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, 2007

Date of reporting period: March 31, 2007

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 annual 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.

INCOME EARNED BY CERTAIN SECURITIES IN THE PORTFOLIO MAY BE SUBJECT TO THE
FEDERAL ALTERNATIVE MINIMUM TAX (AMT).

FUND REPORT

For the year ended March 31, 2007

MARKET CONDITIONS

The economy continued to send mixed signals about its overall strength during
the fiscal year. Huge swings in oil prices and ongoing geopolitical uncertainty
had a negative impact on the economic outlook, as did the contraction in the
residential real estate sector. Turmoil in the sub-prime mortgage market in the
latter months of the reporting period intensified concerns about the housing
sector and had the greatest impact on the capital markets. In fact, these
concerns were the primary contributor to the sharp decline in the equity market
in late February, which led to a "flight to quality" that forced yields on U.S.
Treasury bonds lower and prices higher. The changing economic and financial
picture led to changes in the Federal Open Market Committee's (the "Fed")
monetary policy as well. In the first three months of the reporting period, the
Fed continued to pursue its monetary tightening campaign, raising the target
federal funds rate to 5.25 percent by the end of June 2006. In the months that
followed, however, the Fed held the rate steady but still maintained a bias
toward tightening until March, when statements released following that month's
meeting signaled a more neutral bias. This apparent change in policy led to a
firmer equity market and began to move bond yields higher in the final weeks of
the period.

Long-term municipal bond yields rose modestly at the beginning of the fiscal
period, with representative yields on 30-year AAA-rated municipal bonds
increasing from 4.40 percent in March to 4.65 percent in July. The subsequent
stabilization of Fed monetary policy, coupled with the growing risks to the
economy, led long-term municipal rates to reverse course and decline to 3.95
percent in November before ending the fiscal year higher at 4.15 percent. Credit
spreads between lower-quality, high-yield municipal bonds -- which comprise the
bulk of the Fund's investments -- and higher-rated bonds narrowed during the
period. Credit spreads measure the incremental yield investors are willing to
accept to assume additional credit risk. When credit spreads have tightened,
lower quality issues have typically outperformed high-grade issues.

The slope of the municipal yield curve remained relatively flat, with only a 60
basis point yield differential, or "pick-up", between 30-year maturities and
one-year maturities. In comparison, the yield pick-up from one to 30 years in
March 2006 was over 100 basis points, and has averaged over 170 basis points
over the past three years.

Although municipal bond issuance in 2006 lagged that of the previous year,
declining interest rates in the fourth quarter of the year spurred a rebound
that led new issue volume for the year to reach $383 billion, the second highest
on record and only 6 percent below 2005's record pace. In the first three months
of 2007, new issue municipal volume increased by 49 percent to $104 billion.
Municipalities continued to take advantage of lower interest rates to refinance
their debt and refundings increased dramatically to an 88 percent share of total
volume. The top five issuing states during the period were California
(reflecting a 122 percent increase in new issuance for a 20 percent total market
share), New York, Texas, Illinois and Florida. Together, these states accounted
for 45 percent of total volume. Despite the increase in

volume, however, the supply of high-yield municipal bonds remained constrained.

Strong demand by institutional investors and non-traditional buyers, including
hedge funds and arbitrage accounts, helped long-term municipal bonds perform in
line with Treasuries for the period. The 30-year municipal-to-Treasury yield
ratio, which measures the relative attractiveness of these two sectors, declined
from 92 to 85 percent during the fiscal year. A declining ratio indicates that
municipals outperformed Treasuries while at the same time becoming richer (less
attractive) on a relative basis.

PERFORMANCE ANALYSIS

For the 12-month period ended March 31, 2007, Morgan Stanley Municipal Income
Opportunities Trust III's (OIC's) net asset value (NAV) increased from $9.77 to
$10.08 per share. Based on this change plus reinvestment of tax-free dividends
totaling $0.54 per share, and a taxable distribution of approximately $0.01 per
share, the Fund's total NAV return was 9.06 percent. OIC's value on the New York
Stock Exchange (NYSE) moved from $9.60 to $10.21 per share during the same
period. Based on this change plus reinvestment of distributions, the Fund's
total market return was 12.42 percent. OIC's NYSE market price was at a 1.29
percent premium to its NAV.

Monthly dividends for the second quarter of 2007, declared in March, were
unchanged at $0.045 per share. The dividend reflects the current level of the
Fund's net investment income. OIC's level of undistributed net investment income
was $0.097 per share on March 31, 2007, versus $0.124 per share 12 months
earlier.(1) All holdings were accruing interest at fiscal year-end.

During the fiscal reporting period, the Fund's interest-rate positioning
continued to reflect our anticipation of higher rates. As a result, at the end
of March the Fund's option-adjusted duration* stood at 6.9 years. At the
beginning of the period this duration strategy helped the Fund's total returns
when interest rates rose, but tempered returns later in the fiscal year when
rates declined.

The Fund invests primarily in higher yielding municipal bonds. During the
period, the Fund's exposure to these below investment-grade or non-rated issues
was more than three-quarters of its assets. This security mix had a positive
impact on performance as lower-rated, high-yield municipal bonds outperformed
investment-grade issues. The lower supply of high-yield bonds, coupled with
strong demand, served as catalysts to their strong performance. Another boost to
the Fund's performance were several holdings that appreciated significantly when
they were prerefunded.** Reflecting an ongoing commitment to diversification,
the Fund's net assets of approximately $86 million were invested among 11
long-term sectors and 86 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 as
discussed herein 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.
** Prerefunding, or advance refunding, is a financing structure under which
new bonds are issued to repay an outstanding bond issue prior to its first
call date.

TOP FIVE SECTORS

Retirement & Life Care Facilities 24.6%
Hospital 13.7
Tax Allocation 13.5
Nursing & Health Related Facilities 7.7
Educational Facilities 7.1

LONG-TERM CREDIT ANALYSIS

Aaa/AAA 2.8%
Aa/AA 2.0
A/A 1.2
Baa/BBB 16.4
Ba/BB or Less 7.6
NR 70.0

Data as of March 31, 2007. 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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. 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 March 31, 2007

WEIGHTED AVERAGE MATURITY: 22 YEARS(a)

0-5 10
6-10 3
11-15 6
16-20 16
21-25 26
26-30 32
31+ 7

(a) When 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%
Alaska................. 1.1
Arizona................ 1.3
California............. 9.4
Colorado............... 3.2
Connecticut............ 3.0
District of Columbia... 1.1
Florida................ 9.4
Georgia................ 1.2
Hawaii................. 2.0
Illinois............... 4.3
Indiana................ 2.9
Iowa................... 1.9%
Kansas................. 2.5
Maryland............... 4.0
Massachusetts.......... 3.7
Minnesota.............. 2.1
Missouri............... 4.9
Nevada................. 3.6
New Hampshire.......... 1.2
New Jersey............. 6.7
New York............... 5.0
North Carolina......... 1.2
Oklahoma............... 1.3
Pennsylvania........... 5.1%
South Carolina......... 1.0
Tennessee.............. 2.7
Texas.................. 3.1
Utah................... 1.3
Virginia............... 5.8
Washington............. 0.3
Wyoming................ 1.9
Joint exemptions*...... (1.1)
-----
Total+................. 98.3%
=====

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

+ Does not include open short futures contracts with an underlying face amount
of $1,621,875 with unrealized appreciation of $4,998 and an open swap
contract with unrealized appreciation of $9,804.

CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of March 31, 2007

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

2007(a) 10
2008 7
2009 10
2010 8
2011 8
2012 8
2013 9
2014 8
2015 7
2016 19
2017+ 6

COST (BOOK) YIELD(b) -- WEIGHTED AVERAGE BOOK YIELD: 6.4%

2007(a) 6.40
2008 6.40
2009 6.20
2010 7.30
2011 7.50
2012 6.50
2013 6.50
2014 6.10
2015 5.50
2016 6.00
2017+ 5.80

(a) May include issues initially 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 6.4% on 10% of the
long-term portfolio that is callable in 2007.

Portfolio structure is subject to change.

