis Holdings 9 B.V.
659,465 Term Loan B2, 7.70%, 04/27/15 ................. 634,735
1,340,535 Term Loan B4, 7.70%, 04/27/15 ................. 1,290,265
659,465 Term Loan C2, 8.08%, 04/26/16 ................. 638,863
1,340,535 Term Loan C4, 8.08%, 04/26/16 ................. 1,298,657
Standard Steel, LLC
166,667 Delayed Draw Term Loan,
8.04%, 07/02/12 ............................... 160,833
825,000 Initial Term Loan, 7.86%, 07/02/12 ............ 796,125
------------
4,819,478
------------

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
RETAIL - 6.3%
Blockbuster Entertainment Corp.
1,168,517 Tranche A Term Loan,
9.37%, 08/20/09 ............................... 1,133,952
25,695,905 Tranche B Term Loan,
9.45%, 08/20/11 ............................... 24,981,302
42,935,942 Burlington Coat Factory
Warehouse Corp.
Term Loan, 7.76%, 05/28/13 .................... 40,386,406
10,000,000 Dollar General Corp.
Tranche B-1 Term Loan,
8.07%, 07/07/14 ............................... 9,315,600
2,925,469 Dollarama Group LP
Term Loan B, 7.11%, 11/18/11 .................. 2,837,705
3,990,000 Eddie Bauer, Inc.
Term Loan, 8.87%, 04/01/14 .................... 3,890,250
3,491,250 General Nutrition Centers, Inc.
Term Loan, 7.61%, 09/16/13 .................... 3,290,503
35,276,033 Home Interiors & Gifts, Inc.
Initial Term Loan,
10.36%, 03/31/11 .............................. 21,342,000
886,909 MAPCO Express, Inc./MAPCO
Family Centers, Inc.
Term Loan, 8.11%, 04/28/11 .................... 869,170
15,959,799 Michaels Stores, Inc.
Replacement Loan,
7.63%, 10/31/13 ............................... 15,088,713
1,995,000 Mother's Work, Inc.
Term Loan, 7.86%, 03/13/13 .................... 1,855,350
Movie Gallery, Inc.
1,380,000 First Lien Synthetic Letter of Credit,
10.86%, 03/08/12 (e) .......................... 1,160,925
33,066,000 First Lien Term Loan,
10.86%, 03/08/12 (e) .......................... 27,816,773
5,462,481 Sally Holdings, LLC
Term B Loan, 7.86%, 11/18/13 .................. 5,312,263
1,485,000 Sports Authority, Inc., The
Term Loan B, 7.60%, 05/03/13 .................. 1,395,900
1,990,000 Totes Isotoner Corp.
First Lien Term Loan,
7.84%, 01/31/13 ............................... 1,930,300
4,000,000 Toys "R" Us
Tranche B Term Loan,
9.76%, 07/19/12 ............................... 3,973,000
4,000,000 TRU 2005 Holding Co. I, Ltd.
Term Loan, 8.32%, 10/09/10 .................... 3,940,000
------------
170,520,112
------------

SERVICE - ENVIRONMENTAL SERVICES - 0.5%
1,477,855 Duratek, Inc.
Term Loan, 7.66%, 06/07/13 .................... 1,420,588
EnergySolutions, LLC
157,233 Synthetic Letter of Credit,
7.84%, 06/07/13 ............................... 151,140
3,082,946 Term Loan, 7.66%, 06/07/13 .................... 2,963,481
Safety-Kleen Systems, Inc.
1,220,339 Synthetic Letter of Credit,
7.88%, 08/02/13 ............................... 1,195,932
4,642,881 Term Loan B, 7.88%, 08/02/13 .................. 4,550,024
3,990,000 Valleycrest Companies LLC
Term Loan, 7.35%, 03/12/14 .................... 3,910,200
------------
14,191,365
------------

See accompanying Notes to Financial Statements. | 13

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

SERVICE - OTHER SERVICES - 3.2%
4,000,000 Audio Visual Services Group, Inc.
Second Lien Loan,
10.86%, 08/28/14 .............................. 3,840,000
4,000,000 BearingPoint, Inc.
Letter of Credit Loan,
9.29%, 05/30/12 ............................... 3,860,000
1,900,000 Cydcor, Inc.
First Lien Tranche B Term Loan,
8.61%, 02/05/13 ............................... 1,890,500
9,949,749 Education Management LLC
Tranche C Term Loan,
7.13%, 06/01/13 ............................... 9,515,741
6,902,848 NES Rentals Holdings, Inc.
Second Lien Permanent Term Loan,
12.13%, 07/20/13 .............................. 6,786,328
9,749,049 Rental Service Corp.
Second Lien Initial Term Loan,
8.86%, 11/30/13 ............................... 9,651,558
48,931,177 Sabre, Inc.
Initial Term Loan, 7.61%, 09/30/14 ............ 45,505,995
766,871 Survey Sampling International LLC
Term Loan, 7.86%, 05/06/11 .................... 751,534
United Rentals, Inc.
1,357,315 Initial Term Loan, 7.32%, 02/14/11 ............ 1,331,865
2,710,600 Tranche B Credit-Linked Deposit,
5.32%, 02/14/11 ............................... 2,676,718
------------
85,810,239
------------

TELECOMMUNICATIONS - 7.7%
11,500,000 Discovery Communications Holding LLC
Term B Loan, 7.36%, 05/14/14 .................. 11,198,125
Global Tel Link Corp.
260,870 Acquisition Synthetic Deposit,
6.36%, 02/13/08 ............................... 254,348
391,304 Acquisition Term Loan,
10.75%, 02/14/13 .............................. 381,522
65,217 Synthetic Deposit,
5.25%, 02/14/08 ............................... 63,587
770,870 Term Facility, 8.85%, 02/13/08 ................ 751,598
36,750,000 Gray Television, Inc.
Term Loan B, 6.86%, 12/31/14 .................. 34,728,750
9,925,000 Intelsat Corp.
Tranche B-2 Term Loan,
7.35%, 01/03/14 ............................... 9,637,175
53,250,000 Level 3 Financing, Inc.
Term Loan, 7.61%, 03/13/14 .................... 50,986,875
1,464,844 Maritime Telecommunications
Network, Inc.
First Lien Term Loan,
8.11%, 05/11/12 ............................... 1,435,547
6,573,658 PaeTec Holding Corp.
Replacement Term Loan,
7.82%, 02/28/13 (e) ........................... 6,465,234
2,000,000 SkillSoft Corp.
Term Loan, 8.11%, 05/14/13 .................... 1,970,000
8,424,240 Sorenson Communications, Inc.
Tranche C Term Loan,
7.86%, 08/16/13 ............................... 8,171,513

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (CONTINUED)
3,712,500 Stratos Global Corp./Stratos Funding LP
Term B Facility, 8.11%, 02/13/12 .............. 3,642,891
3,466,101 Time Warner Telecom Holdings Inc.
Term Loan B, 7.36%, 01/07/13 .................. 3,405,444
181,208 Univision Communications Inc
Delayed Draw Term Loan
08/15/14 (d) (e) .............................. 168,185
Univision Communications, Inc.
72,348,993 Initial Term Loan, 7.61%, 09/29/14 (e) ........ 67,149,271
8,000,000 Second Lien Loan, 7.82%, 02/12/09 ............. 7,920,000
------------
208,330,065
------------
TELECOMMUNICATIONS - CLEC - 0.3%
7,875,000 Consolidated Communications, Inc.
Term D Loan, 7.09%, 10/14/11 .................. 7,638,750
------------

TELECOMMUNICATIONS - DATA/INTERNET - 0.1%
2,000,000 Pine Tree Holdings/Country Road
Communications, Inc.
Second Lien Term Loan,
13.11%, 07/15/13 .............................. 1,985,000
------------

TELECOMMUNICATIONS - FIBER/LONG DISTANCE - 0.6%
6,500,000 FairPoint Communications, Inc.
Replacement B Term Loan,
7.13%, 02/08/12 ............................... 6,329,375
4,000,000 Hawaiian Telcom Communications, Inc.
Tranche C Term Loan,
7.61%, 06/02/14 ............................... 3,810,000
6,500,000 Qwest Corp.
Tranche B Term Loan,
6.95%, 06/30/10 (g) ........................... 6,556,875
------------
16,696,250
------------

TRANSPORTATION - AUTO - 6.1%
31,161 Carey International, Inc.
Second Lien Term Loan,
16.53%, 05/10/12 .............................. 31,317
309,539 Cooper-Standard Automotive
Canada Ltd.
Tranche B Term Loan,
7.88%, 12/23/11 ............................... 302,835
269,394 Cooper-Standard Automotive, Inc.
Term Loan D, 7.88%, 12/23/11 .................. 263,559
27,000,000 Dana Corp.
Term Loan, 7.98%, 04/13/08 (e) ................ 26,679,510
Delphi Corp.
6,000,000 Tranche B Term Loan,
7.63%, 12/31/07 ............................... 5,904,960
39,107,500 Tranche C Term Loan,
8.13%, 12/31/07 ............................... 38,618,656
6,000,000 Federal-Mogul Corp.
DIP Term Loan, 7.25%, 12/31/07 ................ 5,951,280
52,735,000 Ford Motor Co.
Term Loan, 8.36%, 12/16/13 .................... 49,620,471
12,437,500 General Motors Corp.
Secured Term Loan,
7.74%, 11/29/13 ............................... 11,927,563
Hertz Corp.
444,444 Letter of Credit, 5.36%, 12/21/12 ............. 432,849
2,476,460 Tranche B Term Loan,
7.10%, 12/21/12 ............................... 2,413,211

14 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

TRANSPORTATION - AUTO (CONTINUED)
Key Safety Systems, Inc.
17,886,438 First Lien Term Loan,
7.68%, 03/08/14 (e) .......................... 16,992,116
2,000,000 Second Lien Term Loan,
10.54%, 09/08/14 ............................. 1,935,000
3,792,946 Tire Rack Holdings, Inc.
Tranche B Term Loan,
7.11%, 06/24/12 .............................. 3,736,052
493,182 United Components, Inc.
Tranche D Term Loan,
7.38%, 06/30/12 .............................. 480,852
-------------
165,290,231
-------------

TRANSPORTATION - LAND - 0.5%
972,273 JHT Holdings, Inc.
Term Loan B, 8.62%, 12/21/12 ................. 918,798
2,537,454 Ozburn-Hessey Holding Co., LLC
Term Loan, 8.63%, 08/10/12 ................... 2,445,471
Quality Distribution, Inc.
2,427,481 Synthetic Letters of Credit,
5.25%, 11/13/09 .............................. 2,415,343
5,562,141 Term Loan, 8.42%, 11/13/09 (f) ............... 5,534,331
856,521 Term Loan, 8.32%, 11/13/09 ................... 852,238
3,125,967 SIRVA Worldwide, Inc.
Tranche B Term Loan,
12.61%, 12/01/10 ............................. 2,403,869
-------------
14,570,050
-------------

