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: 811-05597
Morgan Stanley Municipal Income Opportunities Trust
(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: 212-762-4000
Date of fiscal year end: May 31, 2007
Date of reporting period: May 31, 2007
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Municipal Income Opportunities Trust 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 May 31, 2007
MARKET CONDITIONS
The economy sent mixed signals about its overall strength during the fiscal
reporting year. Early in the period economic growth moderated, prompting the
Federal Open Market Committee (the "Fed") to pause in its two-year campaign of
raising the target federal funds rate following its last increase in June 2006.
As the months progressed, weaker consumer spending, rising energy prices and
ongoing geopolitical uncertainty continued to weigh on the economy, as did a
contraction in the residential real estate sector. In early 2007, turmoil in the
sub-prime mortgage market intensified concerns about the sector, contributing to
a sharp decline in the equity market in late February which led to a "flight to
quality" that forced yields on U.S. Treasury bonds lower and prices higher.
Although the Fed continued to hold interest rates steady, the changing economic
and financial picture led to a more neutral monetary bias and market speculation
of a potential decrease in interest rates. In the last weeks of the period, the
economy began to show signs of improvement while strong employment growth raised
concerns about inflation. These factors created a more favorable outlook and
dispelled expectations of Fed easing in the near future.
The municipal bond market rallied in the initial months of the period, with
yields on long-term issues (as represented by the 30-year AAA rated municipal
bond) declining from 4.55 percent at the beginning of the period to 3.90 percent
by the end of November 2006. During the second half of the period, long-term
municipal rates reversed course, rising to 4.25 percent by the end of May 2007.
The slope of the municipal yield curve steepened slightly in the final weeks of
the reporting period, but still remained relatively flat with only a 62 basis
point yield differential, or "pick-up", between 30-year maturities and one-year
maturities as of the end of May. In comparison, the yield pick-up from one to 30
years has averaged 155 basis points over the past three years.
Credit spreads between lower-quality, high-yield municipal bonds -- which
comprise the bulk of the Fund's investments--and higher-rated bonds narrowed
during the period. Credit spreads measure the incremental yield investors are
willing to accept to assume additional credit risk. When spreads tighten, lower
quality issues typically outperform high-grade issues.
Declining interest rates in the fourth quarter of 2006 spurred a rebound in
municipal bond issuance that led new issue volume for the year to reach $383
billion, the second highest on record and only 6 percent below 2005's record
pace. In the first five months of 2007, new issue municipal volume increased by
30 percent, reaching a total of $173 billion. The low level of interest rates
also fueled a surge in refundings, which was the key driver of the strong new
issue supply during much of the period. The supply of high-yield municipal
bonds, however, remained constrained.
The top five issuing states during the fiscal year were California, Texas, New
York, Florida, and Illinois. Together, these states accounted for 42 percent of
total volume.
2
Strong demand by institutional investors and non-traditional buyers, including
hedge funds and arbitrage accounts, helped long-term municipal bonds to slightly
outperform Treasuries for the period. The 30-year municipal-to-Treasury yield
ratio, which measures the relative attractiveness of these two sectors, declined
slightly from 87 percent at the beginning of the period to 85 percent by period
end. A declining ratio indicates that municipals outperformed Treasuries while
at the same time becoming more expensive (less attractive) on a relative basis.
Traditional retail buying was mixed as lower interest rates softened demand for
all but higher-yielding issues.
PERFORMANCE ANALYSIS
For the 12-month period ended May 31, 2007, the net asset value (NAV) of Morgan
Stanley Municipal Income Opportunities Trust (OIA) increased from $8.02 to $8.28
per share. Based on this change plus reinvestment of tax-free dividends totaling
$0.54 per share and a taxable distribution of $0.000969 per share, the Fund's
total NAV return was 9.30 percent. OIA's value on the New York Stock Exchange
(NYSE) moved from $8.76 to $9.68 per share during the same period. Based on this
change plus reinvestment of dividends and distributions, the Fund's total market
return was 16.99 percent. OIA's NYSE market price was at a 16.91 percent premium
to its NAV. Past performance is no guarantee of future results.
Monthly dividends for the second quarter of 2007, declared in March, were
unchanged at $0.045 per share. The dividend reflects the current level of the
Fund's net investment income. OIA's level of undistributed net investment income
was $0.080 per share on May 31, 2007 versus $0.137 per share 12 months
earlier.(1) All holdings were accruing interest at the end of the fiscal year.
During the reporting period, the Fund's interest-rate positioning continued to
reflect our anticipation of higher rates. As a result, at the end of May the
Fund's option-adjusted duration* stood at 6.9 years. To reduce the Fund's
duration, a U.S. Treasury futures hedge and a Bond Market Association (BMA)
interest rate swap contract were used. At the beginning of the period this
duration strategy helped the Fund's total returns when interest rates rose, but
tempered returns later in the fiscal year when rates generally declined.
The Fund invests primarily in higher yielding municipal bonds. During the
period, the Fund's exposure to these below investment-grade or non-rated issues
was 71 percent of long-term holdings. This security mix had a positive impact on
performance as lower-rated, high-yield municipal bonds outperformed investment-
grade issues. The lower supply of high-yield bonds, coupled with strong demand,
served as catalysts to their strong performance. Several holdings that
appreciated significantly when they were pre-refunded were another boost to the
Fund's performance.** Reflecting an ongoing commitment to diversification, the
Fund's net assets of approximately $163 million were invested among 13 long-term
sectors and 104 credits.
OIA'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
3
would like to remind you that the Trustees have approved a procedure whereby the
Fund may, when appropriate, purchase shares in the open market or in privately
negotiated transactions at a price not above market value or net asset value,
whichever is lower at the time of purchase.
----------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. INVESTMENT RETURN, NET ASSET VALUE AND COMMON SHARE MARKET PRICE WILL
FLUCTUATE AND FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Fund in
the future.
(1) Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, funds with shorter durations perform better in
rising-interest-rate environments, while funds with longer durations perform
better when rates decline.
** Pre-refunding, or advance refunding, is a financing structure under which new
bonds are issued to repay an outstanding bond issue on its first call date.
TOP FIVE SECTORS
Life Care 23.5%
Housing 11.7
Hospital 11.1
Refunded 10.3
Incremental Tax 9.4
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 2.4%
Aa/AA 6.2
A/A 1.5
Baa/BBB 18.6
Ba/BB or Less 9.2
N/R 62.1
Data as of May 31, 2007. Subject to change daily. All percentages for top five
sectors are as a percentage of net assets and all percentages for long-term
credit analysis are as a percentage of total long-term investments. These data
are provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.
4
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 THEFIRST 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 May 31, 2007
WEIGHTED AVERAGE MATURITY: 21 YEARS(A)
0-5 16.00
6-10 7.00
11-15 4.00
16-20 11.00
21-25 16.00
26-30 35.00
31+ 11.00
(a) Where applicable maturities reflect mandatory tenders, puts and call dates.
Portfolio structure is subject to change.
Geographic Summary of Investments
Based on Market Value as a Percent of Total Net Investments
Alabama..................... 0.6%
Alaska...................... 0.6
California.................. 5.6
Colorado.................... 5.3
Connecticut................. 3.8
District of Columbia........ 0.2
Florida..................... 10.4
Georgia..................... 1.3
Hawaii...................... 2.1
Illinois.................... 5.4
Indiana..................... 0.7
Iowa........................ 0.9
Kansas...................... 1.0
Maryland.................... 2.9
Massachusetts............... 2.6
Michigan.................... 0.4
Minnesota................... 1.0
Missouri.................... 6.9
Nevada...................... 3.4
New Hampshire............... 5.2
New Jersey.................. 5.8
New York.................... 8.8
North Carolina.............. 1.3
North Dakota................ 0.9
Ohio........................ 0.1
Pennsylvania................ 8.4
South Carolina.............. 1.3
Tennessee................... 2.3
Texas....................... 6.3
Vermont..................... 1.4
Virginia.................... 2.7
Washington.................. 0.6
Joint exemptions*........... (0.2)
-----
Total**..................... 100.0%
=====
------------------
* Joint exemptions have been included in each geographic location.
** Does not include open futures contracts with an underlying face amount of
$4,828,125 with unrealized appreciation of $33,391 and an open swap contract
with unrealized appreciation of $50,854.
