<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, 2005
Date of reporting period: June 30, 2005
Item 1 - Report to Shareholders
<Page>
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 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.
<Page>
FUND REPORT
FOR THE YEAR ENDED JUNE 30, 2005
MARKET CONDITIONS
Against the backdrop of economic improvement and rising oil prices, the Federal
Open Market Committee (the "Fed") raised the federal funds target rate in each
of its meetings during the 12-month reporting period. Through this "measured"
series of eight 25 basis point increases, the Fed brought the target rate from
1.25 percent at the start of the reporting to 3.25 percent at the close. The
yields of short-term instruments rose in response to the Fed's actions. Within
the municipal money market, variable-rate securities performed particularly
well. Variable-rate securities quickly adjust their yields in response to
changes in interest rates, a desirable characteristic in a rising-rate
environment.
PERFORMANCE ANALYSIS
As of June 30, 2005, Active Assets Tax-Free Trust had net assets of
approximately $2.9 billion and an average portfolio maturity of 27 days. For the
12-month period ended June 30, 2005, the Fund provided a total return of 1.32
percent. For the seven-day period ended June 30, 2005, the Fund provided an
effective annualized yield of 1.97 percent and a current yield of 1.95 percent,
while its 30-day moving average yield for June was 1.88 percent. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
We continue to manage the Fund conservatively in anticipation of continued
interest-rate increases. We favored securities with daily or weekly rate reset
features; this strategy positioned the Fund to benefit speedily as rates
increased. Additionally, within the Fund's fixed-rate portfolio, we emphasized
commercial paper with maturities of one to three months and to a lesser extent,
municipal notes and bonds in the six-to-nine month range. Meanwhile, we
decreased exposure to notes with one-year maturities, to avoid hindering the
Fund's ability to redeploy assets in higher yielding securities as they came to
market. We sought opportunities in financings for smaller municipalities whose
issues often offered more attractive yields than those of larger municipal
government entities.
PORTFOLIO COMPOSITION
<Table>
Variable Rate Municipal Obligations 84.1%
Municipal Notes & Bonds 8.5
Tax-Exempt Commercial Paper 7.4
</Table>
MATURITY SCHEDULE
<Table>
1- 30 Days 85.1%
31- 60 Days 2.7
61- 90 Days 4.7
91- 120 Days 1.9
121+ Days 5.6
</Table>
DATA AS OF JUNE 30, 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.
2
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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, 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.
3
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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 01/01/05 - 06/30/05.
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 *
------------- ------------- ---------------
01/01/05 -
01/01/05 06/30/05 06/30/05
------------- ------------- ---------------
Actual (0.84% return) $ 1,000.00 $ 1,008.40 $ 2.44
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.36 $ 2.46
</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
181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
4
<Page>
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Fund's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities. (The Investment Adviser and
the Administrator together are referred to as the "Adviser" and the Advisory and
Administration Agreements together are referred to as the "Management
Agreement.") The Board also compared the nature of the services provided by the
Adviser with similar services provided by non-affiliated advisers as reported to
the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2004, as shown in reports provided by Lipper (the
"Lipper Reports"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"), and noted that the Fund's performance was
better than its performance peer group average for all three periods. The Board
concluded that the Fund's performance was satisfactory.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the rate was comparable to the management fee rates charged by the
Adviser to any other funds it manages with investment strategies comparable to
those of the Fund.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund.
The Board noted that: (i) the Fund's management fee rate was lower than the
average management fee rate for funds, selected by Lipper (the "expense peer
group"), managed by other advisers, with investment strategies comparable to
those of the Fund,
5
<Page>
as shown in the Lipper Report for this Fund; and (ii) the Fund's total expense
ratio was also lower than the average total expense ratio of the funds included
in the Fund's expense peer group. The Board concluded that the Fund's management
fee rate and total expense ratio were competitive with those of its expense peer
group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as "float" benefits derived from handling of checks for purchases
and redemptions of Fund shares through a broker-dealer affiliate of the Adviser.
The Board considered the float benefits and concluded that they were relatively
small. The Board also considered that a broker-dealer affiliate of the Adviser
receives from the Fund 12b-1 fees for shareholder services. The Board concluded
that the total benefits were relatively small and that the 12b-1 fees were
competitive with those of other broker-dealer affiliates of investment advisers.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Fund ("soft
dollars"). The Board noted that the Fund invests only in fixed income
securities, which do not generate soft dollars.
6
<Page>
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.
