ACTIVE ASSETS TAX FREE TRUST, 497, 1998-08-27

ACTIVE ASSETS TAX FREE TRUST
497, 1998-08-27

Previous: HEI INC, SC 14D1/A, 1998-08-27

Next: TELXON CORP, DEFA14A, 1998-08-27

<PAGE>
ACTIVE ASSETS MONEY TRUST
ACTIVE ASSETS TAX-FREE TRUST
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
--------------------

THIS DOCUMENT CONSISTS OF THE PROSPECTUSES OF ACTIVE ASSETS MONEY TRUST,
ACTIVE ASSETS TAX-FREE TRUST, ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST AND ACTIVE
ASSETS GOVERNMENT SECURITIES TRUST (COLLECTIVELY, THE "TRUSTS") AND AN APPENDIX
TO SUCH PROSPECTUSES WHICH CONSTITUTES PART OF THE PROSPECTUSES. A TABLE OF
CONTENTS IS CONTAINED ON PAGE 1 OF EACH PROSPECTUS.
------------------------

Each Trust is a diversified open-end management investment company seeking
high current income, preservation of capital and liquidity from investments in
short-term securities. Active Assets Money Trust invests in money market
instruments generally; Active Assets Tax-Free Trust invests in high quality,
short-term tax-exempt securities and pays dividends exempt from federal personal
income taxation; Active Assets California Tax-Free Trust invests in high
quality, short-term California tax-exempt securities and pays dividends exempt
from federal and California personal income taxation; and Active Assets
Government Securities Trust invests in money market instruments issued or
guaranteed by the United States Government or its agencies or instrumentalities.

The Active Assets -Registered Trademark- Account financial service program
("Active Assets") of Dean Witter Reynolds Inc. ("Dean Witter") provides a medium
for the investment of free credit cash balances held in the Active Assets
account in shares of the Trusts. An Active Assets account is a Dean Witter
securities account (the "Securities Account") which is linked to the Trusts, a
Federal Deposit Insurance Corporation ("FDIC") insured account (the "Active
Assets Insured Account") maintained at a depository institution which has
entered into an agreement with Dean Witter to participate in Active Assets and a
Visa-Registered Trademark- check/card account maintained by Bank One, Columbus,
N.A., Columbus, Ohio ("Visa Account").

The annual fee for participation in the Active Assets program is presently
$80 ($100 for corporations). Dean Witter may charge certain group or special
accounts a different fee. Dean Witter reserves the right to change the fee for
participation in the Active Assets program at any time. As described in the
Appendix to the Prospectus under the section "Purchase of Shares", shares of the
Trusts may be purchased by investors maintaining brokerage accounts with Dean
Witter who are not subscribers to the Active Assets program. In addition,
certain other Securities Accounts which are not subscribers to the Active Assets
Program may be linked to the Trusts and the Active Assets Insured Account.
Shareholders of the Trusts not subscribing to the Active Assets program will not
be charged the program fee.

Subject to the conditions set forth herein, a subscriber to the Active
Assets program will have his or her free credit cash balances held in the
account automatically invested daily in shares of any of the Trusts or
transmitted to the bank for deposit into the Active Assets Insured Account,
depending upon which investment is selected by the investor, and earn a return
thereon pending further investment of such funds in other aspects of the Active
Assets program or utilization through the Visa Account. A program participant
may make additional investments in or change his or her chosen investment at any
time by following the procedures set forth in the Appendix under "Purchase and
Redemption of Shares."
------------------------

THE INFORMATION IN THIS DOCUMENT SHOULD BE READ IN CONJUNCTION WITH THE
CLIENT ACCOUNT AGREEMENT WHICH IS BEING FURNISHED TO ALL ACTIVE ASSETS
SUBSCRIBERS (OR OTHER ACCOUNT AGREEMENT FOR NON-ACTIVE ASSETS SUBSCRIBERS) AND
WILL BE FURNISHED TO NEW SUBSCRIBERS PRIOR TO THE TIME AN ACTIVE ASSETS ACCOUNT,
OR OTHER SECURITIES ACCOUNT, IS OPENED. REFERENCE IS MADE TO SUCH MATERIAL FOR
INFORMATION WITH RESPECT TO THE ACTIVE ASSETS AND OTHER PROGRAMS, INCLUDING THE
FEES RELATED THERETO. FOR MORE COMPLETE DETAILS ABOUT THE ACTIVE ASSETS INSURED
ACCOUNT, INCLUDING PROCEDURES FOR TRANSFERRING FROM ANY OF THE TRUSTS, THE
SUBSCRIBER SHOULD CONSULT HIS OR HER MORGAN STANLEY DEAN WITTER FINANCIAL
ADVISOR.

For information on participation in the Active Assets program and
information relating to a specific account, call:
- Anywhere in the United - In New York City (212)
States, Puerto Rico and the 392-5000
Virgin Islands toll free at
(800) 869-3326

ACTIVE ASSETS IS A REGISTERED TRADEMARK OF DEAN WITTER REYNOLDS INC. AUGUST 20,
1998
<PAGE>
TRUSTEES AND OFFICERS

ACTIVE ASSETS MONEY TRUST
ACTIVE ASSETS TAX-FREE TRUST
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

TRUSTEES

Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder

OFFICERS

Charles A. Fiumefreddo
Chairman and Chief Executive Officer

Barry Fink
Vice President, Secretary and
General Counsel

Jonathan R. Page
Vice President

Katherine H. Stromberg
Vice President

Thomas F. Caloia
Treasurer
<PAGE>
ACTIVE ASSETS MONEY TRUST

TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048 - (212) 392-5000

Active Assets Money Trust (the "Money Trust" or the "Trust") is a no-load,
diversified open-end management investment company the investment objectives of
which are high current income, preservation of capital and liquidity. The Trust
is authorized to reimburse Morgan Stanley Dean Witter Distributors Inc. for
specific expenses incurred in promoting the distribution of the Trust's shares
pursuant to a Plan of Distribution pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"). Reimbursement may in no event
exceed an amount equal to payments at the annual rate of 0.15% of the average
daily net assets of the Trust.

The Trust will invest in a diversified portfolio of short-term money market
instruments consisting primarily of United States Government securities,
obligations of U.S. regulated banks and savings and loan associations having
assets of $1 billion or more, certificates of deposit of savings banks and
savings and loan associations having total assets of $1 billion or more, high
grade commercial paper, high grade corporate obligations maturing in thirteen
months or less and certificates of deposit of $100,000 or less of U.S. regulated
banks and savings institutions, having total assets of less than $1 billion,
which are fully insured by the FDIC.

AN INVESTMENT IN THE TRUST IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THE TRUST WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.

SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
TABLE OF CONTENTS

<TABLE>
<S> <C>
Highlights/2 How Net Asset Value is Determined/A-4
Summary of Trust Expenses/3 Confirmations/A-5
Financial Highlights/4 The Trusts and Their Management/A-5
Investment Objective and Policies/5 Plan of Distribution/A-6
Investment Restrictions/7 Dividends, Distributions and Taxes/A-7
Financial Statements -- June 30, 1998/8 General Information/A-9
Report of Independent Accountants/18 Voting Rights/A-9
Purchase and Redemption of Shares/A-1 Custodian/A-10
Purchase of Shares/A-1 Shareholder Inquiries/A-10
Purchase of Shares by Non-Participants in
Active Assets Program/A-2
Redemption of Shares/A-3
Redemption of Shares by Non-Participants in
Active Assets Program/A-4
</TABLE>

THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION YOU SHOULD KNOW BEFORE
INVESTING IN THE TRUST. IT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE TRUST IS CONTAINED IN THE STATEMENT OF
ADDITIONAL INFORMATION, DATED AUGUST 20, 1998, WHICH HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, AND WHICH IS AVAILABLE AT NO CHARGE UPON
REQUEST OF THE TRUST AT THE ADDRESS LISTED ABOVE OR BY CALLING MORGAN STANLEY
DEAN WITTER ADVISORS INC. (THE "INVESTMENT MANAGER" OR "MSDW ADVISORS") AT (212)
392-2550. THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY
REFERENCE.

THE INFORMATION IN THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE
INFORMATION APPEARING ELSEWHERE IN THIS DOCUMENT, INCLUDING THE APPENDIX HERETO,
WHICH IS PART OF THIS PROSPECTUS, AND IN THE CLIENT ACCOUNT AGREEMENT.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------

THE DATE OF THIS PROSPECTUS IS AUGUST 20, 1998.

ACTIVE ASSETS MONEY TRUST
<PAGE>
HIGHLIGHTS

<TABLE>
<S> <C>
THE A no-load, open-end diversified management investment company investing in money market
TRUST instruments. The Trust is authorized to reimburse Morgan Stanley Dean Witter Distributors Inc. for
specific expenses incurred in promoting the distribution of the Trust's shares pursuant to a Plan
of Distribution pursuant to Rule 12b-1 under the Act. (See page A-6). The Trust is organized as an
unincorporated business trust under the laws of Massachusetts. (See page A-5).
- ------------------------------------------------------------------------------------------------------------------------
SHARES The shares of the Money Trust are offered to participants in the Active Assets program of Dean
OFFERED Witter and to non-participants who wish to invest directly in shares of the Trust (See page A-2).
The primary components of the Active Assets program are the Securities Account, which is linked to
the Active Assets Insured Account, the Money Trust, the Active Assets Tax-Free Trust, the Active
Assets California Tax-Free Trust or the Active Assets Government Securities Trust and to the Visa
Account. See the Client Account Agreement for further information.
- ------------------------------------------------------------------------------------------------------------------------
PURCHASE Pursuant to the Client Account Agreement between Dean Witter and the customer, free credit cash
OF SHARES balances will be automatically invested in shares of the Money Trust daily at their net asset value
without any sales charge. Morgan Stanley Dean Witter Distributors Inc. is the Distributor of shares
of the Trust. Investments in shares are made under the circumstances described under "Purchase and
Redemption of Shares" (see page A-1). Non-participants in the Active Assets program should refer to
the discussion appearing at page A-2.
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT High current income, preservation of capital and liquidity (see page 5). There can be no assurance
OBJECTIVES that the Trust's objectives can be achieved.
- ------------------------------------------------------------------------------------------------------------------------
AUTHORIZED Money market instruments as follows (see page 5):
INVESTMENTS - United States Government securities;
- Obligations of U.S. regulated banks having assets of $1 billion or more;
- High grade commercial paper;
- High grade corporate obligations maturing in thirteen months or less;
- Certificates of deposit of savings banks and savings institutions having assets of $1 billion or
more;
- Certificates of deposit of $100,000 or less, of U.S. regulated banks and savings institutions,
having total assets of less than $1 billion, fully insured by the FDIC;
- Repurchase Agreements (see page 5).
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of the Trust, and its wholly-owned
MANAGER subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various investment
management, advisory, management and administrative capacities to 102 investment companies and
other portfolios with assets of approximately $115.9 billion at July 31, 1998 (see page A-5).
- ------------------------------------------------------------------------------------------------------------------------
MANAGEMENT Monthly fee at an annual rate of 1/2 of 1% of average daily net assets, scaled down on assets over
FEE $500 million (see page A-5).
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR Morgan Stanley Dean Witter Distributors Inc. (the "Distributor") sells shares of the Trust through
Dean Witter Reynolds Inc. Other than the reimbursement to the Distributor pursuant to the Rule
12b-1 Distribution Plan, the Distributor receives no distribution fees (see page A-2).
- ------------------------------------------------------------------------------------------------------------------------
PLAN OF The Trust is authorized to reimburse specific expenses incurred in promoting the distribution of
DISTRIBUTION the Trust's shares pursuant to a Plan of Distribution with the Distributor pursuant to Rule 12b-1
under the Investment Company Act of 1940. Reimbursement may in no event exceed an amount equal to
payments at the annual rate of 0.15 of 1% of average daily net assets of the Trust (see page A-6).
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS Automatically reinvested daily in additional shares at net asset value (see page A-7).
- ------------------------------------------------------------------------------------------------------------------------
REPORTS Individual monthly account statements from Dean Witter on the Dean Witter Transaction Statement;
annual and semi-annual Trust financial statements.
- ------------------------------------------------------------------------------------------------------------------------
REDEMPTION For participants in the Active Assets program, shares of the Money Trust will be redeemed at net
OF SHARES asset value automatically to satisfy debit balances in the Securities Account created by activity
therein or to satisfy amounts owing in the Visa Account resulting from Visa card purchases, cash
advances or checks written against the Visa Account. Non-participants in the Active Assets program
should refer to the discussion appearing at page A-4. It is anticipated that the net asset value
will remain constant at $1.00 per share. Dean Witter has the right to terminate a shareholder's
Active Assets service, in which event all Trust shares held in a shareholder's account will be
involuntarily redeemed. The Trust also reserves the right to reduce the number of shares in all
accounts if the Trustees determine that this is necessary to maintain the constant $1.00 per share
net asset value. See "Purchase and Redemption of Shares" (page A-1).
- ------------------------------------------------------------------------------------------------------------------------
RISKS The Trust's investments are limited to U.S. Government securities, high grade corporate obligations
and obligations of banks and savings and loan associations having assets of $1 billion or more and
fully insured Certificates of Deposit; consequently, the portfolio securities of the Trust are
subject to minimal risk of loss of income and principal. However, the investor is directed to the
discussion of "Repurchase Agreements" (page 5) concerning the risks associated with such portfolio
securities and management techniques.
- ------------------------------------------------------------------------------------------------------------------------
THE SUMMARY INFORMATION ABOVE SHOULD BE READ IN CONJUNCTION WITH THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE APPENDIX HERETO, IN THE CLIENT ACCOUNT AGREEMENT AND IN THE TRUST'S STATEMENT OF ADDITIONAL
INFORMATION, INCLUDING THE APPENDIX THERETO.
</TABLE>

2
ACTIVE ASSETS MONEY TRUST
<PAGE>
SUMMARY OF TRUST EXPENSES
- --------------------------------------------------------------------------------

The following table illustrates all expenses and fees that a shareholder of
the Trust will incur. The expenses and fees set forth in the table are for the
fiscal year ended June 30, 1998.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases.............................. None
Maximum Sales Charge Imposed on
Reinvested Dividends................... None
Deferred Sales Charge................... None
Redemption Fees......................... None
Exchange Fee............................ None
ANNUAL TRUST OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees......................... 0.28%
12b-1 Fees.............................. 0.10%
Other Expenses.......................... 0.06%
---------
Total Trust Operating Expenses.......... 0.44%
---------
---------
</TABLE>

<TABLE>
<CAPTION>
10
EXAMPLE 1 year 3 years 5 years years
- ---------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment,
assuming (1) 5% annual return and (2)
redemption at the end
of each time period:................... $ 4 $14 $25 $55
</TABLE>

Dean Witter charges an annual Active Assets program participation fee of $80
($100 for corporate participants). Shareholders of the Trust who are not program
participants will not be charged an Active Assets program fee.

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE TRUST MAY BE GREATER OR
LESS THAN THOSE SHOWN.

The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Trust will bear directly or
indirectly. For a more complete description of these costs and expenses, see
pages A-5 and A-6 in the Appendix to this Prospectus.

3
ACTIVE ASSETS MONEY TRUST
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by PricewaterhouseCoopers
LLP, independent accountants. The financial highlights should be read in
conjunction with the financial statements and notes thereto and the unqualified
report of independent accountants which are contained in this Prospectus
commencing on page 8.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income..... 0.052 0.051 0.052 0.051 0.029 0.029 0.045 0.068 0.081 0.083
Less dividends from net
investment
income................... (0.052) (0.051) (0.052) (0.051) (0.029) (0.029) (0.045) (0.068) (0.081) (0.083)
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN... 5.38% 5.23% 5.33% 5.23% 2.99% 2.95% 4.58% 7.05% 8.43% 8.57%

RATIOS TO AVERAGE NET
ASSETS:
Expenses.................. 0.44% 0.45% 0.47% 0.49% 0.51% 0.51% 0.54% 0.52% 0.50% 0.52%
Net investment income..... 5.24% 5.07% 5.21% 5.16% 2.95% 2.90% 4.45% 6.80% 8.10% 8.33%

SUPPLEMENTAL DATA:
Net assets, end of period,
in millions.............. $11,922 $8,928 $7,170 $5,709 $4,144 $3,604 $3,628 $3,688 $3,454 $3,021
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

4
ACTIVE ASSETS MONEY TRUST
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

THE INVESTMENT OBJECTIVES OF THE TRUST ARE HIGH CURRENT INCOME, PRESERVATION
OF CAPITAL AND LIQUIDITY. THE INVESTMENT OBJECTIVES MAY NOT BE CHANGED WITHOUT
THE APPROVAL OF THE TRUST'S SHAREHOLDERS. THE TRUST SEEKS TO ACHIEVE ITS
OBJECTIVES BY INVESTING IN THE FOLLOWING MONEY MARKET INSTRUMENTS:

U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration, and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank, Federal Intermediate Credit Banks and Federal Land
Bank), including Treasury bills, notes, bonds (including zero coupon bonds) and
coupons;

BANK OBLIGATIONS. Obligations (including certificates of deposit, bankers'
acceptances and bank notes) of banks subject to regulation by the U.S.
Government and having total assets of $1,000,000,000 or more, and instruments
secured by such obligations, including obligations of foreign branches of
domestic banks (because of its relationship to the Active Assets program, the
Trust will not purchase securities of Bank One, Columbus, N.A. or its affiliates
and will not deal with such Bank or its affiliates as a principal in the
purchase and sale of securities);

OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1,000,000,000
or more;

FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions, having total assets of less than $1,000,000,000, if the
principal amount of the obligation is insured by the FDIC, limited to $100,000
principal amount per certificate and to 10% or less of the Trust's total assets
in all such obligations or in all illiquid assets, in the aggregate;

COMMERCIAL PAPER AND CORPORATE OBLIGATIONS. Commercial paper and corporate
debt obligations maturing in thirteen months or less which are rated in one of
the two highest rating categories for short-term debt obligations or, if not
rated, have been issued by issuers which have another short-term debt obligation
that is comparable in priority and security to such non-rated securities and is
so rated, by at least two nationally recognized statistical rating organizations
("NRSROs") (or one NRSRO if the instrument was rated by only one such
organization) or which, if unrated, are of comparable quality as determined in
accordance with procedures established by the Board of Trustees. The NRSROs
currently rating instruments of the type the Fund may purchase are Moody's
Investors Service, Inc., Standard & Poor's Corporation, Duff and Phelps, Inc.,
Fitch Investors Service, Inc., IBCA Limited and IBCA Inc., and Thomson
Bankwatch, Inc. Their rating criteria are described in the Appendix to the
Trust's Statement of Additional Information.

The foregoing rating limitations apply at the time of acquisition of a
security. Any subsequent change in any rating by a rating service will not
require elimination of any security from the Trust's portfolio. However, in
accordance with procedures adopted by the Trust's Board of Trustees pursuant to
federal securities regulations governing money market funds, if the Investment
Manager becomes aware that a portfolio security has received a new rating from
an NRSRO that is below the second highest rating, then, unless the security is
disposed of within five days, the Investment Manager will perform a
creditworthiness analysis of any such down-graded securities, which analysis
will be reported to the Trustees who will, in turn, determine whether the
securities continue to present minimal credit risks to the Fund.

The ratings assigned by the NRSROs represent their opinions as to the
quality of the securities they undertake to rate. It should be emphasized,
however, that the ratings are general and not absolute standards of quality.

REPURCHASE AGREEMENTS. The Trust may enter into repurchase agreements,
which may be viewed

5
ACTIVE ASSETS MONEY TRUST
<PAGE>
as a type of secured lending by the Trust, and which typically involve the
acquisition by the Trust of debt securities from a selling financial institution
such as a bank, savings and loan association or broker-dealer. The agreement
provides that the Trust will sell back to the institution, and that the
institution will repurchase, the underlying security ("collateral") at a
specified price and at a fixed time in the future. The Trust will accrue
interest from the institution until the time when the repurchase is to occur.
Although such date is deemed by the Trust to be the maturity date of a
repurchase agreement, the maturities of securities subject to repurchase
agreements are not subject to any limits and may exceed thirteen months. While
repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Trust follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
and specifying the required value of the collateral underlying the agreement.

VARIABLE RATE AND FLOATING RATE OBLIGATIONS. Certain of the types of
investments described above may be variable rate or floating rate obligations.
The interest rates payable on variable rate or floating rate obligations are not
fixed and may fluctuate based upon changes in market rates. The interest rate
payable on a variable rate obligation may be adjusted either at predesignated
periodic intervals and on a floating rate obligation whenever there is a change
in the market rate of interest on which the interest rate payable is based.

The foregoing investment policies are not fundamental and may be changed by
the Board of Trustees without shareholder vote.

PORTFOLIO MANAGEMENT--

Although the Trust will generally not seek profits through short-term
trading, it may dispose of any portfolio security prior to its maturity if, on
the basis of a revised credit evaluation of the issuer or other circumstances or
considerations, it believes such disposition advisable.

The Trust is expected to have a high portfolio turnover due to the short
maturities of securities purchased, but this should not affect income or net
asset value as brokerage commissions are not normally charged on the purchase or
sale of money market instruments.

The Trust will attempt to balance its objectives of high current income,
capital preservation and liquidity by investing in securities of varying
maturities and risks. The Trust will not, however, invest in securities that
mature in more than thirteen months from the date of purchase.

BROKERAGE ALLOCATION. Brokerage commissions are not normally charged on the
purchase or sale of money market instruments, but such transactions may involve
transaction costs in the form of spreads between bid and asked prices. Although
the Trust is expected to have a high portfolio turnover rate due to the short
maturities of its portfolio securities, the Trust's income or the net asset
value of its shares should not be affected as brokers' commissions are not
normally incurred. Pursuant to an order of the Securities and Exchange
Commission, the Trust may effect principal transactions in certain money market
instruments with Dean Witter. In addition, the Trust may incur brokerage
commissions on transactions conducted through Dean Witter, Morgan Stanley & Co.
Incorporated and other broker-dealers that are affiliates of the Investment
Manager.

YEAR 2000. The investment management services provided to the Trust by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000 and
expect that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.

6
ACTIVE ASSETS MONEY TRUST
<PAGE>

In addition, it is possible that the markets for securities in which the
Trust invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial. Accordingly, the Trust's investments may be adversely affected.

INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

These restrictions provide that the Trust may not:

1. Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require the
untimely disposition of securities. Borrowing in the aggregate may not exceed
20%, and borrowing for purposes other than meeting redemptions may not exceed 5%
of the value of the Trust's total assets (including the amount borrowed), less
liabilities (not including the amount borrowed) at the time the borrowing is
made;

2. Purchase securities of any issuer, except for securities issued by the
U.S. Government or its agencies or instrumentalities, having a record, together
with predecessors, of less than three years' continuous operation, if,
immediately after such purchase, more than 5% of the value of the Trust's total
assets would be invested in such securities;

3. Purchase any securities, other than obligations of the U.S. Government, or
its agencies or instrumentalities, if, immediately after such purchase, more
than 5% of the value of the Trust's total assets would be invested in securities
of any one issuer, or more than 10% of the outstanding securities of one issuer
would be owned by the Trust (for this purpose all indebtedness of an issuer
shall be deemed a single class of security); and

4. Purchase any securities, other than obligations of banks or of the U.S.
Government, or its agencies or instrumentalities, if, immediately after such
purchase, more than 25% of the value of the Trust's total assets would be
invested in the securities of issuers in the same industry; however, there is no
limitation as to investments in bank obligations or in obligations issued or
guaranteed by the Federal Government or its agencies or instrumentalities.

If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.