6
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of May 31, 2007
YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS
2007(A) 10.00
2008 8.00
2009 7.00
2010 3.00
2011 7.00
2012 7.00
2013 8.00
2014 7.00
2015 14.00
2016 18.00
2017+ 11.00
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 6.6%
2007(A) 7.70
2008 6.50
2009 6.30
2010 7.00
2011 7.10
2012 6.60
2013 6.70
2014 6.40
2015 7.10
2016 6.00
2017+ 5.80
(a) May include issues initially callable in previous years.
(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Fund's operating expenses.
For example, the Fund is earning a book yield of 7.7% on 10% of the
long-term portfolio that is callable in 2007.
Portfolio structure is subject to change.
7
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Fund's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Investment Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2006, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. The
Board concluded that the Fund's performance was competitive with that of its
performance peer group.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by the Fund under the Management Agreement. The
Board noted that the management fee rate was comparable to
8
the management fee rates charged by the Adviser to other proprietary funds it
manages with investment strategies comparable to those of the Fund.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund
as compared to the average management fee rate and average total expense ratio
for funds, selected by Lipper (the "expense peer group"), managed by other
advisers with investment strategies comparable to those of the Fund, as shown in
the Lipper Report. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it does not include any breakpoints. The
Board considered that the Fund is a closed-end fund and, therefore, that the
Fund's assets are not likely to grow with new sales or grow significantly as a
result of capital appreciation. The Board concluded that economies of scale for
the Fund were not a factor that needed to be considered at the present time.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and affiliates were not
excessive in light of the advisory, administrative and other services provided
to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as commissions on the purchase and sale of Fund Shares and "float"
benefits derived from handling of checks for purchases and sales of Fund shares,
through a broker-dealer affiliate of the Adviser. The Board concluded that the
float benefits were relatively small and that the commissions were competitive
with those of other broker-dealers.
9
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Fund ("soft
dollars"). The Board noted that the Fund invests only in fixed income
securities, which do not generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
10
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Tax-Exempt Municipal Bonds (104.7%)
General Obligation (3.8%)
$ 1,000 Copperleaf Metropolitan District #2, Colorado, Ser
2006................................................... 5.95% 12/01/36 $ 1,033,250
2,000 Northwest Metropolitan District #3, Colorado, Ser 2005... 6.25 12/01/35 2,093,160
1,000 Southlands Metropolitan District #1, Colorado, Ser
2004................................................... 7.125 12/01/34 1,104,910
2,000 Georgetown Special Taxing District, Connecticut, Ser 2006
A...................................................... 5.125 10/01/36 1,987,840
------------
--------
6,219,160
6,000
------------
--------
Dedicated Tax (6.2%)
1,000 Poway Unified School District Community Facilities
District #14, California, Ser 2006..................... 5.25 09/01/36 1,020,110
1,000 San Marcos Community Facilities District #2002-01,
California, University Commons Ser 2004................ 5.95 09/01/35 1,045,880
1,000 Santa Ana Unified School District Community Facilities
District #2004-1, California, Central Park Ser 2005.... 5.10 09/01/35 1,005,610
2,000 Atlanta, Georgia, Eastside Ser 2005 B.................... 5.60 01/01/30 2,071,760
1,000 Bolingbrook, Illinois, Sales Tax Ser 2005................ 0.00@ 01/01/24 996,640
2,000 Chicago, Illinois, Lake Shore East Ser 2002.............. 6.75 12/01/32 2,158,340
725 Lincolnshire, Illinois, Service Area #1-Sedgebrook Ser
2004................................................... 6.25 03/01/34 770,146
1,000 Yorkville, Illinois, Cannonball/Beecher Road Ser 2007.... 5.75 03/01/28 993,310
------------
--------
10,061,796
9,725
------------
--------
Incremental Tax (9.4%)
2,000 Elk Valley Public Improvement Corporation, Colorado, Ser
2001 A................................................. 7.35 09/01/31 2,114,560
2,000 Beacon Lakes, Community Development District, Florida,
Ser 2003 A............................................. 6.90 05/01/35 2,177,921
960 Bellalago Educational Facilities Benefits District,
Florida, Bellalago Charter School Ser 2004 B........... 5.80 05/01/34 1,001,261
1,000 Midtown Miami Community Development District, Florida,
Parking Garage Ser 2004 A.............................. 6.25 05/01/37 1,082,300
980 Renaissance Commons Community Development District,
Florida, Ser 2005 A.................................... 5.60 05/01/36 994,582
1,000 Split Pine Community Development District, Florida, Ser
2007 A................................................. 5.25 05/01/39 992,450
750 Branson Hills Community Improvement District, Missouri,
Ser 2007 A............................................. 5.50 04/01/27 749,490
2,000 Des Peres, Missouri, West County Center Ser 2002......... 5.75 04/15/20 2,048,840
1,965 Las Vegas District #808, Nevada, Summerlin Ser 2001...... 6.75 06/01/21 2,040,436
1,000 Washington County, Pennsylvania, Victory Centre/Tanger
Outlet, Redevelopment Authority Ser 2006 A............. 5.45 07/01/35 1,022,130
1,000 Myrtle Beach, South Carolina, Air Force Base
Redevelopment Ser 2006 A............................... 5.30 11/01/35 1,020,960
------------
--------
15,244,930
14,655
------------
--------
11
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Education (4.0%)
$ 800 Maryland Health & Higher Educational Facilities
Authority, Washington Christian Academy Ser 2006....... 5.50% 07/01/38 $ 816,384
500 Maryland Industrial Development Financing Authority, Our
Lady of Good Counsel High School Ser 2005 A............ 6.00 05/01/35 536,215
1,000 Massachusetts Health & Educational Facilities Authority,
The Learning Center for Deaf Children Ser 1999 C....... 6.125 07/01/29 1,025,280
1,000 Westchester County Industrial Development Agency, New
York, Guiding Eyes for The Blind Inc Ser 2004.......... 5.375 08/01/24 1,055,840
1,000 Harrisburg Authority, Pennsylvania Harrisburg University
of Science & Technology Ser 2007 B..................... 6.00 09/01/36 1,039,870
2,000 Chattanooga Health Educational & Housing Facilities
Board, Tennessee, Student Housing Refg Ser 2005 A...... 5.00 10/01/25 2,027,760
------------
--------
6,501,349
6,300
------------
--------
Hospital (11.1%)
1,000 Colbert County - Northwest Health Care Authority,
Alabama, Helen Keller Hospital Ser 2003................ 5.75 06/01/27 1,042,340
700 Salida Hospital District, Colorado, Heart of the Rockies
Regional Medical Center Ser 2006....................... 5.25 10/01/36 704,312
2,000 Hawaii Department of Budget & Finance, Kuakini Health Ser
2002 A................................................. 6.375 07/01/32 2,174,280
1,000 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002...................................... 6.125 08/01/31 1,073,910
525 Washington County Hospital, Iowa, Ser 2006............... 5.375 07/01/26 535,941
600 Gaylord Hospital Financing Authority, Michigan, Otsego
Memorial Hospital Ser 2004............................. 6.50 01/01/37 632,886
1,500 St Paul Housing & Redevelopment Authority, Minnesota,
HealthEast Ser 2005.................................... 6.00 11/15/35 1,635,285
1,500 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Assn Ser 1998 A.......... 6.00 05/01/28 1,536,075
2,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994.................... 7.25 07/01/27 2,061,340
4,000 Allegheny County Hospital Development Authority,
Pennsylvania, West Penn Allegheny Health Ser 2007 A
(WI) @@................................................ 5.375 11/15/40 4,077,800
500 Fulton County Industrial Development Authority,
Pennsylvania, Fulton County Medical Center Ser 2006.... 5.875 07/01/31 516,665
1,000 Monroe County Hospital Authority, Pennsylvania, Pocono
Medical Center Ser 2003................................ 6.00 01/01/43 1,070,610
1,000 Decatur Hospital Authority, Texas, Wise Regional Health
Ser 2004 A............................................. 7.125 09/01/34 1,096,910
------------
--------
18,158,354
17,325
------------
--------
12
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Housing (11.7%)
California Housing Finance Agency,
$ 500 RITES PA 1417 Ser 2006 (AMT)........................... 4.946%## 08/01/31 $ 458,300
500 RITES PA 1417 Ser 2006 (AMT)........................... 5.146## 08/01/36 464,250
Colorado Housing & Finance Authority,
45 Ser 1996 Ser B-1 (AMT)................................. 7.65 11/01/26 45,702
395 Ser 1998 Ser D-2 (AMT)................................. 6.35 11/01/29 410,160
14,895 New Hampshire Housing Finance Authority, Residential Ser
1983 B................................................. 0.00 01/01/15 6,842,614
3,000 Brookhaven Industrial Development Agency, New York,
Woodcrest Estates Ser 1998 A (AMT)..................... 6.375 12/01/37 3,093,120
Pennsylvania Housing Finance Agency,
3,520 Ser 2006-96A (AMT) @@.................................. 4.65 10/01/31 3,403,374
