<Page>
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, 2004
Date of reporting period: June 30, 2004
Item 1 - Report to Shareholders
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WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN ACTIVE ASSETS TAX-FREE
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.
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 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.
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FUND REPORT
FOR THE YEAR ENDED JUNE 30, 2004
MARKET CONDITIONS
Perhaps the most significant event of the 12-month review period happened on its
final day. On June 30, 2004, the Federal Open Market Committee (the "Fed")
raised the federal funds rate target by 25 basis points, to 1.25 percent. Prior
to that, the target rate had been at a multidecade low for a full year. Indeed,
rates across the money market yield curve had steadily trended lower for several
years. The Fed's change had been widely anticipated; at the end of the period
the market reflected investors' general expectation that rates would rise still
further in the coming months as a result of mounting inflationary pressures.
For the year prior to the Fed's rate hike the municipal money markets were
largely mixed. At the outset of the period, the U.S. economy remained weak and
state governments were facing severe budgetary difficulties. Across the board,
municipalities sought ways to reduce expenditures and boost revenue through a
variety of tactics, including new fees and taxes, refinancing of existing debt
and, in some instances, borrowing to fund deficits. The economic and investment
environment both showed marked improvement in the spring of 2004, when continued
growth in employment and corporate profits alike resulted in improving outlooks
for municipal tax revenues. The money market yield curve -- the difference
between short- and longer-term yields -- steepened significantly over the first
six months of 2004, reflecting the market's expectation of further strength in
the U.S. economy.
PERFORMANCE ANALYSIS
As of June 30, 2004, Active Assets Tax-Free Trust had net assets of more than
$2.85 billion and an average portfolio maturity of 30 days. For the twelve-month
period ended June 30, 2004, the Fund provided a total return of 0.50 percent.
For the seven-day period ended June 30, 2004, the Fund provided an effective
annualized yield and a current yield both of 0.60 percent, while its 30-day
moving average yield for June was 0.58 percent. PAST PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS.
We were largely cautious in managing the Fund's portfolio during the period,
preferring to avoid the one-year segment of the money market in anticipation of
further yield increases there. As a result, the Fund's portfolio ended the
period with a weighted average maturity somewhat lower than has historically
been the case at this point in the year. We chose to emphasize short-term
variable-rate paper and shorter maturities of tax-exempt commercial paper in
order to minimize the potential adverse effects of rising interest rates. Given
the budgetary challenges facing many municipal governments, we remained highly
cautious in our security selection over the course of the review period.
2
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PORTFOLIO COMPOSITION
<Table>
Variable Rate Municipal Obligations 80.1%
Municipal Notes & Bonds 11.9
Tax-Exempt Commercial Paper 8.0
</Table>
MATURITY SCHEDULE
<Table>
1 - 30 Days 78.4%
31 - 60 Days 6.7
61 - 90 Days 5.3
91 - 120 Days 2.7
121 + Days 6.9
</Table>
DATA AS OF JUNE 30, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR PORTFOLIO
COMPOSITION AND MATURITY SCHEDULE ARE AS A PERCENTAGE OF TOTAL INVESTMENTS.
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 INVESTS IN HIGH QUALITY, SHORT-TERM DEBT OBLIGATIONS. IN SELECTING
INVESTMENTS, THE "INVESTMENT MANAGER," 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.
ANNUAL 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.
3
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ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS - JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (84.1%)
ALABAMA
$ 14,970 Morgan County-Decatur Health Care Authority,
General Hospital Ser 1994 PT-947 1.12% 07/08/04 $ 14,970,000
28,565 University of Alabama, Hospital Ser 2000 B (Ambac) 1.01 07/08/04 28,565,000
ARIZONA
9,800 University of Arizona, Arizona Board of Regents
Ser 2004 B (Ambac) 1.05 07/08/04 9,800,000
CALIFORNIA
11,100 Golden Empire Schools Financing Authority,
Kern High School District Ser 2001 1.03 07/08/04 11,100,000
COLORADO
15,000 Colorado Student Obligation Bond Authority,
Ser 1989 A (Ambac) (AMT) 1.10 07/08/04 15,000,000
DELAWARE
10,000 University of Delaware, Ser 1998 1.04 07/08/04 10,000,000
