nvcsr

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 800
Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

R. Joseph Dougherty
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 800
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: June 30

Date of reporting period: June 30, 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.

PORTFOLIO MANAGERS’ LETTER



June 30, 2010		Highland Floating Rate Fund

Dear Shareholders:

Q: How has the Highland Floating Rate Fund (the “Fund”) performed?

A: Please note that the Fund has changed its fiscal year end to June 30 from August 31. Therefore, the performance period covered throughout this report is for the ten month period ended June 30, 2010. For the ten month period ended June 30, 2010, the Fund’s Class A Shares returned 9.54%. That was less than the return of the Fund’s benchmark, the Credit Suisse Leveraged Loan Index (the “Index”), which was 10.54% for the period, and the Lipper Loan Participation Loan Category average, which was 10.11% for the period. During this same time period, the Standard & Poor’s (S&P) 500 Index returned 5.00%. The Fund’s strongest performers during the period included Young Broadcasting Inc., Value Creation Inc, CCS Medical, Inc., LifeCare Holdings and PBL Media Group Limited. The weakest performers included Lake at Las Vegas Joint Venture LLC, Broadstripe, LLC, Westgate Investments, LLC, Endurance Business Media, Inc. and Fontainebleau Florida Hotel, LLC.

Q: What was the investment environment like for corporate bank loans during the period?

A: The loan market during the ten month period ended June 30, 2010 was characterized by a continuation of the strengthening experienced in 2009 after 2008’s unprecedented loan market dislocation, which was primarily driven by technical factors generated in part by the turmoil in the financial sector. During the first eight months of the period the average bid in the Index moved up ten points, from 81.8 on August 31, 2009 to 91.8 on April 30, 2010. This improvement was largely attributable to continued strengthening in the technical environment caused by a lack of forced selling and continued strong demand for loans thanks to issuers paying down debt through bond refinancings. This increased cash in the market was augmented by more positive investor sentiment due to improving issuer fundamentals, which helped to push the average bid up. However, during the final two months of the period the loan market, along with the broader market, weakened, with the average bid falling to 89.4 by June 30, 2010. This pull back was due in part to macroeconomic fears surrounding sovereign debt risk, particularly in Europe.

Q: How is the Fund currently positioned?

A: As of June 30, 2010, the Fund is approximately 89.77% loans, 4.90% equities and 5.33% other corporate debt, as a percentage of investments. With regards to diversification, the Fund is currently invested in approximately 25 industries and 139 issuers.

Q: What is your outlook?

A: It is our expectation that capital markets will continue to exhibit volatility during 2010, with the equity and high-yield bond markets experiencing greater volatility than leveraged loans. We continue to believe that the risk-return profile for leveraged loans is attractive relative both to other asset classes and to historical standards for leveraged loans. We look to capitalize on volatility in the leveraged loan market by adhering to disciplined valuation targets for our investments and by actively rotating capital as opportunities present. We believe that issuers will continue to bring amendments to lender groups in an effort to stay within covenants, which will improve the economics of the loans to the lenders.

We thank you for your investment in the Fund.



Brad Means, CFA		Greg Stuecheli, CFA
Partner & Senior		Partner & Senior
Portfolio Manager		Portfolio Manager

Brad Means and Greg Stuecheli have been portfolio managers of the Highland Floating Rate Fund since December 31, 2008.

Annual Report | 1

PORTFOLIO MANAGERS’ LETTER



June 30, 2010		Highland Floating Rate Fund

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

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

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

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

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

Prior investment returns are not indicative of future results.

2 | Annual Report

FUND PROFILE (unaudited)

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 June 30, 2010

$453.4 million

Portfolio Data as of June 30, 2010

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


Quality Breakdown as of 06/30/10 (%)*
A	0.7	%
B	61.9
BB	5.0
BBB	2.9
C	0.4
CC	1.1
CCC	9.6
D	3.2
Non Rated	15.2


Top 5 Sectors as of 06/30/10 (%)*
Broadcasting	10.3	%
Cable/Wireless Video	9.5
Healthcare	9.2
Financial	7.9
Diversified Media	6.2


Top 10 Holdings as of 06/30/10 (%)*
Broadstripe, LLC (Senior Loans)	7.0	%
Young Broadcasting, Inc. (Common Stocks)	3.0
LifeCare Holdings (Senior Loans)	3.0
CCS Medical, Inc. (Senior Loans)	2.3
Travelport, LLC (Senior Loans)	2.0
PBL Media Group Ltd. (Foreign Denominated Senior Loans)	1.9
Lyondell Chemical Co. (Corporate Notes and Bonds)	1.7
Key Safety Systems, Inc. (Senior Loans)	1.7
SMG H5 Pty., Ltd. (Foreign Denominated Senior Loans)	1.6
Avaya, Inc. (Senior Loans)	1.3


*		Quality is calculated as a percentage of total senior loans, corporate notes and bonds and asset-backed securities. Sectors and holdings are calculated as a percentage of total assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not that of the fund itself. Quality Ratings are subject to change.

Annual Report | 3

FINANCIAL STATEMENTS



June 30, 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.

4 | Annual Report

INVESTMENT PORTFOLIO



June 30, 2010		Highland Floating Rate Fund


Principal Amount ($)			Value ($)
US Senior Loans (a) — 72.4%

AEROSPACE — 2.4%
	1,878,271	AWAS Capital, Inc. First Lien Term Loan, 2.31%, 03/25/13		1,756,183
	1,012,519	Second Priority Term Loan, 6.56%, 03/25/13		827,735
	1,385,408	Delta Air Lines, Inc. Credit-Linked Deposit Loan, 2.22%, 04/30/12		1,323,716
	1,000,000	Dyncorp International LLC Term Loan B, 06/30/16 (b)		980,000
	112,275	Hawker Beechcraft Acquisition Co. LLC Letter of Credit Facility Deposit, 03/26/14 (b)		91,099
	1,882,859	Term Loan, 03/26/14 (b)		1,527,733
	5,619,701	US Airways Group, Inc. Term Loan, 2.81%, 03/21/14		4,485,730

				10,992,196


BROADCASTING — 4.9%
	2,883,246	All3Media Intermediate Ltd. Facility B1, 2.91%, 08/31/14		2,494,008
	271,635	ComCorp Broadcasting, Inc. Revolving Loan, 9.00%, 10/03/12 (c) (d)		232,384
	2,717,483	Term Loan, 9.00%, 04/03/13 (c) (d)		2,324,807
	4,918,228	Cumulus Media, Inc. Replacement Term Loan, 4.35%, 06/11/14		4,475,587
	3,360,000	Entercom Radio LLC Term A Loan, 1.51%, 06/29/12		3,141,600
	6,396,296	Univision Communications, Inc. Initial Term Loan, 2.60%, 09/29/14		5,349,799
	4,329,813	Young Broadcasting, Inc. Term Loan, PIK, 8.00%, 06/30/15 (c) (d)		4,329,813

				22,347,998


CABLE/WIRELESS VIDEO — 10.1%
	3,250,859	Broadstripe, LLC DIP Revolver, 3.72%, 06/30/11 (d) (e)		3,249,233
	44,306,267	First Lien Term Loan, 06/30/11 (d) (f)		33,774,667
	1,428,203	Revolver, 06/30/11 (d) (f)		1,088,719
	4,725,085	Northland Cable Television, Inc. First Lien Term Loan B, 4.36%, 12/22/12		4,465,205
	4,000,000	Second Lien Term Loan, 8.35%, 06/22/13		3,140,000

				45,717,824


CHEMICALS — 2.4%
	1,577,080	TPC Group LLC Incremental Term Loan B, 2.88%, 06/27/13		1,486,397
	5,361,060	Term B Loan, 2.88%, 06/27/13		5,052,799
	1,247,740	W.R. Grace & Co. 5 Year Revolver (b)		2,158,590
	1,247,740	Revolving Credit Loan (b)		2,158,590

				10,856,376


CONSUMER NON-DURABLES — 1.3%
	2,755,020	BioTech Research Labs/Philosophy Merger Sub, Inc. First Lien Term Loan, 2.10%, 03/16/14		2,534,618
	351,945	KIK Custom Products, Inc. First Lien Canadian Term Loan, 06/02/14 (b)		292,701
	2,053,013	First Lien U.S. Term Loan, 06/02/14 (b)		1,707,419
	2,000,000	Second Lien Term Loan, 5.32%, 12/01/14		1,190,000

				5,724,738


DIVERSIFIED MEDIA — 2.5%
	3,772,744	Cengage Learning Acquisitions, Inc. Term Loan, 3.03%, 07/03/14		3,263,952
	2,006,090	Cydcor, Inc. First Lien Tranche B Term Loan, 9.00%, 02/05/13		1,870,679
	2,000,000	Endurance Business Media, Inc. Second Lien Term Loan, 01/26/14 (f)		130,000
	2,725,784	Term Loan, 07/26/13 (f)		579,229
	8,263,880	Metro-Goldwyn-Mayer, Inc. Tranche B Term Loan, 04/09/12 (f)		3,768,329
	3,984,694	Tranche B-1 Term Loan, 04/09/12 (f)		1,817,020

				11,429,209


ENERGY — 1.4%
	1,100,000	Big West Oil, LLC Term Loan, 01/30/15 (b)		1,108,938
	157,904	Calumet Lubricants Co., LP Credit-Linked Letter of Credit, 4.14%, 01/03/15		143,298
	1,166,310	Term Loan, 4.44%, 01/03/15		1,058,427
	4,735,118	Venoco, Inc. Second Lien Term Loan, 4.38%, 05/07/14		4,232,012

				6,542,675


FINANCIAL — 2.6%
	4,000,000	AGFS Funding Co. Term Loan, 7.25%, 04/21/15		3,904,000
	2,500,000	Checksmart Financial Co. Second Lien Term Loan, 5.94%, 05/01/13		312,500
	1,414,588	HUB International Ltd. Initial Term Loan, 3.03%, 06/13/14		1,264,875

See accompanying Notes to Financial Statements. | 5

INVESTMENT PORTFOLIO (continued)



