ACTIVE ASSETS TAX FREE TRUST, 485BPOS, 2000-08-29

ACTIVE ASSETS TAX FREE TRUST
485BPOS, 2000-08-29

Previous: CAMELOT FUNDS /KY, NSAR-A, EX-27, 2000-08-29

Next: ACTIVE ASSETS TAX FREE TRUST, 485BPOS, EX-99.10(A), 2000-08-29

<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 2000

REGISTRATION NOS.: 2-71559
811-3162

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------

<TABLE>
<S> <C>
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. _____ / /
POST-EFFECTIVE AMENDMENT NO. 23 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 /X/
AMENDMENT NO. 24 /X/
</TABLE>

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

ACTIVE ASSETS TAX-FREE TRUST
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600

BARRY FINK, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------

COPY TO:
STUART M. STRAUSS, ESQ.
MAYER, BROWN & PLATT
1675 BROADWAY
NEW YORK, NEW YORK 10019
----------------

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:

As soon as practicable after this Post-Effective Amendment becomes effective.

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)

<TABLE>
<C> <S>
--- immediately upon filing pursuant to paragraph (b)
X on August 29, 2000 pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)
---
on (date) pursuant to paragraph (a) of rule 485
---
</TABLE>

AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

PROSPECTUS - AUGUST 29, 2000

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

FOUR DIFFERENT MONEY MARKET FUNDS OFFERED EXCLUSIVELY TO PARTICIPANTS IN
THE ACTIVE ASSETS-Registered Trademark- OR
BUSINESSCAPE-SM- FINANCIAL SERVICE PROGRAMS AND TO OTHER
INVESTORS WHO HAVE BROKERAGE ACCOUNTS WITH DEAN WITTER REYNOLDS

FOR INFORMATION ON THE ACTIVE ASSETS OR
BUSINESSCAPE FINANCIAL SERVICE PROGRAMS, READ
THE CLIENT ACCOUNT AGREEMENT FOR EACH PROGRAM
AND/OR CALL (800) 869-3326 OR (212) 392-5000 (FOR THE ACTIVE
ASSETS PROGRAM) OR (800) 355-3086 (FOR THE BUSINESSCAPE PROGRAM).

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
CONTENTS

<TABLE>
<S> <C> <C>
Eligible Investors/Overview ...................................................................... 1

The Funds
Active Assets Money
Trust Investment Objectives................................. 2
Principal Investment Strategies....................... 2
Principal Risks....................................... 3
Past Performance...................................... 4
Fees and Expenses..................................... 5
Active Assets
Tax-Free Trust Investment Objective.................................. 6
Principal Investment Strategies....................... 6
Principal Risks....................................... 7
Past Performance...................................... 8
Fees and Expenses..................................... 9
Active Assets
California
Tax-Free Trust Investment Objective.................................. 10
Principal Investment Strategies....................... 10
Principal Risks....................................... 11
Past Performance...................................... 12
Fees and Expenses..................................... 13
Active Assets
Government
Securities Trust Investment Objectives................................. 14
Principal Investment Strategies....................... 14
Principal Risks....................................... 15
Past Performance...................................... 16
Fees and Expenses..................................... 17

Fund Management ................................................................................. 18

Shareholder Information Pricing Fund Shares................................... 19
How Are Fund Investments Made?........................ 19
How Are Fund Shares Sold?............................. 20
Distributions......................................... 22
Tax Consequences...................................... 23

Financial Highlights ............................................................................ 24

THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUNDS.
PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
</TABLE>

<PAGE>
ELIGIBLE INVESTORS/OVERVIEW

Active Assets Money Trust, Active Assets Tax-Free Trust, Active
Assets California Tax-Free Trust and Active Assets Government
Securities Trust (each, a "Fund") are four separate money market
funds offered exclusively to: (i) participants in the Active
Assets-Registered Trademark- or BusinesScape-SM- financial service
programs offered by Dean Witter Reynolds (the "Financial Service
Programs"); and (ii) other investors who have a brokerage account
with Dean Witter Reynolds. (Dean Witter Reynolds is affiliated with
Morgan Stanley Dean Witter Advisors Inc., the Funds' Investment
Manager.)

Participants in the Financial Service Programs are offered a Dean
Witter brokerage account that is linked to the Funds, as well as to
Active Assets Institutional Money Trust and Active Assets Premier
Money Trust (two other money market funds participating in the
Financial Service Programs), a debit card, a checking account and, in
the case of the Active Assets program, a federally insured bank
account. In addition, participants in the BusinesScape program may
have access to a commercial line of credit.

The annual fee presently charged for participating in the Active
Assets Program is $80 for individuals and $100 for businesses. The
annual fee presently charged for participating in the BusinesScape
program is $150. At any time, Dean Witter Reynolds Inc. may change
the annual fee charged and the services provided under the Financial
Service Programs. For details on the Financial Service Programs,
please read the client account agreement for each program.

1
<PAGE>
[Sidebar]
MONEY MARKET
A MUTUAL FUND HAVING THE GOAL TO SELECT SECURITIES TO PROVIDE CURRENT INCOME
WHILE SEEKING TO MAINTAIN A STABLE SHARE PRICE OF $1.00.
YIELD
THE FUND'S YIELD REFLECTS THE ACTUAL INCOME THE FUND PAYS TO YOU EXPRESSED AS A
PERCENTAGE OF THE FUND'S SHARE PRICE. BECAUSE THE FUND'S INCOME FROM ITS
PORTFOLIO SECURITIES WILL FLUCTUATE, THE INCOME IT IN TURN DISTRIBUTES TO YOU
AND THE FUND'S YIELD WILL VARY.
[End Sidebar]

THE FUNDS
ACTIVE ASSETS MONEY TRUST

[ICON] INVESTMENT OBJECTIVES
--------------------------------------------------------------------------------
Active Assets Money Trust is a money market fund that seeks to
provide high current income, preservation of capital and liquidity.

[ICON] PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund invests in high quality, short-term debt
obligations. In selecting investments, the
"Investment Manager," Morgan Stanley Dean Witter
Advisors Inc., seeks to maintain the Fund's share
price at $1.00. The share price remaining stable at
$1.00 means that the Fund would preserve the
principal value of your investment.

The Fund's investments include the following money
market instruments:

- Commercial paper.
- Corporate obligations.
- Debt obligations of U.S.-regulated banks and
instruments secured by those obligations. These
investments include certificates of deposit.
- Certificates of deposit of savings banks and
savings and loan associations.
- Debt obligations issued or guaranteed as to
principal and interest by the U.S. Government,
its agencies or its instrumentalities.
- Repurchase agreements, which may be viewed as a
type of secured lending by the Fund.

2
<PAGE>
[ICON] PRINCIPAL RISKS
--------------------------------------------------------------------------------

There is no assurance that the Fund will achieve its investment
objectives.

CREDIT AND INTEREST RATE RISKS. Principal risks of investing in the
Fund are associated with its debt obligation investments. All debt
obligations, such as bonds, are subject to two types of risk: credit
risk and interest rate risk.

Credit risk refers to the possibility that the issuer of a security
will be unable to make interest payments and/or repay the principal
on its debt. Interest rate risk refers to fluctuations in the value
of a debt security resulting from changes in the general level of
interest rates.

The Investment Manager actively manages the Fund's assets to reduce
the risk of losing any principal investment as a result of credit or
interest rate risks. The Fund's assets are reviewed to maintain or
improve creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of high quality
and short-term maturities.

FOREIGN MONEY MARKET SECURITIES. The Fund may invest in U.S. dollar
denominated money market instruments and other short-term debt
obligations issued by foreign banks. Although the Fund will invest in
these securities only if the Investment Manager determines they are
of comparable quality to the Fund's U.S. investments, investing in
securities of foreign issuers involves some additional risks. These
risks may include higher costs of foreign investing, and the
possibility of adverse political, economic or other developments
affecting the issuers of these securities.

Shares of the Fund are not bank deposits and are not insured or
guaranteed by the FDIC or any other government agency. Although the
Fund seeks to preserve the value of your investment at $1.00 per
share, if it is unable to do so, it is possible to lose money by
investing in the Fund.

3
<PAGE>
[Sidebar]
ANNUAL TOTAL RETURNS
THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S SHARES HAS VARIED FROM YEAR
TO YEAR OVER THE PAST 10 CALENDAR YEARS.

AVERAGE ANNUAL
TOTAL RETURNS
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS.
[End Sidebar]

[ICON] PAST PERFORMANCE
--------------------------------------------------------------------------------
The bar chart and table below provide some indication of the risks of
investing in the Fund. The Fund's past performance does not indicate
how the Fund will perform in the future.

ANNUAL TOTAL RETURNS - CALENDAR YEARS

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the periods shown in the bar chart, the highest return for a
calendar quarter was 1.97% (quarter ended March 31, 1990) and the
lowest return for a calendar quarter was 0.67% (quarter ended
June 30, 1993). Year-to-date total return information as of
June 30, 2000 was 2.89%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1999)
-----------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Active Assets Money Trust 4.88% 5.28% 5.02%
-----------------------------------------------------------------------------
</TABLE>

For the Fund's most recent 7-day annualized yield you may call
(800) 869-NEWS.

4
<PAGE>

[Sidebar]
ANNUAL FUND
OPERATING EXPENSES
THESE EXPENSES ARE DEDUCTED FROM THE FUND'S ASSETS AND ARE BASED ON EXPENSES
PAID FOR THE FISCAL YEAR ENDED JUNE 30, 2000.

[End Sidebar]

[ICON] FEES AND EXPENSES
--------------------------------------------------------------------------------

The table below briefly describes the fees and expenses that you may
pay if you buy and hold shares of the Fund. The Fund is a no-load
fund. The Fund does not impose any sales charges.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C>
----------------------------------------------------------------------
Management fee 0.27%
----------------------------------------------------------------------
Distribution and service (12b-1) fees 0.10%
----------------------------------------------------------------------
Other expenses 0.05%
----------------------------------------------------------------------
Total annual Fund operating expenses 0.42%
----------------------------------------------------------------------
</TABLE>

EXAMPLE
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.

The example assumes that you invest $10,000 in the Fund, your
investment has a 5% return each year, and the Fund's operating
expenses remain the same. Although your actual costs may be higher or
lower, the table below shows your costs at the end of each period
based on these assumptions.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
---------------------------------------------------------
$43 $134 $234 $527
---------------------------------------------------------
</TABLE>

5
<PAGE>
[Sidebar]
MONEY MARKET
A MUTUAL FUND HAVING THE GOAL TO SELECT SECURITIES TO PROVIDE CURRENT INCOME
WHILE SEEKING TO MAINTAIN A STABLE SHARE PRICE OF $1.00.
YIELD
THE FUND'S YIELD REFLECTS THE ACTUAL INCOME THE FUND PAYS TO YOU EXPRESSED AS A
PERCENTAGE OF THE FUND'S SHARE PRICE. BECAUSE THE FUND'S INCOME FROM ITS
PORTFOLIO SECURITIES WILL FLUCTUATE, THE INCOME IT IN TURN DISTRIBUTES TO YOU
AND THE FUND'S YIELD WILL VARY.
[End Sidebar]

ACTIVE ASSETS TAX-FREE TRUST

[ICON] INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------
Active Assets Tax-Free Trust is a money market fund that seeks to
provide as high a level of daily income exempt from federal personal
income tax as is consistent with stability of principal and
liquidity.

[ICON] PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund will invest in high quality, short-term
securities that are normally municipal obligations
that pay interest exempt from federal income taxes.
The Fund's "Investment Manager," Morgan Stanley Dean
Witter Advisors Inc., seeks to maintain the Fund's
share price at $1.00. The share price remaining
stable at $1.00 means that the Fund would preserve
the principal value of your investment.

Municipal obligations are securities issued by state
and local governments, and their agencies. These
securities typically are "general obligation" or
"revenue" bonds, notes or commercial paper. General
obligation securities are secured by the issuer's
faith and credit, including its taxing power for
payment of principal and interest. Revenue bonds,
however, are generally payable from a specific
revenue source. They are issued to fund a wide
variety of public and private projects in sectors
such as transportation, education and industrial
development. Included within the revenue bonds
category are participations in lease obligations and
installment purchase contracts of municipalities.

The Fund has a fundamental policy of investing at
least 80% of its total assets in securities the
interest on which is exempt from federal personal
income tax. This policy may not be changed without
shareholder approval.

The Fund may invest up to 20% of its total assets in securities that
pay interest income subject to the "alternative minimum tax," and
some taxpayers may have to pay tax on a Fund distribution of this
income; see the "Tax Consequences" section of this PROSPECTUS for
more details.

6
<PAGE>
[ICON] PRINCIPAL RISKS
--------------------------------------------------------------------------------

There is no assurance that the Fund will achieve its investment
objective.

CREDIT AND INTEREST RATE RISKS. Principal risks of investing in the
Fund are associated with its municipal investments. Municipal
obligations, as with all debt securities, are subject to two types of
risks: credit risk and interest rate risk.

Credit risk refers to the possibility that the issuer of a security
will be unable to make interest payments and repay the principal on
its debt. Interest rate risk, another risk of debt securities, refers
to fluctuations in the value of a fixed-income security resulting
from changes in the general level of interest rates.

The Investment Manager, however, actively manages the Fund's assets
to reduce the risk of losing any principal investment as a result of
credit or interest rate risks. The Fund's assets are reviewed to
maintain or improve creditworthiness. In addition, federal
regulations require money market funds, such as the Fund, to invest
only in debt obligations of high quality and short-term maturities.

7
<PAGE>
[Sidebar]
ANNUAL TOTAL RETURNS
THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S SHARES HAS VARIED FROM YEAR
TO YEAR OVER A 10-YEAR PERIOD.

AVERAGE ANNUAL

TOTAL RETURNS
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS.
[End Sidebar]

ANNUAL TOTAL RETURNS - CALENDAR YEARS

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the periods shown in the bar chart, the highest return for a
calendar quarter was 1.40% (quarter ended December 31, 1990) and
the lowest return for a calendar quarter was 0.46% (quarter ended
March 31, 1994). Year-to-date total return information as of
June 30, 2000 was 1.68%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1999)
-----------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Active Assets Tax-Free Trust 2.74% 3.03% 3.16%
-----------------------------------------------------------------------------
</TABLE>

For the Fund's most recent 7-day annualized yield you may call
(800) 869-NEWS.

8
<PAGE>

[Sidebar]
ANNUAL FUND
OPERATING EXPENSES
THESE EXPENSES ARE DEDUCTED FROM THE FUND'S ASSETS AND ARE BASED ON EXPENSES
PAID FOR THE FISCAL YEAR ENDED JUNE 30, 2000.

[End Sidebar]

[ICON] FEES AND EXPENSES
--------------------------------------------------------------------------------

The table below briefly describes the fees and expenses that you may
pay if you buy and hold shares of the Fund. The Fund is a no-load
fund. The Fund does not impose any sales charges.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C>
----------------------------------------------------------------------
Management fee 0.37%
----------------------------------------------------------------------
Distribution and service (12b-1) fees 0.10%
----------------------------------------------------------------------
Other expenses 0.03%
----------------------------------------------------------------------
Total annual Fund operating expenses 0.50%
----------------------------------------------------------------------
</TABLE>

EXAMPLE
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.

This example shows what expenses you could pay over time. The example
assumes that you invest $10,000 in the Fund, your investment has a 5%
return each year, and the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, the table below
shows your costs at the end of each period based on these
assumptions.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
---------------------------------------------------------
$52 $162 $282 $634
---------------------------------------------------------
</TABLE>

9
<PAGE>
[Sidebar]
MONEY MARKET
A MUTUAL FUND HAVING THE GOAL TO SELECT SECURITIES TO PROVIDE CURRENT INCOME
WHILE SEEKING TO MAINTAIN A STABLE SHARE PRICE OF $1.00.
YIELD
THE FUND'S YIELD REFLECTS THE ACTUAL INCOME THE FUND PAYS TO YOU EXPRESSED AS A
PERCENTAGE OF THE FUND'S SHARE PRICE. BECAUSE THE FUND'S INCOME FROM ITS
PORTFOLIO SECURITIES WILL FLUCTUATE, THE INCOME IT IN TURN DISTRIBUTES TO YOU
AND THE FUND'S YIELD WILL VARY.
[End Sidebar]

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

[ICON] INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------
Active Assets California Tax-Free Trust is a money market fund that
seeks 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.

[ICON] PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund will invest in high quality, short-term securities that are
normally municipal obligations that pay interest exempt from federal
and California income taxes. The Fund's "Investment Manager," Morgan
Stanley Dean Witter Advisors Inc., seeks to maintain the Fund's share
price at $1.00. The share price remaining stable at $1.00 means that
the Fund would preserve the principal value of your investment.

The Investment Manager generally invests substantially all of the
Fund's assets in California municipal obligations. The interest on
these investments is exempt from federal and California state income
tax. The Fund may invest up to 20% of its assets in securities that
pay interest income subject to the "alternative minimum tax," and
some taxpayers may have to pay tax on a Fund distribution of this
income; see the "Tax Consequences" section of this PROSPECTUS for
more details. Municipal obligations are securities issued by state
and local governments and regional government authorities. These
securities typically are "general obligation" or "revenue" bonds,
notes or commercial paper. General obligation securities are secured
by the issuer's faith and credit, including its taxing power for
payment of principal and interest. Revenue bonds, however, are
generally payable from a specific revenue source. They are issued to
fund a wide variety of public and private projects in sectors such as
transportation, education and industrial development. Included within
the revenue bonds category are participations in lease obligations
and installment contracts of municipalities.

The Fund has a fundamental policy of investing at least 80% of its
total assets in securities the interest on which is exempt from
federal and California personal income tax. This policy may not be
changed without shareholder approval.

10
<PAGE>
[ICON] PRINCIPAL RISKS
--------------------------------------------------------------------------------

There is no assurance that the Fund will achieve its investment
objective.
CREDIT AND INTEREST RATE RISKS. A principal risk of investing in the
Fund is associated with its municipal investments, particularly its
concentration in municipal obligations of a single state. Municipal
obligations, as with all debt securities, are subject to two types of
risks: credit risk and interest rate risk.

Credit risk refers to the possibility that the issuer of a security
will be unable to make interest payments and repay the principal on
its debt. However, unlike most fixed-income mutual funds, the Fund is
subject to the added credit risk of concentrating its investments in
a single state -- California -- and its municipalities. Because the
Fund concentrates its investments in securities issued by California
state and local governments and government authorities, the Fund
could be affected by political, economic and regulatory developments
concerning these issuers. Should any difficulties develop concerning
California issuers' ability to pay principal and/or interest on their
debt obligations, the Fund's value and yield could be adversely
affected.

Interest rate risk, another risk of debt securities, refers to
fluctuations in the value of a fixed-income security resulting from
changes in the general level of interest rates.

11
<PAGE>

[Sidebar]
ANNUAL TOTAL RETURNS
THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S SHARES HAS VARIED FROM YEAR
TO YEAR OVER THE PAST 8 CALENDAR YEARS.

AVERAGE ANNUAL
TOTAL RETURNS

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS.

[End Sidebar]

ANNUAL TOTAL RETURNS - CALENDAR YEARS

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the periods shown in the bar chart, the highest return for a
calendar quarter was 0.82% (quarter ended June 30, 1995) and the
lowest return for a calendar quarter was 0.41% (quarter ended
March 31, 1994). Year-to-date total return as of June 30, 2000 was
1.34%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1999)
--------------------------------------------------------------------------------
LIFE OF FUND
PAST 1 YEAR PAST 5 YEARS (SINCE 11/12/91)
<S> <C> <C> <C>
--------------------------------------------------------------------------------
Active Assets California Tax-Free
Trust 2.35% 2.73% 2.49%
--------------------------------------------------------------------------------
</TABLE>

For the Fund's most recent 7-day annualized yield you may call
(800) 869-NEWS.

12
<PAGE>

[Sidebar]
ANNUAL FUND
OPERATING EXPENSES
THESE EXPENSES ARE DEDUCTED FROM THE FUND'S ASSETS AND ARE BASED ON EXPENSES
PAID FOR THE FISCAL YEAR ENDED JUNE 30, 2000.

[End Sidebar]

[ICON] FEES AND EXPENSES
--------------------------------------------------------------------------------

The table below briefly describes the fees and expenses that you may
pay if you buy and hold shares of the Fund. The Fund is a no-load
fund. The Fund does not impose any sales charges.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C>
----------------------------------------------------------------------
Management fee 0.47%
----------------------------------------------------------------------
Distribution and service (12b-1) fees 0.10%
----------------------------------------------------------------------
Other expenses 0.04%
----------------------------------------------------------------------
Total annual Fund operating expenses 0.61%
----------------------------------------------------------------------
</TABLE>

EXAMPLE
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
---------------------------------------------------------
$63 $196 $342 $765
---------------------------------------------------------
</TABLE>

13
<PAGE>
[Sidebar]
MONEY MARKET
A MUTUAL FUND HAVING THE GOAL TO SELECT SECURITIES TO PROVIDE CURRENT INCOME
WHILE SEEKING TO MAINTAIN A STABLE SHARE PRICE OF $1.00.
YIELD
THE FUND'S YIELD REFLECTS THE ACTUAL INCOME THE FUND PAYS TO YOU EXPRESSED AS A
PERCENTAGE OF THE FUND'S SHARE PRICE. BECAUSE THE FUND'S INCOME FROM ITS
PORTFOLIO SECURITIES WILL FLUCTUATE, THE INCOME IT IN TURN DISTRIBUTES TO YOU
AND THE FUND'S YIELD WILL VARY.
[End Sidebar]

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

[ICON] INVESTMENT OBJECTIVES
--------------------------------------------------------------------------------
Active Assets Government Securities Trust is a money market fund that
seeks to provide high current income, preservation of capital and
liquidity.

[ICON] PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund will invest in high quality, short-term U.S. Government
securities. The Fund's "Investment Manager," Morgan Stanley Dean
Witter Advisors Inc., seeks to maintain the Fund's share price at
$1.00. The share price remaining stable at $1.00 means that the Fund
would preserve the principal value of your investment.

The U.S. Government securities that the Fund may purchase include:

- U.S. Treasury bills, notes and bonds, all of which
are direct obligations of the U.S. Government.

- Securities issued by agencies and instrumentalities
of the U.S. Government which are backed by the full
faith and credit of the United States. Among the
agencies and instrumentalities issuing these
obligations are the Government National Mortgage
Association and the Federal Housing Administration.

- Securities issued by agencies and instrumentalities
which are not backed by the full faith and credit
of the United States, but whose issuing agency or
instrumentality has the right to borrow from the
U.S. Treasury to meet its obligations. Among these
agencies and instrumentalities are the Federal
National Mortgage Association, the Federal Home
Loan Mortgage Corporation and the Federal Home Loan
Banks.

- Securities issued by agencies and instrumentalities
which are backed solely by the credit of the
issuing agency or instrumentality. Among these
agencies and instrumentalities is the Federal Farm
Credit System.

The Fund also may invest up to 10% of its total assets in FDIC
insured certificates of deposit of banks and savings and loan
institutions.

In addition, the Fund may invest in repurchase agreements which may
be viewed as a type of secured lending by the Fund.

14
<PAGE>
[ICON] PRINCIPAL RISKS
--------------------------------------------------------------------------------

There is no assurance that the Fund will achieve its investment
objectives.

CREDIT AND INTEREST RATE RISKS. A principal risk of investing in the
Fund is associated with its U.S. Government securities investments,
which are subject to two types of risks: credit risk and interest
rate risk. Credit risk refers to the possibility that the issuer of a
security will be unable to make interest payments and repay the
principal on its debt. Interest rate risk, another risk of debt
securities, refers to fluctuations in the value of a fixed-income
security resulting from changes in the general level of interest
rates.

Credit risk is minimal with respect to the Fund's U.S. Government
securities investments. Repurchase agreements and insured
certificates of deposit may involve a greater degree of credit risk.
The Investment Manager, however, actively manages the Fund's assets
to reduce the risk of losing any principal investment as a result of
credit or interest rate risks. In addition, federal regulations
require money market funds, such as the Fund, to invest only in debt
obligations of high quality and short-term maturities.

15
<PAGE>
[Sidebar]
ANNUAL TOTAL RETURNS
THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S SHARES HAS VARIED FROM YEAR
TO YEAR OVER THE PAST 10 CALENDAR YEARS.

AVERAGE ANNUAL
TOTAL RETURNS
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS.

[End Sidebar]

ANNUAL TOTAL RETURNS - CALENDAR YEARS

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the periods shown in the bar chart, the highest return for a
calendar quarter was 1.88% (quarter ended June 30, 1990) and the
lowest return for a calendar quarter was 0.62% (quarter ended
June 30, 1993). Year-to-date total return information as of
June 30, 2000 was 2.72%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1999)
-----------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Active Assets Government
Securities Trust 4.58% 4.96% 4.73%
-----------------------------------------------------------------------------
</TABLE>

For the Fund's most recent 7-day annualized yield you may call
(800) 869-NEWS.

16
<PAGE>

[Sidebar]
ANNUAL FUND
OPERATING EXPENSES
THESE EXPENSES ARE DEDUCTED FROM THE FUND'S ASSETS AND ARE BASED ON EXPENSES
PAID FOR THE FISCAL YEAR ENDED JUNE 30, 2000.

[End Sidebar]

[ICON] FEES AND EXPENSES
--------------------------------------------------------------------------------

The table below briefly describes the fees and expenses that you may
pay if you buy and hold shares of the Fund. The Fund is a no-load
fund. The Fund does not impose any sales charges.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C>
----------------------------------------------------------------------
Management fee 0.45%
----------------------------------------------------------------------
Distribution and service (12b-1) fees 0.10%
----------------------------------------------------------------------
Other expenses 0.04%
----------------------------------------------------------------------
Total annual Fund operating expenses 0.59%
----------------------------------------------------------------------
</TABLE>

EXAMPLE
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
---------------------------------------------------------
$60 $187 $327 $732
---------------------------------------------------------
</TABLE>

17
<PAGE>

[Sidebar]
MORGAN STANLEY DEAN WITTER ADVISORS INC.
THE INVESTMENT MANAGER IS WIDELY RECOGNIZED AS A LEADER IN THE MUTUAL FUND
INDUSTRY AND TOGETHER WITH MORGAN STANLEY DEAN WITTER SERVICES COMPANY INC., ITS
WHOLLY-OWNED SUBSIDIARY, HAD APPROXIMATELY $150 BILLION IN ASSETS UNDER
MANAGEMENT AS OF JULY 31, 2000.

[End Sidebar]

FUND MANAGEMENT

Each Fund has retained the Investment Manager -- Morgan Stanley Dean
Witter Advisors Inc. -- to provide administrative services, manage
its business affairs and invest its assets, including the placing of
orders for the purchase and sale of portfolio securities. The
Investment Manager is a wholly-owned subsidiary of Morgan Stanley
Dean Witter & Co., a preeminent global financial services firm that
maintains leading market positions in each of its three primary
businesses: securities, asset management and credit services. Its
main business office is located at Two World Trade Center, New York,
NY 10048.

Each Fund pays the Investment Manager a monthly management fee as
full compensation for the services and facilities furnished to the
Fund, and for Fund expenses assumed by the Investment Manager. The
fee is based on each Fund's average daily net assets. For the fiscal
year ended June 30, 2000, each Fund accrued total compensation to the
Investment Manager as follows:

<TABLE>
<CAPTION>
INVESTMENT MANAGEMENT
FEE ACCRUED
(AS A PERCENT OF
FUND FUND'S AVERAGE NET ASSETS)
<S> <C>
------------------------------------------------------------------------------
Active Assets Money Trust 0.27%
------------------------------------------------------------------------------
Active Assets Tax-Free Trust 0.37%
------------------------------------------------------------------------------
Active Assets California Tax-Free Trust 0.47%
------------------------------------------------------------------------------
Active Assets Government Securities Trust 0.45%
------------------------------------------------------------------------------
</TABLE>

18
<PAGE>

[Sidebar]
CONTACTING A
FINANCIAL ADVISOR
IF YOU ARE NEW TO THE MORGAN STANLEY DEAN WITTER FAMILY OF FUNDS AND WOULD LIKE
TO CONTACT A FINANCIAL ADVISOR, CALL (877) 937-MSDW (TOLL-FREE) FOR THE
TELEPHONE NUMBER OF THE MORGAN STANLEY DEAN WITTER OFFICE NEAREST YOU.

YOU MAY ALSO ACCESS OUR OFFICE LOCATOR ON OUR INTERNET SITE
AT: www.msdw.com/individual/funds
[End Sidebar]

SHAREHOLDER INFORMATION

[ICON] PRICING FUND SHARES
--------------------------------------------------------------------------------
The price of each Fund's shares, called "net asset value," is based
on the amortized cost of the Fund's portfolio securities. The
amortized cost valuation method involves valuing a debt obligation in
reference to its cost, rather than market forces.

The net asset value per share of each Fund is determined once daily
at 12:00 noon Eastern time on each day that the New York Stock
Exchange is open. Shares will not be priced on days that the New York
Stock Exchange is closed.

[ICON] HOW ARE FUND INVESTMENTS MADE?
--------------------------------------------------------------------------------

PARTICIPANTS:

Cash balances in your Financial Service Program account (through the
Active Assets program or the BusinesScape program) that are not
invested in securities will be automatically invested in shares of
the Fund of your choice on days that the New York Stock Exchange is
open for business (a "business day"). You may select any fund offered
for investment to Financial Service Program participants, including
the Funds and Active Assets Institutional Money Trust and Active
Assets Premier Money Trust. In each case, please read the respective
fund's prospectus carefully prior to making an investment decision.
If you are a participant in the BusinesScape program, you may select
more than one fund unless you select to invest in either Active
Assets Institutional Money Trust or Active Assets Premier Money
Trust. Alternatively, if you are a participant in the Active Assets
program, you may choose to have your cash balances deposited in a
federally insured bank account designated by Dean Witter Reynolds
Inc. rather than invested in a fund. You may change your investment
selection at any time by notifying your Morgan Stanley Dean Witter
Financial Advisor. Upon selecting a different fund, your shares held
in the previously designated fund will automatically be sold and
reinvested in shares of the newly selected fund.

Your account will be reviewed on each business day to determine
whether the account has a cash balance as a result of any credits
accrued that day. Credits to your account may arise, for example,
from sales of securities or from direct cash payments into the
account. The cash balance, reduced by any debits to your account
incurred that day, will be used to purchase shares of the fund of
your choice on the next business day at the fund's share price
calculated on that next day. Debits to your account may arise from
purchases of securities, margin calls, other account charges
(including, in the case of your BusinesScape account, any principal
and/or interest owed on your commercial line of credit, if
applicable), debit card purchases, cash advances, or withdrawals, and
any checks written against the account.

19
<PAGE>
Dividends are not earned until the next business day following the
purchase of Fund shares.

If you make a cash payment into your account after your Financial
Advisor's deadline for processing checks has passed, then investment
in the Fund of your choice may not occur until the second business
day after the payment is made (and at the price of the Fund's shares
calculated on that second business day). No payments into the account
will be credited until federal or other immediately available funds
become available to the account.

There is no minimum investment amount for participants, although the
current minimum initial deposit into an Active Assets account is
$5,000 in cash or securities and $20,000 in cash or securities for a
BusinesScape account.

NON-PARTICIPANTS:

To invest in any of the Funds, contact your Morgan Stanley Dean
Witter Financial Advisor. Your Financial Advisor will assist you
step-by-step with the procedures to invest in a Fund. The minimum
investment amount is $5,000 for initial investments. We may offer
reduced minimums or automatic investment options for investors that
have certain brokerage accounts held with Dean Witter Reynolds Inc.
Fund shares are purchased at the next share price calculated after we
receive your purchase order (accompanied by federal or other
immediately available funds).

Non-Participants considering investing in any of the Funds should
recognize that the Funds have been created specifically for the
Financial Service Programs and, as such, the Funds do not offer
typical money market fund features, such as checkwriting privileges,
to non-Participants. (We do offer other comparable money market funds
that have these features. For more information, call your Morgan
Stanley Dean Witter Financial Advisor.)

PLAN OF DISTRIBUTION:
Each Fund has adopted a Plan of Distribution in accordance with
Rule 12b-1 under the Investment Company Act of 1940. The Plan allows
each Fund to pay distribution fees for the sale and distribution of
these shares. It also allows each Fund to pay for services to
shareholders. Because these fees are paid out of each Fund's assets
on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of
sales charges.

[ICON] HOW ARE FUND SHARES SOLD?
--------------------------------------------------------------------------------

PARTICIPANTS:

AUTOMATIC SALES. Your account will be reviewed on each business day
to determine whether the account has a negative balance as a result
of debits incurred on that day. Of course, the negative balance will
be reduced by any credits accrued to the account on

20
<PAGE>

that day. On the next business day, a sufficient number of your Fund
shares will automatically be sold to equal the value of the negative
balance. The sale price of the Fund's shares will be the share price
calculated on that next business day. If the value of your Fund
shares is insufficient to equal the negative balance, Dean Witter
Reynolds Inc. is authorized to take the actions described in your
client account agreement, including, if you are eligible, applying a
margin loan to your account or accessing your line of credit, as
applicable, to cover outstanding debits.

In addition, if Dean Witter Reynolds Inc. exercises its right to
terminate the Financial Service Program you are invested in, then all
of your Fund shares will be sold.