7
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
-------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
COMMERCIAL PAPER (83.2%)
AUTOMOTIVE - FINANCE (13.8%)
$ 50,000 American Honda Finance Corp.
09/09/98.................................................. 5.60 % $ 49,463,333
100,000 Chrysler Financial Corp. 08/27/98 - 10/15/98................ 5.60 - 5.62 98,759,278
435,000 Daimler-Benz North America Corp. 07/24/98 - 10/30/98........ 5.56 - 5.61 428,634,217
536,000 Ford Motor Credit Co. 07/07/98 - 10/02/98................... 5.55 - 5.59 533,610,930
540,000 General Motors Acceptance Corp. 07/10/98 - 09/24/98......... 5.58 - 5.60 536,737,439
---------------
1,647,205,197
---------------
BANK HOLDING COMPANIES (11.3%)
345,800 Bankers Trust Corp.
08/20/98 - 12/31/98....................................... 5.53 - 5.76 338,219,426
30,000 Corestates Capital Corp.
09/29/98.................................................. 5.63 29,589,750
50,000 First Chicago NBD Corp.
10/01/98.................................................. 5.61 49,298,500
595,000 Morgan (J.P.) & Co. Inc. 09/04/98 - 10/07/98................ 5.58 - 5.61 587,575,678
175,000 NationsBank Corp.
07/09/98 - 08/28/98....................................... 5.54 - 5.67 174,599,236
35,000 PNC Funding Corp.
07/06/98.................................................. 5.57 34,973,313
130,000 SunTrust Banks Inc.
08/05/98 - 08/19/98....................................... 5.57 - 5.58 129,203,394
---------------
1,343,459,297
---------------
BANKS - COMMERCIAL (23.0%)
330,000 Abbey National North America Corp. 08/03/98 - 11/04/98...... 5.58 - 5.65 326,181,550
295,000 ABN - AMRO North America Finance Inc.
08/25/98 - 01/29/99....................................... 5.57 - 5.72 290,222,378
150,000 ANZ (DE) Inc.
07/23/98 - 07/28/98....................................... 5.57 - 5.60 149,457,500
545,000 Deutsche Bank Financial Inc. 07/14/98 - 12/28/98............ 5.56 - 5.60 537,152,083
200,000 Dresdner U.S. Finance Inc. 10/21/98 - 10/22/98.............. 5.60 196,600,000
200,000 International Nederlanden (U.S.) Funding Corp. 07/08/98 -
10/19/98.................................................. 5.57 - 5.60 197,794,667
430,000 Societe Generale N.A. Inc. 08/21/98 - 10/06/98.............. 5.57 - 5.63 424,935,347
350,000 Toronto-Dominion Holdings USA Inc. 07/27/98 - 12/31/98...... 5.55 - 5.66 344,969,606
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
8
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
-------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$ 105,000 UBS Finance (DE) Inc. 10/13/98 - 10/30/98................... 5.61 - 5.62% $ 103,154,401
170,000 WestPac Capital Corp. 10/29/98 - 11/02/98................... 5.65 - 5.66 166,840,556
---------------
2,737,308,088
---------------
BROKERAGE (2.6%)
312,600 Goldman Sachs Group L.P. 07/02/98 - 08/27/98................ 5.58 - 5.90 310,500,565
---------------
ENERGY (0.4%)
50,000 Texaco Inc.
08/14/98.................................................. 5.56 49,663,889
---------------
FINANCE - COMMERCIAL (1.8%)
213,875 CIT Group Holdings, Inc. 07/24/98 - 09/25/98................ 5.58 - 5.60 212,248,163
---------------
FINANCE - CONSUMER (12.7%)
489,075 American Express Credit Corp. 07/06/98 - 10/01/98........... 5.54 - 5.66 485,147,507
55,000 American General Finance Corp.
09/04/98.................................................. 5.59 54,452,826
355,000 Avco Financial Services Inc. 08/17/98 - 09/15/98............ 5.58 - 5.60 351,768,194
229,350 Beneficial Corp.
07/27/98 - 09/10/98....................................... 5.58 - 5.60 227,281,098
50,000 Commercial Credit Co.
07/23/98.................................................. 5.58 49,831,333
247,200 Household Finance Corp. 08/11/98 - 09/14/98................. 5.58 - 5.60 245,481,614
96,350 Norwest Financial Inc. 07/10/98 - 10/07/98.................. 5.57 - 5.59 95,388,833
---------------
1,509,351,405
---------------
FINANCE - CORPORATE (4.9%)
587,750 Ciesco, L.P.
07/07/98 - 10/08/98....................................... 5.56 - 5.60 584,439,373
---------------
FINANCE - DIVERSIFIED (9.5%)
566,750 Associates Corp. of North America 07/30/98 - 09/28/98....... 5.56 - 5.60 562,355,367
581,650 General Electric Capital Corp. 07/02/98 - 03/16/99.......... 5.53 - 5.84 574,100,171
---------------
1,136,455,538
---------------
FINANCE - EQUIPMENT (1.4%)
168,200 Deere (John) Capital Corp. 07/08/98 - 09/04/98.............. 5.55 - 5.60 167,391,082
---------------
FOODS & BEVERAGES (0.7%)
90,000 Sara Lee Corp.
07/14/98.................................................. 5.63 89,817,350
---------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
9
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

TOTAL COMMERCIAL PAPER
(AMORTIZED COST $9,921,548,474).......................................... 9,921,548,474
---------------

CERTIFICATES OF DEPOSIT (6.9%)
150,000 Chase Manhattan Bank (USA)
07/22/98.................................................. 5.55 150,000,000
440,000 Fleet National Bank
08/12/98 - 10/09/98....................................... 5.58 - 5.61 440,000,000
144,500 NationsBank N.A.
09/08/98 - 12/29/98....................................... 5.59 - 5.60 144,500,000
85,000 U.S. Bank N.A.
08/28/98 - 12/29/98....................................... 5.52 - 5.62 85,000,000
---------------

TOTAL CERTIFICATES OF DEPOSIT
(AMORTIZED COST $819,500,000)............................................ 819,500,000
---------------

SHORT-TERM BANK NOTES (5.7%)
140,000 BankBoston, N.A.
09/30/98 - 10/08/98....................................... 5.59 - 5.61 140,000,000
245,000 F.C.C. National Bank
09/11/98 - 12/30/98....................................... 5.57 - 5.61 245,000,000
200,000 First Union National Bank
09/09/98 - 01/28/99....................................... 5.62 - 5.66 200,000,000
100,000 NationsBank N.A.
08/31/98.................................................. 5.58 100,000,000
---------------

TOTAL SHORT-TERM BANK NOTES
(AMORTIZED COST $685,000,000)............................................ 685,000,000
---------------

U.S. GOVERNMENT AGENCY OBLIGATIONS (4.1%)
239,000 Federal Farm Credit Bank 07/01/98 - 12/15/98................ 5.61 - 5.73 236,865,143
40,000 Federal Home Loan Banks
09/04/98.................................................. 5.74 39,607,833
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
10
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(AMORTIZED COST $488,801,226)............................................ 488,801,226
---------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(AMORTIZED COST $11,914,849,700) (a)............................................. 99.9 % 11,914,849,700

CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES................................... 0.1 6,830,896
------ ---------------

NET ASSETS....................................................................... 100.0 % $11,921,680,596
------ ---------------
------ ---------------
</TABLE>

- ---------------------

(a) Cost is the same for federal income tax purposes.

SEE NOTES TO FINANCIAL STATEMENTS
11
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $11,914,849,700)......................................................... $11,914,849,700
Cash....................................................................................... 35,389
Interest receivable........................................................................ 11,585,749
Prepaid expenses and other assets.......................................................... 180,383
---------------

TOTAL ASSETS.......................................................................... 11,926,651,221
---------------

LIABILITIES:
Payable for:
Investment management fee.............................................................. 2,906,321
Plan of distribution fee............................................................... 1,048,556
Shares of beneficial interest repurchased.............................................. 3,995
Accrued expenses and other payables........................................................ 1,011,753
---------------

TOTAL LIABILITIES..................................................................... 4,970,625
---------------

NET ASSETS............................................................................ $11,921,680,596
---------------
---------------

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................ $11,921,672,238
Accumulated undistributed net investment income............................................ 8,358
---------------

NET ASSETS............................................................................ $11,921,680,596
---------------
---------------

NET ASSET VALUE PER SHARE,
11,921,672,238 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)........ $1.00
---------------
---------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
12
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998

<TABLE>
<S> <C>
NET INVESTMENT INCOME:

INTEREST INCOME............................................................................... $604,424,726
------------

EXPENSES
Investment management fee..................................................................... 29,850,539
Plan of distribution fee...................................................................... 10,220,600
Transfer agent fees and expenses.............................................................. 4,429,693
Registration fees............................................................................. 1,301,497
Custodian fees................................................................................ 411,386
Shareholder reports and notices............................................................... 317,074
Professional fees............................................................................. 49,099
Trustees' fees and expenses................................................................... 18,147
Other......................................................................................... 73,600
------------

TOTAL EXPENSES........................................................................... 46,671,635
------------

NET INVESTMENT INCOME.................................................................... 557,753,091

NET REALIZED GAIN........................................................................ 52,509
------------

NET INCREASE.................................................................................. $557,805,600
------------
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
13
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>

INCREASE (DECREASE) IN NET ASSETS:

OPERATIONS:
Net investment income...................................................... $ 557,753,091 $ 420,477,213
Net realized gain.......................................................... 52,509 --
--------------- --------------

NET INCREASE.......................................................... 557,805,600 420,477,213
--------------- --------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................................................... (557,754,793) (420,473,721)
Net realized gain.......................................................... (52,509) --
--------------- --------------

TOTAL................................................................. (557,807,302) (420,473,721)
--------------- --------------
Net increase from transactions in shares of beneficial interest............ 2,993,642,870 1,757,892,646
--------------- --------------

NET INCREASE.......................................................... 2,993,641,168 1,757,896,138

NET ASSETS:
Beginning of period........................................................ 8,928,039,428 7,170,143,290
--------------- --------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $8,358 AND $10,060,
RESPECTIVELY).......................................................... $11,921,680,596 $8,928,039,428
--------------- --------------
--------------- --------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
14
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998

1. ORGANIZATION AND ACCOUNTING POLICIES

Active Assets Money Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Trust's investment objective is high current
income, preservation of capital and liquidity. The Trust was organized as a
Massachusetts business trust on March 30, 1981 and commenced operations on July
7, 1981.

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.

The following is a summary of significant accounting policies:

A. VALUATION OF INVESTMENTS -- Portfolio securities are valued at amortized
cost, which approximates market value.

B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Trust amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.

C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute 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 Trust records dividends
and distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

15
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

assets exceeding $1 billion but not exceeding $1.5 billion; 0.325% to the
portion of the daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.30% to the portion of the daily net assets exceeding $2 billion but
not exceeding $2.5 billion; 0.275% to the portion of the daily net assets
exceeding $2.5 billion but not exceeding $3 billion; and 0.25% to the portion of
the daily net assets exceeding $3 billion.

Under the terms of the Agreement, in addition to managing the Trust's
investments, the Investment Manager maintains certain of the Trust's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Trust who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Trust.

3. PLAN OF DISTRIBUTION

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Trust'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 therewith.

Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Trust, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor under the Plan: (1)
compensation to sales representatives of Dean Witter Reynolds Inc., an affiliate
of the Investment Manager and Distributor, and other broker-dealers; (2) sales
incentives and bonuses to sales representatives and to marketing personnel in
connection with promoting sales of the Trust's shares; (3) expenses incurred in
connection with promoting sales of the Trust's shares; (4) preparing and
distributing sales literature; and (5) providing advertising and promotional
activities, including direct mail solicitation and television, radio, newspaper,
magazine and other media advertisements.

The Trust is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the
Trust's shares. The amount of each monthly reimbursement payment may in no event
exceed an amount equal to a payment at the annual rate of 0.15% of the Trust's
average daily net assets. Expenses incurred by the Distributor pursuant to the
Plan in any fiscal year will not be reimbursed by the Trust through payments
accrued in any subsequent fiscal year. For the year ended June 30, 1998, the
distribution fee was accrued at the annual rate of 0.10%.

16
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

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, 1998 aggregated $38,311,164,180 and $35,857,554,382,
respectively.

Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Trust's transfer agent. At June 30, 1998, the Trust had
transfer agent fees and expenses payable of approximately $500.

The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended June 30, 1998 included in
Trustees' fees and expenses in the Statement of Operations amounted to $4,514.
At June 30, 1998, the Trust had an accrued pension liability of $48,803 which is
included in accrued expenses in the Statement of Assets and Liabilities.

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, 1998 JUNE 30, 1997
--------------- ---------------
<S> <C> <C>
Shares sold...................................................... 43,883,134,528 32,530,523,067
Shares issued in reinvestment of dividends and distributions..... 556,771,082 419,594,925
--------------- ---------------
44,439,905,610 32,950,117,992
Shares repurchased............................................... (41,446,262,740) (31,192,225,346)
--------------- ---------------
Net increase in shares outstanding............................... 2,993,642,870 1,757,892,646
--------------- ---------------
--------------- ---------------
</TABLE>

6. FINANCIAL HIGHLIGHTS

See the "Financial Highlights" table on page 4 of this Prospectus.

17
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF ACTIVE ASSETS MONEY TRUST

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights (which appear under the
heading "Financial Highlights" on page 4 of this Prospectus) present fairly, in
all material respects, the financial position of Active Assets Money Trust (the
"Trust") at June 30, 1998, 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 ten years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at June
30, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.

PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
AUGUST 5, 1998

18
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048 - (212) 392-5000

Active Assets Tax-Free Trust (the "Tax-Free Trust" or the "Trust") is a
no-load, diversified open-end management investment company. The Trust is
authorized to reimburse Morgan Stanley Dean Witter Distributors Inc. for
specific expenses incurred in promoting the distribution of the Trust's shares
pursuant to a Plan of Distribution pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"). Reimbursement may in no event
exceed an amount equal to payments at the annual rate of 0.15% of the average
daily net assets of the Trust.

The investment objective of the Tax-Free Trust is 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 Trust seeks to achieve its objective
by investing primarily in high quality, tax-exempt securities with short-term
maturities including Municipal Bonds, Municipal Notes and Municipal Commercial
Paper.

AN INVESTMENT IN THE TRUST IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THE TRUST WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Highlights/2 How Net Asset Value is Determined/A-4
Summary of Trust Expenses/3 Confirmations/A-5
Financial Highlights/4 The Trusts and Their Management/A-5
Investment Objective and Policies/5 Plan of Distribution/A-6
Investment Restrictions/8 Dividends, Distributions and Taxes/A-7
Financial Statements -- June 30, 1998/10 General Information/A-9
Report of Independent Accountants/23 Voting Rights/A-9
Purchase and Redemption of Shares/A-1 Custodian/A-10
Purchase of Shares/A-1 Shareholder Inquiries/A-10
Purchase of Shares by Non-Participants in
the Active Assets Program/A-2
Redemption of Shares/A-3
Redemption of Shares by Non-Participants in
the Active Assets Program/A-4
</TABLE>

-------------------
<PAGE>
THE DATE OF THIS PROSPECTUS IS AUGUST 20, 1998.

ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
HIGHLIGHTS

<TABLE>
<S> <C>
THE A no-load, open-end diversified management investment company investing principally in short-term
TRUST securities exempt from federal income tax. The Trust is authorized to reimburse Morgan Stanley Dean
Witter Distributors Inc. for specific expenses incurred in promoting the distribution of the
Trust's shares pursuant to a Plan of Distribution pursuant to Rule 12b-1 under the Act (See page
A-6). The Trust is organized as an unincorporated business trust under the laws of Massachusetts.
(See page A-5).
- ------------------------------------------------------------------------------------------------------------------------
SHARES The shares of the Tax-Free Trust are offered to participants in the Active Assets program of Dean
OFFERED Witter and to non-participants who wish to invest directly in shares of the Trust. (See page A-2).
The primary components of the Active Assets program are the Securities Account, which is linked to
the Active Assets Insured Account, the Active Assets Money Trust, the Tax-Free Trust, the Active
Assets California Tax-Free Trust or the Active Assets Government Securities Trust and to the Visa
Account. See the Client Account Agreement for further information.
- ------------------------------------------------------------------------------------------------------------------------
PURCHASE Pursuant to the Client Account Agreement between Dean Witter and the customer, free credit cash
OF SHARES balances will be automatically invested daily in shares of the Trust at their current net asset
value without any sales charge. Morgan Stanley Dean Witter Distributors Inc. is the Distributor of
shares of the Trust. Investments in shares are made under the circumstances described under
"Purchase and Redemption of Shares" (see page A-1). Non-participants in the Active Assets program
should refer to the discussion appearing at page A-2.
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT High level of daily tax-exempt income consistent with stability of principal and liquidity (see
OBJECTIVE page 5). There can be no assurance that the Trust's investment objective will be achieved.
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT A diversified portfolio of tax-exempt, fixed-income securities with short-term maturities (see page
POLICY 5).
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of the Trust, and its wholly-owned
MANAGER subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various investment
management, advisory, management and administrative capacities to 102 investment companies with
assets under management of approximately $115.9 billion at July 31, 1998 (see page A-5).
- ------------------------------------------------------------------------------------------------------------------------
MANAGEMENT Monthly fee at an annual rate of 1/2 of 1% of average daily net assets, scaled down on assets over
FEE $500 million (see page A-5).
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR Morgan Stanley Dean Witter Distributors Inc. (the "Distributor") sells shares of the Trust through
Dean Witter Reynolds Inc. Other than the reimbursement to the Distributor pursuant to the Rule
12b-1 Distribution Plan, the Distributor receives no distribution fees (see page A-2).
- ------------------------------------------------------------------------------------------------------------------------
PLAN OF The Trust is authorized to reimburse specific expenses incurred in promoting the distribution of
DISTRIBUTION the Trust's shares pursuant to a Plan of Distribution with the Distributor pursuant to Rule 12b-1
under the Investment Company Act of 1940. Reimbursement may in no event exceed an amount equal to
payments at the annual rate of 0.15 of 1% of average daily net assets of the Trust (see page A-6).
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS Automatically reinvested daily in additional shares at net asset value (see page A-7).
- ------------------------------------------------------------------------------------------------------------------------
REPORTS Individual monthly account statements from Dean Witter on the Dean Witter Transaction Statement;
annual and semi-annual Trust financial statements.
- ------------------------------------------------------------------------------------------------------------------------
REDEMPTION For participants in the Active Assets program, shares of the Trust will be redeemed at net asset
OF SHARES value automatically to satisfy debit balances in the Securities Account created by activity therein
or to satisfy amounts owing in the Visa Account resulting from Visa card purchases, cash advances
or checks written against the Visa Account. Non-participants in the Active Assets program should
refer to the discussion appearing at page A-4. It is anticipated that the net asset value will
remain constant at $1.00 per share. Dean Witter has the right to terminate a shareholder's Active
Assets service, in which event all Trust shares held in a shareholder's account will be
involuntarily redeemed. The Trust also reserves the right to reduce the number of shares in all
accounts if the Trustees determine that this is necessary to maintain the constant $1.00 per share
net asset value. See "Purchase and Redemption of Shares" (page A-1).
- ------------------------------------------------------------------------------------------------------------------------
RISKS The Trust invests principally in high quality, short-term fixed-income securities issued or
guaranteed by state and local governments which are subject to minimal risk of loss of income and
principal. However, the investor is directed to the discussions of "lease obligations" (page 6) and
"when-issued and delayed delivery securities" (page 7) concerning the risks associated with such
portfolio securities and management techniques.
- ------------------------------------------------------------------------------------------------------------------------
THE SUMMARY INFORMATION ABOVE SHOULD BE READ IN CONJUNCTION WITH THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE APPENDIX HERETO, IN THE CLIENT ACCOUNT AGREEMENT AND IN THE TRUST'S STATEMENT OF ADDITIONAL
INFORMATION, INCLUDING THE APPENDIX THERETO.
</TABLE>

ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
SUMMARY OF TRUST EXPENSES
- --------------------------------------------------------------------------------

The following table illustrates all expenses and fees that a shareholder of
the Trust will incur. The expenses and fees set forth in the table are for the
fiscal year ended June 30, 1998.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
- ---------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases.................................. None
Maximum Sales Charge Imposed on Reinvested Dividends....................... None
Deferred Sales Charge...................................................... None
Redemption Fees............................................................ None
Exchange Fee............................................................... None

ANNUAL TRUST OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ---------------------------------------------------------------------------
Management Fees............................................................ 0.40%
12b-1 Fees................................................................. 0.10%
Other Expenses............................................................. 0.04%
-----
Total Trust Operating Expenses............................................. 0.54%
-----
-----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ---------------------------------------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period:............... $ 6 $17 $30 $ 68
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE TRUST MAY BE GREATER OR
LESS THAN THOSE SHOWN.

3
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net investment income................... 0.031 0.030 0.031 0.030 0.020 0.021 0.033
Less dividends from net investment
income................................. (0.031) (0.030) (0.031) (0.030) (0.020) (0.021) (0.033)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL INVESTMENT RETURN................. 3.11% 3.05% 3.12% 3.09% 2.01% 2.15% 3.38%

RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 0.54% 0.55% 0.55% 0.56% 0.56% 0.57% 0.59%
Net investment income................... 3.05% 2.98% 3.08% 3.05% 1.98% 2.13% 3.30%

SUPPLEMENTAL DATA:
Net assets, end of period, in
millions............................... $1,869 $1,634 $1,542 $1,499 $1,416 $1,355 $1,304

1991 1990 1989
---------- ---------- ----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 1.00 $ 1.00 $ 1.00
---------- ---------- ----------
Net investment income................... 0.047 0.054 0.056
Less dividends from net investment
income................................. (0.047) (0.054) (0.056)
---------- ---------- ----------
Net asset value, end of period.......... $ 1.00 $ 1.00 $ 1.00
---------- ---------- ----------
---------- ---------- ----------
TOTAL INVESTMENT RETURN................. 4.84% 5.57% 5.77%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 0.60% 0.56% 0.58%
Net investment income................... 4.71% 5.44% 5.66%
SUPPLEMENTAL DATA:
Net assets, end of period, in
millions............................... $1,342 $1,174 $1,112
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

4
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

THE INVESTMENT OBJECTIVE OF THE TRUST IS TO PROVIDE AS HIGH A LEVEL OF DAILY
INCOME EXEMPT FROM FEDERAL PERSONAL INCOME TAX AS IS CONSISTENT WITH STABILITY
OF PRINCIPAL AND LIQUIDITY. It is a fundamental policy of the Trust that at
least 80% of its total assets will be invested in securities the interest on
which is exempt from federal personal income tax ("tax-exempt securities"). This
policy and the Trust's investment objective may not be changed without a vote of
a majority of the Trust's outstanding voting securities (as defined in the Act).
There is no assurance that the objective will be achieved.

The Trust seeks to achieve its investment objective by investing primarily
in high quality tax-exempt securities with short-term maturities. Such
securities will include Municipal Bonds, Municipal Notes and Municipal
Commercial Paper ("Municipal Obligations") with maturities of thirteen months or
less, which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations ("NRSROs" -- primarily Moody's Investors Service ("Moody's") and
Standard & Poor's Corporation ("S&P")), or one NRSRO if the obligation is rated
by only one NRSRO. Unrated obligations may be purchased if they are determined
to be of comparable quality by the Trust's Trustees.

Municipal Bonds and Municipal Notes are debt obligations of states, cities,
municipalities and municipal agencies which generally have maturities, at the
time of their issuance, of either one year or more (Bonds) or from six months to
three years (Notes). Municipal Commercial Paper refers to short-term obligations
of municipalities.

The Trust may purchase certain Municipal Obligations which have a final
maturity of more than thirteen months but which are subject to short-term demand
features or tenders prior to final maturity, either determined by the issuer or
selected at the holder's option. The former are commonly referred to as
"variable rate" obligations (see below) and the latter as municipal commercial
paper. The Trust may purchase Municipal Bonds and Notes if they are within
either the short-term or long-term rating levels set forth above for Municipal
Obligations.

See the Appendix to the Statement of Additional Information for an
explanation of Moody's and S&P ratings.

Any municipal obligation which depends on the credit of the Federal
Government shall be considered to have a rating in the highest category.

Up to 20% of the Trust's total assets may be invested in securities the
interest on which is not exempt from federal personal income tax ("taxable
securities") and in tax-exempt securities subject to the federal alternative
minimum tax for individuals ("AMT") (tax-exempt securities which are subject to
the AMT will not be included in the 80% total referred to above for investment
in tax-exempt securities).

Up to 20% of the Trust's total assets may be invested in taxable securities
of the type described below. The Trust may temporarily invest more than 20% in
taxable securities and tax-exempt securities subject to AMT to maintain a
"defensive" posture when, in the opinion of the Investment Manager, it is
advisable to do so because of market conditions. The types of taxable securities
in which the Trust may invest are limited to the following short-term,
fixed-income securities (maturing in thirteen months or less from the time of
purchase): (i) obligations of the United States Government or its agencies,
instrumentalities or authorities; (ii) prime commercial paper rated P-1 by
Moody's or A-1 by S&P; (iii) certificates of deposit and banker's acceptances of
domestic banks with assets of $1 billion or more; and (iv) repurchase agreements
with respect to any of the foregoing portfolio securities.

5
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
The foregoing percentage and rating limitations apply at the time of
acquisition of a security based on the last previous determination of the
Trust's net asset value. Any subsequent change in any rating by a rating service
or change in percentages resulting from market fluctuations or amount of total
or net assets may not require elimination of any security from the Trust's
portfolio.

The ratings assigned by NRSROs represent their opinions as to the quality of
the securities which they undertake to rate. It should be emphasized, however,
that the ratings are general and not absolute standards of quality. However, in
accordance with procedures adopted by the Trust's Trustees pursuant to federal
securities regulations governing money market funds, the Investment Manager will
perform a creditworthiness analysis of such downgraded securities, which
analysis will be reported to the Trustees who will, in turn, determine whether
the securities continue to present minimal credit risks to the Trust.

The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" bonds, notes or commercial paper. General obligation
bonds, notes or commercial paper are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds, notes or commercial paper include a state,
its counties, cities, towns and other governmental units. Revenue bonds, notes
or commercial paper are payable from the revenues derived from a particular
facility or class of facilities or, in some cases, from specific revenue
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multi-family housing units; public buildings and
facilities; air and marine ports, transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.

Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. State and local agencies or authorities
issue lease obligations to acquire equipment and facilities.

Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases, and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer), have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.

6
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
securities), the Trustees of the Trust have established guidelines to be
utilized by the Trust in determining the liquidity of a lease obligation. The
factors to be considered in making the determination include: 1) the frequency
of trades and quoted prices for the obligation; 2) the number of dealers willing
to purchase or sell the security and the number of other potential purchasers;
3) the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including, the time needed to dispose
of the security, the method of soliciting offers, and the mechanics of the
transfer. All lease obligations purchased by the Trust are subject to the
creditworthiness standards discussed above for Municipal Obligations.

The Trust does not generally intend to invest more than 25% of its total
assets in securities of governmental units located in any one state, territory,
or possession of the United States. The Trust may invest more than 25% of its
total assets in industrial development and pollution control bonds (two kinds of
tax-exempt Municipal Bonds) whether or not the users of facilities financed by
such bonds are in the same industry. In cases where such users are in the same
industry, there may be additional risk to the Trust in the event of an economic
downturn in such industry, which may result generally in a lowered need for such
facilities and a lowered ability of such users to pay for the use of such
facilities.

The high quality, short-term fixed income securities in which the Trust
principally invests are issued and/or guaranteed by state and local governments
and their agencies and authorities and are subject to minimal risk of loss of
income and principal.

PORTFOLIO MANAGEMENT

Although the Trust will generally acquire securities for investment with the
intent of holding them to maturity and will not seek profits through short-term
trading, the Trust may dispose of any security prior to its maturity to meet
redemption requests. Securities may also be sold when the Trust's Investment
Manager believes such disposition to be advisable on the basis of a revised
evaluation of the issuer or based upon relevant market considerations. There may
be occasions when, as a result of maturities of portfolio securities or sales of
Trust shares, or in order to meet anticipated redemption requests, the Trust may
hold cash which is not earning income.

