Edgar Filing: MORGAN STANLEY MUNICIPAL INCOME OPPORTUNITIES TRUST III

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: 811-06052

Morgan Stanley Municipal Income Opportunities Trust III
(Exact name of registrant as specified in charter)

1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)

Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)

Registrant's telephone number, including area code: 212-762-4000

Date of fiscal year end: March 31, 2006

Date of reporting period: September 30, 2005

Item 1 - Report to Shareholders

Welcome, Shareholder:

In this report, you'll learn about how your investment in
Morgan Stanley Municipal Income Opportunities Trust III performed during the
semiannual period. We will provide an overview of the market conditions, and
discuss some of the factors that affected performance during the reporting
period. In addition, this report includes the Fund's financial statements and a
list of Fund investments.

MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND.

FUND REPORT

For the six months ended September 30, 2005

MARKET CONDITIONS

During the six months ended September 30, 2005, data continued to show moderate
economic growth, sustained consumer spending, and reasonable gains in
employment. Although core inflation (which excludes energy and food) remained
benign, inflationary concerns mounted as heavy demand and geopolitical events
drove oil prices to protracted highs. September brought heightened uncertainty
in the wake of the unprecedented devastation caused by Hurricanes Katrina and
Rita. The immediate economic impact was a major disruption to the nation's
energy infrastructure.

Continuing the "measured" rate tightening cycle that began in June of 2004, the
Federal Open Market Committee raised the federal funds target rate four times
during the second and third quarters of 2005. As a result, the rate rose from
2.75 percent to 3.75 percent, a four-year high.

Through most of the period, yields on short maturity bonds also rose in response
to the Fed's actions. However, on the whole, long-term municipal bond yields
declined. Representative yields on 30-year AAA rated municipal bonds declined
from 4.60 percent at the start of the period to a low of 4.25 percent in the
summer, then rose to 4.45 percent at the end of September. Overall, the
municipal yield curve continued to flatten and the yield spread (or differential
between one-year rates and 30-year rates) narrowed. Investors' quest for yield
favored lower-quality bonds over high-grade issues and kept credit spreads
relatively tight.

Led by a surge in refinancing activity, municipal issuance remained strong in
2005. New issue volume increased by 15 percent to $310 billion, a record for the
first nine months of a calendar year. As issuers rushed to refinance higher cost
debt, refundings increased to 35 percent of total issuance, up from 24 percent
in 2004. Bonds backed by insurance dominated issuance and increased their market
penetration to nearly 60 percent. Issuers in California, New York, Texas,
Florida and Pennsylvania accounted for more than 40 percent of the total
underwriting volume during the year-to-date period.

The municipal-to-Treasury yield ratio, which gauges performance between the two
markets, remained attractive for tax-exempt bonds. The 30-year ratio averaged 98
percent during the period and moved as high as 101 percent in June. (Higher
ratios indicate increased relative attractiveness of municipal bonds.) As a
result, institutional investors that normally focus on taxable bond sectors
supported municipals by "crossing over" to purchase tax-exempt bonds.

PERFORMANCE ANALYSIS

For the six-month period ended September 30, 2005, Morgan Stanley Municipal
Income Opportunities Trust III's (OIC's) net asset value (NAV) increased from
$9.51 to $9.70 per share. Based on this change plus reinvestment of tax-free
dividends totaling $0.255 per share, the Fund's total NAV return was 4.93
percent. OIC's value on the New York Stock Exchange (NYSE) increased from $8.27
to $9.28 per share during the same period. Based on this change plus
reinvestment of tax-free dividends, the Fund's total market return was 15.44
percent. On September 30, 2005, OIC's

NYSE market price was at a 4.33 percent discount to its NAV. During the
six-month period ended September 30, 2005, the Fund purchased and retired
182,721 shares of common stock at a weighted average market discount of 7.66
percent. Past performance is no guarantee of future results.

Monthly dividends for the fourth quarter of 2005, declared in September, were
increased from $0.0425 to $0.045 per share. The new dividend reflects the
current level of the Fund's net investment income. OIC's level of undistributed
net investment income was $0.117 per share on September 30, 2005, versus $0.098
per share six months earlier.(1)

The Fund invests primarily in higher yielding municipal bonds. Consistent with
this focus, over two-thirds of the Fund is invested in below investment grade or
non-rated issues. As of the end of the reporting period, the Fund included only
one nonperforming holding which represented less than one percent of net assets.
During the period, the Fund maintained a conservative strategy in anticipation
of continued Fed tightening and higher interest rates. Overall, the Fund's
duration* (a measure of interest rate sensitivity) positioning tempered total
returns when rates declined, but helped total returns when rates rose later in
the period. The portfolio's option-adjusted duration was 6.0 years. Reflecting a
commitment to diversification, the Fund's net assets of $84 million were
invested among 11 long-term sectors and 84 credits.