June 30, 2010		Highland Floating Rate Fund


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

FINANCIAL (continued)
	5,000,000	Nuveen Investments, Inc. First Lien Term Loan, 3.45%, 11/13/14		4,176,575
	1,500,000	Second Lien Term Loan, 07/31/15 (b) (g)		1,578,000
	479,412	Online Resources Corp. Term Loan, 2.60%, 02/21/12		399,110

				11,635,060


FOOD AND DRUG — 0.8%
	977,849	Rite Aid Corp. Tranche 2 Term Loan, 2.10%, 06/04/14		847,062
	1,958,128	Tranche 3 Term Loan, 6.00%, 06/04/14		1,853,495
	747,376	Tranche 4 Term Loan, 9.50%, 06/10/15		760,268

				3,460,825


FOOD/TOBACCO — 2.1%
	2,728,333	DS Waters of America, Inc. Term Loan, 2.60%, 10/29/12		2,626,021
	5,500,000	DSW Holdings, Inc. Term Loan, 4.35%, 03/02/12		5,211,250
	632,000	Pierre Foods, Inc. Term Loan, 7.00%, 03/03/16		633,049
	1,000,000	WM. Bolthouse Farms, Inc. Second Lien Term Loan, 9.50%, 08/11/16		997,185

				9,467,505


FOREST PRODUCTS/CONTAINERS — 1.0%
	2,000,000	Consolidated Container Co. LLC Second Lien Term Loan, 5.88%, 09/28/14		1,715,000
	2,750,000	Smurfit Stone Container Enterprises, Inc. Exit Term Loan, 6.75%, 02/22/16		2,747,126

				4,462,126


GAMING/LEISURE — 4.5%
	9,000,000	Fontainebleau Florida Hotel, LLC Tranche C Term Loan, 06/06/12 (f)		3,150,000
	8,648,046	Ginn LA Conduit Lender, Inc. First Lien Tranche A Credit-Linked Deposit, 06/08/11 (f)		724,274
	18,530,804	First Lien Tranche B Term Loan, 06/08/11 (f)		1,575,118
	258,176	Lake at Las Vegas Joint Venture Mezzanine (f)		9,036
	12,527,233	Revolving Loan Credit-Linked Deposit Account, 06/20/12 (f)		78,295
	147,275,306	Term Loan, 06/20/12 (f)		618,140
	14,098,694	Term Loan, DIP, 4.10%, 06/20/12		4,229,608
	469,499	Las Vegas Sands, LLC Delayed Draw I Term Loan, 2.10%, 05/23/14		416,798
	2,323,541	Tranche B Term Loan, 2.10%, 05/23/14		2,062,724
	131,200	MGM Mirage, Inc. Class A-2 Loan, 1.81%, 02/21/14 (e)		105,288
	1,000,000	Class B Loan, 10/03/11 (b)		955,750
	216,891	Class C Loan, 7.00%, 02/21/14		180,019
	3,292,663	Class D Loan, 6.00%, 10/03/11 (b)		3,146,963
	400,000	Class E Loan, 02/21/14 (b)		332,000
	273,812	Nevada Land Group, LLC First Lien Initial Loan, PIK, 40.35%, 11/10/13		274,497
	766,123	Second Lien Initial Loan, 10.00%, 11/12/13 (g)		768,039
	280,618	Tamarack Resort, LLC Term Loan (f)		224,494
	636,480	VML US Finance, LLC Term B Delayed Draw Project Loan, 5.04%, 05/25/12		620,479
	1,101,914	Term B Funded Project Loan, 5.04%, 05/27/13		1,074,212
	5,000,000	WAICCS Las Vegas 3 LLC Second Lien Term Loan (f)		25,000

				20,570,734


HEALTHCARE — 7.9%
	12,366,302	CCS Medical, Inc. First Lien Term Loan, 9.00%, 03/31/15 (c)		11,253,335
	4,205,459	Second Lien Term Loan, PIK, 11.00%, 03/31/16 (c)		3,637,722
	4,615,219	Graceway Pharmaceuticals, LLC Mezzanine Loan, 10.10%, 11/01/13		830,739
	588,225	HCA, Inc. Tranche A-1 Term Loan, 1.78%, 11/16/12		556,608
	3,198,548	Tranche B-1 Term Loan, 2.78%, 11/18/13		3,019,877
	15,836,598	LifeCare Holdings Term Loan, 4.59%, 08/10/12		14,569,670
	757,143	MultiPlan, Inc. Incremental Term D Loan, 6.00%, 04/12/13		754,303
	972,778	Rehabcare Group, Inc. Term Loan B, 6.00%, 11/24/15		969,251

				35,591,505


HOUSING — 2.7%
	721,202	Custom Building Products, Inc. Term Loan, 5.75%, 03/19/15		715,793
	4,000,000	EH/Transeastern, LLC/TE TOUSA Term Loan (d) (f)		—
	1,142,857	Kyle Acquisition Group LLC Facility B (f)		112,383
	857,143	Facility C, 07/20/11 (f)		84,287
	457,440	Las Vegas Land Holdings, LLC Term Loan, 5.53%, 03/31/16		381,963

6 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (continued)



June 30, 2010		Highland Floating Rate Fund


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

HOUSING (continued)
	4,843,945	LBREP/L-Suncal Master I, LLC First Lien Term Loan (f)		72,659
	1,117,890	November 2005 Land Investors, LLC First Lien New Term Loan, 03/31/11 (f)		270,155
	9,901,146	Pacific Clarion, LLC Term Loan (d) (f)		1,521,806
	1,472,463	Roofing Supply Group, LLC Term Loan, 7.25%, 08/24/13		1,433,811
	18,822,929	Westgate Investments, LLC Senior Secured Loan, 09/25/10 (f)		5,584,928
	8,177,228	Third Lien Term Loan, 06/30/15 (f)		1,180,206
	1,694,876	Withers Preserve MB-I B-Note (d) (f)		649,985

				12,007,976


INFORMATION TECHNOLOGY — 3.3%
	421,463	Bridge Information Systems, Inc. Multidraw Term Loan (d) (f) (h)		—
	6,951,916	CDW Corp. Term Loan, 4.35%, 10/10/14		6,094,710
	888,258	Infor Enterprise Solutions Holdings, Inc. First Lien Extended Delayed Draw Term Loan, 6.10%, 07/28/15		828,301
	1,702,494	First Lien Extended Initial U.S. Term Loan, 6.10%, 07/28/15		1,587,576
	3,600,000	Kronos, Inc. Second Lien Term Loan, 6.28%, 06/11/15		3,366,018
	1,795,500	RedPrairie Corp. Term Loan, 6.00%, 03/24/16		1,783,156
	1,500,000	SSI Investments II LLC Term Loan, 6.50%, 05/30/17		1,492,268

				15,152,029


MANUFACTURING — 0.9%
	2,000,000	Brand Energy & Infrastructure Services, Inc. Second Lien Term Loan, 6.45%, 02/07/15 (b)		1,790,000
	2,525,345	Dana Holdings Corp. Term Advance, 4.62%, 01/30/15		2,438,221

				4,228,221


MEDIA/TELECOMMUNICATIONS — 0.2%
	990,446	Entravision Communications Corp. Term Loan, 5.55%, 03/29/13		981,190


METALS/MINERALS — 0.5%
	1,040,095	Euramax International, Inc. Domestic Term Loan (Cash Pay), 10.00%, 06/29/13		985,490
	1,095,075	Domestic Term Loan, PIK, 3.00%, 06/29/13		1,037,584

				2,023,074


RETAIL — 3.3%
	5,229,523	Burlington Coat Factory Warehouse Corp. Term Loan, 2.67%, 05/28/13		4,894,650
	3,365,378	Guitar Center, Inc. Term Loan, 3.85%, 10/09/14		2,986,773
	3,984,398	Michaels Stores, Inc. B-1 Term Loan, 2.76%, 10/31/13		3,702,642
	1,082,120	B-2 Term Loan, 5.01%, 07/31/16		1,030,551
	2,980,000	Spirit Finance Corp. Term Loan, 3.34%, 08/01/13		2,504,794

				15,119,410


SERVICE — 5.8%
	500,000	Advantage Sales & Marketing, Inc. Second Lien Term Loan, 8.50%, 05/05/17		496,250
	2,154,079	Audio Visual Services Group, Inc. Second Lien Term Loan, 6.04%, 08/28/14		834,706
	1,989,796	CCS, Inc. Term Loan, 3.35%, 11/14/14		1,644,069
	7,075,888	First Data Corp. Initial Tranche B-1 Term Loan, 3.10%, 09/24/14 (b)		5,971,412
	901,982	NES Rentals Holdings, Inc. Second Lien Permanent Term Loan, 10.00%, 07/20/13		818,548
	3,359,929	Sabre, Inc. Initial Term Loan, 2.34%, 09/30/14		2,993,848
	639,901	Safety-Kleen Systems, Inc. Synthetic Letter of Credit Loan, 3.38%, 08/02/13		604,707
	2,958,876	Term B Loan, 3.38%, 08/02/13		2,796,138
	858,592	Thermo Fluids (Northwest), Inc. Tranche B Term Loan, 5.33%, 06/27/13		699,752
	10,000,000	Travelport, LLC New Post-First Amendment & Restatement Synthetic Letter of Credit, 3.03%, 08/23/13		9,375,000

				26,234,430


TELECOMMUNICATIONS — 4.2%
	7,215,918	Avaya, Inc. Term B-1 Loan, 3.26%, 10/24/14 (b)		6,190,934
	3,066,772	Digicel International Finance, Ltd. U.S. Term Loan, 3.06%, 03/30/12		3,016,937
	3,947,368	FairPoint Communications, Inc. B Term Loan, 03/31/15 (b) (f)		2,661,513
	1,000,000	Knowledgepoint360 Group, LLC Second Lien Term Loan, 7.45%, 04/13/15		610,000
	3,700,000	Level 3 Financing, Inc. Tranche A Term Loan, 2.55%, 03/13/14		3,295,905
	1,000,000	Tranche B Term Loan, 11.50%, 03/13/14		1,076,875
	1,995,000	U.S. Telepacific Corp. Term Loan Advance, 9.25%, 08/17/15		1,990,511

				18,842,675

See accompanying Notes to Financial Statements. | 7

INVESTMENT PORTFOLIO (continued)



