nvcsrs

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 811-08953

Highland Floating Rate Fund

(Exact name of registrant as specified in charter)

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

(Address of principal executive offices) (Zip code)

R. Joseph Dougherty
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 900
Dallas, Texas 75240

(Name and address of agent for service)

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

Date of fiscal year end: August 31

Date of reporting period: February 28, 2010

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

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

FUND PROFILE

Highland Floating Rate Fund

Objective

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

Net Assets as of February 28, 2010

$532.6 million

Portfolio Data as of February 28, 2010

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


Quality Breakdown as of 02/28/10 (%)*

A			0.6
Baa			4.3
Ba			15.5
B			65.4
Caa or lower			7.3
NR			6.9


Top 5 Sectors as of 02/28/10 (%)*

Healthcare			9.6
Cable/Wireless Video			9.5
Financial			7.5
Broadcasting			7.0
Diversified Media			6.4


Top 10 Holdings as of 02/28/10 (%)*

Broadstripe, LLC (Senior Loans)			6.4
CCS Medical, Inc. (Senior Loans)			3.3
Young Broadcasting, Inc. (Senior Loans)			2.8
LifeCare Holdings (Senior Loans)			2.5
Travelport, LLC (Senior Loans)			1.7
PBL Media Group Ltd. (Foreign Denominated Senior Loans)			1.7
Value Creation, Inc. (Senior Loans)			1.7
Sacher Funding Ltd. (Foreign Denominated Senior Loans)			1.5
Revlon Consumer Products Corp. (Senior Loans)			1.4
SMG H5 Pty., Ltd. (Foreign Denominated Senior Loans)			1.4


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

Semi-Annual Report | 1

FINANCIAL STATEMENTS



February 28, 2010		Highland Floating Rate Fund

A guide to understanding the Fund’s financial statements


Investment Portfolio		The Investment Portfolio details all of the Fund’s holdings and their value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification.

Statement of Assets and Liabilities		This statement details the Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all the Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and non-investment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period.

Statement of Operations		This statement details income earned by the Fund and the expenses accrued by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period, as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund’s net increase or decrease in net assets from operations.

Statements of Changes in Net Assets		These statements demonstrate how the Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distributions reinvestments) during the reporting period. The Statements of Changes in Net Assets also detail changes in the number of shares outstanding.

Statement of Cash Flows		This statement reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency during the period.

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

Notes to Financial Statements		These notes disclose the organizational background of the Fund, certain of its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies.

2 | Semi-Annual Report

INVESTMENT PORTFOLIO (unaudited)



February 28, 2010		Highland Floating Rate Fund


Principal Amount ($)			Value ($)
US Senior Loans (a) - 72.8%

AEROSPACE - 2.1%
		AWAS Capital, Inc.
		First Lien Term Loan,
	2,713,971	2.00%, 03/24/13		2,539,829
		Second Priority Term Loan,
	1,076,823	6.25%, 03/15/13		837,230
		Continental Airlines, Inc.
		Tranche A-1 Term Loan,
	285,714	3.63%, 06/01/11		277,357
		Tranche A-2 Term Loan,
	714,286	3.63%, 06/01/11		693,393
		Delta Air Lines, Inc.
	2,410,000	Credit-Linked Deposit Loan,
		2.17%, 04/30/12		2,260,713
		US Airways Group, Inc.
	5,681,194	Term Loan, 03/19/14 (b)		4,344,324

				10,952,846


BROADCASTING - 5.2%
		All3Media Intermediate Ltd.
	2,883,246	Facility B1, 2.63%, 08/31/14		2,450,759
		ComCorp Broadcasting, Inc.
		Revolving Loan,
	271,635	9.00%, 10/03/12 (c) (d)		225,349
		Term Loan,
	2,717,483	9.00%, 04/03/13 (c) (d)		2,254,424
		Univision Communications, Inc.
		Initial Term Loan,
	7,443,254	2.50%, 09/29/14		6,446,267
		Young Broadcasting, Inc.
		Term Loan,
	19,520,239	11/03/12 (e)		16,067,597
		Term Loan,
	42,286	9.00%, 04/15/10 (d)		42,286

				27,486,682


CABLE/WIRELESS VIDEO - 9.0%
		Broadstripe, LLC
		First Lien Term Loan, PIK,
	44,306,267	06/30/11 (d) (e)		36,047,578
		Revolver,
	1,428,203	03/06/14 (d) (e)		1,161,986
		Revolver, DIP,
	3,250,859	3.72%, 06/30/11 (d) (f)		3,247,608
		Northland Cable Television, Inc.
		First Lien Term Loan B,
	4,800,000	4.23%, 12/22/12		4,476,000
		Second Lien Term Loan,
	4,000,000	8.23%, 06/22/13		3,160,000

				48,093,172


CHEMICALS - 1.4%
		Lyondell Chemical Co.
		Dutch Revolving Credit Loan,
	12,034	12/20/13 (b) (e)		8,487
		Dutch Tranche A Dollar Term Loan,
	27,239	12/20/13 (b) (e)		19,211
		German Tranche B-1 Euro Term Loan,
	34,547	12/22/14 (b) (e)		24,365
		German Tranche B-2 Euro Term Loan,
	34,547	12/22/14 (b) (e)		24,365
		German Tranche B-3 Euro Term Loan,
	34,547	12/22/14 (b) (e)		24,365
		Primary Revolving Credit Loan,
	45,126	12/20/13 (b) (e)		31,826
	2,400,000	Roll-Up Loan, DIP,
		04/06/10 (b)		2,532,600
	85,978	U.S. Tranche A Dollar Term Loan,
		12/20/13 (b) (e)		60,638
	149,911	U.S. Tranche B-1 Dollar Term Loan,
		12/22/14 (b) (e)		105,729
	149,911	U.S. Tranche B-2 Dollar Term Loan,
		12/22/14 (b) (e)		105,729
	149,911	U.S. Tranche B-3 Dollar Term Loan,
		12/22/14 (b) (e)		105,729
		Texas Petrochemical, LP
	1,079,022	Incremental Term Loan B,
		2.81%, 06/27/13		1,006,188
	3,888,927	Term B Loan,
		2.81%, 06/27/13		3,626,424

				7,675,656


CONSUMER NON-DURABLES - 1.1%
		BioTech Research Labs/Philosophy
		Merger Sub, Inc.
		First Lien Term Loan,
	2,755,020	2.23%, 03/16/14 (b)		2,517,399
		KIK Custom Products, Inc.
		First Lien Canadian Term Loan,
	353,755	06/02/14 (b)		298,334
		First Lien U.S. Term Loan,
	2,063,568	06/02/14 (b)		1,740,279
		Second Lien Term Loan,
	2,000,000	12/01/14 (b)		1,180,000

				5,736,012


DIVERSIFIED MEDIA - 3.2%
		Cengage Learning Acquisitions, Inc.
	2,288,295	Term Loan, 2.75%, 07/03/14		2,001,549
		Cydcor, Inc.
		First Lien Tranche B Term Loan,
	2,458,613	9.00%, 02/05/13		2,301,876
		DTN, Inc.
		Tranche C Term Loan,
	1,345,578	5.25%, 03/10/13		1,308,574
		Endurance Business Media, Inc.
		Second Lien Term Loan,
	2,000,000	01/26/14 (e)		451,260
		Term Loan,
	2,725,785	07/26/13 (e)		817,735
		Harland Clarke Holdings Corp.
		Tranche B Term Loan,
	2,977,099	2.75%, 06/30/14		2,621,083
		Metro-Goldwyn-Mayer, Inc.
		Tranche B Term Loan,
	8,263,879	04/09/12 (b) (e)		5,019,481
		Tranche B-1 Term Loan,
	3,984,694	04/09/12 (b) (e)		2,420,303

				16,941,861


ENERGY - 3.2%
		ATP Oil & Gas Corp.
		Tranche B-1 Term Loan,
	696,105	11.25%, 07/15/14		700,118
		Tranche B-2 Term Loan,
	98,277	12.25%, 01/15/11		98,843

See accompanying Notes to Financial Statements. | 3

INVESTMENT PORTFOLIO (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund


Principal Amount ($)			Value ($)
US Senior Loans (continued)

ENERGY (continued)
		Big West Oil LLC
	1,100,000	Term Loan, 01/30/15 (b)		1,109,625
		Calumet Lubricants Co. LP
		Credit-Linked Letter of Credit,
	157,904	4.10%, 01/03/15		144,679
		Term Loan,
	1,172,390	4.25%, 01/03/15		1,074,202
		Monitor US Finco, Inc.
		Second Lien Term Loan,
	919,772	01/11/15 (d) (e)		—
	8,981,498	Value Creation, Inc.
		Term Loan, 12.50%, 02/15/11		9,363,212
		Venoco, Inc.
		Second Lien Term Loan,
	5,063,152	4.25%, 05/07/14		4,707,162