DISTRICT OF COLUMBIA
16,000 District of Columbia, George Washington University
Ser 1999 C (MBIA) 1.06 07/08/04 16,000,000
FLORIDA
22,250 Dade County Industrial Development Authority,
Dolphins Stadium Ser 1985 B & C 1.04 07/08/04 22,250,000
8,000 Jacksonville Economic Development Commission,
Florida Proton Therapy Institute Ser 2003 A 1.23 07/01/04 8,000,000
9,200 Jacksonville Electric Authority, Water & Sewer
System 2003 Ser B (XLCA) 1.06 07/08/04 9,200,000
500 Orange County School Board, 2000
Ser B COPs (Ambac) 1.06 07/01/04 500,000
44,150 Orlando-Orange County Expressway Authority,
Ser 2003C3 (FSA) & 2003C4 (FSA) 1.06 07/08/04 44,150,000
4,200 Palm Beach County School Board,
Ser 2004 A COPs ROCs II-R Ser 6008 (FGIC) 1.14 07/08/04 4,200,000
18,600 Tampa Bay Water, Utility System Ser 2002 (AMT) 1.15 07/08/04 18,600,000
16,340 Volusia County Health Facilities Authority,
Pooled Hospital Loan Ser 1985 (FGIC) 1.03 07/08/04 16,340,000
GEORGIA
21,000 Albany-Dougherty County Hospital Authority, Phoebe
Putney Memorial Hospital Ser 1991 (Ambac) 1.06 07/08/04 21,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
4
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<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------------------
$ 28,329 Burke County Development Authority, Oglethorpe
Power Co Ser 1994 A (FGIC) 1.04% 07/08/04 $ 28,329,000
2,000 Clayton County, Delta Airlines Inc 2000 A 1.10 07/08/04 2,000,000
13,600 Clayton County Hospital Authority, Southern Regional
Medical Center Ser 1998 B 1.08 07/08/04 13,600,000
47,315 Private Colleges & Universities Authority,
Emory University 2000 Ser B & 2001 Ser B 1.00 07/08/04 47,315,000
HAWAII
13,780 Hawaii, ROCs II-R Ser 6012 1.14 07/08/04 13,780,000
ILLINOIS
Chicago,
8,910 Eagle Ser 20041002 Class A (FGIC) 1.14 07/08/04 8,910,000
12,500 Neighborhoods Alive Ser 21 B (MBIA) 1.08 07/08/04 12,500,000
1,610 Chicago Board of Education, Ser 2000 B (FSA) 1.08 07/08/04 1,610,000
Chicago Metropolitan Water Reclamation District,
60,000 2002 Ser A 1.06 07/08/04 60,000,000
37,350 2002 Ser E 1.02 07/08/04 37,350,000
30,500 Cook County, Ser 2002 B 1.11 07/08/04 30,500,000
Illinois Development Finance Authority,
2,300 Jewish Federation of Metropolitan Chicago
Ser 2002 (Ambac) 1.10 07/01/04 2,300,000
8,000 Palos Community Hospital Ser 1998 1.08 07/08/04 8,000,000
1,500 Illinois Health Facilities Authority, Northwestern
Memorial Hospital Ser 2004 B Subser 2004 B-1 1.10 07/01/04 1,500,000
11,480 Kane, Cook & DuPage Counties,
School District #U-46 PUTTERs Ser 426 (Ambac) 1.12 07/08/04 11,480,000
12,550 Roaring Fork Municipal Products, Class A Certificates
Ser 2004-1 (Ambac) 1.16 07/08/04 12,550,000
INDIANA
Indiana Health Facility Financing Authority,
35,000 Ascension Health Ser 2001 A 0.98 07/02/04 35,000,000
35,000 Ascension Health Ser 2001 A (DD) 1.73 11/15/04 35,000,000
1,900 Clarian Health Obligated Group Ser 2000 B 1.08 07/01/04 1,900,000
4,000 Clarian Health Obligated Group Ser 2003 H 1.08 07/08/04 4,000,000
2,580 Indianapolis, Health Quest Realty XXI, Ser 1994 A
TOBs (FHA) 1.26 07/08/04 2,580,000
21,910 Indianapolis Local Public Improvement Bond Bank,
Ser 2002 F-2 (MBIA) (DD) 1.05 07/08/04 21,910,000
1,700 Merrillville, Southlake Care Center Ser 1992 A TOBs
(FHA) 1.26 07/08/04 1,700,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
5
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<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------------------
$ 2,515 South Bend, Fountainview Place Ser 1992 A TOBs
(FHA) 1.26% 07/08/04 $ 2,515,000
5,790 University of Southern Indiana, Student Fee ROCs II-R
Ser 2117 (Ambac) 1.14 07/08/04 5,790,000
KENTUCKY
4,200 Breckinridge County, Kentucky Association of
Counties Leasing Trust 2002 Ser A 1.10 07/01/04 4,200,000
22,500 Kenton County Airport Board, Flight Safety
International Inc Ser 2001A (AMT) 1.15 07/08/04 22,500,000
26,055 Louisville & Jefferson County Metropolitan
Sewer District, Sewer and Drainage
System Ser 2003 A (FSA) 1.05 07/08/04 26,055,000
LOUISIANA
12,100 New Orleans Aviation Board, Ser 1993 B (MBIA) 1.08 07/08/04 12,100,000
MARYLAND
5,000 Maryland Health & Higher Educational Facilities
Authority, Catholic Health Initiatives Ser 1997 B (DD) 1.00 07/08/04 5,000,000
MASSACHUSETTS
44,500 Massachusetts Bay Transportation Authority,
Ser 2000 1.02 07/08/04 44,500,000
11,505 Massachusetts Development Finance Agency, Dana
Hall School Ser 2004 1.07 07/08/04 11,505,000
22,100 Massachusetts Water Resources Authority,
Multi-Modal Sub 2001 Ser A (FGIC) 1.05 07/08/04 22,100,000
MICHIGAN
Detroit,
20,000 Sewage Disposal System Second Lien
Ser 2000 E (FGIC) 1.05 09/02/04 20,000,000
51,155 Sewage Disposal System Senior Lien
Ser 2001 C-1 (FSA) 1.08 07/08/04 51,155,000
Detroit,
