N-CSR 1 y51171nvcsr.txt FORM N-CSR 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: 811-05793 Morgan Stanley Municipal Income Opportunities Trust II (Exact name of registrant as specified in charter) 522 Fifth Avenue, New York, New York 10036 (Address of principal executive offices) (Zip code) Ronald E. Robison 522 Fifth Avenue, New York, New York 10036 (Name and address of agent for service) Registrant's telephone number, including area code: 212-296-6990 Date of fiscal year end: February 29, 2008 Date of reporting period: February 29, 2008 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Municipal Income Opportunities Trust II 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 February 29, 2008 MARKET CONDITIONS The fiscal reporting year was an extremely volatile period for the municipal bond market, as well as all other sectors of the financial markets. The accelerating decline in residential housing, fallout from the subprime mortgage market collapse, and subsequent liquidity and credit contraction created a very challenging environment. The municipal market had performed quite well until these events began to unfold in the spring of 2007. After a difficult summer, the market rebounded in the fall when the Federal Open Market Committee (the "Fed") began its efforts to boost market liquidity by cutting the target federal funds rate in both September and October. In December, however, performance waned again as signs of slowing economic growth fueled fears of an impending recession, prompting the Fed to further reduce rates -- once that month and twice more in January 2008. Although the municipal market rallied in January, recouping much of the losses incurred in the previous month, massive selling in the market in February, as well as growing liquidity concerns, caused performance to decline significantly. As a result, over the course of the 12-month reporting period, the 30-year municipal-to-Treasury ratio, which measures the relative attractiveness of these two sectors, rose from 85 percent to 116 percent, indicating that municipals underperformed Treasuries while at the same time becoming historically cheap (more attractive) on a relative basis. The high yield segment of the market in particular struggled as investors shunned these riskier assets in favor of higher quality securities. This caused spreads on high yield municipals to widen from 110 basis points at the beginning of the reporting period to 240 basis points as of the end of February. Yields on intermediate-to-long maturity municipal bonds increased over the course of the reporting year. Representative yields on 30-year AAA rated municipal bonds rose from 3.97 percent at the start of the period to 5.14 percent by February 29, 2008. However, yields on the short end of the municipal curve fell, with yields on one-year bonds declining from 3.56 percent to 2.25 percent. Accordingly, the spread between long-term and short-term yields, which began the period at 41 basis points, widened to 289 basis points by the end of the period, causing the slope of the municipal yield curve to steepen considerably. PERFORMANCE ANALYSIS For the 12-month period ended February 29, 2008, the net asset value (NAV) of Morgan Stanley Municipal Income Opportunities Trust II (OIB) decreased from $9.30 to $8.01 per share. Based on this change plus reinvestment of tax-free dividends totaling $0.4925 per share, the Fund's total NAV return was -8.89 percent. OIB's value on the New York Stock Exchange (NYSE) moved from $9.14 to $8.15 per share during the same period. Based on this change plus reinvestment of dividends, the Fund's total market return was -5.67 percent. OIB's NYSE market price was at a 1.75 percent premium to its NAV. During the fiscal period, the Fund purchased and retired 45,400 shares of common stock at a weighted average market discount of 5.27 percent. Past performance is no guarantee of future results. Monthly dividends for the fourth quarter of 2007, declared in September, increased from $.040 to $.0425 per share, and were unchanged for the first 2 quarter of 2008. The dividend reflects the current level of the Fund's net investment income. OIB's level of undistributed net investment income was $0.068 per share on February 29, 2008 versus $0.083 per share 12 months earlier.(1) The Fund invests primarily in high yield municipal bonds, which represented more than two-thirds of assets during the period. The Fund's emphasis on this segment of the market was beneficial early in the period when lower-rated, higher- yielding bonds outperformed higher-quality issues. The increasingly risk-averse environment over the remainder of the period, however, led to a considerable downturn in the performance of high yield bonds. As a result, the Fund's focus on high yield securities hindered its performance. The Fund's allocation to AAA rated credits, however, increased slightly during the period. We took advantage of attractive short-term auction rates created by a supply/demand imbalance, adding select AAA rated municipal auction rate securities to the portfolio toward the end of the reporting year. In the first half of the reporting year, we maintained a slightly shorter option-adjusted duration* for the portfolio, primarily through a Treasury futures hedge position. Although this defensive positioning was beneficial to performance during that time, the flight to quality and rally in the Treasury market that occurred around the middle of the period hindered the performance of the hedge. Therefore, we eliminated the position, which effectively lengthened the portfolio's duration. This longer duration, or sensitivity to interest rate changes, held back returns as municipal rates continued to move higher. Conversely, the Fund's pre-refunded holdings were additive to performance as these short-term securities did not experience the sell-off that longer maturity bonds did when long-term municipal yields rose. Additionally, an overweight to health care, as well as our focus on stronger credits within the sector, also boosted returns. The Fund's holdings in single family housing bonds, however, detracted from overall performance, and we have reduced exposure to this sector. Holdings in zero coupon tobacco bonds also hampered returns. The Fund's yield curve positioning had little effect on performance as a whole, though performance varied across segments of the portfolio. We overweighted the long end of the curve, where the majority of new investments were made, as well as the very short end of the curve, where most of the portfolio's older, "seasoned" investments and pre-refunded holdings were focused. Although the emphasis on the short end of the curve was beneficial, the performance of holdings on the long end of the curve waned as rates there rose over the course of the reporting period. Overall, the Fund's investments remained well-diversified across a broad range of sectors. As of the end of the period, sector exposure was relatively unchanged with life care, special tax districts, hospital, and industrial development revenue/pollution control revenue (IDR/PCR) representing the Fund's largest sector weightings. OIB'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 3 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. 4
TOP FIVE SECTORS Retirement & Life Care Facilities 28.3% Special Tax Districts 16.2 Hospital 13.3 IDR/PCR* 11.8 Refunded 9.4
LONG-TERM CREDIT ANALYSIS Aaa/AAA 7.2% Aa/AA 1.6 A/A 1.2 Baa/BBB 13.5 Ba/BB or Less 6.8 NR 69.7
* Industrial Development Revenue/Pollution Control Revenue Data as of February 29, 2008. 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. 5 DISTRIBUTION BY MATURITY (% of Long-Term Portfolio) As of February 29, 2008 WEIGHTED AVERAGE MATURITY: 21 YEARS(A) 0-5 10 6-10 3 11-15 10 16-20 17 21-25 21 26-30 33 31+ 6
(a) Where applicable, maturities reflect mandatory tenders, puts and call dates. Portfolio structure is subject to change. Summary of Investments by State Classification as of February 29, 2008 Florida................ 11.0% Pennsylvania........... 9.9 Texas.................. 7.8 California............. 7.6 New York............... 7.5 Illinois............... 6.7 Virginia............... 6.6 New Jersey............. 6.3 Maryland............... 3.6 Colorado............... 3.2 Arizona................ 3.1 Ohio................... 3.0 Massachusetts.......... 2.6 Nevada................. 2.5 Kansas................. 2.4 South Carolina......... 2.3% Alabama................ 2.2 Missouri............... 2.2 Michigan............... 1.9 Connecticut............ 1.8 New Hampshire.......... 1.6 Georgia................ 1.5 Minnesota.............. 1.5 Tennessee.............. 1.4 Wisconsin.............. 1.4 Washington............. 1.3 Oklahoma............... 1.2 Iowa................... 1.1 Hawaii................. 0.8 Vermont................ 0.8 New Mexico............. 0.8% Louisiana.............. 0.5 District of Columbia*.. 0.5 Maine.................. 0.4 Indiana................ 0.3 North Carolina......... 0.3 North Dakota........... 0.3 ------ Total Investments...... 109.9 Liability for Floating Rate Note and Dealer Trusts Obligations... (11.4) Other Assets in Excess of Liabilities....... 1.5 ------ Net Assets............. 100.0% ======
