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 811-21994
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FIRST TRUST STRATEGIC HIGH INCOME FUND III
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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: APRIL 30, 2007
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.

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

ITEM 1. REPORTS TO STOCKHOLDERS.

The Report to Shareholders is attached herewith.

FIRST TRUST
STRATEGIC
HIGH INCOME
FUND III

SEMI-ANNUAL
REPORT
FOR THE PERIOD MARCH 27, 2007 TO APRIL 30, 2007
(COMMENCEMENT OF INVESTMENT OPERATIONS)

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Table of Contents
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FIRST TRUST STRATEGIC HIGH INCOME FUND III (FHO)
SEMI-ANNUAL REPORT
APRIL 30, 2007

Shareholder Letter ......................................................... 1
Portfolio Commentary ....................................................... 2
Portfolio Components ....................................................... 4
Portfolio of Investments ................................................... 5
Statement of Assets and Liabilities ........................................ 7
Statement of Operations .................................................... 8
Statement of Changes in Net Assets ......................................... 9
Financial Highlights ....................................................... 10
Notes to Financial Statements .............................................. 11
Additional Information ..................................................... 15
Dividend Reinvestment Plan
Proxy Voting Policies and Procedures
Portfolio Holdings
NYSE Certification Information
Advisory and Sub-Advisory Agreements
Privacy Policy

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933. Forward-looking statements include
statements regarding the goals, beliefs, plans or current expectations of First
Trust Advisors L.P. (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 III (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.

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 letter from the Fund's President, James A. Bowen, together with
the portfolio commentary by the portfolio management team at the Fund's
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 Mr. Bowen and
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. Of course, 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 III (FHO)
SEMI-ANNUAL REPORT
APRIL 30, 2007

Dear Shareholders:

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

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

The report you hold will give you detailed information about your investment in
First Trust Strategic High Income Fund III for the period March 27, 2007 to
April 30, 2007. I encourage you to read this report and discuss it with your
financial advisor.

First Trust is pleased to be 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 III
June 11, 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 III, 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 April
30, 2007, Valhalla had approximately $650 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 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
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 (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 a 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 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 III

First Trust Strategic High Income Fund III (the "Fund") commenced trading on
March 28, 2007. 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 the Sub-Advisor believes offer attractive yield and/or
capital appreciation potential. Valhalla believes this combination of exposure
to both consumer and commercial default risk provides investors with an
investment vehicle more broadly diversified than a corporate-only "high-yield"
strategy.

FUND RECAP

Over the one-month period ending April 30, 2007 and during the offering period,
the primary news affecting the Fund was the negative events surrounding
sub-prime residential mortgage-backed securities. While the headlines generally
made it appear that all sub-prime mortgages were in trouble, the primary
problems in sub-prime mortgages were generally limited to those mortgages
originated in late 2005 and throughout 2006. However, the entire sub-prime
mortgage market was negatively impacted in sympathy to the problems in those
vintages. In the end, this sell-off should create a number of buying
opportunities in oversold mortgage market segments that the Fund can take
advantage of in the months to come.

Page 2

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Portfolio Commentary (continued)
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SUB-ADVISOR Q&A

HOW DID THE FUND PERFORM SINCE ITS COMMENCEMENT OF OPERATIONS ON MARCH 27, 2007?

FUND PERFORMANCE FOR PERIOD ENDING 4/30/07

FHO FHO LEHMAN BA
DATE NAV RETURN MARKET RETURN INDEX
04/30/07 0.47% (0.70%) 0.89%

The Fund is in its "ramp-up" period; therefore, there is limited performance
history. In addition, the Fund still had a significant cash position as of the
end of April, 2007. As we expected, the recent negative sub-prime news has
provided what we believe to be some significant buying opportunities in
mortgage-backed securities and collateralized debt obligations. In addition, we
are finding a few "pockets of value" in corporate bonds; however, we continue to
believe overall that corporate high-yield bonds are fully valued.

WHAT IS YOUR OUTLOOK FOR THE MARKET AND THE FUND?

