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: 811-03162 Active Assets Tax-Free Trust (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: June 30, 2006 Date of reporting period: December 31, 2005 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Active Assets Tax-Free Trust performed during the semiannual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT A MUTUAL FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT RISKS. FUND REPORT For the six months ended December 31, 2005 MARKET CONDITIONS During the semiannual period ended December 31, 2005, the economy continued to grow at a good pace, despite soaring oil prices and the Gulf Coast hurricanes. Gains in employment were respectable, and consumer confidence and spending remained largely intact. Against this backdrop, the Federal Open Market Committee (the "Fed") continued to raise the federal funds target rate. Through a series of four increases of 25 basis points each, the Fed brought the target rate to 4.25 percent at the end of the period. Despite the Fed's steady course, yields in the tax-free money markets fluctuated during the period, with shorter-term variable rate demand obligations (VRDOs) demonstrating greater volatility than one-year notes. For the overall period, however, yields across the municipal money market sector ended sharply higher. PERFORMANCE ANALYSIS As of December 31, 2005, Active Assets Tax-Free Trust had net assets of approximately $4 billion and an average portfolio maturity of 35 days. For the six-month period ended December 31, 2005, the Fund provided a total return of 1.09 percent. For the seven-day period ended December 31, 2005, the Fund provided an effective annualized yield of 2.84 percent and a current yield of 2.81 percent, while its 30-day moving average yield for December was 2.58 percent. Past performance is no guarantee of future results. Throughout the period, we managed the portfolio according to our long-standing conservative discipline. Based on our view that short-term rates would continue to rise, the Fund was invested primarily in VRDOs. These securities offer daily or weekly reset features, which allowed the Fund to quickly benefit from rising short-term rates. To help offset the potential volatility associated with VRDOs without committing to the uncertainty of longer-dated municipal notes, we invested in fixed-rate tax-exempt commercial paper in the one- to three-month range. This strategy afforded us with the flexibility to invest in higher-yielding securities as they came to market. We used our research-intensive approach to seek out investments that would add value while meeting our conservative, risk-conscious criteria. These included financings for rural schools with attractive debt characteristics and the issues of certain smaller municipalities. Additionally, we were able to increase the Fund's yield by taking advantage of seasonal imbalances in supply and demand. Generally, we favored notes with maturities in the three- to six-month range, while paring exposure to notes in the one-year range. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. 2 <Table> <Caption> PORTFOLIO COMPOSITION Variable Rate Municipal obligations 83.2% Tax-Exempt Commercial Paper 8.5 Municipal Notes & Bonds 8.3 </Table> <Table> <Caption> MATURITY SCHEDULE 1 - 30 Days 83.8% 31 - 60 Days 2.1 61 - 90 Days 1.9 91 - 120 Days 1.7 121 + Days 10.5 </Table> Data as of December 31, 2005. Subject to change daily. All percentages for portfolio composition and maturity schedule are as a percentage of total 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. INVESTMENT STRATEGY THE FUND WILL INVEST IN HIGH QUALITY, SHORT-TERM SECURITIES THAT ARE NORMALLY MUNICIPAL OBLIGATIONS THAT PAY INTEREST EXEMPT FROM FEDERAL INCOME TAXES. THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., SEEKS TO MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE PRICE REMAINING STABLE AT $1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL VALUE OF YOUR INVESTMENT. AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 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 BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, 3 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. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 07/01/05 - 12/31/05. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds that have transactional costs, such as sales charges (loads), and redemption fees, or exchange fees. <Table> <Caption> BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 07/01/05 - 07/01/05 12/31/05 12/31/05 ------------- ------------- --------------- Actual (1.09% return)....................................... $1,000.00 $1,010.90 $2.47 Hypothetical (5% annual return before expenses)............. $1,000.00 $1,022.61 $2.48 </Table> - ------------------ * Expenses are equal to the Fund's annualized expense ratio of 0.49% multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 5 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- Short-Term Variable Rate Municipal Obligations (86.5%) Arizona $ 15,000 McAllister Academic Village LLC, Arizona State University Ser 2005 A (Ambac)..................................... 3.51% 01/09/06 $ 15,000,000 5,000 Pima County Industrial Development Authority, El Dorado Hospital Ser 2004...................................... 3.55 01/09/06 5,000,000 8,805 Sun Devil Energy Center LLC, Arizona State University Ser 2004 (FGIC)............................................ 3.53 01/09/06 8,805,000 2,900 University of Arizona, Student Union Bookstore Ser 1999 COPs (Ambac)........................................... 3.38 01/09/06 2,900,000 California 1,700 East Bay Municipal Utility District, Water System Sub Refg Ser 2005 B-1 (XLCA)........................... 3.43 01/09/06 1,700,000 4,000 Hacienda-La Puente Unified School District, 2000 Ser B P-FLOATs PT-1988 (FSA)................................. 3.53 01/09/06 4,000,000 1,900 Los Angeles Department of Water & Power, Water System Ser 2001 B Subser B-1...................................... 3.55 01/09/06 1,900,000 5,800 Pittsburg Redevelopment Agency, Los Medanos Community Development Sub 2004 Ser A (Ambac)..................... 3.75 01/03/06 5,800,000 Colorado 12,000 Broomfield Urban Renewal Authority, Broomfield Event Center Ser 2005........................................ 3.53 01/09/06 12,000,000 Colorado Health Facilities Authority, 8,700 Catholic Health Initiatives Ser 2004 B-4............... 