--------- * Joint exemption 6 CALL AND COST (BOOK) YIELD STRUCTURE (Based on Long-Term Portfolio) As of February 29, 2008 YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 7 YEARS 2008(a) 12 2009 8 2010 2 2011 9 2012 4 2013 11 2014 9 2015 7 2016 15 2017 17 2018+ 6
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 6.6% 2008(a) 6.1 2009 6.4 2010 7.2 2011 7.3 2012 6.2 2013 6.8 2014 6.6 2015 5.7 2016 6.1 2017 6.7 2018+ 8.1
(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 6.1% on 12% of the long- term portfolio that is callable in 2008. Portfolio structure is subject to change. 7 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------- Tax-Exempt Municipal Bonds (107.4%) Alabama (0.7%) $ 1,000 Colbert County-Northwest Health Care Authority, Helen Keller Hospital Ser 2003.................................... 5.75 % 06/01/27 $ 913,060 ------------- Arizona (3.1%) 1,125 Pima County Arizona Industrial Development Authority, Constellation Schools Ser 2008.................................... 7.00 01/01/38 1,018,238 800 Pima County Arizona Industrial Development Authority, Water and Wastewater Global Water Resources LLC Ser 2007 (AMT)...... 6.55 12/01/37 724,128 2,600 Salt Verde Financial Corp Ser 2007++++.... 5.25 12/01/24 2,357,173 ------------- 4,099,539 ------------- California (7.5%) 1,970 California County Tobacco Securitization Agency, Gold County Settlement Funding Corp Ser 2006........................... 0.00 06/01/33 318,234 500 California Housing Finance Agency, RITES PA 1417 Ser 2006 (AMT).................. 8.222## 08/01/31 221,860 500 California Housing Finance Agency, RITES PA 1417 Ser 2006 (AMT).................. 8.372## 08/01/36 211,630 500 California Statewide Communities Development Authority, California Baptist University Ser 2007 A........... 5.50 11/01/38 426,545 500 California Statewide Communities Development Authority, Lancer Educational Student Housing LLC Ser 2007.................................... 5.625 06/01/33 433,275 1,000 Carlsbad Assessment District #2002-2001, Poinsettia Lane East Ser 2005 A......... 5.20 09/02/35 818,550 1,000 Carlsbad Community Facilities District #3 Ser 2006................................ 5.30 09/01/36 817,020 4,000 Golden State Tobacco Securitization Corporation, Asset Backed Ser 2007 A- 1++++................................... 5.125 06/01/47 3,221,228 530 Palm Springs, Palm Spring Int'l Airport Ser 2006 (AMT).......................... 5.55 07/01/28 468,732 750 Quechan Indian Tribe FT Yuma Indian Reservation Ser 2008.................... 7.00 12/01/27 717,345 2,000 Sacramento Financing Authority, Convention Center Hotel 1999 Ser A................. 6.25 01/01/30 1,831,920 12,000 Silicon Valley Tobacco Securitization Authority, Santa Clara Tobacco Securitization Corp Ser 2007............ 0.00 06/01/56 266,160 ------------- 9,752,499 ------------- Colorado (3.2%) 1,000 Colorado Health Facilities Authority, Christian Living Communities Ser 2006 A....................................... 5.75 01/01/37 859,550 155 Colorado Housing Finance Authority 1998 Ser B-3................................. 6.55 05/01/25 159,149
See Notes to Financial Statements 8 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------- $ 1,420 Copperleaf Metropolitan District #2 Ser 2006.................................... 5.85 % 12/01/26 $ 1,172,934 2,000 Elk Valley Public Improvement Corporation Ser 2001 A.............................. 7.30 09/01/22 2,023,480 ------------- 4,215,113 ------------- Connecticut (1.8%) 1,000 Mashantucket (Western) Pequot Tribe, Special 1997 Ser B (a).................. 5.75 09/01/27 917,230 1,500 Mohegan Tribe of Indians, Gaming Authority Ser 2001 (a)............................ 6.25 01/01/31 1,409,970 ------------- 2,327,200 ------------- District of Columbia (0.5%) 615 Metropolitan Washington Airports Authority, District of Columbia & Virginia, CaterAir International Corp Ser 1991 (AMT)++........................ 10.125 09/01/11 615,301 ------------- Florida (10.2%) 500 Alachua County, North Florida Retirement Village Ser 2007........................ 5.25 11/15/17 463,960 700 Alachua County, North Florida Retirement Village Ser 2007........................ 5.875 11/15/36 609,819 550 Brevard County Health Facilities Authority, Buena Vida Estates, Inc Ser 2007.................................... 6.75 01/01/37 525,470 1,000 Fiddlers Creek Community Development District #1 Ser 2005.................... 6.00 05/01/38 842,790 500 Fountainbleau Lakes Community Development District Ser 2007 B..................... 6.00 05/01/15 462,695 500 Grand Bay at Doral Community Development District Ser 2007 A..................... 6.00 05/01/39 417,520 710 Mid-Bay Bridge Authority, Sr Lien Crossover Refg Ser 1993 A (AMBAC Insd).. 5.85 10/01/13 739,870 500 Orange County Health Facilities Authority, Orlando Lutheran Towers Inc Ser 2005.... 5.70 07/01/26 441,030 1,000 Orange County Health Facilities Authority, Orlando Lutheran Towers Inc Ser 2007.... 5.50 07/01/38 820,210 2,000 Orange County Health Facilities Authority, Westminister Community Care Services Inc Ser 1999................................ 6.75 04/01/34 2,013,920 1,000 Pinellas County Health Facilities Authority, Oaks of Clearwater Ser 2004.. 6.25 06/01/34 982,170 995 Renaissance Commons Community Development District 2005 Ser A..................... 5.60 05/01/36 809,512 2,640 South Miami Health Facilities Authority, Baptist Health South Florida Obligated Group++++............................... 5.00 08/15/32 2,407,469 1,000 St Johns County Industrial Development Authority, Glenmoor Ser 1999 A.......... 8.00 01/01/10+ 1,107,010 600 Tolomato Community Development District, Special Assessment Ser 2007............. 6.55 05/01/27 564,750 ------------- 13,208,195 ------------- Georgia (1.4%) 2,000 Atlanta, Eastside Ser 2005 B.............. 5.40 01/01/20 1,847,260 -------------
See Notes to Financial Statements 9 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------- Hawaii (0.8%) $ 1,000 Hawaii Department of Budget & Finance, Kahala Nui 2003 Ser A................... 8.00 % 11/15/33 $ 1,083,100 ------------- Illinois (6.7%) 500 Bolingbrook, Sales Tax Ser 2005........... 6.25 01/01/24 483,005 115 Chicago, GNMA-Collateralized Ser 1998 A-1 (AMT)................................... 6.45 09/01/29 116,659 1,000 Chicago, Lake Shore East Ser 2002......... 6.75 12/01/32 1,001,740 450 Hampshire Special Service Area #18 Ser 2007 A.................................. 6.00 03/01/44 369,891 1,000 Illinois Finance Authority, Landing at Plymouth Ser 2005 A..................... 6.00 05/15/37 880,080 1,000 Illinois Finance Authority, Luther Oaks Ser 2006 A.............................. 6.00 08/15/39 879,780 2,000 Illinois Health Facilities Authority, Smith Crossing Ser 2003 A............... 7.00 11/15/32 2,024,500 1,000 Illinois Health Facilities Authority, Villa St Benedict Ser 2003 A-1.......... 6.90 11/15/33 840,780 750 Lincolnshire, Service Area #1-Sedgebrook Ser 2004................................ 6.25 03/01/34 707,385 1,000 Pingree Grove Special Service Area #7, Cambridge Lakes Ser 2006-1.............. 6.00 03/01/36 875,190 550 Will-Kankakee Regional Development Authority, Senior Estates Supportive Living Ser 2007 (AMT)................... 7.00 12/01/42 500,775 ------------- 8,679,785 ------------- Indiana (0.3%) 525 Saint Joseph County, Holy Cross Village at Notre Dame Ser 2006 A................... 6.00 05/15/38 457,847 ------------- Iowa (1.1%) 970 Iowa Health Facilities Development Financing Authority, Care Initiatives Ser 1996................................ 9.25 07/01/11+ 1,164,320 250 Washington County Hospital Ser 2006....... 5.375 07/01/26 228,900 ------------- 1,393,220 ------------- Kansas (2.4%) 1,000 Olathe, Catholic Care Ser 2006 A.......... 6.00 11/15/38 877,110 2,000 Overland Park Development Corporation, Convention Center Hotel Ser 2000 A...... 7.375 01/01/11+ 2,237,300 ------------- 3,114,410 ------------- Louisiana (0.5%) 750 Lakeshore Villages Master Community Development District, Special Assessment Ser 2007................................ 5.25 07/01/17 659,917 ------------- Maine (0.4%) 500 South Berwick, Berwick Academy Ser 1998... 5.55 08/01/23 487,595 -------------