7
<Page>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS - JUNE 30, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (87.5%)
ALABAMA
$ 6,300 Jefferson County, Sewer Ser 2003 Subser B-6 (XLCA) 2.30% 07/08/05 $ 6,300,000
ARIZONA
5,000 Pima County Industrial Development Authority,
El Dorado Hospital Ser 2004 2.30 07/08/05 5,000,000
6,000 Sun Devil Energy Center LLC,
Arizona State University Ser 2004 (FGIC) 2.32 07/08/05 6,000,000
2,900 University of Arizona, Student Union Bookstore
Ser 1999 COPs (Ambac) 2.25 07/08/05 2,900,000
CALIFORNIA
200 California Health Facilities Financing Authority,
Adventist Health System/West 1998 Ser A (MBIA) 2.22 07/01/05 200,000
700 Los Angeles Department of Water & Power,
Water Systems 2001 Ser B Subser B-1 2.25 07/08/05 700,000
COLORADO
1,700 Colorado Educational & Cultural Facilities Authority,
National Jewish Federation Ser 2005 B-1 2.30 07/01/05 1,700,000
Colorado Health Facilities Authority,
13,500 Catholic Health Initiatives Ser 2004 B-4 2.25 07/08/05 13,500,000
16,700 Catholic Health Initiatives Ser 2004 B-5 2.23 07/08/05 16,700,000
20,000 NCMC Inc Ser 2005 (FSA) 2.28 07/08/05 20,000,000
1,200 Sisters of Charity of Leavenworth Health System
Ser 2002 2.32 07/08/05 1,200,000
15,000 Colorado Student Obligation Bond Authority,
Ser 1989 A (Ambac) (AMT) 2.34 07/08/05 15,000,000
8,000 Denver Urban Renewal Authority, Stapleton Senior
Tax Increment Ser 2004 A-1 P-FLOATs PT-999 2.37 07/08/05 8,000,000
16,735 Midcities Metropolitan District No 1,
STARS BNP Ser 2004-110 2.35 07/08/05 16,735,000
5,775 Park Creek Metropolitan District,
Ser 2001 P-FLOATs PT-2321 2.37 07/08/05 5,775,000
39,400 University of Colorado Hospital Authority,
Ser 2004 A (FSA) 2.27 07/08/05 39,400,000
14,010 Westminster, Multifamily Housing Camden
Arbors Apartments Ser 2004 2.29 07/08/05 14,010,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
DELAWARE
$ 7,700 Delaware Economic Development Authority,
St Andrew's School Ser 2004 2.30% 07/08/05 $ 7,700,000
5,100 University of Delaware, Ser 2001 B 2.42 07/01/05 5,100,000
DISTRICT OF COLUMBIA
3,500 District of Columbia, Public Welfare Foundation
Ser 2000 2.29 07/08/05 3,500,000
FLORIDA
22,250 Dade County Industrial Development Authority,
Dolphins Stadium Ser 1985 B & C 2.22 07/08/05 22,250,000
7,325 Florida Housing Finance Corporation,
Monterey Lakes Apartments 2005 Ser C 2.27 07/08/05 7,325,000
16,855 Jacksonville Health Facilities Authority,
Baptist Medical Center Ser 2003 A 2.28 07/01/05 16,855,000
18,300 Orlando Utilities Commission, Water & Electric Ser
2002 A 2.23 07/08/05 18,300,000
16,100 Orlando-Orange County Expressway Authority,
Ser 2003C3 (FSA) & Ser 2005 Subser A-1 (Ambac) 2.23 07/08/05 16,100,000
4,185 Palm Beach County School Board,
Ser 2004 A COPs ROCs II-R Ser 6008 (FGIC) 2.32 07/08/05 4,185,000
10,000 Port St Lucie, Utility System Ser 2005 (MBIA) 2.31 07/08/05 10,000,000
18,300 Tampa Bay Water, Utility System Ser 2002 (AMT) 2.35 07/08/05 18,300,000
GEORGIA
20,300 Albany-Dougherty County Hospital Authority, Phoebe
Putney Memorial Hospital Ser 1991 (Ambac) 2.29 07/08/05 20,300,000
3,995 Atlanta, Airport Ser 2004 A MERLOTs Ser C14 (FSA) (AMT) 2.37 07/08/05 3,995,000
13,000 DeKalb County Hospital Authority,
DeKalb Medical Center Ser 2005 2.29 07/08/05 13,000,000
5,990 DeKalb Private Hospital Authority, Egleston
Children's Health Care System Ser 1995 B 2.28 07/08/05 5,990,000
16,450 Gwinnett County Water & Sewerage Authority, Ser 2004 A 2.26 07/08/05 16,450,000
8,200 Hapeville Development Authority,
Hapeville Hotel Ltd Ser 1985 2.35 07/01/05 8,200,000
25,700 Private Colleges and Universities Authority,
Emory University 2000 Ser B & 2001 Ser B 2.20 07/08/05 25,700,000
HAWAII
13,720 Hawaii, ROCs II-R Ser 6012 2.32 07/08/05 13,720,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
ILLINOIS
$ 6,100 Bi-State Development Agency of the
Missouri-Illinois Metropolitan District, Metrolink
Cross County Extension Ser 2002 A (FSA) 2.25% 07/08/05 $ 6,100,000
Chicago,
10,000 2004 Ser A P-FLOATs PT-2361 (FSA) 2.31 07/08/05 10,000,000
8,910 Eagle Ser 20041002 Class A (FGIC) 2.32 07/08/05 8,910,000
17,900 Neighborhoods Alive Ser 21 B (MBIA) 2.28 07/08/05 17,900,000
30,500 Cook County, Ser 2002 B 2.29 07/08/05 30,500,000
12,400 Glendale Heights, Glendale Lakes Ser 2000 2.29 07/08/05 12,400,000
1,200 Illinois Development Finance Authority,
Jewish Federation of Metropolitan Chicago
Ser 2002 (Ambac) 2.30 07/01/05 1,200,000
15,700 Illinois Finance Authority, Northwestern University
Ser 2004 B 2.25 07/08/05 15,700,000
Illinois Health Facilities Authority,
76,250 Northwestern Memorial Hospital Ser 1995 2.35 07/08/05 76,250,000
20,000 Resurrection Health Care System Ser 2005 C 2.21 07/08/05 20,000,000
10,000 Illinois Toll Highway Authority, Refg 1998 Ser B (FSA) 2.25 07/08/05 10,000,000
