UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR S/A

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, 2004

Date of reporting period: September 30, 2003

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
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, 2003

MARKET OVERVIEW

The six-month period ended September 30, 2003 was a volatile time for the fixed
income markets. The U.S. economy struggled early in the period, but then showed
signs of recovery. The bond market performed strongly during much of the spring,
with yields falling steadily through the first half of June. At that point,
however, signs of economic growth led investors to fear that interest rates were
unsustainably low. Bond prices (which generally move in opposition to yields)
fell sharply through the end of July, when investors shifted assets away from
the debt markets. In August and September the fixed-income markets stabilized as
investors tempered their reactions to the improvement in the economy.

While municipal bonds also rallied early in the period, several factors caused
them to lag Treasuries. Municipalities issued a record amount of debt to take
advantage of low costs for financing and refinancing. Although this supply was
readily absorbed by investors, it slowed the rally. Changes to the corporate
dividend tax also caused investors to reassess the attractiveness of tax-free
municipal bonds.

The summer started out as one of the weakest periods for municipal bonds in the
past 20 years. In July, bond prices plummeted as interest rates moved higher
across the yield curve. However, the market stabilized by the end of September,
recouping nearly half its losses. Although the pace of municipal new-issue
volume slowed in the third quarter, annual underwriting volume remained on track
to exceed $350 billion for the first time.

PERFORMANCE ANALYSIS

For the six-month period ended September 30, 2003, the net asset value (NAV) of
Morgan Stanley Municipal Income Opportunities Trust III (OIC) decreased from
$9.33 to $9.27 per share. Based on this change plus the reinvestment of tax-free
dividends totaling $0.285 per share, the Fund's total NAV return was 2.58
percent. OIC's value on the New York Stock Exchange (NYSE) increased from $8.63
to $8.90 per share during the same period. Based on this change plus the
reinvestment of tax-free dividends, OIC's total market return was 6.48 percent.
OIC's share price was trading at a 3.99 percent discount to its NAV on September
30, 2003. Past performance is no guarantee of future results.

Monthly dividends for the fourth quarter of 2003, declared in September were
decreased to $0.045 per share to reflect the Fund's current and projected
earnings level. The Fund's level of undistributed net investment income was
$0.10 per share on September 30, 2003, versus $0.12 per share six months
earlier.

The Fund's performance benefited from several positive factors. Previous
decisions to avoid tobacco bonds and to maintain our position in airline-backed
securities helped the Fund's performance. The Fund's investment in the nonrated
sector was another positive contributor. The prices of these securities are
typically less sensitive than investment-grade bonds to movements in interest
rates. As a result they declined less than investment-grade bonds when interest
rates jumped in July. Purchases during the period focused on health-care issues
to take advantage of supply and attractive yield opportunities.

The Fund's procedure for reinvestment of all dividends and distributions on
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.

<Table>
<Caption>
LARGEST INDUSTRIES

Hospital 20.4%
IDR/PCR* 17.4
Retirement & Life Care Facilities 15.8
Recreational Facilities 14.1
Nursing & Health Related Facilities 9.2
Mortgage 6.8
Education 6.4
</Table>

* Industrial Development/Pollution Control Revenue.

<Table>
<Caption>
CREDIT ANALYSIS

Aaa/AAA 4.7%
Aa/AA 0.6
A/A 2.6
Baa/BBB 29.2
Ba/BB or less 8.7
NR 54.2
</Table>

Subject to change daily. Largest industries' percentages are as a percentage of
net assets and credit analysis is as a percentage of total long-term
investments. Provided for information purposes only and should not be deemed as
a recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service firm engaged in securities trading and brokerage activities,
investment banking, research and analysis, financing and financial advisory
services.

CALL AND COST (BOOK) YIELD STRUCTURE

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

(Based on Long-Term Portfolio) As of 9/30/03

<Table>
%
----

2003(a) 16%
2004 5%
2005 8%
2006 3%
2007 1%
2008 9%
2009 10%
2010 13%
2011 10%
2012 16%
2013+ 9%
</Table>

COST (BOOK) YIELD(b) -- WEIGHTED AVERAGE BOOK YIELD: 6.9%

(Based on Long-Term Portfolio) As of 9/30/03

<Table>
%
---

2003(a) 8.1%
2004 6.7%
2005 6.9%
2006 7.6%
2007 6.0%
2008 6.3%
2009 6.1%
2010 6.8%
2011 7.4%
2012 6.7%
2013+ 6.6%
</Table>

(a) Includes 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 8.1% on 16% of the
long-term portfolio that is callable in 2003. Portfolio structure is
subject to change.

