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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-03162
Active Assets Tax-Free Trust
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: June 30, 2006
Date of reporting period: June 30, 2006
Item 1 - Report to Shareholders
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Welcome, Shareholder:
In this report, you'll learn about how your investment in Active Assets Tax-Free
Trust performed during the annual period. We will provide an overview of the
market conditions, and discuss some of the factors that affected performance
during the reporting period. In addition, this report includes the Fund's
financial statements and a list of Fund investments.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT 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.
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FUND REPORT
FOR THE YEAR ENDED JUNE 30, 2006
MARKET CONDITIONS
During the 12-month period ended June 30, 2006, the economy continued to show
overall solid growth, despite sustained high energy prices, the Gulf Coast
hurricanes, and signs of weakness in the housing market. The stock market gained
most of the period, employment data was positive, inflation remained in check
and consumer confidence and spending kept on course.
Interest rates continued to climb as the Federal Open Market Committee (the
"Fed") raised the federal funds target rate eight times during the period to
5.25 percent. The last increase, implemented on June 29, was the seventeenth
consecutive rate increase, leading to market speculation about how much longer
the Fed would continue its two-year tightening cycle. As of the end of the
reporting period, the federal funds futures market was pricing in one additional
rate increase in August.
In this environment of rising interest rates, yields on municipal money-market
securities generally rose as well. Although yields fluctuated early in the
period and dipped slightly in the first quarter of this year due mainly to
seasonal factors, they spiked sharply in the second quarter to the extent that
tax-free variable-rate money-market instruments outperformed treasuries on a
relative basis. These attractive yields spurred investor demand, drawing
significant inflows into the market, some of which represented "crossover"
investments from the taxable market.
The supply of municipal money-market securities rose in the latter half of 2005,
but waned early this year and as of the end of the reporting period remained 20
to 30 percent below last year's levels. State and local municipalities have had
less incentive to borrow, given consistently rising interest rates and the fact
that many issuing entities found themselves flush with cash from increased tax
receipts.
PERFORMANCE ANALYSIS
As of June 30, 2006, Active Assets Tax-Free Trust had net assets of
approximately $4.6 billion and an average portfolio maturity of 18 days. For the
12-month period ended June 30, 2006, the Fund provided a total return of 2.53
percent. For the seven-day period ended June 30, 2006, the Fund provided an
effective annualized yield of 3.47 percent and a current yield of 3.42 percent,
while its 30-day moving average yield for June was 3.17 percent. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
In anticipation of ongoing interest-rate increases, we focused on securities
from segments of the market that were most responsive to (rather than hurt by)
upward shifts in rates. In particular, we emphasized daily and weekly
variable-rate securities. In doing so, we were able to quickly capitalize on
rising yields and enhance the Fund's return while reducing its vulnerability to
falling prices on longer, fixed-rate instruments. Increased fund inflows during
the reporting period further enabled this strategy. As of the end of the
reporting period, less than one percent of the portfolio's assets were invested
in securities with maturities of greater than six months. As a result, the
Fund's weighted average maturity fell over the period to 18 days.
The Fund was not, however, exclusively invested in floating-rate instruments. We
did selectively invest the fund assets in one- to three-month commercial paper
and three- to six-month notes when the opportunity arose to lock in what we
believe were attractive yields,
2
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while generally avoiding investments with longer, nine- to 12-month maturities.
Fund inflows also afforded us the opportunity to enhance the Fund's
diversification. We were able to broaden our scope of investments, reaching out
to more areas of the country. The Fund was not overweighted in any particular
state, however, and contained no investments in the New Orleans area. We
continued our research-intensive approach, selectively choosing for the fund
only those securities that we believed would potentially add value while still
meeting our conservative, risk-conscious criteria.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS
DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN
THE FUTURE.
PORTFOLIO COMPOSITION
Variable Rate Municipal Obligations 93.3%
Municipal Notes & Bonds 4.7
Tax-Exempt Commercial Paper 2.0
MATURITY SCHEDULE
1 - 30 Days 92.5%
31 - 60 Days 0.6
61 - 90 Days 2.3
91 - 120 Days 2.0
121 + Days 2.6
DATA AS OF JUNE 30, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR PORTFOLIO
COMPOSITION AND MATURITY SCHEDULE ARE AS A PERCENTAGE OF TOTAL INVESTMENTS.
THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED
A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
INVESTMENT STRATEGY
ACTIVE ASSETS TAX-FREE TRUST IS A MONEY MARKET FUND THAT SEEKS TO PROVIDE AS
HIGH A LEVEL OF DAILY INCOME EXEMPT FROM FEDERAL PERSONAL INCOME TAX AS IS
CONSISTENT WITH STABILITY OF PRINCIPAL AND LIQUIDITY. 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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL
AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER,
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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.
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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 01/01/06 - 06/30/06.
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.
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BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
Actual (1.42% return) $1,000.00 $1,014.20 $2.31
Hypothetical (5% annual return before expenses) $1,000.00 $1,022.64 $2.32
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* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.46%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
182**/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
** ADJUSTED TO REFLECT NON-BUSINESS DAY ACCRUAL.
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INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Fund's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Investment Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the advisory and administrative services to the Fund. The Board
determined that the Adviser's portfolio managers and key personnel are well
qualified by education and/or training and experience to perform the services in
an efficient and professional manner. The Board concluded that the nature and
extent of the advisory and administrative services provided were necessary and
appropriate for the conduct of the business and investment activities of the
Fund. The Board also concluded that the overall quality of the advisory and
administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. The
Board concluded that the Fund's performance was competitive with that of its
performance peer group.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by the Fund under the Management Agreement. The
Board noted that the management fee rate was comparable to the management fee
rates charged by the Adviser to other proprietary funds it manages with
investment strategies comparable to those of the Fund taking into account the
scope of the services provided.
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FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund
as compared to the average management fee rate and average total expense ratio
for funds, selected by Lipper (the "expense peer group"), managed by other
advisers with investment strategies comparable to those of the Fund, as shown in
the Lipper Report. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it 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 THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and affiliates were not
excessive in light of the advisory, administrative and other services provided
to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
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 sales of Fund shares, through a broker-dealer affiliate of the Adviser. The
Board also considered that a broker-dealer affiliate of the Adviser receives
from the Fund 12b-1 fees for distribution and shareholder services. The Board
concluded that the float benefits were relatively small and the 12b-1 fees were
competitive with those of other broker-dealers.
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.