11,595 Kane, Cook & DuPage Counties,
School District #U-46 PUTTERs Ser 426 (Ambac) 2.35 07/08/05 11,595,000
5,020 Metropolitan Pier & Exposition Authority,
McCormick Place Expansion
Ser 2002 A Eagle #20040030 Class A (MBIA) 2.32 07/08/05 5,020,000
12,450 Roaring Fork Municipal Products, Cook County
Class A Certificates Ser 2004-1 (Ambac) 2.36 07/08/05 12,450,000
INDIANA
7,160 Franklin Community Multi-School Building Corporation,
Ser 2004 ROCs II-R Ser 2140 (FGIC) 2.32 07/08/05 7,160,000
Indiana Health Facilities Financing Authority,
35,000 Ascension Health Ser 2001 A 1.73 07/05/05 35,000,000
4,750 Clarian Health Obligated Group Ser 2000 B 2.32 07/01/05 4,750,000
2,355 Indianapolis, Health Quest Realty XXI
Ser 1994 A TOBs (FHA) 2.46 07/08/05 2,355,000
1,445 Merrillville, Southlake Care Center Ser 1992 A TOBs (FHA) 2.46 07/08/05 1,445,000
2,345 South Bend, Fountainview Place Ser 1992 A TOBs (FHA) 2.46 07/08/05 2,345,000
5,775 University of Southern Indiana, Student Fee ROCs II-R
Ser 2117 (Ambac) 2.32 07/08/05 5,775,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
KANSAS
Kansas Department of Transportation,
$ 50,315 Highway Ser 2004 C-1 & C-2 2.26% 07/08/05 $ 50,315,000
40,300 Highway Ser 2004 C-4 2.20 07/08/05 40,300,000
KENTUCKY
22,500 Kenton County Airport Board, Flight Safety
International Inc Ser 2001A (AMT) 2.32 07/08/05 22,500,000
MARYLAND
7,400 Maryland Health & Higher Educational Facilities
Authority,
Catholic Health Initiatives Ser 1997 B 2.32 07/08/05 7,400,000
MASSACHUSETTS
15,000 Massachusetts, Ser 2005 A 2.29 07/08/05 15,000,000
44,500 Massachusetts Bay Transportation Authority, Ser 2000 2.22 07/08/05 44,500,000
11,505 Massachusetts Development Finance Agency,
Dana Hall School Ser 2004 2.29 07/08/05 11,505,000
Massachusetts Health & Educational Facilities Authority,
17,850 Emmanuel College Ser 2003 2.28 07/08/05 17,850,000
14,725 Partners Healthcare System Inc Ser 1997 P-1 (FSA) 2.26 07/08/05 14,725,000
15,000 Partners Healthcare System Inc 2003 Ser D-3 2.28 07/08/05 15,000,000
5,920 Partners Healthcare System Inc 2003 Ser D-5 2.28 07/01/05 5,920,000
MICHIGAN
Detroit,
15,600 Sewage Disposal System Senior Lien Ser 2003 B (FSA) 2.25 07/01/05 15,600,000
38,300 Water Supply System Refg Second Lien
Ser 2001-C (FGIC) 2.24 07/08/05 38,300,000
9,790 Water Supply System Refg Senior Lien Ser 2003-D (MBIA) 2.35 07/08/05 9,790,000
10,850 Holt Public Schools, Ser 2002 2.20 07/08/05 10,850,000
8,700 Kent Hospital Finance Authority, Metropolitan Hospital
Ser 2005B 2.28 07/08/05 8,700,000
16,000 Michigan, Grant Anticipation Notes Ser 2002 C (FSA) 2.25 07/08/05 16,000,000
Michigan State University,
5,600 Ser 2002 A 2.25 07/01/05 5,600,000
14,885 Ser 2003 B & Ser 2005 2.22 07/08/05 14,885,000
6,000 Michigan Strategic Fund, The Van Andel Research
Institute Ser 2001 2.32 07/08/05 6,000,000
1,900 Milan Area Schools, Refg Ser 2002 2.20 07/08/05 1,900,000
11,110 Oakland University, Ser 2001 (FGIC) 2.40 07/08/05 11,110,000
22,000 Saline Area Schools, Ser 2002 B 2.20 07/08/05 22,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
MINNESOTA
$ 16,700 University of Minnesota Regents, Ser 1999 A & Ser 2001A 2.43% 07/08/05 $ 16,700,000
MISSISSIPPI
1,600 Jackson County, Chevron USA Inc Ser 1992 2.25 07/01/05 1,600,000
13,500 Mississippi Development Bank, MGAM Natural Gas Supply
2005 Ser 2.29 07/08/05 13,500,000
30,500 Perry County, Leaf River Forest Products Inc Ser 2002 2.25 07/08/05 30,500,000
MISSOURI
1,700 Missouri Development Finance Board, Nelson Gallery
Foundation Ser 2001 B (MBIA) 2.29 07/01/05 1,700,000
Missouri Health & Educational Facilities Authority,
20,100 Stowers Institute Ser 2002 (MBIA) 2.30 07/08/05 20,100,000
4,100 Washington University Ser 2004 A 2.30 07/01/05 4,100,000
NEBRASKA
9,800 American Public Energy Agency, National Public
Gas Agency 2003 Ser A 2.30 07/08/05 9,800,000
7,000 Omaha, Eagle #2004001 Class A 2.32 07/08/05 7,000,000
NEVADA
16,000 Clark County, Las Vegas - McCarran International Airport
Passenger Facility 2005 Ser A (MBIA) (AMT) 2.31 07/08/05 16,000,000
NEW HAMPSHIRE
16,000 New Hampshire Health & Education Facilities Authority,
Dartmouth College Ser 2002 2.35 07/08/05 16,000,000
5,100 New Hampshire State Business Finance Authority,
Cottage Hospital Ser 2005 2.28 07/08/05 5,100,000
NEW YORK
15,000 Long Island Power Authority, Electric System
Ser 2 Subser 2A 2.20 07/08/05 15,000,000
15,000 Metropolitan Transportation Authority, Ser 2002 D-1 (FSA) 2.20 07/08/05 15,000,000
4,800 Monroe County Industrial Development Agency,
St John Fisher College Ser 2005 (Radian) 2.32 07/08/05 4,800,000
7,300 Nassau County Interim Finance Authority,
Sales Tax Ser 2002 B (FSA) 2.17 07/08/05 7,300,000
4,150 New York City, Fiscal 2004 Subser A-4 2.18 07/08/05 4,150,000
2,000 New York City Industrial Development Agency,
