Edgar Filing: FIRST TRUST/GALLATIN SPECIALTY FINANCE & FINANCIAL OPPORTUNITIES FUND

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 811-22039
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
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(Exact name of registrant as specified in charter)

1001 Warrenville Road, Suite 300
LISLE, IL 60532
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(Address of principal executive offices) (Zip code)

W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
LISLE, IL 60532
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(Name and address of agent for service)

registrant's telephone number, including area code: 630-241-4141
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Date of fiscal year end: NOVEMBER 30
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Date of reporting period: NOVEMBER 30, 2007
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.

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

ITEM 1. REPORTS TO STOCKHOLDERS.

The Report to Shareholders is attached herewith.

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[GRAPHIC OMITTED]
FIRST TRUST/GALLATIN
SPECIALTY FINANCE
AND FINANCIAL
OPPORTUNITIES FUND

ANNUAL REPORT

FOR THE PERIOD MAY 25, 2007
(COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 2007

[LOGO] FIRSTTRUST [LOGO] GALLATIN
ADVISORS L.P. ASSET MANAGEMENT(SM)

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TABLE OF CONTENTS
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
ANNUAL REPORT
NOVEMBER 30, 2007

Shareholder Letter ........................................................ 1
Portfolio Commentary ...................................................... 2
Portfolio Components ...................................................... 6
Portfolio of Investments .................................................. 7
Statement of Assets and Liabilities ....................................... 9
Statement of Operations ................................................... 10
Statement of Changes in Net Assets ........................................ 11
Statement of Cash Flows ................................................... 12
Financial Highlights ...................................................... 13
Notes to Financial Statements ............................................. 14
Report of Independent Registered Public Accounting Firm ................... 19
Additional Information .................................................... 20
Board of Trustees and Officers ............................................ 24

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933. Forward-looking statements include
statements regarding the goals, beliefs, plans or current expectations of First
Trust Advisors L.P. ("First Trust" or the "Advisor") and/or Gallatin Asset
Management, Inc. ("Gallatin" or the "Sub-Advisor") and their respective
representatives, taking into account the information currently available to
them. Forward-looking statements include all statements that do not relate
solely to current or historical fact. For example, forward-looking statements
include the use of words such as "anticipate," "estimate," "intend," "expect,"
"believe," "plan," "may," "should," "would" or other words that convey
uncertainty of future events or outcomes.

Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of First Trust and/or Gallatin and their respective representatives
only as of the date hereof. We undertake no obligation to publicly revise or
update these forward-looking statements to reflect events and circumstances that
arise after the date hereof.

PERFORMANCE AND RISK DISCLOSURE

There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund.

Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares
may be worth more or less than their original cost.

HOW TO READ THIS REPORT

This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.

By reading the portfolio commentary by the portfolio management team at the
Sub-Advisor, you may obtain an understanding of how the market environment
affected the Fund's performance. The statistical information that follows may
help you understand the Fund's performance compared to that of the relevant
market benchmarks.

It is important to keep in mind that the opinions expressed by personnel of
Gallatin are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus.

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SHAREHOLDER LETTER
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
ANNUAL REPORT
NOVEMBER 30, 2007

Dear Shareholders:

We believe investment opportunities abound, both here and abroad, affording the
potential for exceptional returns for investors. At First Trust Advisors L.P.
("First Trust"), we realize that we must be mindful of the complexities of the
global economy and at the same time address the needs of our customers through
the types of investments we bring to market.

We are single-minded about providing a range of investment products, including
our family of closed-end funds, to help First Trust meet the challenge of
maximizing our customers' financial opportunities. Translating investment ideas
into products which can deliver performance over the long term while continuing
to support our current product line remains a focus for First Trust as we head
into the future.

The report you hold will give you detailed information about your investment in
First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the
"Fund") for the period May 25, 2007 (commencement of operations) to November 30,
2007. I encourage you to read this report and discuss it with your financial
advisor.

First Trust is pleased that the Fund is a part of your financial portfolio and
we will continue to offer you current information about your investment, as well
as new opportunities in the financial marketplace, through your financial
advisor. We value our relationship with you and appreciate the opportunity to
assist you in achieving your financial goals.

Sincerely,

/s/ James A. Bowen

James A. Bowen
President of First Trust/Gallatin Specialty Finance and Financial Opportunities
Fund

Page 1

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PORTFOLIO COMMENTARY
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND

The primary investment objective of the First Trust/Gallatin Specialty Finance
and Financial Opportunities Fund ("FGB") is to seek a high level of current
income. As a secondary objective, the Fund seeks an attractive total return. The
Fund pursues its investment objectives by investing at least 80% of its managed
assets in a portfolio of securities of specialty finance and other financial
companies that the Fund's Sub-Advisor believes offer attractive opportunities
for income and capital appreciation. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund may not be appropriate for all
investors.

MARKET RECAP

FGB began trading on May 25, 2007. As a fund focusing specifically on stocks in
the financial sector, FGB has been in the eye of the market's hurricane, since
its inception. This is because much of the stock market's volatility in 2007
began in the financial sector. Although the turmoil has pressured down the
Fund's net asset value ("NAV"), the environment has created numerous
opportunities.

A LOOK BACK

To understand what happened among financial stocks, and the nature of the
opportunities that exist, it's helpful to look back to before 2007 and review
the issues that created the problems that currently exist in the financial
markets. The financial markets were flush with "liquidity," which essentially
means that there was a lot of cash that was ready to be invested. There are many
theories as to why liquidity was so high, but it's likely that several factors
were at play, including multiple years of low interest rate policy from the
Federal Reserve, a strong economy, rising real estate markets, global capital
flows and financial innovations on Wall Street. With abundant liquidity, many
investors became complacent in sizing up risk and indiscriminately bought
investments, accepting high levels of risk and low levels of return potential.
It was a bit like the technology bubble of the late 1990s, though its public
visibility was much lower because the investments were often "structured
products" that didn't trade on exchanges.

HOW LEVERAGE WORKS AND HOW IT AFFECTS AN INVESTMENT

Exacerbating the high level of liquidity in the financial market was the
widespread availability and use of leverage. Leverage is the ability to borrow
capital to buy something. A common example is a mortgage, where a homeowner
takes out a loan and pledges the house as collateral. If the homeowner puts down
20 percent, and borrows 80 percent, the leverage ratio is 4:1 (80 divided by
20). In the financial markets, a similar technique involves purchasing
securities and pledging the securities as collateral to a lender. When liquidity
was high, lenders often allowed leverage of 10 or 20:1, sometimes more.

The important thing to remember about leverage is that it's a two-edged sword.
If a leveraged investment performs well, the returns are large because the
investor captures gains using someone else's capital. However, if an investment
doesn't perform, an investor's equity can be decimated, or completely
eliminated, because the lender has to be repaid. Leverage can also put investors
in a precarious position, as the lenders may decide to pull their funding,
forcing investors to scramble for new sources of debt.

PERFORMANCE ANALYSIS

Long before the Fund began trading, as a seasoned manager in this area, we
recognized the hazards of subprime mortgage lending. For this reason, we avoided
investments in subprime lenders. This posture didn't insulate us from all the
related problems; however, it has helped us to form a portfolio characterized by
companies with durable business plans. We expect our companies to not just
survive the recent turmoil, but actually grow earnings and dividends because of
it. And ultimately, we believe these benefits should flow through to
shareholders of FGB.

The table below quantifies how the Fund and its blended benchmark performed
through the end of November 2007. Note that the Fund's actual sector and
industry allocations are materially different than those of the blended
benchmark. However, we provide the blended benchmark to illustrate how some
areas of the financial sector performed, which can be helpful in broadly
describing our investment universe. Additionally, for comparative purposes,
included below is the total return for the MSCI U.S. Investable Market
Financials Index. This is a broad based financials index and is based upon the
2,500 stocks in the MSCI investable universe with a financial classification
according to the Global Industry Classification Standard (GICS).

Page 2

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PORTFOLIO COMMENTARY - (CONTINUED)
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Returns (5/25/07 to 11/30/07)

Blended Benchmark (a) -23.33%
MSCI U.S. Investable
Market Financials Index -16.24%
FGB Market Value (b) -25.36%
FGB NAV (c) -24.53%

SOURCE: BLOOMBERG

(a) The blended benchmark is based upon the following allocations: 40% Red
Rocks Listed Private Equity; 20% FTSE NAREIT Mortgage REIT; 20% FTSE
NAREIT Hybrid REIT; 10% Merrill Lynch Preferred Stock/Hybrid Securities;
and 10% Russell 2000 Financial Services.

(b) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share market value.

(c) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gains distributions, if any, at
prices obtained by the Dividend Reinvestment Plan and changes NAV per
share and does not reflect sales load.

The blended benchmark, market value and NAV all performed similarly in the
period, though we would not often expect this. The Fund does invest in the
blended benchmark sectors, but usually not in the same proportion. Furthermore,
the Fund is specifically focused on Business Development Companies ("BDCs"), a
relatively new sector of the market that is not entirely reflected in the
blended benchmark.

The blended benchmark does however illustrate that the financial sector was
among the hardest hit in 2007. Within the blended benchmark, the mortgage and
hybrid Real Estate Investment Trust ("REIT") components were the poorest
performing sectors, declining 37 percent and 30 percent, respectively. The
private equity component was down 19 percent, while the preferred and small-cap
financial services components were down 9 percent and 12 percent, respectively.

The Fund's exposure to mortgage and hybrid REITs was less than that of the
blended benchmark, which contributed to relative performance. However, the Fund
did not have exposure to preferred securities, which detracted from relative
performance because this was the blended benchmark's best-performing component.
The Fund's BDC exposure shared some similarity to the private equity and
financial services components of the blended benchmark, while the exposure to
Canadian Income Trusts was a contributor to relative performance in the period.

MANAGER Q & A

WHY WAS 2007 SUCH A DIFFICULT YEAR FOR THE FINANCIAL MARKETS?

In our opinion, the market turmoil of 2007 involved the confluence of complacent
investors and excessive leverage. Problems arose as high-risk subprime mortgage
investments began to default at an alarming rate during the summer. The prices
of these securities fell, and highly leveraged investors suddenly lost their
funding. They were forced to sell their positions, creating a downward spiral in
prices. And as the other side of the leverage sword cut through the market, many
investors suffered enormous losses. Liquidity evaporated and fear spread far
beyond the subprime mortgage market. By late summer, the downward price spiral
phenomenon had spread to even high-quality investments. Many high profile
financial companies, including some of the largest banks in the world, reported
staggering losses. Against this backdrop, investors sold just about everything
in the financial sector, regardless of whether it had losses. Ironically, while
investors apparently paid little or no attention to what they were buying before
the crisis, today, they are seemingly paying little attention to what they're
selling. Herein lies the opportunity, in our opinion, for those who are able to
apply patience and discipline to their investing mindset.

WHAT IS YOUR OUTLOOK FOR THE MARKET AND THE FUND?

As we look forward, it's helpful to first review the Fund's objectives. FGB's
primary investment objective is to seek a high level of current income. The Fund
seeks attractive total return as a secondary objective. A particularly important
focus is on BDCs, which lend and invest in the private debt and equity markets.
BDCs have publicly-traded shares and have some similarity to REITs in that they
aren't taxed at the corporate level, as long as they distribute most of their
income. Accordingly, many BDCs have relatively high dividend yields.

Historically, private market investing was limited to institutional investors
and high net worth individuals who utilized partnership vehicles. However, BDCs
are beginning to change the landscape, making the private markets more available
to individual investors. And while BDCs are a relatively new sector (most have
been public for less than five years), their management teams are typically
highly experienced, often bringing decades of private market investing to the
table.

Page 3

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PORTFOLIO COMMENTARY - (CONTINUED)
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We don't know how long it may take for the liquidity crisis in the financial
sector to pass. However, we have invested in what we believe are durable
companies positioned to not just survive, but prosper. After the storm clears,
these companies should emerge, in our opinion, with a high degree of credibility
and we expect them to be awarded much higher valuations.

DO YOU SEE THE BDC MARKET CONTINUING TO GROW IN THE FUTURE?

We believe that there are several reasons why the number of BDCs, as well as the
size of the existing ones, will grow significantly in coming years. First, BDCs
are efficiently providing access to the private markets to a wide variety of
investors. As awareness of the sector increases, we think the interest will
follow, particularly as investors look to BDCs to help diversify portfolios.
Second, we believe BDC management teams will develop visible track records
involving growing dividends and attractive gain realizations. As the length of
these track records increases, so should investor confidence. And finally, the
BDC structure is attractive to the management teams themselves. Unlike
limited-life partnerships, a BDC is an ongoing entity. This characteristic
provides both stability and flexibility to managers in making private market
investments. Over time, we expect many more top-tier professionals to join
existing BDCs or create new ones.

HOW WILL THESE FACTORS AFFECT THE FUND?

In our opinion, these are positive long-term trends that affirm the Fund's
objectives. Few (if any) other funds have such a specific focus on BDCs. This
fact puts FGB in the first-mover position, and makes the Fund a very unique
investment, in our opinion. Still, we know that before reaching the long-term
trends, we must first navigate the more immediate ones. Like other stocks in the
financial sector, BDC prices moved down significantly in 2007 and contributed to
the Fund's NAV decline. The good news is that the BDC price declines did not
move in tandem with their fundamentals. In fact, we believe that in many ways
they actually moved in the opposite direction.

Unlike other financial companies, BDCs are limited by regulation to 1:1
debt/equity leverage. So relative to other financial companies that often have
very high leverage ratios, BDCs are quite conservative. As a result, BDCs did
not face solvency problems, even as liquidity became very scarce. Instead, BDCs
have taken advantage of the environment, making loans and investing with higher
rates and more profitable terms. So while the price declines are not pleasant,
we believe the BDCs have the balance sheet strength to make it through the
near-term turmoil and participate in the positive long-term trends.

For the Fund, we also look to current dividend payments to help make it through
difficult short-term horizons. Through the crisis, the BDCs have actually grown
their dividends. With higher dividends and lower prices, many of the BDCs now
sport double-digit yields. Stocks usually don't maintain double-digit yields for
very long because either the dividend is cut, or the stock price moves up. Due
to the fact that we don't foresee dividend cuts (quite the opposite, actually),
we expect price movement to be the corrective mechanism. Another way of looking
at BDCs is their valuation of price to book value. Book value is the value of
the company's assets, minus debt and other obligations. Historically, BDCs have
often traded in a range of 1.2 to 1.6 times book value, sometimes reaching
around 2.0 times book. When the Fund began trading, the BDCs were in this 1.2 to
1.6 times book range. Today many are trading at or below 1.0 times book.
Needless to say, we view these low BDC valuations as the kind of opportunity the
Fund was formed to pursue.

WHAT ARE SOME OF THE RISKS YOU SEE AHEAD?

The principal risk we monitor for BDCs is credit risk. Credit risk is an ongoing
exposure when investing in BDCs that existed long before the 2007 liquidity
crisis and one that should remain long after it has passed. It is for this
reason we focus so much on the quality of management. We want to invest in
companies where management is steadfast in its approach to underwriting risk,
regardless of how the market perceives and prices the BDC.

WHAT ELSE IS IMPORTANT TO NOTE ABOUT THIS MARKET AND ITS EFFECT ON THE FUND?

A significant part of FGB's portfolio is the commercial/hybrid REIT allocation.
These companies own or finance commercial real estate. They also may invest in
commercial real estate securities. Like the BDCs, their leverage posture tends
to be more conservative relative to other financial companies, often in the 3 to
5:1 range. In addition, their share prices declined even as fundamentals
remained intact. With the exception of one company, all of these companies in
the portfolio increased their dividends in 2007 and several paid an extra
distribution derived from sizable realized gains. This portion of the portfolio
is also characterized by double-digit yields and low price to book value ratios,
implying significant upside potential for the stocks.

Page 4

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PORTFOLIO COMMENTARY - (CONTINUED)
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Outside of the financial sector, the Fund had nine percent invested in Canadian
Income Trusts. Although some recent changes in Canadian tax laws have adversely
affected this sector, we believe that there are attractive investment
opportunities in the space. The trusts have stable production assets with long
reserve lives. Given the need for energy in North America, we believe energy
assets providing consistent, stable supply can play a constructive role in the
Fund's portfolio.

DO YOU FEEL COMFORTABLE WITH THE FUND'S POSITION RIGHT NOW?

As a financial sector fund, FGB was launched right in front of a major market
tempest. And while the declines in the Fund's price and NAV have been difficult
to endure, we believe the Fund's strategies should remain intact. As well, we
believe that focusing on BDCs is a unique and effective way to pursue growing
dividends and a higher NAV. In our opinion, the long-term trends for BDCs are
very positive, and near-term trends are aided by high dividend yields and low
valuations. Finally, the Fund's level of borrowed funds was only at 15 percent
at the end of November 2007. Therefore, we have significant resources that can
be utilized to pursue emerging opportunities.

We are grateful for the opportunity to manage this Fund and look forward to
delivering the Fund's objectives through a unique exposure in the financial
sector.

SUB-ADVISOR

Gallatin Asset Management, Inc. provides asset management and advisory services
to high net worth individual and institutional investors. Gallatin Asset
Management, Inc., organized in 2005, is a wholly owned subsidiary of A.G.
Edwards, Inc. On October 1, 2007, Wachovia Corp. completed its previously
announced acquisition of A.G. Edwards, Inc. The majority of Gallatin's
investment personnel previously comprised A.G. Edwards' Asset Management
Department, and its investment management team has remained intact since that
time. Its 13 managers and analysts count more than 180 years of aggregate
investment experience. As of October 31, 2007, Gallatin had approximately $10.6
billion of assets under management. Of these, approximately $3.1 billion were
managed in equity and investment grade fixed income portfolios. Gallatin also
manages approximately $7.5 billion in portfolios of selected exchange-traded
funds that are guided by proprietary asset allocation models. These models are
driven by the firm's analysis of cyclical changes within the economy and
financial markets combined with quantitative modeling.

PORTFOLIO MANAGEMENT TEAM

MARK A. KELLER, CFA, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER

Mark Keller serves as senior vice president and chief investment officer for
Gallatin. Since 1994, Mr. Keller has led the Asset Management program for A.G.
Edwards, Inc. and its affiliates and continues in this capacity now as part of
the wholly-owned subsidiary, Gallatin. Mr. Keller also chairs the A.G. Edwards
Investment Strategy Committee. Prior to 1994, he served for 15 years in A.G.
Edwards' Securities Research Department as an analyst covering a variety of
industries. During his last five years in Securities Research, Mr. Keller served
as equity strategist and manager of the firm's Focus List. He has been a CFA
charterholder since 1984 and has a B.A. from Wheaton College (Wheaton,
Illinois).

DAVID B. MIYAZAKI, CFA, VICE PRESIDENT, EQUITY PORTFOLIO MANAGER

David Miyazaki serves as a portfolio manager for Gallatin where he manages
equity portfolios with a value discipline. He is also a member of the A.G.
Edwards Investment Strategy Committee, working to establish and maintain the
firm's asset allocation recommendations. Prior to joining A.G. Edwards in 1999,
Mr. Miyazaki managed a short-term interest rate arbitrage portfolio for Koch
Industries from 1996 to 1999. He worked as an analyst for Prudential Capital's
private placement group from 1993 to 1996 and traded mortgage-backed securities
for a boutique firm in Dallas, Texas, from 1991 to 1993. Mr. Miyazaki has been a
CFA charterholder since 1995. He graduated from Texas Christian University with
a B.A. in business administration.

DANIEL T. WINTER, CFA, VICE PRESIDENT, EQUITY PORTFOLIO MANAGER

Dan Winter serves as a portfolio manager for Gallatin where he manages equity
portfolios with a value discipline. He has served A.G. Edwards, Inc. and its
affiliates in an equity portfolio manager capacity since 1992, first for A.G.
Edwards Trust Co., then with A.G. Edwards Asset Management department and
continues in this capacity now as part of the wholly-owned subsidiary, Gallatin.
During his tenure with A.G. Edwards Trust Co., Mr. Winter specialized in the
management of a variety of portfolios, including charitable remainder trusts,
foundations, endowments, employee benefits, and rabbi and personal trusts; in
1996 he formally joined the Asset Management department. He also directs the
daily trading for the equity portfolios. Mr. Winter has been a CFA charterholder
since 1995. He earned a B.A. in business management with a

Page 5

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO COMPONENTS (a)
NOVEMBER 30, 2007

[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]

Diversified Financial Services 2.7%
Capital Markets 54.8%
Real Estate Investment Trusts 33.8%
Canadian Income Trusts 8.7%

(a) Percentages are based on total investments. Please note that the
percentages shown on the Portfolio of Investments are based on net assets.

Page 6 See Notes to Financial Statements.

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a)
NOVEMBER 30, 2007

SHARES DESCRIPTION VALUE
------------ ------------------------------------------------------------- --------------

COMMON STOCKS - 110.4%

CAPITAL MARKETS - 66.3%
535,660 Allied Capital Corp. ........................................ $ 13,032,608
382,326 American Capital Strategies, Ltd. ........................... 14,379,281
846,706 Apollo Investment Corp. ..................................... 14,995,163
760,000 Ares Capital Corp. .......................................... 11,445,600
650,000 BlackRock Kelso Capital Corp. ............................... 9,282,000
410,000 Gladstone Capital Corp. ..................................... 8,031,900
100,000 Gladstone Investment Corp. .................................. 1,142,000
40,910 GSC Investment Corp. ........................................ 452,056
506,205 Hercules Technology Growth Capital, Inc. .................... 5,978,281
50,000 Highland Distressed Opportunities, Inc. ..................... 473,000
15,000 Invesco, Ltd., Sponsored ADR (b) ............................ 393,750
490,000 Kohlberg Capital Corp. ...................................... 5,140,100
472,000 MCG Capital Corp. ........................................... 5,333,600
690,000 MVC Capital, Inc. ........................................... 11,088,300
371,737 NGP Capital Resources Co. ................................... 5,453,382
550,000 Patriot Capital Funding, Inc. ............................... 5,895,998
555,000 PennantPark Investment Corp. ................................ 6,376,950
306,152 Prospect Energy Corp. ....................................... 4,292,251
463,785 Technology Investment Capital Corp. ......................... 4,846,553
---------------
128,032,773
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DIVERSIFIED FINANCIAL SERVICES - 3.2%
85,211 Financial Federal Corp. ..................................... 1,882,311
446,000 Medallion Financial Corp. ................................... 4,384,180
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6,266,491
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REAL ESTATE INVESTMENT TRUSTS (REITS) - 40.9%
350,000 Annaly Capital Management, Inc. ............................. 6,023,500
330,000 Arbor Realty Trust, Inc. .................................... 5,643,000
225,000 Capital Trust, Inc. - Class A ............................... 6,921,000
870,000 CapitalSource, Inc. ......................................... 14,581,200
640,000 Gramercy Capital Corp. ...................................... 15,219,200
400,000 iStar Financial, Inc. ....................................... 11,708,000
1,030,000 NorthStar Realty Finance Corp. .............................. 9,445,100
200,000 RAIT Financial Trust ........................................ 1,730,000
250,000 Redwood Trust, Inc. ......................................... 7,632,500
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78,903,500
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TOTAL COMMON STOCKS ......................................... 213,202,764
(Cost $277,897,669)
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CANADIAN INCOME TRUSTS - 10.5%

100 ARC Energy Trust, Units ..................................... 1,902
364,100 Enerplus Resources Fund, Units .............................. 14,880,767
200,000 Penn West Energy Trust, Units ............................... 5,316,000
100 Progress Energy Trust, Units ................................ 1,085
---------------

TOTAL CANADIAN INCOME TRUSTS ................................ 20,199,754
(Cost $23,467,869)
---------------

See Notes to Financial Statements. Page 7

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2007

DESCRIPTION VALUE
------------------------------------------------------------- --------------

TOTAL INVESTMENTS - 120.9%. ................................................ $ 233,402,518
(Cost $301,365,538) (c)

LOAN OUTSTANDING - (18.7)%. ................................................ (36,000,000)
NET OTHER ASSETS AND LIABILITIES - (2.2%) .................................. (4,332,055)
---------------
NET ASSETS - 100.0% ........................................................ $ 193,070,463
===============

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(a) All percentages shown in the Portfolio of Investments are based on net
assets.