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2003 (UNAUDITED)

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------

Tax-Exempt Municipal Bonds (95.3%)
Educational Facilities Revenue (6.4%)
$ 800 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs..................................................... 7.50% 05/01/11 $ 861,176
1,200 San Diego County, California, The Burnham Institute COPs... 6.25 09/01/29 1,242,528
1,500 Upland, Indiana, Taylor University Ser 2002................ 6.25 09/01/28 1,585,425
2,000 New York City Industrial Development Agency, New York,
Polytechnic University 2000.............................. 6.125 11/01/30 1,745,200
-----------
-------
5,434,329
5,500
-----------
-------
Hospital Revenue (20.4%)
1,000 Colbert County-Northwest Health Care Authority, Alabama,
Helen Keller Hospital Ser 2003........................... 5.75 06/01/27 952,760
1,000 Arizona Health Facilities Authority, John C Lincoln Health
Ser 2002................................................. 6.375 12/01/37 1,034,290
1,500 Hawaii Department of Budget & Finance, Wilcox Memorial
Hospital Ser 1998........................................ 5.50 07/01/28 1,472,025
500 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002........................................ 6.125 08/01/31 511,625
Massachusetts Health & Educational Facilities Authority,
1,000 Dana Farber Cancer Institute Ser G-1..................... 6.25 12/01/14 1,059,220
1,000 Dana Farber Cancer Institute Ser G-1..................... 6.25 12/01/22 1,051,740
1,000 Nevada, Missouri, Nevada Regional Medical Center Ser
2001..................................................... 6.75 10/01/31 1,022,980
1,000 Henderson, Nevada, Catholic Health Care West Ser 1998 A.... 5.125 07/01/28 889,000
1,000 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Association Ser 1998 A..... 6.00 05/01/28 808,750
1,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994...................... 7.25 07/01/27 1,030,830
1,000 New York City Industrial Development Agency, New York,
Staten Island University Hospital Ser B.................. 6.375 07/01/31 1,052,940
1,500 Oklahoma Development Finance Authority, Comanche County
Hospital 2000 Ser B...................................... 6.60 07/01/31 1,477,845
1,000 Lehigh County General Purpose Authority, Pennsylvania, St
Lukes Hospital Ser 2003.................................. 5.25 08/15/23 974,660
1,000 South Carolina Jobs- Economic Development Authority,
Palmetto Health, Refg Ser 2003 C......................... 6.875 08/01/27 1,053,930
1,500 Knox County Health Educational & Housing Facility Board,
Tennessee, Baptist Health of East Tennessee Ser 2002..... 6.50 04/15/31 1,531,995
1,500 Teton County Hospital District, Wyoming, St Johns Medical
Center Ser 2002.......................................... 6.75 12/01/27 1,464,915
-----------
-------
17,389,505
17,500
-----------
-------
Industrial Development/Pollution Control Revenue (17.4%)
1,000 Los Angeles Regional Airports Improvement Corporation,
California, American Airlines Inc Terminal 4 Ser 2002 C
(AMT).................................................... 7.50 12/01/24 897,890
</Table>

5
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2003 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------