3.40 01/09/06 8,700,000 20,000 NCMC Inc Ser 2005 (FSA)................................ 3.48 01/09/06 20,000,000 1,100 Sisters of Charity of Leavenworth Health System Ser 2002................................................... 3.58 01/09/06 1,100,000 15,000 Colorado Student Obligation Bond Authority, Ser 1989 A (Ambac) (AMT).......................................... 3.55 01/09/06 15,000,000 8,000 Denver Urban Renewal Authority, Stapleton Senior Tax Increment Ser 2004 A-1 P-FLOATs PT 999................. 3.60 01/09/06 8,000,000 16,720 Midcities Metropolitan School District No 1, STARS BNP Ser 2004-110........................................... 3.58 01/09/06 16,720,000 31,450 University of Colorado Hospital Authority, Ser 2004 A (FSA).................................................. 3.48 01/09/06 31,450,000 14,010 Westminster, Multifamily Housing Camden Arbors Apartments Ser 2004............................................... 3.52 01/09/06 14,010,000 Delaware 7,700 Delaware Economic Development Authority, St Andrew's School Ser 2004........................................ 3.55 01/09/06 7,700,000 8,965 New Castle County, University Courtyard Apartments Ser 2005................................................... 3.54 01/09/06 8,965,000 2,745 University of Delaware, Ser 2001 B....................... 3.65 01/03/06 2,745,000 District of Columbia 3,500 District of Columbia, Public Welfare Foundation Ser 2000................................................... 3.55 01/09/06 3,500,000 </Table> See Notes to Financial Statements 6 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- Florida $ 24,500 Collier County Health Facilities Authority, The Moorings Inc Ser 2005........................................... 3.40% 01/09/06 $ 24,500,000 22,250 Dade County Industrial Development Authority, Dolphins Stadium Ser 1985 B & C................................. 3.55 01/09/06 22,250,000 7,325 Florida Housing Finance Corporation, Monterey Lakes Apartments 2005 Ser C.................................. 3.59 01/09/06 7,325,000 11,100 Jacksonville Health Facilities Authority, Baptist Medical Center Ser 2003 A...................................... 3.75 01/03/06 11,100,000 35,000 Miami-Dade County, Water & Sewer System Ser 2005 (FSA)... 3.51 01/09/06 35,000,000 12,735 Orange County Housing Finance Authority, Post Lakes Apartments Ser 1997 F.................................. 3.54 01/09/06 12,735,000 18,300 Orlando Utilities Commission, Water & Electric Ser 2002 A...................................................... 3.33 01/09/06 18,300,000 4,180 Palm Beach County School Board, Ser 2004 A COPs ROCs II-R Ser 6008 (FGIC)........................................ 3.55 01/09/06 4,180,000 9,690 Pasco County School Board, Ser 1996 COPs (Ambac)......... 3.51 01/09/06 9,690,000 1,070 Polk County School Board, Ser 2003 A COPs (FSA).......... 3.39 01/09/06 1,070,000 33,695 Port St Lucie, Utility System Ser 2005 (MBIA)............ 3.51 01/09/06 33,695,000 18,000 Tampa Bay Water, Utility Systems Ser 2002 (AMT).......... 3.60 01/09/06 18,000,000 Georgia 19,500 Albany-Dougherty County Hospital Authority, Phoebe Putney Memorial Hospital Ser 1991 (Ambac)..................... 3.50 01/09/06 19,500,000 Atlanta, 11,625 Airport Ser 2003 RF B-2 (MBIA)......................... 3.52 01/09/06 11,625,000 3,990 Airport Ser 2004 A MERLOTs Ser C14 (FSA) (AMT)......... 3.59 01/09/06 3,990,000 7,900 Water & Wastewater Ser 2001 B (FSA).................... 3.40 01/09/06 7,900,000 10,430 Atlanta & Fulton County Recreation Authority, Park Improvement Ser 2005 A TOCs Ser V V (MBIA)............. 3.55 01/09/06 10,430,000 13,000 DeKalb County Hospital Authority, DeKalb Medical Center Ser 2005............................................... 3.55 01/09/06 13,000,000 2,600 Hapeville Development Authority, Hapeville Hotel Ltd Ser 1998................................................... 3.72 01/03/06 2,600,000 Hawaii 13,690 Hawaii, ROCs II-R Ser 6012............................... 3.56 01/09/06 13,690,000 Illinois 14,800 Bi-State Development Agency of the Missouri-Illinois Metropolitan District, Metrolink Cross County Extension Ser 2002 A (FSA)....................................... 3.40 01/09/06 14,800,000 Chicago, 9,960 2004 Ser A P-FLOATs PT-2361 (FSA)...................... 3.55 01/09/06 9,960,000 89,000 Chicago O'Hare International Airport Third Lien Ser 2005 C & D (CIFG)................................ 3.51 01/09/06 89,000,000 8,910 Eagle Ser 20041002 Class A (FGIC)...................... 3.56 01/09/06 8,910,000 17,900 Neighborhoods Alive Ser 21 B (MBIA).................... 3.55 01/09/06 17,900,000 </Table> See Notes to Financial Statements 7 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- $ 11,430 Chicago Board of Education, Ser 2005 MERLOTs Ser A-15 (Ambac)................................................ 3.54% 01/09/06 $ 11,430,000 30,500 Cook County, Ser 2002 B.................................. 3.52 01/09/06 30,500,000 12,400 Glendale Heights, Glendale Lakes Project Ser 2000........ 3.52 01/09/06 12,400,000 Illinois Health Facilities Authority, 76,250 Northwestern Memorial Hospital Ser 1995................ 3.58 01/09/06 76,250,000 2,000 Northwestern Memorial Hospital Ser 2004 B Subser 2004B-2................................................ 3.68 01/03/06 2,000,000 23,900 OSF Healthcare System Ser 2002......................... 3.70 01/03/06 23,900,000 11,595 Kane, Cook & DuPage Counties, School District #U-46 PUTTERs Ser 426 (Ambac)................................ 3.58 01/09/06 11,595,000 5,020 Metropolitan Pier & Exposition Authority, McCormick Place Expansion Ser 2002 A Eagle #20040030 Class A (MBIA).... 3.56 01/09/06 5,020,000 17,500 Regional Transportation Authority, Refg Ser 2005 B....... 3.55 01/09/06 17,500,000 12,445 Roaring Fork Municipal Products, Cook County Class A Certificates Ser 2004-1 (Ambac)........................ 3.59 01/09/06 12,445,000 9,000 University of Illinois, Auxiliary Facilities System Ser 2005 B (FSA)........................................... 3.48 01/09/06 9,000,000 Indiana 7,140 Franklin Community Multi-School Building Corporation, Ser 2004 ROCs II-R Ser 2140 (FGIC)......................... 3.56 01/09/06 7,140,000 19,000 Indiana Health Facilities Financing Authority, Ascension Health Ser 2001 A...................................... 2.74 07/03/06 19,000,000 2,235 Indianapolis, Health Quest Realty XXI Ser 1994 A TOBs (FHA).................................................. 