OIC's procedure for reinvesting all dividends and distributions in common shares
is through purchases in the open market. This method helps support the market
value of the Fund's shares. In addition, we would like to remind you that the
Trustees have approved a procedure whereby the Fund may, when appropriate,
purchase shares in the open market or in privately negotiated transactions at a
price not above market value or net asset value, whichever is lower at the time
of purchase.
----------------------------------------------------
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. INVESTMENT RETURN, NET ASSET VALUE AND COMMON SHARE MARKET PRICE WILL
FLUCTUATE AND FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
There is no guarantee that any sectors mentioned will continue to perform well
or that securities in such sectors will be held by the Fund in the future.

(1) Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).

* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, funds with shorter durations perform better in
rising-interest-rate environments, while funds with longer durations perform
better when rates decline.

TOP FIVE SECTORS

Retirement & Life Care Facilities 19.7%
Hospital 16.3
IDR/PCR* 13.4
Recreational Facilities 12.6
Nursing & Health Related Facilities 11.0

LONG-TERM CREDIT ANALYSIS

Aaa/AAA 2.4%
Aa/AA 0.3
A/A 1.2
Baa/BBB 24.9
Ba/BB or Less 9.5
Non-Rated 61.7

* Industrial Development/Pollution Control Revenue

Data as of September 30, 2005. Subject to change daily. All percentages for top
five sectors are as a percentage of net assets and all percentages for long-term
credit analysis are as a percentage of total long-term investments. These data
are provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.

FOR MORE INFORMATION
ABOUT PORTFOLIO HOLDINGS

EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102.

DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of 9/30/05

WEIGHTED AVERAGE MATURITY: 21 YEARS(A)

0-5 7
6-10 11
11-15 7
16-20 15
21-25 26
26-30 27
30+ 7

(a) Where applicable maturities reflect mandatory tenders, puts and call dates.

Portfolio structure is subject to change.

Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets

Alabama................. 1.2%
Arizona................. 2.6
California.............. 8.2
Colorado................ 1.6
Connecticut............. 2.5
District of Columbia.... 1.3
Florida................. 9.4
Hawaii.................. 2.6
Illinois................ 4.0
Indiana................. 2.8
Iowa.................... 2.6%
Kansas.................. 1.3
Louisiana............... 1.4
Maryland................ 2.2
Massachusetts........... 4.1
Minnesota............... 0.6
Missouri................ 8.5
Nevada.................. 3.1
New Hampshire........... 1.2
New Jersey.............. 7.5
New York................ 4.3
Oklahoma................ 1.3%
Pennsylvania............ 5.2
South Carolina.......... 1.8
Tennessee............... 2.7
Texas................... 4.4
Virginia................ 9.0
Washington.............. 0.4
Wyoming................. 1.9
Joint exemptions*....... (1.3)
----
Total................... 98.4%
====

---------------

* Joint exemptions have been included in each geographic location.

CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of 9/30/05

YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 5 YEARS

2005(a) 15
2006 4
2007 3
2008 8
2009 12
2010 8
2011 10
2012 14
2013 10
2014 7
2015+ 9

COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 6.7%

2005(a) 7.5
2006 6.2
2007 5.7
2008 6.4
2009 6.3
2010 7.3
2011 7.4
2012 6.7
2013 6.6
2014 6.2
2015+ 5.4

(a) May include issues callable in previous years.

(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Fund's operating expenses.
For example, the Fund is earning a book yield of 7.5% on 15% of the
long-term portfolio that is callable in 2005.
Portfolio structure is subject to change.

INVESTMENT ADVISORY AGREEMENT APPROVAL

NATURE, EXTENT AND QUALITY OF SERVICES

The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Fund's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Adviser's expense. (The
Investment Adviser and the Administrator together are referred to as the
"Adviser" and the Advisory and Administration Agreements together are referred
to as the "Management Agreement.") The Board also compared the nature of the
services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").

The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.

PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS

The Board reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2004, as shown in reports provided by Lipper (the
"Lipper Reports"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"), and noted that the Fund's performance was
lower than its performance peer group average for all three periods. The Board
discussed with the Adviser possible steps to improve performance. The Board
considered that the Fund's defensive positioning in the most recent year reduced
the Fund's risk exposure and that the Fund's performance was close to the
performance of its performance peer group year by year over the previous four
years. The Board concluded that the Fund's performance can reasonably be
expected to be competitive with that of its performance peer group.

FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES

The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the rate was comparable to the management fee rates charged by the
Adviser to any other funds it manages with investment strategies comparable to
those of the Fund.

FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS

The Board reviewed the management fee rate and total expense ratio of the Fund.
The Board noted that: (i) the Fund's management fee rate was lower than the
average management fee rate for funds, selected by Lipper (the "expense peer
group"), managed by other advisers, with investment strategies comparable to
those of the Fund, as shown in the Lipper Report for this Fund; and (ii) the
Fund's total expense ratio was also lower than the average total expense ratio
of the funds included in the Fund's expense peer group. The Board concluded that
the Fund's management fee and total expense ratio were competitive with those of
its expense peer group.

BREAKPOINTS AND ECONOMIES OF SCALE

The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it does not include any breakpoints. The
Board considered that the Fund is closed-end and is not a growth fund and,
therefore, that the Fund's assets are not likely to grow with new sales or grow
significantly as a result of capital appreciation. The Board concluded that
economies of scale for this Fund were not a factor that needed to be considered.

PROFITABILITY OF ADVISER AND AFFILIATES

The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.

FALL-OUT BENEFITS

The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as "float" benefits derived from handling of checks

for purchases and sales of Fund shares through a broker-dealer affiliate of the
Adviser. The Board considered the float benefits and concluded that they were
relatively small.

SOFT DOLLAR BENEFITS

The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Fund ("soft
dollars"). The Board noted that the Fund invests only in fixed income
securities, which do not generate soft dollars.

ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS

The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.

HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER

The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.

OTHER FACTORS AND CURRENT TRENDS

The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.

GENERAL CONCLUSION

After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2005 (UNAUDITED)

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------

Tax-Exempt Municipal Bonds (97.0%)
Educational Facilities Revenue (8.3%)
$ 1,000 Pima County Industrial Development Authority, Arizona, Noah
Webster Basic School Ser 2004 A.......................... 6.125% 12/15/34 $ 1,021,040
600 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs..................................................... 7.50 05/01/11 620,550
1,200 San Diego County, California, The Burnham Institute COPs... 6.25 09/01/29 1,254,996
500 Bellalago Educational Facilities Benefits District,
Florida, Bellalago Charter School 2004 Ser B............. 5.80 05/01/34 515,335
500 Illinois Finance Authority, Fullerton Village Student
Housing Ser 2004 A....................................... 5.125 06/01/35 502,395
1,500 Upland, Indiana, Taylor University Ser 2002................ 6.25 09/01/28 1,654,665
420 Maryland Industrial Development Financing Authority, Our
Lady of Good Counsel High School Ser 2005 A.............. 5.50 05/01/20 424,813
1,000 Chattanooga Health Educational & Housing Facilities Board,
Tennessee, Student Housing Refg Ser 2005 A............... 5.00 10/01/25 983,240
-----------
-------
6,977,034
6,720
-----------
-------
Hospital Revenue (16.3%)
1,000 Colbert County - Northwest Health Care Authority, Alabama,
Helen Keller Hospital Ser 2003........................... 5.75 06/01/27 1,029,120
1,000 Arizona Health Facilities Authority, John C Lincoln Health
Ser 2002................................................. 6.375 12/01/37 1,097,480
1,500 Hawaii Department of Budget & Finance, Wilcox Memorial
Hospital Ser 1998........................................ 5.50 07/01/28 1,508,265
500 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002........................................ 6.125 08/01/31 536,360
500 St Paul Housing & Redevelopment Authority, Minnesota,
HealthEast Ser 2005...................................... 6.00 11/15/35 537,095
1,000 Nevada, Missouri, Nevada Regional Medical Center Ser
2001..................................................... 6.75 10/01/31 1,061,980
1,000 Henderson, Nevada, Catholic Health West Ser 1998 A......... 5.125 07/01/28 1,012,110
1,000 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Association Ser 1998 A..... 6.00 05/01/28 1,023,620
1,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994...................... 7.25 07/01/27 1,028,900
1,000 Oklahoma Development Finance Authority, Comanche County
Hospital 2000 Ser B...................................... 6.60 07/01/31 1,109,420
1,000 South Carolina Jobs Economic Development Authority,
Palmetto Health Refg & Impr Ser 2003 C................... 6.875 08/01/27 1,139,010
500 Knox County Health, Educational & Housing Facility Board,
Tennessee, Baptist Health of East Tennessee Ser 2002..... 6.50 04/15/31 531,925