25,000 Water Supply System Refg Second Lien
Ser 2001-C (FGIC) 1.05 07/08/04 25,000,000
8,300 Water Supply System Refg Senior Lien
Ser 2003-D (MBIA) 1.05 07/08/04 8,300,000
22,120 Holt Public Schools, Ser 2002 1.06 07/08/04 22,120,000
21,300 Michigan Housing Development Authority, Rental
Housing 2002 Ser B (MBIA) 1.06 07/08/04 21,300,000
6,000 Michigan Strategic Fund, The Van Andel Research
Institute Ser 2001 (DD) 1.08 07/08/04 6,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------------------
$ 9,500 Oakland University, Ser 2001 (FGIC) 1.06% 07/08/04 $ 9,500,000
5,000 Woodhaven-Brownstone School District,
Ser 2004 B 1.50 11/01/04 5,007,719
MINNESOTA
5,000 Minneapolis, Guthrie Theater on the River
Ser 2003 A 1.08 07/08/04 5,000,000
9,735 Minnesota Housing Finance Agency, Residential
Housing 2002 Ser C 1.20 05/18/05 9,735,000
6,500 University of Minnesota Regents, Ser 2001A 1.09 07/08/04 6,500,000
MISSISSIPPI
3,200 Jackson County, Chevron USA Inc Ser 1993 1.05 07/01/04 3,200,000
35,200 Mississippi, Capital Improvement Ser 2003 E (DD) 1.06 07/08/04 35,200,000
30,500 Perry County, Leaf River Forest Products Inc
Ser 2002 1.08 07/08/04 30,500,000
MISSOURI
25,000 Lee's Summit, Multifamily Housing Ser 2001 A 1.42 07/08/04 25,000,000
Missouri Health & Educational Facilities Authority,
4,800 Cox Health System Ser 1997 (MBIA) 1.08 07/01/04 4,800,000
38,600 Stowers Institute Ser 2000 (MBIA) & Ser 2002 (MBIA) 1.08 07/08/04 38,600,000
3,600 Washington University Ser 1985 A 1.04 07/08/04 3,600,000
1,600 Washington University Ser 2000 B 1.10 07/01/04 1,600,000
600 University of Missouri, Ser 2000 B 1.10 07/01/04 600,000
NEBRASKA
11,000 American Public Energy Agency, National Public
Gas Agency 2003 Ser A 1.05 07/08/04 11,000,000
Omaha,
7,000 Eagle # 2004001 Class A 1.14 07/08/04 7,000,000
5,445 Omaha Convention Center & Arena Ser 2004
PT-2141 1.12 07/08/04 5,445,000
NEVADA
28,700 Clark County, Airport Improvement Refg 1993 Ser A
(MBIA) (DD) 1.06 07/08/04 28,700,000
NEW HAMPSHIRE
16,000 New Hampshire Health & Education Facilities
Authority, Dartmouth College Ser 2002 1.01 07/08/04 16,000,000
NEW JERSEY
39,800 New Jersey Turnpike Authority, Ser 1991 D (FGIC) 1.05 07/08/04 39,800,000
NEW YORK
Jay Street Development Corporation,
500 Fiscal 2001 Ser A-1 1.00 07/08/04 500,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------------------
$ 1,400 Fiscal 2001 Ser A-3 1.07% 07/08/04 $ 1,400,000
10,000 Long Island Power Authority, Electric System
Ser 2 Subser 2A 1.00 07/08/04 10,000,000
1,200 Suffolk County Water Authority, Ser 2003 BANs 1.07 07/08/04 1,200,000
NORTH CAROLINA
10,800 Charlotte, Fiscal Year 2002 Ser C COPs 1.08 07/08/04 10,800,000
40,000 Charlotte-Mecklenburg Hospital Authority,
Health Care System Ser 1996 C 1.05 07/08/04 40,000,000
2,900 Durham, Ser 1993A COPs 1.09 07/08/04 2,900,000
Mecklenburg County,
12,625 Ser 2001 COPs 1.08 07/08/04 12,625,000
9,155 Ser 2004 COPs 1.07 07/08/04 9,155,000
57,000 North Carolina, Ser 2002 C 1.05 07/08/04 57,000,000
North Carolina Medical Care Commission,
32,600 Firsthealth of the Carolinas Ser 2002 1.07 07/08/04 32,600,000
600 Mission-St Joseph's Health System Ser 2003 1.13 07/08/04 600,000
33,400 North Carolina Baptist Hospitals Ser 2000 1.05 07/08/04 33,400,000
OHIO
5,625 Ohio, Ser 2004 PT-2137 1.12 07/08/04 5,625,000
OKLAHOMA
Oklahoma Water Resources Board, State Loan Program
8,610 Ser 1995 0.98 09/01/04 8,610,000
12,620 Ser 1999 1.02 09/01/04 12,620,000
25,000 Ser 2001 0.98 10/01/04 25,000,000
10,000 Tulsa County Industrial Authority, Capital Improvement
Ser 2003 A 1.40 11/15/04 10,000,000
OREGON
15,000 Clackamas County Hospital Facility Authority,
Legacy Health System Ser 2003 1.08 07/08/04 15,000,000
18,600 Oregon Health Sciences University, OHSU Medical
Group Ser 2004 A 1.06 07/08/04 18,600,000
PENNSYLVANIA
6,250 Geisinger Authority, Geisinger Health System
Ser 2000 1.10 07/01/04 6,250,000
20,635 Northampton County General Purpose Authority,
Lehigh University Ser 2000 B 1.06 07/08/04 20,635,000
Pennsylvania Higher Education Assistance Agency,
33,000 Student Loan 1988 Ser B (Ambac) (AMT) 1.05 07/08/04 33,000,000
15,000 Student Loan 2001 Ser A (Ambac) (AMT) 1.13 07/08/04 15,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------------------
$ 4,800 Pennsylvania Higher Educational Facilities Authority,
Carnegie Mellon University Ser 1995 B,C & D 1.10% 07/01/04 $ 4,800,000
25,000 Pennsylvania Turnpike Commission, 2002 Ser A-2 1.04 07/08/04 25,000,000
27,800 Philadelphia, Water & Wastewater Ser 2003 (FSA) 1.07 07/08/04 27,800,000
2,700 Philadelphia Hospitals & Higher Education Facilities
Authority, Children's Hospital of Philadelphia
Ser 2002 B 1.10 07/01/04 2,700,000
7,700 Philadelphia Industrial Development Authority, The Fox
Chase Cancer Center Ser 1997 1.10 07/01/04 7,700,000