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007

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

Tax-Exempt Municipal Bonds (98.6%)
General Obligation (1.2%)
$ 1,000 Georgetown Special Taxing District, Connecticut, Ser 2006
A (a)................................................... 5.125% 10/01/36 $ 1,002,240
-----------
-------
Educational Facilities Revenue (7.1%)
1,000 Pima County Industrial Development Authority, Arizona,
Noah Webster Basic School Ser 2004 A.................... 6.125 12/15/34 1,055,110
495 Bellalago Educational Facilities Benefits District,
Florida, Bellalago Charter School Ser 2004 B............ 5.80 05/01/34 513,132
1,500 Upland, Indiana, Taylor University Ser 2002............... 6.25 09/01/28 1,647,900
400 Maryland Health & Higher Educational Facilities Authority,
Washington Christian Academy Ser 2006................... 5.50 07/01/38 411,984
420 Maryland Industrial Development Financing Authority, Our
Lady of Good Counsel High School Ser 2005 A............. 5.50 05/01/20 443,671
1,000 Harrisburg Authority, Pennsylvania, Harrisburg University
of Science & Technology Ser 2007 B...................... 6.00 09/01/36 1,042,020
1,000 Chattanooga Health Educational & Housing Facilities Board,
Tennessee, Student Housing Refg Ser 2005 A***........... 5.00 10/01/25 1,019,070
-----------
-------
6,132,887
5,815
-----------
-------
Hospital Revenue (13.7%)
1,000 Colbert County - Northwest Health Care Authority, Alabama,
Helen Keller Hospital Ser 2003.......................... 5.75 06/01/27 1,049,250
500 Salida, Hospital District, Colorado, Heart of the Rockies
Regional Medical Center Ser 2006........................ 5.25 10/01/36 508,795
1,500 Hawaii Department of Budget & Finance, Wilcox Memorial
Hospital Ser 1998....................................... 5.50 07/01/28 1,539,105
500 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002....................................... 6.125 08/01/31 539,355
500 Washington County Hospital, Iowa, Ser 2006................ 5.375 07/01/26 516,330
1,250 Aitkin, Minnesota, Riverwood Healthcare Center Ser 2006... 5.60 02/01/32 1,289,700
1,000 Henderson, Nevada, Catholic Health West Ser 1998 A........ 5.125 07/01/28 1,018,080
1,000 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Association Ser 1998 A.... 6.00 05/01/28 1,026,780
1,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994..................... 7.25 07/01/27 1,031,650
1,000 Oklahoma Development Finance Authority, Comanche County
Hospital 2000 Ser B..................................... 6.60 07/01/31 1,111,170
500 Decatur Hospital Authority, Texas, Wise Regional Health
Ser 2004 A.............................................. 7.125 09/01/34 551,000
1,500 Teton County Hospital District, Wyoming, St John's Medical
Center Ser 2002......................................... 6.75 12/01/27 1,601,520
-----------
-------
11,782,735
11,250
-----------
-------

See Notes to Financial Statements
4

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 continued

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

Industrial Development/Pollution Control Revenue (6.2%)
$ 905 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser
1991 (AMT)*............................................. 10.125% 09/01/11 $ 906,421
1,235 Maryland Industrial Development Financing Authority,
Medical Waste Associates LP 1989 Ser (AMT).............. 8.75 11/15/10 1,027,718
New York City Industrial Development Agency, New York,
1,000 American Airlines Inc Ser 2005 (AMT).................... 7.75 08/01/31 1,214,050
1,000 7 World Trade Center LLC Ser 2005 A..................... 6.50 03/01/35 1,064,550
425 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT)................................................... 6.65 05/01/10 442,705
500 Pennsylvania Economic Development Financing Authority,
Reliant Energy Inc Ser 2001 A (AMT)..................... 6.75 12/01/36 551,020
100 Lexington County, South Carolina, Ellett Brothers Inc Refg
Ser 1988................................................ 7.50 09/01/08 99,688
-----------
-------
5,306,152
5,165
-----------
-------
Mortgage Revenue - Multi-Family (0.9%)
500 Buffalo, Minnesota, Central Minnesota Senior Housing Ser
2006 A.................................................. 5.50 09/01/33 504,915
290 Washington Housing Finance Commission, FNMA Collateralized
Refg Ser 1990 A......................................... 7.50 07/01/23 290,583
-----------
-------
795,498
790
-----------
-------
Mortgage Revenue - Single Family (4.0%)
20 Maricopa County Industrial Development Authority, Arizona,
Ser 2000-1C (AMT)....................................... 6.25 12/01/30 20,393
California Housing Finance Agency,
500 RITES PA 1417 Ser 2006 (AMT)............................ 5.325** 08/01/31 497,000
500 RITES PA 1417 Ser 2006 (AMT)............................ 5.525** 08/01/36 498,890
180 Colorado Housing Finance Authority, 1998 Ser B-2 (AMT).... 7.25 10/01/31 181,168
245 Chicago, Illinois, GNMA-Collateralized Ser 1998 A-1
(AMT)................................................... 6.45 09/01/29 247,722
Pennsylvania Housing Finance Agency,
880 Ser 2006-96 A (AMT)++................................... 4.65 10/01/31 868,575
1,120 Ser 2006-96 A (AMT)++................................... 4.70 10/01/37 1,105,460
-----------
-------
3,419,208
3,445
-----------
-------
Nursing & Health Related Facilities Revenue (7.7%)
2,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999....... 6.75 04/01/34 2,079,880
1,000 Pinellas County Health Facilities Authority, Florida, Oaks
of Clearwater Ser 2004.................................. 6.25 06/01/34 1,068,030
Massachusetts Development Finance Agency,
500 Evergreen Center Ser 2005............................... 5.50 01/01/35 514,085
1,205 Kennedy-Donovan Center Inc 1990 Issue................... 7.50 06/01/10 1,249,645

See Notes to Financial Statements
5

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 continued

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

$ 695 New Jersey Health Care Facilities Financing Authority,
Spectrum for Living - FHA Insured Mortgage Refg Ser B... 6.50% 02/01/22 $ 696,334
1,000 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999..................... 6.20 06/01/29 1,035,830
-----------
-------
6,643,804
6,400
-----------
-------
Public Facilities Revenue (1.2%)
1,000 Kansas City Industrial Development Authority, Missouri,
------- Plaza Library Ser 2004.................................. 5.90 03/01/24 1,013,300
-----------
Recreational Facilities (6.5%)
1,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser A................................. 6.25 01/01/30 1,040,120
1,300 San Diego County, California, San Diego Natural History
Museum COPs............................................. 5.60 02/01/18 1,301,885
1,500 Mohegan Tribe of Indians, Connecticut, Gaming Authority
Ser 2001 (a)............................................ 6.25 01/01/31 1,596,135
1,000 Overland Park Development Corporation, Kansas, Convention
Center Hotel Ser 2000 A................................. 7.375 01/01/32 1,090,700
500 Austin Convention Enterprises Inc, Texas, Convention
Center Hotel Ser 2006 B................................. 5.75 01/01/34 535,720
-----------
-------
5,564,560
5,300
-----------
-------
Retirement & Life Care Facilities Revenue (24.6%)
1,100 Orange County Health Facilities Authority, Florida,
Orlando Lutheran Towers Inc Ser 2005.................... 5.375 07/01/20 1,109,746
1,000 Medical Center Hospital Authority, Georgia, Spring Harbor
at Green Island Ser 2007 (WI)........................... 5.25 07/01/27 1,023,820
1,000 Illinois Finance Authority, Friendship Village of
Schaumburg Ser 2005 A................................... 5.625 02/15/37 1,032,980
750 Illinois Health Facilities Authority, Villa St Benedict
Ser 2003 A-1............................................ 6.90 11/15/33 829,958
275 Saint Joseph County, Indiana, Holy Cross Village at Notre
Dame Ser 2006 A......................................... 6.00 05/15/26 293,686
1,000 Olathe, Kansas, Catholic Care Ser 2006 A.................. 6.00 11/15/38 1,070,390
500 Howard County, Maryland, Vantage House Ser 2007 B (WI).... 5.25 04/01/37 511,720
500 Maryland Health & Higher Educational Facilities Authority,
King Farm Presbyterian Community Ser 2007 A............. 5.30 01/01/37 514,500
1,425 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A.................................. 5.625 07/01/15 1,458,887
1,000 Kansas City Industrial Development Authority, Missouri,
Bishop Spencer 2004 Ser I............................... 6.25 01/01/24 1,055,750