See Notes to Financial Statements 10 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------- Maryland (3.6%) $ 2,000 Annapolis, Park Place Ser 2005 A.......... 5.35 % 07/01/34 $ 1,635,100 500 Maryland Industrial Development Financing Authority, Our Lady of Good Counsel High School Ser 2005 A....................... 6.00 05/01/35 451,535 1,000 Maryland State Economic Development Corporation, Chesapeake Bay Conference Center Ser 2006 A....................... 5.00 12/01/31 810,340 500 Maryland State Health & Higher Educational Facilities Authority, King Farm Presbyterian Community 2007 Ser A....... 5.30 01/01/37 392,815 1,500 Westminster, Caroll Lutheran Village Inc 2004 Ser A.............................. 6.25 05/01/34 1,423,215 ------------- 4,713,005 ------------- Massachusetts (2.6%) 1,500 Massachusetts Development Finance Agency, Loomis Communities Ser 1999 A........... 5.75 07/01/23 1,442,265 1,350 Massachusetts Development Finance Agency, New England Center for Children Ser 1998.................................... 5.875 11/01/18 1,289,129 750 Massachusetts Development Finance Authority, Evergreen Center Ser 2005.... 5.50 01/01/35 622,388 ------------- 3,353,782 ------------- Michigan (1.9%) 600 Gaylord Hospital Financing Authority, Otsego Memorial Hospital Ser 2004....... 6.50 01/01/37 563,316 2,000 Michigan Tobacco Settlement Finance Authority Ser 2007 A.................... 6.00 06/01/48 1,854,960 ------------- 2,418,276 ------------- Minnesota (1.5%) 750 Buffalo Central Minnesota Senior Housing Ser 2006 A.............................. 5.50 09/01/33 645,157 500 North Oaks Presbyterian Homes of North Oaks Ser 2007........................... 6.125 10/01/39 467,355 1,000 St. Paul Housing & Redevelopment Authority, Rossy & Richard Shaller Ser 2007 A.................................. 5.25 10/01/42 815,310 ------------- 1,927,822 ------------- Missouri (2.2%) 450 Branson Regional Airport Transportation Development District Ser 2007 B (AMT)... 6.00 07/01/37 380,772 2,000 Des Peres West County Center Ser 2002..... 5.75 04/15/20 1,871,320 130 Missouri Housing Development Commission, Homeownership GNMA/FNMA Collateralized 2000 Ser A-1 (AMT)...................... 7.50 03/01/31 136,503 500 St. Louis Industrial Development Authority, St. Andrews Resources for Seniors Ser 2007 A...................... 6.375 12/01/41 457,570 ------------- 2,846,165 -------------
See Notes to Financial Statements 11 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------- Nevada (2.5%) $ 980 Clark County Special Improvement District #142, Mountain's Edge Ser 2003.......... 6.375% 08/01/23 $ 893,476 675 Henderson Local Improvement District #T- 18, Ser 2006............................ 5.30 09/01/35 489,449 1,500 Henderson Catholic Health West Ser 2004 Ser A................................... 5.625 07/01/24 1,507,005 1,000 Nevada Department of Business & Industry, Las Vegas Monorail 2nd Tier Ser 2000.... 7.375 01/01/40 344,710 ------------- 3,234,640 ------------- New Hampshire (1.6%) 2,000 New Hampshire Higher Educational and Health Facilities Authority, Littleton Hospital Association Ser 1998 B......... 5.90 05/01/08+ 2,051,240 ------------- New Jersey (6.3%) 1,000 New Jersey Economic Development Authority, Cedar Crest Village Inc Ser 2001 A...... 7.25 11/15/11+ 1,144,370 1,500 New Jersey Economic Development Authority, Cigarette Tax Ser 2004.................. 5.75 06/15/34 1,381,905 2,000 New Jersey Economic Development Authority, Franciscan Oaks Ser 1997................ 5.75 10/01/23 1,845,940 710 New Jersey Economic Development Authority, Lions Gate Ser 2005 A................... 5.75 01/01/25 645,440 500 New Jersey Economic Development Authority, The Presbyterian Home at Montgomery Ser 2001 A.................................. 6.375 11/01/31 474,825 1,000 New Jersey Economic Development Authority, United Methodist Homes of New Jersey Ser 1998.................................... 5.125 07/01/25 825,350 2,000 New Jersey Health Care Facilities Financing Authority, Raritan Bay Medical Center Ser 1994......................... 7.25 07/01/27 1,895,540 ------------- 8,213,370 ------------- New Mexico (0.8%) 1,150 Mariposa East Public Improvement District Ser 2006................................ 6.00 09/01/32 1,027,824 ------------- New York (7.5%) 1,800 Dutchess County Development Agency, St Francis Hospital Refg Ser 2004 A........ 7.50 03/01/29 1,885,806 1,000 Mount Vernon Industrial Development Agency, Meadowview at the Wartburg Ser 1999.................................... 6.15 06/01/19 982,000 2,000 New York City Industrial Development Agency, 7 World Trade Center LLC Ser 2005 A.................................. 6.50 03/01/35 2,021,900 2,000 New York City Industrial Development Agency, American Airlines Inc Ser 2005 (AMT)................................... 7.75 08/01/31 2,074,300
See Notes to Financial Statements 12 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------- $ 2,000 New York City Industrial Development Agency, Brooklyn Navy Yard Cogeneration Partners LP Ser 1997 (AMT).............. 5.65 % 10/01/28 $ 1,783,480 1,000 New York Liberty Development Corp, National Sports Museum, Ser 2006 A...... 6.125 02/15/19 951,430 ------------- 9,698,916 ------------- North Carolina (0.3%) 450 North Carolina Medical Care Commission Retirement Facilities, Southminster Ser 2007 A.................................. 5.75 10/01/37 420,372 ------------- North Dakota (0.3%) 450 Ward County Health Care Facilities, Trinity Obligated Group Ser 2006........ 5.125 07/01/29 392,661 ------------- Ohio (3.0%) 3,000 Buckeye Tobacco Settlement Financing Authority, Asset-Backed Ser 2007 A- 2++++................................... 5.875 06/01/30 2,807,420 700 Cuyahoga County Health Care and Independent Living Facilities, Eliza Jennings Senior Care Ser 2007 A......... 5.75 05/15/27 619,353 550 Tuscarawas County Hospital Facilities, Twin City Hospital Ser 2007............. 6.35 11/01/37 492,899 ------------- 3,919,672 ------------- Oklahoma (1.2%) 550 Chickasaw Nation Health Systems Ser 2007.. 6.25 12/01/32 534,105 1,000 Oklahoma Development Finance Authority, Comanche County Hospital 2000 Ser B..... 6.60 07/01/31 1,005,730 ------------- 1,539,835 ------------- Pennsylvania (9.9%) 2,600 Allegheny County Development Authority, West Penn Ser 2007 A++++................ 5.375 11/15/40 2,129,075 500 Allegheny County Redevelopment Authority, Pittsburgh Mills Ser 2004............... 5.60 07/01/23 456,445 1,000 Bucks County Industrial Development Authority, Ann's Choice Ser 2005 A...... 6.25 01/01/35 950,730 1,000 Carbon County Industrial Development Authority, Panther Creek Partners Refg 2000 Ser (AMT).......................... 6.65 05/01/10 1,021,440 2,940 Chester County Industrial Development Authority, RHA/PA Nursing Home Inc Ser 1989.................................... 8.50 05/01/32 2,985,746 1,000 Harrisburg Authority, Harrisburg University of Science & Technology Ser 2007 B.................................. 6.00 09/01/36 884,480 1,000 Montgomery County Industrial Development Authority, Whitemarsh Community Ser 2005.................................... 6.25 02/01/35 921,470
See Notes to Financial Statements 13 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------- $ 1,000 Pennsylvania Economic Development Financing Authority, Reliant Energy Inc Ser 2001 A (AMT)........................ 6.75 % 12/01/36 $ 999,230 2,640 Pennsylvania Housing Finance Agency Ser 2007-100A (AMT)++++..................... 5.10 10/01/22 2,555,454 ------------- 12,904,070 ------------- South Carolina (2.3%) 1,000 Myrtle Beach, Myrtle Beach Air Force Base Ser 2006................................ 5.25 11/01/26 824,480 1,000 South Carolina Jobs - Economic Development Authority, Lutheran Homes Ser 2007...... 5.625 05/01/42 807,220 1,000 South Carolina Jobs - Economic Development Authority, Westley Commons Ser 2006..... 5.125 10/01/26 816,940 575 South Carolina Jobs - Economic Development Authority, Woodlands at Furman Ser 2007 A....................................... 6.00 11/15/37 506,397 ------------- 2,955,037 ------------- Tennessee (1.4%) 1,000 Shelby County Health, Educational & Housing Facilities Board, Trezevant Manor Ser 2006 A........................ 5.75 09/01/37 909,360 1,000 Shelby County Health, Educational & Housing Facilities Board, Village at Germantown Ser 2003 A................... 7.25 12/01/34 938,840 ------------- 1,848,200 ------------- Texas (7.8%) 2,000 Austin Convention Enterprises Inc, Convention Center Hotel Ser 2000 A...... 6.70 01/01/11+ 2,183,580 1,000 Brazos River Authority, TXU Electric Co Refg Ser 1999 A (AMT)................... 7.70 04/01/33 1,004,460 1,000 Decatur Hospital Authority, Wise Regional Health Ser 2004 A....................... 7.125 09/01/34 1,013,980 1,000 HFDC Central Texas Inc, Legacy at Willow Bend, Ser 2006 A........................ 5.75 11/01/36 846,150 1,000 Houston Health Facilities Development Corporation, Buckingham Senior Living Community Ser 2004 A.................... 7.125 02/15/14+ 1,192,100 1,000 Lubbock Health Facilities Development Corporation, Carillon Ser 2005 A........ 6.50 07/01/26 951,150 3,110 Texas Department of Housing and Community Affairs Ser 2007 B (AMT)++++............ 5.15 09/01/27 2,899,119 ------------- 10,090,539 ------------- Vermont (0.8%) 1,000 Vermont Economic Development Authority, Wake Robin Corp Ser 1999 A.............. 6.75 03/01/09+ 1,056,510 ------------- Virginia (6.6%) 4,419 Chesterfield County Industrial Development Authority, Brandermill Woods Ser 1998... 6.50 01/01/28 4,382,454 1,300 Lexington Industrial Development Authority, Ser 2007 A................... 5.50 01/01/37 1,106,937 2,250 Peninsula Ports Authority of Virginia, Baptist Homes Ser 2006 C................ 5.40 12/01/33 1,845,630
