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Active Assets California Tax Free Trust, et al. – ‘485APOS’ on 8/28/06

On: Monday, 8/28/06, at 4:01pm ET · Accession #: 1047469-6-11322 · File #s: 33-41685, 811-06350

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/28/06  Active Assets Cal Tax Free Trust  485APOS                1:313K                                   Merrill Corp/New/FA
          → Active Assets California Tax Free Trust ⇒ AACXX

Post-Effective Amendment
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 485APOS     Post-Effective Amendment                              96    453K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Business and Other Connections of Investment Adviser Distributions Exhibits Fund Management Indemnification Lease Obligations Location of Accounts and Records Management Services Morgan Stanley Funds Persons Controlled by or Under Common Control With the Fund Principal Investment Strategies Principal Risks Shareholder Communications Shareholder Information Tax Consequences Undertakings
1	1st Page - Filing Submission
2	Morgan Stanley Funds
6	Principal Investment Strategies
"	Principal Risks
21	Fund Management
23	Shareholder Information
26	Distributions
"	Tax Consequences
37	Lease Obligations
68	Shareholder Communications
89	Item 23. Exhibits
90	Item 24. Persons Controlled by or Under Common Control With the Fund
"	Item 25. Indemnification
91	Item 26. Business and Other Connections of Investment Adviser
95	Item 28. Location of Accounts and Records
"	Item 29. Management Services
"	Item 30. Undertakings

485APOS 1st Page of 96 TOC ↑Top Previous Next ↓Bottom Just 1st
 
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 2006 

                                                     REGISTRATION NOS.: 33-41685
                                                                        811-6350

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------

FORM N-1A 

REGISTRATION STATEMENT
                        UNDER THE SECURITIES ACT OF 1933                     |X|

                           PRE-EFFECTIVE AMENDMENT NO.                       |_|

                         POST-EFFECTIVE AMENDMENT NO. 18                     |X|
AND/OR
 REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
                                   ACT OF 1940                               |X|

                                AMENDMENT NO. 19                             |X|

----------

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

1221 AVENUE OF THE AMERICAS 
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) 

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 869-6397

AMY R. DOBERMAN, ESQ. 
1221 AVENUE OF THE AMERICAS 
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE) 

----------

COPY TO:

CARL FRISCHLING, ESQ.                    STUART M. STRAUSS, ESQ.
KRAMER LEVIN NAFTALIS & FRANKEL LLP             CLIFFORD CHANCE US LLP        
1177 AVENUE OF THE AMERICAS                  31 WEST 52ND STREET      
NEW YORK, NEW YORK 10036                  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):

|_|  Immediately upon filing pursuant to paragraph (b)      

|_|  On (date) pursuant to paragraph (b)                    

|_|  60 days after filing pursuant to paragraph (a)(1)      

|X|  On October 31, 2006 pursuant to paragraph (a)(1)       

|_|  75 days after filing pursuant to paragraph (a)(2)      

|_|  On (date) pursuant to paragraph (a)(2) of Rule 485.    

AMENDING THE PROSPECTUS                                     

If appropriate, check the following box:                    

          |_|  This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.      

================================================================================

485APOS 2nd Page of 96 TOC 1st Previous Next ↓Bottom Just 2nd
MORGAN STANLEY FUNDS                                                            

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

FOUR DIFFERENT MONEY MARKET FUNDS OFFERED EXCLUSIVELY TO INVESTORS WHO HAVE AN  
ACTIVE ASSETS ACCOUNT(R) OR BUSINESSCAPE(R) ACCOUNT WITH MORGAN STANLEY DW INC. 

[MORGAN STANLEY LOGO]                                                           

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.                                             

Prospectus                                                                      
October 31, 2006                                                                

485APOS 3rd Page of 96 TOC 1st Previous Next ↓Bottom Just 3rd
Contents                                                                        

Eligible Investors/Overview                                                    1
THE FUNDS                                                                       
ACTIVE ASSETS MONEY TRUST                                                       
   Investment Objectives                                                       2
   Principal Investment Strategies                                             2
   Principal Risks                                                             2
   Past Performance                                                            4
   Fees and Expenses                                                           5
   Portfolio Holdings                                                          5
ACTIVE ASSETS TAX-FREE TRUST                                                    
   Investment Objective                                                        6
   Principal Investment Strategies                                             6
   Principal Risks                                                             7
   Past Performance                                                            8
   Fees and Expenses                                                           9
   Portfolio Holdings                                                          9
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST                                         
   Investment Objective                                                       10
   Principal Investment Strategies                                            10
   Principal Risks                                                            11
   Past Performance                                                           12
   Fees and Expenses                                                          13
   Portfolio Holdings                                                         13

485APOS 4th Page of 96 TOC 1st Previous Next ↓Bottom Just 4th
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST                                       
   Investment Objectives                                                      14
   Principal Investment Strategies                                            14
   Principal Risks                                                            15
   Past Performance                                                           16
   Fees and Expenses                                                          17
   Portfolio Holdings                                                         17
FUND MANAGEMENT                                                               17
SHAREHOLDER INFORMATION                                                         
   Pricing Fund Shares                                                        19
   How Are Fund Investments Made?                                             19
   How Are Fund Shares Sold?                                                  21
   Distributions                                                              22
   Frequent Purchases and Redemptions of Fund Shares                          22
   Tax Consequences                                                           22
   Additional Information                                                     23
FINANCIAL HIGHLIGHTS                                                          24

This PROSPECTUS contains important information about the Funds. Please read it  
carefully and keep it for future reference.                                     

485APOS 5th Page of 96 TOC 1st Previous Next ↓Bottom Just 5th
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 investors   
who have an Active Assets Account or BusinesScape Account (the "Accounts") with 
Morgan Stanley DW Inc. ("Morgan Stanley DW"). (Morgan Stanley DW is affiliated  
with Morgan Stanley Investment Advisors Inc., the Funds' Investment Adviser.)   

As of October 10, 2005, certain investors who have an Active Assets Account are 
no longer able to elect Active Assets Money Trust or Active Assets Government   
Securities Trust as a cash sweep investment option. Such investors may continue 
to elect Active Assets Tax-Free Trust and Active Assets California Tax-Free     
Trust as a cash sweep investment option. Beginning on or after November 21, 2005
(the "Effective Date"), if your Active Assets Account sweeps cash to Active     
Assets Money Trust or Active Assets Government Securities Trust, your new cash  
sweep investment will be interest-bearing bank deposit accounts established     
under the Bank Deposit Program, unless you choose an alternative sweep option.  
See "Shareholder Information" in this Prospectus for further details.           

There are various account and service fees charged in connection with your      
Account. Please refer to the respective Account agreement for details. At any   
time, Morgan Stanley DW may change the fees charged and the services provided in
connection therewith, as set forth in the Account agreements. Please speak to   
your Morgan Stanley Financial Advisor for more information.                     

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THE FUNDS                                                                       
ACTIVE ASSETS MONEY TRUST                                                       

INVESTMENT OBJECTIVES                                                           

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

PRINCIPAL INVESTMENT STRATEGIES                                                 

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

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

-    Commercial paper.                                                          

-    Corporate obligations, including but not limited to commercial paper.      

-    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.                                                             

In pursuing the Fund's investment objectives, the Investment Adviser has        
considerable leeway in deciding which investments it buys, holds or sells on a  
day to day basis and which trading strategies it uses. For example, the         
Investment Adviser in its discretion may determine to use some permitted trading
strategies while not using others.                                              

PRINCIPAL RISKS                                                                 

[GRAPHIC] There is no assurance that the Fund will achieve its investment       
objectives. Shares of the Fund are not bank deposits and are not insured or     
guaranteed by the Federal Deposit Insurance Corporation ("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.                                                 

[SIDENOTE]                                                                      

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.                                                 

 2

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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 Adviser 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 
Adviser 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.                                                    

 3

485APOS 8th Page of 96 TOC 1st Previous Next ↓Bottom Just 8th
PAST PERFORMANCE                                                                

[GRAPHIC] 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                                            

 [CHART]

                                                                [Download Table]
            
1996   5.19%
1997   5.32%
1998   5.28%
1999   4.88%
2000   6.09%
2001   4.15%
2002   1.46%
2003   0.78%
2004   0.99%
2005        

The year-to-date total return as of September 30, 2006 was ____%.               

During the periods shown in the bar chart, the highest return for a calendar    
quarter was ____% (quarter ended ________________) and the lowest return for a  
calendar quarter was ____% (quarter ended ________________).                    

AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2005)                          

                  PAST 1 YEAR   PAST 5 YEARS   PAST 10 YEARS
Active Assets Money Trust                                                       

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

[SIDENOTE]                                                                      

ANNUAL TOTAL RETURNS                                                            

THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S SHARES HAS VARIED FROM YEAR  
TO YEAR OVER THE PAST TEN CALENDAR YEARS.                                       

AVERAGE ANNUAL TOTAL RETURNS                                                    

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

 4

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FEES AND EXPENSES                                                               

[GRAPHIC] 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.                                              

ANNUAL FUND OPERATING EXPENSES                                                  

Advisory fee                                                                    
Distribution and service (12b-1) fees                                           
Other expenses                                                                  
Total annual Fund operating expenses                                            

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.                              

1 YEAR   3 YEARS   5 YEARS   10 YEARS                                           

PORTFOLIO HOLDINGS                                                              

[GRAPHIC] A description of the Fund's policies and procedures with respect to   
the disclosure of the Fund's portfolio securities is available in the Fund's    
STATEMENT OF ADDITIONAL INFORMATION.                                            

[SIDENOTE]                                                                      

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, 2006.                                   

 5

485APOS 10th Page of 96 TOC 1st Previous Next ↓Bottom Just 10th
ACTIVE ASSETS TAX-FREE TRUST                                                    

INVESTMENT OBJECTIVE                                                            

[GRAPHIC] 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.                     

PRINCIPAL INVESTMENT STRATEGIES                                                 

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

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.         
Additionally, the Fund's investments may include tender option bonds and        
custodial receipts.                                                             

The Fund has a fundamental policy of investing at least 80% of its net 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 net 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.                                    

In pursuing the Fund's investment objective, the Investment Adviser has         
considerable leeway in deciding which investments it buys, holds or sells on a  
day to day basis and which trading strategies it uses. For example, the         
Investment Adviser in its discretion may determine to use some permitted trading
strategies while not using others.                                              

[SIDENOTE]                                                                      

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.                                                 

 6

485APOS 11th Page of 96 TOC 1st Previous Next ↓Bottom Just 11th
PRINCIPAL RISKS                                                                 

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

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 Adviser, 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.                                                          

TENDER OPTION BONDS AND CUSTODIAL RECEIPTS. Tender option bonds and custodial   
receipts are instruments similar to variable rate demand obligations. Tender    
option bonds are municipal obligations held pursuant to a custodial arrangement 
and issued pursuant to an agreement with a third party such as a bank or        
financial institution to provide the holder with the option of tendering the    
bond at periodic intervals. The holder of the tender option bond effectively    
holds a demand obligation that bears interest at prevailing short-term rates.   
Custodial receipts represent interests in future interest and/or principal      
payments on U.S. government securities or municipal obligations and provide the 
holder with the option of tendering the receipt back to the custodian or        
trustee. The risks of tender option bonds and custodial receipts include the    
risk that the owner of such instruments may not be considered the owner for     
federal income tax purposes and thus will not be entitled to treat such interest
as exempt from federal income tax. Additionally, a credit rating downgrade on   
the underlying security may impair the ability to tender the bond or receipt    
back to the third party provider of the demand option, thus causing the bond or 
receipt to become illiquid.                                                     

 7

485APOS 12th Page of 96 TOC 1st Previous Next ↓Bottom Just 12th
PAST PERFORMANCE                                                                

[GRAPHIC] 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                                            

 [CHART]

                                                                [Download Table]
            
1996   2.98%
1997   3.14%
1998   2.95%
1999   2.74%
2000   3.57%
2001   2.33%
2002   0.99%
2003   0.57%
2004   0.74%
2005        

The year-to-date total return as of September 30, 2006 was ____%.               

During the periods shown in the bar chart, the highest return for a calendar    
quarter was ____% (quarter ended ________________) and the lowest return for a  
calendar quarter was ____% (quarter ended ________________).                    

AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2005)                          

                        PAST 1 YEAR   PAST 5 YEARS   PAST 10 YEARS
Active Assets Tax-Free Trust                                                    

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

[SIDENOTE]                                                                      

ANNUAL TOTAL RETURNS                                                            

THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S SHARES HAS VARIED FROM YEAR  
TO YEAR OVER THE PAST TEN CALENDAR YEARS.                                       

AVERAGE ANNUAL TOTAL RETURNS                                                    

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

 8

485APOS 13th Page of 96 TOC 1st Previous Next ↓Bottom Just 13th
FEES AND EXPENSES                                                               

[GRAPHIC] 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.                                              

ANNUAL FUND OPERATING EXPENSES                                                  

Advisory fee                                                                    
Distribution and service (12b-1) fees                                           
Other expenses                                                                  
Total annual Fund operating expenses                                            

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.                              

1 YEAR   3 YEARS   5 YEARS   10 YEARS                                           

PORTFOLIO HOLDINGS                                                              

[GRAPHIC] A description of the Fund's policies and procedures with respect to   
the disclosure of the Fund's portfolio securities is available in the Fund's    
STATEMENT OF ADDITIONAL INFORMATION.                                            

[SIDENOTE]                                                                      

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, 2006.                                   

9 

485APOS 14th Page of 96 TOC 1st Previous Next ↓Bottom Just 14th
Active Assets California Tax-Free Trust                                         

INVESTMENT OBJECTIVE                                                            

[GRAPHIC] 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.                                                                      

PRINCIPAL INVESTMENT STRATEGIES                                                 

[GRAPHIC] 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 Adviser," Morgan Stanley        
Investment Advisors Inc., seeks to maintain the Fund's share price at $1.00. The
share price remaining stable at $1.00 means that the Fund would preserve the    
principal value of your investment.                                             

The Investment Adviser 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 net 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. Additionally, the Fund's investments   
may include tender option bonds and custodial receipts.                         

The Fund has a fundamental policy of investing at least 80% of its net 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.        

In pursuing the Fund's investment objective, the Investment Adviser has         
considerable leeway in deciding which investments it buys, holds or sells on a  
day to day basis and which trading strategies                                   

[SIDENOTE]                                                                      

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.                                                 

10

485APOS 15th Page of 96 TOC 1st Previous Next ↓Bottom Just 15th
it uses. For example, the Investment Adviser in its discretion may determine to 
use some permitted trading strategies while not using others.                   

PRINCIPAL RISKS                                                                 

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

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.                                                              

The Investment Adviser, 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.                                                          

TENDER OPTION BONDS AND CUSTODIAL RECEIPTS. Tender option bonds and custodial   
receipts are instruments similar to variable rate demand obligations. Tender    
option bonds are municipal obligations held pursuant to a custodial arrangement 
and issued pursuant to an agreement with a third party such as a bank or        
financial institution to provide the holder with the option of tendering the    
bond at periodic intervals. The holder of the tender option bond effectively    
holds a demand obligation that bears interest at prevailing short-term rates.   
Custodial receipts represent interests in future interest and/or principal      
payments on U.S. government securities or municipal obligations and provide the 
holder with the option of tendering the receipt back to the custodian or        
trustee. The risks of tender option bonds and custodial receipts include the    
risk that the owner of such instruments may not be considered the owner for     
federal income tax purposes and thus will not be entitled to treat such interest
as exempt from federal income tax. Additionally, a credit rating downgrade on   
the underlying security may impair the ability to tender the bond or receipt    
back to the third party provider of the demand option, thus causing the bond or 
receipt to become illiquid.                                                     

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PAST PERFORMANCE                                                                

[GRAPHIC] 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                                            

[CHART] 

                                                                [Download Table]
            
1996   2.73%
1997   2.88%
1998   2.58%
1999   2.35%
2000   2.90%
2001   1.86%
2002   0.80%
2003   0.41%
2004   0.60%
2005        

The year-to-date total return as of September 30, 2006 was ____%.               