38,300 Washington County Authority, The Trustees of the
University of Pennsylvania Ser 2004 (DD) 1.08 07/08/04 38,300,000
23,300 York General Authority, Harrisburg School District
Subser 1996B (Ambac) 1.09 07/08/04 23,300,000
RHODE ISLAND
23,520 Rhode Island Convention Center Authority,
Refg 2001 Ser A (MBIA) 1.08 07/08/04 23,520,000
16,000 Rhode Island Health & Educational Building
Corporation, Brown University 2003 Ser B 1.06 07/08/04 16,000,000
SOUTH CAROLINA
13,100 Florence County, McLeod Regional Medical Center
Ser 1985 A (FGIC) 1.08 07/08/04 13,100,000
24,000 Greenwood County, Fuji Photo Film Inc
Ser 2001 (AMT) 1.17 07/08/04 24,000,000
5,000 South Carolina Jobs Economic Development Authority,
Burroughs & Chapin Business Park Ser 2002 1.13 07/08/04 5,000,000
9,845 South Carolina Public Service Authority, ROCs II-R
Ser 2098 (Ambac) & Ser 6007 (Ambac) 1.14 07/08/04 9,845,000
TENNESSEE
Clarksville Public Building Authority,
16,890 Pooled Financing Ser 1997 1.08 07/08/04 16,890,000
2,150 Pooled Financing Ser 2001 1.10 07/01/04 2,150,000
6,500 Memphis, Airport Refg Ser 1995 B (AMT) 1.10 07/08/04 6,500,000
10,000 Metropolitan Government of Nashville & Davidson
County Health & Educational Facilities Board,
Ensworth School Ser 2002 1.08 07/08/04 10,000,000
47,770 Montgomery County Public Building Authority, Pooled
Financing Ser 1997 & 1999 1.08 07/08/04 47,770,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------------------
TEXAS
Bell County Health Facilities Development Corporation,
Scott & White Memorial Hospital
$ 6,370 Ser 2000B-1 (MBIA) & Ser 2000B-2 (MBIA) 1.10% 07/01/04 $ 6,370,000
19,970 Ser 2001-1 (MBIA) & Ser 2001-2 (MBIA) 1.10 07/01/04 19,970,000
1,795 Bexar County Housing Finance Corporation,
Multi-Family PT-2082 1.12 07/08/04 1,795,000
21,000 Brownsville, Utilities System Sub Lien
Ser 2002 B (MBIA) 1.03 07/08/04 21,000,000
19,519 Garland Health Facilities Development Corporation,
Chambrel Club Hill Ser 2002 1.08 07/08/04 19,519,000
Harris County Health Facilities Development Corporation,
56,700 Methodist Hospital Ser 2002 1.10 07/01/04 56,700,000
28,500 St Luke's Episcopal Hospital Ser 2001 B 1.10 07/01/04 28,500,000
3,400 Texas Medical Center Ser 1999 B (FSA) 1.10 07/01/04 3,400,000
26,500 Harris County Industrial Development Corporation,
Baytank Inc Ser 1998 1.04 07/08/04 26,500,000
5,190 Houston, Combined Utility System Ser 2004 ROCs II-R
Ser 4559 (FSA) 1.14 07/08/04 5,190,000
8,000 Lower Neches Valley Authority, Chevron USA Inc
Ser 1987 0.95 08/16/04 8,000,000
8,900 Mansfield Independent School District, ROCs II-R
Ser 6005 1.14 07/08/04 8,900,000
5,380 Northside Independent School District,
Ser 2003 PT-2254 1.11 07/08/04 5,380,000
San Antonio,
6,025 ROCs II-R Ser 6003 (FSA) 1.14 07/08/04 6,025,000
19,900 Water System Ser 2003 B (MBIA) 1.05 07/08/04 19,900,000
7,150 Texas Department of Housing and Community Affairs,
High Point III Development Ser 1993 A 1.06 07/08/04 7,150,000
23,640 Texas Municipal Gas Corporation, Senior Lien
Ser 1998 (FSA) 1.06 07/08/04 23,640,000
8,000 University of Texas System, Refg Ser 2001 A 1.04 07/08/04 8,000,000
8,800 West Side Calhoun County, Sohio Chemical Co
Ser 1985 1.10 07/01/04 8,800,000
UTAH
Intermountain Power Agency,
16,750 1985 Ser E (Ambac) 0.93 09/15/04 16,750,000
17,600 1985 Ser E (Ambac) 1.24 12/01/04 17,600,000
35,900 1985 Ser F (Ambac) 0.92 09/15/04 35,900,000
3,600 Murray City, IHC Health Services Inc Ser 2003 C 1.10 07/01/04 3,600,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------------------
$ 2,000 Salt Lake County, Service Station Holdings British
Petroleum Ser 1994B 1.10% 07/01/04 $ 2,000,000
VIRGINIA
12,500 Chesapeake Hospital Authority, Chesapeake
General Hospital Ser 2001A 1.08 07/08/04 12,500,000
7,590 Fairfax County, Ser 2004 A PUTTERs Ser 461 1.12 07/08/04 7,590,000
51,100 Loudoun County Industrial Development Authority,
Howard Hughes Medical Institute Ser 2003 F 1.05 07/08/04 51,100,000
WASHINGTON
3,595 King County School District #216, ROCs II-R
Ser 5026 (FSA) 1.14 07/08/04 3,595,000
4,195 Pierce County, Puyallup School District No 3 PUTTERs
Ser 415 (FSA) 1.12 07/08/04 4,195,000
15,000 Port of Seattle, 1997 Ser A (AMT) 1.14 07/08/04 15,000,000
6,800 Washington Health Care Facilities Authority,
Providence Services Ser 2002 A (MBIA) 1.10 07/01/04 6,800,000
WISCONSIN
9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT) 1.38 07/08/04 9,500,000
3,300 Wisconsin, PUTTERs Ser 417 (MBIA) 1.12 07/08/04 3,300,000
3,250 Wisconsin Health & Educational Facilities Authority,
Ministry Health Care PUTTERs Ser 399 (MBIA) 1.12 07/08/04 3,250,000
---------------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(COST $2,404,730,719) 2,404,730,719
---------------
<Caption>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------ -------- ----------