See Notes to Financial Statements 14 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------- $ 500 Peninsula Town Center Community Development Authority, Ser 2007......... 6.45 % 09/01/37 $ 441,980 1,000 Virginia Beach Development Authority, Westminster-Canterbury Refg Ser 2005 A.. 5.375 11/01/32 868,590 ------------- 8,645,591 ------------- Washington (1.3%) 2,000 Washington Housing Finance Commission, Skyline at First Hill Ser 2007 A........ 5.625 01/01/38 1,662,740 ------------- Wisconsin (1.4%) 1,750 Wisconsin Health & Educational Facilities Authority, Beaver Dam Community Hospital Ser 2004 A.............................. 6.75 08/15/34 1,764,927 ------------- Total Tax-Exempt Municipal Bonds (Cost $150,503,384)........... 139,539,235 ------------- Short-Term Tax-Exempt Municipal Obligations (2.5%) Alabama (1.5%) 1,950 Health Care Authority for Baptist Health Ser 2006 B ### (Reset date 03/07/08).... 11.00 11/15/37 1,950,000 ------------- California (0.1%) 150 California Statewide Communities Development Authority, Ser 2004 D (FSA Insd) ### (Reset date 03/04/08)......... 10.00 04/01/32 150,000 ------------- Florida (0.8%) 1,000 Miami-Dade County Health Facilities Authority, Miami Children's Hospital Ser 2006 B2 (MBIA Insd) ### (Reset date 03/06/08)............................... 8.00 08/01/34 1,000,000 ------------- Georgia (0.1%) 150 Gwinnett County Hospital Authority, Gwinnett Hospital Systems, Inc Ser 2007 E (FSA Insd) ### (Reset date 03/04/08).. 7.84 07/01/34 150,000 ------------- Total Short-Term Tax-Exempt Municipal Obligations (Cost $3,250,000).................................................... 3,250,000 ------------- Total Investments (Cost $153,753,384).......................... 142,789,235 -------------
See Notes to Financial Statements 15 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO OF INVESTMENTS - FEBRUARY 29, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS VALUE ----------------------------------------------------------------------------------------------- Floating Rate Note Obligations Related to Securities Held (-11.4%) $(14,855) Notes with interest rates ranging from 3.20% to 3.75% at February 29, 2008 and contractual maturities of collateral ranging from 10/01/22 to 06/01/47 (See Note 1D) ++ (Cost $(14,855,000)).............................................. $(14,855,000) ------------ Total Net Investments (Cost $138,898,384) (b)................. 98.5% 127,934,235 Other Assets in Excess of Liabilities ........................ 1.5 1,956,710 ----- ------------ Net Assets ................................................... 100.0% $129,890,945 ===== ============
---------- AMT Alternative Minimum Tax. RITES Residual Interest Tax--Exempt Security. ++ Joint exemption. ++++ Underlying security related to inverse floater entered into by the Fund (See Note 1D). + Prerefunded to call date shown. ++ Floating rate note obligations related to securities held. The interest rates shown reflect the rates in effect at February 29, 2008. ## Current coupon rate for inverse floating rate municipal obligation . 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 $433,490 which represents 0.3% of net assets. ### Auction rate security. (a) Resale is restricted to qualified institutional investors. (b) The aggregate cost for federal income tax purposes is $138,859,646. The aggregate gross unrealized appreciation is $2,027,151 and the aggregate gross unrealized depreciation is $12,952,562, resulting in net unrealized depreciation of $10,925,411.
Bond Insurance: --------------- AMBAC AMBAC Assurance Corporation. FSA Financial Security Assurance Inc. MBIA Municipal Bond Investors Assurance Corporation.
See Notes to Financial Statements 16 Morgan Stanley Municipal Income Opportunities Trust II FINANCIAL STATEMENTS Statement of Assets and Liabilities February 29, 2008 Assets: Investments in securities, at value (cost $153,753,384)......... $142,789,235 Cash.......................... 607,120 Receivable for: Interest................... 2,440,635 Investments sold........... 115,000 Dividends from affiliate... 947 Prepaid expenses and other assets...................... 3,941 ------------ Total Assets............... 145,956,878 ------------ Liabilities: Floating rate note obligations................. 14,855,000 Payable for: Investments purchased...... 1,000,000 Investment advisory fee.... 66,029 Administration fee......... 10,601 Transfer agent fee......... 2,362 Accrued expenses and other payables.................... 131,941 ------------ Total Liabilities.......... 16,065,933 ------------ Net Assets................. $129,890,945 ============ Composition of Net Assets: Paid-in-capital............... $145,465,034 Net unrealized depreciation... (10,964,149) Accumulated undistributed net investment income........... 1,107,205 Accumulated net realized loss........................ (5,717,145) ------------ Net Assets................. $129,890,945 ============ Net Asset Value Per Share 16,208,190 shares outstanding (unlimited shares authorized of $.01 par value)............ $8.01 =====
Statement of Operations For the year ended February 29, 2008 Net Investment Income: Income Interest...................... $ 9,068,095 Dividends from affiliate...... 34,309 ------------ Total Income............... 9,102,404 ------------ Expenses Investment advisory fee....... 726,668 Interest and residual trust expenses.................... 305,345 Administration fee............ 116,267 Shareholder reports and notices..................... 64,038 Professional fees............. 59,035 Listing fees.................. 20,098 Transfer agent fees and expenses.................... 16,482 Trustees' fees and expenses... 8,595 Custodian fees................ 8,073 Other......................... 33,930 ------------ Total Expenses............. 1,358,531 Less: amounts waived/reimbursed........... (1,053) Less: expense offset.......... (7,928) ------------ Net Expenses............... 1,349,550 ------------ Net Investment Income...... 7,752,854 ------------ Realized and Unrealized Gain (Loss): Realized Gain (Loss) on: Investments................... (194,625) Futures contracts............. (405,021) Swap contract................. 235,002 ------------ Net Realized Loss.......... (364,644) ------------ Change in Unrealized Appreciation/Depreciation on: Investments................... (20,197,296) Futures contracts............. 2,033 Swap contract................. (10,743) ------------ Net Change in Unrealized Appreciation/Depreciation... (20,206,006) ------------ Net Loss................... (20,570,650) ------------ Net Decrease.................. $(12,817,796) ============
See Notes to Financial Statements 17 Morgan Stanley Municipal Income Opportunities Trust II FINANCIAL STATEMENTS continued Statements of Changes in Net Assets
FOR THE FOR THE YEAR ENDED YEAR ENDED FEBRUARY 29, 2008 FEBRUARY 28, 2007 ----------------- ----------------- Increase (Decrease) in Net Assets: Operations: Net investment income............................ $ 7,752,854 $ 7,891,314 Net realized gain (loss)......................... (364,644) 1,954,264 Net change in unrealized appreciation/depreciation...................... (20,206,006) 2,492,692 ------------ ------------ Net Increase (Decrease)....................... (12,817,796) 12,338,270 Dividends to shareholders from net investment income......................................... (7,994,980) (8,151,554) Decrease from transactions in shares of beneficial interest............................ (380,039) (584,598) ------------ ------------ Net Increase (Decrease)....................... (21,192,815) 3,602,118 Net Assets: Beginning of period.............................. 151,083,760 147,481,642 ------------ ------------ End of Period (Including accumulated undistributed net investment income of $1,107,205 and $1,349,808, respectively).................................... $129,890,945 $151,083,760 ============ ============
See Notes to Financial Statements 18 Morgan Stanley Municipal Income Opportunities Trust II NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2008 1. Organization and Accounting Policies Morgan Stanley Municipal Income Opportunities Trust II (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 current income exempt from federal income tax. The Fund was organized as a Massachusetts business trust on March 8, 1989 and commenced operations on June 30, 1989. 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; (4) investments in open-end mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (5) 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 and are included in interest income. Interest income is accrued daily except where collection is not expected. 19 Morgan Stanley Municipal Income Opportunities Trust II NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2008 continued C. Futures Contracts -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon 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 and Dealer Trusts 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" on the 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 February 29, 2008, Fund investments with a value of $18,376,938 are held by the Dealer Trusts and serve as collateral for the $14,855,000 in floating rate note obligations outstanding at that date. Contractual maturities of the floating rate note obligations and interest rates in effect at February 29, 2008 are presented in the Portfolio of Investments. 