UTILITIES - 4.5%
2,000,000 ANP Funding I, LLC
Tranche A Term Loan,
8.86%, 07/29/10 .............................. 1,998,760
4,500,000 Astoria Generating Co. Acquisitions LLC
Second Lien Term Loan C,
9.11%, 08/23/13 .............................. 4,429,125
Boston Generating LLC
579,310 First Lien Revolving Credit,
5.23%, 12/20/13 .............................. 560,239
2,068,965 First Lien Synthetic Letter of Credit
Facility, 5.24%, 12/20/13 .................... 2,000,855
9,304,966 First Lien Term Loan,
7.60%, 12/20/13 .............................. 8,998,646
2,000,000 Mezzanine, 12.35%, 12/21/16 .................. 2,075,000
2,000,000 Second Lien Term Loan,
9.61%, 06/20/14 .............................. 1,996,680
Coleto Creek Power, LP
8,428,803 First Lien Term Loan,
8.11%, 06/28/13 .............................. 8,007,363
5,940,000 Second Lien Term Loan,
9.35%, 06/28/13 .............................. 5,702,400
512,291 Synthetic Letter of Credit,
6.33%, 06/28/13 .............................. 486,677
Covanta Energy Corp.
329,897 Funded Letter of Credit,
5.24%, 02/09/14 .............................. 327,835
668,428 Term Loan, 6.88%, 02/09/14 ................... 652,974
3,891,020 Entegra TC LLC
Third Lien Term Loan,
11.36%, 04/19/14 ............................. 3,813,199
3,960,000 GBGH LLC
First Lien Term Loan,
10.76%, 08/07/13 ............................. 3,969,900

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------
UTILITIES (CONTINUED)
448,718 Kelson Energy Inc
First Lien Term Loan, 03/08/14 (e) ........... 406,090
Longview Power, LLC
60,000 Delayed Draw Loan,
7.81%, 02/28/14 .............................. 56,513
133,333 Synthetic Line of Credit,
7.63%, 02/28/14 .............................. 125,584
2,000,000 Synthetic Revolver,
7.63%, 02/28/13 .............................. 1,821,200
400,000 Term B Loan, 7.63%, 02/28/14 ................. 376,752
Mach Gen, LLC
5,410,313 First Lien Term B Loan,
7.50%, 02/22/14 .............................. 5,157,813
562,500 Synthetic Letter of Credit,
7.36%, 02/22/13 .............................. 540,000
2,412,837 Mirant North America, LLC
Term Loan, 7.42%, 01/03/13 ................... 2,346,484
NATG Holdings LLC
8,316 Credit-Linked Certificate of Deposit,
6.08%, 01/23/09 (c) .......................... 7,235
126,579 Term Loan A, 8.75%, 01/23/09 (c) ............. 22,468
92,678 Term Loan B-1,
12.25%, 01/23/10 (c) ......................... 16,219
NE Energy, Inc.
4,397,186 First Lien Term Loan B,
7.86%, 11/01/13 .............................. 4,309,242
1,000,000 Second Lien Term Loan,
9.88%, 05/01/14 .............................. 990,000
528,455 Synthetic Letter of Credit,
7.85%, 11/01/13 .............................. 517,886
NRG Energy, Inc.
6,735,891 Credit-Linked Deposit,
7.07%, 02/01/13 (e) .......................... 6,424,356
16,225,216 Term Loan, 06/08/14 (d) (e) .................. 15,623,585
Ridgefield Acquisition Sarl
4,671,923 Facility B3, 7.61%, 03/30/15 ................. 4,525,925
4,671,923 Facility C3, 7.86%, 03/28/16 ................. 4,549,284
4,426,190 Riverside Energy Center LLC
Term Loan, 9.82%, 06/24/11 ................... 4,415,125
Rocky Mountain Energy Center LLC
361,073 Credit-Linked Certificate of Deposit,
5.22%, 06/24/11 .............................. 360,171
2,718,298 Term Loan, 9.57%, 06/24/11 ................... 2,711,502
TECO Panda - Union Power Partners, L.P.
353,774 Tranche A Term Loan, 06/01/12 (e) ............ 641,805
339,623 Tranche B Term Loan, 06/01/20 (e) ............ 616,133
TECO Panda Generating Co. -
Gila River Power L.P.
601,415 Tranche A Term Loan, 06/01/12 (e) ............ 1,091,069
580,189 Tranche B Term Loan, 06/01/20 (e) ............ 1,052,561
TPF Generation Holdings LLC
11,594,549 First Lien Term Loan,
7.36%, 12/15/13 (e) .......................... 11,116,273
4,000,000 Second Lien Term Loan,
9.61%, 12/15/14 .............................. 3,845,000
1,853,177 Synthetic Letter of Credit,
7.36%, 12/15/13 (e) .......................... 1,776,734
686,648 Synthetic Revolver,
7.36%, 12/15/11 (e) .......................... 658,324
-------------
121,120,986
-------------

WIRELESS - CELLULAR/PCS - 4.4%
3,562,534 Centennial Cellular Operating Co.
Term Loan, 7.36%, 02/09/11 ................... 3,491,284
42,010,315 Cricket Communications, Inc.
Term B Loan, 7.36%, 06/16/13 ................. 40,907,544

See accompanying Notes to Financial Statements. | 15

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

WIRELESS - CELLULAR/PCS (CONTINUED)
15,678,302 Insight Midwest Holdings, LLC
Term Loan B, 7.36%, 04/06/14 ................. 15,309,862
MetroPCS Wireless, Inc.
52,425,365 Tranche B Term Loan,
7.63%, 11/04/13 (e) .......................... 51,136,749
6,977,412 Tranche B Term Loan,
7.62%, 11/04/13 .............................. 6,805,907
-------------
117,651,346
-------------

WIRELESS - WIRELESS INFRASTRUCTURE - 0.1%
1,000,000 CellNet Data Systems, Inc.
Second Lien Term Loan,
9.62%, 10/22/11 .............................. 975,000
1,965,000 DPI Holdings, LLC
Term Loan, 7.32%, 09/30/10 ................... 1,935,525
-------------
2,910,525
-------------

Total Senior Loans
(Cost $3,308,229,676) ..................... 3,163,525,924
-------------

PRINCIPAL AMOUNT
- ----------------

FOREIGN DENOMINATED SENIOR LOANS (a) - 16.6%

AUSTRALIA- 2.8%
AUD
PBL Media Finance Pty., Ltd.
5,500,000 Term Loan A, 8.78%, 02/07/13 ................. 4,282,836
21,000,000 Term Loan B, 9.03%, 02/07/13 (e) ............. 16,657,436
30,000,000 Sacher Funding Ltd.
Euro Term Loan, 9.96%, 05/14/14 .............. 39,670,638
19,702,381 Seven Media Group
Facility A Term Loan,
8.87%, 12/22/13 (e) .......................... 15,467,861
-------------
76,078,771
-------------

DENMARK - 0.5%
EUR
Nordic Telephone Co. Holdings APS
2,265,808 Facility B2, 6.10%, 04/10/14 ................. 3,011,646
2,731,611 Facility C2, 6.35%, 04/10/15 ................. 3,648,094
5,000,000 Nyco Holdings 3 ApS
Second Lien, Facility D
9.16%, 06/29/16 .............................. 6,381,724
-------------
13,041,464
-------------

FRANCE - 1.7%
GBP
Ristretto Investissements SAS
1,050,000 Tranche E-B2 GBP,
8.43%, 09/30/13 (e) .......................... 2,062,322
1,050,000 Tranche E-C2 GBP,
8.80%, 09/30/14 (e) .......................... 2,072,911
EUR
Ypso Holding SA
221,431 Capex Term Loan,
6.23%, 12/15/12 (d) .......................... 286,740
7,571 Eur A (Acq) 1 Facility,
6.23%, 06/06/13 .............................. 9,857
1,790 Eur A (Acq) 2 Facility,
6.23%, 06/06/13 .............................. 2,318

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE ($)
- --------------------------------------------------------------------------------
FRANCE (CONTINUED)
EUR
Ypso Holding SA (continued)
12,659 Eur A Recap 1 Facility,
6.23%, 06/06/13 .............................. 16,305
480 Eur A Recap 2 Facility,
6.23%, 06/06/13 .............................. 618
3,466,793 Eur B Acq 1 Facility,
6.61%, 06/15/14 .............................. 4,526,577
5,656,346 Eur B Acq 2 Facility,
6.61%, 06/15/14 .............................. 7,385,467
8,983,252 Eur B Recap 1 Facility,
6.61%, 06/15/14 .............................. 11,654,935
4,690,407 Eur C Acq, 6.86%, 12/31/15 ................... 6,163,121
8,809,593 Eur C Recap, 6.86%, 12/31/15 ................. 11,575,666
-------------
45,756,837
-------------

GERMANY - 1.6%
EUR
CBR Fashion GMBH
4,500,000 Second Lien Facility,
8.18%, 10/19/16 .............................. 5,904,586
1,000,000 Term B Facility, 6.31%, 04/17/15 ............. 1,305,314
1,000,000 Term C Facility, 6.56%, 04/17/15 ............. 1,312,130
6,000,000 Iesy Hessen/ISH NRW GMBH/
Arena Sport
Euro Senior Secured Term Loan,
7.34%, 10/15/11 .............................. 7,893,230
Kabel Baden Wurttemburg GMBH
& CO. KG
2,500,000 Second Lien Facility,
9.12%, 12/09/15 .............................. 3,308,204
1,826,284 Term B Facility, 6.62%, 06/09/14 ............. 2,401,775
1,826,284 Term C Facility, 7.12%, 06/09/15 ............. 2,409,393
Lavena Holding 3 GMBH
7,500,000 Facility D, 09/02/16 (e) ..................... 9,355,318
7,000,000 Mezzanine Facility, 03/02/17 (e) ............. 9,017,913
879,378 Schieder Mobel Holding, GMBH
Delayed Draw Term Loan,
13.03%, 07/20/08 (d) (g) ..................... 869,140
-------------
43,777,003
-------------

IRELAND - 0.1%
EUR
1,000,000 BCM Ireland Holdings Ltd.
Facility D, 8.28%, 03/31/16 .................. 1,319,233
-------------

ITALY - 1.0%
EUR
4,456 Pirelli Cables
Euro Term Loan C2,
6.85%, 08/04/12 .............................. 6,147
Wind Telecommunicatione S.p.A.
6,843,118 A1 Term Loan Facility,
5.96%, 05/26/12 .............................. 9,116,103
6,750,000 B1 Term Loan Facility,
6.51%, 05/26/13 .............................. 8,971,903
6,750,000 C1 Term Loan Facility,
7.26%, 05/26/14 .............................. 9,017,913
-------------
27,112,066
-------------

16 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

NETHERLANDS - 1.3%
EUR
Amsterdamse Beheer- En
Consultingmaatschappij B.V.
4,388,443 Casema B1 Term Loan,
6.61%, 09/12/14 .............................. 5,840,468
Amsterdamse Beheer- En
Consultingmaatschappij B.V. (continued)
2,279,577 Casema B2 Term Loan,
6.61%, 09/12/14 .............................. 3,061,024
6,668,019 Casema C Term Loan,
7.11%, 09/12/15 .............................. 8,919,751
1,500,000 Casema D Term Loan Second Lien,
8.36%, 03/12/16 .............................. 2,007,171
5,150,162 Kabelcom B Term Loan,
6.61%, 09/12/14 .............................. 6,915,655
5,150,162 Kabelcom C Term Loan,
7.11%, 09/12/15 .............................. 6,915,655
1,000,000 Kabelcom D Term Loan,
8.36%, 03/12/16 .............................. 1,338,114
-------------
34,997,838
-------------