The average weighted maturity of the portfolio will be 90 days or less. The
relatively short-term nature of the Trust's portfolio is expected to result in a
lower yield than portfolios comprised of longer-term tax-exempt securities.

VARIABLE RATE AND FLOATING RATE OBLIGATIONS. The interest rates payable on
certain Municipal Bonds and Municipal Notes are not fixed and may fluctuate
based upon changes in market rates. Municipal obligations of this type are
called "variable rate" or "floating rate" obligations. The interest rate payable
on a variable rate obligation is adjusted at predesignated periodic intervals
and on a floating rate obligation, whenever there is a change in the market rate
of interest on which the interest rate payable is based.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Trust may purchase
tax-exempt securities on a when-issued or delayed delivery basis; i.e., delivery
and payment can take place a month or more after the date of the transaction.
These securities are subject to market fluctuation and no interest accrues to
the purchaser prior to settlement. At the time the Trust makes the commitment to
purchase such securities, it will record the transaction and thereafter reflect
the value, each day, of such security in determining its net asset value.

7
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>

changes to their own computer systems to prepare for the year 2000 and expect
that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.

BROKERAGE ALLOCATION. Brokerage commissions are not normally charged on
purchases and sales of short-term municipal obligations, but such transactions
may involve transaction costs in the form of spreads between bid and asked
prices. Pursuant to an order of the Securities and Exchange Commission, the
Trust may effect principal transactions in certain money market instruments with
Dean Witter. In addition, the Trust may incur brokerage commissions on
transactions conducted through Dean Witter, Morgan Stanley & Co. Incorporated
and other broker-dealers that are affiliates of the Investment Manager.

INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

The investment restrictions listed below are among the restrictions that
have been adopted by the Trust as fundamental policies. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Trust, as defined in the Act. For purposes
of the following limitations: (a) an "issuer" of a security is the entity whose
assets and revenues are committed to the payment of interest and principal on
that particular security provided that the guarantee of a security will be
considered a separate security and, provided further, that a guarantee of a
security shall not be deemed to be a security issued by the guarantor if the
value of all securities issued or guaranteed by the guarantor and owned by the
Fund does not exceed 10% of the value of the total assets of the Fund; (b) a
"taxable security" is any security the interest on which is subject to federal
income tax; and (c) all percentage limitations apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations or amount of total or net assets
does not require elimination of any security from the portfolio.

The Trust may not:

1. Invest more than 5% of the value of its total assets in the
securities of any one issuer (other than obligations issued, or guaranteed
by, the United States Government, its agencies or instrumentalities);

2. Purchase more than 10% of all outstanding taxable debt securities of
any one issuer;

3. Invest more than 25% of the value of its total assets in taxable
securities of issuers in any one industry (industrial development and
pollution control bonds are grouped into industries based upon the business
in which the issuers of such obligations are engaged). This restriction does
not apply to obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities or to investments in bank
obligations;

4. Invest more than 5% of the value of its total assets in taxable
securities of issuers having a record, together with predecessors, of less

8
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
than three years of continuous operation. This restriction shall not apply
to any obligation of the United States Government, its agencies or
instrumentalities; and

5. Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which

might otherwise require the untimely disposition of securities. Borrowing in
the aggregate may not exceed 20%, and borrowing for purposes other than
meeting redemptions may not exceed 5%, of the value of the Trust's total
assets (including the amount borrowed), less liabilities (not including the
amount borrowed) at the time the borrowing is made.

9
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (66.8%)
ALABAMA
$16,300 Birmingham Medical Clinic
Board, University of Alabama
Health Services Foundation
Ser 1991.................... 3.45% 07/08/98 $ 16,300,000
20,800 University of Alabama,
Hospital Ser 1997 B......... 3.50 07/08/98 20,800,000
ARIZONA
12,200 Arizona Educational Loan
Marketing Corporation, 1991
Ser A (AMT)................. 3.60 07/08/98 12,200,000
ARKANSAS
20,000 Crossett, Georgia Pacific Corp
Ser 1984**.................. 3.40 07/08/98 20,000,000
CALIFORNIA
8,500 California Health Facilities
Financing Authority,
Adventist Health System/
West 1998 Ser A (MBIA)...... 3.50 07/01/98 8,500,000
California Pollution Control
Financing Authority,
5,000 Pacific Gas & Electric Co
1996 Ser F.................. 3.50 07/01/98 5,000,000
7,900 Pacific Gas & Electric Co
1997 Ser C (AMT)............ 3.60 07/01/98 7,900,000
26,600 Foothill/Eastern
Transportation Corridor
Agency, Toll Road Ser 1995
C........................... 3.10 07/08/98 26,600,000
27,600 Newport Beach, Hoag Memorial
Hospital/Presbyterian Ser
1996 B & C.................. 3.60 07/01/98 27,600,000
15,000 WateReuse Finance Authority,
Ser 1998 (FSA).............. 3.40 07/08/98 15,000,000
COLORADO
11,500 Colorado Health Facilities
Authority, Kaiser Permanente
1994 Ser A**................ 3.80 07/08/98 11,500,000
15,000 Colorado Student Obligation
Bond Authority, Ser 1989 A
(AMT)....................... 3.50 07/08/98 15,000,000
CONNECTICUT
25,000 Connecticut Development
Authority, Connecticut Light
& Power Co
1993 Ser A**................ 3.50 07/08/98 25,000,000
7,500 Connecticut Health &
Educational Facilities
Authority, Yale University
Ser T....................... 3.45 07/08/98 7,500,000
Connecticut Special
Assessment,
30,000 Unemployment Compensation
1993 Ser C (FGIC)........... 3.90 07/01/98 30,000,000
30,000 Unemployment Compensation
1993 Ser C (FGIC)........... 3.60 07/01/99 30,000,000
DELAWARE
20,000 Delaware Economic Development
Authority, Star Enterprise
Ser 1997 A & C (AMT)........ 3.65 07/08/98 20,000,000
FLORIDA
25,000 Dade County, Water & Sewer Ser
1994 (FGIC)................. 3.40 07/08/98 25,000,000
5,300 Dade County Health Facilities
Authority, Miami Children's
Hospital Ser 1990........... 4.10 07/01/98 5,300,000
21,900 Dade County Industrial
Development Authority,
Dolphins Stadium Ser 1985 B
& C......................... 3.55 07/08/98 21,900,000
17,650 Escambia County, Gulf Power Co
Ser 1997.................... 3.90 07/01/98 17,650,000
14,000 Putnam County Development
Authority, Seminole Electric
Co-op Inc Ser 1984 D
(NRU-CFC Gtd)............... 3.65 12/15/98 14,000,000
20,000 Volusia County Health
Facilities Authority, Pooled
Ser 1985 (FGIC)**........... 3.50 07/08/98 20,000,000
GEORGIA
21,000 Albany-Dougherty County
Hospital Authority,
Phoebe-Putney Memorial
Hospital Ser 1991
(AMBAC)**................... 3.55 07/08/98 21,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
10
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HAWAII
$11,460 Hawaii Department of Budget &
Finance, Kaiser Permanente
Semiannual Tender Ser 1984
B........................... 3.70% 09/01/98 $ 11,460,000
IDAHO
12,475 Idaho Health Facilities
Authority, St Luke's
Regional Medical Center Ser
1995........................ 3.75 07/01/98 12,475,000
ILLINOIS
20,000 Chicago, Tender Notes Ser
1997........................ 3.55 10/29/98 20,000,000
Illinois Health Facilities
Authority,
8,900 Gottlieb Health Resources
Ser 1990.................... 3.50 07/08/98 8,900,000
15,000 Northwestern Memorial
Hospital Ser 1995........... 3.80 07/01/98 15,000,000
11,685 Illinois Housing Development
Authority, Homeowner
Mortgage 1997 Subser E-2
(AMT)....................... 3.85 12/17/98 11,685,000
20,000 Illinois Toll Highway
Authority, Refg Ser 1993-B
(MBIA)...................... 3.40 07/08/98 20,000,000
INDIANA
8,500 Indiana Development Financing
Authority, Southern Indiana
Gas & Electric Co Ser 1988
A........................... 3.65 09/01/98 8,500,000
18,000 Indiana Hospital Equipment
Financing Authority, Ser
1985 A (MBIA)............... 3.60 07/08/98 18,000,000
15,800 Indianapolis, Ogden Martin
Systems Inc Ser 1987
(AMT)....................... 4.10 07/01/98 15,800,000
8,400 Petersburg, Indianapolis Power
& Light Co Ser 1995 B
(AMBAC)..................... 3.60 07/08/98 8,400,000
KENTUCKY
7,000 Jamestown, Union Underwear Co
1983 Ser A.................. 3.70 07/08/98 7,000,000
LOUISIANA
29,800 New Orleans Aviation Board,
Ser 1993 B (MBIA)........... 3.50 07/08/98 29,800,000
MARYLAND
Maryland Health & Educational
Facilities Authority,
8,000 Johns Hopkins Hospital Ser
1997 A...................... 3.50 07/08/98 8,000,000
10,000 North Arundel Hospital Ser
1997 A...................... 3.55 07/08/98 10,000,000
MASSACHUSETTS
15,000 Massachusetts Bay
Transportation Authority,
1984 Ser A.................. 3.40 09/01/98 15,000,000
Massachusetts Health &
Educational Facilities
Authority,
5,800 Amherst College Ser F....... 3.40 07/08/98 5,800,000
27,700 Harvard University Ser 1985
I........................... 3.40 07/08/98 27,700,000
14,658 Williams College Ser E...... 3.15 07/08/98 14,658,000
10,000 Massachusetts Municipal
Wholesale Electric Company,
Power Supply System 1994 Ser
C (MBIA).................... 3.35 07/08/98 10,000,000
MICHIGAN
7,000 Delta County Economic
Development Corporation,
Mead-Escanaba Paper Co Ser
1985 E...................... 4.00 07/01/98 7,000,000
9,100 Michigan Strategic Fund,
Detroit Edison Co Ser 1995
CC.......................... 3.80 07/01/98 9,100,000
MINNESOTA
6,000 Minneapolis & St Paul Housing
& Redevelopment Authority,
Childrens' Health Care Ser
1995 B (FSA)................ 4.05 07/01/98 6,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
11
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MISSOURI
$22,000 Missouri Environmental
Improvement & Energy
Resources Authority, Union
Electric Company Ser 1984
B........................... 3.75% 06/01/99 $ 22,000,000
Missouri Health & Educational
Facilities Authority,
16,300 Cox Health Care Ser 1997
(MBIA)...................... 3.80 07/01/98 16,300,000
6,800 Drury College Ser 1996 A.... 4.05 07/01/98 6,800,000
11,700 SSM Health Care Ser 1995
B........................... 3.85 08/17/98 11,700,000
10,000 St Louis County Industrial
Development Authority,
Charity Obligated
Group-Daughters of Charity
National Health System Ser
1997 E...................... 3.40 07/08/98 10,000,000
NEW JERSEY
5,200 New Jersey Economic
Development Authority,
United Water New Jersey Inc
Ser 1996 B (AMBAC).......... 3.55 07/01/98 5,200,000
23,400 New Jersey Turnpike Authority,
Ser 1991 D (FGIC)........... 3.30 07/08/98 23,400,000
NEW MEXICO
27,000 Albuquerque, Airport Sub Lien
Ser 1995 (AMBAC)............ 3.40 07/08/98 27,000,000
NEW YORK
5,000 Port Authority of New York &
New Jersey, Ser 4 (AMT)..... 4.00 07/01/98 5,000,000
NORTH CAROLINA
14,800 Durham, Ser 1993 A COPs....... 3.50 07/08/98 14,800,000
7,000 North Carolina Educational
Facilities Finance Agency,
Bowman Gray School of
Medicine Ser 1996........... 3.50 07/08/98 7,000,000
18,500 North Carolina Medical Care
Commission, Duke University
Hospital Ser 1985 B......... 3.45 07/08/98 18,500,000
21,700 Person County Industrial
Facilities & Pollution
Control Financing Authority,
Carolina Power & Light Co
Ser 1992 A**................ 3.70 07/08/98 21,700,000
OHIO
10,000 Cleveland, Airport System Ser
1997 D (AMT)................ 3.60 07/08/98 10,000,000
39,095 Cuyahoga County, Cleveland
Clinic Foundation Ser 1997 B
(AMBAC) & Ser 1998 A........ 3.55 07/08/98 39,095,000
2,400 Ohio Air Quality Development
Authority, Sohio Air-British
Petroleum Co Ser 1995....... 4.00 07/01/98 2,400,000
OKLAHOMA
34,205 Oklahoma Water Resources
Board, State Loan Program
Ser 1994 A & Ser 1995....... 3.55 09/01/98 34,205,000
PENNSYLVANIA
10,000 Allegheny County Hospital
Development Authority,
Health Education & Research
Corp Ser 1988 B............. 3.60 07/08/98 10,000,000
10,700 Lehigh County General Purpose
Authority, Lehigh Valley
Hospital Ser 1997 A
(AMBAC)..................... 3.90 07/01/98 10,700,000
16,500 Pennsylvania Higher Education
Assistance Agency, Student
Loan 1997 Ser A (AMT)....... 3.70 07/08/98 16,500,000
12,700 York General Authority, Pooled
Ser 1996.................... 3.60 07/08/98 12,700,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
12
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SOUTH CAROLINA
York County,
$15,220 North Carolina Electric
Membership Corp Ser 1984 N-5
(NRU-CFC Gtd)............... 3.50% 09/15/98 $ 15,220,000
21,295 Saluda River Electric Co-op
Inc Ser 1984 E-1 & E-2
(NRU-CFC Gtd)............... 3.45 08/15/98 21,295,000
TENNESSEE
20,000 Clarksville Public Building
Authority, Pooled Financing
Ser 1995.................... 3.60 07/08/98 20,000,000
5,000 Metropolitan Nashville Airport
Authority, American Airlines
Refg Ser 1995 B............. 4.00 07/01/98 5,000,000
TEXAS
25,000 Harris County, Toll Road
Unlimited Tax Sub Lien Ser
1994 C...................... 3.50 07/08/98 25,000,000
10,000 Hockley County Industrial
Development Corporation,
Amoco Oil Co Ser 1985....... 3.65 11/01/98 10,000,000
2,300 Matagorda County Navigation
District #1, Houston
Lighting & Power Co Ser 1997
(AMBAC) (AMT)............... 4.05 07/01/98 2,300,000
18,600 Waco Health Facilities
Development Corporation,
Charity Obligation Group Ser
1997 F**.................... 3.40 07/08/98 18,600,000
UTAH
20,000 Intermountain Power Agency,
1985 Ser E (AMBAC).......... 3.45 09/15/98 20,000,000
WASHINGTON
17,700 Washington, Ser 1996 A........ 3.40 07/08/98 17,700,000
WISCONSIN
9,500 Brokaw, Wausau Paper Mills Co
Ser 1995 (AMT).............. 3.80 07/08/98 9,500,000
11,280 Wisconsin Health & Educational
Facilities Authority,
Franciscan Health Care Inc
Ser 1985 A-1................ 3.50 07/08/98 11,280,000
WYOMING
13,600 Lincoln County, Exxon Corp Ser
1987 A & B (AMT)............ 4.10 07/01/98 13,600,000
10,800 Sweet Water County, Pacificorp
Ser 1984.................... 3.75 07/01/98 10,800,000
--------------

TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL
OBLIGATIONS
(AMORTIZED COST $1,249,323,000)................... 1,249,323,000
--------------
</TABLE>

<TABLE>
<CAPTION>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------ -------- ----------
<C> <S> <C> <C> <C> <C>
TAX-EXEMPT COMMERCIAL PAPER (28.9%)
ARIZONA
7,750 Maricopa County Pollution
Control Corporation,
Southern California Edison
Co 1985 Ser B............... 3.65% 09/10/98 3.65% 7,750,000
Salt River Project
Agricultural Improvement &
Power District,
6,500 Ser 1997 A.................. 3.60 09/11/98 3.60 6,500,000
7,000 Ser 1997 A.................. 3.55 09/17/98 3.55 7,000,000
COLORADO
10,000 Platte River Power Authority,
Electric Subordinate Lien
S-1......................... 3.70 08/20/98 3.70 10,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
13
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
FLORIDA
Jacksonville Electric
Authority,
$10,000 Ser C....................... 3.40% 07/14/98 3.40% $ 10,000,000
11,300 Ser C....................... 3.60 08/11/98 3.60 11,300,000
8,000 Ser C....................... 3.60 10/15/98 3.60 8,000,000
GEORGIA
10,000 Burke County Development
Authority, Oglethorpe Power
Corp Ser 1998 B (AMBAC)..... 3.55 09/22/98 3.55 10,000,000
HAWAII
4,000 Hawaii Department of Budget &
Finance, Citizens Utilities
Co 1996 Ser B (AMT)......... 3.70 08/12/98 3.70 4,000,000
Honolulu City & County,
7,800 Ser 1993 BANs............... 3.45 07/13/98 3.45 7,800,000
12,100 Ser 1993 BANs............... 3.55 10/08/98 3.55 12,100,000
INDIANA
13,000 Petersburg, Indianapolis Power
& Light Co Ser 1991......... 3.50 10/28/98 3.50 13,000,000
LOUISIANA
Plaquemines Port Harbor &
Terminal District,
12,350 Electric - Coal Transfer Co
Ser 1985 B.................. 3.70 08/24/98 3.70 12,350,000
13,400 Electric - Coal Transfer Co
Ser 1985 D.................. 3.40 07/15/98 3.40 13,400,000
10,000 Electric - Coal Transfer Co
Ser 1985 D.................. 3.75 08/19/98 3.75 10,000,000
MARYLAND
10,500 Baltimore County, Ser 1995
BANs........................ 3.55 09/10/98 3.55 10,500,000
MINNESOTA
8,600 Rochester, Mayo
Foundation/Mayo Medical
Center Ser 1992 C........... 3.50 08/12/98 3.50 8,600,000
NEBRASKA
Nebraska Public Power
District,
10,000 Series A Notes.............. 3.65 07/29/98 3.65 10,000,000
10,000 Series A Notes.............. 3.60 09/09/98 3.60 10,000,000
6,000 Series A Notes.............. 3.65 09/09/98 3.65 6,000,000
13,000 Series B Notes.............. 3.45 08/13/98 3.45 13,000,000
NEVADA
Las Vegas Valley Water
District,
11,000 Water Ser A................. 3.60 09/29/98 3.60 11,000,000
8,000 Water Ser A................. 3.60 10/21/98 3.60 8,000,000
NORTH CAROLINA
North Carolina Eastern
Municipal Power Agency,
7,200 Ser 1996.................... 3.60 07/21/98 3.60 7,200,000
10,000 Ser 1996.................... 3.40 07/23/98 3.40 10,000,000
10,000 Ser 1996.................... 3.55 10/06/98 3.55 10,000,000
PENNSYLVANIA
Delaware County Industrial
Development Authority,
15,000 PECO Energy Ser 1988 C
(FGIC)...................... 3.55 10/14/98 3.55 15,000,000
16,600 PECO Energy Ser 1988 C
(FGIC)...................... 3.55 10/27/98 3.55 16,600,000
10,900 Pennsylvania, Ser 1997 A
BANs........................ 3.70 08/13/98 3.70 10,900,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
14
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
SOUTH CAROLINA
$15,000 South Carolina Public Service
Authority, Promissory
Notes....................... 3.50% 10/20/98 3.50% $ 15,000,000
TEXAS
8,000 Dallas Area Rapid Transit,
Sales Tax Ser A............. 3.60 08/12/98 3.60 8,000,000
Houston,
10,000 1996 Ser B.................. 3.70 08/19/98 3.70 10,000,000
7,000 Airport Ser 1993 A (AMT).... 3.65 10/14/98 3.65 7,000,000
15,000 Water & Sewer 1994 Ser A.... 3.55 07/20/98 3.55 15,000,000
10,000 Water & Sewer 1994 Ser A.... 3.40 07/21/98 3.40 10,000,000
7,650 Water & Sewer 1994 Ser A.... 3.75 07/22/98 3.75 7,650,000
8,000 Water & Sewer 1994 Ser A.... 3.60 10/08/98 3.60 8,000,000
10,000 Water & Sewer 1994 Ser A.... 3.65 10/22/98 3.65 10,000,000
San Antonio,
12,000 Electric & Gas Ser 1988 A... 3.45 07/13/98 3.45 12,000,000
12,900 Electric & Gas Ser 1988 A... 3.50 07/22/98 3.50 12,900,000
10,200 Electric & Gas Ser 1988 A... 3.75 08/25/98 3.75 10,200,000
16,600 Electric & Gas Ser 1988 A... 3.75 09/10/98 3.75 16,600,000
12,000 Electric & Gas Ser 1995 A... 3.65 09/24/98 3.65 12,000,000
13,400 Electric & Gas Ser 1988 A... 3.60 10/22/98 3.60 13,400,000
10,000 Texas, Ser 1997 B TRANs....... 3.50 08/12/98 3.50 10,000,000
Texas A & M University,
15,000 Ser 1993 B.................. 3.30 07/14/98 3.30 15,000,000
12,800 Ser 1993 B.................. 3.30 07/17/98 3.30 12,800,000
10,000 Texas Municipal Power Agency,
Ser 1991.................... 3.55 10/21/98 3.55 10,000,000
UTAH
10,300 Utah, Highway Ser 1997 B...... 3.75 09/30/98 3.75 10,300,000
VIRGINIA
10,000 Virginia, Ser 1997 BANs....... 3.55 08/20/98 3.55 10,000,000
WISCONSIN
15,000 Wisconsin Health & Educational
Facilities Authority, SSM
Health Care Ser 1998 B...... 3.60 10/07/98 3.60 15,000,000
--------------

TOTAL TAX-EXEMPT COMMERCIAL PAPER
(AMORTIZED COST $540,850,000)................................ 540,850,000
--------------

SHORT-TERM MUNICIPAL NOTES (12.0%)
IDAHO
10,000 Idaho, Ser 1998 TANs, dtd
07/01/98 (WI)............... 4.50 06/30/99 3.60 10,086,600
INDIANA
5,000 Indianapolis Local Improvement
Bond Bank, Ser 1997 E Notes,
dtd 12/18/97................ 4.25 07/09/98 3.80 5,000,483
IOWA
45,000 Iowa School Corporations,
Warrant Certificates 1998-99
Ser A (FSA), dtd 06/25/98... 4.50 06/25/99 3.65 45,362,934
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
15
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
KENTUCKY
$15,000 Kentucky Asset/Liability
Commission, 1998 Ser A
TRANs, dtd 07/01/98 (WI).... 4.50% 06/25/99 3.57% $ 15,132,450
MICHIGAN
Michigan Municipal Bond
Authority,
30,000 Ser 1997 B Notes, dtd
07/02/97.................... 4.50 07/02/98 3.89 30,000,486
7,500 Ser 1998 B-1 Notes, dtd
07/02/98 (WI)............... 4.50 07/02/99 3.60 7,565,100
NEW MEXICO
30,000 New Mexico, Ser 1998-1999
TRANs, dtd 07/02/98 (WI).... 4.25 06/30/99 3.60 30,187,200
TEXAS
20,000 Houston, Ser 1998 TRANs, dtd
07/01/98 (WI)............... 4.50 06/30/99 3.55 20,134,800
15,000 Texas, Ser 1997 A TRANs, dtd
09/02/97.................... 4.75 08/31/98 3.85 15,023,835
WISCONSIN
44,500 Wisconsin, Operating Notes of
1998, dtd 07/01/98 (WI)..... 4.50 06/15/99 3.55 44,891,280
--------------

TOTAL SHORT-TERM MUNICIPAL NOTES
(AMORTIZED COST $223,385,168)................................ 223,385,168
--------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(AMORTIZED COST $2,013,558,168) (a)............................ 107.7 % 2,013,558,168

LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS................. (7.7) (144,167,324)
------ ---------------

NET ASSETS..................................................... 100.0 % $ 1,869,390,844
------ ---------------
------ ---------------
</TABLE>

- ---------------------

AMT Alternative Minimum Tax.
BANs Bond Anticipation Notes.
COPs Certificates of Participation.
NRU-CFC National Rural Utilities - Cooperative Finance Corporation.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
WI Security purchased on a "when-issued" basis.
+ Rate shown is the rate in effect at June 30, 1998.
* Date in which the principal amount can be recovered through demand.
** All or a portion of these securities have been segregated in connection
with the purchase of "when-issued" securities and a delayed delivery
security.
(a) Cost is the same for federal income tax purposes.
BOND INSURANCE:
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.