One Bryant Park LLC Ser 2004 A 2.32 07/08/05 2,000,000
New York State Local Government Assistance Corporation,
19,500 Ser 1994 B 2.18 07/08/05 19,500,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
$ 10,000 Sub Lien Ser 3V (FGIC) 2.31% 07/08/05 $ 10,000,000
1,200 Suffolk County Water Authority, Ser 2003 BANs 2.23 07/08/05 1,200,000
NORTH CAROLINA
20,000 Charlotte-Mecklenburg Hospital Authority,
Health Care System Ser 1996 C 2.25 07/08/05 20,000,000
2,200 Durham, Ser 1993A COPs 2.43 07/08/05 2,200,000
30,020 Guilford County, Ser 2005 A & B 2.30 07/08/05 30,020,000
8,290 Mecklenburg County, Ser 2004 COPs 2.28 07/08/05 8,290,000
9,800 North Carolina Capital Facilities Finance Agency,
Durham Academy Ser 2001 2.29 07/08/05 9,800,000
North Carolina Medical Care Commission,
25,000 Duke University Health System Ser 2005 C 2.26 07/08/05 25,000,000
27,000 Firsthealth of the Carolinas Ser 2002 2.27 07/08/05 27,000,000
600 Mission-St Joseph's Health System Ser 2003 2.35 07/08/05 600,000
31,700 North Carolina Baptist Hospitals Ser 2000 2.25 07/08/05 31,700,000
6,450 Rowan Regional Medical Center Ser 2004 ROCs II-R
Ser 296 (FSA) 2.32 07/08/05 6,450,000
48,000 Raleigh, Downtown Improvement Ser 2005 B COPs 2.27 07/08/05 48,000,000
OHIO
4,000 Cincinnati City School District,
Ser 2003 Eagle #20040034 Class A (FSA) 2.31 07/08/05 4,000,000
32,905 Cleveland, Water 2004 Ser M (FSA) 2.24 07/08/05 32,905,000
4,890 Middletown City School District, ROCs II-R Ser 303 (FGIC) 2.31 07/08/05 4,890,000
5,610 Ohio, Ser 2004 P-FLOATs PT-2137 2.31 07/08/05 5,610,000
OKLAHOMA
8,000 Oklahoma Student Loan Authority, Ser 2005 A (MBIA) (AMT) 2.34 07/08/05 8,000,000
Oklahoma Water Resources Board, State Loan Program
26,755 Ser 1994 A & 1999 2.20 09/01/05 26,755,000
8,030 Ser 1995 2.15 09/01/05 8,030,000
17,915 Ser 2001 2.47 10/01/05 17,915,000
10,000 Tulsa County Industrial Authority, Capital Improvement
Ser 2003 A 2.95 11/15/05 10,000,000
OREGON
15,000 Clackamas County Hospital Facility Authority,
Legacy Health System Ser 2003 2.28 07/08/05 15,000,000
4,500 Oregon Department of Administrative Services,
Oregon Appropriation Ser 2003 Eagle #20041010
Class A (FSA) 2.32 07/08/05 4,500,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
$ 20,000 Oregon Health Sciences University, OHSU Medical Group
Ser 2004 A 2.26% 07/08/05 $ 20,000,000
PENNSYLVANIA
10,000 Easton Area School District, Ser 2005 (FSA) 2.30 07/08/05 10,000,000
11,300 Northampton County Higher Education Authority,
Lafayette College Ser 1998A 2.22 07/08/05 11,300,000
15,000 Pennsylvania Higher Education Assistance Agency,
Student Loan 2001 Ser A (Ambac) (AMT) 2.45 07/08/05 15,000,000
20,900 Pennsylvania Turnpike Commission, 2002 Ser A-2 2.32 07/08/05 20,900,000
Philadelphia Hospitals & Higher Education Facilities
Authority,
9,150 Children's Hospital of Philadelphia Ser 2002 D (MBIA) 2.30 07/01/05 9,150,000
7,000 Temple University Health System 2005 Ser C 2.25 07/08/05 7,000,000
31,700 Washington County Authority, The Trustees of
The University of Pennsylvania Ser 2004 2.25 07/08/05 31,700,000
22,800 York General Authority, Harrisburg School District
Subser 1996 B (Ambac) 2.29 07/08/05 22,800,000
RHODE ISLAND
6,000 Rhode Island Convention Center Authority, Refg 2001
Ser A (MBIA) 2.25 07/08/05 6,000,000
10,000 Rhode Island Health & Educational Building Corporation,
Meeting Street Center Ser 2005 2.25 07/08/05 10,000,000
SOUTH CAROLINA
13,100 Florence County, McLeod Regional Medical Center
Ser 1985 A (FGIC) 2.25 07/08/05 13,100,000
5,000 Greenwood County, Fuji Photo Film Inc Ser 2004 (AMT) 2.46 07/08/05 5,000,000
5,000 South Carolina Jobs Economic Development Authority,
Burroughs & Chapin Business Park Ser 2002 2.35 07/08/05 5,000,000
4,565 South Carolina Public Service Authority,
ROCs II-R Ser 6007 (Ambac) 2.32 07/08/05 4,565,000
TENNESSEE
13,000 Chattanooga Health, Educational & Housing Facility Board,
The Baylor School Ser 2004 2.29 07/08/05 13,000,000
6,100 Clarksville Public Building Authority, Pooled Financing
Ser 2003 2.28 07/01/05 6,100,000
17,000 Greeneville Health & Educational Facilities Board,
Laughlin Memorial Hospital Ser 2004 2.29 07/08/05 17,000,000
10,125 Jackson Health, Educational & Housing Facility Board,
Union University Ser 2005 2.29 07/08/05 10,125,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
$ 5,100 Memphis, Airport Refg Ser 1995 B (AMT) 2.47% 07/08/05 $ 5,100,000
Metropolitan Government of Nashville & Davidson
County Health & Educational Facilities Board,
7,600 Ensworth School Ser 2002 2.29 07/08/05 7,600,000
7,395 Mary Queen of Angels Inc Ser 2000 2.29 07/08/05 7,395,000
23,960 Vanderbilt University Ser 2005 A-2 2.15 07/08/05 23,960,000
27,035 Montgomery County Public Building Authority,
Pooled Financing Ser 1999 2.30 07/08/05 27,035,000
22,000 Shelby County Health, Educational & Housing