(b) Non-income producing security.

ADR American Depositary Receipt

Page 8 See Notes to Financial Statements.

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2007

ASSETS:
Investments, at value
(Cost $301,365,538) .......................................................................... $ 233,402,518
Cash ............................................................................................ 316,065
Dividends receivable ............................................................................ 1,023,586
-------------
Total Assets .............................................................................. 234,742,169
-------------
LIABILITIES:
Payables:
Outstanding loan .......................................................................... 36,000,000
Distributions to Common Shareholders ...................................................... 5,063,100
Investment advisory fees .................................................................. 192,146
Interest and fees due on loan ............................................................. 182,139
Offering costs ............................................................................ 115,591
Printing fees ............................................................................. 37,339
Audit fees ................................................................................ 33,845
Administrative fees ....................................................................... 18,658
Trustees' fees and expenses ............................................................... 10,530
Transfer agent fees ....................................................................... 4,132
Custodian fees ............................................................................ 3,332
Legal fees ................................................................................ 2,504
Accrued expenses and other liabilities .......................................................... 8,390
-------------
Total Liabilities ......................................................................... 41,671,706
-------------
NET ASSETS ...................................................................................... $ 193,070,463
=============
NET ASSETS CONSIST OF:
Paid-in capital ................................................................................. $ 267,810,056
Par value ....................................................................................... 140,642
Accumulated net investment income (loss) ........................................................ (166,949)
Accumulated net realized gain (loss) on investments ............................................. (6,750,266)
Net unrealized appreciation (depreciation) on investments ....................................... (67,963,020)
-------------
NET ASSETS ...................................................................................... $ 193,070,463
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) ............................ $ 13.73
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ..... 14,064,166
=============

See Notes to Financial Statements. Page 9

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED NOVEMBER 30, 2007 (a)

INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $138,862) ...................... $ 12,069,233
-------------
Total investment income .................................................. 12,069,233
-------------
EXPENSES:
Investment advisory fees .................................................... 1,262,178
Interest and fees on loan ................................................... 658,774
Administration fees ......................................................... 121,357
Printing fees ............................................................... 53,169
Audit fees .................................................................. 33,845
Legal fees .................................................................. 33,759
Trustees' fees and expenses ................................................. 30,580
Transfer agent fees ......................................................... 27,256
Custodian fees .............................................................. 15,274
Other ....................................................................... 26,292
-------------
Total expenses ........................................................... 2,262,484
-------------
NET INVESTMENT INCOME ....................................................... 9,806,749
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments .............................................................. (6,750,266)
Foreign currency transactions ............................................ (16)
-------------
Net realized gain (loss) .................................................... (6,750,282)
-------------
Net change in unrealized appreciation (depreciation) on investments ......... (67,963,020)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ..................................... (74,713,302)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............. $ (64,906,553)
=============

----------
(a) Initial seed date of April 23, 2007. The Fund commenced operations on
May 25, 2007.

Page 10 See Notes to Financial Statements.

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF CHANGES IN NET ASSETS

PERIOD ENDED
11/30/2007 (a)
--------------

OPERATIONS:
Net investment income (loss) ................................................ $ 9,806,749
Net realized gain (loss) .................................................... (6,750,282)
Net change in unrealized appreciation (depreciation) ........................ (67,963,020)
--------------
Net increase (decrease) in net assets resulting from operations ............. (64,906,553)
--------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................................... (9,973,682)
--------------
Total distributions to shareholders ......................................... (9,973,682)
--------------
CAPITAL TRANSACTIONS:
Proceeds from sale of 14,030,236 Common Shares .............................. 267,977,508
Proceeds from 33,930 Common Shares reinvested ............................... 534,400
Offering costs .............................................................. (561,210)
--------------
Total capital transactions .................................................. 267,950,698
--------------
Net increase (decrease) in net assets ....................................... 193,070,463

NET ASSETS:
Beginning of period ......................................................... --
--------------
End of period ............................................................... $ 193,070,463
==============
Accumulated net investment income (loss) at end of period ................... $ (166,949)
==============

----------
(a) Initial seed date of April 23, 2007. The Fund commenced operations on
May 25, 2007.

See Notes to Financial Statements. Page 11

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED NOVEMBER 30, 2007 (a)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations .................... $ (64,906,553)
Adjustments to reconcile net decrease in net assets resulting from
operations to net cash used for operating activities:
Purchases of investments ............................................. (314,189,416)
Sales of investments ................................................. 6,073,612
Net realized loss on investments ..................................... 6,750,266
Net change in unrealized appreciation (depreciation) on investments .. 67,963,020
CHANGES IN ASSETS AND LIABILITIES:
Increase in dividends receivable ..................................... (1,023,586)
Increase in investment advisory fees payable ......................... 192,146
Increase in interest and fees due on loan ............................ 182,139
Increase in offering costs payable ................................... 115,591
Increase in printing fees payable .................................... 37,339
Increase in audit fees payable ....................................... 33,845
Increase in administrative fees payable .............................. 18,658
Increase in Trustees' fees and expenses payable ...................... 10,530
Increase in transfer agent fees payable .............................. 4,132
Increase in custodian fees payable ................................... 3,332
Increase in legal fees payable ....................................... 2,504
Increase in accrued expenses and other liabilities ................... 8,390
-------------
CASH USED FOR OPERATING ACTIVITIES ...................................... $(298,724,051)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares issued ...................................... 267,977,508
Proceeds from Common Shares reinvested .................................. 534,400
Offering costs .......................................................... (561,210)
Distributions to Common Shareholders .................................... (4,910,582)
Issuances of loan ....................................................... 39,500,000
Repayments of loan ...................................................... (3,500,000)
-------------
CASH PROVIDED BY FINANCING ACTIVITIES ................................... 299,040,116
-------------
Increase in cash ........................................................ 316,065
Cash at beginning of period ............................................. --
-------------
Cash at end of period ................................................... $ 316,065
=============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees ....................... $ 476,635
=============

----------
(a) Initial seed date of April 23, 2007. The Fund commenced operations on May
25, 2007.

Page 12 See Notes to Financial Statements.

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD

PERIOD
ENDED
11/30/07 (a)
------------
Net asset value, beginning of period ...................... $ 19.10(b)
------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............................. 0.70
Net realized and unrealized gain (loss) ................... (5.32)
------------
Total from investment operations .......................... (4.62)
------------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .................................... (0.71)
------------
Total from distributions .................................. (0.71)
------------
Common Shares offering costs charged to paid-in capital ... (0.04)
------------
Net asset value, end of period ............................ $ 13.73
============
Market value, end of period .............................. $ 14.23
============
TOTAL RETURN BASED ON NET ASSET VALUE (c) (e) ............. (24.53)%
============
TOTAL RETURN BASED ON MARKET VALUE (d) (e) ................ (25.36)%
============
--------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ...................... $ 193,070
Ratio of total expenses to average net assets ............. 1.99%(f)
Ratio of total expenses to average net assets excluding
interest expense and fees ............................. 1.41%(f)
Ratio of net investment income to average net assets ...... 8.64%(f)
Portfolio turnover rate. .................................. 3%
INDEBTEDNESS:
Loan outstanding (in 000's) ............................... $ 36,000
Asset Coverage per $1,000 of indebtedness (g) ............. $ 6,363
--------------------------------------------

(a) Initial seed date of April 23, 2007. The Fund commenced operations on May
25, 2007.

(b) Net of sales load of $0.90 per share on initial offering.

(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.

(d) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share market price per share.

(e) Total return is not annualized for periods less than one year.

(f) Annualized

(g) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance.

See Notes to Financial Statements. Page 13

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

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007

1. FUND DESCRIPTION

First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the
"Fund") is a non-diversified, closed-end management investment company organized
as a Massachusetts business trust on March 20, 2007, and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FGB
on the New York Stock Exchange ("NYSE").

The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks attractive total return as a secondary objective. Under
normal market conditions, the Fund will invest at least 80% of its Managed
Assets in a portfolio of securities of specialty finance and other financial
companies that Gallatin Asset Management, Inc. ("Gallatin" or the "Sub-Advisor")
believes offer attractive opportunities for income and capital appreciation.
There can be no assurance that the Fund's investment objectives will be
achieved. Under normal market conditions, the Fund will concentrate its
investments in securities of companies within industries in the financial
sector. Managed Assets are defined as the value of the securities and other
investments the Fund holds plus cash and other assets, including interest
accrued but not yet received, minus accrued liabilities other than the principal
amount of any borrowings.

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. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.

A. PORTFOLIO VALUATION:

The net asset value ("NAV") of the Fund's Common Shares is determined daily as
of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time, on
each day the NYSE is open for trading. Domestic debt securities and foreign
securities are priced using data reflecting the earlier closing of the principal
markets for those securities. The NAV per Common Share is calculated by
subtracting the Fund's liabilities (including accrued expenses, dividends
payable and any borrowings of the Fund) from the Fund's Total Assets (the value
of the securities and other investments the Fund holds plus cash or other
assets, including interest accrued but not yet received) and dividing the result
by the total number of Common Shares outstanding.

The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, First Trust Advisors L.P. ("First Trust") may use a fair value
method to value the Fund's securities and investments. Additionally, if events
occur after the close of the principal markets for particular securities (e.g.,
domestic debt and foreign securities), but before the Fund values its assets,
that could materially affect NAV, First Trust may use a fair value method to
value the Fund's securities and investments. The use of fair value pricing by
the Fund is governed by valuation procedures adopted by the Fund's Board of
Trustees and in accordance with the provisions of the 1940 Act.

Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days are valued at amortized cost.

B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:

Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis.

C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

Dividends from net investment income, if any, of the Fund are declared and paid
quarterly or as the Board of Trustees may determine from time to time.
Distributions of any net capital gains earned by the Fund are distributed at
least annually. Distributions will automatically be reinvested into additional
Common Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.

Page 14

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

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007

Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund. Permanent differences incurred during the fiscal period ended
November 30, 2007, resulting in book and tax accounting differences, have been
reclassified at period end to reflect a decrease in accumulated net investment
income (loss) by $16 and an increase in accumulated net realized gain (loss) on
investments by $16. Net assets were not affected by this reclassification.

The tax character of distributions paid during the fiscal period ended November
30, 2007 was as follows:

Distributions paid from:

Ordinary Income ......................................... $ 9,973,682

As of November 30, 2007, the components of distributable earnings on a tax basis
were as follows:

Undistributed Ordinary Income ........................... $ 4,896,152
Net Unrealized Appreciation (Depreciation) .............. (67,963,028)

D. INCOME TAXES:

The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, and by distributing substantially all of its net investment income and
net realized gains to shareholders. Accordingly, no provision has been made for
federal or state income taxes.

The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry a realized capital loss forward for eight years following the
year of loss and offset such loss against any future realized capital gains. At
November 30, 2007, the Fund had an available realized capital loss of $6,750,256
to offset future net capital gains through the fiscal year ending 2015.

In June 2006, Financial Accounting Standards Board ("FASB") Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109 ("FIN 48"), was issued and is effective for fiscal years beginning
after December 15, 2006. This Interpretation prescribes a minimum threshold for
financial statement recognition of the benefit of a tax position taken or
expected to be taken in a tax return. As of November 30, 2007, management has
evaluated the application of FIN 48 to the Fund, and has determined that there
is no material impact resulting from the adoption of this Interpretation on the
Fund's financial statements.

E. EXPENSES:

The Fund pays all expenses directly related to its operations.

F. ORGANIZATION AND OFFERING COSTS:

Organization costs consist of costs incurred to establish the Fund and enable it
to legally do business. These costs include filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consist of legal fees pertaining
to the Fund's Common Shares offered for sale, registration fees, underwriting
fees, and printing of the initial prospectus, among other fees. First Trust and
Gallatin have paid all organization expenses and all offering costs of the Fund
(other than sales load) that exceeded $0.04 per Common Share. The Fund's share
of Common Share offering costs, $561,210, was recorded as a reduction of the
proceeds from the sale of Common Shares during the fiscal period ended November
30, 2007.

G. ACCOUNTING PRONOUNCEMENT:

In September 2006, Statement of Financial Accounting Standards No. 157 Fair
Value Measurements ("SFAS 157") was issued by FASB and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. At this time, management is evaluating the implications
of SFAS 157 and its impact on the Fund's financial statements, if any has not
been determined.

Page 15

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007

3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS

First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets.

Gallatin serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee at an annual rate of 0.50% of Managed Assets that is paid by
First Trust from its investment advisory fee.

On May 24, 2007, the Fund entered into the original sub-advisory agreement with
the Advisor and Gallatin, which was then a wholly-owned subsidiary of A.G.
Edwards, Inc. ("A.G. EDWARDS"). On May 31, 2007, A.G. Edwards and Wachovia
Corporation ("WACHOVIA CORP.") announced that they had agreed that Wachovia
Corp. would acquire A.G. Edwards, (the "TRANSACTION"). On September 28, 2007,
A.G. Edwards announced that its shareholders had approved the Transaction.

The consummation of the Transaction resulted in a change of control of the
Sub-Advisor, which constituted an "assignment" of the original sub-advisory
agreement, as that term is used in the 1940 Act. Pursuant to the terms of the
original sub-advisory agreement and the requirements of the 1940 Act, the
original sub-advisory agreement automatically terminated upon its assignment on
October 1, 2007. At a meeting of the Board held on September 21, 2007, the
Board, after careful consideration (see "Sub-Advisory Agreements" below under
Additional Information), determined that following the Transaction, it was in
the best interests of the Fund for Gallatin to continue to act as sub-advisor to
the Fund. The Board approved an interim sub-advisory agreement to ensure the
continuation of investment sub-advisory services to the Fund upon the
termination of the original sub-advisory agreement. The interim sub-advisory
agreement has been in effect since October 1, 2007 and, pursuant to Rule 15a-4
under the 1940 Act, will be in effect no longer than through February 28, 2008.
In addition, at its meeting on September 21, 2007, the Board approved, subject
to shareholder approval, a new sub-advisory agreement among the Fund, the
Advisor and Gallatin. The terms of the new sub-advisory agreement are
substantially identical to the terms of the original sub-advisory agreement
except for the effective date and the initial term. To permit Gallatin to
continue to serve as the Fund's current sub-advisor after the expiration of the
interim sub-advisory agreement, shareholders of the Fund were asked to approve
the new sub-advisory agreement at a Special Shareholders meeting held on January
23, 2008 which was subsequently adjourned until February 20, 2008, in order to
continue the solicitation process to obtain the requisite shareholder approval.
Please refer to the Funds' Proxy Statement dated December 7, 2007 for additional
information. The Proxy Statement is available by calling 1-800-988-5891 or on
the SEC's website at http://www.sec.gov.

PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary of The PNC Financial
Services Group, Inc., serves as the Fund's Administrator and Transfer Agent in
accordance with certain fee arrangements. PFPC Trust Company, also an indirect,
majority-owned subsidiary of The PNC Financial Services Group, Inc., serves as
the Fund's Custodian in accordance with certain fee arrangements.

Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust added to the
First Trust Fund Complex. The annual retainer is allocated equally among each of
the trusts. No additional meeting fees are paid in connection with board or
committee meetings.

Additionally, Thomas R. Kadlec is paid $10,000 annually to serve as the Lead
Independent Trustee and Niel B. Nielson is paid $5,000 annually to serve as the
chairman of the Audit Committee, with such compensation paid by the trusts in
the First Trust Fund Complex and divided among those trusts. Independent
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. Effective
January 1, 2008, each of the chairmen of the Nominating and Governance Committee
and the Valuation Committee will be paid $2,500 to serve in such capacities with
such compensation paid by the trusts in the First Trust Fund Complex and divided
among those trusts. Also, effective January 1, 2008, each committee chairman
will serve two years before rotating to serve as a chairman of another
committee.

For the fiscal period ended November 30, 2007, the Fund paid brokerage
commissions to A.G. Edwards & Sons, Inc., an affiliate of the Sub-Advisor,
totaling $8,894.

4. PURCHASES AND SALES OF SECURITIES

Cost of purchases and proceeds from sales of investment securities, excluding
U.S. government and short-term investments, for the period ended November 30,
2007, were $314,189,416 and $6,073,612, respectively.

Page 16

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007

As of November 30, 2007, the aggregate gross unrealized appreciation for all
securities in which there as an excess of value over tax cost was $1,198,773 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $69,161,801.

5. COMMON SHARES

As of November 30, 2007, 14,064,166 of $0.01 par value Common Shares were
issued. An unlimited number of Common Shares has been authorized under the
Fund's Dividend Reinvestment Plan.

COMMON SHARE TRANSACTIONS WERE AS FOLLOWS:
PERIOD ENDED NOVEMBER 30, 2007
------------------------------
SHARES AMOUNT
-------------- -------------
Proceeds from Common Shares sold .............. 14,030,236 $267,977,508
Common Shares issued as reinvestment of
dividends under the Dividend Reinvestment
Plan ....................................... 33,930 534,400
Offering costs ................................ -- (561,210)
-------------- ------------
14,064,166 $267,950,698
============== ============

6. LOAN AND PLEDGE AGREEMENT

On July 11, 2007, the Fund entered into a Loan and Pledge Agreement with
Custodial Trust Company, which provides for a credit facility to be used as
leverage for the Fund. The credit facility provides for a secured line of credit
for the Fund, where Fund assets are pledged against advances made to the Fund.
Under the requirements of the 1940 Act, the Fund, immediately after any such
borrowings, must have an "asset coverage" of at least 300% (33- 1/3% of the
Fund's total assets after borrowings). The total commitment under the Loan and
Pledge Agreement is $120,000,000. For the period ended November 30, 2007, the
average amount outstanding was $30,487,903. The high and low annual interest
rates during the period ended November 30, 2007 were 6.50% and 5.78%,
respectively, and the weighted average interest rate was 6.15%. Total interest
and fees incurred during the period ended November 30, 2007 were $658,774. The
interest rate at November 30, 2007 was 5.78%.

7. INDEMNIFICATION

The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.

8. CONCENTRATION OF RISK

INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the equity market, or when political or economic events
affecting the issuers occur.

FINANCIAL SECTOR CONCENTRATION RISK: Under normal market conditions, the Fund
will invest at least 25% of its total assets in securities of companies within
industries in the financial sector. A fund concentrated in a single industry or
group of industries is likely to present more risks than a fund that is broadly
diversified over several industries or groups of industries. Compared to the
broad market, an individual sector may be more strongly affected by changes in
the economic climate, broad market shifts, moves in a particular dominant stock,
or regulatory changes. Specialty Finance and other financial companies in
general are subject to extensive government regulation, which may change
frequently. The profitability of specialty finance and other financial companies
is largely dependent upon the availability and cost of capital funds, and may
fluctuate significantly in response to changes in interest rates, as well as
changes in general economic conditions. From time to time, severe competition
may also affect the profitability of specialty finance and other financial
companies. Financial companies can be highly dependent upon access to capital
markets and any impediments to such access, such as general economic conditions
or a negative perception in the capital markets of a company's financial
condition or prospects could adversely affect its business. Leasing companies
can be negatively impacted by changes in tax laws which affect the types of
transactions in which such companies engage.

BUSINESS DEVELOPMENT COMPANY RISK: Investments in closed-end funds that elect to
be treated as BDCs may be subject to a high degree of risk. BDCs typically
invest in small and medium-sized private and certain public companies that may
not have access to public equity markets or capital raising. As a result, a
BDC's portfolio typically will include a substantial amount of securities
purchased in private placements, and its portfolio may carry risks similar to
those of a private equity or venture capital fund. Securities that are not

Page 17

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007

publicly registered may be difficult to value and may be difficult to sell at a
price representative of their intrinsic value. Investments in BDCs are subject
to various risks, including management's ability to meet the BDC's investment
objective, and to manage the BDC's portfolio when the underlying securities are
redeemed or sold, during periods of market turmoil and as investors' perceptions
regarding a BDC or its underlying investments change. BDC shares are not
redeemable at the option of the BDC shareholder and, as with shares of other
closed-end funds, they may trade in the secondary market at a discount to their
NAV.

REIT, MORTGAGE-RELATED AND ASSET-BACKED SECURITIES RISKS: Investing in REITs
involves certain unique risks in addition to investing in the real estate
industry in general. REITs are subject to interest rate risks (especially
Mortgage REITs) and the risk of default by lessees or borrowers. An Equity REIT
may be affected by changes in the value of the underlying properties owned by
the REIT. A Mortgage REIT may be affected by the ability of the issuers of its
portfolio mortgages to repay their obligations. REITs whose underlying assets
are concentrated in properties used by a particular industry are also subject to
risks associated with such industry. REITs may have limited financial resources,
their securities may trade less frequently and in a limited volume, and their
securities may be subject to more abrupt or erratic price movements than larger
company securities.

In addition to REITs, the Fund may invest in a variety of other mortgage-related
securities, including commercial mortgage securities and other mortgage-backed
instruments. Rising interest rates tend to extend the duration of
mortgage-related securities, making them more sensitive to changes in interest
rates, and may reduce the market value of the securities. In addition,
mortgage-related securities are subject to prepayment risk-the risk that
borrowers may pay off their mortgages sooner than expected, particularly when
interest rates decline. This can reduce the Fund's returns because the Fund may
have to reinvest that money at lower prevailing interest rates.