SEE NOTES TO FINANCIAL STATEMENTS
16
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $2,013,558,168)........................................................... $2,013,558,168
Cash........................................................................................ 13,007,742
Interest receivable......................................................................... 11,716,416
Prepaid expenses and other assets........................................................... 69,948
--------------

TOTAL ASSETS........................................................................... 2,038,352,274
--------------

LIABILITIES:
Payable for:
Investments purchased................................................................... 167,999,243
Investment management fee............................................................... 667,840
Plan of distribution fee................................................................ 168,397
Shares of beneficial interest repurchased............................................... 177
Accrued expenses............................................................................ 125,773
--------------

TOTAL LIABILITIES...................................................................... 168,961,430
--------------

NET ASSETS............................................................................. $1,869,390,844
--------------
--------------

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................. $1,869,382,329
Accumulated undistributed net investment income............................................. 9,834
Accumulated net realized loss............................................................... (1,319)
--------------

NET ASSETS............................................................................. $1,869,390,844
--------------
--------------

NET ASSET VALUE PER SHARE,
1,869,392,429 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE).......... $1.00
--------------
--------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
17
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998

<TABLE>
<S> <C>
NET INVESTMENT INCOME:

INTEREST INCOME................................................................................ $66,669,943
-----------

EXPENSES
Investment management fee...................................................................... 7,412,622
Plan of distribution fee....................................................................... 1,797,493
Transfer agent fees and expenses............................................................... 344,031
Registration fees.............................................................................. 238,422
Custodian fees................................................................................. 80,971
Shareholder reports and notices................................................................ 56,254
Professional fees.............................................................................. 45,072
Trustees' fees and expenses.................................................................... 18,164
Other.......................................................................................... 20,609
-----------

TOTAL EXPENSES............................................................................ 10,013,638

Less: expense offset........................................................................... (80,615)
-----------

NET EXPENSES.............................................................................. 9,933,023
-----------

NET INVESTMENT INCOME..................................................................... 56,736,920

NET REALIZED GAIN......................................................................... 5,223
-----------

NET INCREASE................................................................................... $56,742,143
-----------
-----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
18
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

INCREASE (DECREASE) IN NET ASSETS:

OPERATIONS:
Net investment income....................................................... $ 56,736,920 $ 49,576,805
Net realized gain (loss).................................................... 5,223 (6,542)
-------------- --------------

NET INCREASE........................................................... 56,742,143 49,570,263
-------------- --------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................................................... (56,742,296) (49,562,686)
Net realized gain........................................................... -- (7,971)
-------------- --------------

TOTAL.................................................................. (56,742,296) (49,570,657)
-------------- --------------
Net increase from transactions in shares of beneficial interest............. 235,864,187 91,640,075
-------------- --------------

NET INCREASE........................................................... 235,864,034 91,639,681

NET ASSETS:
Beginning of period......................................................... 1,633,526,810 1,541,887,129
-------------- --------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $9,834 AND $15,210,
RESPECTIVELY)........................................................... $1,869,390,844 $1,633,526,810
-------------- --------------
-------------- --------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
19
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998

1. ORGANIZATION AND ACCOUNTING POLICIES

Active Assets Tax-Free Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Trust's investment objective is to provide a
high level of daily income which is exempt from federal income tax consistent
with stability of principal and liquidity. The Trust 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.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

20
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

exceeding $500 million but not exceeding $750 million; 0.375% to the portion of
daily net assets exceeding $750 million but not exceeding $1 billion; 0.35% to
the portion of daily net assets exceeding $1 billion but not exceeding $1.5
billion; 0.325% to the portion of daily net assets exceeding $1.5 billion but
not exceeding $2 billion; 0.30% to the portion of daily net assets exceeding $2
billion but not exceeding $2.5 billion; 0.275% to the portion of daily net
assets exceeding $2.5 billion but not exceeding $3 billion; and 0.25% to the
portion of daily net assets exceeding $3 billion.

3. PLAN OF DISTRIBUTION

Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Trust, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor and other
broker-dealers under the Plan: (1) compensation to sales representatives of Dean
Witter Reynolds Inc., an affiliate of the Investment Manager and Distributor,
and other broker-dealers; (2) sales incentives and bonuses to sales
representatives and to marketing personnel in connection with promoting sales of
the Trust's shares; (3) expenses incurred in connection with promoting sales of
the Trust's shares; (4) preparing and distributing sales literature; and (5)
providing advertising and promotional activities, including direct mail
solicitation and television, radio, newspaper, magazine and other media
advertisements.

21
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

Plan in any fiscal year will not be reimbursed by the Trust through payments
accrued in any subsequent fiscal year. For the year ended June 30, 1998, 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, 1998 aggregated $4,315,527,503 and $3,951,491,429,
respectively.

The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended June 30, 1998, included
in Trustees' fees and expenses in the Statement of Operations amounted to
$4,515. At June 30, 1998, the Trust had an accrued pension liability of $48,803
which is included in accrued expenses in the Statement of Assets and
Liabilities.

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, 1998 JUNE 30, 1997
--------------- ---------------
<S> <C> <C>
Shares sold...................................................... 6,715,086,000 5,701,581,425
Shares issued in reinvestment of dividends and distributions..... 56,742,296 49,570,657
--------------- ---------------
6,771,828,296 5,751,152,082
Shares repurchased............................................... (6,535,964,109) (5,659,512,007)
--------------- ---------------
Net increase in shares outstanding............................... 235,864,187 91,640,075
--------------- ---------------
--------------- ---------------
</TABLE>

6. FEDERAL INCOME TAX STATUS

At June 30, 1998, the Trust had a net capital loss carryover of approximately
$1,300 which will be available through June 30, 2006 to offset future capital
gains to the extent provided by regulations.

7. FINANCIAL HIGHLIGHTS

See the "Financial Highlights" table on page 4 of this Prospectus.

22
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>

ACTIVE ASSETS TAX-FREE TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF ACTIVE ASSETS TAX-FREE TRUST

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights (which appear under the
heading "Financial Highlights" on page 4 of this Prospectus) present fairly, in
all material respects, the financial position of Active Assets Tax-Free Trust
(the "Trust") at June 30, 1998, 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 ten years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at June
30, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.

PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
AUGUST 5, 1998

1998 FEDERAL TAX NOTICE (UNAUDITED)

For the year ended June 30, 1998, all of the Trust's dividends
from net investment income were exempt interest dividends,
excludable from gross income for Federal income tax purposes.

23
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048 - (212) 392-5000

Active Assets California Tax-Free Trust (the "California Tax-Free Trust" or
the "Trust") is a no-load, diversified open-end management investment company.
The Trust is authorized to reimburse Morgan Stanley Dean Witter Distributors
Inc. for specific expenses incurred in promoting the distribution of the Trust's
shares pursuant to a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "Act"). Reimbursement may in no
event exceed an amount equal to payments at the annual rate of 0.15% of the
average daily net assets of the Trust.

The investment objective of the Trust is to provide as high a level of daily
income exempt from federal and California personal income tax as is consistent
with stability of principal and liquidity. The Trust seeks to achieve its
objective by investing primarily in high quality, California tax-exempt
securities with short-term maturities including Municipal Bonds, Municipal Notes
and Municipal Commercial Paper. The Trust may invest a significant percentage of
its assets in the securities of a single issuer and therefore an investment in
the Trust may be riskier than an investment in other types of money funds.

AN INVESTMENT IN THE TRUST IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THE TRUST WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Highlights/2 How Net Asset Value is Determined/A-4
Summary of Trust Expenses/3 Confirmations/A-5
Financial Highlights/4 The Trusts and Their Management/A-5
Investment Objective and Policies/5 Plan of Distribution/A-6
Investment Restrictions/10 Dividends, Distributions and Taxes/A-7
Financial Statements -- June 30, 1998/11 General Information/A-9
Report of Independent Accountants/21 Voting Rights/A-9
Purchase and Redemption of Shares/A-1 Custodian/A-10
Purchase of Shares/A-1 Shareholder Inquiries/A-10
Purchase of Shares by Non-Participants in
the Active Assets Program/A-2
Redemption of Shares/A-3
Redemption of Shares by Non-Participants in
the Active Assets Program/A-4
</TABLE>

THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION YOU SHOULD KNOW BEFORE
INVESTING IN THE TRUST. IT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE TRUST IS CONTAINED IN THE STATEMENT OF
ADDITIONAL INFORMATION, DATED AUGUST 20, 1998, WHICH HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, AND WHICH IS AVAILABLE AT NO CHARGE UPON
REQUEST OF THE TRUST AT THE ADDRESS LISTED ABOVE OR BY CALLING THE MORGAN
STANLEY DEAN WITTER ADVISORS INC. (THE "INVESTMENT MANAGER" OR "MSDW ADVISORS")
AT (212) 392-2550. THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED
HEREIN BY REFERENCE.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

-------------------

THE DATE OF THIS PROSPECTUS IS AUGUST 20, 1998.
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
HIGHLIGHTS

<TABLE>
<S> <C>
THE A no-load, open-end diversified management investment company investing principally in short-term
TRUST securities exempt from federal and California personal income tax. The Trust is authorized to
reimburse Morgan Stanley Dean Witter Distributors Inc. for specific expenses incurred in promoting
the distribution of the Trust's shares pursuant to a Plan of Distribution pursuant to Rule 12b-1
under the Act (See page A-6). The Trust is organized as an unincorporated business trust under the
laws of Massachusetts. (See page A-5).
- ------------------------------------------------------------------------------------------------------------------------
SHARES The shares of the Trust are offered to participants in the Active Assets program of Dean Witter and
OFFERED to non- participants who wish to invest directly in shares of the Trust. (See page A-2). The
primary components of the Active Assets program are the Securities Account, which is linked to the
Active Assets Insured Account, the Active Assets Money Trust, the Active Assets Tax-Free Trust, the
California Tax-Free Trust or the Active Assets Government Securities Trust and to the Visa Account.
See the Client Account Agreement for further information.
- ------------------------------------------------------------------------------------------------------------------------
PURCHASE Pursuant to the Client Account Agreement between Dean Witter and the customer, free credit cash
OF SHARES balances will be automatically invested daily in shares of the Trust at their current net asset
value without any sales charge. Morgan Stanley Dean Witter Distributors Inc. is the Distributor of
shares of the Trust. Investments in shares are made under the circumstances described under
"Purchase and Redemption of Shares" (see page A-1). Non-participants in the Active Assets program
should refer to the discussion appearing at page A-2.
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT High level of daily California tax-exempt income consistent with stability of principal and
OBJECTIVE liquidity (see page 5). There can be no assurance that the Trust's investment objective will be
achieved.
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT A diversified portfolio of tax-exempt, fixed-income securities with short-term maturities (see page
POLICY 5).
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of the Trust, and its wholly-owned
MANAGER subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various investment
management, advisory, management and administrative capacities to 102 investment companies with
assets under management of approximately $115.9 billion at July 31, 1998 (see page A-5).
- ------------------------------------------------------------------------------------------------------------------------
MANAGEMENT Monthly fee at an annual rate of 1/2 of 1% of average daily net assets, scaled down on assets over
FEE $500 million (see page A-5).
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS Automatically reinvested daily in additional shares at net asset value (see page A-7).
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR Morgan Stanley Dean Witter Distributors Inc. (the "Distributor") sells shares of the Trust through
Dean Witter Reynolds Inc. Other than the reimbursement to the Distributor pursuant to the Rule
12b-1 Distribution Plan, the Distributor receives no distribution fees (see page A-2).
- ------------------------------------------------------------------------------------------------------------------------
PLAN OF The Trust is authorized to reimburse specific expenses incurred in promoting the distribution of
DISTRIBUTION the Trust's shares pursuant to a Plan of Distribution with the Distributor pursuant to Rule 12b-1
under the Investment Company Act of 1940. Reimbursement may in no event exceed an amount equal to
payments at the annual rate of 0.15 of 1% of average daily net assets of the Trust (see page A-6).
- ------------------------------------------------------------------------------------------------------------------------
REPORTS Individual monthly account statements from Dean Witter on the Dean Witter Transaction Statement;
annual and semi-annual Trust financial statements.
- ------------------------------------------------------------------------------------------------------------------------
REDEMPTION For participants in the Active Assets program, shares of the Trust will be redeemed at net asset
OF SHARES value automatically to satisfy debit balances in the Securities Account created by activity therein
or to satisfy amounts owing in the Visa Account resulting from Visa card purchases, cash advances
or checks written against the Visa Account. Non-participants in the Active Assets program should
refer to the discussion appearing at page A-4. It is anticipated that the net asset value will
remain constant at $1.00 per share. Dean Witter has the right to terminate a shareholder's Active
Assets service, in which event all Trust shares held in a shareholder's account will be
involuntarily redeemed. The Trust also reserves the right to reduce the number of shares in all
accounts if the Trustees determine that this is necessary to maintain the constant $1.00 per share
net asset value. See "Purchase and Redemption of Shares" (page A-1).
- ------------------------------------------------------------------------------------------------------------------------
RISKS The Trust invests principally in high quality, short-term fixed-income securities issued or
guaranteed by the state of California and its local governments which are subject to minimal risk
of loss of income and principal. However, the investor is directed to the discussions of "lease
obligations" (page 6) and "when-issued and delayed delivery securities" (page 7) concerning the
risks associated with such portfolio securities and management techniques. Since the Trust
concentrates its investments in California tax-exempt securities, the Trust is affected by any
political, economic or regulatory developments affecting the ability of California issuers to pay
interest or repay principal (page 8).
- ------------------------------------------------------------------------------------------------------------------------
THE SUMMARY INFORMATION ABOVE SHOULD BE READ IN CONJUNCTION WITH THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE APPENDIX HERETO, IN THE CLIENT ACCOUNT AGREEMENT AND IN THE TRUST'S STATEMENT OF ADDITIONAL
INFORMATION, INCLUDING THE APPENDIX THERETO.
</TABLE>

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
SUMMARY OF TRUST EXPENSES
- --------------------------------------------------------------------------------

The following table illustrates all expenses and fees that a shareholder of
the Trust will incur. The expenses and fees set forth in the table are for the
fiscal year ended June 30, 1998.

ANNUAL TRUST OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ---------------------------------------------------------------------------
Management Fees............................................................ 0.49%
12b-1 Fees................................................................. 0.10%
Other Expenses............................................................. 0.05%
-----
Total Trust Operating Expenses............................................. 0.64%
-----
-----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ---------------------------------------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period:............... $ 7 $21 $36 $ 80
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE TRUST MAY BE GREATER OR
LESS THAN THOSE SHOWN.

3
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED JUNE 30, NOVEMBER 12, 1991*
------------------------------------------------------------- THROUGH JUNE 30,
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------
Net investment income.... 0.028 0.028 0.028 0.029 0.018 0.018 0.017
Less dividends from net
investment income....... (0.028) (0.028) (0.028) (0.029) (0.018) (0.018) (0.017)
-------- -------- -------- -------- -------- -------- -------
Net asset value, end of
period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
TOTAL INVESTMENT
RETURN.................. 2.84% 2.83% 2.82% 2.89% 1.78% 1.84% 1.66%(1)

RATIOS TO AVERAGE NET
ASSETS:
Expenses................. 0.64% 0.66%(4) 0.67% 0.67% 0.68% 0.71% 0.56%(2)(3)
Net investment income.... 2.79% 2.78% 2.79% 2.86% 1.77% 1.82% 2.42%(2)(3)

SUPPLEMENTAL DATA:
Net assets, end of
period, in thousands.... $549,779 $431,382 $384,218 $313,566 $288,506 $202,149 $170,364
</TABLE>

- ------------------------
* COMMENCEMENT OF OPERATIONS.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE TRUST HAD BORNE ALL EXPENSES THAT WERE ASSUMED OR WAIVED BY THE
INVESTMENT MANAGER, THE ABOVE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN 0.80% AND 2.18%, RESPECTIVELY.
(4) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%.

SEE NOTES TO FINANCIAL STATEMENTS

4
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

THE INVESTMENT OBJECTIVE OF THE TRUST IS TO PROVIDE AS HIGH A LEVEL OF DAILY
INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL INCOME TAX AS IS CONSISTENT
WITH STABILITY OF PRINCIPAL AND LIQUIDITY. It is a fundamental policy of the
Trust that at least 80% of its total assets will be invested in securities the
interest on which is exempt from federal and California personal income tax
("California tax-exempt securities"). This policy and the Trust's investment
objective may not be changed without a vote of a majority of the Trust's
outstanding voting securities, as defined in the Act. There is no assurance that
the objective will be achieved.

The Trust seeks to achieve its investment objective by investing primarily
in high quality tax-exempt securities with short-term maturities. Such
securities will include California Municipal Bonds, California Municipal Notes
and California Municipal Commercial Paper ("Municipal Obligations") with
maturities of thirteen months or less, which are rated in one of the two highest
rating categories for debt obligations by at least two nationally recognized
statistical rating organizations ("NRSRO's"-- primarily Moody's Investors
Service ("Moody's") and Standard & Poor's Corporation ("S&P")), or one NRSRO if
the obligation is rated by only one NRSRO. Unrated obligations may be purchased
if they are determined to be of comparable quality by the Trust's Trustees.

Up to 20% of the Trust's total assets may also be invested in securities
exempt from federal personal income tax but not from California personal income
tax ("non-California tax-exempt securities"), in taxable securities and in
tax-exempt securities subject to the federal alternative minimum tax for
individual shareholders ("AMT") (California tax-exempt securities subject to AMT
will not be included in the 80% total referred to above for investment in
California tax-exempt securities). In addition, the Trust may temporarily invest
more than 20% of its total assets in taxable securities, non-California
tax-exempt securities, or in tax-exempt securities subject to AMT, to maintain a
"defensive" posture when, in the opinion of the Investment Manager, it is
advisable to do so because of market conditions. The types of taxable securities
in which the Trust may temporarily invest are limited to the following
short-term fixed-income securities (maturing in thirteen months or less from the
time of purchase); (i) obligations of the United States Government or its
agencies, instrumentalities or authorities; (ii) commercial paper rated P-1 by
Moody's or A-1 by S&P; (iii) certificates of deposit of domestic banks with
assets of $1 billion or more; and (iv) repurchase agreements with respect to any
of the foregoing portfolio securities.

California Municipal Bonds and California Municipal Notes are debt
obligations of a state, its cities, municipalities and municipal agencies which
generally have maturities, at the time of their issuance, of either one year or
more (Bonds) or from six months to three years (Notes). California Municipal
Commercial Paper refers to short-term obligations of municipalities. Any
Municipal Obligation which depends on the credit of the Federal Government, its
agencies or instrumentalities shall be considered to have a Moody's rating of
Aaa or S&P rating of AAA. An obligation shall be considered a Municipal
Obligation only if, in the opinion of bond counsel, the interest payable
therefrom is exempt from both federal income tax and California personal income
tax.

The foregoing percentage and rating limitations apply at the time of
acquisition of a security based on the last previous determination of the
Trust's net asset value. Any subsequent change in any rating by a rating service
or change in percentages resulting from market fluctuations may not require
elimination of any security from the Trust's portfolio. However, in accordance
with procedures adopted by the Trust's Trustees pursuant to federal securities
regulations governing money market funds, the Investment Manager will perform a

5
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
creditworthiness analysis of such downgraded securities, which analysis will be
reported to the Trustees who will, in turn, determine whether the securities
continue to present minimal credit risks to the Trust. The Trust does not
anticipate that more than 5% of its net assets are likely to be downgraded below
the rating requirements described above for Municipal Obligations.

The ratings assigned by NRSROs represent their opinions as to the quality of
the securities which they undertake to rate (see the Appendix to the Statement
of Additional Information for an explanation of Moody's and S&P ratings). It
should be emphasized, however, that the ratings are general and not absolute
standards of quality.

Certain lease obligations have not developed the depth of marketability
associated with more conventional municipal obligations, and, as a result, may
be considered illiquid securities. To determine whether or not the Trust will
consider such securities to be illiquid (the Trust may not invest more than ten
percent of its net assets in illiquid securities), the Trustees of the Trust
have established guidelines to be utilized by the Trust in determining the
liquidity of a lease obligation. The factors to be considered in making the
determination include: 1) the frequency of trades and quoted prices for the
obligation; 2) the number of dealers willing to purchase or sell the security
and the

6
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
number of other potential purchasers; 3) the willingness of dealers to undertake
to make a market in the security; and 4) the nature of the marketplace trades,
including, the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of the transfer. All lease obligations purchased by
the Trust are subject to the creditworthiness standards discussed above for
Municipal Obligations.

The Trust does not generally intend to invest more than 25% of its total
assets in securities of any one governmental unit. The Trust may invest more
than 25% of its total assets in industrial development and pollution control
bonds (two kinds of tax-exempt Municipal Bonds) whether or not the users of
facilities financed by such bonds are in the same industry. In cases where such
users are in the same industry, there will be additional risk to the Trust in
the event of an economic downturn in such industry, which may result generally
in a lowered need for such facilities and a lowered ability of such users to pay
for the use of such facilities.

PORTFOLIO MANAGEMENT

Although the Trust will generally acquire securities for investment with the
intent of holding them to maturity and will not seek profits through short-term
trading, the Trust may dispose of any security prior to its maturity to meet
redemption requests. Securities may also be sold when the Trust's Investment
Manager believes such disposition to be advisable on the basis of a revised
evaluation of the issuer or based upon relevant market considerations. There may
be occasions when, as a result of maturities of portfolio securities or sale of
Trust shares, or in order to meet anticipated redemption requests, the Trust may
hold cash which is not earning income.

The Trust anticipates that the average weighted maturity of the portfolio
will be 90 days or less. The relatively short-term nature of the Trust's
portfolio is expected to result in a lower yield than portfolios comprised of
longer-term tax-exempt securities.

7
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>

have a negative impact on the handling of securities trades, pricing and account
services. The Investment Manager, the Distributor and the Transfer Agent have
been actively working on necessary changes to their own computer systems to
prepare for the year 2000 and expect that their systems will be adapted before
that date, but there can be no assurance that they will be successful, or that
interaction with other non-complying computer systems will not impair their
services at that time.

SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA TAX-EXEMPT SECURITIES

Because the Trust's investments are concentrated in securities issued by the
State of California or entities within the State, an investment in the Trust may
be riskier than an investment in other types of money funds which do not
similarly concentrate their investments. The Trust will be affected by any
political, economic or regulatory developments affecting the ability of
California issuers to pay interest or repay principal on their obligations.
Various subsequent developments regarding the California Constitution and State
of California ("State") statutes which limit the taxing and spending authority
of California governmental entities may impair the ability of California issuers
to maintain debt service on their obligations. Of particular impact are
constitutional voter initiatives, which have become common in recent years. The
following information constitutes only a brief summary and is not intended as a
complete description.

California is the most populous state in the nation with a total population
estimated at 32,383,000. Growth has been incessant since World War II, with
population gains in each decade since 1950 of between 18% and 49%. During the
last decade, the population rose 20%. The State now comprises 12.2% of the
nation's population and 12.5% of its total personal income. Its economy is broad
and diversified with major concentrations in high technology research and
manufacturing, aerospace and defense-related manufacturing, trade,
entertainment, real estate, and financial services. After experiencing strong
growth throughout much of the 1980s, from 1990-1993, the State suffered through
a severe recession, the worst since the 1930's, heavily influenced by large
cutbacks in defense/aerospace industries and military base closures and a major
drop in real estate construction. California's economy has been recovering and
growing steadily stronger since the start of 1994, to the point where the
State's economic growth is outpacing the rest of the nation. The unemployment
rate, while still higher than the national average, fell to the low 6% range in
mid-1997, compared to over 10% at the worst of the recession. California's
economic recovery from the recession is continuing at a strong pace. Recent
economic reports indicate that, while the rate of economic growth in California
is expected to moderate over the next three years, the increases in employment
and income may exceed those of the nation as a whole. The unsettled financial
situation occurring in certain Asian economies may adversely affect the State's
export-related industries and, therefore, the State's rate of economic growth.

These economic difficulties have exacerbated the structural budget imbalance
which has been evident since fiscal year 1985-1986. Since that time, budget
shortfalls have become increasingly more difficult to solve and the State has
recorded General Fund operating deficits in several fiscal years. Many of these
problems have been attributable to the fact that the great population influx has

8
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
produced increased demand for education and social services at a far greater
pace than the growth in the State's tax revenues. Despite substantial tax
increases, expenditure reductions and the shift of some expenditure
responsibilities to local government, the budget condition remains problematic.

On August 18, 1997, the Governor signed the 1997-98 Budget Act which
provides for General Fund and Special Fund expenditures of approximately $67.2
billion and projects a 97-98 fiscal year end reserve of $112 million. For the
second year in a row, the State budget contains a large increase in funding for
K-14 education, reflecting strong revenues which have exceeded initial budgeted
amounts. The Budget Act reflects a $1.235 billion pension case judgment payment,
and returns funding of the State's pension contribution to the quarterly basis
existing prior to the deferral actions invalidated by the courts. Because of the
effect of the pension payment, most other State programs were continued at
1996-97 levels. Health and welfare costs are contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the new
CalWORKs welfare reform program. Unlike prior years, this Budget Act does not
depend on uncertain federal budget actions. About $300 million in federal funds,
already included in the federal FY 1997 and 1998 budgets, are included in the
Budget Act to offset incarceration costs for illegal immigrants. The Budget Act
contains no tax increases and no tax reductions. The Renters Tax Credit was
suspended for another year, saving approximately $500 million. After enactment
of the Budget Act, and prior to the end of the Legislative Session, the
Legislature and the Governor reached certain agreements related to State
expenditures and taxes. Legislation signed by the Governor includes a variety of
phased-in tax cuts, conformity with certain provisions of the federal tax reform
law passed earlier in the year, and reform of funding for county trial courts,
with the State to assume greater financial responsibility.

The Governor's proposed budget for fiscal year 1998-1999 proposes total
State spending of $70.6 billion (excluding the expenditure of federal funds and
selected bond funds), which is up 4.7% from the current year's budget. This
total includes $55.4 billion in General Fund spending (a 4.5% increase from the
current year) and $15.2 billion in special funds spending (a 5.3% increase). The
Governor's proposed budget anticipates a $296 million reserve for economic
uncertainties. The new budget reflects agreements reached in the prior year in
the areas of welfare reform, education, state tax relief, and the financial
restructuring of the State's trial court system. The budget contains no tax
changes and relatively few major programmatic changes.

Because of the State's continuing budget problems, the State's General
Obligation bonds were downgraded in July 1994 from Aa to A1 by Moody's, to A
from A+ by Standard & Poor's, and from AA to A by Fitch Investors Service, Inc.
All three rating agencies expressed uncertainty in the State's ability to
balance its budget by 1996. However, in 1996, citing California's improving
economy and budget situation, both Fitch and Standard and Poor's raised their
ratings from A to A+. In October, 1997, Fitch raised its rating from A+ to AA-
referring to the State's fundamental strengths, the extent of its economic
recovery and the return of financial stability.

The effect of these various constitutional and statutory amendments and
budget developments upon the ability of California issuers to pay interest and
principal on their obligations remains unclear and in any event may depend upon
whether a particular California tax-exempt security is a general or limited
obligation bond and on the type of security provided for the bond. It is
possible that other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.