SPAIN - 0.3%
EUR
Gasmedi 2000 S.A. / Nattai, S.L.U.
1,666,667 Tranche B Term Loan,
6.65%, 08/11/14 .............................. 2,215,285
1,666,667 Tranche C Term Loan,
7.15%, 08/11/15 .............................. 2,215,285
1,666,667 Tranche E Second Lien Term Loan,
8.90%, 02/11/16 .............................. 2,226,645
2,000,000 Maxi PIX SARL
PIK Loan, 11.85%, 05/31/16 ................... 2,660,032
-------------
9,317,247
-------------

SWEDEN - 0.5%
EUR
3,500,000 B-FLY 2 AB
Euro Term Loan B2
6.41%, 12/30/15 .............................. 4,620,273
SEK
Nordic Cable Acquisition
15,342,466 Facility A Com Hem,
5.61%, 01/31/13 .............................. 2,093,820
15,333,333 Facility B2 Com Hem Comm,
5.88%, 01/31/14 .............................. 2,103,704
9,109,589 Facility B2 Com Hem Comm,
6.11%, 01/31/14 .............................. 1,249,818
14,666,667 Facility C2 Com Hem,
6.24%, 01/31/15 .............................. 2,017,562
5,513,699 Facility C2 Com Hem,
6.24%, 01/31/15 .............................. 758,470
5,000,000 Facility D Com Hem,
7.75%, 07/31/15 .............................. 695,065
6,750,000 Facility D Com Hem,
7.99%, 07/31/15 .............................. 938,337
-------------
14,477,049
-------------

UNITED KINGDOM - 5.2%
GBP
3,000,000 AA Acquisitions Co., Ltd.
Additional Term Loan B,
8.18%, 03/12/15 .............................. 5,986,928

- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE ($)
- --------------------------------------------------------------------------------
UNITED KINGDOM (CONTINUED)
GBP
4,000,000 Airport Development & Investment Ltd.
Second Lien Facility,
10.03%, 04/07/11 ............................. 7,851,381
All3Media Intermediate Ltd.
1,180,825 Facility B, 8.20%, 08/31/14 .................. 2,244,846
4,281,271 Facility C, 8.70%, 08/31/15 .................. 8,139,050
3,000,000 Facility D, 10.57%, 02/29/16 ................. 5,824,272
3,665,449 Mezzanine Loan, 15.65%, 08/31/16 ............. 7,596,764
992,462 Ansco UK Finance CO. Ltd.
Tranche B Term Loan,
8.02%, 03/08/12 .............................. 1,916,781
De Facto 1121 Limited
1,250,000 Facility B Loan, 9.03%, 06/30/15 ............. 2,494,856
1,250,000 Facility C Loan, 9.53%, 06/30/16 ............. 2,494,856
1,750,000 Facility D Loan, 11.03%, 12/31/16 ............ 3,510,448
Forgings International Ltd.
446,636 Term B1 (GBP), 8.09%, 09/11/14 ............... 855,849
478,674 Term C1 (GBP), 8.34%, 09/11/15 ............... 922,069
Highland Acquisitions Ltd.
1,000,000 Facility B, 9.41%, 12/31/14 .................. 1,921,254
1,000,000 Facility C, 9.91%, 12/31/15 .................. 1,931,339
1,040,714 Mezzanine Facility,
16.66%, 12/31/16 ............................. 2,020,468
Mobileserv Ltd.
1,415,563 Facility B Loan, 8.52%, 09/22/14 ............. 2,694,015
1,084,437 Facility C Loan, 9.08%, 09/22/15 ............. 2,068,058
3,125,000 Osprey Acquisitions Ltd.
Term Tranche 2, 8.21%, 02/18/12 .............. 6,177,259
Peacock Group
2,250,000 Facility B, 8.59%, 10/30/13 .................. 4,390,896
2,250,000 Facility C, 9.09%, 10/30/14 .................. 4,413,588
Safety-Kleen JPMP SK Holdings Ltd.
EUR
1,817,400 Euro Term Loan C,
7.16%, 12/20/14 .............................. 2,415,635
GBP
1,350,000 GBP Term Loan B1,
7.93%, 12/14/12 .............................. 2,597,096
1,378,368 SunGard UK Holdings, Ltd.
U.K. Term Loan B,
8.00%, 02/12/14 .............................. 2,696,849
Towergate Partnership Ltd.
3,125,000 Facility A, 8.43%, 10/31/12 .................. 6,161,500
3,125,000 Facility B, 8.93%, 10/31/13 .................. 6,240,292
Trinitybrook PLC
2,500,000 Term Loan B1, 9.02%, 07/31/13 ................ 4,939,084
2,500,000 Term Loan C1, 9.52%, 07/31/14 ................ 4,952,598
United Biscuits Holdco Ltd.
12,383,459 Facility B1, 8.69%, 12/16/14 ................. 24,073,517
3,500,000 Second Lien Facility,
10.19%, 06/16/16 ............................. 6,816,164
Virgin Media Investment Holdings Ltd.
559,395 A Facility, 7.77%, 07/10/11 .................. 1,071,919
1,750,000 C Facility, 8.48%, 03/03/13 .................. 3,406,317
-------------
140,825,948
-------------

UNITED STATES - 1.6%
GBP
1,243,750 Aramark Corp.
U.K. Term Loan,
7.71%, 01/26/14 .............................. 2,408,374
3,332,813 Champion Home Builders Co.
Term Loan, 9.25%, 10/31/12 ................... 6,453,596

See accompanying Notes to Financial Statements. | 17

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

UNITED STATES (CONTINUED)
GBP
Doncasters Group Ltd.
596,910 Facility B1, 8.38%, 04/03/15 ................. 1,164,876
EUR
431,484 Facility B3, 6.59%, 04/03/15 ................. 569,104
GBP
596,910 Facility C1, 8.88%, 04/03/16 ................. 1,170,896
EUR
431,484 Facility C3 7.09%, 04/03/16 .................. 572,045
Hayes Lemmerz International, Inc.
518,182 Synthetic Letter of Credit,
6.78%, 05/30/14 .............................. 686,986
8,981,818 Term Loan Facility,
6.87%, 05/30/14 .............................. 11,907,760
GBP
2,250,000 IPC Systems, Inc.
Tranche B-2 Term Loan,
8.27%, 06/02/14 .............................. 4,561,086
GBP
2,895,408 PlayPower, Inc.
Tranche B Sterling Term Loan,
8.71%, 06/30/12 ........................... 5,723,419
EUR
2,517,795 RD German Holdings GMBH
Euro Term Loan, EUR,
6.01%, 03/02/14 .............................. 3,200,703
GBP
1,689,475 TME UK Acquisition Co. Ltd.
U.K. Term Loan GBP,
9.62%, 04/26/14 .............................. 3,399,259
-------------
41,818,104
-------------

Total Foreign Denominated
Senior Loans
(Cost $447,160,918) ....................... 448,521,560
-------------

PRINCIPAL AMOUNT ($)
- --------------------

CORPORATE NOTES AND BONDS - 0.1%

HOUSING - REAL ESTATE DEVELOPMENT - 0.0%
705,065 TOUSA, Inc.
14.75%, 07/31/15 (b) (g) ..................... 352,533
-------------

TELECOMMUNICATIONS - 0.1%
1,517,051 American Messaging Services, Inc.
Senior Secured Note,
11.63%, 09/03/08 ............................. 1,515,154
-------------

Total Corporate Notes and Bonds
(Cost $2,233,679) ......................... 1,867,687
-------------

CLAIMS (h) - 0.2%

AEROSPACE - AIRLINES - 0.2%
Delta Air Lines, Inc.
310,290 Comair ALPA Claim, 12/31/10 .................. 159,799
879,660 Delta ALPA Claim, 12/31/10 ................... 393,648
Northwest Airlines, Inc.
5,400,000 ALPA Trade Claim, 08/21/13 ................... 580,500
2,914,734 Bell Atlantic Trade Claim, 08/21/13 .......... 276,900
3,000,000 Citibank/Airbus Trade Claim,
08/21/13 ..................................... 285,000
2,500,000 EDC Trade Claims, 08/21/13 ................... 268,750

AEROSPACE - AIRLINES (CONTINUED)
9,587,700 Flight Attendant Claim, 05/17/14 ............. 910,832
2,250,000 GE Trade Claim, 08/21/13 ..................... 213,750
2,500,000 GE Trade Claim, 08/21/13 (e) ................. 268,750
1,000,000 GE Trade Claim, 08/21/13 ..................... 107,500
5,690,250 IAM Trade Claim, 08/21/13 .................... 611,702
6,250,000 Mesaba Trade Claim, 08/15/13 ................. 671,875
6,322,050 Retiree Claim, 08/21/13 ...................... 679,620
-------------
5,428,626
-------------

UTILITIES - 0.0%
18,500,000 Mirant Corp. .................................... 971,250
-------------

Total Claims
(Cost $11,922,063) ........................ 6,399,876
-------------

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

COMMON STOCKS (i) - 2.1%

AEROSPACE - AIRLINES - 0.8%
65,959 Delta Air Lines, Inc. ........................... 1,113,388
1,062,380 Northwest Airlines Corp. ........................ 19,739,020
-------------
20,852,408
-------------

UTILITIES - 1.1%
102,146 Entegra TC LLC .................................. 3,387,825
686,885 Mirant Corp. .................................... 26,767,898
-------------
30,155,723
-------------

WIRELESS - CELLULAR/PCS - 0.2%
73,363 Leap Wireless International, Inc. ............... 5,318,818
-------------

Total Common Stocks
(Cost $43,060,174) ........................ 56,326,949
-------------

PREFERRED STOCKS - 0.1%

HOUSING - REAL ESTATE DEVELOPMENT - 0.1%
5,795 TOUSA, Inc., Series A (b) ....................... 2,897,500
-------------

MANUFACTURING - 0.0%
14,382 Superior Telecom, Inc., Series A ................ 17,618
-------------

Total Preferred Stocks
(Cost $5,809,132) ......................... 2,915,118
-------------

UNITS
- --------------------

WARRANT - 0.0%

OIL AND GAS - 0.0%
141,093 Monitor Oil ..................................... 0
-------------
Total Warrant
(Cost $0) ................................. 0
-------------

TOTAL INVESTMENTS - 136.5% .................................... 3,679,557,114
(cost of $3,818,415,642) (j) -------------

OTHER ASSETS & LIABILITIES, NET - (36.5)% ..................... (983,463,596)
-------------
NET ASSETS - 100.0% ........................................... 2,696,093,518
=============

18 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

- ----------
Forward foreign currency contracts outstanding as of August 31, 2007 were as
follows:

PRINCIPAL NET
CONTRACTS AMOUNT UNREALIZED
TO BUY OR COVERED BY APPRECIATION
TO SELL CURRENCY CONTRACTS EXPIRATION (DEPRECIATION)
- ----------------------------------------------------------------------------
Sell AUD 7,000,000 02/28/08 $ 36,750
Sell AUD 10,800,000 02/29/08 (9,720)
Sell EUR 86,000,000 02/04/08 1,144,762
Sell GBP 23,000,000 02/07/08 312,578
Sell GBP 12,000,000 01/22/08 258,192
--------------
$ 1,742,562
==============

(a) Senior loans in which the Fund invests generally pay interest at rates
which are periodically redetermined by reference to a base lending rate
plus a premium. (Unless otherwise identified by (g), all senior loans
carry a variable rate interest.) These base lending rates are generally
(i) the prime rate offered by one or more major U.S. banks, (ii) the
lending rate offered by one or more European banks such as the London
Inter-Bank Offered Rate ("LIBOR") or (iii) the certificate of deposit
rate. Rate shown represents the weighted average rate at August 31, 2007.
Senior loans, while exempt from registration under the Securities Act of
1933, as amended (the "1933 Act"), contain certain restrictions on resale
and cannot be sold publicly. Senior secured floating rate loans often
require prepayments from excess cash flow or permit the borrower to repay
at its election. The degree to which borrowers repay, whether as a
contractual requirement or at their election, cannot be predicted with
accuracy. As a result, the actual remaining maturity may be substantially
less than the stated maturities shown.