See Notes to Financial Statements
6

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 continued

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

New Jersey Economic Development Authority,
$ 1,000 Franciscan Oaks Ser 1997................................ 5.70% 10/01/17 $ 1,020,650
1,000 Franciscan Oaks Ser 1997................................ 5.75 10/01/23 1,020,400
500 Lions Gate Ser 2005 A................................... 5.875 01/01/37 523,960
1,000 North Carolina Medical Care Commission Healthcare
Facilities, Presbyterian Homes Ser 2006................. 5.50 10/01/31 1,042,830
750 Bucks County Industrial Development Authority,
Pennsylvania, Ann's Choice Ser 2005 A................... 6.25 01/01/35 797,302
500 Montgomery County Industry Development Authority,
Pennsylvania, Whitemarsh Community Ser 2005............. 6.25 02/01/35 530,095
750 South Carolina Jobs-Economic Development Authority, Wesley
Commons Ser 2006........................................ 5.30 10/01/36 765,945
Shelby County Health, Educational & Housing Facilities
Board, Tennessee,
500 Trezevant Manor Ser 2006 A.............................. 5.75 09/01/37 514,250
750 Village at Germantown Ser 2003 A........................ 7.25 12/01/34 761,865
500 HFDC Central Texas Inc, Legacy at Willow Bend, Ser 2006
A....................................................... 5.75 11/01/36 519,265
1,000 Lubbock Health Facilities Development Corporation, Texas,
Carillon Ser 2005 A..................................... 6.50 07/01/26 1,049,470
2,580 Chesterfield County Industrial Development Authority,
Virginia, Brandermill Woods Ser 1998.................... 6.50 01/01/28 2,684,357
1,000 Peninsula Ports Authority of Virginia, Virginia Baptist
Homes Ser 2006 C........................................ 5.40 12/01/33 1,036,510
-----------
-------
21,168,336
20,380
-----------
-------
Tax Allocation Revenue (13.5%)
475 Carlsbad Community Facility District #3, California, Ser
2006.................................................... 5.30 09/01/36 489,754
1,500 Poway Unified School District, Community Facilities
District #14, California, Ser 2006...................... 5.25 09/01/36 1,546,920
1,000 San Marcos Community Facilities District #2002-01,
California, University Commons Ser 2004................. 5.90 09/01/28 1,050,140
700 Santa Ana Unified School District Communities Facilities
District #2004-1, California, Ser 2005.................. 5.05 09/01/30 708,834
1,000 Copperleaf Metropolitan District #2, Colorado, Ser 2006... 5.95 12/01/36 1,038,930
Elk Valley Public Improvement Corporation, Colorado,
500 Ser 2001 A.............................................. 7.30 09/01/22 531,740
500 Ser 2001 A.............................................. 7.35 09/01/31 530,895
1,000 Midtown Miami Community Development District, Florida,
Parking Garage Ser 2004 A............................... 6.25 05/01/37 1,088,370
500 Bolingbrook, Illinois, Sales Tax Ser 2005................. 0.00+++ 01/01/24 499,160
500 Chicago, Illinois, Lake Shore East Ser 2002............... 6.75 12/01/32 542,105
500 Pingree Grove Special Service Area #7, Illinois, Cambridge
Lakes Ser 2006.......................................... 6.00 03/01/36 522,590

See Notes to Financial Statements
7

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 continued

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

$ 500 Prince George's County, Maryland, National Harbor Ser
2004.................................................... 5.20% 07/01/34 $ 512,260
1,000 Des Peres, Missouri, West County Center Ser 2002.......... 5.75 04/15/20 1,028,330
500 Clark County Special Improvement District #142, Nevada,
Mountain's Edge Ser 2003................................ 6.375 08/01/23 517,145
500 Henderson, Nevada, Local Improvement District # T-18, Ser
2006.................................................... 5.30 09/01/35 507,890
500 Allegheny County Redevelopment Authority, Pennsylvania,
Pittsburgh Mills Ser 2004............................... 5.60 07/01/23 531,675
-----------
-------
11,646,738
11,175
-----------
-------
Tobacco Revenue (5.5%)
1,000 Northern Tobacco Securitization Corporation, Alaska, Asset
Backed Ser 2006 A....................................... 5.00 06/01/46 974,780
1,000 California County Tobacco Securitization Agency, Gold
County Settlement Funding Corp Ser 2006................. 0.00 06/01/33 223,030
2,000 Golden State Tobacco Securitization Corporation,
California, Ser 2007A-1++............................... 5.125 06/01/47 1,986,030
5,000 Silicon Valley Tobacco Securitization Authority,
California, Santa Clara Tobacco Securitization Corp Ser
2007 C.................................................. 0.00 06/01/56 239,250
2,000 Tobacco Settlement Financing Corporation, New Jersey, Ser
2007-1B................................................. 0.00 06/01/41 298,640
1,000 Nassau County Tobacco Settlement Corporation, New York,
Asset Backed Ser 2006 A-3............................... 5.125 06/01/46 1,019,430
-----------
-------
4,741,160
12,000
-----------
-------
Transportation Facilities Revenue (1.2%)
1,000 Nevada Department of Business & Industry, Las Vegas
------- Monorail 2nd Tier Ser 2000.............................. 7.375 01/01/40 1,052,190
-----------
Refunded (5.3%)
2,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A..................................... 8.00 01/01/10+ 2,224,180
940 Iowa Health Facilities Development Financing Authority,
Care Initiatives Ser 1996............................... 9.25 07/01/11+ 1,147,185
1,000 New Jersey Economic Development Authority, Cedar Crest
Village Inc Ser 2001 A.................................. 7.25 11/15/11+ 1,151,800
-----------
-------
4,523,165
3,940
-----------
-------
88,660 Total Tax-Exempt Municipal Bonds (Cost $80,534,020)........................... 84,791,973
-----------
-------
Short-Term Tax-Exempt Municipal Obligations (3.2%)
200 Hawaii Department of Budget & Finance, Hawaiian Electric
Co
Ser 1996 A (AMT) (MBIA) (call for Redemption
05/01/07)............................................... 6.20 05/01/26 200,388
1,100 Missouri Health & Educational Facilities Authority, Saint
Louis University Ser 2006 A (MBIA) (Demand 04/02/07).... 3.75@ 10/01/35 1,100,000
1,100 Murray City, Utah, IHC Health Ser 2005 B (Demand
04/02/07)............................................... 3.77@ 05/15/37 1,100,000

See Notes to Financial Statements
8

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 continued

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

$ 400 Virginia Commonwealth University, Ser 2006 A (Ambac)
(Demand 04/02/07)....................................... 3.80@% 11/01/30 $ 400,000
-----------
-------
2,800 Total Short-Term Tax-Exempt Municipal Obligations (Cost $2,800,181)........... 2,800,388
-----------
-------
91,460 Total Investments (Cost $83,334,201).......................................... 87,592,361
-----------
-------
Floating Rate Note Obligation Related to Securities Held (-3.5%)
(3,000) Notes with interest rates ranging from 3.68% to 3.75% at March 31, 2007 and
contractual maturities of collateral ranging from 10/01/31 to 06/01/47 (See
Note 1D)++++ (Cost $(3,000,000))............................................ (3,000,000)
-----------
-------

$88,460 Total Net Investments (Cost $80,334,201) (b) (c)................... 98.3% 84,592,361
=======
Other Assets In Excess of Liabilities.............................. 1.7 1,419,799
----- -----------
Net Assets......................................................... 100.0% $86,012,160
===== ===========

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

AMT Alternative Minimum Tax.
COPs Certificates of Participation.
RITES Residual Interest Tax-Exempt Security.
WI Security purchased on a when-issued basis.
@ Current coupon of variable rate demand obligation.
* Joint exemption in locations shown.
** Current coupon rate for inverse floating rate municipal
obligations (See Note 7). This rate resets periodically as
the auction rate on the related security changes. Positions
in inverse floating rate municipal obligations have a total
value of $995,890 which represents 1.2% of net assets.
*** A portion of this security has been physically segregated in
connection with open futures contracts in the amount of
$11,250.
+ Refunded to call date shown.
++ Underlying security related to inverse floater entered into
by the Fund.
+++ Security is a "step-up" bond where the coupon increases on a
predetermined future date.
++++ Floating rate note obligation related to securities held.
The interest rate shown reflects the rate in effect at March
31, 2007.
(a) Resale is restricted to qualified institutional investors.
(b) Securities have been designated as collateral in an amount
equal to $3,160,334 in connection with securities purchased
on a when-issued basis, open futures contracts and an open
swap contract.
(c) The aggregate cost for federal income tax purposes is
$80,288,425. The aggregate gross unrealized appreciation is
$4,610,772 and the aggregate gross unrealized depreciation
is $306,836, resulting in net unrealized appreciation of
$4,303,936.