TAX-EXEMPT COMMERCIAL PAPER (8.4%)
ALABAMA
13,000 Montgomery County Industrial Development
Board, PECO Energy 1994 Ser A 1.10% 08/24/04 1.10% 13,000,000
COLORADO
7,500 Regional Transportation District, Sub Lien
Sales Tax Ser 2001 A 1.15 08/12/04 1.15 7,500,000
DISTRICT OF COLUMBIA
25,500 District of Columbia, The American National
Red Cross Ser 2000 1.07 07/19/04 1.07 25,500,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ------------------------------------------------------------------------------------------------------------------------
FLORIDA
$ 5,000 Collier County Health Facilities Authority,
Cleveland Clinic Health System
Ser 2003 C-2 1.15% 08/26/04 1.15% $ 5,000,000
15,000 Hillsborough County, Ser 2002 A 1.12 08/26/04 1.12 15,000,000
25,000 Jacksonville Electric Authority, 2000 Sub Ser F 1.00 08/10/04 1.00 25,000,000
17,445 Jacksonville Health Facilities Authority,
St Luke's Hospital Association Ser 2001 A 1.10 08/25/04 1.10 17,445,000
MARYLAND
20,000 Maryland Health & Higher Educational
Facilities Authority, The Johns Hopkins
Hospital Ser C 1.12 08/23/04 1.12 20,000,000
MASSACHUSETTS
8,500 Massachusetts Water Resources Authority,
Ser 1999 1.10 08/19/04 1.10 8,500,000
MINNESOTA
Rochester, Mayo Foundation/Mayo Medical Center
14,000 Ser 1992 C 1.12 08/24/04 1.12 14,000,000
10,000 Ser 2000 C 1.12 07/27/04 1.12 10,000,000
NEVADA
6,000 Las Vegas Valley Water District, Water
Ser 2004 A 0.95 07/20/04 0.95 6,000,000
NEW HAMPSHIRE
14,000 New Hampshire, Ser A 1998 BANs 1.10 07/14/04 1.10 14,000,000
PENNSYLVANIA
8,000 Montgomery County Industrial Development
Authority, PECO Energy Co 1994 Ser A 1.10 08/18/04 1.10 8,000,000
TENNESSEE
20,000 Shelby County Health Educational & Housing
Facilities Board, Baptist Memorial Hospital
Ser 2000 1.08 07/28/04 1.08 20,000,000
TEXAS
30,000 Dallas Area Rapid Transit, Senior Sub Lien
Ser 2001 1.10 07/28/04 1.10 30,000,000
---------------
TOTAL TAX-EXEMPT COMMERCIAL PAPER
(COST $238,945,000) 238,945,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL NOTES & BONDS (12.5%)
CALIFORNIA
$ 22,500 California School Cash Reserve Program
Authority, 2003 Pool Ser A (Ambac),
dtd 07/03/03 2.00% 07/06/04 0.90% $ 22,503,357
COLORADO
38,000 Colorado, Education Loan Ser 2003 B TRANs,
dtd 12/11/03 2.00 08/09/04 1.21 38,031,600
ILLINOIS
7,270 Chicago Park District, Tax Anticipation Warrants
Ser 2004 A, dtd 06/23/04 3.00 05/02/05 1.55 7,356,994
30,000 Illinois, Certificates Ser 2004, dtd 06/23/04 2.00 10/22/04 1.15 30,078,166
3,000 Illinois Finance Authority, Ser 2004-A
School Notes, dtd 02/25/04 1.80 12/01/04 0.96 3,006,836
INDIANA
Indiana Bond Bank,
25,000 Advance Funding Notes Ser 2004 A,
dtd 01/29/04 2.00 01/25/05 1.10 25,126,409
16,000 Midyear Funding Notes Ser 2004 A,
dtd 06/24/04 2.50 01/26/05 1.38 16,101,249
25,000 Indianapolis Local Public Improvement Bond Bank,
Ser 2004 B Notes, dtd 01/14/04 2.00 07/06/04 1.00 25,003,398
KENTUCKY
20,000 Kentucky Association of Counties Advance
Revenue Program, Ser 2004 A COPs TRANs,
dtd 07/01/04 (WI) 3.00 06/30/05 1.68 20,258,800
MICHIGAN
25,000 Michigan, Ser 2004 A, dtd 02/04/04 2.00 09/30/04 0.98 25,063,205
22,500 Michigan Municipal Bond Authority, Ser 2003 B-1,
dtd 08/20/03 2.00 08/20/04 1.02 22,529,815
NEW YORK
14,000 Spencer-Van Etten Central School District,
Ser 2004 BANs, dtd 06/17/04 3.00 06/17/05 1.88 14,148,632
OHIO
20,575 Central Ohio Solid Waste Authority,
Ser 2004 BANs, dtd 06/10/04 2.50 12/10/04 1.29 20,684,466
OREGON
22,000 Oregon, 2003 Ser A TANs, dtd 10/22/03 2.25 11/15/04 1.07 22,096,139
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ------------------------------------------------------------------------------------------------------------------------
TEXAS
Texas,
$ 37,000 Ser 2003 TRANs, dtd 09/02/03 2.00% 08/31/04 1.12% $ 37,053,697
18,000 Ser 2003 TRANs, dtd 09/02/03 2.00 08/31/04 1.15 18,025,218
10,000 Ser 2003 TRANs, dtd 09/02/03 2.00 08/31/04 1.16 10,013,842
---------------
TOTAL SHORT-TERM MUNICIPAL NOTES & Bonds
(COST $357,081,823) 357,081,823
---------------
TOTAL INVESTMENTS
(COST $3,000,757,542) (a) (b) 105.0% 3,000,757,542
LIABILITIES IN EXCESS OF OTHER ASSETS (5.0) (143,095,894)
----- ---------------
NET ASSETS 100.0% $ 2,857,661,648
===== ===============
</Table>
- ----------
AMT ALTERNATIVE MINIMUM TAX.
BANs BOND ANTICIPATION NOTES.
COPs CERTIFICATES OF PARTICIPATION.
DD ALL OR A PORTION OF THIS SECURITY WAS PURCHASED ON A DELAYED
DELIVERY BASIS.
PUTTERs PUTTABLE TAX-EXEMPT RECEIPTS.
ROCs RESET OPTION CERTIFICATES.
TANs TAX ANTICIPATION NOTES.
TOBs TENDER OPTION BONDS.
TRANs TAX AND REVENUE ANTICIPATION NOTES.
WI SECURITY PURCHASED ON A WHEN-ISSUED BASIS.
+ RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2004.
* DATE ON WHICH THE PRINCIPAL AMOUNT CAN BE RECOVERED THROUGH DEMAND.