(b) Represents fair value as determined in good faith under the direction of
the Fund's Board of Trustees.

(d) Senior loan notes have additional unfunded loan commitments. See Note 9.

(e) All or a portion of this position has not settled. Contract rates do not
take effect until settlement date.

(f) Loan held on participation. See Note 7.

(g) Fixed rate senior loan or corporate note and bond.

(h) Security represents an unsecured, unfunded claim generated against the
issuer that will be converted into equity upon the completion of court
proceedings.

(i) Non-income producing security.

(j) Cost for U.S. federal income tax purposes is $3,819,361,191.

AUD Australia Dollar
DIP Debtor in Possession
EUR Euro Currency
GBP Great Britain Pound
PIK Payment in Kind
SEK Swedish Krona

FOREIGN DENOMINATED SENIOR LOANS
INDUSTRY CONCENTRATION TABLE:
(% of Total Net Assets)

Cable - International Cable ........................................... 3.6%
Other ................................................................. 3.1%
Telecommunications .................................................... 2.2%
Financial ............................................................. 1.9%
Broadcasting .......................................................... 1.6%
Retail ................................................................ 1.4%
Food/Tobacco - Food/Tobacco Producers ................................. 1.3%
Diversified Media ..................................................... 1.0%
Service ............................................................... 0.5%
-----
Total ................................................................. 16.6%
=====

See accompanying Notes to Financial Statements. | 19

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

AS OF AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

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

ASSETS:
Investments, at value (cost $3,818,415,642) .............................................................. 3,679,557,114
Cash ..................................................................................................... 105,899
Foreign currency (cost $35,112,354) ...................................................................... 35,595,735
Net unrealized appreciation on forward currency contracts ................................................ 1,742,562
Receivable for:
Investments sold ...................................................................................... 104,085,894
Fund shares sold ...................................................................................... 5,080,915
Dividend and interest receivable ...................................................................... 45,215,164
Other assets ............................................................................................. 76,476
-------------
Total assets ....................................................................................... 3,871,459,759
-------------

LIABILITIES:
Notes payable (Note 8) ................................................................................... 960,000,000
Net discount and unrealized depreciation on unfunded transactions (Note 9) ............................... 2,591,970
Payables for:
Distributions ......................................................................................... 7,081,045
Investments purchased ................................................................................. 197,411,651
Investment advisory fee payable (Note 4) .............................................................. 1,839,183
Administration fee (Note 4) ........................................................................... 622,467
Trustees' fees (Note 4) ............................................................................... 1,000
Service and distribution fees (Note 4) ................................................................ 1,347,503
Interest expense (Note 8) ............................................................................. 4,078,578
Accrued expenses and other liabilities ................................................................... 392,844
-------------
Total liabilities .................................................................................. 1,175,366,241
-------------
NET ASSETS ............................................................................................... 2,696,093,518
=============

COMPOSITON OF NET ASSETS:
Paid-in capital .......................................................................................... 2,834,215,890
Overdistributed net investment income .................................................................... (3,265,785)
Accumulated net realized gain/(loss) from investments and foreign currency transactions .................. 3,484,392
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign
currency contracts and translation of assets and liabilities denominated in foreign currency .......... (138,340,979)
-------------
NET ASSETS .................................................................................................. 2,696,093,518
=============

CLASS A
Net assets ............................................................................................... 1,050,738,328
Shares outstanding (unlimited authorization) ............................................................. 89,415,226
Net asset value per share (Net assets/shares outstanding) ................................................ 11.75(a)
Maximum offering price per share (100/96.50 of $11.75) ................................................... 12.18(b)

CLASS B
Net assets ............................................................................................... 95,122,034
Shares outstanding (unlimited authorization) ............................................................. 8,094,779
Net asset value and offering price per share (Net assets/shares outstanding) ............................ 11.75(a)

CLASS C
Net assets ............................................................................................... 1,269,849,989
Shares outstanding (unlimited authorization) ............................................................. 108,047,470
Net asset value and offering price per share (Net assets/shares outstanding) ............................ 11.75(a)

CLASS Z
Net assets ............................................................................................... 280,383,167
Shares outstanding (unlimited shares authorized) ........................................................ 23,861,529
Net asset value, offering and redemption price per share (Net assets/shares outstanding) ................ 11.75

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

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

20 | See accompanying Notes to Financial Statements.

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

FOR THE YEAR ENDED AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

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

INVESTMENT INCOME:
Interest ................................................................................................. 258,898,786
Dividends ................................................................................................ 3,711,153
Facility and other fees .................................................................................. 17,182
-------------
Total investment income ............................................................................ 262,627,121
-------------

EXPENSES:
Investment advisory fees (Note 4) ........................................................................ 14,627,564
Administration fees (Note 4) ............................................................................. 5,942,979
Accounting service fees .................................................................................. 597,386
Transfer agent fee ....................................................................................... 1,194,716
Professional fees ........................................................................................ 472,127
Trustees' fees (Note 4) .................................................................................. 102,367
Custodian fees ........................................................................................... 303,001
Reports to shareholders .................................................................................. 883,986
Distribution fee: (Note 4)
Class A ............................................................................................... 989,812
Class B ............................................................................................... 498,049
Class C ............................................................................................... 6,865,003
Service fee: (Note 4)
Class A ............................................................................................... 2,474,531
Class B ............................................................................................... 276,694
Class C ............................................................................................... 2,860,418
Registration fees ........................................................................................ 231,736
Other expenses ........................................................................................... 308,376
-------------
Net operating expenses ............................................................................. 38,628,745
Interest expense (Note 8) ................................................................................ 24,902,663
Facility expense ......................................................................................... 1,811,740
-------------
Net expenses ....................................................................................... 65,343,148
-------------
Net investment income .............................................................................. 197,283,973
-------------

NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on investments .................................................................. 4,402,462
Net realized gain/(loss) on foreign currency transactions ................................................ (9,084,814)
Net change in unrealized appreciation/(depreciation) on investments ...................................... (157,185,909)
Net change in unrealized appreciation/(depreciation) on unfunded transactions ............................ (1,677,092)
Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts ............... 1,742,562
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities
denominated in foreign currency ....................................................................... 723,124
-------------
Net realized and unrealized gain/(loss) on investments ............................................. (161,079,667)
-------------
Net increase in net assets from operations ......................................................... 36,204,306
=============

See accompanying Notes to Financial Statements. | 21

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

HIGHLAND FLOATING RATE ADVANTAGE FUND

------------------------------
YEARS ENDED AUGUST 31,
2007 2006
($) ($)
------------------------------

INCREASE IN NET ASSETS:

FROM OPERATIONS
Net investment income ...................................................................... 197,283,973 98,262,114
Net realized gain/(loss) on investments and foreign currency transactions .................. (4,682,352) 19,527,838
Net change in unrealized appreciation/(depreciation) on investments, unfunded
transactions, forward foreign currency contracts, and translation of assets and
liabilities denominated in foreign currency .......................................... (156,397,315) 3,159,526
------------- -------------
Net change in net assets from operations ............................................. 36,204,306 120,949,478
------------- -------------

FROM DISTRIBUTIONS TO STOCKHOLDERS
From net investment income: ................................................................
Class A ................................................................................. (79,922,864) (39,595,036)
Class B ................................................................................. (8,618,730) (8,837,518)
Class C ................................................................................. (86,570,427) (40,413,435)
Class Z ................................................................................. (22,861,188) (8,134,869)
------------- -------------
Total distributions from net investment income ....................................... (197,973,209) (96,980,858)
From capital gains:
Class A ................................................................................. (4,805,043) --
Class B ................................................................................. (606,560) --
Class C ................................................................................. (5,510,036) --
Class Z ................................................................................. (1,314,861) --
------------- -------------
Total distributions from capital gains ............................................... (12,236,500) --
------------- -------------
Total distributions declared to shareholders ......................................... (210,209,709) (96,980,858)
------------- -------------

SHARE TRANSACTIONS
Class A
Subscriptions ........................................................................... 651,657,783 509,092,824
Distributions reinvested ................................................................ 54,792,362 26,150,996
Redemptions ............................................................................. (316,865,696) (166,364,386)
------------- -------------
Net increase ......................................................................... 389,584,449 368,879,434
Class B
Subscriptions ........................................................................... 1,035 789
Distributions reinvested ................................................................ 5,759,483 5,382,976
Redemptions ............................................................................. (20,487,283) (16,695,298)
------------- -------------
Net decrease ......................................................................... (14,726,765) (11,311,533)
Class C
Subscriptions ........................................................................... 700,206,693 471,122,036
Distributions reinvested ................................................................ 62,233,256 27,967,790
Redemptions ............................................................................. (228,801,092) (84,176,434)
------------- -------------
Net increase ......................................................................... 533,638,857 414,913,392
Class Z
Subscriptions ........................................................................... 226,311,676 115,875,101
Distributions reinvested ................................................................ 13,717,484 4,884,669
Redemptions ............................................................................. (102,639,270) (35,802,179)
------------- -------------
Net Increase ......................................................................... 137,389,890 84,957,591
------------- -------------
Net increase from share transactions ................................................. 1,045,886,431 857,438,884
------------- -------------
Total increase in net assets ...................................................... 871,881,028 881,407,504

NET ASSETS
Beginning of year .......................................................................... 1,824,212,490 942,804,986
------------- -------------
End of year (including undistributed/(overdistributed) net investment income of
$(3,265,785) and $6,424,519, respectively) .............................................. 2,696,093,518 1,824,212,490
============= =============

22 | See accompanying Notes to Financial Statements.