20 Morgan Stanley Municipal Income Opportunities Trust II NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2008 continued 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 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 Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable and non taxable income to its shareholders. Therefore, no provisions for federal income taxes is required. The Fund files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Fund adopted the provisions of the Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48") Accounting for Uncertainty in Income Taxes on August 30, 2007. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four year period ended February 29, 2008, remains subject to examination by taxing authorities. 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. Under an agreement between the Administrator and State Street Bank and Trust Company ("State Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund. 21 Morgan Stanley Municipal Income Opportunities Trust II NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2008 continued 3. Security Transactions and Transactions with Affiliates The Fund invests in Morgan Stanley Institutional Liquidity Tax-Exempt Portfolio -- Institutional Class, an open-end management investment company managed by the Investment Adviser. Investment advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service fees paid by Morgan Stanley Institutional Liquidity Tax-Exempt Portfolio -- Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Tax-Exempt Portfolio -- Institutional Class. For the year ended February 29, 2008, advisory fees paid were reduced by $1,053 relating to the Fund's investment in Morgan Stanley Institutional Liquidity Tax-Exempt Portfolio -- Institutional Class. Income distributions earned by the Fund are recorded as dividends from affiliate in the Statement of Operations and totaled $34,309 for the year ended February 29, 2008. During the year ended February 29, 2008, cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Tax-Exempt Portfolio -- Institutional Class aggregated $24,973,358 and $24,973,358, respectively. The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended February 29, 2008 aggregated $49,480,979 and $37,952,144, respectively. In the aforementioned transactions are sales of $1,617,208 with other Morgan Stanley funds including net realized losses of $143,259. Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator, is the Fund's transfer agent. Effective September 28, 2007, the transfer agent services previously provided to the Fund by Morgan Stanley Trust was assumed by Computershare Trust Company, N.A. (the "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 benefits growth due to increases to compensation after July 31, 2003. Aggregate pension costs for the year ended February 29, 2008, included in Trustees' fees and expenses in the Statement of Operations amounted to $5,951. At February 29, 2008, the Fund had an accrued pension liability of $61,076 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 22 Morgan Stanley Municipal Income Opportunities Trust II NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2008 continued 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. 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. 5. Dividends The Fund declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE DATE PER SHARE DATE DATE ----------------- --------- -------------- -------------- December 31, 2007 $0.0425 March 7, 2008 March 20, 2008 April 8, 2008 $0.0425 April 18, 2008 April 25, 2008 April 8, 2008 $0.0425 May 23, 2008 May 30, 2008 April 8, 2008 $0.0425 June 20, 2008 June 27, 2008
6. 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, February 28, 2006...................... 16,319,790 $163,198 $146,265,346 Treasury shares purchased and retired (weighted average discount 2.25%)*...................... (66,200) (662) (583,936) Reclassification due to permanent book/tax differences................................... -- -- 1,268 ---------- -------- ------------ Balance, February 28, 2007...................... 16,253,590 162,536 145,682,678 Treasury shares purchased and retired (weighted average discount 5.27%)*...................... (45,400) (454) (379,585) Reclassification due to permanent book/tax differences................................... -- -- (141) ---------- -------- ------------ Balance, February 29, 2008...................... 16,208,190 $162,082 $145,302,952 ========== ======== ============
---------- * The Trustees have voted to retire the shares purchased. 7. Accounting Pronouncement 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 23 Morgan Stanley Municipal Income Opportunities Trust II NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2008 continued 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. 8. 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. 24 Morgan Stanley Municipal Income Opportunities Trust II NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2008 continued 9. 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 FEBRUARY 29, 2008 FEBRUARY 28, 2007 ----------------- ----------------- Tax-exempt income................................ $7,994,980 $8,091,422 Ordinary income.................................. -- 60,132 ---------- ---------- Total distributions.............................. $7,994,980 $8,151,554 ========== ==========
As of February 29, 2008, the tax-basis components of accumulated losses were as follows: Undistributed tax-exempt income.................... $ 1,097,048 Undistributed ordinary income...................... 33,477 Undistributed long-term gains...................... -- ------------ Net accumulated earnings........................... 1,130,525 Capital loss carryforward*......................... (5,190,684) Post-October losses................................ (526,357) Temporary differences.............................. (62,162) Net unrealized depreciation........................ (10,925,411) ------------ Total accumulated losses........................... $(15,574,089) ============
---------- * During the year ended February 29, 2008, the Fund utilized $164,432 of its net capital loss carryforward. As of February 29, 2008, the Fund had a net capital loss carryforward of $5,190,684 of which $3,717,985 will expire on February 28, 2011 and $1,472,699 will expire on February 28, 2013 to offset future capital gains to the extent provided by regulations. As of February 29, 2008, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund's next taxable year) and book amortization of discounts on debt securities. 25 Morgan Stanley Municipal Income Opportunities Trust II NOTES TO FINANCIAL STATEMENTS - FEBRUARY 29, 2008 continued Permanent differences, due to a nondeductible expense and tax adjustments on debt securities sold by the Fund, resulted in the following reclassifications among the Fund's components of net assets at February 29, 2008:
ACCUMULATED UNDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED INCOME LOSS PAID-IN-CAPITAL -------------- ------------ --------------- $(477) $618 $(141) ====== ==== ======
26 Morgan Stanley Municipal Income Opportunities Trust II FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED FEBRUARY 28, -------------------------------------------------------- 2008** 2007 2006 2005 2004** -------- -------- -------- -------- -------- Selected Per Share Data: Net asset value, beginning of period......... $9.30 $9.04 $8.78 $8.62 $8.37 ----- ----- ----- ----- ----- Income (loss) from investment operations: Net investment income*.................... 0.48 0.49 0.50 0.48 0.49 Net realized and unrealized gain (loss)... (1.28) 0.27 0.23 0.15 0.25 ------ ----- ----- ----- ----- Total income (loss) from investment operations.................................. (0.80) 0.76 0.73 0.63 0.74 ------ ----- ----- ----- ----- Less dividends from net investment income.... (0.49) (0.50) (0.49) (0.50) (0.51) ------ ------ ------ ------ ------ Anti-dilutive effect of acquiring treasury shares*..................................... 0.00(3) 0.00(3) 0.02 0.03 0.02 ----- ----- ----- ----- ----- Net asset value, end of period............... $8.01 $9.30 $9.04 $8.78 $8.62 ===== ===== ===== ===== ===== Market value, end of period.................. $8.15 $9.14 $8.77 $8.00 $8.09 ===== ===== ===== ===== ===== Total Return+................................ (5.67)% 10.15% 16.23% 5.38% 14.90% Ratios to Average Net Assets: Total expenses (before expense offset)....... 0.94 %(1)(2)0.73%(1) 0.72%(1) 0.89%(1) 0.96%(1) Total expenses (before expense offset, exclusive of interest and residual trust expenses)................................... 0.73 %(1)(2)0.71%(1) 0.72%(1) 0.89%(1) 0.96%(1) Net investment income........................ 5.36 % 5.30% 5.56% 5.62% 5.87% Supplemental Data: Net assets, end of period, in thousands...... $129,891 $151,084 $147,482 $148,169 $150,421 Portfolio turnover rate...................... 25 % 24% 15% 16% 11%
---------- * The per share amounts were computed using an average number of shares outstanding during the period. ** For the year ended February 29. + 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 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) Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Tax-Exempt Portfolio -- Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%. (3) Includes anti-dilutive effect of acquiring treasury shares of less than $0.01.