$ 1,305 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser 1991
(AMT)+................................................... 10.125% 09/01/11 $ 1,285,660
600 Chicago, Illinois, United Airlines Inc Refg Ser 2001 C
(a)...................................................... 6.30 05/01/16 132,600
1,000 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT)........... 6.00 06/01/27 928,660
3,000 Perry County, Kentucky, TJ International Inc Ser 1994
(AMT).................................................... 7.00 06/01/24 3,113,190
1,285 Maryland Industrial Development Financing Authority,
Medical Waste Associates LP 1989 Ser (AMT)............... 8.75 11/15/10 1,123,206
1,000 New Jersey Economic Development Authority, Continental
Airlines Inc Ser 1999 (AMT)#............................. 6.625 09/15/12 913,790
1,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995
B........................................................ 7.75 05/01/20 1,081,250
880 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT).................................................... 6.65 05/01/10 940,738
755 Lexington County, South Carolina, Ellett Brothers Inc Refg
Ser 1988................................................. 7.50 09/01/08 734,200
650 Brazos River Authority, Texas, TXU Electric Refg Ser 1999 A
(AMT).................................................... 7.70 04/01/33 717,444
3,000 Pittsylvania County Industrial Development Authority,
Virginia, Multi-Trade LP Ser 1994 A (AMT)................ 7.45 01/01/09 2,963,010
-----------
-------
14,831,638
15,475
-----------
-------
Mortgage Revenue - Multi-Family (4.8%)
Alexandria Redevelopment & Housing Authority, Virginia,
1,760 Courthouse Commons Apts Ser 1990 A (AMT)................. 10.00 01/01/21 1,671,260
9,259 Courthouse Commons Apts Ser 1990 B (AMT)................. 0.00 01/01/21 1,006,900
1,435 Washington Housing Finance Commission, FNMA Collateralized
Refg Ser 1990 A.......................................... 7.50 07/01/23 1,437,253
-----------
-------
4,115,413
12,454
-----------
-------
Mortgage Revenue - Single Family (2.0%)
445 Colorado Housing Finance Authority, 1998 Ser B-2 (AMT)..... 7.25 10/01/31 464,954
1,235 Chicago, Illinois, GNMA-Collateralized Ser 1998 A-1
(AMT).................................................... 6.45 09/01/29 1,278,435
-----------
-------
1,743,389
1,680
-----------
-------
Nursing & Health Related Facilities Revenue (9.2%)
2,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Ser 1999..................... 6.75 04/01/34 1,541,400
985 Iowa Health Facilities Development Financing Authority,
Care Initiatives Ser 1996................................ 9.25 07/01/25 1,148,392
1,300 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993......... 8.375 10/01/13 1,339,026
1,905 Massachusetts Development Finance Agency, Kennedy-Donovan
Center Inc 1990 Issue.................................... 7.50 06/01/10 1,975,294
1,000 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999...................... 6.20 06/01/29 927,500
1,790 Hurricane, Utah, Mission Health Service Ser 1990 (b)....... 10.50 07/01/20 896,897
-----------
-------
7,828,509
8,980
-----------
-------
</Table>

6
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2003 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------

Recreational Facilities Revenue (14.1%)
$ 1,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser A.................................. 6.25% 01/01/30 $ 997,700
1,300 San Diego County, California, San Diego Natural History
Museum COPs.............................................. 5.60 02/01/18 1,199,796
3,250 Metropolitan Football Stadium District, Colorado, Sales Tax
Ser 1999 A (MBIA)........................................ 0.00 01/01/10 2,619,370
500 Mashantucket (Western) Pequot Tribe, Connecticut, 1996 Ser
A (c).................................................... 6.40 09/01/11 541,975
1,500 Mohegan Tribe of Indians of Connecticut Gaming Authority,
Ser 2001................................................. 6.25 01/01/31 1,570,635
1,000 Overland Park Development Corporation, Kansas, Convention
Center Hotel Ser 2000 A.................................. 7.375 01/01/32 1,003,930
3,000 St Louis Industrial Development Authority, Missouri, Kiel
Center Refg Ser 1992 (AMT)............................... 7.75 12/01/13 3,026,040
1,000 Austin Convention Enterprises Inc, Texas, Convention Center
Hotel Ser 2000 A......................................... 6.70 01/01/32 1,025,380
-----------
-------
11,984,826
12,550
-----------
-------
Retirement & Life Care Facilities Revenue (15.8%)
2,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A...................................... 8.00 01/01/30 1,997,220
500 Hawaii Department of Budget and Finance, Kahala Nui 2003
Ser A.................................................... 8.00 11/15/33 497,110
1,425 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A................................... 5.625 07/01/15 1,344,687
New Jersey Economic Development Authority,
1,000 Cedar Crest Village Inc Ser 2001 A....................... 7.25 11/15/31 1,021,260
1,000 Franciscan Oaks Ser 1997................................. 5.70 10/01/17 912,600
1,000 Franciscan Oaks Ser 1997................................. 5.75 10/01/23 874,280
990 Glen Cove Housing Authority, New York, Mayfair at Glen Cove
Ser 1996 (AMT)........................................... 8.25 10/01/26 1,049,915
1,000 Bexar County Health Facilities Development Corporation,
Texas, Army Retirement Residence Ser 2002................ 6.30 07/01/32 1,030,280
2,925 Chesterfield County Industrial Development Authority,
Virginia, Brandermill Woods Ser 1998..................... 6.50 01/01/28 2,748,564
500 Peninsula Ports Authority of Virginia , Virginia Baptist
Homes Ser 2003 A......................................... 7.375 12/01/32 507,205
1,750 Wisconsin Health & Educational Facilities Authority,
Oakwood Ser 1998......................................... 5.90 08/15/28 1,441,352
-----------
-------
13,424,473
14,090
-----------
-------
Tax Allocation Revenue (4.1%)
1,000 Capistrano Unified School District, California, Community
Facilities District #98-2 Ladera Ser 1999 Special Tax.... 5.75 09/01/29 995,940
Elk Valley Public Improvement Corporation, Colorado
500 Ser 2001 A............................................... 7.30 09/01/22 513,070
500 Ser 2001 A............................................... 7.35 09/01/31 513,040
500 Chicago, Illinois, Lake Shore East Ser 2002................ 6.75 12/01/32 496,155
</Table>