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

HIGHLAND FLOATING RATE ADVANTAGE FUND

------------------------------
YEARS ENDED AUGUST 31,
2007 2006
($) ($)
------------------------------

CHANGE IN SHARES
Class A
Subscriptions ........................................................................... 52,304,082 41,216,188
Issued for distributions reinvested ..................................................... 4,435,660 2,115,861
Redemptions ............................................................................. (26,027,358) (13,476,164)
------------- -------------
Net increase ......................................................................... 30,712,384 29,855,885
Class B
Subscriptions ........................................................................... 84 63
Issued for distributions reinvested ..................................................... 465,504 436,133
Redemptions ............................................................................. (1,672,720) (1,350,004)
------------- -------------
Net decrease ......................................................................... (1,207,132) (913,808)
Class C
Subscriptions ........................................................................... 56,187,588 38,110,054
Issued for distributions reinvested ..................................................... 5,038,221 2,261,974
Redemptions ............................................................................. (18,859,930) (6,809,203)
------------- -------------
Net increase ......................................................................... 42,365,879 33,562,825
Class Z
Subscriptions ........................................................................... 18,154,313 9,364,415
Issued for distributions reinvested ..................................................... 1,110,722 395,086
Redemptions ............................................................................. (8,434,054) (2,907,290)
------------- -------------
Net increase ......................................................................... 10,830,981 6,852,211

See accompanying Notes to Financial Statements. | 23

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

FOR THE YEAR ENDED AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

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

CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment income .................................................................................... 197,283,973

ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO
NET CASH AND FOREIGN CURRENCY USED FOR OPERATING ACTIVITIES
Purchase of investment securities ........................................................................ (3,762,727,790)
Proceeds from disposition of investment securities ....................................................... 2,227,794,434
Increase in interest and fees receivable ................................................................. (22,670,445)
Increase in receivable for investments sold .............................................................. (86,546,681)
Decrease in other assets ................................................................................. 2,541
Decrease in deferred facility fees ....................................................................... (6,038)
Net amortization/(accretion) of premium/(discount) ....................................................... (3,407,303)
Decrease in payable for investments purchased ............................................................ (86,253,440)
Increase in payables to related parties .................................................................. 1,967,973
Decrease in mark-to-market on realized and unrealized gain/(loss) on foreign currency .................... (8,361,690)
Increase in other expenses and liabilities ............................................................... 463,832
--------------
Net cash and foreign currency flow from operating activities .......................................... (1,542,460,634)
--------------

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Increase in notes payable ................................................................................ 625,000,000
Increase in interest payable ............................................................................. 2,818,245
Cash received for shares sold ............................................................................ 1,589,395,477
Payment of shares redeemed ............................................................................... (668,793,341)
Distributions paid in cash ............................................................................... (66,634,188)
--------------
Net cash flow provided by financing activities ........................................................ 1,481,786,193
--------------
Net decrease in cash and foreign currency ............................................................. (60,674,441)
--------------

CASH AND FOREIGN CURRENCY
Beginning of the year .................................................................................... 96,376,075
--------------
End of the year .......................................................................................... 35,701,634
==============

24 | 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:

- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED AUGUST 31,
------------------------------------------------------------------
CLASS A SHARES 2007 2006 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, BEGINNING
OF YEAR $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 1.00 0.96 0.67 0.56 0.81
Net realized and unrealized gain/(loss)
on investments(a) (0.60) 0.22 0.11 0.89 0.74
----------- --------- --------- --------- --------
Total from investment operations 0.40 1.18 0.78 1.45 1.55
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (1.01) (0.94) (0.67) (0.59) (0.81)
From net realized gains (0.07) -- -- -- --
----------- --------- --------- --------- --------
Total distributions declared to
shareholders (1.08) (0.94) (0.67) (0.59) (0.81)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 11.75 $ 12.43 $ 12.19 $ 12.08 $ 11.22
Total return(b) 3.10% 10.08% 6.56%(c) 13.14% 15.55%
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.33% 1.12% 1.28% 1.29%(d) 1.38%(d)
Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73%
Net expenses(e) 2.39% 2.16% 2.00% 1.69%(d) 2.11%(d)
Net investment income 8.05% 7.78% 5.60% 4.73%(d) 7.67%(d)
Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36%
Portfolio turnover rate 70% 61% 85% 110% 90%
Net assets, end of year (000's) $ 1,050,738 $ 729,845 $ 351,557 $ 212,205 $ 85,166
- ------------------------------------------------------------------------------------------------------------------

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

(b) Total return is at net asset value assuming all distributions are
reinvested and no initial sales charge or contingent deferred sales charge
("CDSC"). For periods with waivers/reimbursements, had the Fund's
investment adviser not waived or reimbursed a portion of expenses, total
return would be reduced.

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

(e) Net expense ratio has been calculated after applying any
waiver/reimbursement, if applicable.

See accompanying Notes to Financial Statements. | 25

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

HIGHLAND FLOATING RATE ADVANTAGE FUND

SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:

- ---------------------------------------------------------------------------------------------------------------
YEARS ENDED AUGUST 31,
---------------------------------------------------------------
CLASS B SHARES 2007 2006 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, BEGINNING
OF YEAR $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.96 0.92 0.63 0.53 0.78
Net realized and unrealized gain/(loss)
on investments(a) (0.60) 0.22 0.11 0.88 0.73
-------- --------- --------- --------- --------
Total from investment operations 0.36 1.14 0.74 1.41 1.51
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.97) (0.90) (0.63) (0.55) (0.77)
From net realized gains (0.07) -- -- -- --
-------- --------- --------- --------- --------
Total distributions declared to
shareholders (1.04) (0.90) (0.63) (0.55) (0.77)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 11.75 $ 12.43 $ 12.19 $ 12.08 $ 11.22
Total return(b) 2.74% 9.70% 6.19%(c) 12.75% 15.16%
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.68% 1.47% 1.63% 1.64%(d) 1.73%(d)
Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73%
Net expenses(e) 2.74% 2.51% 2.35% 2.04%(d) 2.46%(d)
Net investment income 7.70% 7.43% 5.25% 4.50%(d) 7.34%(d)
Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36%
Portfolio turnover rate 70% 61% 85% 110% 90%
Net assets, end of year (000's) $ 95,122 $ 115,651 $ 124,500 $ 124,589 $ 76,379
- ---------------------------------------------------------------------------------------------------------------

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

(b) Total return is at net asset value assuming all distributions are
reinvested and no initial sales charge or CDSC. For periods with
waivers/reimbursements, had the Fund's investment adviser not waived or
reimbursed a portion of expenses, total return would be reduced.

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

(e) Net expense ratio has been calculated after applying any
waiver/reimbursement, if applicable.

26 | 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:

- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED AUGUST 31,
------------------------------------------------------------------
CLASS C SHARES 2007 2006 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, BEGINNING
OF YEAR $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.93 0.90 0.61 0.50 0.76
Net realized and unrealized gain/(loss)
on investments(a) (0.59) 0.22 0.11 0.89 0.74
----------- --------- --------- --------- --------
Total from investment operations 0.34 1.12 0.72 1.39 1.50
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.95) (0.88) (0.61) (0.53) (0.76)
From net realized gains (0.07) -- -- -- --
----------- --------- --------- --------- --------
Total distributions declared to
shareholders (1.02) (0.88) (0.61) (0.53) (0.76)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 11.75 $ 12.43 $ 12.19 $ 12.08 $ 11.22
Total return(b) 2.50% 9.62% 6.03%(c) 12.57% 14.99%
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.83% 1.62% 1.78% 1.79%(d) 1.88%(d)
Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73%
Net expenses(e) 2.89% 2.66% 2.50% 2.19%(d) 2.61%(d)
Net investment income 7.55% 7.28% 5.10% 4.19%(d) 7.14%(d)
Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36%
Portfolio turnover rate 70% 61% 85% 110% 90%
Net assets, end of year (000's) $ 1,269,850 $ 816,720 $ 391,455 $ 278,731 $ 80,572
- ------------------------------------------------------------------------------------------------------------------

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

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

(e) Net expense ratio has been calculated after applying any
waiver/reimbursement, if applicable.

See accompanying Notes to Financial Statements. | 27

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

HIGHLAND FLOATING RATE ADVANTAGE FUND

SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:

- -------------------------------------------------------------------------------------------------------------
YEARS ENDED AUGUST 31,
-------------------------------------------------------------
CLASS Z SHARES 2007 2006 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, BEGINNING
OF YEAR $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48
- -------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 1.04 1.00 0.71 0.59 0.78
Net realized and unrealized gain/(loss)
on investments(a) (0.60) 0.22 0.11 0.90 0.81
--------- --------- -------- -------- -------
Total from investment operations 0.44 1.22 0.82 1.49 1.59
- -------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (1.05) (0.98) (0.71) (0.63) (0.85)
From net realized gains (0.07) -- -- -- --
--------- --------- -------- -------- -------
Total distributions declared to
shareholders (1.12) (0.98) (0.71) (0.63) (0.85)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 11.75 $ 12.43 $ 12.19 $ 12.08 $ 11.22
Total return(b) 3.46% 10.47% 6.93%(c) 13.52% 15.95%
- -------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 0.98% 0.77% 0.93% 0.94%(d) 1.03%(d)
Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73%
Net expenses(c) 2.04% 1.81% 1.65% 1.34%(d) 1.76%(d)
Net investment income 8.40% 8.13% 5.95% 4.93%(d) 7.21%(d)
Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36%
Portfolio turnover rate 70% 61% 85% 110% 90%
Net assets, end of year (000's) $ 280,383 $ 161,996 $ 75,293 $ 53,049 $ 5,178
- -------------------------------------------------------------------------------------------------------------

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

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

(e) Net expense ratio has been calculated after applying any
waiver/reimbursement if applicable.

28 | See accompanying Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

AUGUST 31, 2007 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 non-diversified, closed-end management investment company.

INVESTMENT OBJECTIVE

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

FUND SHARES

The Fund may issue an unlimited number of shares and continuously offers three
classes of shares: Class A, Class C and Class Z. The Fund has discontinued
selling Class B Shares to new and existing investors, although existing
investors may still reinvest distributions in Class B Shares. 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 and greater at the time of
purchase are subject to a 1.00% contingent deferred sales charge ("CDSC") on
shares tendered and accepted for repurchase within eighteen months after
purchase. 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. Please read the Fund's prospectus for additional
details on the Class B CDSC. Class C Shares are subject to a 1.00% CDSC on
shares tendered and accepted for repurchase within one year after purchase.
Class Z Shares are not subject to a sales charge. There are certain restrictions
on the purchase of Class Z Shares, as described in the Fund's Class Z shares
prospectus.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

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

USE OF ESTIMATES

The 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.

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. If there is more than one such principal market maker, the value
will be the average of such means. Securities without a sale price or bid and
ask quotations from principal market makers on the valuation day will be valued
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 (such as when events
materially affecting the value of securities occur between the time when the
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 by the
Fund's investment adviser, Highland Capital Management, L.P. ("Highland" or the
"Investment Adviser"), in accordance with procedures established by the Fund's
Board of Trustees (the "Board"). In these cases, the Fund's net asset value will
reflect the affected portfolio securities' value as determined in the judgment
of the Board or its designee instead of being determined by the market. Using a
fair value pricing methodology to 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. Short-term investments,
that is, those with a remaining maturity of 60 days or less, are valued at
amortized cost. Repurchase agreements are valued at cost plus accrued interest.
Foreign price quotations are converted to U.S. dollar equivalents using the 4:00
PM London Time Spot Rate.

SECURITY TRANSACTIONS

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

FOREIGN CURRENCY

Foreign currencies, investments and other assets and liabilities are translated
into U.S. dollars at the exchange rates using the current 4:00 PM London Time
Spot Rate. Fluctuations in the value of the foreign currencies and other assets
and liabilities resulting from changes in exchange rates, between trade and
settlement dates on securities transactions and between the accrual and payment
dates on

Annual Report | 29

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

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

dividends, interest income and foreign withholding taxes, are recorded as
unrealized foreign currency gains (losses). Realized gains (losses) and
unrealized appreciation (depreciation) on investment securities and income and
expenses are translated on the respective dates of such transactions. The effect
of changes in foreign currency exchange rates on investments in securities are
not segregated in the Statement of Operations from the effects of changes in
market prices of those securities, but are included with the net realized and
unrealized gain or loss on investment securities.

FORWARD FOREIGN CURRENCY CONTRACTS

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

INCOME RECOGNITION

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

DETERMINATION OF CLASS NET ASSET VALUES

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

U.S. FEDERAL INCOME TAX STATUS

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

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

ADDITIONAL ACCOUNTING STANDARDS

In July 2006, the Financial Accounting Standards Board ("FASB") released FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 provides guidance on how uncertain tax positions should be recognized,
measured, presented, and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authorities. Tax
positions not deemed to satisfy the "more-likely-than-not" threshold would be
recorded as a tax benefit or expense in the current year. FASB required adoption
of FIN 48 for fiscal years beginning after December 15, 2006, and FIN 48 is to
be applied to all open tax years as of the effective date. Implementation of FIN
48 will be required beginning after August 31, 2007.