10
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2005 (UNAUDITED) continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------

$ 500 Decatur Hospital Authority, Texas, Wise Regional Health Ser
2004 A................................................... 7.125% 09/01/34 $ 542,120
1,500 Teton County Hospital District, Wyoming, St John's Medical
Center Ser 2002.......................................... 6.75 12/01/27 1,557,915
-----------
-------
13,715,320
13,000
-----------
-------
Industrial Development/Pollution Control Revenue (13.4%)
1,000 Los Angeles, California, American Airlines Inc Terminal 4
Ser 2002 C (AMT)......................................... 7.50 12/01/24 993,020
1,105 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser 1991
(AMT)+................................................... 10.125 09/01/11 1,106,513
200 Hawaii Department of Budget & Finance, Hawaiian Electric Co
Ser 1996 A (AMT) (MBIA).................................. 6.20 05/01/26 205,206
600 Chicago, Illinois, United Airlines Inc Refg Ser 2001
C(a)..................................................... 6.30 05/01/16 72,048
1,000 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT)........... 6.00 06/01/27 1,022,600
1,235 Maryland Industrial Development Financing Authority,
Medical Waste Associates LP 1989 Ser (AMT)............... 8.75 11/15/10 879,221
1,000 New Jersey Economic Development Authority, Continental
Airlines Inc
Ser 1999 (AMT)........................................... 6.625 09/15/12 926,650
New York City Industrial Development Agency, New York,
1,000 IAC/Interactive Corp Ser 2005............................ 5.00 09/01/35 1,014,180
1,000 7 World Trade Center LLC Ser A........................... 6.50 03/01/35 1,072,230
500 New York Counties Tobacco Trust IV, New York, Ser 2005 A... 5.00 06/01/45 483,160
1,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995
B........................................................ 7.75 05/01/20 1,024,590
725 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT).................................................... 6.65 05/01/10 784,639
500 Pennsylvania Economic Development Financing Authority,
Reliant Energy Inc Ser 2001 A (AMT)...................... 6.75 12/01/36 537,760
375 Lexington County, South Carolina, Ellett Brothers Inc Refg
Ser 1988................................................. 7.50 09/01/08 370,699
800 Pittsylvania County Industrial Development Authority,
Virginia, Multi-Trade Pittsylvania County Ser 1994 A
(AMT).................................................... 7.45 01/01/09 827,640
-----------
-------
11,320,156
12,040
-----------
-------
Mortgage Revenue - Multi-Family (4.0%)
500 Honolulu City & County, Hawaii, Smith-Beretania FHA Insured
Ser 2002 A............................................... 5.45 01/01/25 500,405
Alexandria Redevelopment & Housing Authority, Virginia,
1,760 Courthouse Commons Apts Ser 1990 A (AMT)................. 10.00 01/01/21 1,606,017
8,791 Courthouse Commons Apts Ser 1990 B (AMT)................. 0.00 01/01/21 991,061
290 Washington Housing Finance Commission, FNMA Collateralized
Refg Ser 1990 A.......................................... 7.50 07/01/23 290,542
-----------
-------
3,388,025
11,341
-----------
-------

11
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2005 (UNAUDITED) continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------