				17,197,841


FINANCIAL - 1.5%
		American General Finance Corp.
	1,600,000	Term Loan, 07/09/10 (b)		1,553,328
		Checksmart Financial Co.
		Second Lien Term Loan,
	2,500,000	05/01/13 (e)		312,500
		HUB International Ltd.
		Delayed Draw Term Loan,
	35,025	2.75%, 06/13/14		32,321
		Initial Term Loan,
	1,942,080	2.75%, 06/13/14		1,792,171
		Nuveen Investments, Inc.
		First Lien Term Loan,
	4,000,000	3.29%, 11/13/14		3,502,240
		Second Lien Term Loan,
	500,000	07/31/15 (b)		525,938
		Online Resources Corp.
	573,529	Term Loan, 2.73%, 02/21/12		476,029

				8,194,527


FOOD AND DRUG - 0.8%
		Rite Aid Corp.
		Tranche 2 Term Loan,
	1,989,873	1.98%, 06/04/14		1,777,216
		Tranche 3 Term Loan,
	1,970,029	6.00%, 06/04/14		1,885,811
		Tranche 4 Term Loan,
	750,000	9.50%, 06/10/15		784,155

				4,447,182


FOOD/TOBACCO - 4.2%
		DS Waters of America, Inc.
	2,743,333	Term Loan, 2.50%, 10/29/12		2,561,588
		DSW Holdings, Inc.
	5,500,000	Term Loan, 4.25%, 03/02/12		5,115,000
		Pierre Foods, Inc.
	684,000	Term Loan, 8.50%, 09/30/14		684,000
		Sturm Foods, Inc.
		First Lien Initial Term Loan,
	5,201,924	4.75%, 01/31/14		5,201,924
		Second Lien Initial Term Loan,
	7,312,500	8.25%, 07/31/14		7,269,832
		WM. Bolthouse Farms, Inc.
		First Lien Term Loan,
	500,000	5.50%, 02/11/16		501,095
		Second Lien Term Loan,
	1,000,000	9.50%, 08/08/16		998,750

				22,332,189


FOREST PRODUCTS/CONTAINERS - 0.8%
		Consolidated Container Co., LLC
		Second Lien Term Loan,
	2,000,000	09/28/14 (b)		1,730,000
		Smurfit-Stone Container
		Enterprises, Inc.
	2,750,000	Exit Term Loan, 01/02/16 (b)		2,743,111

				4,473,111


GAMING/LEISURE - 4.2%
		Fontainebleau Florida Hotel, LLC
		Tranche C Term Loan,
	9,000,000	06/06/12 (e)		2,970,000
		Ginn LA Conduit Lender, Inc.
		First Lien Tranche A
		Credit-Linked Deposit,
	8,648,045	06/08/11 (e)		724,274
		First Lien Tranche B Term Loan,
	18,530,803	06/08/11 (e)		1,575,118
		Lake at Las Vegas Joint Venture
	258,175	Mezzanine (e)		9,036
		Revolving Loan Credit-Linked
		Deposit Account,
	12,527,233	06/20/12 (e)		219,227
		Term Loan,
	136,483,060	06/20/12 (e)		1,730,792
		Term Loan DIP, PIK,
	14,098,694	9.73%, 07/16/10		4,229,608
		Las Vegas Sands, LLC
		Delayed Draw I Term Loan,
	724,675	2.01%, 05/23/14		638,710
		Tranche B Term Loan,
	3,586,587	2.01%, 05/23/14		3,161,128
		MGM Mirage, Inc.
		Advance Term Loan,
	2,792,663	6.00%, 10/03/11 (b)		2,692,924
		Revolver,
	1,000,000	10/03/11 (b)		908,750
		Nevada Land Group, LLC
		First Lien Initial Loan, PIK,
	244,665	40.23%, 11/10/13		244,665
		Second Lien Initial Loan,
	729,927	10.00%, 11/12/13 (g)		729,927
		Tamarack Resort, LLC
	280,618	Term Loan (e)		210,464
		VML US Finance, LLC
		Term B Delayed Draw Project Loan,
	640,318	4.76%, 05/25/12		611,049
		Term B Funded Project Loan,
	1,108,557	4.76%, 05/27/13		1,057,885
		WAICCS Las Vegas 3, LLC
		Second Lien Term Loan,
	5,000,000	02/01/11 (e)		506,250

				22,219,807

4 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund


Principal Amount ($)			Value ($)
US Senior Loans (continued)

HEALTHCARE - 8.9%
		Aveta, Inc.
		MMM Original Term Loan,
	810,499	5.48%, 08/22/11		797,665
		NAMM New Term Loan,
	120,403	5.48%, 08/22/11		118,497
		NAMM Original Term Loan,
	216,961	5.48%, 08/22/11		213,526
		PHMC Acquisition Term Loan,
	664,223	5.48%, 08/22/11		653,705
		CCS Medical, Inc.
		First Lien Term Loan,
	28,315,213	09/28/12 (e)		18,924,048
		Second Lien Term Loan,
	4,750,000	03/29/13 (e)		490,841
		Term Loan (DIP),
	1,151,491	15.00%, 03/26/10		1,134,218
		Graceway Pharmaceuticals, LLC
		Mezzanine Loan,
	4,500,000	8.48%, 11/01/13		1,856,250
		HCA, Inc.
		Tranche A-1 Term Loan,
	693,651	1.75%, 11/16/12		656,600
		Tranche B-1 Term Loan,
	4,951,043	2.50%, 11/18/13		4,704,159
		HealthSouth Corp.
		Tranche 1 Term Loan,
	1,084,307	2.51%, 03/10/13		1,052,797
		Tranche 2 Term Loan,
	892,431	4.05%, 03/15/14		893,917
		IM US Holdings, LLC
		Second Lien Term Loan,
	1,000,000	4.50%, 06/26/15		973,960
		LifeCare Holdings
	15,919,730	Term Loan, 4.50%, 08/10/12		14,128,760
		Rehabcare Group, Inc.
	1,000,000	Term Loan B, 6.00%, 11/24/15		1,000,625

				47,599,568


HOUSING - 2.8%
		Custom Building Products, Inc.
		First Lien Term Loan,
	855,321	8.00%, 10/29/11		857,459
		Second Lien Term Loan,
	2,356,250	10.75%, 04/20/12		2,282,617
		EH/Transeastern, LLC/TE TOUSA
	4,000,000	Term Loan (d) (e)		—
		Kyle Acquisition Group LLC
	1,142,857	Facility B (e)		85,714
	857,143	Facility C (e)		64,286
		LBREP/L-Suncal Master I, LLC
		First Lien Term Loan,
	4,843,945	01/18/11 (e)		145,318
		November 2005 Land Investors, LLC
		First Lien New Term Loan,
	1,117,890	03/31/10 (e)		176,067
		Pacific Clarion, LLC
	9,901,146	Term Loan (d) (e)		1,521,806
		Rhodes Cos., LLC, The
		First Lien Term Loan,
	2,998,071	11/21/10 (e)		606,903
		Roofing Supply Group, LLC
	1,580,273	Term Loan, 7.25%, 08/24/13		1,511,136
		Westgate Investments, LLC
		Senior Secured Loan,
	18,333,989	09/25/10 (e)		5,626,545
		Third Lien Term Loan,
	8,177,228	06/30/15 (e)		1,180,206
		Withers Preserve MB-I
	1,694,876	B-Note (d) (e)		649,985

				14,708,042


INFORMATION TECHNOLOGY - 2.3%
		Bridge Information Systems, Inc.
	421,463	Multidraw Term Loan (d) (e)		—
		CDW Corp.
	5,984,508	Term Loan, 4.23%, 10/10/14		5,131,716
		Infor Enterprise Solutions Holdings, Inc.
		Delayed Draw Term Loan,
	892,873	3.98%, 07/30/12		835,474
		Initial U.S. Term Loan,
	1,711,339	3.98%, 07/30/12		1,601,325
		Kronos, Inc.
		First Lien Initial Term Loan,
	1,431,929	2.25%, 06/11/14		1,357,204
		Second Lien Term Loan,
	1,850,000	6.00%, 06/11/15		1,743,625
		Verint Systems, Inc.
	1,832,025	Term Loan, 3.48%, 05/25/14		1,740,424