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

See Notes to Financial Statements
9

Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2007 continued

FUTURES CONTRACTS OPEN AT MARCH 31, 2007:

NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
-----------------------------------------------------------------------------------------------

15 Short U.S. Treasury Notes 10 Year $(1,621,875) $4,998
June 2007 ======

INTEREST RATE SWAP CONTRACT OPEN AT MARCH 31, 2007:

NOTIONAL PAYMENTS PAYMENTS TERMINATION UNREALIZED
COUNTERPARTY AMOUNT (000) MADE BY FUND RECEIVED BY FUND DATE APPRECIATION
-------------------------------------------------------------------------------------------------------------

J.P. Morgan Chase Co. $2,000 Fixed Rate 3.6075% Floating Rate BMA 05/25/17 $9,804
(Bond Market Association) ======

See Notes to Financial Statements
10

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
March 31, 2007

Assets:
Investments in securities, at value
(cost $83,334,201)................. $87,592,361
Unrealized appreciation on an open
swap contract...................... 9,804
Cash................................. 87,900
Receivable for:
Investments sold................. 1,678,254
Interest......................... 1,326,895
Variation margin................. 1,875
Prepaid expenses and other assets.... 15,699
-----------
Total Assets..................... 90,712,788
-----------
Liabilities:
Floating rate note obligations....... 3,000,000
Payable for:
Investments purchased............ 1,534,866
Investment advisory fee.......... 42,593
Administration fee............... 6,815
Transfer agent fee............... 1,323
Accrued expenses and other
payables........................... 115,031
-----------
Total Liabilities................ 4,700,628
-----------
Net Assets....................... $86,012,160
===========
Composition of Net Assets:
Paid-in-capital...................... $81,402,056
Net unrealized appreciation.......... 4,272,962
Accumulated undistributed net
investment income.................. 824,356
Accumulated net realized loss........ (487,214)
-----------
Net Assets....................... $86,012,160
-----------
Net Asset Value Per Share
8,532,857 shares outstanding
(unlimited shares authorized of $.01
par value)........................... $10.08
===========

Statement of Operations
For the year ended March 31, 2007

Net Investment Income:
Interest Income....................... $5,166,452
----------
Expenses
Investment advisory fee............... 427,455
Professional fees..................... 69,172
Administration fee.................... 68,393
Shareholder reports and notices....... 41,153
Listing fees.......................... 22,004
Interest and residual trust
expenses............................ 21,097
Transfer agent fees and expenses...... 11,114
Custodian fees........................ 6,151
Trustees' fees and expenses........... 6,069
Other................................. 23,884
----------
Total Expenses.................... 696,492

Less: expense offset.................. (6,062)
----------
Net Expenses...................... 690,430
----------
Net Investment Income............. 4,476,022
----------
Net Realized and Unrealized Gain
(Loss):
Net Realized Gain (Loss) on:
Investments........................... 954,320
Futures contracts..................... (97,793)
----------
Net Realized Gain................. 856,527
----------
Net Change in Unrealized Appreciation:
Investments........................... 1,990,884
Futures contracts..................... 4,998
Swap contract......................... 9,804
----------
Net Appreciation.................. 2,005,686
----------
Net Gain.......................... 2,862,213
----------
Net Increase.......................... $7,338,235
==========

See Notes to Financial Statements
11

Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS, continued

Statements of Changes in Net Assets

FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, 2007 MARCH 31, 2006
-------------- --------------

Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 4,476,022 $ 4,834,759
Net realized gain........................................... 856,527 756,757
Net change in unrealized appreciation....................... 2,005,686 1,140,280
----------- -----------
Net Increase............................................ 7,338,235 6,731,796
Dividends to shareholders from net investment income........ (4,715,902) (4,574,650)

Decrease from transactions in shares of beneficial
interest.................................................. (407,092) (2,740,265)
----------- -----------
Net Increase (Decrease)................................. 2,215,241 (583,119)
Net Assets:
Beginning of period......................................... 83,796,919 84,380,038
----------- -----------
End of Period
(Including accumulated undistributed net investment income
of $824,356 and $1,063,894, respectively)................... $86,012,160 $83,796,919
=========== ===========

See Notes to Financial Statements
12

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007

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; (3) interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations; (4) 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

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 continued

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 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. Floating Rate Note Obligations Related to Securities Held -- The Fund enters
into transactions in which it transfers to Dealer Trusts ("Dealer Trusts"),
fixed rate bonds in exchange for cash and residual interests in the Dealer
Trusts' assets and cash flows, which are in the form of inverse floating rate
investments. The Dealer Trusts fund the purchases of the fixed rate bonds by
issuing floating rate notes to third parties and allowing the Fund to retain
residual interest in the bonds. The Fund enters into shortfall agreements with
the Dealer Trusts which commit the Fund to pay the Dealer Trusts, in certain
circumstances, the difference between the liquidation value of the fixed rate
bonds held by the Dealer Trusts and the liquidation value of the floating rate
notes held by third parties, as well as any shortfalls in interest cash flows.
The residual interests held by the Fund (inverse floating rate investments)
include the right of the Fund (1) to cause the holders of the floating rate
notes to tender their notes at par at the next interest rate reset date, and (2)
to transfer the municipal bond from the Dealer Trusts to the Fund, thereby
collapsing the Dealer Trusts. The Fund accounts for the transfer of bonds to the
Dealer Trusts as secured borrowings, with the securities transferred remaining
in the Fund's investment assets, and the related floating rate notes reflected
as Fund liabilities under the caption "floating rate note obligations" on the
"Statement of Assets and Liabilities." The Fund records the interest income from
the fixed rate bonds under the caption "Interest Income" and records the
expenses related to floating rate note obligations and any administrative
expenses of the Dealer Trusts under the caption "Interest and residual trust
expenses" in the Fund's "Statement of Operations." The notes issued by the
Dealer Trusts have interest rates that reset weekly and the floating rate note
holders have the option to tender their notes to the Dealer Trusts for
redemption at par at each reset date. At March 31, 2007, Fund investments with a
value of $3,960,065 are held by the Dealer Trusts and serve as collateral for
the $3,000,000 in floating rate note obligations outstanding at that date.
Contractual maturities of the floating rate note obligations and interest rates
in effect at March 31, 2007 are presented in the "Portfolio of Investments."

E. Interest Rate Swaps -- Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal amount.
Net periodic interest payments to be received

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 continued

or paid are accrued daily and are recorded as realized gains or losses in the
Statement of Operations.

F. 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.

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

H. 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 year ended March 31, 2007 aggregated $22,883,162
and $22,864,804, respectively. Included in the aforementioned transactions are
purchases and sales of $1,043,750 and $3,071,075, respectively, with other
Morgan Stanley funds including net realized gains of $92,236.

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
certain 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 factors which include years of service and compensation. The
Trustees voted to close the plan to new participants and eliminate the future

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 continued

benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for the year ended March 31, 2007 included in Trustees' fees and
expenses in the Statement of Operations amounted to $4,537. At March 31, 2007,
the Fund had an accrued pension liability of $59,908, 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 or she 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
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
--------- --------- -----------

Balance, March 31, 2005..................................... 8,876,378 $88,764 $84,462,826
Treasury shares purchased and retired (weighted average
discount 5.68%)*.......................................... (300,621) (3,006) (2,737,259)
Reclassification due to permanent book/tax differences...... -- -- (2,177)
--------- ------- -----------
Balance, March 31, 2006..................................... 8,575,757 85,758 81,723,390
Treasury shares purchased and retired (weighted average
discount 3.73%)*.......................................... (42,900) (429) (406,663)
--------- ------- -----------
Balance, March 31, 2007..................................... 8,532,857 $85,329 $81,316,727
========= ======= ===========

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

5. Dividends

On March 26, 2007, the Fund declared the following dividends from net investment
income:

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

April 5, April 20,
$0.045 2007 2007
$0.045 May 4, 2007 May 18, 2007
$0.045 June 8, 2007 June 22, 2007

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 continued

6. Expense Offset

The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent and
custodian.

7. Purposes of and Risks Relating to Certain Financial Instruments

The Fund may invest a portion of its assets in inverse floating rate
instruments, either through outright purchases of inverse floating rate
securities or through the transfer of bonds to a Dealer Trust in exchange for
cash and residual interests in the Dealer Trust. These investments are typically
used by the Fund in seeking to enhance the yield of the portfolio. These
instruments typically involve greater risks than a fixed rate municipal bond. In
particular, these instruments are acquired through leverage or may have leverage
embedded in them and therefore involve many of the risks associated with
leverage. Leverage is a speculative technique that may expose the Fund to
greater risk and increased costs. Leverage may cause the Fund's net asset value
to be more volatile than if it had not been leveraged because leverage tends to
magnify the effect of any increases or decreases in the value of the Fund's
portfolio securities. The use of leverage may also cause the Fund to liquidate
portfolio positions when it may not be advantageous to do so in order to satisfy
its obligations with respect to inverse floating rate instruments.