3.69 01/09/06 2,235,000 15,000 Indianapolis Local Public Improvement Bond Bank, Ser 2005 E (Ambac).............................................. 3.53 01/09/06 15,000,000 1,300 Merrillville, Southlake Care Center Ser 1992 A TOBs (FHA).................................................. 3.69 01/09/06 1,300,000 8,300 Purdue University, Student Facilities System Ser 2005 A...................................................... 3.37 01/09/06 8,300,000 2,250 South Bend, Fountainview Place Ser 1992 A TOBs (FHA)..... 3.69 01/09/06 2,250,000 5,765 University of Southern Indiana, Student Fee ROCs II-R Ser 2117 (Ambac)........................................... 3.56 01/09/06 5,765,000 11,060 Zionsville Community School Building Corporation, Boone County Ser 2005A P-FLOATs PT-2870 (FSA)................ 3.55 01/09/06 11,060,000 Kansas 30,315 Kansas Department of Transportation, Highway Ser 2004 C-2.................................................... 3.48 01/09/06 30,315,000 11,300 Wichita, St Francis Regional Medical Center P-FLOATs MT-170 (MBIA).......................................... 3.55 01/09/06 11,300,000 Kentucky 22,500 Kenton County Airport Board, Flight Safety International Inc Ser 2001A (AMT).................................... 3.55 01/09/06 22,500,000 36,585 Ohio County, Big Rivers Electric Corp Ser 1983 (Ambac)... 3.57 01/09/06 36,585,000 Maryland 7,000 Maryland Health & Higher Educational Facilities Authority, Catholic Health Initiatives Ser 1997 B...... 3.58 01/09/06 7,000,000 </Table> See Notes to Financial Statements 8 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- Massachusetts $ 24,100 Massachusetts, Ser 2005 A................................ 3.50% 01/09/06 $ 24,100,000 30,000 Massachusetts Bay Transportation Authority, Ser 2000..... 3.40 01/09/06 30,000,000 Massachusetts Development Finance Agency, 11,505 Dana Hall School Ser 2004.............................. 3.52 01/09/06 11,505,000 10,715 New Jewish High School Ser 2002........................ 3.51 01/09/06 10,715,000 67,040 Massachusetts Health & Educational Facilities Authority, Partners Healthcare System Inc 2003 Ser D-4 & 2005 Ser F-3.................................................... 3.52 01/09/06 67,040,000 29,100 Massachusetts Water Resources Authority, Multi-Modal Sub 2000 Ser C (FGIC)...................................... 3.54 01/09/06 29,100,000 Michigan Detroit, 30,240 Sewage Disposal System Senior Lien Ser 2001 C-1 (FSA).................................................. 3.40 01/09/06 30,240,000 38,300 Water Supply System Refg Second Lien Ser 2001-C (FGIC)................................................. 3.57 01/09/06 38,300,000 9,790 Water Supply System Refg Senior Lien Ser 2003-D (MBIA)................................................. 3.58 01/09/06 9,790,000 10,850 Holt Public Schools, Ser 2002............................ 3.39 01/09/06 10,850,000 Kent Hospital Finance Authority, 21,500 Metropolitan Hospital Ser 2005B........................ 3.43 01/09/06 21,500,000 22,400 Spectrum Health Ser 2005 (FGIC)........................ 3.48 01/09/06 22,400,000 Michigan State University, 13,150 Ser 2002 A............................................. 3.70 01/03/06 13,150,000 27,200 Ser 2003 A............................................. 3.37 01/09/06 27,200,000 6,000 Michigan Strategic Fund, The Van Andel Research Institute Ser 2001............................................... 3.58 01/09/06 6,000,000 11,110 Oakland University, Ser 2001 (FGIC)...................... 3.55 01/09/06 11,110,000 25,860 Saline Area Schools, Ser 2002 B.......................... 3.39 01/09/06 25,860,000 Minnesota 27,300 Minneapolis, Guthrie Theater on the River Ser 2003 A..... 3.51 01/09/06 27,300,000 11,600 University of Minnesota Regents, Ser 1999 A.............. 3.58 01/09/06 11,600,000 Mississippi 23,000 Mississippi Development Bank, MGAM Natural Gas Supply 2005 Ser............................................... 3.60 01/09/06 23,000,000 66,700 Perry County, Leaf River Forest Products Inc Ser 2002.... 3.40 01/09/06 66,700,000 Missouri Missouri Health & Educational Facilities Authority, 9,700 SSM Health Care Ser 2005 C-1 (FSA)..................... 3.68 01/03/06 9,700,000 20,900 Stowers Institute Ser 2002 (MBIA)...................... 3.58 01/09/06 20,900,000 1,500 Washington University Ser 2000 B....................... 3.70 01/03/06 1,500,000 Nebraska American Public Energy Agency, 50,000 Gas Supply Ser 2005A................................... 3.60 01/09/06 50,000,000 </Table> See Notes to Financial Statements 9 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- $ 16,500 National Public Gas Agency 2003 Ser A.................. 3.41% 01/09/06 $ 16,500,000 7,000 Omaha, Eagle #2004001 Class A............................ 3.56 01/09/06 7,000,000 Nevada Clark County, 16,000 Airport Improvement Refg 1993 Ser A (MBIA)............. 3.49 01/09/06 16,000,000 16,000 Las Vegas-McCarran International Airport Passenger Facility 2005 Ser A (MBIA) (AMT)..................... 3.54 01/09/06 16,000,000 New Mexico 35,000 New Mexico Hospital Equipment Loan Council, Presbyterian Healthcare Services Ser 2005 (FSA)..................... 3.60 01/09/06 35,000,000 New York 15,000 Metropolitan Transportation Authority, Ser 2002 D-1 (FSA).................................................. 3.48 01/09/06 15,000,000 5,100 Monroe County Industrial Development Agency, St John Fisher College Ser 2005 (Radian)....................... 3.51 01/09/06 5,100,000 New York City, 4,150 Fiscal 2004 SubSer A-4................................. 3.34 01/09/06 4,150,000 22,000 Fiscal 2006 SubSer E-4................................. 3.51 01/09/06 22,000,000 37,000 New York City Industrial Development Agency, One Bryant Park LLC Ser 2004 A......................... 3.52 01/09/06 37,000,000 21,930 New York City Municipal Water Finance Authority, Fiscal 2003 Subser C-2................................. 3.50 01/09/06 21,930,000 30,265 New York State Dormitory Authority, Mental Health Services Facilities Ser 2003D-2F....................... 3.54 01/09/06 30,265,000 1,100 Suffolk County Water Authority, Ser 2003 BANs............ 3.49 01/09/06 1,100,000 North Carolina 1,500 Durham, Ser 1993A COPs................................... 3.55 01/09/06 1,500,000 30,020 Guilford County, Ser 2005 A & B.......................... 3.55 01/09/06 30,020,000 8,290 Mecklenburg County, Ser 2004 COPs........................ 3.52 01/09/06 8,290,000 North Carolina, 15,295 Ser 2002 E............................................. 3.53 01/09/06 15,295,000 34,160 Ser 2002 E............................................. 3.50 01/09/06 34,160,000 North Carolina Capital Facilities Agency, 13,500 Capital Area YMCA Ser 2002............................. 