We construct and study a triangulated category of motives with modulus MDM eff gm over a field k that extends Voevodsky's category DM eff gm in such a way as to encompass nonhomotopy invariant phenomena. In a similar way as DM eff gm is constructed out of smooth k-varieties, MDM eff gm is constructed out of proper modulus pairs, introduced in Part I of this work. To such a modulus pair we associate its motive in MDM eff gm . In some cases the Hom group in MDM eff gm between the motives of two modulus pairs can be described in terms of Bloch's higher Chow groups.