VOLUNTARY SALES. If you wish to sell all or some of your Fund shares,
you may do so by:

(a) writing a check against your account in an amount equal to the
value of shares you wish to sell (there may be fees imposed for
writing these checks);

(b) obtaining cash using your debit card (there may be fees imposed
and certain limitations on withdrawals); or

Once you have taken any of these steps, Fund shares will be sold at
the Fund's share price calculated on the next business day. Proceeds
from your sale of Fund shares will be reduced by any outstanding
debits to your account. Prior to selling any Fund shares through any
of the above methods you should call your Morgan Stanley Dean Witter
Financial Advisor or the applicable information number appearing on
the cover of this PROSPECTUS to determine the value of Fund shares
you own. If there is an insufficient value of Fund shares to cover
your account withdrawals (I.E., debit card purchases or checks
written), then Dean Witter Reynolds Inc. may take the authorized
steps described in your client account agreement.

NON-PARTICIPANTS:
You can sell some or all of your Fund shares at any time. Your shares
will be sold at the next share price calculated after we receive your
order to sell as described below.

To sell your shares, simply call your Morgan Stanley Dean Witter
Financial Advisor or other authorized financial representative.
Payment will be sent to the address to which the account is
registered or deposited in your brokerage account.

You may also sell your shares by writing a "letter of instruction"
that includes:

- your account number;

- the dollar amount or the number of shares you wish to sell; and

- the signature of each owner as it appears on the account.

If you are requesting payment to anyone other than the registered
owner(s) or that payment be sent to any address other than the
address of the registered owner(s)

21
<PAGE>
or pre-designated bank account, you will need a signature guarantee.
You can generally obtain a signature guarantee from an eligible
guarantor acceptable to Morgan Stanley Dean Witter Trust FSB. (You
should contact Morgan Stanley Dean Witter Trust FSB at
(800) 869-NEWS for a determination as to whether a particular
institution is an eligible guarantor.) A notary public CANNOT provide
a signature guarantee. Additional documentation may be required for
shares held by a corporation, partnership, trustee or executor. Mail
the letter to Morgan Stanley Dean Witter Trust FSB at P.O. Box 983,
Jersey City, NJ 07303. A check will be mailed to the name(s) and
address in which the account is registered, or otherwise according to
your instructions.

After we receive your complete instructions to sell as described
above, a check will be mailed to you within seven days, although we
will attempt to make payment within one business day. Payment may
also be sent to your brokerage account.

Certain Dean Witter brokerage accounts held by non-Participants may
be eligible for an automatic redemption option where Fund shares are
sold automatically under specified circumstances. For more
information contact your Morgan Stanley Dean Witter Financial
Advisor.

PARTICIPANTS AND NON-PARTICIPANTS:

Payment for Fund shares sold may be postponed or the right to have
Fund shares sold may be suspended under unusual circumstances. If you
request to sell shares that were recently purchased by check, your
sale will not be effected until it has been verified that the check
has been honored.

[ICON] DISTRIBUTIONS
--------------------------------------------------------------------------------

Each Fund passes substantially all of its earnings along to its
investors as "distributions." Each Fund earns interest from
fixed-income investments. These amounts are passed along to Fund
shareholders as "income dividend distributions." Each Fund realizes
capital gains whenever it sells securities for a higher price than it
paid for them. These amounts may be passed along as "capital gain
distributions;" the Investment Manager does not anticipate that there
will be significant capital gain distributions.

Each Fund declares income dividends, payable on each day the New York
Stock Exchange is open for business, of all of its daily net income
to shareholders of record as of 12:00 noon the preceding business
day. Dividends are reinvested automatically in additional shares of
the Fund (rounded to the last 1/100 of a share). With respect to each
of Active Assets Money Trust and Active Assets Government Securities
Trust, its short-term capital gains, if any, are declared and payable
on each business day. The other Funds' short-term capital gains, if
any, are distributed periodically. Each Fund's long-term capital
gains, if any, are distributed at least once in December.

22
<PAGE>
[ICON] TAX CONSEQUENCES
--------------------------------------------------------------------------------
As with any investment, you should consider how your investment in a
Fund will be taxed. The tax information in this PROSPECTUS is
provided as general information. You should consult your own tax
professional about the tax consequences of an investment in a Fund.

Your income dividend distributions from Active Assets Money Trust and
Active Assets Government Securities Trust are normally subject to
federal and state income tax when they are paid.

Income dividend distributions from Active Assets Tax-Free Trust are
normally exempt from federal income tax and will generally be subject
to state income tax. Income dividend distributions from Active Assets
California Tax-Free Trust are exempt from federal and California
state income taxes -- to the extent they are derived from California
municipal obligations. With respect to these two Funds, income
derived from certain portfolio securities may be subject to federal,
state and/or local income taxes.

With respect to Active Assets Tax-Free Trust and Active Assets
California Tax-Free Trust, income derived from certain municipal
securities may be subject to the federal "alternative minimum tax."
Certain tax-exempt securities whose proceeds are used to finance
private, for-profit organizations are subject to this special tax
system that ensures that individuals pay at least some federal taxes.
Although interest on these securities is generally exempt from
federal income tax, some taxpayers who have many tax deductions or
exemptions nevertheless may have to pay tax on the income.

If a Fund makes any capital gain distributions, those distributions
will normally be subject to federal and state income tax when they
are paid. Any short-term capital gain distributions are taxable to
you as ordinary income. Any long-term capital gain distributions are
taxable to you as long-term capital gains, no matter how long you
have owned shares in a Fund.

Every January, you will be sent a statement (IRS Form 1099-DIV)
showing the distributions paid to you in the previous year. The
statement provides information on your dividends and capital gains
for tax purposes.

When you open your Fund account, you should provide your social
security or tax identification number. By providing this information,
you will avoid being subject to a federal backup withholding tax of
31% on taxable distributions and sale proceeds. Any withheld amount
would be sent to the IRS as an advance tax payment.

23
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the Fund's
financial performance for the past five fiscal years of the Fund. Certain
information reflects financial results for a single Fund share throughout each
year. The total returns in the table represent the rate an investor would have
earned or lost on an investment in the Fund (assuming reinvestment of all
dividends and distributions).

This information for the year ended June 30, 2000 has been audited by
Deloitte & Touche LLP, independent accountants, whose report, along with the
Fund's financial statements, is included in this Prospectus. The financial
highlights for each of the years in the four-year period ended June 30, 1999
have been audited by other independent accountants.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------

SELECTED PER SHARE DATA:
---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------------------
Net income from investment operations 0.054 0.048 0.052 0.051 0.052
---------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.054) (0.048) (0.052) (0.051) (0.052)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------------------

TOTAL RETURN 5.50% 4.92% 5.38% 5.23% 5.33%
---------------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------
Expenses 0.42% 0.43% 0.44% 0.45% 0.47%
---------------------------------------------------------------------------------------------------------------------
Net investment income 5.38% 4.78% 5.24% 5.07% 5.21%
---------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in millions $20,972 $15,989 $11,922 $8,928 $7,170
---------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

24
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
COMMERCIAL PAPER (68.1%)
BANKING (9.0%)
$ 200,000 Bank of America Corp.
09/06/00................................................ 6.40% $ 197,681,056
400,800 Citicorp
07/14/00 - 08/08/00..................................... 6.59 - 6.64 398,931,450
100,000 FleetBoston Financial Corp.
07/27/00................................................ 6.63 99,523,333
700,000 Morgan (J.P.) & Co. Inc.
07/10/00 - 09/01/00..................................... 6.58 - 6.68 696,918,556
20,000 SunTrust Banks, Inc.
07/03/00................................................ 7.05 19,992,167
60,000 Wachovia Corp.
10/03/00................................................ 6.29 59,050,600
420,000 Wells Fargo & Co.
07/05/00 - 08/01/00..................................... 6.62 - 6.68 417,959,811
---------------
1,890,056,973
---------------
DIVERSIFIED FINANCIAL SERVICES (7.6%)
350,000 Associates Corp. of North America 07/07/00 - 08/24/00..... 6.61 - 6.70 348,370,528
200,000 Associates First Capital Corp. 07/12/00 - 07/26/00........ 6.55 - 6.64 199,347,139
1,057,450 General Electric Capital Corp. 07/11/00 - 12/28/00........ 5.95 - 6.86 1,042,060,412
---------------
1,589,778,079
---------------
FINANCE - AUTOMOTIVE (7.7%)
1,045,000 DaimlerChrysler North America Holding Corp.
07/12/00 - 09/05/00..................................... 6.59 - 6.75 1,034,787,767
526,550 Ford Motor Credit Co.
07/12/00 - 08/21/00..................................... 6.57 - 6.62 524,371,472
53,000 General Motors Acceptance Corp.
07/12/00 - 07/14/00..................................... 6.58 52,875,912
---------------
1,612,035,151
---------------
FINANCE - CONSUMER (5.7%)
514,950 American Express Credit Corp.
07/06/00 - 08/02/00..................................... 6.56 - 6.76 513,831,071
630,000 New Center Asset Trust
07/25/00 - 09/12/00..................................... 6.58 - 6.85 623,281,036
63,900 Norwest Financial Inc.
07/05/00................................................ 6.55 63,853,992
---------------
1,200,966,099
---------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

25
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FINANCE - CORPORATE (3.3%)
$ 200,000 CIT Group Inc.
07/11/00 - 09/19/00..................................... 6.57 - 6.70% $ 198,942,444
490,000 Ciesco, L.P.
07/12/00 - 09/13/00..................................... 6.59 - 6.72 486,272,450
---------------
685,214,894
---------------
INTERNATIONAL BANKS (26.5%)
599,800 Barclays U.S. Funding Corp. 07/05/00 - 07/13/00........... 6.57 - 6.80 599,039,898
200,000 Canadian Imperial Holdings Inc.
09/14/00................................................ 6.71 197,250,000
600,000 Commerzbank U.S. Finance Inc. 08/23/00 - 08/25/00......... 6.74 - 6.75 593,993,222
600,000 Cregem North America Inc. 08/28/00 - 09/19/00............. 6.71 - 6.74 592,855,125
823,150 Deutsche Bank Financial Inc. 07/06/00 - 09/13/00.......... 6.58 - 6.76 817,573,807
320,000 Dresdner U.S. Finance Inc. 07/07/00 - 09/12/00............ 6.56 - 6.70 318,359,336
500,000 National Australia Funding (DE) Inc.
08/04/00 - 10/04/00..................................... 6.46 - 6.63 493,257,222
750,000 Societe Generale N.A. Inc. 08/03/00 - 09/21/00............ 6.63 - 6.76 741,933,806
350,000 Toronto-Dominion Holdings (USA) Inc.
07/24/00................................................ 6.64 348,530,875
873,250 UBS Finance (Delaware) LLC 07/05/00 - 03/16/01............ 6.20 - 7.07 853,518,904
---------------
5,556,312,195
---------------
INVESTMENT BANKERS/BROKERS/SERVICES (2.9%)
621,725 Goldman Sachs Group Inc. 07/03/00 - 08/18/00.............. 6.61 - 6.65 619,316,003
---------------
MAJOR U.S. TELECOMMUNICATIONS (2.5%)
535,000 AT&T Corp.
09/18/00 - 10/11/00..................................... 6.72 - 6.78 525,666,053
---------------
PHARMACEUTICAL (2.9%)
600,000 Merck & Co., Inc.
07/14/00................................................ 6.67 598,559,167
---------------

TOTAL COMMERCIAL PAPER
(COST $14,277,904,614)............................................................. 14,277,904,614
---------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

26
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $4,033,800,064).............................................................. 4,033,800,064
---------------

CERTIFICATES OF DEPOSIT (9.3%)
450,000 Citibank, N.A.
08/10/00 - 09/27/00..................................... 6.51 - 6.56 450,000,000
800,000 First Union National Bank 07/28/00 - 09/29/00............. 6.62 - 6.70 800,000,000
700,000 SunTrust Bank, Atlanta 07/25/00 - 10/13/00................ 6.25 - 6.75 700,000,000
---------------

TOTAL CERTIFICATES OF DEPOSIT
(COST $1,950,000,000).............................................................. 1,950,000,000
---------------

SHORT-TERM BANK NOTE (3.4%)
700,000 Bank of America, N.A.
07/07/00 - 07/21/00
(COST $700,000,000)..................................... 6.25 - 6.60 700,000,000
---------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $20,961,704,678) (a) ............................................................ 100.0% 20,961,704,678

OTHER ASSETS IN EXCESS OF LIABILITIES.................................................. 0.0 10,443,566
------ ---------------

NET ASSETS............................................................................. 100.0% $20,972,148,244
------ ---------------
------ ---------------
</TABLE>

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

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

SEE NOTES TO FINANCIAL STATEMENTS

27
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(cost $20,961,704,678)................................................................... $20,961,704,678
Cash....................................................................................... 21,783
Interest receivable........................................................................ 18,540,653
Prepaid expenses and other assets.......................................................... 83,765
---------------

TOTAL ASSETS.......................................................................... 20,980,350,879
---------------

LIABILITIES:
Payable for:
Investment management fee.............................................................. 4,600,298
Plan of distribution fee............................................................... 1,736,800
Shares of beneficial interest repurchased.............................................. 149,165
Accrued expenses and other payables........................................................ 1,716,372
---------------

TOTAL LIABILITIES..................................................................... 8,202,635
---------------

NET ASSETS............................................................................ $20,972,148,244
===============

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................ $20,972,143,300
Accumulated undistributed net investment income............................................ 3,980
Undistributed net realized gain............................................................ 964
---------------

NET ASSETS............................................................................ $20,972,148,244
===============

NET ASSET VALUE PER SHARE,
20,972,143,300 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE).......................................... $1.00
===============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

28
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000

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

INTEREST INCOME............................................................................. $1,117,033,652
--------------

EXPENSES
Investment management fee................................................................... 51,232,674
Plan of distribution fee.................................................................... 18,747,728
Transfer agent fees and expenses............................................................ 6,933,610
Registration fees........................................................................... 1,999,773
Custodian fees.............................................................................. 763,726
Shareholder reports and notices............................................................. 420,644
Professional fees........................................................................... 74,009
Trustees' fees and expenses................................................................. 17,934
Other....................................................................................... 114,559
--------------

TOTAL EXPENSES......................................................................... 80,304,657
--------------

NET INVESTMENT INCOME.................................................................. 1,036,728,995

NET REALIZED GAIN...................................................................... 1,305
--------------

NET INCREASE................................................................................ $1,036,730,300
==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

29
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, 2000 JUNE 30, 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:

OPERATIONS:
Net investment income..................................................... $ 1,036,728,995 $ 694,899,969
Net realized gain......................................................... 1,305 118,973
--------------- ---------------

NET INCREASE......................................................... 1,036,730,300 695,018,942
--------------- ---------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................................... (1,036,739,747) (694,893,595)
Net realized gain......................................................... (341) (118,973)
--------------- ---------------

TOTAL DIVIDENDS AND DISTRIBUTIONS.................................... (1,036,740,088) (695,012,568)
--------------- ---------------
Net increase from transactions in shares of beneficial interest........... 4,982,775,399 4,067,695,663
--------------- ---------------

NET INCREASE......................................................... 4,982,765,611 4,067,702,037

NET ASSETS:
Beginning of period....................................................... 15,989,382,633 11,921,680,596
--------------- ---------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $3,980 AND $14,732,
RESPECTIVELY)......................................................... $20,972,148,244 $15,989,382,633
=============== ===============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

30
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000

1. ORGANIZATION AND ACCOUNTING POLICIES

Active Assets Money Trust (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is high current
income, preservation of capital and liquidity. The Fund 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 Fund 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 Fund'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 Fund records dividends and
distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of the daily net assets not exceeding $500
million; 0.425% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of the daily net assets
exceeding $750 million but not

31
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

exceeding $1 billion; 0.35% to the portion of the daily net assets exceeding $1
billion but not exceeding $1.5 billion; 0.325% to the portion of the daily net
assets exceeding $1.5 billion but not exceeding $2 billion; 0.30% to the portion
of the daily net assets exceeding $2 billion but not exceeding $2.5 billion;
0.275% to the portion of the daily net assets exceeding $2.5 billion but not
exceeding $3 billion; 0.25% to the portion of the daily net assets exceeding $3
billion but not exceeding $15 billion; 0.249% to the portion of the daily net
assets exceeding $15 billion but not exceeding $17.5 billion; and 0.248% to the
portion of the daily net assets exceeding $17.5 billion.

3. PLAN OF DISTRIBUTION

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution pursuant to Rule 12b-1 under the Act,
finances certain expenses in connection therewith.

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, 2000 aggregated $93,531,915,642 and $89,560,410,717,
respectively.

Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At June 30, 2000, the Fund had
transfer agent fees and expenses payable of approximately $95,000.

The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended June 30, 2000 included in
Trustees' fees and expenses in the Statement of Operations amounted to $5,973.
At June 30, 2000, the Fund had an accrued pension liability of $51,839 which is
included in accrued expenses in the Statement of Assets and Liabilities.

32
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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, 2000 JUNE 30, 1999
---------------- ----------------
<S> <C> <C>
Shares sold...................................................... 85,552,651,140 56,769,537,371
Shares issued in reinvestment of dividends and distributions..... 1,034,424,652 693,725,182
--------------- ---------------
86,587,075,792 57,463,262,553
Shares repurchased............................................... (81,604,300,393) (53,395,566,890)
--------------- ---------------
Net increase in shares outstanding............................... 4,982,775,399 4,067,695,663
=============== ===============
</TABLE>

33
ACTIVE ASSETS MONEY TRUST
<PAGE>

ACTIVE ASSETS MONEY TRUST
INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF ACTIVE ASSETS MONEY TRUST:

We have audited the accompanying statement of assets and liabilities of Active
Assets Money Trust (the "Fund"), including the portfolio of investments, as of
June 30, 2000, and the related statements of operations and changes in net
assets, and financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the year ended June 30, 1999 and the financial highlights for
each of the years in the four-year period ended June 30, 1999 were audited by
other auditors whose report, dated August 5, 1999, expressed an unqualified
opinion on those statements and financial highlights.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. Our procedures included confirmation of securities owned at
June 30, 2000 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Active Assets Money
Trust as of June 30, 2000, the results of its operations, the changes in its net
assets and the financial highlights for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP
NEW YORK, NEW YORK
AUGUST 7, 2000

2000 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal
year ended June 30, 2000, 5.15% was attributable to qualifying
Federal obligations. Please consult your tax advisor to determine
if any portion of the dividends you received is exempt from state
income tax.
34
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 statement of changes in net assets and the financial
highlights of Active Assets Money Trust (the "Fund") (not presented separately
herein) presents fairly, in all material respects, the changes in its net assets
for the year ended June 30, 1999 and the financial highlights for each of the
four years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles. This financial statement and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund'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 provide a reasonable basis for the opinion expressed above. We have not
audited the financial statements or financial highlights of the Fund for any
period subsequent to June 30, 1999.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
August 5, 1999

35
<PAGE>

ACTIVE ASSETS MONEY TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS

On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.

The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.

In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.

On July 1, 2000, the Fund, with the approval of its Board of Trustees and its
Audit Committee, engaged Deloitte & Touche LLP as its new independent
accountants for the year ended June 30, 2000.

36
ACTIVE ASSETS MONEY TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL HIGHLIGHTS

SELECTED PER SHARE DATA:
---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------------------
Net income from investment operations 0.031 0.027 0.031 0.030 0.031
---------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.031) (0.027) (0.031) (0.030) (0.031)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------------------

TOTAL RETURN 3.15% 2.73% 3.11% 3.05% 3.12%
---------------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------
Expenses 0.50% 0.52% 0.54% 0.55% 0.55%
---------------------------------------------------------------------------------------------------------------------
Net investment income 3.11% 2.68% 3.05% 2.98% 3.08%
---------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in millions $2,660 $2,290 $1,869 $1,634 $1,542
---------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

37
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (66.0%)
ALABAMA
$10,200 Birmingham Special Care Facilities Financing Authority, Eye
Foundation Hospital Ser 1998-A............................ 4.70 % 07/10/00 $ 10,200,000
50,000 Birmingham Medical Clinic Board, University of Alabama
Health Services Foundation Ser 1991....................... 4.70 07/10/00 50,000,000
23,700 University of Alabama, Birmingham Hospital Ser 1997B........ 4.70 07/10/00 23,700,000
ARIZONA
12,200 Arizona Educational Loan Marketing Corporation, 1991 Ser A
(AMT)..................................................... 4.80 07/10/00 12,200,000
10,500 Maricopa County, Arizona Public Service Co Palo Verde 1994
Ser C..................................................... 4.50 07/03/00 10,500,000
4,000 Pinal County Industrial Development Authority, Magma Copper
Co Ser 1984A.............................................. 4.60 07/03/00 4,000,000
ARKANSAS
20,000 Crossett, Georgia Pacific Corp Ser 1984**................... 4.60 07/10/00 20,000,000
CALIFORNIA
7,000 Big Bear Lake, Southwest Gas Corp 1993 Ser A (AMT).......... 4.45 07/10/00 7,000,000
California Health Facilities Financing Authority,
13,550 Adventist Health System West 1998 Ser A & B (MBIA)........ 4.00 07/03/00 13,550,000
6,000 Scripps Memorial Hospital Ser 1991 B (MBIA)................. 4.65 07/10/00 6,000,000
2,500 St Joseph Health System Ser 1985A........................... 4.15 07/03/00 2,500,000
8,500 California Pollution Control Financing Authority, Pacific
Gas & Electric Co 1996 Ser F & 1997 Ser A................. 4.00 07/03/00 8,500,000
3,000 California Statewide Communities Development Authority,
Sutter Health Ser 1995 COPs (AMBAC)....................... 4.15 07/03/00 3,000,000
6,100 Irvine, Assessment District No 87-8 Improvement Bond Act
1915...................................................... 4.15 07/03/00 6,100,000
15,000 Los Angeles Department of Water & Power, Electric Plant
Second Issue of 2000 Ser E................................ 4.25 07/10/00 15,000,000
4,300 MSR Public Power Agency, San Juan Sub Lien Ser 1997 D
(MBIA).................................................... 4.25 07/10/00 4,300,000
8,000 Newport Beach, Hoag Memorial Hospital Presbyterian
Ser 1992.................................................. 4.25 07/03/00 8,000,000
4,100 Western Riverside County Regional Wastewater Authority,
Ser 1996.................................................. 4.15 07/03/00 4,100,000
COLORADO
15,000 Colorado Student Obligation Bond Authority, Ser 1989A
(AMT)..................................................... 4.85 07/10/00 15,000,000
CONNECTICUT
22,190 Connecticut, Second Lien Special Tax Transportation
Ser 1..................................................... 4.75 07/10/00 22,190,000
27,500 Connecticut Health & Educational Facilities Authority, Yale
University Ser T-2........................................ 4.35 07/10/00 27,500,000
25,500 Connecticut Special Assessment, Unemployment Compensation
1993 Ser C (FGIC)......................................... 3.38 07/01/00 25,500,000
DELAWARE
Delaware Economic Development Authority,
18,400 Ciba Specialty Chemicals Corp 1998 Ser A (AMT)............ 4.55 07/03/00 18,400,000
14,800 Star Enterprise Ser 1997A (AMT)............................. 4.95 07/10/00 14,800,000
10,000 Star Enterprise Ser 1997C (AMT)............................. 4.81 07/10/00 10,000,000
DISTRICT OF COLUMBIA
10,000 District of Columbia, George Washington University,
Ser 1999 C (MBIA)......................................... 4.80 07/10/00 10,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

38
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA
$45,000 Dade County, Water & Sewer Ser 1994 (FGIC).................. 4.70 % 07/10/00 $ 45,000,000
22,650 Dade County Industrial Development Authority, Dolphins
Stadium Ser 1985 B & C.................................... 4.95 07/10/00 22,650,000
4,700 Jacksonville Electric Authority, Electric System Ser C...... 4.55 07/03/00 4,700,000
25,000 Jacksonville Health Facilities Authority, Charity Obligated
Group Ser 1997 C (MBIA)................................... 4.75 07/10/00 25,000,000
20,000 Pasco County School Board, Ser 1996 COPs (AMBAC)............ 4.75 07/10/00 20,000,000
Putnam County Development Authority, Seminole Electric Co-op
Inc
24,000 Ser 1984 D (NRU-CFC Gtd).................................. 4.35 12/15/00 24,000,000
13,265 Ser 1984 H-3 (NRU-CFC Gtd)................................ 4.05 09/15/00 13,265,000
19,400 Volusia County Health Facilities Authority, Pooled Ser 1985
(FGIC)**.................................................. 4.85 07/10/00 19,400,000
GEORGIA
21,000 Albany-Dougherty County Hospital Authority, Phoebe-Putney
Memorial Hospital Ser 1991 (AMBAC)**...................... 4.80 07/10/00 21,000,000
7,000 Clayton County, Delta Airlines Project Ser 2000 A........... 4.70 07/10/00 7,000,000
13,900 Clayton County Hospital Authority, Southern Regional Medical
Center Ser 1998B**........................................ 4.80 07/10/00 13,900,000
IDAHO
8,755 Idaho Health Facilities Authority, St Luke's Regional
Medical Center Ser 1995................................... 4.60 07/03/00 8,755,000
ILLINOIS
15,000 Chicago, Tender Notes Ser 2000 A............................ 3.90 12/07/00 15,000,000
33,000 Illinois Development Finance Authority, Palos Community
Hospital Ser 1994......................................... 4.80 07/10/00 33,000,000
Illinois Health Facilities Authority,
6,200 Northwestern Memorial Hospital Ser 1995..................... 4.60 07/03/00 6,200,000
4,550 Resurrection Health Care System Ser 1999A (FSA)............. 4.65 07/03/00 4,550,000
INDIANA
8,500 Indiana Development Finance Authority, Southern Indiana
Gas & Electric Co 1998 Ser A.............................. 4.30 03/01/01 8,500,000
21,200 Indiana Hospital Equipment Financing Authority, Ser 1985 A
(MBIA).................................................... 4.85 07/10/00 21,200,000
22,300 Indianapolis, Res Recov Ogden Martin Systems Inc Ser 1987
(AMT)..................................................... 4.55 07/03/00 22,300,000
8,400 Petersburg, Indianapolis Power & Light Co Ser 1995B
(AMBAC)................................................... 4.80 07/10/00 8,400,000
KENTUCKY
7,000 Jamestown, Union Underwear Co 1983 Ser A.................... 4.95 07/10/00 7,000,000
13,000 Louisville & Jefferson County Regional Airport Authority,
United Parcel Service Worldwide Forwarding Inc 1999 Ser C
(AMT)..................................................... 4.55 07/03/00 13,000,000
LOUISIANA
14,500 New Orleans Aviation Board, Ser 1993 B (MBIA)............... 4.80 07/10/00 14,500,000
MARYLAND
Maryland Health & Higher Educational Facilities Authority,
6,900 Johns Hopkins Hospital Ser A.............................. 4.90 07/10/00 6,900,000
9,720 North Arundel Hospital Ser 1997A............................ 4.80 07/10/00 9,720,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

39
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$15,860 Washington Suburban Sanitary District, 1998 Ser BANs........ 4.75 % 07/10/00 $ 15,860,000
MASSACHUSETTS
34,000 Massachusetts, Refg 1998 Ser A.............................. 4.50 07/10/00 34,000,000
Massachusetts Health & Educational Facilities Authority,
9,900 Amherst College Ser F..................................... 4.70 07/10/00 9,900,000
13,000 Capital Asset Ser D (MBIA).................................. 4.45 07/03/00 13,000,000
41,690 Harvard University Ser 1985 I............................... 4.50 07/10/00 41,690,000
16,205 Williams College Ser E...................................... 4.55 07/10/00 16,205,000
26,000 Massachusetts Water Resources Authority, Multi-Modal Sub
1999 Ser B................................................ 4.40 07/10/00 26,000,000
MICHIGAN
Delta County Economic Development Corporation, Mead-Escanaba
Paper Co
6,900 Ser 1985 C................................................ 4.45 07/03/00 6,900,000
5,000 Ser 1985 E................................................ 4.50 07/03/00 5,000,000
3,500 Michigan Strategic Fund, Detroit Edison Co Ser 1995 CC...... 4.60 07/03/00 3,500,000
MINNESOTA
1,700 Beltrami County, Environmental Northwood Panelboard Co
Ser 1991.................................................. 4.45 07/03/00 1,700,000
30,985 Minneapolis, Convention Center Ser 1999..................... 4.60 07/10/00 30,985,000
4,900 Minneapolis & St Paul Housing & Redevelopment Authority,
Children's Health Care Ser 1995B (FSA).................... 4.65 07/03/00 4,900,000
20,000 University of Minnesota Regents, Ser 1999A.................. 4.80 07/10/00 20,000,000
MISSOURI
4,000 Columbia, Water & Electric Ser B............................ 4.75 07/10/00 4,000,000
22,200 Missouri Health & Educational Facilities Authority,
Washington University Ser 1996 C & 2000 B................. 4.50 07/03/00 22,200,000
NEVADA
Clark County,
30,000 Airport Impr Refg 1993 Ser A (MBIA)....................... 4.70 07/10/00 30,000,000
9,000 Airport Sub Lien Ser 1999 B-1 (AMT)....................... 4.80 07/10/00 9,000,000
NEW HAMPSHIRE
10,000 New Hampshire Higher Educational & Health Facilities
Authority, St Paul's School Ser 1998...................... 4.75 07/10/00 10,000,000
NEW JERSEY
32,500 New Jersey Educational Facilities Authority, College of New
Jersey Ser 1999A (AMBAC).................................. 4.45 07/10/00 32,500,000
22,800 New Jersey Turnpike Authority, Ser 1991 D (FGIC)............ 4.20 07/10/00 22,800,000
NEW MEXICO
23,500 Albuquerque, Airport Sub Lien Ser 1995 (AMBAC).............. 4.70 07/10/00 23,500,000
NEW YORK
6,000 New York City, 1992 Ser D (FGIC)............................ 4.65 07/10/00 6,000,000
2,150 New York City Municipal Water Finance Authority, 1994 Ser C
(FGIC).................................................... 4.45 07/03/00 2,150,000
11,000 New York State Dormitory Authority, Cornell University
Ser 1990B................................................. 4.45 07/03/00 11,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

40
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
New York State Local Government Assistance Corporation,
$14,800 Ser 1994B................................................. 4.35 % 07/10/00 $ 14,800,000
9,600 Ser 1995G................................................. 4.40 07/10/00 9,600,000
4,100 Port Authority of New York & New Jersey, Ser 2.............. 4.30 07/03/00 4,100,000
NORTH CAROLINA
9,705 Charlotte, Airport Refg Ser 1993A (MBIA).................... 4.70 07/10/00 9,705,000
23,500 Charlotte-Mecklenberg Hospital Authority, Health Care System
Ser C..................................................... 4.65 07/10/00 23,500,000
14,800 Durham, Ser 1993A COPs...................................... 4.85 07/10/00 14,800,000
North Carolina Educational Facilities Finance Agency,
7,000 The Bowman Gray School of Medicine Ser 1996............... 4.90 07/10/00 7,000,000
23,200 Duke University Ser 1987A & 1991B......................... 4.75 07/10/00 23,200,000
NORTH DAKOTA
12,000 North Dakota Housing Finance Agency, Housing Finance Program
2000 Ser B (AMT).......................................... 4.25 03/01/01 12,000,000
OHIO
9,800 Cleveland, Airport System Ser 1997 D (AMT).................. 4.80 07/10/00 9,800,000
11,300 Columbus, Unlimited Tax Ser 1995-1.......................... 4.60 07/10/00 11,300,000
1,300 Ohio Air Quality Development Authority, Sohio Air-British
Petroleum Co Ser 1995..................................... 4.50 07/03/00 1,300,000
OKLAHOMA
Oklahoma Water Resources Board,
34,205 State Loan Program Ser 1994A & Ser 1995................... 4.05 09/01/00 34,205,000
15,000 State Loan Program Ser 1999............................... 4.10 09/01/00 15,000,000
OREGON
20,000 Oregon, Veterans' Ser 73 E.................................. 4.75 07/10/00 20,000,000
PENNSYLVANIA
3,100 Delaware County Industrial Development Authority, United
Parcel Service of America Inc Ser 1985.................... 4.45 07/03/00 3,100,000
2,800 Lehigh County General Purpose Authority, Lehigh Valley
Hospital Ser 1999 B (MBIA)................................ 4.50 07/03/00 2,800,000
Pennsylvania Higher Education Assistance Agency,
8,000 1999 Ser A (AMBAC) (AMT).................................. 4.80 07/10/00 8,000,000
16,500 Student Loan 1997 Ser A (AMT)............................. 5.10 07/10/00 16,500,000
20,000 Pennsylvania Turnpike Commission, Ser Q of 1998............. 4.50 07/03/00 20,000,000
6,400 Philadelphia Industrial Development Authority, The Fox Chase
Cancer Center Ser 1997.................................... 4.50 07/03/00 6,400,000
24,800 York General Authority, Harrisburg School District Subser
1996B (AMBAC)............................................. 4.75 07/10/00 24,800,000
SOUTH CAROLINA
14,385 York County, North Carolina Electric Membership Corporation,
Ser 1984 N-5 (NRU-CFC Gtd)................................ 4.05 09/15/00 14,385,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