4,480 Ser 2006-96A (AMT) @@.................................. 4.70 10/01/37 4,331,566
------------
--------
19,049,086
27,335
------------
--------
Industrial Development/Pollution Control (6.6%)
260 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser
1991 (AMT)++........................................... 10.125 09/01/11 260,395
New York City Industrial Development Agency, New York,
2,000 American Airlines Inc Ser 2005 (AMT)................... 7.75 08/01/31 2,411,359
2,000 7 World Trade Center LLC Ser 2005 A.................... 6.50 03/01/35 2,116,680
200 Zanesville-Muskingum County Port Authority, Ohio, Anchor
Glass Container Corp Ser 1989 B (AMT).................. 10.25 12/01/08 200,598
2,120 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT).................................................. 6.65 05/01/10 2,211,987
1,000 Pennsylvania Economic Development Financing Authority,
Reliant Energy Inc Ser 2001 A (AMT).................... 6.75 12/01/36 1,105,670
350 Lexington County, South Carolina, Ellett Brothers Inc
Refg Ser 1988.......................................... 7.50 09/01/08 348,754
1,000 Brazos River Authority, Texas, Texas Utilities Electric
Co Refg Ser 1999 A (AMT)............................... 7.70 04/01/33 1,126,560
1,000 Chesterfield County Industrial Development Authority,
Virginia, Virginia Electric & Power Co Ser 1985........ 5.50 10/01/09 1,010,970
------------
--------
10,792,973
9,930
------------
--------
Life Care (23.5%)
1,000 Colorado Health Facilities Authority, Christian Living
Communities Ser 2006................................... 5.75 01/01/37 1,045,730
1,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999...... 6.75 04/01/34 1,036,540
500 Orange County Health Facilities Authority, Florida,
Orlando Lutheran Towers Inc Ser 2005 **................ 5.70 07/01/26 511,565
13
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
$ 1,000 Pinellas County Health Facilities Authority, Florida,
Oaks of Clearwater Ser 2004............................ 6.25% 06/01/34 $ 1,062,100
1,000 Hawaii Department of Budget & Finance, Kahala Nui Ser
2003 A................................................. 8.00 11/15/33 1,152,140
Illinois Finance Authority,
1,000 Landing at Plymouth Ser 2005 A......................... 6.00 05/15/37 1,062,330
1,000 Luther Oaks Ser 2006 A................................. 6.00 08/15/39 1,051,870
1,650 Montgomery Place Ser 2006 A............................ 5.75 05/15/38 1,702,304
1,000 Iowa Finance Authority, Bethany Life Communities Refg Ser
2006 A................................................. 5.55 11/01/41 1,003,680
1,500 Lenexa, Kansas, Lakeview Village - Southridge Ser 2002
C...................................................... 6.875 05/15/32 1,621,815
1,000 Howard County, Maryland, Vantage House Ser 2007 A........ 5.25 04/01/33 1,023,060
Maryland Health & Higher Educational Facilities
Authority,
750 King Farm Presbyterian Community 2007 Ser A............ 5.30 01/01/37 769,748
500 Edenwald Ser 2006 A.................................... 5.40 01/01/31 518,685
1,500 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A................................. 5.75 07/01/23 1,534,620
1,500 Kansas City Industrial Development Agency, Missouri,
Bishop Spencer 2004 Ser A.............................. 6.50 01/01/35 1,588,095
New Jersey Economic Development Authority,
1,000 Franciscan Oaks Ser 1997............................... 5.70 10/01/17 1,018,320
730 Lions Gate Ser 2005 A.................................. 5.875 01/01/37 752,813
1,000 The Presbyterian Home at Montgomery Ser 2001 A......... 6.375 11/01/31 1,059,150
2,000 United Methodist Homes of New Jersey Ser 1998.......... 5.125 07/01/25 1,968,660
1,500 Suffolk County Industrial Development Agency, New York,
Medford Hamlet Ser 2006................................ 6.375 01/01/39 1,535,595
1,000 North Carolina Medical Care Commission, Presbyterian
Homes Ser 2006......................................... 5.50 10/01/31 1,039,880
1,500 Grand Forks, North Dakota, 4000 Valley Square Ser 2006... 5.30 12/01/34 1,508,160
1,500 Bucks County Industrial Development Authority,
Pennsylvania, Ann's Choice Ser 2005 A.................. 6.125 01/01/25 1,592,265
1,000 Montgomery County Industry Development Authority,
Pennsylvania, Whitemarsh Community Ser 2005............ 6.25 02/01/35 1,057,190
750 South Carolina Jobs-Economic Development Authority,
Wesley Commons Ser 2006................................ 5.30 10/01/36 763,988
Shelby County Health, Educational & Housing Facilities
Board, Tennessee,
500 Trezevant Manor Ser 2006 A............................. 5.75 09/01/37 512,565
750 Village at Germantown Ser 2003 A....................... 7.25 12/01/34 760,553
500 Village at Germantown Ser 2006......................... 6.25 12/01/34 455,635
1,250 HFDC Central Texas Inc, Legacy at Willow Bend, Ser 2006
A...................................................... 5.75 11/01/36 1,294,688
1,000 Houston Health Facilities Authority, Texas, Buckingham
Senior Living Community Ser 2004 A..................... 7.125 02/15/34 1,106,830
14
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
$ 1,000 Lubbock, Health Facilities Development Corporation,
Texas, Carillon Senior Lifecare Ser 2005 A............. 6.50% 07/01/26 $ 1,045,050
2,000 Peninsula Ports Authority of Virginia, Virginia Baptist
Homes Ser 2006 C....................................... 5.40 12/01/33 2,067,559
1,000 Virginia Beach Development Authority, Virginia,
Westminster-Canterbury Refg Ser 2005 A................. 5.25 11/01/26 1,026,980
1,000 Washington Housing Finance Commission, Skyline at First
Hill Ser 2007 A........................................ 5.625 01/01/38 1,018,630
------------
--------
38,268,793
36,880
------------
--------
Nursing & Health Services (5.8%)
Escambia County, Florida,
4,250 Pensacola Care Development Centers Ser 1989............ 10.25 07/01/11 4,263,514
980 Pensacola Care Development Centers Ser 1989 A.......... 10.25 07/01/11 983,116
1,675 Massachusetts Development Finance Agency, New England
Center for Children Ser 1998........................... 5.875 11/01/18 1,713,726
1,300 St Louis County Industrial Development Authority,
Missouri, Pediatric Rehabilitation Center Ser 2003 A... 5.00 11/15/35 1,300,455
700 New Jersey Economic Development Authority, Seashore
Gardens Living Center Ser 2006......................... 5.375 11/01/36 712,964
415 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999.................... 6.00 06/01/09 422,491
------------
--------
9,396,266
9,320
------------
--------
Tobacco Settlement (5.6%)
1,000 Northern Tobacco Securitization Corporation, Alaska,
Asset Backed Ser 2006 A................................ 5.00 06/01/46 972,430
1,955 California County Tobacco Securitization Agency, Gold
County Settlement Funding Corp Ser 2006................ 0.00 06/01/33 445,408
4,000 Golden State Tobacco Securitization Corporation,
California, Enhanced Asset Backed Ser 2007 A-1 @@...... 5.125 06/01/47 3,976,420
13,000 Silicon Valley Tobacco Securitization Authority,
California, Santa Clara Tobacco Settlement Corp Ser
2007................................................... 0.00 06/01/56 635,310
4,000 Tobacco Settlement Financing Corporation, New Jersey, Ser
2007-1B................................................ 0.00 06/01/41 613,560
1,000 Nassau County Tobacco Settlement Corporation, New York,
Ser 2006 A-3........................................... 5.125 06/01/46 1,020,230
1,500 TSASC Inc, New York, Tobacco Settlement Ser 2006-1....... 5.125 06/01/42 1,530,345
------------
--------
9,193,703
26,455
------------
--------
15
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Transportation (1.6%)
$ 1,515 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg
Ser 1993 A (Ambac)..................................... 5.85% 10/01/13 $ 1,584,069
1,000 Nevada Department of Business & Industry, Las Vegas
Monorail 2nd Tier Ser 2000............................. 7.375 01/01/40 1,048,570
------------
--------
2,632,639
2,515
------------
--------
Other Revenue (5.1%)
2,000 Sacramento Financing Authority, California, Convention
Center Hotel Ser 1999 A................................ 6.25 01/01/30 2,073,740
1,000 San Diego County, California, San Diego Natural History
Museum COPs............................................ 5.70 02/01/28 1,004,470
1,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special
Ser 1997 B (a)......................................... 5.75 09/01/27 1,021,340
1,000 Maryland State Economic Development Corporation,
Chesapeake Bay Conference Center Ser 2006 A............ 5.00 12/01/31 1,005,640
1,000 New York Liberty Development Corporation, National Sports
Museum, Ser 2006 A..................................... 6.125 02/15/19 1,048,390
2,000 Austin Convention Enterprises Inc, Texas, Convention
Center Hotel Ser 2006 B................................ 5.75 01/01/34 2,100,580
------------
--------
8,254,160
8,000
------------
--------
Refunded (10.3%)
1,000 St Johns County Industrial Development Authority,
Florida, Glenmoor Ser 1999 A........................... 8.00 01/01/10+ 1,101,590
3,850 Fenton, Missouri, Gravois Bluffs Redevelopment Ser 2001
A...................................................... 7.00 10/01/11+ 4,353,080
1,000 St Louis County Industrial Development Authority,
Missouri, Pediatric Rehabilitation Center Ser 2003 A... 6.625 11/15/13+ 1,139,190
2,335 Henderson, Nevada, Catholic Health West 1998 Ser A....... 5.375 07/01/08+ 2,397,648
1,000 New Jersey Economic Development Authority, Cedar Crest
Village Inc Ser 2001 A................................. 7.25 11/15/11+ 1,138,260
1,000 North Carolina Medical Care Commission, Givens Estate Ser
2003 A................................................. 6.50 07/01/13+ 1,140,180