The Fund's investments in other asset-backed securities are subject to risks
similar to those associated with mortgage-backed securities, as well as
additional risks associated with the nature of the assets and the servicing of
those assets.

LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program, or obtained through the issuance of Preferred Shares, constitute a
substantial lien and burden by reason of their prior claim against the income of
the Fund and against the net assets of the Fund in liquidation. The rights of
lenders to receive payments of interest on and repayments of principal on any
borrowings made by the Fund under a leverage borrowing program are senior to the
rights of holders of Common Shares and the holders of Preferred Shares, with
respect to the payment of dividends or upon liquidation. The Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or Preferred Shares or purchase
Common Shares or Preferred Shares.

NON-DIVERSIFICATION RISK: Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.

Page 18

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

TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/GALLATIN SPECIALTY
FINANCE AND FINANCIAL OPPORTUNITIES FUND:

We have audited the accompanying statement of assets and liabilities of First
Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the "Fund"),
including the portfolio of investments, as of November 30, 2007, and the related
statements of operations, cash flows, and changes in net assets and the
financial highlights for the period May 25, 2007 (commencement of operations)
through November 30, 2007. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.

We conducted our audit 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 and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
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, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2007, by correspondence with the Fund's
custodian. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust/Gallatin Specialty Finance and Financial Opportunities Fund as of November
30, 2007, the results of its operations and cash flows, the changes in its net
assets, and the financial highlights for the period May 25, 2007 (commencement
of operations) through November 30, 2007, in conformity with accounting
principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois
January 22, 2008

Page 19

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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007 (UNAUDITED)

DIVIDEND REINVESTMENT PLAN

If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PFPC
Inc. (the "Plan Agent"), in additional Common Shares under the Plan. If you
elect to receive cash distributions, you will receive all distributions in cash
paid by check mailed directly to you by PFPC Inc., as dividend paying agent.

If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:

(1) If Common Shares are trading at or above NAV at the time of
valuation, the Fund will issue new shares at a price equal to the
greater of (i) NAV per Common Share on that date or (ii) 95% of the
market price on that date.

(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases.

Therefore, the average purchase price per share paid by the Plan Agent may
exceed the market price at the time of valuation, resulting in the purchase of
fewer shares than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and distributions
received in cash to purchase Common Shares in the open market within 30 days of
the valuation date except where temporary curtailment or suspension of purchases
is necessary to comply with federal securities laws. Interest will not be paid
on any uninvested cash payments.

You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.

The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.

There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.

Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.

If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.

The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PFPC Inc., 301 Bellevue
Parkway, Wilmington, Delaware 19809.

--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES

A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.

Page 20

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

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007 (UNAUDITED)

PORTFOLIO HOLDINGS

The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.

TAX INFORMATION

Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the period ended November 30, 2007, none qualified for the
corporate dividend received deduction available to corporate shareholders.

The Fund hereby designates as qualified dividend income distributions 9.70% of
ordinary income distributions (including short-term capital gains), for the
period end November 30, 2007.

NYSE CERTIFICATION INFORMATION

In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 27, 2007, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q will contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.

BY-LAW AMENDMENTS

On June 11, 2007, the Board of Trustees of the Fund approved certain changes to
the By-Laws of the Fund relating to the staggered Board of Trustees. These
changes were not required to be, and were not, approved by the Fund's
Shareholders. To receive a copy of the amended By-Laws, investors may call the
Fund at (800) 988-5891.

SUB-ADVISORY AGREEMENTS

BOARD CONSIDERATIONS REGARDING APPROVAL OF SUB-ADVISORY AGREEMENTS

The Board of Trustees of First Trust/Gallatin Specialty Finance and Financial
Opportunities Fund (the "Fund"), including a majority of the Independent
Trustees, approved the Interim Sub-Advisory Agreement and the New Sub-Advisory
Agreement (collectively, the "Agreements") among the Fund, First Trust Advisors
L.P. (the "Advisor") and Gallatin Asset Management, Inc. ("Gallatin") at a
meeting held on September 21, 2007. The Board determined that the terms of the
Agreements are fair and reasonable and in the best interests of the Fund. Based
on information provided by the Advisor and Gallatin, the Board concluded that it
believes that the scope and quality of services to be provided to the Fund under
the Agreements will be at least equivalent to the scope and quality of services
provided under the current Sub-Advisory Agreement among the Fund, the Advisor
and Gallatin (the "Current Sub-Advisory Agreement").

In late May 2007, shortly after the launch of the Fund, the Board was informed
that A.G. Edwards, Inc., the parent company of Gallatin, had entered into an
Agreement and Plan of Merger with Wachovia Corporation ("Wachovia Corp.")
pursuant to which A.G. Edwards would be combined with Wachovia Securities, LLC,
a subsidiary of Wachovia Corp. (the "Transaction"). The Board was also informed
that, if the Transaction was consummated, the Current Sub-Advisory Agreement
would terminate pursuant to its terms and the requirements of the Investment
Company Act of 1940, as amended (the "1940 Act"). On June 13, 2007, counsel to
the Independent Trustees forwarded to Gallatin a request for information
regarding the Transaction. In late August 2007, the Board was informed that the
Transaction was expected to close on October 1, 2007. In light of the expected
consummation of the Transaction, the Board held a special meeting on September
21, 2007, to consider the information provided by Gallatin in response to the
Independent Trustees' request for information and to consider the approval of
the Agreements. As part of its considerations, the Board reviewed information
regarding: the structure of the Transaction, the organizational structure of
Wachovia Corp., the strategic plan for Gallatin following the Transaction,
benefits to Wachovia Corp. from the Transaction, conflicts of interests arising
in connection with the Transaction and regulatory issues relating to Wachovia
Corp. and its affiliates. The Board also met on several occasions, prior to
September 21, 2007, with representatives of the Advisor to discuss the
Transaction. Throughout the entire process, the Independent Trustees were
advised by their independent legal counsel.

To reach its determination, the Board considered its duties under the 1940 Act,
as well as under the general principles of state law in reviewing and approving
advisory contracts; the requirements of the 1940 Act in such matters; the
fiduciary duty of investment advisors with respect to advisory agreements and
compensation; the standards used by courts in determining whether investment
company boards have fulfilled their duties; and the factors to be considered by
the Board in voting on such agreements. In connection with its

Page 21

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

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007 (UNAUDITED)

deliberations regarding the Agreements, the Board noted the Advisor's
representation that apart from their effective and termination dates and any
provisions of the Interim Sub-Advisory Agreement required by Rule 15a-4 under
the 1940 Act, the Agreements were the same in all material respects as the
Current Sub-Advisory Agreement. The Board considered that it had recently
considered Gallatin's capabilities and the terms of the Current Sub-Advisory
Agreement at a meeting held on April 16, 2007. Because the Board determined that
any differences between the Current Sub-Advisory Agreement and the Agreements
were immaterial, the Board determined that much of its previous analysis in
approving the Current Sub-Advisory Agreement applied to its review and
consideration of the Agreements. Accordingly, the Board took note of such prior
analysis and supplemented it with the additional considerations noted below.

In reviewing the Agreements, the Board considered the nature, quality and extent
of services to be provided by Gallatin under the Agreements. The Board noted the
background and experience of Gallatin's portfolio managers and Gallatin's
investment style. The Board considered that the Fund's portfolio managers were
expected to remain the same following the Transaction and that no changes to the
services provided by Gallatin to the Fund were expected as a result of the
Transaction. Due to the limited operating history of the Fund and the volatility
of the markets since the Fund's launch, the Board did not give extensive
consideration to the investment performance of the Fund. In light of the
information presented and the considerations made, the Board concluded that the
nature, quality and extent of services to be provided to the Fund by Gallatin
under the Agreements are expected to be satisfactory.

The Board considered the sub-advisory fees to be paid under the Agreements,
noting that they would be the same as the fees paid under the Current
Sub-Advisory Agreement. The Board also considered how the sub-advisory fee
relates to the overall management fee structure of the Fund, noting that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board
reviewed its prior consideration of the fees that Gallatin charges to other
clients for a similar investment strategy, noting that such fees are higher than
the Fund's sub-advisory fee. The Board concluded that the sub-advisory fees were
reasonable and appropriate in light of the nature, quality and extent of
services expected to be provided by Gallatin under the Agreements.

The Board considered that Gallatin was unable to estimate the profitability of
the Agreements to Gallatin, but the Board noted that the sub-advisory fee rate
was negotiated at arm's length between the Advisor and Gallatin, and that
Gallatin would be paid by the Advisor. The Board noted its previous
determination that the overall management fee structure reflects an appropriate
level of sharing of any economies of scale. The Board also considered the
fall-out benefits expected to be realized by Gallatin and Wachovia Corp. from
Gallatin's relationship with the Fund. The Board considered that Wachovia Corp.
would benefit to the extent that the Fund executes portfolio securities
transactions with affiliates of Wachovia Corp., but that the Fund will be
subject to substantial restrictions with respect to its ability to engage in
investment transactions with Wachovia Corp. or its affiliates. The Board noted
that Gallatin does not utilize soft dollars in connection with its management of
the Fund's portfolio. The Board considered that the Fund would not bear any
costs associated with soliciting shareholder approval of the New Gallatin
Sub-Advisory Agreement and that such costs would be borne by Wachovia Corp. or
its affiliates.

Based on all of the information considered and the conclusions reached, the
Board, including a majority of the Independent Trustees, determined that the
terms of the Agreements are fair and reasonable and that the approval of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.

The open-end and closed-end funds advised by First Trust Advisors, L.P. (each a
"Fund") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.

SOURCES OF INFORMATION

We may collect nonpublic personal information about you from the following
sources:

o Information we receive from you or your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;

o Information about your transactions with us, our affiliates or
others;

o Information we receive from your inquiries by mail, e-mail or
telephone; and

o Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.

Page 22

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

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007 (UNAUDITED)

INFORMATION COLLECTED

The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.

DISCLOSURE OF INFORMATION

We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:

o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives and
printers.

o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).

In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund. Please note,
however, that the California Financial Information Privacy Act contains an "opt
out" mechanism that California consumers may use to prevent us from sharing
nonpublic personal information with affiliates.

CONFIDENTIALITY AND SECURITY

With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.

POLICY UPDATES AND INQUIRIES

As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do change
it, we will tell you promptly.

For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.

Page 23

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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007 (UNAUDITED)

NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUST TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE

------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Two Year Term Physician; President, 58 None
c/o First Trust Advisors L.P. Wheaton Orthopedics;
1001 Warrenville Road, o Since Fund Co-owner and Co-
Suite 300 Inception Director (January 1996 to
Lisle, IL 60532 May 2007), Sports Med
D.O.B. 04/51 Center for Fitness;
Limited Partner,
Gundersen Real Estate
Partnership; Limited
Partner, Sportsmed LLC

Thomas R. Kadlec, Trustee o Two Year Term Senior Vice President and 58 None
c/o First Trust Advisors L.P. Chief Financial Officer
1001 Warrenville Road, o Since Fund (May 2007 to Present),
Suite 300 Inception Vice President and Chief
Lisle, IL 60532 Financial Officer (1990
D.O.B. 11/57 to May 2007), ADM
Investor Services, Inc.
(Futures Commission
Merchant); Vice
President (May 2005 to
Present), ADM
Derivatives, Inc.;
Registered Representative
(2000 to Present),
Segerdahl & Company,
Inc., a FINRA member
(Broker-Dealer)

Robert F. Keith, Trustee o One Year Term President (2003 to 58 None
c/o First Trust Advisors L.P. Present), Hibs Enterprises
1001 Warrenville Road, o Since Fund (Financial and
Suite 300 Inception Management
Lisle, IL 60532 Consulting); President
D.O.B. 11/56 (2001 to 2003), Aramark
Service Master
Management; President
and Chief Operating
Officer (1998 to 2003),
Service Master
Management Services

Page 24

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BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
--------------------------------------------------------------------------------

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007 (UNAUDITED)

------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEE - (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Niel B. Nielson, Trustee o Three Year Term President (June 2002 to 58 Director of Covenant
c/o First Trust Advisors L.P. Present), Covenant Transport Inc.
1001 Warrenville Road, o Since Fund College
Suite 300 Inception
Lisle, IL 60532
D.O.B. 03/54

------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen, Trustee, o Three Year Trustee President, First Trust 58 Trustee of Wheaton
President, Chairman of the Term and Indefinite Advisors L.P. and First College
Board and CEO Officer Term Trust Portfolios L.P.;
1001 Warrenville Road, Chairman of the Board of
Suite 300 o Since Fund Directors, BondWave
Lisle, IL 60532 Inception LLC (Software
D.O.B. 09/55 Development
Company/Broker-Dealer)
and Stonebridge Advisors
LLC (Investment
Advisor)

NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS

------------------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley Treasurer, Controller, o Indefinite Term Chief Financial Officer,
1001 Warrenville Road, Chief Financial Officer First Trust Advisors L.P.
Suite 300 and Chief Accounting o Since Fund Inception and First Trust Portfolios
Lisle, IL 60532 Officer L.P.; Chief Financial
D.O.B. 11/57 Officer, BondWave LLC
(Software Development
Company/Broker-Dealer)
and Stonebridge Advisors
LLC (Investment Advisor)

----------
1 Mr. Bowen is deemed an "interested person" of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.

Page 25

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007 (UNAUDITED)

NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS

James M. Dykas Assistant Treasurer o Indefinite Term Senior Vice President
1001 Warrenville Road, (April 2007 to Present),
Suite 300 o Since Fund Inception Vice President (January
Lisle, IL 60532 2005 to April 2007), First
D.O.B. 01/66 Trust Advisors L.P. and
First Trust Portfolios L.P.;
Executive Director
(December 2002 to
January 2005), Vice
President (December 2000
to December 2002), Van
Kampen Asset
Management and Morgan
Stanley Investment
Management

Christopher Fallow Assistant Vice President o Indefinite Term Assistant Vice President
1001 Warrenville Road, (August 2006 to Present),
Suite 300 o Since Fund Inception Associate (January 2005
Lisle, IL 60532 to August 2006), First
D.O.B. 04/79 Trust Advisors L.P. and
First Trust Portfolios L.P.;
Municipal Bond Trader
(July 2001 to January
2005), BondWave LLC
(Software Development
Company/Broker-Dealer)

W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First
1001 Warrenville Road, Compliance Officer Trust Advisors L.P. and
Suite 300 o Since Fund Inception First Trust Portfolios L.P.;
Lisle, IL 60532 Secretary, BondWave LLC
D.O.B. 05/60 (Software Development
Company/Broker-Dealer)
and Stonebridge Advisors
LLC (Investment Advisor)

Page 26

FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
NOVEMBER 30, 2007 (UNAUDITED)

NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS

------------------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES - (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Daniel J. Lindquist Vice President o Indefinite Term Senior Vice President
1001 Warrenville Road, (September 2005 to
Suite 300 o Since Fund Inception Present), Vice President
Lisle, IL 60532 (April 2004 to September
D.O.B. 02/70 2005), First Trust
Advisors L.P. and First
Trust Portfolios L.P.; Chief
Operating Officer (January
2004 to April 2004), Mina
Capital Management,
LLC; Chief Operating
Officer (April 2000 to
January 2004), Samaritan
Asset Management
Services, Inc.

Kristi A. Maher Assistant Secretary o Indefinite Term Deputy General Counsel
1001 Warrenville Road, (May 2007 to Present),
Suite 300 o Since Fund Inception Assistant General Counsel
Lisle, IL 60532 (March 2004 to May
D.O.B. 12/66 2007), First Trust
Advisors L.P. and First
Trust Portfolios L.P.;
Associate (December 1995
to March 2004), Chapman
and Cutler LLP

Page 27

This Page Left Blank Intentionally.

[LOGO] FIRSTTRUST
ADVISORS L.P.

INVESTMENT ADVISOR
First Trust Advisors L.P.
1001 Warrenville Road
Lisle, IL 60532

INVESTMENT SUB-ADVISOR
Gallatin Asset Management, Inc.
One North Jefferson
St. Louis, MO 63103

ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT,
TRANSFER AGENT &
BOARD ADMINISTRATOR
PFPC Inc.
301 Bellevue Parkway
Wilmington, DE 19809

INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606

LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603

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.

(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 waivers, including an 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.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a) AUDIT FEES (REGISTRANT) -- The aggregate fees billed from
Registrant's inception on May 25, 2007 through November 30, 2007 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 such fiscal years were $55,000.

(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed from
Registrant's inception on May 25, 2007 through November 30, 2007 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 were $0.

AUDIT-RELATED FEES (INVESTMENT ADVISER) -- The aggregate fees
billed from Registrant's inception on May 25, 2007 through November 30, 2007 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 were $0.

(c) TAX FEES (REGISTRANT) -- The aggregate fees billed from
Registrant's inception on May 25, 2007 through November 30, 2007 for
professional services rendered by the principal accountant for tax compliance,
tax advice, and tax planning to the Registrant were $0.

TAX FEES (INVESTMENT ADVISER) -- The aggregate fees billed from
Registrant's inception on May 25, 2007 through November 30, 2007 for
professional services rendered by the principal accountant for tax compliance,
tax advice, and tax planning to the Registrant's investment adviser were $0.

(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed from
Registrant's inception on May 25, 2007 through November 30, 2007 for products
and services provided by the principal accountant to the Registrant, other than
the services reported in paragraphs (a) through (c) of this Item were $0.

ALL OTHER FEES (INVESTMENT ADVISER) -- The aggregate fees billed
from Registrant's inception on May 25, 2007 through November 30, 2007 for
products and services provided by the principal accountant to the Registrant's
investment adviser, other than services reported in paragraphs (a) through (c)
of this Item were $0.

(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.

Pursuant to its charter and its Audit and Non-Audit Services
Pre-Approval Policy, the Audit Committee (the "COMMITTEE") is responsible for
the pre-approval of all audit services and permitted non-audit services
(including the fees and terms thereof) to be performed for the Registrant by its
independent auditors. The Chairman of the Committee authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.

The Committee is also responsible for the pre-approval of the
independent auditor's engagements for non-audit services with the Registrant's
adviser (not including a sub-adviser whose role is primarily portfolio
management and is sub-contracted 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, if the
engagement relates directly to the operations and financial reporting of the
Registrant, subject to the DE MINIMIS exceptions for non-audit services
described in Rule 2-01 of Regulation S-X. If the independent auditor has
provided non-audit services to the Registrant's adviser (other than any
sub-adviser whose role is primarily portfolio management and is sub-contracted
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 the DE
MINIMIS exception, the Committee will consider whether the provision of such
non-audit services is compatible with the auditor's independence.

(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the Registrant and the Registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:

(b) 0%

(d) 0%

(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 from Registrant's inception on May 25, 2007 through
November 30, 2007 were $0 for the Registrant and $7,000 for the
Registrant's investment adviser.

(h) The Registrant's audit committee of its Board of Trustees has
determined that 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.

(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.

ITEM 6. SCHEDULE OF INVESTMENTS.

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

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.

The Proxy Voting Policies are attached herewith.

GALLATIN ASSET MANAGEMENT, INC.
PROXY VOTING GUIDELINES

PROXY VOTING POLICY AND GUIDELINES

In January 2003, the Securities and Exchange Commission (SEC) adopted
regulations regarding proxy voting by investment advisors (SEC Release No.
IA-2106). The new regulation requires an investment adviser exercising voting
authority over client proxies to adopt policies and procedures reasonably
designed to ensure that the adviser (1) votes proxies in the best interests of
clients; (2) discloses to clients information about those policies and
procedures; and (3) discloses to clients how they may obtain information
regarding how their proxies were voted.

Gallatin Asset Management, Inc. ("Gallatin") has adopted policies and
procedures governing the voting of proxies in A.G. Edwards & Sons, Inc. ("
Edwards") Asset Management and Allocation advisor program client accounts where
discretionary voting authority has been granted to Edwards. The Gallatin Proxy
Committee is responsible for setting policy guidelines and reviewing conflicts
of interests. The Business Manager is responsible for supervising the proxy
voting process.

Gallatin and Edwards clients have the option of choosing whether they
prefer to vote proxy ballots themselves, or have us vote proxies on their
behalf. Clients can direct Edwards to vote proxies by selecting the appropriate
box on the investment management contract. Clients can revoke this authorization
at any time by requesting in writing. If a conflict of interest should arise,
the analyst reviewing the proxy issues cannot override the ISS recommended vote,
but should refer the issue to the proxy committee for review.

Gallatin is required to vote proxies on ERISA accounts unless the
client acknowledges that they are subject to the provisions of ERISA and are
acting as a named fiduciary and expressly retain the right and obligation to
vote proxies.

PROXY-VOTING GUIDELINES

Gallatin retains the services of an unaffiliated third-party
proxy-voting agent to monitor corporate actions, analyze proxy voting issues and
provide voting recommendations and execute proxy votes based on our
predetermined voting policy. This predetermined voting policy is predicated on
general proxy-voting guidelines, which have been adopted by Gallatin Asset
Management. These guidelines are reviewed periodically by the Gallatin Proxy
Committee and are subject to change.

GALLATIN PROXY COMMITTEE

Gallatin has established a proxy committee to assist the investment
officer in carrying out the responsibilities of monitoring corporate actions and
voting proxies. The proxy committee is primarily responsible for maintaining and
periodically reaffirming proxy voting policies, procedures and guidelines, as
well as making the final voting decision on issues not covered by the
third-party proxy-voting agent. The proxy committee also is responsible for
monitoring the actions of the third-party proxy-voting agent, and for reviewing
and analyzing unique situations as they arise. The committee is responsible for
meeting on a quarterly, or as needed basis to resolve and review proxy-voting
issues.

Proxy Committee Members:

Mark Keller- Chief Investment Officer

Dan Winter- Portfolio Manager

Dave Miyazaki- Portfolio Manager

Tore Stole- Portfolio Manager

Chris Stein- Portfolio Manager

Greg Ellston - Fund Analyst

Peggy Waites - Business Manager, Proxy Administrator

CONFLICTS OF INTEREST

Gallatin may occasionally be subject to conflicts of interest in voting
proxies due to business or personal relationships with persons or entities
having an interest in the outcome of certain votes. For example, Gallatin may
provide custody, investment management, brokerage, investment banking and
related services to accounts owned or controlled by companies whose management
is soliciting proxies. Additionally, Gallatin may have business or personal
relationships with other proponents of proxy proposals, corporate directors or
candidates for directorship.