The overall economic outlook remains solid. While the drag from housing could
continue into the second half of the year, the potential impact on consumer
spending is still the biggest cause for concern for 2007. The Federal Reserve
(the "Fed") may allow the consumer to feel some pain relating to housing, but it
is unlikely to allow a prolonged slump to occur in that sector. Even with
inflation risk on the horizon, we believe the Fed may be likely to step in and
lower rates if necessary to prevent a recession. The challenge the Fund now
faces is navigating a fixed-income landscape of tight spreads, while
safeguarding against highly susceptible credit positions should the economy pull
back.

Page 3

FIRST TRUST STRATEGIC HIGH INCOME FUND III
PORTFOLIO COMPONENTS*
APRIL 30, 2007 (UNAUDITED)

[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:

Corporate Bonds 14.3%
Government Agencies 60.8%
Residential Mortgage 17.4%
CDO's 7.5%

* 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 III
PORTFOLIO OF INVESTMENTS
APRIL 30, 2007 (UNAUDITED)

PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
---------- ----------------------------------------------------------------- -----------------

ASSET-BACKED SECURITIES - 19.3%

$ 3,500,000 ABCLO, Ltd.,
Series 2007-1A, Class D, 9.26%, 4/15/21 (a) (b) ........... $ 3,314,500
4,000,000 ACE Securities Corp.,
Series 2007-HE4, 7.82%, 5/25/37 (b) ....................... 3,320,000
4,000,000 Bear Stearns Asset Backed Security Trust,
Series 2007-HE3, Class M9, 7.57%, 4/25/37 (b) ............. 3,235,000
2,000,000 Bear Stearns Second Lien Trust,
Series 2007-1, Class 2B1, 8.32%, 3/25/35 (b) .............. 1,340,000
2,000,000 Bear Stearns Second Lien Trust,
Series 2007-1, Class 2M6, 8.32%, 3/25/35 (b) .............. 1,620,000
3,850,000 Home Equity Asset Trust,
Series 2007-3, Class M9, 7.82%, 8/25/37 (b) ............... 3,163,818
4,000,000 Home Equity Mortgage Trust,
Series 2007-2, Class M3, 7.82%, 6/25/37 (b) ............... 3,040,000
3,250,000 Pebble Creek LCDO Ltd.,
Series 2007-2A, Class E, 8.60%, 6/22/14 (a) (b) ........... 2,892,500
2,500,000 Rosedale CLO Ltd.,
Series 1-A, Class II, 7/24/21 (a) ......................... 2,462,500
2,000,000 WaMu,
Series 2007-HE3, Class M9, 7.82%, 5/25/37 ................. 1,677,740
3,482,000 Wells Fargo Home Equity Trust,
Series 2007-2, Class B1, 7.82%, 4/25/37 (a) (b) ........... 2,611,500
---------------
TOTAL ASSET-BACKED SECURITIES ................................ 28,677,558
---------------
(Cost $28,669,431)

CORPORATE BONDS AND NOTES - 11.1%

2,000,000 AmeriCast Technologies, Inc.,
Company Guarantee, 11.00%, 12/01/14 (a) ................... 2,035,000
2,000,000 Dayton Superior Corp.,
Company Guarantee, 13.00%, 6/15/09 ........................ 2,060,000
2,500,000 Interdent Service Corp.,
Company Guarantee, 10.75%, 12/15/11 ....................... 2,343,750
2,000,000 Key Plastics LLC,
Secured Note, 11.75%, 3/15/13 (a) ......................... 2,030,000
1,500,000 MSX International UK/MXS International
Business Service FR/MXS International
GmBH,
Company Guarantee, 12.50%, 4/01/12 (a) .................... 1,518,750
3,000,000 PNA Intermediate Holding Corp.,
Senior Note, 12.36%, 2/15/13 (a) (b) ...................... 3,105,000
2,000,000 Rafealla Apparel Group, Inc.,
Series B, Secured Note, 11.25%, 6/15/11 ................... 2,050,000
250,000 Rare Restaurant Group LLC,
Secured Note, 9.25%, 5/15/14 (a) .......................... 253,750
1,000,000 Vintage Petroleum, Inc.,
Senior Unsecured Note, 8.25%, 5/01/12 ..................... 1,040,079
---------------
TOTAL CORPORATE BONDS AND NOTES .............................. 16,436,329
---------------
(Cost $16,450,134)

See Notes to Financial Statements. Page 5

FIRST TRUST STRATEGIC HIGH INCOME FUND III
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2007 (UNAUDITED)

PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
---------- ----------------------------------------------------------------- -----------------

SHORT-TERM INVESTMENTS - 47.0%

$ 40,000,000 Fannie Mae,
5.16%, 5/23/07 (c) ........................................ $ 39,876,920
30,000,000 Freddie Mac,
5.14%, 5/18/07 (c) ........................................ 29,928,660
---------------
TOTAL SHORT TERM INVESTMENTS ................................. 69,805,580
---------------
(Cost $69,802,452)

TOTAL INVESTMENTS - 77.4% .................................... 114,919,467
(Cost $114,922,017) (d)

NET OTHER ASSETS AND LIABILITIES - 22.6% ..................... 33,575,719
---------------
NET ASSETS - 100.0% .......................................... $ 148,495,186
===============
<FN>
- -----------------------------------------
(a) Securities sold within the terms of a private placement memorandum,
exempt from registration under Rule 144A of the Securities Act of
1933, as amended, 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 the Fund's
sub-advisor. At April 30, 2007, these securities amounted to
$20,223,500 or 13.62% of net assets.
(b) Variable rate security. The interest rate shown reflects the rate
in effect at April 30, 2007.
(c) Yield at time of purchase.
(d) Aggregate cost for federal income tax and financial reporting
purposes.
</FN>

Page 6 See Notes to Financial Statements.

FIRST TRUST STRATEGIC HIGH INCOME FUND III
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2007 (UNAUDITED)

ASSETS:
Investments, at value
Cost ($114,922,017) ................................................................................... $114,919,467
Cash ..................................................................................................... 44,742,858
Receivables:
Interest .............................................................................................. 599,662
Dividends ............................................................................................. 274,318
-------------
Total Assets ........................................................................................ 160,536,305
-------------
LIABILITIES:
Payables:
Investment securities purchased ....................................................................... 11,585,958
Offering cost ......................................................................................... 310,209
Investment advisory fees .............................................................................. 105,907
Administrative fees ................................................................................... 12,036
Audit and legal fees .................................................................................. 10,027
Printing fees ......................................................................................... 7,083
Trustees' fees and expenses ........................................................................... 3,568
Custodian fees ........................................................................................ 1,984
Transfer agent fees ................................................................................... 955
Accrued expenses and other liabilities ................................................................... 3,392
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Total Liabilities ................................................................................... 12,041,119
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NET ASSETS ............................................................................................... $148,495,186
=============

NET ASSETS CONSIST OF:
Undistributed net investment income ...................................................................... $ 682,938
Net unrealized depreciation of investments ............................................................... (2,550)
Par value ................................................................................................ 77,552
Paid-in capital .......................................................................................... 147,737,246
-------------
Net Assets .......................................................................................... $148,495,186
=============
NET ASSET VALUE, applicable to Common Shares outstanding (par value $0.01 per Common Share) .............. $ 19.15
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) .............. 7,755,236
=============

See Notes to Financial Statements. Page 7

FIRST TRUST STRATEGIC HIGH INCOME FUND III
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED APRIL 30, 2007(A) (UNAUDITED)

INVESTMENT INCOME:
Interest ..................................................................... $ 534,867
Dividends .................................................................... 311,788
-----------
Total investment income ................................................... 846,655
-----------

EXPENSES:
Investment advisory fees ..................................................... 120,487
Administration fees .......................................................... 13,656
Audit and legal fees ......................................................... 10,027
Printing fees ................................................................ 7,083
Trustees' fees and expenses .................................................. 3,568
Transfer agent fees .......................................................... 3,455
Custodian fees ............................................................... 1,983
Other ........................................................................ 3,458
-----------
Total expenses ............................................................ 163,717
-----------
NET INVESTMENT INCOME ........................................................ 682,938
-----------
NET UNREALIZED GAIN (LOSS):
Net change in unrealized appreciation (depreciation) on investments .......... (2,550)
-----------
Net unrealized gains (losses) ................................................ (2,550)
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .............. $ 680,388
===========
<FN>
- --------------------------------------------------
(a) Initial seed date of February 20, 2007. The Fund commenced operations on
March 27, 2007.
</FN>

Page 8 See Notes to Financial Statements.