Facilities Board, Baptist Memorial Health Care
Ser 2004A P-FLOATs PA-1277 2.32 07/08/05 22,000,000
TEXAS
16,985 Austin, Water & Wastewater System Ser 2004 (FSA) 2.30 07/08/05 16,985,000
3,400 Bell County Health Facilities Development Corporation,
Scott & White Memorial Hospital Ser 2001-2 (MBIA) 2.30 07/01/05 3,400,000
4,755 Bexar County Housing Finance Corporation,
Multi-Family P-FLOATs PT-2082 2.31 07/08/05 4,755,000
12,000 Brownsville, Utilities System Sub Lien Ser 2001 A (MBIA) 2.45 08/24/05 12,000,000
4,500 Cypress-Fairbanks Independent School District,
Ser 2004 MERLOTs Ser C16 2.32 07/08/05 4,500,000
6,180 Dallas Independent School District, Ser 2004A ROCs II-R
Ser 6038 2.32 07/08/05 6,180,000
8,615 El Paso Independent School District,
Ser 2004 A ROCs II-R Ser 2129 2.32 07/08/05 8,615,000
19,519 Garland Health Facilities Development Corporation,
Chambrel Club Hill Ser 2002 2.27 07/08/05 19,519,000
Harris County Health Facilities Development Corporation,
31,700 Methodist Hospital Ser 2005 B 2.30 07/01/05 31,700,000
1,400 Texas Medical Center Ser 1999 B (FSA) 2.30 07/01/05 1,400,000
19,200 Harris County Industrial Development Corporation,
Baytank Inc Ser 1998 2.32 07/08/05 19,200,000
5,175 Houston, Combined Utility System
Ser 2004 ROCs II-R Ser 4559 (FSA) 2.32 07/08/05 5,175,000
11,000 Lower Neches Valley Authority, Chevron USA Inc Ser 1987 2.14 08/15/05 11,000,000
5,340 Northside Independent School District,
Ser 2003 P-FLOATs PT-2254 2.31 07/08/05 5,340,000
9,100 Roaring Fork Municipal Products, Dallas Independent
School District Class A Certificates Ser 2004-6 2.36 07/08/05 9,100,000
San Antonio,
6,000 ROCs II-R Ser 6003 (FSA) 2.32 07/08/05 6,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
$ 20,300 Water System Sub Lien Ser 2003 B (MBIA) 2.38% 07/08/05 $ 20,300,000
14,500 Texas, Ser 2004 TRANs Floater-Trust Receipts
Ser 2004 L61J 2.43 07/08/05 14,500,000
6,520 Texas Department of Housing & Community Affairs,
High Point III Development Ser 1993 A 2.30 07/08/05 6,520,000
20,300 Texas Municipal Gas Corporation, Senior Lien
Ser 1998 (FSA) 2.30 07/08/05 20,300,000
9,500 Texas Transportation Commission, Mobility Fund Ser 2005-B 2.22 07/08/05 9,500,000
3,000 Texas Water Development Board, Revolving Fund
Senior Lien Ser 2000 A P-FLOATs PT-2187 2.30 07/08/05 3,000,000
UTAH
Intermountain Power Agency,
52,650 1985 Ser E (Ambac) & 1985 Ser F (Ambac) 2.20 09/15/05 52,650,000
17,600 1985 Ser E (Ambac) 2.72 12/01/05 17,600,000
7,000 1985 Ser F (Ambac) 2.73 12/01/05 7,000,000
VARIOUS STATES
38,000 Municipal Securities Pooled Trust Receipts,
Various States Ser 2004 SG P-18 2.43 07/08/05 38,000,000
VERMONT
11,000 Vermont Housing Finance Agency, West Block
University of Vermont Apartments Ser 2004 A 2.30 07/08/05 11,000,000
VIRGINIA
16,000 Chesapeake Hospital Authority, Chesapeake
General Hospital Ser 2001A 2.29 07/08/05 16,000,000
7,545 Fairfax County, Ser 2004 A PUTTERs Ser 461 2.32 07/08/05 7,545,000
15,000 Fairfax County Industrial Development Authority,
Inova Health System Foundation Ser 2005 A-2 2.29 07/08/05 15,000,000
41,100 Loudoun County Industrial Development Authority,
Howard Hughes Medical Institute Ser 2003 F 2.26 07/08/05 41,100,000
WASHINGTON
6,050 Bellevue, Ser 2004 Eagle #20041011 Class A (MBIA) 2.32 07/08/05 6,050,000
3,570 King County School District No 216, ROCs II-R
Ser 5026 (FSA) 2.32 07/08/05 3,570,000
4,175 Pierce County, Puyallup School District No 3 PUTTERs
Ser 415 (FSA) 2.32 07/08/05 4,175,000
WISCONSIN
9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT) 2.53 07/08/05 9,500,000
6,275 Wisconsin, Clean Water 2004 Ser 1 ROCs II-R
Ser 2165 (MBIA) 2.32 07/08/05 6,275,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ---------------------------------------------------------------------------------------------------------------------------
$ 3,250 Wisconsin Health & Educational Facilities Authority,
Ministry Health Care PUTTERs Ser 399 (MBIA) 2.32% 07/08/05 $ 3,250,000
PUERTO RICO
11,795 Puerto Rico, Public Improvement Ser 2001-1 TOCs (FSA) 2.30 07/08/05 11,795,000
----------------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (COST $2,500,739,000) 2,500,739,000
----------------
<Caption>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------- -------- ----------
TAX-EXEMPT COMMERCIAL PAPER (7.8%)
ARIZONA
8,750 Salt River Project Agricultural Improvement &
Power District, Ser C 2.75% 07/21/05 2.75% 8,750,000
FLORIDA
8,500 Jacksonville, Ser A 2.60 07/11/05 2.60 8,500,000
Palm Beach County School District,
10,000 Sales Tax Ser 2005 2.75 08/11/05 2.75 10,000,000
8,000 Sales Tax Ser 2005 2.55 08/18/05 2.55 8,000,000
ILLINOIS
8,639 Chicago, Water System 2004 Ser A 2.45 08/18/05 2.45 8,639,000
Illinois Health Facilities Authority,
15,000 Evanston Hospital Corp Ser 1995 2.45 07/07/05 2.45 15,000,000