41
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TENNESSEE
$ 9,900 Chattanooga-Hamilton County Hospital Authority, Erlanger
Medical Center Ser 1987................................... 4.55 % 07/03/00 $ 9,900,000
64,050 Montgomery County Public Building Authority, County Pool
Ser 1997 & 1999........................................... 4.75 07/10/00 64,050,000
TEXAS
28,000 Dallas Area Rapid Transit, North Central Light Rail
Ser 2000.................................................. 4.75 07/10/00 28,000,000
6,100 Harris County Health Facilities Development Corporation, St
Luke's Episcopal Hospital Ser 1997 A...................... 4.55 07/03/00 6,100,000
24,400 Harris County, Toll Road Unlimited Tax Sub Lien Ser 1994
E......................................................... 4.70 07/10/00 24,400,000
10,000 Texas Municipal Gas Corporation, Senior Lien Gas Reserve
Ser 1998.................................................. 4.70 07/10/00 10,000,000
UTAH
20,000 Intermountain Power Agency, 1985 Ser E (AMBAC).............. 4.075 09/15/00 20,000,000
18,500 Salt Lake City, IHC Health Services Inc Ser 1990 B.......... 4.75 07/10/00 18,500,000
14,375 Utah County Environmental Improvement, USX Corp Ser 1995.... 3.85 10/05/00 14,375,000
VERMONT
40,700 Vermont Educational & Health Buildings Financing Agency,
Fletcher Allen Health Care Ser 2000B (AMBAC).............. 4.70 07/10/00 40,700,000
WASHINGTON
15,000 Port of Seattle, 1997 Ser A (AMT)........................... 4.95 07/10/00 15,000,000
20,300 Washington, Ser 1996 A...................................... 4.80 07/10/00 20,300,000
WISCONSIN
9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT)................ 5.10 07/10/00 9,500,000
WYOMING
14,000 Lincoln County, Exxon Corp Ser 1987 B (AMT)................. 4.55 07/03/00 14,000,000
PUERTO RICO
4,000 Puerto Rico Government Development Bank, Refg Ser 1985
(MBIA).................................................... 4.60 07/10/00 4,000,000
--------------

TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(COST $1,754,890,000).......................................................... 1,754,890,000
--------------
</TABLE>

<TABLE>
<CAPTION>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------- -------- ----------
<C> <S> <C> <C> <C> <C>
TAX-EXEMPT COMMERCIAL PAPER (29.3%)
ARIZONA
7,750 Maricopa County Pollution Control Corporation,
Southern California Edison Co 1985 Ser B....... 4.65 % 07/20/00 4.65% 7,750,000
COLORADO
Platte River Power Authority,
10,000 Electric Sub Lien S-1.......................... 4.65 07/19/00 4.65 10,000,000
15,000 Electric Sub Lien S-1.......................... 4.10 08/15/00 4.10 15,000,000
10,000 University of Colorado Regents, Ser A............ 4.25 09/28/00 4.25 10,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

42
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, 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>
DISTRICT OF COLUMBIA
$10,000 District of Columbia, The American National Red
Cross Issue Ser 2000........................... 4.20 % 09/11/00 4.20% $ 10,000,000
FLORIDA
12,770 Jacksonville Electric Authority, Ser C........... 4.05 08/09/00 4.05 12,770,000
7,000 Orlando Utility Commission, Water & Electric
Systems Ser 1999 A............................. 4.55 09/08/00 4.55 7,000,000
St Lucie County,
4,900 Florida Power & Light Co Ser 1992.............. 4.65 09/11/00 4.65 4,900,000
5,600 Florida Power & Light Co Ser 1992.............. 4.70 09/11/00 4.70 5,600,000
Sunshine State Governmental Financing Commission,
10,000 Ser A.......................................... 4.00 07/31/00 4.00 10,000,000
18,000 Ser C (AMT).................................... 4.05 07/31/00 4.05 18,000,000
HAWAII
17,900 Honolulu City & County, Ser 1998 BANs............ 3.90 07/12/00 3.90 17,900,000
ILLINOIS
Illinois Educational Facilities Authority,
9,000 Pooled Financing Ser 1998...................... 4.65 09/12/00 4.65 9,000,000
15,000 The University of Chicago...................... 3.95 07/27/00 3.95 15,000,000
10,000 Illinois Health Facilities Authority, SSM Health
Care Ser 1998 B (MBIA)......................... 3.95 07/11/00 3.95 10,000,000
INDIANA
15,000 Indiana State Office Building Commission, Hoosier
Notes Ser A.................................... 4.25 10/23/00 4.25 15,000,000
Petersburg,
10,000 Indianapolis Power & Light Co Ser 1991......... 4.60 09/12/00 4.60 10,000,000
20,000 Indianapolis Power & Light Co Ser 1991......... 4.50 10/11/00 4.50 20,000,000
KENTUCKY
15,000 Kentucky Asset/Liability Commission 1999 1st
Ser............................................ 4.40 07/12/00 4.40 15,000,000
LOUISIANA
10,000 Louisiana Public Facilities Authority, Christus
Health Ser 1999 B (AMBAC)...................... 4.70 07/26/00 4.70 10,000,000
14,450 Plaquemines Port Harbor & Terminal District,
Electric - Coal Transfer Co Ser 1985 B......... 4.35 08/24/00 4.35 14,450,000
MARYLAND
16,000 Baltimore County, Baltimore Gas & Electric Co
Ser 1985....................................... 4.20 08/14/00 4.20 16,000,000
MASSACHUSETTS
Massachusetts Water Resources Authority,
25,500 Ser 1995....................................... 4.00 07/27/00 4.00 25,500,000
10,000 Ser 1999....................................... 4.35 08/14/00 4.35 10,000,000
MINNESOTA
Rochester,
23,500 Mayo Foundation/Mayo Medical Center Ser 1988
F.............................................. 4.20 09/13/00 4.20 23,500,000
15,550 Mayo Foundation/Mayo Medical Center Ser 1992
C.............................................. 4.40 09/06/00 4.40 15,550,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

43
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, 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>
NEBRASKA
Nebraska Public Power District,
$10,000 Ser A Notes.................................... 4.00 % 07/31/00 4.00% $ 10,000,000
12,000 Ser A Notes.................................... 4.20 09/13/00 4.20 12,000,000
NEW HAMPSHIRE
New Hampshire State Business Finance Authority,
17,000 New England Power Co Ser 1993 A (AMT).......... 4.45 07/24/00 4.45 17,000,000
6,500 New England Power Co Ser 1993 B................ 4.65 07/20/00 4.65 6,500,000
18,600 New England Power Co Ser 1993 B................ 4.40 07/25/00 4.40 18,600,000
NEW YORK
6,500 Long Island Power Authority, Electric System
Subser 3....................................... 4.00 08/10/00 4.00 6,500,000
7,200 Metropolitan Transportation Authority, Transit
Facilities
Ser CP-1 Subser A BANs......................... 4.05 08/08/00 4.05 7,200,000
25,000 New York City Municipal Water Finance Authority,
Ser 3 Resolution............................... 3.95 07/13/00 3.95 25,000,000
7,900 New York State Power Authority, Ser 4............ 3.95 07/19/00 3.95 7,900,000
OKLAHOMA
Oklahoma City Industrial & Cultural Facilities
Trust,
10,000 SSM Healthcare Ser 1998 B (MBIA)............... 3.90 07/18/00 3.90 10,000,000
8,000 SSM Healthcare Ser 1998 B (MBIA)............... 3.90 07/19/00 3.90 8,000,000
8,895 SSM Healthcare Ser 1998 B (MBIA)............... 4.50 08/22/00 4.50 8,895,000
PENNSYLVANIA
9,100 Delaware County Industrial Development Authority,
PECO Energy Co Ser 1988 C (FGIC)............... 4.05 08/10/00 4.05 9,100,000
12,000 Montgomery County Industrial Development
Authority, PECO Energy Co Ser 1994 A........... 4.50 09/06/00 4.50 12,000,000
SOUTH CAROLINA
South Carolina Public Service Authority,
13,700 Santee Cooper Ser 1998......................... 4.20 08/17/00 4.20 13,700,000
30,000 Santee Cooper Ser 1998......................... 4.65 09/07/00 4.65 30,000,000
10,000 Santee Cooper Ser 1998......................... 4.35 09/20/00 4.35 10,000,000
7,000 Santee Cooper Ser 1998......................... 4.45 10/11/00 4.45 7,000,000
TEXAS
15,000 Bexar Metropolitan Water District, Ser 1997...... 4.50 08/17/00 4.50 15,000,000
8,000 Dallas Area Rapid Transit, Sales Tax Ser A....... 3.95 07/26/00 3.95 8,000,000
14,000 Houston, 1993 Ser A.............................. 4.10 09/14/00 4.10 14,000,000
Houston,
13,000 Water & Sewer 1994 Ser A....................... 4.10 07/19/00 4.10 13,000,000
13,500 Water & Sewer 1994 Ser A....................... 3.85 07/20/00 3.85 13,500,000
10,000 Water & Sewer 1994 Ser A....................... 3.85 07/25/00 3.85 10,000,000
10,000 Texas A&M University, Ser 1993 B................. 4.20 09/08/00 4.20 10,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

44
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

TOTAL TAX-EXEMPT COMMERCIAL PAPER
(COST $778,735,000)............................................................. 778,735,000
--------------

SHORT-TERM MUNICIPAL NOTES & BONDS (6.6%)
ARIZONA
15,000 Arizona School District, Ser 1999A TANs COPs, dtd
08/19/99....................................... 4.05 07/31/00 3.58 15,005,589
IDAHO
15,000 Idaho, Ser 2000 TANs, dtd 07/03/00 (WI).......... 5.375 06/29/01 4.37 15,142,800
ILLINOIS
12,000 Illinois, Illinois FIRST Ser of June 2000........ 5.00 06/01/01 4.39 12,064,607
IOWA
20,000 Iowa School Corporations, Warrant Certificates
2000-2001 Ser A (FSA), dtd 06/22/00............ 5.50 06/22/01 4.49 20,188,367
KENTUCKY
30,000 Kentucky Assset/Liability Commission, 2000 Ser A
TRANs, dtd 07/03/00 (WI)....................... 5.25 06/27/01 4.54 30,200,400
MASSACHUSETTS
17,645 Massachusetts, 2000 Ser B, dtd 06/01/00.......... 5.50 06/01/01 4.40 17,816,736
NEW YORK
12,000 New York State Local Government Assistance
Corporation, Ser 1991C......................... 7.00 04/01/01++ 4.20 12,534,897
PENNSYLVANIA
13,300 Temple University, University Funding
Ser of 2000, dtd 05/11/00...................... 5.00 05/10/01 4.25 13,381,886
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

45
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

TOTAL SHORT-TERM MUNICIPAL NOTES & BONDS
(COST $176,533,653)............................................................. 176,533,653
--------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $2,710,158,653) (a).......................................... 101.9% 2,710,158,653

LIABILITIES IN EXCESS OF OTHER ASSETS.............................. (1.9) (49,814,849)
--------- ---------------

NET ASSETS......................................................... 100.0% $ 2,660,343,804
--------- ---------------
--------- ---------------
</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, 2000.
++ Prerefunded to call date shown.
* 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 Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.

SEE NOTES TO FINANCIAL STATEMENTS

46
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(cost $2,710,158,653)..................................................................... $2,710,158,653
Cash........................................................................................ 862,379
Interest receivable......................................................................... 16,034,327
Prepaid expenses and other assets........................................................... 59,777
--------------

TOTAL ASSETS........................................................................... 2,727,115,136
--------------

LIABILITIES:
Payable for:
Investments purchased................................................................... 65,515,800
Investment management fee............................................................... 834,794
Plan of distribution fee................................................................ 229,046
Accrued expenses............................................................................ 191,692
--------------

TOTAL LIABILITIES...................................................................... 66,771,332
--------------

NET ASSETS............................................................................. $2,660,343,804
==============

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................. $2,660,363,033
Accumulated undistributed net investment income............................................. 13,040
Accumulated net realized loss............................................................... (32,269)
--------------

NET ASSETS............................................................................. $2,660,343,804
==============

NET ASSET VALUE PER SHARE,
2,660,376,730 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)........................................... $1.00
==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

47
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000

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

INTEREST INCOME................................................................................ $92,746,848
-----------

EXPENSES
Investment management fee...................................................................... 9,548,312
Plan of distribution fee....................................................................... 2,533,648
Transfer agent fees and expenses............................................................... 342,054
Registration fees.............................................................................. 212,633
Custodian fees................................................................................. 106,605
Shareholder reports and notices................................................................ 82,862
Professional fees.............................................................................. 74,040
Trustees' fees and expenses.................................................................... 17,882
Other.......................................................................................... 28,157
-----------

TOTAL EXPENSES............................................................................ 12,946,193

Less: expense offset........................................................................... (106,399)
-----------

NET EXPENSES.............................................................................. 12,839,794
-----------

NET INVESTMENT INCOME..................................................................... 79,907,054

NET REALIZED LOSS......................................................................... (32,269)
-----------

NET INCREASE................................................................................... $79,874,785
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

48
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

OPERATIONS:
Net investment income....................................................... $ 79,907,054 $ 58,616,609
Net realized gain (loss).................................................... (32,269) 23,373
-------------- --------------

NET INCREASE........................................................... 79,874,785 58,639,982
-------------- --------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................................................... (79,907,189) (58,616,865)
Net realized gain........................................................... -- (22,054)
-------------- --------------

TOTAL DIVIDENDS AND DISTRIBUTIONS...................................... (79,907,189) (58,638,919)
-------------- --------------
Net increase from transactions in shares of beneficial interest............. 370,566,468 420,417,833
-------------- --------------

NET INCREASE........................................................... 370,534,064 420,418,896

NET ASSETS:
Beginning of period......................................................... 2,289,809,740 1,869,390,844
-------------- --------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $13,040 AND $9,578,
RESPECTIVELY)........................................................... $2,660,343,804 $2,289,809,740
============== ==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

49
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000

1. ORGANIZATION AND ACCOUNTING POLICIES

Active Assets Tax-Free Trust (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is to provide a
high level of daily income which is exempt from federal income tax consistent
with stability of principal and liquidity. The Fund was organized as a
Massachusetts business trust on March 30, 1981 and commenced operations on
July 7, 1981.

The following is a summary of significant accounting policies:

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

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

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding
$500 million; 0.425% to the portion of daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of daily net assets
exceeding $750 million but not

50
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under
the Act, finances certain expenses in connection therewith.

The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the Fund'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 Fund's average
daily net assets. Expenses incurred by the Distributor pursuant to the Plan in
any fiscal year will not be reimbursed by the Fund through payments accrued in
any subsequent fiscal year. For the year ended June 30, 2000, 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, 2000 aggregated $5,356,487,672 and $5,069,860,950,
respectively.

The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended June 30, 2000, included
in Trustees' fees and expenses in the Statement of Operations amounted to
$5,973. At June 30, 2000, the Fund had an accrued pension liability of $51,839
which is included in accrued expenses in the Statement of Assets and
Liabilities.

51
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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, 2000 JUNE 30, 1999
--------------- ---------------
<S> <C> <C>
Shares sold...................................................... 9,830,192,933 7,461,949,724
Shares issued in reinvestment of dividends and distributions..... 79,907,189 58,638,919
-------------- --------------
9,910,100,122 7,520,588,643
Shares repurchased............................................... (9,539,533,654) (7,100,170,810)
-------------- --------------
Net increase in shares outstanding............................... 370,566,468 420,417,833
============== ==============
</TABLE>

6. FEDERAL INCOME TAX STATUS

Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $32,000 during fiscal 2000.

As of June 30, 2000, the Fund had temporary book/tax differences primarily
attributable to post-October losses and permanent book/tax differences
attributable to nondeductible expense. To reflect reclassification arising from
the permanent difference, paid-in-capital was charged and undistributed net
investment income was credited $3,597.

52
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>

ACTIVE ASSETS TAX-FREE TRUST
INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities of Active
Assets Tax-Free Trust (the "Fund"), including the portfolio of investments, as
of June 30, 2000, and the related statements of operations and changes in net
assets, and financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the year ended June 30, 1999 and the financial highlights for
each of the years in the four-year period ended June 30, 1999 were audited by
other auditors whose report, dated August 5, 1999, expressed an unqualified
opinion on those statements and financial highlights.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. Our procedures included confirmation of securities owned at
June 30, 2000 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Active Assets
Tax-Free Trust as of June 30, 2000, the results of its operations, the changes
in its net assets and the financial highlights for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP
NEW YORK, NEW YORK
AUGUST 7, 2000

2000 FEDERAL TAX NOTICE (UNAUDITED)

For the year ended June 30, 2000, all of the Fund's dividends from
net investment income were exempt interest dividends, excludable
from gross income for Federal income tax purposes.
53
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 statement of changes in net assets and the financial
highlights of Active Assets Tax-Free Trust (the "Fund") (not presented
separately herein) presents fairly, in all material respects, the changes in its
net assets for the year ended June 30, 1999 and the financial highlights for
each of the four years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. This financial statement and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund'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 provide a reasonable basis for the opinion expressed above. We have not
audited the financial statements or financial highlights of the Fund for any
period subsequent to June 30, 1999.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
August 5, 1999

54
<PAGE>

ACTIVE ASSETS TAX-FREE TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS

On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.

On July 1, 2000, the Fund, with the approval of its Board of Trustees and its
Audit Committee, engaged Deloitte & Touche LLP as its new independent
accountants for the year ended June 30, 2000.

55
ACTIVE ASSETS TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL HIGHLIGHTS

The information for the year ended June 30, 2000 has been audited by Deloitte &
Touche LLP, independent accountants, whose report, along with the Fund's
financial statements, is included in this Prospectus. The financial highlights
for each of the years in the four-year period ended June 30, 1999 have been
audited by other independent accountants.

SELECTED PER SHARE DATA:
---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------------------
Net income from investment operations 0.026 0.023 0.028 0.028 0.028
---------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.026) (0.023) (0.028) (0.028) (0.028)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------------------

TOTAL RETURN 2.60% 2.31% 2.84% 2.83% 2.82%
---------------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------
Expenses 0.61% 0.63%(1) 0.64% 0.66%(1) 0.67%
---------------------------------------------------------------------------------------------------------------------
Net investment income 2.55% 2.28% 2.79% 2.78% 2.79%
---------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $697,703 $625,753 $549,779 $431,382 $384,218
---------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Does not reflect the effect of expense offset of 0.01%.

SEE NOTES TO FINANCIAL STATEMENTS

56
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000

<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 (70.6%)
$10,000 ABAG Finance Authority for Nonprofit Corporations,
Episcopal Homes Foundation Ser 2000 COPs.............. 4.40% 07/10/00 $ 10,000,000
10,850 Anaheim, 1993 COPs (AMBAC).............................. 4.30 07/10/00 10,850,000
20,300 Big Bear Lake, Southwest Gas Corp 1993 Ser A (AMT)...... 4.45 07/10/00 20,300,000
11,970 California Alternative Energy Source Financing
Authority, General Electric Capital Corp-Arroyo Energy
1993 Ser B (AMT)**.................................... 4.30 07/10/00 11,970,000
California Educational Facilities Authority,
10,000 California Institute of Technology Ser 1994........... 4.30 07/10/00 10,000,000
15,165 Stanford University Ser L-5........................... 4.30 07/10/00 15,165,000
California Health Facilities Financing Authority,
11,000 Adventist Health System/West 1998 Ser A (MBIA)........ 4.00 07/03/00 11,000,000
14,000 Memorial Health Services 1994 Ser..................... 4.40 07/10/00 14,000,000
3,825 St Joseph Health System Ser 1985A..................... 4.15 07/03/00 3,825,000
California Housing Finance Agency,
6,600 Home Mortgage 2000 Ser G (AMT) (FSA).................. 4.35 07/10/00 6,600,000
9,150 Single Family Mortgage 1999 Ser E (AMT)............... 3.40 08/01/00 9,150,000
California Pollution Control Financing Authority,
5,040 Chevron USA Inc Ser 1983.............................. 3.80 11/15/00 5,042,196
4,000 Chevron USA Inc Ser 1984.............................. 4.15 05/15/01 4,000,000
10,485 Chevron USA Inc Ser 1984B............................. 4.25 06/15/01 10,489,463
24,500 California Public Capital Improvements Financing
Authority, Pooled Ser 1988 C.......................... 4.00 09/15/00 24,500,000
California Statewide Communities Development Authority,
15,500 John Muir/Mt Diablo Health System Ser 1997 COPs
(AMBAC)............................................... 4.00 07/03/00 15,500,000
6,100 St Joseph Health System COPs **....................... 4.35 07/10/00 6,100,000
9,300 Contra Costa County, Multi-Family The Park Regency 1992
Ser A (AMT)........................................... 4.40 07/10/00 9,300,000
10,000 Eastern Municipal Water District, Water & Sewer
Ser 1993B COPs (FGIC)................................. 4.25 07/10/00 10,000,000
4,200 Elsinore Valley Municipal Water District, Ser 2000 A
COPs (FGIC)........................................... 4.25 07/10/00 4,200,000
10,500 Fremont, Creekside Village Multi-Family Issue D of
1985.................................................. 4.35 07/10/00 10,500,000
Irvine Assessment District,
4,500 No 87-8 Improvement Bond Act 1915..................... 4.15 07/03/00 4,500,000
3,555 No 94-13 Improvement Bond Act 1915.................... 4.15 07/03/00 3,555,000
9,562 No 97-17 Improvement Bond Act 1915.................... 4.15 07/03/00 9,562,000
3,400 Irvine Ranch Water District, 1986 Capital Improvement
COPs.................................................. 3.50 07/03/00 3,400,000
Los Angeles, Multi-Family
7,300 1985 Ser K............................................ 4.40 07/10/00 7,300,000
4,500 1994 Ser A (AMT)...................................... 4.30 07/03/00 4,500,000
7,755 Los Angeles County Metropolitan Transportation
Authority, Prop C Sales Tax Refg Ser 1993-A (MBIA).... 4.25 07/10/00 7,755,000
2,100 Los Angeles County Transportation Commission, Sales Tax
Ser 1992-A (FGIC)..................................... 4.30 07/10/00 2,100,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

57
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Los Angeles Department of Water & Power, Electric Plant
$28,000 Second Issue of 2000 Ser A & D........................ 4.25% 07/10/00 $ 28,000,000
2,700 M-S-R Public Power Agency, San Juan Sub Lien Ser 1998F
(MBIA)................................................ 4.15 07/03/00 2,700,000
Metropolitan Water District of Southern California,
6,000 Water 1998 Ser C...................................... 4.15 07/10/00 6,000,000
5,600 Water 1999 Ser C...................................... 4.15 07/03/00 5,600,000
3,000 Monterey County Financing Authority, 1995 Ser A......... 4.30 07/10/00 3,000,000
16,300 Monterey Peninsula Water Management District, Wastewater
Ser 1992 COPs......................................... 4.45 07/10/00 16,300,000
16,000 Newport Beach, Hoag Memorial Hospital Presbyterian
Ser 1992 & 1996 Ser B................................. 4.25 07/03/00 16,000,000
12,800 Oakland-Alameda County Coliseum Authority, Oakland
Coliseum 2000 Refg Ser C-2............................ 4.40 07/10/00 12,800,000
Oakland Joint Powers Financing Authority,
12,000 1998 Ser A-1 (FSA)**.................................. 4.25 07/10/00 12,000,000
7,100 1998 Ser A-2 (FSA).................................... 4.25 07/10/00 7,100,000
22,100 Rancho California Water District Financing Authority,
Ser of 1998A (FGIC)................................... 4.25 07/10/00 22,100,000
3,800 Redlands, Orange Village Apts 1988 Ser A (AMT).......... 4.30 07/10/00 3,800,000
7,345 Sacramento County, Administration Center & Courthouse
1990 COPs............................................. 4.35 07/10/00 7,345,000
20,000 San Bernardino County, Medical Center Financing
Ser 1998 COPs (MBIA).................................. 4.70 07/10/00 20,000,000
3,415 San Jacinto Unified School District, 1997 COPs (FSA).... 4.35 07/10/00 3,415,000
7,200 San Jose Redevelopment Agency, Merged Area 1996
Ser B................................................. 4.40 07/10/00 7,200,000
10,000 Santa Clara County Financing Authority, Valley Medical
Center 1994 Ser B..................................... 4.30 07/10/00 10,000,000
10,000 Southern California Public Power Authority, Transmission
1991 Sub
Refg Ser (AMBAC)...................................... 4.30 07/10/00 10,000,000
10,000 Stanislaus Waste-to-Energy Financing Agency, Ogden
Martin Systems Inc Ser 2000 (MBIA).................... 4.35 07/10/00 10,000,000
6,200 Turlock Irrigation District, 1988 Ser A................. 4.25 07/10/00 6,200,000
15,060 West Basin Municipal Water District, Ser 1997B COPs..... 4.25 07/10/00 15,060,000

PUERTO RICO
3,000 Puerto Rico Government Development Bank, Refg Ser 1985
(MBIA)................................................ 4.60 07/10/00 3,000,000
---------------

TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(COST $492,783,659).............................................................. 492,783,659
---------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

58
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

PUERTO RICO
Puerto Rico Government Development Bank,
6,000 Ser 1996................................... 3.35 08/17/00 3.35 6,000,000
5,012 Ser 1996................................... 3.90 09/12/00 3.90 5,012,000
12,832 Ser 1996................................... 4.25 11/08/00 4.25 12,832,000
---------------

TOTAL CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER
(COST $156,169,000)............................................................. 156,169,000
---------------

CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL NOTES (9.9%)
7,000 Alameda County, 1999-2000 TRANs, dtd
07/08/99................................... 4.00 07/07/00 3.32 7,000,755
California School Cash Reserve Program
Authority,
26,000 1999 Pool Ser A (AMBAC), dtd 07/02/99...... 4.00 07/03/00 3.10 26,001,240
28,000 2000 Pool Ser A (AMBAC), dtd 07/03/00
(WI)....................................... 5.25 07/03/01 4.27 28,262,920
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

59
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL NOTES
(COST $69,265,761).............................................................. 69,265,761
---------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $718,218,420) (a)................................................................... 102.9% 718,218,420

LIABILITIES IN EXCESS OF OTHER ASSETS..................................................... (2.9) (20,515,647)
------ ------------

NET ASSETS................................................................................ 100.0% $697,702,773
------ ------------
------ ------------
</TABLE>

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

AMT Alternative Minimum Tax.
COPs Certificates of Participation.
TRANs Tax and Revenue Anticipation Notes.
WI Security purchased on a "when-issued" basis.
+ Rate shown is the rate in effect at June 30, 2000.
* Date on which the principal amount can be recovered through demand.
** This security has been segregated in connection with the purchase of a
"when-issued" security.
(a) Cost is the same for federal income tax purposes.

SEE NOTES TO FINANCIAL STATEMENTS

60
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(cost $718,218,420)......................................................................... $718,218,420
Cash.......................................................................................... 3,311,064
Interest receivable........................................................................... 4,852,560
Prepaid expenses.............................................................................. 14,424
------------

TOTAL ASSETS............................................................................. 726,396,468
------------

LIABILITIES:
Payable for:
Investments purchased..................................................................... 28,262,920
Investment management fee................................................................. 277,282
Plan of distribution fee.................................................................. 58,010
Accrued expenses and other payables........................................................... 95,483
------------

TOTAL LIABILITIES........................................................................ 28,693,695
------------

NET ASSETS............................................................................... $697,702,773
============

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $697,723,419
Accumulated undistributed net investment income............................................... 492
Net realized loss............................................................................. (21,138)
------------

NET ASSETS............................................................................... $697,702,773
============

NET ASSET VALUE PER SHARE,
697,723,419 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)............................................. $1.00
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

61
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, 2000

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

INTEREST INCOME................................................................................ $23,579,858
-----------

EXPENSES
Investment management fee...................................................................... 3,534,793
Plan of distribution fee....................................................................... 736,235
Transfer agent fees and expenses............................................................... 87,813
Professional fees.............................................................................. 71,798
Shareholder reports and notices................................................................ 46,626
Registration fees.............................................................................. 33,901
Custodian fees................................................................................. 33,781
Trustees' fees and expenses.................................................................... 17,029
Other.......................................................................................... 8,300
-----------

TOTAL EXPENSES............................................................................ 4,570,276

Less: expense offset........................................................................... (33,709)
-----------

NET EXPENSES.............................................................................. 4,536,567
-----------

NET INVESTMENT INCOME:.................................................................... 19,043,291

NET REALIZED LOSS......................................................................... (21,138)
-----------

NET INCREASE................................................................................... $19,022,153
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

62
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
------------------------------------------------------------------------------------------------------------

<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:

OPERATIONS:
Net investment income........................................................... $ 19,043,291 $ 14,766,018
Net realized loss............................................................... (21,138) --
------------ ------------

NET INCREASE............................................................... 19,022,153 14,766,018

Dividends to shareholders from net investment income............................ (19,043,159) (14,765,860)
Net increase from transactions in shares of beneficial interest................. 71,970,497 75,973,793
------------ ------------

NET INCREASE............................................................... 71,949,491 75,973,951

NET ASSETS:
Beginning of period............................................................. 625,753,282 549,779,331
------------ ------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$492 AND $360, RESPECTIVELY)................................................ $697,702,773 $625,753,282
============ ============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

63
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000

1. ORGANIZATION AND ACCOUNTING POLICIES

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

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors, Inc. (the "Investment Manager"), the Fund pays the Investment Manager
a management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of the daily net assets not exceeding $500
million; 0.425% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of the daily net assets
exceeding $750 million but not

64
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under
the Act, finances certain expenses in connection therewith.

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, 2000 aggregated $1,658,528,920 and $1,642,563,950,
respectively.

The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund 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, 2000 included in
Trustees' fees and expenses in the Statement of Operations amounted to $5,109.
At June 30, 2000, the Fund had an accrued pension liability of $41,323 which is
included in accrued expenses in the Statement of Assets and Liabilities.

65
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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, 2000 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
Shares sold............................. 2,921,570,057 2,258,604,717
Shares issued in reinvestment of
dividends.............................. 19,043,159 14,765,860
-------------- --------------
2,940,613,216 2,273,370,577
Shares repurchased...................... (2,868,642,719) (2,197,396,784)
-------------- --------------
Net increase in shares outstanding...... 71,970,497 75,973,793
============== ==============
</TABLE>

6. FEDERAL INCOME TAX STATUS

66
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities of Active
Assets California Tax-Free Trust (the "Fund"), including the portfolio of
investments, as of June 30, 2000, and the related statements of operations and
changes in net assets, and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the year ended June 30, 1999 and the financial
highlights for each of the years in the four-year period ended June 30, 1999
were audited by other auditors whose report, dated August 5, 1999, expressed an
unqualified opinion on those statements and financial highlights.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. Our procedures included confirmation of securities owned at
June 30, 2000 by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Active Assets
California Tax-Free Trust as of June 30, 2000, the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

Deloitte & Touche LLP
NEW YORK, NEW YORK
AUGUST 7, 2000

2000 FEDERAL TAX NOTICE (UNAUDITED)

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 statement of changes in net assets and the financial
highlights of Active Assets California Tax-Free Trust (the "Fund") (not
presented separately herein) presents fairly, in all material respects, the
changes in its net assets for the year ended June 30, 1999 and the financial
highlights for each of the four years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. This financial
statement and financial highlights (hereafter referred to as "financial
statements") (are the responsibility of the Fund'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 provide a reasonable basis for the opinion expressed
above. We have not audited the financial statements or financial highlights of
the Fund for any period subsequent to June 30, 1999.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
August 5, 1999

68
<PAGE>

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS

On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.

On July 1, 2000, the Fund, with the approval of its Board of Trustees and its
Audit Committee, engaged Deloitte & Touche LLP as its new independent
accountants for the year ended June 30, 2000.

69
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS

SELECTED PER SHARE DATA:
---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------------------
Net income from investment operations 0.050 0.045 0.049 0.048 0.049
---------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.050) (0.045) (0.049) (0.048) (0.049)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------------------

TOTAL RETURN 5.17% 4.64% 5.05% 4.92% 5.03%
---------------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------
Expenses 0.59% 0.61% 0.63% 0.64% 0.65%
---------------------------------------------------------------------------------------------------------------------
Net investment income 5.03% 4.50% 4.93% 4.78% 4.93%
---------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $932,466 $995,448 $698,977 $620,449 $571,400
---------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

70
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000

TOTAL U.S. GOVERNMENT AGENCIES
(COST $879,059,920)............................................................ 879,059,920
------------

U.S. GOVERNMENT OBLIGATION (0.8%)
7,000 U.S. Treasury Bill
09/07/00
(COST $6,923,047)............................................... 6.00 6,923,047
------------

REPURCHASE AGREEMENT (5.0%)
47,000 Banc of America Securities LLC
6.90% due 07/03/00 (dated 06/30/00;
proceeds $47,027,025) (a)
(COST $47,000,000).............................................. 47,000,000
------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $932,982,967) (b)............................................................ 100.1% 932,982,967

LIABILITIES IN EXCESS OF OTHER ASSETS.............................................. (0.1) (516,975)
------ ------------

NET ASSETS......................................................................... 100.0% $932,465,992
------ ------------
------ ------------
</TABLE>

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

(a) Collateralized by $7,309,269 Federal Home Loan Mortgage Corp. 7.50% due
05/01/30 valued at $7,239,087; and $44,322,830 Federal National Mortgage
Assoc. 6.00% - 8.50% due 06/01/14 - 06/01/30 valued at $40,700,913.
(b) Cost is the same for federal income tax purposes.