During the periods shown in the bar chart, the highest return for a calendar    
quarter was ____% (quarter ended _________________) and the lowest return for a 
calendar quarter was ____% (quarter ended _________________).                   

AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2005)                          

                                                                [Download Table]

                                         PAST 1 YEAR  PAST 5 YEARS  PAST 10 YEARS
                                                                                 
Active Assets California Tax-Free Trust                                          

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

[SIDENOTE]                                                                      

ANNUAL TOTAL RETURNS                                                            

THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S SHARES HAS VARIED FROM YEAR  
TO YEAR OVER THE PAST TEN CALENDAR YEARS.                                       

AVERAGE ANNUAL TOTAL RETURNS                                                    

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

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FEES AND EXPENSES                                                               

[GRAPHIC] 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.                                              

ANNUAL FUND OPERATING EXPENSES                                                  

Advisory fee                                                                    
Distribution and service (12b-1) fees                                           
Other expenses                                                                  
Total annual Fund operating expenses                                            

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.                              

1 YEAR   3 YEARS   5 YEARS   10 YEARS                                           

PORTFOLIO HOLDINGS                                                              

[GRAPHIC] A description of the Fund's policies and procedures with respect to   
the disclosure of the Fund's portfolio securities is available in the Fund's    
STATEMENT OF ADDITIONAL INFORMATION.                                            

[SIDENOTE]                                                                      

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, 2006.                                   

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ACTIVE ASSETS GOVERNMENT SECURITIES TRUST                                       

INVESTMENT OBJECTIVES                                                           

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

PRINCIPAL INVESTMENT STRATEGIES                                                 

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

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 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.                                          

[SIDENOTE]                                                                      

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.                                                 

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In pursuing the Fund's investment objectives, the Investment Adviser has        
considerable leeway in deciding which investments it buys, holds or sells on a  
day to day basis and which trading strategies it uses. For example, the         
Investment Adviser in its discretion may determine to use some permitted trading
strategies while not using others.                                              

PRINCIPAL RISKS                                                                 

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

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 Adviser, 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.                          

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PAST PERFORMANCE                                                                

[GRAPHIC] 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                                            

 [CHART]

                                                                [Download Table]
            
1996   4.89%
1997   4.99%
1998   4.96%
1999   4.58%
2000   5.82%
2001   3.77%
2002   1.25%
2003   0.60%
2004   0.79%
2005        

The year-to-date total return as of September 30, 2006 was ____%.               

During the periods shown in the bar chart, the highest return for a calendar    
quarter was ____% (quarter ended ________________) and the lowest return for a  
calendar quarter was ____% (quarter ended ________________).                    

AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2005)                          

                                                                [Download Table]

                                           PAST 1 YEAR  PAST 5 YEARS  PAST 10 YEARS
                                                                                   
Active Assets Government Securities Trust                                          

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

[SIDENOTE]                                                                      

ANNUAL TOTAL RETURNS                                                            

THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S SHARES HAS VARIED FROM YEAR  
TO YEAR OVER THE PAST TEN CALENDAR YEARS.                                       

AVERAGE ANNUAL TOTAL RETURNS                                                    

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

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FEES AND EXPENSES                                                               

[GRAPHIC] 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.                                              

ANNUAL FUND OPERATING EXPENSES                                                  

Advisory fee                                                                    
Distribution and service (12b-1) fees                                           
Other expenses                                                                  
Total annual Fund operating expenses                                            

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.                              

1 YEAR   3 YEARS   5 YEARS   10 YEARS                                           

PORTFOLIO HOLDINGS                                                              

[GRAPHIC] A description of the Fund's policies and procedures with respect to   
the disclosure of the Fund's portfolio securities is available in the Fund's    
STATEMENT OF ADDITIONAL INFORMATION.                                            

FUND MANAGEMENT                                                                 

[GRAPHIC] Each Fund has retained the Investment Adviser--Morgan Stanley         
Investment Advisors Inc.--to provide investment advisory services. The          
Investment Adviser is a wholly-owned subsidiary of Morgan Stanley, a preeminent 
global financial services firm that maintains leading market positions in each  
of its three primary businesses: securities, asset management and credit        
services. Morgan Stanley is a full service securities firm engaged in securities
trading and brokerage activities, as well as providing investment banking,      
research and analysis, financing and financial advisory services. The Investment
Adviser's address is 1221 Avenue of the Americas, New York, NY 10020.           

[SIDENOTE]                                                                      

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, 2006.                                   

MORGAN STANLEY INVESTMENT ADVISORS INC.                                         

THE INVESTMENT ADVISER IS WIDELY RECOGNIZED AS A LEADER IN THE MUTUAL FUND      
INDUSTRY AND HAD APPROXIMATELY $____ BILLION IN ASSETS UNDER MANAGEMENT OR      
ADMINISTRATION AS OF SEPTEMBER 30, 2006.                                        

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Each Fund pays the Investment Adviser a monthly advisory fee as full            
compensation for the services and facilities furnished to each Fund, and for    
Fund expenses assumed by the Investment Adviser. This fee is based on each      
Fund's average daily net assets.                                                

For the fiscal year ended June 30, 2006, each Fund accrued total compensation to
the Investment Adviser as follows:                                              

                                   INVESTMENT ADVISORY
                                   FEE ACCRUED
                                   (AS A PERCENTAGE OF THE
FUND                                        FUND'S AVERAGE NET ASSETS)          

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

A discussion regarding the basis for the Board of Trustees' approval of the     
investment advisory agreement is available in each Fund's annual report to      
shareholders for the period ended June 30, 2006.                                

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SHAREHOLDER INFORMATION                                                         

PRICING FUND SHARES                                                             

[GRAPHIC] 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.          

HOW ARE FUND INVESTMENTS MADE?                                                  

[GRAPHIC] Cash balances in your Account that are not invested in securities or  
other investments 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 as a sweep investment including
the Funds, Active Assets Institutional Money Trust and Active Assets            
Institutional Government Securities Trust. In each case, please read the        
respective fund's prospectus carefully prior to making an investment decision.  
You may change your investment selection at any time by notifying your Morgan   
Stanley 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 it 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, 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.                                                    

With respect to certain investors, beginning on or after the Effective Date, if 
your Active Assets Account sweeps cash to Active Assets Money Trust or Active   
Assets Government Securities Trust, your new cash sweep investment will be      
interest-bearing bank deposit accounts established under the Bank Deposit       
Program, unless you choose an alternative sweep option.                         

[SIDENOTE]                                                                      

CONTACTING A FINANCIAL ADVISOR                                                  

IF YOU ARE NEW TO THE MORGAN STANLEY FUNDS AND WOULD LIKE TO CONTACT A MORGAN   
STANLEY FINANCIAL ADVISOR, CALL TOLL-FREE 1-866-MORGAN8 FOR THE TELEPHONE NUMBER
OF THE MORGAN STANLEY OFFICE NEAREST YOU. YOU MAY ALSO ACCESS OUR OFFICE LOCATOR
ON OUR INTERNET SITE AT: www.morganstanley.com/funds                            

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Your interest-bearing deposit accounts will be established at Morgan Stanley    
Bank (the "Bank"), an affiliate of Morgan Stanley DW, and will be eligible for  
FDIC insurance for up to $100,000 per depositor, in accordance with FDIC rules. 
Additional banks may be added in the future. You may continue to elect a new    
cash sweep investment from the available options at any time. On the Effective  
Date, such cash sweep investment options will include the Bank Deposit Program, 
two tax-free money market funds and two institutional money market funds.       

The interest rates paid with respect to the bank deposit accounts established   
under the Bank Deposit Program may be higher or lower than interest rates       
available on other deposit accounts offered by the Bank or on deposit accounts  
offered by other depository institutions and may be lower than interest rates   
paid under your current sweep investment. You should compare the terms, interest
rates, required account minimums, and other features of the Bank Deposit Program
with other deposit accounts, money market funds and alternative cash            
investments.                                                                    

If Active Assets Money Trust or Active Assets Government Securities Trust       
currently is your cash sweep investment, new cash balances will sweep to        
interest-bearing bank deposit accounts established under the Bank Deposit       
Program beginning on the Effective Date. Existing Active Assets Money Trust or  
Active Assets Government Securities Trust balances will remain invested in the  
Funds until withdrawn or reassigned by you. After the Effective Date, your      
existing balances in Active Assets Money Trust or Active Assets Government      
Securities Trust will diminish over time as they will be used to satisfy cash   
needs that (i) arise in connection with your Active Assets Account, including,  
for example, debits that arise from checkwriting, use of your debit card,       
purchases of securities and fees and (ii) are not first satisfied by cash       
balances in your Active Assets Account that have not been swept through the Bank
Deposit Program (or to any alternative sweep investment designated by you). Such
debits will continue to be satisfied by funds remaining in the Active Assets    
Money Trust or Active Assets Government Securities Trust until all such funds   
have been depleted. After that, debits in your Active Assets Account will be    
satisfied from funds in the Bank Deposit Program (or any alternative sweep      
investment designated by you).                                                  

Dividends are not earned until the next business day following the purchase of  
Fund shares.                                                                    

If you make a cash payment into your Active Assets 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 Active Assets Account will be credited until federal 
or other immediately available funds become available to the account.           

There is no minimum investment amount for investors, 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.        

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To help the government fight the funding of terrorism and money laundering      
activities, federal law requires all financial institutions to obtain, verify   
and record information that identifies each person who opens an account. What   
this means to you: when you open an account, we will ask your name, address,    
date of birth and other information that will allow us to identify you. If we   
are unable to verify your identity, we reserve the right to restrict additional 
transactions and/or liquidate your account at the next calculated net asset     
value after your account is closed (less any applicable sales/account charges   
and/or tax penalties) or take any other action required by law.                 

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.                                                                  

HOW ARE FUND SHARES SOLD?                                                       

[GRAPHIC] AUTOMATIC SALES. Your Account will be reviewed on each business day to
determine whether it 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 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, Morgan Stanley DW 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 Morgan Stanley DW exercises its right to terminate the Account  
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                                       

c)   calling your Morgan Stanley Financial Advisor.                             

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 Financial Advisor 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 Morgan Stanley 
DW may take the authorized steps described in your client account agreement.    

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DISTRIBUTIONS                                                                   

[GRAPHIC] 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 Adviser 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.                                      

FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES                               

[GRAPHIC] Because, as money market funds, each Fund's principal investment      
strategy is to maintain a stable share price, frequent purchases and redemptions
of shares by Fund shareholders generally do not present risks for other         
shareholders of each Fund. Therefore, the policies and procedures regulating    
frequent purchases and redemptions adopted by the Funds' Board of Trustees      
applicable to other Morgan Stanley Funds are not applicable with respect to     
frequent purchases and redemptions of each Fund shares. However, frequent       
trading by Fund shareholders can disrupt management of each Fund and raise its  
expenses. Therefore, we may not accept any request for a purchase when we       
believe that it is being used as a tool for market timing and we may bar        
shareholders who trade excessively from making further purchases for an         
indefinite period.                                                              

TAX CONSEQUENCES                                                                

[GRAPHIC] 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   

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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, whether 
the shareholder receives them in cash or reinvests them in shares of a Fund. 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. Under current law, a 
portion of the ordinary income dividends you receive may be taxed at the same   
rate as long-term capital gains. However, even if income received in the form of
ordinary income dividends is taxed at the same rates as long-term capital gains,
such income will not be considered long-term capital gains for other federal    
income tax purposes. For example, you generally will not be permitted to offset 
ordinary income dividends with capital losses. Short-term capital gain          
distributions will continue to be taxed at ordinary income rates.               

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 federal backup withholding tax on taxable distributions and          
redemption proceeds (as of the date of this PROSPECTUS this rate is 28%). Any   
withheld amount would be sent to the IRS as an advance payment of your taxes due
on your income.                                                                 

ADDITIONAL INFORMATION                                                          

[GRAPHIC] The Investment Adviser and/or the distributor may pay compensation    
(out of their own funds and not as an expense of the Funds) to certain          
affiliated or unaffiliated brokers, dealers or other financial intermediaries or
service providers in connection with the sale or retention of Fund shares and/or
shareholder servicing. Such compensation may be significant in amount and the   
prospect of receiving any such additional compensation may provide such         
affiliated or unaffiliated entities with an incentive to favor sales of shares  
of the Funds over other investment options. Any such payments will not change   
the net asset value or the price of the Funds' shares. For more information,    
please see the Funds' STATEMENT OF ADDITIONAL INFORMATION.                      

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FINANCIAL HIGHLIGHTS                                                            

The financial highlights table is intended to help you understand the Fund's    
financial performance for the periods indicated. Certain information reflects   
financial results for a single Fund share throughout each period. 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 has been audited by _________________, an independent          
registered public accounting firm, whose report, along with the Fund's financial
statements, is incorporated by reference in the STATEMENT OF ADDITIONAL         
INFORMATION from the Fund's annual report, which is available upon request.     

ACTIVE ASSETS MONEY TRUST                                                       

To Come 

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The financial highlights table is intended to help you understand the Fund's    
financial performance for the periods indicated. Certain information reflects   
financial results for a single Fund share throughout each period. 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 has been audited by _________________, an independent          
registered public accounting firm, whose report, along with the Fund's financial
statements, is incorporated by reference in the STATEMENT OF ADDITIONAL         
INFORMATION from the Fund's annual report, which is available upon request.     

ACTIVE ASSETS TAX-FREE TRUST                                                    

To Come 

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The financial highlights table is intended to help you understand the Fund's    
financial performance for the periods indicated. Certain information reflects   
financial results for a single Fund share throughout each period. 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 has been audited by _________________, an independent          
registered public accounting firm, whose report, along with the Fund's financial
statements, is incorporated by reference in the STATEMENT OF ADDITIONAL         
INFORMATION from the Fund's annual report, which is available upon request.     

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST                                         

To Come 

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The financial highlights table is intended to help you understand the Fund's    
financial performance for the periods indicated. Certain information reflects   
financial results for a single Fund share throughout each period. 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 has been audited by _________________, an independent          
registered public accounting firm, whose report, along with the Fund's financial
statements, is incorporated by reference in the STATEMENT OF ADDITIONAL         
INFORMATION from the Fund's annual report, which is available upon request.     

ACTIVE ASSETS GOVERNMENT SECURITIES TRUST                                       

To Come 

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Additional information about each Fund's investments is available in the Fund's 
ANNUAL and SEMIANNUAL REPORT TO SHAREHOLDERS.                                   

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 toll-free (800) 869-NEWS.   
Free copies of these documents are also available from our Internet site at:    
www.morganstanley.com/funds.                                                    

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

Information about the Funds (including the STATEMENT OF ADDITIONAL INFORMATION) 
can be viewed and copied at the Securities and Exchange Commission's (the "SEC")
Public Reference Room in Washington, DC. Information about the Reference Room's 
operations may be obtained by calling the SEC at (202) 551-8090. 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: publicinfo@sec.gov, 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:                                

ACTIVE ASSETS MONEY TRUST                   811-3159                            
ACTIVE ASSETS TAX-FREE TRUST                811-3162                            
ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST     811-6350                            
ACTIVE ASSETS GOVERNMENT SECURITIES TRUST   811-3165                            

Investments and services are offered through Morgan Stanley DW Inc., member     
SIPC. Morgan Stanley, Active Assets, Active Assets Account and BusinesScape are 
service marks of Morgan Stanley or its affiliates.                              

