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 811-21842
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First Trust Strategic High Income Fund II
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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: October 31
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Date of reporting period: October 31, 2007
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.

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

ITEM 1. REPORTS TO STOCKHOLDERS.

The Report to Shareholders is attached herewith.

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FIRST TRUST STRATEGIC HIGH INCOME FUND II
ANNUAL REPORT
FOR THE YEAR ENDED OCTOBER 31, 2007
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TABLE OF CONTENTS
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
ANNUAL REPORT
OCTOBER 31, 2007

Shareholder Letter ........................................................ 1
Portfolio Commentary ...................................................... 2
Portfolio Components ...................................................... 4
Portfolio of Investments .................................................. 5
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statements of Changes in Net Assets ....................................... 12
Statement of Cash Flows ................................................... 13
Financial Highlights ...................................................... 14
Notes to Financial Statements ............................................. 15
Report of Independent Registered Public Accounting Firm ................... 21
Additional Information .................................................... 22
Board of Trustees and Officers ............................................ 25

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Forward-looking
statements include statements regarding the goals, beliefs, plans or current
expectations of First Trust Advisors L.P. (the "Advisor") and/or Valhalla
Capital Partners, LLC ("Valhalla" 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 Strategic High Income Fund II (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 the Advisor and/or
Valhalla 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 objective. 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 relevant market
benchmarks.

It is important to keep in mind that the opinions expressed by personnel of
Valhalla 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 STRATEGIC HIGH INCOME FUND II (FHY)
ANNUAL REPORT
OCTOBER 31, 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 Strategic High Income Fund II (the "Fund") for the 12-month period
ended October 31, 2007. Adverse conditions in the credit markets have had a
significant negative impact on the Fund's net asset value as described in this
report. Such conditions have continued beyond the Fund's year-end of October 31,
2007 and and through the date of this letter. The Fund's net asset value per
share has declined from $16.31 at year end to $13.84 on December 28, 2007. First
Trust and the Fund's sub-adviser, Valhalla Capital Partners, LLC, will continue
to monitor market conditions and strive to position the Fund's portfolio to
maximize shareholder value. 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 Strategic High Income Fund II
December 28, 2007

Page 1

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PORTFOLIO COMMENTARY
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SUB-ADVISOR

Valhalla Capital Partners, LLC ("Valhalla" or the "Sub-Advisor"), the
sub-advisor to First Trust Strategic High Income Fund II, is a boutique asset
management firm focused on managing high-yield portfolios with an emphasis on
structured finance securities. Valhalla was founded in 2005 and is currently
managed by its Managing Partners, Ken L. Mathis, Ramond P. Mecherle, CFA, and
Justin L. Ventura. Valhalla is a Kentucky limited liability company located at
2527 Nelson Miller Parkway, Suite 207, Louisville, Kentucky 40223. As of October
31, 2007, Valhalla had approximately $550 million in assets under management.

PORTFOLIO MANAGEMENT TEAM

MR. RAMOND P. MECHERLE, CFA, PORTFOLIO MANAGER

Mr. Ramond P. Mecherle, CFA, is a founding Managing Partner of Valhalla. He has
nine years of experience in the financial industry. Mr. Mecherle currently
serves as Co-Manager of First Trust Strategic High Income Fund (New York Stock
Exchange ("NYSE"): FHI), First Trust Strategic High Income Fund II (NYSE: FHY)
and First Trust Strategic High Income Fund III (NYSE: FHO). Mr. Mecherle was a
dual employee of Hilliard Lyons Asset Management and Valhalla from Valhalla's
inception in 2005 through April 2006. From October 2004 to April 2006, Mr.
Mecherle was employed by Hilliard Lyons Asset Management as Director of Fixed
Income and Co-Manager of FHI. Prior to that, Mr. Mecherle was employed by Morgan
Keegan Asset Management for seven years. There, Mr. Mecherle was an Assistant
Portfolio Manager for three high-yield funds including the Regions Morgan Keegan
Select High Income Fund (MKHIX), an open-end fund; RMK High Income Fund (NYSE:
RMH), a closed-end fund; RMK Strategic Income Fund (NYSE: RSF), a closed-end
fund; and separate accounts. Mr. Mecherle received a B.A. from the University of
Virginia and an M.B.A. from the Johnson Graduate School of Management, Cornell
University.

MR. JUSTIN L. VENTURA, PORTFOLIO MANAGER

Mr. Justin L. Ventura is a founding Managing Partner of Valhalla. He has
fourteen years of experience in the financial industry. Mr. Ventura currently
serves as Co-Manager of First Trust Strategic High Income Fund (NYSE: FHI),
First Trust Strategic High Income Fund II (NYSE: FHY) and First Trust Strategic
High Income Fund III (NYSE: FHO). Mr. Ventura was a dual employee of Hilliard
Lyons Asset Management and Valhalla from Valhalla's inception in 2005 through
April 2006. From June 2005 to April 2006, Mr. Ventura was employed by Hilliard
Lyons Asset Management as Co-Manager of FHI. Prior to that, Mr. Ventura was
employed by State Street Bank for six years as Vice President, Capital Markets
Portfolio/ABS-MBS-CDO Sectors. Mr. Ventura began his career with Fitch IBCA,
Inc. where he worked for five years and was a Director of Structured
Finance/Mortgage and Asset-Backed Securities. Mr. Ventura received a B.A. from
the University of Massachusetts and a J.D. from George Mason School of Law.

FIRST TRUST STRATEGIC HIGH INCOME FUND II

The primary investment objective of the First Trust Strategic High Income Fund
II (FHY) is to seek a high level of current income. The Fund seeks capital
growth as a secondary objective. The Fund seeks to achieve its investment
objectives by investing in a diversified portfolio of below-investment grade and
investment grade debt securities and equity securities that the Sub-Advisor
believes offer attractive yield and/or capital appreciation potential. There can
be no assurance that the Fund will achieve its investment objectives. The Fund
may not be appropriate for all investors.

MARKET RECAP

The six months ending October 31, 2007 have been the most treacherous the
worldwide credit markets have seen in at least a decade, and perhaps ever. The
problems that began earlier in the year in the sub-prime mortgage space spread
to affect virtually every segment of the capital markets. Unprecedented supply
and demand imbalances, combined with outright fear, drove prices down across the
credit sectors, including corporate debt. In addition, the media focus that
began last quarter intensified, generating waves of negative stories which
frequently contained as much conjecture as they did fact. In short, by the end
of the quarter, volatility and illiquidity had reached unprecedented levels in
the structured-finance universe. Due to these adverse market conditions, in
early August the Sub-Advisor adopted a temporary defensive posture. While in
such posture, the Fund curtailed its purchase of additional structured-finance
securities, including residential mortgage-backed securities ("RMBS").

Page 2

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PORTFOLIO COMMENTARY (CONTINUED)
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FUND PROFILE AT 10/31/07

FHY LEHMAN BA INDEX
Wtd. Avg. Yield-to-Maturity 11.07% 7.67%
Wtd. Avg. Effective Maturity 5.25 yrs 7.94 yrs
Wtd. Avg. Credit Quality B BB/BB+

FUND RECAP

The Fund was not immune to the massive downdraft in pricing across the credit
sectors. The Fund's net asset value ("NAV") total return was -9.92% (1) for the
twelve-month period ended October 31, 2007. The months of August and September
were the most severe. Not surprisingly, RMBS experienced the greatest price
pressure; however, virtually every asset class in the Fund produced negative
price performance during the second half of the period. In the end, it was the
Fund's diversification across multiple asset-backed sectors that helped offset
the severe price declines in RMBS. These negative market conditions, along with
investor fear, also punished the Fund's market price total return, which was
- -19.21% (2) for the twelve-month period covered by this report. Since the Fund's
fiscal year-end, the credit markets have continued to experience significant
volatility. These difficult conditions have continued to pressure market prices
and have caused a significant decline in the Fund's NAV through December 28,
2007. The duration of this difficult time period is uncertain.

FUND PERFORMANCE FOR PERIOD ENDING 10/31/07

FHY FHY LEHMAN BA
DATES NAV TOTAL RETURN 1 MARKET TOTAL RETURN 2 INDEX
----- ------------------ --------------------- ---------
One Year -9.92% -19.21% 5.29%
Inception-to-Date -0.80% -12.00% 10.98%

MANAGER'S Q&A

HOW DID THE NEGATIVE FACTORS IN THE CREDIT MARKETS HURT THE MARKET?

The negative momentum, which started in the second quarter, picked up tremendous
speed over the months of July and August and continued through the Fund's Fiscal
year ended October 31, 2007. Rating agencies announced that billions of dollars
of mortgage-backed securities were being put on watch for a downgrade. In
addition, continued forced liquidations dramatically increased the amount of
bonds offered in the secondary market, often without any bid available. These
trends significantly affected high-yield fixed-income pricing and set the table
for the subsequent meltdown. Over the next ten weeks, several prominent banks
around the world faced insolvency crises; central banks would inject billions
into the financial system; the commercial paper markets would seize up; the
Federal Reserve would cut both the discount rate and the Fed Funds rate; and
Wall Street would begin to announce billions of dollars of write-downs. We
believe these events, among others, unleashed destructive forces in the mortgage
and asset-backed sectors.