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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
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
8
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Active Assets Tax-free Trust
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006
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PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
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SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (95.6%)
ALABAMA
$40,000 Birmingham Medical Clinic Board, University of Alabama
Health Services Foundation Ser 1991 3.99% 07/10/06 $40,000,000
Infirmary Health System Special Care Facilities
Financing Authority,
19,000 Infirmary Health System Ser 2006 A 3.97 07/10/06 19,000,000
16,500 Infirmary Health System Ser 2006 B 3.99 07/10/06 16,500,000
ARIZONA
15,000 McAllister Academic Village LLC, Arizona State
University Ser 2005 A (Ambac) 3.97 07/10/06 15,000,000
5,000 Pima County Industrial Development Authority, El Dorado
Hospital Ser 2004 4.01 07/10/06 5,000,000
16,900 Pine Ridge Village, Northern Arizona University
Ser 2005 (FGIC) 3.99 07/10/06 16,900,000
37,400 Scottsdale Industrial Development Authority, Scottsdale
Healthcare Ser 2006 D (FSA) 3.96 07/10/06 37,400,000
8,805 Sun Devil Energy Center LLC, Arizona State University
Ser 2004 (FGIC) 3.99 07/10/06 8,805,000
CALIFORNIA
800 California Educational Facilities Authority, Stanford
University Ser S-4 3.89 07/03/06 800,000
36,000 California Health Facilities Financing Authority,
Kaiser Permanente Ser 2006 C 3.95 07/10/06 36,000,000
1,300 Los Angeles Department of Water & Power, Water System
Ser 2001 B Subser B-1 3.95 07/10/06 1,300,000
1,235 Roseville, Electric System
Ser 2005 A COPs P-FLOATs PT-3021 (FGIC) 4.01 07/10/06 1,235,000
COLORADO
12,000 Broomfield Urban Renewal Authority, Broomfield Event
Center Ser 2005 3.99 07/10/06 12,000,000
7,900 Centerra Metropolitan District No 1, Ser 2004 4.00 07/10/06 7,900,000
12,580 Colorado, UCDHSC Fitzsimons Academic Facilities
Ser 2005 B COPs P-FLOATs PT-3336 (MBIA) 4.01 07/10/06 12,580,000
6,255 Colorado Educational & Cultural Facilities Authority,
Oklahoma's Public Radio Ser 2005 A 3.99 07/10/06 6,255,000
Colorado Health Facilities Authority,
8,300 Catholic Health Initiatives Ser 2004 B-4 4.00 07/10/06 8,300,000
19,835 NCMC Inc Ser 2005 (FSA) 3.95 07/10/06 19,835,000
15,000 Colorado Student Obligation Bond Authority,
Ser 1989 A (Ambac) (AMT) 4.01 07/10/06 15,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
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<Table>
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PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -----------------------------------------------------------------------------------------------------
$ 8,000 Denver Urban Renewal Authority, Stapleton Senior
Tax Increment Ser 2004 A-1 P-FLOATs PT 999 4.06% 07/10/06 $ 8,000,000
13,205 Midcities Metropolitan District No 1, STARS BNP Ser
2004-110 4.00 07/10/06 13,205,000
14,010 Westminster, Multifamily Housing Camden Arbors
Apartments Ser 2004 3.97 07/10/06 14,010,000
DELAWARE
7,700 Delaware Economic Development, St Andrew's School Ser
2004 4.00 07/10/06 7,700,000
8,965 New Castle County, University Courtyard Apartments Ser
2005 4.01 07/10/06 8,965,000
DISTRICT OF COLUMBIA
3,500 District of Columbia, Public Welfare Foundation Ser
2000 3.99 07/10/06 3,500,000
FLORIDA
13,500 Broward County School Board, Ser 2005 COPs (FSA)
Capital Trust Agency, 4.00 07/10/06 13,500,000
16,675 Multifamily Housing Floater Ser 2006 P-FLOATs MT-194 4.06 07/10/06 16,675,000
20,655 Multifamily Housing Floater-TRs Ser 2005 F7 4.06 07/10/06 20,655,000
24,500 Collier County Health Facilities Authority, The
Moorings Inc Ser 2005 3.97 07/10/06 24,500,000
22,250 Dade County Industrial Development Authority, Dolphins
Stadium Ser 1985 B & C 3.94 07/10/06 22,250,000
7,325 Florida Housing Finance Corporation, Monterey Lakes
Apartments 2005 Ser C 3.97 07/10/06 7,325,000
8,000 Leesburg, The Villages Regional Hospital Ser 2006
(Radian) 4.03 07/10/06 8,000,000
54,050 Miami-Dade County, Water & Sewer System Ser 2005 (FSA) 3.97 07/10/06 54,050,000
9,000 Miami-Dade County Educational Facilities Authority,
Carlos Albizu University Ser 2000 4.05 07/10/06 9,000,000
12,735 Orange County Housing Finance Authority, Post Lakes
Apartments Ser 1997 F 3.99 07/10/06 12,735,000
18,300 Orlando Utilities Commission, Water & Electric
Ser 2002 A 3.98 07/10/06 18,300,000
4,175 Palm Beach County School Board, Ser 2004 A COPs ROCs
II-R Ser 6008 (FGIC) 4.01 07/10/06 4,175,000
9,685 Polk County School Board, Ser 2003 A COPs (FSA) 3.96 07/10/06 9,685,000
33,695 Port St Lucie, Utility System Ser 2005 (MBIA) 3.97 07/10/06 33,695,000
GEORGIA
ATLANTA,
11,625 Airport Ser 2003 RF B-2 (MBIA) 4.00 07/10/06 11,625,000
3,980 Airport Ser 2004 A MERLOTs Ser C14 (FSA) (AMT) 4.06 07/10/06 3,980,000
15,000 Sub Lien Tax Allocation Atlantic Station Ser 2006 4.07 07/10/06 15,000,000
7,900 Water & Wastewater Ser 2001 B (FSA) 3.98 07/10/06 7,900,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
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<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -----------------------------------------------------------------------------------------------------
$13,000 DeKalb County Hospital Authority, DeKalb Medical Center
Ser 2005 3.99% 07/10/06 $13,000,000
16,550 Egleston Children's Health Care System Ser 1994 B 3.97 07/10/06 16,550,000
11,000 Floyd County Development Authority, Berry College Ser
2006 3.99 07/10/06 11,000,000
8,900 Fulton County Development Authority, St George Village
CCRC Ser 2004 4.00 07/10/06 8,900,000
49,500 Georgia Municipal Gas Authority, Gas Portfolio II Ser
1997 C 4.00 07/10/06 49,500,000
30,000 Private Colleges & Universities Authority, Emory
University 2000 Ser B 3.95 07/10/06 30,000,000
HAWAII
13,655 Hawaii, ROCs II-R Ser 6012 (MBIA) 4.01 07/10/06 13,655,000
ILLINOIS
14,800 Bi-State Development Agency of the Missouri-Illinois
Metropolitan District, Metrolink Cross County
Extension Ser 2002 A (FSA) 4.00 07/10/06 14,800,000
Chicago,
6,520 2004 Ser A P-FLOATs PT-2361 (FSA) 4.01 07/10/06 6,520,000
7,435 Chicago O'Hare International Airport Third Lien Ser
2005 A P-FLOATs PT-3340 (MBIA) 4.01 07/10/06 7,435,000
96,000 Chicago O'Hare International Airport Third Lien Ser
2005 C & D (CIFG) 3.98 07/10/06 96,000,000
17,900 Neighborhoods Alive Ser 21 B (MBIA) 3.98 07/10/06 17,900,000
19,700 Refg Ser 2005 D (FSA) 3.97 07/10/06 19,700,000
11,390 Chicago Board of Education, Ser 2005 MERLOTs Ser A-15