(C) 2006 Morgan Stanley                                                         

[Morgan Stanley LOGO]                                                           

MORGAN STANLEY FUNDS                                                            

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

                                                                     37829 10/06

FOUR DIFFERENT MONEY MARKET FUNDS OFFERED EXCLUSIVELY TO INVESTORS WHO HAVE AN  
ACTIVE ASSETS ACCOUNT OR BUSINESSCAPE ACCOUNT WITH MORGAN STANLEY DW INC.       

[Morgan Stanley LOGO]                                                           

Prospectus                                                                      

October 31, 2006                                                                

CLF #37829PRO-00                                                                

485APOS 33rd Page of 96 TOC 1st Previous Next ↓Bottom Just 33rd
STATEMENT OF ADDITIONAL INFORMATION                                             

OCTOBER 31, 2006                                                                

ACTIVE ASSETS                                                                   
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 October 31, 2006 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 Morgan      
Stanley DW Inc. at any of its branch offices.                                   

    The Funds' audited financial statements for the fiscal year ended June 30,
2006, including notes thereto and the report of __________, are herein          
incorporated by reference from the Funds' annual reports. Copies of the Funds'  
ANNUAL REPORT TO SHAREHOLDERS must accompany the delivery of this STATEMENT OF  
ADDITIONAL INFORMATION.                                                         

Active Assets Money Trust                                                       
Active Assets Tax-Free Trust                                                    
Active Assets California Tax-Free Trust                                         
Active Assets Government Securities Trust                                       
1221 Avenue of the Americas                                                     
New York, NY 10020                                                              
(800) 869-NEWS                                                                  

485APOS 34th Page of 96 TOC 1st Previous Next ↓Bottom Just 34th
TABLE OF CONTENTS                                                               

    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 Objectives/Policies/Investment Restrictions            19
         D. Disclosure of Portfolio Holdings                                  23
  III.   Management of the Funds                                              28
         A. Board of Trustees                                                 28
         B. Management Information                                            28
         C. Compensation                                                      36
   IV.   Control Persons and Principal Holders of Securities                  39
    V.   Investment Advisory and Other Services                               39
         A. Investment Adviser and Administrator                              39
         B. Principal Underwriter                                             42
         C. Services Provided by the Investment Adviser and Administrator     42
         D. Rule 12b-1 Plan                                                   43
         E. Other Service Providers                                           45
         F. Codes of Ethics                                                   46
         G. Proxy Voting Policy and Proxy Voting Record                       46
         H. Revenue Sharing                                                   47
   VI.   Brokerage Allocation and Other Practices                             48
         A. Brokerage Transactions                                            48
         B. Commissions                                                       48
         C. Brokerage Selection                                               49
         D. Directed Brokerage                                                49
         E. Regular Broker-Dealers                                            49
  VII.   Capital Stock and Other Securities                                   50
 VIII.   Purchase, Redemption and Pricing of Shares                           50
         A. Purchase/Redemptions of Shares                                    50
         B. Offering Price                                                    51
   IX.   Taxation of the Funds and Their Shareholders                         52
    X.   Underwriters                                                         56
   XI.   Performance Data                                                     56
  XII.   Financial Statements                                                 56
 XIII.   Fund Counsel                                                         56

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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).                                                                  

 "ADMINISTRATOR" OR "MORGAN STANLEY SERVICES" -- Morgan Stanley Services
Company Inc., a wholly-owned fund services subsidiary of the Investment Adviser.

"CUSTODIAN" -- The Bank of New York.                                  

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

"FINANCIAL ADVISORS" -- Morgan Stanley 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 1940, as amended ("Investment Company  
Act")) of the Funds.                                                            

"INVESTMENT ADVISER" -- Morgan Stanley Investment Advisors Inc., a    
wholly-owned investment adviser subsidiary of Morgan Stanley.                   

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

     "MORGAN STANLEY DW" -- Morgan Stanley DW Inc., a wholly-owned broker-dealer
subsidiary of Morgan Stanley.                                                   

 "MORGAN STANLEY FUNDS" -- Registered investment companies for which the
Investment Adviser serves as the investment adviser and that hold themselves out
to investors as related companies for investment and investor services.         

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

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

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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:                                   

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-    to provide as high a level of daily income
Free Trust --                    exempt  from federal and California  
                                     personal income tax as is consistent with
                                 stability of principal and liquidity.

Active Assets Government         high current income, preservation of 
Securities Trust --              capital and liquidity.               

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 approved by  
the Trustees that are 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 by the Investment Adviser. 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         
nationally recognized statistical rating organization ("Requisite NRSRO") (as   
defined under Rule 2a-7 of the Investment Company Act (the "Rule")).            
Additionally, upon an Event of Insolvency (as defined under Rule 2a-7) with     
respect to the seller,                                                          

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the collateral must qualify the repurchase agreement for preferential treatment 
under a provision of applicable insolvency law providing an exclusion from any  
automatic stay of creditors' rights against the seller. In the event of a       
default or bankruptcy by a selling financial institution, the 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 Adviser, 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 a 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.        

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                                                                      

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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 Adviser 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 Adviser 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 Adviser not to   
enter into put transactions with, and to exercise outstanding puts of, any      
municipal securities dealer which, in the judgment of the Investment Adviser,   
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.                                        

   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                                                                     

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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 Active Assets 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  
Active Assets California Tax-Free Trust.                                        

The types of taxable money market instruments in which Active Assets  
Tax-Free Trust and Active Assets 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 U.S. 
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 Rating Group, a division of The McGraw-Hill Companies, Inc.   
("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.                                                

    CUSTODIAL RECEIPTS. Each of Active Assets Tax-Free Trust and Active Assets
California Tax-Free Trust may invest in custodial receipts representing         
interests in U.S. government securities, municipal obligations or other debt    
instruments held by a custodian or trustee. Custodial receipts evidence         
ownership of future interest payments, principal payments or both on notes or   
bonds issued or guaranteed as to principal or interest by the U.S. government,  
its agencies, instrumentalities, political subdivisions or authorities, or by a 
state or local governmental body or authority, or by other types of issuers. For
certain securities law purposes, custodial receipts are not considered          
obligations of the underlying issuers. In addition, if for tax purposes the     
Funds are not considered to be the owner of the underlying securities held in   
the custodial account, the Funds may suffer adverse tax consequences. As a      
holder of custodial receipts, the Funds will bear their respective proportionate
share of the fees and expenses charged to the custodial account.                

     TENDER OPTION BONDS. Each of Active Assets Tax-Free Trust and Active Assets
California Tax-Free Trust may invest in tender option bonds. A tender option    
bond is a municipal obligation (generally held pursuant to a custodial          
arrangement) having a relatively long maturity and bearing interest at a fixed  
rate substantially higher than prevailing short-term tax-exempt rates. The bond 
is typically issued in conjunction with the agreement of a third party, such as 
a bank, broker-dealer or other financial institution, pursuant to which the     
institution grants the security holder the option, at periodic intervals, to    
tender its securities to the institution. As consideration for providing the    
option, the financial institution receives periodic fees equal to the difference
between the bond's fixed-rate coupon and the rate, as determined by a           
remarketing or similar agent, that would cause the securities, coupled with the 
tender option, to trade at par on the date of such determination. Thus, after   
payment of this fee, the security holder effectively holds a demand obligation  
that bears interest at the prevailing short-term, tax-exempt rate. An           
institution will normally not be obligated to accept tendered bonds in the event
of certain defaults or significant downgrading in the credit rating assigned to 
the issuer of the bond. The tender option will be taken into account in         
determining the maturity of the tender option bonds and the Funds' average      
portfolio maturity. There is a risk that the Funds may not be considered the    
owner of a tender option bond for federal income tax purposes, and thus will not
be entitled to treat such interest as exempt from federal income tax. Certain   
tender option bonds may be illiquid or may become illiquid as a result of a     
credit rating downgrade, a payment default or a disqualification from tax-exempt
status.                                                                         

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

  LOANS OF PORTFOLIO SECURITIES. Active Assets Government Securities Trust
and Active Assets Money Trust may lend its portfolio securities to brokers,     
dealers, banks and other institutional investors. By lending its portfolio      
securities, each Fund attempts to increase its net investment income through the

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receipt of interest on the cash collateral with respect to the loan or fees     
received from the borrower in connection with the loan. Any gain or loss in the 
market price of the securities loaned that might occur during the term of the   
loan would be for the account of the Fund. Each Fund employs an agent to        
implement the securities lending program and the agent receives a fee from the  
Fund for its services. Each Fund will not lend more than 331/3% of the value of 
its total assets.                                                               

     Each Fund may lend its portfolio securities so long as the terms, structure
and the aggregate amount of such loans are not inconsistent with the Investment 
Company Act or the Rules and Regulations or interpretations of the Securities   
and Exchange Commission ("SEC") thereunder, which currently require that (i) the
borrower pledge and maintain with the Fund collateral consisting of liquid,     
unencumbered assets having a value at all times not less than 100% of the value 
of the securities loaned; (ii) the borrower add to such collateral whenever the 
price of the securities loaned rises (i.e., the borrower "marks to market" on a 
daily basis); (iii) the loan be made subject to termination by the Fund at any  
time; and (iv) the Fund receive a reasonable return on the loan (which may      
include the Fund investing any cash collateral in interest bearing short-term   
investments), any distributions on the loaned securities and any increase in    
their market value. In addition, voting rights may pass with the loaned         
securities, but each Fund will retain the right to call any security in         
anticipation of a vote that the Investment Adviser deems material to the        
security on loan.                                                               

     There may be risks of delay and costs involved in recovery of securities or
even loss of rights in the collateral should the borrower of the securities fall
financially. These delays and costs could be greater for foreign securities.    
However, loans will be made only to borrowers deemed by the Investment Adviser  
to be creditworthy and when, in the judgment of the investment Adviser, the     
income which can be earned from such securities loans justifies the attendant   
risk. All relevant facts and circumstances, including the creditworthiness of   
the broker, dealer, bank or institution, will be considered in making decisions 
with respect to the lending of securities, subject to review by the Funds' Board
of Trustees. Each Fund also bears the risk that the reinvestment of collateral  
will result in a principal loss. Finally, there is the risk that the price of   
the securities will increase while they are on loan and the collateral will not 
be adequate to cover their value.                                               

  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.                                              

 SPECIAL RISK CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES

 As described in the PROSPECTUS, except during temporary periods, Active
Assets California Tax-Free Trust will invest substantially all of its assets in 
California municipal securities. The portfolio of the Fund may include          
securities issued by the State of California (the "State"), by its various      
public bodies (the "Agencies") and/or by other municipal entities located within
the State (securities of all such entities are referred to herein as "California
municipal securities"). In addition, the specific California municipal          
securities in which the Fund will invest will change from time to time. The Fund
is therefore susceptible to political, economic, regulatory or other factors    
affecting issuers of California municipal securities. The following information 
constitutes only a brief summary of a number of the complex factors which may   
impact issuers of California municipal securities and does not purport to be a  
complete or exhaustive description of all adverse conditions to which issuers of
California municipal securities may be subject. Such information is derived from
official statements utilized in connection with the issuance of California      
municipal securities, as well as from other publicly available documents. Such  
an official statement,                                                          

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together with any updates or supplements thereto, generally may be obtained upon
request to the Treasurer's office of the State. Such information has not been   
independently verified by the Fund and the Fund assumes no responsibility for   
the completeness or accuracy of such information. The summary below does not    
include all of the information pertaining to the budget, receipts and           
disbursements of the State that would ordinarily be included in various public  
documents issued thereby, such as an official statement prepared in connection  
with the issuance of general obligation bonds of the State. Additionally, many  
factors, including national, economic, social and environmental policies and    
conditions, which are not within the control of such issuers, could have an     
adverse impact on the financial condition of such issuers. The Fund cannot      
predict whether or to what extent such factors or other factors may affect the  
issuers of California municipal securities, the market value or marketability of
such securities or the ability of the respective issuers of such securities     
acquired by the Fund to pay interest on or principal of such securities. The    
creditworthiness of obligations issued by local California issuers may be       
unrelated to the creditworthiness of obligations issued by the State, and there 
is no assurance on the part of the State to make payments on such local         
obligations. There may be specific factors that are applicable in connection    
with investment in the obligations of particular issuers located within         
California, and it is possible the Fund will invest in obligations of particular
issuers as to which such specific factors are applicable. However, the          
information set forth below is intended only as a general summary and not as a  
discussion of any specific factors that may affect any particular issuer of     
California municipal securities.                                                

GENERAL ECONOMIC CONDITIONS                                                     

California's economy, the largest among the 50 states and one of the  
largest in the world, has major components in high technology, trade,           
entertainment, agriculture, manufacturing, tourism, construction and services.  
U.S. economic growth was slower than expected in the first half of 2001, and the
California economy began to slow in the spring of 2001. The State finally showed
the impact of the national recession, coupled with a cyclical downturn in the   
high-technology sector, and entered a mild recession. The terrorist attacks on  
September 11, 2001 resulted in a further, but mostly temporary, weakening of the
economy in tourism-based areas. The economy has since stabilized with 480,000   
jobs gained between July 2003 and November 2005 compared with 367,000 jobs lost 
between January 2001 and July 2003. California's population as of July 1, 2005  
of about 37 million represented over 12 percent of the total United States      
population. The State's population is concentrated in metropolitan areas.       

  Both the California economy and the national economy have improved since
the second quarter of 2003. Output of the national economy, adjusted for        
inflation, has grown more strongly, and job growth has turned around more       
recently. Personal income growth picked up in California during 2003,           
particularly in the fourth quarter. From April 2003 to April 2004, nonfarm      
payroll employment rose by 0.6 percent in the State and 0.9 percent in the      
nation. The State unemployment rate was 6.32 percent in April 2004, down from   
6.8 percent a year earlier. The national unemployment rate in April 2004 was 5.6
percent, down from 6.0 percent a year earlier. Nonfarm payroll employment grew  
by 1.6 percent in 2005 after growing by 1 percent in 2004. The improvement in   
job growth was due primarily to small job gains in government and manufacturing,
and bigger job gains in professional and business services, which widened the   
distribution of job gains across major industries. In addition, the State's     
unemployment rate dropped from an average of 6.2 percent in 2004 to 5.3 percent 
in 2005, as the number of unemployed persons fell below 1,000,000 for the first 
time in nearly four years. In January 2006, the unemployment rate dropped to 4.9
percent, the lowest rate since March 2001. The national unemployment rate was   
4.7 percent in January 2006.                                                    

Broad measures of the national and California economies, such as      
inflation-adjusted gross domestic product and California personal income and    
taxable sales, posted solid gains in 2005, even if all three measures grew      
somewhat more slowly than in 2004. Year-over-year growth of real GDP and        
California personal income in the first three quarters of 2005 and California   
taxable sales in the first half of 2005 were higher than average yearly growth  
in the preceding ten years. Also, made-in-California exports continued to grow, 
but not nearly as quickly as in 2004. Real GDP grew by 3.5 percent in 2005,     
compared to 4.2 percent in 2004. California personal income was 6.2 percent     
higher in the first three quarters of 2005 that during the same period in 2004. 
California taxable sales were more than 6 percent higher than a year ago in the 
first half of 2005, and California merchandise exports grew by 6 percent in     
2005. High-tech exports fell by 1 percent in 2005, after growing by 15 percent  
in 2004.                                                                        

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Housing permits issuance was 2.7 percent lower in 2005 than in 2004.  
Single-family permits were up about 2.2 percent, while multi-family permits were
down by 15 percent. Statewide, the dollar value of private nonresidential       
construction permits rose by 16 percent, with the gains widespread across types 
of nonresidential buildings, structures, and alterations and additions.         
Nonresidential permits issued in January 2006 were up over 56 percent from the  
previous year.                                                                  

   Home sales slowed in California during 2005. In December, sales were down
by 15.5 percent from year-ago levels in the nine-county San Francisco Bay Area, 
4.5 percent in Southern California, and 9.7 percent in the state as a whole.    
Overall, the pace of home sales during the four months ending with January 2006 
slowed 14 percent from the same months a year earlier. The median price of      
existing single-family homes sold in January 2006 was $551,300, a slight        
increase from December 2005 and nearly 14 percent higher than the previous      
January. In the 2006-07 Governor's Budget, the Department of Finance projected  
that in calendar years 2006 and 2007, the California economy will decelerate    
slightly but continue to grow at a rate close to the long-run average growth of 
the State economy. The most recent economic forecasts of the State Department of
Finance, updated in November 2005, project that unemployment will remain at or  
below 5.2 percent throughout 2008. Personal income was expected to grow 6.0     
percent in 2005, but is expected only to grow 5.8 percent in 2006, 5.5 percent  
in 2007, and then rise to 5.9 percent in 2008. The economic forecasts of the    
State Department of Finance are prepared using national economic activity       
forecasts; major national and California economic indicators; revenue estimates;
legislative, judicial and administrative changes; and recent cash results.      