FIRST TRUST STRATEGIC HIGH INCOME FUND III
STATEMENT OF CHANGES IN NET ASSETS

PERIOD
ENDED
4/30/2007(A)
(UNAUDITED)
-------------

OPERATIONS:
Net investment income ............................................................ $ 682,938
Net change in unrealized appreciation (depreciation) on investments .............. (2,550)
------------
Net increase in net assets resulting from operations ............................. 680,388

CAPITAL TRANSACTIONS:
Net proceeds from sale of 7,755,236 Common Shares ................................ 148,125,007
Offering costs ................................................................... (310,209)
------------
Net increase from capital transactions ........................................... 147,814,798
------------
Net increase in net assets ....................................................... 148,495,186

NET ASSETS:
Beginning of period .............................................................. --
------------
End of period .................................................................... $148,495,186
============
Undistributed net investment income at end of period ............................. $ 682,938
============
<FN>
- --------------------------------------------------
(a) Initial seed date of February 20, 2007. The Fund commenced operations on
March 27, 2007.
</FN>

See Notes to Financial Statements. Page 9

FIRST TRUST STRATEGIC HIGH INCOME FUND III
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD

PERIOD
ENDED
4/30/2007(A)
(UNAUDITED)
-------------

Net asset value, beginning of period ...................................... $ 19.10(b)
-----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ..................................................... 0.09
Net realized and unrealized gain (loss) on investments .................... --(c)
-----------
Total from investment operations .......................................... 0.09
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ..................................................... --
-----------
Total from distributions .................................................. --
-----------
Common Shares offering costs charged to paid-in capital ................... (0.04)
-----------
Net asset value, end of period ............................................ $ 19.15
===========
Market value, end of period ............................................... $ 20.00
===========
TOTAL RETURN BASED ON NET ASSET VALUE (d)(e) .............................. 0.26%
===========
TOTAL RETURN BASED ON MARKET VALUE (e)(f) ................................. 0.00%
===========
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ...................................... $ 148,495
Ratio of total expenses to average net assets ............................. 1.19%(g)
Ratio of net investment income to average net assets ...................... 4.95%(g)
Portfolio turnover rate (h) ............................................... 26%
<FN>
- --------------------------------------------------
(a) Initial seed date of February 20, 2007. The Fund commenced operations on
March 27, 2007.
(b) Net of sales load of $0.90 per share on initial shares issued.
(c) Amount represents less than $0.01 per Common Share.
(d) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gainsdistributions, if any, at
prices obtained by the Dividend Reinvestment Plan and changes in net asset
value per share anddoes not reflect sales load.
(e) Total return is not annualized for periods less than one year.
(f) Total return based on market value is the combination of reinvested dividend
distributions and reinvested capital gainsdistributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in Common Share
market value.
(g) Annualized.
(h) Not Annualized.
</FN>

Page 10 See Notes to Financial Statements.

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Notes to Financial Statements
- --------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND III
APRIL 30, 2007 (UNAUDITED)

1. FUND DESCRIPTION

First Trust Strategic High Income Fund III (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on November 14, 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 FHO 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 intends
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 an 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 computed based
upon the value of the Fund's portfolio securities and other assets less any
accrued liabilities. The NAV is determined as of the close of regular trading on
the NYSE, normally 4:00 p.m. Eastern Standard 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 Fund calculates NAV per Common Share by subtracting the Fund's
liabilities (including accrued expenses, dividends payable and any borrowings of
the Fund) from the Fund's Total Assets (the value of the securities and other
investments the Fund holds plus cash or other assets, including interest accrued
but not yet received) and dividing the result by the total number of Common
Shares outstanding.

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

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

B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:

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

Page 11

- --------------------------------------------------------------------------------
Notes to Financial Statements - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND III
APRIL 30, 2007 (UNAUDITED)

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.

C. 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.

D. INCOME TAXES:

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

E. EXPENSES:

The Fund pays all expenses directly related to its operations.

F. ORGANIZATION AND OFFERING COSTS:

Organization costs consist of costs incurred to establish the Fund and enable it
to legally do business. These costs include filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consist of legal fees pertaining
to the Fund's Common Shares offered for sale, registration fees, underwriting
fees, and printing of the initial prospectus, among other fees. First Trust and
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, $310,209, was recorded as a reduction of the
proceeds from the sale of Common Shares during the period ended April 30, 2007.