(Ambac) 4.01 07/10/06 11,390,000
30,500 Cook County, Ser 2002 B 3.98 07/10/06 30,500,000
12,400 Glendale Heights, Glendale Lakes Ser 2000 3.97 07/10/06 12,400,000
7,460 Illinois Development Finance Authority, Jewish
Federation of Metropolitan Chicago Ser 1999 (Ambac) 4.00 07/10/06 7,460,000
Illinois Finance Authority,
7,500 Dominican University Ser 2006 4.00 07/10/06 7,500,000
10,000 Northwestern University Ser 2004 B 3.98 07/10/06 10,000,000
40,000 Illinois Health Facilities Authority, Northwestern
Memorial Hospital Ser 1995 4.00 07/10/06 40,000,000
11,595 Kane, Cook & DuPage Counties, School District #U-46
PUTTERs Ser 426 (Ambac) 4.04 07/10/06 11,595,000
5,020 Metropolitan Pier & Exposition Authority, McCormick
Place Expansion Ser 2002 A Eagle #20040030 Class A
(MBIA) 4.02 07/10/06 5,020,000
13,050 Oak Forest, Homewood South Suburban Mayors & Managers
Association Ser 1989 3.97 07/10/06 13,050,000
32,770 Regional Transportation Authority, Refg Ser 2005 B 4.00 07/10/06 32,770,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
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<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------------------------------------------
$ 9,920 Roaring Fork Municipal Products, Cook County Class A Certificates Ser
2004-1 (Ambac) 4.05% 07/10/06 $ 9,920,000
INDIANA
7,125 Franklin Community Multi-School Building Corporation, Ser 2004 ROCs
II-R Ser 2140 (FGIC) 4.01 07/10/06 7,125,000
50,000 Indiana Health & Educational Facility Financing Authority, Sisters of
St Francis Health System Ser 2006 A (MBIA) 3.96 07/10/06 50,000,000
Indiana Health Facility Financing Authority,
19,000 Ascension Health Ser 2001 A 2.74 07/03/06 19,000,000
2,600 Clarian Health Obligated Group Ser 2000 B 4.03 07/03/06 2,600,000
44,200 Clarian Health Obligated Group Ser 2000 C & 2003 H 3.99 07/10/06 44,200,000
2,105 Indianapolis, Health Quest Realty XXI Ser 1994 A TOBs (FHA) 4.14 07/10/06 2,105,000
Indianapolis Local Public Improvement Bond Bank,
14,800 Ser 2005 E (Ambac) 3.99 07/10/06 14,800,000
7,000 Waterworks Ser 2005 H (MBIA) 4.00 07/10/06 7,000,000
1,150 Merrillville, Southlake Care Center Ser 1992 A TOBs (FHA) 4.14 07/10/06 1,150,000
2,000 Mount Vernon, Pollution Control & Solid Waste Disposal General
Electric Co Ser 2004 3.93 07/03/06 2,000,000
12,700 Purdue University, Student Facilities System Ser 2005 A 3.97 07/10/06 12,700,000
2,150 South Bend, Fountainview Place Ser 1992 A TOBs (FHA) 4.14 07/10/06 2,150,000
5,755 University of Southern Indiana, Student Fee ROCs II-R Ser 2117 (Ambac) 4.01 07/10/06 5,755,000
11,030 Zionsville Community School Building Corporation, Boone County Ser
2005 A P-FLOATs PT-2870 (FSA) 4.01 07/10/06 11,030,000
KANSAS
30,315 Kansas Department of Transportation, Highway Ser 2004 C-2 3.94 07/10/06 30,315,000
KENTUCKY
11,000 Georgetown, Industrial Building Refg Georgetown College Ser 2006 3.97 07/10/06 11,000,000
5,200 Kentucky Public Energy Authority Inc, Gas Supply Ser 2006 A 4.06 07/03/06 5,200,000
12,975 Louisville & Jefferson County Metropolitan Government, Waterford Place
Apartments Ser 2003 4.00 07/10/06 12,975,000
36,585 Ohio County, Big Rivers Electric Corp Ser 1983 (Ambac) 3.98 07/10/06 36,585,000
MARYLAND
7,000 Maryland Health & Higher Educational Facilities Authority, Catholic
Health Initiatives Ser 1997 B 3.98 07/10/06 7,000,000
MASSACHUSETTS
30,000 Massachusetts Bay Transportation Authority, Ser 2000 3.96 07/10/06 30,000,000
7,050 Massachusetts Development Finance Agency,
Boston University Ser 2002 R-4 (XLCA) 3.98 07/03/06 7,050,000
</Table>
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12
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------------------------------------------
$11,265 Dana Hall School Ser 2004 3.98% 07/10/06 $11,265,000
10,715 New Jewish High School Ser 2002 3.97 07/10/06 10,715,000
24,430 Simmons College Ser 2006 G (XLCA) 3.95 07/10/06 24,430,000
7,000 The Institute of Contemporary Art Ser 2004 A 3.98 07/10/06 7,000,000
21,500 Massachusetts Health & Educational Facilities Authority, Partners
HealthCare System Inc 2003 Ser D-4 3.98 07/10/06 21,500,000
29,100 Massachusetts Water Resources Authority, Multi-Modal Sub 2000 Ser C
(FGIC) 3.98 07/10/06 29,100,000
MICHIGAN
Detroit,
46,395 Water Supply System Refg Second Lien Ser 2001-C (FGIC) 3.98 07/10/06 46,395,000
9,790 Water Supply System Refg Senior Lien Ser 2003-D (MBIA) 3.98 07/10/06 9,790,000
13,450 Holt Public Schools, Ser 2002 3.96 07/10/06 13,450,000
22,000 Kalamazoo Hospital Finance Authority, Bronson Methodist Hospital Ser
2006 (FSA) 3.96 07/10/06 22,000,000
Kent Hospital Finance Authority,
19,700 Metropolitan Hospital Ser 2005 B 4.01 07/10/06 19,700,000
22,400 Spectrum Health Ser 2005 A (FGIC) 3.95 07/10/06 22,400,000
Michigan Hospital Finance Authority,
15,000 Ascension Health Ser 1999 B 3.95 07/10/06 15,000,000
10,000 Henry Ford Health System Ser 2006 B 4.00 07/10/06 10,000,000
26,700 Michigan State University, Ser 2003 A 3.97 07/10/06 26,700,000
6,000 Michigan Strategic Fund, The Van Andel Research Institute Ser 2001 4.00 07/10/06 6,000,000
11,110 Oakland University, Ser 2001 (FGIC) 3.98 07/10/06 11,110,000
25,710 Saline Area Schools, Ser 2002 B 3.96 07/10/06 25,710,000
MINNESOTA
Minneapolis,
32,280 Fairview Health Services Ser 2005 B (Ambac) 3.96 07/10/06 32,280,000
24,100 Guthrie Theater on the River Ser 2003 A 3.97 07/10/06 24,100,000
15,000 Oak Park Heights, Multifamily Boutwells Landing Ser 2005 3.97 07/10/06 15,000,000
10,710 University of Minnesota Regents, Ser 1999 A 3.95 07/10/06 10,710,000
MISSISSIPPI
26,808 Mississippi Development Bank, MGAM Natural Gas Supply 2005 Ser 3.99 07/10/06 26,808,000
45,500 Perry County, Leaf River Forest Products Inc Ser 2002 3.98 07/10/06 45,500,000
MISSOURI
7,995 Kirkwood School District Educational Facilities Authority, Ser 2005
B P-FLOATs PT-3164 (MBIA) 4.01 07/10/06 7,995,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ---------------------------------------------------------------------------------------------------------------------
$ 20,900 Missouri Health & Educational Facilities Authority, Stowers Institute
Ser 2002 (MBIA) 3.98% 07/10/06 $ 20,900,000
NEBRASKA
89,325 American Public Energy Agency, Gas Supply Ser 2005 A 3.99 07/10/06 89,325,000
7,000 Omaha, Eagle #2004001 Class A 4.02 07/10/06 7,000,000
NEVADA
Clark County,
31,700 Airport Improvement Refg 1993 Ser A (MBIA) 3.96 07/10/06 31,700,000
29,300 Airport System Sub-Lien Ser 2001C (FGIC) 3.96 07/10/06 29,300,000
101,215 Airport System Sub-Lien Ser 2005 D-1 (FGIC) 3.97 07/10/06 101,215,000