SEE NOTES TO FINANCIAL STATEMENTS

71
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(cost $932,982,967)......................................................................... $932,982,967
Cash.......................................................................................... 4,386
Interest receivable........................................................................... 9,008
Prepaid expenses and other assets............................................................. 27,529
------------

TOTAL ASSETS............................................................................. 933,023,890
------------

LIABILITIES:
Payable for:
Investment management fee................................................................. 375,108
Plan of distribution fee.................................................................. 83,829
Accrued expenses and other payables........................................................... 98,961
------------

TOTAL LIABILITIES........................................................................ 557,898
------------

NET ASSETS............................................................................... $932,465,992
============

COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $932,465,487
Accumulated undistributed net investment income............................................... 505
------------

NET ASSETS............................................................................... $932,465,992
============

NET ASSET VALUE PER SHARE,
932,465,487 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)............................................. $1.00
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

72
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000

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

INTEREST INCOME................................................................................ $56,610,477
-----------

EXPENSES
Investment management fee...................................................................... 4,515,824
Plan of distribution fee....................................................................... 996,734
Transfer agent fees and expenses............................................................... 112,689
Professional fees.............................................................................. 69,794
Registration fees.............................................................................. 63,731
Custodian fees................................................................................. 54,122
Shareholder reports and notices................................................................ 47,428
Trustees' fees and expenses.................................................................... 17,891
Other.......................................................................................... 8,112
-----------

TOTAL EXPENSES............................................................................ 5,886,325
-----------

NET INVESTMENT INCOME:.................................................................... 50,724,152

NET REALIZED GAIN......................................................................... 10,475
-----------

NET INCREASE................................................................................... $50,734,627
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

73
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

OPERATIONS:
Net investment income........................................................... $ 50,724,152 $ 40,897,926
Net realized gain............................................................... 10,475 36,800
------------ ------------

NET INCREASE............................................................... 50,734,627 40,934,726
------------ ------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................................................... (50,724,075) (40,897,560)
Net realized gain............................................................... (10,475) (36,800)
------------ ------------

TOTAL DIVIDENDS AND DISTRIBUTIONS.......................................... (50,734,550) (40,934,360)
------------ ------------
Net increase (decrease) from transactions in shares of beneficial interest...... (62,981,628) 296,470,113
------------ ------------

NET INCREASE (DECREASE).................................................... (62,981,551) 296,470,479

NET ASSETS:
Beginning of period............................................................. 995,447,543 698,977,064
------------ ------------

END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$505 AND $428, RESPECTIVELY)................................................ $932,465,992 $995,447,543
============ ============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

74
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000

1. ORGANIZATION AND ACCOUNTING POLICIES

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

The following is a summary of significant accounting policies:

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

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

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets exceeding
$750 million but not

75
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under
the Act, finances certain expenses in connection therewith.

The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the Fund'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 Fund's average
daily net assets during the month. Expenses incurred by the Distributor pursuant
to the Plan in any fiscal year will not be reimbursed by the Fund through
payments accrued in any subsequent fiscal year. For the year ended June 30,
2000, 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, 2000 aggregated $19,647,404,750 and $19,762,858,424,
respectively.

76
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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, 2000 JUNE 30, 1999
--------------- ---------------
<S> <C> <C>
Shares sold...................................................... 3,996,050,976 3,141,395,012
Shares issued in reinvestment of dividends and distributions..... 50,670,672 40,910,486
-------------- --------------
4,046,721,648 3,182,305,498
Shares repurchased............................................... (4,109,703,276) (2,885,835,385)
-------------- --------------
Net increase (decrease) in shares outstanding.................... (62,981,628) 296,470,113
============== ==============
</TABLE>

77
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF ACTIVE ASSETS GOVERNMENT SECURITIES TRUST:

We have audited the accompanying statement of assets and liabilities of Active
Assets Government Securities Trust (the "Fund"), including the portfolio of
investments, as of June 30, 2000, and the related statements of operations and
changes in net assets, and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the year ended June 30, 1999 and the financial
highlights for each of the years in the four-year period ended June 30, 1999
were audited by other auditors whose report, dated August 5, 1999, expressed an
unqualified opinion on those statements and financial highlights.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Active Assets
Government Securities Trust as of June 30, 2000, the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

Deloitte & Touche LLP
NEW YORK, NEW YORK
AUGUST 7, 2000

2000 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal
year ended June 30, 2000, 53.25% was attributable to qualifying
Federal obligations. Please consult your tax advisor to determine
if any portion of the dividends you received is exempt from state
income tax.
78
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 statement of changes in net assets and the financial
highlights of Active Assets Government Securities Trust (the "Fund") (not
presented separately herein) presents fairly, in all material respects, the
changes in its net assets for the year ended June 30, 1999 and the financial
highlights for each of the four years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. This financial
statement and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund'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 provide a reasonable basis for the opinion expressed above. We have not
audited the financial statements or financial highlights of the Fund for any
period subsequent to June 30, 1999.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
August 5, 1999

79
<PAGE>

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS

On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.

On July 1, 2000, the Fund, with the approval of its Board of Trustees and its
Audit Committee, engaged Deloitte & Touche LLP as its new independent
accountants for the year ended
June 30, 2000.

80
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
<PAGE>
NOTES

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

81
<PAGE>

PROSPECTUS - AUGUST 29, 2000

Additional information about each Fund's investments is available in the Fund's
ANNUAL AND SEMI-ANNUAL REPORT TO SHAREHOLDERS (the current annual report is
included in this PROSPECTUS). The Funds' STATEMENT OF ADDITIONAL INFORMATION
also provides additional information about the Funds. The STATEMENT OF
ADDITIONAL INFORMATION is incorporated herein by reference (legally is part of
this PROSPECTUS). For a free copy of any of these documents, to request other
information about the Funds, or to make shareholder inquiries, please call:

(800) 869-NEWS

You also may obtain information about each Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:

www.msdw.com/individual/funds

Information about the Funds (including the STATEMENT OF ADDITIONAL INFORMATION)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (202) 942-8090. Reports and
other information about the Funds are available on the EDGAR Database on the
SEC's Internet site (www.sec.gov) and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the following
E-mail address: [email protected], or by writing the Public Reference Section
of the SEC, Washington, DC 20549-0102.

TICKER SYMBOLS:

ACTIVE ASSETS MONEY TRUST AAMXX
---------------------------------------- -------

ACTIVE ASSETS TAX-FREE TRUST AATXX
---------------------------------------- -------

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST AACXX
---------------------------------------- -------

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST AAGXX
---------------------------------------- -------

(THE FUNDS' INVESTMENT COMPANY ACT FILE NOS. ARE 811-3159, 811-3162, 811-6530,
811-3165)
Active Assets

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

FOUR DIFFERENT MONEY MARKET FUNDS OFFERED
EXCLUSIVELY TO PARTICIPANTS IN THE ACTIVE
ASSETS-Registered Trademark- OR BUSINESSCAPE-SM-
FINANCIAL SERVICE PROGRAMS AND TO
OTHER INVESTORS WHO HAVE BROKERAGE ACCOUNTS WITH
DEAN WITTER REYNOLDS

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION ACTIVE ASSETS
AUGUST 29, 2000 MONEY TRUST
ACTIVE ASSETS
TAX-FREE TRUST
ACTIVE ASSETS
CALIFORNIA
TAX-FREE TRUST
ACTIVE ASSETS
GOVERNMENT
SECURITIES TRUST

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

This STATEMENT OF ADDITIONAL INFORMATION is not a PROSPECTUS. The PROSPECTUS
dated August 29, 2000 for Active Assets Money Trust, Active Assets Tax-Free
Trust, Active Assets California Tax-Free Trust and Active Assets Government
Securities Trust (each a "Fund") may be obtained without charge from the Funds
at their address or telephone number listed below or from Dean Witter Reynolds
at any of its branch offices.

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
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
--------------------------------------------------------------------------------

<TABLE>
<S> <C>
I. History of the Funds..................................... 4

II. Description of the Funds and Their Investments and
Risks....................................................... 4

A. Classification......................................... 4

B. Investment Strategies and Risks........................ 4

C. Investment Objective/Policies/Investment
Restrictions............................................. 12

III. Management of the Funds................................ 16

A. Board of Trustees...................................... 16

B. Management Information................................. 17

C. Compensation........................................... 22

IV. Control Persons and Principal Holders of Securities..... 26

V. Investment Management and Other Services................. 26

A. Investment Manager..................................... 26

B. Principal Underwriter.................................. 26

C. Services Provided by the Investment Manager............ 27

D. Rule 12b-1 Plan........................................ 28

E. Other Service Providers................................ 30

F. Codes of Ethics........................................ 31

VI. Brokerage Allocation and Other Practices................ 31

A. Brokerage Transactions................................. 31

B. Commissions............................................ 31

C. Brokerage Selection.................................... 32

D. Directed Brokerage..................................... 32

E. Regular Broker-Dealers................................. 32

VII. Capital Stock and Other Securities..................... 33

VIII. Purchase, Redemption and Pricing of Shares............ 33

A. Purchase/Redemptions of Shares......................... 33

B. Offering Price......................................... 34

IX. Taxation of the Funds and Their Shareholders............ 36

X. Underwriters............................................. 38

XI. Calculation of Performance Data......................... 38

XII. Financial Statements................................... 39
</TABLE>

2
<PAGE>
GLOSSARY OF SELECTED DEFINED TERMS
--------------------------------------------------------------------------------

The terms defined in this glossary are frequently used in this STATEMENT OF
ADDITIONAL INFORMATION (other terms used occasionally are defined in the text of
the document).

"CUSTODIAN"--The Bank of New York is the Custodian of the Funds' assets.

"DEAN WITTER REYNOLDS"--Dean Witter Reynolds Inc., a wholly-owned broker-dealer
subsidiary of MSDW.

"DISTRIBUTOR"--Morgan Stanley Dean Witter Distributors Inc., a wholly-owned
broker-dealer subsidiary of MSDW.

"FINANCIAL ADVISORS"--Morgan Stanley Dean Witter authorized financial services
representatives.

"FUND"--Any of the Active Assets Money Trust, the Active Assets Tax-Free Trust,
the Active Assets California Tax-Free Trust and the Active Assets Government
Securities Trust, each a registered no-load open-end investment company.

"INDEPENDENT TRUSTEES"--Trustees who are not "interested persons" (as defined by
the Investment Company Act) of the Fund.

"INVESTMENT MANAGER"--Morgan Stanley Dean Witter Advisors Inc., a wholly-owned
investment advisor subsidiary of MSDW.

"MORGAN STANLEY & CO."--Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of MSDW.

"MORGAN STANLEY DEAN WITTER FUNDS"--Registered investment companies (i) for
which the Investment Manager serves as the investment advisor and (ii) that hold
themselves out to investors as related companies for investment and investor
services.

"MSDW"--Morgan Stanley Dean Witter & Co., a preeminent global financial services
firm.

"MSDW SERVICES COMPANY"--Morgan Stanley Dean Witter Services Company Inc., a
wholly-owned fund services subsidiary of the Investment Manager.

"TRANSFER AGENT"--Morgan Stanley Dean Witter Trust FSB, a wholly-owned transfer
agent subsidiary of MSDW.

"TRUSTEES"--The Board of Trustees of the Funds.

3
<PAGE>
I. HISTORY OF THE FUNDS
--------------------------------------------------------------------------------

Each Fund is organized as a Massachusetts business trust, under a separate
Declaration of Trust. With the exception of ACTIVE ASSETS CALIFORNIA TAX-FREE
TRUST, each Fund was organized on March 30, 1981. ACTIVE ASSETS CALIFORNIA
TAX-FREE TRUST was organized on July 10, 1991.

II. DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
--------------------------------------------------------------------------------

A. CLASSIFICATION

Each Fund is an open-end, diversified management investment company. Each
Fund's investment objective(s) is as follows:

<TABLE>
<S> <C>
ACTIVE ASSETS MONEY TRUST-- high current income, preservation of capital
and liquidity.

ACTIVE ASSETS TAX-FREE TRUST-- to provide as high a level of daily income
exempt from federal personal income tax as is
consistent with stability of principal and
liquidity.

ACTIVE ASSETS CALIFORNIA TAX-FREE to provide as high a level of daily income
TRUST-- exempt from federal and California personal
income tax as is consistent with stability of
principal and liquidity.

ACTIVE ASSETS GOVERNMENT SECURITIES high current income, preservation of capital
TRUST-- and liquidity.
</TABLE>

B. INVESTMENT STRATEGIES AND RISKS

The following discussion of the Funds' investment strategies and risks
should be read with the sections of the Funds' PROSPECTUS titled "Principal
Investment Strategies" and "Principal Risks."

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

While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Funds follow 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 continuously 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, or other securities that, at the time the repurchase agreement is
entered into, are rated in the highest rating category by the Requisite NRSROs
(as defined under Rule 2a-7 of the Investment Company Act of 1940).
Additionally, upon an Event of Insolvency (as defined under Rule 2a-7) with
respect to the seller, the collateral must qualify the repurchase agreement for
preferential treatment under a provision of applicable insolvency

4
<PAGE>
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 Funds will seek to liquidate such collateral. However, the
exercise of the Funds' 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 Funds
could suffer a loss. It is the current policy of each Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 10% of its total assets. A Fund's investments in repurchase agreements
may at times be substantial when, in the view of the Fund's Investment Manager,
liquidity or other considerations warrant.

VARIABLE RATE AND FLOATING RATE OBLIGATIONS. Each of the Funds may invest
in variable rate and floating rate obligations. ACTIVE ASSETS TAX-FREE TRUST and
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST may only invest in variable rate and
floating rate municipal obligations. The interest rate payable on a variable
rate obligation is 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. Other features may include
the right whereby the Fund 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 applicable Funds to maintain a stable net asset value per share
and to sell obligations prior to maturity at a price that is approximately the
full principal amount of the obligations. The principal benefit to a Fund of
purchasing obligations with a demand feature is that liquidity, and the ability
of the Fund 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 a Fund 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 a Fund's investment quality requirements.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time each of the
Funds other than ACTIVE ASSETS MONEY TRUST may purchase eligible portfolio
securities, on a when-issued or delayed delivery basis. When these transactions
are negotiated, the price is fixed at the time of the commitment, but delivery
and payment can take place a month or more after the date of commitment. While a
Fund will only purchase securities on a when-issued or delayed delivery basis
with the intention of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. The securities so
purchased or sold are subject to market fluctuation and no interest or dividends
accrue to the purchaser prior to the settlement date.

At the time a Fund makes the commitment to purchase or sell securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of such security purchased, or if a
sale, the proceeds to be received, in determining its net asset value. At the
time of delivery of the securities, their value may be more or less than the
purchase or sale price. An increase in the percentage of a Fund's assets
committed to the purchase of securities on a when-issued or delayed delivery
basis may increase the volatility of its net asset value. A Fund will also
establish a segregated account on its books in which it will continually
maintain cash or cash equivalents or other liquid portfolio securities equal in
value to commitments to purchase securities on a when-issued or delayed delivery
basis.

INVESTMENT STRATEGIES AND RISKS APPLICABLE TO ACTIVE ASSETS--TAX-FREE TRUST AND
CALIFORNIA TAX-FREE TRUST ONLY

LEASE OBLIGATIONS. Included within the revenue bonds category in which
ACTIVE ASSETS TAX-FREE TRUST and ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST may
invest are participations in lease obligations or installment purchase contracts
(collectively called "lease obligations") of municipalities. State and local
governments issue lease obligations to acquire equipment and facilities.

5
<PAGE>
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.

PUT OPTIONS. Each of ACTIVE ASSETS TAX-FREE TRUST and ACTIVE ASSETS
CALIFORNIA TAX-FREE TRUST may purchase securities together with the right to
resell them to the seller at an agreed upon price or yield within a specified
period prior to the maturity date of such securities. Such a right to resell is
commonly known as a "put," and the aggregate price which a Fund pays for
securities with puts may be higher than the price which otherwise would be paid
for the securities. The primary purpose of this practice is to permit these
Funds to be fully invested in securities, the interest on which is exempt from
Federal income tax and, with respect to ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST,
California personal income tax, while preserving the necessary flexibility and
liquidity to purchase securities on a when-issued basis, to meet unusually large
redemptions and to purchase at a later date securities other than those subject
to the put. The Funds' policy is, generally, to exercise the puts on their
expiration date, when the exercise price is higher than the current market price
for the related securities. Puts may be exercised prior to the expiration date
in order to fund obligations to purchase other securities or to meet redemption
requests. These obligations may arise during periods in which proceeds from
sales of Fund shares and from recent sales of portfolio securities are
insufficient to meet such obligations or when the funds available are otherwise
allocated for investment. In addition, puts may be exercised prior to their
expiration date in the event the Investment Manager revises its evaluation of
the creditworthiness of the issuer of the underlying security. In determining
whether to exercise puts prior to their expiration date and in selecting which
puts to exercise in such circumstances, the Investment Manager considers, among
other things, the amount of cash available to the Funds, the expiration dates of
the available puts, any future commitments for securities purchases, the yield,
quality and maturity dates of the underlying securities, alternative investment
opportunities and the desirability of retaining the underlying securities in the
Funds' portfolios.

A Fund values securities which are subject to puts at its amortized cost and
values the put, apart from the security, at zero. Thus, the cost of the put will
be carried on a Fund's books as an unrealized loss from the date of acquisition
and will be reflected in realized gain or loss when the put is exercised or
expires. Since the value of the put is dependent on the ability of the put
writer to meet its obligation to repurchase, a Fund enters into put transactions
only with municipal securities dealers who are approved by the Trustees. Each
dealer will be approved on its own merits and it is the Funds' general policy to
enter into put transactions only with those dealers which are determined to
present minimal credit risks. In connection with such determination, the
Trustees will review, among other things, the ratings, if available, of equity
and debt securities of such municipal securities dealers, their reputations in
the municipal securities markets, the net worth of such dealers and their
efficiency in consummating transactions. Bank dealers normally will be members
of the Federal Reserve System, and other dealers will be members of the National
Association of Securities Dealers, Inc. or members of a national securities
exchange. The Trustees have directed the Investment Manager not to enter into
put transactions with, and to exercise outstanding puts of, any municipal
securities dealer which, in the judgment of the Investment Manager, ceases at
any time to present a minimal credit risk. In the event that a dealer should
default on its obligation to repurchase an underlying security, a Fund is unable
to predict whether all or any portion of any loss sustained could be
subsequently recovered from such dealer.

6
<PAGE>
In Revenue Ruling 82-144, the Internal Revenue Service stated that, under
certain circumstances, a purchaser of tax-exempt obligations which are subject
to puts will be considered the owner of the obligations for Federal income tax
purposes.

INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. Each of ACTIVE ASSETS
TAX-FREE TRUST and ACTIVE ASSETS CALIFORNIA TAX-FREE 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 Funds 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.

TAXABLE SECURITIES. Each of ACTIVE ASSETS TAX-FREE TRUST and ACTIVE ASSETS
CALIFORNIA TAX-FREE TRUST may invest up to 20% of its total assets in taxable
money market instruments including, with respect to CALIFORNIA TAX-FREE TRUST,
non-California tax-exempt securities. Investments in taxable money market
instruments would generally be made under any one of the following
circumstances: (a) pending investment proceeds of sale of Fund shares or of
portfolio securities; (b) pending settlement of purchases of portfolio
securities; and (c) to maintain liquidity for the purpose of meeting anticipated
redemptions. Only those non-California tax-exempt securities which satisfy the
standards established for California tax-exempt securities may be purchased by
CALIFORNIA TAX-FREE TRUST.

The types of taxable money market instruments in which TAX-FREE TRUST and
CALIFORNIA TAX-FREE 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, its agencies,
instrumentalities or authorities; (ii) commercial paper rated P-1 by Moody's
Investors Services, Inc. ("Moody's") or A-1 by Standard & Poor's Corporation
("S&P"); (iii) certificates of deposit and bankers' acceptances of domestic
banks with assets of $1 billion or more; and (iv) repurchase agreements with
respect to portfolio securities.

INVESTMENT STRATEGIES AND RISKS APPLICABLE TO ACTIVE ASSETS--MONEY TRUST AND/OR
GOVERNMENT SECURITIES TRUST ONLY

LENDING PORTFOLIO SECURITIES. Each of ACTIVE ASSETS MONEY TRUST and ACTIVE
ASSETS GOVERNMENT SECURITIES TRUST may lend its portfolio securities to brokers,
dealers and other financial institutions, provided that the loans are callable
at any time by the Fund, and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations and that are equal to at least 100% of the market value, determined
daily, of the loaned securities. The advantage of these loans is that a Fund
continues to receive the income on the loaned securities while at the same time
earning interest on the cash amounts deposited as collateral, which will be
invested in short-term obligations. A Fund 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.

As with any extensions of credit, there are risks of delay in recovery and,
in some cases, even loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities will
only be made to firms deemed by management to be creditworthy and when the
income which can be earned from such loans justifies the attendant risks. Upon
termination of the loan, the borrower is required to return the securities to
the Fund. Any gain or loss in the market price during the loan period would
inure to the Fund.

When voting or consent rights which accompany loaned securities pass to the
borrower, a Fund will follow the policy of calling the loaned securities, to be
delivered within one day after notice, to permit the exercise of the rights if
the matters involved would have a material effect on the Fund's investment in
the loaned securities. The Funds will pay reasonable finder's, administrative
and custodial fees in connection with a loan of their securities.

7
<PAGE>
REVERSE REPURCHASE AGREEMENTS. ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
may also use reverse repurchase agreements as part of its investment strategy.
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. Generally, the effect of such a transaction is that
the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to the
Fund of the reverse repurchase agreement is less than the cost of obtaining the
cash otherwise. Opportunities to achieve this advantage may not always be
available, and the Fund intends to use the reverse repurchase technique only
when it will be to its advantage to do so. The Fund will establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents or other portfolio securities equal in value to its obligations in
respect of reverse repurchase agreements. Reverse repurchase agreements are
considered borrowings by the Fund.

THE STATE OF CALIFORNIA--SPECIAL INVESTMENT CONSIDERATIONS APPLICABLE TO
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST ONLY. The following describes certain
risks with respect to municipal obligations of California issuers in which
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST may invest. This summarized information
is based on information drawn from official statements and prospectuses relating
to securities offerings of the State of California and other public documents
available as of the date of this Statement of Additional Information. Although
the Investment Manager has not independently verified such information, it has
no reason to believe that such information is not correct in all material
aspects.

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST will be affected by any political,
economic or regulatory developments affecting the ability of California issuers
to pay interest or repay principal. Provisions of the California Constitution
and 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. Future California political and economic
developments, constitutional amendments, legislative measures, executive orders,
administrative regulations, litigation and voter initiatives could have an
adverse effect on the debt obligations of California issuers.

Certain debt obligations held by ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST may
be obligations of issuers which rely in whole or in substantial part on
California state revenues for the continuance of their operations and payment of
their obligations. Whether and to what extent the California Legislature will
continue to appropriate a portion of the State's General Fund to counties,
cities and their various entities, is not entirely certain. To the extent local
entities do not receive money from the State to pay for their operations and
services, their ability to pay debt service on obligations held by ACTIVE ASSETS
CALIFORNIA TAX-FREE TRUST may be impaired.

In 1978, Proposition 13, an amendment to the California Constitution, was
approved, limiting real property valuation for property tax purposes and the
power of local governments to increase real property tax revenues and revenues
from other sources. Legislation adopted after Proposition 13 provided for
assistance to local governments, including the redistribution of the
then-existing surplus in the General Fund, reallocation of revenues to local
governments, and assumption by the State of certain local government
obligations. However, more recent legislation reduced such state assistance.
There can be no assurance that any particular level of State aid to local
governments will be maintained in future years. In NORDLINGER V. HAHN, the
United States Supreme Court upheld certain provisions of Proposition 13 against
claims that it violated the equal protection clause of the Constitution.

In 1979, an amendment was passed adding Article XIIIB to the State
Constitution. As amended in 1990, Article XIIIB imposes an "appropriations
limit" on the spending authority of the State and local government entities. In
general, the appropriations limit is based on certain 1978-1979 expenditures,
adjusted annually to reflect changes in the cost of living, population and
certain services provided by State and local government entities.
"Appropriations limit" does not include appropriations for qualified capital
outlay projects, certain increases in transportation-related taxes, and certain
emergency appropriations.

8
<PAGE>
If a government entity raises revenues beyond its "appropriations limit" in
any year, a portion of the excess which cannot be appropriated within the
following year's limit must be returned to the entity's taxpayers within two
subsequent fiscal years, generally by a tax credit, refund or temporary
suspension of tax rates or fee schedules. "Debt service" is excluded from these
limitations, and is defined as "appropriations required to pay the cost of
interest and redemption charges, including the funding of any reserve or sinking
fund required in connection therewith, on indebtedness existing or legally
authorized as of January 1, 1979 or on bonded indebtedness thereafter approved
[by the voters]." In addition, Article XIIIB requires the State Legislature to
establish a prudent State reserve, and to require the transfer of 50% of excess
revenue to the State School Fund; any amounts allocated to the State School Fund
will increase the appropriations limit.

In June 1982, the voters of California passed two initiative measures to
repeal the California gift and inheritance tax laws and to enact, in lieu
thereof, California death taxes. California voters also passed an initiative
measure to increase, for taxable years commencing on or after January 1, 1982,
the amount to account for the effects of inflation. Decreases in State and local
revenues in future fiscal years as a consequence of these initiatives may result
in reductions in allocations of state revenues to California issuers or in the
ability of California issuers to pay their obligations.

In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity,
(ii) requires that any special tax (defined as tax levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by the
Proposition 13 amendment, (v) prohibits the imposition of transaction taxes and
sales taxes on the sale of real property by local governments, (vi) requires
that any tax imposed by a local government on or after August 1, 1985, be
ratified by a majority vote of the electorate within two years of the adoption
of the initiative or be terminated by November 15, 1989, (vii) requires that, in
the event a local government fails to comply with the provisions of this
measure, a reduction of the amount of property tax revenue allocated to such
local government occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the initiative, and
(viii) permits these provisions to be amended exclusively by the voters of the
State of California.

In September 1995, the California Supreme Court upheld the constitutionality
of Proposition 62, creating uncertainty as to the legality of certain local
taxes enacted by non-charter cities in California without voter approval. It is
not possible to predict the impact of the decision.

In November 1996, California voters approved Proposition 218. The initiative
applied the provisions of Proposition 62 to all entities, including charter
cities. It requires that all taxes for general purposes obtain a simple majority
popular vote and that taxes for special purposes obtain a two-thirds majority
vote. Prior to the effectiveness of Proposition 218, charter cities could levy
certain taxes such as transient occupancy taxes and utility user's taxes without
a popular vote. Proposition 218 will also limit the authority of local
governments to impose property-related assessments, fees and charges, requiring
that such assessments be limited to the special benefit conferred and
prohibiting their use for general governmental services. Proposition 218 also
allows voters to use their initiative power to reduce or repeal
previously-authorized taxes, assessments, fees and charges.

In 1988, State voters approved Proposition 87, which amended Article XVI of
the State Constitution to authorize the State Legislature to prohibit
redevelopment agencies from receiving any property tax revenues raised by
increased property taxes to repay bonded indebtedness of local government which
is not approved by voters on or before January 1, 1989. It is not possible to
predict whether the State Legislature will enact such a prohibition, nor is it
possible to predict the impact of Proposition 87 on redevelopment agencies and
their ability to make payments on outstanding debt obligations.

9
<PAGE>
In November 1988, California voters approved Proposition 98. This initiative
requires that (i) revenues in excess of amounts permitted to be spent and which
would otherwise be returned by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits to be annually increased
for any such allocation made in the prior year. Proposition 98 also requires the
State of California to provide a minimum level of funding for public schools and
community colleges. The initiative permits the enactment of legislation, by a
two-thirds vote, to suspend the minimum funding requirement for one year.

Certain tax-exempt securities in which the Fund may invest may be
obligations payable solely from the revenues of specific institutions, or may be
secured by specific properties, which are subject to provisions of California
law which could adversely affect the holders of such obligations. For example,
the revenues of California health care institutions may be subject to state
laws, and California law limits the remedies of a creditor secured by a mortgage
or deed of trust on real property.

California is the most populous state in the nation with a total population
currently estimated at 33.4 million. The State now comprises 12.4% of the
nation's population and 12.7% 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 performing
strongly since 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 an average of 5.9% in 1998 and to 4.8% in November
1999, compared to over 10% at the worst of the recession. A significant downturn
in U.S. stock market prices could adversely affect California's economy by
reducing household spending and business investment, particularly in the
important high technology sector. Moreover, a large and increasing share of the
State's General Fund revenue in the form of income and capital gains taxes is
directly related to, and would be adversely affected by a significant downturn
in the performance of, the stock markets.

The recession severely affected state revenues while the State's health and
welfare costs were increasing. Consequently, the State had a lengthy period of
budget imbalance; the State's accumulated budget deficit approached
$2.8 billion at its peak at June 30, 1993. The large budget deficits depleted
the State's available cash resources and it had to use a series of external
borrowings to meet its cash needs. With the end of the recession, the State's
financial condition improved in the 1995-96 through 1998-99 fiscal years, with a
combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint. The accumulated budget
deficit from the recession years was eliminated. No deficit borrowing has
occurred at the end of the last four fiscal years and the State's cash flow
borrowing was limited to $1.7 billion in 1998-99. The State issued $1.0 billion
of revenue anticipation notes for the 1999-2000 fiscal year.

On June 29, 1999, the Governor of California signed the 1999-2000 Budget
Act. The Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion. The Budget Act
also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated a budget reserve
balance at June 30, 2000, of approximately $880 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated in
bargaining with employee unions), and for litigation reserves. The Budget Act
anticipates normal cash flow borrowing during the fiscal year. Continued State
economic expansion and large revenue increases enabled the Governor and State
legislature to provide increases in spending programs in the 1999-2000 budget.
These included large increases in education and health and human services
funding.

10
<PAGE>

The Governor's 2000-2001 proposed budget provides for total State spending
of $85.1 billion (excluding expenditures of federal funds and selected bond
funds), an increase of 3.7% from the current year. Approximately 80% of this
total is from the General Fund and 20% from special funds. The proposed budget
assumes that General Fund revenues will total $68.2 billion in 2000-01, a 4.7%
increase from the current year. General Fund expenditures are proposed to be
$68.8 billion, an increase of 4.5%. After accounting for various set-asides, the
year-end reserve is estimated to be $1.2 billion, or about 1.8% of total 2000-01
General Fund revenues.

As of January 1, 2000, the State had over $17.5 billion aggregate amount of
its general obligation bonds outstanding. General obligation bond authorizations
in an aggregate amount of approximately $10.6 billion remained unissued as of
that date. The State also builds and acquires capital facilities through the use
of lease purchase borrowing. As of January 1, 2000, the State had approximately
$6.7 billion of outstanding Lease-Purchase Debt.

In addition to the general obligation bonds, State agencies and authorities
had approximately $26 billion aggregate principal amount of revenue bonds and
notes outstanding as of June 30, 1999. Revenue bonds represent both obligations
payable from State revenue-producing enterprises and projects, which are not
payable from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by such revenue bonds.
Such enterprises and projects include transportation projects, various public
works and exposition projects, educational facilities (including the California
State University and University of California systems), housing, health
facilities, and pollution control facilities.

Because of the State of California's budget problems, the State's General
Obligation bonds were downgraded in July 1994 to A1 from Aa by Moody's, to A
from A+ by S&P, and to A from AA by Fitch. Moody's, Fitch and S&P 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
S&P 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. In October 1998,
Moody's raised its rating from A1 to Aa3 citing the State's continuing economic
recovery and a number of actions taken to improve the State's credit condition,
including the rebuilding of cash and budget reserves. In August 1999, S&P raised
its rating from A+ to AA- citing the State's strong economic performance and its
return to structural fiscal balance.

The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations and which, if decided against the State, might
require the State to make significant future expenditures or impair future
revenue sources.

Some local governments in California have experienced notable financial
difficulties on December 6, 1994, Orange County, California, became the largest
municipality in the United States to file for protection under the Federal
bankruptcy laws. The filing stemmed from approximately $1.7 billion in losses
suffered by the County's investment pool due to investments in high risk
"derivative" securities. On June 12, 1996, it emerged from bankruptcy after the
successful sale of $880 million in municipal bonds allowed the county to pay off
the last of its creditors. On January 7, 1997, Orange County returned to the
municipal bond market with a $136 million bond issue maturing in 13 years at an
insured yield of 7.23%. In December, 1997, Moody's raised its ratings on $325
million of Orange County pension obligation bonds to Baa3 from Ba. In February
1998, Fitch assigned outstanding Orange County pension obligation bonds a BBB
rating. In September 1999, Moody's assigned the County an issuer (implied
general obligation) rating of Aa3 and, among other things, upgraded the ratings
on the County's pension obligation bonds to A1. In January 2000, S&P upgraded
its rating on the County's pension obligation bonds from BB to A-.