June 30, 2010		Highland Floating Rate Fund


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

TRANSPORTATION — AUTOMOTIVE — 4.3%
	1,971,322	Federal-Mogul Corp. Tranche B Term Loan, 2.29%, 12/29/14		1,730,249
	1,005,777	Tranche C Term Loan, 2.29%, 12/28/15		882,780
	4,934,765	Ford Motor Co. Tranche B-1 Term Loan, 3.33%, 12/15/13		4,678,181
	9,274,638	Key Safety Systems, Inc. First Lien Term Loan, 2.60%, 03/08/14		7,958,845
	2,000,000	Second Lien Term Loan, 5.35%, 09/08/14		1,025,000
	1,870,952	Motor Coach Industries International, Inc. Second Lien Tranche A, 06/30/12 (f)		1,122,571
	1,152,700	Second Lien Tranche B, 06/30/12 (f)		691,620
	1,159,759	Remy International, Inc. First Lien Tranche B Term Loan, 5.96%, 12/06/13		1,148,161

				19,237,407


TRANSPORTATION — LAND TRANSPORTATION — 0.3%
	553,851	SIRVA Worldwide, Inc. Revolving Credit Loan (Exit Finance), PIK, 11.63%, 05/12/12 (e)		379,388
	2,022,488	Second Lien Term Loan, 12.00%, 05/12/15		556,184
	855,980	Term Loan (Exit Finance), PIK, 10.53%, 05/12/12		620,585

				1,556,157


UTILITY — 3.0%
	25,431	Coleto Creek Power, LP First Lien Synthetic Letter of Credit, 3.28%, 06/28/13		22,951
	331,300	First Lien Term Loan, 3.24%, 06/28/13		298,419
	4,800,000	Second Lien Term Loan, 4.35%, 06/28/13		3,873,600
	3,372,645	Entegra TC, LLC Third Lien Term Loan, PIK, 6.53%, 10/19/15		1,696,441
	1,762,115	GBGH, LLC First Lien Term Loan, 4.00%, 06/09/13 (d)		1,436,300
	599,090	Second Lien Term Loan, PIK, 12.00%, 06/09/14 (d) (g)		—
	275,103	Mach Gen, LLC First Lien Synthetic Letter of Credit Loan, 2.53%, 02/22/13		255,502
	498,718	Texas Competitive Electric Holdings Co., LLC Initial Tranche B-1 Term Loan, 3.85%, 10/10/14		370,485
	7,863,685	Initial Tranche B-2 Term Loan, 3.98%, 10/10/14		5,841,735

				13,795,433

		Total US Senior Loans (Cost $569,544,756)		327,976,773


Principal Amount			Value ($)
Foreign Denominated Senior Loans (a) — 15.6%

AUSTRALIA — 4.1%
AUD
	2,790,881	PBL Media Group Ltd. Facility A Term Loan, 6.88%, 12/31/12		2,050,871
	12,375,240	Facility B Tranche 1 Term Loan, 7.13%, 02/07/13		8,905,761
	9,640,647	SMG H5 Pty., Ltd. Facility A Term Loan, 7.12%, 12/24/12		7,471,195

				18,427,827


AUSTRIA — 0.4%
EUR
	6,021,017	Sacher Funding Ltd. Euro Term Loan, 05/14/14 (f)		1,978,531


GERMANY — 0.1%
EUR
	625,000	CBR Fashion GmbH Second Lien Facility, 4.47%, 10/19/16		602,883
	379,669	Schieder Mobel Holding, GmbH Delayed Draw Term Loan, 07/20/10 (d) (f)		90,407

				693,290


SPAIN — 1.4%
EUR
	3,166,667	Grupo Gasmedi, S.L. Second Lien Tranche E Term Loan, 5.46%, 02/11/16		3,064,303
	1,409,008	Tranche B Term Loan, 3.21%, 08/11/14		1,605,088
	1,409,008	Tranche C Term Loan, 3.71%, 08/11/15		1,605,088
	2,908,210	Maxi PIX Sarl Euro Term Loan, PIK, 8.70%, 05/31/16		53,488

				6,327,967


UNITED KINGDOM — 7.6%
GBP
	3,131,600	Airport Development & Investment Ltd. Second Lien Facility, 4.85%, 04/07/11		4,497,809
	714,753	All3Media Intermediate Ltd. Facility B1, 3.02%, 08/31/14		957,068
	2,585,073	Facility C, 3.59%, 08/31/15		3,461,461
	3,000,000	Facility D, 5.46%, 02/29/16		3,411,131
	4,199,192	Mezzanine Loan, PIK, 9.71%, 08/31/16		4,554,779
	1,875,035	Henson No. 4 Ltd. Facility B, 4.66%, 10/30/13		2,391,483
	1,875,035	Facility C, 5.16%, 02/03/15		2,405,509
	1,000,000	Highland Acquisitions Ltd. Facility B, 3.45%, 12/31/14		1,312,837

8 | See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (continued)



June 30, 2010		Highland Floating Rate Fund


Principal Amount			Value ($)
Foreign Denominated Senior Loans (continued)

UNITED KINGDOM (continued)
GBP
	1,000,000	Highland Acquisitions Ltd. (continued) Facility C, 3.95%, 12/31/15		1,320,317
	1,193,140	Mezzanine Facility, PIK, 10.70%, 12/29/16		1,539,622
	3,125,000	Towergate Partnership Ltd. Facility A, 3.08%, 10/31/12		4,254,563
	3,125,000	Facility B, 3.57%, 10/31/13		4,254,563

				34,361,142


UNITED STATES — 2.0%
EUR
	1,865,464	Infor Enterprise Solutions Holdings, Inc. First Lien Extended Initial Euro Term Loan, 6.18%, 07/28/15		2,106,019


GBP
	1,206,250	Aramark Corp. U.K. Term Loan, 2.86%, 01/26/14		1,732,495
	1,578,465	Knowledgepoint360 Group, LLC First Lien U.K. Term Loan, 3.95%, 04/13/14		1,889,246
	2,367,993	PlayPower, Inc. Tranche B Sterling Term Loan, 6.18%, 06/30/12		3,347,926

				6,969,667

		Total Foreign Denominated Senior Loans (Cost $103,667,216)		70,864,443


Principal Amount ($)
Asset-Backed Securities (i) (j) — 3.4%
	2,000,000	ABCLO, Ltd. Series 2007-1A, Class C, 2.15%, 04/15/21 (d)	991,194
	4,800,000	ACA CLO, Ltd. Series 2006-2A, Class B, 1.03%, 01/20/21	2,832,000
	1,000,000	Series 2007-1A, Class D, 2.65%, 06/15/22	455,000
	1,000,000	Babson CLO, Ltd. Series 2007-1A, Class C, 1.55%, 01/18/21	452,160
	1,000,000	Series 2007-2A, Class D, 2.00%, 04/15/21	525,000
	1,000,000	Cent CDO, Ltd. Series 2007-14A, Class D, 1.60%, 04/15/21	522,500
	1,000,000	Series 2007-15A, Class C, 2.79%, 03/11/21	496,570
	2,000,000	Columbus Nova CLO, Ltd. Series 2007-1A, Class D, 1.79%, 05/16/19	1,030,000
	2,500,000	Cornerstone CLO, Ltd. Series 2007-1A, Class C, 2.70%, 07/15/21	1,381,250
	847,661	Goldman Sachs Asset Management CLO, PLC, Series 2007-1A, Class E, 5.34%, 08/01/22	415,354
	1,000,000	GSC Partners CDO Fund, Ltd., Series 2007-8A, Class C, 1.78%, 04/17/21	349,890
	1,000,000	Gulf Stream Sextant CLO, Ltd. Series 2007-1A, Class D, 2.94%, 06/17/21	480,000
	1,000,000	ING Investment Management Series 2006-3A, Class C, 1.75%, 12/13/20	510,000
	3,000,000	Madison Park Funding Ltd. Series 2007-5A, Class C, 1.96%, 02/26/21	1,376,730
	835,038	Navigator CDO, Ltd. Series 2006-2A, Class D, 4.04%, 09/20/20	313,636
	1,622,089	Ocean Trails CLO Series 2007-2A, Class D, 4.80%, 06/27/22	697,498
	826,734	PPM Grayhawk CLO, Ltd. Series 2007-1A, Class D, 3.90%, 04/18/21	379,000
	1,889,756	Primus CLO, Ltd. Series 2007-2A, Class E, 5.05%, 07/15/21	793,697
	1,000,000	Stanfield Daytona CLO, Ltd. Series 2007-1A, Class B1L, 1.67%, 04/27/21	500,000
	2,000,000	Stone Tower CLO, Ltd. Series 2007-6A, Class C, 1.65%, 04/17/21	1,010,000

		Total Asset-Backed Securities (Cost $21,981,684)	15,511,479


Corporate Notes and Bonds — 1.8%

CHEMICALS — 1.8%
	7,600,205	Lyondell Chemical Co. 11.00%, 05/01/18	8,189,221

		Total Corporate Notes and Bonds (Cost $7,924,278)	8,189,221


Claims (d) (k) — 0.0%

RETAIL — 0.0%
	28,851,468	Home Interiors & Gifts, Inc. Proof of Claims	49,047

		Total Claims (Cost $26,925,174)	49,047


Shares
Common Stocks (k) — 4.8%

BROADCASTING — 3.2%
	152,363	Communications Corp. of America (c) (d)	—
	7,205	Young Broadcasting, Inc. (d)	14,581,479

			14,581,479

See accompanying Notes to Financial Statements. | 9

INVESTMENT PORTFOLIO (continued)



June 30, 2010		Highland Floating Rate Fund


Shares			Value ($)
Common Stocks (continued)

CHEMICALS — 0.3%
	33,594	Lyondell Chemical Co., Class A		557,240
	30,786	Lyondell Chemical Co., Class B		510,663
	20,650	Panda Hereford Ethanol, L.P.		309,750

				1,377,653


ENERGY — 0.2%
	427,210	Value Creation, Inc.		854,420


GAMING/LEISURE — 0.3%
	4	Nevada Land Group, LLC (d)		1,089,655


HEALTHCARE — 0.5%
	82,441	CCS Medical, Inc. (c)		2,184,687


HOUSING — 0.1%
	880,996	Las Vegas Land Holdings, LLC		308,349


METALS/MINERALS — 0.2%
	6,158	Euramax International, Inc. (d)		1,069,090


TRANSPORTATION — LAND TRANSPORTATION — 0.0%
	10,048	SIRVA Worldwide, Inc. (d)		188,098


UTILITY — 0.0%
	132,930	Entegra TC, LLC		59,819
	3,178	GBGH, LLC (d)		—

				59,819

		Total Common Stocks (Cost $26,093,179)		21,713,250


Warrants — 0.0%

BROADCASTING — 0.0%
	6	Young Broadcasting, Inc. expires 12/24/24 (c) (d)		12,143

		Total Warrants (Cost $12,563)		12,143

Total Investments — 98.0% (Cost of $756,148,850) (l)				444,316,356

Other Assets & Liabilities, Net — 2.0%				9,096,725

Net Assets — 100.0%			$	453,413,081


(a)		Senior loans (also called bank loans, leveraged loans, or floating rate loans) in 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 (f), 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 weighted average rate at June 30, 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 remaining 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 10.