G. ACCOUNTING PRONOUNCEMENTS:

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes."
This pronouncement provides guidance on the recognition, measurement,
classification, and disclosures related to uncertain tax positions, along with
any related interest and penalties. FIN 48 is effective for fiscal years
beginning after December 15, 2006. At this time, management is evaluating the
implications of FIN 48 and its impact on the financial statements has not yet
been determined.

In addition, in September 2006, Statement of Financial Accounting Standards No.
157 Fair Value Measurements ("SFAS 157") was issued by the FASB and is effective
for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.

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 borrowings).

Page 12

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.

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

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 Advisors, any sub-advisor or any of their affiliates, ("Independent
Trustees") is paid an annual retainer of $10,000 per investment company for the
first 14 investment companies of the First Trust Fund Complex and an annual
retainer of $7,500 per investment company of each subsequent investment company
added to the First Trust Fund Complex. The annual retainer is allocated equally
among each of the investment companies. 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 funds in the
First Trust Fund Complex and divided among those funds. Trustees are also
reimbursed by the investment companies in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. The Trustees
adopted the revised plan because the increase in the number of funds in the
First Trust Fund Complex had the effect of rapidly increasing their compensation
under the previous arrangements. Prior to January 1, 2007, the Funds paid each
Trustee who is not an officer or employee of First Trust Advisors, any
sub-advisor or any of their affiliates an annual retainer of $10,000, which
included compensation for all board and committee meetings.

4. PURCHASES AND SALES OF SECURITIES

Cost of purchases and proceeds from sales of investment securities, excluding
U.S. government and short-term investments, for the period March 27, 2007 to
April 30, 2007, aggregated amounts were $144,575,183 and $30,000,000,
respectively.

As of April 30, 2007, the aggregate gross unrealized appreciation for all
securities in which there as an excess of value over tax cost was $47,020 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $49,570.

5. COMMON SHARES

As of April 30, 2007, 7,755,236 of $0.01 par value Common Shares were issued. An
unlimited number of Common Shares has been authorized under the Fund's Dividend
Reinvestment Plan.

COMMON SHARE TRANSACTIONS WERE AS FOLLOWS:

PERIOD ENDED APRIL 30, 2007
SHARES AMOUNT
Proceeds from Common Shares Sold 7,755,236 $148,125,007
Offering Costs -- (310,209)
---------- ------------
7,755,236 $147,814,798
========== ============

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
April 30, 2007, no Preferred Shares had been issued.

7. CONCENTRATION OF 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.

Page 13

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.

NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 100% of its
Managed Assets in non-investment grade securities. Below-investment grade
securities are rated below "Baa3" by Moody's Investors Service, Inc., below
"BBB-" by Standard & Poor's Ratings Group, comparably rated by another
nationally recognized statistical rating organization or, if unrated, determined
to be of comparable credit quality by the Sub-Advisor. Below-investment grade
debt instruments are commonly referred to as "high-yield" or "junk" bonds and
are considered speculative with respect to the issuer's capacity to pay interest
and repay principal and are susceptible to default or decline in market value
due to adverse economic and business developments. The market values for
high-yield securities tend to be volatile, and these securities are less liquid
than investment grade debt securities.

8. SUBSEQUENT EVENT

On May 21, 2007, the Fund declared a dividend of $0.1584 per share, which
represents a dividend from net investment income to Common Shareholders of
record June 5, 2007, payable June 15, 2007.

Page 14

- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND III
APRIL 30, 2007 (UNAUDITED)

DIVIDEND REINVESTMENT PLAN

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

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

(1) If Common Shares are trading at or above net asset value ("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 15

- --------------------------------------------------------------------------------
Additional Information - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND III
APRIL 30, 2007 (UNAUDITED)

PORTFOLIO HOLDINGS

The Fund will file 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 February 16, 2007, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q will contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.