WHAT IS YOUR OUTLOOK FOR THE MARKET AND THE FUND?

Today, market participants are eagerly awaiting a return to normalcy in both
secondary-market trading and primary issuance. This will be critical to ending
this capital-market crisis and restoring a normal mortgage-lending environment.
We believe the latter is an especially important variable in the Fund's
longer-term performance for one simple reason: individual mortgage obligors of
all types must have re-financing options. Without that liquidity in place, the
capital markets will continue to struggle. In our opinion, most of the economic
data shows the economy remains on solid footing, albeit with slower growth
projected. With that intact, we believe the markets should be able to push
through the storm and eventually re-establish liquidity for both the mortgage
investor and borrower alike.

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1 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 in NAV per
share and does not reflect sales load.

2 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.

Page 3

FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO COMPONENTS (a)
OCTOBER 31, 2007

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

Manufactured Housing 20.1%
Residential Mortgage-Backed Securities 19.8%
Collateralized Debt Obligations 20.0%
Franchise 17.2%
Corporate Bonds 10.0%
Equity 5.4%
Commercial Mortgage-Backed Securities 6.0%
Equipment Lease Receivables 1.5%

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

Page 4 See Notes to Financial Statements

FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS (a)
OCTOBER 31, 2007

PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
- ----------- ----------------------------------------------------------------- -------- ---------- ------------

ASSET-BACKED SECURITIES - 86.8%
ABCLO, Ltd.
$ 1,500,000 Series 2007-1A, Class D (b) (c) .............................. 9.14% 04/15/21 $ 1,117,500
ACE Securities Corp., Home Equity Loan Trust
2,171,143 Series 2004-HE4, Class M11 (c) ............................... 8.37% 12/25/34 535,361
3,000,000 Series 2007-HE4, Class M8 (c) ................................ 7.37% 05/25/37 1,057,500
ACLC Business Loan Receivables Trust
5,000,000 Series 1998-2, Class B (b) ................................... 6.85% 04/15/20 4,844,697
2,499,845 Series 1999-2, Class B (b) ................................... 8.75% 01/15/21 2,536,192
1,499,907 Series 1999-2, Class D (b) ................................... 9.35% 01/15/21 1,541,164
Argent Securities, Inc.
3,510,996 Series 2004-PW1, Class M10 (b) (c) ........................... 8.38% 06/25/34 1,087,717
Asset Backed Securities Corp. Home Equity
Loan Trust
2,000,000 Series 2005-HE2, Class M8 (c) (d) ............................ 7.37% 02/25/35 1,607,650
Atherton Franchisee Loan Funding
5,520,342 Series 1999-A, Class A2 (b) .................................. 7.23% 04/15/12 5,658,666
BankAmerica Manufactured Housing Contract Trust II
2,300,000 Series 1997-1, Class B1 ...................................... 6.94% 06/10/21 1,145,446
Bear Stearns Asset Backed Security Trust
5,103,000 Series 2007-HE3, Class M9 (c) ................................ 7.12% 04/25/37 2,041,200
Bear Stearns Second Lien Trust
2,404,000 Series 2007-1, Class 2B1 (c) ................................. 7.87% 08/25/37 601,000
2,000,000 Series 2007-1, Class 2M6 (c) ................................. 7.87% 08/25/37 800,000
BNC Mortgage Loan Trust
3,000,000 Series 2007-2, Class B1 (b) (c) .............................. 7.37% 05/25/37 1,650,000
2,000,000 Series 2007-3, Class B2 (b) (c) .............................. 7.37% 07/25/37 1,300,000
Bombardier Capital Mortgage Securitization Corp.
704,530 Series 1999-B, Class A3 ...................................... 7.18% 12/15/15 462,723
Captec Franchise Trust
5,413,119 Series 1999-1, Class D (b) ................................... 8.63% 01/25/13 1,043,264
Citigroup Mortgage Loan Trust, Inc.
2,301,000 Series 2003-HE3, Class M4 (c). ............................... 7.87% 12/25/33 426,862
Conseco Finance Securitizations Corp.
4,350,097 Series 1999-6, Class M1 (d) .................................. 7.96% 06/01/30 409,215
1,700,000 Series 2001-3, Class M1 ...................................... 7.15% 05/01/33 928,883
3,000,000 Series 2002-2, Class M2 ...................................... 9.16% 03/01/33 2,806,231
EMAC Owner Trust, LLC
3,641,481 Series 1998-1, Class A3 (b). ................................. 6.63% 01/15/25 3,459,407
3,885,897 Series 2000-1, Class A1 (b) .................................. 6.50% 01/15/27 2,914,423
4,622,258 Series 2000-1, Class A2 (b) .................................. 6.50% 01/15/27 3,466,693
Encore Credit Receivables Trust
3,000,000 Series 2005-4, Class M11 (b) (c) ............................. 7.37% 01/25/36 1,200,000
FMAC Loan Receivables Trust
1,588,046 Series 1996-B, Class A2 (b) (c) .............................. 6.13% 11/15/18 1,270,436
1,520,000 Series 1997-A, Class B (b) ................................... 7.66% 04/15/19 1,520,126
16,841,675 Series 1997-C, Class AX (b) (h) .............................. 1.95% 12/15/19 1,094,709
6,000,000 Series 1998-CA, Class A3 (b) ................................. 6.99% 09/15/20 5,400,000

See Notes to Financial Statements Page 5

FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2007

PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
- ----------- ----------------------------------------------------------------- -------- ---------- ------------

ASSET-BACKED SECURITIES - (CONTINUED)
Green Tree Financial Corp.
$ 1,744,908 Series 1995-6, Class B1 ...................................... 7.70% 09/15/26 $ 1,495,597
2,233,899 Series 1996-6, Class B1 ...................................... 8.00% 09/15/27 668,196
2,000,000 Series 1997-3, Class M1 ...................................... 7.53% 03/15/28 1,459,341
8,500,000 Series 1998-6, Class M1 ...................................... 6.63% 06/01/30 5,054,440
1,000,000 Series 1998-8, Class M1 ...................................... 6.98% 09/01/30 590,106
18,149,627 Series 1999-4, Class M1 ...................................... 7.60% 05/01/31 2,777,058
23,074,497 Series 1999-5, Class M1 ...................................... 8.05% 03/01/30 2,368,269
GreenPoint Manufactured Housing Contract Trust
11,000,000 Series 1999-5, Class M2 ...................................... 9.23% 12/15/29 5,643,720
Halyard Multi Asset CBO I, Ltd.
3,396,241 Series 1A, Class B (b) (c) ................................... 6.52% 03/24/10 2,513,218
Helios Series I Multi Asset CBO, Ltd.
9,317,203 Series 1A, Class C (b) (c) ................................... 8.15% 12/13/36 2,608,817
Home Equity Mortgage Trust
4,000,000 Series 2007-2, Class M4 (c) .................................. 7.37% 06/25/37 480,000
IMC Home Equity Loan Trust
3,086,972 Series 1997-3, Class B ....................................... 7.87% 08/20/28 948,662
4,542,493 Series 1997-5, Class B ....................................... 7.59% 11/20/28 1,218,139
Independence lll CDO, Ltd.
2,000,000 Series 3A, Class C1 (b) (c) .................................. 7.73% 10/03/37 1,100,000
Liberty Square CDO, Ltd.
2,100,000 Series 2001-1X, Class C (b) (c) .............................. 7.30% 04/15/13 1,659,000
Longhorn CDO, Ltd.
1,873,379 Series 1, Class C (b) (c) .................................... 11.63% 05/10/12 1,217,697
Madison Avenue Manufactured Housing
16,333,000 Contract Trust Series 2002-A, Class B2 (c) ................... 8.12% 03/25/32 6,153,244
Merit Securities Corp.
8,506,000 Series 13, Class M2 .......................................... 8.65% 12/28/33 3,487,460
Merrill Lynch Mortgage Investors Trust
2,500,000 Series 2006-SL1, Class B4 (b) ................................ 7.50% 09/25/36 500,000
Morgan Stanley ABS Capital I, Inc.
791,842 Series 2004-NC5, Class B4 (c) (d) ............................ 7.74% 05/25/34 220,303
North Street Referenced Linked Notes
5,000,000 Series 2000-1A, Class B (b) (c) .............................. 6.03% 04/28/11 4,050,000
7,000,000 Series 2000-1A, Class D1 (b) (c) ............................. 7.58% 04/28/11 4,760,000
Oakwood Mortgage Investors, Inc.
1,746,232 Series 1999-B, Class M1 ...................................... 7.18% 12/15/26 386,732
2,587,794 Series 2001-C, Class A3 ...................................... 6.61% 02/15/21 1,632,655
3,000,000 Series 2002-B, Class M1 ...................................... 7.62% 06/15/32 1,513,621
Park Place Securities, Inc.
4,000,000 Series 2004-WCW1, Class M9 (c) (d) ........................... 8.37% 09/25/34 2,458,975
5,250,000 Series 2005-WCH1, Class M10 (c) (d) .......................... 7.37% 01/25/36 3,652,827
Pebble Creek LCDO, Ltd.
1,500,000 Series 2007-2A, Class E (b) (c) .............................. 8.46% 06/22/14 1,125,000
Pegasus Aviation Lease Securitization III
3,581,763 Series 2001-1A, Class A3 (b) (c) ............................. 5.80% 03/10/14 3,008,681