See Notes to Financial Statements 27 Morgan Stanley Municipal Income Opportunities Trust II REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Trustees of Morgan Stanley Municipal Income Opportunities Trust II: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Municipal Income Opportunities Trust II (the "Fund"), including the portfolio of investments, as of February 29, 2008, 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 February 29, 2008, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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 II as of February 29, 2008, 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 April 25, 2008 28 Morgan Stanley Municipal Income Opportunities Trust II SHAREHOLDER VOTING RESULTS (UNAUDITED) On June 19, 2007, an annual meeting of the Fund's shareholders was held for the purpose of voting on the following matter, the results of which were as follows: Election of Trustees:
# OF SHARES --------------------------------------- FOR WITHHELD ABSTAIN --------------------------------------- Kathleen A. Dennis........................... 14,554,284 352,813 0 Manuel H. Johnson............................ 14,555,269 351,828 0 Joseph J. Kearns............................. 14,570,982 336,115 0 Fergus Reid.................................. 14,531,778 375,319 0
29 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO MANAGEMENT/REVISED INVESTMENT POLICY (UNAUDITED) Portfolio Management As of the date of this report, the Fund is managed within the Morgan Stanley Municipals 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 Wayne Godlin, a Managing Director of the Investment Adviser, Gerald J. Lian, an Executive Director of the Investment Adviser, and Robert Stryker, a Vice President of the Investment Adviser. Mr. Godlin has been associated with the investment Adviser in a investment management capacity since July 2001 and began managing the Fund in October 2001. Mr. Lian has been associated with the Investment Adviser in an investment management capacity since December 1991 and began managing the Fund in May 2003. Mr. Stryker has been associated with the Adviser in an investment management capacity since February 1994 and began managing the Fund in September 2007. Revised Investment Policy To the extent permitted by applicable law and the Fund's investment objectives, policies, and restrictions, the Fund may invest all or some of its short-term cash investments in any money market fund advised or managed by the Investment Adviser or its affiliates. In connection with any such investments, the Fund, to the extent permitted by the Investment Company Act, will pay its share of all expenses (other than advisory and administrative fees) of a money market fund in which it invests which may result in the Fund bearing some additional expenses. The Board of Trustees Approved a Clarification in the Investment Policies Discussed Below The Fund may invest in put and call options and futures on its portfolio securities. The Fund may use options and futures to protect against a decline in the Fund's securities or an increase in prices of securities that may be purchased or to adjust the Fund's yield curve exposure. If the Fund invests in options and/or futures, its participation in these markets would subject the Fund's portfolio to certain risks. If the Investment Adviser's predictions of movements in the direction of the markets are inaccurate, the adverse consequences to the Fund (e.g., a reduction in the Fund's net asset value or a reduction in the amount of income available for distribution) may leave the Fund in a worse position than if these strategies were not used. Other risks inherent in the use of options and futures include, for example, the possible imperfect correlation between the price of options and futures contracts and movements in the prices of the securities being hedged. With respect to futures contracts, this correlation may be further distorted since the futures contracts that are being used to hedge are not based on municipal obligations. There is also the possibility of an absence of a liquid 30 Morgan Stanley Municipal Income Opportunities Trust II PORTFOLIO MANAGEMENT/REVISED INVESTMENT POLICY (UNAUDITED) continued secondary market for any particular instrument. Certain options may be over-the- counter options which are options negotiated with dealers; there is no secondary market for these investments and therefore may be difficult to value. If the Fund uses an option or futures transaction as an alternative to purchasing or selling an underlying instrument in order to obtain desired exposure, the Fund will be exposed to the same risks as are incurred in purchasing and selling the underlying instrument directly. 31 Morgan Stanley Municipal Income Opportunities Trust II DIVIDEND REINVESTMENT PLAN (UNAUDITED) The dividend reinvestment plan (the "Plan") offers you a prompt and simple way to reinvest your dividends and capital gains distributions into additional shares of the Fund. Under the Plan, the money you earn from dividends and capital gains distributions will be reinvested automatically in more shares of the Fund, allowing you to potentially increase your investment over time. All shareholders in the Fund are automatically enrolled in the Plan when shares are purchased. PLAN BENEFITS - ADD TO YOUR ACCOUNT You may increase your shares in the Fund easily and automatically with the Plan. - LOW TRANSACTION COSTS Transaction costs are low because the new shares are bought in blocks and the brokerage commission is shared among all participants. - CONVENIENCE You will receive a detailed account statement from Computershare Trust Company, N.A., which administers the Plan, whenever shares are reinvested for you. The statement shows your total distributions, date of investment, shares acquired, and price per share, as well as the total number of shares in your reinvestment account. You can also access your account via the Internet. To do this, please go to morganstanley.com. - SAFEKEEPING Computershare Trust Company, N.A. will hold the shares it has acquired for you in safekeeping. HOW TO PARTICIPATE IN THE PLAN If you own shares in your own name, you can participate directly in the Plan. If your shares are held in "street name" -- in the name of your brokerage firm, bank, or other financial institution -- you must instruct that entity to participate on your behalf. If they are unable to participate on your behalf, you may request that they reregister your shares in your own name so that you may enroll in the Plan. If you choose to participate in the Plan, whenever the Fund declares a dividend or capital gains distributions, it will be invested in additional shares of your Fund that are purchased in the open market. HOW TO ENROLL To enroll in the Plan, please read the Terms and Conditions in the Plan brochure. You can obtain a copy of the Plan Brochure and enroll in the Plan by visiting morganstanley.com, calling toll-free (888) 421-4015 or notifying us in writing at Morgan Stanley Closed-End Funds, Computershare Trust 32 Morgan Stanley Municipal Income Opportunities Trust II DIVIDEND REINVESTMENT PLAN (UNAUDITED) continued Company, N.A., P.O. Box 43078, Providence, RI 02940-3078. Please include the Fund name and account number and ensure that all shareholders listed on the account sign these written instructions. Your participation in the Plan will begin with the next dividend or capital gains distribution payable after Computershare Trust Company, N.A. receives your authorization, as long as they receive it before the "record date," which is generally ten business days before the dividend is paid. If your authorization arrives after such record date, your participation in the Plan will begin with the following dividend or distribution. COSTS OF THE PLAN There is no direct charge to you for reinvesting dividends and capital gains distributions because the Plan's fees are paid by the Fund. However, when applicable, you will pay your portion of any brokerage commissions incurred when the new shares are purchased on the open market. These brokerage commissions are typically less than the standard brokerage charges for individual transactions, because shares are purchased for all participants in blocks, resulting in lower commissions for each individual participant. Any brokerage commissions or service fees are averaged into the purchase price. TAX IMPLICATIONS The automatic reinvestment of dividends and capital gains distributions does not relieve you of any income tax that may be due on dividends or distributions. You will receive tax information annually to help you prepare your federal and state income tax returns. Morgan Stanley does not offer tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used by any taxpayer; for avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Federal and state tax laws are complex and constantly changing. Shareholders should always consult a legal or tax advisor for information concerning their individual situation. HOW TO WITHDRAW FROM THE PLAN To withdraw from the Plan, please visit morganstanley.com or call (888) 421-4015 or notify us in writing at the address below. Morgan Stanley Closed-End Funds Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 33 Morgan Stanley Municipal Income Opportunities Trust II DIVIDEND REINVESTMENT PLAN (UNAUDITED) continued All shareholders listed on the account must sign any written withdrawal instructions. If you withdraw, you have three options with regard to the shares held in your account: 1. If you opt to continue to hold your non-certificated shares, they will be held by Computershare Trust Company, N.A. 2. If you opt to sell your shares through Morgan Stanley, we will sell all full and fractional shares and send the proceeds via check to your address of record after deducting brokerage commissions. 