In rare instances where Gallatin determines it appropriate to deviate
from the pre-determined voting policy, it will conduct further due diligence and
vote the proxies in a manner believed to be in the best interest of its clients.
Gallatin will take reasonable steps to identify possible conflicts of interest
that could bias its voting decision.

With respect to identifying possible conflicts of interest resulting
from BUSINESS RELATIONSHIPS, Gallatin will determine whether any of the
companies (including their executive officers) involved in the proxy votes have
accounts or relationships with Edwards.

WITH RESPECT TO IDENTIFYING POSSIBLE CONFLICTS OF INTEREST RESULTING
FROM personal or family relationships, GALLATIN WILL DETERMINE WHETHER KEY
PERSONNEL OF EITHER GALLATIN OR EDWARDS, OR THEIR IMMEDIATE FAMILY MEMBERS
(SPOUSE, CHILD, PARENT, SIBLINGS OR ANY OTHER RELATIVE RESIDING WITH THE
EXECUTIVE OFFICER):

o Are executives, directors or candidates for directorship with
any companies involved in the proxy votes.

o Have personal or business relationships with any of the
companies (including their executive officers) involved in the proxy
votes.

o Are aware of any conflicts of interest that may arise between
companies involved in the proxy votes and A.G. Edwards or an affiliate.

o Have been contacted by any party seeking to influence the
voting of proxies.

Key personnel shall include division directors of Edwards, key officers
of Edwards Asset Management (as identified in the Edwards Form ADV), the proxy
committee, analysts making voting decisions and the proxy administrator.

Any conflicts of interest identified will be referred to the proxy
committee. If after reviewing the facts and circumstances, the proxy committee
perceives the conflict as material, Gallatin will either defer to its
predetermined voting policy, submit the proxy to an independent party for voting
or disclose to the client and submit the proxy to the client for voting.

REQUIRED RECORDS MAINTENANCE

The proxy administrator is responsible for maintaining all proxy-voting
records required by SEC rules. These shall include the following:

o Copies of Gallatin's Proxy-Voting Policies and Procedures.

o A copy of each proxy statement received relating to its
clients' securities.

o A record of each vote cast by Gallatin on behalf of its
clients.

o Copies of all documents created by Gallatin material in
making a decision on how to vote proxies on behalf of its
clients or that memorialize the basis for its voting
decision.

o A copy of each written client request, for information on
how proxies were voted on their behalf and copies of any
written response from Gallatin, to clients, relating to
these requests for information.

To the extent permitted by law, the unaffiliated third-party
proxy-voting agent may be used to retain certain records on behalf of Gallatin.
All records will be retained for at least five years; for the first two years,
the records will be retained on-site.

OBTAINING INFORMATION REGARDING PROXY VOTES

Advisory clients of Gallatin may request copies of proxy-voting records
by sending a written request to: Business Manager, Gallatin Asset Management,
Inc., One North Jefferson, St, Louis, MO 63103. Clients of Edwards advisory
programs for which Gallatin acts as sub-adviser may request the proxy-voting
records by written request to Edwards. The Gallatin proxy-voting policies and
procedures may be reviewed online at WWW.AGEDWARDS.COM (via Products and
-----------------
Services, Private Money Management and A.G. Edwards Asset Management links) and
may request copies by writing to the address above. The proxy administrator is
responsible for ensuring the proxy-voting policies and procedures are available
as required by law and for overseeing the filing of such policies, procedures
and voting records. In addition, every client who opens a new Gallatin account
is provided a copy of Gallatin's proxy voting policy & procedures along with
instructions on how the client may obtain additional proxy voting guidelines and
procedures as well was actual security vote information. (See attachment below).

THIRD-PARTY PROVIDERS

Gallatin has contracted with Institutional Shareholder Services to
provide the following proxy Services.

1. Voting Policy

THE ISS PROXY VOTING AGENT SERVICE (VAS) is widely used by institutions
throughout the United States, Canada, and the United Kingdom. ISS is the leading
proxy analysis, voting execution, recordkeeping, and reporting service for
investors that provides a comprehensive, reliable solution to the daily
mechanics of proxy voting without relinquishing final voting authority.

Designed to meet the regulatory needs of ERISA fiduciaries, the VAS
allows Gallatin to cast informed votes with a minimum commitment of internal
resources. The VAS system allows Gallatin to customize voting policies to
Gallatin guidelines if they differ from ISS policies.

ISS offers timely delivery of meeting and record date information and
ISS's comprehensive proxy analysis through PROXYMASTER.COM, our web-based
---------------
application. ProxyMaster.com deliver customized coverage based on the client's
portfolio.

The ISS Proxy Voting Manual for U.S. securities and the ISS Global
Proxy Voting Manual for non-U.S. securities are believed to be the most complete
proxy voting guides available anywhere. ISS works directly with Gallatin through
the ISS Blueprint service to create new policies or amend existing guidelines.
Customized voting ensures that all votes are cast according to policies defined
and approved by Gallatin. ISS web-based applications allow Gallatin to review
ISS voting analysis, recommendations and to direct vote using the ISS VoteX.com
web service.

2. ADP Proxy Edge

ADP Proxy Edge is used to forward proxy material to ISS. ISS will vote
proxies for accounts that are setup by the Edwards Proxy Department on behalf of
Gallatin based on the proxy waiver bit on the BETA WRAP module. This bit is
turned on by Fee Based Operations Department, when a client has elected to have
proxies waived. ISS keeps voting records on all accounts that are forward
through the ADP Proxy Edge system and provides a quarterly voting record to GAM.

Holdings are stored in a central database and maintained by a
sophisticated production system that tracks and reconciles against incoming
proxy ballots. If ballots do not arrive on time, ISS proactively procures them
from the appropriate custodian or proxy distribution agent.

ISS casts votes based on either Gallatin's proxy voting policy or ISS's
recommendations. ISS provides the ability to view ISS analyses and voting
recommendations delivered via Votex.ISSProxy.com and confirm or override
specific votes. Votes are then sent electronically or via fax to custodians
around the world.

3. ISS Reports

ISS provides a variety of standard reports available in electronic
format, as well as data feeds that can be customized to Gallatin's needs. For
each vote ISS records the security name, CUSIP or SEDOL, meeting date, number of
shares voted, proxy proposal, management recommendation and vote cast by ISS on
behalf of Gallatin.

*PROCEDURE STEPS

OBTAINING ISS VOTE ANALYSIS AND VOTING

------ ----------------------------------------------------------------------------------------------------
STEP ACTION

1 Logon to VoteX.com site using Internet explorer @ HTTP://VOTEX.ISSPROXY.COM
-------------------------

Logon Ids are only assigned to appropriate personnel who have
been approved by the Proxy Administrator. Votex allows for users
to have "view only" access and actual "voting" permissions. Only
the Proxy Administrator and one designated back-up has voting
permissions.

------ ----------------------------------------------------------------------------------------------------
------ ----------------------------------------------------------------------------------------------------
2 Review the list of Companies that will appear to determine the companies that need to be provided
to the analyst for review.
------ ----------------------------------------------------------------------------------------------------
------ ----------------------------------------------------------------------------------------------------
3 Click on the Company name to be reviewed, and select `ISS Recommendation' to view the analysis
reports.

------ ----------------------------------------------------------------------------------------------------
------ ----------------------------------------------------------------------------------------------------
4 Print one copy of the company analysis report and add reminder to Outlook Calendar 4 business days
before vote deadline to send an e-mail reminder to the analyst that their response on this
security is due, if it has not been received back yet.
------ ----------------------------------------------------------------------------------------------------
------ ----------------------------------------------------------------------------------------------------

The analyst is responsible for reviewing the proxy issues and
recommendations and determining if the recommendations made for
the ballot (based on the adopted voting policies) are in the
best interest of the clients.

Note: The analyst covering Exchange Traded Funds must also
determine when reviewing ballots for Barclay's Ishares funds, if
Gallatin's ownership in either of the Met Investors cyclical
portfolios (individually) is 5% or more of the outstanding
voting shares of the Underlying Fund. If ownership is 5% or
greater, the analyst must notify the Proxy Administrator that
the shares in the MET fund must be voted in the same proportion
as the vote of all other holders of shares of such iShares Fund.

If the analyst determines that there is an issue with the
recommended vote, a Conflict of Interest worksheet must be
completed by the analyst. The Conflicts of Interest worksheet is
then sent to the Proxy Committee for review and approval. If
approved by the committee, the proxy administrator will enter
the vote recommendation.

------ ----------------------------------------------------------------------------------------------------
------ ----------------------------------------------------------------------------------------------------
7 For approved changes the Proxy Admin will logon to Votex site, as detailed above, and will locate
the appropriate security.
------ ----------------------------------------------------------------------------------------------------
------ ----------------------------------------------------------------------------------------------------
8 From here, each issue will be voted according to the Proxy Committee recommendation and
submitted. ISS will submit the recommend vote as saved.
------ ----------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------
ISS 2007 PROXY VOTING GUIDELINES
SUMMARY
--------------------------------------------------------------------------------

[GRAPHIC OMITTED]
LOGO
2099 GAITHER ROAD
SUITE 501
ROCKVILLE, MD o
20850-4045
(301) 556-0500
FAX (301)
556-0486
WWW.ISSPROXY.COM

All rights reserved. No part of this publication may be reproduced or
transmitted in any form or by any means, electronic or mechanical, including
photocopy, recording, or any information storage and retrieval system, without
permission in writing from the publisher.

Requests for permission to make copies of any part of this work should be sent
to: Institutional Shareholder Services Marketing Department 2099 Gaither Road
Rockville, MD 20850 ISS is a trademark used herein under license.

ISS 2007 PROXY VOTING GUIDELINES SUMMARY
EFFECTIVE FOR MEETINGS FEB 1, 2007

UPDATED DECEMBER 15, 2006

The following is a condensed version of the proxy voting recommendations
contained in the ISS Proxy Voting Manual.

1. OPERATIONAL ITEMS........................................................6
Adjourn Meeting...................................................... 6
Amend Quorum Requirements.............................................6
Amend Minor Bylaws ...................................................6
Auditor Indemnification and Limitation of Liability.................. 6
Auditor Ratification................................................. 6
Change Company Name ................................................. 7
Change Date, Time, or Location of Annual Meeting..................... 7
Transact Other Business ............................................. 7

2. BOARD OF DIRECTORS...................................................... 8
Voting on Director Nominees in Uncontested Elections ................ 8
2007 Classification of Directors ................................... 10
Age Limits ......................................................... 11
Board Size ......................................................... 11
Classification/Declassification of the Board........................ 11
Cumulative Voting................................................... 11
Director and Officer Indemnification and Liability Protection....... 12
Establish/Amend Nominee Qualifications.............................. 12
Filling Vacancies/Removal of Directors ............................. 12
Independent Chair (Separate Chair/CEO............................... 13
Majority of Independent Directors/Establishment of Committees....... 13
Majority Vote Shareholder Proposals ................................ 13
Office of the Board................................................. 14
Open Access......................................................... 14
Performance Test for Directors...................................... 14
Stock Ownership Requirements ....................................... 15
Term Limits ........................................................ 15

3. PROXY CONTESTS ........................................................ 16
Voting for Director Nominees in Contested Elections................. 16
Reimbursing Proxy Solicitation Expenses ............................ 16
Confidential Voting................................................. 16

4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES........................ 17
Advance Notice Requirements for Shareholder Proposals/Nominations .. 17
Amend Bylaws without Shareholder Consent ........................... 17
Poison Pills ....................................................... 17
Shareholder Ability to Act by Written Consent....................... 17
Shareholder Ability to Call Special Meetings........................ 17
Supermajority Vote Requirements..................................... 17

5. MERGERS AND CORPORATE RESTRUCTURINGS ....................................... 18
Overall Approach......................................................... 18
Appraisal Rights......................................................... 18
Asset Purchases ......................................................... 18
Asset Sales ............................................................. 19
Bundled Proposals........................................................ 19
Conversion of Securities................................................. 19
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy
Plans/Reverse
Leveraged Buyouts/Wrap Plans ............................................ 19
Formation of Holding Company ............................................ 19
Going Private Transactions (LBOs, Minority Squeezeouts, and Going Dark.. 20
Joint Ventures .......................................................... 20
Liquidations............................................................. 20
Mergers and Acquisitions/ Issuance of Shares to Facilitate Merger or
Acquisition.............................................................. 20
Private Placements/Warrants/Convertible Debentures ...................... 20
Spinoffs ................................................................ 21
Value Maximization Proposals............................................. 21

6. STATE OF INCORPORATION ..................................................... 22
Control Share Acquisition Provisions..................................... 22
Control Share Cash-out Provisions ....................................... 22
Disgorgement Provisions.................................................. 22
Fair Price Provisions.................................................... 22
Freeze-out Provisions.....................................................22
Greenmail ............................................................... 22
Reincorporation Proposals................................................ 23
Stakeholder Provisions .................................................. 23
State Antitakeover Statutes ............................................. 23

7. CAPITAL STRUCTURE........................................................... 24
Adjustments to Par Value of Common Stock................................. 24
Common Stock Authorization .............................................. 24
Dual-Class Stock ........................................................ 24
Issue Stock for Use with Rights Plan..................................... 24
Preemptive Rights........................................................ 24
Preferred Stock ......................................................... 24
Recapitalization......................................................... 25
Reverse Stock Splits..................................................... 25
Share Repurchase Programs ............................................... 25
Stock Distributions: Splits and Dividends ............................... 25
Tracking Stock .......................................................... 25

8. EXECUTIVE AND DIRECTOR COMPENSATION ........................................ 26
Equity Compensation Plans ..................................................26
Cost of Equity Plans..................................................... 26
Repricing Provisions .................................................... 26
Pay-for Performance Disconnect........................................... 26
Three-Year Burn Rate/Burn Rate Commitment................................ 28
Poor Pay Practices ...................................................... 29
Specific Treatment of Certain Award Types in Equity Plan Evaluations........30
Dividend Equivalent Rights............................................... 30
Liberal Share Recycling Provisions ...................................... 30
Other Compensation Proposals and Policies ..................................30

401(k) Employee Benefit Plans ........................................... 30
Director Compensation ................................................... 30
Director Retirement Plans................................................ 31
Employee Stock Ownership Plans (ESOPs) .................................. 31
Employee Stock Purchase Plans-- Qualified Plans.......................... 31
Employee Stock Purchase Plans-- Non-Qualified Plans...................... 31
Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related ..... 32
Compensation Proposals................................................... 32
Options Backdating....................................................... 32
Option Exchange Programs/Repricing Options............................... 32
Stock Plans in Lieu of Cash.............................................. 33
Transfer Programs of Stock Options ...................................... 33
Shareholder Proposals on Compensation ..................................... 33
Advisory Vote on Executive Compensation (Say-on-Pay) .................... 33
Compensation Consultants- Disclosure of Board or Company's Utilization... 33
Disclosure/Setting Levels or Types of Compensation for Executives and
Directors................................................................ 34
Option Repricing ........................................................ 34
Pay for Superior Performance ............................................ 34
Pension Plan Income Accounting .......................................... 34
Performance-Based Awards................................................. 35
Severance Agreements for Executives/Golden Parachutes.................... 35
Supplemental Executive Retirement Plans (SERPs) ......................... 35

9. CORPORATE RESPONSIBILITY.................................................... 36
Consumer Issues and Public Safety ......................................... 36
Animal Rights............................................................ 36
Drug Pricing ............................................................ 36
Drug Reimportation....................................................... 36
Genetically Modified Foods .............................................. 36
Handguns................................................................. 37
HIV/AIDS................................................................. 37
Predatory Lending........................................................ 37
Tobacco ................................................................. 38
Toxic Chemicals.......................................................... 38
Environment and Energy..................................................... 38
Arctic National Wildlife Refuge ......................................... 38
CERES Principles......................................................... 39
Climate Change .......................................................... 39
Concentrated Area Feeding Operations (CAFOs.............................. 39
Environmental-Economic Risk Report....................................... 39
Environmental Reports ................................................... 39
Global Warming .......................................................... 40
Kyoto Protocol Compliance................................................ 40
Land Use................................................................. 40
Nuclear Safety .......................................................... 40
Operations in Protected Areas............................................ 40
Recycling................................................................ 40
Renewable Energy......................................................... 41
Sustainability Report.................................................... 41
General Corporate Issues .................................................. 41
Charitable/Political Contributions....................................... 41
Disclosure of Lobbying Expenditures/Initiatives ......................... 42
Link Executive Compensation to Social Performance........................ 42
Outsourcing/Offshoring................................................... 42
Labor Standards and Human Rights........................................... 42
China Principles ........................................................ 42
Country-specific Human Rights Reports.................................... 42

International Codes of Conduct/Vendor Standards ......................... 42
MacBride Principles ..................................................... 43
Military Business ......................................................... 43
Foreign Military Sales/Offsets........................................... 43
Landmines and Cluster Bombs.............................................. 43
Nuclear Weapons ......................................................... 44
Operations in Nations Sponsoring Terrorism (e.g., Iran).................. 44
Spaced-Based Weaponization .............................................. 44

Workplace Diversity...................................................... 44
Board Diversity......................................................... 44
Equal Employment Opportunity (EEO....................................... 44
Glass Ceiling........................................................... 45
Sexual Orientation ..................................................... 45

10. MUTUAL FUND PROXIES ....................................................... 46
Election of Directors.................................................... 46
Converting Closed-end Fund to Open-end Fund ............................. 46
Proxy Contests........................................................... 46
Investment Advisory Agreements .......................................... 46
Approving New Classes or Series of Shares................................ 46
Preferred Stock Proposals................................................ 46
1940 Act Policies ....................................................... 46
Changing a Fundamental Restriction to a Nonfundamental Restriction....... 47
Change Fundamental Investment Objective to Nonfundamental................ 47
Name Change Proposals.................................................... 47
Change in Fund's Subclassification....................................... 47
Disposition of Assets/Termination/Liquidation............................ 47
Changes to the Charter Document ......................................... 47
Changing the Domicile of a Fund ......................................... 48
Authorizing the Board to Hire and Terminate Subadvisors Without
Shareholder Approval..................................................... 48
Distribution Agreements.................................................. 48
Master-Feeder Structure.................................................. 48
Mergers.................................................................. 48
Shareholder Proposals for Mutual Funds..................................... 48
Establish Director Ownership Requirement................................. 48
Reimburse Shareholder for Expenses Incurred.............................. 48
Terminate the Investment Advisor ........................................ 48

1. OPERATIONAL ITEMS
ADJOURN MEETING

Generally vote AGAINST proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal.

Vote FOR proposals that relate specifically to soliciting votes for a merger or
transaction if supporting that merger or transaction. Vote AGAINST proposals if
the wording is too vague or if the proposal includes "other business."

AMEND QUORUM REQUIREMENTS

Vote AGAINST proposals to reduce quorum requirements for shareholder meetings
below a majority of the shares outstanding unless there are compelling reasons
to support the proposal.

AMEND MINOR BYLAWS

Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or
corrections).

AUDITOR INDEMNIFICATION AND LIMITATION OF LIABILITY

Consider the issue of auditor indemnification and limitation of liability on a
CASE-BY-CASE basis. Factors to be assessed include, but are not limited to:

The terms of the auditor agreement- the degree to which these
agreements impact shareholders' rights;

Motivation and rationale for establishing the agreements; Quality of
disclosure; and Historical practices in the audit area.

WTHHOLD against members of an audit committee in situations where there is
persuasive evidence that the audit committee entered into an inappropriate
indemnification agreement with its auditor that limits the ability of the
company, or its shareholders, to pursue legitimate legal recourse against the
audit firm.

AUDITOR RATIFICATION

Vote FOR proposals to ratify auditors, unless any of the following apply:

An auditor has a financial interest in or association with the company,
and is therefore not independent,

There is reason to believe that the independent auditor has rendered an
opinion which is neither accurate nor indicative of the company's financial
position, or

Fees for non-audit services ("Other" fees) are excessive.

Non-audit fees are excessive if:

Non-audit ("other") fees >audit fees + audit-related fees + tax compliance/
preparation fees

Tax compliance and preparation include the preparation of original and amended
tax returns, refund claims and tax payment planning. All other services in the
tax category, such as tax advice, planning or consulting should be added to
"Other" fees. If the breakout of tax fees cannot be determined, add all tax fees
to "Other" fees.

Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.

Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account: The tenure of the audit firm; The length of rotation
specified in the proposal; Any significant audit-related issues at the company;
The number of Audit Committee meetings held each year; The number of financial
experts serving on the committee; and Whether the company has a periodic renewal
process where the auditor is evaluated for both
audit quality and competitive price.

CHANGE COMPANY NAME

Vote FOR proposals to change the corporate name.

CHANGE DATE, TIME, OR LOCATION OF ANNUAL MEETING

Vote FOR management proposals to change the date, time, and/or location of the
annual meeting unless the proposed change is unreasonable.

Vote AGAINST shareholder proposals to change the date, time, and/or location of
the annual meeting unless the current scheduling or location is unreasonable.

TRANSACT OTHER BUSINESS

Vote AGAINST proposals to approve other business when it appears as voting item.

2. BOARD OF DIRECTORS:

VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS

Vote CASE-BY-CASE on director nominees, examining, but not limited to, the
following factors:

o Composition of the board and key board committees;
o Attendance at board and committee meetings;
o Corporate governance provisions and takeover activity;
o Disclosures under Section 404 of Sarbanes-Oxley Act;
o Long-term company performance relative to a market and peer index;
o Extent of the director's investment in the company;
o Existence of related party transactions;
o Whether the chairman is also serving as CEO; o Whether a retired CEO sits on
the board;
o Number of outside boards at which a director serves;
o Majority vote standard for director elections without a provision to allow for
plurality voting when

there are more nominees than seats.

WITHHOLD from individual directors who:

o Attend less than 75 percent of the board and committee meetings without
a valid excuse (such as illness, service to the nation, work on behalf
of the company);
o Sit on more than six public company boards;
o Are CEOs of public companies who sit on the boards of more than two
public companies besides their own-- withhold only at their outside
boards.

WITHHOLD from the entire board of directors, (except from new nominees, who
should be considered on a CASE-BY-CASE basis) if:

o The company's proxy indicates that not all directors attended 75% of
the aggregate of their board and committee meetings, but fails to
provide the required disclosure of the names of the directors involved.
If this information cannot be obtained, withhold from all incumbent
directors;
o The company's poison pill has a dead-hand or modified dead-hand
feature. Withhold every year until this feature is removed;
o The board adopts or renews a poison pill without shareholder approval
since the beginning of 2005, does not commit to putting it to
shareholder vote within 12 months of adoption, or reneges on a
commitment to put the pill to a vote, and has not yet received a
withhold recommendation for this issue;
o The board failed to act on a shareholder proposal that received
approval by a majority of the shares outstanding the previous year;
o The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years;
o The board failed to act on takeover offers where the majority of the
shareholders tendered their shares;
o At the previous board election, any director received more than 50
percent withhold votes of the shares cast and the company has failed to
address the issue(s) that caused the high withhold rate;
o The company is a Russell 3000 company that underperformed its industry
group (GICS group) under the criteria discussed in the section
"Performance Test for Directors".
o WITHHOLD from Inside Directors and Affiliated Outside Directors (per
the Classification of Directors below) when:
o The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
o The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
o The company lacks a formal nominating committee, even if board attests
that the independent directors fulfill the functions of such a
committee;

o The full board is less than majority independent.