For a more detailed discussion of the State of California economic factors,
see the Statement of Additional Information.

9
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

Investment restrictions listed below are among the restrictions which have
been adopted by the Trust as fundamental policies. Under the Act, a fundamental
policy may not be changed without the vote of a majority of the outstanding
voting securities of the Trust, as defined in the Act.

For purposes of the following restrictions: (a) an "issuer" of a security is
the entity whose assets and revenues are committed to the payment of interest
and principal on that particular security, provided that the guarantee of a
security will be considered a separate security and, provided further, that a
guarantee of a security shall not be deemed a security issued by the guarantor
if the value of all securities issued or guaranteed by the guarantor and owned
by the Fund does not exceed 10% of the value of the total assets of the Fund;
(b) a "taxable security" is any security the interest on which is subject to
federal income tax; and (c) all percentage limitations apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations does not require elimination of
any security from the portfolio.

The Trust may not:

1. With respect to 75% of its total assets, purchase securities of any issuer
if, immediately thereafter, more than 5% (10% where the security is the
guarantee of a security) of the value of its total assets are in the securities
of any one issuer (other than obligations issued, or guaranteed by, the United
States Government, its agencies or instrumentalities or by the State of
California or its political subdivisions).

2. With respect to 75% of its total assets, purchase more than 10% of all
outstanding taxable debt securities of any one issuer (other than debt
securities issued, or guaranteed as to principal and interest by, the United
States Government, its agencies or instrumentalities).

3. Invest 25% or more of the value of its total assets in taxable securities
of issuers in any one industry (industrial development and pollution control
bonds are grouped into industries based upon the business in which the issuers
of such obligations are engaged). This restriction does not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities or by the State of California or its political subdivisions,
or to domestic bank obligations (including domestic branches of foreign banks).

The Trust will comply with any investment policies necessitated by rules
governing the pricing of shares of money market funds (see "How Net Asset Value
is Determined" in the Appendix), even though an investment restriction of the
Trust is less restrictive than the related policy.

10
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(64.7%)
$ 8,000 Alameda-Contra Costa Schools
Financing Authority, Capital
Improvements Ser B COPs..... 3.20% 07/08/98 $ 8,000,000
8,200 Big Bear Lake, Southwest Gas
Corp 1993 Ser A (AMT)....... 3.15 07/08/98 8,200,000
11,970 California Alternative Energy
Financing Authority, General
Electric Capital Corp-Arroyo
Energy Ser 1993 B (AMT)**... 3.05 07/08/98 11,970,000
California Educational
Facilities Authority,
10,000 California Institute of
Technology Ser 1994......... 2.90 07/08/98 10,000,000
15,165 Stanford University Ser
L-5......................... 3.20 07/08/98 15,165,000
2,000 University of Southern
California Refg Ser 1996.... 4.35 10/01/98 2,002,398
California Health Facilities
Financing Authority,
2,350 Adventist Health System/
West 1988 Ser A (MBIA)...... 3.50 07/01/98 2,350,000
5,000 Catholic HealthCare West
1997 Ser C (MBIA)........... 3.00 07/08/98 5,000,000
6,900 Kaiser Permanente Ser 1993
A........................... 3.50 07/08/98 6,900,000
14,000 Memorial Health Services Ser
1994........................ 3.20 07/08/98 14,000,000
9,700 St Francis Medical Center
1995 Ser E (MBIA)**......... 3.00 07/08/98 9,700,000
5,050 St Joseph Health System Ser
1985 A...................... 3.25 07/01/98 5,050,000
5,000 California Housing Finance
Agency, Multi-family III
1997 Ser B (AMT)............ 3.25 07/08/98 5,000,000
California Pollution Control
Financing Authority,
5,040 Chevron USA Ser 1983........ 3.85 11/16/98 5,045,393
10,485 Chevron USA Ser 1984 B...... 3.70 06/15/99 10,491,266
11,700 Pacific Gas & Electric Co
1996 Ser F.................. 3.50 07/01/98 11,700,000
8,600 Pacific Gas & Electric Co
1997 Ser C (AMT)............ 3.60 07/01/98 8,600,000
5,000 Shell Oil Co 1991 Ser B..... 3.25 07/01/98 5,000,000
8,000 Shell Oil Co 1996 Ser A
(AMT)....................... 3.40 07/01/98 8,000,000
4,300 Stanislaus Inc Ser 1987
(AMT)....................... 3.70 07/01/98 4,300,000
16,500 California Public Capital
Improvements Financing
Authority, Pooled Ser 1988
C**......................... 3.65 09/15/98 16,500,000
California Statewide
Communities Development
Authority,
6,239 House Ear Institute 1993 Ser
A COPs...................... 3.50 07/01/98 6,239,000
9,000 Kaiser Permanente Ser 1995
COPs**...................... 3.50 07/08/98 9,000,000
6,100 St Joseph Health System
COPs........................ 3.20 07/08/98 6,100,000
8,200 Foothill/Eastern
Transportation Corridor
Agency, Toll Road Ser 1995
C........................... 3.10 07/08/98 8,200,000
9,500 Fremont, Creekside Village
Multi-family Ser 1985 D..... 3.10 07/08/98 9,500,000
Los Angeles, Multi-family
7,800 1985 Ser K.................. 3.45 07/08/98 7,800,000
4,900 1994 Ser A (AMT)............ 3.50 07/01/98 4,900,000
7,905 Los Angeles County
Metropolitan Transportation
Authority, Prop C Sales Tax
Refg Ser 1993 A (MBIA)...... 3.00 07/08/98 7,905,000
8,000 M-S-R Public Power Agency, San
Juan Ser 1997 D (MBIA)...... 3.15 07/08/98 8,000,000
22,600 Newport Beach, Hoag Memorial
Hospital/Presbyterian Ser
1992 & 1996 B............... 3.60 07/01/98 22,600,000
10,595 Northern California Public
Power Agency, Geothermal No
3 1996 Ser A (AMBAC)........ 3.10 07/08/98 10,595,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
11
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Redlands,
$ 3,900 Orange Village Apts 1988 Ser
A (AMT)..................... 3.40% 07/08/98 $ 3,900,000
3,585 1993 Water Treatment
Facilities COPs (FGIC)...... 3.15 07/08/98 3,585,000
7,805 Sacramento County,
Administration Center &
Courthouse Ser 1990 COPs.... 3.15 07/08/98 7,805,000
4,000 San Bernardino County, 1996
County Center Refinancing
COPs........................ 3.15 07/08/98 4,000,000
4,000 San Jose, Almaden Lake Village
Apts Ser 1997 A (AMT)....... 3.40 07/08/98 4,000,000
7,200 San Jose Redevelopment Agency,
Merged Area Ser 1996 B...... 3.00 07/08/98 7,200,000
2,000 San Jose-Santa Clara Clean
Water Financing Authority,
Sewer Ser 1995 B (FGIC)..... 3.10 07/08/98 2,000,000
4,100 Santa Clara, Electric Ser 1985
B........................... 3.15 07/08/98 4,100,000
6,800 Santa Clara County-El Camino
Hospital District Facilities
Authority, Valley Medical
Center 1985 Ser A........... 3.00 07/08/98 6,800,000
10,000 Santa Clara County Financing
Authority, Valley Medical
Center 1994 Ser B........... 3.10 07/08/98 10,000,000
11,800 Southern California Public
Power Authority,
Transmission 1991 Refg Ser
(AMBAC)..................... 3.10 07/08/98 11,800,000
6,605 Turlock, Irrigation District
Ser 1988 A.................. 3.20 07/08/98 6,605,000
10,000 West Basin Municipal Water
District, Ser 1997 B COPs... 3.00 07/08/98 10,000,000
-----------

TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE RATE
MUNICIPAL OBLIGATIONS
(AMORTIZED COST $355,608,057)........................ 355,608,057
-----------
</TABLE>

<TABLE>
<CAPTION>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------ -------- ----------
<C> <S> <C> <C> <C> <C>
CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER (28.6%)
California Pollution Control
Financing Authority,
4,000 Pacific Gas & Electric Co
Ser 1996 E.................. 3.30% 07/14/98 3.30% 4,000,000
4,000 Southern California Edison
Co Ser 1985 A............... 3.45 07/23/98 3.45 4,000,000
7,600 Southern California Edison
Co Ser 1985 A............... 3.60 08/13/98 3.60 7,600,000
4,500 Southern California Edison
Co Ser 1985 A............... 3.50 10/08/98 3.50 4,500,000
5,000 Thermal Energy Development
Partnership Ser A (AMT)..... 3.70 08/20/98 3.70 5,000,000
5,000 Chula Vista, San Diego Gas &
Electric Co Ser 1992 C
(AMT)....................... 3.30 07/15/98 3.30 5,000,000
5,000 Contra Costa Water District,
Ser A....................... 3.60 08/26/98 3.60 5,000,000
East Bay Municipal Utility
District,
3,000 Water....................... 3.25 07/22/98 3.25 3,000,000
4,000 Water....................... 3.50 08/11/98 3.50 4,000,000
Los Angeles,
8,000 Wastewater Ser 1997......... 3.50 08/12/98 3.50 8,000,000
8,000 Wastewater Ser 1997......... 3.55 10/14/98 3.55 8,000,000
4,000 Los Angeles County
Metropolitan Transportation
Authority, Sales Tax Ser
A........................... 3.50 08/27/98 3.50 4,000,000
Metropolitan Water District of
Southern California,
2,300 Ser 1996 B.................. 3.60 08/25/98 3.60 2,300,000
10,000 Ser 1996 B.................. 3.50 09/15/98 3.50 10,000,000
5,500 Ser 1996 B.................. 3.45 09/24/98 3.45 5,500,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
12
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
$10,000 Sacramento Municipal Utility
District, Ser I............. 3.35% 09/17/98 3.35% $ 10,000,000
San Diego,
9,000 Gas & Electric Co Ser 1995
B........................... 3.65 09/08/98 3.65 9,000,000
6,400 Gas & Electric Co Ser 1995
A........................... 3.45 09/10/98 3.45 6,400,000
4,700 San Diego County Water
Authority, Ser #1........... 3.60 09/09/98 3.60 4,700,000
San Francisco Airport
Commission,
3,100 San Francisco International
Airport Ser 1997 A (AMT).... 3.80 07/13/98 3.80 3,100,000
5,110 San Francisco International
Airport Ser 1997 A (AMT).... 3.45 09/24/98 3.45 5,110,000
San Joaquin County
Transportation Authority,
5,000 Sales Tax Ser 1997.......... 3.55 08/06/98 3.55 5,000,000
5,000 Sales Tax Ser 1997.......... 3.65 08/06/98 3.65 5,000,000
6,000 Sales Tax Ser 1997.......... 3.45 09/23/98 3.45 6,000,000
University of California
Regents,
8,000 Ser A....................... 3.45 09/22/98 3.45 8,000,000
5,000 Ser A....................... 3.50 09/29/98 3.50 5,000,000
5,000 Ser A....................... 3.40 10/07/98 3.40 5,000,000
5,000 Puerto Rico Government
Development Bank, Ser
1996........................ 3.60 08/11/98 3.60 5,000,000
------------

TOTAL CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER
(AMORTIZED COST $157,210,000)...................................... 157,210,000
------------

CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL NOTES (11.3%)
10,000 Alameda County, 1998-99 TRANs,
dtd 07/08/98 (WI)........... 4.50 07/07/99 3.60 10,086,600
10,000 California School Cash Reserve
Program Authority, 1998 Pool
Ser A, dtd 07/02/98 (WI).... 4.50 07/02/99 3.74 10,073,200
10,000 Fresno County, 1998-99 TRANs,
dtd 07/02/98 (WI)........... 4.00 07/01/99 3.59 10,039,400
10,000 Marin County, 1998-99 TRANs,
dtd 07/01/98 (WI)........... 4.50 06/30/99 3.55 10,091,400
6,000 San Mateo County, Ser 1997-98
TRANs, dtd 07/01/97......... 4.50 07/01/98 3.80 6,000,000
16,000 Ventura County, Ser 1997
TRANs, dtd 07/01/97......... 4.50 07/01/98 3.84 16,000,000
------------

TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL NOTES
(AMORTIZED COST $62,290,600)....................................... 62,290,600
------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(AMORTIZED COST $575,108,657) (a)......................................................... 104.6 % 575,108,657

LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................................ (4.6) (25,329,326)
------ -------------

NET ASSETS................................................................................ 100.0 % $ 549,779,331
------ -------------
------ -------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
13
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

- ---------------------

AMT Alternative Minimum Tax.
COPs Certificates of Participation.
TRANs Tax and Revenue Anticipation Notes.
WI Securities purchased on a "when-issued" basis.
+ Rate shown is rate in effect at June 30, 1998.
* Date on which the principal amount can be recovered through demand.
** All or a portion of these securities have been segregated in connection
with the purchase of "when-issued" securities.
(a) Cost is the same for federal income tax purposes.

BOND INSURANCE:
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.

SEE NOTES TO FINANCIAL STATEMENTS
14
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $575,108,657)............................................................... $575,108,657
Cash.......................................................................................... 12,768,575
Interest receivable........................................................................... 3,127,879
Prepaid expenses.............................................................................. 15,645
------------

TOTAL ASSETS............................................................................. 591,020,756
------------

LIABILITIES:
Payable for:
Investments purchased..................................................................... 40,290,600
Investment management fee................................................................. 238,509
Plan of distribution fee.................................................................. 48,384
Accrued expenses and other payables........................................................... 663,932
------------

TOTAL LIABILITIES........................................................................ 41,241,425
------------

NET ASSETS............................................................................... $549,779,331
------------
------------

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $549,779,129
Accumulated undistributed net investment income............................................... 202
------------

NET ASSETS............................................................................... $549,779,331
------------
------------

NET ASSET VALUE PER SHARE,
549,779,129 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE).............. $1.00
------------
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
15
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998

<TABLE>
<S> <C>
NET INVESTMENT INCOME:

INTEREST INCOME................................................................................ $18,498,281
-----------

EXPENSES
Investment management fee...................................................................... 2,663,643
Plan of distribution fee....................................................................... 518,827
Transfer agent fees and expenses............................................................... 81,316
Professional fees.............................................................................. 54,810
Registration fees.............................................................................. 47,153
Shareholder reports and notices................................................................ 41,240
Custodian fees................................................................................. 26,566
Trustees' fees and expenses.................................................................... 18,386
Other.......................................................................................... 8,389
-----------

TOTAL EXPENSES............................................................................ 3,460,330

Less: expense offset........................................................................... (26,479)
-----------

NET EXPENSES.............................................................................. 3,433,851
-----------

NET INVESTMENT INCOME..................................................................... 15,064,430

NET REALIZED GAIN......................................................................... 2,410
-----------

NET INCREASE................................................................................... $15,066,840
-----------
-----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
16
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>

INCREASE (DECREASE) IN NET ASSETS:

OPERATIONS:
Net investment income........................................................... $ 15,064,430 $ 11,980,607
Net realized gain............................................................... 2,410 9,454
------------ ------------

NET INCREASE............................................................... 15,066,840 11,990,061
------------ ------------

Dividends from net investment income............................................ (15,064,414) (11,980,506)

Net increase from transactions in shares of beneficial interest................. 118,394,453 47,154,733
------------ ------------

NET INCREASE............................................................... 118,396,879 47,164,288

NET ASSETS:
Beginning of period............................................................. 431,382,452 384,218,164
------------ ------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $202 AND $186,
RESPECTIVELY)............................................................... $549,779,331 $431,382,452
------------ ------------
------------ ------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
17
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998

1. ORGANIZATION AND ACCOUNTING POLICIES

Active Assets California Tax-Free Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Trust's investment objective is to
provide a high level of daily income which is exempt from federal and California
income tax consistent with stability of principal and liquidity. The Trust was
organized as a Massachusetts business trust on July 10, 1991 and commenced
operations on November 12, 1991.

The following is a summary of significant accounting policies:

A. VALUATION OF INVESTMENTS -- Portfolio securities are valued at amortized
cost, which approximates market value.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

18
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

assets exceeding $500 million but not exceeding $750 million; 0.375% to the
portion of the daily net assets exceeding $750 million but not exceeding $1
billion; 0.35% to the portion of the daily net assets exceeding $1 billion but
not exceeding $1.5 billion; 0.325% to the portion of the daily net assets
exceeding $1.5 billion but not exceeding $2 billion; 0.30% to the portion of the
daily net assets exceeding $2 billion but not exceeding $2.5 billion; 0.275% to
the portion of the daily net assets exceeding $2.5 billion but not exceeding $3
billion; and 0.25% to the portion of the daily net assets exceeding $3 billion.

3. PLAN OF DISTRIBUTION

Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Trust, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor and other
broker-dealers under the Plan: (1) compensation to sales representatives of Dean
Witter Reynolds Inc., an affiliate of the Investment Manager and Distributor,
and other broker-dealers; (2) sales incentives and bonuses to sales
representatives and to marketing personnel in connection with promoting sales of
the Trust's shares; (3) expenses incurred in connection with promoting sales of
the Trust's shares; (4) preparing and distributing sales literature; and (5)
providing advertising and promotional activities, including direct mail
solicitation and television, radio, newspaper, magazine and other media
advertisements.

19
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

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, 1998 aggregated $1,250,181,811 and $1,124,272,340,
respectively.

Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Trust's transfer agent.

The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as an independent
Trustee for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended June 30, 1998 included in
Trustees' fees and expenses in the Statement of Operations amounted to $4,710.
At June 30, 1998, the Trust had an accrued pension liability of $37,170 which is
included in accrued expenses in the Statement of Assets and Liabilities.

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, 1998 JUNE 30, 1997
--------------- ---------------
<S> <C> <C>
Shares sold...................................................... 1,906,367,914 1,641,164,284
Shares issued in reinvestment of dividends....................... 15,064,414 11,980,506
--------------- ---------------
1,921,432,328 1,653,144,790
Shares repurchased............................................... (1,803,037,875) (1,605,990,057)
--------------- ---------------
Net increase in shares outstanding............................... 118,394,453 47,154,733
--------------- ---------------
--------------- ---------------
</TABLE>

6. FEDERAL INCOME TAX STATUS

During the year ended June 30, 1998, the Trust utilized all of its net capital
loss carryover of approximately $2,400.

7. FINANCIAL HIGHLIGHTS

See the "Financial Highlights" table on page 4 of this Prospectus.

20
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights (which appear under the
heading "Financial Highlights" on page 4 of this Prospectus) present fairly, in
all material respects, the financial position of Active Assets California
Tax-Free Trust (the "Trust") at June 30, 1998, 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 six years in
the period then ended and for the period November 12, 1991 (commencement of
operations) through June 30, 1992, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit 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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1998 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
AUGUST 5, 1998

1998 FEDERAL TAX NOTICE (UNAUDITED)

For the year ended June 30, 1998, all of the Trust's dividends
from net investment income were exempt interest dividends,
excludable from gross income for Federal income tax purposes.

21
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048 - (212) 392-5000

Active Assets Government Securities Trust (the "Government Securities Trust"
or the "Trust") is a no-load, diversified open-end management investment
company. The Trust is authorized to reimburse Morgan Stanley Dean Witter
Distributors Inc. for specific expenses incurred in promoting the distribution
of the Trust's shares pursuant to a Plan of Distribution pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"). Reimbursement
may in no event exceed an amount equal to payments at the annual rate of 0.15%
of the average daily net assets of the Trust.

The investment objectives of the Trust are high current income, preservation
of capital and liquidity. The Trust will seek to achieve these objectives by
investing in a diversified portfolio of short-term money market instruments
issued or guaranteed by the United States Government or its agencies or
instrumentalities.

AN INVESTMENT IN THE TRUST IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THE TRUST WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Highlights/2 How Net Asset Value is Determined/A-4
Summary of Trust Expenses/3 Confirmations/A-5
Financial Highlights/4 The Trusts and Their Management/A-5
Investment Objectives and Policies/5 Plan of Distribution/A-6
Financial Statements -- June 30, 1998/8 Dividends, Distributions and Taxes/A-7
Report of Independent Accountants/15 General Information/A-9
Purchase and Redemption of Shares/A-1 Voting Rights/A-9
Purchase of Shares/A-1 Custodian/A-10
Purchase of Shares by Non-Participants in Shareholder Inquiries/A-10
Active Assets Program/A-2
Redemption of Shares/A-3
Redemption of Shares by Non-Participants in
Active Assets Program/A-4
</TABLE>

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

-------------------

THE DATE OF THIS PROSPECTUS IS AUGUST 20, 1998.
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
HIGHLIGHTS

<TABLE>
<S> <C>
THE A no-load, open-end diversified management investment company investing principally in short-term
TRUST money market instruments issued or guaranteed by the United States Government or its agencies or
instrumentalities. The Trust is authorized to reimburse Morgan Stanley Dean Witter Distributors
Inc. for specific expenses incurred in promoting the distribution of the Trust's shares pursuant to
a Plan of Distribution pursuant to Rule 12b-1 under the Act. (see page A-6). The Trust is organized
as an unincorporated business trust under the laws of Massachusetts. (see page A-5).
- ------------------------------------------------------------------------------------------------------------------------
SHARES The shares of the Government Securities Trust are offered to participants in the Active Assets
OFFERED program of Dean Witter and to non-participants who wish to invest directly in shares of the Trust
(See page A-2). The primary components of the Active Assets program are the Securities Account,
which is linked to the Active Assets Insured Account, the Active Assets Money Trust, the Active
Assets Tax-Free Trust, the Active Assets California Tax-Free Trust or the Government Securities
Trust, and to the Visa Account. See the Client Account Agreement for further information.
- ------------------------------------------------------------------------------------------------------------------------
PURCHASE Pursuant to the Client Account Agreement between Dean Witter and the customer, free credit cash
OF SHARES balances in an Active Assets account will automatically be invested in shares of the Government
Securities Trust daily at their net asset value without any sales charge. Morgan Stanley Dean
Witter Distributors Inc. is the Distributor of shares of the Trust. Investments in shares are made
under the circumstances described under "Purchase and Redemption of Shares" (see page A-1).
Non-participants in the Active Assets program should refer to the discussion appearing at page A-2.
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT High current income, preservation of capital and liquidity (see page 5). There can be no assurance
OBJECTIVES that the Trust's investment objectives will be achieved.
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT A diversified portfolio of short-term money market instruments issued or guaranteed by the United
POLICY States Government or its agencies or instrumentalities (see page 5).
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of the Trust, and its wholly-owned
MANAGER subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various investment manage-
ment, advisory, management and administrative capacities to 102 investment companies and other
portfolios with assets under management of approximately $115.9 billion at July 31, 1998 (see page
A-5).
- ------------------------------------------------------------------------------------------------------------------------
MANAGEMENT Monthly fee at an annual rate of 1/2 of 1% of average daily net assets, scaled down on assets over
FEE $500 million (see page A-5).
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR Morgan Stanley Dean Witter Distributors Inc. (the "Distributor") sells shares of the Trust through
Dean Witter Reynolds Inc. Other than the reimbursement to the Distributor pursuant to the Rule
12b-1 Distribution Plan, the Distributor receives no distribution fees (see page A-2).
- ------------------------------------------------------------------------------------------------------------------------
PLAN OF The Trust is authorized to reimburse specific expenses incurred in promoting the distribution of
DISTRIBUTION the Trust's shares pursuant to a plan of Distribution with the Distributor pursuant to Rule 12b-1
under the Investment Company Act of 1940. Reimbursement may in no event exceed an amount equal to
payments at the annual rate of 0.15 of 1% of average daily net assets of the Trust (see page A-6).
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS Automatically reinvested daily in additional shares at net asset value (see page A-7).
- ------------------------------------------------------------------------------------------------------------------------
REPORTS Individual monthly account statements from Dean Witter on the Dean Witter Transaction Statement;
annual and semi-annual Trust financial statements.
- ------------------------------------------------------------------------------------------------------------------------
REDEMPTION For participants in the Active Assets program, shares of the Government Securities Trust will be
OF SHARES redeemed at net asset value automatically to satisfy debit balances in the securities account
created by activity therein or to satisfy amounts owing in the Visa Account resulting from Visa
card purchases, cash advances or checks written against the Visa Account. Non-participants in the
Active Assets program should refer to the discussion appearing at page A-4. It is anticipated that
the net asset value will remain constant at $1.00 per share. Dean Witter has the right to terminate
a shareholder's Active Assets service, in which event all Trust shares held in a shareholder's
account will be involuntarily redeemed. The Trust also reserves the right to reduce the number of
shares in all accounts if the Trustees determine that this is necessary to maintain the constant
$1.00 per share net asset value. See "Purchase and Redemption of Shares" (page A-1).
- ------------------------------------------------------------------------------------------------------------------------
RISKS The Trust invests principally in high quality, short-term securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities which are subject to minimal risk of loss of
income and principal. However, the investor is directed to the discussion under the captions
"Investment Objectives and Policies" (page 5), "Repurchase Agreements" (page 6), and "When-Issued
and Delayed Delivery Securities" (page 6) concerning the risks associated with such portfolio
securities and management strategies.
- ------------------------------------------------------------------------------------------------------------------------
THE SUMMARY INFORMATION ABOVE SHOULD BE READ IN CONJUNCTION WITH THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE APPENDIX HERETO, IN THE CLIENT ACCOUNT AGREEMENT AND IN THE TRUST'S STATEMENT OF ADDITIONAL
INFORMATION, INCLUDING THE APPENDIX THERETO.
</TABLE>

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
SUMMARY OF TRUST EXPENSES
- --------------------------------------------------------------------------------

The following table illustrates all expenses and fees that a shareholder of
the Trust will incur. The expenses and fees set forth in the table are for the
fiscal year ended June 30, 1998.

ANNUAL TRUST OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ---------------------------------------------------------------------------
Management Fees............................................................ 0.48%
12b-1 Fees................................................................. 0.10%
Other Expenses............................................................. 0.05%
-----
Total Trust Operating Expenses............................................. 0.63%
-----
-----
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE TRUST MAY BE GREATER OR
LESS THAN THOSE SHOWN.