STATE GOVERNMENT                                                                

    The State Constitution provides for three separate branches of government:
the legislative, the judicial and the executive. The Constitution guarantees the
electorate the right to make basic decisions, including amending the            
Constitution and local government charters. In addition, the State voters may   
directly influence State government through the initiative, referendum and      
recall processes.                                                               

LOCAL GOVERNMENTS                                                               

     The primary units of local government in California are the counties, which
range in population from 1,200 in Alpine County to approximately 10 million in  
Los Angeles County. Counties are responsible for the provision of many basic    
services, including indigent health care, welfare, jails, and public safety in  
unincorporated areas. There are also 478 incorporated cities and thousands of   
special districts formed for education, utilities, and other services. The      
fiscal condition of local governments has been constrained since Proposition 13,
which added Article XIII A to the State Constitution ("Proposition 13"), was    
approved by California voters in 1978. Proposition 13 reduced and limited the   
future growth of property taxes and limited the ability of local governments to 
impose "special taxes" (those devoted to a specific purpose) without two-thirds 
voter approval. Proposition 218, another initiative constitutional amendment    
enacted in 1996, further limited the ability of local governments to raise      
taxes, fees, and other exactions. Counties, in particular, have had fewer       
options to raise revenues than many other local government entities, while they 
have been required to maintain many services.                                   

 Subsequent to the adoption of Proposition 13, the State provided aid to
local governments from the General Fund; however, during the recession of the   
early 1990s, the Legislature eliminated most components of aid to local         
government entities but provided additional revenue sources, such as sales      
taxes, and reduced certain mandates for local services. The 2004 Budget Act,    
related legislation and the enactment of Senate Constitutional Amendment No. 4  
dramatically changed the State-local fiscal relationship. These statutory and   
Constitutional changes implemented an agreement negotiated between the Governor 
and local government officials (the "state-local agreement") in connection with 
the 2004 Budget Act. One such change relates to the reduction of the vehicle    
license fee ("VLF") rate from 2 percent to 0.65 percent of the market value of  
the vehicle. In order to protect local governments, which have previously       
received all VLF revenues, the reduction in VLF revenue to cities and counties  
from this rate change was replaced by an increase in the amount of property tax 
they receive.                                                                   

     As part of the state-local agreement, Senate Constitutional Amendment No. 4
was enacted by the Legislature and subsequently approved by voters as           
Proposition 1A at the November 2004 election. Proposition 1A amended the State  
Constitution to, among other things, reduce the Legislature's authority over    
local government revenue sources by placing restrictions on the State's access  
to local governments' property, sales and VLF revenues as of November 3, 2004.  
Beginning with fiscal year 2008-09, the State                                   

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will be able to borrow up to 8 percent of local property tax revenues, but only 
if the Governor proclaims such action is necessary due to a severe State fiscal 
hardship, two-thirds of both houses of the Legislature approve the borrowing and
the amount borrowed is required to be paid back within three years. The State   
also will not be able to borrow from local property tax revenues for more than  
two fiscal years within a period of 10 fiscal years, and only if previous       
borrowings have been repaid. In addition, the State cannot reduce the local     
sales tax rate or restrict the authority of local governments to impose or      
change the distribution of the statewide local sales tax. Proposition 1A also   
prohibits the State from mandating activities on cities, counties or special    
districts without providing for the funding needed to comply with the mandates. 
Beginning in fiscal year 2005-06, if the State does not provide funding for the 
activity that has been determined to be mandated, the requirement on cities,    
counties or special districts to abide by the mandate would be suspended. In    
addition, Proposition 1A expanded the definition of what constitutes a mandate  
to encompass State action that transfers financial responsibility to cities,    
counties and special districts for a required program for which the State       
previously had partial or complete responsibility. The State mandate provisions 
of Proposition 1A do not apply to schools or community colleges or to mandates  
relating to employee rights.                                                    

STATE FINANCES                                                                  

   The moneys of the State are segregated into the General Fund and over 900
other funds, including special, bond and trust funds. The General Fund consists 
of revenues received by the State Treasury and not required by law to be        
credited to any fund and earnings from the investment of State moneys not       
allocable to another Fund. The General Fund is the principal operating fund for 
the majority of governmental activities and is the depository of most of the    
major revenue sources of the State.                                             

The following is a summary of the State's major revenue sources:      

     -    PERSONAL INCOME TAX. The California personal income tax, modeled after
      the federal income tax laws, accounts for a significant portion of
         General Fund tax revenues. It is imposed on net taxable income (gross
       income less exclusions and deductions), with rates ranging from 1.0
        percent to 9.3 percent. The personal income tax is adjusted annually
          by the change in the consumer price index. Taxpayers may be subject to
      an alternative minimum tax ("AMT"), similar to the federal AMT. In
         addition, Proposition 63, approved by the voters in the November 2004
     election, imposes a 1 percent surcharge on taxpayers with taxable
          income over $1 million. The proceeds of the tax surcharge are required
    to be used to expand county mental health programs. The personal
         income tax structure is considered to be highly progressive. Taxes on
          capital gains realizations and stock options, which are largely linked
   to stock market performance, can add a significant dimension of
       volatility to personal income tax receipts. Capital gains and stock
        option tax receipts have accounted for as much as 24.7 percent or as
         little as 7.3 percent of General Fund revenues in the last ten years.
        The 2006-07 Governor's Budget estimates that capital gains and stock
     option tax receipts will account for 12.9 percent of General Fund
  revenue in 2005-06 and 13.1 percent of General Fund revenue in
2006-07.                                                    

   -    SALES TAX. The sales tax is imposed upon retailers for the privilege
          of selling tangible personal property in California. Most retail sales
    and leases are subject to the tax. However, exemptions have been
      provided for certain essentials such as food for home consumption,
          prescription drugs, gas delivered through mains and electricity. Other
        exemptions provide relief for a variety of sales ranging from custom
          computer software to aircraft. As of January 1, 2006, the breakdown of
          the base state and local sales tax rate of 7.25 percent is as follows:
        5 percent imposed as a State General Fund tax; 0.5 percent dedicated
         to local government for health and welfare program realignment (Local
        Revenue Fund); 0.5 percent dedicated to local governments for public
   safety services (Local Public Safety Fund); 1 percent local tax
    imposed under the Uniform Local Sales and Use Tax Law, with 0.25
        percent dedicated to county transportation purposes and 0.75 percent
       for city and county general-purpose use; and 0.25 percent deposited
        into the Fiscal Recovery Fund to repay the State's economic recovery
        bonds. Senate Constitutional Amendment No. 4, approved by the voters
      as Proposition 1A in the November 2004 election, amended the State
 Constitution to, among other things, reduce the Legislature's
      authority over local government revenue sources by restricting the
State from lowering the local sales tax rate or changing the
  allocation of local sales tax revenues without meeting certain
conditions.                                                 

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 -    CORPORATION TAX. The State's corporate tax revenue is derived from
      franchise tax, corporate income tax, additional taxes on banks and
         other financial corporations, an AMT similar to the federal AMT and a
     tax on the profits of Sub-Chapter S corporations. On February 23,
        2004, the U.S. Supreme Court denied the Franchise Tax Board's appeal
requesting review of a tax refund case which involved the   
      deductibility of corporate dividends. Potential revenue losses are
        estimated at $400 million over several fiscal years through 2007-08.
         These revenue losses are included in the State budget projections for
fiscal years 2005-06 and 2006-07.                           

-    INSURANCE TAX. The majority of insurance written in California,  
     subject to certain exceptions, is subject to a 2.35 percent gross
premium tax.                                                

 -    ESTATE TAX; OTHER TAXES. The California estate tax is based on the
        State death tax credit allowed against the federal estate tax and is
      designed to pick up the maximum credit allowed against the federal
       estate tax return. The State estate tax was eliminated beginning in
        2005 in conjunction with the phase out of the federal estate tax. In
       2010 the federal estate tax will be reinstated along with the State
        estate tax, unless future federal legislation is enacted to make the
      provisions eliminating the tax permanent. Other sources of General
     Fund revenue include inheritance and gift taxes, cigarette taxes,
         alcoholic beverage taxes, horse racing license fees and trailer coach
license fees.                                               

STATE BUDGET PROCESS                                                            

 The State's fiscal year begins on July 1st and ends on June 30th of the
following year. Under the State Constitution, money may be drawn from the       
Treasury only through an appropriation made by law. The primary source of the   
annual expenditure is the annual Budget Act as approved by the Legislature and  
signed by the Governor. The annual budget is proposed by the Governor by January
10 of each year for the next fiscal year (the "Governor's Budget"). State law   
requires the annual proposed Governor's Budget to provide for projected revenues
equal to or in excess of projected expenditures for the ensuing fiscal year.    
Following the submission of the Governor's Budget, the Legislature takes up the 
proposal. During late spring, usually in May, the Department of Finance submits 
revised revenue and expenditure estimates for both the current and budget years 
to the Legislature. This update process is referred to as the May Revision. The 
Budget Act, which follows the May Revision, must be approved by a two-third     
majority vote of each House of the Legislature.                                 

  Appropriations also may be included in legislation other than the Budget
Act. With limited exceptions, bills containing General Fund appropriations must 
be approved by a two-thirds majority vote in each House of the Legislature and  
be signed by the Governor. Continuing appropriations, available without regard  
to fiscal year, may also be provided by statute or the State Constitution.      

    The Governor may reduce or eliminate specific line items in the Budget Act
or any other appropriations bill without vetoing the entire bill. Such          
individual line-item vetoes are subject to override by a two-thirds majority    
vote of each House of the Legislature.                                          

     The Balanced Budget Amendment ("Proposition 58") beginning with fiscal year
2004-2005 requires the State to enact a balanced budget, establishes a special  
reserve in the General Fund, restricts future borrowings to cover budget        
deficits, and provides for mid-year budget adjustments in the event that the    
budget falls out of balance. The Legislature may not pass a budget bill in which
General Fund expenditures exceed estimated General Fund revenues and fund       
balances at the time of passage and as set forth in the budget bill. As a result
of the requirements of Proposition 58, the State would, in some cases, have to  
take more immediate actions to correct budgetary shortfalls. Proposition 58 also
prohibits certain future borrowings to cover budget deficits. These restrictions
apply to general obligation bonds, revenue bonds and certain other forms of     
long-term borrowings, but do not apply to certain short-term and inter-fund     
borrowings.                                                                     

  In addition to Proposition 58, a number of other laws and constitutional
amendments have been enacted over the years, often through voter initiatives,   
which have made it more difficult to raise State taxes, have restricted the use 
of State General Fund or special fund revenues, or have otherwise limited the   
Legislature and Governor's discretion in enacting budgets. Examples of          
constraints on the budget process include Proposition 13 (requiring a two-thirds
vote in each House of the Legislature to change State taxes enacted for the     
purpose of increasing revenues collected), Proposition 98 (requiring a minimum  
percentage                                                                      

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of General Fund revenues be spent on local education), Proposition 49 (requiring
expanded State funding for before and after school programs), Proposition 10    
(raising taxes on tobacco products but mandating the expenditure of such        
revenues) and Proposition 63 (imposing a 1 percent tax surcharge on taxpayers   
with annual taxable income of more than $1 million in order to fund mental      
health services and limiting the Legislature or Governor from redirecting funds 
now used for mental health services).                                           

CURRENT STATE BUDGET AND 2006-2007 PROPOSED GOVERNOR'S BUDGET                   

   The 2005 Budget Act was adopted by the Legislature on July 7, 2005, along
with a number of implementing measures, and was signed by the Governor on July  
11, 2005. In approving the budget, the Governor vetoed $190 million in          
appropriations (including $115 million in General Fund appropriations). Under   
the 2005 Budget Act, revenues and transfers were projected to increase 5.7      
percent, from $79.9 billion in fiscal year 2004-05 to $84.5 billion in fiscal   
year 2005-06. The revenue projections assumed continued but moderating growth in
California's economy as reflected in several key indicators. The 2005 Budget Act
contained General Fund appropriations of $90.0 billion, compared to $81.7       
billion in 2004-05. The difference between revenues and expenditures in fiscal  
year 2005-06 is expected to be funded by using part of the $7.5 billion fund    
balance at June 30, 2005. The June 30, 2006 reserve was projected to be $1.302  
billion, compared to an estimated June 30, 2005 reserve of $6.857 billion. About
$900 million of this reserve is to be set aside for payment in fiscal year      
2006-07 of tax refunds and other adjustments related to the tax amnesty program 
implemented in early 2005. The 2005 Budget Act also included special fund       
expenditures of $23.3 billion and bond fund expenditures of $4.0 billion. The   
State has issued $3.0 billion of Revenue Anticipation Notes ("RANS") to meet the
State's short-term cash flow needs for fiscal year 2005-06.                     

The 2006-07 Governor's Budget, released on January 10, 2006, revised  
various revenue and expenditure estimates for 2005-06. The 2006-07 Governor's   
Budget projects that the State will end fiscal year 2005-06 with a budgetary    
reserve of $6.5 billion, up $5.2 billion from estimates made at the time of the 
2005 Budget Act. This increase in the budgetary reserve is a result of $2.3     
billion higher revenues in 2004-05, and projected increases in revenues in      
2005-06 of $3.2 billion. This includes the following significant adjustments    
since the 2005 Budget Act: a $3.242 billion increase in major tax revenues due  
to an improved economic forecast; a $198 million increase due to higher State   
Lands Royalties and Unclaimed Property revenues; and a $252 million loss in     
revenues due to not issuing pension obligation bonds as a result of pending     
litigation contesting their issuance.                                           

   Under the 2006-07 Governor's Budget, General Fund expenditures for fiscal
year 2005-06 are projected at $90.3 billion, an increase of $0.3 billion        
compared with 2005 Budget Act estimates. This includes the following significant
changes since the 2005 Budget Act: a $273 million loss of expenditure savings   
due to not issuing pension obligation bonds as a result of pending litigation   
contesting their issuance; $126 million in additional expenditures for employee 
compensation; $117 million in additional expenditures due to caseload growth in 
the Medi-Cal program; a $280 million decrease in Proposition 98 expenditures;   
and a $174 million decrease in non-Proposition 98 K-12 expenditures.            