Page 6 See Notes to Financial Statements

FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2007

PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
- ----------- ----------------------------------------------------------------- -------- ---------- ------------

ASSET-BACKED SECURITIES - (CONTINUED)
Rosedale CLO, Ltd.
$ 4,000,000 Series I-A, Class II (b) ..................................... 0.00% 07/24/21 $ 3,000,000
Signature 5, Ltd.
1,000,000 Series 5A, Class C (b) ....................................... 12.56% 10/27/12 960,000
Soundview Home Equity Loan Trust
1,304,000 Series 2006-OPT1, Class M9 (b) (c) ........................... 7.37% 03/25/36 371,118
1,884,000 Series 2007-OPT3, Class M10 (b) (c) .......................... 7.37% 08/25/37 659,400
Structured Asset Securities Corp.
3,000,000 Series 2002-HF2, Class M3 (c) ................................ 6.87% 07/25/32 2,460,705
1,203,286 Series 2004-S3, Class M9 (d) ................................. 6.00% 11/25/34 379,784
5,032,000 Series 2005-S6, Class B2 (b) (c) ............................. 7.37% 11/25/35 280,065
3,527,000 Series 2007-BC3, Class B1 (b) (c) ............................ 7.37% 05/25/47 1,939,850
2,000,000 Series 2007-OSI, Class M10 (c) ............................... 7.37% 06/25/37 800,000
UCFC Manufactured Housing Contract
913,000 Series 1996-1, Class M ....................................... 7.90% 01/15/28 812,054
2,000,000 Series 1998-3, Class M1 ...................................... 6.51% 01/15/30 800,000
Wilbraham CBO, Ltd.
3,000,000 Series 1A, Class A2 (b) (c) .................................. 6.05% 07/13/12 2,610,000
------------
TOTAL ASSET-BACKED SECURITIES ......................................................... 133,751,799
(Cost $156,303,231) ------------

COLLATERALIZED MORTGAGE OBLIGATIONS - 7.3%
Countrywide Alternative Loan Trust
3,983,519 Series 2005-56, Class B4 (b) (c) ............................. 6.12% 11/25/35 1,394,232
3,136,141 Series 2006-OA2, Class B2 (c) ................................ 7.25% 05/20/46 1,473,986
Countrywide Home Loans, Inc., Pass-Through
1,311,483 Certificates Series 2004-23, Class B4 (c) .................... 6.12% 11/25/34 1,088,531
Deutsche Alt-A Securities, Inc. Mortgage Loan Trust
3,000,000 Series 2007-OA4, Class M10 (c) ............................... 7.87% 08/25/47 1,427,343
HarborView Mortgage Loan Trust
1,755,504 Series 2004-2, Class B5 (c) .................................. 6.02% 06/19/34 1,527,288
1,461,961 Series 2004-8, Class B5 (c) .................................. 6.27% 11/19/34 1,264,596
Washington Mutual Pass-Through Certificates
4,148,938 Series 2006-AR2, Class B13 (b) (c) ........................... 6.08% 04/25/46 1,991,490
1,392,493 Series 2006-AR4, Class B13 (b) (c) ........................... 6.07% 05/25/46 668,397
3,483,903 Series 2006-AR4, Class B14 (b) (c) ........................... 6.07% 05/25/46 435,488
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS ............................................. 11,271,351
(Cost $ 14,387,082) ------------

See Notes to Financial Statements Page 7

FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2007

PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
- ----------- ----------------------------------------------------------------- -------- ---------- ------------

COMMERCIAL MORTGAGE-BACKED SECURITIES - 7.9%
Banc of America Large Loan, Inc.
$ 1,000,000 Series 2005-MIB1, Class L (b) (c) ............................ 8.09% 03/15/22 $ 973,690
CS First Boston Mortgage Securities Corp.
315,027 Series 1995-WF1, Class G (b) ................................. 8.57% 12/21/27 316,858
FannieMae-ACES
14,879,881 Series 1998-M7, Class N, IO (g) (h) .......................... 0.60% 05/25/36 301,020
GE Capital Commercial Mortgage Corp.
955,269 Series 2000-1, Class G (b) ................................... 6.13% 01/15/33 861,123
Government National Mortgage Association
81,459,975 Series 2001-44, Class IO, IO (h) ............................. 0.59% 07/16/41 1,736,083
40,754,874 Series 2003-59, Class XA, IO (h) ............................. 1.69% 06/16/34 3,434,487
LB-UBS Commercial Mortgage Trust
4,948,309 Series 2001-C7, Class S (b) .................................. 5.87% 11/15/33 2,489,500
Morgan Stanley Capital I, Inc.
5,000,000 Series 2003-IQ5, Class O (b) ................................. 5.24% 04/15/38 2,014,265
------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES ........................................... 12,127,026
(Cost $16,165,064) ------------

CORPORATE BONDS AND NOTES - 13.1%
3,000,000 Americast Technologies, Inc. (b) ................................ 11.00% 12/01/14 2,925,000
1,000,000 Coleman Cable, Inc. ............................................. 9.88% 10/01/12 990,000
2,500,000 Dayton Superior Corp. ........................................... 13.00% 06/15/09 2,487,500
2,000,000 Interdent Service Corp. ......................................... 10.75% 12/15/11 1,850,000
1,000,000 International Coal Group, Inc. .................................. 10.25% 07/15/14 975,000
3,000,000 Key Plastics LLC (b) ............................................ 11.75% 03/15/13 2,565,000
1,500,000 Lexington Precision Corp., Units (i) ............................ N/A 08/01/09 1,455,000
2,500,000 MSX International UK, MXS International
Business Service FR/MXS International
GmBH (b) ..................................................... 12.50% 04/01/12 2,387,500
1,000,000 PNA Intermediate Holding Corp. PIK (b) (c) (e) .................. 12.56% 02/15/13 987,500
1,500,000 Rafealla Apparel Group, Inc., Series B .......................... 11.25% 06/15/11 1,462,500
2,500,000 The Restaurant Company .......................................... 10.00% 10/01/13 2,118,750
------------
TOTAL CORPORATE BONDS AND NOTES ....................................................... 20,203,750
(Cost $21,124,883) ------------

STRUCTURED NOTES - 8.8%
Babson CLO, Ltd.
5,000,000 Series 2005-1A, Subordinated Note (b) ........................ 0.00% 04/15/19 4,100,000
Flagship CLO
1,000,000 Series 2005-4I, Subordinated Note (b) ........................ 0.00% 06/01/17 740,000
Kenmore Street Synthetic CDO
10,000,000 Series 2006-1A, Note (b) (c) ................................. 10.60% 04/30/14 3,500,000
MM Community Funding III
6,500,000 Series 3A, Subordinated Notes (b) ............................ 0.00% 05/01/32 3,250,000
2,000,000 Preferred Term Securities XXV, Ltd. (b) ......................... 0.00% 06/22/37 1,975,000
------------
TOTAL STRUCTURED NOTES ................................................................ 13,565,000
(Cost $14,541,846) ------------

Page 8 See Notes to Financial Statements

FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2007

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

PREFERRED SECURITIES - 7.1%
3,000,000 AMMC CLO V, Ltd. (b) (f) ............................................................... $ 1,440,000
2,000,000 Babson CLO, Ltd. (b) (f) ............................................................... 1,240,000
350,000 Independence III CDO, Ltd., Series 3A, Class PS (b) (f) ................................ 490,000
4,775,000 Pro Rata Funding, Ltd., Inc. (b) (f) ................................................... 3,867,750
2,000,000 Soloso CDO, Ltd., Series 2005-1 (b) (f) ................................................ 1,330,000
3,000,000 White Marlin CDO, Ltd., Series AI (b) (f) .............................................. 2,610,000
------------
TOTAL PREFERRED SECURITIES ............................................................. 10,977,750
(Cost $12,903,256) ------------

TOTAL INVESTMENTS - 131.0% ............................................................. 201,896,676
(Cost $235,425,362) (j)

LOAN OUTSTANDING - (43.5)% ............................................................. (67,000,000)
NET OTHER ASSETS AND LIABILITIES - 12.5% ............................................... 19,233,843
------------
NET ASSETS - 100.0% .................................................................... $154,130,519
============

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

(b) Securities sold within the terms of a private placement memorandum, exempt
from registration under Rule 144A of the Securities Act of 1933, as
amended (the "1933 Act"), and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, these securities have
been determined to be liquid by Valhalla Capital Partners, LLC, the Fund's
sub-advisor. At October 31, 2007, these securities amounted to
$118,020,633 or 76.6% of net assets.