Mortgage Revenue - Single Family (0.9%)
$ 85 Maricopa County Industrial Development Authority, Arizona,
Ser 2000-1C (AMT)........................................ 6.25% 12/01/30 $ 85,432
230 Colorado Housing Finance Authority, 1998 Ser B-2 (AMT)..... 7.25 10/01/31 243,059
415 Chicago, Illinois, GNMA-Collateralized Ser 1998 A-1
(AMT).................................................... 6.45 09/01/29 432,737
-----------
-------
761,228
730
-----------
-------
Nursing & Health Related Facilities Revenue (11.0%)
2,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999........ 6.75 04/01/34 2,064,301
1,000 Pinellas County Health Facilities Authority, Florida, Oaks
of Clearwater Ser 2004................................... 6.25 06/01/34 1,045,590
960 Iowa Health Facilities Development Financing Authority,
Care Initiatives Ser 1996................................ 9.25 07/01/25 1,175,731
1,200 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993......... 8.375 10/01/13 1,208,424
Massachusetts Development Finance Agency,
500 Evergreen Center Ser 2005................................ 5.50 01/01/35 502,475
1,455 Kennedy-Donovan Center Inc 1990 Issue.................... 7.50 06/01/10 1,508,471
745 New Jersey Health Care Facilities Financing Authority,
Spectrum for Living - FHA Insured Mortgage Refg Ser B.... 6.50 02/01/22 746,542
1,000 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999...................... 6.20 06/01/29 1,023,980
-----------
-------
9,275,514
8,860
-----------
-------
Public Facilities Revenue (1.2%)
1,000 Kansas City Industrial Development Authority, Missouri,
------- Plaza Library Ser 2004................................... 5.90 03/01/24 997,270
-----------
Recreational Facilities Revenue (12.6%)
1,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser A.................................. 6.25 01/01/30 1,049,250
1,300 San Diego County, California, San Diego Natural History
Museum COPs.............................................. 5.60 02/01/18 1,244,750
500 Mashantucket (Western) Pequot Tribe, Connecticut, Special
1996 Ser A(b)............................................ 6.40 09/01/11 521,500
1,500 Mohegan Tribe of Indians, Connecticut, Gaming Authority Ser
2001..................................................... 6.25 01/01/31 1,613,655
1,000 Overland Park Development Corporation, Kansas, Convention
Center Hotel Ser 2000 A.................................. 7.375 01/01/32 1,091,410
3,000 St Louis Industrial Development Authority, Missouri, Kiel
Center Refg Ser 1992 (AMT)............................... 7.75 12/01/13 3,051,600

12
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2005 (UNAUDITED) continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------

$ 1,000 Philadelphia Industrial Development Authority,
Pennsylvania, The Franklin Institute Ser 1998............ 5.20% 06/15/26 $ 1,004,300
1,000 Austin Convention Enterprises Inc, Texas, Convention Center
Hotel Ser 2000 A......................................... 6.70 01/01/32 1,061,000
-----------
-------
10,637,465
10,300
-----------
-------
Retirement & Life Care Facilities Revenue (19.7%)
1,100 Orange County Health Facilities Authority, Florida, Orlando
Lutheran Towers Inc Ser 2005............................. 5.375 07/01/20 1,095,468
2,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A...................................... 8.00 01/01/30 2,158,660
1,000 Illinois Finance Authority, Friendship Village of
Schaumburg, Ser 2005 A................................... 5.625 02/15/37 1,013,380
750 Illinois Health Facilities Authority, Villa St Benedict Ser
2003 A-1................................................. 6.90 11/15/33 809,018
1,425 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A................................... 5.625 07/01/15 1,439,136
1,000 Kansas City Industrial Development Authority, Missouri,
Bishop Spencer 2004 Ser I................................ 6.25 01/01/24 1,045,600
New Jersey Economic Development Authority,
1,000 Cedar Crest Village Inc Ser 2001 A....................... 7.25 11/15/31 1,087,700
1,000 Franciscan Oaks Ser 1997................................. 5.70 10/01/17 1,016,640
1,000 Franciscan Oaks Ser 1997................................. 5.75 10/01/23 1,013,030
500 Lions Gate Ser 2005 A.................................... 5.875 01/01/37 511,875
500 Montgomery County Industry Development Authority,
Pennsylvania, Whitemarsh Community Ser 2005.............. 6.25 02/01/35 524,445
750 Shelby County Health, Educational & Housing Facilities
Board, Tennessee, Village at Germantown Ser 2003 A....... 7.25 12/01/34 769,748
1,000 Bexar County Health Facilities Development Corporation,
Texas, Army Retirement Residence Ser 2002................ 6.30 07/01/32 1,073,010
2,625 Chesterfield County Industrial Development Authority,
Virginia, Brandermill Woods Ser 1998..................... 6.50 01/01/28 2,531,689
500 Peninsula Ports Authority of Virginia, Virginia Baptist
Homes Ser 2003 A......................................... 7.375 12/01/32 558,225
-----------
-------
16,647,624
16,150
-----------
-------
Tax Allocation Revenue (8.3%)
1,000 San Marcos Community Facilities District No 2002-01,
California, University Commons Ser 2004.................. 5.90 09/01/28 1,049,970
700 Santa Ana Unified School District, California Communities
Facilities District, No 2004-1 Ser 2005.................. 5.05 09/01/30 678,461