WITHHOLD from the members of the Audit Committee if:

o The non - audit fees paid to the auditor are excessive (see discussion
under Auditor Ratification);
o A material weakness identified in the Section 404 Sarbanes-Oxley Act
disclosures rises to a level of serious concern; there are chronic
internal control issues and an absence of established effective control
mechanisms;
o There is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.

WITHHOLD from the members of the Compensation Committee if:

o There is a negative correlation between the chief executive's pay and
company performance (see discussion under Equity Compensation Plans);
o The company reprices underwater options for stock, cash or other
consideration without prior shareholder approval, even if allowed in
their equity plan;
o The company fails to submit one-time transfers of stock options to a
shareholder vote;
o The company fails to fulfill the terms of a burn rate commitment they
made to shareholders;
o The company has backdated options (see "Options Backdating" policy);
o The company has poor compensation practices (see "Poor Pay Practices"
policy). Poor pay practices may warrant withholding votes from the CEO
and potentially the entire board as well.

WITHHOLD from directors, individually or the entire board, for egregious actions
or failure to replace management as appropriate.

2007 CLASSIFICATION OF DIRECTORS
INSIDE DIRECTOR (I)

o Employee of the company or one of its affiliates(1);
o Non-employee officer of the company if among the five most highly paid
individuals (excluding interim CEO);
o Listed as a Section 16 officer(2);
o Current interim CEO;
o Beneficial owner of more than 50 percent of the company's voting power
(this may be aggregated if voting power is distributed among more than
one member of a defined group).

AFFILIATED OUTSIDE DIRECTOR (AO)

o Board attestation that an outside director is not independent;
o Former CEO of the company;
o Former CEO of an acquired company within the past five years;
o Former interim CEO if the service was longer than 18 months. If the
service was between twelve and eighteen months an assessment of the
interim CEO's employment agreement will be made;(3)
o Former executive(2) of the company, an affiliate or an acquired firm
within the past five years;
o Executive(2) of a former parent or predecessor firm at the time the
company was sold or split off from the parent/predecessor within the
past five years;
o Executive, former executive, general or limited partner of a joint
venture or partnership with the company;
o Relative(4) of a current Section 16 officer of company or its
affiliates;
o Relative(4) of a current employee of company or its affiliates where
additional factors raise concern (which may include, but are not
limited to, the following: a director related to numerous employees;
the company or its affiliates employ relatives of numerous board
members; or a non-Section 16 officer in a key strategic role);
o Relative(4) of former Section 16 officer, of company or its affiliate
within the last five years;
o Currently provides (or a relative(4) provides) professional services(5)
to the company, to an affiliate of the company or an individual officer
of the company or one of its affiliates in excess of $10,000 per year;
o Employed by (or a relative(4) is employed by) a significant customer or
supplier(6);
o Has (or a relative(4) has) any transactional relationship with the
company or its affiliates excluding investments in the company through
a private placement; (6)
o Any material financial tie or other related party transactional
relationship to the company;
o Party to a voting agreement to vote in line with management on
proposals being brought to shareholder vote;
o Has (or a relative(4) has) an interlocking relationship as defined by
the SEC involving members of the board of directors or its Compensation
and Stock Option Committee; (7)

o Founder(8) of the company but not currently an employee;
o Is (or a relative(4) is) a trustee, director or employee of a
charitable or non-profit organization that receives grants or
endowments6 from the company or its affiliates(1).

INDEPENDENT OUTSIDE DIRECTOR (IO)

o No material9 connection to the company other than a board seat.

--------------------------------------------------------------------------------
FOOTNOTES:

(1) "Affiliate" includes a subsidiary, sibling company, or parent company. ISS
uses 50 percent control ownership by the parent company as the standard for
applying its affiliate designation.

(2) "Executives" (officers subject to Section 16 of the Securities and Exchange
Act of 1934) include the chief executive, operating, financial, legal,
technology, and accounting officers of a company (including the president,
treasurer, secretary, controller, or any vice president in charge of a principal
business unit, division or policy function).

--------------------------------------------------------------------------------
3 ISS will look at the terms of the interim CEO's employment contract to
determine if it contains severance pay, long-term health and pension benefits or
other such standard provisions typically contained in contracts of permanent,
non-temporary CEOs. ISS will also consider if a formal search process was
underway for a full-time CEO at the time.

4 "Relative" follows the SEC's new definition of "immediate family members"
which covers spouses, parents, children, step-parents, step-children, siblings,
in-laws, and any person (other than a tenant or employee) sharing the household
of any director, nominee for director, executive officer, or significant
shareholder of the company.

5 Professional services can be characterized as advisory in nature and
generally include the following: investment banking/financial advisory services;
commercial banking (beyond deposit services); investment services; insurance
services; accounting/audit services; consulting services; marketing services;
and legal services. The case of participation in a banking syndicate by a
non-lead bank should be considered a transaction (and hence subject to the
associated materiality test) rather than a professional relationship.

6 If the company makes or receives annual payments exceeding the greater of
$200,000 or five percent of the recipient's gross revenues. (The recipient is
the party receiving the financial proceeds from the transaction).

7 Interlocks include: (a) executive officers serving as directors on each
other's compensation or similar committees (or, in the absence of such a
committee, on the board) or (b) executive officers sitting on each other's
boards and at least one serves on the other's compensation or similar committees
(or, in the absence of such a committee, on the board).

8 The operating involvement of the Founder with the company will be
considered. Little to no operating involvement may cause ISS to deem the Founder
as an independent outsider.

9 For purposes of ISS' director independence classification, "material" will be
defined as a standard of relationship (financial, personal or otherwise) that a
reasonable person might conclude could potentially influence one's objectivity
in the boardroom in a manner that would have a meaningful impact on an
individual's ability to satisfy requisite fiduciary standards on behalf of
shareholders.
--------------------------------------------------------------------------------

AGE LIMITS

Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors through mandatory retirement ages.

BOARD SIZE

Vote FOR proposals seeking to fix the board size or designate a range for the
board size.

Vote AGAINST proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.

CLASSIFICATION/DECLASSIFICATION OF THE BOARD Vote AGAINST proposals to classify
the board.

Vote FOR proposals to repeal classified boards and to elect all directors
annually.

CUMULATIVE VOTING

Generally vote AGAINST proposals to eliminate cumulative voting.

Generally vote FOR proposals to restore or provide for cumulative voting unless
the company meets ALL of the following criteria:

o Majority vote standard in director elections, including a carve-out for
plurality voting in contested situations;
o Annually elected board;
o Two-thirds of the board composed of independent directors;
o Nominating committee composed solely of independent directors;
o Confidential voting; however, there may be a provision for suspending
confidential voting during proxy contests;

o Ability of shareholders to call special meetings or act by written
consent with 90 days' notice;
o Absence of superior voting rights for one or more classes of stock;
o Board does not have the right to change the size of the board beyond a
stated range that has been approved by shareholders;
o The company has not under-performed its both industry peers and index
on both a one-year and three-year total shareholder returns basis*,
unless there has been a change in the CEO position within the last
three years; and
o No director received a WITHHOLD vote level of 35% or more of the votes
cast in the previous election.

* Starting in 2007, the industry peer group used for this evaluation will change
from the 4-digit GICS group to the average of the 12 companies in the same
6-digit GICS group that are closest in revenue to the company. To fail, the
company must under-perform its index and industry group on all 4 measures (1 and
3 year on industry peers and index).

DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION

Vote CASE-BY-CASE on proposals on director and officer indemnification and
liability protection using Delaware law as the standard.

Vote AGAINST proposals to eliminate entirely directors' and officers' liability
for monetary damages for violating the duty of care.

Vote AGAINST indemnification proposals that would expand coverage beyond just
legal expenses to liability for acts, such as negligence, that are more serious
violations of fiduciary obligation than mere carelessness.

Vote AGAINST proposals that would expand the scope of indemnification to provide
for mandatory indemnification of company officials in connection with acts that
previously the company was permitted to provide indemnification for at the
discretion of the company's board (i.e. "permissive indemnification") but that
previously the company was not required to indemnify.

Vote FOR only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply:

If the director was found to have acted in good faith and in a manner
that he reasonably believed was in the best interests of the company; and

If only the director's legal expenses would be covered.

ESTABLISH/AMEND NOMINEE QUALIFICATIONS

Vote CASE-BY-CASE on proposals that establish or amend director qualifications.
Votes should be based on how reasonable the criteria are and to what degree they
may preclude dissident nominees from joining the board.

Vote AGAINST shareholder proposals requiring two candidates per board seat.

FILLING VACANCIES/REMOVAL OF DIRECTORS

Vote AGAINST proposals that provide that directors may be removed only for
cause.

Vote FOR proposals to restore shareholders' ability to remove directors with or
without cause.

Vote AGAINST proposals that provide that only continuing directors may elect
replacements to fill board vacancies.

Vote FOR proposals that permit shareholders to elect directors to fill board
vacancies.

INDEPENDENT CHAIR (SEPARATE CHAIR/CEO)

Generally vote FOR shareholder proposals requiring the position of chair be
filled by an independent director unless there are compelling reasons to
recommend against the proposal, such as a counterbalancing governance structure.
This should include all of the following:

o Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role may
alternatively reside with a presiding director, vice chairman, or
rotating lead director; however the director must serve a minimum of
one year in order to qualify as a lead director.) At a minimum these
should include:

- Presides at all meetings of the board at which the chairman is not
present, including executive sessions of the independent directors,
- Serves as liaison between the chairman and the independent directors,
- Approves information sent to the board,
- Approves meeting agendas for the board,
- Approves meetings schedules to assure that there is
sufficient time for discussion of all agenda items,
- Has the authority to call meetings of the independent directors,
- If requested by major shareholders, ensures that he is available for
consultation and direct communication;

Two-thirds independent board;

o All-independent key committees;
o Established governance guidelines;
o The company should not have underperformed both its industry peers and
index on both a one-year and three-year total shareholder returns
basis*, unless there has been a change in the Chairman/CEO position
within that time;
o The company does not have any problematic governance issues.

MAJORI

TY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES

Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS' definition of independent outsider. (See Classification of Directors.)

Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.

MAJORITY VOTE SHAREHOLDER PROPOSALS

Generally vote FOR precatory and binding resolutions requesting that the board
change the company's bylaws to stipulate that directors need to be elected with
an affirmative majority of votes cast, provided it does not conflict with the
state law where the company is incorporated. Binding resolutions need to allow
for a carve-out for a plurality vote standard when there are more nominees than
board seats.

Companies are strongly encouraged to also adopt a post-election policy (also
know as a director resignation policy) that will provide guidelines so that the
company will promptly address the situation of a holdover director.

OFFICE OF THE BOARD

Generally vote FOR shareholders proposals requesting that the board establish an
Office of the Board of Directors in order to facilitate direct communications
between shareholders and non-management directors, unless the company has all of
the following:

o Established a communication structure that goes beyond the exchange
requirements to facilitate the exchange of information between
shareholders and members of the board;
o Effectively disclosed information with respect to this structure to its
shareholders;
o Company has not ignored majority-supported shareholder proposals or a
majority withhold vote on a director nominee; and
o The company has an independent chairman or a lead/presiding director,
according to ISS' definition. This individual must be made available
for periodic consultation and direct communication with major
shareholders.

OPEN ACCESS

Generally vote FOR reasonably crafted shareholder proposals providing
shareholders with the ability to nominate director candidates to be included on
management's proxy card, provided the proposal substantially mirrors the SEC's
proposed two-trigger formulation (see the proposed "Security Holder Director
Nominations" rule (HTTP://WWW.SEC.GOV/RULES/PROPOSED/34-48626.HTM) or ISS'
comment letter to the SEC dated 6/13/2003, available on ISS website under
Governance Center- ISS Position Papers).

PERFORMANCE TEST FOR DIRECTORS

WITHHOLD from directors of Russell 3000 companies that underperformed relative
to their industry peers. The criterion used to evaluate such underperformance is
a combination of four performance measures:

One measurement will be a market-based performance metric and three measurements
will be tied to the company's operational performance. The market performance
metric in the methodology is five-year Total Shareholder Return (TSR) on a
relative basis within each four-digit GICS group. The three operational
performance metrics are sales growth, EBITDA growth, and pre-tax operating
Return on Invested Capital (ROIC) on a relative basis within each four-digit
GICS group. All four metrics will be time-weighted as follows: 40 percent on the
trailing 12 month period and 60 percent on the 48 month period prior to the
trailing 12 months. This methodology emphasizes the company's historical
performance over a five-year period yet also accounts for near-term changes in a
company's performance.

The table below summarizes the new framework: Adopt a two-phased approach. In
2007 (YEAR 1), the worst performers (bottom five percent) within each of the 24
GICS groups will automatically receive CAUTIONARY LANGUAGE, except for companies
that have already received cautionary language or withhold votes in 2006 under
the current policy. The latter may be subject to withhold votes in 2007. For
2008 (YEAR 2), WITHHOLD votes from director nominees if a company continues to
be in the bottom five percent within its GICS group for that respective year
and/or shows no improvement in its most recent trailing 12 months operating and
market performance relative to its peers in its GICS group. This policy would be
applied on a rolling basis going forward.

---------------------------------------------------------------------------------------------------------------------------------
Metrics Basis of Evaluation Weighting 2nd Weighting
---------------------------------------------------------------------------------------------------------------------------------
OPERATIONAL PERFORMANCE 50%
---------------------------------------------------------------------------------------------------------------------------------
5-YEAR AVERAGE PRE-TAX MANAGEMENT EFFICIENCY 33.3%
OPERATING ROIC IN DEPLOYING ASSETS
---------------------------------------------------------------------------------------------------------------------------------
5-YEAR SALES GROWTH TOP-LINE 33.3%
---------------------------------------------------------------------------------------------------------------------------------
5-YEAR EBITDA GROWTH CORE-EARNINGS 33.3%
---------------------------------------------------------------------------------------------------------------------------------
SUB TOTAL 100%
---------------------------------------------------------------------------------------------------------------------------------

STOCK 50%
PERFORMANCE
----------------------------------------------------------------
5-YEAR TSR MARKET
----------------------------------------------------------------
TOTAL 100%
----------------------------------------------------------------

STOCK OWNERSHIP REQUIREMENTS

Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While stock ownership on the part of directors is desired, the
company should determine the appropriate ownership requirement.

Vote CASE-BY-CASE on shareholder proposals asking that the company adopt a
holding or retention period for its executives (for holding stock after the
vesting or exercise of equity awards), taking into account any stock ownership
requirements or holding period/retention ratio already in place and the actual
ownership level of executives.

TERM LIMITS

Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors through term limits. However, scrutinize boards where the average
tenure of all directors exceeds 15 years for independence from management and
for sufficient turnover to ensure that new perspectives are being added to the
board.

3. PROXY CONTESTS

VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS

Vote CASE-BY-CASE on the election of directors in contested elections,
considering the following factors:
Long-term financial performance of the target company relative to its industry;
Management's track record; Background to the proxy contest;
Qualifications of director nominees (both slates);
Strategic plan of dissident slate and quality of critique against
management; Likelihood that the proposed goals and objectives can be
achieved (both slates); Stock ownership positions.

REIMBURSING PROXY SOLICITATION EXPENSES

Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.

CONFIDENTIAL VOTING

Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators, and use independent inspectors of
election, as long as the proposal includes a provision for proxy contests as
follows: In the case of a contested election, management should be permitted to
request that the dissident group honor its confidential voting policy. If the
dissidents agree, the policy remains in place. If the dissidents will not agree,
the confidential voting policy is waived.

Vote FOR management proposals to adopt confidential voting.

4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS

Vote CASE-BY-CASE on advance notice proposals, supporting those proposals which
allow shareholders to submit proposals as close to the meeting date as
reasonably possible and within the broadest window possible.

AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT

Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition
to shareholders.

POISON PILLS

Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has: (1) A
shareholder approved poison pill in place; or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if either:

o Shareholders have approved the adoption of the plan; or
o The board, in its exercise of its fiduciary responsibilities,
determines that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay in adoption that would
result from seeking stockholder approval (i.e. the "fiduciary out"
provision). A poison pill adopted under this fiduciary out will be put
to a shareholder ratification vote within twelve months of adoption or
expire. If the pill is not approved by a majority of the votes cast on
this issue, the plan will immediately terminate.

Vote FOR shareholder proposals calling for poison pills to be put to a vote
within a time period of less than one year after adoption. If the company has no
non-shareholder approved poison pill in place and has adopted a policy with the
provisions outlined above, vote AGAINST the proposal. If these conditions are
not met, vote FOR the proposal, but with the caveat that a vote within twelve
months would be considered sufficient.

Vote CASE-by-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:

o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a qualifying offer is
announced, ten percent of the shares may call a special meeting or seek
a written consent to vote on rescinding the pill.

SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT

Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent. Vote FOR proposals to allow or make easier
shareholder action by written consent.

SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS

Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings. Vote FOR proposals that remove restrictions on the right of
shareholders to act independently of management.

SUPERMAJORITY VOTE REQUIREMENTS

Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR
proposals to lower supermajority vote requirements.

5. MERGERS AND CORPORATE RESTRUCTURINGS OVERALL APPROACH

For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction, balancing various and sometimes countervailing factors
including:

o VALUATION - Is the value to be received by the target shareholders (or
paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.

o MARKET REACTION - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.

o STRATEGIC RATIONALE - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of
historical acquisitions.

o NEGOTIATIONS AND PROCESS - Were the terms of the transaction negotiated
at arm's-length? Was the process fair and equitable? A fair process
helps to ensure the best price for shareholders. Significant
negotiation "wins" can also signify the deal makers' competency. The
comprehensiveness of the sales process (e.g., full auction, partial
auction, no auction) can also affect shareholder value.

o CONFLICTS OF INTEREST - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger
than if they did not hold these interests. Consider whether these
interests may have influenced these directors and officers to support
or recommend the merger. The CIC figure presented in the "ISS
Transaction Summary" section of this report is an aggregate figure that
can in certain cases be a misleading indicator of the true value
transfer from shareholders to insiders. Where such figure appears to be
excessive, analyze the underlying assumptions to determine whether a
potential conflict exists.

o GOVERNANCE - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other
issues (such as valuation) outweigh any deterioration in governance.

APPRAISAL RIGHTS

Vote FOR proposals to restore, or provide shareholders with, rights of
appraisal.

ASSET PURCHASES

Vote CASE-BY-CASE on asset purchase proposals, considering the following
factors:
o Purchase price;
o Fairness opinion;
o Financial and strategic benefits;
o How the deal was negotiated;
o Conflicts of interest;
o Other alternatives for the business;
o Non-completion risk.

ASSET SALES

Vote CASE-BY-CASE on asset sales, considering the following factors:

o Impact on the balance sheet/working capital;
o Potential elimination of diseconomies;
o Anticipated financial and operating benefits;
o Anticipated use of funds;
o Value received for the asset;
o Fairness opinion;
o How the deal was negotiated;
o Conflicts of interest.

BUNDLED PROPOSALS

Vote CASE-BY-CASE on bundled or "conditional" proxy proposals. In the case of
items that are conditioned upon each other, examine the benefits and costs of
the packaged items. In instances when the joint effect of the conditioned items
is not in shareholders' best interests, vote AGAINST the proposals. If the
combined effect is positive, support such proposals.

CONVERSION OF SECURITIES

Vote CASE-BY-CASE on proposals regarding conversion of securities. When
evaluating these proposals the investor should review the dilution to existing
shareholders, the conversion price relative to market value, financial issues,
control issues, termination penalties, and conflicts of interest.

Vote FOR the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is
not approved.

CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY PLANS/REVERSE
LEVERAGED BUYOUTS/WRAP PLANS

Vote CASE-BY-CASE on proposals to increase common and/or preferred shares and to
issue shares as part of a debt restructuring plan, taking into consideration the
following:

o Dilution to existing shareholders' position;
o Terms of the offer;
o Financial issues;
o Management's efforts to pursue other alternatives;
o Control issues;
o Conflicts of interest.

Vote FOR the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.

FORMATION OF HOLDING COMPANY

Vote CASE-BY-CASE on proposals regarding the formation of a holding company,
taking into consideration the following:

o The reasons for the change;
o Any financial or tax benefits;
o Regulatory benefits;
o Increases in capital structure;
o Changes to the articles of incorporation or bylaws of the company.

Absent compelling financial reasons to recommend the transaction, vote
AGAINST the formation of a holding company if the transaction would include
either of the following:

o Increases in common or preferred stock in excess of the allowable
maximum (see discussion under "Capital Structure");
o Adverse changes in shareholder rights.

GOING PRIVATE TRANSACTIONS (LBOS, MINORITY SQUEEZEOUTS, AND GOING DARK) Vote
CASE-BY-CASE on going private transactions, taking into account the following:

o Offer price/premium;
o Fairness opinion;
o How the deal was negotiated;
o Conflicts of interest;
o Other alternatives/offers considered; and
o Non-completion risk.

Vote CASE-BY-CASE on "going dark" transactions, determining whether the
transaction enhances shareholder value by taking into consideration:

o Whether the company has attained benefits from being publicly-traded
(examination of trading volume, liquidity, and market research of the
stock);
o Cash-out value;
o Whether the interests of continuing and cashed-out shareholders are
balanced; and
o The market reaction to public announcement of transaction.

JOINT VENTURES

Vote CASE-BY-CASE on proposals to form joint ventures, taking into account the
following:

o Percentage of assets/business contributed;
o Percentage ownership;
o Financial and strategic benefits;
o Governance structure;
o Conflicts of interest;
o Other alternatives;
o Noncompletion risk.

LIQUIDATIONS

Vote CASE-BY-CASE on liquidations, taking into account the following:

o Management's efforts to pursue other alternatives;
o Appraisal value of assets; and
o The compensation plan for executives managing the liquidation.

Vote FOR the liquidation if the company will file for bankruptcy if the proposal
is not approved.