(d) Securities sold within the terms of a private placement memorandum, exempt
from registration under Rule 144A under the 1933 Act, and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers (See Note 2C- Restricted Securities).

(e) PIK - Payment in Kind

(f) Zero coupon.

(g) ACES - Alternative Credit Enhancement Securities

(h) IO - Interest only

(i) The issuer is in default. Income is not being accrued.

(j) Aggregate cost for federal income tax purposes is $239,789,463.

See Notes to Financial Statements Page 9

FIRST TRUST STRATEGIC HIGH INCOME FUND II
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2007

ASSETS:
Investments, at value
(Cost $235,425,362) ........................................................................ $ 201,896,676
Cash .......................................................................................... 17,482,553
Prepaid expenses .............................................................................. 11,244
Receivables:
Interest ................................................................................... 2,355,295
Dividends .................................................................................. 58,496
--------------
Total Assets ............................................................................. 221,804,264
--------------
LIABILITIES:
Payables:
Outstanding loan ........................................................................... 67,000,000
Interest and fees due on loan payable ...................................................... 377,743
Investment advisory fees ................................................................... 170,879
Audit fees ................................................................................. 44,100
Printing fees .............................................................................. 26,425
Administrative fees ........................................................................ 18,586
Legal fees ................................................................................. 18,247
Custodian fees ............................................................................. 9,459
Transfer agent fees ........................................................................ 2,756
Trustees' fees and expenses ................................................................ 2,712
Accrued expenses and other liabilities ..................................................... 2,838
--------------
Total Liabilities ........................................................................ 67,673,745
--------------
NET ASSETS .................................................................................... $ 154,130,519
==============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... $ 179,873,631
Par value ..................................................................................... 94,496
Accumulated net investment income (loss) ...................................................... 8,893,850
Accumulated net realized gain (loss) on investments ........................................... (1,202,772)
Net unrealized appreciation (depreciation) on investments ..................................... (33,528,686)
--------------
NET ASSETS .................................................................................... $ 154,130,519
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .......................... $ 16.31
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ... 9,449,584
==============

Page 10 See Notes to Financial Statements

FIRST TRUST STRATEGIC HIGH INCOME FUND II
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2007

INVESTMENT INCOME:
Interest ....................................................................... $ 23,069,065
Dividends ...................................................................... 7,378,424
--------------
Total investment income ................................................... 30,447,489
--------------
EXPENSES:
Interest and fees on outstanding loan .......................................... 4,432,285
Investment advisory fees ....................................................... 2,291,327
Administration fees ............................................................ 243,674
Legal fees ..................................................................... 74,858
Printing fees .................................................................. 55,732
Custodian fees ................................................................. 51,400
Audit fees ..................................................................... 50,728
Trustees' fees and expenses .................................................... 39,838
Transfer agent fees ............................................................ 36,594
Other .......................................................................... 309,968
--------------
Total expenses ............................................................ 7,586,404
--------------
NET INVESTMENT INCOME .......................................................... 22,861,085
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments ..................................... (310,017)
Net change in unrealized appreciation (depreciation) on investments ......... (40,194,912)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ........................................ (40,504,929)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................ $ (17,643,844)
==============

See Notes to Financial Statements Page 11

FIRST TRUST STRATEGIC HIGH INCOME FUND II
STATEMENTS OF CHANGES IN NET ASSETS

YEAR PERIOD
ENDED ENDED
10/31/2007 10/31/2006 (a)
------------- --------------

OPERATIONS:
Net investment income (loss) ................................................ $ 22,861,085 $ 11,084,939
Net realized gain (loss) .................................................... (310,017) 605,525
Net change in unrealized appreciation (depreciation) ........................ (40,194,912) 6,666,226
------------- --------------
Net increase (decrease) in net assets resulting from operations ............. (17,643,844) 18,356,690
------------- --------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................................... (18,364,664) (7,844,418)
Net realized gain ........................................................... (519,156) --
------------- --------------
Total distributions to shareholders ......................................... (18,883,820) (7,844,418)
------------- --------------

CAPITAL TRANSACTIONS:
Net proceeds from sale of 0 and 9,405,236 Common Shares, respectively ....... -- 179,640,008
Proceeds from 27,245 and 17,103 Common Shares reinvested, respectively ...... 547,387 334,726
Offering costs .............................................................. -- (376,210)
------------- --------------
Total capital transactions .................................................. 547,387 179,598,524
------------- --------------
Net increase (decrease) in net assets ....................................... (35,980,277) 190,110,796

NET ASSETS:
Beginning of period ......................................................... 190,110,796 --
------------- --------------
End of period ............................................................... $ 154,130,519 $ 190,110,796
============= ==============
Accumulated net investment income (loss) at end of period ................... $ 8,893,850 $ 3,240,521
============= ==============

- ----------
(a) The Fund commenced operations on March 21, 2006.

Page 12 See Notes to Financial Statements

FIRST TRUST STRATEGIC HIGH INCOME FUND II
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2007

CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations .................................. $ (17,643,844)
Adjustments to reconcile net increase in net assets resulting from operations to
net cash provided by operating activities:
Purchases of investments ......................................................... (75,819,349)
Sales and maturities of investments .............................................. 69,910,542
Net amortization/accretion of premium/discount on investments .................... 7,290,631
Net realized loss on investments ................................................. 310,017
Net change in unrealized appreciation (depreciation) on investments .............. 40,194,912

CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest and dividends receivable .................................... 842,500
Decrease in receivable for investment securities sold ............................ 2,472,111
Decrease in prepaid expenses ..................................................... 58,240
Decrease in payable for investment securities purchased .......................... (1,533,229)
Increase in interest and fees due on loan payable ................................ 66,199
Decrease in investment advisory fees payable ..................................... (19,808)
Increase in audit fees payable ................................................... 3,847
Increase in legal fees payable ................................................... 14,049
Increase in printing fees payable ................................................ 2,106
Increase in transfer agent fees payable .......................................... 17
Decrease in administrative fees payable .......................................... (1,761)
Increase in custodian fees payable ............................................... 7,671
Decrease in Trustees' fees and expenses payable .................................. (621)
Decrease in accrued expenses and other liabilities ............................... (2,571)
-------------
CASH PROVIDED BY OPERATING ACTIVITIES ................................................. $ 26,151,659
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested ........................................... 547,387
Distributions to shareholders from net investment income and net realized gain ... (18,883,820)
Issuances of loan ................................................................ 15,000,000
Repayments of loan ............................................................... (10,000,000)
-------------
CASH USED FOR FINANCING ACTIVITIES .................................................... (13,336,433)
--------------
Increase in cash ...................................................................... 12,815,226
Cash at beginning of year ............................................................. 4,667,327
--------------
Cash at end of year ................................................................... $ 17,482,553
==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest and fees ....................................... $ 4,366,086
==============

See Notes to Financial Statements Page 13

FIRST TRUST STRATEGIC HIGH INCOME FUND II
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD

YEAR PERIOD
ENDED ENDED
10/31/2007 10/31/2006 (a)
---------- --------------

Net asset value, beginning of period ........................................ $ 20.18 $ 19.10(b)
---------- --------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................................................ 2.42 1.18
Net realized and unrealized gain (loss) ..................................... (4.29) 0.77
---------- --------------
Total from investment operations ............................................ (1.87) 1.95
---------- --------------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ....................................................... (1.95) (0.83)
Net realized gain ........................................................... (0.05) --
---------- --------------
Total distributions ......................................................... (2.00) (0.83)
---------- --------------
Common Shares offering costs charged to paid-in capital ..................... -- (0.04)
---------- --------------
Net asset value, end of period .............................................. $ 16.31 $ 20.18
========== ==============
Market value, end of period ................................................. $ 15.15 $ 20.88
========== ==============
TOTAL RETURN BASED ON NET ASSET VALUE (c) (d) ............................... (9.92)% 10.13%
========== ==============
TOTAL RETURN BASED ON MARKET VALUE (d) (e) .................................. (19.21)% 8.93%
========== ==============

- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........................................ $ 154,131 $ 190,111
Ratio of total expenses to average net assets ............................... 4.19% 2.13%(f)
Ratio of total expenses to average net assets excluding interest expense .... 1.74% 1.40%(f)
Ratio of net investment income to average net assets ........................ 12.64% 10.15%(f)
Portfolio turnover rate ..................................................... 21% 24%

INDEBTEDNESS:
Loan outstanding (in 000's) ................................................. $ 67,000 $ 62,000
Asset coverage per $1,000 of indebtedness (g) ............................... $ 3,300 $ 4,066

- ----------
(a) The Fund commenced operations on March 21, 2006.

(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 is not annualized for periods less than one year.