(a) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$148,489,057 IN CONNECTION WITH THE PURCHASE OF WHEN-ISSUED AND
DELAYED DELIVERY SECURITIES.
(b) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
BOND INSURANCE:
AMBAC AMBAC ASSURANCE CORPORATION.
FGIC FINANCIAL GUARANTY INSURANCE COMPANY.
FHA FEDERAL HOUSING ADMINISTRATION.
FSA FINANCIAL SECURITY ASSURANCE INC.
MBIA MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION.
XLCA XL CAPITAL ASSURANCE INC.
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2004
<Table>
ASSETS:
Investments in securities, at value (cost $3,000,757,542) $ 3,000,757,542
Interest receivable 6,790,547
Prepaid expenses and other assets 106,124
---------------
TOTAL ASSETS 3,007,654,213
---------------
LIABILITIES:
Payable for:
Investments purchased 148,489,057
Investment management fee 953,331
Distribution fee 264,699
Payable to bank 158,345
Accrued expenses and other payables 127,133
---------------
TOTAL LIABILITIES 149,992,565
---------------
NET ASSETS $ 2,857,661,648
===============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 2,857,621,572
Accumulated undistributed net investment income 39,234
Accumulated undistributed net realized gain 842
---------------
NET ASSETS $ 2,857,661,648
===============
NET ASSET VALUE PER SHARE,
2,857,662,306 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE) $ 1.00
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2004
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 29,915,050
---------------
EXPENSES
Investment management fee 10,917,193
Distribution fee 3,038,166
Transfer agent fees and expenses 382,118
Custodian fees 127,331
Registration fees 99,194
Shareholder reports and notices 72,780
Professional fees 62,143
Trustees' fees and expenses 45,165
Other 94,607
---------------
TOTAL EXPENSES 14,838,697
Less: expense offset (126,369)
---------------
NET EXPENSES 14,712,328
---------------
NET INVESTMENT INCOME 15,202,722
NET REALIZED GAIN 10,932
---------------
NET INCREASE $ 15,213,654
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 15,202,722 $ 24,809,627
Net realized gain 10,932 --
--------------- ---------------
NET INCREASE 15,213,654 24,809,627
Dividends to shareholders from net investment income (15,205,016) (24,808,438)
Net increase (decrease) from transactions in shares of beneficial interest (258,005,853) 169,007,069
--------------- ---------------
NET INCREASE (DECREASE) (257,997,215) 169,008,258
NET ASSETS:
Beginning of period 3,115,658,863 2,946,650,605
--------------- ---------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$39,234 AND $41,528, RESPECTIVELY) $ 2,857,661,648 $ 3,115,658,863
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2004
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 MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management 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: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets exceeding
$750 million but not exceeding $1 billion; 0.35% to the portion of daily net
assets exceeding $1 billion but not exceeding $1.5 billion; 0.325% to the
portion of daily net assets exceeding $1.5 billion but not exceeding $2 billion;
0.30% to the portion of daily net assets exceeding $2 billion but not exceeding
$2.5 billion; 0.275% to the portion of daily net
18
<Page>
assets exceeding $2.5 billion but not exceeding $3 billion; 0.25% to the portion
of daily net assets exceeding $3 billion but not exceeding $15 billion; and
0.249% to the portion of daily net assets exceeding $15 billion.
3. PLAN OF DISTRIBUTION
Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, 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 year ended June 30, 2004, 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 year ended June 30, 2004, aggregated $6,549,716,101 and $6,759,395,932,
respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager 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.
Aggregate pension costs for the year ended June 30, 2004, included in Trustees'
fees and expenses in the Statement of Operations amounted to $7,361. At June 30,
2004, the Fund had an accrued pension liability of $59,574 which is included in
accrued expenses in the Statement of Assets and Liabilities. On December 2,
2003, 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.
Effective April 1, 2004, the Fund began 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.
19
<Page>
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2004 JUNE 30, 2003
---------------- ----------------
Shares sold 10,208,181,474 9,532,821,650
Shares issued in reinvestment of dividends 15,205,016 24,808,438
---------------- ----------------
10,223,386,490 9,557,630,088
Shares redeemed (10,481,392,343) (9,388,623,019)
---------------- ----------------
Net increase (decrease) in shares outstanding (258,005,853) 169,007,069
================ ================
</Table>
6. FEDERAL INCOME TAX STATUS
During the year ended June 30, 2004, the Fund utilized $10,090 of its net
capital loss carryforward.
7. EXPENSE OFFSET
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
8. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges that defendants, including the Fund,
violated their statutory disclosure obligations and fiduciary duties by failing
properly to disclose (i) that the Investment Manager and certain affiliates of
the Investment Manager allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Manager or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Manager or its affiliates, including
the Fund, allegedly paid excessive commissions to 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. While the Fund believes that it has meritorious defenses,
the ultimate outcome of this matter is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of this matter.
20
<Page>
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 YEAR ENDED JUNE 30,
-----------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net income from investment operations 0.005 0.008 0.014 0.033 0.031
Less dividends from net investment income (0.005) (0.008) (0.014) (0.033) (0.031)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
TOTAL RETURN 0.50% 0.81% 1.38% 3.34% 3.15%
RATIOS TO AVERAGE NET ASSETS:
Expenses (before expense offset) 0.48% 0.48% 0.48%(1) 0.48% 0.50%
Net investment income 0.50% 0.80% 1.38% 3.28% 3.11%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 2,858 $ 3,116 $ 2,947 $ 3,075 $ 2,660
</Table>
- ----------
(1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
ACTIVE ASSETS TAX-FREE TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
ACTIVE ASSETS TAX-FREE TRUST:
We have audited the accompanying statement of assets and liabilities of Active
Assets Tax-Free Trust (the "Fund"), including the portfolio of investments, as
of June 30, 2004, 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 2004, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. 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 Active
Assets Tax-Free Trust as of June 30, 2004, 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
AUGUST 13, 2004
2004 FEDERAL TAX NOTICE (UNAUDITED)
For the year ended June 30, 2004, all of the Fund's dividends from net
investment income were exempt interest dividends, excludable from
gross income for Federal income tax purposes.