Los Angeles County, the nation's largest county, has also experienced
financial difficulty. Between 1992 and 1995, the County's long term bonds were
downgraded three times. This occured as a result of, and among other things,
severe operating deficits for the county's health care system. In addition, the
county was affected by an ongoing loss of revenue caused by state property tax
shift initiatives in 1993

11
<PAGE>

through 1995. The County's improving financial condition has been reflected in
improved general obligation bond ratings. In June 1999, the Los Angeles County
Board of Supervisors approved a budget of approximately $15 billion for
1999-2000, up from the $13.6 billion approved for the previous fiscal year. The
County's financial condition will continue to be affected by the large number of
County residents who are dependent on government services and by a structural
deficit in its health department.

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.

C. INVESTMENT OBJECTIVE/POLICIES/INVESTMENT RESTRICTIONS

Each Fund's investment objective/policies/restrictions listed below have
been adopted by the Funds as fundamental policies. Under the Investment Company
Act of 1940 (the "Investment Company Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the applicable Fund. The Investment Company Act defines a majority as the lesser
of (a) 67% or more of the shares present at a meeting of shareholders, if the
holders of 50% of the outstanding shares of the applicable Fund are present or
represented by proxy; or (b) more than 50% of the outstanding shares of the
applicable Fund. For purposes of the following restrictions: (i) all percentage
limitations apply immediately after a purchase or initial investment; and
(ii) any subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total or net assets does not require
elimination of any security from the portfolio.

In addition, 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 guaranteed by the guarantor and
owned by a 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 other changes in
total or net assets does not require elimination of any security from the
portfolio.

ACTIVE ASSETS MONEY TRUST

ACTIVE ASSETS MONEY TRUST will:

1. Seek high current income, preservation of capital and liquidity.

ACTIVE ASSETS MONEY TRUST will 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 Fund'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 Fund'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 Fund's total

12
<PAGE>
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 Fund (for this
purpose all indebtedness of an issuer shall be deemed a single class of
security);

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 Fund'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;

5. Purchase any common stocks or other equity securities;

6. Make loans to others, except through permitted purchases of debt
obligations and repurchase agreements and loans of portfolio securities, not in
excess of 10% of the value of the Fund'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;

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

8. Purchase securities on margin or sell short;

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

10. Purchase securities for which there are legal or contractual
restrictions on resale (I.E. restricted securities), except for repurchase
agreements;

11. Underwrite securities of other issuers;

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

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

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

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

16. Invest in securities of any issuer if, to the knowledge of the Fund, any
officer, Trustee or director of the Fund 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.

ACTIVE ASSETS TAX-FREE TRUST

ACTIVE ASSETS TAX-FREE TRUST will:

1. Seek to provide as high a level of daily income exempt from federal
personal income tax as is consistent with stability of principal and liquidity.

ACTIVE ASSETS TAX-FREE TRUST will 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;

13
<PAGE>
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 than
three years of continuous operation. This restriction shall not apply to any
obligation of the United States Government, its agencies or instrumentalities;

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 Fund's total assets (including the amount borrowed),
less liabilities (not including the amount borrowed) at the time the borrowing
is made;

6. Invest in common stock;

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

8. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein;

9. Purchase or sell commodities or commodity futures contracts;

10. Purchase oil, gas or other mineral leases, rights or royalty contracts,
or exploration or development programs;

11. Write, purchase or sell puts, calls, or combinations thereof except
that it may acquire rights to resell municipal obligations at an agreed upon
price and at or within an agreed upon time;

12. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets;

13. Pledge its assets or assign or otherwise encumber them except to secure
borrowings effected within the limitations set forth in Investment Restriction
5. To meet the requirements of regulations in certain states, the Fund, as a
matter of operating policy but not as a fundamental policy, will limit any
pledge of its assets to 10% of its net assets so long as shares of the Fund are
being sold in those states;

14. Issue senior securities as defined in the Investment Company Act except
insofar as the Fund may be deemed to have issued a senior security by reason of:
(a) entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; or (c) borrowing money in accordance with
restrictions described above;

15. Make loans of money or securities, except: (a) by the purchase of debt
obligations in which the Fund may invest consistent with its investment
objective and policies; and (b) by investment in repurchase agreements;

16. Make short sales of securities;

17. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities;

18. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security; and

19. Invest for the purpose of exercising control or management of any other
issuer.

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST will:

1. Seek 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.

14
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST will not:

1. Invest in common stock;

2. Write, purchase or sell puts, calls, or combinations thereof, except
that the Fund may acquire rights to resell municipal obligations at an agreed
upon price and at or within an agreed upon time;

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);

4. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee of the Fund or of the Investment Manager owns more than
1/2 of 1% of the outstanding securities of the issuer, and the officers and
trustees who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of the issuer;

5. Purchase or sell real estate or interests therein, although the Fund
may purchase securities secured by real estate or interests therein;

6. Purchase or sell commodities or commodity futures contracts;

7. Borrow money, except that the Fund may borrow from a bank for temporary
or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or
current value) of the value of its total assets (not including the amount
borrowed);

8. Pledge its assets or assign or otherwise encumber them except to secure
permitted borrowings. To meet the requirements of regulations in certain states,
the Fund, as a matter of operating policy but not as a fundamental policy, will
limit any pledge of its assets to 10% of its net assets so long as shares of the
Fund are being sold in those states;

9. Issue senior securities as defined in the Investment Company Act except
insofar as the Fund may be deemed to have issued a senior security by reason of:
(a) purchasing any securities on a when-issued or delayed delivery basis; or (b)
borrowing money;

10. Make loans of money or securities, except: (a) by the purchase of debt
obligations in which the Fund may invest consistent with its investment
objective and policies; and (b) by investment in repurchase agreements;

11. Make short sales of securities;

12. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities;

13. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act in disposing of a
portfolio security;

14. Invest for the purpose of exercising control or management of any other
issuer;

15. Purchase oil, gas or other mineral leases, rights or royalty contracts,
or exploration or development programs;

16. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets;

17. 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

15
<PAGE>
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);
and

18. 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).

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST will:

1. Seek high current income, preservation of capital and liquidity.

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST will not:

1. Purchase common stocks, preferred stocks, warrants, other equity
securities, corporate bond debentures, state bonds, municipal bonds or
industrial revenue bonds;

2. 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 Fund's
total assets (including the amount borrowed), less liabilities (not including
the amount borrowed) at the time the borrowing is made;

3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 10% of the value of its net assets but only to secure
borrowings for temporary or emergency purposes;

4. Sell securities short or purchase securities on margin;

5. Write or purchase put or call options;

6. Underwrite the securities of other issuers or purchase securities with
contractual or other restrictions on resale;

7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts or oil and gas interests;

8. Make loans to others except through the purchase of qualified debt
obligations, loans of portfolio securities and entry into permitted repurchase
agreements;

9. Issue senior securities as defined in the Investment Company Act except
insofar as the Fund may be deemed to have issued a senior security by reason of:
(a) entering into any repurchase or reverse repurchase agreement; (b) borrowing
money; or (c) lending portfolio securities;

10. Invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation or acquisition of assets; and

11. Lend its portfolio securities in excess of 10% of its total assets,
taken at value. Any loans of portfolio securities will be made according to
guidelines established by the Trustees, including maintenance of collateral of
the borrower equal at all times to the current market value of the securities
loaned.

III. MANAGEMENT OF THE FUNDS
--------------------------------------------------------------------------------

A. BOARD OF TRUSTEES

The Board of Trustees of each of the Funds oversees the management of each
Fund but does not itself manage the Fund. The Trustees review various services
provided by or under the direction of the Investment Manager to ensure that the
Funds' general investment policies and programs are properly carried out. The
Trustees also conduct their review to ensure that administrative services are
provided to the Funds in a satisfactory manner.

16
<PAGE>
Under state law, the duties of the Trustees are generally characterized as a
duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Funds and not the Trustee's
own interest or the interest of another person or organization. A Trustee
satisfies his or her duty of care by acting in good faith with the care of an
ordinarily prudent person and in a manner the Trustee reasonably believes to be
in the best interest of each Fund and its shareholders.

B. MANAGEMENT INFORMATION

TRUSTEES AND OFFICERS. The Board of each of the Funds consists of the same
nine (9) Trustees. These same individuals also serve as directors or trustees
for all of the Morgan Stanley Dean Witter Funds. Six Trustees (67% of the total
number) have no affiliation or business connection with the Investment Manager
or any of its affiliated persons and do not own any stock or other securities
issued by the Investment Manager's parent company, MSDW. These are the
"non-interested" or "independent" Trustees. The other three Trustees (the
"management Trustees") are affiliated with the Investment Manager.

The Trustees and executive officers of the Funds, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the Morgan Stanley Dean Witter Funds (there were 93
such Funds as of the calendar year ended December 31, 1999), are shown below.

Charles A. Fiumefreddo* (67) ................ Chairman, Director or Trustee and Chief
Chairman of the Board, Executive Officer of the Morgan Stanley Dean
Chief Executive Officer and Trustee Witter Funds; formerly Chairman, Chief
Two World Trade Center Executive Officer and Director of the
New York, New York Investment Manager, the Distributor and MSDW
Services Company; Executive Vice President and
Director of Dean Witter Reynolds; Chairman and
Director of the Transfer Agent; formerly
Director and/or officer of various MSDW
subsidiaries (until June 1998).
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUNDS AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- -----------------------------------------------
<S> <C>
Edwin J. Garn (67) .......................... Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; formerly United States Senator
c/o Summit Ventures LLC (R-Utah) (1974-1992) and Chairman, Senate
1 Utah Center Banking Committee (1980-1986); formerly Mayor
201 S. Main Street of Salt Lake City, Utah (1971-1974); formerly
Salt Lake City, Utah Astronaut, Space Shuttle Discovery (April
12-19, 1985); Vice Chairman, Huntsman
Corporation (chemical company); Director of
Franklin Covey (time management systems), BMW
Bank of North America, Inc. (industrial loan
corporation), United Space Alliance (joint
venture between Lockheed Martin and the Boeing
Company) and Nuskin Asia Pacific (multilevel
marketing); member of the Utah Regional
Advisory Board of Pacific Corp.; member of the
board of various civic and charitable
organizations.

Wayne E. Hedien (66) ........................ Retired; Director or Trustee of the Morgan
Trustee Stanley Dean Witter Funds; Director of The PMI
c/o Mayer, Brown & Platt Group, Inc. (private mortgage insurance);
Counsel to the Independent Trustees Trustee and Vice Chairman of The Field Museum
1675 Broadway of Natural History; formerly associated with
New York, New York the Allstate Companies (1966-1994), most
recently as Chairman of The Allstate
Corporation (March 1993-December 1994) and
Chairman and Chief Executive Officer of its
wholly-owned subsidiary, Allstate Insurance
Company (July 1989-December 1994); director of
various other business and charitable
organizations.

James F. Higgins*(52) ....................... Chairman of the Private Client Group of MSDW
Trustee (since August 2000); Director of the Transfer
Two World Trade Center Agent and Dean Witter Realty Inc.; Director or
New York, New York Trustee of the Morgan Stanley Dean Witter Funds
(since June 2000); previously President and
Chief Operating Officer of the Private Client
Group of MSDW (May 1999-August 2000), President
and Chief Operating Officer of Individual
Securities of MSDW (February 1997-May 1999),
President and Chief Operating Officer of Dean
Witter Securities of MSDW (1995-February 1997),
and President and Chief Operating Officer of
Dean Witter Financial (1989-1995) and Director
(1985-1997) of Dean Witter Reynolds.
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUNDS AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- -----------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (51) .................. Senior Partner, Johnson Smick International,
Trustee Inc., a consulting firm; Co-Chairman and a
c/o Johnson Smick International, Inc. founder of the Group of Seven Council (G7C), an
1133 Connecticut Avenue, N.W. international economic commission; Chairman of
Washington, D.C. the Audit Committee and Director or Trustee of
the Morgan Stanley Dean Witter Funds; Director
of Greenwich Capital Markets, Inc.
(broker-dealer), Independence Standards Board
(private sector organization governing
independence of auditors) and NVR, Inc. (home
construction); Chairman and Trustee of the
Financial Accounting Foundation (oversight
organization of the Financial Accounting
Standards Board); formerly Vice Chairman of the
Board of Governors of the Federal Reserve
System and Assistant Secretary of the U.S.
Treasury.

Michael E. Nugent (64) ...................... General Partner, Triumph Capital, L.P., a
Trustee private investment partnership; Chairman of the
c/o Triumph Capital, L.P. Insurance Committee and Director or Trustee of
237 Park Avenue the Morgan Stanley Dean Witter Funds; formerly
New York, New York Vice President, Bankers Trust Company and BT
Capital Corporation (1984-1988); director of
various business organizations.

Philip J. Purcell* (56) ..................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds
1585 Broadway and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds; Director of American
Airlines, Inc. and its parent company, AMR
Corporation; Director and/ or officer of
various MSDW subsidiaries.

John L. Schroeder (70) ...................... Retired; Chairman of the Derivatives Committee
Trustee and Director or Trustee of the Morgan Stanley
c/o Mayer, Brown & Platt Dean Witter Funds; Director of Citizens
Counsel to the Independent Trustees Utilities Company (telecommunications, gas,
1675 Broadway electric and water utility company); formerly
New York, New York Executive Vice President and Chief Investment
Officer of the Home Insurance Company (August
1991-September 1995).
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUNDS AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- -----------------------------------------------
<S> <C>
Mitchell M. Merin (47) ...................... President and Chief Operating Officer of Asset
President Management of MSDW (since December 1998);
Two World Trade Center President and Director (since April 1997) and
New York, New York Chief Executive Officer (since June 1998) of
the Investment Manager and MSDW Services
Company; Chairman, Chief Executive Officer and
Director of the Distributor (since June 1998);
Chairman and Chief Executive Officer (since
June 1998) and Director (since January 1998) of
the Transfer Agent; Director of various MSDW
subsidiaries; President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index
Series (since May 1999); Trustee of various Van
Kampen investment companies (since December
1999); previously Chief Strategic Officer of
the Investment Manager and MSDW Services
Company and Executive Vice President of the
Distributor (April 1997-June 1998), Vice
President of the Morgan Stanley Dean Witter
Funds (May 1997-April 1999), and Executive Vice
President of Dean Witter, Discover & Co.

Barry Fink (45) ............................. General Counsel of Asset Management of MSDW
Vice President, (since May 2000); Executive Vice President
Secretary and General Counsel (since December 1999) and Secretary and General
Two World Trade Center Counsel (since February 1997) and Director
New York, New York (since July 1998) of the Investment Manager and
MSDW Services Company; Vice President,
Secretary and General Counsel of the Morgan
Stanley Dean Witter Funds (since February
1997); Vice President and Secretary of the
Distributor; previously, Senior Vice President
(March 1997-December 1999), First Vice
President, Assistant Secretary and Assistant
General Counsel of the Investment Manager and
MSDW Services Company.

Jonathan R. Page (53) ....................... Senior Vice President and Director of the Money
Vice President Market Group of the Investment Manager; Vice
Two World Trade Center President of various Morgan Stanley Dean Witter
New York, New York Funds.

Katherine H. Stromberg (52) ................. Senior Vice President of the Investment
Vice President Manager; Vice President of various Morgan
Two World Trade Center Stanley Dean Witter Funds.
New York, New York

Thomas F. Caloia (54) ....................... First Vice President and Assistant Treasurer of
Treasurer the Investment Manager, the Distributor and
Two World Trade Center MSDW Services Company; Treasurer of the Morgan
New York, New York Stanley Dean Witter Funds.
</TABLE>

------------------------
*Denotes Trustees who are "interested persons" of each Fund as defined by the
Investment Company Act.

20
<PAGE>

In addition, RONALD E. ROBISON, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, ROBERT S. GIAMBRONE, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, JOSEPH J. MCALINDEN, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer Agent
and JAMES F. WILLISON, Senior Vice Presidents of the Investment Manager and
Director of the Tax-Exempt Fixed Income Group of the Investment Manager, are
Vice Presidents of each Fund.

In addition, PETER M. AVELAR, Senior Vice President of the Investment
Manager and Director of the High Yield Group of the Investment Manager is Vice
President of ACTIVE ASSETS GOVERNMENT SECURITIES TRUST and ACTIVE ASSETS MONEY
TRUST. Also, JOSEPH ARCIERI, Senior Vice President of the Investment Manager and
GERARD J. LIAN, Vice President of the Investment Manager are Vice Presidents of
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST and ACTIVE ASSETS TAX-FREE TRUST.

In addition, MARILYN K. CRANNEY, TODD LEBO, LOU ANNE D. MCINNIS, CARSTEN
OTTO and RUTH ROSSI, First Vice Presidents and Assistant General Counsels of the
Investment Manager and MSDW Services Company and NATASHA KASSIAN, Assistant Vice
President and Assistant General Counsel of the Investment Manager and MSDW
Services Company, are Assistant Secretaries of each Fund.

INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation
establish both general guidelines and specific duties for the independent
directors/trustees. The Morgan Stanley Dean Witter Funds seek as independent
directors/trustees individuals of distinction and experience in business and
finance, government service or academia; these are people whose advice and
counsel are in demand by others and for whom there is often competition. To
accept a position on the Funds' boards, such individuals may reject other
attractive assignments because the Funds make substantial demands on their time.
All of the independent directors/trustees serve as members of the Audit
Committee. In addition, three of the directors/trustees, including two
independent directors/trustees, serve as members of the Derivatives Committee
and the Insurance Committee.

The independent directors/trustees are charged with recommending to the full
board approval of management, advisory and administration contracts, Rule 12b-1
plans and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage and
allocations, as well as other matters that arise from time to time. The
independent directors/trustees are required to select and nominate individuals
to fill any independent director/trustee vacancy on the board of any Fund that
has a Rule 12b-1 plan of distribution. Most of the Morgan Stanley Dean Witter
Funds have a Rule 12b-1 plan.

The Audit Committee is charged with recommending to the full board the
engagement or discharge of the Funds' independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of the services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Funds' system of internal
controls; and preparing and submitting Committee meeting minutes to the full
board.

The board of each Fund has a Derivatives Committee to approve parameters for
and monitor the activities of the Fund with respect to derivative investments,
if any, made by the Fund.

Finally, the board of each Fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.

ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES FOR
ALL MORGAN STANLEY DEAN WITTER FUNDS. The independent directors/trustees and
the Funds' management believe that having the same independent
directors/trustees for each of the Morgan Stanley Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as

21
<PAGE>
independent directors/trustees for each of the Morgan Stanley Dean Witter Funds
or even of these Funds. They believe that having the same individuals serve as
independent directors/trustees of all the Funds tends to increase their
knowledge and expertise regarding matters which affect the Fund complex
generally and enhances their ability to negotiate on behalf of each Fund with
the Fund's service providers. This arrangement also precludes the possibility of
separate groups of independent directors/ trustees arriving at conflicting
decisions regarding operations and management of the Morgan Stanley Dean Witter
Funds and avoids the cost and confusion that would likely ensue. Finally, having
the same independent directors/trustees serve on all Fund boards enhances the
ability of each Morgan Stanley Dean Witter Fund to obtain, at modest cost to
each separate Fund, the services of independent directors/trustees, of the
caliber, experience and business acumen of the individuals who serve as
independent directors/trustees of the Morgan Stanley Dean Witter Funds.

TRUSTEE AND OFFICER INDEMNIFICATION. Each Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of the Fund, except
as such liability may arise from his/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her or its duties. It
also provides that all third persons shall look solely to Fund property for
satisfaction of claims arising in connection with the affairs of the Fund. With
the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.

C. COMPENSATION

Each Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (each
Fund pays the Chairman of the Audit Committee an additional annual fee of $750,
and the Chairmen of the Derivatives and Insurance Committees additional annual
fees of $500). If a Board meeting and a meeting of the Independent Trustees or a
Committee meeting, or a meeting of the Independent Trustees and/or more than one
Committee meeting, take place on a single day, the Trustees are paid a single
meeting fee by each Fund. Each Fund also reimburses such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Funds who are or have been employed by
the Investment Manager or an affiliated company receive no compensation or
expense reimbursement from the Funds for their services as Trustee.

The following tables illustrate the compensation that each Fund paid to its
Independent Trustees for the fiscal year ended June 30, 2000.

FUND COMPENSATION

ACTIVE ASSETS MONEY TRUST

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
--------------------------- -------------
<S> <C>
Michael Bozic................................................. $1,600
Edwin J. Garn................................................. 1,600
Wayne E. Hedien............................................... 1,600
Dr. Manuel H. Johnson......................................... 2,350
Michael E. Nugent............................................. 2,100
John L. Schroeder............................................. 2,050
</TABLE>

22
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

The following table illustrates the compensation paid to the Funds'
Independent Trustees for the calendar year ended December 31, 1999 for services
to the 93 Morgan Stanley Dean Witter Funds that were in operation at December
31, 1999.

CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS

<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION
FOR SERVICES TO
93 MORGAN
STANLEY
DEAN WITTER
NAME OF INDEPENDENT TRUSTEE FUNDS
--------------------------- ---------------
<S> <C>
Michael Bozic.................................. $134,600
Edwin J. Garn.................................. 138,700
Wayne E. Hedien................................ 138,700
Dr. Manuel H. Johnson.......................... 208,638
Michael E. Nugent.............................. 193,324
John L. Schroeder.............................. 193,324
</TABLE>

23
<PAGE>
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, 55 of the Morgan
Stanley Dean Witter Funds, including each Fund, have adopted a retirement
program under which an independent director/ trustee who retires after serving
for at least five years (or such lesser period as may be determined by the
Board) as an independent director/trustee of any Morgan Stanley Dean Witter Fund
that has adopted the retirement program (each such Fund referred to as an
"Adopting Fund" and each such director/trustee referred to as an "Eligible
Trustee") is entitled to retirement payments upon reaching the eligible
retirement age (normally, after attaining age 72). Annual payments are based
upon length of service.

Currently, upon retirement, each Eligible Trustee is entitled to receive
from the Adopting Fund, commencing as of his or her retirement date and
continuing for the remainder of his or her life, an annual retirement benefit
(the "Regular Benefit") equal to 30.22% of his or her Eligible Compensation plus
0.5036662% of such Eligible Compensation for each full month of service as an
independent director/ trustee of any Adopting Fund in excess of five years up to
a maximum of 60.44% after ten years of service. The foregoing percentages may be
changed by the Board.(1) "Eligible Compensation" is one-fifth of the total
compensation earned by such Eligible Trustee for service to the Adopting Fund in
the five year period prior to the date of the Eligible Trustee's retirement.
Benefits under the retirement program are accrued as expenses by the Adopting
Funds. Such benefits are not secured or funded by the Adopting Funds.

The following tables illustrate the retirement benefits accrued to the
Funds' Independent Trustees by each Fund for the fiscal year ended June 30, 2000
and by the 55 Morgan Stanley Dean Witter Funds (including each Fund) for the
calendar year ended December 31, 1999, and the estimated retirement benefits for
the Independent Trustees, to commence upon their retirement, from the Funds as
of June 30, 2000 and from the 55 Morgan Stanley Dean Witter Funds as of
December 31, 1999.

RETIREMENT BENEFITS FROM THE FUNDS AND ALL MORGAN STANLEY DEAN WITTER FUNDS

ACTIVE ASSETS MONEY TRUST

<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------ RETIREMENT BENEFITS ESTIMATED ANNUAL
ESTIMATED ACCRUED AS BENEFITS
CREDITED EXPENSES UPON RETIREMENT(2)
YEARS ESTIMATED -------------------- ------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
--------------------------- -------------- -------------- ------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic................ 10 60.44% $370 $20,933 $ 907 $50,588
Edwin J. Garn................ 10 60.44 536 31,737 909 50,675
Wayne E. Hedien.............. 9 51.37 696 39,566 771 43,000
Dr. Manuel H. Johnson........ 10 60.44 302 13,129 1,360 75,520
Michael E. Nugent............ 10 60.44 513 23,175 1,209 67,209
John L. Schroeder............ 8 50.37 987 41,558 955 52,994
</TABLE>

------------------------
1 An Eligible Trustee may elect alternative payments of his or her retirement
benefits based upon the combined life expectancy of the Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. In
addition, the Eligible Trustee may elect that the surviving spouse's
periodic payment of benefits will be equal to a lower percentage of the
periodic amount when both spouses were alive. The amount estimated to be
payable under this method, through the remainder of the later of the lives
of the Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit.

2 Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.

24
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST

<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------ RETIREMENT BENEFITS ESTIMATED ANNUAL
ESTIMATED ACCRUED AS BENEFITS
CREDITED EXPENSES UPON RETIREMENT(3)
YEARS ESTIMATED -------------------- ------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
--------------------------- -------------- -------------- ------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic................ 10 60.44% $370 $20,933 $ 907 $50,588
Edwin J. Garn................ 10 60.44 536 31,737 909 50,675
Wayne E. Hedien.............. 9 51.37 696 39,566 771 43,000
Dr. Manuel H. Johnson........ 10 60.44 302 13,129 1,360 75,520
Michael E. Nugent............ 10 60.44 513 23,175 1,209 67,209
John L. Schroeder............ 8 50.37 987 41,558 955 52,994
</TABLE>

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

3 Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) on
page 24.

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------ RETIREMENT BENEFITS ESTIMATED ANNUAL
ESTIMATED ACCRUED AS BENEFITS
CREDITED EXPENSES UPON RETIREMENT(4)
YEARS ESTIMATED -------------------- ------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
--------------------------- -------------- -------------- ------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic................ 10 60.44% $370 $20,933 $ 907 $50,588
Edwin J. Garn................ 10 60.44 620 31,737 909 50,675
Wayne E. Hedien.............. 9 51.37 696 39,566 771 43,000
Dr. Manuel H. Johnson........ 10 60.44 327 13,129 1,360 75,520
Michael E. Nugent............ 10 60.44 599 23,175 1,209 67,209
John L. Schroeder............ 8 50.37 987 41,558 955 52,994
</TABLE>

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

4 Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) on
page 24.

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------ RETIREMENT BENEFITS ESTIMATED ANNUAL
ESTIMATED ACCRUED AS BENEFITS
CREDITED EXPENSES UPON RETIREMENT(5)
YEARS ESTIMATED -------------------- ------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
--------------------------- -------------- -------------- ------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic................ 10 60.44% $370 $20,933 $ 907 $50,588
Edwin J. Garn................ 10 60.44 536 31,737 909 50,675
Wayne E. Hedien.............. 9 51.37 696 39,566 771 43,000
Dr. Manuel H. Johnson........ 10 60.44 302 13,129 1,360 75,520
Michael E. Nugent............ 10 60.44 513 23,175 1,209 67,209
John L. Schroeder............ 8 50.37 987 41,558 955 52,994
</TABLE>

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

5 Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) on
page 24.

25
<PAGE>
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------

As of August 9, 2000, no shareholder was known to own beneficially or of
record as much as 5% of the outstanding shares of each Fund. The percentage
ownership of shares of each Fund changes from time to time depending on
purchases and redemptions by shareholders and the total number of shares
outstanding.

As of the date of this STATEMENT OF ADDITIONAL INFORMATION, the aggregate
number of shares of beneficial interest of each Fund owned by the Fund's
officers and Trustees as a group was less than 1% of the Fund's shares of
beneficial interest outstanding.

V. INVESTMENT MANAGEMENT AND OTHER SERVICES
--------------------------------------------------------------------------------

A. INVESTMENT MANAGER

The Investment Manager to each Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New York,
NY 10048. The Investment Manager is a wholly-owned subsidiary of MSDW, a
Delaware corporation. MSDW is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.

Pursuant to separate Investment Management Agreements (the "Management
Agreements") with the Investment Manager, each Fund has retained the Investment
Manager to provide administrative services and manage the investment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. Each Fund pays the Investment Manager monthly compensation
calculated daily by applying the following annual rates to the net assets of the
Fund, determined as of the close of business on every business day: 0.50% of the
portion of the daily net assets not exceeding $500 million; 0.425% of the
portion of the daily net assets exceeding $500 million but not exceeding $750
million; 0.375% of the portion of the daily net assets exceeding $750 million
but not exceeding $1 billion; 0.35% of the portion of the daily net assets
exceeding $1 billion but not exceeding $1.5 billion; 0.325% of the portion of
the daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.30%
of the portion of the daily net assets exceeding $2 billion but not exceeding
$2.5 billion; 0.275% of the portion of the daily net assets exceeding $2.5
billion but not exceeding $3 billion; 0.25% of the portion of the daily net
assets exceeding $3 billion; and with respect to ACTIVE ASSETS MONEY TRUST,
0.249% of the portion of daily net assets exceeding $15 billion but not
exceeding $17.5 billion; and 0.248% of the portion of daily net assets exceeding
$17.5 billion.

For the fiscal years ended June 30, 1998, 1999 and 2000, ACTIVE ASSETS MONEY
TRUST accrued to the Investment Manager total compensation under its Management
Agreement in the amounts of $29,850,539, $39,612,403 and $51,232,674,
respectively.

For the fiscal years ended June 30, 1998, 1999 and 2000, ACTIVE ASSETS
TAX-FREE TRUST accrued to the Investment Manager total compensation under its
Management Agreement in the amounts of $7,412,622, $8,443,285 and $9,548,312,
respectively.

For the fiscal years ended June 30, 1998, 1999 and 2000, ACTIVE ASSETS
CALIFORNIA TAX-FREE TRUST accrued to the Investment Manager total compensation
under its Management Agreement in the amounts of $2,663,643, $3,130,854 and
$3,534,793, respectively.

For the fiscal years ended June 30, 1998, 1999 and 2000, ACTIVE ASSETS
GOVERNMENT SECURITIES TRUST accrued to the Investment Manager total compensation
under its Management Agreement in the amounts of $3,338,933, $4,153,807 and
$4,515,824, respectively.

The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for each Fund.

B. PRINCIPAL UNDERWRITER

Each Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, each Fund's shares are
distributed by the Distributor. The Distributor has

26
<PAGE>
entered into a selected dealer agreement with Dean Witter Reynolds, which
through its own sales organization sells shares of each Fund. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.

The Distributor bears all expenses it may incur in providing services under
each Distribution Agreement. The Distributor also pays certain expenses in
connection with the distribution of each Fund's shares, including the costs of
preparing, printing and distributing advertising or promotional materials, and
the costs of printing and distributing prospectuses and supplements thereto used
in connection with the offering and sale of each Fund's shares. Each Fund bears
the costs of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. Each Fund also bears the costs of
registering the Fund and its shares under federal and state securities laws and
pays filing fees in accordance with state securities laws.

Each Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to each Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.

C. SERVICES PROVIDED BY THE INVESTMENT MANAGER

The Investment Manager manages the investment of each Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Investment Manager obtains and evaluates the information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of each Fund
in a manner consistent with its investment objective.

Under the terms of each Management Agreement, in addition to managing each
Fund's investments, the Investment Manager maintains certain of each Fund's
books and records and furnishes, at its own expense, the office space,
facilities, equipment, clerical help, bookkeeping and certain legal services as
the Fund may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be filed
with federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in the
opinion of the Investment Manager, necessary or desirable). In addition, the
Investment Manager pays the salaries of all personnel, including officers of the
Funds, who are employees of the Investment Manager. The Investment Manager also
bears the cost of telephone service, heat, light, power and other utilities
provided to the Funds.

Expenses not expressly assumed by the Investment Manager under each
Management Agreement or by the Distributor, will be paid by the applicable Fund.
These expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs; the cost
and expense of printing, including typesetting, and distributing prospectuses;
all expenses of shareholders' and Trustees' meetings and of preparing, printing
and mailing of proxy statements and reports to shareholders; fees and travel
expenses of Trustees or members of any advisory board or committee who are not
employees of the Investment Manager or any corporate affiliate of the Investment
Manager; all expenses incident to any dividend, withdrawal or redemption
options; charges and expenses of any outside service used for pricing of the
Fund's shares; fees and expenses of legal counsel, including counsel to the
Trustees who are not interested persons of the Funds or of the Investment
Manager (not including compensation or expenses of attorneys who are employees
of the Investment Manager); fees and expenses of the Fund's independent
accountants; membership dues of industry associations; interest on Fund
borrowings; postage; insurance premiums on property or personnel (including
officers and Trustees) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification relating thereto); and all other costs
of the Fund's operation.

27
<PAGE>
Each Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.

Each Management Agreement will remain in effect from year to year
thereafter, provided continuance of the Management Agreement is approved at
least annually by the vote of the holders of a majority, as defined in the
Investment Company Act, of the outstanding shares of the applicable Fund, or by
the Trustees; provided that in either event such continuance is approved
annually by the vote of a majority of the Trustees, including a majority of the
Independent Trustees.

D. RULE 12b-1 PLAN

In accordance with a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act between each Fund and the Distributor, the Distributor
provides certain services in connection with the promotion of sales of each
Fund's shares (a "Plan").

Each Plan provides that the Distributor bears the expense of all promotional
and distribution related activities on behalf of the respective Fund, except for
expenses that the Trustees determine to reimburse, as described below. The
following activities and services may be provided by the Distributor under each
Plan: (1) compensation to and expenses of Dean Witter Reynolds' and other
selected Broker-Dealers' Financial Advisors and other employees, including
overhead and telephone expenses; (2) sales incentives and bonuses to sales
representatives and to marketing personnel in connection with promoting sales of
each Fund's shares; (3) expenses incurred in connection with promoting sales of
each Fund'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.