The 2006-07 Governor's Budget estimates that the operating deficit for
2006-07 will be $6.3 billion. However, the Budget is balanced by using a large  
part of the 2005-06 ending fund balance. After taking into consideration the    
adjustments of $1.6 billion for the repayment or prepayment of prior            
obligations, including $460 million to prepay the Economic Recovery Bonds, the  
effective operating deficit for 2006-07 is $4.7 billion. The 2006-07 Governor's 
Budget projects a $613 million total reserve at the end of fiscal year 2006-07, 
including $460 million in the newly created Budget Stabilization Account        
pursuant to Proposition 58. General Fund revenues and transfers for fiscal year 
2006-07 are projected at $91.5 billion, an increase of $3.9 billion compared    
with revised estimates for fiscal year 2005-06.                                 

  General Fund expenditures for fiscal year 2006-07 are projected at $97.9
billion, an increase of $7.6 billion, or 8.4 percent, compared with revised     
estimates for 2005-06. The increase is due to: $5.3 billion in additional       
mandated program cost (70 percent of total increase); $1.7 billion to prepay    
Proposition 98 maintenance factor (22 percent); $0.3 billion to prepay or repay 
prior obligations (4 percent); and $0.3 billion in policy choices (4 percent).  

 The above discussion of the fiscal year 2005-06 and 2006-07 budgets are
based on estimates and projections of revenues and expenditures for the current 
fiscal year and must not be construed as statements of fact. These estimates and
projections are based upon various assumptions, which may be                    

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affected by numerous factors, including future economic conditions in the State 
and the nation, and there can be no assurance that the estimates will be        
achieved.                                                                       

STATE INDEBTEDNESS AND OTHER OBLIGATIONS                                        

    The State Treasurer is responsible for the sale of debt obligations of the
State and its various authorities and agencies. Current State debt obligations  
include:                                                                        

-    GENERAL OBLIGATION BONDS. The State Constitution prohibits the   
          creation of general obligation indebtedness of the State unless a bond
   measure is approved by a majority of the electorate voting at a
    general election or direct primary. General obligation bond acts
  provide that debt service on general obligation bonds shall be
       appropriated annually from the General Fund and all debt service on
     general obligation bonds is paid from the General Fund. Under the
       State Constitution, debt service on general obligation bonds is the
        second charge to the General Fund after the application of moneys in
          the General Fund to the support of the public school system and public
   institutions of higher education. Certain general bond programs
     receive revenues from sources other than the sale of bonds or the
      investment of bond proceeds. As of February 1, 2006, the state had
       outstanding $47,917,977,000 aggregate principal amount of long-term
       general obligation bonds, and unused voter authorization for future
      issuance of $33,195,211,000 of long-term general obligation bonds.

 -    COMMERCIAL PAPER PROGRAM. Pursuant to legislation enacted in 1995,
         voter-approved general obligation indebtedness may, in some cases, be
   issued as commercial paper notes. Commercial paper notes may be
      renewed or refunded by the issuance of long-term bonds. Commercial
      paper notes are deemed issued upon authorization by the respective
      finance committees, whether or not such notes are actually issued.
   Pursuant to the terms of the bank credit agreement presently in
          effect, the general obligation commercial paper program may have up to
$1.5 billion in aggregate principal and interest commitments
         outstanding at any time. This amount may be increased or decreased in
  the future. As of February 1, 2006, the finance committees had
        authorized the issuance of up to $18,171,206,000 of commercial paper
          notes and, as of that date, $758,050,000 aggregate principal amount of
general obligation commercial paper notes were outstanding. 

   -    LEASE-PURCHASE OBLIGATIONS. The State builds and acquires facilities
       through the use of lease purchase borrowing, in addition to general
      obligation bonds. Under these arrangements, the State Public Works
    Board, another State or local agency or a joint powers authority
          issues bonds to pay for the construction of facilities, such as office
       buildings, university buildings or correctional institutions. These
facilities are leased to a State agency or the University of
          California under a long-term lease that provides the source of payment
   of the debt service on the lease-purchase bonds. Certain of the
        lease-purchase financings are supported by special funds rather than
         the General Fund. The State had $7,753,410,075 General Fund-supported
      lease purchase obligations outstanding as of February 1, 2006. The
       State Public Works Board, which is authorized to sell lease revenue
       bonds, had $2,998,367,922 authorized and unissued as of February 1,
 2006. In addition, as of that date, certain joint powers were
        authorized to issue approximately $81,000,000 of revenue bonds to be
secured by State leases.                                    

-    NON-RECOURSE DEBT. Certain agencies and authorities issue revenue
      obligations for which the General Fund has no liability, including
      revenue bonds 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 the bonds. The enterprises and projects include
      transportation projects, various public works projects, public and
  private educational facilities, housing, health facilities and
    pollution control facilities. State agencies and authorities had
         $49,761,867,260 aggregate principal amount of revenue bonds and notes
         which are non-recourse to the General Fund outstanding as of December
31, 2005.                                                   

-    PENSION OBLIGATION BONDS. Pursuant to the California Pension     
       Restructuring Bond Act of 2004 ("Act"), the State proposes to issue
      $560 million of pension obligation bonds, yielding a projected net
benefit to the General Fund of $525 million, to make future 
       contributions to the California Public Employees' Retirement System
          ("CalPERS"). The payment of the debt service on the pension obligation
bonds will be payable from the General Fund. As with        
previously-proposed                                         

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          pension bond issuances, the proposed pension obligation bonds issuance
is the subject of a validation action brought by the Pension
    Obligation Bond Committee ("Committee") for and on behalf of the
State.                                                      

         Pursuant to the Act, the Pension Obligation Bond Committee authorized
 the issuance of bonds to pay a portion of the State's pension
       obligation for fiscal year 2004-05 or a subsequent fiscal year. The
   Pension Obligation Bond Committee initiated a validation action
        seeking court determination that the bonds would not be in violation
      of the Constitutional debt limit because the proceeds of the bonds
        would be used to pay the State's employer contribution obligation to
     CalPERS, which is an obligation imposed by law. The Pacific Legal
         Foundation challenged the validation action in court, which prevented
   the issuance of the pension obligation bonds in time to pay the
         pension contribution during fiscal year 2004-05. After a trial in the
          Sacramento County Superior Court, the judge ruled on November 15, 2005
        that the bonds were not valid. The Pension Obligation Bond Committee
         has filed a notice of appeal. The Administration has not included any
       pension obligation bonds in the proposed 2006-07 Budget, but if the
    litigation is successful such bonds may be issued in the future.

 -    ECONOMIC RECOVERY BONDS. The California Economic Recovery Bond Act
("Proposition 57") was approved by voters on March 2, 2004. 
  Proposition 57 authorizes the issuance of up to $15 billion in
        economic recovery bonds to finance the negative General Fund reserve
         balance and other General Fund obligations. Repayment of the economic
        recovery bonds is secured by a pledge of revenues from a one-quarter
        cent increase in the State's sale and use tax starting July 1, 2004.
       In addition, the economic recovery bonds are secured by the State's
        full faith and credit; however, moneys in the General Fund will only
   be used in the event the dedicated sales and use tax revenue is
         insufficient to repay the bonds. The State has issued $10.896 billion
 principal amount of economic recovery bonds and may issue the
      remainder of authorized economic recovery bonds at any time in the
          future, but the 2006-07 Governor's Budget assumes no economic recovery
bonds will be issued in fiscal year 2005-06 or 2006-07.     

      Three different sources of funds are required to be applied to the
      early retirement (generally by purchase or redemption) of economic
       recovery bonds: (i) all proceeds from the quarter cent sales tax in
     excess of the amounts needed, on a semi-annual basis, to pay debt
         service and other required costs of the bonds, (ii) all proceeds from
       the sale of surplus State property, and (iii) fifty percent of each
         annual deposit, up to $5 billion in the aggregate, of future deposits
      in the reserve fund created by the California Balanced Budget Act.
        Funds from sources (i) and (ii) above were used for early retirement
       of approximately $369 million of bonds during the fourth quarter of
        2005. It is expected that an additional $273 million of excess sales
         tax proceeds will be available for early retirement of bonds in early
    2006. The 2006-07 Governor's Budget assumes $460 million will be
          transferred from the reserve created under Proposition 58 in September
         2006. These moneys will be used to retire bonds prior to December 31,
2006.                                                       

     -    TOBACCO SETTLEMENT REVENUE BONDS. Under a settlement agreement between
   the State and four major cigarette manufacturers, the cigarette
          manufacturers agreed to make payments to the State in perpetuity, such
     payments amounting to approximately $25 billion over the first 25
        years. Half of the payments made by the cigarette manufacturers will
     be paid to the State and half to local governments. The State has
       issued revenue bonds secured by the tobacco settlement revenues. An
   initial sale of 56.57 percent of the State's tobacco settlement
          revenues producing $2.485 billion in proceeds was completed in January
2003.                                                       

       A second sale of the remaining 43.43 percent of the State's tobacco
       settlement revenues, which produced $2.264 billion in proceeds, was
          completed in September 2003 (Series 2003B). The Tobacco Securitization
 Law was amended in 2003 to require the Governor to request an
        appropriation in the annual Budget Act to pay debt service and other
        related costs of the tobacco settlement revenue bonds secured by the
         second (and only the second) sale of tobacco settlement revenues when
   such tobacco settlement revenues are insufficient therefor. The
          Legislature is not obligated to make any such requested appropriation.
        In August 2005 the Series 2003B Bonds were refinanced, retaining all
  of the covenants of the original issue, including the covenant
regarding the request for                                   

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          a General Fund appropriation in the event tobacco revenues fall short.
      In return for providing this covenant, the State was paid a credit
enhancement fee of $525 million as part of the refinancing. 

  Tobacco settlement revenue bonds are neither general nor legal
     obligations of the State or any of its political subdivisions and
          neither the faith and credit nor the taxing power nor any other assets
        or revenues of the State or of any political subdivision is or shall
be pledged to the payment of any such bonds.                

-    CASH FLOW BORROWINGS. As part of its cash management program, the
       State has regularly issued short-term obligations to meet cash flow
         needs. The State has issued revenue anticipation notes ("RANs") in 19
     of the last 20 years to partially fund timing differences between
         receipts and disbursements. By law, RANs must mature prior to the end
    of the fiscal year of issuance. If additional external cash flow
      borrowings are required, the State has issued revenue anticipation
         warrants ("RAWs"), which can mature in a subsequent fiscal year. RANs
       and RAWs are both payable from any "Unapplied Money" in the General
Fund on their maturity date.                                

LITIGATION                                                                      

 At any given time, there are numerous civil actions pending against the
State which could, if determined adversely to the State, affect the State's     
expenditures and, in some cases, its revenues and cash flows. The following is a
brief list of the most significant pending legal proceedings to which the State 
is a party, as reported by the Office of the Attorney General of the State:     

    -    CHALLENGE SEEKING PAYMENT TO TEACHER'S RETIREMENT BOARD. This lawsuit
          seeks, primarily, a writ of mandate compelling the State Controller to
 transfer funds from the State's General Fund to the CalSTRS's
Supplemental Benefit Maintenance Account.                   

-    TAX REFUND CASES. Five pending cases challenge the Franchise Tax 
       Board's treatment of receipts from investment of cash in short-term
        financial instruments, and the resulting impact on the apportionment
     of corporate income allegedly earned outside of California to the
         corporation's California tax obligation. A final decision in favor of
    any of these plaintiffs could result in tax refunds to similarly
  situated taxpayers in an amount exceeding $400 million, with a
potential future annual revenue loss of $85 million.        

          In addition, two pending cases challenge the Franchise Tax Board's LLC
          fees imposed by Revenue and Taxation Code section 17942. In both cases
        plaintiffs allege that section 17942 is unconstitutional on its face
       and as applied because it discriminates against interstate commerce
and violates the Due Process and Equalization clauses of the
         Constitution. In the alternative, the plaintiffs also allege that the
       Board misinterprets the section and that the section is an improper
       exercise of the State's police powers. A final decision in favor of
      these plaintiffs applied to all taxpayers similarly situated could
result in loss of annual revenue in excess of $250 million. 

  -    ENVIRONMENTAL CLEANUP MATTERS. The State, as owner of the Leviathan
 Mine, is a party in a federal Environmental Protection Agency
          administrative abatement action and related proceedings. Litigation on
     the related claims has been tolled by agreement among the parties
         until October 1, 2006. It is possible these matters could result in a
potential loss to the State in excess of $400 million.      

      In another case, thirty-two plaintiffs who own property or live in
  Santa Rosa brought a toxic tort case alleging that water wells
    supplying water to their homes were contaminated by carcinogenic
        chemicals. The State was sued under a mandatory duty theory premised
          on an alleged violation of Proposition 65 (The Safe Drinking Water and
       Toxic Enforcement Act of 1986). Plaintiffs claim property damage, a
        variety of physical and psychological harms including birth defects,
       medical monitoring costs and damages for fear of cancer. Plaintiffs
claim damages exceeding $400 million.                       

-    ENERGY-RELATED MATTERS. The State is party to a case in which the
          court is considering whether and to what extent compensation is due to
          market participants which have claimed compensation as a result of the
          Governor's issuance of executive orders "commandeering" power purchase
arrangements.                                               

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  -    ESCHEATED PROPERTY CLAIMS. In three pending cases, plaintiffs claim
        that the State Controller has a constitutional and statutory duty to
        give notice prior to the time the Controller sells property that has
      escheated to the State (in these cases, shares of stock). In three
          other pending cases, plaintiffs claim that the State Controller has an
        obligation to pay interest on private property that has escheated to
        the State, and that failure to do so constitutes an unconstitutional
          taking of private property. If the issues raised in any of these cases
      require the Controller to pay interest on escheated property or to
    manage unclaimed property as a trust for the benefit of the true
     owners, as the plaintiffs allege is required by law, costs to the
State could be in excess of $500 million.                   

    -    ACTION SEEKING DAMAGES FOR ALLEGED VIOLATIONS OF PRIVACY RIGHTS. In a
          class action, plaintiffs seek damages for alleged violations of prison
          visitors rights resulting from the Department of Corrections' use of a
      body imaging machine to search visitors entering state prisons for
        contraband. The Superior Court granted summary adjudication in favor
    of the State, and in doing so, dismissed all claims for damages,
        leaving a remaining taxpayer claim for injunctive relief. Plaintiffs
          have filed a motion for reconsideration of the ruling. If a court were
  to revive the damages claims and award damages pursuant to the
    California Civil Code for every use of the body-imaging machine,
damages could exceed $3 billion.                            

         Two pending cases involve due process constitutional challenges to an
          individual being placed on the State's child abuse central index prior
          to the conclusion of a noticed hearing. The Court of Appeals in one of
        the cases said that before a person is placed on such an index he or
       she is entitled to a hearing. However, the Court did not decide the
       issue of what type of hearing would be sufficient. Depending on the
 type of hearing that the trial court orders and the number of
          individuals currently on the index that might be entitled to a hearing
      prior to remaining on the index, the costs to the State related to
 conducting these hearings could be in excess of $500 million.

          A plaintiff subject to an audit by the Franchise Tax Board involving a
      claimed change of residence from California to Nevada filed a tort
  action in the State of Nevada alleging invasion of privacy and
        interference with his business relationships arising from the audit.
Plaintiff will likely seek damages exceeding $500 million.  

  -    ACTION SEEKING A COST OF LIVING ADJUSTMENT FOR CALWORKS RECIPIENTS.
     The trial court decision in this case pending before the Court of
      Appeals determined that the Governor's executive order in November
         2003, which reduced the Vehicle License Fee charged to vehicle owners
       and increased the corresponding Vehicle License Fee offset to local
         governments, acted as an "increase in tax relief," which, by statute,
  triggers an upward cost of living adjustment for recipients of
    CalWORKs program benefits. The petitioners seek a cost of living
         adjustment, beginning with fiscal year 2003-04. The estimated cost to
        the State of a final, unappealable determination consistent with the
         determination of the trial court is now estimated to be approximately
$350 million.                                               

-    ACTIONS SEEKING PROGRAM MODIFICATIONS. In several pending cases, 
          plaintiffs seek court orders or judgments that would require the State
        to modify existing programs. A judgment against the State in any one
       of these cases could require changes in the challenged program that
          could result in increased programmatic costs to the Statue in a future
         fiscal year. However, a judgment against the State could be addressed
     by legislative changes to the program that would reduce costs. In
          several other pending cases, plaintiffs seek reforms to State programs
       for the treatment of institutionalized disabled persons. Some rough
         estimates suggest that the financial impact of a judgment against the
       State defendants in any of the cases could be as high as $1 billion
per year in programmatic costs going forward.               