(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 $66,678,827, or 14.7% of net assets, were fair valued as of June 30, 2010.

(e)		Senior Loan Notes have additional unfunded loan commitments. See Note 9.

(f)		The issuer is, or is in danger of being, in default of its payment obligation. Income is not being accrued.

(g)		Fixed rate senior loan.

(h)		Senior loan held on participation.

(i)		Floating rate asset. The interest rate shown reflects the rate in effect at June 30, 2010.

(j)		Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At June 30, 2010, these securities amounted to $15,511,479 or 3.4% of net assets.

(k)		Non-income producing security.

(l)		Cost for U.S. federal income tax purposes is $758,259,276.

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

10 | See accompanying Notes to Financial Statements.

STATEMENT OF ASSETS AND LIABILITIES



June 30, 2010		Highland Floating Rate Fund


	($)

Assets:
Unaffiliated issuers, at value (cost $699,881,832)		405,759,986
Affiliated issuers, at value (cost $56,267,018) (Note 10)		38,556,370

Total investments, at value (cost $756,148,850)		444,316,356
Cash and foreign currency*		11,589,698
Net unrealized appreciation on forward foreign currency contracts		3,093,518
Receivable for:
Investments sold		16,866,015
Dividend and interest receivable		2,764,942
Fund shares sold		202,063
Prepaid litigation fee		295,342
Other assets		17,287

Total assets		479,145,221


Liabilities:
Net discount and unrealized appreciation/(depreciation) on unfunded transactions (Note 9)		323,419
Net unrealized depreciation on forward foreign currency contracts		599,531
Payables for:
Distributions		625,505
Investments purchased		22,873,217
Investment advisory fee payable (Note 4)		254,686
Administration fee (Note 4)		78,365
Trustees’ fees (Note 4)		41,000
Service and distribution fees (Note 4)		238,081
Commitment fee payable (Note 8)		8,716
Accrued expenses and other liabilities		689,620

Total Liabilities		25,732,140

Net Assets		453,413,081


Composition of Net Assets:
Par value (Note 1)		72,247
Paid-in capital		1,088,574,253
Overdistributed net investment income (Note 3)		(4,159,170	)
Accumulated net realized gain/(loss) from investments, forward foreign currency contracts and foreign currency transactions		(320,834,388	)
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, forward currency contracts and translation of assets and liabilities denominated in foreign currency		(310,239,861	)

Net Assets		453,413,081


Class A
Net assets		161,221,716
Shares outstanding (unlimited authorization)		25,680,586
Net asset value per share (Net assets/shares outstanding)		6.28	^(a)
Maximum offering price per share (100 / 96.50 of $6.28)		6.51	^(b)

Class B
Net assets		12,067,400
Shares outstanding (unlimited authorization)		1,924,807
Net asset value and offering price per share (Net assets/shares outstanding)		6.27	^(a)

Class C
Net assets		248,873,356
Shares outstanding (unlimited authorization)		39,661,567
Net asset value and offering price per share (Net assets/shares outstanding)		6.27	^(a)

Class Z
Net assets		31,250,609
Shares outstanding (unlimited shares authorized)		4,980,161
Net asset value, offering and redemption price per share (Net assets/shares outstanding)		6.28


*		Foreign currency held at cost is $67,051.

(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.

12 | See accompanying Notes to Financial Statements.

STATEMENT OF OPERATIONS

Highland Floating Rate Fund


	Ten Months
	Ended			Year Ended
	June 30, 2010			August 31, 2009
	($)			($)
Investment Income:
Interest from unaffiliated issuers		23,733,917			57,764,053
Interest from affiliated issuer (Note 10)		303,043			371,558

Total investment income		24,036,960			58,135,611


Expenses:
Investment advisory fees (Note 4)		2,849,945			4,838,233
Administration fees (Note 4)		876,906			1,491,210
Accounting service fees		151,235			219,205
Distribution fee: (Note 4)
Class A		156,335			275,630
Class B		56,891			144,241
Class C		1,424,368			2,230,665
Service fee: (Note 4)
Class A		390,836			689,076
Class B		31,606			80,134
Class C		593,487			929,444
Transfer agent fee		806,492			878,148
Trustees’ fees (Note 4)		177,676			203,058
Custodian fees		51,684			84,853
Registration fees		35,506			56,879
Reports to shareholders		277,965			381,555
Audit fees		93,695			89,500
Legal fees		1,201,215			807,023
Insurance expenses		168,963			117,881
Interest expense (Note 8)		375			6,945
Commitment and upfront fee expenses (Note 8)		150,904			300,713
Litigation expense		104,658			—
Other expenses		92,681			314,037

Net operating expenses		9,693,423			14,138,430

Fees and expenses waived or reimbursed by Investment Adviser (Note 4)		—			(75,133	)

Net expenses		9,693,423			14,063,297

Net investment income		14,343,537			44,072,314


Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on investments from unaffiliated issuers		(37,717,046	)		(208,565,796	)
Net realized gain/(loss) on forward foreign currency contracts⁽¹⁾		1,477,962			38,119,067
Net realized gain/(loss) on foreign currency transactions		243,284			(12,660,388	)
Net change in unrealized appreciation/(depreciation) on investments		65,121,530			(119,240,221	)
Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 9)		222,847			239,433
Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts⁽¹⁾		5,064,935			(16,626,565	)
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency		(416,833	)		1,026,873

Net realized and unrealized gain/(loss) on investments		33,996,679			(317,707,597	)

Net increase/(decrease) in net assets		48,340,216			(273,635,283	)


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

See accompanying Notes to Financial Statements. | 13

STATEMENTS OF CHANGES IN NET ASSETS

Highland Floating Rate Fund


	Ten Months
	Ended			Year Ended			Year Ended
	June 30, 2010			August 31, 2009			August 31, 2008
	($)			($)			($)
Increase/(Decrease) in Net Assets:

From Operations
Net investment income		14,343,537			44,072,314			114,155,344
Net realized gain/(loss) on investments, forward foreign currency contracts and foreign currency transactions		(35,995,800	)		(183,107,117	)		(83,725,992	)
Net change in unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currency		69,992,479			(134,600,480	)		(173,029,706	)

Net increase/(decrease) in net assets from operations		48,340,216			(273,635,283	)		(142,600,354	)


Distributions Declared to Shareholders
From net investment income:
Class A		(2,579,408	)		(27,054,721	)		(45,875,769	)
Class B		(190,494	)		(3,171,260	)		(6,117,006	)
Class C		(3,385,780	)		(34,673,576	)		(48,402,770	)
Class Z		(576,124	)		(6,903,087	)		(13,982,101	)

Total distributions from net investment income		(6,731,806	)		(71,802,644	)		(114,377,646	)


From return of capital:
Class A		(3,238,704	)		—			—
Class B		(238,339	)		—			—
Class C		(4,250,376	)		—			—
Class Z		(724,313	)		—			—

Total distributions from return of capital		(8,451,732	)		—			—

Total distributions declared to shareholders		(15,183,538	)		(71,802,644	)		(114,377,646	)


Share Transactions

Class A
Subscriptions		12,062,171			38,704,218			173,305,724
Distributions reinvested		2,878,932			14,260,548			21,495,858
Redemptions		(86,514,885	)		(189,510,081	)		(537,929,077	)

Net decrease		(71,573,782	)		(136,545,315	)		(343,127,495	)

Class B
Subscriptions		9,134			645,806			120,075
Distributions reinvested		249,330			1,885,709			3,676,392
Redemptions		(9,467,416	)		(32,757,532	)		(45,523,266	)

Net decrease		(9,208,952	)		(30,226,017	)		(41,726,799	)

Class C
Subscriptions		7,513,813			13,569,281			79,685,545
Distributions reinvested		3,706,643			16,182,887			22,545,251
Redemptions		(98,109,493	)		(156,492,881	)		(306,900,082	)

Net decrease		(86,889,037	)		(126,740,713	)		(204,669,286	)

Class Z
Subscriptions		1,436,979			5,241,711			35,791,872
Distributions reinvested		412,650			2,194,780			4,860,149
Redemptions		(19,243,528	)		(51,422,068	)		(234,090,910	)

Net decrease		(17,393,899	)		(43,985,577	)		(193,438,889	)

Net decrease from share transactions		(185,065,670	)		(337,497,622	)		(782,962,469	)

Total decrease in net assets		(151,908,992	)		(682,935,549	)		(1,039,940,469	)


Net Assets
Beginning of period		605,322,073			1,288,257,622			2,328,198,091

End of period (including overdistributed net investment income of $(4,159,170), $(9,976,234) and $(6,006,051), respectively)		453,413,081			605,322,073			1,288,257,622

14 | See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS (continued)

Highland Floating Rate Fund


	Ten Months
	Ended			Year Ended			Year Ended
	June 30, 2010			August 31, 2009			August 31, 2008
Change in Shares

Class A
Subscriptions		1,951,303			6,282,589			19,008,681
Issued for distributions reinvested		459,691			2,474,019			2,387,245

Redemptions		(14,114,976	)		(29,534,277	)		(59,321,594	)
Net decrease		(11,703,982	)		(20,777,669	)		(37,925,668	)

Class B
Subscriptions		1,459			92,142			13,454
Issued for distributions reinvested		39,924			326,260			407,732
Redemptions		(1,544,602	)		(5,152,450	)		(5,077,429	)