7
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2003 (UNAUDITED) continued

<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------

$ 1,000 Des Peres, Missouri, West County Center Ser 2002........... 5.75% 04/15/20 $ 1,001,300
-----------
-------
3,519,505
3,500
-----------
-------
Transportation Facilities Revenue (1.1%)
1,000 Nevada Department of Business & Industry, Las Vegas
Monorail 2nd Tier Ser 2000............................... 7.375 01/01/40 935,130
-----------
-------
92,729 Total Tax-Exempt Municipal Bonds (Cost $82,898,760)........................... 81,206,717
-----------
-------
Short-Term Tax-Exempt Municipal Obligation (2.7%)
2,300 Atlanta, Georgia, Water & Wastewater Ser 2002 C (FSA)
------- (Demand 10/01/03) (Cost $2,300,000)...................... 1.20* 11/01/41 2,300,000
-----------
</Table>

<Table>

$95,029 Total Investments (Cost $85,198,760) (d)(e)........................ 98.0% 83,506,717
=======
Other Assets in Excess of Liabilities.............................. 2.0 1,742,373
----- -----------
Net Assets......................................................... 100.0% $85,249,090
===== ===========
</Table>

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

<Table>

AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate demand obligation.
+ Joint exemption in locations shown.
# This security has been physically segregated in connection
with open futures contracts.
(a) Non-income producing security; issuer in bankruptcy.
(b) Non-income producing security; issuer in default.
(c) Resale is restricted to qualified institutional investors.
(d) Securities have been designated as collateral in an amount
equal to $1,318,891 in connection with open futures
contracts.
(e) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $2,111,413 and
the aggregate gross unrealized depreciation is $3,803,456,
resulting in net unrealized depreciation of $1,692,043.

Bond Insurance:
- ---------------
MBIA Municipal Bond Investors Assurance Corporation.
FSA Financial Security Assurance Inc.
</Table>

8
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2003 (UNAUDITED) continued

Futures Contracts Open at September 30, 2003:

<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE DEPRECIATION
- --------- ---------- ---------------------- ------------------------ --------------

10 Short U.S. Treasury Notes 5 $(1,134,688) $(19,246)
Yr December/2003
10 Short U.S. Treasury Notes 10 (1,146,250) (29,066)
Yr December/2003
--------
Total Unrealized Depreciation................... $(48,312)
========
</Table>

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

<Table>

Alabama................. 1.1%
Arizona................. 1.2
California.............. 7.3
Colorado................ 4.8
Connecticut............. 2.5
District of Columbia.... 1.5
Florida................. 4.2
Georgia................. 2.7
Hawaii.................. 2.3
Illinois................ 2.2
Indiana................. 2.5
Iowa.................... 2.4
Kansas.................. 1.2
Kentucky................ 3.7
Louisiana............... 1.6
Maryland................ 1.3
Massachusetts........... 6.4
Missouri................ 5.9
Nevada.................. 2.1
New Hampshire........... 0.9
New Jersey.............. 5.6
New York................ 5.6
Oklahoma................ 1.7
Pennsylvania............ 3.5
South Carolina.......... 2.1
Tennessee............... 1.8
Texas................... 3.3
Utah.................... 1.1
Virginia................ 11.9
Washington.............. 1.7
Wisconsin............... 1.7
Wyoming................. 1.7
Joint Exemption*........ (1.5)
----

Total................... 98.0%
====
</Table>

- ---------------------
* Joint exemptions have been included in each geographic location.