22
<Page>
ACTIVE ASSETS TAX-FREE TRUST
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------------ ----------- ------------ ------------------------------- ------------- -------------------------
Michael Bozic (63) Trustee Since Private Investor; Director or 208 Director of Weirton Steel
c/o Kramer Levin Naftalis & April 1994 Trustee of the Retail Funds Corporation.
Frankel LLP (since April 1994) and the
Counsel to the Independent Institutional Funds (since
Trustees July 2003); formerly Vice
919 Third Avenue Chairman of Kmart Corporation
New York, NY (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);
formerly variously Chairman,
Chief Executive Officer,
President and Chief Operating
Officer (1987-1991) of the
Sears Merchandise Group of
Sears, Roebuck & Co.
Edwin J. Garn (71) Trustee Since Managing Director of Summit 208 Director of Franklin
c/o Summit Ventures LLC January 1993 Ventures LLC; Director or Covey (time management
1 Utah Center Trustee of the Retail Funds systems), BMW Bank of
201 S. Main Street (since January 1993) and the North America, Inc.
Salt Lake City, UT Institutional Funds (since (industrial loan
July 2003); member of the corporation), United
Utah Regional Advisory Board Space Alliance (joint
of Pacific Corp.; formerly venture between
United States Senator Lockheed Martin and the
(R-Utah) (1974-1992) and Boeing Company) and
Chairman, Senate Banking Nuskin Asia Pacific
Committee (1980-1986), Mayor (multilevel marketing);
of Salt Lake City, Utah member of the board of
(1971-1974), Astronaut, Space various civic and
Shuttle Discovery (April charitable
12-19, 1985), and Vice organizations.
Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (70) Trustee Since Retired; Director or Trustee 208 Director of The PMI
c/o Kramer Levin Naftalis & September of the Retail Funds (since Group Inc. (private
Frankel LLP 1997 September 1997) and the mortgage insurance);
Counsel to the Independent Institutional Funds (since Trustee and Vice
Trustees July 2003); formerly Chairman of The Field
919 Third Avenue associated with the Allstate Museum of Natural
New York, NY Companies (1966-1994), most History; director of
recently as Chairman of The various other business
Allstate Corporation (March and charitable
1993-December 1994) and organizations.
Chairman and Chief Executive
Officer of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
23
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------------ ----------- ------------ ------------------------------- ------------- -------------------------
Dr. Manuel H. Johnson (55) Trustee Since Senior Partner, Johnson Smick 208 Director of NVR, Inc.
c/o Johnson Smick July 1991 International, Inc., a (home construction);
International, Inc. consulting firm; Chairman of Chairman and Trustee of
2099 Pennsylvania Avenue, N.W. the Audit Committee and the Financial
Suite 950 Director or Trustee of the Accounting Foundation
Washington, D.C. Retail Funds (since July (oversight organization
1991) and the Institutional of the Financial
Funds (since July 2003); Accounting Standards
Co-Chairman and a founder of Board); Director of RBS
the Group of Seven Council Greenwich Capital
(G7C), an international Holdings (financial
economic commission; formerly holding company).
Vice Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (61) Trustee Since President, Kearns & 209 Director of Electro
PMB754 July 2003 Associates LLC (investment Rent Corporation
23852 Pacific Coast Highway consulting); Deputy Chairman (equipment leasing),
Malibu, CA of the Audit Committee and The Ford Family
Director or Trustee of the Foundation, and the
Retail Funds (since July UCLA Foundation.
2003) and the Institutional
Funds (since August 1994);
previously Chairman of the
Audit Committee of the
Institutional Funds (October
2001- July 2003); formerly
CFO of the J. Paul Getty
Trust.
Michael E. Nugent (68) Trustee Since General Partner of Triumph 208 Director of various
c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private business organizations.
445 Park Avenue investment partnership;
New York, NY Chairman of the Insurance
Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (71) Trustee Since Chairman of Lumelite Plastics 209 Trustee and Director of
c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment
Corporation Governance Committee and companies in the
85 Charles Colman Blvd. Director or Trustee of the JPMorgan Funds complex
Pawling, NY Retail Funds (since July managed by J.P. Morgan
2003) and the Institutional Investment Management
Funds (since June 1992). Inc.
</Table>
24
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------------ ----------- ------------ ------------------------------- ------------- -------------------------
Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director or 208 None
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Funds
Harborside Financial Center, and Trustee (since July 1991) and the
Plaza Two, Institutional Funds (since
Jersey City, NJ July 2003); formerly Chief
Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (56) Trustee Since Director or Trustee of the 208 Director of AXA
c/o Morgan Stanley Trust June 2000 Retail Funds (since June Financial, Inc. and The
Harborside Financial Center, 2000) and the Institutional Equitable Life
Plaza Two, Funds (since July 2003); Assurance Society of
Jersey City, NJ Senior Advisor of Morgan the United States
Stanley (since August 2000); (financial services).
Director of the Distributor
and Dean Witter Realty Inc.;
previously President and
Chief Operating Officer of
the Private Client Group of
Morgan Stanley (May 1999-
August 2000), and President
and Chief Operating Officer
of Individual Securities of
Morgan Stanley (February
1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT
INC.).
25
<Page>
OFFICERS:
<Table>
<Caption>
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**
- -------------------------------- ------------------- ------------------- ---------------------------------------------------
Mitchell M. Merin (50) President Since May 1999 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY Director and Chief Executive Officer of the
Investment Manager and Morgan Stanley Services;
Chairman and Director of the Distributor; Chairman
and Director of the Transfer Agent; Director of
various Morgan Stanley subsidiaries; President of
the Institutional Funds (since July 2003) and
President of the Retail Funds (since May 1999);
Trustee (since July 2003) and President (since
December 2002) of the Van Kampen Closed-End Funds;
Trustee (since May 1999) and President (since
October 2002) of the Van Kampen Open-End Funds.