13
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2005 (UNAUDITED) continued

PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------

Elk Valley Public Improvement Corporation, Colorado,
$ 500 Ser 2001 A............................................... 7.30% 09/01/22 $ 537,155
500 Ser 2001 A............................................... 7.35 09/01/31 533,235
1,000 Midtown Miami Community Development District, Florida,
Parking Garage Ser 2004 A................................ 6.25 05/01/37 1,065,150
500 Chicago, Illinois, Lake Shore East Ser 2002................ 6.75 12/01/32 544,995
500 Prince George's County, Maryland, National Harbor Ser
2004..................................................... 5.20 07/01/34 507,410
1,000 Des Peres, Missouri, West County Center Ser 2002........... 5.75 04/15/20 1,027,630
500 Clark County Special Improvement District 142, Nevada,
Mountains Edge Ser 2003.................................. 6.375 08/01/23 518,655
500 Allegheny County Redevelopment Authority, Pennsylvania,
Pittsburgh Mills Ser 2004................................ 5.60 07/01/23 520,245
-----------
-------
6,982,906
6,700
-----------
-------
Transportation Facilities Revenue (1.3%)
1,000 Nevada Department of Business & Industry, Las Vegas
------- Monorail 2nd Tier Ser 2000............................... 7.375 01/01/40 1,048,510
-----------
87,841 Total Tax-Exempt Municipal Bonds (Cost $79,887,456)........................... 81,751,052
-----------
-------
Short-Term Tax-Exempt Municipal Obligations (1.4%)
200 Indiana Health Facility Financing Authority, Clarian Health
Ser 2000 B (Demand 10/03/05)............................. 2.98* 03/01/30 200,000
1,000 Harris County Health Facilities Development Corporation,
Texas, Methodist Hospital Ser 2005 B (Demand 10/03/05)... 2.81* 12/01/32 1,000,000
-----------
-------
1,200 Total Short-Term Tax-Exempt Municipal Obligations (Cost $1,200,000)........... 1,200,000
-----------
-------

$89,041 Total Investments (Cost $81,087,456) (c)........................... 98.4% 82,951,052
=======
Other Assets in Excess of Liabilities.............................. 1.6 1,363,240
----- -----------
Net Assets......................................................... 100.0% $84,314,292
===== ===========

---------------------

AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate demand obligation.
+ Joint exemption in locations shown.
(a) Bond in default; issuer in bankruptcy.
(b) Resale is restricted to qualified institutional investors.
(c) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is $4,028,753
and the aggregate gross unrealized depreciation is
$2,093,689, resulting in net unrealized appreciation of
$1,935,064.

Bond Insurance:
---------------
MBIA Municipal Bond Investors Assurance Corporation.

14
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
September 30, 2005 (unaudited)

Assets:
Investments in securities, at value (cost $81,087,456)...... $82,951,052
Cash........................................................ 60,455
Receivable for:
Interest................................................ 1,439,650
Investments sold........................................ 35,000
Prepaid expenses and other assets........................... 11,225
-----------
Total Assets............................................ 84,497,382
-----------
Liabilities:
Payable for:
Investment advisory fee................................. 40,729
Shares of beneficial interest repurchased............... 23,117
Transfer agent fee...................................... 16,464
Administration fee...................................... 6,517
Accrued expenses and other payables......................... 96,263
-----------
Total Liabilities....................................... 183,090
-----------
Net Assets.............................................. $84,314,292
===========
Composition of Net Assets:
Paid-in-capital............................................. $82,922,634
Net unrealized appreciation................................. 1,863,596
Accumulated undistributed net investment income............. 1,017,312
Accumulated net realized loss............................... (1,489,250)
-----------
Net Assets.............................................. $84,314,292
===========
Net Asset Value Per Share,
8,693,657 shares outstanding (unlimited shares authorized of
$.01 par value)............................................. $9.70
===========

See Notes to Financial Statements
15

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended September 30, 2005 (unaudited)

Net Investment Income:
Interest Income............................................. $2,730,691
----------
Expenses
Investment advisory fee..................................... 213,185
Administration fee.......................................... 34,110
Professional fees........................................... 30,696
Transfer agent fees and expenses............................ 18,471
Shareholder reports and notices............................. 18,302
Registration fees........................................... 8,090
Trustees' fees and expenses................................. 4,114
Custodian fees.............................................. 2,747
Other....................................................... 8,513
----------
Total Expenses.......................................... 338,228