MERGERS AND ACQUISITIONS/ ISSUANCE OF SHARES TO FACILITATE MERGER OR ACQUISITION

Vote CASE-BY-CASE on mergers and acquisitions, determining whether the
transaction enhances shareholder value by giving consideration to items listed
under "Mergers and Corporate Restructurings: Overall Approach."

PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES

Vote CASE-BY-CASE on proposals regarding private placements, taking into
consideration:

o Dilution to existing shareholders' position;
o Terms of the offer;
o Financial issues;
o Management's efforts to pursue other alternatives;
o Control issues;
o Conflicts of interest.

Vote FOR the private placement if it is expected that the company will file for
bankruptcy if the transaction is not approved.

SPINOFFS

Vote CASE-BY-CASE on spin-offs, considering:

o Tax and regulatory advantages;
o Planned use of the sale proceeds;
o Valuation of spinoff;
o Fairness opinion;
o Benefits to the parent company;
o Conflicts of interest;
o Managerial incentives;
o Corporate governance changes;
o Changes in the capital structure.
o

VALUE MAXIMIZATION PROPOSALS
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
by hiring a financial advisor to explore strategic alternatives, selling the
company or liquidating the company and distributing the proceeds to
shareholders. These proposals should be evaluated based on the following
factors:

o Prolonged poor performance with no turnaround in sight;
o Signs of entrenched board and management;
o Strategic plan in place for improving value;
o Likelihood of receiving reasonable value in a sale or dissolution; and
o Whether company is actively exploring its strategic options, including
retaining a financial advisor.

6. STATE OF INCORPORATION
CONTROL SHARE ACQUISITION PROVISIONS

Control share acquisition statutes function by denying shares their voting
rights when they contribute to ownership in excess of certain thresholds. Voting
rights for those shares exceeding ownership limits may only be restored by
approval of either a majority or supermajority of disinterested shares. Thus,
control share acquisition statutes effectively require a hostile bidder to put
its offer to a shareholder vote or risk voting disenfranchisement if the bidder
continues buying up a large block of shares.

Vote FOR proposals to opt out of control share acquisition statutes unless doing
so would enable the completion of a takeover that would be detrimental to
shareholders.

Vote AGAINST proposals to amend the charter to include control share acquisition
provisions.

Vote FOR proposals to restore voting rights to the control shares.

CONTROL SHARE CASH-OUT PROVISIONS

Control share cash-out statutes give dissident shareholders the right to
"cash-out" of their position in a company at the expense of the shareholder who
has taken a control position. In other words, when an investor crosses a preset
threshold level, remaining shareholders are given the right to sell their shares
to the acquirer, who must buy them at the highest acquiring price.

Vote FOR proposals to opt out of control share cash-out statutes.

DISGORGEMENT PROVISIONS

Disgorgement provisions require an acquirer or potential acquirer of more than a
certain percentage of a company's stock to disgorge, or pay back, to the company
any profits realized from the sale of that company's stock purchased 24 months
before achieving control status. All sales of company stock by the acquirer
occurring within a certain period of time (between 18 months and 24 months)
prior to the investor's gaining control status are subject to these
recapture-of-profits provisions.

Vote FOR proposals to opt out of state disgorgement provisions.

FAIR PRICE PROVISIONS

Vote CASE-BY-CASE on proposals to adopt fair price provisions (provisions that
stipulate that an acquirer must pay the same price to acquire all shares as it
paid to acquire the control shares), evaluating factors such as the vote
required to approve the proposed acquisition, the vote required to repeal the
fair price provision, and the mechanism for determining the fair price.

Generally, vote AGAINST fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.

FREEZE-OUT PROVISIONS

Vote FOR proposals to opt out of state freeze-out provisions. Freeze-out
provisions force an investor who surpasses a certain ownership threshold in a
company to wait a specified period of time before gaining control of the
company.

GREENMAIL

Greenmail payments are targeted share repurchases by management of company stock
from individuals or groups seeking control of the company. Since only the
hostile party receives payment, usually at a substantial premium over the market
value of its shares, the practice discriminates against all other shareholders.

Vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or
otherwise restrict a company's ability to make greenmail payments.

Vote CASE-BY-CASE on anti-greenmail proposals when they are bundled with other
charter or bylaw amendments.

REINCORPORATION PROPOSALS

Vote CASE-BY-CASE on proposals to change a company's state of incorporation,
taking into consideration both financial and corporate governance concerns,
including:
The reasons for reincorporating;
A comparison of the governance provisions;
Comparative economic benefits; and
A comparison of the jurisdictional laws.

Vote FOR re-incorporation when the economic factors outweigh any neutral or
negative governance changes.

STAKEHOLDER PROVISIONS

Vote AGAINST proposals that ask the board to consider non-shareholder
constituencies or other non-financial effects when evaluating a merger or
business combination.

STATE ANTITAKEOVER STATUTES

Vote CASE-BY-CASE on proposals to opt in or out of state takeover statutes
(including control share acquisition statutes, control share cash-out statutes,
freezeout provisions, fair price provisions, stakeholder laws, poison pill
endorsements, severance pay and labor contract provisions, anti-greenmail
provisions, and disgorgement provisions).

7. CAPITAL STRUCTURE

ADJUSTMENTS TO PAR VALUE OF COMMON STOCK

Vote FOR management proposals to reduce the par value of common stock.

COMMON STOCK AUTHORIZATION

Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance using a model developed by ISS.

Vote FOR proposals to approve increases beyond the allowable increase when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.

In addition, for capital requests less than or equal to 300 percent of the
current authorized shares that marginally fail the calculated allowable cap
(i.e., exceed the allowable cap by no more than 5 percent), on a CASE-BY-CASE
basis, vote FOR the increase based on the company's performance and whether the
company's ongoing use of shares has shown prudence. Factors should include, at a
minimum, the following:

o Rationale;
o Good performance with respect to peers and index on a five-year total
shareholder return basis;
o Absence of non-shareholder approved poison pill;
o Reasonable equity compensation burn rate;
o No non-shareholder approved pay plans; and
o Absence of egregious equity compensation practices.

DUAL-CLASS STOCK

Vote AGAINST proposals to create a new class of common stock with superior
voting rights.

Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.

Vote FOR proposals to create a new class of nonvoting or sub-voting common stock
if:

o It is intended for financing purposes with minimal or no dilution to
current shareholders;
o It is not designed to preserve the voting power of an insider or
significant shareholder.

ISSUE STOCK FOR USE WITH RIGHTS PLAN

Vote AGAINST proposals that increase authorized common stock for the explicit
purpose of implementing a non-shareholder approved shareholder rights plan
(poison pill).

PREEMPTIVE RIGHTS

Vote CASE-BY-CASE on shareholder proposals that seek preemptive rights, taking
into consideration: the size of a company, the characteristics of its
shareholder base, and the liquidity of the stock.

PREFERRED STOCK

Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).

Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense).

Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.

Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.

Vote CASE-BY-CASE on proposals to increase the number of blank check preferred
shares after analyzing the number of preferred shares available for issue given
a company's industry and performance in terms of shareholder returns.

RECAPITALIZATION

Vote CASE-BY-CASE on recapitalizations (reclassifications of securities), taking
into account the following:

o More simplified capital structure;
o Enhanced liquidity;
o Fairness of conversion terms;
o Impact on voting power and dividends;
o Reasons for the reclassification;
o Conflicts of interest; and
o Other alternatives considered.

REVERSE STOCK SPLITS

Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced.

Vote FOR management proposals to implement a reverse stock split to avoid
delisting.

Vote CASE-BY-CASE on proposals to implement a reverse stock split that do not
proportionately reduce the number of shares authorized for issue based on the
allowable increased calculated using the Capital Structure model.

SHARE REPURCHASE PROGRAMS

Vote FOR management proposals to institute open-market share repurchase plans in
which all shareholders may participate on equal terms.

STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS

Vote FOR management proposals to increase the common share authorization for a
stock split or share dividend, provided that the increase in authorized shares
would not result in an excessive number of shares available for issuance as
determined using a model developed by ISS.

TRACKING STOCK

Vote CASE-BY-CASE on the creation of tracking stock, weighing the strategic
value of the transaction against such factors as:

o Adverse governance changes;
o Excessive increases in authorized capital stock;
o Unfair method of distribution;
o Diminution of voting rights;
o Adverse conversion features;
o Negative impact on stock option plans; and
o Alternatives such as spin-off.

8. EXECUTIVE AND DIRECTOR COMPENSATION EQUITY COMPENSATION PLANS

Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:

o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits the repricing of stock options without prior
shareholder approval;
o There is a disconnect between CEO pay and the company's performance;
o The company's three year burn rate exceeds the greater of 2% and the
mean plus 1 standard deviation of its industry group; or
o The plan is a vehicle for poor pay practices.

Each of these factors is further described below:

COST OF EQUITY PLANS

Generally, vote AGAINST equity plans if the cost is unreasonable. For
non-employee director plans, vote FOR the plan if certain factors are met (see
Director Compensation section).

The cost of the equity plans is expressed as Shareholder Value Transfer (SVT),
which is measured using a binomial option pricing model that assesses the amount
of shareholders' equity flowing out of the company to employees and directors.
SVT is expressed as both a dollar amount and as a percentage of market value,
and includes the new shares proposed, shares available under existing plans, and
shares granted but unexercised. All award types are valued. For omnibus plans,
unless limitations are placed on the most expensive types of awards (for
example, full value awards), the assumption is made that all awards to be
granted will be the most expensive types. See discussion of specific types of
awards.

The Shareholder Value Transfer is reasonable if it falls below the
company-specific allowable cap. The allowable cap is determined as follows: The
top quartile performers in each industry group (using the Global Industry
Classification Standard GICS) are identified. Benchmark SVT levels for each
industry are established based on these top performers' historic SVT. Regression
analyses are run on each industry group to identify the variables most strongly
correlated to SVT. The benchmark industry SVT level is then adjusted upwards or
downwards for the specific company by plugging the company-specific performance
measures, size and cash compensation into the industry cap equations to arrive
at the company's allowable cap.

REPRICING PROVISIONS

Vote AGAINST plans that expressly permit the repricing of underwater stock
options without prior shareholder approval, even if the cost of the plan is
reasonable. Also, WITHHOLD from members of the Compensation Committee who
approved and/or implemented an option exchange program by repricing and buying
out underwater options for stock, cash or other consideration or canceling
underwater options and regranting options with a lower exercise price without
prior shareholder approval, even if such repricings are allowed in their equity
plan.

Vote AGAINST plans if the company has a history of repricing options without
shareholder approval, and the applicable listing standards would not preclude
them from doing so.

PAY-FOR PERFORMANCE DISCONNECT Generally vote AGAINST plans in which:

o there is a disconnect between the CEO's pay and company performance (an
increase in pay and a decrease in performance);
o the main source of the pay increase (over half) is equity-based, and
o the CEO is a participant of the equity proposal.

Performance decreases are based on negative one- and three-year total
shareholder returns. CEO pay increases are based on the CEO's total direct
compensation (salary, cash bonus, present value of stock options, face value of
restricted stock, value of non-equity incentive payouts, change in pension value
and nonqualified deferred compensation earnings, and all other compensation)
increasing over the previous year.

WITHHOLD votes from the Compensation Committee members when the company has a
pay for performance disconnect.

On a CASE-BY-CASE basis, vote for equity plans and FOR compensation committee
members with a pay-for-performance disconnect if compensation committee members
can present strong and compelling evidence of improved committee performance.
This evidence must go beyond the usual compensation committee report disclosure.
This additional evidence necessary includes all of the following:

o The compensation committee has reviewed all components of the CEO's
compensation, including the following:

- Base salary, bonus, long-term incentives;
- Accumulative realized and unrealized stock option and restricted
stock gains;
- Dollar value of perquisites and other personal benefits to the CEO
and the total cost to the company;
- Earnings and accumulated payment obligations under the company's
nonqualified deferred compensation program;
- Actual projected payment obligations under the company's supplemental
executive retirement plan (SERPs).

o A tally sheet with all the above components should be disclosed for the
following termination scenarios:

- Payment if termination occurs within 12 months: $_____;
- Payment if "not for cause" termination occurs within 12 months:
$_____;
- Payment if "change of control" termination occurs within 12 months:
$_____.

o The compensation committee is committed to providing additional
information on the named executives' annual cash bonus program and/or
long-term incentive cash plan for the current fiscal year. The
compensation committee will provide full disclosure of the qualitative
and quantitative performance criteria and hurdle rates used to
determine the payouts of the cash program. From this disclosure,
shareholders will know the minimum level of performance required for
any cash bonus to be delivered, as well as the maximum cash bonus
payable for superior performance.

The repetition of the compensation committee report does not meet ISS'
requirement of compelling and strong evidence of improved disclosure. The level
of transparency and disclosure is at the highest level where shareholders can
understand the mechanics of the annual cash bonus and/or long-term incentive
cash plan based on the additional disclosure.

o The compensation committee is committed to granting a substantial
portion of performance-based equity awards to the named executive
officers. A substantial portion of performance-based awards would be at
least 50 percent of the shares awarded to each of the named executive
officers. Performance-based equity awards are earned or paid out based
on the achievement of company performance targets. The company will
disclose the details of the performance criteria (e.g., return on
equity) and the hurdle rates (e.g., 15 percent) associated with the
performance targets. From this disclosure, shareholders will know the
minimum level of performance required for any equity grants to be made.
The performance-based equity awards do not refer to non-qualified stock
options(1) or performance-accelerated grants.(2) Instead,
performance-based equity awards are performance-contingent grants where
the individual will not receive the equity grant by not meeting the
target performance and vice versa.

The level of transparency and disclosure is at the highest level where
shareholders can understand the mechanics of the performance-based equity awards
based on the additional disclosure.

o The compensation committee has the sole authority to hire and fire
outside compensation consultants. The role of the outside compensation
consultant is to assist the compensation committee to analyze executive
pay packages or contracts and understand the company's financial
measures.

THREE-YEAR BURN RATE/BURN RATE COMMITMENT

Generally vote AGAINST plans if the company's most recent three-year burn rate
exceeds one standard deviation in excess of the industry mean (per the following
Burn Rate Table) and is over two percent of common shares outstanding. The
three-year burn rate policy does not apply to non-employee director plans unless
outside directors receive a significant portion of shares each year.

However, vote FOR equity plans if the company fails this burn rate test but the
company commits in a public filing to a three-year average burn rate equal to
its GICS group burn rate mean plus one standard deviation (or 2%, whichever is
greater), assuming all other conditions for voting FOR the plan have been met.

If a company fails to fulfill its burn rate commitment, vote to WITHHOLD from
the compensation committee.

(1) Non-qualified stock options are not performance-based awards unless the
grant or the vesting of the stock options is tied to the achievement of a
pre-determined and disclosed performance measure. A rising stock market will
generally increase share prices of all companies, despite of the company's
underlying performance. (2) Performance-accelerated grants are awards that vest
earlier based on the achievement of a specified measure. However, these grants
will ultimately vest over time even without the attainment of the goal(s).

2007 BURN RATE TABLE

RUSSELL 3000 NON-RUSSELL 3000
Standard Mean +
GICS Description Mean Deviation STDEV
-----------------------------------------------------------------------------------------------------------------
1010 Energy 1.37% 0.92% 2.29%
-----------------------------------------------------------------------------------------------------------------
1510 Materials 1.23% 0.62% 1.85%
-----------------------------------------------------------------------------------------------------------------
2010 Capital Goods 1.60% 0.98% 2.57%
-----------------------------------------------------------------------------------------------------------------
2020 Commercial Services & Supplies 2.39% 1.42% 3.81%
-----------------------------------------------------------------------------------------------------------------
2030 Transportation 1.30% 1.01% 2.31%
-----------------------------------------------------------------------------------------------------------------
2510 Automobiles & Components 1.93% 0.98% 2.90%
-----------------------------------------------------------------------------------------------------------------
2520 Consumer Durables & Apparel 1.97% 1.12% 3.09%
-----------------------------------------------------------------------------------------------------------------
2530 Hotels Restaurants & Leisure 2.22% 1.19% 3.41%
-----------------------------------------------------------------------------------------------------------------
2540 Media 1.78% 0.92% 2.70%
-----------------------------------------------------------------------------------------------------------------
2550 Retailing 1.95% 1.10% 3.05%
-----------------------------------------------------------------------------------------------------------------
3010,
3020, Food & Staples Retailing 1.66% 1.25% 2.91%
3030
-----------------------------------------------------------------------------------------------------------------
3510 Health Care Equipment & Services 2.87% 1.32% 4.19%
-----------------------------------------------------------------------------------------------------------------
3520 Pharmaceuticals & Biotechnology 3.12% 1.38% 4.50%
-----------------------------------------------------------------------------------------------------------------
4010 Banks 1.31% 0.89% 2.20%
-----------------------------------------------------------------------------------------------------------------
4020 Diversified Financials 2.13% 1.64% 3.76%
4030 Insurance 1.34% 0.88% 2.22%
------------------------------------------------------------------------------------------------------------------
4040 Real Estate 1.21% 1.02% 2.23%
-----------------------------------------------------------------------------------------------------------------
4510 Software & Services 3.77% 2.05% 5.82%
-----------------------------------------------------------------------------------------------------------------
4520 Technology Hardware & Equipment 3.05% 1.65% 4.70%
-----------------------------------------------------------------------------------------------------------------
4530 Semiconductors & Semiconductor 3.76% 1.64% 5.40%
Equip.
-----------------------------------------------------------------------------------------------------------------
5010 Telecommunication Services 1.71% 0.99% 2.70%
-----------------------------------------------------------------------------------------------------------------
5510 Utilities 0.84% 0.51% 1.35%
-----------------------------------------------------------------------------------------------------------------

Standard Mean +
Mean Deviation STDEV
------------------------------------------------------------
1.76% 2.01% 3.77%
------------------------------------------------------------
2.21% 2.15% 4.36%
------------------------------------------------------------
2.34% 1.98% 4.32%
------------------------------------------------------------
2.25% 1.93% 4.18%
------------------------------------------------------------
1.92% 1.95% 3.86%
------------------------------------------------------------
2.37% 2.32% 4.69%
------------------------------------------------------------
2.02% 1.68% 3.70%
------------------------------------------------------------
2.29% 1.88% 4.17%
------------------------------------------------------------
3.26% 2.36% 5.62%
------------------------------------------------------------
2.92% 2.21% 5.14%
------------------------------------------------------------
1.90% 2.00% 3.90%
------------------------------------------------------------
3.51% 2.31% 5.81%
------------------------------------------------------------
3.96% 2.89% 6.85%
------------------------------------------------------------
1.15% 1.10% 2.25%
------------------------------------------------------------
4.84% 5.03% 9.87%
------------------------------------------------------------
1.60% 1.96% 3.56%
------------------------------------------------------------
1.21% 1.02% 2.23%
------------------------------------------------------------
5.33% 3.13% 8.46%
------------------------------------------------------------
3.58% 2.34% 5.92%
------------------------------------------------------------
4.48% 2.46% 6.94%
------------------------------------------------------------
2.98% 2.94% 5.92%
------------------------------------------------------------
0.84% 0.51% 1.35%
------------------------------------------------------------

For companies that grant both full value awards and stock options to their
employees, ISS shall apply a premium on full value awards for the past three
fiscal years. The guideline for applying the premium is as follows:

-----------------------------------------------------------------------------------------------------------------------
CHARACTERISTICS ANNUAL STOCK PRICE VOLATILITY PREMIUM
-----------------------------------------------------------------------------------------------------------------------
High annual volatility 53% and higher 1 full-value award will count as 1.5 option shares
-----------------------------------------------------------------------------------------------------------------------
Moderate annual volatility 25% - 52% 1 full-value award will count as 2.0 option shares
-----------------------------------------------------------------------------------------------------------------------
Low annual volatility Less than 25% 1 full-value award will count as 4.0 option shares
-----------------------------------------------------------------------------------------------------------------------

POOR PAY PRACTICES

Vote AGAINST equity plans if the plan is a vehicle for poor compensation
practices.

WITHHOLD from compensation committee members, CEO, and potentially the entire
board, if the company has poor compensation practices. The following practices,
while not exhaustive, are examples of poor compensation practices that may
warrant withholding votes:

Egregious employment contracts (e.g., those containing multi-year guarantees for
bonuses and grants);
Excessive perks that dominate compensation (e.g., tax gross-ups for personal use
of corporate aircraft);
Huge bonus payouts without justifiable performance linkage or proper disclosure;
Performance metrics that are changed (e.g., canceled or replaced during the
performance period
without adequate explanation of the action and the link to performance);
Egregious pension/SERP (supplemental executive retirement plan) payouts
(e.g., the inclusion of additional years of service not worked or inclusion of
performance-based equity awards in the pension calculation);
New CEO awarded an overly generous new hire package (e.g., including excessive
"make whole" provisions or any of the poor pay practices listed in this policy);
Excessive severance provisions (e.g., including excessive change in control
payments);

Change in control payouts without loss of job or substantial diminution of job
duties; Internal pay disparity;
Options backdating (covered in a separate policy);
and Other excessive compensation payouts or poor pay practices at the company.

SPECIFIC TREATMENT OF CERTAIN AWARD TYPES IN EQUITY PLAN EVALUATIONS:

DIVIDEND EQUIVALENT RIGHTS

Options that have Dividend Equivalent Rights (DERs) associated with them will
have a higher calculated award value than those without DERs under the binomial
model, based on the value of these dividend streams. The higher value will be
applied to new shares, shares available under existing plans, and shares awarded
but not exercised per the plan specifications. DERS transfer more shareholder
equity to employees and non-employee directors and this cost should be captured.

LIBERAL SHARE RECYCLING PROVISIONS

Under net share counting provisions, shares tendered by an option holder to pay
for the exercise of an option, shares withheld for taxes or shares repurchased
by the company on the open market can be recycled back into the equity plan for
awarding again. All awards with such provisions should be valued as full-value
awards. Stock-settled stock appreciation rights (SSARs) will also be considered
as full-value awards if a company counts only the net shares issued to employees
towards their plan reserve.

OTHER COMPENSATION PROPOSALS AND POLICIES

401(K) EMPLOYEE BENEFIT PLANS

Vote FOR proposals to implement a 401(k) savings plan for employees.

DIRECTOR COMPENSATION

Vote CASE-BY-CASE on compensation plans for non-employee directors, based on the
cost of the plans against the company's allowable cap.

On occasion, director stock plans that set aside a relatively small number of
shares when combined with employee or executive stock compensation plans exceed
the allowable cap. Vote for the plan if ALL of the following qualitative factors
in the board's compensation are met and disclosed in the proxy statement:

Director stock ownership guidelines with a minimum of three times the annual
cash retainer.

o Vesting schedule or mandatory holding/deferral period:
- A minimum vesting of three years for stock options or restricted
stock; or
- Deferred stock payable at the end of a three-year deferral
period.
o Mix between cash and equity:
- A balanced mix of cash and equity, for example 40% cash/60%
equity or 50% cash/50% equity;

- If the mix is heavier on the equity component, the vesting
schedule or deferral period should be more stringent, with the
lesser of five years or the term of directorship.