				12,409,768


MANUFACTURING - 1.4%
		Brand Energy & Infrastructure Services, Inc.
		First Lien Term B Loan,
	2,917,500	2.56%, 02/07/14		2,726,054
		Second Lien Term Loan,
	1,500,000	6.28%, 02/07/15		1,316,250
		Dana Holdings Corp.
	2,761,933	Term Advance, 4.82%, 01/30/15		2,702,096
		Hillman Group, Inc.
	629,729	Term B-1 Loan, 3.01%, 03/31/11		626,580

				7,370,980


MEDIA/TELECOMMUNICATIONS - 0.2%
		Entravision Communications Corp.
	1,000,000	Term Loan, 5.51%, 03/29/13		998,440


METALS/MINERALS - 0.3%
		Euramax International, Inc.
		Domestic Term Loan (Cash Pay),
	1,040,095	10.00%, 06/29/13		876,280
		Domestic Term Loan, PIK,
	1,065,450	14.00%, 06/29/13		897,642

				1,773,922


RETAIL - 4.4%
		Burlington Coat Factory
		Warehouse Corp.
		Term Loan,
	7,326,617	2.50%, 05/28/13 (b)		6,760,453
		Guitar Center, Inc.
	3,420,116	Term Loan, 3.73%, 10/09/14		3,041,047

See accompanying Notes to Financial Statements. | 5

INVESTMENT PORTFOLIO (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund


Principal Amount ($)			Value ($)
US Senior Loans (continued)

RETAIL (continued)
		Michaels Stores, Inc.
	848,213	B-1 Term Loan,
		2.52%, 10/31/13		767,951
	1,141,504	B-2 Term Loan,
		4.77%, 07/31/16		1,091,882
	8,000,000	Revlon Consumer Products Corp.
		Term Loan, 4.26%, 01/15/12		7,942,120
	4,500,000	Spirit Finance Corp.
		Term Loan, 3.25%, 08/01/13		3,555,000

				23,158,453


SERVICE - 4.0%
		Audio Visual Services Group, Inc.
		Second Lien Term Loan,
	2,154,079	5.76%, 08/28/14		484,668
		First Data Corp.
		Initial Tranche B-1 Term Loan,
	1,483,528	2.98%, 09/24/14		1,302,553
		NES Rentals Holdings, Inc.
		Second Lien Permanent Term Loan,
	2,437,788	7.09%, 07/20/13		2,050,790
		Sabre, Inc.
		Initial Term Loan,
	4,400,000	2.49%, 09/30/14		3,878,908
		Safety-Kleen Systems, Inc.
		Synthetic Letter of Credit,
	693,226	3.13%, 08/02/13		656,832
		Term B Loan,
	2,966,542	2.75%, 08/02/13		2,810,798
		Thermo Fluids (Northwest), Inc.
		Tranche B Term Loan,
	934,612	5.25%, 06/27/13		724,324
		Travelport, LLC
		New Post-First Amendment & Restatement Synthetic Letter of Credit,
	10,000,000	2.78%, 08/23/13		9,436,850

				21,345,723


TELECOMMUNICATIONS - 3.1%
		Avaya, Inc.
		Term B-1 Loan,
	2,992,296	3.00%, 10/24/14		2,626,563
		Digicel International Finance, Ltd.
		Tranche A Term Loan,
	3,833,350	2.81%, 03/30/12		3,708,766
		Integra Telecom Holdings, Inc.
		First Lien Term Loan,
	1,997,449	10.50%, 08/31/13 (b)		2,006,198
		Knowledgepoint360 Group, LLC
		Second Lien Term Loan,
	1,000,000	7.25%, 04/13/15		650,000
		Level 3 Financing, Inc.
		Tranche A Term Loan,
	4,700,000	2.50%, 03/13/14		4,264,287
		Tranche B Term Loan,
	1,000,000	11.50%, 03/13/14		1,084,500
		U.S. Telepacific Corp.
		Term Loan Advance,
	2,000,000	9.25%, 08/17/15		2,003,750

				16,344,064


TRANSPORTATION - AUTOMOTIVE - 3.1%
		Federal-Mogul Corp.
		Tranche B Term Loan,
	1,981,432	2.17%, 12/29/14		1,747,554
		Tranche C Term Loan,
	1,010,935	2.17%, 12/28/15		891,609
		Ford Motor Co.
		Tranche B-1 Term Loan,
	4,973,114	3.26%, 12/15/13		4,679,800
		Key Safety Systems, Inc.
		First Lien Term Loan,
	7,298,080	2.48%, 03/08/14		5,808,031
		Second Lien Term Loan,
	2,000,000	5.24%, 09/08/14		700,000
		Motor Coach Industries International, Inc.
		Second Lien Tranche A,
	1,869,601	11.75%, 06/30/12 (d)		1,085,491
		Second Lien Tranche B,
	1,151,868	11.75%, 06/30/12 (d)		668,775
		Remy International, Inc.
		First Lien Tranche B Term Loan,
	1,165,775	5.75%, 03/20/10		1,108,459

				16,689,719


TRANSPORTATION - LAND TRANSPORTATION - 0.2%
		SIRVA Worldwide, Inc.
		Revolving Credit Loan Exit Finance,
	654,494	13.00%, 05/12/12 (f)		330,520
		Second Lien Term Loan,
	1,920,200	12.00%, 05/12/15		288,030
		Term Loan Exit Finance,
	843,265	9.54%, 05/12/12		421,633

				1,040,183


UTILITY - 4.6%
		Bosque Power Co., LLC
	7,422,299	Term Loan, 5.49%, 01/16/15		5,622,391
		Coleto Creek Power, LP
		First Lien Synthetic Letter of Credit,
	183,783	3.00%, 06/28/13		167,013
		First Lien Term Loan,
	3,316,670	3.00%, 06/28/13		3,011,271
	4,825,000	Second Lien Term Loan,
		4.23%, 06/28/13		3,950,469
		Entegra TC, LLC
		Third Lien Term Loan, PIK,
	6,085,473	6.25%, 10/19/15		3,194,873
		GBGH, LLC
		First Lien Term Loan,
	1,762,115	4.00%, 06/09/13 (d)		1,464,846
		Second Lien Term Loan, PIK,
	564,971	12.00%, 06/09/14 (d)		401,920
		Mach Gen, LLC
		First Lien Synthetic Letter of Credit,
	275,103	2.25%, 02/22/13		258,138
		Texas Competitive Electric
		Holdings Co., LLC
		Initial Tranche B-2 Term Loan,
	7,904,115	3.73%, 10/10/14		6,395,970

				24,466,891

6 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund


Principal Amount ($)			Value ($)
US Senior Loans (continued)

WIRELESS COMMUNICATIONS - 0.8%
		MetroPCS Wireless, Inc.
		Tranche B Term Loan,
	4,349,820	2.50%, 11/03/13		4,206,994


		Total US Senior Loans (Cost $625,787,139)		387,863,633


Principal Amount

Foreign Denominated Senior Loans (a) - 16.0%

AUSTRALIA - 3.6%
AUD
		PBL Media Group Ltd.
		Facility A Term Loan,
	2,790,881	6.30%, 12/31/12		2,069,075
		Facility B Tranche 1 Term Loan,
	12,375,240	6.55%, 02/07/13		9,405,912
		SMG H5 Pty., Ltd.
		Facility A Term Loan,
	9,640,647	6.21%, 12/24/12		7,899,413

				19,374,400


AUSTRIA - 1.6%
EUR
		Sacher Funding Ltd.
	17,231,147	Euro Term Loan, 05/14/14 (e)		8,533,241


GERMANY - 0.6%
EUR
		Kabel Baden Wurttemburg
		GmbH & Co. KG
		Second Lien Facility,
	2,500,000	5.42%, 12/09/15		3,275,288
		Schieder Mobel Holding, GmbH
	381,674	Delayed Draw Term Loan (d) (e)		101,882

				3,377,170


SPAIN - 1.4%
EUR
		Grupo Gasmedi, S.L.
		Second Lien Tranche E Term Loan,
	3,166,667	5.42%, 02/11/16		3,241,170
		Tranche B Term Loan,
	1,610,342	3.17%, 08/11/14		1,867,994
		Tranche C Term Loan,
	1,610,342	3.67%, 08/11/15		1,867,994
		Maxi PIX Sarl
		Euro Term Loan, PIK,
	2,847,259	8.66%, 05/31/16		330,281

				7,307,439


UNITED KINGDOM - 7.0%
EUR
		Dollar Financial UK Ltd.
		UK Borrower Euro Term Loan,
	141,630	7.00%, 10/30/12		186,518