Less: expense offset........................................ (2,618)
----------
Net Expenses............................................ 335,610
----------
Net Investment Income................................... 2,395,081
----------
Net Realized and Unrealized Gain:
Net realized gain........................................... 674,855
Net change in unrealized appreciation....................... 736,600
----------
Net Gain................................................ 1,411,455
----------
Net Increase................................................ $3,806,536
==========

See Notes to Financial Statements
16

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
SEPTEMBER 30, 2005 MARCH 31, 2005
------------------ --------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 2,395,081 $ 4,778,236
Net realized gain (loss).................................... 674,855 (891,137)
Net change in unrealized appreciation/depreciation.......... 736,600 1,695,270
----------- -----------
Net Increase............................................ 3,806,536 5,582,369

Dividends to shareholders from net investment income........ (2,243,326) (4,789,919)

Decrease from transactions in shares of beneficial
interest.................................................. (1,628,956) (1,961,269)
----------- -----------
Net Decrease............................................ (65,746) (1,168,819)
Net Assets:
Beginning of period......................................... 84,380,038 85,548,857
----------- -----------
End of Period
(Including accumulated undistributed net investment income
of $1,017,312 and $865,557, respectively)................... $84,314,292 $84,380,038
=========== ===========

See Notes to Financial Statements
17

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2005 (UNAUDITED)

1. Organization and Accounting Policies

Morgan Stanley Municipal Income Opportunities Trust III (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Fund's investment
objective is to provide a high level of current income which is exempt from
federal income tax. The Fund was organized as a Massachusetts business trust on
February 20, 1990 and commenced operations on April 30, 1990.

The following is a summary of significant accounting policies:

A. Valuation of Investments -- (1) portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid matrix of tax-exempt securities and evaluations by its
staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the mean between the last reported bid and
asked price. The portfolio securities are thus valued by reference to a
combination of transactions and quotations for the same or other securities
believed to be comparable in quality, coupon, maturity, type of issue, call
provisions, trading characteristics and other features deemed to be relevant.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees; and (3) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.

B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily except where collection
is not expected.

C. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2005 (UNAUDITED) continued

broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments known as variation margin are recorded by
the Fund as unrealized gains and losses. Upon closing of the contract, the Fund
realizes a gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.

D. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.

E. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.

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

2. Investment Advisory/Administration Agreements

Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser") the Fund pays the Investment Adviser an
advisory fee, calculated weekly and payable monthly, by applying the annual rate
of 0.50% to the Fund's weekly net assets.

Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, calculated weekly and payable monthly, by applying
the annual rate of 0.08% to the Fund's weekly net assets.

3. Security Transactions and Transactions with Affiliates

The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended September 30, 2005 aggregated
$8,164,794 and $10,103,647, respectively. Included in the aforementioned
transactions is a purchase of $999,250 with another Morgan Stanley fund.

Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent.

The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2005 (UNAUDITED) continued

last five years of service. The Trustees voted to close the plan to new
participants and eliminate the future benefits growth due to increase to
compensation after July 31, 2003. Aggregate pension costs for the six months
ended September 30, 2005 included in Trustees' fees and expenses in the
Statement of Operations amounted to $3,633. At September 30, 2005, the Fund had
an accrued pension liability of $60,687 which is included in accrued expenses in
the Statement of Assets and Liabilities.

The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan Stanley funds that are offered as
investment options under the Compensation Plan. Appreciation/depreciation and
distributions received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Fund.

4. Shares of Beneficial Interest

Transactions in shares of beneficial interest were as follows:

CAPITAL
PAR VALUE PAID IN
OF EXCESS OF
SHARES SHARES PAR VALUE
--------- --------- -----------

Balance, March 31, 2004..................................... 9,109,873 $91,099 $86,421,820
Treasury shares purchased and retired (weighted average
discount 10.25%)*......................................... (233,495) (2,335) (1,958,934)
Reclassification due to permanent book/tax differences...... -- -- (60)
--------- ------- -----------
Balance, March 31, 2005..................................... 8,876,378 88,764 84,462,826
Treasury shares purchased and retired (weighted average
discount 7.66%)*.......................................... (182,721) (1,827) (1,627,129)
--------- ------- -----------
Balance, September 30, 2005................................. 8,693,657 $86,937 $82,835,697
========= ======= ===========

---------------------
* The Trustees have voted to retire the shares purchased.