3. You may sell your shares through your financial advisor through the Direct Registration System ("DRS"). DRS is a service within the securities industry that allows Fund shares to be held in your name in electronic format. You retain full ownership of your shares, without having to hold a stock certificate. The Fund and Computershare Trust Company, N.A. may amend or terminate the Plan. Participants will receive written notice at least 30 days before the effective date of any amendment. In the case of termination, Participants will receive written notice at least 30 days before the record date for the payment of any dividend or capital gains distribution by the Fund. In the case of amendment or termination necessary or appropriate to comply with applicable law or the rules and policies of the Securities and Exchange Commission or any other regulatory authority, such written notice will not be required. TO OBTAIN A COMPLETE COPY OF THE DIVIDEND REINVESTMENT PLAN, PLEASE CALL OUR CLIENT RELATIONS DEPARTMENT AT 888-421-4015 OR VISIT MORGANSTANLEY.COM. 34 Morgan Stanley Municipal Income Opportunities Trust II MORGAN STANLEY ADVISOR CLOSED END FUNDS AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY (UNAUDITED) We are required by federal law to provide you with a copy of our Privacy Policy annually. The following Policy applies to current and former individual investors in Morgan Stanley Advisor closed end funds. This Policy is not applicable to partnerships, corporations, trusts or other non-individual clients or account holders. Please note that we may amend this Policy at any time, and will inform you of any changes to this Policy as required by law. WE RESPECT YOUR PRIVACY We appreciate that you have provided us with your personal financial information. We strive to maintain the privacy of such information while we help you achieve your financial objectives. This Policy describes what non-public personal information we collect about you, why we collect it, and when we may share it with others. We hope this Policy will help you understand how we collect and share non-public personal information that we gather about you. Throughout this Policy, we refer to the non-public information that personally identifies you or your accounts as "personal information." 1. WHAT PERSONAL INFORMATION DO WE COLLECT ABOUT YOU? To serve you better and manage our business, it is important that we collect and maintain accurate information about you. We may obtain this information from applications and other forms you submit to us, from your dealings with us, from consumer reporting agencies, from our Web sites and from third parties and other sources. FOR EXAMPLE: - We may collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through applications and other forms you submit to us. - We may obtain information about account balances, your use of account(s) and the types of products and services you prefer to receive from us through your dealings and transactions with us and other sources. - We may obtain information about your creditworthiness and credit history from consumer reporting agencies. - We may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements. - If you interact with us through our public and private Web sites, we may collect information that you provide directly through online communications (such as an e-mail address), We may also collect information about your Internet service provider, your domain name, your computer's operating system and Web browser, your use of our Web sites and your product and service preferences, 35 Morgan Stanley Municipal Income Opportunities Trust II MORGAN STANLEY ADVISOR CLOSED END FUNDS AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY (UNAUDITED) continued through the use of "cookies." "Cookies" recognize your computer each time you return to one of our sites, and help to improve our sites' content and personalize your experience on our sites by, for example, suggesting offerings that may interest you. Please consult the Terms of Use of these sites for more details on our use of cookies. 2. WHEN DO WE DISCLOSE PERSONAL INFORMATION WE COLLECT ABOUT YOU? To provide you with the products and services you request, to serve you better and to manage our business, we may disclose personal information we collect about you to our affiliated companies and to non-affiliated third parties as required or permitted by law. A. INFORMATION WE DISCLOSE TO OUR AFFILIATED COMPANIES. We do not disclose personal information that we collect about you to our affiliated companies except to enable them to provide services on our behalf or as otherwise required or permitted by law. B. INFORMATION WE DISCLOSE TO THIRD PARTIES. We do not disclose personal information that we collect about you to non-affiliated third parties except to enable them to provide services on our behalf, to perform joint marketing agreements with other financial institutions, or as otherwise required or permitted by law. For example, some instances where we may disclose information about you to nonaffiliated third parties include: for servicing and processing transactions, to offer our own products and services, to protect against fraud, for institutional risk control, to respond to judicial process or to perform services on our behalf. When we share personal information with these companies, they are required to limit their use of personal information to the particular purpose for which it was shared and they are not allowed to share personal information with others except to fulfill that limited purpose. 3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE COLLECT ABOUT YOU? We maintain physical, electronic and procedural security measures to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information. Third parties that provide support or marketing services on our behalf may also receive personal information, and we require them to adhere to confidentiality standards with respect to such information. 36 Morgan Stanley Municipal Income Opportunities Trust II TRUSTEE AND OFFICER INFORMATION (UNAUDITED) Independent Trustees:
Number of Portfolios in Fund Complex Name, Age and Position(s) Term of Office Principal Occupation(s) Overseen by Other Directorships Address of Held with and Length of During Independent Held by Independent Trustee Registrant Time Served* Past 5 Years Trustee** Independent Trustee -------------------- ----------- ---------------- ------------------------- --------------- -------------------- Frank L. Bowman (63) Trustee Since August President and Chief 180 Director of the c/o Kramer Levin 2006 Executive Officer of the National Energy Naftalis & Frankel Nuclear Energy Institute Foundation, the U.S. LLP (policy organization) Energy Association, Counsel to the (since February 2005); the American Council Independent Trustees Director or Trustee of for Capital 1177 Avenue of the various Retail Funds and Formation and the Americas Institutional Funds Armed Services YMCA New York, NY 10036 (since August 2006); of the USA. Chairperson of the Insurance Sub-Committee of the Insurance, Valuation 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 (67) Trustee Since April 1994 Private investor; 182 Director of various c/o Kramer Levin Chairperson of the business Naftalis & Frankel Insurance, Valuation and organizations. LLP Compliance Committee Counsel to the (since October 2006); Independent Trustees Director or Trustee of 1177 Avenue of the the Retail Funds (since Americas April 1994) and the New York, NY 10036 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.
37 Morgan Stanley Municipal Income Opportunities Trust II TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of Portfolios in Fund Complex Name, Age and Position(s) Term of Office Principal Occupation(s) Overseen by Other Directorships Address of Held with and Length of During Independent Held by Independent Trustee Registrant Time Served* Past 5 Years Trustee** Independent Trustee -------------------- ----------- ---------------- ------------------------- --------------- -------------------- Kathleen A. Dennis Trustee Since August President, Cedarwood 180 Director of various (54) 2006 Associates (mutual fund non-profit c/o Kramer Levin and investment organizations. Naftalis & Frankel management) (since July LLP 2006); Chairperson of the Counsel to the Money Market and Independent Trustees Alternatives Sub- 1177 Avenue of the Committee of the Americas Investment Committee New York, NY 10036 (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. Trustee Since July 1991 Senior Partner, Johnson 182 Director of NVR, Johnson (59) Smick International, Inc. (home c/o Johnson Smick Inc., (consulting firm); construction); Group, Inc. Chairperson of the Director of 888 16th Street, Investment Committee Evergreen Energy. N.W. (since October 2006) and Suite 740 Director or Trustee of Washington, D.C. the Retail Funds (since 20006 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.
38 Morgan Stanley Municipal Income Opportunities Trust II TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of Portfolios in Fund Complex Name, Age and Position(s) Term of Office Principal Occupation(s) Overseen by Other Directorships Address of Held with and Length of During Independent Held by Independent Trustee Registrant Time Served* Past 5 Years Trustee** Independent Trustee -------------------- ----------- ---------------- ------------------------- --------------- -------------------- Joseph J. Kearns Trustee Since August President, Kearns & 183 Director of Electro (65) 1994 Associates LLC Rent Corporation c/o Kearns & (investment consulting); (equipment leasing) Associates LLC Chairperson of the Audit and The Ford Family PMB754 Committee (since October Foundation. 23852 Pacific Coast 2006) and Director or Highway Trustee of the Retail Malibu, CA 90265 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 Trustee Since August Managing Director, Aetos 180 Director of certain (49) 2006 Capital, LLC (since March investment funds c/o Kramer Levin 2000) and Co-President, managed or sponsored Naftalis & Frankel Aetos Alternatives by Aetos Capital, LLP Management, LLC (since LLC. Director of Counsel to the January 2004); Sanitized AG and Independent Trustees Chairperson of the Fixed- Sanitized Marketing 1177 Avenue of the Income Sub-Committee of AG (specialty Americas the Investment Committee chemicals). New York, NY 10036 (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).