3.52 01/09/06 13,500,000 9,800 Durham Academy Ser 2001................................ 3.52 01/09/06 9,800,000 North Carolina Medical Care Commission, 27,000 Firsthealth of the Carolinas Ser 2002.................. 3.49 01/09/06 27,000,000 31,700 North Carolina Baptist Hospitals Ser 2000.............. 3.52 01/09/06 31,700,000 6,450 Rowan Regional Medical Center Ser 2004 ROCs II-R Ser 296 (FSA)........................................ 3.56 01/09/06 6,450,000 48,000 Raleigh, Downtown Improvement Ser 2005 B COPs............ 3.49 01/09/06 48,000,000 </Table> See Notes to Financial Statements 10 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- Ohio $ 4,000 Cincinnati City School District, Ser 2003 Eagle# 20040034 Class A (FSA).......................................... 3.55% 01/09/06 $ 4,000,000 60,605 Cleveland, Water 2004 Ser M (FSA)........................ 3.50 01/09/06 60,605,000 Ohio, 10,000 Common Schools Ser 2005 B.............................. 3.46 01/09/06 10,000,000 5,590 Ser 2004 P-FLOATs PT-2137.............................. 3.54 01/09/06 5,590,000 Oklahoma 13,600 Oklahoma Capital Improvement Authority, State Facilities Ser 2005 F P-FLOATs PT-3286 (Ambac).................... 3.55 01/09/06 13,600,000 8,000 Oklahoma Student Loan Authority, Ser 2005A (MBIA) (AMT).................................................. 3.55 01/09/06 8,000,000 Oklahoma Water Resources Board, State Loan Program 29,000 Ser 1994 A & 1999...................................... 2.80 03/01/06 29,000,000 6,830 Ser 1995............................................... 2.75 03/01/06 6,830,000 19,015 Ser 2001 & 2003 A...................................... 2.85 04/01/06 19,015,000 15,000 Tulsa County Industrial Authority, Capital Improvement Ser 2003 A............................................. 3.13 05/15/06 15,000,000 Oregon 15,000 Clackamas County Hospital Facility Authority, Legacy Health System Ser 2003................................. 3.50 01/09/06 15,000,000 4,500 Oregon Department of Administrative Services, Oregon Appropriation Ser 2003 Eagle # 20041010 Class A (FSA).................................................. 3.56 01/09/06 4,500,000 20,000 Oregon Health Sciences University, OHSU Medical Group Ser 2004 A................................................. 3.41 01/09/06 20,000,000 Pennsylvania 15,000 Dauphin County General Authority, Pinnacle Health System Ser 2005 (FSA)......................................... 3.48 01/09/06 15,000,000 20,000 Easton Area School District, Ser 2005 (FSA).............. 3.53 01/09/06 20,000,000 32,300 Geisinger Authority, Geisinger Health System Ser 2005 C...................................................... 3.70 01/03/06 32,300,000 11,300 Northampton County Higher Education Authority, Lafayette College Ser 1998 A..................................... 3.37 01/09/06 11,300,000 15,000 Pennsylvania Higher Education Assistance Agency, Student Loan 2001 Ser A (Ambac) (AMT).......................... 3.60 01/09/06 15,000,000 29,900 Pennsylvania Turnpike Commission, 2002 Ser A-2........... 3.58 01/09/06 29,900,000 Philadelphia Hospitals & Higher Education Facilities Authority, 5,700 Children's Hospital of Philadelphia Ser 2002 B......... 3.70 01/09/06 5,700,000 7,000 Temple University Health System 2005 Ser C............. 3.40 01/09/06 7,000,000 Philadelphia Industrial Development Authority, 28,600 Girard Estate Aramark Tower Ser 2002................... 3.58 01/09/06 28,600,000 16,500 New Courtland Elder Services Ser 2003.................. 3.65 01/03/06 16,500,000 22,300 York General Authority, Harrisburg School District SubSer 1996 B (Ambac)......................................... 3.52 01/09/06 22,300,000 </Table> See Notes to Financial Statements 11 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- Rhode Island $ 6,000 Rhode Island Convention Center Authority, Refg 2001 Ser A (MBIA)................................. 3.40% 01/09/06 $ 6,000,000 Rhode Island Health & Educational Building Corporation, 20,000 Brown University 2005 Ser A............................ 3.50 01/09/06 20,000,000 10,000 Meeting Street Center Ser 2005......................... 3.40 01/09/06 10,000,000 South Carolina 25,000 Charleston Educational Excellence Finance Corporation, Charleston County School District Ser 2005 ROCs II-R Ser 471................................................ 3.56 01/09/06 25,000,000 13,100 Florence County, McLeod Regional Medical Center Ser 1985 A (FGIC)............................................... 3.40 01/09/06 13,100,000 5,000 Greenwood County, Fuji Photo Film Inc Ser 2004 (AMT)..... 3.69 01/09/06 5,000,000 11,000 South Carolina Jobs Economic Development Authority, Borroughs & Chapin Business Park Ser 2002.............. 3.60 01/09/06 11,000,000 4,555 South Carolina Public Service Authority, ROCs II-R Ser 6007 (Ambac)........................................... 3.56 01/09/06 4,555,000 Tennessee 13,000 Chattanooga Health, Educational & Housing Facility Board, The Baylor School Ser 2004............................. 3.55 01/09/06 13,000,000 10,200 Clarksville Public Building Authority, Pooled Financing Ser 2001............................................... 3.75 01/03/06 10,200,000 16,700 Greeneville Health & Educational Facilities Board, Laughlin Memorial Hospital Ser 2004.................... 3.55 01/09/06 16,700,000 9,955 Jackson Health, Educational & Housing Facility Board, Union University Ser 2005.............................. 3.55 01/09/06 9,955,000 3,500 Memphis Airport, Refg Ser 1995 B (AMT)................... 3.65 01/09/06 3,500,000 Metropolitan Government of Nashville & Davidson County Health & Educational Facilities Board, 7,600 Ensworth School Ser 2002............................... 3.55 01/09/06 7,600,000 7,395 Mary Queen of Angels Inc Ser 2000...................... 3.55 01/09/06 7,395,000 23,960 Vanderbilt University Ser 2005 A-2..................... 3.44 01/09/06 23,960,000 25,500 Montgomery County Public Building Authority, Pooled Financing Ser 1999..................................... 