(e) 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.

(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.

Page 14 See Notes to Financial Statements

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

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 2007

1. FUND DESCRIPTION

First Trust Strategic High Income Fund II (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on January 18, 2006 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 FHY 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 capital growth as a secondary objective. The Fund seeks
to achieve its investment objectives by investing in a diversified portfolio of
below-investment grade and investment grade debt securities, and equity
securities that Valhalla Capital Partners, LLC ("Valhalla" or the "Sub-Advisor")
believes offer attractive yield and/or capital appreciation potential. There can
be no assurance that the Fund will achieve its investment objectives. The Fund
may not be appropriate for all investors.

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 Common Shares of the Fund 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. Securities for which
market quotations are readily available are valued at market value, which is
currently determined using the last reported sale price on the business day as
of which such value is being determined or, if no sales are reported on such day
(as in the case of some securities traded over-the-counter), the last reported
bid price, except that certain U.S. government securities are valued at the mean
between the last reported bid and ask prices. The Fund values mortgage-backed
securities and other debt securities not traded in an organized market on the
basis of valuations provided by dealers who make markets in such securities or
by an independent pricing service approved by the Board of Trustees which uses
information with respect to transactions in such securities, quotations from
dealers, market transactions for comparable securities, various relationships
between securities and yield to maturity in determining value. In the Fund's
financial statements, the Statement of Assets and Liabilities includes
investments with a value of $107,096,995 (53.0% of total investments) as of
October 31, 2007, whose values have been determined based on prices supplied by
dealers in the absence of readily determinable values. These values may differ
from the values that would have been used had a ready market for these
investments existed, and the differences could be material. The remaining
investments, with a value of $94,799,681 (47.0% of total investments), were
valued by an independent pricing service.

Debt securities having a remaining maturity of less than sixty days when
purchased are valued at cost adjusted for amortization of premiums and accretion
of discounts.

In the event that market quotations are not readily available, the pricing
service or dealer does not provide a valuation for a particular security, the
valuations are deemed unreliable, or events occur after the close of the
principal market for particular securities but before the Fund values its
assets, that could materially affect NAV, First Trust Advisors L.P. ("First
Trust") may use a fair value method to value the Fund's securities. As a general
principle, the fair value of a security is the amount which the Fund might
reasonably expect to receive for the security upon its current sale. A variety
of factors may be considered in determining the fair value of such securities
including 1) the fundamental business data relating to the issuer; 2) an
evaluation of the forces which influence the market in which these securities
are purchased and sold; 3) type of holding; 4) financial statements of the
issuer; 5) cost at date of purchase; 6) size of holding; 7) credit quality and
cash flow of issuer based on external analysis; 8) information as to any
transactions in or offers for the holding; 9) price and extent of public trading
in similar securities of the issuer/borrower, or comparable companies; and 10)
other relevant factors. 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. When fair value pricing of securities is
employed, the prices of securities used by the Fund to calculate its NAV may
differ from market quotations or official closing prices. In light of the
judgement involved in fair valuations, there can be no assurance that a fair
value assigned to a particular security will be the amount which the Fund might
be able to receive upon its current sale.

The Fund invests a significant portion of its assets in below-investment grade
debt securities, including mortgage-backed securities, asset-backed securities,
corporate bonds and collateralized debt obligations. The value and related
income of these securities is sensitive to changes in economic conditions,
including delinquencies and/or defaults. Recent instability in the markets for
fixed-income securities,

Page 15

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

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 2007

particularly mortgage-backed and asset-backed securities, has resulted in
increased volatility of market prices and periods of illiquidity that have
adversely impacted the valuation of certain securities held by the Fund.

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. Amortization of premiums and accretion of discounts are
recorded using the effective interest method.

The Fund follows the provisions of Emerging Issues Task Force No. 99-20 ("EITF
99-20"), "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets" for certain lower
credit quality securitized assets that have contractual cash flows (for example,
asset-backed securities, collateralized mortgage obligations and commercial
mortgage-backed securities). Under EITF 99-20, if there is a change in the
estimated cash flows for any of these securities, based on an evaluation of
current information, then the estimated yield is adjusted on a prospective basis
over the remaining life of the security. Investment income is recorded net of
foreign taxes withheld where recovery of such taxes is uncertain. Debt
obligations may be placed on non-accrual status and related interest income may
be reduced by ceasing current accruals and writing off interest receivables when
the collection of all or a portion of interest has become doubtful based on
consistently applied procedures. A debt obligation is removed from non-accrual
status when the issuer resumes interest payments or when collectibility of
interest is reasonably assured.

Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund maintains liquid assets with a
current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At October 31, 2007, the Fund had no
when-issued or delayed-delivery purchase commitments.

C. RESTRICTED SECURITIES:

The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the Securities Act
of 1933, as amended (the "1933 Act"). Prior to registration, restricted
securities may only be resold in transactions exempt from registration under
Rule 144A of the 1933 Act, normally to qualified institutional buyers. As of
October 31, 2007, the Fund held restricted securities as shown in the table
below that the Sub-Advisor has deemed illiquid pursuant to procedures adopted by
the Fund's Board of Trustees. The Fund does not have the right to demand that
such securities be registered. These securities are valued according to the
valuation procedures as stated in the Portfolio Valuation footnote (Note 2A) and
are not expressed as a discount to the carrying value of a comparable
unrestricted security. There are no unrestricted securities with the same
maturity dates and yields for these issuers.

CARRYING CURRENT MARKET % OF
ACQUISITION PRINCIPAL VALUE PER SHARE CARRYING VALUE NET
SECURITY DATE VALUE 10/31/07 COST 10/31/07 ASSETS
- -------- ----------- ------------ --------------- ------------ ----------- ------

Asset Backed Securities Corp. Home Equity Loan
Trust, Series 2005-HE2, Class M8, 7.37%, 02/25/35 06/09/06 $ 2,000,000 $ 80.38 $ 1,957,783 $ 1,607,650 1.04%
Conseco Finance Securitizations Corp.,
Series 1999-6, Class M1, 7.96%, 06/01/30 04/27/06 4,350,097 9.41 75,706 409,215 0.27
Morgan Stanley ABS Capital I, Inc.,
Series 2004-NC5, Class B4, 7.74%, 05/25/34 06/14/06 791,842 27.82 801,726 220,303 0.14
Park Place Securities Inc.
Series 2004-WCW1, Class M9, 8.37%, 09/25/34 06/08/06 4,000,000 61.47 3,811,107 2,458,975 1.59
Series 2005-WCH1, Class M10, 7.37%, 01/25/36 04/04/06 5,250,000 69.58 5,061,421 3,652,827 2.37
Structured Asset Securities Corp.,
Series 2004-S3, Class M9. 6.00%, 11/25/34 04/21/06 1,203,286 31.56 1,091,757 379,784 0.25
------------ ------------ ----------- ------
$ 17,595,225 $ 12,799,500 $ 8,728,754 5.66%
============ ============ =========== ======

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage. 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.

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 year ended
October 31, 2007, resulting in book and tax accounting differences,

Page 16

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 2007

have been reclassified at year end to reflect an increase in accumulated net
investment income by $1,156,908, a decrease in accumulated net realized gain on
investments sold by $979,124 and a decrease to paid-in capital of $177,784. Net
assets were not affected by this reclassification.

The tax character of distributions paid during the fiscal year ended October 31,
2007 and the fiscal period ended October 31, 2006 was as follows:

Distributions paid from: 2007 2006
------------ -----------
Ordinary Income .................................. $ 18,883,820 $ 7,844,418

As of October 31, 2007, the components of distributable earnings on a tax basis
were as follows:

Capital Loss Carryforward ....................... $ (1,202,026)
Undistributed Ordinary Income ................... 13,582,644
Net Unrealized Depreciation ..................... (37,892,787)

E. INCOME TAXES:

The Fund intends to continue 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 the loss and offset such loss against any future realized capital gains.
At October 31, 2007, the Fund had an available realized capital loss of
$1,202,026 to offset future net capital gains through the fiscal year ended
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 October 31, 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.

F. EXPENSES:

The Fund pays all expenses directly related to its operations.

G. 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
Valhalla 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, $376,210, was recorded as a reduction of the
proceeds from the sale of Common Shares during the period ended October 31,
2006.

H. ACCOUNTING PRONOUNCEMENTS:

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

Also, in February 2007, FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
("SFAS 159"), which provides companies with an option to report selected
financial assets and liabilities at fair value. The objective of SFAS 159 is to
reduce both complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities
differently. SFAS 159 establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities and to more
easily understand the effect of the Fund's choice to use fair value on its
earnings. SFAS 159 also requires entities to display the fair value of the
selected assets and liabilities on the face of the balance sheet. SFAS 159 does
not eliminate disclosure requirements of other accounting standards, including
fair value measurement disclosures in SFAS 157. SFAS 159 is effective for fiscal
years beginning after November 15, 2007.