Net decrease		(1,503,219	)		(4,734,048	)		(4,656,243	)

Class C
Subscriptions		1,204,199			2,292,881			8,658,585
Issued for distributions reinvested		592,361			2,813,560			2,505,716
Redemptions		(15,931,932	)		(25,017,909	)		(34,088,422	)

Net decrease		(14,135,372	)		(19,911,468	)		(22,924,121	)

Class Z
Subscriptions		231,702			860,053			3,961,872
Issued for distributions reinvested		65,943			379,342			532,609
Redemptions		(3,132,468	)		(8,480,241	)		(25,349,655	)

Net decrease		(2,834,823	)		(7,240,846	)		(20,855,174	)

See accompanying Notes to Financial Statements. | 15

STATEMENT OF CASH FLOWS

Highland Floating Rate Fund


	Ten Months
	Ended			Year Ended
	June 30, 2010			August 31, 2009
	($)			($)
Cash Flows Provided by Operating Activities
Net investment income		14,343,537			44,072,314

Adjustments to Reconcile Net Investment Income to Net Cash and Foreign Currency Provided by Operating Activities
Purchase of investment securities		(296,010,133	)		(179,195,744	)
Proceeds from disposition of investment securities		408,677,894			518,707,882
Decrease in receivable for investments sold		13,256,126			37,176,026
Decrease in interest and fees receivable		1,924,932			9,841,334
Increase in prepaid litigation fees		(295,342	)		—
(Increase)/decrease in other assets		287,856			(148,314	)
Net amortization/(accretion) of premium/(discount)		(3,166,756	)		(3,791,406	)
Effect of exchange rate changes on cash		(173,549	)		1,026,873
Net realized gain/(loss) on forward foreign currency contracts		1,477,962			25,458,679
Increase/(decrease) in payable for investments purchased		6,291,960			(44,333,572	)
Decrease in payables to related parties		(34,770	)		(771,620	)
Increase/(decrease) in other expenses and liabilities		270,735			(345,390	)

Net cash and foreign currency flow provided by operating activities		146,850,452			407,697,062


Cash Flows Used in FInancing Activities
Decrease in notes payable		—			(11,086	)
Proceeds from shares sold		21,206,612			60,887,904
Payment of shares redeemed		(213,335,322	)		(430,188,248	)
Distributions paid in cash		(8,026,307	)		(40,133,973	)

Net cash flow used in financing activities		(200,155,017	)		(409,445,403	)

Net decrease in cash and foreign currency		(53,304,565	)		(1,748,341	)


Cash and Foreign Currency
Beginning of the period		64,894,263			66,642,604

End of the period		11,589,698			64,894,263


Supplemental disclosure of cash flow information:
Cash paid during the period for interest and commitment fees	142,563	6,945

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:


	Ten Months Ended
	June 30,			Years Ended August 31,
Class A Shares	2010			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)		0.18			0.37			0.63			0.75			0.70			0.49
Net realized and unrealized gain/(loss)^(a)		0.38			(2.19	)		(1.36	)		(0.29	)		0.07			0.08

Total from investment operations		0.56			(1.82	)		(0.73	)		0.46			0.77			0.57

Less Distributions Declared to Shareholders:
From net investment income		(0.08	)		(0.58	)		(0.61	)		(0.76	)		(0.70	)		(0.49	)
From return of capital		(0.11	)		—			—			—			—			—

Total distributions declared to shareholders		(0.19	)		(0.58	)		(0.61	)		(0.76	)		(0.70	)		(0.49	)

Net Asset Value, End of Period	$	6.28		$	5.91		$	8.31		$	9.65		$	9.95		$	9.88
Total return^(b)		9.54	%^(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)	$	161,222		$	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 and commitment fee		0.02	%		—	^(e)		0.01	%		0.03	%		0.04	%		0.05	%
Waiver/reimbursement		—			(0.01	)%		(0.01	)%		—			(0.01	)%		(0.08	)%
Net expenses including interest expense^(f)		1.95	%		1.65	%		1.42	%		1.15	%		1.21	%		1.20	%
Net investment income		3.53	%		6.14	%		6.92	%		7.55	%		7.08	%		5.05	%
Portfolio turnover rate		60	%^(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)		Rounds to less than 0.01%.

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

See accompanying Notes to Financial Statements. | 17

FINANCIAL HIGHLIGHTS

Highland Floating Rate Fund

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


	Ten Months Ended
	June 30,			Years Ended August 31,
Class B Shares	2010			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)		0.16			0.36			0.59			0.72			0.67			0.46
Net realized and unrealized gain/(loss)^(a)		0.37			(2.19	)		(1.35	)		(0.31	)		0.08			0.06

Total from investment operations		0.53			(1.83	)		(0.76	)		0.41			0.75			0.52

Less Distributions Declared to Shareholders:
From net investment income		(0.07	)		(0.56	)		(0.58	)		(0.72	)		(0.67	)		(0.45	)
From return of capital		(0.10	)		—			—			—			—			—

Total distributions declared to shareholders		(0.17	)		(0.56	)		(0.58	)		(0.72	)		(0.67	)		(0.45	)

Net Asset Value, End of Period	$	6.27		$	5.91		$	8.30		$	9.64		$	9.95		$	9.87
Total return^(b)		9.06	%^(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)	$	12,067		$	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 and commitment fee		0.02	%		—	^(d)		0.01	%		0.03	%		0.04	%		0.05	%
Waiver/reimbursement		—			(0.01	)%		(0.01	)%		—			(0.01	)%		(0.08	)%
Net expenses including interest expense^(e)		2.30	%		2.00	%		1.77	%		1.50	%		1.56	%		1.55	%
Net investment income		3.18	%		5.79	%		6.57	%		7.20	%		6.73	%		4.70	%
Portfolio turnover rate		60	%^(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)		Rounds to less than 0.01%.

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

18 | See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS

Highland Floating Rate Fund

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


	Ten Months Ended
	June 30,			Years Ended August 31,
Class C Shares	2010			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)		0.16			0.34			0.58			0.70			0.65			0.45
Net realized and unrealized gain/(loss)^(a)		0.37			(2.18	)		(1.35	)		(0.30	)		0.08			0.06

Total from investment operations		0.53			(1.84	)		(0.77	)		0.40			0.73			0.51

Less Distributions Declared to Shareholders:
From net investment income		(0.08	)		(0.55	)		(0.57	)		(0.71	)		(0.65	)		(0.44	)
From return of capital		(0.09	)		—			—			—			—			—

Total distributions declared to shareholders		(0.17	)		(0.55	)		(0.57	)		(0.71	)		(0.65	)		(0.44	)

Net Asset Value, End of Period	$	6.27		$	5.91		$	8.30		$	9.64		$	9.95		$	9.87
Total return^(b)		8.92	%(^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)	$	248,873		$	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 and commitment fee		0.02	%		—	^(d)		0.01	%		0.03	%		0.04	%		0.05	%
Waiver/reimbursement		—			(0.01	)%		(0.01	)%		—			(0.01	)%		(0.08	)%
Net expenses including interest expense^(e)		2.45	%		2.15	%		1.92	%		1.65	%		1.71	%		1.70	%
Net investment income		3.03	%		5.64	%		6.42	%		7.05	%		6.58	%		4.55	%
Portfolio turnover rate		60	%^(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)		Rounds to less than 0.01%.

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

See accompanying Notes to Financial Statements. | 19

FINANCIAL HIGHLIGHTS

Highland Floating Rate Fund

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


	Ten Months Ended
	June 30,			Years Ended August 31,
Class Z Shares	2010			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)		0.20			0.40			0.66			0.79			0.74			0.53
Net realized and unrealized gain/(loss)^(a)		0.38			(2.19	)		(1.36	)		(0.31	)		0.08			0.06

Total from investment operations		0.58			(1.79	)		(0.70	)		0.48			0.82			0.59

Less Distributions Declared to Shareholders:
From net investment income		(0.09	)		(0.60	)		(0.64	)		(0.79	)		(0.74	)		(0.52	)
From return of capital		(0.12	)		—			—			—			—			—

Total distributions declared to shareholders		(0.21	)		(0.60	)		(0.64	)		(0.79	)		(0.74	)		(0.52	)

Net Asset Value, End of Period	$	6.28		$	5.91		$	8.30		$	9.64		$	9.95		$	9.87
Total return^(b)		9.84	%(^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)	$	31,251		$	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 and commitment fee		0.02	%		—	(d)		0.01	%		0.03	%		0.04	%		0.05	%
Waiver/reimbursement		—			(0.01	)%		(0.01	)%		—			(0.01	)%		(0.08	)%
Net expenses including interest expense^(e)		1.60	%		1.30	%		1.07	%		0.80	%		0.86	%		0.85	%
Net investment income		3.88	%		6.49	%		7.27	%		7.90	%		7.43	%		5.40	%
Portfolio turnover rate		60	%(^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)		Rounds to less than 0.01%.

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

20 | See accompanying Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS



June 30, 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. On March 22, 2010, the Board of Trustees approved a change in the Funds’ fiscal year end from August 31 to June 30.

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, Class B and Class 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, or 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

Annual Report | 21

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund

accrued interest. Foreign price quotations are converted to U.S. dollar equivalents using the 4:00 PM London Time Spot Rate.

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.