9
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
September 30, 2003 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $85,198,760)........................................ $83,506,717
Cash........................................................ 32,607
Receivable for:
Interest................................................ 1,577,810
Investments sold........................................ 325,000
Prepaid expenses............................................ 4,916
-----------
Total Assets............................................ 85,447,050
-----------
Liabilities:
Payable for:
Investment advisory fee................................. 37,305
Shares of beneficial interest repurchased............... 31,549
Administration fee...................................... 22,383
Variation margin........................................ 19,062
Accrued expenses............................................ 87,661
-----------
Total Liabilities....................................... 197,960
-----------
Net Assets.............................................. $85,249,090
===========
Composition of Net Assets:
Paid-in-capital............................................. $87,245,643
Net unrealized depreciation................................. (1,740,355)
Accumulated undistributed net investment income............. 923,319
Accumulated net realized loss............................... (1,179,517)
-----------
Net Assets.............................................. $85,249,090
===========
Net Asset Value Per Share,
9,193,273 shares outstanding (unlimited shares authorized
of $.01 par value)........................................ $9.27
===========
</Table>

10
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended September 30, 2003 (unaudited)

<Table>

Net Investment Income:
Interest Income............................................. $2,865,035
----------
Expenses
Investment advisory fee..................................... 216,713
Administration fee.......................................... 130,028
Professional fees........................................... 24,257
Transfer agent fees and expenses............................ 20,375
Shareholder reports and notices............................. 15,846
Trustees' fees and expenses................................. 10,256
Registration fees........................................... 7,019
Custodian fees.............................................. 3,793
Other....................................................... 5,756
----------
Total Expenses.......................................... 434,043

Less: expense offset........................................ (3,742)
----------
Net Expenses............................................ 430,301
----------
Net Investment Income................................... 2,434,734
----------
Net Realized and Unrealized Gain (Loss):
Net realized gain......................................... 403,975
----------
Net Change in Unrealized Depreciation on:
Investments............................................... (725,595)
Futures contracts......................................... (48,312)
----------
Net Depreciation........................................ (773,907)
----------
Net Loss................................................ (369,932)
----------
Net Increase................................................ $2,064,802
==========
</Table>

11
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
SEPTEMBER 30, 2003 MARCH 31, 2003
------------------ --------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 2,434,734 $ 5,236,607
Net realized gain (loss).................................... 403,975 (744,766)
Net change in unrealized depreciation....................... (773,907) 786,162
----------- -----------
Net Increase............................................ 2,064,802 5,278,003

Dividends to shareholders from net investment income........ (2,635,078) (5,346,225)

Decrease from transactions in shares of beneficial
interest.................................................. (747,964) (1,635,237)
----------- -----------
Net Decrease............................................ (1,318,240) (1,703,459)
Net Assets:
Beginning of period......................................... 86,567,330 88,270,789
----------- -----------
End of Period
(Including accumulated undistributed net investment income
of $923,319 and $1,123,663, respectively)................... $85,249,090 $86,567,330
=========== ===========
</Table>

12
See Notes to Financial Statements

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2003 (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 bid side of the market each day. 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; (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 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

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2003 (UNAUDITED) continued

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 Advisor") the Fund pays the Investment Advisor 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 Advisor, the Fund
pays an administration fee, calculated weekly and payable monthly, by applying
the annual rate of 0.30% 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, 2003 aggregated
$2,976,920 and $5,938,318, respectively.

Morgan Stanley Trust, an affiliate of the Investment Advisor and Administrator,
is the Fund's transfer agent. At September 30, 2003, the Fund had transfer agent
fees and expenses payable of approximately $5,400.

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 last five years
of service. Aggregate pension costs for the six months ended September 30, 2003,
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,590. At

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2003 (UNAUDITED) continued

September 30, 2003, the Fund had an accrued pension liability of $57,298 which
is included in accrued expenses in the Statement of Assets and Liabilities.