10,500 Las Vegas Economic Development, Andre Agassi Charitable Foundation Ser
2005 3.97 07/10/06 10,500,000
16,000 Las Vegas-McCarran International Airport Passenger Facility 2005 Ser A
(MBIA) (AMT) 4.03 07/10/06 16,000,000
NEW HAMPSHIRE
New Hampshire Health & Education Facilities Authority,
8,500 LRG Healthcare Ser 2006 B 4.02 07/10/06 8,500,000
8,500 Tilton School Ser 2006 3.99 07/10/06 8,500,000
NEW JERSEY
20,340 New Jersey Economic Development Authority, School Facilities
Construction Ser 2005 O ROCs II-R Ser 437 4.01 07/10/06 20,340,000
2,435 New Jersey Transportation Trust Fund Authority, Ser 2004 A PUTTERs Ser
503 (FGIC) 4.01 07/10/06 2,435,000
NEW MEXICO
35,000 New Mexico Hospital Equipment Loan Council, Presbyterian Healthcare
Services Ser 2005 (FSA) 4.00 07/10/06 35,000,000
NEW YORK
6,300 Monroe County Industrial Development Agency, St John Fisher College
Ser 2005 (Radian) 3.97 07/10/06 6,300,000
New York City,
4,150 Fiscal 2004 Subser A-4 3.94 07/10/06 4,150,000
25,200 Fiscal 2006 Subser E-4 3.96 07/10/06 25,200,000
3,000 Fiscal 2006 Subser H-2 3.93 07/03/06 3,000,000
78,500 New York City Industrial Development Agency, One Bryant Park LLC Ser
2004 A 4.02 07/10/06 78,500,000
21,930 New York City Municipal Water Finance Authority, Fiscal 2003 Subser
C-2 3.96 07/10/06 21,930,000
15,000 New York City Transitional Finance Authority, Recovery Fiscal 2003 Ser
3 Subser 3E 4.00 07/03/06 15,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ---------------------------------------------------------------------------------------------------------------------
New York State Dormitory Authority,
$30,265 Mental Health Services Facilities Ser 2003D-2F 3.95% 07/10/06 $30,265,000
17,940 Rochester General Hospital Ser 2005 P-FLOATs PA-1335 (Radian) 4.02 07/10/06 17,940,000
1,100 Suffolk County Water Authority, Ser 2003 BANs 3.93 07/10/06 1,100,000
50,000 Triborough Bridge & Tunnel Authority, Ser 2005 B-4 3.94 07/10/06 50,000,000
NORTH CAROLINA
5,150 Charlotte, Convention Facility Ser 2003 B COPs 4.05 07/10/06 5,150,000
1,500 Durham, Ser 1993A COPs 3.98 07/10/06 1,500,000
34,140 Guilford County, Ser 2005 A & B 4.00 07/10/06 34,140,000
7,375 Mecklenburg County, Ser 2004 COPs 3.97 07/10/06 7,375,000
North Carolina,
15,295 Ser 2002 E 3.97 07/10/06 15,295,000
39,660 Ser 2002 E 3.95 07/10/06 39,660,000
North Carolina Capital Facilities Finance Agency,
13,100 Capital Area YMCA Ser 2002 4.02 07/10/06 13,100,000
9,500 Durham Academy Ser 2001 3.98 07/10/06 9,500,000
North Carolina Medical Care Commission,
45,200 Duke University Health System Ser 2005 A & C 3.95 07/10/06 45,200,000
27,000 Firsthealth of the Carolinas Ser 2002 3.96 07/10/06 27,000,000
29,900 North Carolina Baptist Hospitals Ser 2000 4.00 07/10/06 29,900,000
7,300 University Health Systems of Eastern Carolina Ser 2006 C-2 (Ambac) 3.93 07/10/06 7,300,000
48,000 Raleigh, Downtown Improvement Ser 2005 B COPs 3.96 07/10/06 48,000,000
OHIO
4,000 Cincinnati City School District,
Ser 2003 Eagle #20040034 Class A (FSA) 4.02 07/10/06 4,000,000
60,020 Cleveland, Water 2004 Ser M (FSA) 3.98 07/10/06 60,020,000
Franklin County,
4,700 Doctors OhioHealth Corp Ser 2001 ROCs II-R Ser 55 4.01 07/10/06 4,700,000
9,000 OhioHealth Corp Ser 2006 (Ambac) 3.96 07/10/06 9,000,000
Ohio,
40,000 Common Schools Ser 2006 B 3.97 07/10/06 40,000,000
5,570 Ser 2004 P-FLOATs PT-2137 4.00 07/10/06 5,570,000
16,225 Portage County, Robinson Memorial Hospital Ser 2005 4.02 07/10/06 16,225,000
OKLAHOMA
8,000 Oklahoma Student Loan Authority, Ser 2005A (MBIA) (AMT) 4.01 07/10/06 8,000,000
28,305 Oklahoma Water Resources Board, State Loan Program
Ser 1994 A & 1999 3.38 09/01/06 28,305,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------
$ 6,655 Ser 1995 3.35% 09/01/06 $ 6,655,000
34,650 Ser 2001 & 2003 A 3.50 10/01/06 34,650,000
Tulsa County Industrial Authority,
15,000 Capital Improvement Ser 2003 A 3.70 11/05/06 15,000,000
6,500 St Francis Health System Ser 2003 Floater-TRs
Ser 2006 P7U 4.04 07/10/06 6,500,000
OREGON
14,500 Clackamas County Hospital Facility Authority, Legacy
Health System Ser 2003 3.96 07/10/06 14,500,000
13,335 Oregon, Homeowner Ser 2005 A P-FLOATs MT-133 4.02 07/10/06 13,335,000
20,000 Oregon Health Sciences University, OHSU Medical Group
Ser 2004 A 4.00 07/10/06 20,000,000
PENNSYLVANIA
11,300 Allegheny County Industrial Development Authority,
Carnegie Museums of Pittsburgh Ser 2002 4.00 07/10/06 11,300,000
5,500 Delaware County Industrial Development Authority,
United Parcel Service of America Ser 1985 3.97 07/03/06 5,500,000
10,000 Easton Area School District, Ser 2006 (FSA) 3.97 07/10/06 10,000,000
18,000 Harrisburg Authority, School Ser 2006 (FSA) 3.98 07/10/06 18,000,000
9,500 Lancaster County Hospital Authority, Willow Valley
Retirement Communities Ser 2002 B (Radian) 3.99 07/10/06 9,500,000
11,300 Northampton County Higher Education Authority,
Lafayette College Ser 1998 A 3.95 07/10/06 11,300,000
15,000 Pennsylvania Higher Education Assistance Agency,
Student Loan 2001 Ser A (Ambac) (AMT) 4.05 07/10/06 15,000,000
29,900 Pennsylvania Turnpike Commission, 2002 Ser A-2 3.98 07/10/06 29,900,000
30,700 Philadelphia, Water & Wastewater Ser 2003 (FSA) 3.96 07/10/06 30,700,000
7,000 Philadelphia Hospitals & Higher Education Facilities
Authority, Temple University Health System 2005 Ser C 3.98 07/10/06 7,000,000
22,300 York General Authority, Harrisburg School District
Subser 1996 B (Ambac) 3.98 07/10/06 22,300,000
RHODE ISLAND
5,805 Rhode Island Convention Center Authority, Refg 2001 Ser
A (MBIA) 3.98 07/10/06 5,805,000
Rhode Island Health & Educational Building Corporation,
20,000 Brown University 2005 Ser A 3.97 07/10/06 20,000,000
11,100 Meeting Street Center Ser 2005 4.00 07/10/06 11,100,000
SOUTH CAROLINA
25,000 Charleston Educational Excellence Finance
Corporation, Charleston County School District Ser 2005
ROCs II-R Ser 471 4.01 07/10/06 25,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------
$13,100 Florence County, McLeod Regional Medical Center
Ser 1985 A (FGIC) 3.98% 07/10/06 $13,100,000
5,000 Greenwood County, Fuji Photo Film Inc Ser 2004 (AMT) 4.15 07/10/06 5,000,000
10,780 South Carolina, Research University Infrastructure
Ser 2005 A P-FLOATs PT-3245 4.01 07/10/06 10,780,000
10,955 South Carolina Educational Facilities Authority,
Charleston Southern University Ser 2003 4.00 07/10/06 10,955,000
11,000 South Carolina Jobs Economic Development Authority,
Burroughs & Chapin Business Park Ser 2002 4.05 07/10/06 11,000,000
4,545 South Carolina Public Service Authority, ROCs II-R
Ser 6007 (Ambac) 4.01 07/10/06 4,545,000
TENNESSEE