At the end of each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

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. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value the Fund’s assets as of June 30, 2010 is as follows:


					Level 2		Level 3
			Level 1		Significant		Significant
	Total Value at		Quoted		Observable		Unobservable
Investment in Securities	June 30, 2010		Price		Input		Input
Common Stocks
Broadcasting	$	14,581,479	$	—	$	—	$	14,581,479
Chemicals		1,377,653		—		1,067,903		309,750
Energy		854,420		—		—		854,420
Gaming/Leisure		1,089,655		—		—		1,089,655
Healthcare		2,184,687		—		2,184,687		—
Housing		308,349		—		308,349		—
Metals/Minerals		1,069,090		—		—		1,069,090
Transportation — Land Transportation		188,098		—		—		188,098
Utility		59,819		—		—		59,819
Warrants
Broadcasting		12,143		—		—		12,143
Corporate Notes and Bonds		8,189,221		—		8,189,221		—
Debts
Senior Loans		398,841,216		—		275,339,432		123,501,784
Asset-Backed Securities		15,511,479		—		—		15,511,479
Claims		49,047		—		—		49,047

Total	$	444,316,356	$	—	$	287,089,592	$	157,226,764

22 | Annual Report

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund


					Level 2		Level 3
			Level 1		Significant		Significant
	Total Value at		Quoted		Observable		Unobservable
Investment in Securities	June 30, 2010		Price		Input		Input
Other Financial Instruments*
Assets
Foreign exchange contracts	$	3,093,518	$	—	$	3,093,518	$	—

Total	$	447,409,874	$	—	$	290,183,110	$	137,226,764

Other Financial Instruments*
Liabilities
Foreign exchange contracts	$	599,531	$	—	$	599,531	$	—

Total	$	599,531	$	—	$	599,531	$	—


*		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 June 30, 2010.

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 period ended June 30, 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/			June 30,
Inputs Level 3	2009		of Level 3			(Discount)		(Losses)			(Losses)			(Sales)			2010
Common Stocks
Broadcasting	$	—	$	—		$	—	$	—		$	(504,767	)	$	15,086,246		$	14,581,479
Chemicals		225,091		—			—		—			66,020			18,639			309,750
Energy		—		—			—		—			854,013			407			854,420
Gaming/Leisure		—		—			—		—			9,363			1,080,292			1,089,655
Metals/Minerals		246,690		—			—		—			404,070			418,330			1,069,090
Transportation — Land Transportation		470,950		—			—		—			(282,852	)					188,098
Utility		166,805		—			—		(327,433	)		(197,766	)		418,213			59,819
Warrants
Broadcasting		—		—			—		—			(420	)		12,563			12,143
Debt
Senior Loans		278,391,898		(65,243,215	)		636,772		(24,876,150	)		36,246,566			(101,654,087	)		123,501,784
Asset-Backed Securities		7,477,719		—			—		322,966			8,610,382			(899,588	)		15,511,479
Claims		171,511		—			—		(8,249,405	)		8,422,616			(295,675	)		49,047

Total	$	287,150,664	$	(65,243,215	)	$	636,772	$	(33,130,022	)	$	53,627,225		$	(85,814,660	)	$	157,226,764


*		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 June 30, 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 period ended June 30, 2010, a net amount of $65,243,215 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.

Annual Report | 23

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund

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 may 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 period ended June 30, 2010, the open and close values of forward foreign currency contracts were EUR 12,320,000 and EUR 34,200,000 and GBP 27,768,600 and GBP 25,920,000 respectively, which indicates the volume of activity.

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 June 30, 2010, the Fund had $67,849 of cash and cash equivalents denominated in foreign currencies, with a cost of $67,051.

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.

24 | Annual Report

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund

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 period ended June 30, 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 were identified and 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
$(1,794,667)	$	1,826,805	$	(32,138	)

The tax character of distributions paid during the period ended June 30, 2010 and the years ended August 31, 2009 and August 31, 2008, were as follows:


Distributions paid from:	2010		2009		2008
Ordinary Income *	$	6,731,806	$	71,802,644	$	114,377,646

Return of capital **		8,451,732		—		—


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

**		Additional information will be distributed on Form 1099 at the end of the calendar year.

As of June 30, 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
$ —	$	—	$	(312,350,287	)	$	(319,115,878	)


*		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 $203,932,074 which will expire on June 30, 2016, June 30, 2017 and June 30, 2018, respectively. For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains for a period up to eight years to the extent allowed by the Internal Revenue Code.

Unrealized appreciation and depreciation at June 30, 2010, based on the cost of investments for U.S. federal income tax purposes was:


Gross unrealized appreciation	$	5,450,865
Gross unrealized depreciation		(319,393,785	)


Net unrealized depreciation	$	(313,942,920	)

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 period ended June 30, 2010, the Fund intends to elect to defer net realized capital losses incurred from November 1, 2009 through June 30, 2010 of $11,651,840. In addition, the Fund also elected to defer currency losses of $1,400,469 incurred from November 1, 2009, through June 30, 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		0.65	%

Next $1 billion		0.60	%

Over $2 billion		0.55	%

For the period ended June 30, 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.

Annual Report | 25

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund

For the period ended June 30, 2010, the Underwriter received $1,436 of front-end sales charges on Class A Shares and received $10,850, $3,618 and $28,162 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.

Expense Limits and Fee Reimbursements

Prior to October 1, 2008, the Investment Adviser voluntarily had agreed to waive advisory fees and administration fees and reimburse the Fund for certain expenses (exclusive of distribution and service fees, brokerage commissions, commitment fees, interest, taxes and extraordinary expenses, if any) so that total expenses will not exceed 1.00% of the average daily net assets of the Fund for each share class. For the part of the year ended August 31, 2009, the Investment Adviser waived fees in an amount equal to 0.01% of the average daily net assets of the Fund. This waiver was discontinued by the Investment Adviser effective October 1, 2008.

Fees Paid to Officers and Trustees

Each Trustee who is not an “interested person” of the Fund as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser as of the date of this 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 period ended June 30, 2010, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $296,010,133 and $408,677,894 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 period ended June 30, 2010, there were four Repurchase Offers. In the September 2009, December 2009, March 2010 and June 2010 Repurchase Offers, the Fund offered to repurchase 10%, 10%, 7% and 7%, respectively, of its outstanding shares. In the September 2009, December 2009, March 2010 and June 2010 Repurchase Offers, 12.0%, 10.3%, 7.0% and 8.1%, respectively of shares outstanding were repurchased. In connection with the September 2009, December 2009 and June 2010 Repurchase Offer, the Fund repurchased an additional 2.0%, 0.3% and 1.1%, respectively, of the shares outstanding on the Repurchase Request Deadline to accommodate the shareholder repurchase requests.

Note 7. Senior Loan Participation Commitments

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

As such, the Fund assumes the credit risk of the Borrowers, as well as of the selling participants or other persons inter-positioned between the Fund and the Borrowers. The ability

26 | Annual Report

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund

of Borrowers, selling participants or other persons inter-positioned between the Fund and the Borrowers to meet their obligations may be affected by a number of factors, including economic developments in a specific industry.

At June 30, 2010, the following sets forth the selling participants with respect to interests in Senior Loans purchased by the Fund on a participation basis.


	Principal
Selling Participant	Amount		Value
Goldman Sachs Group:
Bridge Information Systems, Inc. Multidraw Term Loan	$	421,463	$	—

Note 8. 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 “Prior 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 0.20% on the undrawn amounts which amounted to $30,000 and which are included in commitment and upfront fee expense on the Statement of Operations. Effective September 12, 2009, the Prior 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 the Prior Credit Agreement.

On February 26, 2010, the Fund entered into a $35,000,000 unsecured credit agreement with PNC Bank (the “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%. Concurrent with entering into the Credit Agreement, the Fund agreed to pay a $87,500 upfront fee. This fee is amortized over the remaining term of the Credit Agreement and $29,966 of upfront fee is included in commitment and up front fee expense on the Statement of Operations. Also, the Fund has agreed to pay a commitment fee of 0.75% on any undrawn amounts, which amounts to $90,938 for the period, and which is also included in commitment and up front fee expense on the Statement of Operations.

For the period February 26, 2010 through June 30, 2010, the average daily loan balance outstanding for the two days where borrowing existed was $5,000,000 at a weighted average interest rate of 2.50%.

Interest expense of $375 was paid for use of the line of credit and is included in the Statement of Operations.

Note 9. Unfunded Loan Commitments

As of June 30, 2010, the Fund had unfunded loan commitments of $4,745,282, which could be extended at the option of the borrower, as detailed below:


	Unfunded
	Loan
Borrower	Commitment
Broadstripe, LLC	$	3,555,627
MGM Mirage, Inc.		451,910
SIRVA Worldwide, Inc.		737,745

	$	4,745,282

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 June 30, 2010, the Fund recognized net discount and unrealized depreciation on unfunded transactions of $323,419. The net change in unrealized appreciation on unfunded transactions of $222,847 is recorded in the Statement of Operations.

Note 10. 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 June 30, 2010:


	Par Value at		Shares at		Market Value
	June 30,		June 30,		August 31,		June 30,
	2010		2010		2009		2010
CCS Medical, Inc. (Senior Loans)	$	16,571,761		—	$	—	$	14,891,057
CCS Medical, Inc. (Common Stock)		—		82,441		—		2,184,687
ComCorp Broad-casting, Inc. (Senior Loans)*		2,989,118		—		1,736,584		2,557,191
Communications Corp of America (Common Stock)		—		152,363		—		—
Young Broadcasting, Inc. (Senior Loans)		4,329,813		—		—		4,329,813
Young Broadcasting, Inc. (Common Stocks)	—			7,205		—		14,581,479
Young Broadcasting, Inc. (Warrants)		—		6		—		12,143

	$	23,890,692		242,015	$	1,736,584	$	38,556,370


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

Annual Report | 27

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund

The Fund is permitted to purchase or sell securities from or to certain other affiliated funds under specified conditions outlined in the procedures adopted by the Board of Trustees of the Fund. The procedures have been designed to provide assurance that any purchase or sale of securities by the Fund from or to another fund that is or could be considered an affiliate by virtue of having a common investment adviser (or affiliated investment adviser), common Trustees and/or common officers complies with Rule 17a-7 under the 1940 act. Further, as defined under the procedures, each transaction is effective at the current market price. For the period ended June 30, 2010, the Fund engaged in security transactions with affiliated funds with proceeds from sales of $4,703,125 and net realized losses from sales of $(773,750).

Note 11. Indemnification

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

Note 12. 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 purposes as unrealized gains or losses by the Fund. At the expiration of the contracts, the Fund realizes the gain or loss.

28 | Annual Report

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund

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 13. Legal Matters

Matters Relating to the Fund’s Investment in TOUSA, Inc. 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. This amount is recorded in the Statement of Assets and Liabilities and the Statement of Operations.