In September 2006, Statement of Financial Accounting Standards No. 157 FAIR
VALUE MEASUREMENTS ("SFAS 157") was issued and is effective for fiscal years
beginning after November 15, 2007. SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.

In February 2007, FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS
159"), which provides companies with an option to report selected financial
assets and liabilities at fair value. The objective of SFAS 159 is to reduce
both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently. SFAS
159 establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities and to more easily understand the effect
of the Fund's choice to use fair value on its earnings. SFAS 159 also requires
entities to display the fair value of the selected assets and liabilities on the
face of the balance

30 | Annual Report

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

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

sheet. SFAS 159 does not eliminate disclosure requirements of other accounting
standards, including fair value measurement disclosures in SFAS 157. SFAS 159 is
effective for fiscal years beginning after November 15, 2007.

At this time, management is evaluating the implications of FIN 48, SFAS 157 and
SFAS 159 and their impact on the Fund's financial statements, if any, has not
been determined.

NOTE 3. U.S. FEDERAL TAX INFORMATION

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

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.

For the year ended August 31, 2007, permanent differences resulting from
premiums sold Section 988 gain/(loss) reclass, foreign bond bifurcation and
non-deductible excise tax paid were identified and reclassified among the
components of the Fund's net assets as follows:

- --------------------------------------------------------------------------------
Undistributed
(Overdistributed) Accumulated Net
Net Investment Realized Gain/ Paid-in
Income (Loss) Capital
- --------------------------------------------------------------------------------
$(9,001,068) $9,059,589 $(58,521)
- --------------------------------------------------------------------------------

The tax character of distributions paid during the years ended August 31, 2007
and August 31, 2006 were as follows:

- --------------------------------------------------------------------------------
2007 2006
- --------------------------------------------------------------------------------
Distributions paid from:
- --------------------------------------------------------------------------------
Ordinary income* $210,015,075 $96,980,858
- --------------------------------------------------------------------------------
Long-term capital gains 194,634 --
- --------------------------------------------------------------------------------

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

As of August 31, 2007, the most recent tax year end, the components of
distributable earnings (accumulated losses) on a tax basis were as follows:

- --------------------------------------------------------------------------------
Undistributed Undistributed
Ordinary Long-Term Net Unrealized
Income Capital Gains Depreciation*
- --------------------------------------------------------------------------------
$15,458,515 $1,924,460 $(141,029,090)
- --------------------------------------------------------------------------------

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

Portfolio unrealized appreciation and depreciation at August 31, 2007, based on
cost of investments for U.S. federal income tax purposes, and excluding any
unrealized appreciation and depreciation from changes in the value of other
assets and liabilities resulting from changes in exchange rates, was:

- --------------------------------------------------------------------------------
Unrealized appreciation $ 21,164,490
Unrealized depreciation (160,968,567)
-------------

Net unrealized depreciation $(139,804,077)
=============
- --------------------------------------------------------------------------------

The amount of long-term capital gains designated for the Fund for the year ended
August 31, 2007 is $1,925,514.

POST-OCTOBER LOSSES

Under current laws, certain capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal year.
For the fiscal year ended August 31, 2007, the Fund intends to elect to defer
net realized currency losses incurred from November 1, 2006 through August 31,
2007 of $7,395,212

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

INVESTMENT ADVISORY FEE

Highland Capital Management, L.P. is the investment adviser to the Fund.
Effective December 18, 2006, the Fund is accruing a monthly investment advisory
fee based on the Fund's average daily managed assets at the following annual
rates:

Prior to December 18, 2006, the Fund was accruing a

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

monthly investment advisory fee based on the Fund's average daily net assets at
the following annual rates:

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

For the year ended August 31, 2007, the Fund's effective investment advisory fee
rate was 0.49%.

Annual Report | 31

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

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

The excess investment advisory fees held in escrow as a result of the differing
calculation methodologies (discussed below) that was expensed for the year ended
August 31, 2007 was $1,416,799. The impact of the investment advisory fee for
the year ended August 31, 2007 was as follows:

- --------------------------------------------------------------------------------
Calculated Investment Advisory Fee $ 16,044,363
Release of Escrow (1,416,799)
------------

Net Investment Advisory Fee $ 14,627,564
============
- --------------------------------------------------------------------------------

Without the impact of the release of the escrowed amounts, the Fund's effective
advisory fee for the year ended August 31, 2007 was 0.54%.

On April 9, 2004, Columbia Management Advisors, Inc. ("Columbia") and Highland
entered into an agreement to sell certain of the assets of Columbia's bank loan
asset management group to Highland. Upon completion of the sale on April 15,
2004, the advisory agreement between Columbia and the Fund terminated because
such sale effected an "assignment" (as defined in the 1940 Act), and an interim
advisory agreement between Highland and the Fund took effect. At a meeting held
on March 29, 2004, the prior board of trustees of the Fund, approved, by an
unanimous vote of the trustees present, (i) the interim advisory agreement to
take effect on April 15, 2004 and (ii) the agreement that was in effect between
the Fund and Highland until December 18, 2006 (the "Former Advisory Agreement"),
subject to shareholder approval. On July 30, 2004 the shareholders of the Fund
approved the Former Advisory Agreement with Highland and it became effective
immediately after such approval. Due to a drafting error, the detailed
description of the advisory fee in the proxy statement and the form of the
Former Advisory Agreement submitted to shareholders in 2004 and signed by the
parties described an advisory fee calculation methodology based on average daily
net assets rather than managed assets that would result in Highland's receiving
a lower advisory fee than that believed approved by the prior trustees and
actually calculated and paid to Highland since the adoption of the Former
Advisory Agreement. The only difference between the two methodologies is that
the intended advisory fee would have been charged against managed assets rather
than net assets. Because the Fund borrows to seek to enhance its returns,
Highland's fee computed on the basis of average daily managed assets would be
higher than the fee computed on the basis of average daily net assets and thus
Highland may have an economic incentive to incur more leverage in order to
maximize its compensation.

In view of the time and resources it would take to obtain a judicial ruling
regarding retroactive approval of the correction under the 1940 Act, Highland
resolved to release the fee differential to the Fund and recommend that the
Board approve and submit to shareholders a new advisory agreement that would
make certain changes to the way that the advisory fee is calculated. Inasmuch as
the proxy disclosure presented to shareholders in 2004 as to the precise rate of
the advisory fee to be paid by the Fund was inconsistent with the intention of
the prior board, Highland proposed that the current Board approve a correction
to the advisory fee calculation methodology to indicate that advisory fees are
calculated based on average daily managed assets rather than average daily net
assets. Additionally, in light of the performance of the Fund during the period
Highland has served as the investment adviser and in view of the fact that the
advisory/management fee for the Fund is substantially below the average of the
Fund's Lipper peer group, Highland also proposed that the Board approve an
increase in the advisory fee. At an in-person Board meeting held on May 19,
2006, the current Board, including the members of the Board who are not
"interested persons" (as defined in the 1940 Act) of the Fund (the "Independent
Trustees"), unanimously approved both the continuation of the Former Advisory
Agreement and a new advisory agreement between the Fund and Highland that would
include the terms that Highland proposed (the "New Advisory Agreement"). The New
Advisory Agreement was submitted to and approved by shareholders at a meeting on
December 18, 2006.

ADMINISTRATION FEES

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 assets. Under a separate sub-administration agreement, Highland has
delegated certain administrative functions to PFPC Inc. ("PFPC"). Highland pays
PFPC directly for these services.

SERVICE AND DISTRIBUTION FEES

PFPC Distributors, Inc. (the "Underwriter") serves as the principal underwriter
and distributor of the Fund's shares. The Underwriter receives the CDSC imposed
on certain redemptions of Class A, Class B and Class C Shares. For the year
ended August 31, 2007, the Underwriter received $275,774, $146,523 and $499,636
of CDSCs 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 Underwriter
at an annual rate of 0.25% of the average daily net assets attributable to Class
A, Class B and Class C Shares of the Fund. The Plan also requires the payment of
a monthly distribution fee to the Underwriter at an annual rate of 0.10%, 0.45%
and 0.60% of the average daily net assets attributable to Class A, Class B and
Class C shares, respectively.

32 | Annual Report

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

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

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

EXPENSE LIMITS AND FEE REIMBURSEMENTS

Effective December 18, 2006, Highland has voluntarily agreed to waive management
fees so that the Fund's ordinary annual operating expenses (exclusive of
advisory fees, administration fees, brokerage commissions, taxes, distribution
and service fees, leverage expenses and extraordinary expenses, if any) will not
exceed 0.15% of the average daily net assets of the Fund. This arrangement may
be revised or discontinued by Highland at any time upon seven days prior written
notice to shareholders of the Fund.

FEES PAID TO OFFICERS AND TRUSTEES

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

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

NOTE 5. PORTFOLIO INFORMATION

For the year ended August 31, 2007, the cost of purchases and proceeds from
sales of securities, excluding short-term obligations, were $3,762,727,790 and
$2,227,794,434, respectively.

NOTE 6. PERIODIC REPURCHASE OFFERS

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

For the year ended August 31, 2007, there were four Repurchase Offers. For each
Repurchase Offer, the Fund offered to repurchase 10% of its shares. In the
November 2006, February 2007, May 2007 and August 2007 Repurchase Offers, 4.14%,
4.67%, 4.54% and11.10%, 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 August 31, 2007, 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
- --------------------------------------------------------------------------------
Credit Suisse:
Berry Plastics Holding Corp.
Term C Loan $ 249,375 $ 239,400
Jacuzzi Brands Corp.
First Lien Term B Loan 3,668,378 3,324,468
Pre-Funded Letter of Credit 324,324 295,135
Verso Paper Holdings
Term B Loan 2,261,952 2,256,297
Quality Distributions, Inc.
Term Loan 934,343 929,672

Highland Distressed Opportunities, Inc.:
CCS Medical, Inc.
First Lien Term Loan 4,846,619 4,789,042

Morgan Stanley Senior Funding, Inc.:
Realogy Corp.
Initial B Term Loan 13,563,825 12,355,830
Synthetic Letter of Credit 2,935,902 2,674,431
- --------------------------------------------------------------------------------

Annual Report | 33

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

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

NOTE 8. LOAN AGREEMENT

Effective October 12, 2006, the Fund entered into a loan agreement with The Bank
of Nova Scotia (the "Credit Agreement") pursuant to which the Fund could borrow
up to $650,000,000. Effective June 6, 2007, the Credit Agreement was amended to
increase the total commitment to $1,000,000,000. Prior to October 12, 2006, the
Fund had a loan agreement with Citicorp North America, Inc. under which the Fund
could borrow up to $400,000,000.

At August 31, 2007, the Fund's outstanding borrowing under the Credit Agreement
totaled $960,000,000. The interest rate charged at August 31, 2007 was 5.81%.
The average daily loan balance was $455,219,178 at a weighted average interest
rate of 5.36%. With respect to these borrowings, interest expense of $24,808,229
is included on the Statement of Operations.