ADVISORY AND SUB-ADVISORY AGREEMENTS

BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND SUB-
ADVISORY AGREEMENTS

The Board of Trustees of First Trust Strategic High Income Fund III (the
"Fund"), including the Independent Trustees, unanimously approved the Investment
Management Agreement (the "Advisory Agreement") between the Fund and First Trust
Advisors L.P. (the "Advisor") and the Investment Sub-Advisory Agreement (the
"Sub-Advisory Agreement" and together with the Advisory Agreement, the
"Agreements") among the Fund, the Advisor and Valhalla Capital Partners, LLC
(the "Sub-Advisor"), at a meeting held on December 10, 2006. The Board
determined that the terms of the Agreements are fair and reasonable and that the
Agreements are in the best interests of the Fund.

To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services to be provided by the Advisor and Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the proposed advisory and sub-advisory fees for the Fund as
compared to fees charged by investment advisors and sub-advisors to comparable
funds and as compared to fees charged to other clients of the Advisor and
Sub-Advisor; estimated expenses of the Fund as compared to expense ratios of
comparable funds; the nature of expenses to be incurred in providing services to
the Fund and the potential for economies of scale, if any; financial data on the
Advisor and Sub-Advisor; fall out benefits to the Advisor and Sub-Advisor; and
summaries of the Advisor's and Sub-Advisor's compliance programs. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.

In reviewing the Agreements, the Board considered the nature, extent and quality
of services to be provided by the Advisor and Sub-Advisor under the Agreements.
With respect to the Advisory Agreement, the Board noted that the Advisor's
employees provided management services to other closed-end funds in the First
Trust complex with diligence and care. The Board specifically considered the
services provided by the Advisor to two funds, First Trust Strategic High Income
Fund ("FHI") and First Trust Strategic High Income Fund II ("FHY"), which have
the same investment objectives, are managed by the same portfolio managers and
utilize substantially the same strategies as the Fund. The Board noted the
compliance program that had been developed by the Advisor and the experience and
skills of its employees who would be working with the Fund. The Board also noted
the efforts expended by the Advisor in organizing the Fund and making
arrangements for entities to provide services to the Fund. The Board concluded
that it was comfortable that the Advisor had the capabilities and resources to
oversee the operations of the Fund, including overseeing the Sub-Advisor, which
was particularly important in light of the limited operating history of the
Sub-Advisor. With respect to the Sub-Advisory Agreement, the Board noted the
background and experience of the Sub-Advisor's portfolio managers and noted that
they currently also serve as the portfolio managers of FHI and FHY. At the
meeting, the Board received a presentation from two managing members of the
Sub-Advisor, who described the Sub-Advisor's experience and investment style.
The Independent Trustees noted that First Trust Portfolios L.P., an affiliate of
the Advisor, has a minority ownership interest in the Sub-Advisor and that this
investment allows for more informed oversight of the Sub-Advisor by the Advisor.
The Board concluded that the Sub-Advisor had the capability to provide the
necessary investment advisory services to the Fund.

Page 16

The Board considered the fees to be paid under the Agreements. The Board
reviewed information compiled by an independent source on management and
advisory fees charged to similar closed-end funds, and discussed with
representatives of the Advisor certain differences between those funds and the
Fund. The Board noted that the management fee to be paid to the Advisor by the
Fund was at the same rate as the management fee paid to the Advisor by FHI and
FHY. The Board considered that the fees to be paid to the Sub-Advisor would be
paid by the Advisor from its advisory fee. The Sub-Advisor provided information
on fees charged to clients for which it provides discretionary, investment
supervisory services, and the Board noted that those fees generally were the
same as or higher than the fees to be paid under the Sub-Advisory Agreement. The
Board also noted that the fees to be paid under the Sub-Advisory Agreement were
at the same rate as the fees payable under the sub-advisory agreements for FHI
and FHY. Since the Fund is newly organized, the Board did not consider
investment performance of the Fund, but the Board did consider the investment
performance of FHI and FHY. The Board concluded that the fees to be paid under
the Agreements were reasonable.