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.

The Fund may enter into interest rate swaps and may purchase or sell interest
rate caps, floors and collars. The Fund expects to enter into these transactions
primarily to manage interest rate risk, hedge portfolio positions and preserve a
return or spread on a particular investment or portion of its portfolio. The
Fund may also enter into these transactions to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date.
Interest rate swap transactions are subject to market risk, risk of default by
the other party to the transaction, risk of imperfect correlation and manager
risk. Such risks may exceed the related amounts shown in the Statement of Assets
and Liabilities.

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 continued

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.

The tax character of distributions paid was as follows:

FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, 2007 MARCH 31, 2006
-------------- --------------

Tax-exempt income........................................... $4,614,770 $4,574,650
Ordinary income............................................. 101,132 --
---------- ----------
Total distributions......................................... $4,715,902 $4,574,650
========== ==========

As of March 31, 2007, the tax-basis components of accumulated earnings were as
follows:

Undistributed tax-exempt income............................. $ 838,784
Undistributed long-term gains............................... --
----------
Net accumulated earnings.................................... 838,784
Capital loss carryforward*.................................. (482,196)
Temporary differences....................................... (60,224)
Net unrealized appreciation................................. 4,313,740
----------
Total accumulated earnings.................................. $4,610,104
==========

* During the year ended March 31, 2007, the Fund utilized $861,195 of its net
capital loss carryforward. As of March 31, 2007, the Fund had a net capital loss
carryforward of $482,196 which will expire on March 31, 2013 to offset future
capital gains to the extent provided by regulations.

As of March 31, 2007, the Fund had temporary book/tax differences primarily
attributable to book amortization of discounts on debt securities and
mark-to-market of open futures contracts.

Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 continued

Permanent differences, due to tax adjustments on debt securities sold by the
Fund, resulted in the following reclassifications among the Fund's components of
net assets at March 31, 2007:

ACCUMULATED
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED
INCOME LOSS PAID-IN-CAPITAL
-------------- ------------ ---------------

$342 $(342 ) --
==== ====== ====

9. New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and is to be
applied to all open tax years as of the effective date. The impact to the Fund's
financial statements, if any, is currently being assessed.

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

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 YEAR ENDED MARCH 31
----------------------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------

Selected Per Share Data:
Net asset value, beginning of period.............. $ 9.77 $9.51 $9.39 $9.33 $9.32
------ ----- ----- ----- -----
Income from investment operations:
Net investment income*........................ 0.52 0.55 0.53 0.52 0.56
Net realized and unrealized gain.............. 0.34 0.22 0.10 0.09 0.01
------ ----- ----- ----- -----
Total income from investment operations........... 0.86 0.77 0.63 0.61 0.57
------ ----- ----- ----- -----
Less dividends from net investment income......... (0.55) (0.53) (0.53) (0.56) (0.57)
------ ----- ----- ----- -----
Anti-dilutive effect of acquiring treasury
shares*.......................................... 0.00(2) 0.02 0.02 0.01 0.01
------ ----- ----- ----- -----
Net asset value, end of period.................... $10.08 $9.77 $9.51 $9.39 $9.33
====== ===== ===== ===== =====
Market value, end of period....................... $10.21 $9.60 $8.27 $8.92 $8.63
====== ===== ===== ===== =====
Total Return+..................................... 12.42% 22.84% (1.27)% 10.00% 5.58%
Ratios to Average Net Assets:
Total expenses (before expense offset)............ 0.82%(1) 0.79%(1) 0.93%(1) 1.02%(1) 0.98%(1)
Total expenses (before expense offset, exclusive
of interest and residual trust expenses)......... 0.79%(1) 0.79%(1) 0.93%(1) 1.02%(1) 0.98%(1)
Net investment income............................. 5.25% 5.74% 5.68% 5.59% 5.96%
Supplemental Data:
Net assets, end of period, in thousands........... $86,012 $83,797 $84,380 $85,549 $86,567
Portfolio turnover rate........................... 28% 20% 17% 12% 8%

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

* 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) Does not reflect the effect of expense offset of 0.01%.
(2) Includes anti-dilutive effect of acquiring treasury shares
of less than $0.01.

See Notes to Financial Statements
20

Morgan Stanley Municipal Income Opportunities Trust III
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Trustees of
Morgan Stanley Municipal Income Opportunities Trust III:

We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Municipal Income Opportunities Trust III (the "Fund"), including the
portfolio of investments, as of March 31, 2007, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of March 31, 2007, by correspondence with the custodian.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Municipal Income Opportunities Trust III as of March 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP
New York, New York
May 22, 2007

Morgan Stanley Municipal Income Opportunities Trust III
REVISED INVESTMENT POLICY (UNAUDITED)

INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and may
purchase or sell interest rate caps, floors and collars. The Fund expects to
enter into these transactions primarily to manage interest rate risk, hedge
portfolio positions and preserve a return or spread on a particular investment
or portion of its portfolio. The Fund may also enter into these transactions to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund does not intend to use these transactions
as speculative investments and will not enter into interest rate swaps or sell
interest rate caps or floors where it does not own or have the right to acquire
the underlying securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed-rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the party selling the interest rate floor. An interest
rate collar combines the elements of purchasing a cap and selling a floor. The
collar protects against an interest rate rise above the maximum amount but
foregoes the benefit of an interest rate decline below the minimum amount.

The Fund may enter into interest rate swaps, caps, floors and collars on either
an asset-based or liability-based basis, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and the Fund segregates an amount of cash and/or liquid securities
having an aggregate net asset value at least equal to the accrued excess. If the
Fund enters into an interest rate swap on other than a net basis, the Fund would
segregate the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. Interest rate transactions do not constitute senior
securities under the 1940 Act when the Fund segregates assets to cover the
obligations under the transactions. The Fund will enter into interest rate swap,
cap or floor transactions only with counterparties approved by the Fund's Board
of Trustees. The Adviser will monitor the creditworthiness of counterparties to
the Fund's interest rate swap, cap, floor and collar transactions on an ongoing
basis. If there is a default by the other party to such a transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction. To the extent the Fund sells (i.e., writes) caps, floors and
collars, it will segregate cash and/or liquid securities having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of the
Fund's net obligations with respect to the

Morgan Stanley Municipal Income Opportunities Trust III
REVISED INVESTMENT POLICY (UNAUDITED) continued

caps, floors or collars. The use of interest rate swaps is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the Adviser is
incorrect in its forecasts of the market values, interest rates and other
applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment techniques were not
used. The use of interest rate swaps, caps, collars and floors may also have the
effect of shifting the recognition of income between current and future periods.

These transactions do not involve the delivery of securities or other underlying
assets or principal. Accordingly, the risk of loss with respect to interest rate
swaps is limited to the net amount of interest payments that the Fund is
contractually obligated to make. If the other party to an interest rate swap
defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive.

Morgan Stanley Municipal Income Opportunities Trust III
RESULTS OF ANNUAL SHAREHOLDER MEETING (UNAUDITED)

On October 25, 2006, an annual meeting of the Fund's shareholders was held for
the purpose of voting on the following matters, the results of which were as
follows:

Election of Trustees:

# OF SHARES
-----------------------------------------------
FOR WITHHELD ABSTAIN
-----------------------------------------------

Frank L. Bowman............................................. 7,213,261 42,476 57,765
Kathleen Dennis............................................. 7,216,728 39,009 57,765
Edwin J. Garn............................................... 7,214,451 41,286 57,765
Michael F. Klein............................................ 7,214,451 41,286 57,765
Michael E. Nugent........................................... 7,213,661 42,076 57,765
W. Allen Reed............................................... 7,214,051 41,686 57,765

The following Trustees were not standing for reelection at this meeting: Michael
Bozic, James Higgins, Dr. Manuel H. Johnson, Joseph J. Kearns and Fergus Reid.

Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION (UNAUDITED)

Independent Trustees:

Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
--------------------------------------- ----------- -------------- ------------------------------ -------------

Frank L. Bowman (62) Trustee Since August President and Chief Executive 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Officer of the Nuclear Energy
Counsel to the Independent Trustees Institute (policy
1177 Avenue of the Americas organization) (since February
New York, NY 10036 2005); Director or Trustee of
various Retail Funds and
Institutional Funds (since
August 2006); Chairperson of
the Insurance Sub-Committee of
the Valuation, Insurance and
Compliance Committee (since
February 2007); formerly
variously, Admiral in the U.S.
Navy, Director of Naval
Nuclear Propulsion Program and
Deputy Administrator-Naval
Reactors in the National
Nuclear Security
Administration at the U.S.
Department of Energy
(1996-2004). Honorary Knight
Commander of the Most
Excellent Order of the British
Empire.

Michael Bozic (66) Trustee Since April Private investor; Chairperson 173
c/o Kramer Levin Naftalis & Frankel LLP 1994 of the Valuation, Insurance
Counsel to the Independent Trustees and Compliance Committee
1177 Avenue of the Americas (since October 2006); Director
New York, NY 10036 or Trustee of the Retail Funds
(since April 1994) and the
Institutional Funds (since
July 2003); formerly
Chairperson of the Insurance
Committee (July 2006-September
2006); Vice Chairman of Kmart
Corporation (December
1998-October 2000), Chairman
and Chief Executive Officer of
Levitz Furniture Corporation
(November 1995-November 1998)
and President and Chief
Executive Officer of Hills
Department Stores (May
1991-July 1995); variously
Chairman, Chief Executive
Officer, President and Chief
Operating Officer (1987-1991)
of the Sears Merchandise Group
of Sears, Roebuck & Co.

Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
--------------------------------------- -----------------------------

Frank L. Bowman (62) Director of the National
c/o Kramer Levin Naftalis & Frankel LLP Energy Foundation, the U.S.
Counsel to the Independent Trustees Energy Association, the
1177 Avenue of the Americas American Council for Capital
New York, NY 10036 Formation and the Armed
Services YMCA of the USA.
Michael Bozic (66) Director of various business
c/o Kramer Levin Naftalis & Frankel LLP organizations.
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, NY 10036

Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued

Kathleen A. Dennis (53) Trustee Since August President, Cedarwood 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Associates (mutual fund
Counsel to the Independent Trustees consulting) (since July 2006);
1177 Avenue of the Americas Chairperson of the Money
New York, NY 10036 Market and Alternatives Sub-
Committee of the Investment
Committee (since October 2006)
and Director or Trustee of
various Retail Funds and
Institutional Funds (since
August 2006); formerly, Senior
Managing Director of Victory
Capital Management (1993-
2006).

Dr. Manuel H. Johnson (58) Trustee Since July Senior Partner, Johnson Smick 173
c/o Johnson Smick Group, Inc. 1991 International, Inc.,
888 16th Street, N.W. (consulting firm); Chairperson
Suite 740 of the Investment Committee
Washington, D.C. 20006 (since October 2006) and
Director or Trustee of the
Retail Funds (since July 1991)
and the Institutional Funds
(since July 2003); Co-Chairman
and a founder of the Group of
Seven Council (G7C),
(international economic
commission); formerly
Chairperson of the Audit
Committee (July 1991-
September 2006); Vice Chairman
of the Board of Governors of
the Federal Reserve System and
Assistant Secretary of the
U.S. Treasury.

Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
--------------------------------------- -----------------------------

Kathleen A. Dennis (53) None.
c/o Kramer Levin Naftalis & Frankel LLP
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, NY 10036
Dr. Manuel H. Johnson (58) Director of NVR, Inc. (home
c/o Johnson Smick Group, Inc. construction); Director of
888 16th Street, N.W. Evergreen Energy.
Suite 740
Washington, D.C. 20006

Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued

Joseph J. Kearns (64) Trustee Since August President, Kearns & Associates 174
c/o Kearns & Associates LLC 1994 LLC (investment consulting);
PMB754 Chairperson of the Audit
23852 Pacific Coast Highway Committee (since October 2006)
Malibu, CA 90265 and Director or Trustee of the
Retail Funds (since July 2003)
and the Institutional Funds
(since August 1994); formerly,
Deputy Chairperson of the
Audit Committee (July 2003-
September 2006) and
Chairperson of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); formerly CFO of the J.
Paul Getty Trust.

Michael F. Klein (48) Trustee Since August Managing Director, Aetos 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Capital, LLC (since March
Counsel to the Independent Trustees 2000) and Co-President, Aetos
1177 Avenue of the Americas Alternatives Management, LLC
New York, NY 10036 (since January 2004);
Chairperson of the
Fixed-Income Sub-Committee of
the Investment Committee
(since October 2006) and
Director or Trustee of various
Retail Funds and Institutional
Funds (since August 2006);
formerly Managing Director,
Morgan Stanley & Co. Inc. and
Morgan Stanley Dean Witter
Investment Management,
President, Morgan Stanley
Institutional Funds (June
1998-March 2000) and
Principal, Morgan Stanley &
Co. Inc. and Morgan Stanley
Dean Witter Investment
Management (August
1997-December 1999).

Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
--------------------------------------- -----------------------------

Joseph J. Kearns (64) Director of Electro Rent
c/o Kearns & Associates LLC Corporation (equipment
PMB754 leasing), The Ford Family
23852 Pacific Coast Highway Foundation, and the UCLA
Malibu, CA 90265 Foundation.
Michael F. Klein (48) Director of certain
c/o Kramer Levin Naftalis & Frankel LLP investment funds managed or
Counsel to the Independent Trustees sponsored by Aetos Capital,
1177 Avenue of the Americas LLC. Director of Sanitized AG
New York, NY 10036 and Sanitized Marketing AG
(specialty chemicals).

Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued

Michael E. Nugent (70) Chairperson Chairperson of General Partner of Triumph 173
c/o Triumph Capital, L.P. of the the Boards Capital, L.P. (private
445 Park Avenue Board and since July investment partnership);
New York, NY 10022 Trustee 2006 and Chairperson of the Boards of
Trustee since the Retail Funds and
July 1991 Institutional Funds (since
July 2006) and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly
Chairperson of the Insurance
Committee (until July 2006),
and Vice President, Bankers
Trust Company and BT Capital
Corporation (1984-1988).

W. Allen Reed (59) Trustee Since August Chairperson of the Equity Sub- 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Committee of the Investment
Counsel to the Independent Trustees Committee (since October 2006)
1177 Avenue of the Americas and Director or Trustee of
New York, NY 10036 various Retail Funds and
Institutional Funds (since
August 2006); President and
CEO of General Motors Asset
Management; formerly, Chairman
and Chief Executive Officer of
the GM Trust Bank and
Corporate Vice President of
General Motors Corporation
(August 1994-December 2005).

Fergus Reid (74) Trustee Since June Chairman of Lumelite Plastics 174
c/o Lumelite Plastics Corporation 1992 Corporation; Chairperson of
85 Charles Colman Blvd. the Governance Committee and
Pawling, NY 12564 Director or Trustee of the
Retail Funds (since July 2003)
and the Institutional Funds
(since June 1992).

Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
--------------------------------------- -----------------------------

Michael E. Nugent (70) None.
c/o Triumph Capital, L.P.
445 Park Avenue
New York, NY 10022
W. Allen Reed (59) Director of GMAC (financial
c/o Kramer Levin Naftalis & Frankel LLP services), and Temple-Inland
Counsel to the Independent Trustees Industries (packaging,
1177 Avenue of the Americas banking and forest products);
New York, NY 10036 Director of Legg Mason, Inc.
and Director of the Auburn
University Foundation.
Fergus Reid (74) Trustee and Director of
c/o Lumelite Plastics Corporation certain investment companies
85 Charles Colman Blvd. in the JPMorgan Funds complex
Pawling, NY 12564 managed by J.P. Morgan
Investment Management Inc.

Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued

Interested Trustee:

Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Interested
Interested Trustee Registrant Time Served* Past 5 Years Trustee**
------------------------------------- ----------- -------------- ------------------------------ -------------

James F. Higgins (59) Trustee Since June Director or Trustee of the 173
c/o Morgan Stanley Trust 2000 Retail Funds (since June 2000)
Harborside Financial Center and the Institutional Funds
Plaza Two (since July 2003); Senior
Jersey City, NJ 07311 Advisor of Morgan Stanley
(since August 2000).

Name, Age and Address of Other Directorships Held by
Interested Trustee Interested Trustee
------------------------------------- ------------------------------

James F. Higgins (59) Director of AXA Financial,
c/o Morgan Stanley Trust Inc. and The Equitable Life
Harborside Financial Center Assurance Society of the
Plaza Two United States (financial
Jersey City, NJ 07311 services).