1,000 Chester County Health & Education Facilities Authority,
Pennsylvania, Jenner's Pond Inc Ser 2002............... 7.625 07/01/12+ 1,177,500
2,000 Austin Convention Enterprises Inc, Texas, Convention
Center Hotel Ser 2000 A................................ 6.70 01/01/11+ 2,185,860
2,100 Vermont Economic Development Authority, Wake Robin Corp
Ser 1999 A............................................. 6.75 03/01/09+ 2,231,439
------------
--------
16,864,747
15,285
------------
--------
189,725 Total Tax-Exempt Municipal Bonds (Cost $163,006,278)......................... 170,637,956
------------
--------
16
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Short Term Tax-Exempt Municipal Obligations (2.2%)
$ 3,200 Connecticut Health & Educational Facilities Authority,
Quinnipiac University Ser F (Demand 06/01/07).......... 3.91*% 07/01/31 $ 3,200,000
300 North Central Texas Health Facility Development
Corporation, Presbyterian Medical Center Ser 1985 D
(MBIA) (Demand 06/01/07)............................... 3.80* 12/01/15 300,000
------------
--------
3,500 Total Short-Term Tax-Exempt Municipal Obligations (Cost $3,500,000).......... 3,500,000
------------
--------
193,225 Total Investments (Cost $166,506,278)........................................ 174,137,956
------------
--------
Floating Rate Note Obligation Related to Securities Held
(-7.4%)
(12,000) Notes with interest rates ranging from 3.79% to 3.86% at
-------- May 31, 2007 and contractual maturities of collateral
ranging from 10/01/31 to 06/01/47 (See Note 1D)+++
(Cost $(12,000,000))................................... (12,000,000)
------------
$181,225 Total Net Investments (Cost $154,506,278) (b)(c)..................... 99.5% 162,137,956
========
Other Assets in Excess of Liabilities................................ 0.5 863,846
----- ------------
Net Assets........................................................... 100.0% $163,001,802
===== ============
17
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007 continued
---------------------
COPs Certificate of Participation.
AMT Alternative Minimum Tax.
RITES Residual Interest Tax-Exempt Security.
WI Security purchased on a when - issued basis.
+ Prerefunded to call date shown.
++ Joint exemption in locations shown.
+++ Floating rate note obligations related to securities held.
The interest rates shown reflects the rates in effect at May
31, 2007.
@ Security is a "step-up" bond where the coupon increases on a
predetermined future date.
@@ Underlying security related to inverse floater entered into
by the Fund. (See Note 1D).
## Current coupon rate for inverse floating rate municipal
obligation (See Note 8). 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 $922,550, which represents 0.6% of net assets.
* Current coupon of variable rate demand obligation.
** A portion of this security has been physically segregated in
connection with open futures contracts in the amount of
$34,500.
(a) Resale is restricted to qualified institutional Investors.
(b) Securities have been designated as collateral in an amount
equal to $5,950,554 in connection with open futures, an open
swap contract and the purchase of a when-issued security.
(c) The aggregate cost for federal income tax purposes is
154,464,955. The aggregate gross unrealized appreciation is
$8,236,025 and the aggregate gross unrealized depreciation
is $563,024, resulting in net unrealized appreciation of
$7,673,001.
Bond Insurance:
---------------
Ambac Ambac Assurance Corporation.
MBIA Municipal Bond Investors Assurance Corporation.
18
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2007 continued
FUTURES CONTRACTS OPEN AT MAY 31, 2007:
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
---------------------------------------------------------------------------------------
15 Short U.S. Treasury Bonds 20 Year $(1,636,875) $12,615
September 2007
30 Short U.S. Treasury Notes 10 Year (3,191,250) 20,776
September 2007
-------
Total Unrealized Appreciation................ $33,391
=======
INTEREST RATE SWAP CONTRACT OPEN AT MAY 31, 2007:
NOTIONAL PAYMENTS PAYMENTS TERMINATION UNREALIZED
COUNTERPARTY AMOUNT (OOO) MADE BY FUND RECEIVED BY FUND DATE APPRECIATION
-------------------------------------------------------------------------------------------------------
JPMorgan Chase & Co. $12,000 Fixed Rate 3.79% Floating Rate BMA 08/24/17 $50,854
(Bond Market =======
Association)
19
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
May 31, 2007
Assets:
Investments in securities, at value
(cost $166,506,278)....................................... $174,137,956
Unrealized appreciation on an open swap contract............ 50,854
Cash........................................................ 63,521
Receivable for:
Investments sold........................................ 4,338,114
Interest................................................ 2,730,493
Variation margin........................................ 3,282
Prepaid expenses and other assets........................... 24,479
------------
Total Assets............................................ 181,348,699
------------
Liabilities:
Floating rate note obligations.............................. 12,000,000
Payable for:
Investments purchased................................... 6,145,275
Investment advisory fee................................. 76,256
Administration fee...................................... 12,201
Transfer agent fee...................................... 932
Accrued expenses and other payables......................... 112,233
------------
Total Liabilities....................................... 18,346,897
------------
Net Assets.............................................. $163,001,802
============
Composition of Net Assets:
Paid-in-capital............................................. $174,014,357
Net unrealized appreciation................................. 7,715,923
Accumulated undistributed net investment income............. 1,550,877
Accumulated net realized loss............................... (20,279,355)
------------
Net Assets.............................................. $163,001,802
============
Net Asset Value Per Share
19,685,043 shares outstanding (unlimited shares authorized
of $.01 par value).......................................... $8.28
============
20
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statement of Operations
For the year ended May 31, 2007
Net Investment Income:
Interest Income............................................. $10,816,023
-----------
Expenses
Investment advisory fee..................................... 811,939
Interest and residual trust expenses........................ 141,720
Administration fee.......................................... 129,910
Professional fees........................................... 70,251
Shareholder reports and notices............................. 50,788
Listing fees................................................ 22,063
Transfer agent fees and expenses............................ 21,622
Custodian fees.............................................. 8,346
Trustees' fees and expenses................................. 7,631
Other....................................................... 35,853
-----------
Total Expenses.......................................... 1,300,123
Less: expense offset........................................ (8,402)
-----------
Net Expenses............................................ 1,291,721
-----------
Net Investment Income................................... 9,524,302
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain (Loss) on:
Investments................................................. (8,704,592)
Futures contracts........................................... 629
Swap contract............................................... 152,471
-----------
Net Realized Loss....................................... (8,551,492)
-----------
Net Change in Unrealized Appreciation on:
Investments................................................. 14,683,374
Futures contracts........................................... 15,744
Swap contract............................................... 50,854
-----------
Net Appreciation........................................ 14,749,972
-----------
Net Gain................................................ 6,198,480
-----------
Net Increase................................................ $15,722,782
===========
21
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2007 MAY 31, 2006
------------ ------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 9,524,302 $ 10,672,776
Net realized gain (loss).................................... (8,551,492) 29,575
Net change in unrealized appreciation/depreciation.......... 14,749,972 131,023
------------ ------------
Net Increase............................................ 15,722,782 10,833,374
Dividends to shareholders from net investment income........ (10,648,870) (10,435,062)
Decrease from transactions in shares of beneficial
interest.................................................. -- (64,710)
------------ ------------
Net Increase............................................ 5,073,912 333,602
Net Assets:
Beginning of period......................................... 157,927,890 157,594,288
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $1,550,877 and $2,703,247, respectively)................. $163,001,802 $157,927,890
============ ============
22
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2007
1. Organization and Accounting Policies
Morgan Stanley Municipal Income Opportunities Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company. The Fund's investment objective is to
provide a high level of current income which is exempt from federal income tax.