10,300 Chattanooga Health, Educational & Housing Facility Board,
The Baylor School Ser 2004 3.99 07/10/06 10,300,000
16,700 Greeneville Health & Educational Facilities Board,
Laughlin Memorial Hospital Ser 2004 3.99 07/10/06 16,700,000
9,955 Jackson Health, Educational & Housing Facility Board,
Union University Ser 2005 3.99 07/10/06 9,955,000
17,945 Memphis Health, Educational & Housing Facility Board,
Watergrove Apartments Ser 2004 4.00 07/10/06 17,945,000
Metropolitan Government of Nashville & Davidson County
Health & Educational Facilities Board,
7,600 Ensworth School Ser 2002 3.99 07/10/06 7,600,000
7,395 Mary Queen of Angels Inc Ser 2000 3.99 07/10/06 7,395,000
32,060 Vanderbilt University Ser 2005 A-2 3.90 07/10/06 32,060,000
25,500 Montgomery County Public Building Authority, Pooled
Financing Ser 1999 4.00 07/10/06 25,500,000
22,000 Shelby County Health, Educational & Housing Facilities
Board, Baptist Memorial Health Care Ser 2004 A
P-FLOATs PA-1277 4.02 07/10/06 22,000,000
Tennergy Corporation,
28,000 Gas Ser 2006 A PUTTERs Ser 1258Q 4.03 07/10/06 28,000,000
55,000 Gas Ser 2006 A PUTTERs Ser 1260B 4.02 07/10/06 55,000,000
6,410 Wilson County, Ser 2005 P-FLOATs PT-2661 (MBIA) 4.01 07/10/06 6,410,000
TEXAS
6,530 Beaumont, Waterworks & Sewer System
Ser 2005 P-FLOATs PT-2895 (MBIA) 4.01 07/10/06 6,530,000
4,705 Bexar County Housing Finance Corporation,
Multi-Family P-FLOATs PT-2082 4.01 07/10/06 4,705,000
34,655 Coastal Bend Health Facilities Development Corporation,
Christus Health Ser 2005 Subser B-3 (Ambac) 3.96 07/10/06 34,655,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -----------------------------------------------------------------------------------------------------------
$ 6,140 Dallas Independent School District,
Ser 2004 A ROCs II-R Ser 6038 4.01% 07/10/06 $ 6,140,000
5,980 Duncanville Independent School District,
Ser 2005 P-FLOATs PT-3224 4.01 07/10/06 5,980,000
8,585 El Paso Independent School District,
Ser 2004 A ROCs II-R Ser 2129 4.01 07/10/06 8,585,000
19,519 Garland Health Facilities Development Corporation,
Chambrel Club Hill Ser 2002 3.97 07/10/06 19,519,000
Harris County Health Facilities Development Corporation,
65,000 Christus Health Ser 2005 Subser A-1 (Ambac) 3.96 07/10/06 65,000,000
25,000 Methodist Hospital System Ser 2006 A 3.60 07/03/06 25,000,000
29,700 Harris County Industrial Development Corporation, Baytank Inc
Ser 1998 3.98 07/10/06 29,700,000
5,155 Houston, Combined Utility System
Ser 2004 ROCs II-R Ser 4559 (FSA) 4.01 07/10/06 5,155,000
12,630 Houston Health Facilities Development Corporation, Buckingham
Senior Living Community Inc Ser 2004 C 3.97 07/10/06 12,630,000
11,000 Lower Neches Valley Authority, Chevron USA Inc Ser 1987 3.35 08/15/06 11,000,000
12,245 North Central Texas Health Facilities Development
Corporation, Baylor Health Care System Ser 2006 A 3.98 07/10/06 12,245,000
37,100 North Texas Tollway Authority, Dallas North Tollway System
Ser 2005 C (FGIC) 4.00 07/10/06 37,100,000
5,330 Northside Independent School District,
Ser 2003 P-FLOATs PT-2254 4.01 07/10/06 5,330,000
6,545 Port Arthur Independent School District,
Ser 2005 P-FLOATs PT-2679 (FGIC) 4.01 07/10/06 6,545,000
9,055 Roaring Fork Municipal Products, Dallas Independent School
District Class A Certificates Ser 2004-6 4.05 07/10/06 9,055,000
19,600 San Antonio, Water System Sub Lien Ser 2003 B (MBIA) 3.97 07/10/06 19,600,000
6,795 Texas Department of Housing & Community Affairs,
High Point III Development Ser 1993 A 3.97 07/10/06 6,795,000
17,275 Texas Municipal Gas Corporation, Senior Lien Ser 1998 (FSA) 3.97 07/10/06 17,275,000
2,960 Texas Water Development Board, Revolving Fund Senior Lien
Ser 2000 A P-FLOATs PT-2187 3.99 07/10/06 2,960,000
7,200 Upper Trinity Regional Water District, Regional Treated Water
Supply System Refg Ser 2005 P-FLOATs PT-3290 (Ambac) 4.01 07/10/06 7,200,000
UTAH
35,900 Intermountain Power Agency, 1985 Ser F (Ambac) 3.45 09/15/06 35,900,000
43,825 Murray City, IHC Health Services Inc Ser 2005 D 3.97 07/10/06 43,825,000
</Table>
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18
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------------------------------------------------------------------------------------------------------
VERMONT
$ 11,000 Vermont Housing Finance Agency, West Block
University of Vermont Apartments Ser 2004 A 3.99% 07/10/06 $ 11,000,000
VIRGINIA
16,000 Chesapeake Hospital Authority, Chesapeake General Hospital
Ser 2001A 3.99 07/10/06 16,000,000
108,020 Fairfax County Industrial Development Authority, Inova
Health System Foundation Ser 2005 A-1, A-2 & C-2 3.93 07/10/06 108,020,000
41,100 Loudoun County Industrial Development Authority,
Howard Hughes Medical Institute Ser 2003 F 3.94 07/10/06 41,100,000
WASHINGTON
6,050 Bellevue, Ser 2004 Eagle #20041011 Class A (MBIA) 4.02 07/10/06 6,050,000
9,825 Eclipse Funding Trust, Seattle Water System Ser 2005
Solar Eclipse Ser 2006-0002 (MBIA) 4.00 07/10/06 9,825,000
14,685 Energy Northwest, Columbia Generating Station Electric
Ser 2006-A ROCs II-R Ser 6063 4.01 07/10/06 14,685,000
4,155 Pierce County, Puyallup School District No 3 PUTTERs
Ser 415 (FSA) 4.01 07/10/06 4,155,000
10,000 Washington State, Floater-TRs Ser 2006 P23U (MBIA) 3.98 07/10/06 10,000,000
WISCONSIN
9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT) 4.22 07/10/06 9,500,000
6,245 Wisconsin, Clean Water 2004 Ser 1 ROCs II-R Ser 2165 (MBIA) 4.01 07/10/06 6,245,000
3,250 Wisconsin Health & Educational Facilities Authority,
Ministry Health Care PUTTERs Ser 399 (MBIA) 4.01 07/10/06 3,250,000
WYOMING
35,000 Campbell County, Two Elk Power Generation Station
Ser 2005 B (AMT) 3.35 11/30/06 35,000,000
VARIOUS STATES
38,000 Reset Option Certificates Trust II-R, ROCs II-R Ser 8002FA 4.07 07/10/06 38,000,000
PUERTO RICO
11,795 Puerto Rico Public Improvement, Ser 2001-1 TOCs (FSA) 3.98 07/10/06 11,795,000
--------------
Total Short-Term Variable Rate Municipal Obligations
(COST $4,434,587,000) 4,434,587,000
--------------
</Table>
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19
<Page>
<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Commercial Paper (2.0%)
ILLINOIS
$28,000 Illinois Health Facilities Authority, Evanston Hospital Corp Ser 1988 3.50% 07/13/06 3.50% $28,000,000
KENTUCKY
Kentucky Asset Liability Commission,
34,000 General Fund Second Ser 2005 A-1 3.15 10/12/06 3.15 34,000,000
15,000 General Fund Second Ser 2005 A-2 3.15 10/11/06 3.15 15,000,000
TEXAS
University of Texas Regents,
8,558 Ser 2002 A 3.48 07/11/06 3.48 8,558,000
8,000 Ser 2002 A 3.48 07/14/06 3.48 8,000,000
-----------
