HIGHLAND FLOATING RATE ADVANTAGE FUND

                           HIGHLAND FLOATING RATE FUND

                         Supplement Dated July 20, 2005
          To Class A, B and C Shares Prospectuses Dated January 1, 2005

         This Supplement provides new and additional information beyond
             that contained in the Prospectus and should be read in
                        conjunction with the Prospectus.


On July 12,  2005,  the Board of  Trustees  of each of  Highland  Floating  Rate
Advantage Fund and Highland  Floating Rate Fund (the "Funds")  unanimously voted
to change the applicability of the Contingent  Deferred Sales Charge ("CDSC") to
certain  purchases  of Class A Shares of the  Funds.  Effective  July 20,  2005,
purchases of Class A shares bought in a single transaction at net asset value in
amounts of $5 million or more will be subject to a 1.00% CDSC if such shares are
sold,  redeemed  or  exchanged  within the first  three  months  following  such
purchase,  such three month  period to commence on the first day of the month in
which such shares were purchased. Accordingly, the Prospectuses are supplemented
as noted below.

FOOTNOTE #4 TO THE "FUND EXPENSES" TABLE FOUND ON PAGE 8 OF THE  PROSPECTUSES IS
REPLACED IN ITS ENTIRETY WITH THE FOLLOWING:

(4)      Class A shares  bought in single  transactions  of less than $5 million
         and without an initial sales charge in accounts  aggregating $1 million
         to $25  million  are  subject to a 1.00% CDSC if such  shares are sold,
         redeemed or exchanged  within the first 18 months after  purchase.  The
         18-month  period  begins  on the  first  day of the  month in which the
         purchase was made.  Class A shares  bought in a single  transaction  in
         amounts  of $5  million or more will be subject to a 1.00% CDSC if such
         shares are sold,  redeemed or  exchanged  within the first three months
         after the  purchase.  The three month period begins on the first day of
         the month in which the purchase was made.

THE  SUBSECTION  ENTITLED  "CLASS A SHARES"  UNDER THE HEADING  "MULTIPLE  SHARE
CLASSES" FOUND ON PAGE 33 OF HIGHLAND FLOATING RATE FUND AND PAGE 34 OF HIGHLAND
FLOATING RATE ADVANTAGE FUND IS REPLACED IN ITS ENTIRETY WITH THE FOLLOWING:

CLASS A SHARES. Your purchases of Class A shares are made at the public offering
price for these shares.  This price includes a sales charge that is based on the
amount of your initial  investment when you open your account.  The sales charge
you pay on an  additional  investment,  if any, is based on the total  amount of
your  additional  purchases and the current  value of your  account.  Shares you
purchase with reinvested  dividends or other  distributions are not subject to a
sales  charge.  A portion of the sales  charge is paid as a  commission  to your
financial advisor on the sale of Class A shares. The amount of the sales charge,
if any, differs depending on the amount you invest as shown in the table below.

                                       AS A % OF                  % OF OFFERING
                                       THE PUBLIC    AS A % OF    PRICE PAID TO
                                       OFFERING      YOUR NET     FINANCIAL
AMOUNT INVESTED                        PRICE         INVESTMENT   ADVISOR

Less than $100,000                      3.50            3.63         3.25
$100,000 to less than $500,000          2.25            2.30         2.00
$500,000 to less than $1,000,000        1.25            1.27         1.00
$1,000,000 or more*                     0.00            0.00         0.00


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* Class A shares  bought in single  transactions  of less  than $5  million  and
without  an  initial  sales  charge in  accounts  aggregating  $1 million to $25
million at the time of  purchase  are  subject to a 1.00% CDSC if the shares are
sold,  redeemed or  exchanged  within the first 18 months  after  purchase.  The
18-month  period  begins on the first day of the month in which the purchase was
made. Class A shares bought in a single  transaction in amounts of $5 million or
more will be  subject  to a 1.00%  CDSC if such  shares  are sold,  redeemed  or
exchanged  within the first three  months  after the  purchase.  The three month
period begins on the first day of the month in which the purchase was made.  The
CDSC does not apply to retirement plans purchased through a fee-based program.

For Class A share purchases of $1 million or more,  financial advisors receive a
cumulative commission from the Distributor as follows:

AMOUNT PURCHASED                                           COMMISSION %*

$1 million to less than $3 million                            1.00
$3 million to less than $5 million                            0.80
$5 million to less than $25 million                           0.50
$25 million or more                                           0.25

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* The  commission  to financial  advisors with respect to Class A shares is paid
monthly in arrears based on the commission rates set forth in this table.  Those
rates will be applied to the amount  originally  invested minus any  redemptions
(as  calculated  at month end) and will be paid ratably over the first 12 months
after the  investment  is made.  In  addition,  for Class A share  purchases  by
participants  in certain  group  retirement  plans  offered  through a fee-based
program,  financial  advisors receive a 1.00% commission from the Distributor on
all purchases of less than $3 million.















                INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE
                         PROSPECTUS FOR FUTURE REFERENCE