3.55 01/09/06 25,500,000 9,000 Sevier County Public Building Authority, Local Government Public Improvement Ser 6 A-1........................... 3.80 01/03/06 9,000,000 22,000 Shelby County Health, Educational & Housing Facilities Board, Baptist Memorial Health Care Ser 2004 A P-FLOATs PA-1277................................................ 3.56 01/09/06 22,000,000 Texas 6,800 Bell County Health Facilities Development Corporation, Scott & White Memorial Hospital Ser 2001-1 (MBIA) & Ser 2001-2 (MBIA).................................... 3.70 01/09/06 6,800,000 4,730 Bexar County Housing Finance Corporation, Multi-Family P-FLOATs PT-2082....................................... 3.55 01/09/06 4,730,000 </Table> See Notes to Financial Statements 12 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- $ 24,655 Coastal Bend Health Facilities Development Corporation, Christus Health Ser 2005 Subser B-3 (Ambac)............ 3.49% 01/09/06 $ 24,655,000 4,500 Cypress-Fairbanks Indepedent School District, Ser 2004 MERLOTs Ser C16........................................ 3.54 01/09/06 4,500,000 10,000 Dallas, Ser 2005 ROCs II-R Ser 472....................... 3.56 01/09/06 10,000,000 6,155 Dallas Independent School District, Ser 2004A ROCs II-R Ser 6038............................................... 3.56 01/09/06 6,155,000 8,605 El Paso Independent School District, Ser 2004 A ROCs II-R Ser 2129............................................... 3.56 01/09/06 8,605,000 19,519 Garland Health Facilities Development Corporation, Chambrel Club Hill Ser 2002............................ 3.54 01/09/06 19,519,000 Harris County Health Facilities Development Corporation, 11,900 Christus Health Ser 2005 Subser A-1 (Ambac)............ 3.49 01/09/06 11,900,000 76,200 Methodist Hospital System Ser 2005 B................... 3.70 01/03/06 76,200,000 117,840 St Luke's Episcopal Hospital Ser 2001 B................ 3.70 01/03/06 117,840,000 10,700 Young Men's Christian Association of Greater Houston Area Ser 1999............................................. 3.70 01/03/06 10,700,000 29,700 Harris County Industrial Development Corporation, Baytank Inc Ser 1998........................................... 3.58 01/09/06 29,700,000 5,165 Houston, Combined Utility System Ser 2004 ROCs II-R Ser 4559 (FSA)............................................. 3.56 01/09/06 5,165,000 11,000 Lower Neches Valley Authority, Chevron USA Inc Ser 1987................................................... 2.83 02/15/06 11,000,000 Northside Independent School District, 5,345 Ser 2003 P-FLOATs PT-2254.............................. 3.55 01/09/06 5,345,000 43,000 Ser 2005............................................... 2.85 06/15/06 43,000,000 9,080 Roaring Fork Municipal Products, Dallas Indepedent School District Class A Certificates Ser 2004-6............... 3.59 01/09/06 9,080,000 San Antonio, 5,985 ROCs II-R Ser 6003 (FSA)............................... 3.56 01/09/06 5,985,000 20,300 Water System Sub Lien Ser 2003 B (MBIA)................ 3.50 01/09/06 20,300,000 6,705 Texas Department of Housing & Community Affairs, High Point III Development Ser 1993 A....................... 3.59 01/09/06 6,705,000 18,685 Texas Municipal Gas Corporation, Senior Lien Ser 1998 (FSA).................................................. 3.51 01/09/06 18,685,000 8,700 Texas Transportation Commission, Mobility Fund Ser 2005-B................................................. 3.37 01/09/06 8,700,000 2,980 Texas Water Development Board, Revolving Fund Senior Lien Ser 2000 A P-FLOATs PT-2187............................ 3.53 01/09/06 2,980,000 Utah Intermountain Power Agency, 24,600 1985 Ser E (Ambac) & 1985 F (Ambac).................... 3.20 06/01/06 24,600,000 35,900 1985 F (Ambac)......................................... 2.75 03/15/06 35,900,000 3,200 Murray City, IHC Health Services Inc Ser 2005 B.......... 3.70 01/03/06 3,200,000 </Table> See Notes to Financial Statements 13 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------- Various States $ 18,900 Municipal Securities Pooled Trust Receipts, Various States Ser 2004 SG P-18................................ 3.66% 01/09/06 $ 18,900,000 Vermont 11,000 Vermont Housing Finance Agency, West Block University of Vermont Apartments Ser 2004 A.......................... 3.53 01/09/06 11,000,000 Virginia 16,000 Chesapeake Hospital Authority, Chesapeake General Hospital Ser 2001A..................................... 3.55 01/09/06 16,000,000 34,700 Fairfax County Industrial Development Authority, Inova Health System Foundation Ser 2005 A-2 & C-2...... 3.47 01/09/06 34,700,000 41,100 Loudoun County Industrial Development Authority, Howard Hughes Medical Institute Ser 2003 F.................... 3.48 01/09/06 41,100,000 Washington 6,050 Bellevue, Ser 2004 Eagle# 20041011 Class A (MBIA)........ 3.56 01/09/06 6,050,000 4,165 Pierce County, Puyallup School District No 3 PUTTERs Ser 415 (FSA).............................................. 3.55 01/09/06 4,165,000 4,900 Washington Health Care Facilities Authority, Providence Services Ser 2002 A (MBIA)............................. 3.70 01/03/06 4,900,000 Wisconsin 9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT)............. 3.76 01/09/06 9,500,000 6,260 Wisconsin Clean Water, 2004 Ser 1 ROCs II-R Ser 2165 (MBIA)................................................. 3.56 01/09/06 6,260,000 3,250 Wisconsin Health & Educational Facilities Authority, Ministry Health Care PUTTERs Ser 399 (MBIA)............ 3.55 01/09/06 3,250,000 Wyoming 35,000 Campbell County, Elk Power Generation Station Ser 2005 B (AMT).................................................. 3.35 11/30/06 35,000,000 Puerto Rico 11,795 Puerto Rico Public Improvement, Ser 2001-1 TOCs (FSA).... 3.53 01/09/06 11,795,000 -------------- Total Short-Term Variable Rate Municipal Obligations (Cost $3,453,029,000)............................................................. 3,453,029,000 -------------- </Table> See Notes to Financial Statements 14 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> YIELD TO PRINCIPAL MATURITY AMOUNT IN COUPON MATURITY ON DATE OF THOUSANDS RATE DATE PURCHASE VALUE - --------------------------------------------------------------------------------------------------------- Tax-Exempt Commercial Paper (8.8%) Florida Palm Beach County, $ 11,500 Sales Tax Ser 2005....................... 2.82% 01/19/06 2.82% $ 11,500,000 18,000 Sales Tax Ser 2005....................... 