GBP
		Airport Development & Investment Ltd.
		Second Lien Facility,
	3,131,600	4.85%, 04/07/11		4,499,355
		All3Media Intermediate Ltd.
		Facility B1,
	714,753	3.29%, 08/31/14		943,958
		Facility C,
	2,585,073	3.52%, 08/31/15		3,414,046
		Facility D,
	3,000,000	5.39%, 02/29/16		3,311,207
		Mezzanine Loan, PIK,
	4,148,119	4.65%, 08/31/16		4,578,427
		Henson No. 4 Ltd.
		Facility B,
	1,875,035	4.54%, 10/30/13		2,447,770
		Facility C,
	1,875,035	5.04%, 02/13/15		2,462,043
		Highland Acquisitions Ltd.
		Facility B,
	1,000,000	3.39%, 12/31/14		1,368,251
		Facility C,
	1,000,000	3.89%, 12/31/15		1,375,864
		Mezzanine Facility, PIK,
	1,179,088	5.64%, 12/29/16		1,495,867
		Towergate Partnership Ltd.
		Facility A,
	3,125,000	3.11%, 10/31/12		4,329,308
		Facility B,
	3,125,000	3.61%, 10/31/13		4,329,308
		Virgin Media Investment Holdings Ltd.
	1,750,000	C Facility, 3.57%, 03/04/13		2,510,759

				37,066,163


UNITED STATES - 1.8%
EUR
		Infor Enterprise Solutions
		Holdings, Inc.
		Initial Euro Term Loan,
	1,875,155	4.13%, 07/28/12		2,273,276


GBP
		Aramark Corp.
	1,212,500	U.K. Term Loan, 2.73%, 01/26/14		1,730,534
		Knowledgepoint360 Group, LLC
		First Lien U.K. Term Loan,
	1,586,913	3.90%, 04/13/14		1,932,725
		PlayPower, Inc.
		Tranche B Sterling Term Loan,
	2,393,411	5.62%, 06/30/12		3,443,311

				7,106,570


		Total Foreign Denominated Senior Loans (Cost $126,132,847)		85,224,777

See accompanying Notes to Financial Statements. | 7

INVESTMENT PORTFOLIO (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund


Principal Amount ($)			Value ($)
Asset-Backed Securities (h) (i) - 3.2%
		ABCLO, Ltd.
		Series 2007-1A, Class C,
	2,000,000	2.10%, 04/15/21		1,322,070
		ACA CLO, Ltd.
		Series 2006-2A, Class B,
	4,800,000	0.97%, 01/20/21		2,712,000
		Series 2007-1A, Class D,
	1,000,000	2.60%, 06/15/22		630,000
		Babson CLO, Ltd.
		Series 2007-1A, Class C,
	1,000,000	1.50%, 01/18/21		524,400
		Series 2007-2A, Class D,
	1,000,000	1.95%, 04/15/21		550,000
		Cent CDO, Ltd.
		Series 2007-14A, Class D,
	1,000,000	1.55%, 04/15/21		640,000
		Series 2007-15A, Class C,
	1,000,000	2.51%, 03/11/21		575,000
		Columbus Nova CLO, Ltd.
		Series 2007-1A, Class D,
	2,000,000	1.60%, 05/16/19		1,175,000
		Cornerstone CLO, Ltd.
		Series 2007-1A, Class C,
	2,500,000	2.65%, 07/15/21		1,562,500
		Goldman Sachs Asset
		Management CLO, PLC,
		Series 2007-1A, Class E,
	948,815	5.25%, 08/01/22		246,692
		GSC Partners CDO Fund, Ltd.,
		Series 2007-8A, Class C,
	1,000,000	1.73%, 04/17/21		263,600
		Gulf Stream Sextant CLO, Ltd.
		Series 2007-1A, Class D,
	1,013,186	2.65%, 06/17/21		516,724
		ING Investment Management
		Series 2006-3A, Class C,
	1,000,000	1.70%, 12/13/20		580,000
		Madison Park Funding Ltd.
		Series 2007-5A, Class C,
	3,000,000	1.70%, 02/26/21		1,603,500
		Navigator CDO, Ltd.
		Series 2006-2A, Class D,
	1,005,684	3.75%, 09/20/20 (e)		251,421
		Ocean Trails CLO
		Series 2007-2A, Class D,
	1,622,089	4.75%, 06/27/22		778,603
		PPM Grayhawk CLO, Ltd.
		Series 2007-1A, Class D,
	826,734	3.85%, 04/18/21		382,282
		Primus CLO, Ltd.
		Series 2007-2A, Class E,
	2,091,094	5.00%, 07/15/21		940,992
		Stanfield Daytona CLO, Ltd.
		Series 2007-1A, Class B1L,
	1,000,000	1.60%, 04/27/21		480,000
		Stone Tower CLO, Ltd.
		Series 2007-6A, Class C,
	2,000,000	1.60%, 04/17/21		1,000,000

		Total Asset-Backed Securities (Cost $22,308,150)		16,734,784


Claims (d) (j) - 0.1%

RETAIL - 0.0%
		Home Interiors & Gifts, Inc.
	28,851,468	Proof of Claims, 03/31/11		43,277


UTILITY - 0.1%
		Mirant Corp.
	3,000,000	03 Revolver		30,000
	6,000,000	364 Day Revolver		60,000
	7,000,000	California Claim Loan		70,000
	2,500,000	Cleco Trade Claim		25,000

				185,000

		Total Claims (Cost $26,925,176)		228,277


Shares

Common Stocks (j) - 0.4%

BROADCASTING - 0.0%
	152,363	Communications Corp. of America (c) (d)		—


CHEMICALS - 0.0%
	20,650	Panda Hereford Ethanol, L.P. (d)		225,085


ENERGY - 0.0%
	427,210	Value Creation, Inc. (d)		—


GAMING/LEISURE - 0.2%
	4	Nevada Land Group, LLC (d)		1,089,655


METALS/MINERALS - 0.1%
	6,158	Euramax International, Inc. (d)		502,124


TRANSPORTATION - LAND TRANSPORTATION - 0.1%
	10,048	SIRVA Worldwide, Inc. (d)		426,437


UTILITY - 0.0%
	132,930	Entegra TC, LLC		96,374
	3,178	GBGH, LLC (d)		—

				96,374

		Total Common Stocks (Cost $4,044,398)		2,339,675


Total Investments - 92.5% (Cost of $805,197,710) (k)				492,391,146


Other Assets & Liabilities, Net - 7.5%				40,162,005


Net Assets - 100.0%			$	532,553,151


(a)		Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which Highland Floating Rate Fund (the “Fund”) invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread. (Unless otherwise identified by footnote (g), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the

8 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund


		weighted average rate at February 28, 2010. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual maturity may be substantially less than the stated maturity shown.

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

(c)		Affiliated issuer. See Note 9.

(d)		Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate market value of $51,345,514, or 9.6% of net assets, were fair valued as of February 28, 2010.

(e)		The issuer is in default of its payment obligation. Income is not being accrued.

(f)		Senior loan assets had additional unfunded loan commitments. See Note 8.

(g)		Fixed rate senior loan.

(h)		Floating rate asset. The interest rate shown reflects the rate in effect at February 28, 2010.

(i)		Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers.

		At February 28, 2010, these securities amounted to $16,734,784 or 3.2% of net assets.

(j)		Non-income producing security.

(k)		Cost for U.S. federal income tax purposes is $806,319,019.

AUD		Australian Dollar

EUR		Euro Currency

GBP		Great Britain Pound

CDO		Collateralized Debt Obligation

CLO		Collateralized Loan Obligation

DIP		Debtor-in-Possession

PIK		Payment-in-Kind

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

Principal

Contracts

Amount

Net

to Buy or

Covered by

Unrealized

to Sell

Currency

Contracts

Expiration

Appreciation*

Sell

EUR

19,320,000

08/04/10

645,953

Sell

GBP

19,100,000

05/14/10

2,785,710

Sell

GBP

9,748,600

08/04/10

696,862

4,128,525


*		The primary risk exposure is foreign exchange contracts (See Notes 2 and 11).