Total Tax-Exempt Commercial Paper
(COST $93,558,000) 93,558,000
-----------
Short-Term Municipal Notes & Bonds (4.8%)
MARYLAND
12,445 Maryland Community Development Administration, Department of Housing
& Community Development Residential Notes 2005 Ser F, dtd 11/10/05 3.12 11/24/06 3.12 12,445,000
MASSACHUSETTS
6,200 Cape Cod Regional Transit Authority, Ser 2005 RANs, dtd 07/28/05 4.00 07/28/06 3.00 6,204,449
14,534 Medway, Ser 2006 BANs, dtd 03/17/06 4.00 11/17/06 3.40 14,566,525
11,851 Milford, Ser 2006 BANs, dtd 04/17/06 4.25 10/17/06 3.55 11,875,039
10,255 Peabody, Ser 2006 BANs, dtd 02/09/06 4.00 07/21/06 3.20 10,259,531
10,000 Pioneer Valley Transit Authority, Ser 2005 RANs, dtd 08/05/05 4.00 08/03/06 3.05 10,008,327
MICHIGAN
8,000 Michigan Municipal Bond Authority, Ser 2005 C, dtd 08/19/05 4.25 08/18/06 3.03 8,012,448
MINNESOTA
10,000 Minnesota Rural Water Finance Authority, Public Projects Construction
Notes Ser 2005, dtd 08/31/05 4.25 09/15/06 3.54 10,013,855
NEW HAMPSHIRE
8,500 Cheshire County, Ser 2006 TANs, dtd 04/04/06 4.25 12/27/06 3.77 8,518,923
</Table>
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20
<Page>
<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
$10,000 Merrimack County, Ser 2006 TANs, dtd 02/17/06 4.50% 12/28/06 3.59% $ 10,043,681
NEW JERSEY
20,000 Barnegat Township Board of Education, 2005 Temporary Notes, dtd
07/07/05 3.50 07/07/06 2.75 20,002,397
10,900 Hudson County, Ser 2005 BANs, dtd 09/21/05 4.00 09/20/06 3.00 10,923,321
NEW YORK
8,574 Burnt Hills-Ballston Lake Central School District,
Ser 2005 B BANs, dtd 07/07/05 3.75 07/07/06 2.74 8,575,386
Gloversville City School District,
10,000 Ser 2005 BANs, dtd 12/01/05 4.50 09/28/06 3.33 10,027,764
10,000 Ser 2006 BANs, dtd 06/29/06 4.50 06/29/07 3.90 10,057,384
4,500 Hastings, Ser 2005 BANs, dtd 07/15/05 3.25 07/14/06 3.03 4,500,346
13,000 Marlboro Central School District, Ser 2006 B BANs, dtd 04/12/06 4.50 12/22/06 3.75 13,045,151
4,000 Vestal, Ser 2005 BANs, dtd 07/14/05 3.75 07/14/06 2.77 4,001,358
SOUTH CAROLINA
9,000 Aiken County Consolidated School District,
Ser 2005 BANs, dtd 07/14/05 3.25 07/14/06 2.55 9,000,000
18,000 Beaufort County School District, Ser 2005 A BANs, dtd 07/14/05 3.15 07/14/06 2.65 18,000,000
6,660 Three Rivers Solid Waste Authority, Ser 2006 BANs, dtd 05/15/06 4.75 01/15/07 3.73 6,695,685
WISCONSIN
7,000 Oconomowoc Area School District, Ser 2006 TRANs, dtd 09/20/05 4.00 09/19/06 3.37 7,008,661
---------------
Total Short-Term Municipal Notes & Bonds
(COST $223,785,231) 223,785,231
---------------
Total Investments
(COST $4,751,930,231) (A) 102.4% 4,751,930,231
Liabilities in Excess of Other Assets (2.4) (114,842,672)
----- ---------------
Net Assets 100.0% $ 4,637,087,559
===== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
- ----------
AMT ALTERNATIVE MINIMUM TAX.
BANS BOND ANTICIPATION NOTES.
COPS CERTIFICATES OF PARTICIPATION.
FLOATER-TRS FLOATING RATE TRUST RECEIPTS.
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.
TANS TAX ANTICIPATION NOTES.
TOBS TENDER OPTION BONDS.
TOCS TENDER OPTION CERTIFICATES.
TRANS TAX AND REVENUE ANTICIPATION NOTES.
+ RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2006.
* DATE ON WHICH THE PRINCIPAL AMOUNT CAN BE RECOVERED THROUGH DEMAND.
(A) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
BOND INSURANCE:
AMBAC AMBAC ASSURANCE CORPORATION.
CIFG CIFG ASSURANCE NORTH AMERICA INC.
FGIC FINANCIAL GUARANTY INSURANCE COMPANY.
FHA FEDERAL HOUSING ADMINISTRATION.
FSA FINANCIAL SECURITY ASSURANCE INC.
MBIA MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION.
RADIAN RADIAN ASSET ASSURANCE INC.
XLCA XL CAPITAL ASSURANCE INC.
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
Active Assets Tax-Free Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
JUNE 30, 2006
Assets:
Investments in securities, at value
(cost $4,751,930,231) $4,751,930,231
Cash 85,143
Receivable for:
Interest 26,200,579
Investments sold 21,787,081
Shares of beneficial interest 7,295
Prepaid expenses and other assets 282,882
--------------
Total Assets 4,800,293,211
--------------
Liabilities:
Payable for:
Investments purchased 161,269,830
Investment advisory fee 1,048,211
Distribution fee 390,544
Administration fee 195,272
Accrued expenses and other payables 301,795
--------------
Total Liabilities 163,205,652
--------------
Net Assets $4,637,087,559
==============
Composition of Net Assets:
Paid-in-capital $4,637,055,322
Accumulated undistributed net
investment income 40,841
Accumulated net realized loss (8,604)
--------------
Net Assets $4,637,087,559
==============
Net Asset Value Per Share
4,637,095,207 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01
PAR VALUE) $ 1.00
==============
Statement of Operations
FOR THE YEAR ENDED JUNE 30, 2006
Net Investment Income:
Interest Income $121,256,710
------------
Expenses
Investment advisory fee 11,233,555
Distribution fee 3,851,600
Administration fee 1,996,986
Transfer agent fees and expenses 710,529
Registration fees 316,960
Shareholder reports and notices 127,757
Custodian fees 118,039
Professional fees 77,276
Trustees' fees and expenses 52,703
Other 209,647
------------
Total Expenses 18,695,052
Less: expense offset (3,084)
------------
Net Expenses 18,691,968
------------
Net Investment Income 102,564,742
Net Realized Loss (8,541)
------------
Net Increase $102,556,201
============
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2005
-------------- --------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income $ 102,564,742 $ 38,653,262
Net realized loss (8,541) --
-------------- --------------
Net Increase 102,556,201 38,653,262
Dividends to shareholders from net investment income (102,563,944) (38,652,509)
Net increase (decrease) from transactions in shares
of beneficial interest 1,780,513,305 (1,080,404)
-------------- --------------
Net Increase (Decrease) 1,780,505,562 (1,079,651)
Net Assets:
Beginning of period 2,856,581,997 2,857,661,648
-------------- --------------
End of Period
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME OF $40,841 AND $40,113, RESPECTIVELY) $4,637,087,559 $2,856,581,997
============== ==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
Active Assets Tax-free Trust
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2006
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 as
high a level of daily income exempt from federal income tax as is 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, in accordance with Rule 2a-7 under the
Act.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to shareholders as of the close of each business day.
E. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), the Fund pays the Investment Adviser
an advisory fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.45% to the portion of the daily net assets not exceeding $500
million; 0.375% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.325% to the portion of the daily net assets
exceeding $750 million but not exceeding $1 billion; 0.30% to the portion of the
daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.275% to
the portion of the daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.25% to the portion of the daily net assets exceeding $2 billion but
not exceeding $2.5 billion; 0.225% to the portion of the daily net assets
exceeding $2.5 billion but not exceeding $3 billion; 0.20% to the portion of the
daily net assets exceeding $3 billion but not exceeding $15 billion; and 0.199%
to the portion of the daily net assets exceeding $15 billion.
25
<Page>
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.05% to the Fund's daily net assets.
3. PLAN OF DISTRIBUTION
Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the
Investment Adviser and Administrator, is the distributor of the Fund's shares
and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Act, finances certain expenses in connection with the promotion
of sales of Fund shares.
Reimbursements for these expenses are made in monthly payments by the Fund to
the Distributor, which will in no event exceed an amount equal to a payment at
the annual rate of 0.15% of the Fund's average daily net assets during the
month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal
year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the year ended June 30, 2006, 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, 2006, aggregated $12,947,016,751 and
$11,166,783,862, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation. The
Trustees voted to close the plan to new participants and eliminate the future
benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for the year ended June 30, 2006, included in Trustees' fees and
expenses in the Statement of Operations amounted to $7,377. At June 30, 2006,
the Fund had an accrued pension liability of $62,580 which is included in
accrued expenses in the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he 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
26
<Page>
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, 2006 JUNE 30, 2005
---------------- ----------------
Shares sold $ 21,066,195,217 $ 11,647,980,944
Shares issued in reinvestment of dividends 102,563,944 38,652,509
---------------- ----------------
21,168,759,161 11,686,633,453
Shares redeemed (19,388,245,856) (11,687,713,857)
---------------- ----------------
Net increase (decrease) in shares outstanding $ 1,780,513,305 $ (1,080,404)
================ ================
</Table>
6. EXPENSE OFFSET
The expense offset represents a reduction of custodian and transfer agent fees
and expenses for earnings on cash balances maintained by the Fund.
7. FEDERAL INCOME TAX STATUS
As of June 30, 2006, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year) and permanent book/tax differences attributable to
ordinary income and capital gain retained by the Fund and nondeductible
expenses. To reflect reclassifications arising from the permanent differences,
accumulated net realized loss was charged $63, accumulated undistributed net
investment income was charged $70 and paid-in-capital was credited $133.
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, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to
27
<Page>
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. On March 9, 2005, Plaintiffs sought
leave to supplement their complaint to assert claims on behalf of other
investors, which motion defendants opposed. On April 14, 2006, the Court granted
defendants' motion to dismiss in its entirety. Additionally, the Court denied
Plaintiff's motion to supplement their complaint. This matter is now concluded.
9. NEW ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Fund will
adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if
any, is currently being assessed.
28
<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,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
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 0.025 0.013 0.005 0.008 0.014
Less dividends from net investment income (0.025) (0.013) (0.005) (0.008) (0.014)
------- ------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return 2.53% 1.32% 0.50% 0.81% 1.38%
Ratios to Average Net Assets:
Total expenses (before expense offset) 0.47% 0.49% 0.48% 0.48% 0.48%(1)
Net investment income 2.57% 1.30% 0.50% 0.80% 1.38%
Supplemental Data:
Net assets, end of period, in millions $ 4,637 $ 2,857 $ 2,858 $ 3,116 $ 2,947
</Table>
- ----------
(1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
29
<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, 2006, 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, 2006, by correspondence with the custodian.
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, 2006, 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 22, 2006
30
<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) OVERSEEN BY OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** HELD BY TRUSTEE
- --------------------------- ----------- ------------ ------------------------------------- ----------- ------------------------
Michael Bozic (65) Trustee Since Private Investor; Chairman of the 197 Director of various
c/o Kramer Levin Naftalis & April 1994 Insurance Committee (since July 2006) business organizations.
Frankel LLP and Director or Trustee of the Retail
Counsel to the Independent Funds (since April 1994) and the
Trustees Institutional Funds (since July
1177 Avenue of the Americas 2003); formerly Vice Chairman of
New York, NY 10036 Kmart Corporation (December
1998-October 2000), Chairman and
Chief Executive Officer of Levitz
Furniture Corporation (November
1995-November 1998) and President and
Chief Executive Officer of Hills
Department Stores (May 1991-July
1995); 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 (73) Trustee Since Consultant; Director or Trustee of 197 Director of Franklin
1031 N. Chartwell Court January 1993 the Retail Funds (since January 1993) Covey (time management
Salt Lake City, UT 84103 and the Institutional Funds (since systems), BMW Bank of
July 2003); member of the Utah North America, Inc.
Regional Advisory Board of Pacific (industrial loan
Corp. (utility company); formerly corporation), Escrow
Managing Director of Summit Ventures Bank USA (industrial
LLC (2000-2004) (lobbying and loan corporation),
consulting firm); United States United Space Alliance
Senator (R-Utah) (1974-1992) and (joint venture between
Chairman, Senate Banking Committee Lockheed Martin and the
(1980-1986), Mayor of Salt Lake City, Boeing Company) and
Utah (1971-1974), Astronaut, Space Nuskin Asia Pacific
Shuttle Discovery (April 12-19, (multilevel marketing);
1985), and Vice Chairman, Huntsman member of the board of
Corporation (chemical company). various civic and
charitable
organizations.
Wayne E. Hedien (72) Trustee Since Retired; Director or Trustee of the 197 Director of The PMI
c/o Kramer Levin Naftalis & September Retail Funds (since September 1997) Group Inc. (private
Frankel LLP 1997 and the Institutional Funds (since mortgage insurance);
Counsel to the Independent July 2003); formerly associated with Trustee and Vice
Trustees the Allstate Companies (1966-1994), Chairman of The Field
1177 Avenue of the Americas most recently as Chairman of The Museum of Natural
New York, NY 10036 Allstate Corporation (March History; director of
1993-December 1994) and Chairman and various other business
Chief Executive Officer of its and charitable
wholly-owned subsidiary, Allstate organizations.
Insurance Company (July 1989-December
1994).
</Table>
31
<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) OVERSEEN BY OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** HELD BY TRUSTEE
- --------------------------- ----------- ------------ ------------------------------------- ----------- ------------------------
Dr. Manuel H. Johnson (57) Trustee Since Senior Partner, Johnson Smick 197 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 International, Inc., a consulting (home construction);
888 16th Street, NW firm; Chairman of the Audit Committee Director of KFX Energy;
Suite 740 and Director or Trustee of the Retail Director of RBS
Washington, D.C. 20006 Funds (since July 1991) and the Greenwich Capital
Institutional Funds (since July Holdings (financial
2003); Co-Chairman and a founder of holding company).