3.08 02/22/06 3.08 18,000,000 Hawaii 9,000 Honolulu, Ser 2005 W....................... 2.85 01/19/06 2.85 9,000,000 22,300 Honolulu City & County, Ser H.............. 2.85 02/16/06 2.85 22,300,000 Illinois 8,100 Chicago, Water System 2004 Ser A........... 2.95 05/12/06 2.95 8,100,000 Kentucky Kentucky Asset Liability Commission, 34,000 General Fund Second Ser 2005 A-1......... 3.15 10/12/06 3.15 34,000,000 15,000 General Fund Second Ser 2005 A-2......... 3.15 10/11/06 3.15 15,000,000 Maryland 25,500 Montgomery County, 2002 Ser BANs........... 3.13 01/30/06 3.13 25,500,000 Nevada Clark County, 10,000 Flood Control Ser 2003 B................. 3.08 01/12/06 3.08 10,000,000 10,000 Sales Tax Ser 2004B...................... 3.10 01/24/06 3.10 10,000,000 26,000 Las Vegas Valley Water District, Water Ser 2004 B................................... 2.80 01/23/06 2.80 26,000,000 New York 35,000 New York City Municipal Water Finance Authority, Ser 5-B....................... 3.15 01/09/06 3.15 35,000,000 North Carolina 20,000 Board of Governors of the University of North Carolina, Chapel Hill Ser 2004 B... 2.80 01/26/06 2.80 20,000,000 Texas 24,000 Austin, Combined Utility Systems Ser A..... 3.10 01/24/06 3.10 24,000,000 8,600 Dallas Area Rapid Transit, Senior Sub Lien Ser 2001................................. 3.15 01/31/06 3.15 8,600,000 25,000 Houston, 1993 Ser A........................ 2.82 01/25/06 2.82 25,000,000 15,000 Houston Water & Sewer, Ser A............... 2.77 01/12/06 2.77 15,000,000 10,000 Lower Colorado River Authority, Transmission Service Corp Ser 2003....... 3.08 01/12/06 3.08 10,000,000 </Table> See Notes to Financial Statements 15 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> YIELD TO PRINCIPAL MATURITY AMOUNT IN COUPON MATURITY ON DATE OF THOUSANDS RATE DATE PURCHASE VALUE - --------------------------------------------------------------------------------------------------------- $ 9,000 San Antonio, Water System Ser 2001 A....... 3.15% 03/09/06 3.15% $ 9,000,000 15,000 Texas Department of Transportation, Highway Ser 2005 A............................... 2.82 01/11/06 2.82 15,000,000 -------------- Total Tax-Exempt Commercial Paper (Cost $351,000,000)...................... 351,000,000 -------------- Short-Term Municipal Notes & Bonds (8.7%) Illinois 45,000 Illinois, Certificates Ser 2005, dtd 11/22/05................................. 4.50 04/28/06 3.14 45,196,504 Indiana 35,000 Indiana Bond Bank, Midyear Funding Notes Ser 2005 A, dtd 06/16/05................. 3.50 01/27/06 2.50 35,025,368 12,000 Indianapolis Local Public Improvement Bond Bank, Ser 2005 F Notes, dtd 07/14/05..... 4.00 01/06/06 2.60 12,002,725 Maryland 12,445 Maryland Community Development Administration, Department of Housing & Community Development Residential Notes 2005 Ser F, dtd 11/10/05................. 3.12 11/24/06 3.12 12,445,000 Massachusetts 6,200 Cape Cod Regional Transit Authority, Ser 2005 RANs, dtd 07/28/05.............. 4.00 07/28/06 3.00 6,234,436 12,000 Montachusett Regional Transit Authority, Ser 2005 RANs, dtd 06/17/05.............. 4.00 06/16/06 3.03 12,051,642 5,143 Nashoba Regional School District, Ser 2005 BANs, dtd 09/02/05.............. 4.00 01/03/06 2.79 5,143,504 10,000 Pioneer Valley Transit Authority, Ser 2004 RANs, dtd 08/05/05....................... 4.00 08/03/06 3.05 10,054,253 4,000 Wachusett Regional School District, Ser 2005 RANs, dtd 07/15/05.............. 3.75 06/30/06 2.77 4,018,927 Michigan 8,000 Michigan Municipal Bond Authority, Ser 2005 C, dtd 08/19/05.......................... 4.25 08/18/06 3.03 8,059,648 New Jersey 20,000 Barnegat Township Board of Education, 2005 Temporary Notes, dtd 07/07/05............ 3.50 07/07/06 2.75 20,075,097 10,900 Hudson County, Ser 2005 BANs, dtd 09/21/05................................. 4.00 09/20/06 3.00 10,975,721 21,000 New Jersey, Ser Fiscal 2005-6 A TRANs, dtd 08/03/05............................. 4.00 06/23/06 3.23 21,071,618 </Table> See Notes to Financial Statements 16 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued <Table> <Caption> YIELD TO PRINCIPAL MATURITY AMOUNT IN COUPON MATURITY ON DATE OF THOUSANDS RATE DATE PURCHASE VALUE - --------------------------------------------------------------------------------------------------------- New York Board of Cooperative Educational Services, $ 6,000 Oswego County School District Ser 2005 RANs, dtd 06/23/05..................... 4.00% 06/23/06 2.85% $ 6,031,978 3,500 Suffolk County First Supervisory District Ser 2005 RANs, dtd 07/01/05............ 3.75 06/29/06 2.84 3,515,273 8,574 Burnt Hills-Ballston Lake Central School District, Ser 2005 B BANs, dtd 07/07/05................................. 3.75 07/07/06 2.74 8,617,411 10,000 Gloversville City School District, Ser 2005 BANs, dtd 12/01/05....................... 4.50 09/28/06 3.33 10,084,541 4,500 Hastings, Ser 2005 BANs, dtd 07/15/05...... 3.25 07/14/06 3.03 4,505,183 16,000 Hempstead Union Free School District, TANs Ser 2005, dtd 08/17/05................... 4.25 06/29/06 3.15 16,084,486 8,000 Marlboro Central School District, Ser 2005 BANs, dtd 09/08/05....................... 4.25 04/13/06 3.05 8,026,695 8,000 Spencer-Van Etten Central School District, Ser 2005 BANs, dtd 06/17/05.............. 4.25 06/15/06 2.83 8,050,230 7,000 Utica City School District, Ser 2005 RANs, dtd 06/23/05............................. 4.00 06/23/06 3.00 7,032,369 4,000 Vestal, Ser 2005 BANs, dtd 07/14/05........ 3.75 07/14/06 2.77 4,020,365 South Carolina 9,000 Aiken County Consolidated School District, Ser 2005 BANs, dtd 07/14/05.............. 3.25 07/14/06 2.55 9,002,206 18,000 Beaufort County School District, Ser 2005 A BANs, dtd 07/14/05....................... 3.15 07/14/06 2.65 18,003,146 Texas 41,000 Texas, Ser 2005 TRANs, dtd 09/01/05........ 4.50 08/31/06 3.23 41,328,259 -------------- Total Short-Term Municipal Notes & Bonds (Cost $346,656,585)............... 346,656,585 -------------- </Table> <Table> Total Investments (Cost $4,150,685,585) (a)....................... 104.0% 4,150,685,585 Liabilities in Excess of Other Assets............................. (4.0) (158,702,105) ----- -------------- Net Assets........................................................ 