The Fund was organized as a Massachusetts business trust on June 22, 1988 and
commenced operations on September 19, 1988.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid matrix of tax-exempt securities and evaluations by its
staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the mean between the last reported bid and
asked price. The portfolio securities are thus valued by reference to a
combination of transactions and quotations for the same or other securities
believed to be comparable in quality, coupon, maturity, type of issue, call
provisions, trading characteristics and other features deemed to be relevant.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees; (3) interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations; and (4) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily except where collection
is not expected.
C. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its
23
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2007 continued
taxable and nontaxable income to its shareholders. Accordingly, no federal
income tax provision is required.
D. Floating Rate Note Obligations Related to Securities Held -- The Fund enters
into transactions in which it transfers to Dealer Trusts ("Dealer Trusts"),
fixed rate bonds in exchange for cash and residual interests in the Dealer
Trusts' assets and cash flows, which are in the form of inverse floating rate
investments. The Dealer Trusts fund the purchases of the fixed rate bonds by
issuing floating rate notes to third parties and allowing the Fund to retain
residual interest in the bonds. The Fund enters into shortfall agreements with
the Dealer Trusts which commit the Fund to pay the Dealer Trusts, in certain
circumstances, the difference between the liquidation value of the fixed rate
bonds held by the Dealer Trusts and the liquidation value of the floating rate
notes held by third parties, as well as any shortfalls in interest cash flows.
The residual interests held by the Fund (inverse floating rate investments)
include the right of the Fund (1) to cause the holders of the floating rate
notes to tender their notes at par at the next interest rate reset date, and (2)
to transfer the municipal bond from the Dealer Trusts to the Fund, thereby
collapsing the Dealer Trusts. The Fund accounts for the transfer of bonds to the
Dealer Trusts as secured borrowings, with the securities transferred remaining
in the Fund's investment assets, and the related floating rate notes reflected
as Fund liabilities under the caption "floating rate note obligations" on the
"Statement of Assets and Liabilities." The Fund records the interest income from
the fixed rate bonds under the caption "Interest Income" and records the
expenses related to floating rate note obligations and any administrative
expenses of the Dealer Trusts under the caption "Interest and residual trust
expenses" in the Fund's "Statement of Operations." The notes issued by the
Dealer Trusts have interest rates that reset weekly and the floating rate note
holders have the option to tender their notes to the Dealer Trusts for
redemption at par at each reset date. At May 31, 2007, Fund investments with a
value of $15,789,160 are held by the Dealer Trusts and serve as collateral for
the $12,000,000 in floating rate note obligations outstanding at that date.
Contractual maturities of the floating rate note obligations and interest rates
in effect at May 31, 2007 are presented in the "Portfolio of Investments."
E. 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
24
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2007 continued
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
F. 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.
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 an advisory fee,
calculated weekly and payable monthly, by applying the annual rate of 0.50% to
the Fund's weekly net assets.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, calculated weekly and payable monthly, by applying
the annual rate of 0.08% to the Fund's weekly net assets.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended May 31, 2007 aggregated $45,882,136
and $41,995,086, respectively. Included in the aforementioned transactions are
purchases and sales of $1,043,750 and $1,278,335 with other Morgan Stanley funds
including net realized gains of $49,277.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation. The
Trustees voted to close the plan to new participants and eliminate the future
benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for
25
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2007 continued
the year ended May 31, 2007 included in Trustees' fees and expenses in the
Statement of Operations amounted to $4,543. At May 31, 2007, the Fund had an
accrued pension liability of $62,195, which is included in accrued expenses in
the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he or she receives for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have the deferred amounts credited with a return
equal to the total return on one or more of the Morgan Stanley funds that are
offered as investment options under the Compensation Plan.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund.
4. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
Balance, May 31, 2005....................................... 19,693,243 $196,932 $174,267,222
Treasury shares purchased and retired (weighted average
discount 0.54%)*.......................................... (8,200) (82) (64,628)
Reclassification due to permanent book/tax differences...... -- -- (413,264)
---------- -------- ------------
Balance, May 31, 2006 and May 31, 2007...................... 19,685,043 $196,850 $173,789,330
========== ======== ============
---------------------
* The Trustees have voted to retire the shares purchased.
5. Dividends
The Fund declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
-------------- --------- ------------------ ------------------
March 26, 2007 $0.045 June 8, 2007 June 22, 2007
June 26, 2007 $0.045 July 6, 2007 July 20, 2007
June 26, 2007 $0.045 August 3, 2007 August 17, 2007
June 26, 2007 $0.045 September 7, 2007 September 21, 2007
6. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent and
custodian.
26
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2007 continued
7. 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
MAY 31, 2007 MAY 31, 2006
------------ ------------
Tax-exempt income........................................... $10,629,071 $10,435,062
Ordinary income............................................. 19,799 --
------------ -----------
Total distributions......................................... $10,648,870 $10,435,062
============ ===========
As of May 31, 2007, the tax-basis components of accumulated losses were as
follows:
Undistributed tax-exempt income............................. $ 1,572,405
Undistributed long-term gains............................... --
------------
Net accumulated earnings.................................... 1,572,405
Capital loss carryforward*.................................. (10,670,588)
Post-October losses......................................... (9,575,338)
Temporary differences....................................... (62,889)
Net unrealized appreciation................................. 7,723,855
------------
Total accumulated losses.................................... $(11,012,555)
============
* During the year ended May 31, 2007, the Fund utilized $785,778 of its net
capital loss carryforward. As of May 31, 2007, the Fund had a net capital loss
carryforward of $10,670,588 of which $3,930,059 will expire on May 31, 2009,
$1,864,080 will expire on May 31, 2011 and $4,876,449 will expire on May 31,
2013 to offset future capital gains to the extent provided by regulations.
As of May 31, 2007, 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), book amortization of discounts on debt securities
and mark-to-market of open futures contracts.
27
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2007 continued
Permanent differences, due to a nondeductible expense and tax adjustments on
debt securities sold and taxable income retained by the Fund, resulted in the
following reclassifications among the Fund's components of net assets at May 31,
2007:
ACCUMULATED
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED
INCOME LOSS PAID-IN-CAPITAL
-------------- ------------ ---------------
($27,802) ($375) $28,177
======== ===== =======
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 Dealer Trusts in exchange for
cash and residual interests in the Dealer Trusts. 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
28
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2007 continued
correlation and manager risk. Such risks may exceed the related amounts shown in
the Statement of Assets and Liabilities.
9. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and is to be
applied to all open tax years as of the effective date. The impact to the Fund's
financial statements, if any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.