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


Diversified Media	3.6	%
Financial	3.3	%
Broadcasting	2.3	%
Retail	1.7	%
Healthcare	1.3	%
Cable/Wireless Video	1.1	%
Aerospace	0.8	%
Consumer Durables	0.7	%
Information Technology	0.4	%
Food/Tobacco	0.4	%
Telecommunications	0.4	%

Total	16.0	%

See accompanying Notes to Financial Statements. | 9

STATEMENT OF ASSETS AND LIABILITIES



February 28, 2010 (unaudited)		Highland Floating Rate Fund


	($)
Assets:
Unaffiliated issuers, at value (cost $801,365,557)		489,911,373
Affiliated issuers, at value (cost $3,832,153) (Note 9)		2,479,773

Total investments, at value (cost $805,197,710)		492,391,146
Cash		46,118,532
Foreign currency (Cost $382,626)		387,629
Net unrealized appreciation on forward foreign currency contracts		4,128,525
Receivable for:
Investments sold		19,616,230
Dividends and interest receivable		3,674,888
Fund shares sold		279,587
Prepaid litigation fee		362,191
Other assets		172,099

Total assets		567,130,827


Liabilities:
Net discount and unrealized depreciation on unfunded transactions (Note 8)		247,562
Payables for:
Distributions		670,127
Investments purchased		32,455,539
Investment advisory fee payable (Note 4)		263,039
Administration fee (Note 4)		80,935
Trustees’ fees (Note 4)		3,292
Service and distribution fees (Note 4)		245,242
Commitment fee payable (Note 7)		2,187
Legal fees		234,759
Accrued expenses and other liabilities		374,994

Total liabilities		34,577,676

Net Assets		532,553,151


Composition of Net Assets:
Par value (Note 1)		83,428
Paid-in capital		1,167,992,263
Overdistributed net investment income (Note 3)		(10,297,840	)
Accumulated net realized gain/(loss) from investments, forward foreign currency contracts and foreign currency transactions		(315,939,666	)
Net unrealized appreciation/(depreciation) from investments, unfunded transactions, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currency		(309,285,034	)

Net Assets		532,553,151


Class A
Net assets		190,716,319
Shares outstanding (unlimited authorization)		29,863,506
Net asset value per share (Net assets/shares outstanding)		6.39	^(a)
Maximum offering price per share (100 / 96.50 of $6.39)		6.62	^(b)

Class B
Net assets		14,894,657
Shares outstanding (unlimited authorization)		2,335,591
Net asset value and offering price per share (Net assets/shares outstanding)		6.38	^(a)

Class C
Net assets		288,807,373
Shares outstanding (unlimited authorization)		45,253,010
Net asset value and offering price per share (Net assets/shares outstanding)		6.38	^(a)

Class Z
Net assets		38,134,802
Shares outstanding (unlimited authorization)		5,975,398
Net asset value, offering and redemption price per share (Net assets/shares outstanding)		6.38


(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.

10 | See accompanying Notes to Financial Statements.

STATEMENT OF OPERATIONS



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


	($)
Investment Income:
Interest from unaffiliated issuers		15,078,767
Interest from affiliated issuers (Note 9)		210,835

Total investment income		15,289,602

Expenses:
Investment advisory fees (Note 4)		1,762,433
Administration fees (Note 4)		542,287
Accounting service fees		95,271
Distribution fee: (Note 4)
Class A		96,480
Class B		36,726
Class C		878,279
Service fee: (Note 4)
Class A		241,199
Class B		20,403
Class C		365,950
Transfer agent fee		404,289
Trustees’ fees (Note 4)		98,225
Custodian fees		33,798
Registration fees		22,315
Reports to shareholders		209,364
Audit fees		45,591
Legal fees		852,404
Insurance expense		100,932
Commitment fee expense (Note 7)		32,906
Litigation expense		37,809
Other expenses		46,762

Net expenses		5,923,423

Net investment income		9,366,179


Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on investments from unaffiliated issuers		(27,913,159	)
Net realized gain/(loss) on forward foreign currency contracts (1)		(2,740,177	)
Net realized gain/(loss) on foreign currency transactions		1,379,063
Net change in unrealized appreciation/(depreciation) on investments		64,147,460
Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 8)		177,557
Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts (1)		6,699,473
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency		(77,184	)

Net realized and unrealized gain/(loss) on investments		41,673,033

Net increase in net assets from operations		51,039,212


(1)		The primary risk exposure is foreign exchange contracts (See Notes 2 and 11).

See accompanying Notes to Financial Statements. | 11

STATEMENTS OF CHANGES IN NET ASSETS

Highland Floating Rate Fund


	Six Months Ended
	February 28, 2010			Year Ended
	(unaudited)			August 31, 2009
	($)			($)
From Operations
Net investment income		9,366,179			44,072,314
Net realized gain/(loss) on investments and foreign currency transactions		(29,274,273	)		(183,107,117	)
Net change in unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currency		70,947,306			(134,600,480	)

Net change in net assets from operations		51,039,212			(273,635,283	)


Distributions Declared to Shareholders
From net investment income
Class A		(3,698,513	)		(27,054,721	)
Class B		(286,028	)		(3,171,260	)
Class C		(4,868,120	)		(34,673,576	)
Class Z		(835,124	)		(6,903,087	)

Total distributions declared to shareholders		(9,687,785	)		(71,802,644	)


Share Transactions

Class A
Subscriptions		9,827,739			38,704,218
Distributions reinvested		1,822,595			14,260,548
Redemptions		(56,662,745	)		(189,510,081	)

Net decrease		(45,012,411	)		(136,545,315	)

Class B
Subscriptions		5,606			645,806
Distributions reinvested		167,280			1,885,709
Redemptions		(6,763,252	)		(32,757,532	)

Net decrease		(6,590,366	)		(30,226,017	)

Class C
Subscriptions		5,101,421			13,569,281
Distributions reinvested		2,374,597			16,182,887
Redemptions		(58,901,023	)		(156,492,881	)

Net decrease		(51,425,005	)		(126,740,713	)

Class Z
Subscriptions		1,163,173			5,241,711
Distributions reinvested		262,397			2,194,780
Redemptions		(12,518,137	)		(51,422,068	)

Net decrease		(11,092,567	)		(43,985,577	)

Net decrease from share transactions		(114,120,349	)		(337,497,622	)

Total decrease in net assets		(72,768,922	)		(682,935,549	)


Net Assets:
Beginning of period		605,322,073			1,288,257,622

End of period (including overdistributed net investment income of $(10,297,840) and $(9,976,234), respectively)		532,553,151			605,322,073

12 | See accompanying Notes to Financial Statements.

STATEMENT OF CASH FLOWS



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


	($)
Cash Flows Provided by Operating Activities
Net investment income		9,366,179

Adjustments to Reconcile Net Investment Income to Net Cash and Foreign Currency Provided by Operating Activities
Purchase of investment securities		(138,116,825	)
Proceeds from disposition of investment securities		210,694,154
Decrease in receivable for investments sold		10,505,911
Decrease in interest and fees receivable		1,014,986
Increase in prepaid litigation fees		(362,191	)
Decrease in other assets		11,897
Net amortization/(accretion) of premium/(discount)		(2,321,297	)
Mark-to-market on realized and unrealized gain/(loss) on foreign currency		(1,438,298	)
Increase in payable for investments purchased		15,874,282
Decrease in payables to related parties		(54,394	)
Increase in other expenses and liabilities		184,339

Net cash and foreign currency provided by operating activities		105,358,743


Cash Flows Used by Financing Activities
Proceeds from shares sold		16,204,930
Payment of shares redeemed		(134,845,157	)
Distributions paid in cash		(5,106,618	)

Net cash flow used by financing activities		(123,746,845	)

Net decrease in cash and foreign currency		(18,388,102	)


Cash and Foreign Currency
Beginning of the period		64,894,263

End of the period		46,506,161


Supplemental disclosure of cash flow information:
Cash paid during the period for commitment fees		30,719

14 | See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS

Highland Floating Rate Fund

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


				Years Ended August 31,
	Six Months Ended
	February 28, 2010
Class A Shares	(unaudited)			2009			2008			2007			2006			2005

Net Asset Value, Beginning of Period	$	5.91		$	8.31		$	9.65		$	9.95		$	9.88		$	9.80

Income from Investment Operations:
Net investment income^(a)		0.11			0.37			0.63			0.75			0.70			0.49
Net realized and unrealized gain/(loss)^(a)		0.49			(2.19	)		(1.36	)		(0.29	)		0.07			0.08

Total from investment operations		0.60			(1.82	)		(0.73	)		0.46			0.77			0.57

Less Distributions Declared to Shareholders:
From net investment income		(0.12	)		(0.58	)		(0.61	)		(0.76	)		(0.70	)		(0.49	)

Total distributions declared to shareholders		(0.12	)		(0.58	)		(0.61	)		(0.76	)		(0.70	)		(0.49	)

Net Asset Value, End of Period	$	6.39		$	5.91		$	8.31		$	9.65		$	9.95		$	9.88
Total return^(b)		10.16	%^(c)		(21.44	)%		(7.62	)%		4.28	%^(d)		8.18	%		5.93	%

Ratios to Average Net Assets/ Supplemental Data:
Net assets, end of period (000’s)	$	190,716		$	221,017		$	483,320		$	926,800		$	732,767		$	355,998
Total expenses excluding interest expense		1.93	%		1.66	%		1.42	%		1.12	%		1.18	%		1.23	%
Interest expense		—			—	^(f)		0.01	%		0.03	%		0.04	%		0.05	%
Waiver/reimbursement		—			(0.01	)%		(0.01	)%		—			(0.01	)%		(0.08	)%
Net expenses including interest expense^(e)		1.93	%		1.65	%		1.42	%		1.15	%		1.21	%		1.20	%
Net investment income		3.71	%		6.14	%		6.92	%		7.55	%		7.08	%		5.05	%
Portfolio turnover rate		27	%^(c)		27	%		24	%		86	%		64	%		75	%


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

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

(c)		Not annualized.