100.0% $3,991,983,480 ===== ============== </Table> See Notes to Financial Statements 17 Active Assets Tax-Free Trust PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2005 (UNAUDITED) continued - --------------------------------------------------- <Table> AMT Alternative Minimum Tax. BANs Bond Anticipation Notes. COPs Certificates of Participation. MERLOTs Municipal Exempt Receipts-Liquidity Option Tender. P-FLOATs Puttable Floating Option Tax-Exempt Receipts. PUTTERs Puttable Tax-Exempt Receipts. RANs Revenue Anticipation Notes. ROCs Reset Option Certificates. STARS Short Term Adjustable Rate Securities. TANs Tax Anticipation Notes. TOBs Tender Option Bonds. TOCs Tender Option Certificates. TRANs Tax and Revenue Anticipation Notes. + Rate shown is the rate in effect at December 31, 2005. Date on which the principal amount can be recovered through * demand. (a) Cost is the same for federal income tax purposes. Bond Insurance: - --------------- Ambac Ambac Assurance Corporation. CIFG CIFG Assurance North America Inc. FGIC Financial Guaranty Insurance Company. FHA Federal Housing Administration. FSA Financial Security Assurance Inc. MBIA Municipal Bond Investors Assurance Corporation. Radian Radian Asset Assurance Inc. XLCA XL Capital Assurance Inc. </Table> See Notes to Financial Statements 18 Active Assets Tax-Free Trust FINANCIAL STATEMENTS Statement of Assets and Liabilities December 31, 2005 (unaudited) <Table> Assets: Investments in securities, at value (cost $4,150,685,585)... $4,150,685,585 Cash........................................................ 36,997 Receivable for: Interest................................................ 18,987,770 Investments sold........................................ 801,955 Shares of beneficial interest........................... 77,478 Prepaid expenses and other assets........................... 114,194 -------------- Total Assets............................................ 4,170,703,979 -------------- Liabilities: Payable for: Investments purchased................................... 177,021,834 Investment advisory fee................................. 946,310 Distribution fee........................................ 339,594 Administration fee...................................... 169,797 Accrued expenses and other payables......................... 242,964 -------------- Total Liabilities....................................... 178,720,499 -------------- Net Assets.............................................. $3,991,983,480 ============== Composition of Net Assets: Paid-in-capital............................................. $3,991,944,058 Accumulated undistributed net investment income............. 39,422 -------------- Net Assets.............................................. $3,991,983,480 ============== Net Asset Value Per Share 3,991,984,076 shares outstanding (unlimited shares authorized of $.01 par value)............................... $1.00 ============== </Table> See Notes to Financial Statements 19 Active Assets Tax-Free Trust FINANCIAL STATEMENTS continued Statement of Operations For the six months ended December 31, 2005 (unaudited) <Table> Net Investment Income: Interest Income............................................. $45,176,473 ----------- Expenses Investment advisory fee..................................... 4,991,426 Distribution fee............................................ 1,683,181 Administration fee.......................................... 841,591 Transfer agent fees and expenses............................ 252,764 Registration fees........................................... 179,994 Custodian fees.............................................. 60,921 Professional fees........................................... 44,044 Shareholder reports and notices............................. 29,278 Trustees' fees and expenses................................. 21,302 Other....................................................... 71,858 ----------- Total Expenses.......................................... 8,176,359 ----------- Net Investment Income....................................... $37,000,114 =========== </Table> See Notes to Financial Statements 20 Active Assets Tax-Free Trust FINANCIAL STATEMENTS continued Statement of Changes in Net Assets <Table> <Caption> FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED DECEMBER 31, 2005 JUNE 30, 2005 ----------------- -------------- (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income....................................... $ 37,000,114 $ 38,653,262 Dividends to shareholders from net investment income........ (37,000,805) (38,652,509) Net increase (decrease) from transactions in shares of beneficial interest....................................... 1,135,402,174 (1,080,404) -------------- -------------- Net Increase (Decrease)................................. 1,135,401,483 (1,079,651) Net Assets: Beginning of period......................................... 2,856,581,997 2,857,661,648 -------------- -------------- End of Period (Including accumulated undistributed net investment income of $39,422 and $40,113, respectively)....................... $3,991,983,480 $2,856,581,997 ============== ============== </Table> See Notes to Financial Statements 21 Active Assets Tax-Free Trust NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005 (UNAUDITED) 1. Organization and Accounting Policies Active Assets Tax-Free Trust (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is to provide a high level of daily income which is exempt from federal income tax consistent with stability of principal and liquidity. The Fund was organized as a Massachusetts business trust on March 30, 1981 and commenced operations on July 7, 1981. The following is a summary of significant accounting policies: A. Valuation of Investments -- Portfolio securities are valued at amortized cost, which approximates market value. 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. 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 taxable and nontaxable income to its shareholders. Accordingly, no federal income tax provision is required. D. Dividends and Distributions to Shareholders -- The Fund records dividends and distributions to shareholders as of the close of each business day. E. Use of Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Advisory/ Administration Agreements Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Adviser"), the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.45% to the portion of the daily net assets not exceeding $500 million; 0.375% to the portion of the daily net assets exceeding $500 million but not exceeding $750 million; 0.325% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; 0.30% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.275% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.25% to the portion of the daily net assets exceeding $2 billion but not 22 Active Assets Tax-Free Trust NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005 (UNAUDITED) continued exceeding $2.5 billion; 0.225% to the portion of the daily net assets exceeding $2.5 billion but not exceeding $3 billion; 0.20% to the portion of the daily net assets exceeding $3 billion but not exceeding $15 billion; and 0.199% to the portion of the daily net assets exceeding $15 billion. 