-    ACTIONS SEEKING MEDI-CAL REIMBURSEMENTS. Two cases have been     
consolidated in the First District Court of Appeal in which 
       approximately 1400 skilled-nursing and intermediate-care facilities
          allege that the Medi-Cal reimbursement rates paid by the Department of
       Health Services ("DHS") to providers for, respectively, the 2001-02
     and 2002-03 rate years were too low. The superior court sustained
       DHS's demurrers in both cases and entered judgment for DHS. A final
         decision adverse to DHS could result in reimbursement costs exceeding
$250 million.                                               

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       In other actions, the Ninth Circuit has ruled that neither Medi-Cal
        recipients nor providers had a private right under 42 U.S.C. section
          1983 to challenge California's compliance with section 1396a(a)(30)(A)
    of the Medicaid Act. Plaintiffs are Medi-Cal providers, provider
      associations, and beneficiaries who challenge the legality of a 5%
   reduction in Medi-Cal reimbursement rates that became effective
    January 1, 2004. The statute by which the reduction was effected
     applies to both the Medi-Cal fee-for-service providers (including
      physicians, dentists, and pharmacists), and to managed health care
         plans. The trial court concluded that (1) Medi-Cal beneficiaries have
        a private right of action under the Medicaid Act, and (2) DHS failed
          to conduct a principled analysis to ensure that the payment reductions
          would not adversely affect the "quality of care" and "equal access" to
       health care in violation of section 30(A) of the Medicaid Act. As a
         result of the Ninth Circuit's decision, the plaintiffs petitioned for
         rehearing en banc, which was denied. A final decision in favor of the
      plaintiffs could result in increased reimbursement costs exceeding
$400 million per year.                                      

-    ACTIONS TO INCREASE AMOUNT OF STATE AID FOR FOSTER OR ADOPTED    
         DEVELOPMENTALLY DISABLED DEPENDENT CHILDREN. Ten pending class action
      lawsuits challenge the amount of aid provided by the State for the
          care of these children, who have been determined to be developmentally
   disabled by a regional center. Plaintiffs assert that they were
       entitled to, but did not receive, the Alternative Residential Model
      ("ARM") rate (also known as the dual agency rate) but have instead
     been receiving the standard AFDC-FC (foster care) rate and/or the
        adoption assistance program rate. A final decision in favor of these
plaintiffs could exceed $450 million.                       

    -    LOCAL GOVERNMENT MANDATE CLAIMS AND ACTIONS. Two lawsuits are pending
       that challenge the State's recent practice of deferring payments to
         local governments for certain state mandated services and programs by
          making a budgetary appropriation for each program, to be divided among
         all 58 counties. A final determination by an appellate court that the
         State is required to reimburse the counties now in an amount equal to
         the previously un-reimbursed State-mandated costs, if applied to each
       of the 58 counties, could result in costs in excess of $1.5 billion
       for existing un-reimbursed mandates. Following a trial, the court's
         tentative decision was to find the State liable for all costs claimed
  by the counties, and to require the State to make equal annual
          payments to the counties for the 15-year term prescribed by Government
          Code Section 17617. An appeal will likely follow. Additionally, a test
  case has been filed before the Commission on State Mandates to
        determine the costs incurred by the county to provide state-mandated
care of medically indigent adults.                          

-    ACTIONS SEEKING TO ENJOIN IMPLEMENTATION OF CERTAIN TRIBAL GAMING
        COMPACTS. Amendments to tribal gaming compacts between the State and
          five Indian tribes are being challenged in at least two pending cases.
  An unfavorable decision to the State in any of the cases could
       eliminate $35 million of additional revenues in fiscal year 2005-06
       anticipated to result from the Amended Compacts, and could delay or
      impair the State's ability to sell a portion of the revenue stream
    anticipated to be generated by these Amended Compacts. The State
          anticipates using the proceeds of that sale to repay existing internal
borrowings of transportation funds.                         

  -    MATTER SEEKING VALIDATION OF PENSION OBLIGATION BONDS. Although the
    Legislature had authorized the Pension Obligation Bond Committee
        ("Committee") to issue bonds to fund all or a portion of the State's
     pension obligation in any two fiscal years, the Sacramento County
     Superior Court ruled on November 15, 2005 that the bonds were not
        valid under the State's debt limit. The Committee has filed a notice
     of appeal. The State will not be able to issue pension obligation
bonds until this matter is resolved.                        

  -    PRISON HEALTHCARE REFORM. Plaintiffs in this class action regarding
        all prison medical care in California alleged that the State was not
       providing constitutionally adequate medical care as required by the
      Eighth Amendment to the U.S. Constitution. The case was settled in
          2002, but the federal court retained jurisdiction to enforce the terms
        of a stipulated judgment. On June 30, 2005, the district court ruled
          that a receiver be appointed to operate the approximately $750 million
         adult health care delivery system (excluding mental health and dental
care) of the California Department                          

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         of Corrections and Rehabilitation, affecting approximately 32 prisons
      throughout the State (excluding Pelican Bay Prison). On October 3,
    2005, the district court issued two orders, one of which ordered
        appointment of an expert to assist the court pending the appointment
     of the receiver. The court-appointed correctional expert issued a
         report, which the court adopted, regarding interim measures including
   salary increases and recruitment and retention differentials to
       address immediate needs. The court appointed a receiver in February
  2006. At this time it is unknown what financial impact such an
unprecedented decision would have on the General Fund.      

-    ACTION SEEKING RECALCULATION OF PROPOSITION 98 MINIMUM FUNDING   
       GUARANTEE. Plaintiffs including the California Teachers Association
      and the California Superintendent of Public Instruction filed suit
    against the Governor in August 2005 alleging that the California
         Constitution's minimum school requirement was not met in fiscal years
2004-05 and 2005-06. Plaintiffs allege an underfunding of   
          approximately $3.1 billion for the two fiscal years and seek a writ of
  mandate requiring the State to recalculate the minimum-funding
         guarantee in compliance with Article XVI, Section 8 of the California
        Constitution and declaratory relief finding that the State failed to
appropriate sufficient funds to comply with the requirement.

C. INVESTMENT OBJECTIVES/POLICIES/INVESTMENT RESTRICTIONS                       

   Each Fund's investment objectives, policies and restrictions listed below
have been adopted by the Funds as fundamental policies. Under 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, except in the case of borrowing and investments in illiquid      
securities.                                                                     

     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
and (b) a "taxable security" is any security the interest on which is subject to
federal income tax.                                                             

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. Invest in a manner inconsistent with its classification as a       
"diversified company" as provided by (i) the Investment Company Act, as amended 
from time to time, (ii) the rules and regulations promulgated by the SEC under  
the Investment Company Act, as amended from time to time, or (iii) an exemption 
or other relief applicable to the Fund from the provisions of the Investment    
Company Act, as amended from time to time.                                      

   2. Borrow money, except the Fund may borrow money to the extent permitted
by (i) the Investment Company Act, as amended from time to time, (ii) the rules 
and regulations promulgated by the SEC under the Investment Company Act, as     
amended from time to time, or (iii) an exemption or other relief applicable to  
the Fund from the provisions of the Investment Company Act, as amended from time
to time.                                                                        

    3. 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                              

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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.                                                           

    4. Make loans of money or property to any person, except (a) to the extent
that securities or interests in which the Fund may invest are considered to be  
loans, (b) through the loan of portfolio securities, (c) by engaging in         
repurchase agreements or (d) as may otherwise be permitted by (i) the Investment
Company Act, as amended from time to time, (ii) the rules and regulations       
promulgated by the SEC under the Investment Company Act, as amended from time to
time, or (iii) an exemption or other relief applicable to the Fund from the     
provision of the Investment Company Act, as amended from time to time.          

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

 6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this restriction    
shall not prohibit the Fund from purchasing or selling options, futures         
contracts and related options thereon, forward contracts, swaps, caps, floors,  
collars and any other financial instruments or from investing in securities or  
other instruments backed by physical commodities or as otherwise permitted by   
(i) the Investment Company Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the Investment Company Act, as amended 
from time to time, or (iii) an exemption or other relief applicable to the Fund 
from the provisions of the Investment Company Act, as amended from time to time.

7. Underwrite securities of other issuers.                            

    8. Issue senior securities, except the Fund may issue senior securities to
the extent permitted by (i) the Investment Company Act, as amended from time to 
time, (ii) the rules and regulations promulgated by the SEC under the Investment
Company Act, as amended from time to time, or (iii) an exemption or other relief
applicable to the Fund from the provisions of the Investment Company Act, as    
amended from time to time.                                                      

In addition, as a non-fundamental policy, ACTIVE ASSETS MONEY TRUST may not:    

 (a) Make short sales of securities, except short sales against the box.

     (b) Invest its assets in the securities of any investment company except as
may be permitted by (i) the Investment Company Act, as amended from time to     
time; (ii) the rules and regulations promulgated by the SEC under the Investment
Company Act, as amended from time to time; or (iii) an exemption or other relief
applicable to the Fund from the provisions of the Investment Company Act, as    
amended from time to time.                                                      

   (c) Invest more than 10% of its net assets or such other amount as may be
permitted by SEC guidelines in illiquid securities, including restricted        
securities.                                                                     

(d) Write, purchase or sell puts, calls, or combinations thereof.     

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 in a manner inconsistent with its classification as a       
"diversified company" as provided by (i) the Investment Company Act, as amended 
from time to time, (ii) the rules and regulations promulgated by the SEC under  
the Investment Company Act, as amended from time to time, or (iii) an exemption 
or other relief applicable to the Fund from the provisions of the Investment    
Company Act, as amended from time to time.                                      

2. 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                        

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business in which the issuers of such obligations are engaged). This restriction
does not apply to obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities or to investments in bank obligations.            

   3. Borrow money, except the Fund may borrow money to the extent permitted
by (i) the Investment Company Act, as amended from time to time, (ii) the rules 
and regulations promulgated by the SEC under the Investment Company Act, as     
amended from time to time, or (iii) an exemption or other relief applicable to  
the Fund from the provisions of the Investment Company Act, as amended from time
to time.                                                                        

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

 5. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this restriction    
shall not prohibit the Fund from purchasing or selling options, futures         
contracts and related options thereon, forward contracts, swaps, caps, floors,  
collars and any other financial instruments or from investing in securities or  
other instruments backed by physical commodities or as otherwise permitted by   
(i) the Investment Company Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the Investment Company Act, as amended 
from time to time, or (iii) an exemption or other relief applicable to the Fund 
from the provisions of the Investment Company Act, as amended from time to time.

    6. Issue senior securities, except the Fund may issue senior securities to
the extent permitted by (i) the Investment Company Act, as amended from time to 
time, (ii) the rules and regulations promulgated by the SEC under the Investment
Company Act, as amended from time to time, or (iii) an exemption or other relief
applicable to the Fund from the provisions of the Investment Company Act, as    
amended from time to time.                                                      

    7. Make loans of money or property to any person, except (a) to the extent
that securities or interests in which the Fund may invest are considered to be  
loans, (b) through the loan of portfolio securities, (c) by engaging in         
repurchase agreements or (d) as may otherwise be permitted by (i) the Investment
Company Act, as amended from time to time, (ii) the rules and regulations       
promulgated by the SEC under the Investment Company Act, as amended from time to
time, or (iii) an exemption or other relief applicable to the Fund from the     
provision of the Investment Company Act, as amended from time to time.          

     8. 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.                                                             

In addition, as a non-fundamental policy, ACTIVE ASSETS TAX-FREE TRUST may not: 

 (a) Make short sales of securities, except short sales against the box.

     (b) Invest its assets in the securities of any investment company except as
may be permitted by (i) the Investment Company Act, as amended from time to     
time; (ii) the rules and regulations promulgated by the SEC under the Investment
Company Act, as amended from time to time; or (iii) an exemption or other relief
applicable to the Fund from the provisions of the Investment Company Act, as    
amended from time to time.                                                      

(c) Write, purchase or sell puts, calls, or combinations thereof.     

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.                                                                      

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST will not:                               

1. Invest in a manner inconsistent with its classification as a       
"diversified company" as provided by (i) the Investment Company Act, as amended 
from time to time, (ii) the rules and regulations promulgated by the SEC under  
the Investment Company Act, as amended from time to time, or (iii) an exemption 
or other relief applicable to the Fund from the provisions of the Investment    
Company Act, as amended from time to time.                                      

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2. 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 U.S. 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). 

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

 4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this restriction    
shall not prohibit the Fund from purchasing or selling options, futures         
contracts and related options thereon, forward contracts, swaps, caps, floors,  
collars and any other financial instruments or from investing in securities or  
other instruments backed by physical commodities or as otherwise permitted by   
(i) the Investment Company Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the Investment Company Act, as amended 
from time to time, or (iii) an exemption or other relief applicable to the Fund 
from the provisions of the Investment Company Act, as amended from time to time.

   5. Borrow money, except the Fund may borrow money to the extent permitted
by (i) the Investment Company Act, as amended from time to time, (ii) the rules 
and regulations promulgated by the SEC under the Investment Company Act, as     
amended from time to time, or (iii) an exemption or other relief applicable to  
the Fund from the provisions of the Investment Company Act, as amended from time
to time.                                                                        

    6. Issue senior securities, except the Fund may issue senior securities to
the extent permitted by (i) the Investment Company Act, as amended from time to 
time, (ii) the rules and regulations promulgated by the SEC under the Investment
Company Act, as amended from time to time, or (iii) an exemption or other relief
applicable to the Fund from the provisions of the Investment Company Act, as    
amended from time to time.                                                      

    7. Make loans of money or property to any person, except (a) to the extent
that securities or interests in which the Fund may invest are considered to be  
loans, (b) through the loan of portfolio securities, (c) by engaging in         
repurchase agreements or (d) as may otherwise be permitted by (i) the Investment
Company Act, as amended from time to time, (ii) the rules and regulations       
promulgated by the SEC under the Investment Company Act, as amended from time to
time, or (iii) an exemption or other relief applicable to the Fund from the     
provision of the Investment Company Act, as amended from time to time.          

     8. 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.                                                                       

In addition, as a non-fundamental policy, ACTIVE ASSETS CALIFORNIA TAX-FREE     
TRUST will not:                                                                 

 (a) Make short sales of securities, except short sales against the box.

     (b) Invest its assets in the securities of any investment company except as
may be permitted by (i) the Investment Company Act as amended from time to time;
(ii) the rules and regulations promulgated by the SEC under the Investment      
Company Act as amended from time to time; or (iii) an exemption or other relief 
applicable to the Fund from the provisions of the Investment Company Act as     
amended from time to time.                                                      

(c) Write, purchase or sell puts, calls, or combinations thereof.     

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. Invest in a manner inconsistent with its classification as a       
"diversified company" as provided by (i) the Investment Company Act, as amended 
from time to time, (ii) the rules and regulations promulgated                   

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485APOS 55th Page of 96 TOC 1st Previous Next ↓Bottom Just 55th
by the SEC under the Investment Company Act, as amended from time to time, or   
(iii) an exemption or other relief applicable to the Fund from the provisions of
the Investment Company Act, as amended from time to time.                       