11,500 Evanston Hospital Corp Ser 1995 2.63 11/03/05 2.63 11,500,000
LOUISIANA
15,600 Louisiana Public Facilities Authority, Christus
Health Ser 1999 B (Ambac) 2.40 07/08/05 2.40 15,600,000
MASSACHUSETTS
6,982 Massachusetts Development Finance Agency,
MassDevelopment Program 2 Issue 2.65 08/04/05 2.65 6,982,000
12,000 Massachusetts Health & Educational Facilities
Authority, Harvard University Ser EE 2.77 07/12/05 2.77 12,000,000
NEVADA
Clark County,
10,000 Flood Control Ser 2003B 2.50 09/06/05 2.50 10,000,000
10,000 Sales Tax Ser 2004B 2.47 07/25/05 2.47 10,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
OHIO
$ 10,000 Ohio State University, General Receipts
Ser 2004 F 2.72% 07/27/05 2.72% $ 10,000,000
TEXAS
26,000 Dallas Area Rapid Transit, Senior Sub Lien
Ser 2001 2.40 07/13/05 2.40 26,000,000
10,175 El Paso, El Paso Water Utilities Ser 1998 2.53 07/12/05 2.53 10,175,000
20,600 San Antonio, Electric & Gas Ser 1995 A 2.55 07/14/05 2.55 20,600,000
15,000 Texas A&M University, Ser B 2.43 07/26/05 2.43 15,000,000
15,000 University of Texas System, Permanent
University Fund Ser A 2.85 07/12/05 2.85 15,000,000
----------------
TOTAL TAX-EXEMPT COMMERCIAL PAPER (COST $221,746,000) 221,746,000
----------------
SHORT-TERM MUNICIPAL NOTES & BONDS (8.8%)
ILLINOIS
20,000 Illinois, Unemployment Insurance Fund Building
Receipts Ser 2004 A, dtd 07/01/04 5.00 12/15/05 2.55 20,220,402
8,000 Illinois Finance Authority,
Ser 2005-A School Notes, dtd 03/02/05 3.00 12/01/05 2.52 8,015,724
INDIANA
35,000 Indiana Bond Bank, Midyear Funding Notes
Ser 2005 A, dtd 06/16/05 3.50 01/27/06 2.50 35,197,307
MASSACHUSETTS
25,000 Ashburnham-Westminster Regional School
District, Ser 2005 BANs, dtd 06/17/05 3.50 09/16/05 2.40 25,057,115
12,000 Montachusett Regional Transit Authority,
Ser 2005 RANs, dtd 06/17/05 4.00 06/16/06 3.03 12,108,231
10,000 Pioneer Valley Transit Authority,
Ser 2004 RANs, dtd 08/06/04 2.75 08/05/05 2.00 10,007,048
7,800 Southeastern Regional Transportation Authority,
Ser 2004 RANs, dtd 09/10/04 2.50 09/09/05 1.85 7,809,540
14,167 Woburn, Ser 2004 BANs, dtd 10/08/04 2.50 07/22/05 1.74 14,173,126
MINNESOTA
2,420 Buffalo-Hanover-Montrose Independent School
District No 877, Aid Anticipation Certificates
Ser 2004 A, dtd 07/20/04 2.75 08/20/05 1.70 2,423,412
2,845 Chisago Lakes Independent School
District No 2144, Aid Anticipation Certificates
Ser 2004 B, dtd 07/29/04 2.75 08/29/05 1.70 2,849,731
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,500 Orono Independent School District No 278,
Aid Anticipation Certificates
Ser 2004 A, dtd 07/29/04 2.75% 08/29/05 1.72% $ 4,507,482
2,600 Rocori Area Schools Independent School
District No 750, Aid Anticipation Certificates
Ser 2004 A, dtd 07/15/04 3.00 08/15/05 1.70 2,604,081
NEW JERSEY
20,000 Barnegat Township Board of Education,
2005 Temporary Notes, dtd 07/07/05 (WI) 3.50 07/07/06 2.75 20,145,800
19,830 Trenton, Ser 2004 BANs, dtd 10/14/04 3.00 10/14/05 1.92 19,890,411
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 6,065,610
3,500 Suffolk County First Supervisory District
Ser 2005 RANs, dtd 07/01/05 (WI) 3.75 06/29/06 2.84 3,530,800
7,500 Westchester County Second Supervisory
District Ser 2004 RANs, dtd 10/28/04 2.75 10/14/05 1.98 7,516,288
10,000 Cato-Meridian Central School District,
Ser 2004 BANs, dtd 07/22/04 2.75 07/22/05 1.75 10,005,650
1,885 Murray, Ser 2004 BANs, dtd 08/05/04 3.00 08/04/05 1.75 1,887,157
8,000 Spencer-Van Etten Central School District,
Ser 2005 BANs, dtd 06/17/05 4.25 06/15/06 2.83 8,105,604
10,000 Union Springs Central School District,
Ser 2005 BANs, dtd 06/30/05 3.50 09/30/05 2.53 10,023,739
7,000 Utica City School District,
Ser 2005 RANs, dtd 06/23/05 4.00 06/23/06 3.00 7,066,412
OHIO
1,860 St Bernard, Ser 2004 BANs, dtd 07/15/04 2.60 07/14/05 1.80 1,860,520
TEXAS
11,200 Texas, Ser 2004 TRANs, dtd 08/31/04 3.00 08/31/05 2.09 11,216,312
----------------
TOTAL SHORT-TERM MUNICIPAL NOTES & BONDS (COST $252,287,502) 252,287,502
----------------
TOTAL INVESTMENTS (COST $2,974,772,502) (a) (b) 104.1% 2,974,772,502
LIABILITIES IN EXCESS OF OTHER ASSETS (4.1) (118,190,505)
----- ----------------
NET ASSETS 100.0% $ 2,856,581,997
===== ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
- ----------
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.
TOBs TENDER OPTION BONDS.
TOCs TENDER OPTION CERTIFICATES.
TRANs TAX AND REVENUE ANTICIPATION NOTES.
WI SECURITY PURCHASED ON A WHEN-ISSUED BASIS.
+ RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2005.
* DATE ON WHICH THE PRINCIPAL AMOUNT CAN BE RECOVERED THROUGH DEMAND.
(a) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$23,676,600 IN CONNECTION WITH THE PURCHASE OF WHEN-ISSUED
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.
RADIAN RADIAN ASSET ASSURANCE INC.
XLCA XL CAPITAL ASSURANCE INC.