4. Shares of Beneficial Interest

Transactions in shares of beneficial interest were as follows:

<Table>
<Caption>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
--------- --------- -----------

Balance, March 31, 2002..................................... 9,467,173 $94,672 $89,534,129
Treasury shares purchased and retired (weighted average
discount 6.71%)*.......................................... (187,600) (1,876) (1,633,361)
Reclassification due to permanent book/tax differences...... -- -- 43
--------- ------- -----------
Balance, March 31, 2003..................................... 9,279,573 92,796 87,900,811
Treasury shares purchased and retired (weighted average
discount 6.43%)*.......................................... (86,300) (863) (747,101)
--------- ------- -----------
Balance, September 30, 2003................................. 9,193,273 $91,933 $87,153,710
========= ======= ===========
</Table>

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

5. Dividends

On September 23, 2003, the Fund declared the following dividends from net
investment income:

<Table>
<Caption>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ---------------- -----------------

$0.045 October 3, 2003 October 17, 2003
$0.045 November 7, 2003 November 21, 2003
$0.045 December 5, 2003 December 19, 2003
</Table>

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.

At September 30, 2003, the Fund did not hold positions in residual interest
bonds.

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2003 (UNAUDITED) continued

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.

At September 30, 2003, the Fund had outstanding futures 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, 2003, the Fund had a net capital loss carryforward of $1,386,312
which will expire on March 31, 2011 to offset future capital gains to the extent
provided by regulations.

As of March 31, 2003, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year), a non-deductible expense and 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:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED MARCH 31
MONTHS ENDED ------------------------------------------------------------
SEPTEMBER 30, 2003 2003 2002 2001 2000 1999
------------------ ------- ------- ------- ------- --------
(unaudited)

Selected Per Share Data:

Net asset value, beginning of period..... $9.33 $9.32 $9.48 $9.34 $ 9.99 $10.02
----- ----- ----- ----- ------ ------

Income (loss) from investment operations:
Net investment income*............... 0.26 0.56 0.57 0.57 0.57 0.58
Net realized and unrealized gain
(loss)............................... (0.04) 0.01 (0.12) 0.11 (0.75) (0.02)
----- ----- ----- ----- ------ ------

Total income (loss) from investment
operations.............................. 0.22 0.57 0.45 0.68 (0.18) 0.56
----- ----- ----- ----- ------ ------

Less dividends and distributions from:
Net investment income................ (0.29) (0.57) (0.57) (0.56) (0.54) (0.59)
Net realized gain.................... -- -- (0.05) (0.01) (0.01) --
----- ----- ----- ----- ------ ------

Total dividends and distributions........ (0.29) (0.57) (0.62) (0.57) (0.55) (0.59)
----- ----- ----- ----- ------ ------

Anti-dilutive effect of acquiring
treasury shares*........................ 0.01 0.01 0.01 0.03 0.08 --
----- ----- ----- ----- ------ ------

Net asset value, end of period........... $9.27 $9.33 $9.32 $9.48 $ 9.34 $ 9.99
===== ===== ===== ===== ====== ======

Market value, end of period.............. $8.90 $8.63 $8.72 $8.85 $7.688 $9.313
===== ===== ===== ===== ====== ======

Total Return+............................ 6.48%(1) 5.58% 5.56% 23.09% (11.87)% 0.11%

Ratios to Average Net Assets:
Expenses................................. 1.00%(2)(3) 0.98%(3) 0.99%(3) 0.97%(3) 0.99%(3) 1.02%(3)

Net investment income.................... 5.62%(2) 5.96% 6.02% 6.05% 5.89% 5.83%

Supplemental Data:
Net assets, end of period, in
thousands............................... $85,249 $86,567 $88,271 $91,424 $92,672 $105,068

Portfolio turnover rate.................. 4%(1) 8% 18% 14% 20% 20%
</Table>

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

<Table>

* 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%.
</Table>

17
See Notes to Financial Statements

(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
Philip J. Purcell
Fergus Reid

OFFICERS

Charles A. Fiumefreddo
Chairman of the Board

Mitchell M. Merin
President

Ronald E. Robison
Executive Vice President and Principal Executive Officer

Barry Fink
Vice President and General Counsel

Joseph J. McAlinden
Vice President

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 AUDITORS

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

INVESTMENT MANAGER

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 Distributors Inc., member NASD.

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Municipal Income
Opportunities Trust III

Semiannual Report
September 30, 2003

[MORGAN STANLEY LOGO]

38513RPT-00-12849K03-0S-11/03

Item 2. Code of Ethics.