3
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income.... 0.049 0.048 0.049 0.048 0.027 0.027 0.043 0.065 0.077 0.079
Less dividends from net
investment income....... (0.049) (0.048) (0.049) (0.048) (0.027) (0.027) (0.043) (0.065) (0.077) (0.079)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT
RETURN.................. 5.05% 4.92% 5.03% 4.92% 2.76% 2.71% 4.37% 6.72% 8.03% 8.20%

RATIOS TO AVERAGE NET ASSETS:
Expenses................. 0.63% 0.64% 0.65% 0.67% 0.66% 0.66% 0.68% 0.70% 0.68% 0.70%
Net investment income.... 4.93% 4.78% 4.93% 4.84% 2.72% 2.68% 4.28% 6.39% 7.74% 7.94%

SUPPLEMENTAL DATA:
Net assets, end of
period, in millions..... $ 699 $ 620 $ 571 $ 542 $ 472 $ 509 $ 533 $ 597 $ 300 $ 244
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
4
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

THE INVESTMENT OBJECTIVES OF THE TRUST ARE HIGH CURRENT INCOME, PRESERVATION
OF CAPITAL AND LIQUIDITY. THE INVESTMENT OBJECTIVES ARE FUNDAMENTAL POLICIES AND
MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE TRUST'S SHAREHOLDERS.

The Trust seeks to achieve its objectives by investing in U.S. Government
securities, including a variety of securities which are issued or guaranteed by
the United States Treasury, by various agencies of the United States Government,
and by various instrumentalities which have been established or sponsored by the
United States Government, and certain interests in the foregoing securities.
Except for U.S. Treasury securities, these obligations, even those which are
guaranteed by Federal agencies or instrumentalities, may or may not be backed by
the "full faith and credit" of the United States. In the case of securities not
backed by the full faith and credit of the United States, they may be backed, in
part, by a line of credit with the U.S. Treasury (such as the Federal National
Mortgage Association), or the Trust must look to the agency issuing or
guaranteeing the obligation for ultimate repayment (such as securities of the
Federal Farm Credit System) in which case the Trust may not be able to assert a
claim against the United States itself in the event the agency or
instrumentality does not meet its commitments.

Treasury securities include Treasury bills, Treasury coupons, Treasury
notes, and Treasury bonds (including zero coupon bonds). Some of the Government
agencies and instrumentalities which issue or guarantee securities include the
Federal Farm Credit System, the Federal Home Loan Banks, the Federal Home Loan
Mortgage Corporation, the Government National Mortgage Association, the Federal
National Mortgage Association, the Farmers Home Administration, the Federal Land
Banks, the Small Business Administration, the Export-Import Bank, the Federal
Intermediate Credit Banks and the Banks for Cooperatives.

The Trust may invest in securities issued or guaranteed by any agency or
instrumentality established or sponsored by the United States Government. Such
investments may take the form of participation interests in, and may be
evidenced by deposit or safekeeping receipts for, any of the foregoing.
Participation interests are pro rata interests in U.S. Government securities
held by others such as interests in pools of mortgages sold by the Government
National Mortgage Association; instruments evidencing deposit or safekeeping are
documentary receipts for such original securities held in custody by others.

The Federal Deposit Insurance Corporation is the administrative authority
over the Bank Insurance Fund and the Savings Insurance Fund which are the
agencies of the U.S. Government which insure (including both principal and
interest) the deposits of certain banks and savings and loan associations up to
$100,000 per deposit. Current federal regulations also permit such institutions
to issue insured negotiable certificates of deposit ("CDs") in principal amounts
of $100,000 or more without regard to the interest rate ceilings on other
deposits. To remain fully insured as to principal, these investments must
currently be limited to $100,000 per bank or savings and loan association. The
interest on such investments is not insured. The Trust may invest in such CDs of
banks and savings and loan institutions having total assets of less than
$1,000,000,000, limited to the insured amount of principal ($100,000) in each
case and limited with regard to all such CDs and all illiquid assets, in the
aggregate, to 10% of the Trust's total assets.

The Trust intends normally to hold its portfolio securities to maturity.
Historically, securities issued or guaranteed by the U.S. Government or its
agencies and instrumentalities have involved minimal risk of loss of principal
or interest, if held to maturity.

The Trust may not borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might otherwise
require the untimely disposition of securities. Borrowing in the aggregate,
including reverse repurchase agreements, may not exceed 20%, and borrowing for
purposes other than meeting redemptions may not exceed 5% of the value of the
Trust's total assets (including the

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
amount borrowed), less liabilities (not including the amount borrowed) at the
time the borrowing is made.

REPURCHASE AGREEMENTS. The Trust may enter into repurchase agreements,
which may be viewed as a type of secured lending by the Trust, and which
typically involve the acquisition by the Trust of government securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Trust will sell back to the
institution, and that the institution will repurchase, the underlying security
("collateral") at a specified price and at a fixed time in the future. The Trust
will accrue interest from the institution until the time when the repurchase is
to occur. Although such date is deemed by the Trust to be the maturity date of a
repurchase agreement, the maturities of securities subject to repurchase
agreements are not subject to any limits and may exceed thirteen months. While
repurchase agreements involve certain risks not associated with direct
investments in U.S. Government securities, the Trust follows procedures designed
to minimize such risks. These procedures include effecting repurchase
transactions only with large, well capitalized and well established financial
institutions and specifying the required value of the collateral underlying the
agreement.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Trust may purchase
securities on a when-issued or delayed delivery basis; i.e., delivery and
payment can take place a month or more after the date of the transaction. When
such transactions are negotiated, the price is fixed at the time of commitment,
but delivery and payment can take place between one month and 120 days after the
date of the commitment. These securities are subject to market fluctuation and
no interest accrues to the purchaser during this period. At the time the Trust
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction and thereafter reflect the value, each
day, of such security in determining its net
asset value.

All the foregoing strategies may subject the Trust to the effects of
interest rate fluctuations to a greater extent than would occur if such
strategies were not used. Certain provisions of the Internal Revenue Code,
related regulations, and rulings of the Internal Revenue Service may also have
the effect of reducing the extent to which the previously cited techniques may
be used by the Trust, either individually or in combination. Furthermore, there
is no assurance that any of these strategies or any other strategies and methods
available to the Trust will result in the achievement of its objectives.

The foregoing investment policies are not fundamental and may be changed by
the Board of Trustees without shareholder vote.

PORTFOLIO MANAGEMENT

The Trust will invest in securities of varying maturities and risks,
although it will not invest in securities with an effective maturity of more
than thirteen months. The Trust will generally not seek profits through
short-term trading, although it may dispose of any portfolio security prior to
maturity if, on the basis of a revised evaluation or other circumstance or
consideration, the Investment Manager deems such disposition advisable.

BROKERAGE ALLOCATION. Brokerage commissions are not normally charged on the
purchase or sale of money market instruments such as U.S. Government
obligations, but such transactions may involve transaction costs in the form of
spreads between bid and asked prices. Pursuant to an order of the Securities and
Exchange Commission, the Trust may effect principal transactions in certain
money market instruments with Dean Witter. In addition, the Trust may incur
brokerage commissions on transactions conducted through Dean Witter, Morgan
Stanley & Co. Incorporated and other broker-dealers that are affiliates of the
Investment Manager.

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. GOVERNMENT AGENCIES (99.2%)
$ 62,650 Federal Farm Credit Bank
08/06/98 - 05/25/99............................. 5.39 - 5.54 % $ 61,378,286
327,866 Federal Home Loan Banks
07/06/98 - 12/02/98............................. 5.44 - 5.66 324,263,442
241,844 Federal Home Loan Mortgage Corp.
07/01/98 - 09/29/98............................. 5.44 - 5.85 240,097,729
57,424 Federal National Mortgage Assoc.
07/27/98 - 11/16/98............................. 5.40 - 5.52 56,788,737
11,000 Tennessee Valley Authority
08/14/98........................................ 5.46 10,927,534
---------------

TOTAL U.S. GOVERNMENT AGENCIES
(AMORTIZED COST $693,455,728)......................................... 693,455,728
---------------

U.S. GOVERNMENT OBLIGATION (0.8%)
6,000 U.S. Treasury Bill
03/04/99 (AMORTIZED COST $5,790,285)............ 5.36 5,790,285
---------------

TOTAL INVESTMENTS
(AMORTIZED COST $699,246,013) (a)......................................... 100.0% 699,246,013

LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................ (0.0) (268,949)
----- ------------

NET ASSETS................................................................ 100.0% $698,977,064
----- ------------
----- ------------

<FN>
- ---------------------
(a) Cost is the same for federal income tax purposes.
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
8
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $699,246,013)............................................................... $699,246,013
Cash.......................................................................................... 6,984
Interest receivable........................................................................... 137,079
Prepaid expenses and other assets............................................................. 37,053
------------

TOTAL ASSETS............................................................................. 699,427,129
------------

LIABILITIES:
Payable for:
Investment management fee................................................................. 298,341
Plan of distribution fee.................................................................. 62,462
Shares of beneficial interest repurchased................................................. 89
Accrued expenses and other payables........................................................... 89,173
------------

TOTAL LIABILITIES........................................................................ 450,065
------------

NET ASSETS............................................................................... $698,977,064
------------
------------

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $698,977,002
Accumulated undistributed net investment income............................................... 62
------------

NET ASSETS............................................................................... $698,977,064
------------
------------

NET ASSET VALUE PER SHARE,
698,977,002 SHARES OUTSTANDING (UNLIMITED SHARES
AUTHORIZED OF $.01 PAR VALUE)............................................................... $1.00
------------
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

9
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998

<TABLE>
<S> <C>
NET INVESTMENT INCOME:

INTEREST INCOME................................................................................ $38,799,742
-----------

EXPENSES
Investment management fee...................................................................... 3,338,933
Plan of distribution fee....................................................................... 671,892
Registration fees.............................................................................. 128,415
Transfer agent fees and expenses............................................................... 113,864
Shareholder reports and notices................................................................ 57,455
Custodian fees................................................................................. 44,658
Professional fees.............................................................................. 43,094
Trustees' fees and expenses.................................................................... 18,170
Other.......................................................................................... 7,073
-----------

TOTAL EXPENSES............................................................................ 4,423,554
-----------

NET INVESTMENT INCOME AND NET INCREASE......................................................... $34,376,188
-----------
-----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

10
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

INCREASE (DECREASE) IN NET ASSETS:

OPERATIONS:
Net investment income and net increase.......................................... $ 34,376,188 $ 31,166,850

Dividends from net investment income............................................ (34,376,623) (31,166,690)

Net increase from transactions in shares of beneficial interest................. 78,528,472 49,048,779
------------ ------------

NET INCREASE............................................................... 78,528,037 49,048,939

NET ASSETS:
Beginning of period............................................................. 620,449,027 571,400,088
------------ ------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $62 AND $497,
RESPECTIVELY)............................................................... $698,977,064 $620,449,027
------------ ------------
------------ ------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

11
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998

1. ORGANIZATION AND ACCOUNTING POLICIES

Active Assets Government Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Trust's investment objectives are
high current income, preservation of capital and liquidity. The Trust 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.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

12
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

exceeding $1 billion but not exceeding $1.5 billion; 0.325% to the portion of
daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.30% to
the portion of daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.275% to the portion of daily net assets exceeding $2.5 billion but
not exceeding $3 billion; and 0.25% to the portion of daily net assets exceeding
$3 billion.

3. PLAN OF DISTRIBUTION

13
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

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, 1998 aggregated $8,905,252,902 and $8,863,848,231,
respectively.

The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended June 30, 1998 included in
Trustees' fees and expenses in the Statement of Operations amounted to $4,515.
At June 30, 1998, the Trust had an accrued pension liability of $48,804 which is
included in accrued expenses in the Statement of Assets and Liabilities.

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, 1998 JUNE 30, 1997
-------------- --------------
<S> <C> <C>
Shares sold............................. 2,429,444,279 2,095,701,110
Shares issued in reinvestment of
dividends.............................. 34,349,876 31,136,575
-------------- --------------
2,463,794,155 2,126,837,685
Shares repurchased...................... (2,385,265,683) (2,077,788,906)
-------------- --------------
Net increase in shares outstanding...... 78,528,472 49,048,779
-------------- --------------
-------------- --------------
</TABLE>

6. FINANCIAL HIGHLIGHTS

See the "Financial Highlights" table on page 4 of this Prospectus.

14
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights (which appear under the
heading "Financial Highlights" on page 4 of this Prospectus) present fairly, in
all material respects, the financial position of Active Assets Government
Securities Trust (the "Trust") at June 30, 1998, 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 ten years
in the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
AUGUST 5, 1998

15
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
APPENDIX

THIS APPENDIX CONSTITUTES PART OF THE PROSPECTUSES OF THE ACTIVE ASSETS
MONEY TRUST (THE "MONEY TRUST"), THE ACTIVE ASSETS TAX-FREE TRUST (THE "TAX-FREE
TRUST"), THE ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST (THE "CALIFORNIA TAX-FREE
TRUST") AND THE ACTIVE ASSETS GOVERNMENT SECURITIES TRUST (THE "GOVERNMENT
SECURITIES TRUST"). THE MONEY TRUST, THE TAX-FREE TRUST, THE CALIFORNIA TAX-FREE
TRUST AND THE GOVERNMENT SECURITIES TRUST ARE REFERRED TO IN THIS APPENDIX
COLLECTIVELY AS THE "TRUSTS". UNLESS OTHERWISE INDICATED, THE INFORMATION SET
FORTH HEREIN IS APPLICABLE TO EACH TRUST.

PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------

PURCHASE OF SHARES

The shares of the Trusts are offered to participants in the Active Assets
financial service program (non-participants see below). Persons subscribing to
the program will have the free credit cash balances in their Active Assets
securities account invested in shares of the Money Trust, the Tax-Free Trust,
the California Tax-Free Trust or the Government Securities Trust or deposited in
the Active Assets Insured Account (a Federal Deposit Insurance Corporation
insured bank account), depending upon which investment vehicle has been
designated by the participant. For further information consult the Client
Account Agreement.

Purchases of shares of the Trusts by program participants will be made only
pursuant to the Active Assets automatic purchase procedures described below.

Subscribers to Active Assets services have the option to change the
designation of their Trust at any time by notifying their Morgan Stanley Dean
Witter Financial Advisor.

The purchase price for shares of the Trusts is the net asset value per share
next determined after receipt by a Trust of a purchase order, pursuant to the
Active Assets program, in proper form. The Trusts anticipate that the net asset
value will remain constant at $1.00 per share and that any fluctuations in value
will be reflected in the daily dividend or in the number of outstanding shares
in the shareholder's account rather than in the per share dollar value. The net
asset value is determined at 12 noon, New York time, on each day that the New
York Stock Exchange is open for business, immediately after the daily
declaration of dividends or on each other day in which there is a sufficient
degree of trading in the Trust's portfolio securities that the current net asset
value of the Trust's shares might be materially affected by changes in the value
of such portfolio securities, but only if on any such day the Trust is required
by the provisions of the Active Assets program to purchase or redeem Trust
shares or receives a request from a non-participant in the Active Assets program
to purchase or redeem shares of the Trust. Shares purchased will receive the
next dividend declared after such shares are issued which will be immediately
prior to the 12 noon pricing on the following business day. The net asset value
per share will not be determined on Good Friday and on such other federal and
non-federal holidays as are observed by the New York Stock Exchange.

A purchase order will not be effective until Federal funds become available
to the Trusts. Federal funds are a commercial bank's deposits in a Federal
Reserve Bank and can be transferred from one member bank's account to that of
another member bank on the same day and thus are considered to be immediately
available funds. There are no minimum investment requirements for the Trusts
(with the exception of non-participants in the Active Assets Program--see below)
although the minimum requirement for entry in the Active Assets program is
currently $5,000 in cash and/or securities. Dean Witter reserves the right to
alter or

A-1
<PAGE>
waive the conditions upon which an Active Assets account may be opened.

Free credit cash balances held in an Active Assets account will be
automatically invested daily in shares of either the Money Trust, the Tax-Free
Trust, the California Tax-Free Trust or the Government Securities Trust, if a
Trust has been selected for investment by the participant, on each business day
on which the New York Stock Exchange is open. Free credit cash balances will be
invested in shares at the price next determined, which is 12 noon New York time,
on the next business day following the credit of any such amounts to the Active
Assets account. Free credit balances arising from a cash payment into an Active
Assets account shall be so invested unless such payment is made after the
cashiering deadline of the Dean Witter office in which the payment is made, in
which case the resulting free credit balance shall be invested on the second
following business day and the investor will not receive the daily dividend
which would have been received had such balance been invested in the designated
Trust. An Active Assets participant desiring to make such a cash payment should
contact his or her Morgan Stanley Dean Witter Financial Advisor for information
concerning the local office's cashiering deadline, which is dependent on such
office's arrangements with its commercial banks.

Each Trust has entered into a Distribution Agreement with Morgan Stanley
Dean Witter Distributors Inc. (the "Distributor"), an affiliate of MSDW
Advisors, which has its principal executive offices at Two World Trade Center,
New York, New York 10048. The Distribution Agreements obligate the Distributor
to pay certain expenses in connection with the offering of the shares of the
Trusts, including costs involved in the distribution of prospectuses and
periodic reports to investors, other supplementary sales literature and
advertising costs. However, costs and expenses incurred by the Distributor may
be reimbursed by the Trusts pursuant to the provisions of the respective Plans
of Distribution pursuant to Rule 12b-1 (see page A-6).

From time to time, certain state administrative agencies may raise questions
as to whether the operation of the Active Assets program constitutes banking
under the laws of their state. In addition, legislation has been proposed in
certain states which, if enacted, could require a modification of the Active
Assets program in those states. The Distributor and Dean Witter are not banks
and believe that the operation of the Active Assets program does not constitute
banking under the laws of any state. The Distributor and Dean Witter intend to
fully contest and resist any regulatory or legislative challenges to the Active
Assets program. Final adverse rulings in any state that the Active Assets
program constitutes unauthorized banking therein or the adoption of legislation
by any state affecting the Active Assets program could force the Trusts to
liquidate shares of residents in such state or to cease offering their shares in
such state as part of the Active Assets program.

PURCHASE OF SHARES BY NON-PARTICIPANTS IN ACTIVE ASSETS PROGRAM

Shares of the Trusts may be purchased by investors maintaining brokerage
accounts with Dean Witter who choose not to participate in the Active Assets
program. Shareholders of the Trusts not participating in the Active Assets
program will not be charged a program fee. The minimum initial purchase for
non-participants is $5,000 and the minimum subsequent purchase is $1,000.
Non-participants in the Active Assets program who are participating in other
brokerage account programs with Dean Witter may have different initial and/or
subsequent purchase minimum accounts, and may make share purchases automatically
through their account programs. Dean Witter account holders should contact their
Morgan Stanley Dean Witter Financial Advisor for further information concerning
methods of purchase.

The Trusts have been created for the purpose of serving as investments for
participants in the Active Assets program and, as such, do not in themselves
offer such typical money market fund features as check writing and exchange
privileges.

A-2
<PAGE>
There are other money market funds, including funds managed by MSDW Advisors,
which have investment objectives similar to the Trusts and which offer check
writing and exchange privileges. Prior to making an investment in any such money
market fund, an investor should obtain and read the prospectus.

REDEMPTION OF SHARES

Each Trust is required to redeem for cash all full and fractional shares of
the Trust. The redemption price is the net asset value per share next determined
after receipt by Morgan Stanley Dean Witter Trust FSB (the "Transfer Agent") of
instructions from Dean Witter in accordance with the automatic procedure set
forth below (non-participants in the Active Assets program see below). Such
instructions are delivered to the Transfer Agent prior to the determination of
net asset value at 12 noon, New York time, on any day that the New York Stock
Exchange is open for business, or on each other day in which there is a
sufficient degree of trading in the Trust's portfolio securities that the
current net asset value of the Trust's shares might be materially affected by
changes in the value of such portfolio securities, but only if on any such day
the Trust is required by the provisions of the Active Assets program to purchase
or redeem Trust shares. Payment of the redemption proceeds will be made on the
same day the redemption becomes effective. Shareholders will receive upon
redemption all dividends declared and reinvested until the time of redemption.

Redemption will be automatically effected by Dean Witter to satisfy debit
balances in the Securities Account created by activity therein or to satisfy
debit balances created by Visa credit card purchases, cash advances or checks
written against the Visa Account. Each Active Assets account will be
automatically scanned for debits each business day that the New York Stock
Exchange is open for business as of the close of business on that day, and after
application of any free credit cash balances in the account to such debits, a
sufficient number of Trust shares owned by the Active Assets participants will
be redeemed at 12 noon the following business day to satisfy any remaining
debits in either the Securities Account or the Visa Account. Margin loans will
be utilized to satisfy debits remaining after the liquidation of all Trust
shares in an Active Assets participant's account and shares may not be purchased
until all debits and margin loans in the account are satisfied. Dean Witter (not
the Trusts) may impose a fee for the use of the Visa credit card to obtain cash
advances.

The right to receive payment with respect to any redemption may be suspended
by each Trust for a period of up to seven days. Suspensions of more than seven
days may not be made except (1) for any period (a) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings or
(b) during which trading on the New York Stock Exchange is restricted; (2) for
any period during which an emergency exists as a result of which (a) disposal by
the Trust of securities owned by it is not reasonably practicable or (b) it is
not reasonably practicable for the Trust to fairly determine the value of its
net assets; or (3) for such other periods as the Securities and Exchange
Commission may by order permit for the protection of security holders of the
Trust. The Commission shall by rules and regulations determine the conditions
under which (i) trading shall be deemed to be restricted and (ii) an emergency
shall be deemed to exist within the meaning of clause (2) above. At various
times the Trusts may be requested to redeem shares with respect to which good
payment has not yet been received by the Distributor. A Trust may delay, or
cause to be delayed, the payment of the redemption proceeds until such time as
it has assured itself that good payment has been collected for the purchase of
such shares. In addition, where the shares to be redeemed have been purchased by
check (including a certified or bank cashier's check), automatic and manual
redemptions may be delayed for the minimum time needed to verify that the check
used for investment has been honored (not more than fifteen days from the time
of receipt of the check).

A-3
<PAGE>
The total value of a shareholder's investment in a Trust at the time of
redemption may be more or less than his or her cost, depending on the value of
the securities held by the Trust at such time and income earned.

If a participant wishes to reduce or eliminate his or her investment in the
Trust shares component of the Active Assets program, he or she should first call
the Active Assets information number shown on the cover page preceding the
Active Assets Money Trust Prospectus, to ascertain the balance in his or her
Trust Account. He or she may then withdraw an amount equal to the value of such
shares, less any charges pending in his or her Active Assets account, in any of
the following ways:

(a) by writing a check against the Visa Account in such amount;

(b) by obtaining a cash advance from a Visa participating bank or branch
thereof for such amount (which the bank may limit to $5,000 per account
per day); or

(c) by calling his or her Morgan Stanley Dean Witter Financial Advisor and
requesting a cash disbursement from the Active Assets program for such
amount.

In any of the above methods, the Trust share balance at any time is subject
to reduction due to prior debits against the participant's account. Accordingly,
if payment is requested through the Visa Account check or the cash advance
methods and if any other debits are paid by automatic redemption of Trust shares
prior to the time the check or cash advance charge is presented for payment,
then the Trust share balance will be reduced. If so, payment of the check or
cash advance may be paid in part from the margin loan value of the Securities
Account or may result in an overdraft. In addition, Dean Witter (not the Trusts)
may impose a fee for the checkwriting service on certain Active Assets accounts.

Under the Active Assets program, both Dean Witter and Bank One have the
right to terminate an Active Assets account for any reason. In such event, all
shares held in a shareholder's account will be redeemed.

REDEMPTION OF SHARES BY NON-PARTICIPANTS IN ACTIVE ASSETS PROGRAM

Shareholders who are not participating in the Active Assets program should
contact Dean Witter, through his or her Morgan Stanley Dean Witter Financial
Advisor, on any day the New York Stock Exchange is open, to effect a redemption
of shares of the Trust. All such redemption requests will be promptly forwarded
to the Transfer Agent; redemption requests should not be sent directly to the
Trusts or the Transfer Agent. If such requests are inadvertently sent to the
Trust or Transfer Agent, they will be forwarded to the Distributor. Cash
proceeds from the manual redemption of Trust shares ordinarily will be credited
to the shareholder's Dean Witter brokerage account or, on request, will be
mailed to the shareholder at his or her address of record. In certain instances,
as where redemption requests are received in writing, such redemption requests
will require written notices containing the signatures of all persons in whose
name the shares are registered, or additional documents such as, but not limited
to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. Non-participants in the
Active Assets program who are participating in other brokerage account programs
with Dean Witter may effect redemption of shares automatically, as provided for
in their account program. Dean Witter account holders should contact their
Morgan Stanley Dean Witter Financial Advisor for further information concerning
methods of redemption.

HOW NET ASSET VALUE IS DETERMINED

The net asset value per share of each Trust, for the purpose of calculating
the price at which shares are issued and redeemed, is determined by the
Investment Manager as of 12 noon New York time on each day that the New York
Stock Exchange is

A-4
<PAGE>
open for business, immediately after the daily declaration of dividends. Each
Trust will also calculate such price on each other day in which there is a
sufficient degree of trading in that Trust's portfolio securities, such that the
current net asset value of the Trust's shares might be materially affected by
changes in the value of such portfolio securities, but only if on any such day
the Trust is required by the provisions of the Active Assets program to purchase
or redeem Trust shares or receives a request from a non-participant in the
Active Assets program to purchase or redeem Trust shares. The determination of
net asset value is made by subtracting from the value of the assets of a Trust
the amount of its liabilities, and dividing the remainder by the number of
outstanding shares of the Trust.