The Fund is required to maintain 300% asset coverage with respect to amounts
outstanding under the Credit Agreement. Asset coverage is calculated by
subtracting the Fund's total liabilities, not including any bank loans and
senior securities, from the Fund's total net assets and dividing such amount by
the principal amount of the debt outstanding. As of the dates indicated below,
the Fund's debt outstanding and asset coverage was as follows:

- --------------------------------------------------------------------------------
Asset
Coverage per
Total Amount $1,000 of
Date Outstanding Indebtedness
- --------------------------------------------------------------------------------
08/31/2007 $960,000,000 $4,005
- --------------------------------------------------------------------------------
08/31/2006 335,000,000 7,292
- --------------------------------------------------------------------------------
08/31/2005 250,000,000 5,129
- --------------------------------------------------------------------------------
08/31/2004 95,000,000 8,038
- --------------------------------------------------------------------------------
08/31/2003 59,500,000 5,156

- --------------------------------------------------------------------------------

NOTE 9. UNFUNDED LOAN COMMITMENTS

As of August 31, 2007, the Fund had unfunded loan commitments of $59,234,579
which could be extended at the option of the Borrower, pursuant to loan
agreements with the following borrowers:

- --------------------------------------------------------------------------------
Unfunded
Loan
Borrower Commitment
- --------------------------------------------------------------------------------
DHM Holdings Co., Inc. $ 78,705
- --------------------------------------------------------------------------------
Drake Hotel Acquisition 958,715
- --------------------------------------------------------------------------------
Federal-Mogul Corp. 117,897
- --------------------------------------------------------------------------------
Fenwal, Inc. 2,607,143
- --------------------------------------------------------------------------------
FleetCor Technologies Operating Company, LLC 666,667
- --------------------------------------------------------------------------------
Fontainebleau Las Vegas Holdings, LLC 2,333,333
- --------------------------------------------------------------------------------
HUB International Holdings, Inc. 1,882,353
- --------------------------------------------------------------------------------
Interstate Bakeries Corp. 7,500,000
- --------------------------------------------------------------------------------
Longview Power, LLC 1,531,667
- --------------------------------------------------------------------------------
MEG Energy Corp. 3,000,000
- --------------------------------------------------------------------------------
Millennium Digital Media Systems, LLC 3,400,567
- --------------------------------------------------------------------------------
Mobileserv Ltd. 2,500,000
- --------------------------------------------------------------------------------
Nordic Cable Acquisition Company
Sub-Holding AB 3,068,493
- --------------------------------------------------------------------------------
NRG Energy, Inc. 2,000,000
- --------------------------------------------------------------------------------
Readers Digest Association, Inc., The 530,000
- --------------------------------------------------------------------------------
Schieder Mobel Holding GMBH 24,721
- --------------------------------------------------------------------------------
Sorenson Communications, Inc. 2,000,000
- --------------------------------------------------------------------------------
Sun Healthcare Group, Inc. 45,977
- --------------------------------------------------------------------------------
Univision Communications Inc. 4,469,799
- --------------------------------------------------------------------------------
Valassis Communications, Inc. 426,667
- --------------------------------------------------------------------------------
Vivarte 5,000,000
- --------------------------------------------------------------------------------
Water PIK, Inc. 1,000,000
- --------------------------------------------------------------------------------
Ypso Holding SA 446,679
- --------------------------------------------------------------------------------
$ 59,234,579
=============
- --------------------------------------------------------------------------------

NOTE 10. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES

INDUSTRY FOCUS

The Fund may focus its investments in certain industries, 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.

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.

34 | Annual Report

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

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

CURRENCY RISK

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

FOREIGN SECURITIES

Investments in foreign securities may involve special risks compared to
investing in securities of U.S. issuers. These risks are more pronounced to the
extent that the Fund invests a significant portion of its non-U.S. investment in
one region or in the securities of emerging market issuers. These risks may
include (i) less information about non-U.S. issuers or markets being available
due to less rigorous disclosure, accounting standards or regulatory
requirements; (ii) many non-U.S. markets are smaller, less liquid and more
volatile and Highland may not be able to sell the Fund's securities at times, in
amounts and at prices it considers reasonable; (iii) the economies of non-U.S.
markets may grow at slower rates than expected or may experience a downturn or
recession; and (iv) withholdings and other non-U.S. taxes may decrease the
Fund's returns.

Annual Report | 35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------

TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF HIGHLAND FLOATING RATE ADVANTAGE
FUND:

In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Highland Floating
Rate Advantage Fund (the "Fund") at August 31, 2007, and the results of its
operations for the year then ended, the changes in its net assets and cash flows
and the financial highlights for period indicated in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments at August 31, 2007 by
correspondence with the custodian and the banks with whom the Fund owns
participations in loans, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Dallas, Texas
October 25, 2007

36 | Annual Report

ADDITIONAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

SHAREHOLDER VOTING RESULTS

At a Special Meeting of the Shareholders of the Fund originally scheduled for
July 20, 2007 and adjourned until August 3, 2007 (the "Meeting"), the
shareholders of record of the Fund as of June 4, 2007 ("Record Date") were asked
to approve an Agreement and Plan of Reorganization pursuant to which the Fund
would be reorganized into a newly formed Delaware statutory trust, also named
Highland Floating Rate Advantage Fund (the "Proposal"). As of the Record Date,
the Fund had the following shares outstanding:

- --------------------------------------------------------------------------------
Class A 90,198,483.23
- --------------------------------------------------------------------------------
Class B 8,601,376.11
- --------------------------------------------------------------------------------
Class C 105,580,229.66
- --------------------------------------------------------------------------------
Class Z 24,969,187.46
- --------------------------------------------------------------------------------

On July 20, 2007, the date of the Meeting, there was not present, in person or
by proxy, thirty percent (30%) of the outstanding shares entitled to vote at the
Meeting. Therefore, the Fund's quorum requirement was not met and the Meeting
was adjourned to August 3, 2007. On August 3, 2007, more than thirty percent
(30%) of the total number of outstanding shares of the Fund entitled to vote was
represented at the meeting and the Fund's quorum requirement was met. On August
3, 2007, the Proposal was voted on and was approved by the shareholders of the
Fund. The shares represented at the Meeting on August 3, 2007 voted on the
Proposal as follows:

- --------------------------------------------------------------------------------
For: 89,222,976
- --------------------------------------------------------------------------------
Against: 2,905,221
- --------------------------------------------------------------------------------
Abstain: 5,115,115
- --------------------------------------------------------------------------------

ADDITIONAL PORTFOLIO INFORMATION

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

Annual Report | 37

ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

TRUSTEES AND OFFICERS

The Board provides broad oversight over the operations and affairs of the Fund
and protects the interests of shareholders. The Board has overall responsibility
to manage and control the business affairs of the Fund, including the complete
and exclusive authority to establish policies regarding the management, conduct
and operation of the Fund's business. The names and ages of the Trustees and
officers of the Fund, the year each was first elected or appointed to office,
their principal business occupations during the last five years, the number of
funds overseen by each Trustee and other directorships they hold are shown
below. The business address for each Trustee and officer of the Fund is c/o
Highland Capital Management, L.P., Two Galleria Tower, 13455 Noel Road, Suite
800, Dallas, TX 75240.

- ------------------------------------------------------------------------------------------------------------------------------------
YEAR FIRST PRINCIPAL NUMBER OF PORTFOLIOS
ELECTED OR OCCUPATION(S) IN HIGHLAND FUNDS OTHER
NAME, ADDRESS, POSITION APPOINTED DURING PAST COMPLEX OVERSEEN DIRECTORSHIPS
AND AGE WITH FUND TO OFFICE FIVE YEARS BY TRUSTEE 1 HELD
- ------------------------------------------------------------------------------------------------------------------------------------

INDEPENDENT TRUSTEES

Timothy K. Hui Trustee Indefinite Dean of Educational Resources 12 None
(Age 59) Term; since July 2006; Assistant
Trustee Provost for Graduate Education
since from July 2004 to June 2006,
2004 and Assistant Provost for
Educational Resources from
July 2001 to June 2004,
Philadelphia Biblical University.

Scott F. Kavanaugh Trustee Indefinite Private Investor since February 12 None
(Age 46) Term; 2004. Sales Representative at
Trustee Round Hill Securities from
since March 2003 to January 2004;
2004 Executive at Provident Funding
Mortgage Corporation, February
2003 to July 2003; Executive
Vice President. Director and
CAO, Commercial Capital Bank,
January 2000 to February 2003;
Managing Principal and Chief
Operating Officer, Financial
Institutional Partners Mortgage
Company and the Managing
Principal and President of
Financial Institutional Partners,
LLC (an investment banking
firm), April 1998 to February
2003.

James F. Leary Trustee Indefinite Managing Director, Benefit 12 Board Member
(Age 77) Term; Capital Southwest, Inc. (a of Capstone
Trustee financial consulting firm) since Group of Funds
since January 1999. (7 portfolios)
2004
- ------------------------------------------------------------------------------------------------------------------------------------

38 | Annual Report

ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

TRUSTEES AND OFFICERS

INDEPENDENT TRUSTEES (CONTINUED)

Bryan A. Ward Trustee Indefinite Senior Manager since January 12 None
(Age 52) Term; 2002 and Special Projects
Trustee Advisor, Accenture, LLP (con-
since sulting firm) with focus on the
2004 oil and gas industry, from
September 1998 to December
2001.

INTERESTED TRUSTEE 2

R. Joseph Dougherty 2 Trustee and Indefinite Senior Portfolio Manager of the 12 None
(Age 37) Chairman of the Term; Investment Adviser since 2000.
Board Trustee Director and Senior Vice
and President of the funds in the
Chairman Highland Fund Complex.
of the
Board
since
2004

OFFICERS

James D. Dondero Chief Executive 1 year President and Director of Strand N/A N/A
(Age 45) Officer and Term; Advisors, Inc. ("Strand"), the
President Chief General Partner of the
Executive Investment Adviser. President
Officer of the funds in the Highland
and Fund Complex.
President
since
2004

Mark Okada Executive Vice 1 year Executive Vice President of N/A N/A
(Age 45) President Term; Strand and the funds in the
Executive Highland Fund Complex.
Vice
President
since
2004
- ------------------------------------------------------------------------------------------------------------------------------------

Annual Report | 39

ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

AUGUST 31, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND

TRUSTEES AND OFFICERS

OFFICERS

R. Joseph Dougherty Senior Vice 1 year Senior Portfolio Manager of the N/A N/A
(Age 37) President Term; Investment Adviser since 2000.
Senior Director and Senior Vice
Vice President of the funds in the
President Highland Fund Complex.
since
2004

M. Jason Blackburn Chief Financial 1 year Assistant Controller of the N/A N/A
(Age 31) Officer, Treasurer Term; Investment Adviser since
and Secretary Secretary, November 2001. Treasurer and
Chief Secretary of the funds in the
Financial Highland Fund Complex.
Officer
and
Treasurer
since
2004

Michael Colvin Chief Compliance 1 year General Counsel and Chief N/A N/A
(Age 38) Officer Term; Chief Compliance Officer of the
Compliance Investment Adviser since June
Officer 2007 and Chief Compliance
since July Officer of the funds in the
2007 Highland Fund Complex since
July 2007. Shareholder in the
Corporate and Securities Group
at Greenberg Traurig, LLP, from
January 2007 to June 2007.
Partner from January 2003 to
January 2007 and Associate
from 1995 to 2002 in the Private
Equity Practice Group at Weil,
Gotshal & Manges, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------

1 The Highland Fund Complex consists of all of the registered investment
companies advised by the Investment Adviser as of the date of this report.