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2005
<Table>
ASSETS:
Investments in securities, at value (cost $2,974,772,502) $ 2,974,772,502
Cash 698,529
Interest receivable 10,830,057
Prepaid expenses and other assets 136,250
----------------
TOTAL ASSETS 2,986,437,338
----------------
LIABILITIES:
Payable for:
Investments purchased 128,624,932
Investment advisory fee 735,937
Distribution fee 235,759
Administration fee 117,880
Accrued expenses and other payables 140,833
----------------
TOTAL LIABILITIES 129,855,341
----------------
NET ASSETS $ 2,856,581,997
================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 2,856,541,884
Accumulated undistributed net investment income 40,113
----------------
NET ASSETS $ 2,856,581,997
================
NET ASSET VALUE PER SHARE,
2,856,581,902 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE) $ 1.00
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2005
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 53,095,041
----------------
EXPENSES
Investment advisory fee 9,683,965
Distribution fee 2,968,377
Administration fee 973,325
Transfer agent fees and expenses 397,270
Custodian fees 126,595
Registration fees 79,800
Professional fees 64,424
Trustees' fees and expenses 45,052
Shareholder reports and notices 40,466
Other 156,967
----------------
TOTAL EXPENSES 14,536,241
Less: expense offset (94,462)
----------------
NET EXPENSES 14,441,779
----------------
NET INVESTMENT INCOME $ 38,653,262
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2004
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 38,653,262 $ 15,202,722
Net realized gain -- 10,932
--------------- ---------------
NET INCREASE 38,653,262 15,213,654
Dividends to shareholders from net investment income (38,652,509) (15,205,016)
Net decrease from transactions in shares of beneficial interest (1,080,404) (258,005,853)
--------------- ---------------
NET DECREASE (1,079,651) (257,997,215)
NET ASSETS:
Beginning of period 2,857,661,648 3,115,658,863
--------------- ---------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$40,113 AND $39,234, RESPECTIVELY) $ 2,856,581,997 $ 2,857,661,648
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2005
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
Effective November 1, 2004, 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 exceeding $2.5 billion;
24
<Page>
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.
Effective November 1, 2004, 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.
Prior to November 1, 2004, the Fund retained the Investment Adviser to provide
administrative services and to manage the investment of the Fund's assets
pursuant to an investment management agreement pursuant to which the Fund paid
the Investment Adviser a monthly management fee accrued daily and payable
monthly, by applying the annual rate of 0.50% to the portion of the daily net
assets not exceeding $500 million; 0.425% to the portion of the daily net assets
exceeding $500 million but not exceeding $750 million; 0.375% to the portion of
the daily net assets exceeding $750 million but not exceeding $1 billion; 0.35%
to the portion of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.325% to the portion of the daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.30% to the portion of the daily net
assets exceeding $2 billion but not exceeding $2.5 billion; 0.275% to the
portion of the daily net assets exceeding $2.5 billion but not exceeding $3
billion; 0.25% to the portion of the daily net assets exceeding $3 billion but
not exceeding $15 billion; and 0.249% to the portion of the daily net assets
exceeding $15 billion.
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 year ended June 30, 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 year ended June 30, 2005, aggregated $7,633,423,003 and $7,656,545,000,
respectively.
25
<Page>
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.
Aggregate pension costs for the year ended June 30, 2005, included in Trustees'
fees and expenses in the Statement of Operations amounted to $7,377. At June 30,
2005, the Fund had an accrued pension liability of $61,077 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.
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 YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2004
--------------- ---------------
Shares sold 11,647,980,944 10,208,181,474
Shares issued in reinvestment of dividends 38,652,509 15,205,016
--------------- ---------------
11,686,633,453 10,223,386,490
Shares redeemed (11,687,713,857) (10,481,392,343)
--------------- ---------------
Net decrease in shares outstanding (1,080,404) (258,005,853)
=============== ===============
</Table>
6. FEDERAL INCOME TAX STATUS
As of June 30, 2005, the Fund had permanent book/tax differences attributable to
capital gain retained by the Fund and nondeductible expenses. To reflect
reclassifications arising from these differences, accumulated undistributed net
realized gain was charged $842, accumulated undistributed net investment income
was credited $126 and paid-in-capital was credited $716.
26
<Page>
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 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 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
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 10, 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 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.
27
<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,
-------------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
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 0.013 0.005 0.008 0.014 0.033
Less dividends from net investment income (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
======== ======== ======== ======== ========
TOTAL RETURN 1.32% 0.50% 0.81% 1.38% 3.34%
RATIOS TO AVERAGE NET ASSETS:
Expenses (before expense offset) 0.49% 0.48% 0.48% 0.48%(1) 0.48%
Net investment income 1.30% 0.50% 0.80% 1.38% 3.28%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 2,857 $ 2,858 $ 3,116 $ 2,947 $ 3,075
</Table>
- ----------
(1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
28
<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, 2005, and the related statements of operations for the year then
ended and changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of June 30, 2005, by correspondence with the custodian
and brokers. 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, 2005, 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 15, 2005
29
<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 HELD
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE
- ------------------------------ ----------- ------------ ------------------------------ ------------- -------------------------
Michael Bozic (64) Trustee Since Private Investor; Director or 197 Director of various
c/o Kramer Levin Naftalis & April 1994 Trustee of the Retail Funds business organizations.
Frankel LLP (since April 1994) and the
Counsel to the Independent Institutional Funds (since
Trustees July 2003); formerly Vice
1177 Avenue of the Americas Chairman of Kmart Corporation
New York, NY 10036 (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 (72) Trustee Since Consultant; Director or 197 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds Covey (time management
Salt Lake City, UT 84103 (since January 1993) and the systems), BMW Bank of
Institutional Funds (since North America, Inc.
July 2003); member of the Utah (industrial loan
Regional Advisory Board of corporation), Escrow Bank
Pacific Corp. (Utility USA (industrial loan
Company); formerly Managing corporation), United
Director of Summit Ventures Space Alliance (joint
LLC (Lobbying and Consulting venture between Lockheed
Firm) (2000-2004); United Martin and the Boeing
States Senator (R-Utah) Company) and Nuskin Asia
(1974-1992) and Chairman, Pacific (multilevel
Senate Banking Committee marketing); member of the
(1980-1986), Mayor of Salt board of various civic
Lake City, Utah (1971-1974), and charitable
Astronaut, Space Shuttle organizations.
Discovery (April 12-19, 1985),
and Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197 Director of The PMI Group
c/o Kramer Levin Naftalis & September of the Retail Funds (since Inc. (private mortgage
Frankel LLP 1997 September 1997) and the insurance); Trustee and
Counsel to the Independent Institutional Funds (since Vice Chairman of The
Trustees July 2003); formerly Field Museum of Natural
1177 Avenue of the Americas associated with the Allstate History; director of
New York, NY 10036 Companies (1966-1994), most various other business
recently as Chairman of The and charitable
Allstate Corporation (March organizations.
1993-December 1994) and
Chairman and Chief Executive
Officer of its wholly owned
subsidiary, Allstate Insurance
Company (July 1989-December
1994).