Dean Witter Reynolds Financial Advisors are paid an annual residual
commission, currently a residual of up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record. The
residual is a charge which reflects residual commissions paid by Dean Witter
Reynolds to its Financial Advisors and Dean Witter Reynolds' expenses associated
with the servicing of shareholders' accounts, including the expenses of
operating Dean Witter Reynolds' branch offices in connection with the servicing
of shareholders' accounts, which expenses include lease costs, the salaries and
employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies and other expenses
relating to branch office serving of shareholder accounts.

Each Fund is authorized to reimburse specific expenses incurred or to be
incurred in promoting the distribution of the Fund's shares. Reimbursement is
made through payments at the end of each month. The amount of each monthly
payment may in no event exceed an amount equal to a payment at the annual rate
of 0.15 of 1% of each Fund's average daily net assets during the month. No
interest or other financing charges will be incurred for which reimbursement
payments under the Plan will be made. In addition, no interest charges, if any,
incurred on any distribution expense incurred by the Distributor or other
selected dealers pursuant to the Plan, will be reimbursable under the Plan. In
the case of all expenses other than expenses representing a residual to
Financial Advisors, such amounts shall be determined at the beginning of each
calendar quarter by the Trustees, including a majority of the Independent 12b-1
Trustees. Expenses representing a residual to Financial Advisors may be
reimbursed without prior determination. In the event that the Distributor
proposes that monies shall be reimbursed for other than such expenses, then in
making quarterly determinations of the amounts that may be expended by each
Fund, the Investment Manager provides and the Trustees review a quarterly budget
of projected incremental distribution expenses to be incurred on behalf of the
Fund, together with a report explaining the purposes and anticipated benefits of
incurring such expenses. The Trustees determine which particular expenses, and
the portions thereof, that may be borne by each Fund, and in making such a
determination shall consider the scope of the Distributor's commitment to
promoting the distribution of the Fund's shares.

28
<PAGE>

ACTIVE ASSETS MONEY TRUST reimbursed $18,747,728 to the Distributor pursuant
to the Plan which amounted to 0.10% of 1% of the Fund's average daily net assets
for the fiscal year ended June 30, 2000. Based upon the total amounts spent by
the Distributor during the period, it is estimated that the amount paid by
ACTIVE ASSETS MONEY TRUST to the Distributor for distribution was spent in
approximately the following ways: (i) advertising -- $0; (ii) printing and
mailing PROSPECTUSES to other than current shareholders -- $0;
(iii) compensation to underwriters -- $0; (iv) compensation to dealers -- $0;
(v) compensation to sales personnel -- $0; (vi) and other, which includes
payments to Dean Witter Reynolds for expenses substantially all of which relate
to compensation of sales personnel and associated overhead expenses --
$18,747,728. No payments under the Plan were made for interest, carrying or
other financing charges.

ACTIVE ASSETS TAX-FREE TRUST reimbursed $2,533,648 to the Distributor
pursuant to the Plan which amounted to 0.10% of 1% of the Fund's average daily
net assets for the fiscal year ended June 30, 2000. Based upon the total amounts
spent by the Distributor during the period, it is estimated that the amount paid
by ACTIVE ASSETS TAX-FREE TRUST to the distributor for distribution was spent in
approximately the following ways: (i) advertising -- $0; (ii) printing and
mailing PROSPECTUSES to other than current shareholders -- $0;
(iii) compensation to underwriters -- $0; (iv) compensation to dealers -- $0;
(v) compensation to sales personnel -- $0; and (vi) other, which includes
payments to Dean Witter Reynolds for expenses substantially all of which relate
to compensation of sales personnel and associated overhead expenses --
$2,533,648. No payments under the Plan were made for interest, carrying or other
financing charges.

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST reimbursed $736,235 to the
Distributor pursuant to the Plan which amounted to 0.10% of 1% of the Fund's
average daily net assets for the fiscal year ended June 30, 2000. Based upon the
total amounts spent by the Distributor during the period, it is estimated that
the amount paid by ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST to the Distributor
for distribution was spent in approximately the following ways:
(i) advertising -- $0; (ii) printing and mailing PROSPECTUSES to other than
current shareholders -- $0; (iii) compensation to underwriters -- $0;
(iv) compensation to dealers -- $0; (v) compensation to sales personnel -- $0;
and (vi) other, which includes payments to Dean Witter Reynolds for expenses
substantially all of which relate to compensation of sales personnel and
associated overhead expenses -- $736,235. No payments under the Plan were made
for interest, carrying or other financing charges.

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST reimbursed $996,734 to the
Distributor pursuant to the Plan which amounted to 0.10% of 1% of the Fund's
average daily net assets for the fiscal year ended June 30, 2000. Based upon the
total amounts spent by the Distributor during the period, it is estimated that
the amount paid by ACTIVE ASSETS GOVERNMENT SECURITIES TRUST to the Distributor
for distribution was spent in approximately the following ways:
(i) advertising -- $0; (ii) printing and mailing PROSPECTUSES to other than
current shareholders -- $0; (iii) compensation to underwriters -- $0;
(iv) compensation to dealers -- $0; (v) compensation to sales personnel -- $0;
and (vi) other, which includes payments to Dean Witter Reynolds for expenses
substantially all of which relate to compensation of sales personnel and
associated overhead expenses -- $996,734. No payments under the Plan were made
for interest, carrying or other financing charges.

Under each Plan, the Distributor uses its best efforts in rendering services
to each Fund, but in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations, the Distributor is not
liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.

Under each Plan, the Distributor provides each Fund, for review by the
Trustees, and the Trustees review, promptly after the end of each calendar
quarter, a written report regarding the incremental distribution expenses
incurred on behalf of the Fund during such calendar quarter, which report
includes (1) an itemization of the types of expenses and the purposes therefore;
(2) the amounts of such expenses; and (3) a description of the benefits derived
by the Fund. In the Trustees' quarterly review of each Plan they consider its
continued appropriateness and the level of compensation provided therein.

29
<PAGE>
No interested person of each Fund nor any Independent Trustee has any direct
financial interest in the operation of each Plan except to the extent that the
Distributor, the Investment Manager, Dean Witter Reynolds, MSDW Services Company
or certain of their employees may be deemed to have such an interest as a result
of benefits derived from the successful operation of each Plan or as a result of
receiving a portion of the amounts expended thereunder by the respective Fund.

On an annual basis, the Trustees, including a majority of the Independent
Trustees, consider whether each Plan should be continued. Prior to approving the
most recent continuation of each Plan, the Trustees requested and received from
the Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
each Plan, the Trustees considered: (1) the applicable Fund's experience under
the Plan and whether such experience indicates that the Plan is operating as
anticipated; (2) the benefits the applicable Fund had obtained, was obtaining
and would be likely to obtain under the Plan, including that the Plan is
essential to enable the Fund to continue to grow and avoid a pattern of net
redemptions which, in turn, is essential for effective investment management;
and without the reimbursement of distribution and account maintenance expenses
of Dean Witter Reynolds' branch offices made possible by the 12b-1 fees, Dean
Witter Reynolds could not establish and maintain an effective system for
distribution, servicing of the Funds' shareholders and maintenance of
shareholder accounts; and (3) what services had been provided and were
continuing to be provided under the Plan to the applicable Fund and its
shareholders. Based upon their review, the Trustees, including each of the
Independent Trustees, determined that continuation of each Plan would be in the
best interest of the applicable Fund and would have a reasonable likelihood of
continuing to benefit the Fund and its shareholders. In the Trustees' quarterly
review of each Plan, they will consider its continued appropriateness and the
level of compensation provided therein.

Each Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
respective Fund, and all material amendments to the Plan must also be approved
by the Trustees. Each Plan may be terminated at any time, without payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities of the respective Fund (as defined
in the Investment Company Act) on not more than thirty days' written notice to
any other party to the Plan. So long as a Fund's Plan is in effect, the election
and nomination of Independent Trustees shall be committed to the discretion of
the Independent Trustees.

E. OTHER SERVICE PROVIDERS

(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT

Morgan Stanley Dean Witter Trust FSB is the transfer agent for each Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various investment
plans. The principal business address of the Transfer Agent is Harborside
Financial Center, Plaza Two, Jersey City, NJ 07311.

(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS

The Bank of New York, 100 Church Street, New York, NY 10007 is the Custodian
for each Fund's assets. Any of the Funds' cash balances with the Custodian in
excess of $100,000 are unprotected by federal deposit insurance. These balances
may, at times, be substantial.

Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281,
serves as the independent accountants of each Fund. The independent accountants
are responsible for auditing the annual financial statements of each Fund.

(3) AFFILIATED PERSONS

The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent's responsibilities include maintaining shareholder accounts, disbursing
cash dividends and reinvesting dividends, processing account registration
changes, handling purchase and redemption transactions, mailing prospectuses and
reports, mailing

30
<PAGE>
and tabulating proxies, processing share certificate transactions, and
maintaining shareholder records and lists. For these services, the Transfer
Agent receives a per shareholder account fee from each Fund and is reimbursed
for its out-of-pocket expenses in connection with such services.

F. CODES OF ETHICS

The Funds, the Investment Manager and the Distributor have each adopted a
Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The
Codes of Ethics are designed to detect and prevent improper personal trading.
The Codes of Ethics permit personnel subject to the Codes to invest in
securities, including securities that may be purchased, sold or held by the
Funds, subject to a number of restrictions and controls including prohibitions
against purchases of securities in an Initial Public Offering and a preclearance
requirement with respect to personal securities transactions.

VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
--------------------------------------------------------------------------------

A. BROKERAGE TRANSACTIONS

Subject to the general supervision of the Trustees, the Investment Manager
is responsible for decisions to buy and sell securities for each Fund, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. Each Fund expects that the primary market for
the securities in which it intends to invest will generally be the
over-the-counter market. Securities are generally traded in the over-the-counter
market on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer. Each Fund also expects that securities will be purchased
at times in underwritten offerings where the price includes a fixed amount of
compensation, generally referred to as the underwriter's concession or discount.
On occasion, each Fund may also purchase certain money market instruments
directly from an issuer, in which case no commissions or discounts are paid.

During the fiscal years ended June 30, 1998, 1999 and 2000, the Funds paid
no such brokerage commissions or concessions.

B. COMMISSIONS

Pursuant to an order of the SEC, each Fund may effect principal transactions
in certain money market instruments with Dean Witter Reynolds. Each Fund will
limit its transactions with Dean Witter Reynolds to U.S. Government and
Government Agency Securities, Bank Money Instruments (i.e. Certificates of
Deposit and Bankers' Acceptances) and Commercial Paper (not including Tax-Exempt
Municipal Paper). The transactions will be effected with Dean Witter Reynolds
only when the price available from Dean Witter Reynolds is better than that
available from other dealers.

During the fiscal years ended June 30, 1998, 1999 and 2000, the Funds did
not effect any principal transactions with Dean Witter Reynolds.

Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Dean Witter Reynolds, Morgan
Stanley & Co. and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect any portfolio transactions on an exchange
for a Fund, the commissions, fees or other remuneration received by the
affiliated broker or dealer must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
affiliated broker or dealer to receive no more than the remuneration which would
be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. Furthermore, the Trustees, including the Independent
Trustees, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to an affiliated broker or
dealer are consistent with the foregoing standard. The Funds do not reduce the
management fee they pay to the Investment Manager by any amount of the brokerage
commissions it may pay to an affiliated broker or dealer.

31
<PAGE>

During the fiscal years ended June 30, 1998, 1999 and 2000, the Funds paid
no brokerage commissions to an affiliated broker or dealer.

C. BROKERAGE SELECTION

The policy of each Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions.

In seeking to implement the Funds' policies, the Investment Manager effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager believes the prices and executions are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Funds or the Investment Manager. The services
may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities.

The information and services received by the Investment Manager from brokers
and dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not in all cases benefit the Funds
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Investment Manager and thereby reduce its expenses,
it is of indeterminable value and the Funds do not reduce the management fee
they pay to the Investment Manager by any amount that may be attributable to the
value of such services.

The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or advisor to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Funds
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Funds and other client accounts, various
factors may be considered, including the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of each Fund and other client accounts. In the case of certain
initial and secondary public offerings, the Investment Manager utilizes a pro
rata allocation process based on the size of the relevant funds and/or client
accounts involved and the number of shares available from the public offering.

D. DIRECTED BROKERAGE

During the fiscal year ended June 30, 2000, the Funds did not pay any
brokerage commissions to brokers because of research services provided.

E. REGULAR BROKER-DEALERS

During the fiscal year ended June 30, 2000, ACTIVE ASSETS MONEY TRUST
purchased commercial paper issued by Goldman Sachs Group Inc., Merrill Lynch,
Pierce, Fenner & Smith, Deutsche Bank Financial Inc., Morgan (J.P.) & Co. Inc.
and Barclays U.S. Funding Corp. which issuers were among the top ten brokers or
the ten dealers which executed transactions for or with ACTIVE ASSETS MONEY
TRUST in the largest dollar amounts during the year. At June 30, 2000 ACTIVE
ASSETS MONEY TRUST in the largest dollar amounts during the year. At June 30,
2000 ACTIVE ASSETS MONEY TRUST held commercial paper issued by Deutsche Bank
Financial Inc., Morgan (J.P.) & Co. Inc, Goldman Sachs Group Inc. and Barclays
U.S. Funding Corp. with values of $817,573,807, $696,918,556, $619,316,003 and
$599,039,898, respectively.

32
<PAGE>
VII. CAPITAL STOCK AND OTHER SECURITIES
--------------------------------------------------------------------------------

The shareholders of each Fund are entitled to a full vote for each full
share of beneficial interest held. The Funds are authorized to issue an
unlimited number of shares of beneficial interest. All shares of beneficial
interest of each Fund are of $0.01 par value and are equal as to earnings,
assets and voting privileges.

Each Fund's 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. The Trustees have not presently authorized any such
additional series or Classes of shares.

The Funds are not required to hold annual meetings of shareholders and in
ordinary circumstances the Funds do 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 Investment Company Act or each Fund's Declaration
of Trust. Under certain circumstances the Trustees may be removed by action of
the Trustees. In addition, under certain circumstances the shareholders may call
a meeting to remove Trustees and the Fund is required to provide assistance in
communicating with shareholders about such a meeting. 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 selected, while the
holders of the remaining shares would be unable to elect any Trustees.

Under Massachusetts law, shareholders of a business trust may, under certain
limited circumstances, be held personally liable as partners for the obligations
of each Fund. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the respective Fund,
requires that notice of such Fund obligations include such disclaimer, and
provides for indemnification out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of each Fund's assets and operations, the possibility of a Fund being
unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Funds, the risk to each Fund's shareholders of
personal liability is remote.

All of the Trustees, except for James F. Higgins, have been elected by the
shareholders of each Fund, most recently at a special meeting of each Fund's
shareholders held on May 21, 1997. The Trustees themselves have the power to
alter the number and the terms of office of the Trustees (as provided for in
each Fund's 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 the respective Fund.

VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
--------------------------------------------------------------------------------

A. PURCHASE/REDEMPTION OF SHARES

Information concerning how the Funds' shares are offered (and how they are
redeemed) is provided in the Funds' PROSPECTUS.

TRANSFER AGENT AS AGENT. With respect to the redemption of the Funds'
shares or the application of proceeds to the purchase of new shares in a Fund,
the Transfer Agent acts as agent for the Distributor and for the shareholder's
authorized broker-dealer in the performance of such functions. With respect to
redemptions, the Transfer Agent shall be liable for its own negligence and not
for the default or negligence of its correspondents or for losses in transit.
The Fund shall not be liable for any default or negligence of the Transfer
Agent, the Distributor or any authorized broker-dealer.

33
<PAGE>
B. OFFERING PRICE

The price of each Fund's shares, called "net asset value," is based on the
value of the Fund's portfolio securities.

Each Fund utilizes the amortized cost method in valuing its portfolio
securities for purposes of determining the net asset value of its shares. Each
Fund 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 at the time of
purchase 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 Fund would receive if it sold the investment.
During such periods, the yield to investors in the Fund may differ somewhat from
that obtained in a similar company which uses market-to-market values for all of
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 Fund 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 use of the amortized cost method to value the portfolio securities of
each Fund and the maintenance of the per share net asset value of $1.00 is
permitted pursuant to Rule 2a-7 of the Investment Company 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 Funds' shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and each Fund'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) the procedures include (i) 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 should 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, as provided by
the Declaration of Trust, reducing the number of outstanding shares of the Fund)
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 method of valuation.

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

A variable rate security 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. A floating rate security 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.

34
<PAGE>
An "NRSRO" is a nationally recognized statistical rating organization. The
term "Requisite NRSROs" means (i) any two NRSROs that have issued a rating with
respect to a security or class of debt obligations of an issuer, or (ii) if only
one NRSRO has issued a rating with respect to such security or issuer at the
time a fund purchases or rolls over the security, that NRSRO.

An Eligible Security is generally defined in the Rule to mean (i) a rated
security with a remaining maturity of 397 calendar days or less that has
received a rating from the Requisite NRSROs in one of the two highest short-term
rating categories (within which there may be sub-categories or gradations
indicating relative standing); or (ii) An Unrated Security that is of comparable
quality to a security meeting the requirements of (1) above, as determined by
Trustees; (iii) In addition, in the case of a security that is subject to a
Demand Feature or Guarantee: (A) The Guarantee has received a rating from an
NRSRO or the Guarantee is issued by a guarantor that has received a rating from
an NRSRO with respect to a class of debt obligations (or any debt obligation
within that class) that is comparable in priority and security to the Guarantee,
unless: (1) the Guarantee is issued by a person that directly or indirectly,
controls, is controlled by or is under a common control with the issuer of the
security subject to the Guarantee (other than a sponsor or a 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 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). Each Fund will limit its
investments to securities that meet the requirements for Eligible Securities.

As permitted by the Rule, the Trustees have delegated to the Funds'
Investment Manager 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, each Fund 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,
with respect to 75% of its total assets no more than 5% of its total assets will
be invested in the securities of any one issuer; and (b) with respect to
Eligible Securities that have received a rating in less than the highest
category by any one of the NRSROs whose ratings are used to qualify the security
as an Eligible Security, or that have been determined to be of comparable
quality: (i) no more than 5% in the aggregate of the Fund's 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 each Fund 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 each Fund
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 Fund 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 Trustees determine that it is no longer in the best interests of a
Fund and its shareholders to maintain a stable price of $1 per share or if the
Trustees believe that maintaining such price no longer reflects a market-based
net asset value per share, the Trustees have the right to change from an
amortized cost basis of valuation to valuation based on market quotations. The
Fund will notify shareholders of the Fund of any such change.

35
<PAGE>
IX. TAXATION OF THE FUNDS AND THEIR SHAREHOLDERS
--------------------------------------------------------------------------------

ACTIVE ASSETS MONEY TRUST and ACTIVE ASSETS GOVERNMENT SECURITIES TRUST will
generally pay ordinary dividends. ACTIVE ASSETS TAX-FREE TRUST will generally
pay tax-exempt dividends that are normally exempt from federal (but not state)
income tax. ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST will generally pay tax-
exempt dividends that are normally exempt from federal and California income
tax. Each Fund also makes distributions of any short-term gains which will be
taxed as ordinary income when distributed to shareholders. Long-term capital
gain distributions may also be made, although it is not anticipated that there
will be any significant long-term capital gains. These types of distributions
are reported differently on a shareholder's income tax return and they are also
subject to different rates of tax. The tax treatment of the investment
activities of a Fund will affect the amount and timing and character of the
distributions made by the Fund. Shareholders are urged to consult their own tax
professionals regarding specific questions as to federal, state or local taxes.

INVESTMENT COMPANY TAXATION. Each Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, each Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.

Each Fund generally intends to distribute sufficient income and gains so
that the Fund will not pay corporate income tax on its earnings. Each Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, a Fund may instead determine to retain all or part
of any ordinary income or capital gains in any year for reinvestment. In such
event, the Fund will pay federal income tax (and possibly excise tax) on such
retained ordinary income or capital gains.

Gains or losses on sales of securities by a Fund will be long-term capital
gains or losses if the securities have a tax holding period of more than one
year. Gains or losses on the sale of securities with a tax holding period of one
year or less will be short-term gains or losses.

In computing net investment income, each Fund will amortize any premiums and
original issue discounts on securities owned, if applicable. Capital gains or
losses realized upon sale or maturity of such securities will be based on their
amortized cost.

All or a portion of any of a Fund's gain from tax-exempt obligations
purchased at a market discount may be treated as ordinary income rather than
capital gain.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Tax-Free Trust and the California Tax-Free
Trust could be affected. In that event, the Funds would re-evaluate their
investment objective and policies.

TAXATION OF DIVIDENDS AND DISTRIBUTIONS. ACTIVE ASSETS TAX-FREE TRUST and
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST intend to qualify to pay
"exempt-interest dividends" to their shareholders by maintaining, as of the
close of each quarter of its taxable years, at least 50% of the value of their
assets in tax-exempt securities. An exempt-interest dividend is that part of the
dividend distributions made by a Fund which consists of interest received by the
Fund on tax-exempt securities upon which the shareholder incurs no federal
income taxes. 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.

ACTIVE ASSETS TAX-FREE TRUST and ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
intend to invest a portion of their assets in certain "private activity bonds".
As a result, a portion of the exempt-interest dividends paid by each Fund will
be an item of tax preference to shareholders subject to the alternative minimum
tax. Certain corporations which are subject to the alternative minimum tax may
also have to include exempt-interest dividends in calculating their alternative
minimum taxable income in situations where the "adjusted current earnings" of
the corporation exceeds its alternative minimum taxable income.

36
<PAGE>

Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term capital gains. Such dividends and distributions are taxable to the
shareholder as ordinary dividend income. Distributions of long-term capital
gains, if any, are taxable as long-term capital gains, regardless of how long
the shareholder has held the applicable Fund's shares. Since each Fund is
expected to be derived entirely from interest rather than dividends, it is
anticipated that no portion of such dividend distributions will be eligible for
the federal dividends received deduction available to corporations.

Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from a Fund in the year they are actually distributed. However, if
any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.

Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by a Fund of any taxable interest income and short term
capital gains.

After the end of each calendar year, shareholders will be sent information
on their dividends and capital gain distributions for tax purposes, including
the portion taxable as ordinary income, the portion taxable as long-term capital
gains and the percentage of any distributions which constitute an item of tax
preference for purposes of the alternative minimum tax.

PURCHASES AND REDEMPTIONS OF THE FUNDS' SHARES. Any dividend or capital
gains distribution received by a shareholder from a Fund will have the effect of
reducing the net asset value of the shareholder's beneficial interest in the
Fund by the exact amount of the dividend or capital gains distribution.
Furthermore, capital gains distributions and some portion of the dividends may
be subject to federal income taxes. If the net asset value of the shares should
be reduced below a shareholder's cost as a result of the payment of dividends or
the distribution of realized long-term capital gains, such payment or
distribution would be in part a return of the shareholder's investment but
nonetheless would be taxable to the shareholder. Therefore, an investor should
consider the tax implications of purchasing a Fund's shares immediately prior to
a distribution record date.

In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less will, for tax purposes, generally result in short-term gains or
losses and those held for more than one year generally result in long-term gain
or loss. Under current law, the maximum tax rate on long-term capital gains
realized by non-corporate shareholders is 20%. Any loss realized by shareholders
upon a sale or redemption of shares within six months of the date of their
purchase will be treated as a long-term capital loss to the extent of any
distributions of net long-term capital gains with respect to such shares during
the six-month period. If a shareholder of a Fund receives exempt-interest
dividends with respect to any share and if such share is held by the shareholder
for six months or less, then any loss on the sale or redemption of such share
may, to the extent of such exempt-interest dividends be disallowed.

Gain or loss on the sale or redemption of shares in a Fund is measured by
the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the tax
basis of their shares. Under certain circumstances a shareholder may compute and
use an average cost basis in determining the gain or loss on the sale or
redemption of shares.

If a shareholder realizes a loss on the redemption of shares and reinvests
in that Fund's shares within 30 days before or after the redemption, the
transactions may be subject to the "wash sale" rules, resulting in a
postponement of the recognition of such loss for tax purposes.

Interest on indebtedness incurred by shareholders to purchase or carry
shares of ACTIVE ASSETS TAX-FREE TRUST or ACTIVE ASSETS CALIFORNIA TAX-FREE
TRUST is not deductible. Furthermore, entities or persons who are "substantial
users" (or related persons) of facilities financed by industrial development
bonds

37
<PAGE>

should consult their tax advisers before purchasing shares of ACTIVE ASSETS
TAX-FREE TRUST or ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST. "Substantial user" is
defined generally by Income Tax Regulation 1.103-11(b) as including a
"non-exempt person" who regularly uses in a trade or business a part of a
facility financed from the proceeds of industrial development bonds.

CALIFORNIA STATE TAX

To the extent that dividends paid by ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
are derived from interest on California tax-exempt securities and on certain
U.S. government securities, such dividends will also be exempt from California
personal income taxes. Under California law, a fund which qualifies as a
regulated investment company must have at least 50% of its total assets invested
in California state and local issues or in U.S. obligations which pay interest
excludable from income or in a combination of such obligations at the end of
each quarter of its taxable year in order to be eligible to pay dividends to
California residents which will be exempt from California personal income taxes.
Unlike federal law, California law provides that no portion of the
exempt-interest dividends will constitute an item of tax preference for
California personal income alternative minimum tax purposes.

For California personal income tax purposes, the shareholders of ACTIVE
ASSETS CALIFORNIA TAX-FREE TRUST will not be subject to tax, or receive a credit
for taxes paid by the Fund, on undistributed capital gains, if any. Under the
California Revenue and Taxation Code, interest on indebtedness incurred or
continued to purchase or carry shares of an investment company paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for state 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 the PROSPECTUS. Distributions
from interest 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.

X. UNDERWRITERS
--------------------------------------------------------------------------------

Each Fund's shares are offered on a continuous basis. The Distributor, as
the principal underwriter of the shares, has certain obligations under the
Distribution Agreement concerning the distribution of the shares. These
obligations and the compensation the Distributor receives are described above in
the sections titled "Principal Underwriter" and "Rule 12b-1 Plan."

XI. CALCULATION OF PERFORMANCE DATA
--------------------------------------------------------------------------------

Each Fund's annualized current yield, as may be quoted from time to time in
advertisements and other communications to shareholders and potential investors,
is computed by determining, for a stated seven-day period, 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 Fund 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).

Each Fund'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
Fund 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.

38
<PAGE>
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the particular Fund 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 Fund and changes in
interest rates on such investments, but also on changes in the Fund's expenses
during the period.

Tax-equivalent yield is computed by dividing that portion of the current
yield (calculated as described above) which is tax-exempt by 1 minus a stated
tax rate and adding the quotient to that portion, if any, of the yield of the
Fund that is not tax-exempt.

Yield information may be useful in reviewing the performance of a Fund 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, each Fund's yield fluctuates.

ACTIVE ASSETS MONEY TRUST'S current yield for the seven days ending
June 30, 2000 was 6.14%. The effective annual yield on June 30, 2000 was 6.32%,
assuming daily compounding.

ACTIVE ASSETS TAX-FREE TRUST'S current yield for the seven days ending
June 30, 2000 was 3.95%. The effective annual yield on June 30, 2000 was 4.03%,
assuming daily compounding. Based upon a Federal personal income tax bracket of
39.6%, ACTIVE ASSETS TAX-FREE TRUST'S tax-equivalent yield for the seven days
ending June 30, 2000 was 6.54%.

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST'S current yield for the seven days
ending June 30, 2000 was 3.60%. The effective annual yield on June 30, 2000 was
3.67%, assuming daily compounding. Based upon a combined Federal and California
personal income tax bracket of 45.22%, ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST'S
tax-equivalent yield for the seven days ended June 30, 2000 was 6.57%.

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST'S current yield for the seven days
ending June 30, 2000 was 5.88%. The effective annual yield on June 30, 2000 was
6.06%, assuming daily compounding.

Each Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of each Fund by adding the sum of all
distributions on 10,000, 50,000 or 100,000 shares of the Fund since inception to
$10,000, $50,000 and $100,000, as the case may be. Investments of $10,000,
$50,000 and $100,000 in ACTIVE ASSETS MONEY TRUST at inception would have grown
to $35,004, $175,020 and $350,040, respectively, at June 30, 2000. Investments
of $10,000, $50,000 and $100,000 in ACTIVE ASSETS TAX-FREE TRUST at inception
would have grown to $21,339, $106,695 and $213,390, respectively at June 30,
2000. Investments of $10,000, $50,000 and $100,000 in ACTIVE ASSETS CALIFORNIA
TAX-FREE TRUST at inception would have grown to $12,376, $61,880 and $123,760,
respectively at June 30, 2000. Investments of $10,000, $50,000 and $100,000 in
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST at inception would have grown to
$32,026, $160,130 and $320,260, respectively at June 30, 2000.

XII. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

EXPERTS. The financial statements of each Fund for its fiscal year ended
June 30, 2000 included in the PROSPECTUS and included and incorporated by
reference in this STATEMENT OF ADDITIONAL INFORMATION have been so included and
incorporated in reliance on the report of Deloitte & Touche LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

*****

This STATEMENT OF ADDITIONAL INFORMATION and the PROSPECTUS do not contain
all of the information set forth in the REGISTRATION STATEMENT the Funds have
filed with the SEC. The complete REGISTRATION STATEMENT may be obtained from the
SEC.

39
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL HIGHLIGHTS

This information for the year ended June 30, 2000 has been audited by
Deloitte & Touche LLP, independent accountants, whose report, along with the
Fund's financial statements, is included in the Prospectus and Statement of
Additional Information. The financial highlights for each of the years in the
four-year period ended June 30, 1999 have been audited by other independent
accountants.

SELECTED PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------------
Net income from investment operations 0.054 0.048 0.052 0.051 0.052
-----------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.054) (0.048) (0.052) (0.051) (0.052)
-----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------------

TOTAL RETURN 5.50% 4.92% 5.38% 5.23% 5.33%
-----------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS:
-----------------------------------------------------------------------------------------------------------------
Expenses 0.42% 0.43% 0.44% 0.45% 0.47%
-----------------------------------------------------------------------------------------------------------------
Net investment income 5.38% 4.78% 5.24% 5.07% 5.21%
-----------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------
Net assets, end of period, in millions $20,972 $15,989 $11,922 $8,928 $7,170
-----------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS MONEY TRUST

40
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS MONEY TRUST

41
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL DESCRIPTION YIELD
AMOUNT IN AND ON DATE OF
THOUSANDS MATURITY DATES PURCHASE VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FINANCE - CORPORATE (3.3%)
$ 200,000 CIT Group Inc.
07/11/00 - 09/19/00..................................... 6.57 - 6.70% $ 198,942,444
490,000 Ciesco, L.P.
07/12/00 - 09/13/00..................................... 6.59 - 6.72 486,272,450
---------------
685,214,894
---------------
INTERNATIONAL BANKS (26.5%)
599,800 Barclays U.S. Funding Corp. 07/05/00 - 07/13/00........... 6.57 - 6.80 599,039,898
200,000 Canadian Imperial Holdings Inc.
09/14/00................................................ 6.71 197,250,000
600,000 Commerzbank U.S. Finance Inc. 08/23/00 - 08/25/00......... 6.74 - 6.75 593,993,222
600,000 Cregem North America Inc. 08/28/00 - 09/19/00............. 6.71 - 6.74 592,855,125
823,150 Deutsche Bank Financial Inc. 07/06/00 - 09/13/00.......... 6.58 - 6.76 817,573,807
320,000 Dresdner U.S. Finance Inc. 07/07/00 - 09/12/00............ 6.56 - 6.70 318,359,336
500,000 National Australia Funding (DE) Inc.
08/04/00 - 10/04/00..................................... 6.46 - 6.63 493,257,222
750,000 Societe Generale N.A. Inc. 08/03/00 - 09/21/00............ 6.63 - 6.76 741,933,806
350,000 Toronto-Dominion Holdings (USA) Inc.
07/24/00................................................ 6.64 348,530,875
873,250 UBS Finance (Delaware) LLC 07/05/00 - 03/16/01............ 6.20 - 7.07 853,518,904
---------------
5,556,312,195
---------------
INVESTMENT BANKERS/BROKERS/SERVICES (2.9%)
621,725 Goldman Sachs Group Inc. 07/03/00 - 08/18/00.............. 6.61 - 6.65 619,316,003
---------------
MAJOR U.S. TELECOMMUNICATIONS (2.5%)
535,000 AT&T Corp.
09/18/00 - 10/11/00..................................... 6.72 - 6.78 525,666,053
---------------
PHARMACEUTICAL (2.9%)
600,000 Merck & Co., Inc.
07/14/00................................................ 6.67 598,559,167
---------------

TOTAL COMMERCIAL PAPER
(COST $14,277,904,614)............................................................. 14,277,904,614
---------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS MONEY TRUST

42
<PAGE>
ACTIVE ASSETS MONEY TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $4,033,800,064).............................................................. 4,033,800,064
---------------

TOTAL CERTIFICATES OF DEPOSIT
(COST $1,950,000,000).............................................................. 1,950,000,000
---------------

SHORT-TERM BANK NOTE (3.4%)
700,000 Bank of America, N.A.
07/07/00 - 07/21/00
(COST $700,000,000)..................................... 6.25 - 6.60 700,000,000
---------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $20,961,704,678) (a) ............................................................ 100.0% 20,961,704,678

OTHER ASSETS IN EXCESS OF LIABILITIES.................................................. 0.0 10,443,566
----- ----------------

NET ASSETS............................................................................. 100.0% $ 20,972,148,244
----- ----------------
----- ----------------
</TABLE>

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

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

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS MONEY TRUST

43
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000

TOTAL ASSETS.......................................................................... 20,980,350,879
---------------

TOTAL LIABILITIES..................................................................... 8,202,635
---------------

NET ASSETS............................................................................ $20,972,148,244
===============

NET ASSET VALUE PER SHARE,
20,972,143,300 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE).......................................... $1.00
===============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS MONEY TRUST

44
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000

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

INTEREST INCOME............................................................................. $1,117,033,652
--------------

TOTAL EXPENSES......................................................................... 80,304,657
--------------

NET INVESTMENT INCOME.................................................................. 1,036,728,995

NET REALIZED GAIN...................................................................... 1,305
--------------

NET INCREASE................................................................................ $1,036,730,300
==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS MONEY TRUST

45
<PAGE>
ACTIVE ASSETS MONEY TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

NET INCREASE......................................................... 1,036,730,300 695,018,942
--------------- ---------------

NET INCREASE......................................................... 4,982,765,611 4,067,702,037

NET ASSETS:
Beginning of period....................................................... 15,989,382,633 11,921,680,596
--------------- ---------------

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS MONEY TRUST

46
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000

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 Fund records dividends and
distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

ACTIVE ASSETS MONEY TRUST

47
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

3. PLAN OF DISTRIBUTION

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, 2000 aggregated $93,531,915,642 and $89,560,410,717,
respectively.