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 (63) Trustee Since President, Kearns & Associates LLC 198 Director of Electro Rent
c/o Kearns & Associates LLC July 2003 (investment consulting); Deputy Corporation (equipment
PMB754 Chairman of the Audit Committee and leasing), The Ford
23852 Pacific Coast Highway Director or Trustee of the Retail Family Foundation, and
Malibu, CA 90265 Funds (since July 2003) and the the UCLA Foundation.
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 (70) Chairman Chairman of General Partner of Triumph Capital, 197 None.
c/o Triumph Capital, L.P. of the the Board L.P., a private investment
445 Park Avenue Board (since July partnership; Chairman of the Board of
New York, NY 10022 and 2006) and the Retail Funds and Institutional
Trustee Trustee Funds (since July 2006) and Director
(since or Trustee of the Retail Funds (since
July 1991) July 1991) and the Institutional
Funds (since July 2001); formerly
Chairman of the Insurance Committee
(July 1991-July 2006) and Vice
President, Bankers Trust Company and
BT Capital Corporation (1984-1988).
Fergus Reid (73) 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 Director or companies in the
85 Charles Colman Blvd. Trustee of the Retail Funds (since JPMorgan Funds complex
Pawling, NY 12564 July 2003) and the Institutional managed by J.P. Morgan
Funds (since June 1992). Investment Management
Inc.
</Table>
32
<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) OVERSEEN BY OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** HELD BY TRUSTEE
- --------------------------- ----------- ------------ ------------------------------------- ----------- ------------------------
Charles A. Fiumefreddo (73) Trustee Since Director or Trustee of the Retail 197 None.
c/o Morgan Stanley Trust July 1991 Funds (since July 1991) and the
Harborside Financial Center Institutional Funds (since July
Plaza Two 2003); formerly Chairman of the
Jersey City, NJ 07311 Retail Funds (July 1991- July 2006)
and the Institutional Funds (July
2003-July 2006) and Chief Executive
Officer of the Retail Funds (until
September 2002).
James F. Higgins (58) Trustee Since Director or Trustee of the Retail 197 Director of AXA
c/o Morgan Stanley Trust June 2000 Funds (since June 2000) and the Financial, Inc. and The
Harborside Financial Center Institutional Funds (since July Equitable Life Assurance
Plaza Two 2003); Senior Advisor of Morgan Society of the United
Jersey City, NJ 07311 Stanley (since August 2000). States (financial
services).
</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.).
33
<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**
- --------------------------- -------------- ----------------- ----------------------------------------------------------
Ronald E. Robison (67) President and President (since President (since September 2005) and Principal Executive
1221 Avenue of the Americas Principal September 2005) Officer (since May 2003) of funds in the Fund Complex;
New York, NY 10020 Executive and Principal President (since September 2005) and Principal Executive
Officer Executive Officer Officer (since May 2003) of the Van Kampen Funds; Managing
(since May 2003) Director, Director and/or Officer of the Investment
Adviser and various entities affiliated with the
Investment Adviser; Director of Morgan Stanley SICAV
(since May 2004). Formerly, Executive Vice President
(July 2003 to September 2005) of funds in the Fund Complex
and the Van Kampen Funds; President and Director of the
Institutional Funds (March 2001 to July 2003); Chief
Global Operating Officer of Morgan Stanley Investment
Management Inc.; Chief Administrative Officer of Morgan
Stanley Investment Advisors Inc.; Chief Administrative
Officer of Morgan Stanley Services Company Inc.
J. David Germany (51) Vice President Since Managing Director and (since December 2005) Chief
Morgan Stanley February 2006 Investment Officer - Global Fixed Income of Morgan Stanley
Investment Management Ltd. Investment Management; Managing Director and Director of
25 Cabot Square Morgan Stanley Investment Management Ltd.; Vice President
Canary Wharf, London (since February 2006) of the Retail and Institutional
United Kingdom E144QA Funds.
Dennis F. Shea (53) Vice President Since Managing Director and (since February 2006) Chief
1221 Avenue of the Americas February 2006 Investment Officer - Global Equity of Morgan Stanley
New York, NY 10020 Investment Management; Vice President (since February
2006) of the Retail and Institutional Funds. Formerly,
Managing Director and Director of Global Equity Research
at Morgan Stanley.
Barry Fink (51) Vice President Since Managing Director and General Counsel of Morgan Stanley
1221 Avenue of the Americas February 1997 Investment Management; Managing Director of the Investment
New York, NY 10020 Adviser and various entities affiliated with the
Investment Adviser; Vice President of the Retail Funds and
(since July 2003) the Institutional Funds. Formerly,
Secretary, General Counsel and/or Director of the
Investment Adviser and various entities affiliated with
the Investment Adviser; Secretary and General Counsel of
the Retail Funds.
Amy R. Doberman (44) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management of Morgan Stanley Investment Management (since
New York, NY 10020 July 2004); Vice President of the Retail Funds and the
Institutional Funds (since July 2004); Vice President of
the Van Kampen Funds (since August 2004); Secretary (since
February 2006) and Managing Director (since July 2004) of
the Investment Adviser and various entities affiliated
with the Investment Adviser. Formerly, Managing Director
and General Counsel - Americas, UBS Global Asset
Management (July 2000 to July 2004).
Carsten Otto (42) Chief Since October Managing Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October 2004);
New York, NY 10020 Officer Managing Director and Chief Compliance Officer of Morgan
Stanley Investment Management. Formerly, Assistant
Secretary and Assistant General Counsel of the Retail
Funds.
</Table>
34
<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 Yu (39) Vice President Since July 2003 Executive Director of the Investment Adviser and various
1221 Avenue of the Americas entities affiliated with the Investment Adviser; Vice
New York, NY 10020 President of the Retail Funds (since July 2002) and the
Institutional Funds (since December 1997). Formerly,
Secretary of various entities affiliated with the
Investment Adviser.
Francis J. Smith (40) Treasurer and Treasurer (since Executive Director of the Investment Adviser and various
c/o Morgan Stanley Trust Chief Financial July 2003) and entities affiliated with the Investment Adviser; Treasurer
Harborside Financial Center Officer Chief Financial and Chief Financial Officer of the Retail Funds (since
Plaza Two Officer (since July 2003). Formerly, Vice President of the Retail Funds
Jersey City, NJ 07311 September 2002) (September 2002 to July 2003).
Mary E. Mullin (39) Secretary Since July 2003 Executive Director of the Investment Adviser and various
1221 Avenue of the Americas entities affiliated with the Investment Adviser; Secretary
New York, NY 10020 of the Retail Funds (since July 2003) and the
Institutional Funds (since June 1999).
</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.
2006 FEDERAL TAX NOTICE (UNAUDITED)
For the year ended June 30, 2006, all the Fund's dividends from net investment
income were exempt interest dividends, excludable from gross income for Federal
income tax purposes.
35
<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
Michael E. Nugent
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang Yu
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
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) 2006 Morgan Stanley
[Morgan Stanley LOGO]
MORGAN STANLEY FUNDS
Active Assets
Tax-Free Trust
Annual Report
June 30, 2006
[Morgan Stanley LOGO]
AATRPT-RA06-00715P-Y06/06
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 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:
2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $27,920 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 531(2) $5,190,300(2)
TAX FEES $ 5,000(3) $2,044,491(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 5,531 $ 7,234,791
TOTAL $33,451 $ 7,234,791
2005
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
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 second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
<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 10, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
- ----------------------------------------
Ronald E. Robison
Principal Executive Officer
August 10, 2006
/s/ Francis Smith
- ----------------------------------------
Francis Smith
Principal Financial Officer
August 10, 2006