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

Annual Report | 29

NOTES TO FINANCIAL STATEMENTS (continued)



June 30, 2010		Highland Floating Rate Fund

defendants managed by the Adviser held debt obligations of Millennium. As of August 31, 2009, the Fund attributed total value to the Fund’s investment in the Millennium revolving credit agreement and term loan, each of which is secured by a first lien, of an aggregate of approximately $44.5 million. The complaint alleges that the Adviser and an unaffiliated investment manager caused Millennium to terminate the contracts to sell the cable systems to the plaintiffs. The amended complaint seeks compensatory and punitive damages in an unspecified amount to be presented at trial, thus, the Fund cannot predict the amount of a judgment, if any. The Fund and other accounts managed by the Adviser have filed a motion to dismiss the lawsuit. The Adviser and the Fund intend to continue to defend this action vigorously.

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

Note 14. Subsequent 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 events:

On July 1, 2010, The PNC Financial Services Group, Inc. sold the outstanding stock of PNC Global Investment Servicing Inc. to The Bank of New York Mellon Corporation. At the closing of the sale, PNC Global Investment Servicing (U.S.) Inc. and PFPC Distributors, Inc. changed their names to BNY Mellon Investment Servicing (US) Inc. and BNY Mellon Distributors Inc., respectively. PFPC Trust Company will not change its name until a later date to be announced.

30 | Annual Report

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders of Highland Floating Rate Fund:

In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and of cash flows and the financial highlights present fairly, in all material respects, the financial position of Highland Floating Rate Fund (the “Fund”) at June 30, 2010, and the results of its operations, the changes in its net assets and, its cash flows and its financial highlights for each of the periods indicated in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of investments at June 30, 2010 by correspondence with the custodian and banks with whom the Fund owns assignments and participations in loans, provide a reasonable basis for our opinion.

Dallas, Texas
August 26, 2010

Annual Report | 31

ADDITIONAL INFORMATION (unaudited)



June 30, 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.

Tax Information

The Fund hereby designates as qualified interest income distributions 100.00% of ordinary income distributions for the ten months ended June 30, 2010.

32 | Annual Report

ADDITIONAL INFORMATION (unaudited) (continued)



June 30, 2010		Highland Floating Rate Fund

Trustees and Officers

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

Term of

Principal

Number of Portfolios

Office and

Occupation(s)

in Highland Fund

Other

Position

Length of

During Past

Complex Overseen

Directorships/

Name and Age

with Funds

Time Served

Five Years

by Trustee¹

Trusteeships Held

INDEPENDENT TRUSTEES

Timothy K. Hui
(Age 62)

Trustee

Indefinite Term; Trustee since 2004

Vice President since February 2008, Dean of Educational Resources from July 2006 to January 2008, Assistant Provost for Graduate Education from July 2004 to June 2006, and Assistant Provost for Educational Resources, July 2001 to June 2004 at Philadelphia Biblical University.

None

Scott F. Kavanaugh
(Age 49)

Trustee

Indefinite Term; Trustee since 2004

Vice-Chairman, President and Chief Operating Officer at Keller Financial Group since September 2007; Chairman and Chief Executive Officer at First Foundation Bank since September 2007; Vice Chairman, President and Chief Operating Officer of First Foundation, Inc. (holding company) since September 2007; Private investor since February 2004; Sales Representative at Round Hill Securities from March 2003 to January 2004; Executive at Provident Funding Mortgage Corporation from February 2003 to July 2003; Executive Vice President, Director and Treasurer at Commercial Capital Bank from January 2000 to February 2003; Managing Principal and Chief Operating Officer at Financial Institutional Partners Mortgage Company and Managing Principal and President of Financial Institutional Partners, LLC (an investment banking firm) from April 1998 to February 2003.

None

Annual Report | 33

ADDITIONAL INFORMATION (unaudited) (continued)



June 30, 2010		Highland Floating Rate Fund

Trustees and Officers

Term of

Principal

Number of Portfolios

Office and

Occupation(s)

in Highland Fund

Other

Position

Length of

During Past

Complex Overseen

Directorships/

Name and Age

with Funds

Time Served

Five Years

by Trustee¹

Trusteeships Held

INDEPENDENT TRUSTEES

James F. Leary
(Age 80)

Trustee

Indefinite Term; Trustee since 2004

Managing Director, Benefit Capital Southwest, Inc. (a financial consulting firm) since January 1999.

Board Member of Capstone Group of Funds (7 portfolios)

Bryan A. Ward
(Age 55)

Trustee

Indefinite Term; Trustee since 2004

Senior Manager, Accenture, LLP (a consulting firm) since January 2002.

None

INTERESTED TRUSTEE²

R. Joseph Dougherty²
(Age 40)

Trustee and Chairman of the Board, President and Chief Executive Officer

Indefinite Term; Trustee and Chairman of the Board since 2004

Team Leader of the Investment Adviser since 2000, Trustee of the funds in the Highland Fund Complex since 2004 and President and Chief Executive Officer of the funds in the Highland Fund Complex since December 2008; Director of NexBank Securities, Inc. since June 2009; Senior Vice President of Highland Distressed Opportunities, Inc. from September 2006 to June 2009; Senior Vice President of the funds in the Highland Fund Complex from 2004 to December 2008.

None


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

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

34 | Annual Report

ADDITIONAL INFORMATION (unaudited) (continued)



June 30, 2010		Highland Floating Rate Fund

Trustees and Officers


		Term of
		Office and
Name, Address,	Position	Length of
and Age	with Funds	Time Served	Principal Occupation(s) During Past Five Years
OFFICERS

R. Joseph Dougherty (Age 40)	Chairman of the Board, President and Chief Executive Officer	Indefinite Term; Chairman of the Board since 2004; President and Chief Executive Officer since December 2008	Team Leader of the Investment Adviser since 2000, Trustee of the funds in the Highland Fund Complex since 2004 and President and Chief Executive Officer of the funds in the Highland Fund Complex since December 2008; Director of NexBank Securities, Inc. since June 2009; Senior Vice President of Highland Distressed Opportunities, Inc. from September 2006 to June 2009; Senior Vice President of the funds in the Highland Fund Complex from 2004 to December 2008.

M. Jason Blackburn (Age 34)	Treasurer (Principal Accounting Officer) and Secretary	Indefinite Term; Treasurer and Secretary since 2004	Assistant Controller of the Investment Adviser since November 2001 and Treasurer and Secretary of the funds in the Highland Fund Complex since 2004.

Matthew S. Okolita (Age 28)	Chief Compliance Officer	Indefinite Term; Chief Compliance Officer since May 2010	Chief Compliance Officer of the Adviser, Cummings Bay Capital Management, L.P., and Tunstall Capital Management, L.P. (investment advisers) since May 2010; Compliance Manager of the Adviser from March 2008 to May 2010; Legal Associate at NewStar Financial Inc. (a commercial finance company) from August 2006 to December 2007; Compliance Associate at Commonwealth Financial Network (a registered investment adviser/broker-dealer) from January 2004 to August 2006.

Annual Report | 35

IMPORTANT INFORMATION ABOUT THIS REPORT

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

Transfer Agent
BNY Mellon Investment Servicing (US) Inc.
101 Sabin Street
Pawtucket, RI 02860

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

Custodian
PFPC Trust Company
301 Bellevue Parkway
Wilmington, DE 19809

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 SEC’s Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. Shareholders may also obtain the Form N-Q by visiting the Fund’s website at www.highlandfunds.com.

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

| Annual Report

Item 2. Code of Ethics.

	(a)		The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party.

	(b)		Not applicable.

	(c)		There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description.

	(d)		The registrant has not granted any waiver, including any implicit waiver, from a provision of the code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item’s instructions.

	(e)		Not applicable.

	(f)		The registrant’s code of ethics is filed herewith as Exhibit (a)(1)

Item 3. Audit Committee Financial Expert.

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

Item 4. Principal Accountant Fees and Services.

Audit Fees

(a)

The aggregate fees billed for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal

years are $75,000 for the fiscal year ended August 31, 2009 and $75,000 for the fiscal year ended June 30, 2010.

Audit-Related Fees

(b)

The aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item are $8,500 for the fiscal year ended August 31, 2009 and $17,103 for the fiscal year ended June 30, 2010. Services related to semi-annual and valuation work.

Tax Fees

(c)

The aggregate fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $6,750 for the fiscal year ended August 31, 2009 and $7,500 for the fiscal year ended June 30, 2010. Services related to assistance on the Fund’s tax returns and excise tax calculations.

All Other Fees

(d)

The aggregate fees billed for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for the fiscal year ended August 31, 2009 and $0 for the fiscal year ended June 30, 2010.

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

			The Audit Committee shall:

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

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

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

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

(e)(2)

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

(b) 100%

(d) N/A

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

	(g)		The aggregate non-audit fees billed by the registrant’s accountant for services rendered to the registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant was $606,000 for the fiscal year ended August 31, 2009 and $872,000 for the fiscal year ended June 30, 2010.

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

Item 5. Audit Committee of Listed registrants.

Not applicable.

Item 6. Investments.

(a)		Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form.

(b)		Not applicable.


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

APPENDIX E

HIGHLAND CAPITAL MANAGEMENT, L.P.

PROXY VOTING POLICY

1. Application; General Principles

1.1 This proxy voting policy (the “Policy”) applies to securities held in Client accounts (including registered investment companies and other pooled investment vehicles) as to which the above-captioned investment adviser (the “Company”) has voting authority, directly or indirectly. Indirect voting authority exists where the Company’s voting authority is implied by a general delegation of investment authority without reservation of proxy voting authority.

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

2. Voting; Procedures

2.1 Monitoring. A member of the settlement group (the “settlement designee”) of the Company shall have responsibility for monitoring portfolios managed by the Company for securities subject to a proxy vote. Upon the receipt of a proxy notice related to a security held in a portfolio managed by the Company, the settlement designee shall forward all relevant information to the portfolio manager(s) with responsibility for the security. The portfolio manager(s) may consult a member of the settlement group as necessary.

2.2 Voting. Upon receipt of notice from the settlement designee, the portfolio manager(s) of the fund(s) in which the security subject to a proxy vote shall evaluate the subject matter of the proxy and cause the proxy to be voted on behalf of the Client in accordance with the Guidelines set forth below.