(d)		A late audit adjustment was made to net asset value, however, performance was not recalculated using the adjusted net asset value. Rather total return is calculated using the net asset value used for trading at the close of business on August 31, 2007.

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

(f)		Rounds to less than 0.01%.

See accompanying Notes to Financial Statements. | 15

FINANCIAL HIGHLIGHTS

Highland Floating Rate Fund

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


				Years Ended August 31,
	Six Months Ended
	February 28, 2010
Class B Shares	(unaudited)			2009			2008			2007			2006			2005

Net Asset Value, Beginning of Period	$	5.91		$	8.30		$	9.64		$	9.95		$	9.87		$	9.80

Income from Investment Operations:
Net investment income^(a)		0.10			0.36			0.59			0.72			0.67			0.46
Net realized and unrealized gain/(loss)^(a)		0.47			(2.19	)		(1.35	)		(0.31	)		0.08			0.06

Total from investment operations		0.57			(1.83	)		(0.76	)		0.41			0.75			0.52

Less Distributions Declared to Shareholders:
From net investment income		(0.10	)		(0.56	)		(0.58	)		(0.72	)		(0.67	)		(0.45	)

Total distributions declared to shareholders		(0.10	)		(0.56	)		(0.58	)		(0.72	)		(0.67	)		(0.45	)

Net Asset Value, End of Period	$	6.38		$	5.91		$	8.30		$	9.64		$	9.95		$	9.87
Total return^(b)		9.80	%^(c)		(21.61	)%		(8.05	)%		4.03	%		7.82	%		5.46	%

Ratios to Average Net Assets/ Supplemental Data:
Net assets, end of period (000’s)	$	14,895		$	20,246		$	67,784		$	123,580		$	150,922		$	169,780
Total expenses excluding interest expense		2.28	%		2.01	%		1.77	%		1.47	%		1.53	%		1.58	%
Interest expense		—			—	^(e)		0.01	%		0.03	%		0.04	%		0.05	%
Waiver/reimbursement		—			(0.01	)%		(0.01	)%		—			(0.01	)%		(0.08	)%
Net expenses including interest expense^(d)		2.28	%		2.00	%		1.77	%		1.50	%		1.56	%		1.55	%
Net investment income		3.36	%		5.79	%		6.57	%		7.20	%		6.73	%		4.70	%
Portfolio turnover rate		27	%^(c)		27	%		24	%		86	%		64	%		75	%


(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 CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(c)		Not annualized.

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

(e)		Rounds to less than 0.01%.

16 | See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS

Highland Floating Rate Fund

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


				Years Ended August 31,
	Six Months Ended
	February 28, 2010
Class C Shares	(unaudited)			2009			2008			2007			2006			2005

Net Asset Value, Beginning of Period	$	5.91		$	8.30		$	9.64		$	9.95		$	9.87		$	9.80

Income from Investment Operations:
Net investment income^(a)		0.10			0.34			0.58			0.70			0.65			0.45
Net realized and unrealized gain/(loss)^(a)		0.47			(2.18	)		(1.35	)		(0.30	)		0.08			0.06

Total from investment operations		0.57			(1.84	)		(0.77	)		0.40			0.73			0.51

Less Distributions Declared to Shareholders:
From net investment income		(0.10	)		(0.55	)		(0.57	)		(0.71	)		(0.65	)		(0.44	)

Total distributions declared to shareholders		(0.10	)		(0.55	)		(0.57	)		(0.71	)		(0.65	)		(0.44	)

Net Asset Value, End of Period	$	6.38		$	5.91		$	8.30		$	9.64		$	9.95		$	9.87
Total return^(b)		9.72	%^(c)		(21.73	)%		(8.19	)%		3.87	%		7.65	%		5.30	%

Ratios to Average Net Assets/ Supplemental Data:
Net assets, end of period (000’s)	$	288,807		$	317,889		$	612,137		$	931,623		$	627,964		$	366,841
Total expenses excluding interest expense		2.43	%		2.16	%		1.92	%		1.62	%		1.68	%		1.73	%
Interest expense		—			—	^(e)		0.01	%		0.03	%		0.04	%		0.05	%
Waiver/reimbursement		—			(0.01	)%		(0.01	)%		—			(0.01	)%		(0.08	)%
Net expenses including interest expense^(d)		2.43	%		2.15	%		1.92	%		1.65	%		1.71	%		1.70	%
Net investment income		3.21	%		5.64	%		6.42	%		7.05	%		6.58	%		4.55	%
Portfolio turnover rate		27	%^(c)		27	%		24	%		86	%		64	%		75	%


(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 CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(c)		Not annualized.

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

(e)		Rounds to less than 0.01%.

See accompanying Notes to Financial Statements. | 17

FINANCIAL HIGHLIGHTS

Highland Floating Rate Fund

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


				Years Ended August 31,
	Six Months Ended
	February 28, 2010
Class Z Shares	(unaudited)			2009			2008			2007			2006			2005

Net Asset Value, Beginning of Period	$	5.91		$	8.30		$	9.64		$	9.95		$	9.87		$	9.80

Income from Investment Operations:
Net investment income^(a)		0.12			0.40			0.66			0.79			0.74			0.53
Net realized and unrealized gain/(loss)^(a)		0.47			(2.19	)		(1.36	)		(0.31	)		0.08			0.06

Total from investment operations		0.59			(1.79	)		(0.70	)		0.48			0.82			0.59

Less Distributions Declared to Shareholders:
From net investment income		(0.12	)		(0.60	)		(0.64	)		(0.79	)		(0.74	)		(0.52	)

Total distributions declared to shareholders		(0.12	)		(0.60	)		(0.64	)		(0.79	)		(0.74	)		(0.52	)

Net Asset Value, End of Period	$	6.38		$	5.91		$	8.30		$	9.64		$	9.95		$	9.87
Total return ^(b)		10.15	%^(c)		(21.06	)%		(7.40	)%		4.75	%		8.57	%		6.20	%

Ratios to Average Net Assets/ Supplemental Data:
Net assets, end of period (000’s)	$	38,135		$	46,170		$	125,017		$	346,195		$	225,284		$	192,482
Total expenses excluding interest expense		1.58	%		1.31	%		1.07	%		0.77	%		0.83	%		0.88	%
Interest expense		—			—	^(e)		0.01	%		0.03	%		0.04	%		0.05	%
Waiver/reimbursement		—			(0.01	)%		(0.01	)%		—			(0.01	)%		(0.08	)%
Net expenses including interest expense^(d)		1.58	%		1.30	%		1.07	%		0.80	%		0.86	%		0.85	%
Net investment income		4.06	%		6.49	%		7.27	%		7.90	%		7.43	%		5.40	%
Portfolio turnover rate		27	%^(c)		27	%		24	%		86	%		64	%		75	%


(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. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(c)		Not annualized.

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

(e)		Rounds to less than 0.01%.