2 Mr. Dougherty is deemed to be an "interested person" of the Fund under the
1940 Act because of his position with the Investment Adviser.

40 | Annual Report

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

INVESTMENT ADVISER
Highland Capital Management, L.P.
Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, TX 75240

TRANSFER AGENT
PFPC Inc.
101 Sabin Street
Pawtucket, RI 02860

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

CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153

INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PricewaterhouseCoopers LLP
2001 Ross Avenue, Suite 1800
Dallas, TX 75201

LEGAL ADVISOR
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
NewYork, NY 10036

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

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

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

Annual Report | 41

THIS PAGE LEFT BLANK INTENTIONALLY.

- --------------------------------------------------------------------------------

HIGHLAND FLOATING RATE ADVANTAGE FUND Annual Report, August 31, 2007

[HIGHLAND FUNDS LOGO]

managed by
Highland Capital Management, L.P.

P.O. BOX 9840
PROVIDENCE, RI 02940-8040

www.highlandfunds.com HLC-FR-ADV AR-08/07

ITEM 2. CODE OF ETHICS.

(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions.

(b) Not applicable.

(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions.

(d) The registrant has not granted any waiver, including any implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.

(e) Not applicable.

(f) The registrant's code of ethics is incorporated by reference to Exhibit
(a)(1) to the registrant's Form N-CSR filed with the Securities and
Exchange Commission on November 9, 2004 (Accession No.
0001047469-04-033537).

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

The Registrant's Board of Trustees (the "Board") has determined that James
Leary, a member of the Audit Committee of the Board, is an audit committee
financial expert as defined by the Securities and Exchange Commission (the
"SEC"). Mr. Leary is "independent" as defined by the SEC for purposes of this
Item 3 of Form N-CSR.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

AUDIT FEES

(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the
audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years are
$59,000 for 2006 and $90,000 for 2007.

AUDIT-RELATED FEES

(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of this
Item are $5,500 for 2006 and $7,000 for 2007. The nature of the
services related to agreed-upon procedures, performed on the Fund's
semi-annual financial statements.

TAX FEES

(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning are $4,800 for 2006 and $5,700
for 2007. The nature of the services related to assistance on the
Fund's tax returns and excise tax calculations.

ALL OTHER FEES

(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item are $0
for 2006 and $0 for 2007.

(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.

The Audit Committee shall:

(a) have direct responsibility for the appointment, compensation,
retention and oversight of the Fund's independent auditors and,
in connection therewith, to review and evaluate matters
potentially affecting the independence and capabilities of the
auditors; and

(b) review and pre-approve (including associated fees) all audit and
other services to be provided by the independent auditors to the
Fund and all non-audit services to be provided by the
independent auditors to the Fund's investment adviser or any
entity controlling, controlled by or under common control with
the investment adviser (an "Adviser Affiliate") that provides
ongoing services to the Fund, if the engagement relates directly
to the operations and financial reporting of the Fund; and

(c) establish, to the extent permitted by law and deemed appropriate
by the Audit Committee, detailed pre-approval policies and
procedures for such services; and

(d) consider whether the independent auditors' provision of any
non-audit services to the Fund, the Fund's investment adviser or
an Adviser Affiliate not pre-approved by the Audit Committee are
compatible with maintaining the independence of the independent
auditors.

(e)(2) The percentage of services described in each of paragraphs (b) through
(d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:

(b) 100%

(d) N/A

(f) The percentage of hours expended on the principal accountant's engagement
to audit the registrant's financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.

(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
registrant for each of the last two fiscal years of the registrant was
$81,000 for 2006 and $ 1,417,420 for 2007.

(h) The registrant's audit committee of the board of directors has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.

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.

Highland Capital Management, L.P. (the "Company") has adopted proxy voting
policies (the "Policy") that provide as follows:

1. Application; General Principles

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

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

2. Voting; Procedures

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

2.2 VOTING.
------

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

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

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

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

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

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

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

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

3. Conflicts of Interest

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

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

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

3.1.3 The issuer is an entity in which a "Covered Person" (as
defined in the Retail Funds' and the Company's Policies and Procedures
Designed to Detect and Prevent Insider Trading and to Comply with Rule
17j-1 of the Investment Company Act of 1940, as amended (each, a "Code
of Ethics")) has a beneficial interest contrary to the position held by
the Company on behalf of Clients.

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

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

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

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

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

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

3.2.1 The securities in respect of which the Company has the
power to vote account for less than 1% of the issuer's outstanding
voting securities, but only if: (i) such securities do not represent

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

one of the 10 largest holdings of such issuer's outstanding voting
securities and (ii) such securities do not represent more than 2% of
the Client's holdings with the Company.

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

4. Recordkeeping and Retention

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

4.1.1 Copies of this Policy and any amendments thereto.

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

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

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

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

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

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

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

Revised: February 21, 2007

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS

The Fund's portfolio is managed by a portfolio management team. As of
the date of this filing, the members of the team who are primarily responsible
for the day-to-day management of the Fund's portfolio are R. Joseph Dougherty
and Mark Okada.

JOE DOUGHERTY, CFA, CPA - PARTNER, HEAD OF RETAIL PRODUCTS, SENIOR PORTFOLIO \
MANAGER

Mr. Dougherty is Head of Retail Products at Highland Capital
Management, L.P., and is a Senior Portfolio Manager. Prior to joining Highland
in March 1998, Mr. Dougherty served as an Investment Analyst with Sandera
Capital Management from 1997 to 1998. Formerly, he was a Business Development
Manager at Akzo Nobel from 1994 to 1996 and a Senior Accountant at Deloitte &
Touche, LLP from 1992 to 1994. Mr. Dougherty is a Partner, Senior Portfolio
Manager, and heads Highland's retail products business unit ("Highland Funds").
He serves as Portfolio Manager, Senior Vice President and/or Director of the
Firm's NYSE-listed funds and 1940 Act Registered Funds. He also serves as
Portfolio Manager for the Firm's sub-advised closed-end funds. In this capacity,
Mr. Dougherty oversees investment decisions for the retail funds, alongside
several other Portfolio Managers, and manages the team dedicated to their
day-to-day operations. Prior to his current duties, Mr. Dougherty served as
Portfolio Analyst for Highland from 1998 to 1999. As a Portfolio Analyst, Mr.
Dougherty helped follow companies within the chemical, retail, supermarket,
wireless and restaurant sectors. He received an MBA from Southern Methodist
University, and a BS in Accounting from Villanova University. Mr. Dougherty is a
Certified Public Accountant, and has earned the right to use the Chartered
Financial Analyst designation.

MARK OKADA, CFA - MANAGING PARTNER, CHIEF INVESTMENT OFFICER

Mr. Okada is a Founder and Chief Investment Officer of Highland Capital
Management, L.P. He is responsible for overseeing Highland's investment
activities for its various strategies, and has over 20 years of experience in
the credit markets. Prior to founding Highland, Mr. Okada served as Manager of
Fixed Income for Protective Life Insurance's GIC subsidiary from 1990 to 1993.
He was primarily responsible for the bank loan portfolio and other risk assets.
Protective was one of the first non-bank entrants into the syndicated loan
market. From 1986 to 1990, he served as Vice President at Hibernia National
Bank, managing a portfolio of high yield loans in excess of $1 billion. Mr.
Okada is an honors graduate of the University of California Los Angeles with
degrees in Economics and Psychology. He has earned the right to use the
Chartered Financial Analyst designation. Mr. Okada is a Director of NexBank and
Highland Financial Partners, and Chairman of the Board of Directors of Common
Grace Ministries, Inc.

(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST

OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER

The following tables provide information about funds and accounts,
other than the Fund, for which the Fund's portfolio managers are primarily
responsible for the day-to-day portfolio management as of August 31, 2007.

R. JOSEPH DOUGHERTY

- ---------------------------------------------------------------------------------------------------------------
Total # of Accounts Managed Total Assets with
# of Accounts Total Assets with Performance-Based Performance-Based
Type of Accounts Managed (millions) Advisory Fee Advisory Fee (millions)
- ---------------------------------------------------------------------------------------------------------------
Registered Investment 12 $4,724 -- --
Companies:
- ---------------------------------------------------------------------------------------------------------------
Other Pooled Investment 1 $357 -- --
Vehicles:
- ---------------------------------------------------------------------------------------------------------------
Other Accounts: -- -- -- --
- ---------------------------------------------------------------------------------------------------------------

MARK OKADA

- ---------------------------------------------------------------------------------------------------------------
Type of Accounts Total Total Assets # of Accounts Managed Total Assets with
# of Accounts with Performance-Based Performance-Based
Managed (millions) Advisory Fee Advisory Fee (millions)
- ---------------------------------------------------------------------------------------------------------------
Registered Investment 13 $5,659 -- --
Companies:
- ---------------------------------------------------------------------------------------------------------------
Other Pooled Investment 30 $17,536 24 $15,686
Vehicles:
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Other Accounts: -- -- -- --
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POTENTIAL CONFLICTS OF INTERESTS

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

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

While the Adviser does not believe there will be frequent conflicts of
interest, if any, the Adviser and its affiliates have both subjective and
objective procedures and policies in place designed to manage the potential
conflicts of interest between the Adviser's fiduciary obligations to the Fund
and their similar fiduciary obligations to other clients so that, for example,
investment opportunities are allocated in a fair and equitable manner among the
Fund and such other clients. An investment opportunity that is suitable for
multiple clients of the Adviser and its affiliates may not be capable of being
shared among some or all of such clients due to the limited scale of the
opportunity or other factors, including regulatory restrictions imposed by the
1940 Act. There can be no assurance that the Adviser's or its affiliates'
efforts to allocate any particular investment opportunity fairly among all
clients for whom such opportunity is appropriate will result in an allocation of
all or part of such opportunity to the Fund. Not all conflicts of interest can
be expected to be resolved in favor of the Fund.

The Adviser expects to apply to the SEC for exemptive relief to enable
the Fund and registered investment companies advised by the Adviser to co-invest
with other accounts and funds managed by the Adviser and its affiliates in
certain privately-placed securities and other situations. There are no
assurances that the Adviser will receive the requested relief. If such relief is
not obtained and until it is obtained, the Adviser may be required to allocate
some investments solely to any of the Fund, a registered fund, or another
account or fund advised by the Adviser or its affiliates. This restriction could
preclude the Fund from investing in certain securities it would otherwise be
interested in and could adversely affect the speed at which the Fund is able to
invest its assets and, consequently, the performance of the Fund.

(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM
MEMBERS

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

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

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

OPTION IT PLAN. The purpose of the Plan is to attract and
retain the highest quality employees for positions of
substantial responsibility, and to provide additional
incentives to a select group of management or highly
compensated employees of the Fund so as to promote the success
of the Fund.

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

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

(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP

The following table sets forth the dollar range of equity securities
beneficially owned by each portfolio manager in the Fund as of August 31, 2007.

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DOLLAR RANGES OF EQUITY
SECURITIES BENEFICIALLY OWNED BY
NAME OF PORTFOLIO MANAGER PORTFOLIO MANAGER
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R. Joseph Dougherty None None
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Mark Okada $100,001 - $500,000
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(B) Not 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.

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 October 31, 2007
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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 October 31, 2007
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By (Signature and Title)* /S/ M. JASON BLACKBURN
-------------------------------------------------------
M. Jason Blackburn, Chief Financial Officer
(principal financial officer)

Date October 31, 2007
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* Print the name and title of each signing officer under his or her signature.