The Trusts utilize the amortized cost method in valuing their portfolio
securities, even though the portfolio securities may increase or decrease in
market value, generally, in regards to changes in interest rates. The amortized
cost method of valuation involves valuing a security at its cost adjusted by a
constant amortization to maturity of any original issue discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. The purpose of this method of calculation is to facilitate the
maintenance of a constant net asset value per share of $1.00, although there is
no assurance that the $1.00 net asset value will be maintained.

CONFIRMATIONS

All purchases and redemptions of Trust shares and dividend reinvestments
will be confirmed monthly to the shareholder (rounded to the nearest share) in
the Active Assets Account Statement. Dean Witter has received an exemptive order
from the Securities and Exchange Commission which permits it to omit sending out
more frequent confirmations with respect to purchases and redemptions.

In the interest of economy and convenience and because of the operating
procedures of the Trusts, certificates representing the Trusts' shares will not
be physically issued. Shares are maintained by the Trusts on the register
maintained by the Transfer Agent and the holders thereof will have the same
rights of ownership with respect to such shares as if certificates had been
issued.

THE TRUSTS AND THEIR MANAGEMENT
- --------------------------------------------------------------------------------

Money Trust, Tax-Free Trust, California Tax-Free Trust and Government
Securities Trust are all no-load, open-end diversified investment management
companies. Money Trust, Tax-Free Trust and Government Securities Trust were
organized under the laws of the Commonwealth of Massachusetts as business trusts
on March 30, 1981. California Tax-Free Trust was organized under the laws of the
Commonwealth of Massachusetts as a business trust on July 10, 1991.

MSDW Advisors, located at Two World Trade Center, New York, New York 10048,
is the Trusts' Investment Manager. The Investment Manager, which was
incorporated in July, 1992 under the name Dean Witter InterCapital Inc., changed
its name to Morgan Stanley Dean Witter Advisors Inc. on June 22, 1998. The
Investment Manager and Dean Witter are wholly-owned subsidiaries of Morgan
Stanley Dean Witter & Co. ("MSDW"), a preeminent global financial services firm
that maintains leading market positions in each of its three primary
businesses--securities, asset management and credit services.

MSDW Advisors and its wholly-owned subsidiary, Morgan Stanley Dean Witter
Services Company Inc. ("MSDW Services"), serve in various investment management,
advisory, management and administrative capacities to 102 investment companies
(the "Dean Witter Funds"), 28 of which are listed on the New York Stock
Exchange, with combined assets of approximately $111.6 billion at July 31, 1998.
The Investment Manager also manages portfolios of pension plans, other
institutions

A-5
<PAGE>
and individuals which aggregated approximately $4.3 billion at such date.

The Trusts have retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. MSDW Advisors has retained MSDW Services to perform the
aforementioned administrative services for the Trusts.

The Trusts' Trustees review the various services provided by the Investment
Manager to ensure that the Trusts' general investment policies and programs are
being properly carried out and that administrative services are being provided
to the Trusts in a satisfactory manner.

As full compensation for the services and facilities furnished to the Trusts
and expenses of the Trusts assumed by the Investment Manager, the Trusts pay the
Investment Manager monthly compensation calculated daily by applying a
percentage rate to the daily net assets of each of the respective Trusts which
declines as net assets of the Trusts reach specified levels (up to $3 billion).
For the fiscal years ended June 30, 1998, the Trusts accrued total compensation
to the Investment Manager amounting to 0.28% (Money Trust), 0.40% (Tax-Free
Trust), 0.49% (California Tax-Free Trust) and 0.48% (Government Securities
Trust) of the respective Trusts' average daily net assets and the Trusts' total
expenses amounted to 0.44% (Money Trust), 0.54% (Tax-Free Trust), 0.64%
(California Tax-Free Trust) and 0.63% (Government Securities Trust) of the
respective Trusts' average daily net assets.

PLAN OF DISTRIBUTION

Each Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act. Under the respective Plans, the Distributor has expanded the nature of
its promotional activities on behalf of the respective Trusts and uses its best
efforts to foster additional sales of Trust shares. The respective Plans provide
that the Distributor bear the expense of all promotional and distribution
related activities on behalf of the respective Trusts, except for expenses that
the respective Trustees determine to reimburse, as described below. The
following activities and services may be provided by the Distributor under the
respective Plans: (1) compensation to sales representatives of Dean Witter and
other broker-dealers; (2) sales incentives and bonuses to sales representatives
and to marketing personnel in connection with promoting sales of shares of the
Trusts; (3) expenses incurred in connection with promoting sales of shares of
the Trusts; (4) preparing and distributing sales literature; and (5) providing
advertising and promotional activities, including direct mail solicitation and
television, radio, newspaper, magazine and other media advertisements.
Reimbursements for these services are made in monthly payments by each Trust at
the annual rate of up to 0.15 of 1% of the average daily net assets of each
Trust. Such payments were made by Money Trust, Tax-Free Trust, California
Tax-Free Trust and Government Securities Trust at the annual rate of 0.10 of 1%
of each Trust's average daily net assets for their respective fiscal years ended
June 30, 1998. Morgan Stanley Dean Witter Financial Advisors are paid an annual
residual commission, currently a gross residual of up to 0.10 of 1% of the
current value of the respective accounts of which they are the Financial
Advisors of record. In addition, some Dean Witter sales personnel will receive
various types of non-cash compensation as special sales incentives, including
trips, educational and/or business seminars and merchandise. Expenses incurred
by the Distributor pursuant to the Plans in any fiscal year will not be
reimbursed by any Trust through payments accrued in any subsequent fiscal year.

Each Trust's expenses include: the Investment Management fee; the fee
pursuant to the Plan of Distribution (see "Purchase of Fund Shares"); taxes;
certain legal, transfer agent, custodian and auditing fees; and printing and
other expenses relating to the Trust's operations which are not expressly
assumed by the Investment Manager under its Investment Management Agreement with
each Trust.

A-6
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS AND DISTRIBUTIONS

Each Trust declares dividends, payable on each day the New York Stock
Exchange is open for business, of all of its daily net investment income (and,
with respect to Money Trust and Government Securities Trust, net short-term
capital gains, if any) to shareholders of record as of 12 noon New York time of
the preceding business day. With respect to Tax-Free Trust and California
Tax-Free Trust, dividends from net short-term capital gains, if any, will be
paid periodically. The amount of dividend may fluctuate from day to day and may
be omitted on some days if net realized losses on portfolio securities exceed a
Trust's net investment income. Dividends are automatically reinvested daily in
additional full and fractional shares of a Trust at the net asset value per
share determined at 12 noon, New York time on that day.

Each Trust intends to distribute dividends from net long-term capital gains,
if any, at least once each year. A Trust may, however, elect to retain all or a
portion of any net long-term capital gains in any year for reinvestment.

Dean Witter will send to each shareholder a monthly summary of his or her
account, including information as to dividends reinvested, on the Dean Witter
Transaction Statement.

TAXES

Because the Trusts currently intend to distribute all of their net
investment income and net capital gains, if any, to shareholders and intend to
otherwise comply with all the provisions of Subchapter M of the Internal Revenue
Code, as amended (the "Code"), to qualify as regulated investment companies, it
is not expected that the Trust will be required to pay any federal income tax.

To avoid being subject to a 31% federal withholding tax on taxable
dividends, capital gains distributions and proceeds of redemptions,
shareholders' taxpayer identification numbers must be furnished and certified as
to accuracy.

MONEY TRUST AND GOVERNMENT SECURITIES TRUST. Distributions of net investment
income and realized net short-term capital gains are taxable to shareholders as
ordinary income, whether such distributions are taken in cash or reinvested in
additional shares. Distributions of long-term capital gains, if any, are taxable
as long-term capital gains, regardless of how long the shareholder has held a
Trust's shares. No portion of such dividends or distributions will be eligible
for the federal dividends received deduction for corporations. The Trusts advise
their shareholders annually as to the federal income tax status of distributions
paid during each calendar year.

TAX-FREE TRUST AND CALIFORNIA TAX-FREE TRUST. The Trusts intend to qualify
to pay "exempt-interest dividends" to their shareholders by maintaining as of
the close of each quarter of their taxable year, at least 50% of the value of
their total assets in tax-exempt securities. If a Trust satisfies such
requirement, dividends from net investment income to shareholders, whether taken
in cash or reinvested in additional Trust shares, will be excludable from gross
income for federal income tax purposes to the extent net interest income is
represented by interest on tax-exempt securities. Exempt-interest dividends are
included, however, in determining what portion, if any, of a person's Social
Security benefits are subject to federal income tax.

The Code now subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on "private activity bonds" (in general, bonds that benefit
non-government entities) issued after August 7, 1986 which, although tax-exempt
are used for purposes other than those generally performed by governmental units
(e.g., bonds used for commercial or housing purposes). Income received on such
bonds is classified as a "tax preference item", under the alternative minimum
tax, for both individual and

A-7
<PAGE>
corporate investors. A portion of a Trust's investments may be made in such
"private activity bonds," with the result that a portion of the exempt-interest
dividends paid by a Trust will be an item of tax preference to shareholders
subject to the alternative minimum tax. In addition, certain corporations which
are subject to the alternative minimum tax may have to include a portion of
exempt-interest dividends in calculating their alternative minimum taxable
income in situations where the "adjusted current earnings" of the corporation
exceeds its preadjustment alternative minimum taxable income.

CALIFORNIA TAXATION. Under California law, an investment company which
qualifies as a regulated investment company must have at least 50% of the value
of its total assets invested in California state and local issues or in
obligations of the United States which if held by an individual, would pay
interest excludable from income (or in a combination thereof), at the end of
each quarter of its taxable year in order to be eligible to pay dividends which
will be exempt from California personal income tax. Shareholders of California
Tax-Free Trust who are California residents will not incur any federal or
California income tax on the amount of exempt-interest dividends received by
them from the Trust and derived from California state and local issues or
certain United States issues whether taken in cash or reinvested in additional
shares to the extent that such dividends are derived from California securities.

Within 60 days after the end of its fiscal year, the Trusts will mail to
shareholders statements indicating the percentage of the dividend distributions
for such fiscal year which constitutes exempt-interest dividends and the
percentage, if any, that is taxable, and the percentage, if any, of the exempt-
interest dividends which constitutes an item of tax preference. This percentage
should be applied uniformly to any distributions made during the fiscal year to
determine the proportion of dividends that is tax-exempt. The percentage may
differ from the percentage of tax-exempt dividend distributions for any
particular month.

Unlike federal law, no portion of the exempt-interest dividends will
constitute an item of tax preference for California personal income tax
purposes. Moreover, unlike federal law, an individual's Social Security benefits
are not subject to California personal income tax, so that the receipt of
California exempt-interest dividends (from the California Tax-Free Trust) will
have no effect on an individual's California personal income tax.

Shareholders will normally be subject to federal and California personal
income tax on dividends paid from interest income derived from taxable
securities and on distributions of net capital gains, if any. For federal income
tax purposes, distributions of long-term capital gains, if any, are taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held a Trust's shares and regardless of whether the distribution is received
in additional shares or cash. In addition, for California personal income tax
purposes, the shareholders of the California Tax-Free Trust will not be subject
to tax, or receive a credit for tax paid by the Trust, on undistributed capital
gains, if any. With respect to the Tax-Free Trust, the exemption of interest
income for federal income tax purposes does not necessarily result in exemption
under the income or other tax laws of any state or local taxing authority. Thus,
shareholders of the Trust may be subject to state and local taxes on
exempt-interest dividends.

Distributions from investment income and long-term and short-term capital
gains will not be excluded from taxable income in determining the California
corporate income or franchise tax for corporate shareholders. Such distributions
also may be includable in income subject to the alternative minimum tax. In
addition, distributions from investment income and long-term and short-term
capital gains may be subject to state taxes in states other than California and
to local taxes.

Interest on indebtedness incurred by shareholders or related parties to
purchase or carry shares of an investment company paying exempt-interest
dividends, such as the Trust, generally will

A-8
<PAGE>
not be deductible by the investor for federal or California personal income tax
purposes.

The foregoing relates to federal income taxation and to California personal
income taxation as in effect as of the date of this Prospectus. Distributions
from investment income and capital gains, including exempt-interest dividends,
may be subject to California franchise taxes if received by a corporation doing
business in California, to state taxes in states other than California and to
local taxes.

Shareholders should consult their tax advisers as to the applicability of
the above to their own tax situation.

CURRENT AND EFFECTIVE YIELD

From time to time the Trusts advertise their "yield" and "effective yield."
Both yield figures are based on historical earnings and are not intended to
indicate future performance. The "yield" of a Trust refers to the income
generated by an investment in the Trust over a given seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that seven-day
period is assumed to be generated each seven-day period within a 365-day period
and is shown as a percentage of the investment. The "effective yield" for a
seven-day period is calculated similarly but, when annualized, the income earned
by an investment in a Trust is assumed to be reinvested each week within a
365-day period. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The Tax-Free
Trust and California Tax-Free Trust may also quote tax-equivalent yield, which
is calculated by determining the pre-tax yield which, after being taxed at a
stated rate, would be equivalent to the yield determined as described above.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

All shares of beneficial interest of a Trust are of $0.01 par value and are
equal as to earnings, assets and voting privileges. There are no conversion,
pre-emptive or other subscription rights. In the event of liquidation, each
share of beneficial interest of a Trust is entitled to its portion of all of the
Trust's assets after all debts and expenses have been paid. The shares do not
have cumulative voting rights.

The Trust is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Trust does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. The Trustees
themselves have the power to alter the number and the terms of office of the
Trustees (as provided for in the Declaration of Trust), and they may at any time
lengthen or shorten their own terms or make their terms of unlimited duration
and appoint their own successors, provided that always at least a majority of
the Trustees has been elected by the shareholders of each Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right under certain circumstances to remove the
Trustees. The voting rights of shareholders are not cumulative, so that holders
of more than 50 percent of the shares voting can, if they choose, elect all
Trustees being elected, while the holders of the remaining shares would be
unable to elect any Trustees.

The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances). However, the Trustees have not authorized
any such additional series or classes of shares.

A-9
<PAGE>
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of a
Trust. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of a Trust and requires that notice of such
disclaimer be given in each instrument entered into or executed by a Trust. The
Declaration of Trust provides for indemnification out of the Trust's property
for any shareholder held personally liable for the obligations of the Trust.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations. Given the nature of the Trusts' assets
and operations, the possibility of a Trust being unable to meet its obligations
is remote and, in the opinion of Massachusetts counsel to the Trusts, the risk
to Trust shareholders is remote.

CUSTODIAN

The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the Trusts' assets. The Custodian has no part in deciding the
Trusts' investment policies or which securities are to be purchased or sold for
the Trusts' portfolios. Any of the Trust's cash balances with the Custodian in
excess of $100,000 are unprotected by Federal deposit insurance. Such balances
may, at times, be substantial.

CODE OF ETHICS. Directors, officers and employees of MSDW Advisors, MSDW
Services and MSDW Distributors are subject to a strict Code of Ethics adopted by
those companies. The Code of Ethics is intended to ensure that the interests of
shareholders and other clients are placed ahead of any personal interest, that
no undue personal benefit is obtained from a person's employment activities and
that actual and potential conflicts of interest are avoided. To achieve these
goals and comply with regulatory requirements, the Code of Ethics requires,
among other things, that personal securities transactions by employees of the
companies be subject to an advance clearance process to monitor that no Morgan
Stanley Dean Witter Fund is engaged at the same time in a purchase or sale of
the same security. The Code of Ethics bans the purchase of securities in an
initial public offering, and also prohibits engaging in futures and options
transactions and profiting on short-term trading (that is, a purchase within
sixty days of a sale or a sale within sixty days of a purchase) of a security.
In addition, investment personnel may not purchase or sell a security for their
personal account within thirty days before or after any transaction in any
Morgan Stanley Dean Witter Fund managed by them. Any violations of the Code of
Ethics are subject to sanctions, including reprimand, demotion or suspension or
termination of employment. The Code of Ethics comports with regulatory
requirements and the recommendations in the 1994 report by the Investment
Company Institute Advisory Group on Personal Investing.

SHAREHOLDER INQUIRIES. All inquiries regarding the Trusts should be
directed to the Trusts at the telephone number or at the address set forth on
the front cover of these Prospectuses.

A-10
<PAGE>
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.

No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in these
Prospectuses or in the Statements of Additional Information, in connection with
the offer contained in these Prospectuses or in the Statements of Additional
Information and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Trusts or the
Distributor. These Prospectuses and the Statements of Additional Information do
not constitute an offer by the Trusts or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Trusts or the
Distributor to make such offer in such jurisdiction.

[LOGO]

ACTIVE ASSETS
MONEY TRUST
ACTIVE ASSETS
TAX-FREE TRUST
ACTIVE ASSETS
CALIFORNIA TAX-FREE
TRUST
ACTIVE ASSETS
GOVERNMENT
SECURITIES TRUST

PROSPECTUSES
AUGUST 20, 1998

The enclosed Prospectuses describe four fully managed money market trusts.
Shares of the Trusts are offered directly to clients of Dean Witter and to
participants in the Active Assets-Registered Trademark- Account program of Dean
Witter Reynolds Inc.

Investors should be aware that the Active Assets Account service is not a bank
account. As with any investment in securities, the value of a shareholder's

investment in the Trusts may fluctuate.

Principal Office of the Trusts
Two World Trade Center
New York, New York 10048
[LOGO]
<PAGE>
[LOGO]
STATEMENTS OF ADDITIONAL INFORMATION
AUGUST 20, 1998

- --------------------------------------------------------------------------------

Active Assets Money Trust (the "Money Trust" or the "Trust") is a no-load,
diversified open-end management investment company whose investment objectives
are high current income, preservation of capital and liquidity. The Money Trust
seeks to achieve its objectives by investing in a diversified portfolio of
short-term money market instruments.

Active Assets Tax-Free Trust (the "Tax-Free Trust" or the "Trust") is a
no-load, diversified open-end management investment company whose investment
objective is 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 Tax-Free Trust seeks to achieve its objective by investing primarily in high
quality, tax-exempt securities with short-term maturities.

Active Assets California Tax-Free Trust (the "California Tax-Free Trust" or
the "Trust") is a no-load, diversified open-end management investment company
whose investment objective is to provide as high a level of daily income exempt
from federal and California personal income tax as is consistent with stability
of principal and liquidity. The California Tax-Free Trust seeks to achieve its
objective by investing primarily in high quality, tax-exempt securities with
short-term maturities.

Active Assets Government Securities Trust (the "Government Securities Trust"
or the "Trust") is a no-load, diversified open-end management investment company
whose investment objectives are high current income, preservation of capital and
liquidity. The Government Securities Trust seeks to achieve its objective by
investing in U.S. Government securities, including a variety of securities which
are issued or guaranteed by the United States Government, its agencies or
instrumentalities.

Prospectuses for the Money Trust, the Tax-Free Trust, the California
Tax-Free Trust and the Government Securities Trust, all dated August 20, 1998,
which provide the basic information you should know before investing in any of
the aforementioned Trusts, may be obtained without charge from any of the Trusts
at the address or telephone number listed below. These Statements of Additional
Information are not Prospectuses. They contain information in addition to and
more detailed than that set forth in the Prospectuses. They are intended to
provide additional information regarding the activities and operations of the
Trusts, and should be read in conjunction with the Prospectuses. They should be
read with the information appearing in the Appendix hereto which is a part of
these Statements of Additional Information.

Active Assets Money Trust
Active Assets Tax-Free Trust
Active Assets California Tax-Free Trust
Active Assets Government Securities Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550

The shares of the Money Trust, the Tax-Free Trust, the California Tax-Free
Trust and the Government Securities Trust are offered to participants in the
Active Assets Account program of Dean Witter Reynolds Inc. ("Dean Witter"). In
addition, shares of the Trusts are offered to investors maintaining brokerage
accounts with Dean Witter who are not subscribers to the Active Assets program.
For further information, either consult the Client Account Agreement or consult
your Morgan Stanley Dean Witter Financial Advisor.

Active Assets Money Trust
<PAGE>
ACTIVE ASSETS MONEY TRUST
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Investment Practices and Policies..................................... 3

Investment Restrictions............................................... 4

How Net Asset Value is Determined..................................... 5

Dividends, Distributions and Taxes.................................... 7

Financial Statements.................................................. 10

Report of Independent Accountants..................................... 21

APPENDIX

Investment Manager.................................................... A-1

Trustees and Officers................................................. A-8

Portfolio Transactions and Brokerage.................................. A-16

General Information................................................... A-17

Custodian and Transfer Agent.......................................... A-17

Independent Accountants............................................... A-17

Reports to Shareholders............................................... A-18

Legal Counsel......................................................... A-18

Experts............................................................... A-18

Registration Statement................................................ A-18

Financial Statements.................................................. A-18

Information with Respect to Securities Ratings........................ A-18
</TABLE>

Active Assets Money Trust 2
<PAGE>
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------

REPURCHASE AGREEMENTS. As discussed in the Prospectus, when cash may be
available for only a few days, it may be invested by the Trust in repurchase
agreements until such time as it may otherwise be invested or used for payments
of obligations of the Trust. These agreements, which may be viewed as a type of
secured lending by the Trust, typically involve the acquisition by the Trust of
debt securities from a selling financial institution such as a bank, savings and
loan association or broker-dealer. The agreement provides that the Trust will
sell back to the institution, and that the institution will repurchase, the
underlying security ("collateral"), which is held by the Trust's Custodian, at a
specified price and at a fixed time in the future, which is usually not more
than seven days from the date of purchase. The Trust will accrue interest from
the institution until the time when the repurchase is to occur. Although such
date is deemed by the Trust to be the maturity date of a repurchase agreement,
the maturities of securities subject to repurchase agreements are not subject to
any limits and may exceed thirteen months.

While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Trust follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well capitalized and well established financial institutions,
whose financial condition will be continually monitored. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the resale price which consists of the acquisition price paid to the
seller of the securities plus the accrued resale premium which is defined as the
amount specified in the repurchase agreement or the daily amortization of the
difference between the acquisition price and the resale price specified in the
repurchase agreement. Such collateral will consist entirely of securities that
are direct obligations of, or that are fully guaranteed as to principal and
interest by, the United States or any agency thereof, and/or certificates of
deposit, bankers' acceptances which are eligible for acceptance by a Federal
Reserve Bank, and, if the seller is a bank, mortgage related securities (as such
term is defined in section 3(a)(41) of the Securities Exchange Act of 1934 that,
at the time the repurchase agreement is entered into, are rated in the highest
rating category by the Requisite NRSROs. Additionally, upon an Event of
Insolvency (as defined under Rule 2a-7 of the Investment Company Act of 1940)
with respect to the seller, the collateral must qualify the repurchase agreement
for preferential treatment under a provision of applicable insolvency law
providing an exclusion from any automatic stay of creditors' rights against the
seller. In the event of a default or bankruptcy by a selling financial
institution, the Trust will seek to liquidate such collateral. However, the
exercise of the Trust's right to liquidate such collateral could involve certain
costs or delays and, to the extent that proceeds from any sale upon a default of
the obligation to repurchase were less than the repurchase price, the Trust
could suffer a loss. It is the current policy of the Trust not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid asset held by the Trust, amount to
more than 10% of its total assets. The Trust's investments in repurchase
agreements may, at times, be substantial when, in the view of the Trust's
investment manager, liquidity or other considerations warrant.

LENDING OF PORTFOLIO SECURITIES. Subject to Investment Restriction (2)
below, the Trust may lend portfolio securities to brokers, dealers and financial
institutions provided that cash equal to at least 100% of the market value
(including accrued interest) of the securities loaned is deposited by the
borrower with the Trust and is maintained each business day in a segregated
account pursuant to applicable regulations. While such securities are on loan,
the borrower will pay the Trust any income accruing thereon, and the Trust may
invest the cash collateral in portfolio securities, thereby earning additional
income. The Trust will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its shares are
qualified for sale and will not lend more than 10% of the value of its total
assets. The creditworthiness of firms to which the Fund lends its portfolio
securities will be monitored on an ongoing basis. Loans would be subject to
termination by the Trust in the normal settlement time, currently two business
days after notice, or by the borrower on one day's notice. Borrowed securities
must be returned when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term of the loan inures
to the Trust and its shareholders. The Trust

Active Assets Money Trust 3
<PAGE>
may pay reasonable finders, borrowers, administrative, and custodial fees in
connection with a loan. During its fiscal year ended June 30, 1997, the Trust
did not lend any of its portfolio securities and it has no intention of doing so
in the foreseeable future.

VARIABLE AND FLOATING RATE OBLIGATIONS. As stated in the Prospectus, the
Trust may invest in variable and floating rate obligations. The interest rate
payable on a variable rate obligation is adjusted at predesignated periodic
intervals and, on floating rate obligations, whenever there is a change in the
market rate of interest on which the interest rate payable is based. Other
features may include the right whereby the Trust may demand prepayment of the
principal amount of the obligation prior to its stated maturity (a "demand
feature") and the right of the issuer to prepay the principal amount prior to
maturity. The principal benefit of a variable rate obligation is that the
interest rate adjustment minimizes changes in the market value of the
obligation. As a result, the purchase of variable rate and floating rate
obligations should enhance the ability of the Trust to maintain a stable net
asset value per share (see "How Net Asset Value is Determined") and to sell
obligations prior to maturity at a price approximating the full principal amount
of the obligations. The principal benefit to the Trust of purchasing obligations
with a demand feature is that liquidity, and the ability of the Trust to obtain
repayment of the full principal amount of an obligation prior to maturity, is
enhanced. The payment of principal and interest by issuers of certain
obligations purchased by the Trust may be guaranteed by letters of credit or
other credit facilities offered by banks or other financial institutions. Such
guarantees will be considered in determining whether an obligation meets the
Trust's investment quality requirements.
------------

The Trust will attempt to balance its objectives of high current income,
preservation of capital and liquidity by investing in securities of varying
maturities and risks. The Trust will not, however, invest in securities with an
effective maturity of more than thirteen months from the date of purchase (see
"How Net Asset Value is Determined"). The amounts invested in obligations of
various maturities of one year or less will depend on management's evaluation of
the risks involved. Longer-term issues, while generally paying higher interest
rates, are subject to greater fluctuations in value resulting from general
changes in interest rates than shorter-term issues. Thus, when rates on new debt
securities increase, the value of outstanding securities may decline, and vice
versa. Such changes may also occur, to a lesser degree, with short-term issues.
These changes, if experienced, may cause fluctuations in the amount of daily
dividends and, in extreme cases, could cause the net asset value per share to
decline (see "How Net Asset Value is Determined"). Longer-term issues also
increase the risk that the issuer may be unable to pay an installment of
interest or principal at maturity. In the event of unusually large redemption
demands, such securities may have to be sold at a loss prior to maturity, or the
Trust might have to borrow money and incur interest expenses. Either occurrence
would adversely impact upon the amount of daily dividends and could result in a
decline in the daily net asset value per share or the reduction by the Trust of
shares held in a shareholder's account. The Trust will attempt to minimize these
risks by investing in relatively longer-term securities when it appears to
management that yields on such securities are not likely to increase
substantially during the period of expected holding, and then only in securities
which are readily marketable. However, there can be no assurance that the Trust
will be successful in achieving this objective.

INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted as fundamental policies
which cannot be changed without the approval of the holders of a "majority" of
the outstanding shares of the Trust as defined in the Investment Company Act of
1940, as amended (the "Act"). Majority is defined in the Act as the lesser of
(a) sixty-seven percent or more of the shares present at a meeting of
shareholders, if the holders of more than fifty percent of the outstanding
shares of the Trust are present or represented by proxy, or (b) more than fifty
percent of the outstanding shares of the Trust.

Active Assets Money Trust 4
<PAGE>
These restrictions provide that the Trust may not:

1. Purchase any common stocks or other equity securities;

2. Make loans to others, except through the purchase of the debt
obligations and repurchase agreements referred to under "Investment
Practices and Policies" above and under "Investment Objectives and Policies"
in the Prospectus and loans of portfolio securities, not in excess of 10% of
the value of the Trust's total assets, made in accordance with guidelines of
the Trustees, including maintaining collateral from the borrower equal at
all times to the current market value of the securities loaned;

3. Purchase or sell real estate; however, the Trust may purchase
marketable securities issued by companies which invest in real estate or
interests therein;

4. Purchase securities on margin or sell short;

5. Purchase or sell commodities or commodity futures contracts, or oil,
gas, or mineral exploration or development programs;

6. Purchase securities for which there are legal or contractual
restrictions on resale (i.e. restricted securities), except for repurchase
agreements;

7. Underwrite securities of other issuers;

8. Purchase warrants, or write, purchase or sell puts, calls,
straddles, spreads or combinations thereof;

9. Participate on a joint or joint and several basis in any securities
trading account;

10. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;

11. Purchase securities of any issuer for the purpose of exercising
control or management; and

12. Invest in securities of any issuer if, to the knowledge of the
Trust, any officer, Trustee or director of the Trust or of the Investment
Manager owns more than 1/2 of 1% of the outstanding securities of such
issuer and such officers, Trustees and directors who own more than 1/2 of 1%
own in the aggregate more than 5% of the outstanding securities of such
issuer.

If a percentage restriction is adhered to at the time of an investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.

HOW NET ASSET VALUE IS DETERMINED
- --------------------------------------------------------------------------------

As discussed in the Appendix to the Prospectus, the net asset value of the
Trust is determined as of 12 noon New York time on each day that the New York
Stock Exchange is open. The New York Stock Exchange currently observes the
following holidays: New Year's Day, Reverend Dr. Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

The Trust utilizes the amortized cost method in valuing its portfolio
securities for purposes of determining the net asset value of the shares of the
Trust. The Trust utilizes the amortized cost method in valuing its portfolio
securities even though the portfolio securities may increase or decrease in
market value, generally, in connection with changes in interest rates. The
amortized cost method of valuation involves valuing a security at its cost
adjusted by a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Trust would receive if it sold the instrument. During
such periods the yield

Active Assets Money Trust 5
<PAGE>
to investors in the Trust may differ somewhat from that obtained in a similar
company which uses mark to market values for all its portfolio securities. For
example, if the use of amortized cost resulted in a lower (higher) aggregate
portfolio value on a particular day, a prospective investor in the Trust would
be able to obtain a somewhat higher (lower) yield than would result from
investment in such a similar company and existing investors would receive less
(more) investment income. The purpose of this method of calculation is to
facilitate the maintenance of a constant net asset value per share of $1.00.

The Trust's use of the amortized cost method to value its portfolio
securities is permitted pursuant to Rule 2a-7 of the Act (the "Rule") and is
conditioned on its compliance with various conditions contained in the Rule
including: (a) the Trustees are obligated, as a particular responsibility within
the overall duty of care owed to the Trust's shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and the Trust's investment objectives, to stabilize the net asset value per
share as computed for the purpose of distribution and redemption at $1.00 per
share; (b)(i) the procedures include calculation, at such intervals as the
Trustees determine are appropriate and as are reasonable in light of current
market conditions, of the deviation, if any between net asset value per share
using amortized cost to value portfolio securities and net asset value per share
based upon available market quotations with respect to such portfolio
securities; (ii) periodic review by the Trustees of the amount of deviation as
well as methods used to calculate it; and (iii) maintenance of written records
of the procedures, and the Trustees' considerations made pursuant to them and
any actions taken upon such consideration; c) the Trustees will consider what
steps should be taken, if any, in the event of a difference of more than 1/2 of
1% between the two methods of valuation; and (d) the Trustees should take such
action as they deem appropriate (such as shortening the average portfolio
maturity, realizing gains or losses, withholding dividends or reducing the
number of the outstanding shares of the Trust) to eliminate or reduce to the
extent reasonably practicable material dilution or other unfair results to
investors or existing shareholders which might arise from differences between
the two methods of valuation. Any reduction of outstanding shares will be
effected by having each shareholder proportionately contribute to the Trust's
capital the necessary shares that represent the amount of excess upon such
determination. Each shareholder will be deemed to have agreed to such
contribution in these circumstances by investment in the Trust. See "Dividends,
Distributions and Taxes" for a discussion of the tax effect of such reduction.

Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the Trust's interest
in the instrument is subject to market action) until the date noted on the face
of the instrument as the date on which the principal amount must be paid, or in
the case of an instrument called for redemption, the date on which the
redemption payment must be made.

A variable rate obligation that is subject to a demand feature is deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand. A floating rate instrument that is
subject to a demand feature is deemed to have a maturity equal to the period
remaining until the principal amount can be recovered through demand.

Active Assets Money Trust 6
<PAGE>
Special Purpose Entity with respect to an Asset Backed Security); (2) the
security subject to the Guarantee is a repurchase agreement that is
Collateralized Fully; or (3) the Guarantee itself is a Government Security and
(B) the issuer of the Demand Feature or Guarantee, or another institution, has
undertaken promptly to notify the holder of the security in the event the Demand
Feature or Guarantee is substituted with another Demand Feature or Guarantee (if
such substitution is permissible under the terms of the Demand Feature or
Guarantee).

As permitted by the Rule, the Board has delegated to the Trust's Investment
Manager, subject to the Board's oversight pursuant to guidelines and procedures
adopted by the Board, the authority to determine which securities present
minimal credit risks and which unrated securities are comparable in quality to
rated securities.

Also, as required by the Rule, the Trust will limit its investments in
securities, other than Government securities, so that, at the time of purchase:
(a) except as further limited in (b) below with regard to certain securities, no
more than 5% of its total assets will be invested in securities issued by the
issuer of the security; and (b) with respect to Eligible Securities that have
received a rating in less than the highest short-term rating category from the
Requisite NRSROs whose ratings are used to qualify the security as an Eligible
Security, or determined to be of comparable quality: (i) no more than 5% in the
aggregate of the Trusts total assets in all such securities, and (ii) no more
than the greater of 1% of total assets, or $1 million, in the securities on any
one issuer.

The presence of a line of credit or other credit facility offered by a bank
or other financial institution which guarantees the payment obligation of the
issuer, in the event of a default in the payment of principal or interest of an
obligation may be taken into account in determining whether an investment is an
Eligible Security, provided that the guarantee itself is an Eligible Security.

The Rule further requires that the Trust limit its investments to U.S.
dollar-denominated instruments which the Trustees determine present minimal
credit risks and which are Eligible Securities. The Rule also requires the Trust
to maintain a dollar-weighted average portfolio maturity (not more than 90 days)
appropriate to its objective of maintaining a stable net asset value of $1.00
per share and precludes the purchase of any instrument with a remaining maturity
of more than 397 days. Should the disposition of a portfolio security result in
a dollar-weighted average portfolio maturity of more than 90 days, the Trust
will invest its available cash in such a manner as to reduce such maturity to 90
days or less as soon as is reasonably practicable.

If the Board determines that it is no longer in the best interests of the
Trust and its shareholders to maintain a stable price of $1 per share or if the
Board believes that maintaining such price no longer reflects a market-based net
asset value per share, the Board has the right to change from an amortized cost
basis of valuation to valuation based on market quotations. The Trust will
notify shareholders of any such change.

DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

As discussed in the Appendix to the Prospectus, the Trust intends to declare
dividends payable on each day the New York Stock Exchange is open for business
of all of its daily net investment income and net short-term capital gains, if
any, to shareholders of record as of 12 noon New York time of the preceding
business day. Net income, for dividend purposes, includes accrued interest and
amortization of original issue and market discount, plus or minus any short-term
gains or losses realized on sales of portfolio securities, less the amortization
of market premium and the estimated expenses of the Trust. Net income will be
calculated immediately prior to the determination of net asset value per share
of the Trust.

Gains or losses on the sales of securities by the Trust will be long-term
capital gains or losses if the securities have been held by the Trust for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.

Active Assets Money Trust 7
<PAGE>

Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Trust's shares and regardless of whether the distribution is received
in additional shares or in cash. Capital gains distributions are not eligible
for the dividends received deduction. The Taxpayer Relief Act reduces the
maximum tax rate on long-term capital gains from 28% to 20%; it also lengthens
the required holding period to obtain the lower rate from more than twelve
months to more than eighteen months. However, the IRS Restructuring and Reform
Act of 1998 reduces the holding period requirement for the lower capital gain
rate to more than 12 months for transactions occurring after January 1, 1998.
The lower rates do not apply to collectibles and certain other assets.
Additionally, the maximum capital gain rate for assets that are held more than
five years and that are acquired after December 31, 2000 is 18%.

The Trustees may revise the above dividend policy, or postpone the payment
of dividends, if the Trust should have or anticipate any large unexpected
expense, loss or fluctuation in net assets which, in the opinion of the
Trustees, might have a significant adverse effect on shareholders. On occasion,
in order to maintain a constant $1 per share net asset value, the Trustees may
direct that the number of outstanding shares be reduced in each shareholder's
account. Such reduction may result in taxable income to a shareholder in excess
of the net increase (i.e., dividends, less such reductions), if any, in the
shareholder's account for a period. Furthermore, such reduction may be realized
as a capital loss when the shares are liquidated.

The Trust has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). If so qualified, the Trust will not be subject to federal
income or excise taxes provided that it distributes all of its taxable net
investment income and all of its net realized capital gains.

Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of realized
net short-term capital gains. Such interest and realized net short-term capital
gains dividends and distributions are taxable to the shareholder as ordinary
dividend income regardless of whether the shareholder receives such
distributions in additional shares or in cash. Since the Trust's income is
expected to be derived entirely from interest rather than dividends, none of the
Trust's dividends/distributions will be eligible for the federal dividends
received deduction available to corporations.

The Code requires each regulated investment company to pay a nondeductible
4% excise tax to the extent the company does not distribute, during each
calendar year, 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined in general on an October 31 year end,
plus certain undistributed amounts from previous years. The Trust anticipates
that it will make sufficient timely distributions to avoid imposition of the
excise tax.

Under present Massachusetts law, the Trust is not subject to any
Massachusetts income tax during any fiscal year in which the Trust qualifies as
a regulated investment company. The Trust might be subject to Massachusetts
income taxes for any taxable year in which it does not so qualify as a regulated
investment company.

The Trust may be subject to tax or taxes in certain states where it does
business. Furthermore, in those states which have income tax laws, the tax
treatment of the Trust and of shareholders with respect to distributions by the
Trust may differ from Federal tax treatment.

Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state or local taxes.

INFORMATION ON COMPUTATION OF YIELD

Active Assets Money Trust 8
<PAGE>
expenses of the Trust such as management fees), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, and dividing the difference by the value of the account at the beginning
of the base period to obtain the base period return, and then multiplying the
base period return by (365/7).

The Trust's annualized effective yield, as may be quoted from time to time
in advertisements and other communications to shareholders and potential
investors, is computed by determining (for the same stated seven-day period as
for the current yield), the net change, exclusive of capital changes and
including the value of additional shares purchased with dividends and any
dividends declared therefrom (which reflect deductions of all expenses of the
Trust such as management fees), in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period, and
dividing the difference by the value of the account at the beginning of the base
period to obtain the base period return, and then compounding the base period
return by adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result.

The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the Trust in the future since the
yield is not fixed. Actual yields will depend not only on the type, quality and
maturities of the investments held by the Trust and changes in interest rates on
such investments, but also on changes in the Trust's expenses during the period.

Yield information may be useful in reviewing the performance of the Trust
and for providing a basis for comparison with other investment alternatives.
However, unlike bank deposits or other investments which typically pay a fixed
yield for a stated period of time, the Trust's yield fluctuates.

The Trust's current yield for the seven days ending June 30, 1998 was 5.20%.
The effective annual yield on 5.20% is 5.34%, assuming daily compounding.

Active Assets Money Trust 9
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $11,914,849,700).......................... $11,914,849,700
Cash........................................................ 35,389
Interest receivable......................................... 11,585,749
Prepaid expenses and other assets........................... 180,383
---------------

TOTAL ASSETS........................................... 11,926,651,221
---------------

LIABILITIES:
Payable for:
Investment management fee............................... 2,906,321
Plan of distribution fee................................ 1,048,556
Shares of beneficial interest repurchased............... 3,995
Accrued expenses and other payables......................... 1,011,753
---------------

TOTAL LIABILITIES...................................... 4,970,625
---------------

NET ASSETS............................................. $11,921,680,596
---------------
---------------

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $11,921,672,238
Accumulated undistributed net investment income............. 8,358
---------------

NET ASSETS............................................. $11,921,680,596
---------------
---------------

NET ASSET VALUE PER SHARE,
11,921,672,238 SHARES OUTSTANDING (UNLIMITED SHARES
AUTHORIZED OF $.01 PAR VALUE).............................
$1.00
---------------
---------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
10
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998

<TABLE>
<S> <C>
NET INVESTMENT INCOME:

INTEREST INCOME............................................. $604,424,726
------------

EXPENSES
Investment management fee................................... 29,850,539
Plan of distribution fee.................................... 10,220,600
Transfer agent fees and expenses............................ 4,429,693
Registration fees........................................... 1,301,497
Custodian fees.............................................. 411,386
Shareholder reports and notices............................. 317,074
Professional fees........................................... 49,099
Trustees' fees and expenses................................. 18,147
Other....................................................... 73,600
------------

TOTAL EXPENSES......................................... 46,671,635
------------

NET INVESTMENT INCOME.................................. 557,753,091

NET REALIZED GAIN...................................... 52,509
------------

NET INCREASE................................................ $557,805,600
------------
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
11
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>

INCREASE (DECREASE) IN NET ASSETS:

OPERATIONS:
Net investment income....................................... $ 557,753,091 $ 420,477,213
Net realized gain........................................... 52,509 --
-------------- -------------

NET INCREASE........................................... 557,805,600 420,477,213
-------------- -------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................................... (557,754,793) (420,473,721)
Net realized gain........................................... (52,509) --
-------------- -------------

TOTAL.................................................. (557,807,302) (420,473,721)
-------------- -------------
Net increase from transactions in shares of beneficial
interest.................................................. 2,993,642,870 1,757,892,646
-------------- -------------

NET INCREASE........................................... 2,993,641,168 1,757,896,138

NET ASSETS:
Beginning of period......................................... 8,928,039,428 7,170,143,290
-------------- -------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $8,358
AND $10,060, RESPECTIVELY).............................. $11,921,680,596 $8,928,039,428
-------------- -------------
-------------- -------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
12
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998

1. ORGANIZATION AND ACCOUNTING POLICIES

The following is a summary of significant accounting policies:

A. VALUATION OF INVESTMENTS -- Portfolio securities are valued at amortized
cost, which approximates market value.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

13
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

3. PLAN OF DISTRIBUTION

14
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998, CONTINUED

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, 1998 aggregated $38,311,164,180 and $35,857,554,382,
respectively.

5. SHARES OF BENEFICIAL INTEREST

Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:

6. FINANCIAL HIGHLIGHTS

See the "Financial Highlights" table on page 4 of this Prospectus.

15
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL HIGHLIGHTS

Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:

SUPPLEMENTAL DATA:
Net assets, end of period,
in millions.............. $11,922 $8,928 $7,170 $5,709 $4,144 $3,604 $3,628 $3,688 $3,454 $3,021
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
16
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
COMMERCIAL PAPER (83.2%)
AUTOMOTIVE - FINANCE (13.8%)
$ 50,000 American Honda Finance Corp.
09/09/98.................................... 5.60 % $ 49,463,333
100,000 Chrysler Financial Corp. 08/27/98 -
10/15/98.................................... 5.60 - 5.62 98,759,278
435,000 Daimler-Benz North America Corp. 07/24/98 -
10/30/98.................................... 5.56 - 5.61 428,634,217
536,000 Ford Motor Credit Co. 07/07/98 - 10/02/98..... 5.55 - 5.59 533,610,930
540,000 General Motors Acceptance Corp. 07/10/98 -
09/24/98.................................... 5.58 - 5.60 536,737,439
-------------------
1,647,205,197
-------------------
BANK HOLDING COMPANIES (11.3%)
345,800 Bankers Trust Corp.
08/20/98 - 12/31/98......................... 5.53 - 5.76 338,219,426
30,000 Corestates Capital Corp.
09/29/98.................................... 5.63 29,589,750
50,000 First Chicago NBD Corp.
10/01/98.................................... 5.61 49,298,500
595,000 Morgan (J.P.) & Co. Inc. 09/04/98 -
10/07/98.................................... 5.58 - 5.61 587,575,678
175,000 NationsBank Corp.
07/09/98 - 08/28/98......................... 5.54 - 5.67 174,599,236
35,000 PNC Funding Corp.
07/06/98.................................... 5.57 34,973,313
130,000 SunTrust Banks Inc.
08/05/98 - 08/19/98......................... 5.57 - 5.58 129,203,394
-------------------
1,343,459,297
-------------------
BANKS - COMMERCIAL (23.0%)
330,000 Abbey National North America Corp. 08/03/98 -
11/04/98.................................... 5.58 - 5.65 326,181,550
295,000 ABN - AMRO North America Finance Inc.
08/25/98 - 01/29/99......................... 5.57 - 5.72 290,222,378
150,000 ANZ (DE) Inc.
07/23/98 - 07/28/98......................... 5.57 - 5.60 149,457,500
545,000 Deutsche Bank Financial Inc. 07/14/98 -
12/28/98.................................... 5.56 - 5.60 537,152,083
200,000 Dresdner U.S. Finance Inc. 10/21/98 -
10/22/98.................................... 5.60 196,600,000
200,000 International Nederlanden (U.S.) Funding Corp.
07/08/98 - 10/19/98......................... 5.57 - 5.60 197,794,667
430,000 Societe Generale N.A. Inc. 08/21/98 -
10/06/98.................................... 5.57 - 5.63 424,935,347
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
17
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$ 350,000 Toronto-Dominion Holdings USA Inc. 07/27/98 -
12/31/98.................................... 5.55 - 5.66% $ 344,969,606
105,000 UBS Finance (DE) Inc. 10/13/98 - 10/30/98..... 5.61 - 5.62 103,154,401
170,000 WestPac Capital Corp. 10/29/98 - 11/02/98..... 5.65 - 5.66 166,840,556
-------------------
2,737,308,088
-------------------
BROKERAGE (2.6%)
312,600 Goldman Sachs Group L.P. 07/02/98 -
08/27/98.................................... 5.58 - 5.90 310,500,565
-------------------
ENERGY (0.4%)
50,000 Texaco Inc.
08/14/98.................................... 5.56 49,663,889
-------------------
FINANCE - COMMERCIAL (1.8%)
213,875 CIT Group Holdings, Inc. 07/24/98 -
09/25/98.................................... 5.58 - 5.60 212,248,163
-------------------
FINANCE - CONSUMER (12.7%)
489,075 American Express Credit Corp. 07/06/98 -
10/01/98.................................... 5.54 - 5.66 485,147,507
55,000 American General Finance Corp.
09/04/98.................................... 5.59 54,452,826
355,000 Avco Financial Services Inc. 08/17/98 -
09/15/98.................................... 5.58 - 5.60 351,768,194
229,350 Beneficial Corp.
07/27/98 - 09/10/98......................... 5.58 - 5.60 227,281,098
50,000 Commercial Credit Co.
07/23/98.................................... 5.58 49,831,333
247,200 Household Finance Corp. 08/11/98 - 09/14/98... 5.58 - 5.60 245,481,614
96,350 Norwest Financial Inc. 07/10/98 - 10/07/98.... 5.57 - 5.59 95,388,833
-------------------
1,509,351,405
-------------------
FINANCE - CORPORATE (4.9%)
587,750 Ciesco, L.P.
07/07/98 - 10/08/98......................... 5.56 - 5.60 584,439,373
-------------------
FINANCE - DIVERSIFIED (9.5%)
566,750 Associates Corp. of North America 07/30/98 -
09/28/98.................................... 5.56 - 5.60 562,355,367
581,650 General Electric Capital Corp. 07/02/98 -
03/16/99.................................... 5.53 - 5.84 574,100,171
-------------------
1,136,455,538
-------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
18
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FINANCE - EQUIPMENT (1.4%)
$ 168,200 Deere (John) Capital Corp. 07/08/98 -
09/04/98.................................... 5.55 - 5.60% $ 167,391,082
-------------------
FOODS & BEVERAGES (0.7%)
90,000 Sara Lee Corp.
07/14/98.................................... 5.63 89,817,350
-------------------
HOUSEHOLD PRODUCTS (0.7%)
90,000 Procter & Gamble Co. 09/22/98 - 09/24/98...... 5.60 88,846,527
-------------------
RETAIL (0.4%)
45,000 Sears Roebuck Acceptance Corp. 07/21/98....... 5.55 44,862,000
-------------------

TOTAL COMMERCIAL PAPER
(AMORTIZED COST $9,921,548,474)................................... 9,921,548,474
-------------------
CERTIFICATES OF DEPOSIT (6.9%)
150,000 Chase Manhattan Bank (USA)
07/22/98.................................... 5.55 150,000,000
440,000 Fleet National Bank
08/12/98 - 10/09/98......................... 5.58 - 5.61 440,000,000
144,500 NationsBank N.A.
09/08/98 - 12/29/98......................... 5.59 - 5.60 144,500,000
85,000 U.S. Bank N.A.
08/28/98 - 12/29/98......................... 5.52 - 5.62 85,000,000
-------------------

TOTAL CERTIFICATES OF DEPOSIT
(AMORTIZED COST $819,500,000)..................................... 819,500,000
-------------------
SHORT-TERM BANK NOTES (5.7%)
140,000 BankBoston, N.A.
09/30/98 - 10/08/98......................... 5.59 - 5.61 140,000,000
245,000 F.C.C. National Bank
09/11/98 - 12/30/98......................... 5.57 - 5.61 245,000,000
200,000 First Union National Bank
09/09/98 - 01/28/99......................... 5.62 - 5.66 200,000,000
100,000 NationsBank N.A.
08/31/98.................................... 5.58 100,000,000
-------------------

TOTAL SHORT-TERM BANK NOTES
(AMORTIZED COST $685,000,000)..................................... 685,000,000
-------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (4.1%)
239,000 Federal Farm Credit Bank 07/01/98 -
12/15/98.................................... 5.61 - 5.73 236,865,143
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
19
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 1998, CONTINUED

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$ 40,000 Federal Home Loan Banks
09/04/98.................................... 5.74% $ 39,607,833
50,000 Federal Home Loan Mortgage Corp. 08/28/98..... 5.70 49,565,000
170,000 Federal National Mortgage Assoc. 03/04/99 -
06/11/99.................................... 5.52 - 5.62 162,763,250
-------------------

TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(AMORTIZED COST $488,801,226)..................................... 488,801,226
-------------------

TOTAL INVESTMENTS
(AMORTIZED COST $11,914,849,700) (a)...... 99.9% 11,914,849,700

CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES............................... 0.1 6,830,896
----- --------------

NET ASSETS................................ 100.0% $11,921,680,596
----- --------------
----- --------------

<FN>
- ---------------------
(a) Cost is the same for federal income tax purposes.
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
20
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF ACTIVE ASSETS MONEY TRUST

PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
AUGUST 5, 1998

21
ACTIVE ASSETS MONEY TRUST
<PAGE>
[LOGO]
STATEMENTS OF ADDITIONAL INFORMATION
AUGUST 20, 1998

- --------------------------------------------------------------------------------

Active Assets Money Trust
Active Assets Tax-Free Trust
Active Assets California Tax-Free Trust
Active Assets Government Securities Trust

Two World Trade Center
New York, New York 10048
(212) 392-2550

Active Assets Tax-Free Trust
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Investment Practices and Policies..................................... 3

Investment Restrictions............................................... 6

How Net Asset Value is Determined..................................... 7

Dividends, Distributions and Taxes.................................... 9

Financial Statements.................................................. 13

Report of Independent Accountants..................................... 27