No retirement/benefits and perquisites provided to non-employee directors; and
Detailed disclosure provided on cash and equity compensation delivered to each
non-employee director for the most recent fiscal year in a table. The column
headers for the table may include the following: name of each non-employee
director, annual retainer, board meeting fees, committee retainer,
committee-meeting fees, and equity grants.

DIRECTOR RETIREMENT PLANS

Vote AGAINST retirement plans for non-employee directors.

Vote FOR shareholder proposals to eliminate retirement plans for non-employee
directors.

EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)

Vote FOR proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares).

EMPLOYEE STOCK PURCHASE PLANS-- QUALIFIED PLANS

Vote CASE-BY-CASE on qualified employee stock purchase plans. Vote FOR employee
stock purchase plans where all of the following apply:
Purchase price is at least 85 percent of fair market value;
Offering period is 27 months or less; and
The number of shares allocated to the plan is ten percent or less of the
outstanding shares.

Vote AGAINST qualified employee stock purchase plans where any of the following
apply:
Purchase price is less than 85 percent of fair market value; or
Offering period is greater than 27 months; or
The number of shares allocated to the plan is more than ten percent of the
outstanding shares.

EMPLOYEE STOCK PURCHASE PLANS-- NON-QUALIFIED PLANS

Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR
nonqualified employee stock purchase plans with all the following features:
Broad-based participation (i.e., all employees of the company with the exclusion
of individuals with 5 percent or more of beneficial ownership of the company);
Limits on employee contribution, which may be a fixed dollar amount or expressed
as a percent of base salary;
Company matching contribution up to 25 percent of employee's contribution, which
is effectively a discount of 20 percent from market value;
No discount on the stock price on the date of purchase since there is a company
matching contribution.

Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.

INCENTIVE BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED COMPENSATION
PROPOSALS) Vote FOR proposals that simply amend shareholder-approved
compensation plans to include administrative features or place a cap on the
annual grants any one participant may receive to comply with the provisions of
Section 162(m).

Vote FOR proposals to add performance goals to existing compensation plans to
comply with the provisions of Section 162(m) unless they are clearly
inappropriate.

Vote CASE-BY-CASE on amendments to existing plans to increase shares reserved
and to qualify for favorable tax treatment under the provisions of Section
162(m) as long as the plan does not exceed the allowable cap and the plan does
not violate any of the supplemental policies.

Generally vote FOR cash or cash and stock bonus plans that are submitted to
shareholders for the purpose of exempting compensation from taxes under the
provisions of Section 162(m) if no increase in shares is requested.

OPTIONS BACKDATING

In cases where a company has practiced options backdating, WITHHOLD on a
CASE-BY-CASE basis from the members of the compensation committee, depending on
the severity of the practices and the subsequent corrective actions on the part
of the board. WITHHOLD from the compensation committee members who oversaw the
questionable options grant practices or from current compensation committee
members who fail to respond to the issue proactively, depending on several
factors, including, but not limited to:

Reason and motive for the options backdating issue, such as inadvertent vs.
deliberate grant date changes;

Length of time of options backdating;
Size of restatement due to options backdating;
Corrective actions taken by the board or compensation committee,
such as canceling or repricing backdated options,
or recoupment of option gains on backdated grants;
Adoption of a grant policy that prohibits backdating, and creation of a fixed
grant schedule or window period for equity grants going forward.

OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS

Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice
options taking into consideration:

Historic trading patterns--the stock price should not be so volatile that the
options are likely to be back "in-the-money" over the near term;
Rationale for the re-pricing--was the stock price decline beyond management's
control? Is this a value-for-value exchange?
Are surrendered stock options added back to the plan reserve?
Option vesting--does the new option vest immediately or is there a black-out
period?
Term of the option--the term should remain the same as that of the replaced
option;
Exercise price--should be set at fair market or a premium to market;
Participants--executive officers and directors should be excluded.

If the surrendered options are added back to the equity plans for re-issuance,
then also take into consideration the company's three-year average burn rate. In
addition to the above considerations, evaluate the intent, rationale, and timing
of the repricing proposal. The proposal should clearly articulate why the board
is choosing to conduct an exchange program at this point in time. Repricing
underwater options after a recent precipitous drop in the company's stock price
demonstrates poor timing. Repricing after a recent decline in stock price
triggers additional scrutiny and a potential AGAINST vote on the proposal. At a
minimum, the decline should not have happened within the past year. Also,
consider the terms of the surrendered options, such as the grant date, exercise
price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to suggest that repricings are being
done to take advantage of short-term downward price movements. Similarly, the
exercise price of surrendered options should be above the 52-week high for the
stock price.

Vote FOR shareholder proposals to put option repricings to a shareholder vote.

STOCK PLANS IN LIEU OF CASH

Vote CASE-by-CASE on plans which provide participants with the option of taking
all or a portion of their cash compensation in the form of stock.

Vote FOR non-employee director only equity plans which provide a
dollar-for-dollar cash for stock exchange.

Vote CASE-by-CASE on plans which do not provide a dollar-for-dollar cash for
stock exchange. In cases where the exchange is not dollar-for-dollar, the
request for new or additional shares for such equity program will be considered
using the binomial option pricing model. In an effort to capture the total cost
of total compensation, ISS will not make any adjustments to carve out the
in-lieu-of cash compensation.

TRANSFER PROGRAMS OF STOCK OPTIONS One-time Transfers: WITHHOLD votes from
compensation committee members if they fail to submit one-time transfers for to
shareholders for approval.

Vote CASE-BY-CASE on one-time transfers. Vote FOR if:
Executive officers and non-employee directors are excluded from participating;
Stock options are purchased by third-party financial institutions at a discount
to their fair value using option pricing models such as Black-Scholes or a
Binomial Option Valuation or other appropriate financial models;
There is a two-year minimum holding period for sale proceeds (cash or stock) for
all participants.

Additionally, management should provide a clear explanation of why options are
being transferred and whether the events leading up to the decline in stock
price were beyond management's control. A review of the company's historic stock
price volatility should indicate if the options are likely to be back
"in-the-money" over the near term.

SHAREHOLDER PROPOSALS ON COMPENSATION

ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)

Generally, vote FOR shareholder proposals that call for non-binding shareholder
ratification of the compensation of the named Executive Officers and the
accompanying narrative disclosure of material factors provided to understand the
Summary Compensation Table.

COMPENSATION CONSULTANTS- DISCLOSURE OF BOARD OR COMPANY'S UTILIZATION

Generally vote FOR shareholder proposals seeking disclosure regarding the
Company, Board, or Board committee's use of compensation consultants, such as
company name, business relationship(s) and fees paid.

DISCLOSURE/SETTING LEVELS OR TYPES OF COMPENSATION FOR EXECUTIVES AND DIRECTORS

Generally, vote FOR shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company.

Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation.

Vote AGAINST shareholder proposals requiring director fees be paid in stock
only.

Vote CASE-BY-CASE on all other shareholder proposals regarding executive and
director pay, taking into account company performance, pay level versus peers,
pay level versus industry, and long term corporate outlook.

OPTION REPRICING

Vote FOR shareholder proposals to put option repricings to a shareholder vote.

PAY FOR SUPERIOR PERFORMANCE

Generally vote FOR shareholder proposals based on a case-by-case analysis that
requests the board establish a pay-for-superior performance standard in the
company's executive compensation plan for senior executives. The proposals call
for:
the annual incentive component of the plan should utilize financial performance
criteria that can be benchmarked against peer group performance, and provide
that no annual bonus be awarded based on financial performance criteria unless
the company exceeds the median or mean performance of a disclosed group of peer
companies on the selected financial criteria;
the long-term equity compensation component of the plan should utilize financial
and/or stock price performance criteria that can be benchmarked against peer
group performance, and any options, restricted shares, or other equity
compensation used should be structured so that compensation is received only
when company performance exceeds the median or mean performance of the peer
group companies on the selected financial and stock price performance criteria;
and
the plan disclosure should allow shareholders to monitor the correlation between
pay and performance.

Consider the following factors in evaluating this proposal:
What aspects of the company's annual and long -term equity incentive programs
are performance driven?
If the annual and long-term equity incentive programs are performance driven,
are the performance criteria and hurdle rates disclosed to shareholders or are
they benchmarked against a disclosed peer group?
Can shareholders assess the correlation between pay and performance based on the
current disclosure?
What type of industry and stage of business cycle does the company belong to?

PENSION PLAN INCOME ACCOUNTING

Generally vote FOR shareholder proposals to exclude pension plan income in the
calculation of earnings used in determining executive bonuses/compensation.

PERFORMANCE-BASED AWARDS

Vote CASE-BY-CASE on shareholder proposal requesting that a significant amount
of future long-term incentive compensation awarded to senior executives shall be
performance-based and requesting that the board adopt and disclose challenging
performance metrics to shareholders, based on the following analytical steps:

First, vote FOR shareholder proposals advocating the use of performance-based
equity awards, such as performance contingent options or restricted stock,
indexed options or premium-priced options, unless the proposal is overly
restrictive or if the company has demonstrated that it is using a "substantial"
portion of performance-based awards for its top executives. Standard stock
options and performance-accelerated awards do not meet the criteria to be
considered as performance-based awards. Further, premium-priced options should
have a premium of at least 25 percent and higher to be considered
performance-based awards.
Second, assess the rigor of the company's performance-based equity program. If
the bar set for the performance-based program is too low based on the company's
historical or peer group comparison, generally vote FOR the proposal.
Furthermore, if target performance results in an above target payout, vote FOR
the shareholder proposal due to program's poor design. If the company does not
disclose the performance metric of the performance-based equity program, vote
FOR the shareholder proposal regardless of the outcome of the first step to the
test.

In general, vote FOR the shareholder proposal if the company does not meet both
of the above two steps.

SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES

Vote FOR shareholder proposals to require golden parachutes or executive
severance agreements to be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts.

Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden parachutes.
An acceptable parachute should include, but is not limited to, the following:

The triggering mechanism should be beyond the control of management; The amount
should not exceed three times base amount (defined as the average annual taxable
W-2 compensation during the five years prior to the year in which the change of
control occurs;
Change-in-control payments should be double-triggered, i.e., (1) after a change
in control has taken place, and (2) termination of the executive as a result of
the change in control. Change in control is defined as a change in the company
ownership structure.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)

Generally vote FOR shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company's
executive pension plans do not contain excessive benefits beyond what is offered
under employee-wide plans.

Generally vote FOR shareholder proposals requesting to limit the executive
benefits provided under the company's supplemental executive retirement plan
(SERP) by limiting covered compensation to a senior executive's annual salary
and excluding of all incentive or bonus pay from the plan's definition of
covered compensation used to establish such benefits.

9. CORPORATE RESPONSIBILITY CONSUMER ISSUES AND PUBLIC SAFETY

ANIMAL RIGHTS

Generally vote AGAINST proposals to phase out the use of animals in product
testing unless:
The company is conducting animal testing programs that are
unnecessary or not required by regulation;
The company is conducting animal testing when suitable alternatives are accepted
and used at peer firms;
The company has been the subject of recent, significant controversy related to
its testing programs.

Generally vote FOR proposals seeking a report on the company's animal welfare
standards unless:
The company has already published a set of animal welfare standards and monitors
compliance;
The company's standards are comparable to or better than those of peer firms;
and
There are no serious controversies surrounding the company's treatment of
animals.

DRUG PRICING

Generally vote AGAINST proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing.

Vote CASE-BY-CASE on proposals requesting that the company evaluate their
product pricing considering: The existing level of disclosure on pricing
policies;

Deviation from established industry pricing norms;
The company's existing initiatives to provide its products to needy consumers;
Whether the proposal focuses on specific products or geographic regions.

DRUG REIMPORTATION

Generally vote FOR proposals requesting that companies report on the financial
and legal impact of their policies regarding prescription drug reimportation
unless such information is already publicly disclosed.

Generally vote AGAINST proposals requesting that companies adopt specific
policies to encourage or constrain prescription drug reimportation.

GENETICALLY MODIFIED FOODS

Vote AGAINST proposals asking companies to voluntarily label genetically
engineered (GE) ingredients in their products or alternatively to provide
interim labeling and eventually eliminate GE ingredients due to the costs and
feasibility of labeling and/or phasing out the use of GE ingredients.

Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients taking into account:
The relevance of the proposal in terms of the company's business and the
proportion of it affected by the resolution;
The quality of the company's disclosure on GE product labeling and related
voluntary initiatives and how this disclosure compares with peer company
disclosure;
Company's current disclosure on the feasibility of GE product labeling,
including information on the related costs;

Any voluntary labeling initiatives undertaken or considered by the company.

Vote CASE-BY-CASE on proposals asking for the preparation of a report on the
financial, legal, and environmental impact of continued use of GE
ingredients/seeds. Evaluate the following:
The relevance of the proposal in terms of the company's business and the
proportion of it affected by the resolution;
The quality of the company's disclosure on risks related to GE product use and
how this disclosure compares with peer company disclosure;
The percentage of revenue derived from international operations, particularly in
Europe, where GE products are more regulated and consumer backlash is more
pronounced.

Vote AGAINST proposals seeking a report on the health and environmental effects
of genetically modified organisms (GMOs). Health studies of this sort are better
undertaken by regulators and the scientific community.

Vote AGAINST proposals to completely phase out GE ingredients from the company's
products or proposals asking for reports outlining the steps necessary to
eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to federal regulators) that outweigh the economic benefits derived from
biotechnology.

HANDGUNS

Generally vote AGAINST requests for reports on a company's policies aimed at
curtailing gun violence in the United States unless the report is confined to
product safety information. Criminal misuse of firearms is beyond company
control and instead falls within the purview of law enforcement agencies.

HIV/AIDS

Vote CASE-BY-CASE on requests for reports outlining the impact of the health
pandemic (HIV/AIDS, malaria and tuberculosis) on the company's Sub-Saharan
operations and how the company is responding to it, taking into account:
The nature and size of the company's operations in Sub-Saharan Africa and the
number of local employees;
The company's existing healthcare policies, including benefits and healthcare
access for local workers;
Company donations to healthcare providers operating in the region.

Vote AGAINST proposals asking companies to establish, implement, and report on a
standard of response to the HIV/AIDS, TB, and malaria health pandemic in Africa
and other developing countries, unless the company has significant operations in
these markets and has failed to adopt policies and/or procedures to address
these issues comparable to those of industry peers.

PREDATORY LENDING

Vote CASE-BY CASE on requests for reports on the company's procedures for
preventing predatory lending, including the establishment of a board committee
for oversight, taking into account:
Whether the company has adequately disclosed mechanisms in place to prevent
abusive lending practices;
Whether the company has adequately disclosed the financial risks of its subprime
business;
Whether the company has been subject to violations of lending laws or
serious lending controversies;
Peer companies' policies to prevent abusive lending practices.

TOBACCO

Most tobacco-related proposals should be evaluated on a CASE-BY-CASE basis,
taking into account the following factors:

Second-hand smoke:
Whether the company complies with all local ordinances and regulations;
The degree that voluntary restrictions beyond those mandated by law might hurt
the company's competitiveness;
The risk of any health-related liabilities.

Advertising to youth:
Whether the company complies with federal, state, and local laws on the
marketing of tobacco or if it has been fined for violations;
Whether the company has gone as far as peers in restricting advertising;
Whether the company entered into the Master Settlement Agreement, which
restricts marketing of tobacco to youth;
Whether restrictions on marketing to youth extend to foreign countries.

Cease production of tobacco-related products or avoid selling products to
tobacco companies:
The percentage of the company's business affected; The economic loss of
eliminating the business versus any potential tobacco-related liabilities.

Spin-off tobacco-related businesses:
The percentage of the company's business affected;
The feasibility of a spin-off; Potential future liabilities related to
the company's tobacco business.

Stronger product warnings:
Vote AGAINST proposals seeking stronger product warnings. Such decisions are
better left to public health authorities.

Investment in tobacco stocks:
Vote AGAINST proposals prohibiting investment in tobacco equities. Such
decisions are better left to portfolio managers.

TOXIC CHEMICALS

Generally vote FOR resolutions requesting that a company discloses its policies
related to toxic chemicals.

Vote CASE-BY-CASE on resolutions requesting that companies evaluate and disclose
the potential financial and legal risks associated with utilizing certain
chemicals, considering:

Current regulations in the markets in which the company operates;
Recent significant controversy, litigation, or fines stemming from toxic
chemicals or ingredients at the company;
and
The current level of disclosure on this topic.

Generally vote AGAINST resolutions requiring that a company reformulate its
products within a certain timeframe unless such actions are required by law in
specific markets.

ENVIRONMENT AND ENERGY

ARCTIC NATIONAL WILDLIFE REFUGE

Generally vote AGAINST request for reports outlining potential environmental
damage from drilling in the Arctic National Wildlife Refuge (ANWR) unless:

New legislation is adopted allowing development and drilling in the ANWR region;
The company intends to pursue operations in the ANWR; and The company does not
currently disclose an environmental risk report for their operations in

the ANWR.

CERES PRINCIPLES

Vote CASE-BY-CASE on proposals to adopt the CERES Principles, taking into
account:
The company's current environmental disclosure beyond legal requirements,
including environmental health and safety (EHS) audits and reports that may
duplicate CERES;
The company's environmental performance record, including violations of federal
and state regulations, level of toxic emissions, and accidental spills;
Environmentally conscious practices of peer companies, including endorsement of
CERES; Costs of membership and implementation.

CLIMATE CHANGE

In general, vote FOR resolutions requesting that a company disclose information
on the impact of climate change on the company's operations unless:
The company already provides current, publicly-available information on the
perceived impact that climate change may have on the company as well as
associated policies and procedures to address such risks and/or opportunities;
The company's level of disclosure is comparable to or better than information
provided by industry peers; and
There are no significant fines, penalties, or litigation associated with the
company's environmental performance.

CONCENTRATED AREA FEEDING OPERATIONS (CAFOS)

Vote FOR resolutions requesting that companies report to shareholders on the
risks and liabilities associated with CAFOs unless:

The company has publicly disclosed guidelines for its corporate and contract
farming operations, including

compliance monitoring; or
The company does not directly source from CAFOs.

ENVIRONMENTAL-ECONOMIC RISK REPORT

Vote CASE-BY-CASE on proposals requesting an economic risk assessment of
environmental performance considering:

The feasibility of financially quantifying environmental risk factors;
The company's compliance with applicable legislation and/or regulations
regarding environmental performance;
The costs associated with implementing improved standards;
The potential costs associated with remediation resulting from poor
environmental performance; and
The current level of disclosure on environmental policies and initiatives.

ENVIRONMENTAL REPORTS

Generally vote FOR requests for reports disclosing the company's environmental
policies unless it already has well-documented environmental management systems
that are available to the public.

GLOBAL WARMING

Generally vote FOR proposals requesting a report on greenhouse gas emissions
from company operations and/or products unless this information is already
publicly disclosed or such factors are not integral to the company's line of
business.

Generally vote AGAINST proposals that call for reduction in greenhouse gas
emissions by specified amounts or within a restrictive time frame unless the
company lags industry standards and has been the subject of recent, significant
fines or litigation resulting from greenhouse gas emissions.

KYOTO PROTOCOL COMPLIANCE

Generally vote FOR resolutions requesting that companies outline their
preparations to comply with standards established by Kyoto Protocol signatory
markets unless:
The company does not maintain operations in Kyoto signatory markets;
The company already evaluates and substantially discloses such
information; or, Greenhouse gas emissions do not significantly impact
the company's core businesses.

LAND USE

Generally vote AGAINST resolutions that request the disclosure of detailed
information on a company's policies related to land use or development unless
the company has been the subject of recent, significant fines or litigation
stemming from its land use.

NUCLEAR SAFETY

Generally vote AGAINST resolutions requesting that companies report on risks
associated with their nuclear reactor designs and/or the production and interim
storage of irradiated fuel rods unless:
The company does not have publicly disclosed guidelines describing its policies
and procedures for addressing risks associated with its operations;
The company is non-compliant with Nuclear Regulatory Commission (NRC)
requirements; or

The company stands out amongst its peers or competitors as having significant
problems with safety or

environmental performance related to its nuclear operations.

OPERATIONS IN PROTECTED AREAS

Generally vote FOR requests for reports outlining potential environmental damage
from operations in protected regions, including wildlife refuges unless:
The company does not currently have operations or plans to develop operations in
these protected regions; or,
The company provides disclosure on its operations and environmental policies in
these regions comparable to industry peers.

RECYCLING

Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy,
taking into account:
The nature of the company's business and the percentage affected;
The extent that peer companies are recycling;
The timetable prescribed by the proposal;
The costs and methods of implementation;
Whether the company has a poor environmental track record, such as violations of
federal and

state regulations.

RENEWABLE ENERGY

In general, vote FOR requests for reports on the feasibility of developing
renewable energy sources unless the report is duplicative of existing disclosure
or irrelevant to the company's line of business.

Generally vote AGAINST proposals requesting that the company invest in renewable
energy sources. Such decisions are best left to management's evaluation of the
feasibility and financial impact that such programs may have on the company.

SUSTAINABILITY REPORT

Generally vote FOR proposals requesting the company to report on policies and
initiatives related to social, economic, and environmental sustainability,
unless:
The company already discloses similar information through existing reports or
policies such as an Environment, Health, and Safety (EHS) report; a
comprehensive Code of Corporate Conduct; and/or a Diversity Report; or
The company has formally committed to the implementation of a reporting program
based on Global Reporting Initiative (GRI) guidelines or a similar standard
within a specified time frame.

GENERAL CORPORATE ISSUES

CHARITABLE/POLITICAL CONTRIBUTIONS

Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:

The company is in compliance with laws governing corporate political activities;
and The company has procedures in place to ensure that employee contributions to
company-sponsored political action committees (PACs) are strictly voluntary and
not coercive.

Vote AGAINST proposals to publish in newspapers and public media the company's
political contributions as such publications could present significant cost to
the company without providing commensurate value to shareholders.

Vote CASE-BY-CASE on proposals to improve the disclosure of a company's
political contributions considering:

Recent significant controversy or litigation related to the company's political
contributions or governmental affairs; and
The public availability of a policy on political contributions.

Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level
and barring contributions can put the company at a competitive disadvantage.

Vote AGAINST proposals restricting the company from making charitable
contributions. Charitable contributions are generally useful for assisting
worthwhile causes and for creating goodwill in the community. In the absence of
bad faith, self-dealing, or gross negligence, management should determine which
contributions are in the best interests of the company.

Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.

DISCLOSURE OF LOBBYING EXPENDITURES/INITIATIVES

Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
initiatives, considering any significant controversy or litigation surrounding a
company's public policy activities, the current level of disclosure on lobbying
strategy, and the impact that the policy issue may have on the company's
business operations.

LINK EXECUTIVE COMPENSATION TO SOCIAL PERFORMANCE

Vote CASE-BY-CASE on proposals to review ways of linking executive compensation
to social factors, such as corporate downsizings, customer or employee
satisfaction, community involvement, human rights, environmental performance,
predatory lending, and executive/employee pay disparities. Such resolutions
should be evaluated in the context of:

The relevance of the issue to be linked to pay;
The degree that social performance is already included in the company's pay
structure and disclosed;
The degree that social performance is used by peer companies in setting pay;
Violations or complaints filed against the company relating to the particular
social performance measure;
Artificial limits sought by the proposal, such as freezing or capping executive
pay Independence of the compensation committee; Current company pay levels.

OUTSOURCING/OFFSHORING

Vote CASE-BY-CASE on proposals calling for companies to report on the risks
associated with outsourcing, considering:

Risks associated with certain international markets;
The utility of such a report to shareholders;
The existence of a publicly available code of corporate conduct that
applies to international operations.

LABOR STANDARDS AND HUMAN RIGHTS

CHINA PRINCIPLES

Vote AGAINST proposals to implement the China Principles unless:

There are serious controversies surrounding the company's China
operations; and
The company does not have a code of conduct with standards similar to those
promulgated by the International Labor Organization (ILO).

COUNTRY-SPECIFIC HUMAN RIGHTS REPORTS

Vote CASE-BY-CASE on requests for reports detailing the company's operations in
a particular country and steps to protect human rights, based on:

The nature and amount of company business in that country; The
company's workplace code of conduct; Proprietary and confidential
information involved; Company compliance with U.S. regulations on
investing in the country; Level of peer company involvement in the
country.

INTERNATIONAL CODES OF CONDUCT/VENDOR STANDARDS

Vote CASE-BY-CASE on proposals to implement certain human rights standards at
company facilities or those of its suppliers and to commit to outside,
independent monitoring. In evaluating these proposals, the following should be
considered:
The company's current workplace code of conduct or adherence to other global
standards and the degree they meet the standards promulgated by the proponent;
Agreements with foreign suppliers to meet certain workplace standards;
Whether company and vendor facilities are monitored and how;
Company participation in fair labor organizations;
Type of business;
Proportion of business conducted overseas;
Countries of operation with known human rights abuses;
Whether the company has been recently involved in significant labor and human
rights controversies or violations;
Peer company standards and practices; Union presence in company's international
factories.

Generally vote FOR reports outlining vendor standards compliance unless any of
the following apply:
The company does not operate in countries with significant human rights
violations;
The company has no recent human rights controversies or violations; or
The company already publicly discloses information on its vendor standards
compliance.

MACBRIDE PRINCIPLES

Vote CASE-BY-CASE on proposals to endorse or increase activity on the MacBride
Principles, taking into account:

Company compliance with or violations of the Fair Employment Act of 1989;
Company antidiscrimination policies that already exceed the legal requirements;
The cost and feasibility of adopting all nine principles;
The cost of duplicating efforts to follow two sets of standards (Fair Employment
and the MacBride Principles);
The potential for charges of reverse discrimination;
The potential that any company sales or contracts in the rest of the United
Kingdom could be negatively impacted;
The level of the company's investment in Northern Ireland; The number of company
employees in Northern Ireland;
The degree that industry peers have adopted the MacBride Principles;
Applicable state and municipal laws that limit contracts with companies that
have not adopted the MacBride Principles.

MILITARY BUSINESS

FOREIGN MILITARY SALES/OFFSETS

Vote AGAINST reports on foreign military sales or offsets. Such disclosures may
involve sensitive and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.

LANDMINES AND CLUSTER BOMBS

Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in antipersonnel landmine production, taking into account:
Whether the company has in the past manufactured landmine components;
Whether the company's peers have renounced future production.

Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in cluster bomb production, taking into account:
What weapons classifications the proponent views as cluster bombs;
Whether the company currently or in the past has manufactured cluster
bombs or their components;
The percentage of revenue derived from cluster bomb manufacture;
Whether the company's peers have renounced future production.

NUCLEAR WEAPONS

Vote AGAINST proposals asking a company to cease production of nuclear weapons
components and delivery systems, including disengaging from current and proposed
contracts. Components and delivery systems serve multiple military and
non-military uses, and withdrawal from these contracts could have a negative
impact on the company's business.

OPERATIONS IN NATIONS SPONSORING TERRORISM (E.G., IRAN)

Vote CASE-BY-CASE on requests for a board committee review and report outlining
the company's financial and reputational risks from its operations in a
terrorism-sponsoring state, taking into account current disclosure on:

The nature and purpose of the operations and the amount of business involved
(direct and indirect revenues and expenses) that could be affected by political
disruption;
Compliance with U.S. sanctions and laws.

SPACED-BASED WEAPONIZATION

Generally vote FOR reports on a company's involvement in spaced-based
weaponization unless:
The information is already publicly available; or
The disclosures sought could compromise proprietary information.

WORKPLACE DIVERSITY
BOARD DIVERSITY

Generally vote FOR reports on the company's efforts to diversify the board,
unless:
The board composition is reasonably inclusive in relation to companies of
similar size and business; or
The board already reports on its nominating procedures and diversity
initiatives.

Generally vote AGAINST proposals that would call for the adoption of specific
committee charter language regarding diversity initiatives unless the company
fails to publicly disclose existing equal opportunity or non-discrimination
policies.

Vote CASE-BY-CASE on proposals asking the company to increase the representation
of women and minorities on the board, taking into account:

The degree of board diversity;
Comparison with peer companies;
Established process for improving board diversity; Existence of
independent nominating committee; Use of outside search firm; History
of EEO violations.

EQUAL EMPLOYMENT OPPORTUNITY (EEO)

Generally vote FOR reports outlining the company's affirmative action
initiatives unless all of the following apply:

The company has well-documented equal opportunity programs;
The company already publicly reports on its company-wide affirmative initiatives
and provides data on its workforce diversity;
and The company has no recent EEO-related violations or litigation.

Vote AGAINST proposals seeking information on the diversity efforts of suppliers
and service providers, which can pose a significant cost and administration
burden on the company.

GLASS CEILING

Generally vote FOR reports outlining the company's progress towards the Glass
Ceiling Commission's business recommendations, unless:

The composition of senior management and the board is fairly inclusive;
The company has well-documented programs addressing diversity
initiatives and leadership development;
The company already issues public reports on its company-wide affirmative
initiatives and provides data on its workforce diversity; and
The company has had no recent, significant EEO-related violations or litigation.

SEXUAL ORIENTATION

Vote FOR proposals seeking to amend a company's EEO statement in order to
prohibit discrimination based on sexual orientation, unless the change would
result in excessive costs for the company.

Vote AGAINST proposals to extend company benefits to or eliminate benefits from
domestic partners. Benefits decisions should be left to the discretion of the
company.

10. MUTUAL FUND PROXIES
ELECTION OF DIRECTORS

Vote CASE-BY-CASE on the election of directors and trustees, following the same
guidelines for uncontested directors for public company shareholder meetings.
However, mutual fund boards do not usually have compensation committees, so do
not withhold for the lack of this committee.

CONVERTING CLOSED-END FUND TO OPEN-END FUND

Vote CASE-BY-CASE on conversion proposals, considering the following factors:
Past performance as a closed-end fund;
Market in which the fund invests;
Measures taken by the board to address the discount; and
Past shareholder activism, board activity, and votes on related
proposals.

PROXY CONTESTS

Vote CASE-BY-CASE on proxy contests, considering the following factors:

Past performance relative to its peers;
Market in which fund invests;
Measures taken by the board to address the issues;
Past shareholder activism, board activity, and votes on related proposals;
Strategy of the incumbents versus the dissidents;
Independence of directors; Experience and skills of director candidates;
Governance profile of the company;
Evidence of management entrenchment.

INVESTMENT ADVISORY AGREEMENTS

Vote CASE-BY-CASE on investment advisory agreements, considering the following
factors:
Proposed and current fee schedules;
Fund category/investment objective;
Performance benchmarks; Share price performance as compared with peers;
Resulting fees relative to peers;
Assignments (where the advisor undergoes a change of control).

APPROVING NEW CLASSES OR SERIES OF SHARES

Vote FOR the establishment of new classes or series of shares.

PREFERRED STOCK PROPOSALS

Vote CASE-BY-CASE on the authorization for or increase in preferred shares,
considering the following factors:
Stated specific financing purpose;
Possible dilution for common shares;
Whether the shares can be used for antitakeover purposes.

1940 ACT POLICIES

Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940,
considering the following factors:
Potential competitiveness; Regulatory developments; Current and
potential returns; and Current and potential risk.

Generally vote FOR these amendments as long as the proposed changes do not
fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.

CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION

Vote CASE-BY-CASE on proposals to change a fundamental restriction to a
non-fundamental restriction, considering the following factors:
The fund's target investments;
The reasons given by the fund for the change; and
The projected impact of the change on the portfolio.

CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL

Vote AGAINST proposals to change a fund's fundamental investment objective to
non-fundamental.

NAME CHANGE PROPOSALS

Vote CASE-BY-CASE on name change proposals, considering the following factors:
Political/economic changes in the target market;
Consolidation in the target market; and
Current asset composition.

CHANGE IN FUND'S SUBCLASSIFICATION

Vote CASE-BY-CASE on changes in a fund's sub-classification, considering the
following factors:
Potential competitiveness;
Current and potential returns;
Risk of concentration;
Consolidation in target industry.

DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION

Vote CASE-BY-CASE on proposals to dispose of assets, to terminate or liquidate,
considering the following factors:
Strategies employed to salvage the company;
The fund's past performance;
The terms of the liquidation.

CHANGES TO THE CHARTER DOCUMENT

Vote CASE-BY-CASE on changes to the charter document, considering the following
factors:
The degree of change implied by the proposal;
The efficiencies that could result;
The state of incorporation;
Regulatory standards and implications.

Vote AGAINST any of the following changes:
Removal of shareholder approval requirement to reorganize or terminate the trust
or any of its series;
Removal of shareholder approval requirement for amendments to the new
declaration of trust;
Removal of shareholder approval requirement to amend the fund's management
contract, allowing the contract to be modified by the investment manager and the
trust management, as permitted by the 1940 Act;
Allow the trustees to impose other fees in addition to sales charges on
investment in a fund, such as deferred sales charges and redemption fees that
may be imposed upon redemption of a fund's shares;
Removal of shareholder approval requirement to engage in and terminate
subadvisory arrangements;
Removal of shareholder approval requirement to change the domicile of the fund.

CHANGING THE DOMICILE OF A FUND

Vote CASE-BY-CASE on re-incorporations, considering the following factors:

Regulations of both states;
Required fundamental policies of both states;
The increased flexibility available.

AUTHORIZING THE BOARD TO HIRE AND TERMINATE SUBADVISORS WITHOUT SHAREHOLDER
APPROVAL

Vote AGAINST proposals authorizing the board to hire/terminate subadvisors
without shareholder approval.

DISTRIBUTION AGREEMENTS

Vote CASE-BY-CASE on distribution agreement proposals, considering the following
factors:
Fees charged to comparably sized funds with similar objectives;
The proposed distributor's reputation and past performance;
The competitiveness of the fund in the industry;
The terms of the agreement.

MASTER-FEEDER STRUCTURE

Vote FOR the establishment of a master-feeder structure.

MERGERS

Vote CASE-BY-CASE on merger proposals, considering the following factors:
Resulting fee structure;
Performance of both funds;
Continuity of management personnel;
Changes in corporate governance and their impact on shareholder rights.

SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS

ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT

Generally vote AGAINST shareholder proposals that mandate a specific minimum
amount of stock that directors must own in order to qualify as a director or to
remain on the board.

REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED

Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation
expenses. When supporting the dissidents, vote FOR the reimbursement of the
proxy solicitation expenses.

TERMINATE THE INVESTMENT ADVISOR

Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering
the following factors:
Performance of the fund's Net Asset Value (NAV);
The fund's history of shareholder relations;
The performance of other funds under the advisor's management.

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

1. All investment decisions for the registrant, as well as other
investment strategies of Gallatin Asset Management, Inc. ("Gallatin"),
are made utilizing a team approach by which no one member can make
decisions unilaterally. All portfolios are developed based on research
conducted internally by Gallatin's research committee which is
comprised of ten members, including portfolio managers which all serve
as security analysts also. Each member of the research committee has
general sector/industry areas of concentration and is responsible for
making security recommendations to the research committee. The research
team generally meets a couple times each week to discuss new security
recommendations, new security ideas in progress, as well as securities
already held in any of the portfolio models.

2. Once a new security has been approved by the research committee, the
Portfolio Management Team for the registrant, comprised of the
following three portfolio managers, is responsible for reviewing the
appropriateness and fit of every new security that has been approved
for investment by the research committee.

3. Mark A. Keller - Mark serves as President and Chief Investment
Officer for Gallatin and chairman of this Registrant's Management Team.
Gallatin was a wholly owned subsidiary of A.G. Edwards, Inc. until
October 1, 2007 when A.G. Edwards, Inc. merged into Wachovia Corp.
Following the merger, Gallatin is a separate registered investment
advisor under Wachovia Corp. and its investment management division,
Evergreen Investments. Evergreen Investments is a global, multi-advisor
investment firm with more than $285 billion in assets under management
(as of September 30, 2007), providing a comprehensive suite of
investment strategies and products to institutional and individual
investors around the world. As part of A.G. Edwards, Mark led the
separately managed accounts program since 1994 and has continued in
this capacity, as part of Gallatin. Mark has chaired the A.G. Edwards'
Investment Strategy Committee since 1999. Prior to 1994, Mark served
for 15 years in A.G. Edwards' Securities Research Department as an
analyst covering a variety of industries. During his last five years in
Securities Research, he served as equity strategist and manager of the
firm's Focus List. As chairman of the Management Team, Mark has overall
responsibility for oversight of the investment process which includes
security research, portfolio development and implementation.

4. David B Miyazaki - David serves as an equity portfolio manager for
Gallatin as well as serving as a member of A.G. Edwards' Investment
Strategy Committee. One of David's security research focuses since
joining A.G. Edwards in 1999, and then at Gallatin after its formation
as a separate wholly owned subsidiary of A.G. Edwards, Inc. in October
2005, has been in the area of BDC's and REITS. Prior to joining A.G.
Edwards in 1999, David worked with high net worth investment portfolios
and administered corporate retirement assets for Koch Industries in
Wichita, Kan. His previous experience includes investment analysis for
an institutional buyer of private placement debt, mezzanine lending and
mortgage-backed securities trading for a regional firm in Dallas,
Texas.

5. Daniel T. Winter - Dan serves as an equity portfolio manager for
Gallatin and directs the daily trading for Gallatin's equity
portfolios. He has served in the capacity of portfolio manager since
1992, first for A.G. Edwards Trust Co., then with the firm's separately
managed accounts department. Since joining the firm's separately
managed accounts department, one of Dan's research focuses has been in
the financial sector including lending institutions and insurance.

OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER AND
POTENTIAL CONFLICTS OF INTEREST

OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER

# of Accounts Total Assets
Managed for which for which
Name of Portfolio Advisory Fee is Advisory Fee
Manager or Total # of Accounts Based on is Based on
Team Member Type of Accounts* Managed Total Assets Performance Performance

1. MARK A. KELLER Registered Investment 2 $500.6 0 n/a
--------------- Companies: million

Other Pooled Investment 11 $37.9 0 n/a
Vehicles: million

Other Accounts: 48,760 $7.7 0 n/a
billion

2. DAVID B. MIYAZAKI Registered Investment 2 $500.6 0 n/a
----------------- Companies: million

Other Pooled Investment 11 $37.9 0 n/a
Vehicles: million

Other Accounts: 48,760 $7.7 0 n/a
billion

3. DANIEL T. WINTER Registered Investment 2 $500.6 0 n/a
------------------ Companies: million

Other Pooled Investment 11 $37.9 0 n/a
Vehicles: million

Other Accounts: 48,760 $7.7 0 n/a
billion

Information provided as of November 30, 2007

POTENTIAL CONFLICTS OF INTERESTS

Gallatin recognizes its fiduciary responsibility as an adviser which requires a
duty of loyalty to all of its clients, including the Registrant. Such duty
requires that the adviser act in the best interest of all its clients and always
place the clients' interests first and foremost. Acknowledging this, Gallatin
has adopted policies and procedures to mitigate conflicts of interests that
could arise because members of the Registrant's management team also manage
other equity portfolios where similar investments to those of the Registrant,
are appropriate. These conflicts could include such things as: the allocation of
investment opportunities amongst clients, employee trading, implementation and
proxy voting.

ALLOCATION OF INVESTMENT OPPORTUNITIES: At times it is possible that security
----------------------------------------
ideas developed and approved by the research committee are potentially
appropriate for more than one of Gallatin's equity strategies. In these
instances, it is the portfolio management team's responsibility to review all of
the possible strategies to determine in which strategies the addition of the
security is appropriate. The portfolio management team looks at many factors
starting with a review of the current holdings in each of the possible
strategies to first determine if there is room (or available cash) for another
security in the strategy. They also compare the new security to similar
securities already held in the model to determine if the new security is more or
less attractive than what is already held, as well as sector weightings within
the strategy. At times the portfolio management team may decide that a new
security would be an equally attractive addition to more than one of its
strategies, in which case it is added to both. It is also possible that
continuously changing factors (such as a sale of a similar security) in an
equity strategy will cause the portfolio management team to add a security to a
second or additional strategy, at a later date.

EMPLOYEE TRADING - When advisory employees invest for their own accounts,
-----------------
conflicts of interest could arise between the Registrant's and the employee's
interests. Potential conflicts would include taking an investment opportunity
from the Registrant for an employee's own portfolio, using an employee's
advisory position to take advantage of available investments, or front running
(which may be an employee trading before making Registrant transactions, thereby
taking advantage of information or using Registrant portfolio assets to have an
effect on the market which is used to the employee's benefit). This potential
conflict exists because employees within Gallatin are responsible not only for
the research and selection of securities for the Registrant but also for the
trading and implementation for the Registrant. To mitigate such potential
conflicts, Gallatin has adopted stringent policies and procedures for trading by
its personnel which includes a trade pre-approval process that must occur BEFORE
trades in non-exempt securities may be placed, a black-out period for purchases,
as well as "last-in, last-out" provisions for sales of securities held in client
portfolios.

The supervision of trading in employee or related accounts is the responsibility
of the Chief Investment Officer and is affected through daily reviews of trades
in employee and family accounts, as well as initial holdings reviews for new
employees, and quarterly holding and transaction reviews. Reports utilized by
the CIO for purposes of supervision are dated and initialed, then filed in a
secure file to meet evidence and recordkeeping requirements.

PROXY VOTING - Gallatin retains the services of an unaffiliated third-party
-------------
proxy-voting agent to monitor corporate actions, analyze proxy voting issues and
provide voting recommendations and execute proxy votes based on its
predetermined voting policy. This predetermined voting policy is predicated on
general proxy-voting guidelines, which have been adopted by Gallatin Asset
Management. These guidelines are reviewed periodically by the Gallatin Proxy
Committee and are subject to change.

Because proxy issues and the circumstances of individual companies are so
varied, there may be rare situations when Gallatin may determine it appropriate
to deviate from these guidelines. As in all other cases, Gallatin has a
fiduciary duty to vote these proxies in what it believes to be the best interest
of the clients. However, Gallatin may occasionally be subject to conflicts of
interest in voting proxies due to business or personal relationships with
persons or entities having an interest in the outcome of certain votes. For
example, an affiliate company may provide custody, investment management,
brokerage, investment banking and related services to accounts owned or
controlled by companies whose management is soliciting proxies. Additionally,
Gallatin may have business or personal relationships with other proponents of
proxy proposals, corporate directors or candidates for directorship.

In instances where Gallatin determines it appropriate to deviate from the
pre-determined voting policy, it has adopted due diligence policies and
procedures to take reasonable steps to identify possible conflicts of interest
that could bias its voting decision. With respect to identifying possible
conflicts of interest resulting from BUSINESS RELATIONSHIPS, Gallatin's policies
and procedures include steps to determine whether any of the companies
(including their executive officers) involved in the proxy votes have accounts
or relationships with an affiliate or their immediate family members, before a
vote may be changed.

IMPLEMENTATION: Gallatin has adopted policies and procedures by which trades are
--------------
aggregated and blocked across all portfolios whenever possible and clients
received an average price if the block is executed at multiple prices. Partially
executed trades are allocated using a computer generated, total random process.

In those cases where it is not possible to aggregate all orders of the same
security, Gallatin has adopted a trade rotation procedure for all of its
discretionary clients that it feels are fair and equitable to all clients with
no client being favored or disfavored over any other group.

Supervision of Gallatin's allocation processes is the responsibility of the
Gallatin Best Execution Committee, which is chaired by the Chief Investment
Officer and is comprised of equity and fixed income portfolio managers, as well
as implementation staff. The committee meets on a quarterly basis to review Best
Execution practices and is evidenced by meeting minutes.

COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS

Gallatin seeks to maintain a highly competitive compensation program designed to
attract and retain qualified investment professionals, which includes portfolio
managers and research analysts, and to align the interests of its investment
professionals with that of its clients and overall firm results. The principal
components of compensation for portfolio managers include a base salary, annual
bonus, restricted stock, annual discretionary merit cash and stock bonus, and
various retirement benefits including contributions to 401(k) plan and excess
profit sharing plan.

Compensation is based on a number of subjective factors, including overall
contribution of the employee to the firm and the department, and is not tied to
the performance of the Registrant.

DISCLOSURE OF SECURITIES OWNERSHIP

Information provided as of November 30, 2007

Dollar Range of Fund Shares
Name Beneficially Owned

Mark A. Keller $0
David B. Miyazaki $10,001 - $50,000
Daniel T. Winter $0

(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, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.

ITEM 11. CONTROLS AND PROCEDURES.

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

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

ITEM 12. EXHIBITS.

(a)(1) 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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

(registrant) FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES
FUND

By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)

Date JANUARY 24, 2008
----------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Date JANUARY 24, 2008
----------------------------------------------------------------------------

By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief Financial
Officer and Chief Accounting Officer
(principal financial officer)

Date JANUARY 24, 2008
----------------------------------------------------------------------------

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