   2. Borrow money, except the Fund may borrow money to the extent permitted
by (i) the Investment Company Act, as amended from time to time, (ii) the rules 
and regulations promulgated by the SEC under the Investment Company Act, as     
amended from time to time, or (iii) an exemption or other relief applicable to  
the Fund from the provisions of the Investment Company Act, as amended from time
to time.                                                                        

 3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this restriction    
shall not prohibit the Fund from purchasing or selling options, futures         
contracts and related options thereon, forward contracts, swaps, caps, floors,  
collars and any other financial instruments or from investing in securities or  
other instruments backed by physical commodities or as otherwise permitted by   
(i) the Investment Company Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the Investment Company Act, as amended 
from time to time, or (iii) an exemption or other relief applicable to the Fund 
from the provisions of the Investment Company Act, as amended from time to time.

     4. Purchase or sell real estate or real estate investment trust securities.

    5. Make loans of money or property to any person, except (a) to the extent
that securities or interests in which the Fund may invest are considered to be  
loans, (b) through the loan of portfolio securities, (c) by engaging in         
repurchase agreements or (d) as may otherwise be permitted by (i) the Investment
Company Act, as amended from time to time, (ii) the rules and regulations       
promulgated by the SEC under the Investment Company Act, as amended from time to
time, or (iii) an exemption or other relief applicable to the Fund from the     
provision of the Investment Company Act, as amended from time to time.          

    6. Issue senior securities, except the Fund may issue senior securities to
the extent permitted by (i) the Investment Company Act, as amended from time to 
time, (ii) the rules and regulations promulgated by the SEC under the Investment
Company Act, as amended from time to time, or (iii) an exemption or other relief
applicable to the Fund from the provisions of the Investment Company Act, as    
amended from time to time.                                                      

7. Underwrite the securities of other issuers.                        

In addition, as a non-fundamental policy, ACTIVE ASSETS GOVERNMENT SECURITIES   
TRUST will not:                                                                 

 (a) Make short sales of securities, except short sales against the box.

     (b) Invest its assets in the securities of any investment company except as
may be permitted by (i) the Investment Company Act as amended from time to time;
(ii) the rules and regulations promulgated by the SEC under the Investment      
Company Act as amended from time to time; or (iii) an exemption or other relief 
applicable to the Fund from the provisions of the Investment Company Act as     
amended from time to time.                                                      

   (c) Invest more than 10% of its net assets or such other amount as may be
permitted by SEC guidelines in illiquid securities, including restricted        
securities.                                                                     

(d) Write, purchase or sell puts, calls, or combinations thereof.     

With respect to Active Assets Money Trust, Active Assets Tax-Free Trust, Active 
Assets California Tax-Free Trust and Active Assets Government Securities Trust, 
each Fund has an operating policy, which may be changed by the Fund's Board of  
Trustees, not to borrow except from a bank for temporary or emergency purposes  
in amounts not exceeding 5% (taken at the lower of cost or current value) of its
total assets (not including the amount borrowed).                               

D. DISCLOSURE OF PORTFOLIO HOLDINGS                                             

The Funds' Board of Trustees and the Investment Adviser have adopted  
policies and procedures regarding disclosure of portfolio holdings (the         
"Policy"). Pursuant to the Policy, the Investment Adviser may disclose          
information concerning Fund portfolio holdings only if such disclosure is       
consistent with the antifraud provisions of the federal securities laws and the 
Funds' and the Investment Adviser's fiduciary duties to Fund shareholders. The  
Investment Adviser may not receive compensation or any other consideration in   
connection with the disclosure of information about the portfolio securities of 
the Funds.                                                                      

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485APOS 56th Page of 96 TOC 1st Previous Next ↓Bottom Just 56th
Consideration includes any agreement to maintain assets in the Funds or in other
investment companies or accounts managed by the Investment Adviser or by any    
affiliated person of the Investment Adviser. Non-public information concerning  
portfolio holdings may be divulged to third parties only when the Funds have a  
legitimate business purpose for doing so and the recipients of the information  
are subject to a duty of confidentiality. Under no circumstances shall current  
or prospective Fund shareholders receive non-public portfolio holdings          
information, except as described below.                                         

The Funds make available on their public website complete portfolio   
holdings information quarterly on a calendar quarter basis with a minimum 30    
calendar day lag.                                                               

    The Funds provide a complete schedule of portfolio holdings for the second
and fourth fiscal quarters in its semiannual and annual reports, and for the    
first and third fiscal quarters in its filings with the SEC on Form N-Q.        

    All other portfolio holdings information that has not been disseminated in
a manner making it available to investors generally as described above is       
non-public information for purposes of the Policy.                              

   The Funds may make selective disclosure of non-public portfolio holdings.
Third parties eligible to receive such disclosures currently include fund rating
agencies, information exchange subscribers, consultants and analysts, portfolio 
analytics providers and service providers, provided that the third party        
expressly agrees to maintain the disclosed information in confidence and not to 
trade portfolio securities based on the non-public information. Non-public      
portfolio holdings information may not be disclosed to a third party unless and 
until the arrangement has been reviewed and approved pursuant to the            
requirements set forth in the Policy. Subject to the terms and conditions of any
agreement between the Investment Adviser or the Funds and the third party       
recipient, if these conditions for disclosure are satisfied, there shall be no  
restriction on the frequency with which Fund non-public portfolio holdings      
information is released, and no lag period shall apply (unless otherwise        
indicated below).                                                               

 The Investment Adviser may provide interest lists to broker-dealers who
execute securities transactions for the Funds without entering into a           
nondisclosure agreement with the broker-dealers, provided that the interest list
satisfies all of the following criteria: (1) the interest list must contain only
the CUSIP numbers and/or ticker symbols of securities held in all registered    
management investment companies advised by the Investment Adviser or any        
affiliate of the Investment Adviser (the "MSIM Funds") on an aggregate, rather  
than a fund-by-fund basis; (2) the interest list must not contain information   
about the number or value of shares owned by a specified MSIM Fund; (3) the     
interest list may identify the investment strategy, but not the particular MSIM 
Funds, to which the list relates; and (4) the interest list may not identify the
portfolio manager or team members responsible for managing the MSIM Funds.      

     Fund shareholders may elect in some circumstances to redeem their shares of
the Fund in exchange for their pro rata share of the securities held by that    
Fund. Under such circumstances, Fund shareholders may receive a complete listing
of the holdings of the Fund up to seven calendar days prior to making the       
redemption request provided that they represent orally or in writing that they  
agree not to disclose or trade on the basis of the portfolio holdings           
information.                                                                    

The Funds may discuss or otherwise disclose performance attribution   
analyses (i.e., mention the effects of having a particular security in the      
portfolio(s)) where such discussion is not contemporaneously made public,       
provided that the particular holding has been disclosed publicly. Additionally, 
any discussion of the analyses may not be more current than the date the holding
was disclosed publicly.                                                         

    The Funds may disclose portfolio holdings to transition managers, provided
that the Funds have entered into a non-disclosure or confidentiality agreement  
with the party requesting that the information be provided to the transition    
manager and the party to the non-disclosure agreement has, in turn, entered into
a non-disclosure or confidentiality agreement with the transition manager.      

The Investment Adviser and/or the Funds have entered into ongoing     
arrangements to make available public and/or non-public information about the   
Funds' portfolio securities. Provided that the recipient of the information     
falls into one or more of the categories listed below, and the recipient has    
entered into a nondisclosure agreement with each Fund, or owes a duty of trust  
or confidence to the Investment Adviser or the Fund, the recipient may receive  
portfolio holdings information pursuant to such agreement without obtaining     
pre-approval from either the Portfolio Holdings Review Committee ("PHRC") or    
each Fund's Board of Trustees. In all such instances, however, the PHRC will be 
responsible for reporting to each Fund's Board of Trustees, or designated       
Committee thereof, material information concerning the ongoing                  

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arrangements at each Board's next regularly scheduled Board meeting. Categories 
of parties eligible to receive information pursuant to such ongoing arrangements
include fund rating agencies, information exchange subscribers, consultants and 
analysts, portfolio analytics providers and service providers.                  

     The Investment Adviser and/or each Fund currently have entered into ongoing
arrangements with the following parties:                                        

                                                        [Enlarge/Download Table]

                NAME                          INFORMATION DISCLOSED              FREQUENCY(1)                   LAG TIME         
----------------------------------------  -----------------------------  ---------------------------  ---------------------------
                                                                                                                                 
SERVICE PROVIDERS                                                                                                                
Institutional Shareholder Services (ISS)  Complete portfolio             Twice a month                            (2)            
   (proxy voting agent)(*)                holdings                                                                               

FT Interactive Data Pricing Service       Complete portfolio             As needed                                (2)            
   Provider(*)                            holdings                                                                               

Morgan Stanley Trust(*)                   Complete portfolio             As needed                                (2)            
                                          holdings                                                                               

The Bank of New York(*)                   Complete portfolio             As needed                                (2)            
                                          holdings                                                                               

FUND RATING AGENCIES                                                                                                             
Lipper(*)                                 Top ten and complete           Quarterly basis              Approximately 15 days after
                                          portfolio holdings                                          quarter end and            
                                                                                                      approximately 30 days after
                                                                                                      quarter end                

Morningstar(**)                           Top ten and complete           Quarterly basis              Approximately 15 days after
                                          portfolio holdings                                          quarter end and            
                                                                                                      approximately 30 days after
                                                                                                      quarter end                

Standard & Poor's(*)                      Complete portfolio             Quarterly basis              Approximately 15 day lag   
                                          holdings                                                                               

Investment Company Institute(**)          Top ten portfolio holdings      Quarterly basis             Approximately 15 days after
                                                                                                      quarter end                

CONSULTANTS AND ANALYSTS                                                                                                         
Americh Massena & Associates, Inc.(*)     Top ten and complete           Quarterly basis(5)           Approximately 10-12 days   
                                          portfolio holdings                                          after quarter end          

Bloomberg(**)                             Complete portfolio             Quarterly basis              Approximately 30 days after
                                          holdings                                                    quarter end                

Callan Associates(*)                      Top ten and complete           Monthly and quarterly        Approximately 10-12 days   
                                          portfolio holdings             basis, respectively(5)       after month/quarter end    

Cambridge Associates(*)                   Top ten and complete           Quarterly basis(5)           Approximately 10-12 days   
                                          portfolio holdings                                          after quarter end          

Citigroup(*)                              Complete portfolio holdings    Quarterly basis(5)           At least one day after     
                                                                                                      quarter end                

Credit Suisse First Boston(*)             Top ten and complete           Monthly and quarterly        Approximately 10-12 days   
                                          portfolio holdings             basis, respectively          after month/quarter end    

CTC Consulting, Inc.(**)                  Top ten and complete           Quarterly basis              Approximately 15 days after
                                          portfolio holdings                                          quarter end and            
                                                                                                      approximately 30 days after
                                                                                                      quarter end, respectively  

Evaluation Associates(*)                  Top ten and complete           Monthly and quarterly        Approximately 10-12 days   
                                          portfolio holdings             basis, respectively(5)       after month/quarter end    

Fund Evaluation Group(**)                 Top ten portfolio holdings(3)  Quarterly basis              At least 15 days after     
                                                                                                      quarter end                

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                                                        [Enlarge/Download Table]

                NAME                          INFORMATION DISCLOSED              FREQUENCY(1)                   LAG TIME         
----------------------------------------  -----------------------------  ---------------------------  ---------------------------
                                                                                                                                 
Jeffrey Slocum & Associates(*)            Complete portfolio             Quarterly basis(5)           Approximately 10-12 days   
                                          holdings(4)                                                 after quarter end          

Hammond Associates(**)                    Complete portfolio             Quarterly basis              At least 30 days after     
                                          holdings(4)                                                 quarter end                

Hartland & Co.(**)                        Complete portfolio             Quarterly basis              At least 30 days after     
                                          holdings(4)                                                 quarter end                

Hewitt Associates(*)                      Top ten and complete           Monthly and quarterly        Approximately 10-12 days   
                                          portfolio holdings             basis, respectively(5)       after month/quarter end    

Merrill Lynch(*)                          Top ten and complete           Monthly and quarterly        Approximately 10-12 days   
                                          portfolio holdings             basis, respectively(5)       after month/quarter end    

Mobius(**)                                Top ten portfolio              Monthly basis                At least 15 days after     
                                          holdings(3)                                                 month end                  

Nelsons(**)                               Top ten portfolio              Quarterly basis              At least 15 days after     
                                          holdings(3)                                                 quarter end                

Prime Buchholz & Associates, Inc.(**)     Complete portfolio             Quarterly basis              At least 30 days after     
                                          holdings(4)                                                 quarter end                

PSN(**)                                   Top ten portfolio holdings(3)  Quarterly basis              At least 15 days after     
                                                                                                      quarter end                

PFM Asset Management LLC(*)               Top ten and complete           Quarterly basis(5)           Approximately 10-12 days   
                                          portfolio holdings                                          after quarter end          

Russell Investment Group/Russell/         Top ten and complete           Monthly and quarterly basis  At least 15 days after     
   Mellon Analytical Services, Inc.(**)   portfolio holdings                                          month end and at least 30  
                                                                                                      days after quarter end,    
                                                                                                      repectively                

Strafford Advisory Group, Inc.(*)         Top ten portfolio holdings(6)  Quarterly basis(5)           Approximately 10-12 days   
                                                                                                      after quarter end          

Thompson Financial(**)                    Complete portfolio             Quarterly basis              At least 30 days after     
                                          holdings(4)                                                 quarter end                

Watershed Investment Consultants,         Top ten and complete           Quarterly basis(5)           Approximately 10-12 days   
   Inc.(*)                                portfolio holdings                                          after quarter end          

Yanni Partners(**)                        Top ten portfolio              Quarterly basis              At least 15 days after     
                                          holdings(3)                                                 quarter end                

PORTFOLIO ANALYTICS PROVIDERS                                                                                                    
Fact Set(*)                               Complete portfolio holdings    Daily                        One day                    

----------                                                                      
(*)  This entity has agreed to maintain Fund non-public portfolio holdings      
  information in confidence and not to trade portfolio securities based on
the non-public portfolio holdings information.                        

(**) The Fund does not currently have a non-disclosure agreement in place with  
  this entity and therefore the entity can only receive publicly available
information.                                                          

(1)  Dissemination of portfolio holdings information to entities listed above   
may occur less frequently than indicated (or not at all).             

(2)  Information will typically be provided on a real time basis or as soon     
thereafter as possible.                                               

(3)  Complete portfolio holdings will also be provided upon request from time to
time on a quarterly basis, with at least a 30 day lag.                

(4)  Top ten portfolio holdings will also be provided upon request from time to 
time, with at least a 15 day lag.                                     

(5)  This information will also be provided upon request from time to time.     

(6)  Complete portfolio holdings will also be provided upon request from time to
time.                                                                 

In addition, persons who owe a duty of trust or confidence to the     
Investment Adviser or each Fund may receive non-public portfolio holdings       
information without entering into a non-disclosure agreement. Currently these   
persons include (i) each Fund's independent registered public accounting firm   
(as of the Fund's fiscal year end and on an as needed basis), (ii) counsel to   
each Fund (on an as needed basis), (iii) counsel to the Independent Trustees (on
an as needed basis) and (iv) members of the Board of Trustees (on an as needed  
basis).                                                                         

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485APOS 59th Page of 96 TOC 1st Previous Next ↓Bottom Just 59th
     All selective disclosures of non-public portfolio holdings information made
to third parties pursuant to the exemptions set forth in the Policy must be     
pre-approved by both the PHRC and each Fund's Board of Trustees (or a designated
Committee thereof), except for (i) disclosures made to third parties pursuant to
ongoing arrangements (discussed above); (ii) disclosures made to third parties  
pursuant to Special Meetings of the PHRC; (iii) broker-dealer interest lists;   
(iv) shareholder in-kind distributions; (v) attribution analyses; or (vi) in    
connection with transition managers. The Investment Adviser shall report        
quarterly to the Board of Trustees (or a designated Committee thereof)          
information concerning all parties receiving non-public portfolio holdings      
information pursuant to an exemption. Procedures to monitor the use of such     
non-public portfolio holdings information may include requiring annual          
certifications that the recipients have utilized such information only pursuant 
to the terms of the agreement between the recipient and the Investment Adviser  
and, for those recipients receiving information electronically, acceptance of   
the information will constitute reaffirmation that the third party expressly    
agrees to maintain the disclosed information in confidence and not to trade     
portfolio securities based on the material nonpublic information.               