Barry Fink (49) Vice President Since General Counsel (since May 2000) and Managing
1221 Avenue of the Americas February 1997 Director (since December 2000) of Morgan Stanley
New York, NY Investment Management; Managing Director (since
December 2000), Secretary (since February 1997) and
Director (since July 1998) of the Investment
Manager and Morgan Stanley Services; Vice
President of the Retail Funds; Assistant Secretary
of Morgan Stanley DW; Vice President of the
Institutional Funds (since July 2003); Managing
Director, Secretary and Director of the
Distributor; previously Secretary (February 1997-
July 2003) and General Counsel
(February 1997-April 2004) of the Retail Funds;
Vice President and Assistant General Counsel of the
Investment Manager and Morgan Stanley Services
(February 1997-December 2001).
Ronald E. Robison (65) Executive Vice Since Principal Executive Officer-Office of the Funds
1221 Avenue of the Americas President and April 2003 (since November 2003); Managing Director of Morgan
New York, NY Principal Stanley & Co. Incorporated, Managing Director of
Executive Morgan Stanley; Managing Director, Chief
Officer Administrative Officer and Director of the
Investment Manager and Morgan Stanley Services;
Chief Executive Officer and Director of the
Transfer Agent; Managing Director and Director of
the Distributor; Executive Vice President and
Principal Executive Officer of the Institutional
Funds (since July 2003) and the Retail Funds (since
April 2003); Director of Morgan Stanley SICAV
(since May 2004); previously President and
Director of the Institutional Funds
(March 2001-July 2003) and Chief Global Operations
Officer and Managing Director of Morgan Stanley
Investment Management Inc.
Joseph J. McAlinden (61) Vice President Since July 1995 Managing Director and Chief Investment Officer of
1221 Avenue of the Americas the Investment Manager and Morgan Stanley
New York, NY Investment Management Inc., Director of the
Transfer Agent, Chief Investment Officer of the
Van Kampen Funds; Vice President of the
Institutional Funds (since July 2003) and the
Retail Funds (since July 1995).
Stefanie V. Chang (37) Vice President Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY Inc., and the Investment Manager; Vice President
of the Institutional Funds (since December 1997)
and the Retail Funds (since July 2003); formerly
practiced law with the New York law firm of
Rogers & Wells (now Clifford Chance US LLP).
</Table>
26
<Page>
<Table>
<Caption>
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 (38) Treasurer and Chief Treasurer since Executive Director of the Investment Manager and
c/o Morgan Stanley Trust Financial Officer July 2003 and Morgan Stanley Services (since December 2001);
Harborside Financial Center, Chief Financial previously Vice President of the Retail Funds
Plaza Two, Officer since (September 2002-July 2003), and Vice President of
Jersey City, NJ September 2002 the Investment Manager and Morgan Stanley Services
(August 2000-November 2001) and Senior Manager at
PricewaterhouseCoopers LLP (January 1998-August
2000).
Thomas F. Caloia (58) Vice President Since July 2003 Executive Director (since December 2002) and
c/o Morgan Stanley Trust Assistant Treasurer of the Investment Manager, the
Harborside Financial Center, Distributor and Morgan Stanley Services;
Plaza Two, previously Treasurer of the Retail Funds (April
Jersey City, NJ 1989-July 2003); formerly First Vice President of
the Investment Manager, the Distributor and Morgan
Stanley Services.
Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY Inc. and the Investment Manager; Secretary of the
Institutional Funds (since June 1999) and the
Retail Funds (since July 2003); formerly practiced
law with the New York law firms of McDermott,
Will & Emery and Skadden, Arps, Slate, Meagher &
Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN
OFFICER FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE
THE OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
27
<Page>
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
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Barry Fink
VICE PRESIDENT
Joseph J. McAlinden
VICE PRESIDENT
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 MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
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) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
RA04-00468P-Y06/04
[GRAPHIC]
MORGAN STANLEY FUNDS
ACTIVE ASSETS
TAX-FREE TRUST
ANNUAL REPORT
JUNE 30, 2004
[MORGAN STANLEY LOGO]
<Page>
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 Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. 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.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 26,761 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 3,225,276(2)
TAX FEES $ 4,529(3) $ 610,053(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 4,981 $ 3,835,329
TOTAL $ 31,742 $ 3,835,329
</Table>
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 25,259 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684(2) $ 739,996(2)
TAX FEES $ 4,028(3) $ 187,500(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 4,712 $ 927,496
TOTAL $ 29,971 $ 927,496
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and
any entity controlling, controlled by or under common control with
the Adviser that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically data
verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review of
the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED JULY 31, 2003(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, supercedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
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
<Page>
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and, to the extent they are Covered Services, the Covered
Entities or that are traditionally performed by the Independent Auditors.
Because the Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor and is consistent with
the SEC's rules on auditor independence, the Audit Committee may grant general
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "Audit services"; assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities; agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix
B.2. All other Audit-related services not listed in Appendix B.2 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved
the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
<Page>
The Audit Committee has pre-approved the All Other services in Appendix
B.4. Permissible All Other services not listed in Appendix B.4 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided
by the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be rendered. The Fund's Chief Financial Officer
will determine whether such services are included within the list of services
that have received the general pre-approval of the Audit Committee. The Audit
Committee will be informed on a timely basis of any such services rendered by
the Independent Auditors. Requests or applications to provide services that
require specific approval by the Audit Committee will be submitted to the Audit
Committee by both the Independent Auditors and the Fund's Chief Financial
Officer, and must include a joint statement as to whether, in their view, the
request or application is consistent with the SEC's rules on auditor
independence.
The Audit Committee has designated the Fund's Chief Financial Officer to
monitor the performance of all services provided by the Independent Auditors and
to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No.
<Page>
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
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
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
<Page>
Covered Entities is compatible with maintaining the auditors' independence in
performing audit services.
Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. [Reserved.]
Item 9 - 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.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
(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 10 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.
<Page>
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
August 19, 2004
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
August 19, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
August 19, 2004