The Board noted that the Advisor continues to invest in personnel and
infrastructure but did not identify any economies of scale to be realized by the
Fund and indicated that, because the Fund is a closed-end fund that is not
issuing more shares after the initial issuance of shares other than pursuant to
its dividend reinvestment plan, the Advisor believed that any discussion of
economies of scale was not meaningful. The Board concluded that the management
fee reflects an appropriate level of sharing of any economies of scale. The
Board took the costs to be borne by the Advisor in connection with its services
to be performed under the Advisory Agreement into consideration and noted that
the Advisor was unable to estimate the profitability of the Advisory Agreement
to the Advisor. The Board considered that the Sub-Advisor was unable to estimate
the profitability of the Sub-Advisory Agreement to the Sub-Advisor, but the
Board noted that the sub-advisory fee rate was negotiated at arm's length
between the Advisor and the Sub-Advisor, and that the Sub-Advisor would be paid
by the Advisor. The Board considered that the Advisor had identified as a fall
out benefit to the Advisor its exposure to investors and brokers who, in the
absence of the Fund, may have had no dealings with the Advisor. The Board
considered that the Sub-Advisor had not identified any fall-out benefits from
its relationship with the Fund. The Board noted that the Sub-Advisor would not
utilize soft dollars in connection with its management of the Fund's portfolio.

After discussion, the Board, including the Independent Trustees, concluded that
the Advisor and Sub-Advisor had the capabilities, resources and personnel
necessary to manage the Fund. Based upon such information as they considered
necessary to the exercise of their reasonable business judgment, the Trustees
concluded unanimously that it was in the best interests of the Fund to approve
the Advisory Agreement and the Sub-Advisory Agreement. No single factor was
determinative in the Board's analysis.

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

SOURCES OF INFORMATION

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

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

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

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

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

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:

Page 17

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

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

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

CONFIDENTIALITY AND SECURITY

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

POLICY UPDATES AND INQUIRIES

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

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

Page 18

This Page Left Blank Intentionally.

ITEM 2. CODE OF ETHICS.

Not applicable.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Not applicable.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Not applicable.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

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.

Not applicable.

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

(A) Not applicable.

(B) IDENTIFICATION OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS

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, trading the securities of the
Registrant and provide support to the sub-adviser'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, trading the securities of the Registrant and provide
support to the sub-adviser'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.

NAME TITLE LENGTH OF SERVICE BUSINESS EXPERIENCE PAST 5 YEARS
----- ----- ----------------- --------------------------------
1. Ramond P. Mecherle, CFA Managing Partner/Portfolio Manager 16 months 12/2005 - Present: Valhalla Capital Partners,
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

2. Justin L. Ventura Managing Partner/Portfolio Manager 16 months 12/2005 - Present: Valhalla Capital Partners,
Managing Partner/Portfolio Manager;
6/2005-12/2005: Hilliard Lyons Asset Management,
Portfolio Manager; 1999-11/2004: State Street
Bank, Portfolio Manager

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

Total # of
Name of Portfolio Manager or Team Member Type of Accounts* Accounts Managed Total Assets
1. Ramond P. Mecherle, CFA Registered Investment Companies: 2 $506 million
Other Pooled Investment Vehicles: 0 $ 0
Other Accounts: 0 $0
2. Justin L. Ventura Registered Investment Companies: 2 $506 million
Other Pooled Investment Vehicles: 0 $0
Other Accounts: 0 $0

Total Assets for
# of Accounts Managed which Advisory Fee
for which Advisory Fee is Based on
Name of Portfolio Manager or Team Member is Based on Performance Performance
1. Ramond P. Mecherle, CFA 0 $0
0 $0
0 $0
2. Justin L. Ventura 0 $0
0 $0
0 $0

Information provided as of April 30, 2007.

POTENTIAL CONFLICTS OF INTERESTS

The allocation procedures of Valhalla Capital Partners LLC ("Valhalla" or
"Sub-adviser") seek to allocate investment opportunities among Valhalla's
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 Valhalla employees must be aware of and comply with the following
undertaking: notify the CCO promptly if an employee becomes 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.

COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS

The co-portfolio managers of the Registrant are also principals of the
sub-advisor. The bulk of their compensation comes from their equity ownership
interests in the sub-adviser. The co-portfolio managers also receive an industry
competitive salary, bonuses based on the profitability of the sub-adviser and
distributions based on the profitability of the sub-adviser. Valhalla uses
common industry practices to determine the compensation structure.

DISCLOSURE OF SECURITIES OWNERSHIP

Information provided as of April 30, 2007.

Dollar Range of Fund Shares
Name Beneficially Owned

Ken L. Mathis $0
Justin L. Ventura $0
Ramond P. Mercherle, CFA $0

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.