2.3 Guideline. In determining how to vote a particular proxy, the portfolio manager(s) shall consider, among other things, the interests of each Client account as it relates to the subject matter of the proxy, any potential conflict of interest the Company may have in voting the proxy on behalf of the Client and the procedures set forth in this Policy. This Policy is designed to be implemented in a manner reasonably expected to ensure that voting rights are exercised in the best interests of the Company’s clients. Each proxy is voted on a case-by-case basis taking into consideration any relevant contractual obligations as well as other relevant facts and circumstances. In general, the Company reviews and considers corporate governance issues related to proxy matters and generally supports proposals that foster good corporate governance practices. Portfolio manager(s) may vote proxies as recommended by the security issuers management on routine matters related to the operation of the issuer and on matters not expected to have a significant impact on the issuer and/or its shareholders, because the Company believes that recommendations by the issuer are generally in shareholders’ best interests, and therefore in the best economic interest of the Company’s clients.

2.4 Conflicts of Interest. If the portfolio manager(s) determine that the Company may have a potential material conflict of interest (as defined in Section 3 of this Policy) in voting a particular proxy, the portfolio manager(s) shall contact the Company’s compliance department prior to causing the proxy to be voted.

2.4.1. For a security held by a an investment company, the Company shall disclose the conflict and its reasoning for voting as it did to the Retail Fund’s Board of Trustees at the next regularly scheduled quarterly meeting. In voting proxies for securities held by an investment company, the Company may consider only the interests of the Fund. It is the responsibility of the

compliance department to document the basis for the decision and furnish the documentation to the Board of Trustees. The Company may resolve the conflict of interest by following the proxy voting recommendation of a disinterested third party (such as ISS, Glass Lewis, or another institutional proxy research firm).

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

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

3. Conflicts of Interest

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

3.1.1 The issuer is a Client of the Company, or of an affiliate, accounting for more than 5% of the Company’s or affiliate’s annual revenues.

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

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

3.1.4 The issuer is an entity in which an officer or partner of the Company or a relative¹ of any such person is or was an officer, director or employee, or such person or relative otherwise has received more than $150,000 in fees, compensation and other payment from the issuer during the Company’s last three fiscal years; provided, however, that the Compliance Department may deem such a relationship not to be a material conflict of interest if the Company representative serves as an officer or director of the issuer at the direction of the Company for purposes of seeking control over the issuer.

3.1.5 The matter under consideration could reasonably be expected to result in a material financial benefit to the Company or its affiliates through the end of the Company’s next


¹		For the purposes of this Policy, “relative” includes the following family members: spouse, minor children or stepchildren or children or stepchildren sharing the person’s home.

two full fiscal years (for example, a vote to increase an investment advisory fee for a Fund advised by the Company or an affiliate).

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

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

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

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

3.2.1 The securities in respect of which the Company has the power to vote account for less than 1% of the issuer’s outstanding voting securities, but only if: (i) such securities do not represent one of the 10 largest holdings of such issuer’s outstanding voting securities and (ii) such securities do not represent more than 2% of the Client’s holdings with the Company.

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

4. Recordkeeping, Retention and Compliance Oversight

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

4.1.1 Copies of this Policy and any amendments thereto.

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

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

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

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

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

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

4.4 Records relating to the voting of proxies for securities held by investment company clients will be reported periodically, as requested, to the investment company’s Board of Trustees and, to the SEC on an annual basis pursuant to Form N-PX.

4.5 Compliance oversees the implementation of this procedure, including oversight over voting and the retention of proxy ballots voted. The CCO may review proxy voting pursuant to the firm’s compliance program.

Adopted by the Company’s Compliance Committee: March 24, 2009, amended June 17, 2009.

Approved by the Highland Funds Board of Trustees for all Funds (except Highland Long/Short Equity Fund): June 5, 2009.

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

(a)(1)

Identification of Portfolio Manager(s) or Management Team Members and Description of Role of Portfolio Manager(s) or Management Team Members

The Highland Floating Rate Advantage Fund’s (the “Fund”) portfolio is managed by Brad Means and Greg Stuecheli.

Brad Means. Mr. Means is a Senior Portfolio Manager at Highland. Prior to joining Highland in May 2004, Mr. Means was a Managing Director in FTI Consulting’s Corporate Finance group where he worked on corporate turnaround, restructuring and bankruptcy advisory engagements. From 1998 to 2001, he was a Director in PricewaterhouseCoopers LLP’s Chairman’s Office and focused on enterprise strategy, venture capital, business development and divestiture initiatives. Prior to his role in the Chairman’s Office, Mr. Means worked in the Strategic Change Consulting and the Assurance & Business Advisory groups of Price Waterhouse serving clients across a broad range of industries including Automotive, Energy, Financials and Industrials. He holds an MBA from the Stanford Graduate School of Business and a BSBA in Finance and Accounting from Creighton University. Mr. Means has earned the right to use the Chartered Financial Analyst designation.

Greg Stuecheli. Mr. Stuecheli is a Senior Portfolio Manager at Highland. Prior to his current duties, Mr. Stuecheli was a Portfolio Manager for Highland covering distressed and special situation credit and equity investments. Prior to joining Highland in June 2002, Mr. Stuecheli served as an analyst for Gryphon Management Partners, LP from 2000 to 2002, where his primary responsibilities included researching long and short investment ideas. In 1999, Mr. Stuecheli was a Summer Associate at Hicks, Muse, Tate & Furst, and from 1995 to 1998, Mr. Stuecheli worked as a chemical engineer at Jacobs Engineering Group and Cytec Industries. Mr. Stuecheli received an MBA from Southern Methodist University and a BS in Chemical Engineering from Rensselaer Polytechnic Institute. He has earned the right to use the Chartered Financial Analyst designation.

(a)(2)

Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest

Other Accounts Managed by Portfolio Manager(s) or Management Team Member

The following tables provide information about funds and accounts, other than the Fund, for which the Fund’s portfolio managers are primarily responsible for the day-to-day portfolio management as of June 30, 2010.

Brad Means

Total Number of

Accounts

Total Assets

Total

Managed with

Number of

Total Assets

Performance-

Accounts

Managed

Based Advisory

Type of Accounts

Managed

(millions)

Fee

Fee (millions)

Registered Investment Companies:

1.049

—

Other Pooled Investment Vehicles:

—

Other Accounts:

—

Greg Stuecheli

Total Number of

Accounts

Total Assets

Total

Managed with

Number of

Total Assets

Performance-

Accounts

Managed

Based Advisory

Type of Accounts

Managed

(millions)

Fee

Fee (millions)

Registered Investment Companies:

1.049

—

Other Pooled Investment Vehicles:

—

Other Accounts:

—

Because each portfolio manager manages other accounts, including accounts that may pay higher fees, potential conflicts of interest exist, including potential conflicts between the investment strategy of a Fund and the investment strategy of the other accounts managed by the portfolio manager and potential conflicts in the allocation of investment opportunities between a Fund and the other accounts.

Conflicts of Interest.

Highland and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other parties and manage other accounts and private investment vehicles similar to the Fund. In connection with such other investment management activities, the Adviser and/or its general partner, limited partners, officers, affiliates and employees may decide to invest the funds of one or more other accounts or recommend the investment of funds by other parties, rather than the Fund’s

monies, in a particular security or strategy. In addition, the Adviser and such other persons will determine the allocation of funds from the Fund and such other accounts to investment strategies and techniques on whatever basis they consider appropriate or desirable in their sole and absolute discretion.

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

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

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

(a)(3)

Compensation Structure of Portfolio Manager(s) or Management Team Members

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

Base compensation. Generally, portfolio managers receive base compensation based on their seniority and/or their position with Highland, which may include the amount of assets supervised and other management roles within Highland. Base compensation is determined by taking into account current industry norms and market data to ensure that Highland pays a competitive base compensation.

Discretionary compensation. In addition to base compensation, portfolio managers may receive discretionary compensation, which can be a substantial portion of total compensation. Discretionary compensation can include a discretionary cash bonus paid to recognize specific business contributions and to ensure that the total level of compensation is competitive with the market, as well as participation in incentive plans, including one or more of the following:

Short-Term Incentive Plan. The purpose of this plan is to attract and retain the highest quality employees for positions of substantial responsibility, and to provide additional incentives to a select group of management or highly-compensated employees of Highland in order to promote the success of Highland.

Long Term Incentive Plan. The purpose of this plan is to create positive morale and teamwork, to attract and retain key talent and to encourage the achievement of common goals. This plan seeks to reward participating employees based on the increased value of Highland.

Because each person’s compensation is based on his or her individual performance, Highland does not have a typical percentage split among base salary, bonus and other compensation. Senior portfolio managers who perform additional management functions may receive additional compensation in these other capacities. Compensation is structured such that key professionals benefit from remaining with Highland.

(a)(4)

Disclosure of Securities Ownership

The following table sets forth the dollar range of equity securities of the Fund beneficially owned by each portfolio manager as of June 30, 2010.


	Dollar Range of Equity Securities
Name of Portfolio Manager	Beneficially Owned by Portfolio Manager
Brad Means		0-$100,000
Greg Stuecheli		0-$100,000

(b)

Not applicable.

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

Not applicable.

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

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

Item 11. Controls and Procedures.

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

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

Item 12. Exhibits.

	(a)(1)		Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto.

	(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.


Portfolio Managers’ Letter			1
Fund Profile			3
Financial Statements			4
Investment Portfolio			5
Statement of Assets and Liabilities			12
Statement of Operations			13
Statements of Changes in Net Assets			14
Statement of Cash Flows			16
Financial Highlights			17
Notes to Financial Statements			21
Report of Independent Registered Public Accounting Firm			31
Additional Information			32
Important Information About This Report			36


	Item 1. Reports to Stockholders
	Item 2. Code of Ethics
	Item 3. Audit Committee Financial Expert
	Item 4. Principal Accountant Fees and Services
	Item 5. Audit Committee of Listed registrants
	Item 6. Investments
	Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
	Item 8. Portfolio Managers of Closed-End Management Investment Companies
	Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
	Item 10. Submission of Matters to a Vote of Security Holders
	Item 11. Controls and Procedures
	Item 12. Exhibits
SIGNATURES
EX-99.CODE ETH
EX-99.CERT
EX-99.906CERT


(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/ M. Jason Blackburn
		M. Jason Blackburn, Chief Financial Officer, Treasurer and Secretary
		(principal financial officer)


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