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, accrued daily and payable monthly, by applying the annual rate of 0.05% to the Fund's daily net assets. 3. Plan of Distribution Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator, is the distributor of the Fund's shares and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act, finances certain expenses in connection with the promotion of sales of Fund shares. Reimbursements for these expenses are made in monthly payments by the Fund to the Distributor, which will in no event exceed an amount equal to a payment at the annual rate of 0.15% of the Fund's average daily net assets during the month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal year will not be reimbursed by the Fund through payments accrued in any subsequent fiscal year. For the six months ended December 31, 2005, the distribution fee was accrued at the annual rate of 0.10%. 4. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales/maturities of portfolio securities for the six months ended December 31, 2005, aggregated $6,148,095,889 and $4,970,527,000, respectively. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, 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 the six months ended December 31, 2005, included in Trustees' fees and expenses in the Statement of Operations amounted to $3,698. At December 31, 2005, the Fund had an accrued pension liability of $63,307 which is included in accrued expenses in the Statement of Assets and Liabilities. 23 Active Assets Tax-Free Trust NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005 (UNAUDITED) continued 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 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. 5. Shares of Beneficial Interest Transactions in shares of beneficial interest, at $1.00 per share, were as follows: <Table> <Caption> FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED DECEMBER 31, 2005 JUNE 30, 2005 ----------------- --------------- (unaudited) Shares sold................................................. 8,749,112,827 11,647,980,944 Shares issued in reinvestment of dividends.................. 37,000,805 38,652,509 -------------- --------------- 8,786,113,632 11,686,633,453 Shares redeemed............................................. (7,650,711,458) (11,687,713,857) -------------- --------------- Net increase (decrease) in shares outstanding............... 1,135,402,174 (1,080,404) ============== =============== </Table> 6. Expense Offset The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by the Fund. 7. Legal Matters The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint, filed in the United States District Court Southern District of New York on April 16, 2004, generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to 24 Active Assets Tax-Free Trust NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005 (UNAUDITED) continued brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 9, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 25 Active Assets Tax-Free Trust FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period: <Table> <Caption> FOR THE SIX FOR THE YEAR ENDED JUNE 30, MONTHS ENDED ---------------------------------------------------- DECEMBER 31, 2005 2005 2004 2003 2002 2001 ----------------- -------- -------- -------- -------- -------- (unaudited) Selected Per Share Data: Net asset value, beginning of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- ------- ------- Net income from investment operations........... 0.011 0.013 0.005 0.008 0.014 0.033 Less dividends from net investment income....... (0.011) (0.013) (0.005) (0.008) (0.014) (0.033) ------- ------- ------- ------- ------- ------- Net asset value, end of period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======= ======= ======= ======= ======= ======= Total Return.................................... 1.09%(1) 1.32% 0.50% 0.81% 1.38% 3.34% Ratios to Average Net Assets: Expenses (before expense offset)................ 0.49%(2) 0.49% 0.48% 0.48% 0.48%(3) 0.48% Net investment income........................... 2.20%(2) 1.30% 0.50% 0.80% 1.38% 3.28% Supplemental Data: Net assets, end of period, in millions.......... $3,992 $2,857 $2,858 $3,116 $2,947 $3,075 </Table> - --------------------- <Table> (1) Not annualized. (2) Annualized. (3) Does not reflect the effect of expense offset of 0.01%. </Table> See Notes to Financial Statements 26 (This Page Intentionally Left Blank) TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo Chairman of the Board Ronald E. Robison President and Principal Executive Officer J. David Germany Vice President Dennis F. Shea Vice President Barry Fink Vice President Amy R. Doberman Vice President Carsten Otto Chief Compliance Officer Stefanie V. Chang Vice President Francis J. Smith Treasurer and Chief Financial Officer Thomas F. Caloia Vice President Mary E. Mullin Secretary TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (c) 2005 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Active Assets Tax-Free Trust Semiannual Report December 31, 2005 [MORGAN STANLEY LOGO] RA06-00099P-Y12/05 Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. 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 registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (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. 2 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. Active Assets Tax-Free Trust /s/ Ronald E. Robison - ------------------------------------- Ronald E. Robison Principal Executive Officer February 9, 2006 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 February 9, 2006 /s/ Francis Smith - ------------------------------------- Francis Smith Principal Financial Officer February 9, 2006 3