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

Page 17

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 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 0.90% of the Fund's Managed Assets (the value of
the securities and other investments the Fund holds plus cash or other assets,
including interest accrued but not yet received minus accrued liabilities other
than the principal amount of any borrowings).

Valhalla, a boutique asset management firm focused on managing high-yield
portfolios with an emphasis on structured finance securities, 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 0.40% of Managed Assets that is paid monthly by First Trust from its
investment advisory fee. First Trust Portfolios L.P., an affiliate of the
Advisor, owns a minority interest in Valhalla.

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, an indirect,
majority-owned subsidiary of The PNC Financial Services Group, Inc., serves as
the Fund's Custodian in accordance with certain fee arrangements.

Effective January 1, 2007, the Trustees approved a revised compensation plan.
Under the revised plan, 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. Prior to
January 1, 2007, the trusts paid each Trustee who is not an officer or employee
of First Trust, any sub-advisor or any of their affiliates an annual retainer of
$10,000, which included compensation for all board and committee 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 First Trust Fund Complex
and divided among those trusts.

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 year ended October 31, 2007,
aggregated amounts were $75,819,349 and $53,090,918, respectively.

As of October 31, 2007, the aggregate gross unrealized appreciation for all
securities in which there as an excess of value over tax cost was $16,212,102
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $54,104,889.

5. COMMON SHARES

As of October 31, 2007, 9,449,584 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:

YEAR ENDED PERIOD ENDED
OCTOBER 31, 2007 OCTOBER 31, 2006
------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT
------ --------- --------- -------------

Proceeds from Common Shares sold ................... -- $ -- 9,405,236 $ 179,640,008
Common Shares issued as reinvestment of dividends
under the Dividend Reinvestment Plan ............ 27,245 547,387 17,103 334,726
Offering costs ..................................... -- -- -- (376,210)
------ --------- --------- -------------
27,245 $ 547,387 9,422,339 $ 179,598,524
====== ========= ========= =============

Page 18

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 2007

6. PREFERRED SHARES OF BENEFICIAL INTEREST

The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of preferred shares of beneficial interest, par value $0.01 per share (the
"Preferred Shares"), in one or more classes or series, with rights as determined
by the Board of Trustees without the approval of Common Shareholders. As of
October 31, 2007, no Preferred Shares had been issued.

7. REVOLVING LOAN AGREEMENT

On May 31, 2006, the Fund entered into a Revolving Credit and Security Agreement
with Liberty Street Funding Corp., as conduit lender, and The Bank of Nova
Scotia, as secondary lender, which provides for a revolving 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). In addition, the Fund has agreed to
pay facility commitment fees on the unutilized line of credit, which are
included in "Interest and fees on outstanding loan" on the Statement of
Operations. The total commitment under the Revolving Credit and Security
Agreement is $92,000,000. For the year ended October 31, 2007, the average
amount outstanding was $73,657,534. The high and low annual interest rates
during the year ended October 31, 2007 were 6.00% and 5.34%, respectively, and
the weighted average interest rate was 5.44%. Total interest and fees incurred
during the fiscal year ended October 31, 2007 were $4,432,285. The interest rate
at October 31, 2007 was 5.65%. The revolving credit facility has been extended
until May 27, 2008.

8. RISK CONSIDERATIONS

INVESTMENT 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 bond market, or when political or economic events affecting the
issuers occur.

RESIDENTIAL MORTGAGE-BACKED SECURITIES CONCENTRATION RISK: The Fund will invest
at least 25% of its total assets in residential mortgage-backed securities under
normal market conditions. A fund concentrated in a single industry is likely to
present more risks than a fund that is broadly diversified over several
industries. Mortgage-backed securities may have less potential for capital
appreciation than comparable fixed-income securities, due to the likelihood of
increased prepayments of mortgages as interest rates decline. If the Fund buys
mortgage-backed securities at a premium, mortgage foreclosures and prepayments
of principal by mortgagors (which usually may be made at any time without
penalty) may result in some loss of the Fund's principal investment to the
extent of the premium paid. Alternatively, in a rising interest rate
environment, the value of mortgage-backed securities may be adversely affected
when payments on underlying mortgages do not occur as anticipated, resulting in
the extension of the security's effective maturity and the related increase in
interest rate sensitivity of a longer-term instrument. The value of
mortgage-backed securities may also change due to shifts in the market's
perception of issuers and regulatory or tax changes adversely affecting the
markets as a whole. In addition, mortgage-backed securities are subject to the
credit risk associated with the performance of the underlying mortgage
properties. In certain instances, third-party guarantees or other forms of
credit support can reduce the credit risk.

BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, your investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse company specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.

ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, the Fund could find it more difficult to sell these securities or may be
able to sell the securities only at prices lower than if such securities were
widely traded.

INTEREST RATE RISK: The Fund is also subject to interest rate risk. Interest
rate risk is the risk that fixed-income securities will decline in value because
of changes in market interest rates. Investments in debt securities with
long-term maturities may experience significant price declines if long-term
interest rates increase.

Page 19

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 2007

9. 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.

10. SUBSEQUENT EVENTS

On October 23, 2007, the Fund declared a dividend of $0.1667 per share, which
represents a dividend from net investment income to Common Shareholders of
record November 5, 2007, payable November 15, 2007.

On November 20, 2007, the Fund declared a dividend of $0.1667 per share, which
represents a dividend from net investment income to Common Shareholders of
record December 5, 2007, payable December 12, 2007.

On December 20, 2007, the Fund declared a dividend of $0.1667 per share, which
represents a dividend from net investment income to Common Shareholders of
record December 31, 2007, payable January 15, 2008.

Page 20

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

TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST STRATEGIC HIGH INCOME
FUND II:

We have audited the accompanying statements of assets and liabilities of First
Trust Strategic High Income Fund II (the "Fund"), including the portfolio of
investments, as of October 31, 2007, the related statements of operations and
cash flows for the year then ended and the statements of changes in net assets
and the financial highlights for the year then ended and for the period March
21, 2006 (commencement of operations) through October 31, 2006. 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 audits 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 audits 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 October 31, 2007, by correspondence with the Fund's
custodian. We believe that our audits provide 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 Strategic High Income Fund II as of October 31, 2007. The results of its
operations and cash flows, the changes in its net assets, and the financial
highlights for the respective stated periods, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 2A to the Fund's financial statements, the statement of
assets and liabilities includes investments with a value of $107,096,995 (53.0%
of total investments) as of October 31, 2007, whose values have been determined
based on prices supplied by dealers in the absence of readily determinable
values. These values differ from the values that would have been used had a
ready market for these investments existed, and the differences could be
material.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois
December 28, 2007

Page 21

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

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 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) 334-1710, 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 22

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

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 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.

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 May 10, 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 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.

TAX INFORMATION

Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2007, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.

BY-LAW AMENDMENT

On December 10, 2006, the Board of Trustees of the Fund approved certain changes
to the By-Laws of the Fund that may have the effect of delaying or preventing a
change of control of the Fund including the implementation of a 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 revised By-Laws, investors may
call the Fund at (800) 988-5891.

SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust/Fiduciary Asset Management Covered Call Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income
Fund, First Trust Strategic High Income Fund, First Trust Strategic High Income
Fund II, First Trust Tax-Advantaged Preferred Income Fund and First
Trust/Aberdeen Emerging Opportunity Fund was held on April 16, 2007. The Annual
Meeting for the Fund was adjourned until May 29, 2007. At the Annual Meeting,
Trustee Keith was elected for a one-year term; Trustees Erickson and Kadlec were
elected for two-year terms; and Trustees Bowen and Nielson were elected for
three-year terms. The number of votes cast in favor of James A. Bowen was
6,168,474, the number of votes withheld was 123,066 and the number of
abstentions was 3,143,445. The number of votes cast in favor of Niel B. Nielson
was 6,167,974, the number of votes withheld was 123,566 and the number of
abstentions was 3,143,445. The number of votes cast in favor of Richard E.
Erickson was 6,168,474, the number of votes withheld was 123,066 and the number
of abstentions was 3,143,445. The number of votes cast in favor of Thomas R.
Kadlec was 6,168,474 number of votes withheld was 123,066 and the number of
abstentions was 3,143,445. The number of votes cast in favor of Robert F. Keith
was 6,168,474, the number of votes withheld was 123,066 and the number of
abstentions was 3,143,445.

Also at the Annual Meeting of Shareholders of the Fund, the Shareholders
approved a change in the Fund's industry concentration policy to provide that
the Fund will invest at least 25% of its total assets in residential
mortgage-backed securities under normal market conditions. The number of votes
cast in favor of the change in industry concentration policy was 4,096,601, the
number of votes cast against was 202,311, the number of abstentions was 261,332,
and the number of broker non-votes was 1,538,537.

As a result of this change in industry concentration policy, please see the
additional concentration of risk disclosure in footnote 8 in the Notes to
Financial Statements.