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

* This is the earliest date the Trustee began serving the funds advised by
Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the
"Retail Funds") or the funds advised by Morgan Stanley Investment Management
Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds").
** The Fund Complex includes all open-end and closed-end funds (including all
of their portfolios) advised by the Investment Adviser and any funds that
have an investment adviser that is an affiliated person of the Investment
Adviser (including, but not limited to, Morgan Stanley Investment Management
Inc.) as of March 31, 2007.

Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued

Executive Officers:

Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years
----------------------------- --------------- -------------- ------------------------------------------------------------

Ronald E. Robison (68) President and President President (since September 2005) and Principal Executive
1221 Avenue of the Americas Principal since Officer (since May 2003) of funds in the Fund Complex;
New York, NY 10020 Executive September 2005 President (since September 2005) and Principal Executive
Officer and Principal Officer (since May 2003) of the Van Kampen Funds; Managing
Executive Director, Director and/or Officer of the Investment Adviser
Officer since and various entities affiliated with the Investment Adviser;
May 2003 Director of Morgan Stanley SICAV (since May 2004). Formerly,
Executive Vice President (July 2003 to September 2005) of
funds in the Fund Complex and the Van Kampen Funds;
President and Director of the Institutional Funds (March
2001 to July 2003); Chief Administrative Officer of the
Investment Adviser; Chief Administrative Officer of Morgan
Stanley Services Company Inc.

J. David Germany (52) Vice President Since February Managing Director and (since December 2005) Chief Investment
Morgan Stanley Investment 2006 Officer -- Global Fixed Income of Morgan Stanley Investment
Management Limited Management; Managing Director and Director of Morgan Stanley
20 Bank Street Investment Management Limited; Vice President of the Retail
Canary Wharf, Funds and Institutional Funds (since February 2006).
London, England E144QAD

Dennis F. Shea (53) Vice President Since February Managing Director and (since February 2006) Chief Investment
1221 Avenue of the Americas 2006 Officer -- Global Equity of Morgan Stanley Investment
New York, NY 10020 Management; Vice President of the Retail and Institutional
Funds (since February 2006). Formerly, Managing Director and
Director of Global Equity Research at Morgan Stanley.

Amy R. Doberman (45) Vice President Since July Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas 2004 Management of Morgan Stanley Investment Management (since
New York, NY 10020 July 2004); Vice President of the Retail Funds and the
Institutional Funds (since July 2004); Vice President of the
Van Kampen Funds (since August 2004); Secretary (since
February 2006) and Managing Director (since July 2004) of
the Investment Adviser and various entities affiliated with
the Investment Adviser. Formerly, Managing Director and
General Counsel -- Americas, UBS Global Asset Management
(July 2000 to July 2004).

Carsten Otto (43) Chief Since October Managing Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Managing
New York, NY 10020 Officer Director and Chief Compliance Officer of Morgan Stanley
Investment Management. Formerly, Assistant Secretary and
Assistant General Counsel of the Retail Funds.

Stefanie V. Chang Yu (40) Vice President Since December Executive Director of the Investment Adviser and various
1221 Avenue of the Americas 1997 entities affiliated with the Investment Adviser; Vice
New York, NY 10020 President of the Retail Funds (since July 2002) and the
Institutional Funds (since December 1997). Formerly,
Secretary of various entities affiliated with the Investment
Adviser.

Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued

Francis J. Smith (41) Treasurer and Treasurer Executive Director of the Investment Adviser and various
c/o Morgan Stanley Trust Chief Financial since July entities affiliated with the Investment Adviser; Treasurer
Harborside Financial Center Officer 2003 and Chief and Chief Financial Officer of the Retail Funds (since July
Plaza Two Financial 2003). Formerly, Vice President of the Retail Funds
Jersey City, NJ 07311 Officer since (September 2002 to July 2003).
September 2002

Mary E. Mullin (40) Secretary Since June Executive Director of the Investment Adviser and various
1221 Avenue of the Americas 1999 entities affiliated with the Investment Adviser; Secretary
New York, NY 10020 of the Retail Funds (since July 2003) and the Institutional
Funds (since June 1999).

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

* This is the earliest date the Officer began serving the Retail Funds or the
Institutional Funds.

In accordance with Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual, the Fund's Annual CEO Certification certifying as to compliance
with NYSE's Corporate Governance Listing Standards was submitted to the Exchange
on November 14, 2006.

The Fund's Principal Executive Officer and Principal Financial Officer
Certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 were
filed with the Fund's N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.

2007 FEDERAL TAX NOTICE (UNAUDITED)

During the year ended March 31, 2007, the Fund paid its
shareholders $0.54 per share from tax-exempt income.

TRUSTEES

Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid

OFFICERS

Michael E. Nugent
Chairperson of the Board

Ronald E. Robison
President and Principal Executive Officer

J. David Germany
Vice President

Dennis F. Shea
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

Stefanie V. Chang Yu
Vice President

Francis J. Smith
Treasurer and Chief Financial Officer

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

LEGAL COUNSEL

Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019

COUNSEL TO THE INDEPENDENT TRUSTEE

Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036

INVESTMENT ADVISER

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

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

LOGO

Morgan Stanley
Municipal Income
Opportunities Trust III

Annual Report
March 31, 2007

[MORGAN STANLEY LOGO]

OICRPT-IU07-01017P-Y03/07

Item 2. Code of Ethics.

(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.

(b) No information need be disclosed pursuant to this paragraph.

(d) Not applicable.

(e) Not applicable.

(f)

(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 A.

(2) Not applicable.

(3) Not applicable.

Item 3. Audit Committee Financial Expert.

The Fund's Board of Trustees has determined that Joseph J. Kearns, an
"independent" Trustee, is an "audit committee financial expert" serving on its
audit committee. Under applicable securities laws, a person who is determined to
be an audit committee financial expert will not be deemed an "expert" for any
purpose, including without limitation for the purposes of Section 11 of the
Securities Act of 1933, as a result of being designated or identified as an
audit committee financial expert. The designation or identification of a person
as an audit committee financial expert does not impose on such person any
duties, obligations, or liabilities that are greater than the duties,
obligations, and liabilities imposed on such person as a member of the audit
committee and Board of Trustees in the absence of such designation or
identification.

Item 4. Principal Accountant Fees and Services.

(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:

2007

REGISTRANT COVERED ENTITIES(1)

AUDIT FEES............................ $ 31,300 N/A

NON-AUDIT FEES

AUDIT-RELATED FEES.................. $ 531(2) 6,559,000(2)
TAX FEES............................ $ 4,600(3) 623,667(4)
ALL OTHER FEES...................... $ - -
TOTAL NON-AUDIT FEES.................. $ 5,131 7,182,667

TOTAL................................. $ 36,431 7,182,667

2006

REGISTRANT COVERED ENTITIES(1)

AUDIT FEES............................ $ 30,446 N/A

NON-AUDIT FEES

AUDIT-RELATED FEES.................. $ 540(2) 5,180,378(2)
TAX FEES............................ $ 4,448(3) 2,275,787(4)
ALL OTHER FEES...................... $ - -
TOTAL NON-AUDIT FEES.................. $ 4,988 7,456,165

TOTAL................................. $ 35,434 7,456,165

N/A- Not applicable, as not required by Item 4.

(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the Adviser
that provides ongoing services to the Registrant.

(2) Audit-Related Fees represent assurance and related services provided that
are reasonably related to the performance of the audit of the financial
statements of the Covered Entities' and funds advised by the Adviser or
its affiliates, specifically data verification and agreed-upon procedures
related to asset securitizations and agreed-upon procedures engagements.

(3) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the preparation and review of the Registrant's
tax returns.

(4) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the review of Covered Entities' tax returns.

(e)(1) The audit committee's pre-approval policies and procedures are as
follows:

APPENDIX A

AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS

AS ADOPTED AND AMENDED JULY 23, 2004,(1)

1. STATEMENT OF PRINCIPLES

The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.

The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("general pre-approval"); or require the specific pre-approval of the Audit
Committee or its delegate ("specific pre-approval"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.

The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.

----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "Policy"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.

The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.

The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.

2. DELEGATION

As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.

3. AUDIT SERVICES

The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.

In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.

The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).

4. AUDIT-RELATED SERVICES

Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters

not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.

The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).

5. TAX SERVICES

The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.

Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).

6. ALL OTHER SERVICES

The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.

The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).

7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS

Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.