</Table>
30
<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 HELD
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE
- ------------------------------ ----------- ------------ ------------------------------ ------------- -------------------------
Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson Smick 197 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 International, Inc., a (home construction);
888 16th Street, NW consulting firm; Chairman of Director of KFX Energy;
Suite 740 the Audit Committee and Director of RBS Greenwich
Washington, D.C. 20006 Director or Trustee of the Capital Holdings
Retail Funds (since July 1991) (financial holding
and the Institutional Funds company).
(since July 2003); Co-Chairman
and a founder of the Group of
Seven Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (62) Trustee Since President, Kearns & Associates 198 Director of Electro Rent
c/o Kearns & Associates LLC July 2003 LLC (investment consulting); Corporation (equipment
PMB754 Deputy Chairman of the Audit leasing), The Ford Family
23852 Pacific Coast Highway Committee and Director or Foundation, and the UCLA
Malibu, CA 90265 Trustee of the Retail Funds Foundation.
(since July 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 (69) Trustee Since General Partner of Triumph 197 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 10022 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 (72) Trustee Since Chairman of Lumelite Plastics 198 Trustee and Director of
c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment
Corporation Governance Committee and companies in the JPMorgan
85 Charles Colman Blvd. Director or Trustee of the Funds complex managed by
Pawling, NY 12564 Retail Funds (since July 2003) J.P. Morgan Investment
and the Institutional Funds Management Inc.
(since June 1992).
</Table>
31
<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 HELD
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE
- ------------------------------ ----------- ------------ ------------------------------ ------------- -------------------------
Charles A. Fiumefreddo (72) Chairman of Since Chairman and Director or 197 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 07311 July 2003); formerly Chief
Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (57) Trustee Since Director or Trustee of the 197 Director of AXA
c/o Morgan Stanley Trust June 2000 Retail Funds (since June 2000) Financial, Inc. and The
Harborside Financial Center, and the Institutional Funds Equitable Life Assurance
Plaza Two, (since July 2003); Senior Society of the United
Jersey City, NJ 07311 Advisor of Morgan Stanley States (financial
(since August 2000); Director services).
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 ADVISER") (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 ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.).
32
<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 (51) President Since May 1999 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY 10020 Director and Chief Executive Officer of the Investment
Adviser and the Administrator; 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 and President (since October
2002) of the Van Kampen Open-End Funds.
Ronald E. Robison (66) Executive Vice Since Principal Executive Officer of Funds in the Fund
1221 Avenue of the Americas President and April 2003 Complex (since May 2003); Managing Director of Morgan
New York, NY 10020 Principal Stanley & Co. Incorporated, Morgan Stanley Investment
Executive Management Inc. and Morgan Stanley; Managing Director,
Officer Chief Administrative Officer and Director of the
Investment Adviser and the Administrator; 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 (62) Vice President Since July 1995 Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas Investment Adviser and Morgan Stanley Investment
New York, NY 10020 Management Inc.; Chief Investment Officer of the Van
Kampen Funds; Vice President of the Institutional
Funds (since July 2003) and the Retail Funds (since
July 1995).
Barry Fink (50) Vice President Since General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas February 1997 (since December 2000) of Morgan Stanley Investment
New York, NY 10020 Management; Managing Director (since December 2000),
Secretary (since February 1997) and Director of the
Investment Adviser and the Administrator; 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 Adviser and the Administrator (February
1997-December 2001).
Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management; Managing Director of Morgan Stanley
New York, NY 10020 Investment Management Inc. and the Investment Adviser,
Vice President of the Institutional and Retail Funds
(since July 2004); Vice President of the Van Kampen
Funds (since August 2004); previously, Managing
Director and General Counsel - Americas, UBS Global
Asset Management (July 2000-July 2004) and General
Counsel, Aeltus Investment Management, Inc. (January
1997-July 2000).
Carsten Otto (41) Chief Compliance Since October Executive Director and U.S. Director of Compliance for
1221 Avenue of the Americas Officer 2004 Morgan Stanley Investment Management (since October
New York, NY 10020 2004); Executive Director of the Investment Adviser
and Morgan Stanley Investment Management Inc.;
formerly Assistant Secretary and Assistant General
Counsel of the Morgan Stanley Retail Funds.
</Table>
33
<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**
- ---------------------------------- ---------------- -------------- ------------------------------------------------------
Stefanie V. Chang (38) Vice President Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY 10020 Inc. and the Investment Adviser; 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).
Francis J. Smith (39) Treasurer and Treasurer since Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief Financial July 2003 and Administration (since December 2001); previously, Vice
Harborside Financial Center, Officer Chief Financial President of the Retail Funds (September 2002-July
Plaza Two, Officer since 2003); Vice President of the Investment Adviser and
Jersey City, NJ 07311 September 2002 the Administrator (August 2000-November 2001) and
Senior Manager at PricewaterhouseCoopers LLP (January
1998-August 2000).
Thomas F. Caloia (59) Vice President Since July 2003 Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust Treasurer of the Investment Adviser, the Distributor
Harborside Financial Center, and the Administrator; previously Treasurer of the
Plaza Two, Retail Funds (April 1989-July 2003); formerly First
Jersey City, NJ 07311 Vice President of the Investment Adviser, the
Distributor and the Administrator.
Mary E. Mullin (38) Secretary Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY 10020 Inc. and the Investment Adviser; 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.
2005 FEDERAL TAX NOTICE (UNAUDITED)
For the year ended June 30, 2005, all of the Fund's
dividends from net investment income were exempt interest
dividends, excludable from gross income for Federal income
tax purposes.
34
<Page>
(This page has been left blank intentionally.)
<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
Joseph J. McAlinden
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
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]
RA05-00637P-Y06/05
[GRAPHIC]
MORGAN STANLEY FUNDS
ACTIVE ASSETS
TAX-FREE TRUST
ANNUAL REPORT
JUNE 30, 2005
[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) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
(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:
2005
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 28,105 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $ 3,215,745(2)
TAX FEES $ 5,164(3) $ 24,000(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 5,704 $ 3,239,745
TOTAL $ 33,809 $ 3,239,745
</Table>
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 $ - $ -(5)
TOTAL NON-AUDIT FEES $ 4,981 $ 3,835,329
TOTAL $ 31,742 $ 3,835,329
</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:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<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
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
<Page>
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
<Page>
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
<Page>
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
<Page>
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
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 only 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) 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 23, 2005
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 23, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
August 23, 2005