18 | See accompanying Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS (unaudited)



February 28, 2010		Highland Floating Rate Fund

Note 1. Organization

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

Investment Objective

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

Fund Shares

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

Note 2. Significant Accounting Policies

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

Use of Estimates

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

Fund Valuation

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

Valuation of Investments

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

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

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

Semi-Annual Report | 19

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

Fair Value Measurements:

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


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


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


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

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

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund’s assets as of February 28, 2010 is as follows:


					Level 2		Level 3
			Level 1		Significant		Significant
	Total Value at		Quoted		Observable		Unobservable
Investment in Securities	February 28, 2010		Price		Input		Input
Common Stocks
Chemicals	$	225,085	$	—	$	—	$	225,085
Gaming/Leisure		1,089,655		—		—		1,089,655
Metals/Minerals		502,124		—		—		502,124
Transportation — Land Transportation		426,437		—		—		426,437
Utility		96,374		—		—		96,374
Debt
Senior Loans		473,088,410		—		292,342,889		180,745,521
Asset-Backed Securities		16,734,784		—		—		16,734,784
Claims		228,277		—		—		228,277

Total	$	492,391,146	$	—	$	292,342,889	$	200,048,257


Other Financial Instruments*
Liabilities	$	4,128,525	$	—	$	4,128,525	$	—

Total	$	4,128,525	$	—	$	4,128,525	$	—


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

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

20 | Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

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


						Net
						Amortization		Net			Net						Balance
Assets at Fair Value	Balance as of		Transfers			(Accretion) of		Realized			Unrealized			Net			as of
Using Unobservable	August 31		in/(out)			Premium/		Gains/			Gains/			Purchase/			February 28,
Inputs (Level 3)	2009		of Level 3			(Discount)		(Losses)			(Losses)			(Sales)*			2010
Common Stocks
Chemicals	$	225,091	$	—		$	—	$	—		$	(6	)	$	—		$	225,085
Gaming/Leisure		—		—			—		—			9,363			1,080,292			1,089,655
Metals/Minerals		246,690		—			—		—			255,434			—			502,124
Transportation - Land Transportation		470,950		—			—		—			(44,513	)		—			426,437
Utility		166,805		—			—		(327,433	)		(161,210	)		418,212			96,374
Debt
Senior Loans		278,391,898		(56,331,016	)		536,107		(14,802,566	)		20,144,866			(47,193,768	)		180,745,521
Asset-Backed Securities		7,477,719		—			—		163,108			9,507,221			(413,264	)		16,734,784
Claims		171,511		185,000			—		(8,249,405	)		8,416,845			(295,674	)		228,277

Total	$	287,150,664	$	(56,146,016	)	$	536,107	$	(23,216,296	)	$	38,128,000		$	(46,404,202	)	$	200,048,257


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

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

Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments. As a result, for the six months ended February 28, 2010, a net amount of $56,146,016 was transferred from Level 3 to Level 2. Determination of fair values is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures.

Security Transactions

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

Foreign Currency

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

Forward Foreign Currency Contracts

In order to minimize the movement in NAV resulting from a decline or appreciation in the value of a particular foreign currency against the U.S. dollar or another foreign currency or for other reasons, the Fund is authorized to enter into forward currency exchange contracts. These contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Fund to establish a rate of exchange for a future point in time. Forwards involve counterparty credit risk to the Fund because the forwards are not exchange traded and there is no clearinghouse to guarantee forwards against default. During the six

Semi-Annual Report | 21

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

months ended February 28, 2010, the open and close values of forward foreign currency contracts were EUR 19,320,000 and EUR 34,200,000 and GBP 28,848,600 and GBP 25,920,000 respectively.

Income Recognition

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

Determination of Class Net Asset Values

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

U.S. Federal Income Tax Status

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

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

Distributions to Shareholders

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

Cash and Cash Equivalents

The Fund considers liquid assets deposited with a bank, money market funds, and certain short term debt instruments with maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the statement of assets and liabilities. At February 28, 2010, the Fund had $387,629 of cash and cash equivalents denominated in foreign currencies, with a cost of $382,626.

Statement of Cash Flows

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

Note 3. U.S. Federal Tax Information

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

For the six month period ended February 28, 2010, net permanent differences resulting from Section 988 gain/loss reclass, net operating loss, paydown reclass, premium amortization accrued/sold, foreign bond bifurcation and forward foreign currency gain/loss of $(1,787,433) were identified. Reclassifications are made to the Fund’s capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations at year end. If these reclassifications were made for the period ended February 28, 2010, they would be reclassified to the components of the Fund’s net assets as follows:


Undistributed/
(Overdistributed)	Accumulated
Net Investment	Net Realized	Paid-In
Income	Gain (Loss)	Capital

$1,126,009	$661,424	$(1,787,433)

22 | Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

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


Distributions paid from:	2010		2009		2008

Ordinary Income *	$	2,232,631	$	71,802,644	$	114,377,646

Return of capital **		7,455,154		—		—


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

**		The final tax character for distributions made this year will be determined at year end. However, based on information as of February 28, 2010, the Fund anticipates a return of capital for tax purposes for the period ending June 30, 2010. Additional information will be distributed on Form 1099 at the end of the tax year.

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


Undistributed	Undistributed		Accumulated
Ordinary	Long-Term	Net Unrealized	Capital and
Income	Capital Gains	Depreciation*	Other Losses

$—	$—	$(310,406,343)	$(314,948,728)


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

The accumulated capital losses to offset future gains (capital loss carryforwards) for the Fund are $11,586,151, $90,545,344 and $207,821,595 which will expire on August 31, 2016, August 31, 2017 and February 28, 2018, respectively.

Unrealized appreciation and depreciation at February 28, 2010, based on the cost of investments for U.S. federal income tax purposes was:


Gross unrealized appreciation	$	13,778,219
Gross unrealized depreciation		(327,706,092	)


Net unrealized depreciation	$	(313,927,873	)

Post-October Losses

Under current laws, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the six-month period ended February 28, 2010, the Fund intends to elect to defer net realized capital losses incurred from November 1, 2009 through February 28, 2010 of $4,792,389. In addition, the Fund also elected to defer currency losses of $203,249 incurred from November 1, 2009, through February 28, 2010.

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

Investment Advisory Fee

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


Average Daily Managed Assets		Annual Fee Rate

First $1 billion Next $1 billion Over $2 billion		0.65% 0.60% 0.55%

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

Administration Fees

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

Service and Distribution Fees

PFPC Distributors, Inc. (the “Underwriter”) serves as the principal underwriter and distributor of the Fund’s shares. The Underwriter receives the front end sales charge imposed on the sale of Class A Shares and the CDSC imposed on certain redemptions of Class A, Class B and Class C Shares. For the six months ended February 28, 2010, the Underwriter received $992 of front-end sales charges on Class A Shares and received $10,850 $2,536 and $22,599 of CDSC on Class A, Class B and Class C Share redemptions, respectively.

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

Fees Paid to Officers and Trustees

Each Trustee who is not an “interested person” of the Fund as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly

Semi-Annual Report | 23

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser as of the date of this semi-annual report.

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

Note 5. Fund Information

For the six months ended February 28, 2010, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $138,116,825 and $210,694,154, 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 NAV (“Repurchase Offers”). Repurchase Offers are scheduled to occur on or about the 15th day (or the next business day if the 15th is not a business day) in the months of March, June, September and December. It is anticipated that normally the date on which the repurchase price of shares will be determined (the “Repurchase Pricing Date”) will be the same date as the deadline for shareholders to provide their repurchase requests to the Distributor (the “Repurchase Request Deadline”), and if so, the Repurchase Request Deadline will be set for a time no later than the close of regular trading on the New York Stock Exchange on such date. The Repurchase Pricing Date will occur no later than the 14th day after the Repurchase Request Deadline, or the next business day if the 14th day is not a business day. Repurchase proceeds will be paid to shareholders no later than seven days after the Repurchase Pricing Date. If shareholders tender for repurchase more than the Repurchase Offer amount for a given Repurchase Offer, the Fund may repurchase an additional amount of shares of up to 2% of the shares outstanding on the Repurchase Request Deadline.

For the six months ended February 28, 2010, there were two Repurchase Offers. For each repurchase offer, the Fund offered to repurchase 10% of its shares. In the September 2009 and December 2009 Repurchase Offers, approximately 12.0% and 10.3% respectively, of shares outstanding were repurchased. In connection with the September 2009 and December 2009 Repurchase Offer, the Fund repurchased and additional 2% and 0.3%, respectively, of the shares outstanding on the Repurchase Request Deadline to accommodate the shareholder repurchase requests.

Note 7. Credit Agreement

On September 12, 2008, the Fund, along with other funds in the Highland Fund Complex, entered into a $75,000,000 credit agreement with The Bank of Nova Scotia (the “Credit Agreement”) to be used for temporary or emergency purposes to facilitate portfolio liquidity. Each of the Funds has access to the facility, but aggregate borrowings may not exceed $75,000,000. Interest is charged to the Funds based on their respective borrowings at a rate equal to the greater of the Prime Rate or 0.50% over the Federal Funds Effective Rate. In addition, the Fund has agreed to pay commitment fees of .20% on the undrawn amounts, which are included on the Statement of Operations. Effective September 12, 2009, the Credit Agreement matured and was not renewed.

For the period September 1, 2009 through September 12, 2009, the Fund did not have any borrowings against this Credit Agreement.

On February 26, 2010, the Fund entered into a $35,000,000 unsecured credit agreement with PNC Bank (the “New Credit Agreement”) to be used for temporary purposes to facilitate portfolio liquidity. Interest on any borrowings is charged to the Fund at a rate equal to the Federal Funds Effective Rate plus 2.50%. In addition, the Fund has agreed to pay a commitment fee of 0.75% on any undrawn amounts, and a closing fee of 0.25%, which are included in the statement of operations.