29
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
FOR THE YEAR ENDED MAY 31,
---------------------------------------------------------------------
2007 2006 2005 2004 2003
--------- --------- --------- --------- ---------
Selected Per Share Data:
Net asset value, beginning of the period.................. $8.02 $8.00 $7.67 $7.91 $7.88
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income*................................ 0.48 0.54 0.53 0.52 0.54
Net realized and unrealized gain (loss)............... 0.32 0.01 0.29 (0.26) 0.04
----- ----- ----- ----- -----
Total income from investment operations................... 0.80 0.55 0.82 0.26 0.58
----- ----- ----- ----- -----
Less dividends from net investment income................. (0.54) (0.53) (0.50) (0.50) (0.55)
----- ----- ----- ----- -----
Anti-dilutive effect of acquiring treasury shares*........ -- -- 0.01 -- --
----- ----- ----- ----- -----
Net asset value, end of period............................ $8.28 $8.02 $8.00 $7.67 $7.91
===== ===== ===== ===== =====
Market value, end of period............................... $9.68 $8.76 $7.97 $7.09 $7.76
===== ===== ===== ===== =====
Total Return+............................................. 16.99% 17.04% 20.12% (2.34)% 3.09%
Ratios to Average Net Assets:
Total expenses (before expense offset).................... 0.80%(1) 0.71% 0.83% 0.94% 0.93%(1)
Total expenses (before expense offset, exclusive of
interest and residual trust expenses).................... 0.72%(1) 0.71% 0.83% 0.94% 0.93%(1)
Net investment income..................................... 5.88% 6.78% 6.76% 6.63% 6.85%
Supplemental Data:
Net assets, end of period, in thousands................... $163,002 $157,928 $157,594 $156,265 $164,208
Portfolio turnover rate................................... 26% 19% 12% 10% 8%
---------------------
* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends are assumed to
be reinvested at the prices obtained under the Fund's
dividend reinvestment plan. Total return does not reflect
brokerage commission.
(1) Does not reflect the effect of expense offset of 0.01%.
30
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Morgan Stanley Municipal Income Opportunities Trust:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Municipal Income Opportunities Trust (the "Fund"), including the
portfolio of investments, as of May 31, 2007, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of May 31, 2007, 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 as of May 31, 2007, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
July 20, 2007
31
Morgan Stanley Municipal Income Opportunities Trust
REVISED INVESTMENT POLICY (UNAUDITED)
THE TRUSTEES APPROVED THE FOLLOWING INVESTMENT POLICY:
INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and may
purchase or sell interest rate caps, floors and collars. The Fund expects to
enter into these transactions primarily to manage interest rate risk, hedge
portfolio positions and preserve a return or spread on a particular investment
or portion of its portfolio. The Fund may also enter into these transactions to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund does not intend to use these transactions
as speculative investments and will not enter into interest rate swaps or sell
interest rate caps or floors where it does not own or have the right to acquire
the underlying securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed-rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the party selling the interest rate floor. An interest
rate collar combines the elements of purchasing a cap and selling a floor. The
collar protects against an interest rate rise above the maximum amount but
foregoes the benefit of an interest rate decline below the minimum amount.
The Fund may enter into interest rate swaps, caps, floors and collars on either
an asset-based or liability-based basis, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and the Fund segregates an amount of cash and/or liquid securities
having an aggregate net asset value at least equal to the accrued excess. If the
Fund enters into an interest rate swap on other than a net basis, the Fund would
segregate the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. Interest rate transactions do not constitute senior
securities under the 1940 Act when the Fund segregates assets to cover the
obligations under the transactions. The Fund will enter into interest rate swap,
cap or floor transactions only with counterparties approved by the Fund's Board
of Trustees. The Adviser will monitor the creditworthiness of counterparties to
the Fund's interest rate swap, cap, floor and collar transactions on an ongoing
basis. If there is a default by the other party to such a transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction. To the extent the Fund sells (i.e., writes) caps, floors and
collars, it will segregate cash and/or liquid securities having an aggregate net
asset value at least
32
Morgan Stanley Municipal Income Opportunities Trust
REVISED INVESTMENT POLICY (UNAUDITED) continued
equal to the full amount, accrued on a daily basis, of the Fund's net
obligations with respect to the caps, floors or collars. The use of interest
rate swaps is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. If the Adviser is incorrect in its forecasts of the market values,
interest rates and other applicable factors, the investment performance of the
Fund would diminish compared with what it would have been if these investment
techniques were not used. The use of interest rate swaps, caps, collars and
floors may also have the effect of shifting the recognition of income between
current and future periods.
These transactions do not involve the delivery of securities or other underlying
assets or principal. Accordingly, the risk of loss with respect to interest rate
swaps is limited to the net amount of interest payments that the Fund is
contractually obligated to make. If the other party to an interest rate swap
defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive.
33
Morgan Stanley Municipal Income Opportunities Trust
RESULTS OF ANNUAL SHAREHOLDER MEETING (UNAUDITED)
On December 13, 2006, 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
---------------------------------------
TRUSTEE FOR WITHHELD ABSTAIN
------- ---------------------------------------
Frank L. Bowman............................................. 15,648,434 127,747 85,361
Kathleen A. Dennis.......................................... 15,634,676 141,505 85,361
Wayne E. Hedein*............................................ 15,648,344 127,837 85,361
Dr. Manuel H. Johnson....................................... 15,658,870 117,311 85,361
Joseph J. Kearns............................................ 15,660,431 115,750 85,361
Michael F. Klein............................................ 15,647,470 128,711 85,361
W. Allen Reed............................................... 15,644,846 131,335 85,361
Fergus Reid................................................. 15,629,651 146,530 85,361
---------------------
* Mr. Hedein retired as of December 31, 2006.
34
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED)
Independent Trustees:
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
--------------------------------------- ----------- -------------- ------------------------------ -------------
Frank L. Bowman (62) Trustee Since August President and Chief Executive 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Officer, Nuclear Energy
Counsel to the Independent Trustees Institute (policy
1177 Avenue of the Americas organization) (since February
New York, NY 10036 2005); Director or Trustee of
various Retail Funds and
Institutional Funds (since
August 2006); Chairperson of
the Insurance Sub-Committee of
the Valuation, Insurance and
Compliance Committee (since
February 2007); formerly,
variously, Admiral in the U.S.
Navy, Director of Naval
Nuclear Propulsion Program and
Deputy Administrator-Naval
Reactors in the National
Nuclear Security
Administration at the U.S.
Department of Energy (1996-
2004). Honorary Knight
Commander of the Most
Excellent Order of the British
Empire.
Michael Bozic (66) Trustee Since April Private investor; Chairperson 173
c/o Kramer Levin Naftalis & Frankel LLP 1994 of the Valuation, Insurance
Counsel to the Independent Trustees and Compliance Committee
1177 Avenue of the Americas (since October 2006); Director
New York, NY 10036 or Trustee of the Retail Funds
(since April 1994) and the
Institutional Funds (since
July 2003); formerly,
Chairperson of the Insurance
Committee (July 2006-
September 2006); Vice Chairman
of Kmart Corporation (December
1998-October 2000), Chairman
and Chief Executive Officer of
Levitz Furniture Corporation
(November 1995-November 1998)
and President and Chief
Executive Officer of Hills
Department Stores (May
1991-July 1995); variously
Chairman, Chief Executive
Officer, President and Chief
Operating Officer (1987-1991)
of the Sears Merchandise Group
of Sears, Roebuck & Co.
Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
--------------------------------------- -----------------------------
Frank L. Bowman (62) Director of the National
c/o Kramer Levin Naftalis & Frankel LLP Energy Foundation, the U.S.
Counsel to the Independent Trustees Energy Association, the
1177 Avenue of the Americas American Council for Capital
New York, NY 10036 Formation and the Armed
Services YMCA of the USA.
Michael Bozic (66) Director of various business
c/o Kramer Levin Naftalis & Frankel LLP organizations.
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, NY 10036
35
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
--------------------------------------- ----------- -------------- ------------------------------ -------------
Kathleen A. Dennis (53) Trustee Since August President, Cedarwood 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Associates (mutual fund
Counsel to the Independent Trustees consulting) (since July 2006);
1177 Avenue of the Americas Chairperson of the Money
New York, NY 10036 Market and Alternatives Sub-
Committee of the Investment
Committee (since October 2006)
and Director or Trustee of
various Retail Funds and
Institutional Funds (since
August 2006); formerly, Senior
Managing Director of Victory
Capital Management (1993-
2006).
Dr. Manuel H. Johnson (58) Trustee Since July Senior Partner, Johnson Smick 173
c/o Johnson Smick Group, Inc. 1991 International, Inc.