CHANGES IN INVESTMENT POLICIES

The Fund may invest up to 50% of its Managed Assets in foreign securities,
provided, however, that the total of 30% (this percentage was incorrectly stated
as 40% in the Fund's annual report for the period ended October 31, 2006) of the
percentage of Managed Assets invested in obligations of foreign domiciled
structured finance issuers plus the percentage of Managed Assets invested in
other foreign domiciled issuers does not exceed 20% of the Fund's Managed
Assets. The new policy was effective on or about March 1, 2007.

Page 23

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 2007 (UNAUDITED)

The Fund is currently permitted to invest up to 15% of its Managed Assets in
securities rated below "CCC" (or a comparable rating) by at least one nationally
recognized statistical rating organization or, if unrated, determined to be of
comparable quality by the Fund's Sub-Advisor. At the December 10, 2007 meeting,
the Board of Trustees amended that policy to allow up to 20% of the Fund's
Managed Assets to be invested in such securities. The new policy will be
effective on or about March 1, 2008.

The changes in investment policies described above were not required to be, and
were not, approved by the shareholders of the Fund. The new policies may be
changed by the Board of Trustees without shareholder approval.

The open-end and closed-end funds advised by First Trust (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 adviser
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.

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).

o 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 24

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

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 2007 (UNAUDITED)

NUMBER OF
PORTFOLIOS IN OTHER
NAME, ADDRESS, THE FIRST TRUST TRUSTEESHIPS OR
DATE OF BIRTH AND TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
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. o Since Fund Wheaton Orthopedics;
1001 Warrenville Road, Inception Co-owner and Co-Director
Suite 300 (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 58 None
c/o First Trust Advisors L.P. o Since Fund (May 2007 to Present),
1001 Warrenville Road, Inception Vice President and Chief
Suite 300 Financial Officer (1990 to
Lisle, IL 60532 May 2007), ADM Investor
D.O.B. 11/57 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. o Since June 2006 Present), Hibs Enterprises
1001 Warrenville Road, (Financial and Management
Suite 300 Consulting); President
Lisle, IL 60532 (2001 to 2003), Aramark
D.O.B. 11/56 Service Master Management;
President and Chief
Operating Officer
(1998 to 2003), Service
Master Management Services

Page 25

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

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 2007 (UNAUDITED)

- -----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------

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

- -----------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------

James A. Bowen 1, Trustee, o Three Year President, First Trust 58 Trustee of Wheaton
President, Chairman of the Trustee Term Advisors L.P. and First College
Board and CEO and Indefinite Trust Portfolios L.P.;
1001 Warrenville Road, Officer Term Chairman of the Board
Suite 300 o Since Fund of Directors,
Lisle, IL 60532 Inception BondWave LLC
D.O.B. 09/55 (Software 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, First Trust
1001 Warrenville Road, Chief Financial Officer o Since Fund Advisors L.P. and First Trust
Suite 300 and Chief Accounting Inception Portfolios L.P.; Chief Financial
Lisle, IL 60532 Officer Officer, BondWave LLC (Software
D.O.B. 11/57 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 26

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 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)
- ---------------------------------------------------------------------------------------------------------------------------

Kelley Christensen Vice President o Indefinite Term Assistant Vice President, First Trust
1001 Warrenville Road, o Since December 2006 Advisors L.P. and First Trust
Suite 300 Portfolios L.P.
Lisle, IL 60532
D.O.B. 09/70

James M. Dykas Assistant Treasurer o Indefinite Term Senior Vice President (April 2007 to
1001 Warrenville Road, o Since Fund Inception Present), Vice President (January 2005
Suite 300 to April 2007), First Trust Advisors
Lisle, IL 60532 L.P. and First Trust Portfolios L.P.;
D.O.B. 01/66 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 (August 2006
1001 Warrenville Road, o Since December 2006 to Present), Associate (January 2005
Suite 300 to August 2006), First Trust Advisors
Lisle, IL 60532 L.P. and First Trust Portfolios L.P.;
D.O.B. 04/79 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 Trust Advisors
1001 Warrenville Road, Compliance Officer o Since Fund Inception L.P. and First Trust Portfolios L.P.;
Suite 300 Secretary, BondWave LLC (Software
Lisle, IL 60532 Development Company/Broker-Dealer) and
D.O.B. 05/60 Stonebridge Advisors LLC (Investment
Advisor)

Page 27

FIRST TRUST STRATEGIC HIGH INCOME FUND II
OCTOBER 31, 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

Daniel J. Lindquist Vice President o Indefinite Term Senior Vice President (September 2005
1001 Warrenville Road, o Since Fund Inception to Present), Vice President (April
Suite 300 2004 to September 2005), First Trust
Lisle, IL 60532 Advisors L.P. and First Trust
D.O.B. 02/70 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 (May 2007 to
1001 Warrenville Road, o Since Fund Inception Present), Assistant General Counsel
Suite 300 (March 2004 to May 2007), First Trust
Lisle, IL 60532 Advisors L.P. and First Trust
D.O.B. 12/66 Portfolios L.P.; Associate (December
1995 to March 2004), Chapman and
Cutler LLP

Page 28

This Page Left Blank Intentionally.

INVESTMENT ADVISOR

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

ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT,
TRANSFER AGENT &
BOARD ADMINISTRATOR

PFPC Inc.
301 Bellevue Parkway
Wilmington, DE 19809

INDEPENDENT REGISTERED
PUBLIC ACCOUNTANT

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 for each
of the last two fiscal years for professional services
rendered by the principal accountant for the audit of the
Registrant's annual financial statements or services that are
normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those
fiscal years were $27,000 from the Registrant's inception on
March 28, 2006 through October 31, 2006 and $25,000 for the
fiscal year ended October 31, 2007.

(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed
in each of the last two fiscal years for assurance and related
services by the principal accountant that are reasonably
related to the

performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of this
Item were $0 from the Registrant's inception on March 28, 2006
through October 31, 2006 and $2,400 for the fiscal year ended
October 31, 2007. These fees were for additional audit work.

AUDIT-RELATED FEES (INVESTMENT ADVISOR) -- The aggregate fees
billed in each of the last two fiscal years for assurance and
related services by the principal accountant that are
reasonably related to the performance of the audit of the
Registrant's financial statements and are not reported under
paragraph (a) of this Item were $0 from the Registrant's
inception on March 28, 2006 through October 31, 2006 and
$2,400 for the fiscal year ended October 31, 2007. These fees
were for additional audit work.

(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of
the last two fiscal years for professional services rendered
by the principal accountant for tax compliance, tax advice,
and tax planning were $0 from the Registrant's inception on
March 28, 2006 through October 31, 2006 and $4,125 for the
fiscal year ended October 31, 2007. These fees were for tax
return preparation.

TAX FEES (INVESTMENT ADVISOR) -- The aggregate fees billed in
each of the last two fiscal years for professional services
rendered by the principal accountant for tax compliance, tax
advice, and tax planning were $0 from the Registrant's
inception on March 28, 2006 through October 31, 2006 and $0
for the fiscal year ended October 31, 2007.

(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in
each of the last two fiscal years 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 $1,745.46 from the Registrant's inception on
March 28, 2006 through October 31, 2006 and $12,863.96 for the
fiscal year ended October 31, 2007. These fees were for
compliance consulting services and agreed upon procedures in
connection with leverage.

ALL OTHER FEES (INVESTMENT ADVISER) The aggregate fees billed
in each of the last two fiscal years 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 $107,729.50 from the Registrant's inception on
March 28, 2006 through October 31, 2006 and $16,769 for the
fiscal year ended October 31, 2007. These fees were for
compliance consulting services.

(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 its policies, 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) of this Item for the Registrant and the
Registrants investment adviser that were approved by the
audit committee pursuant to 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 for each of the last two fiscal years of the
registrant from the Registrant's inception on March 28, 2006
through October 31, 2006 were $1,744.77 for the Registrant and
$138,904.50 for the Registrant's investment adviser and for
the year ended October 31, 2007 were $16,988.96 for the
Registrant and $23,769 for the Registrant's investment
adviser.

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

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

(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.

First Trust Advisors L.P. (the "Adviser") serves as investment adviser
providing discretionary investment advisory services for several open or
closed-end investment companies (the "Funds"). As part of these services, the
Adviser has full responsibility for proxy voting and related duties. In
fulfilling these duties, the Adviser and Funds have adopted the following
policies and procedures:

1. It is the Adviser's policy to seek to ensure that proxies for
securities held by a Fund are voted consistently and solely in the best economic
interests of the respective Fund.

2. The Adviser shall be responsible for the oversight of a Fund's proxy
voting process and shall assign a senior member of its staff to be responsible
for this oversight.

3. The Adviser has engaged the services of Institutional Shareholder
Services, Inc. ("ISS") to make recommendations to the Adviser on the voting of
proxies related to securities held by a Fund. ISS provides voting
recommendations based on established guidelines and practices. The Adviser has
adopted these ISS Proxy Voting Guidelines.