For the six months ended February 28, 2010, the Fund did not have any borrowings outstanding under this New Credit Agreement.

Note 8. Unfunded Loan Commitments

As of February 28, 2010, the Fund had unfunded loan commitments of $4,179,193, which could be extended at the option of the borrower, as detailed below:


	Unfunded
	Loan
Borrower	Commitment

Broadstripe, LLC	$	3,555,627
SIRVA Worldwide, Inc.		623,566

	$	4,179,193

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

24 | Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

$247,562. The net change in unrealized appreciation on unfunded transactions of $177,557 is recorded in the Statement of Operations.

Note 9. Affiliated Issuers and Transactions

Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as “affiliated” if a Fund owns five percent or more of its voting stock. The Fund held at least five percent of the outstanding voting stock of the following companies as of February 28, 2010:


	Par Value at		Shares at		Market Value
	February 28,		February 28,		August 31,		February 28,
	2010		2010		2009		2010

ComCorp Broadcasting, Inc. (Senior Loans) *	$	2,989,118		—	$	1,736,584	$	2,479,773
Communications Corp of America (Common Stock)		—		152,363		—		—

	$	2,989,118		152,363	$	1,736,584	$	2,479,773


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

Note 10. Indemnification

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

Note 11. Disclosure of Significant Risks and Contingencies

Non-Diversification and Industry Concentration Risk

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

Non-Payment Risk

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

Credit Risk

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

Currency Risk

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

Non-U.S. Securities Risk

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

Forward Currency Contracts Risk

The Fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use forward contracts to gain exposure to, or hedge against, changes in the value of foreign currencies. A forward contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Upon entering into such contracts, daily fluctuations in the value of the contract are recorded for financial statement

Semi-Annual Report | 25

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

purposes as unrealized gains or losses by the Fund. At the expiration of the contracts, the Fund realizes the gain or loss. Upon entering into such contracts, the Fund bears the risk of exchange rates moving unexpectedly, in which case, the Fund may not achieve the anticipated benefits of the forward contracts and may realize a loss. Forwards involve counterparty credit risk to the Fund because the forwards are not exchange traded and there is no clearinghouse to guarantee the forwards against default.

Derivatives Risk

Derivative transactions in which the Fund may engage for hedging and speculative purposes or to enhance total return, including engaging in transactions such as options, futures, swaps, foreign currency transactions (including forward foreign currency contracts, currency swaps or options on currency and currency futures) and other derivative transactions, involve certain risks and considerations. These risks include the imperfect correlation between the value of such instruments and the underlying assets, the possible default of the other party to the transaction or illiquidity of the derivative instruments. The use of derivative transactions may result in losses greater than if they had not been used, may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market value, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund to hold a security that it might otherwise sell. The successful use of derivative transactions depends on the Adviser’s ability to predict correctly the direction and extent of movements in interest rates.

Counterparty Credit Risk

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

Note 12. Legal Matters

The Fund is one of numerous defendants (“Lenders”) that have been named in an adversary proceeding pending in the Bankruptcy Court of the Southern District of Florida (the “Court”). The action, entitled In re Tousa Inc., et al., was filed on July 15, 2008, by the Official Committee of Unsecured Creditors of TOUSA, Inc. and its affiliates (the “Plaintiff ”), which are home building companies to which the Lenders loaned money through different lending facilities. An amended complaint was filed on October 17, 2008. Plaintiff alleges that monies used to repay the Lenders should be voided as fraudulent and preferential transfers under the bankruptcy laws. More specifically, Plaintiff alleges that subsidiaries of the home building companies were forced to become co-borrowers and guarantors of the monies used to repay the Lenders, and that the subsidiaries did not receive fair consideration or reasonably equivalent value when they transferred the proceeds to repay the Lenders. Plaintiff seeks to void the transfers and other equitable relief. The Fund and other Funds and accounts managed by the Investment Adviser, and the other Lenders are named as defendants in two separate lending capacities; first, as lenders in a credit agreement (the “Credit Lenders”); and second, as lenders in a term loan (the “Term Loan Lenders”). The Fund, as a Term Loan Lender, moved to dismiss the amended complaint. The Court denied the motion to dismiss on December 4, 2008. The Fund and the other Lenders filed a motion for leave to appeal the dismissal, which was denied on February 23, 2009. Plaintiff thereafter filed a Second Amended Complaint and a Third Amended Complaint. The Fund filed two answers to the Third Amended Complaint in its capacity as a Term Loan Lender. The case went to trial, which concluded in August 2009.

On October 13, 2009, the court ruled for the Plaintiff in the action and ordered the defendants to return the proceeds received from the pay off of the term loan at par on July 31, 2007. The proceeds received by the Fund totaled $4,000,000. Additionally, the court ordered the defendants to pay simple interest on the amount returned at an annual rate of 9%.

In November 2009, the Fund and other defendants filed an appeal to the decision. On December 22, 2009, the Fund posted $5,310,479 with the Court.

Matters Relating to the Fund’s Investment in Broadstripe, LLC. The Fund, the Adviser, other accounts managed by the Adviser, and an unaffiliated investment manager are defendants in a lawsuit filed in Delaware Superior Court on November 17, 2008 (and subsequently amended to include the Trust as a party) by WaveDivision Holdings, LLC and an affiliate, alleging causes of action stemming from the plaintiffs’ 2006 agreements with Millennium Digital Media Systems, LLC (“Millennium”) (now known as Broadstripe, LLC), pursuant to which Millennium had agreed, subject to certain conditions, to sell certain cable television systems to the plaintiffs. During the relevant period, the Fund and other defendants managed by the Adviser held debt obligations of Millennium. As of August 31, 2009, the Fund attributed total value to the Fund’s investment in the Millennium revolving

26 | Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

credit agreement and term loan, each of which is secured by a first lien, of an aggregate of approximately $44.5 million. The complaint alleges that the Adviser and an unaffiliated investment manager caused Millennium to terminate the contracts to sell the cable systems to the plaintiffs. The amended complaint seeks compensatory and punitive damages in an unspecified amount to be presented at trial, thus, the Fund cannot predict the amount of a judgment, if any. The Fund and other accounts managed by the Adviser have filed a motion to dismiss the lawsuit. The Adviser and the Fund intend to continue to defend this action vigorously.

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

Note 13. Subsequent Event

Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there was the following subsequent event:

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

Semi-Annual Report | 27

ADDITIONAL INFORMATION (unaudited)



February 28, 2010		Highland Floating Rate Fund

Additional Portfolio Information

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

Approval of Investment Advisory Agreement

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

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

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

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

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

The Trustees considered the portfolio management services provided by the Investment Adviser and the activities related

28 | Semi-Annual Report

ADDITIONAL INFORMATION (unaudited) (continued)



February 28, 2010		Highland Floating Rate Fund

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

The Investment Adviser’s Historical Performance in Managing the Fund

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

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

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

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

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

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

Semi-Annual Report | 29

IMPORTANT INFORMATION ABOUT THIS REPORT

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

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

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

Custodian
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153

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

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

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

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

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

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

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

30 | Semi-Annual Report

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

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


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

Not applicable.

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

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

Item 11. Controls and Procedures.

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

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

Item 12. Exhibits.

	(a)(1)		Not applicable.

	(a)(2)		Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.

	(a)(3)		Not applicable.

	(b)		Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.


	Six Months Ended
	February 28, 2010			Year Ended
	(unaudited)			August 31, 2009
Change in Shares

Class A
Subscriptions		1,602,895			6,282,589
Issued for distributions reinvested		294,629			2,474,019
Redemptions		(9,418,586	)		(29,534,277	)

Net decrease		(7,521,062	)		(20,777,669	)

Class B
Subscriptions		907			92,142
Issued for distributions reinvested		27,087			326,260
Redemptions		(1,120,429	)		(5,152,450	)

Net decrease		(1,092,435	)		(4,734,048	)

Class C
Subscriptions		829,264			2,292,881
Issued for distributions reinvested		384,085			2,813,560
Redemptions		(9,757,278	)		(25,017,909	)

Net decrease		(8,543,929	)		(19,911,468	)

Class Z
Subscriptions		188,855			860,053
Issued for distributions reinvested		42,450			379,342
Redemptions		(2,070,891	)		(8,480,241	)

Net decrease		(1,839,586	)		(7,240,846	)


(registrant) Highland Floating Rate Fund

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



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



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


Fund Profile			1
Financial Statements			2
Investment Portfolio			3
Statement of Assets and Liabilities			10
Statement of Operations			11
Statements of Changes in Net Assets			12
Statement of Cash Flows			14
Financial Highlights			15
Notes to Financial Statements			19
Additional Information			28
Important Information About This Report			30


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


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