888 16th Street, N.W. (consulting firm); Chairperson
Suite 740 of the Investment Committee
Washington, D.C. 20006 (since October 2006) and
Director or Trustee of the
Retail Funds (since July 1991)
and the Institutional Funds
(since July 2003); Co-Chairman
and a founder of the Group of
Seven Council (G7C)
(international economic
commission); formerly,
Chairperson of the Audit
Committee (July 1991-
September 2006); Vice Chairman
of the Board of Governors of
the Federal Reserve System and
Assistant Secretary of the
U.S. Treasury.
Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
--------------------------------------- -----------------------------
Kathleen A. Dennis (53) None.
c/o Kramer Levin Naftalis & Frankel LLP
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, NY 10036
Dr. Manuel H. Johnson (58) Director of NVR, Inc. (home
c/o Johnson Smick Group, Inc. construction); Director of
888 16th Street, N.W. Evergreen Energy.
Suite 740
Washington, D.C. 20006
36
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
--------------------------------------- ----------- -------------- ------------------------------ -------------
Joseph J. Kearns (64) Trustee Since August President, Kearns & Associates 174
c/o Kearns & Associates LLC 1994 LLC (investment consulting);
PMB754 Chairperson of the Audit
23852 Pacific Coast Highway Committee (since October 2006)
Malibu, CA 90265 and Director or Trustee of the
Retail Funds (since July 2003)
and the Institutional Funds
(since August 1994); formerly,
Deputy Chairperson of the
Audit Committee (July 2003-
September 2006) and
Chairperson of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); formerly CFO of the J.
Paul Getty Trust.
Michael F. Klein (48) Trustee Since August Managing Director, Aetos 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Capital, LLC (since March
Counsel to the Independent Trustees 2000) and Co-President, Aetos
1177 Avenue of the Americas Alternatives Management, LLC
New York, NY 10036 (since January 2004);
Chairperson of the
Fixed-Income Sub-Committee of
the Investment Committee
(since October 2006) and
Director or Trustee of various
Retail Funds and Institutional
Funds (since August 2006);
formerly, Managing Director,
Morgan Stanley & Co. Inc. and
Morgan Stanley Dean Witter
Investment Management,
President, Morgan Stanley
Institutional Funds (June
1998-March 2000) and
Principal, Morgan Stanley &
Co. Inc. and Morgan Stanley
Dean Witter Investment
Management (August
1997-December 1999).
Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
--------------------------------------- -----------------------------
Joseph J. Kearns (64) Director of Electro Rent
c/o Kearns & Associates LLC Corporation (equipment
PMB754 leasing), The Ford Family
23852 Pacific Coast Highway Foundation, and the UCLA
Malibu, CA 90265 Foundation.
Michael F. Klein (48) Director of certain
c/o Kramer Levin Naftalis & Frankel LLP investment funds managed or
Counsel to the Independent Trustees sponsored by Aetos Capital,
1177 Avenue of the Americas LLC. Director of Sanitized AG
New York, NY 10036 and Sanitized Marketing AG
(specialty chemicals).
37
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
--------------------------------------- ----------- -------------- ------------------------------ -------------
Michael E. Nugent (71) Chairperson Chairperson of General Partner of Triumph 173
c/o Triumph Capital, L.P. of the the Boards Capital, L.P. (private
445 Park Avenue Board and since July investment partnership);
New York, NY 10022 Trustee 2006 and Chairperson of the Boards of
Trustee since the Retail Funds and
July 1991 Institutional Funds (since
July 2006) and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly,
Chairperson of the Insurance
Committee (until July 2006),
and Vice President, Bankers
Trust Company and BT Capital
Corporation (1984-1988).
W. Allen Reed (60) Trustee Since August Chairperson of the Equity Sub- 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Committee of the Investment
Counsel to the Independent Trustees Committee (since October 2006)
1177 Avenue of the Americas and Director or Trustee of
New York, NY 10036 various Retail Funds and
Institutional Funds (since
August 2006); formerly,
President and CEO of General
Motors Asset Management;
Chairman and Chief Executive
Officer of the GM Trust Bank
and Corporate Vice President
of General Motors Corporation
(August 1994-December 2005).
Fergus Reid (74) Trustee Since June Chairman of Lumelite Plastics 174
c/o Lumelite Plastics Corporation 1992 Corporation; Chairperson of
85 Charles Colman Blvd. the Governance Committee and
Pawling, NY 12564 Director or Trustee of the
Retail Funds (since July 2003)
and the Institutional Funds
(since June 1992).
Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
--------------------------------------- -----------------------------
Michael E. Nugent (71) None.
c/o Triumph Capital, L.P.
445 Park Avenue
New York, NY 10022
W. Allen Reed (60) Director of GMAC (financial
c/o Kramer Levin Naftalis & Frankel LLP services), and Temple-Inland
Counsel to the Independent Trustees Industries (packaging,
1177 Avenue of the Americas banking and forest products);
New York, NY 10036 Director of Legg Mason, Inc.
and Director of the Auburn
University Foundation.
Fergus Reid (74) Trustee and Director of
c/o Lumelite Plastics Corporation certain investment companies
85 Charles Colman Blvd. in the JPMorgan Funds complex
Pawling, NY 12564 managed by J.P. Morgan
Investment Management Inc.
38
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Interested Trustee:
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Interested
Interested Trustee Registrant Time Served* Past 5 Years Trustee**
------------------------------------- ----------- -------------- ------------------------------ -------------
James F. Higgins (59) Trustee Since June Director or Trustee of the 173
c/o Morgan Stanley Trust 2000 Retail Funds (since June 2000)
Harborside Financial Center and the Institutional Funds
Plaza Two (since July 2003); Senior
Jersey City, NJ 07311 Advisor of Morgan Stanley
(since August 2000).
Name, Age and Address of Other Directorships Held by
Interested Trustee Interested Trustee
------------------------------------- ------------------------------
James F. Higgins (59) Director of AXA Financial,
c/o Morgan Stanley Trust Inc. and The Equitable Life
Harborside Financial Center Assurance Society of the
Plaza Two United States (financial
Jersey City, NJ 07311 services).
---------------------
* This is the earliest date the Trustee began serving the funds advised by
Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the
"Retail Funds") or the funds advised by Morgan Stanley Investment Management
Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds").
** The Fund Complex includes all open-end and closed-end funds (including all
of their portfolios) advised by the Investment Adviser and any funds that
have an investment adviser that is an affiliated person of the Investment
Adviser (including, but not limited to, Morgan Stanley Investment Management
Inc.) as of May 31, 2007.
39
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Executive Officers:
Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years
----------------------------- --------------- -------------- ------------------------------------------------------------
Ronald E. Robison (68) President and President President (since September 2005) and Principal Executive
1221 Avenue of the Americas Principal since Officer (since May 2003) of funds in the Fund Complex;
New York, NY 10020 Executive September 2005 President (since September 2005) and Principal Executive
Officer and Principal Officer (since May 2003) of the Van Kampen Funds; Managing
Executive Director, Director and/or Officer of the Investment Adviser
Officer since and various entities affiliated with the Investment Adviser;
May 2003 Director of Morgan Stanley SICAV (since May 2004). Formerly,
Executive Vice President (July 2003 to September 2005) of
funds in the Fund Complex and the Van Kampen Funds;
President and Director of the Institutional Funds (March
2001 to July 2003); Chief Administrative Officer of the
Investment Adviser; Chief Administrative Officer of Morgan
Stanley Services Company Inc.
J. David Germany (52) Vice President Since February Managing Director and (since December 2005) Chief Investment
Morgan Stanley Investment 2006 Officer -- Global Fixed Income of Morgan Stanley Investment
Management Limited Management; Managing Director and Director of Morgan Stanley
20 Bank Street Investment Management Limited; Vice President of the Retail
Canary Wharf, Funds and Institutional Funds (since February 2006).
London, England E144QAD
Dennis F. Shea (54) Vice President Since February Managing Director and (since February 2006) Chief Investment
1221 Avenue of the Americas 2006 Officer -- Global Equity of Morgan Stanley Investment
New York, NY 10020 Management; Vice President of the Retail Funds and
Institutional Funds (since February 2006). Formerly,
Managing Director and Director of Global Equity Research at
Morgan Stanley.
Amy R. Doberman (45) Vice President Since July Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas 2004 Management of Morgan Stanley Investment Management (since
New York, NY 10020 July 2004); Vice President of the Retail Funds and the
Institutional Funds (since July 2004); Vice President of the
Van Kampen Funds (since August 2004); Secretary (since
February 2006) and Managing Director (since July 2004) of
the Investment Adviser and various entities affiliated with
the Investment Adviser. Formerly, Managing Director and
General Counsel -- Americas, UBS Global Asset Management
(July 2000 to July 2004).