ACTIVE ASSETS MONEY TRUST

48
<PAGE>
ACTIVE ASSETS MONEY TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

5. SHARES OF BENEFICIAL INTEREST

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

ACTIVE ASSETS MONEY TRUST

49
<PAGE>

ACTIVE ASSETS MONEY TRUST
INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF ACTIVE ASSETS MONEY TRUST:

Deloitte & Touche LLP
NEW YORK, NEW YORK
AUGUST 7, 2000

50
<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, 1999

51
<PAGE>

ACTIVE ASSETS MONEY TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS

On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.

On July 1, 2000, the Fund, with the approval of its Board of Trustees and its
Audit Committee, engaged Deloitte & Touche LLP as its new independent
accountants for the year ended June 30, 2000.

ACTIVE ASSETS MONEY TRUST

52
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL HIGHLIGHTS

This information for the year ended June 30, 2000 has been audited by
Deloitte & Touche LLP, independent accountants, whose report, along with the
Fund's financial statements, is included in the Prospectus and Statement of
Additional Information. The financial highlights for each of the years in the
four-year period ended June 30, 1999 have been audited by other independent
accountants.

SELECTED PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------------
Net income from investment operations 0.031 0.027 0.031 0.030 0.031
-----------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.031) (0.027) (0.031) (0.030) (0.031)
-----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------------

TOTAL RETURN 3.15% 2.73% 3.11% 3.05% 3.12%
-----------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS:
-----------------------------------------------------------------------------------------------------------------
Expenses 0.50% 0.52% 0.54% 0.55% 0.55%
-----------------------------------------------------------------------------------------------------------------
Net investment income 3.11% 2.68% 3.05% 2.98% 3.08%
-----------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------
Net assets, end of period, in millions $2,660 $2,290 $1,869 $1,634 $1,542
-----------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

53
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

54
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA
$45,000 Dade County, Water & Sewer Ser 1994 (FGIC).................. 4.70 % 07/10/00 $ 45,000,000
22,650 Dade County Industrial Development Authority, Dolphins
Stadium Ser 1985 B & C.................................... 4.95 07/10/00 22,650,000
4,700 Jacksonville Electric Authority, Electric System Ser C...... 4.55 07/03/00 4,700,000
25,000 Jacksonville Health Facilities Authority, Charity Obligated
Group Ser 1997 C (MBIA)................................... 4.75 07/10/00 25,000,000
20,000 Pasco County School Board, Ser 1996 COPs (AMBAC)............ 4.75 07/10/00 20,000,000
Putnam County Development Authority, Seminole Electric Co-op
Inc
24,000 Ser 1984 D (NRU-CFC Gtd).................................. 4.35 12/15/00 24,000,000
13,265 Ser 1984 H-3 (NRU-CFC Gtd)................................ 4.05 09/15/00 13,265,000
19,400 Volusia County Health Facilities Authority, Pooled Ser 1985
(FGIC)**.................................................. 4.85 07/10/00 19,400,000
GEORGIA
21,000 Albany-Dougherty County Hospital Authority, Phoebe-Putney
Memorial Hospital Ser 1991 (AMBAC)**...................... 4.80 07/10/00 21,000,000
7,000 Clayton County, Delta Airlines Project Ser 2000 A........... 4.70 07/10/00 7,000,000
13,900 Clayton County Hospital Authority, Southern Regional Medical
Center Ser 1998B**........................................ 4.80 07/10/00 13,900,000
IDAHO
8,755 Idaho Health Facilities Authority, St Luke's Regional
Medical Center Ser 1995................................... 4.60 07/03/00 8,755,000
ILLINOIS
15,000 Chicago, Tender Notes Ser 2000 A............................ 3.90 12/07/00 15,000,000
33,000 Illinois Development Finance Authority, Palos Community
Hospital Ser 1994......................................... 4.80 07/10/00 33,000,000
Illinois Health Facilities Authority,
6,200 Northwestern Memorial Hospital Ser 1995..................... 4.60 07/03/00 6,200,000
4,550 Resurrection Health Care System Ser 1999A (FSA)............. 4.65 07/03/00 4,550,000
INDIANA
8,500 Indiana Development Finance Authority, Southern Indiana
Gas & Electric Co 1998 Ser A.............................. 4.30 03/01/01 8,500,000
21,200 Indiana Hospital Equipment Financing Authority, Ser 1985 A
(MBIA).................................................... 4.85 07/10/00 21,200,000
22,300 Indianapolis, Res Recov Ogden Martin Systems Inc Ser 1987
(AMT)..................................................... 4.55 07/03/00 22,300,000
8,400 Petersburg, Indianapolis Power & Light Co Ser 1995B
(AMBAC)................................................... 4.80 07/10/00 8,400,000
KENTUCKY
7,000 Jamestown, Union Underwear Co 1983 Ser A.................... 4.95 07/10/00 7,000,000
13,000 Louisville & Jefferson County Regional Airport Authority,
United Parcel Service Worldwide Forwarding Inc 1999 Ser C
(AMT)..................................................... 4.55 07/03/00 13,000,000
LOUISIANA
14,500 New Orleans Aviation Board, Ser 1993 B (MBIA)............... 4.80 07/10/00 14,500,000
MARYLAND
Maryland Health & Higher Educational Facilities Authority,
6,900 Johns Hopkins Hospital Ser A.............................. 4.90 07/10/00 6,900,000
9,720 North Arundel Hospital Ser 1997A............................ 4.80 07/10/00 9,720,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

55
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$15,860 Washington Suburban Sanitary District, 1998 Ser BANs........ 4.75 % 07/10/00 $ 15,860,000
MASSACHUSETTS
34,000 Massachusetts, Refg 1998 Ser A.............................. 4.50 07/10/00 34,000,000
Massachusetts Health & Educational Facilities Authority,
9,900 Amherst College Ser F..................................... 4.70 07/10/00 9,900,000
13,000 Capital Asset Ser D (MBIA).................................. 4.45 07/03/00 13,000,000
41,690 Harvard University Ser 1985 I............................... 4.50 07/10/00 41,690,000
16,205 Williams College Ser E...................................... 4.55 07/10/00 16,205,000
26,000 Massachusetts Water Resources Authority, Multi-Modal Sub
1999 Ser B................................................ 4.40 07/10/00 26,000,000
MICHIGAN
Delta County Economic Development Corporation, Mead-Escanaba
Paper Co
6,900 Ser 1985 C................................................ 4.45 07/03/00 6,900,000
5,000 Ser 1985 E................................................ 4.50 07/03/00 5,000,000
3,500 Michigan Strategic Fund, Detroit Edison Co Ser 1995 CC...... 4.60 07/03/00 3,500,000
MINNESOTA
1,700 Beltrami County, Environmental Northwood Panelboard Co
Ser 1991.................................................. 4.45 07/03/00 1,700,000
30,985 Minneapolis, Convention Center Ser 1999..................... 4.60 07/10/00 30,985,000
4,900 Minneapolis & St Paul Housing & Redevelopment Authority,
Children's Health Care Ser 1995B (FSA).................... 4.65 07/03/00 4,900,000
20,000 University of Minnesota Regents, Ser 1999A.................. 4.80 07/10/00 20,000,000
MISSOURI
4,000 Columbia, Water & Electric Ser B............................ 4.75 07/10/00 4,000,000
22,200 Missouri Health & Educational Facilities Authority,
Washington University Ser 1996 C & 2000 B................. 4.50 07/03/00 22,200,000
NEVADA
Clark County,
30,000 Airport Impr Refg 1993 Ser A (MBIA)....................... 4.70 07/10/00 30,000,000
9,000 Airport Sub Lien Ser 1999 B-1 (AMT)....................... 4.80 07/10/00 9,000,000
NEW HAMPSHIRE
10,000 New Hampshire Higher Educational & Health Facilities
Authority, St Paul's School Ser 1998...................... 4.75 07/10/00 10,000,000
NEW JERSEY
32,500 New Jersey Educational Facilities Authority, College of New
Jersey Ser 1999A (AMBAC).................................. 4.45 07/10/00 32,500,000
22,800 New Jersey Turnpike Authority, Ser 1991 D (FGIC)............ 4.20 07/10/00 22,800,000
NEW MEXICO
23,500 Albuquerque, Airport Sub Lien Ser 1995 (AMBAC).............. 4.70 07/10/00 23,500,000
NEW YORK
6,000 New York City, 1992 Ser D (FGIC)............................ 4.65 07/10/00 6,000,000
2,150 New York City Municipal Water Finance Authority, 1994 Ser C
(FGIC).................................................... 4.45 07/03/00 2,150,000
11,000 New York State Dormitory Authority, Cornell University
Ser 1990B................................................. 4.45 07/03/00 11,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

56
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
New York State Local Government Assistance Corporation,
$14,800 Ser 1994B................................................. 4.35 % 07/10/00 $ 14,800,000
9,600 Ser 1995G................................................. 4.40 07/10/00 9,600,000
4,100 Port Authority of New York & New Jersey, Ser 2.............. 4.30 07/03/00 4,100,000
NORTH CAROLINA
9,705 Charlotte, Airport Refg Ser 1993A (MBIA).................... 4.70 07/10/00 9,705,000
23,500 Charlotte-Mecklenberg Hospital Authority, Health Care System
Ser C..................................................... 4.65 07/10/00 23,500,000
14,800 Durham, Ser 1993A COPs...................................... 4.85 07/10/00 14,800,000
North Carolina Educational Facilities Finance Agency,
7,000 The Bowman Gray School of Medicine Ser 1996............... 4.90 07/10/00 7,000,000
23,200 Duke University Ser 1987A & 1991B......................... 4.75 07/10/00 23,200,000
NORTH DAKOTA
12,000 North Dakota Housing Finance Agency, Housing Finance Program
2000 Ser B (AMT).......................................... 4.25 03/01/01 12,000,000
OHIO
9,800 Cleveland, Airport System Ser 1997 D (AMT).................. 4.80 07/10/00 9,800,000
11,300 Columbus, Unlimited Tax Ser 1995-1.......................... 4.60 07/10/00 11,300,000
1,300 Ohio Air Quality Development Authority, Sohio Air-British
Petroleum Co Ser 1995..................................... 4.50 07/03/00 1,300,000
OKLAHOMA
Oklahoma Water Resources Board,
34,205 State Loan Program Ser 1994A & Ser 1995................... 4.05 09/01/00 34,205,000
15,000 State Loan Program Ser 1999............................... 4.10 09/01/00 15,000,000
OREGON
20,000 Oregon, Veterans' Ser 73 E.................................. 4.75 07/10/00 20,000,000
PENNSYLVANIA
3,100 Delaware County Industrial Development Authority, United
Parcel Service of America Inc Ser 1985.................... 4.45 07/03/00 3,100,000
2,800 Lehigh County General Purpose Authority, Lehigh Valley
Hospital Ser 1999 B (MBIA)................................ 4.50 07/03/00 2,800,000
Pennsylvania Higher Education Assistance Agency,
8,000 1999 Ser A (AMBAC) (AMT).................................. 4.80 07/10/00 8,000,000
16,500 Student Loan 1997 Ser A (AMT)............................. 5.10 07/10/00 16,500,000
20,000 Pennsylvania Turnpike Commission, Ser Q of 1998............. 4.50 07/03/00 20,000,000
6,400 Philadelphia Industrial Development Authority, The Fox Chase
Cancer Center Ser 1997.................................... 4.50 07/03/00 6,400,000
24,800 York General Authority, Harrisburg School District Subser
1996B (AMBAC)............................................. 4.75 07/10/00 24,800,000
SOUTH CAROLINA
14,385 York County, North Carolina Electric Membership Corporation,
Ser 1984 N-5 (NRU-CFC Gtd)................................ 4.05 09/15/00 14,385,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

57
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TENNESSEE
$ 9,900 Chattanooga-Hamilton County Hospital Authority, Erlanger
Medical Center Ser 1987................................... 4.55 % 07/03/00 $ 9,900,000
64,050 Montgomery County Public Building Authority, County Pool
Ser 1997 & 1999........................................... 4.75 07/10/00 64,050,000
TEXAS
28,000 Dallas Area Rapid Transit, North Central Light Rail
Ser 2000.................................................. 4.75 07/10/00 28,000,000
6,100 Harris County Health Facilities Development Corporation, St
Luke's Episcopal Hospital Ser 1997 A...................... 4.55 07/03/00 6,100,000
24,400 Harris County, Toll Road Unlimited Tax Sub Lien Ser 1994
E......................................................... 4.70 07/10/00 24,400,000
10,000 Texas Municipal Gas Corporation, Senior Lien Gas Reserve
Ser 1998.................................................. 4.70 07/10/00 10,000,000
UTAH
20,000 Intermountain Power Agency, 1985 Ser E (AMBAC).............. 4.075 09/15/00 20,000,000
18,500 Salt Lake City, IHC Health Services Inc Ser 1990 B.......... 4.75 07/10/00 18,500,000
14,375 Utah County Environmental Improvement, USX Corp Ser 1995.... 3.85 10/05/00 14,375,000
VERMONT
40,700 Vermont Educational & Health Buildings Financing Agency,
Fletcher Allen Health Care Ser 2000B (AMBAC).............. 4.70 07/10/00 40,700,000
WASHINGTON
15,000 Port of Seattle, 1997 Ser A (AMT)........................... 4.95 07/10/00 15,000,000
20,300 Washington, Ser 1996 A...................................... 4.80 07/10/00 20,300,000
WISCONSIN
9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT)................ 5.10 07/10/00 9,500,000
WYOMING
14,000 Lincoln County, Exxon Corp Ser 1987 B (AMT)................. 4.55 07/03/00 14,000,000
PUERTO RICO
4,000 Puerto Rico Government Development Bank, Refg Ser 1985
(MBIA).................................................... 4.60 07/10/00 4,000,000
--------------

TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(COST $1,754,890,000).......................................................... 1,754,890,000
--------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

58
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

59
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, 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>
NEBRASKA
Nebraska Public Power District,
$10,000 Ser A Notes.................................... 4.00 % 07/31/00 4.00% $ 10,000,000
12,000 Ser A Notes.................................... 4.20 09/13/00 4.20 12,000,000
NEW HAMPSHIRE
New Hampshire State Business Finance Authority,
17,000 New England Power Co Ser 1993 A (AMT).......... 4.45 07/24/00 4.45 17,000,000
6,500 New England Power Co Ser 1993 B................ 4.65 07/20/00 4.65 6,500,000
18,600 New England Power Co Ser 1993 B................ 4.40 07/25/00 4.40 18,600,000
NEW YORK
6,500 Long Island Power Authority, Electric System
Subser 3....................................... 4.00 08/10/00 4.00 6,500,000
7,200 Metropolitan Transportation Authority, Transit
Facilities
Ser CP-1 Subser A BANs......................... 4.05 08/08/00 4.05 7,200,000
25,000 New York City Municipal Water Finance Authority,
Ser 3 Resolution............................... 3.95 07/13/00 3.95 25,000,000
7,900 New York State Power Authority, Ser 4............ 3.95 07/19/00 3.95 7,900,000
OKLAHOMA
Oklahoma City Industrial & Cultural Facilities
Trust,
10,000 SSM Healthcare Ser 1998 B (MBIA)............... 3.90 07/18/00 3.90 10,000,000
8,000 SSM Healthcare Ser 1998 B (MBIA)............... 3.90 07/19/00 3.90 8,000,000
8,895 SSM Healthcare Ser 1998 B (MBIA)............... 4.50 08/22/00 4.50 8,895,000
PENNSYLVANIA
9,100 Delaware County Industrial Development Authority,
PECO Energy Co Ser 1988 C (FGIC)............... 4.05 08/10/00 4.05 9,100,000
12,000 Montgomery County Industrial Development
Authority, PECO Energy Co Ser 1994 A........... 4.50 09/06/00 4.50 12,000,000
SOUTH CAROLINA
South Carolina Public Service Authority,
13,700 Santee Cooper Ser 1998......................... 4.20 08/17/00 4.20 13,700,000
30,000 Santee Cooper Ser 1998......................... 4.65 09/07/00 4.65 30,000,000
10,000 Santee Cooper Ser 1998......................... 4.35 09/20/00 4.35 10,000,000
7,000 Santee Cooper Ser 1998......................... 4.45 10/11/00 4.45 7,000,000
TEXAS
15,000 Bexar Metropolitan Water District, Ser 1997...... 4.50 08/17/00 4.50 15,000,000
8,000 Dallas Area Rapid Transit, Sales Tax Ser A....... 3.95 07/26/00 3.95 8,000,000
14,000 Houston, 1993 Ser A.............................. 4.10 09/14/00 4.10 14,000,000
Houston,
13,000 Water & Sewer 1994 Ser A....................... 4.10 07/19/00 4.10 13,000,000
13,500 Water & Sewer 1994 Ser A....................... 3.85 07/20/00 3.85 13,500,000
10,000 Water & Sewer 1994 Ser A....................... 3.85 07/25/00 3.85 10,000,000
10,000 Texas A&M University, Ser 1993 B................. 4.20 09/08/00 4.20 10,000,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

60
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

TOTAL TAX-EXEMPT COMMERCIAL PAPER
(COST $778,735,000)............................................................. 778,735,000
--------------

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

61
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

TOTAL SHORT-TERM MUNICIPAL NOTES & BONDS
(COST $176,533,653)............................................................. 176,533,653
--------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $2,710,158,653) (a).......................................... 101.9% 2,710,158,653

LIABILITIES IN EXCESS OF OTHER ASSETS.............................. (1.9) (49,814,849)
--------- ---------------

NET ASSETS......................................................... 100.0% $ 2,660,343,804
--------- ---------------
--------- ---------------
</TABLE>

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

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

62
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000

TOTAL ASSETS........................................................................... 2,727,115,136
--------------

TOTAL LIABILITIES...................................................................... 66,771,332
--------------

NET ASSETS............................................................................. $2,660,343,804
==============

NET ASSET VALUE PER SHARE,
2,660,376,730 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)........................................... $1.00
==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

63
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000

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

INTEREST INCOME................................................................................ $92,746,848
-----------

TOTAL EXPENSES............................................................................ 12,946,193

Less: expense offset........................................................................... (106,399)
-----------

NET EXPENSES.............................................................................. 12,839,794
-----------

NET INVESTMENT INCOME..................................................................... 79,907,054

NET REALIZED LOSS......................................................................... (32,269)
-----------

NET INCREASE................................................................................... $79,874,785
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

64
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

NET INCREASE........................................................... 79,874,785 58,639,982
-------------- --------------

NET INCREASE........................................................... 370,534,064 420,418,896

NET ASSETS:
Beginning of period......................................................... 2,289,809,740 1,869,390,844
-------------- --------------

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS TAX-FREE TRUST

65
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000

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 Fund records dividends and
distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding
$500 million; 0.425% to the portion of daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of daily net assets
exceeding $750 million but not

ACTIVE ASSETS TAX-FREE TRUST

66
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

3. PLAN OF DISTRIBUTION

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under
the Act, finances certain expenses in connection therewith.

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, 2000 aggregated $5,356,487,672 and $5,069,860,950,
respectively.

The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended June 30, 2000, included
in Trustees' fees and expenses in the Statement of Operations amounted to
$5,973. At June 30, 2000, the Fund had an accrued pension liability of $51,839
which is included in accrued expenses in the Statement of Assets and
Liabilities.

ACTIVE ASSETS TAX-FREE TRUST

67
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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, 2000 JUNE 30, 1999
--------------- ---------------
<S> <C> <C>
Shares sold...................................................... 9,830,192,933 7,461,949,724
Shares issued in reinvestment of dividends and distributions..... 79,907,189 58,638,919
--------------- ---------------
9,910,100,122 7,520,588,643
Shares repurchased............................................... (9,539,533,654) (7,100,170,810)
--------------- ---------------
Net increase in shares outstanding............................... 370,566,468 420,417,833
=============== ===============
</TABLE>

6. FEDERAL INCOME TAX STATUS

ACTIVE ASSETS TAX-FREE TRUST

68
<PAGE>

ACTIVE ASSETS TAX-FREE TRUST
INDEPENDENT AUDITORS' REPORT

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

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. Our procedures included confirmation of securities owned at
June 30, 2000 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

Deloitte & Touche LLP
NEW YORK, NEW YORK
AUGUST 7, 2000

2000 FEDERAL TAX NOTICE (UNAUDITED)

69
<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 statement of changes in net assets and the financial
highlights of Active Assets Tax-Free Trust (the "Fund") (not presented
separately herein) presents fairly, in all material respects, the changes in its
net assets for the year ended June 30, 1999 and the financial highlights for
each of the four years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. This financial statement and financial
highlights (hereafter referred to as "financial statements") (are the
responsibility of the Fund'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 provide a reasonable basis for the opinion expressed above. We have not
audited the financial statements or financial highlights of the Fund for any
period subsequent to June 30, 1999.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
August 5, 1999

70
<PAGE>

ACTIVE ASSETS TAX-FREE TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS

On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.

On July 1, 2000, the Fund, with the approval of its Board of Trustees and its
Audit Committee, engaged Deloitte & Touche LLP as its new independent
accountants for the year ended June 30, 2000.

ACTIVE ASSETS TAX-FREE TRUST

71
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL HIGHLIGHTS

The information for the year ended June 30, 2000 has been audited by Deloitte &
Touche LLP, independent accountants, whose report, along with the Fund's
financial statements, is included in the Prospectus and Statement of Additional
Information. The financial highlights for each of the years in the four-year
period ended June 30, 1999 have been audited by other independent accountants.

SELECTED PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------------
Net income from investment operations 0.026 0.023 0.028 0.028 0.028
-----------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.026) (0.023) (0.028) (0.028) (0.028)
-----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------------

TOTAL RETURN 2.60% 2.31% 2.84% 2.83% 2.82%
-----------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS:
-----------------------------------------------------------------------------------------------------------------
Expenses 0.61% 0.63%(1) 0.64% 0.66%(1) 0.67%
-----------------------------------------------------------------------------------------------------------------
Net investment income 2.55% 2.28% 2.79% 2.78% 2.79%
-----------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $697,703 $625,753 $549,779 $431,382 $384,218
-----------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Does not reflect the effect of expense offset of 0.01%.

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

72
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000

<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 (70.6%)
$10,000 ABAG Finance Authority for Nonprofit Corporations,
Episcopal Homes Foundation Ser 2000 COPs.............. 4.40% 07/10/00 $ 10,000,000
10,850 Anaheim, 1993 COPs (AMBAC).............................. 4.30 07/10/00 10,850,000
20,300 Big Bear Lake, Southwest Gas Corp 1993 Ser A (AMT)...... 4.45 07/10/00 20,300,000
11,970 California Alternative Energy Source Financing
Authority, General Electric Capital Corp-Arroyo Energy
1993 Ser B (AMT)**.................................... 4.30 07/10/00 11,970,000
California Educational Facilities Authority,
10,000 California Institute of Technology Ser 1994........... 4.30 07/10/00 10,000,000
15,165 Stanford University Ser L-5........................... 4.30 07/10/00 15,165,000
California Health Facilities Financing Authority,
11,000 Adventist Health System/West 1998 Ser A (MBIA)........ 4.00 07/03/00 11,000,000
14,000 Memorial Health Services 1994 Ser..................... 4.40 07/10/00 14,000,000
3,825 St Joseph Health System Ser 1985A..................... 4.15 07/03/00 3,825,000
California Housing Finance Agency,
6,600 Home Mortgage 2000 Ser G (AMT) (FSA).................. 4.35 07/10/00 6,600,000
9,150 Single Family Mortgage 1999 Ser E (AMT)............... 3.40 08/01/00 9,150,000
California Pollution Control Financing Authority,
5,040 Chevron USA Inc Ser 1983.............................. 3.80 11/15/00 5,042,196
4,000 Chevron USA Inc Ser 1984.............................. 4.15 05/15/01 4,000,000
10,485 Chevron USA Inc Ser 1984B............................. 4.25 06/15/01 10,489,463
24,500 California Public Capital Improvements Financing
Authority, Pooled Ser 1988 C.......................... 4.00 09/15/00 24,500,000
California Statewide Communities Development Authority,
15,500 John Muir/Mt Diablo Health System Ser 1997 COPs
(AMBAC)............................................... 4.00 07/03/00 15,500,000
6,100 St Joseph Health System COPs **....................... 4.35 07/10/00 6,100,000
9,300 Contra Costa County, Multi-Family The Park Regency 1992
Ser A (AMT)........................................... 4.40 07/10/00 9,300,000
10,000 Eastern Municipal Water District, Water & Sewer
Ser 1993B COPs (FGIC)................................. 4.25 07/10/00 10,000,000
4,200 Elsinore Valley Municipal Water District, Ser 2000 A
COPs (FGIC)........................................... 4.25 07/10/00 4,200,000
10,500 Fremont, Creekside Village Multi-Family Issue D of
1985.................................................. 4.35 07/10/00 10,500,000
Irvine Assessment District,
4,500 No 87-8 Improvement Bond Act 1915..................... 4.15 07/03/00 4,500,000
3,555 No 94-13 Improvement Bond Act 1915.................... 4.15 07/03/00 3,555,000
9,562 No 97-17 Improvement Bond Act 1915.................... 4.15 07/03/00 9,562,000
3,400 Irvine Ranch Water District, 1986 Capital Improvement
COPs.................................................. 3.50 07/03/00 3,400,000
Los Angeles, Multi-Family
7,300 1985 Ser K............................................ 4.40 07/10/00 7,300,000
4,500 1994 Ser A (AMT)...................................... 4.30 07/03/00 4,500,000
7,755 Los Angeles County Metropolitan Transportation
Authority, Prop C Sales Tax Refg Ser 1993-A (MBIA).... 4.25 07/10/00 7,755,000
2,100 Los Angeles County Transportation Commission, Sales Tax
Ser 1992-A (FGIC)..................................... 4.30 07/10/00 2,100,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

73
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
-----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Los Angeles Department of Water & Power, Electric Plant
$28,000 Second Issue of 2000 Ser A & D........................ 4.25% 07/10/00 $ 28,000,000
2,700 M-S-R Public Power Agency, San Juan Sub Lien Ser 1998F
(MBIA)................................................ 4.15 07/03/00 2,700,000
Metropolitan Water District of Southern California,
6,000 Water 1998 Ser C...................................... 4.15 07/10/00 6,000,000
5,600 Water 1999 Ser C...................................... 4.15 07/03/00 5,600,000
3,000 Monterey County Financing Authority, 1995 Ser A......... 4.30 07/10/00 3,000,000
16,300 Monterey Peninsula Water Management District, Wastewater
Ser 1992 COPs......................................... 4.45 07/10/00 16,300,000
16,000 Newport Beach, Hoag Memorial Hospital Presbyterian
Ser 1992 & 1996 Ser B................................. 4.25 07/03/00 16,000,000
12,800 Oakland-Alameda County Coliseum Authority, Oakland
Coliseum 2000 Refg Ser C-2............................ 4.40 07/10/00 12,800,000
Oakland Joint Powers Financing Authority,
12,000 1998 Ser A-1 (FSA)**.................................. 4.25 07/10/00 12,000,000
7,100 1998 Ser A-2 (FSA).................................... 4.25 07/10/00 7,100,000
22,100 Rancho California Water District Financing Authority,
Ser of 1998A (FGIC)................................... 4.25 07/10/00 22,100,000
3,800 Redlands, Orange Village Apts 1988 Ser A (AMT).......... 4.30 07/10/00 3,800,000
7,345 Sacramento County, Administration Center & Courthouse
1990 COPs............................................. 4.35 07/10/00 7,345,000
20,000 San Bernardino County, Medical Center Financing
Ser 1998 COPs (MBIA).................................. 4.70 07/10/00 20,000,000
3,415 San Jacinto Unified School District, 1997 COPs (FSA).... 4.35 07/10/00 3,415,000
7,200 San Jose Redevelopment Agency, Merged Area 1996
Ser B................................................. 4.40 07/10/00 7,200,000
10,000 Santa Clara County Financing Authority, Valley Medical
Center 1994 Ser B..................................... 4.30 07/10/00 10,000,000
10,000 Southern California Public Power Authority, Transmission
1991 Sub
Refg Ser (AMBAC)...................................... 4.30 07/10/00 10,000,000
10,000 Stanislaus Waste-to-Energy Financing Agency, Ogden
Martin Systems Inc Ser 2000 (MBIA).................... 4.35 07/10/00 10,000,000
6,200 Turlock Irrigation District, 1988 Ser A................. 4.25 07/10/00 6,200,000
15,060 West Basin Municipal Water District, Ser 1997B COPs..... 4.25 07/10/00 15,060,000

PUERTO RICO
3,000 Puerto Rico Government Development Bank, Refg Ser 1985
(MBIA)................................................ 4.60 07/10/00 3,000,000
--------------

TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(COST $492,783,659)........................................................... 492,783,659
--------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

74
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
COUPON MATURITY YIELD TO
PRINCIPAL MATURITY
AMOUNT IN ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER (22.4%)
California Pollution Control Financing
Authority,
$ 9,000 Southern California Edison Co Ser 1985 A... 4.10% 07/19/00 4.10% $ 9,000,000
7,500 Southern California Edison Co Ser 1985 A... 3.90 10/12/00 3.90 7,500,000
East Bay Municipal Utility District,
4,000 Water...................................... 3.25 07/27/00 3.25 4,000,000
5,000 Water Ser 1997............................. 2.90 07/11/00 2.90 5,000,000
Los Angeles,
8,000 Wastewater Ser 1997........................ 3.30 08/08/00 3.30 8,000,000
14,000 Wastewater Ser 1997........................ 3.95 08/14/00 3.95 14,000,000
10,000 Los Angeles County Metropolitan
Transportation Authority, Sales Tax
Ser A...................................... 3.85 09/07/00 3.85 10,000,000
5,000 Sacramento Municipal Utility District,
Ser I...................................... 3.30 09/21/00 3.30 5,000,000
San Diego,
11,500 San Diego Gas & Electric Co 1995 Ser B..... 3.85 08/22/00 3.85 11,500,000
9,000 San Diego Gas & Electric Co 1995 Ser B..... 3.80 09/12/00 3.80 9,000,000
8,000 San Diego County Water Authority, Ser #1..... 3.30 07/12/00 3.30 8,000,000
14,000 San Francisco Bay Area Transit Financing
Authority, Ser 1992 B...................... 3.95 09/06/00 3.95 14,000,000
3,325 San Francisco Airport Commission, San
Francisco International Airport
Ser 1997 A (AMT)........................... 3.40 08/15/00 3.40 3,325,000
University of California Regents,
14,000 Ser A...................................... 3.00 08/10/00 3.00 14,000,000
5,000 Ser A...................................... 3.95 10/10/00 3.95 5,000,000
5,000 Ser A...................................... 3.90 10/11/00 3.90 5,000,000

TOTAL CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER
(COST $156,169,000).......................................................... 156,169,000
------------

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

75
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000, CONTINUED

<TABLE>
<CAPTION>
COUPON MATURITY YIELD TO
PRINCIPAL MATURITY
AMOUNT IN ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
$ 8,000 Ventura County, Ser 1999 TRANs, dtd
07/01/99................................... 4.00% 07/06/00 3.20% $ 8,000,846
------------

TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL NOTES
(COST $69,265,761)........................................................... 69,265,761
------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $718,218,420) (a)................................................................... 102.9% 718,218,420

LIABILITIES IN EXCESS OF OTHER ASSETS..................................................... (2.9) (20,515,647)
----- -------------

NET ASSETS................................................................................ 100.0% $ 697,702,773
----- -------------
----- -------------
</TABLE>

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

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

76
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000

TOTAL ASSETS............................................................................. 726,396,468
------------

TOTAL LIABILITIES........................................................................ 28,693,695
------------

NET ASSETS............................................................................... $697,702,773
============

NET ASSET VALUE PER SHARE,
697,723,419 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)............................................. $1.00
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

77
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000

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

INTEREST INCOME................................................................................ $23,579,858
-----------

TOTAL EXPENSES............................................................................ 4,570,276

Less: expense offset........................................................................... (33,709)
-----------

NET EXPENSES.............................................................................. 4,536,567
-----------

NET INVESTMENT INCOME:.................................................................... 19,043,291

NET REALIZED LOSS......................................................................... (21,138)
-----------

NET INCREASE................................................................................... $19,022,153
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

78
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

NET INCREASE............................................................... 19,022,153 14,766,018

NET INCREASE............................................................... 71,949,491 75,973,951

NET ASSETS:
Beginning of period............................................................. 625,753,282 549,779,331
------------ ------------

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

79
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000

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 Fund records dividends
and distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

80
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under
the Act, finances certain expenses in connection therewith.