39 Morgan Stanley Municipal Income Opportunities Trust II TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of Portfolios in Fund Complex Name, Age and Position(s) Term of Office Principal Occupation(s) Overseen by Other Directorships Address of Held with and Length of During Independent Held by Independent Trustee Registrant Time Served* Past 5 Years Trustee** Independent Trustee -------------------- ----------- ---------------- ------------------------- --------------- -------------------- Michael E. Nugent Chairperson Chairperson of General Partner of 182 None. (71) of the the Boards since Triumph Capital, L.P. c/o Triumph Capital, Board and July 2006 and (private investment L.P. Trustee Trustee since partnership); Chairperson 445 Park Avenue July 1991 of the Boards of the New York, NY 10022 Retail Funds and 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). W. Allen Reed (60) Trustee Since August Chairperson of the Equity 180 Director of Temple- c/o Kramer Levin 2006 Sub-Committee of the Inland Industries Naftalis & Frankel Investment Committee (packaging, and LLP (since October 2006) and forest products); Counsel to the Director or Trustee of Director of Legg Independent Trustees various Retail Funds and Mason, Inc. and 1177 Avenue of the Institutional Funds Director of the Americas (since August 2006); Auburn University New York, NY 10036 President and CEO of Foundation. 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 (75) Trustee Since June 1992 Chairman of Lumelite 183 Trustee and Director c/o Lumelite Plastics Corporation; of certain Plastics Corporation Chairperson of the investment companies 85 Charles Colman Governance Committee and in the JPMorgan Blvd. Director or Trustee of Funds complex Pawling, NY 12564 the Retail Funds (since managed by J.P. July 2003) and the Morgan Investment Institutional Funds Management Inc. (since June 1992).
40 Morgan Stanley Municipal Income Opportunities Trust II TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued Interested Trustee:
Number of Portfolios in Fund Complex Position(s) Term of Office Principal Occupation(s) Overseen by Name, Age and Address of Held with and Length of During Interested Other Directorships Held by Interested Trustee Registrant Time Served* Past 5 Years Trustee** Interested Trustee --------------------------- ----------- --------------- --------------------------- ------------- --------------------------- James F. Higgins (60) Trustee Since June 2000 Director or Trustee of the 181 Director of AXA Financial, c/o Morgan Stanley Trust Retail Funds (since June Inc. and The Equitable Life Harborside Financial Center 2000) and the Institutional Assurance Society of the Plaza Two Funds (since July 2003); United States (financial Jersey City, NJ 07311 Senior Advisor of Morgan services). Stanley (since August 2000).
---------- * 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. 41 Morgan Stanley Municipal Income Opportunities Trust II 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 (69) President and President President (since September 2005) and Principal 1221 Avenue of the Americas Principal since Executive Officer (since May 2003) of funds in New York, NY 10020 Executive September 2005 the Fund Complex; President (since September Officer and Principal 2005) and Principal Executive Officer (since Executive May 2003) of the Van Kampen Funds; Managing Officer since Director, Director and/or Officer of the May 2003 Investment Adviser and various entities affiliated with the Investment Adviser; 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 (53) Vice President Since February Managing Director and (since December 2005) Morgan Stanley Investment 2006 Chief Investment Officer -- Global Fixed Income Management Limited of Morgan Stanley Investment Management; 20 Bank Street Managing Director and Director of Morgan Canary Wharf, Stanley Investment Management Limited; Vice London, England E144QAD President of the Retail Funds and Institutional Funds (since February 2006). Dennis F. Shea (54) Vice President Since February Managing Director and (since February 2006) 1221 Avenue of the Americas 2006 Chief Investment Officer -- Global Equity of New York, NY 10020 Morgan Stanley Investment 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. 1221 Avenue of the Americas 2004 Investment Management of Morgan Stanley New York, NY 10020 Investment Management (since 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 (44) Chief Since October Managing Director and U.S. Director of 1221 Avenue of the Americas Compliance 2004 Compliance for Morgan Stanley Investment New York, NY 10020 Officer Management (since October 2004); Managing 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 (41) Vice President Since December Managing Director of the Investment Adviser and 1221 Avenue of the Americas 1997 various entities affiliated with the Investment New York, NY 10020 Adviser; Vice 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.
42 Morgan Stanley Municipal Income Opportunities Trust II TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
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 ------------------------------ -------------- -------------- ----------------------------------------------- Francis J. Smith (41) Treasurer and Treasurer Executive Director of the Investment Adviser c/o Morgan Stanley Trust Chief since July and various entities affiliated with the Harborside Financial Center Financial 2003 and Chief Investment Adviser; Treasurer and Chief Plaza Two Officer Financial Financial Officer of the Retail Funds (since Jersey City, NJ 07311 Officer since July 2003). Formerly, Vice President of the September 2002 Retail Funds (September 2002 to July 2003). Mary E. Mullin (40) Secretary Since June Executive Director of the Investment Adviser 1221 Avenue of the Americas 1999 and various entities affiliated with the New York, NY 10020 Investment Adviser; Secretary 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 August 8, 2007. 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. 2008 FEDERAL TAX NOTICE (UNAUDITED) For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Fund during its taxable year ended February 29, 2008. The Fund designated 100% of its income dividends as tax-exempt income dividends. In January, the Fund provides tax information to shareholders for the preceding calendar year. 43 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 Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 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 TRUSTEES Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York 10036 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 522 Fifth Avenue New York, New York 10036 (c) 2008 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Municipal Income Opportunities Trust II Annual Report February 29, 2008 01BANN IU08-02153P-Y02/08 Item 2. Code of Ethics. (a) The Trust/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 Trust/Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) Not applicable. (d) Not applicable. (e) Not applicable. (f) (1) The Trust/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. 2 MUNICIPAL INCOME OPPORTUNITIES TRUST II Item 4. Principal Accountant Fees and Services. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown: 2008
COVERED REGISTRANT ENTITIES(1) ---------- ----------- AUDIT FEES ...................... $32,500 NON-AUDIT FEES AUDIT-RELATED FEES ........... $ 755(2) $6,164,000 TAX FEES ..................... $ 4,738(3) $1,002,000 ALL OTHER FEES ............... $ -- TOTAL NON-AUDIT FEES ............ $ 5,493 $7,166,000 TOTAL ........................... $37,993 $7,166,000
2007
COVERED REGISTRANT ENTITIES(1) ---------- ----------- AUDIT FEES ...................... $32,500 NON-AUDIT FEES AUDIT-RELATED FEES ........... $ 531(2) $6,297,000(2) TAX FEES ..................... $ 4,600(3) 567,000(4) ALL OTHER FEES ............... $ -- TOTAL NON-AUDIT FEES ............ $ 5,131 $6,864,000 TOTAL ........................... $37,631 $6,864,000
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. (5) All other fees represent project management for future business applications and improving business and operational processes. 3 (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. 4 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 5 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 6 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 7 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. 8 The Fund invests in exclusively non-voting securities and therefore this item is not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports covering periods ending on or after December 31, 2005. MORGAN STANLEY MUNICIPAL INCOME OPPORTUNITIES TRUST II 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 Wayne D. Godlin, Managing Directors of the Investment Adviser, Gerard J. Lian, an Executive Director of the Investment Adviser and Robert J. Stryker, a Vice President of the Investment Adviser. 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. 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. Stryker has been associated with the Investment Adviser in an investment management capacity since February 1994 and began managing the Fund in September 2007. 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 February 29, 2008: Mr. Godlin managed eight mutual funds with a total of approximately $6.9 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 $344.0 million in assets; no pooled investment vehicles other than mutual funds; and no other accounts. Mr. Stryker managed 11 mutual funds with a total of approximately $3.7 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 9 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 Investment Adviser 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 funds they manage that are included in the IMAP fund menu, which may or may not include the Fund. - 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 Investment Adviser 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: 10 - 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 February 29, 2008, the portfolio managers did not own any shares of the Fund. 11 Item 9. Closed-End Fund Repurchases REGISTRANT PURCHASE OF EQUITY SECURITIES
(d) Maximum Number (or Approximate (c) Total Number of Dollar Value) of Shares (or Units) Shares (or Units) Purchased as Part that May Yet Be (a) Total Number of (b) Average Price of Publicly Purchased Under Shares (or Units) Paid per Share (or Announced Plans or the Plans or Period Purchased Unit) Programs Programs --------------- ------------------- ------------------ ------------------- ------------------ July 1, July 31, 2007 7,600 8.6443 N/A N/A August 1 August 31, 2007 14,600 8.3422 N/A N/A Total 22,200 8.4932 N/A N/A
12 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 Trust's/Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Trust/Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's 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. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) 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. 13 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 II /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer April 17, 2008 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 April 17, 2008 /s/ Francis Smith Francis Smith Principal Financial Officer April 17, 2008 14