Carsten Otto (43) Chief Since October Managing Director and Global Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since April 2007);
New York, NY 10020 Officer Managing Director and Chief Compliance Officer of Morgan
Stanley Investment Management. Formerly, U.S. Director of
Compliance (October 2004 to April 2007) and Assistant
Secretary and Assistant General Counsel of the Retail Funds.
Stefanie V. Chang Yu (40) Vice President Since December Executive Director of the Investment Adviser and various
1221 Avenue of the Americas 1997 entities affiliated with the Investment Adviser; Vice
New York, NY 10020 President of the Retail Funds (since July 2002) and the
Institutional Funds (since December 1997). Formerly,
Secretary of various entities affiliated with the Investment
Adviser.
40
Morgan Stanley Municipal Income Opportunities Trust
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 and various
c/o Morgan Stanley Trust Chief Financial since July entities affiliated with the Investment Adviser; Treasurer
Harborside Financial Center Officer 2003 and Chief and Chief Financial Officer of the Retail Funds (since July
Plaza Two Financial 2003). Formerly, Vice President of the Retail Funds
Jersey City, NJ 07311 Officer since (September 2002 to July 2003).
September 2002
Mary E. Mullin (40) Secretary Since June Executive Director of the Investment Adviser and various
1221 Avenue of the Americas 1999 entities affiliated with the Investment Adviser; Secretary
New York, NY 10020 of the Retail Funds (since July 2003) and the Institutional
Funds (since June 1999).
---------------------
* This is the earliest date the Officer began serving the Retail Funds or the
Institutional Funds.
In accordance with Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual, the Fund's Annual CEO Certification certifying as to compliance
with NYSE's Corporate Governance Listing Standards was submitted to the Exchange
on January 11, 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.
2007 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended May 31, 2007, the Fund paid to its
shareholders $0.54 per share from tax-exempt income.
41
(This Page Intentionally Left Blank)
(This Page Intentionally Left Blank)
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairperson of the Board
Ronald E. Robison
President and Principal Executive Officer
J. David Germany
Vice President
Dennis F. Shea
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
COUNSEL TO THE INDEPENDENT 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) 2007 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Municipal Income
Opportunities Trust
Annual Report
May 31, 2007
[MORGAN STANLEY LOGO]
OIAANN-IU07-02267P-Y05/07
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Fund or a
third party.
(b) No information need be disclosed pursuant to this paragraph.
(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.
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2
2007
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES........................ $ 32,000 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES...... $ 531 (2) $4,836,000(2)
TAX FEES................... $ 4,600 (3) $ 621,000(4)
ALL OTHER FEES........... $ -- $ --
TOTAL NON-AUDIT FEES.......... $ 5,131 $5,457,000
TOTAL.............................. $37,131 $5,457,000
2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES........................ $31,132 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES..... $ 531 (2) $5,190,300(2)
TAX FEES.................. $ 4,449 (3) $2,044,491(4)
ALL OTHER FEES........... $ -- $ --
TOTAL NON-AUDIT FEES......... $ 4,980 $7,234,791
TOTAL.............................. $36,112 $7,234,791
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.
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
FUND MANAGEMENT
PORTFOLIO MANAGEMENT. As of the date of this report, the Fund is managed by
members within the Municipal Fixed Income team. The team consists of portfolio
managers and analysts. Current members of the team jointly and primarily
responsible for the day-to-day management of the Fund's portfolio are James F.
Willison and Wayne Godlin, Managing Directors of the Investment Adviser and
Gerard J. Lian, an Executive Director of the Investment Adviser.
Mr. Willison has been associated with the Investment Adviser in an investment
management capacity since January 1980 and began managing the Fund at inception.
Mr. 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 May 2003.
The composition of the team may change from time to time.
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
The following information is as of May 31, 2007:
Mr. Willison managed 22 registered investment companies with a total of
approximately $7.1 billion in assets; no pooled investment vehicles other than
mutual funds; and no other accounts.
Mr. Lian managed three registered investment companies with a total of
approximately $398.6 million in assets; no pooled investment vehicles other than
mutual funds; and no other accounts.
Mr. Godlin managed five registered investment companies with a total of
approximately $6.4 billion in assets; no pooled investment vehicles other than
mutual funds; and no other accounts.
Because the portfolio managers may 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
9
Fund, or it may receive a performance-based fee on certain accounts. In those
instances, the portfolio managers may have an incentive to favor the higher
and/or performance-based fee accounts over the Fund. In addition, a conflict of
interest could exist to the extent the Investment Adviser has proprietary
investments in certain accounts, where portfolio managers have personal
investments in certain accounts or when certain accounts are investment options
in the Investment Adviser's employee benefits and/or deferred compensation
plans. The portfolio manager may have an incentive to favor these accounts over
others. If the Investment Adviser manages accounts that engage in short sales of
securities of the type in which the Fund invests, the Investment Adviser could
be seen as harming the performance of the Fund for the benefit of the accounts
engaging in short sales if the short sales cause the market value of the
securities to fall. The Investment Adviser has adopted trade allocation and
other policies and procedures that it believes are reasonably designed to
address these and other conflicts of interest.
PORTFOLIO MANAGER COMPENSATION STRUCTURE
Portfolio managers receive a combination of base compensation and
discretionary compensation, comprising a cash bonus and several deferred
compensation programs described below. The methodology used to determine
portfolio manager compensation is applied across all funds/accounts managed by
the portfolio managers.
BASE SALARY COMPENSATION. Generally, portfolio managers receive base
salary compensation based on the level of their position with the Investment
Adviser.
DISCRETIONARY COMPENSATION. In addition to base compensation, portfolio
managers may receive discretionary compensation.
Discretionary compensation can include:
- Cash Bonus.
- Morgan Stanley's Long Term Incentive Compensation
awards - a mandatory program that defers a portion of
discretionary year-end compensation into restricted
stock units or other awards based on Morgan Stanley
common stock or other investments that are subject to
vesting and other conditions.
- Investment Management Alignment Plan (IMAP) awards -
a mandatory program that defers a portion of
discretionary year-end compensation and notionally
invests it in designated funds advised by the
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.
10
- 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:
- 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 May 31, 2007, the portfolio managers did not own any share of the
Fund.
11
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
-----------------------------------------------------------------------------------------------------------
Period (a) Total (b) Average (c) Total (d) Maximum
Number of Price Paid Number of Number (or
Shares (or per Share Shares (or Approximate
Units) (or Unit) Units) Dollar Value)
Purchased Purchased as of Shares (or
Part of Publicly Units) that May
Announced Yet Be Purchased
Plans or Under the Plans
Programs or Programs
-----------------------------------------------------------------------------------------------------------
June 1, 2006 -- -- --
June 30, 2006 N/A N/A
-----------------------------------------------------------------------------------------------------------
July 1, 2006 -- -- --
July 31, 2006 N/A N/A
-----------------------------------------------------------------------------------------------------------
August 1, 2006-- -- --
August 31, 2006 N/A N/A
-----------------------------------------------------------------------------------------------------------
September 1, 2006 -- -- --
September 30, 2006 N/A N/A
-----------------------------------------------------------------------------------------------------------
October 1, 2006 -- -- --
October 31, 2006 N/A N/A
-----------------------------------------------------------------------------------------------------------
November 1, 2006 -- -- --
November 30, 2006 N/A N/A
-----------------------------------------------------------------------------------------------------------
December 1, 2006-- -- --
December 31, 2006 N/A N/A
-----------------------------------------------------------------------------------------------------------
January 1, 2007 -- -- --
January 31, 2007 N/A N/A
-----------------------------------------------------------------------------------------------------------
February 1, 2007-- -- --
February 28, 2007 N/A N/A
-----------------------------------------------------------------------------------------------------------
March 1, 2007 -- -- --
March 31, 2007 N/A N/A
-----------------------------------------------------------------------------------------------------------
April 1, 2007 -- -- --
April 30, 2007 N/A N/A
-----------------------------------------------------------------------------------------------------------
May 1, 2007 -- -- --
May 31, 2007 N/A N/A
-----------------------------------------------------------------------------------------------------------
Total -- -- 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 Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's 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
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
July 19, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
July 19, 2007
/s/ Francis Smith
Francis Smith
Principal Financial Officer
July 19, 2007
14