4. The Adviser shall review the ISS recommendations and generally will
vote the proxies in accordance with such recommendations. Notwithstanding the
foregoing, the Adviser may not vote in accordance with the ISS recommendations
if the Adviser believes that the specific ISS recommendation is not in the best
interests of the respective Fund.

5. If the Adviser manages the assets or pension fund of a company and
any of the Adviser's clients hold any securities in that company, the Adviser
will vote proxies relating to such company's securities in accordance with the
ISS recommendations to avoid any conflict of interest. In addition, if the
Adviser has actual knowledge of any other type of material conflict of interest
between itself and the respective Fund with respect to the voting of a proxy,
the Adviser shall vote the applicable proxy in accordance with the ISS
recommendations to avoid such conflict of interest.

6. If a Fund requests the Adviser to follow specific voting guidelines
or additional guidelines, the Adviser shall review the request and follow such
guidelines, unless the Adviser determines that it is unable to follow such
guidelines. In such case, the Adviser shall inform the Fund that it is not able
to follow the Fund's request.

7. The Adviser may have clients in addition to the Funds which have
provided the Adviser with discretionary authority to vote proxies on their
behalf. In such cases, the Adviser shall follow the same policies and
procedures.

ISS 2007 US Proxy Voting Guideline
Summary

[ISS LOGO]
Institutional Shareholder Services
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
endowments (6) from the company or its affiliates(1).

INDEPENDENT OUTSIDE DIRECTOR (IO)

o No material(9) 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).

(C) 2006 INSTITUTIONAL SHAREHOLDER SERVICES INC. ALL RIGHTS RESERVED. 10
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
(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.

MAJORITY 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 Weighting 2nd
Evaluation Weighting
- ---------------------------------------------------------------------------------------------------
OPERATIONAL 50%
PERFORMANCE
- ---------------------------------------------------------------------------------------------------
5-year Average Management 33.3%
pre-tax efficiency in
operating ROIC deploying
assets
- ---------------------------------------------------------------------------------------------------
5-year Sales Top-Line 33.3%
Growth
- ---------------------------------------------------------------------------------------------------
5-year EBITDA Core-earnings 33.3%
Growth
- ---------------------------------------------------------------------------------------------------
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.

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 & 2.39% 1.42% 3.81%
Supplies
- ------------------------------------------------------------------------------------------------------------------
2030 Transportation 1.30% 1.01% 2.31%
- ------------------------------------------------------------------------------------------------------------------
Automobiles &
2510 Components 1.93% 0.98% 2.90%
- ------------------------------------------------------------------------------------------------------------------
2520 Consumer Durables & 1.97% 1.12% 3.09%
Apparel
- ------------------------------------------------------------------------------------------------------------------
2530 Hotels Restaurants & 2.22% 1.19% 3.41%
Leisure
- ------------------------------------------------------------------------------------------------------------------
2540 Media 1.78% 0.92% 2.70%
- ------------------------------------------------------------------------------------------------------------------
2550 Retailing 1.95% 1.10% 3.05%
- ------------------------------------------------------------------------------------------------------------------
3010, Food & Staples 1.66% 1.25% 2.91%
3020,
3030 Retailing
- ------------------------------------------------------------------------------------------------------------------
3510 Health Care Equipment 2.87% 1.32% 4.19%
& Services
- ------------------------------------------------------------------------------------------------------------------
3520 Pharmaceuticals & 3.12% 1.38% 4.50%
Biotechnology
- ------------------------------------------------------------------------------------------------------------------
4010 Banks 1.31% 0.89% 2.20%
- ------------------------------------------------------------------------------------------------------------------
Diversified
4020 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 & 3.05% 1.65% 4.70%
Equipment
- ------------------------------------------------------------------------------------------------------------------
4530 Semiconductors & 3.76% 1.64% 5.40%
Semiconductor Equip.
- ------------------------------------------------------------------------------------------------------------------
5010 Telecommunication 1.71% 0.99% 2.70%
Services
- ------------------------------------------------------------------------------------------------------------------
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 PREMIUM
VOLATILITY
- --------------------------------------------------------------------------------------------------------------------------

High annual volatility 53% and higher 1 full-value award will count as 1.5 option
shares
- --------------------------------------------------------------------------------------------------------------------------
Moderate annual 25% - 52% 1 full-value award will count as 2.0 option
volatility 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.

================================================================================
(C) 2006 INSTITUTIONAL SHAREHOLDER SERVICES INC. ALL RIGHTS RESERVED. 29

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; or

- 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.

================================================================================
(C) 2006 INSTITUTIONAL SHAREHOLDER SERVICES INC. ALL RIGHTS RESERVED. 30

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.

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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.

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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.

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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.
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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.

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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 MANAGERS OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS

Valhalla Capital Partners, LLC ("Valhalla") serves as investment
sub-advisor to the Registrant. Ramond P. Mecherle, CFA, and Justin L. Ventura
serve as co-portfolio managers of the Registrant. As co-manager, Mr. Mecherle's
role is to make investment decisions, analyze securities and the markets, trade
the securities of the Registrant and provide support to Valhalla's and First
Trust's administrative and compliance staff. Mr. Mecherle may also be asked to
support client service and marketing in a limited manner. Mr. Mecherle may make
investment decisions on behalf of the Registrant independently or in counsel
with Mr. Ventura, the other co-manager of the Registrant. As co-manager of the
Registrant, Mr. Ventura's role is to make investment decisions, analyze
securities and the markets, trade the securities of the Registrant and provide
support to the Valhalla's and First Trust's administrative and compliance staff.
Mr. Ventura may also be asked to support client service and marketing in a
limited manner. Mr. Ventura may make investment decisions on behalf of the
Registrant independently or in counsel with Mr. Mecherle.

BUSINESS EXPERIENCE PAST
NAME TITLE LENGTH OF SERVICE 5 YEARS
- ---- ----- ----------------- -------

Ramond P. Mecherle, CFA Managing Partner and 28 mos. 12/2005 - Present: Valhalla Capital Partners
Co-Portfolio Manager - Managing Partner, Portfolio Manager
11/2004 - 12/2005: Hilliard Lyons Asset
Management - Director of Fixed Income,
Portfolio Manager. 1998 - 11/2004: Morgan
Asset Management - Assistant Portfolio
Manager.

Justin L. Ventura Managing Partner and 28 mos. 12/2005 - Present: Valhalla Capital Partners
Co-Portfolio Manager - Managing Partner, Portfolio Manager.
6/2005 - 12/2005: Hilliard Lyons Asset
Management - Portfolio Manager. 1999 -
11/2004: State Street Bank - Portfolio
Manager.

(a)(2) 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
MANAGED FOR TOTAL ASSETS
WHICH FOR WHICH
TOTAL # OF ADVISORY FEE ADVISORY FEE
NAME OF PORTFOLIO MANAGER OR TEAM ACCOUNTS TOTAL ASSETS IS BASED ON IS BASED ON
MEMBER TYPE OF ACCOUNTS* MANAGED $MILLIONS PERFORMANCE PERFORMANCE
------ ----------------- ------- --------- ----------- -----------

1. Ramond P. Mecherle, CFA Registered Investment Companies: 2 $330 million 0 $0
Other Pooled Investment 0 $0 0 $0
Vehicles: Other Accounts: 0 $0 0 $0

2. Justin L. Ventura Registered Investment Companies: 2 $330 million 0 $0
Other Pooled Investment 0 $0 0 $0
Vehicles: Other Accounts: 0 $0 0 $0

* Information provided as of October 31, 2007

POTENTIAL CONFLICTS OF INTERESTS

Valhalla's allocation procedures seek to allocate investment
opportunities among clients in the fairest possible way taking into account
clients' best interests. Valhalla will follow procedures to ensure that
allocations do not involve a practice of favoring or discriminating against any
client or group of clients. Account performance is never a factor in trade
allocations. All Employees are required to be aware of and comply with the
following undertaking: notify the CCO promptly if they become aware of any
practice that arguably involves Valhalla in a conflict of interest with any of
its advisory accounts, including registered investment companies and
unregistered investment funds.

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

The co-portfolio managers of the Registrant are also principals of the
Valhalla. The bulk of their compensation comes from their equity ownership
interests in Valhalla. The co-portfolio managers also receive an industry
competitive salary, bonuses based on Valhalla's profitability and distributions
based on the profitability of the sub-adviser. Valhalla uses common industry
practices to determine the compensation structure disclosed. Bonuses are not
based on either performance of the Registrant or an increase in assets of the
Registrant. Bonuses are subjective based on the Managing Partner's discretion.

(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP

Dollar Range of Fund Shares
Name Beneficially Owned

Ramond P. Mecherle $1-$10,000
Justin L. Ventura $10,001-$50,001

* Information provided as of October 31, 2007

(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 Strategic High Income Fund II
--------------------------------------------------------------------

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

Date December 20, 2007
----------------------------------------------------------------------------

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 December 20, 2007
----------------------------------------------------------------------------

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

Date December 20, 2007
----------------------------------------------------------------------------

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