8. PROCEDURES

All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be

rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.

The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.

9. ADDITIONAL REQUIREMENTS

The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.

10. COVERED ENTITIES

Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:

Morgan Stanley Retail Funds
---------------------------
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB

Morgan Stanley Institutional Funds
----------------------------------
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP

(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).

(f) Not applicable.

(g) See table above.

(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.

Item 5. Audit Committee of Listed Registrants.

(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Joseph Kearns, Michael Nugent and Allen Reed.

(b) Not applicable.

Item 6.

See Item 1.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.

The Fund/Trust invests in exclusively non-voting securities and therefore this
item is not applicable.

Item 8. Portfolio Managers of Closed-End Management Investment Companies

FUND MANAGEMENT

PORTFOLIO MANAGEMENT. As of the date of this report, the Fund is managed by
members of the Municipal Fixed Income team. The team consists of portfolio
managers and analysts. Current members of the team jointly and primarily
responsible for the day-to-day management of the Fund's portfolio are James F.
Willison, a Managing Director of the Investment Adviser, Gerard J. Lian, an
Executive Director of the Investment Adviser and Wayne D. Godlin, a Managing
Director of the Investment Adviser.

Mr. Willison has been associated with the Investment Adviser in an investment
management capacity since January 1980 and began managing the Fund at inception.
Mr. Lian has been associated with the Investment Adviser in an investment
management capacity since December 1991 and began managing the Fund in February
2003. Mr. Godlin has been associated with the Investment Adviser in an
investment management capacity since May 1988 and began managing the Fund in
October 2001.

The composition of the team may change without notice from time to time.

OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS

The following information is as of March 31, 2007.

Mr. Willison managed 22 mutual funds with a total of approximately $7.2 billion
in assets; no pooled investment vehicles other than mutual funds; and no other
accounts.

Mr. Lian managed three mutual funds with a total of approximately $400.5 million
in assets; no pooled investment vehicles other than mutual funds; and no other
accounts.

Mr. Godlin managed five mutual funds with a total of approximately $6.5 billion
in assets; no pooled investment vehicles other than mutual funds; and no other
accounts.

Because the portfolio managers manage assets for other investment companies,
pooled investment vehicles and/or other accounts (including institutional
clients, pension plans and certain high net worth individuals), there may be an
incentive to favor one client over another resulting in conflicts of interest.
For instance, the Investment Adviser may receive fees from certain accounts that
are higher than the fee it receives from the Fund, or it may receive a
performance-based fee on certain accounts. In those instances, the portfolio
managers may have an incentive to favor the higher and/or performance-based fee
accounts over the Fund. In addition, a conflict of interest could exist to the
extent the Investment Adviser has proprietary investments in certain accounts,
where portfolio managers have personal investments in certain accounts or when
certain accounts are investment options in the Investment Adviser's employee
benefits and/or deferred compensation plans. The portfolio manager may have an
incentive to favor these accounts over others. If the Investment Adviser manages
accounts that engage in short sales of securities of the type in which the Fund
invests, the Investment Adviser could be seen as harming the performance of the
Fund for the benefit of the accounts engaging in short sales if the short sales
cause the market value of the securities to fall. The Investment Adviser has
adopted trade allocation and other policies and procedures that it believes are
reasonably designed to address these and other conflicts of interest.

PORTFOLIO MANAGER COMPENSATION STRUCTURE

Portfolio managers receive a combination of base compensation and
discretionary compensation, comprising a cash bonus and several deferred
compensation programs described below. The methodology used to determine
portfolio manager compensation is applied across all funds/accounts managed by
the portfolio managers.

BASE SALARY COMPENSATION. Generally, portfolio managers receive base
salary compensation based on the level of their position with the Investment
Adviser.

DISCRETIONARY COMPENSATION. In addition to base compensation, portfolio
managers may receive discretionary compensation.

Discretionary compensation can include:

- Cash Bonus.

- Morgan Stanley's Long Term Incentive Compensation awards - a
mandatory program that defers a portion of discretionary
year-end compensation into restricted stock units or other
awards based on Morgan Stanley common stock or other
investments that are subject to vesting and other conditions;

- Investment Management Alignment Plan (IMAP) awards - a
mandatory program that defers a portion of discretionary
year-end compensation and notionally invests it in designated
funds advised by the Adviser and/or Sub-Advisor or its
affiliates. The award is subject to vesting and other
conditions. Portfolio managers must notionally invest a
minimum of 25% to a maximum of 100% of the IMAP deferral into
a combination of the designated open-end mutual funds they
manage that are included in the IMAP fund menu.

- Voluntary Deferred Compensation Plans - voluntary programs
that permit certain employees to elect to defer a portion of
their discretionary year-end compensation and directly or
notionally invest the deferred amount: (1) across a range of
designated investment funds, including funds advised by the
Adviser and/or Sub-Advisor or its affiliates; and/or (2) in
Morgan Stanley stock units.

Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include:

- Investment performance. A portfolio manager's compensation is
linked to the pre-tax investment performance of the
funds/accounts managed by the portfolio manager. Investment
performance is calculated for one-, three- and five-year
periods measured against a fund's/account's primary benchmark
(as set forth in the fund's prospectus), indices and/or peer
groups where applicable. Generally, the greatest weight is
placed on the three- and five-year periods.

- Revenues generated by the investment companies, pooled
investment vehicles and other accounts managed by the
portfolio manager.

- Contribution to the business objectives of the Investment
Adviser.

- The dollar amount of assets managed by the portfolio manager.

- Market compensation survey research by independent third
parties.

- Other qualitative factors, such as contributions to client
objectives.

- Performance of Morgan Stanley and Morgan Stanley Investment
Management, and the overall performance of the investment
team(s) of which the portfolio manager is a member.

SECURITIES OWNERSHIP OF PORTFOLIO MANAGERS

As of March 31, 2007, the portfolio managers did not own any share of the
Fund.

Item 9. Closed-End Fund Repurchases

REGISTRANT PURCHASE OF EQUITY SECURITIES

(d) Maximum
(c)Total Number (or
Number of Approximate
Shares (or Dollar Value)
Units) of Shares (or
(a) Total Purchased as Units) that May
Number of Part of Publicly Yet Be
Shares (or (b) Average Announced Purchased
Units) Price Paid per Plans or Under the Plans
Period Purchased Share (or Unit) Programs or Programs
------------------ ---------- --------------- ---------------- -----------------

April 1, 2006 -
April 30, 2006 19,100 9.5028 N/A N/A

May 1, 2006 -
May 31, 2006 6,400 9.4178 N/A N/A

June 1, 2006 -
June 30, 2006 13,200 9.3481 N/A N/A

November 1, 2006 -
November 30, 2006 4,200 9.9527 N/A N/A

Total 42,900 9.5554 N/A N/A

Item 10. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 11. Controls and Procedures

a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
provide reasonable assurance that information required to be disclosed by the
Fund in this Form N-CSR was recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's ("SEC")
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report. The
Fund's principal executive officer and principal financial officer have also
concluded that the Fund's disclosure controls and procedures designed to ensure
that information required to be disclosed by the Fund in this Form N-CSR is
accumulated and communicated to the Fund's management, including its principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure were effective.

Management of the Fund has determined that as of and prior to March 31, 2007,
the Fund's fiscal annual period, the Fund had a deficiency in its internal
control over financial reporting related to the review, analysis and
determination of whether certain transfers of municipal securities qualified for
sale accounting under the provisions of Statement of Financial Accounting
Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Since March 31, 2007, and prior to the
issuance of the Fund's semiannual report, management has revised its disclosure
controls and procedures and its internal control over financial reporting in
order to improve the controls' effectiveness to ensure that transactions in
transfers of municipal securities are accounted for properly.

Management notes that other investment companies investing in similar
investments over similar time periods had been accounting for such investments
in a similar manner as the Fund. Accordingly, other investment companies are
also concluding that there was a material weakness in their internal control
over financial reporting of such investments. There was no impact to the net
asset value of the Fund's shares or the Fund's total return for any period as a
result of the changes in financial reporting of such investments.

(b) There were no changes in the Fund's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Fund's internal control over financial reporting.
However, as discussed above, subsequent to March 31, 2007, the Fund's internal
control over financial reporting was revised.

Item 12. Exhibits

(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.

(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.

SIGNATURES

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

Morgan Stanley Municipal Income Opportunities Trust III

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
May 22, 2007

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

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
May 22, 2007

/s/ Francis Smith
Francis Smith
Principal Financial Officer
May 22, 2007