5. Dividends

On September 27, 2005, the Fund declared the following dividends from net
investment income:

AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ----------------- -----------------

$0.045 October 7, 2005 October 21, 2005
$0.045 November 4, 2005 November 18, 2005
$0.045 December 9, 2005 December 23, 2005

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2005 (UNAUDITED) continued

6. Expense Offset

The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.

7. Risks Relating to Certain Financial Instruments

The Fund may invest a portion of its assets in residual interest bonds, which
are inverse floating rate municipal obligations. The prices of these securities
are subject to greater market fluctuations during periods of changing prevailing
interest rates than are comparable fixed rate obligations.

To hedge against adverse interest rate changes, the Fund may invest in financial
futures contracts or municipal bond index futures contracts ("futures
contracts").

These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.

8. Federal Income Tax Status

The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.

As of March 31, 2005, the Fund had a net capital loss carryforward of $2,164,105
of which $1,188,743 will expire on March 31, 2011 and $975,362 will expire on
March 31, 2013 to offset future capital gains to the extent provided by
regulations.

As of March 31, 2005, the Fund had temporary book/tax differences primarily
attributable to book amortization of discounts on debt securities.

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL HIGHLIGHTS

Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:

FOR THE SIX FOR THE YEAR ENDED MARCH 31,
MONTHS ENDED ------------------------------------------------------------
SEPTEMBER 30, 2005 2005 2004 2003 2002 2001
------------------ -------- -------- -------- -------- --------
(unaudited)

Selected Per Share Data:
Net asset value, beginning of period........ $ 9.51 $ 9.39 $ 9.33 $ 9.32 $ 9.48 $ 9.34
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income*.................. 0.27 0.53 0.52 0.56 0.57 0.57
Net realized and unrealized gain
(loss).................................. 0.16 0.10 0.09 0.01 (0.12) 0.11
------ ------ ------ ------ ------ ------
Total income from investment operations..... 0.43 0.63 0.61 0.57 0.45 0.68
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income................... (0.26) (0.53) (0.56) (0.57) (0.57) (0.56)
Net realized gain....................... -- -- -- -- (0.05) (0.01)
------ ------ ------ ------ ------ ------
Total dividends and distributions........... (0.26) (0.53) (0.56) (0.57) (0.62) (0.57)
------ ------ ------ ------ ------ ------
Anti-dilutive effect of acquiring treasury
shares*.................................... 0.02 0.02 0.01 0.01 0.01 0.03
------ ------ ------ ------ ------ ------
Net asset value, end of period.............. $ 9.70 $ 9.51 $ 9.39 $ 9.33 $ 9.32 $ 9.48
====== ====== ====== ====== ====== ======
Market value, end of period................. $ 9.28 $ 8.27 $ 8.92 $ 8.63 $ 8.72 $ 8.85
====== ====== ====== ====== ====== ======
Total Return+............................... 15.44%(1) (1.27)% 10.00% 5.58% 5.56% 23.09%
Ratios to Average Net Assets:
Expenses.................................... 0.79%(2)(3) 0.93%(3) 1.02%(3) 0.98%(3) 0.99%(3) 0.97%(3)
Net investment income....................... 5.62%(2) 5.68% 5.59% 5.96% 6.02% 6.05%
Supplemental Data:
Net assets, end of period, in thousands..... $84,314 $84,380 $85,549 $86,567 $88,271 $91,424
Portfolio turnover rate..................... 10%(1) 17% 12% 8% 18% 14%

---------------------

* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends and
distributions are assumed to be reinvested at the prices
obtained under the Fund's dividend reinvestment plan. Total
return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.

See Notes to Financial Statements
22

(This Page Intentionally Left Blank)

TRUSTEES

Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid

OFFICERS

Charles A. Fiumefreddo
Chairman of the Board

Ronald E. Robison
President and Principal Executive Officer

Joseph J. McAlinden
Vice President

Barry Fink
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

Stefanie V. Chang
Vice President

Francis J. Smith
Treasurer and Chief Financial Officer

Thomas F. Caloia
Vice President

Mary E. Mullin
Secretary

TRANSFER AGENT

Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281

INVESTMENT ADVISER

Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020

The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.

Investments and services offered through Morgan Stanley DW Inc., member SIPC.

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Municipal Income
Opportunities Trust III

Semiannual Report
September 30, 2005

[MORGAN STANLEY LOGO]

38513RPT-RA05-00919P-Y09/05

Item 2. Code of Ethics.