At the Registrant's organizational meeting on December 10, 2006, the
Registrant's Board of Trustees adopted a Nominating and Governance Committee
Charter which includes procedures by which shareholders may recommend nominees
to the Registrant's board of trustees as described below:

Any proposal to elect any person nominated by shareholders for election
as trustee may only be brought before an annual meeting of the Registrant if
timely written notice (the "Shareholder Notice") is provided to the secretary of
the Registrant. Unless a greater or lesser period is required under applicable
law, to be timely, the Shareholder Notice must be delivered to or mailed and
received at Registrant's address, 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, Attn: W. Scott Jardine, not less than forty-five (45) days nor
more than sixty (60) days prior to the first anniversary date of the date of the
Registrant's proxy statement released to shareholders for the prior year's
annual meeting; provided, however, if and only if the annual meeting is not
scheduled to be held within a period that commences thirty (30) days before the
first anniversary date of the annual meeting for the preceding year and ends
thirty (30) days after such anniversary date (an annual meeting date outside
such period being referred to herein as an "Other Annual Meeting Date"), such
Shareholder Notice must be given in the manner provided herein by the later of
the close of business on (i) the date forty-five (45) days prior to such Other
Annual Meeting Date or (ii) the tenth (10th) business day following the date
such Other Annual Meeting Date is first publicly announced or disclosed.

Any shareholder submitting a nomination of any person or persons (as
the case may be) for election as a trustee or trustees of the Registrant shall
deliver, as part of such Shareholder Notice: (i) a statement in writing setting
forth (A) the name, age, date of birth, business address, residence address and
nationality of the person or persons to be nominated; (B) the class or series
and number of all shares of the Registrant owned of record or beneficially by
each such person or persons, as reported to such shareholder by such nominee(s);
(C) any other information regarding each such person required by paragraphs (a),
(d), (e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of
Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (or any successor provision thereto); (D) any other
information regarding the person or persons to be nominated that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitation of proxies for election of trustees or
directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder; and (E) whether such shareholder believes
any nominee is or will be an "interested person" of the Registrant (as defined
in the Investment Company Act of 1940) and, if not an "interested person,"
information regarding each nominee that will be sufficient for the Registrant to
make such determination; and (ii) the written and signed consent of any person
to be nominated to be named as a nominee and to serve as a trustee if elected.
In addition, the trustees may require any proposed nominee to furnish such other
information as they may reasonably require or deem necessary to determine the
eligibility of such proposed nominee to serve as a trustee.

Without limiting the foregoing, any shareholder who gives a Shareholder
Notice of any matter proposed to be brought before a shareholder meeting
(whether or not involving nominees for trustees) shall deliver, as part of such
Shareholder Notice: (i) the description of and text of the proposal to be
presented; (ii) a brief written statement of the reasons why such shareholder
favors the proposal; (iii) such shareholder's name and address as they appear on
the Registrant's books; (iv) any other information relating to the shareholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with the solicitation of proxies with respect
to the matter(s) proposed pursuant to Section 14 of the Exchange Act; (v) the
class or series and number of all shares of the Registrant owned beneficially
and of record by such shareholder; (vi) any material interest of such
shareholder in the matter proposed (other than as a shareholder); (vii) a
representation that the shareholder intends to appear in person or by proxy at
the shareholder meeting to act on the matter(s) proposed; (viii) if the proposal
involves nominee(s) for trustees, a description of all arrangements or
understandings between the shareholder and each proposed nominee and any other
person or persons

(including their names) pursuant to which the nomination(s) are to be made
by the shareholder; and (ix) in the case of a shareholder (a "Beneficial Owner")
that holds shares entitled to vote at the meeting through a nominee or "street
name" holder of record, evidence establishing such Beneficial Owner's indirect
ownership of, and entitlement to vote, shares at the meeting of shareholders. As
used herein, shares "beneficially owned" shall mean all shares which such person
is deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the
Exchange Act.

A copy of the Nominating and Governance Committee Charter is available on the
Registrant's website at www.ftportfolios.com.

ITEM 11. CONTROLS AND PROCEDURES.

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

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

ITEM 12. EXHIBITS.

(a)(1) Not applicable.

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

(a)(3) Not applicable.

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

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 III

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

Date JUNE 29, 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 JUNE 29, 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 JUNE 29, 2007
----------------------------------------------------------------------------

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