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, 2000 aggregated $1,658,528,920 and $1,642,563,950,
respectively.

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

81
<PAGE>
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

5. SHARES OF BENEFICIAL INTEREST

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

6. FEDERAL INCOME TAX STATUS

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

82
<PAGE>

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
INDEPENDENT AUDITORS' REPORT

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

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. Our procedures included confirmation of securities owned at
June 30, 2000 by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

Deloitte & Touche LLP
NEW YORK, NEW YORK
AUGUST 7, 2000

2000 FEDERAL TAX NOTICE (UNAUDITED)

83
<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 statement of changes in net assets and the financial
highlights of Active Assets California Tax-Free Trust (the "Fund") (not
presented separately herein) presents fairly, in all material respects, the
changes in its net assets for the year ended June 30, 1999 and the financial
highlights for each of the four years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. This financial
statement and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund'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 provide a reasonable basis for the opinion expressed above. We have not
audited the financial statements or financial highlights of the Fund for any
period subsequent to June 30, 1999.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
August 5, 1999

84
<PAGE>

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS

On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.

On July 1, 2000, the Fund, with the approval of its Board of Trustees and its
Audit Committee, engaged Deloitte & Touche LLP as its new independent
accountants for the year ended June 30, 2000.

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

85
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS

The information for the year ended June 30, 2000 has been audited by Deloitte &
Touche LLP, independent accountants, whose report, along with the Fund's
financial statements, is included in the Prospectus and Statement of Additional
Information. The financial highlights for each of the years in the four-year
period ended June 30, 1999 have been audited by other independent accountants.

SELECTED PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------------
Net income from investment operations 0.050 0.045 0.049 0.048 0.049
-----------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.050) (0.045) (0.049) (0.048) (0.049)
-----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------------

TOTAL RETURN 5.17% 4.64% 5.05% 4.92% 5.03%
-----------------------------------------------------------------------------------------------------------------

RATIOS TO AVERAGE NET ASSETS:
-----------------------------------------------------------------------------------------------------------------
Expenses 0.59% 0.61% 0.63% 0.64% 0.65%
-----------------------------------------------------------------------------------------------------------------
Net investment income 5.03% 4.50% 4.93% 4.78% 4.93%
-----------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $932,466 $995,448 $698,977 $620,449 $571,400
-----------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

86
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS JUNE 30, 2000

TOTAL U.S. GOVERNMENT AGENCIES
(COST $879,059,920).................................................................... 879,059,920
------------

U.S. GOVERNMENT OBLIGATION (0.8%)
7,000 U.S. Treasury Bill
09/07/00
(COST $6,923,047)............................................... 6.00 6,923,047
------------

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $932,982,967) (b)............................................................ 100.1% 932,982,967

LIABILITIES IN EXCESS OF OTHER ASSETS.............................................. (0.1) (516,975)
----- -------------

NET ASSETS......................................................................... 100.0% $ 932,465,992
----- -------------
----- -------------
</TABLE>

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

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

87
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000

TOTAL ASSETS............................................................................. 933,023,890
------------

TOTAL LIABILITIES........................................................................ 557,898
------------

NET ASSETS............................................................................... $932,465,992
============

NET ASSET VALUE PER SHARE,
932,465,487 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)............................................. $1.00
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

88
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000

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

INTEREST INCOME................................................................................ $56,610,477
-----------

TOTAL EXPENSES............................................................................ 5,886,325
-----------

NET INVESTMENT INCOME:.................................................................... 50,724,152

NET REALIZED GAIN......................................................................... 10,475
-----------

NET INCREASE................................................................................... $50,734,627
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

89
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED

STATEMENT OF CHANGES IN NET ASSETS

NET INCREASE............................................................... 50,734,627 40,934,726
------------ ------------

NET INCREASE (DECREASE).................................................... (62,981,551) 296,470,479

NET ASSETS:
Beginning of period............................................................. 995,447,543 698,977,064
------------ ------------

SEE NOTES TO FINANCIAL STATEMENTS

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

90
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000

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 Fund records dividends
and distributions to shareholders as of the close of each business day.

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets exceeding
$750 million but not

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

91
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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

Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under
the Act, finances certain expenses in connection therewith.

The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the Fund'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 Fund's average
daily net assets during the month. Expenses incurred by the Distributor pursuant
to the Plan in any fiscal year will not be reimbursed by the Fund through
payments accrued in any subsequent fiscal year. For the year ended June 30,
2000, 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, 2000 aggregated $19,647,404,750 and $19,762,858,424,
respectively.

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

92
<PAGE>
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000, CONTINUED

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, 2000 JUNE 30, 1999
--------------- ---------------
<S> <C> <C>
Shares sold...................................................... 3,996,050,976 3,141,395,012
Shares issued in reinvestment of dividends and distributions..... 50,670,672 40,910,486
-------------- --------------
4,046,721,648 3,182,305,498
Shares repurchased............................................... (4,109,703,276) (2,885,835,385)
-------------- --------------
Net increase (decrease) in shares outstanding.................... (62,981,628) 296,470,113
============== ==============
</TABLE>

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

93
<PAGE>

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF ACTIVE ASSETS GOVERNMENT SECURITIES TRUST:

Deloitte & Touche LLP
NEW YORK, NEW YORK
AUGUST 7, 2000

94
<PAGE>

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Trustees of
Active Assets Government Securities Trust

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
August 5, 1999

95
<PAGE>

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS

On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.

On July 1, 2000, the Fund, with the approval of its Board of Trustees and its
Audit Committee, engaged Deloitte & Touche LLP as its new independent
accountants for the year ended
June 30, 2000.

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

96
<PAGE>

ACTIVE ASSETS TAX-FREE TRUST

PART C OTHER INFORMATION
Item 23. Exhibits
-------- ---------------------------------------------------------------------

1(a). Declaration of Trust of the Registrant, dated March 27, 1981, is
incorporated by reference to Exhibit 1(a) of Post-Effective Amendment
No. 17 to the Registration Statement on Form N-1A, filed on August
29, 1995.

1(b). Amendment dated May 21, 1994 to the Declaration of Trust is
incorporated by reference to Exhibit 1(b) of Post-Effective Amendment
No. 17 to the Registration Statement on Form N1-A, filed on August
29, 1995.

1(c). Amendment dated December 17, 1984 to the Declaration of Trust is
incorporated by reference to Exhibit 1(c) of Post-Effective Amendment
No. 17 to the Registration Statement on Form N-1A, filed on August
29, 1995.

2. Amended and Restated By-Laws of the Registrant, dated May 1, 1999, is
incorporated by reference to Exhibit 2 of Post Effective Amendment
No. 21 to the Registration Statement on Form N-1A, filed on June 16,
1999.

3. Not Applicable.

4. Amended and Restated Investment Management Agreement, dated April 30,
1998, is incorporated by reference to Exhibit 4 of Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A, filed on
June 16, 1999.

5(a). Amended and Restated Distribution Agreement dated May 31, 1997 is
incorporated by reference to Exhibit 6 of Post-Effective Amendment
No. 19 to the Registration Statement on Form N-1A, filed on August
22, 1997.

5(b). Selected Dealer Agreement, dated January 4, 1993, between Dean Witter
Distributors Inc. and Dean Witter Reynolds Inc. is incorporated by
reference to Exhibit 5(b) of Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A, filed on June 16, 1999.

6. Second Amended and Restated Retirement Plan for Non-Interested
Directors or Trustees is incorporated by reference to Exhibit 6 of
Post-Effective Amendment No. 21 to the Registration Statement on Form
N-1A, filed on June 16, 1999.

7(a). Custody Agreement between The Bank of New York and the Registrant is
incorporated by reference to Exhibit 8 of Post-Effective Amendment
No. 17 to the Registration Statement on Form N-1A, Filed on August
29, 1995.

<PAGE>

7(b). Amendment dated April 17, 1996 to the Custody Agreement is
incorporated by reference to Exhibit 8 of Post-Effective Amendment
No. 18 to the Registration Statement on Form N-1A, filed on August
22, 1996.

8(a). Amended and Restated Transfer Agency and Service Agreement is
incorporated by reference to Exhibit 8 of Post-Effective Amendment
No. 20 to the Registration Statement on Form N-1A, filed on August
20, 1998.

8(b). Amended and Restated Services Agreement is incorporated by reference
to Exhibit 9 of Post-Effective No. 20 to the Registration Statement
on Form N-1A, filed on August 20, 1998.

9(a). Opinion of Dennis H. Greenwald, Esq. dated June 2, 1981, is
incorporated by reference to Exhibit 9(a) of Post-Effective Amendment
No. 21 to the Registration Statement on Form N-1A, filed on June 16,
1999.

10(a). Consent of Independent Accountants, filed herein.

10(b). Consent of PricewaterhouseCoopers LLP, filed herein.

11. Not Applicable.

12. Not Applicable.

13. Amended and Restated Plan of Distribution pursuant to Rule 12b-1 is
incorporated by reference to Exhibit 15 of Post-Effective Amendment
No. 19 to the Registration Statement on Form N-1A, filed on August
22, 1997.

16(a). Code of Ethics of Morgan Stanley Dean Witter Advisors Inc., Morgan
Stanley Dean Witter Services Company Inc. and Morgan Stanley Dean
Witter Distributors Inc., filed herein.

16(b). Code of Ethics of the Morgan Stanley Dean Witter Funds, filed herein.

Other Powers of Attorney of Trustees are incorporated by reference to
Exhibit (Other) of Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A, filed on August 24, 1994 and of
Post-Effective Amendment No. 20 to the Registration Statement on Form
N-1A, filed on August 20, 1998. The Power of Attorney of James F.
Higgins is filed herein.

<PAGE>

Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.

None

Item 25. INDEMNIFICATION.

Pursuant to Section 5.3 of the Registrant's Declaration of Trust and
under Section 4.8 of the Registrant's By-Laws, the indemnification of the
Registrant's trustees, officers, employees and agents is permitted if it is
determined that they acted under the belief that their actions were in or not
opposed to the best interest of the Registrant, and, with respect to any
criminal proceeding, they had reasonable cause to believe their conduct was not
unlawful. In addition, indemnification is permitted only if it is determined
that the actions in question did not render them liable by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of reckless disregard of their obligations and duties to the
Registrant. Trustees, officers, employees and agents will be indemnified for the
expense of litigation if it is determined that they are entitled to
indemnification against any liability established in such litigation. The
Registrant may also advance money for these expenses provided that they give
their undertakings to repay the Registrant unless their conduct is later
determined to permit indemnification.

Pursuant to Section 5.2 of the Registrant's Declaration of Trust
and paragraph 8 of the Registrant's Investment Management Agreement, neither the
Investment Manager nor any trustee, officer, employee or agent of the Registrant
shall be liable for any action or failure to act, except in the case of bad
faith, willful misfeasance, gross negligence or reckless disregard of duties to
the Registrant.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such trustee,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act, and will be governed by the final adjudication of such
issue.

The Registrant hereby undertakes that it will apply the
indemnification provision of its by-laws in a manner consistent with Release
11330 of the Securities and Exchange Commission under the Investment Company Act
of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such Act
remains in effect.

Registrant, in conjunction with the Investment Manager,
Registrant's Trustees, and other registered investment management companies
managed by the Investment Manager, maintains insurance on behalf of any person
who is or was a Trustee, officer, employee, or agent of Registrant, or who is or
was serving at the request of Registrant as a trustee, director, officer,
employee or agent of another trust or corporation, against any liability
asserted against him and incurred by him or arising out of his position.
However, in no event will Registrant maintain insurance to indemnify any such
person for any act for which Registrant itself is not permitted to indemnify
him.

<PAGE>

Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR

See "The Fund and Its Management" in the Prospectus regarding the
business of the investment advisor. The following information is given regarding
officers of Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"). MSDW
Advisors is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.

The term "Morgan Stanley Dean Witter Funds" refers to the following
registered investment companies:

CLOSED-END INVESTMENT COMPANIES
(1) Morgan Stanley Dean Witter California Insured Municipal Income Trust
(2) Morgan Stanley Dean Witter California Quality Municipal Securities
(3) Morgan Stanley Dean Witter Government Income Trust
(4) Morgan Stanley Dean Witter High Income Advantage Trust
(5) Morgan Stanley Dean Witter High Income Advantage Trust II
(6) Morgan Stanley Dean Witter High Income Advantage Trust III
(7) Morgan Stanley Dean Witter Income Securities Inc.
(8) Morgan Stanley Dean Witter Insured California Municipal Securities
(9) Morgan Stanley Dean Witter Insured Municipal Bond Trust
(10) Morgan Stanley Dean Witter Insured Municipal Income Trust
(11) Morgan Stanley Dean Witter Insured Municipal Securities
(12) Morgan Stanley Dean Witter Insured Municipal Trust
(13) Morgan Stanley Dean Witter Municipal Income Opportunities Trust
(14) Morgan Stanley Dean Witter Municipal Income Opportunities Trust II
(15) Morgan Stanley Dean Witter Municipal Income Opportunities Trust III
(16) Morgan Stanley Dean Witter Municipal Income Trust
(17) Morgan Stanley Dean Witter Municipal Income Trust II
(18) Morgan Stanley Dean Witter Municipal Income Trust III
(19) Morgan Stanley Dean Witter Municipal Premium Income Trust
(20) Morgan Stanley Dean Witter New York Quality Municipal Securities
(21) Morgan Stanley Dean Witter Prime Income Trust
(22) Morgan Stanley Dean Witter Quality Municipal Income Trust
(23) Morgan Stanley Dean Witter Quality Municipal Investment Trust
(24) Morgan Stanley Dean Witter Quality Municipal Securities

OPEN-END INVESTMENT COMPANIES
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Institutional Money Trust
(4) Active Assets Money Trust
(5) Active Assets Premier Money Trust
(6) Active Assets Tax-Free Trust
(7) Morgan Stanley Dean Witter 21st Century Trend Fund
(8) Morgan Stanley Dean Witter Aggressive Equity Fund
(9) Morgan Stanley Dean Witter American Opportunities Fund
(10) Morgan Stanley Dean Witter Balanced Growth Fund
(11) Morgan Stanley Dean Witter Balanced Income Fund
(12) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(13) Morgan Stanley Dean Witter California Tax-Free Income Fund
(14) Morgan Stanley Dean Witter Capital Growth Securities
(15) Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS PORTFOLIO"

<PAGE>

(16) Morgan Stanley Dean Witter Convertible Securities Trust
(17) Morgan Stanley Dean Witter Developing Growth Securities Trust
(18) Morgan Stanley Dean Witter Diversified Income Trust
(19) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(20) Morgan Stanley Dean Witter Equity Fund
(21) Morgan Stanley Dean Witter European Growth Fund Inc.
(22) Morgan Stanley Dean Witter Federal Securities Trust
(23) Morgan Stanley Dean Witter Financial Services Trust
(24) Morgan Stanley Dean Witter Fund of Funds
(25) Morgan Stanley Dean Witter Global Dividend Growth Securities
(26) Morgan Stanley Dean Witter Global Utilities Fund
(27) Morgan Stanley Dean Witter Growth Fund
(28) Morgan Stanley Dean Witter Hawaii Municipal Trust
(29) Morgan Stanley Dean Witter Health Sciences Trust
(30) Morgan Stanley Dean Witter High Yield Securities Inc.
(31) Morgan Stanley Dean Witter Income Builder Fund
(32) Morgan Stanley Dean Witter Information Fund
(33) Morgan Stanley Dean Witter Intermediate Income Securities
(34) Morgan Stanley Dean Witter International Fund
(35) Morgan Stanley Dean Witter International SmallCap Fund
(36) Morgan Stanley Dean Witter Japan Fund
(37) Morgan Stanley Dean Witter Latin American Growth Fund
(38) Morgan Stanley Dean Witter Limited Term Municipal Trust
(39) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(40) Morgan Stanley Dean Witter Market Leader Trust
(41) Morgan Stanley Dean Witter Mid-Cap Equity Trust
(42) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(43) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(44) Morgan Stanley Dean Witter New Discoveries Fund
(45) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(46) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(47) Morgan Stanley Dean Witter Next Generation Trust
(48) Morgan Stanley Dean Witter North American Government Income Trust
(49) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(50) Morgan Stanley Dean Witter Real Estate Fund
(51) Morgan Stanley Dean Witter S&P 500 Index Fund
(52) Morgan Stanley Dean Witter S&P 500 Select Fund
(53) Morgan Stanley Dean Witter Select Dimensions Investment Series
(54) Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
(55) Morgan Stanley Dean Witter Short-Term Bond Fund
(56) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(57) Morgan Stanley Dean Witter Small Cap Growth Fund
(58) Morgan Stanley Dean Witter Special Value Fund
(59) Morgan Stanley Dean Witter Strategist Fund
(60) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(61) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(62) Morgan Stanley Dean Witter Tax-Managed Growth Fund
(63) Morgan Stanley Dean Witter Technology Fund
(64) Morgan Stanley Dean Witter Total Market Index Fund
(65) Morgan Stanley Dean Witter Total Return Trust
(66) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(67) Morgan Stanley Dean Witter U.S. Government Securities Trust
(68) Morgan Stanley Dean Witter Utilities Fund
(69) Morgan Stanley Dean Witter Value-Added Market Series
<PAGE>

(70) Morgan Stanley Dean Witter Value Fund
(71) Morgan Stanley Dean Witter Variable Investment Series
(72) Morgan Stanley Dean Witter World Wide Income Trust

NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
-------------------- ------------------------------------------------
<S> <C>
Mitchell M. Merin President and Chief Operating Officer of Asset
President, Chief Management of Morgan Stanley Dean Witter & Co.
Executive Officer and ("MSDW); Chairman, Chief Executive Officer and Director
Director of Morgan Stanley Dean Witter Distributors Inc. ("MSDW
Distributors") and Morgan Stanley Dean Witter Trust FSB
("MSDW Trust"); President, Chief Executive Officer and
Director of Morgan Stanley Dean Witter Services Company
Inc. ("MSDW Services"); President of the Morgan Stanley
Dean Witter Funds; Executive Vice President and Director
of Dean Witter Reynolds Inc. ("DWR"); Director of various
MSDW subsidiaries; Trustee of various Van Kampen
investment companies.

Barry Fink General Counsel of Asset Management of MSDW;
Executive Vice President, Executive Vice President, Secretary, General Counsel
Secretary, General Counsel and Director of MSDW Services; Vice President and
and Director Secretary of MSDW Distributors; Vice President, Secretary
and General Counsel of the Morgan Stanley Dean Witter
Funds.

Joseph J. McAlinden Vice President of the Morgan Stanley Dean Witter Funds;
Executive Vice President Director of MSDW Trust.
and Chief Investment
Officer

Ronald E. Robison Executive Vice President, Chief Administrative Officer
Executive Vice President, and Director of MSDW Services; Vice President of the
Chief Administrative Morgan Stanley Dean Witter Funds.
Officer and Director

Edward C. Oelsner, III
Executive Vice President

Joseph R. Arcieri Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

<PAGE>

Mark Bavoso Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

Douglas Brown
Senior Vice President

Rosalie Clough
Senior Vice President
and Director of Marketing

Richard G. DeSalvo
Senior Vice President
and Director of Investment
Management Services

Richard Felegy
Senior Vice President

Sheila A. Finnerty Vice President of Morgan Stanley Dean Witter Prime
Senior Vice President Income Trust.

Edward F. Gaylor Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Director of the Research
Group

Robert S. Giambrone Senior Vice President of MSDW Services, MSDW
Senior Vice President Distributors and MSDW Trust and Director of MSDW Trust;
Vice President of the Morgan Stanley Dean Witter Funds.

Rajesh K. Gupta Vice President of various Morgan Stanley Dean Witter
Senior Vice President, Funds.
Director of the Taxable
Fixed Income Group and
Chief Administrative Officer -
Investments

Kenton J. Hinchliffe Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

Kevin Hurley Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

<PAGE>

Michelle Kaufman Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

John B. Kemp, III President of MSDW Distributors.
Senior Vice President

Anita H. Kolleeny Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of Sector
Rotation

Jonathan R. Page Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of the Money
Market Group

Ira N. Ross Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

Guy G. Rutherfurd, Jr. Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of the Growth
Group

Rochelle G. Siegel Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

James Solloway Jr.
Senior Vice President

Katherine H. Stromberg Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.

Paul D. Vance Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
and Director of the Growth
and Income Group

Elizabeth A. Vetell
Senior Vice President
and Director of Shareholder
Communication

<PAGE>

Raymond A. Basile
First Vice President

Thomas F. Caloia First Vice President and Assistant Treasurer of
First Vice President MSDW Services; Assistant Treasurer of MSDW
and Assistant Distributors; Treasurer and Chief Financial and Accounting
Treasurer Officer of the Morgan Stanley Dean Witter Funds.

Thomas Chronert
First Vice President

Richard Colville First Vice President and Controller of MSDW Services
First Vice President and MSDW Distributors.
and Controller

Marilyn K. Cranney Assistant Secretary of DWR; First Vice President and
First Vice President Assistant Secretary of MSDW Services; Assistant
and Assistant Secretary Secretary of MSDW Distributors and the Morgan Stanley
Dean Witter Funds.

Salvatore DeSteno First Vice President of MSDW Services.
First Vice President

Peter W. Gurman
First Vice President

David Johnson
First Vice President

Stanley Kapica
First Vice President

Douglas J. Ketterer
First Vice President

Todd Lebo First Vice President and Assistant Secretary of MSDW
First Vice President and Services; Assistant Secretary of MSDW Distributors and
Assistant Secretary the Morgan Stanley Dean Witter Funds.

<PAGE>

Carsten Otto First Vice President and Assistant Secretary of MSDW
First Vice President Services; Assistant Secretary of MSDW Distributors and
and Assistant Secretary the Morgan Stanley Dean Witter Funds.

Carl F. Sadler
First Vice President

Ruth Rossi First Vice President and Assistant Secretary of MSDW
First Vice President and Services; Assistant Secretary of MSDW Distributors and
Assistant Secretary the Morgan Stanley Dean Witter Funds.

James P. Wallin
First Vice President

Robert Abreu
Vice President

Dale Albright
Vice President

Joan G. Allman
Vice President

Andrew Arbenz Vice President of Morgan Stanley Dean Witter Global
Vice President Utilities Fund.

Sean Aurigemma
Vice President

Armon Bar-Tur Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Maurice Bendrihem
Vice President and
Assistant Controller

Thomas A. Bergeron
Vice President

Philip Bernstein
Vice President

<PAGE>

Michelina Calandrella
Vice President

Ronald Caldwell
Vice President

Joseph Cardwell
Vice President

Liam Carroll
Vice President

Philip Casparius
Vice President

Annette Celenza
Vice President

Aaron Clark Vice President of Morgan Stanley Dean Witter Market
Vice President Leader Trust

William Connerly
Vice President

Virginia Connors
Vice President

Michael J. Davey
Vice President

David Dineen Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

June Ewers
Vice President

Jeffrey D. Geffen Vice President of Morgan Stanley Dean Witter U.S.
Vice President Government Securities Trust

Sandra Gelpieryn
Vice President

Charmaine George
Vice President

<PAGE>

Gail Gerrity Burke
Vice President

Peter Gewirtz
Vice President

Mina Gitsevich
Vice President

Ellen Gold
Vice President

Amy Golub
Vice President

Stephen Greenhut
Vice President

Joan Hamilton
Vice President

Trey Hancock
Vice President

Laury A. Haskamp
Vice President

Matthew T. Haynes Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Peter Hermann Jr. Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

David T. Hoffman
Vice President

Thomas G. Hudson II
Vice President

Linda Jones
Vice President

Norman Jones
Vice President

<PAGE>

Carol Espejo-Kane
Vice President

Nancy Karole Kennedy
Vice President

Paula LaCosta Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Kimberly LaHart
Vice President

Thomas Lawlor
Vice President

Lester Lay
Vice President

Phuong Le
Vice President

Gerard J. Lian Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Cameron J. Livingstone
Vice President

Nancy Login Cole
Vice President

Sharon Loguercio
Vice President

Stephanie Lovinger
Vice President

Steven MacNamara
Vice President

Catherine Maniscalco Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Peter R. McDowell
Vice President

<PAGE>

Teresa McRoberts Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Mark Mitchell
Vice President

Thomas Moore
Vice President

Julie Morrone Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Mary Beth Mueller
Vice President

David Myers Vice President of Morgan Stanley Dean Witter Natural
Vice President Resource Development Securities Inc.

James Nash
Vice President

Daniel Niland
Vice President

Richard Norris
Vice President

Hilary A. O'Neill
Vice President

Steven Orlov
Vice President

Mori Paulsen
Vice President

Anne Pickrell
Vice President

Reginald Rigaud
Vice President

Frances Roman
Vice President

<PAGE>

John Roscoe Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Hugh Rose
Vice President

Robert Rossetti Vice President of Morgan Stanley Dean Witter Competitive
Vice President Edge Fund.

Sally Sancimino Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Deborah Santaniello
Vice President

Patrice Saunders
Vice President

Donna Savoca
Vice President

Howard A. Schloss Vice President of Morgan Stanley Dean Witter Federal
Vice President Securities Trust.

Alison M. Sharkey
Vice President

Peter J. Seeley Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Ronald B. Silvestri Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

Herbert Simon
Vice President

Martha Slezak
Vice President

Frank Smith
Vice President

Otha Smith
Vice President

Stuart Smith
Vice President

<PAGE>

Naomi Stein
Vice President

William Stevens
Vice President

Michael Strayhorn
Vice President

Marybeth Swisher
Vice President

Michael Thayer
Vice President

Bradford Thomas
Vice President

Barbara Toich
Vice President

Robert Vanden Assem
Vice President

Frank Vindigni
Vice President

David Walsh
Vice President

Alice Weiss Vice President of various Morgan Stanley Dean Witter
Vice President Funds.

John Wong
Vice President
</TABLE>

The principal address of MSDW Advisors, MSDW Services, MSDW
Distributors, DWR, and the Morgan Stanley Dean Witter Funds is Two World Trade
Center, New York, New York 10048. The principal address of MSDW is 1585
Broadway, New York, New York 10036. The principal address of MSDW Trust is 2
Harborside Financial Center, Jersey City, New Jersey 07311.

<PAGE>

Item 27. PRINCIPAL UNDERWRITERS

(a) Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors"), a
Delaware corporation, is the principal underwriter of the Registrant. MSDW
Distributors is also the principal underwriter of the following investment
companies:

(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Institutional Money Trust
(4) Active Assets Money Trust
(5) Active Assets Premier Money Trust
(6) Active Assets Tax-Free Trust
(7) Morgan Stanley Dean Witter 21st Century Trend Fund
(8) Morgan Stanley Dean Witter Aggressive Equity Fund
(9) Morgan Stanley Dean Witter American Opportunities Fund
(10) Morgan Stanley Dean Witter Balanced Growth Fund
(11) Morgan Stanley Dean Witter Balanced Income Fund
(12) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(13) Morgan Stanley Dean Witter California Tax-Free Income Fund
(14) Morgan Stanley Dean Witter Capital Growth Securities
(15) Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS PORTFOLIO"
(16) Morgan Stanley Dean Witter Convertible Securities Trust
(17) Morgan Stanley Dean Witter Developing Growth Securities Trust
(18) Morgan Stanley Dean Witter Diversified Income Trust
(19) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(20) Morgan Stanley Dean Witter Equity Fund
(21) Morgan Stanley Dean Witter European Growth Fund Inc.
(22) Morgan Stanley Dean Witter Federal Securities Trust
(23) Morgan Stanley Dean Witter Financial Services Trust
(24) Morgan Stanley Dean Witter Fund of Funds
(25) Morgan Stanley Dean Witter Global Dividend Growth Securities
(26) Morgan Stanley Dean Witter Global Utilities Fund
(27) Morgan Stanley Dean Witter Growth Fund
(28) Morgan Stanley Dean Witter Hawaii Municipal Trust
(29) Morgan Stanley Dean Witter Health Sciences Trust
(30) Morgan Stanley Dean Witter High Yield Securities Inc.
(31) Morgan Stanley Dean Witter Income Builder Fund
(32) Morgan Stanley Dean Witter Information Fund
(33) Morgan Stanley Dean Witter Intermediate Income Securities
(34) Morgan Stanley Dean Witter International Fund
(35) Morgan Stanley Dean Witter International SmallCap Fund
(36) Morgan Stanley Dean Witter Japan Fund
(37) Morgan Stanley Dean Witter Latin American Growth Fund
(38) Morgan Stanley Dean Witter Limited Term Municipal Trust
(39) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(40) Morgan Stanley Dean Witter Market Leader Trust
(41) Morgan Stanley Dean Witter Mid-Cap Equity Trust
(42) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(43) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(44) Morgan Stanley Dean Witter New Discoveries Fund
(45) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(46) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(47) Morgan Stanley Dean Witter Next Generation Trust

<PAGE>

(48) Morgan Stanley Dean Witter North American Government Income Trust
(49) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(50) Morgan Stanley Dean Witter Prime Income Trust
(51) Morgan Stanley Dean Witter Real Estate Fund
(52) Morgan Stanley Dean Witter S&P 500 Index Fund
(53) Morgan Stanley Dean Witter S&P 500 Select Fund
(54) Morgan Stanley Dean Witter Short-Term Bond Fund
(55) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(56) Morgan Stanley Dean Witter Small Cap Growth Fund
(57) Morgan Stanley Dean Witter Special Value Fund
(58) Morgan Stanley Dean Witter Strategist Fund
(59) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(60) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(61) Morgan Stanley Dean Witter Tax-Managed Growth Fund
(62) Morgan Stanley Dean Witter Technology Fund
(63) Morgan Stanley Dean Witter Total Market Index Fund
(64) Morgan Stanley Dean Witter Total Return Trust
(65) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(66) Morgan Stanley Dean Witter U.S. Government Securities Trust
(67) Morgan Stanley Dean Witter Utilities Fund
(68) Morgan Stanley Dean Witter Value-Added Market Series
(69) Morgan Stanley Dean Witter Value Fund
(70) Morgan Stanley Dean Witter Variable Investment Series
(71) Morgan Stanley Dean Witter World Wide Income Trust

(b) The following information is given regarding directors and officers of MSDW
Distributors not listed in Item 26 above. The principal address of MSDW
Distributors is Two World Trade Center, New York, New York 10048. Other than
Messrs. Higgins and Purcell, who are Trustees of the Registrant, none of the
following persons has any position or office with the Registrant.

Name Positions and Office With MSDW Distributors
---- -------------------------------------------

James F. Higgins Director

Philip J. Purcell Director

John Schaeffer Director

Charles Vadala Senior Vice President and Financial Principal.

Item 28. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained by the Investment Manager at its offices, except records relating to
holders of shares issued by the Registrant, which are maintained by the
Registrant's Transfer Agent, at its place of business as shown in the
prospectus.

Item 29. MANAGEMENT SERVICES

Registrant is not a party to any such management-related service contract.

<PAGE>

Item 30. UNDERTAKINGS

Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 29th day of August, 2000.

ACTIVE ASSETS TAX-FREE TRUST

By: /s/ Barry Fink
---------------------------------
Barry Fink
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No.23 has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signatures Title Date
---------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer Chairman, Chief Executive Officer
and Trustee

By: /s/ Charles A. Fiumefreddo 08/29/00
-------------------------------
Charles A. Fiumefreddo

(2) Principal Financial Officer Treasurer and Principal
Accounting Officer

By: /s/ Thomas F. Caloia 08/29/00
-------------------------------
Thomas F. Caloia

(3) Majority of the Trustees

Charles A. Fiumefreddo (Chairman)
Philip J. Purcell
James F. Higgins

By: /s/ Barry Fink 08/29/00
-------------------------------
Barry Fink
Attorney-in-Fact

Michael Bozic Manuel H. Johnson
Edwin J. Garn Michael E. Nugent
Wayne E. Hedien John L. Schroeder

By: /s/ David M. Butowsky 08/29/00
-------------------------------
David M. Butowsky
Attorney-in-Fact
</TABLE>
<PAGE>

ACTIVE ASSETS TAX-FREE TRUST
EXHIBIT INDEX

10(a). Consent of Independent Accountants.

10(b). Consent of PricewaterhouseCoopers LLP.

16(a). Code of Ethics of Morgan Stanley Dean Witter Advisors Inc., Morgan
Stanley Dean Witter Services Company Inc. and Morgan Stanley Dean
Witter Distributors Inc.

16(b). Code of Ethics of the Morgan Stanley Dean Witter Funds.

Other Power of Attorney of James F. Higgins.