In no instance may the Investment Adviser or the Funds receive any    
compensation or consideration in exchange for the portfolio holdings            
information.                                                                    

  The PHRC is responsible for creating and implementing the Policy and, in
this regard, has expressly adopted it. The following are some of the functions  
and responsibilities of the PHRC:                                               

     (a) The PHRC, which will consist of executive officers of each Fund and the
Investment Adviser or their designees, is responsible for establishing portfolio
holdings disclosure policies and guidelines and determining how portfolio       
holdings information will be disclosed on an ongoing basis.                     

  (b) The PHRC will periodically review and have the authority to amend as
necessary each Fund's portfolio holdings disclosure policies and guidelines (as 
expressed by the Policy).                                                       

 (c) The PHRC will meet at least quarterly to (among other matters): (1)
address any outstanding issues relating to the Policy, including matters        
relating to (i) disclosures made to third parties pursuant to ongoing           
arrangements (described above); (ii) broker-dealer interest lists; (iii)        
Shareholder in-kind distributions; (iv) attribution analysis; or (v) in         
connection with transition managers; (2) review non-disclosure agreements that  
have been executed with third parties and determine whether the third parties   
will receive portfolio holdings information; and (3) generally review the       
procedures that the Investment Adviser employs to ensure that disclosure of     
information about portfolio securities is in the best interests of Fund         
shareholders, including procedures to address conflicts between the interests of
Fund shareholders, on the one hand, and those of the Investment Adviser, the    
Distributor or any affiliated person of the Funds, the Investment Adviser or the
Distributor, on the other.                                                      

(d) Any member of the PHRC may call a Special Meeting of the PHRC to  
consider whether a third-party that is not listed in (c) above may receive      
non-public portfolio holdings information pursuant to a validly executed        
nondisclosure agreement. At least three members of the PHRC, or their designees,
and one member of the Funds' Audit Committee, or his or her designee, shall be  
present at the Special Meeting in order to constitute a quorum. At any Special  
Meeting at which a quorum is present, the decision of a majority of the PHRC    
members present and voting shall be determinative as to any matter submitted to 
a vote; provided, however, that the Audit Committee member, or his or her       
designee, must concur in the determination in order for it to become effective. 

 (e) The PHRC, or its designee(s), will document in writing all of their
decisions and actions, which documentation will be maintained by the PHRC, or   
its designee(s) for a period of at least six years. The PHRC, or its            
designee(s), will report their decisions to the Board of Trustees at each       
Board's next regularly scheduled Board meeting. The report will contain         
information concerning decisions made by the PHRC during the most recently ended
calendar quarter immediately preceding the Board meeting.                       

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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 each Fund. The Trustees review various services
provided by or under the direction of the Investment Adviser 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.                                 

    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 Fund consists of 13 Trustees.
These same individuals also serve as directors or trustees for all of the funds 
advised by the Investment Adviser (the "Retail Funds") and certain of the funds 
advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP  
LP (the "Institutional Funds"). Eleven Trustees have no affiliation or business 
connection with the Investment Adviser or any of its affiliated persons and do  
not own any stock or other securities issued by the Investment Adviser's parent 
company, Morgan Stanley. These are the "non-interested" or "Independent"        
Trustees. The other two Trustees (the "Management Trustees") are affiliated with
the Investment Adviser.                                                         

   The Independent Trustees of each Fund, their age, address, term of office
and length of time served, their principal business occupations during the past 
five years, the number of portfolios in the Fund Complex (defined below)        
overseen by each Independent Trustee (as of December 31, 2005) and other        
directorships, if any, held by the Trustees, are shown below. The Fund Complex  
includes all open-end and closed-end funds (including all of their portfolios)  
advised by the Investment Adviser and any funds that have an investment advisor 
that is an affiliated person of the Investment Adviser (including, but not      
limited to, Morgan Stanley Investment Management Inc.).                         

                                                        [Enlarge/Download Table]

                                                                                       NUMBER OF                               
                                                                                      PORTFOLIOS                               
                                                                                        IN FUND                                
                             POSITION(S)   LENGTH OF                                    COMPLEX                                
  NAME, AGE AND ADDRESS OF    HELD WITH      TIME     PRINCIPAL OCCUPATION(S) DURING   OVERSEEN      OTHER DIRECTORSHIPS HELD  
    INDEPENDENT TRUSTEE       REGISTRANT    SERVED*           PAST 5 YEARS            BY TRUSTEE           BY TRUSTEE          
---------------------------  -----------  ----------  ------------------------------  ----------  -----------------------------
                                                                                                                               
Frank L. Bowman (61)         Trustee      Since       President and Chief Executive     187**     Director of the National     
c/o Kramer Levin Naftalis &               [August     Officer of the Nuclear Energy               Energy Foundation, the U.S.  
Frankel LLP                               2006]       Institute (since February                   Energy Association, the      
Counsel to the                                        2005) (policy organization);                American Council for Capital 
Independent Trustees                                  formerly variously, Admiral in              Formation and the Armed      
1177 Avenue of the                                    the U.S. Navy, Director of                  Services YMCA of the USA.    
Americas                                              Naval Nuclear Propulsion                                                 
New York, NY 10036                                    Program and Deputy                                                       
                                                      Administrator -- Naval                                                   
                                                      Reactors in the National                                                 
                                                      Nuclear Security                                                         
                                                      Administration at the U.S.                                               
                                                      Department of Energy                                                     
                                                      (1996-2004), Honorary Knight                                             
                                                      Commander of the Most                                                    
                                                      Excellent Order of the British                                           
                                                      Empire.                                                                  

----------                                                                      

*    This is the earliest date the Trustee began serving the Retail or          
   Institutional Funds. Each Trustee serves an indefinite term, until his or
her successor is elected.                                             

**   As of ________ 2006.                                                       

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                                                        [Enlarge/Download Table]

                                                                                      NUMBER OF                                
                                                                                      PORTFOLIOS                               
                                                                                        IN FUND                                
                             POSITION(S)   LENGTH OF                                    COMPLEX                                
  NAME, AGE AND ADDRESS OF    HELD WITH      TIME     PRINCIPAL OCCUPATION(S) DURING   OVERSEEN      OTHER DIRECTORSHIPS HELD  
     INDEPENDENT TRUSTEE      REGISTRANT    SERVED*           PAST 5 YEARS            BY TRUSTEE            BY TRUSTEE         
---------------------------  -----------  ----------  ------------------------------  ----------  -----------------------------
                                                                                                                               
Michael Bozic (65)           Trustee      Since       Private investor; Chairman of       197     Director of various          
c/o Kramer Levin Naftalis &               April 1994  the Insurance Committee (since              business organizations.      
Frankel LLP                                           July 2006); Director or                                                  
Counsel to the                                        Trustee of the Retail Funds                                              
Independent Trustees                                  (since April 1994) and the                                               
1177 Avenue of the                                    Institutional Funds (since                                               
Americas                                              July 2003); formerly Vice                                                
New York, NY 10036                                    Chairman of Kmart Corporation                                            
                                                      (December 1998-October 2000),                                            
                                                      Chairman and Chief Executive                                             
                                                      Officer of Levitz Furniture                                              
                                                      Corporation (November                                                    
                                                      1995-November 1998) and                                                  
                                                      President and Chief Executive                                            
                                                      Officer of Hills Department                                              
                                                      Stores (May 1991-July 1995);                                             
                                                      formerly variously Chairman,                                             
                                                      Chief Executive Officer,                                                 
                                                      President and Chief Operating                                            
                                                      Officer (1987-1991) of the                                               
                                                      Sears Merchandise Group of                                               
                                                      Sears, Roebuck & Co.                                                     

Kathleen A. Dennis (53)      Trustee      Since       President, Cedarwood                187**   None.                        
c/o Kramer Levin Naftalis &               [August     Associates (since 2006)                                                  
Frankel LLP                               2006]       (mutual fund consulting);                                                
Counsel to the                                        formerly, Senior Managing                                                
Independent Trustees                                  Director of Victory Capital                                              
1177 Avenue of the                                    Management (1993-2006).                                                  
Americas                                                                                                                       
New York, NY 10036                                                                                                             

Edwin J. Garn (74)           Trustee      Since       Consultant; Director or             197     Director of Franklin Covey   
1031 N. Chartwell Court                   January     Trustee of the Retail Funds                 (time management systems),   
Salt Lake City, UT 84103                  1993        (since January 1993) and the                BMW Bank of North America,   
                                                      Institutional Funds (since                  Inc. (industrial loan        
                                                      July 2003); member of the Utah              corporation), Escrow Bank USA
                                                      Regional Advisory Board of                  (industrial loan             
                                                      Pacific Corp. (utility                      corporation), United Space   
                                                      company); formerly Managing                 Alliance (joint venture      
                                                      Director of Summit Ventures                 between Lockheed Martin and  
                                                      LLC (lobbying and consulting                the Boeing Company) and      
                                                      firm) (2000-2004); United                   Nuskin Asia Pacific          
                                                      States Senator (R-Utah)                     (multilevel marketing);      
                                                      (1974-1992) and Chairman,                   member of the board of       
                                                      Senate Banking Committee                    various civic and charitable 
                                                      (1980-1986), Mayor of Salt                  organizations.               
                                                      Lake City, Utah (1971-1974),                                             
                                                      Astronaut, Space Shuttle                                                 
                                                      Discovery (April 12-19, 1985),                                           
                                                      and Vice Chairman, Huntsman                                              
                                                      Corporation (chemical                                                    
                                                      company).                                                                

Wayne E. Hedien (72)         Trustee      Since       Retired; Director or Trustee        197     Director of The PMI Group    
c/o Kramer Levin Naftalis &               September   of the Retail Funds (since                  Inc. (private mortgage       
Frankel LLP                               1997        September 1997) and the                     insurance); Trustee and Vice 
Counsel to the                                        Institutional Funds (since                  Chairman of The Field Museum 
Independent Directors                                 July 2003); formerly                        of Natural History; director 
1177 Avenue of the                                    associated with the Allstate                of various other business and
Americas                                              Companies (1966-1994), most                 charitable organizations.    
New York, NY 10036                                    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).                                                                   

----------                                                                      

*    This is the earliest date the Officer began serving the Retail or          
   Institutional Funds. Each Officer serves an indefinite term, until his or
her successor is elected.                                             

**   As of ________ 2006.                                                       

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                                                        [Enlarge/Download Table]

                                                                                      NUMBER OF                                
                                                                                      PORTFOLIOS                               
                                                                                        IN FUND                                
                             POSITION(S)   LENGTH OF                                    COMPLEX                                
  NAME, AGE AND ADDRESS OF    HELD WITH      TIME     PRINCIPAL OCCUPATION(S) DURING   OVERSEEN      OTHER DIRECTORSHIPS HELD  
     INDEPENDENT TRUSTEE      REGISTRANT    SERVED*           PAST 5 YEARS            BY TRUSTEE            BY TRUSTEE         
---------------------------  -----------  ----------  ------------------------------  ----------  -----------------------------
                                                                                                                               
Dr. Manuel H. Johnson (57)   Trustee      Since       Senior Partner, Johnson Smick       197     Director of NVR, Inc. (home  
c/o Johnson Smick                         July 1991   International, Inc., a                      construction); Director of   
Group, Inc.                                           consulting firm; Chairman of                KFX Energy; Director of RBS  
888 16th Street, NW                                   the Audit Committee and                     Greenwich Capital Holdings   
Suite 740                                             Director or Trustee of the                  (financial holding company). 
Washington, D.C. 20006                                Retail Funds (since July 1991)                                           
                                                      and the Institutional Funds                                              
                                                      (since July 2003); Co-Chairman                                           
                                                      and a founder of the Group of                                            
                                                      Seven Council (G7C), an                                                  
                                                      international economic                                                   
                                                      commission; formerly Vice                                                
                                                      Chairman of the Board of                                                 
                                                      Governors of the Federal                                                 
                                                      Reserve System and Assistant                                             
                                                      Secretary of the U.S.                                                    
                                                      Treasury.                                                                

Joseph J. Kearns (64)        Trustee      Since       President, Kearns & Associates      198     Director of Electro Rent     
c/o Kearns & Associates                   August      LLC (investment consulting);                Corporation (equipment       
LLC                                       1994        Deputy Chairman of the Audit                leasing), The Ford Family    
PMB754                                                Committee and Director or                   Foundation, and the UCLA     
23852 Pacific                                         Trustee of the Retail Funds                 Foundation.                  
Coast Highway                                         (since July 2003) and the                                                
Malibu, CA 90265                                      Institutional Funds (since                                               
                                                      August 1994); previously                                                 
                                                      Chairman of the Audit                                                    
                                                      Committee of the Institutional                                           
                                                      Funds (October 2001-July                                                 
                                                      2003); formerly CFO of the J.                                            
                                                      Paul Getty Trust.                                                        

Michael F. Klein (47)        Trustee      Since       Chief Operating Officer and         187**   Director of certain          
c/o Kramer Levin Naftalis &               [August     Managing Director, Aetos                    investment funds managed or  
Frankel LLP                               2006]       Capital, LLC (since March                   sponsored by Aetos Capital   
Counsel to the                                        2000); Managing Director,                   LLC.                         
Independent Trustees                                  Morgan Stanley & Co. Inc. and                                            
1177 Avenue of the                                    Morgan Stanley Dean Witter                                               
Americas                                              Investment Management and                                                
New York, NY 10036                                    President, Morgan Stanley                                                
                                                      Institutional Funds (June                                                
                                                      1998-March 2000); Principal,                                             
                                                      Morgan Stanley & Co. Inc. and                                            
                                                      Morgan Stanley Dean Witter                                               
                                                      Investment Management (August                                            
                                                      1997-December 1999).                                                     

Michael E. Nugent (70)       Chairman     Chairman    General Partner of Triumph          197     None.                        
c/o Triumph Capital, L.P.    of the       of the      Capital, L.P., a private                                                 
445 Park Avenue              Board        Board       investment partnership;                                                  
New York, NY 10022           and          (since      Chairman of the Board of the                                             
                             Trustee      July 2006)  Retail Funds and Institutional                                           
                                          and         Funds (since July 2006),                                                 
                                          Trustee     Director or Trustee of the                                               
                                          (Since      Retail Funds (since July 1991)                                           
                                          July 1991)  and the Institutional Funds                                              
                                                      (since July 2001); formerly                                              
                                                      Chairman of the Insurance                                                
                                                      Committee (until July 2006);                                             
                                                      Vice President, Bankers Trust                                            
                                                      Company and BT Capital                                                   
                                                      Corporation (1984-1988).                                                 

----------                                                                      

*    This is the earliest date the Trustee began serving the Retail or          
   Institutional Funds. Each Trustee serves an indefinite term, until his or
her successor is elected.                                             

**   As of ________ 2006.                                                       

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                                                        [Enlarge/Download Table]

                                                                                             NUMBER OF                              
                                                                                            PORTFOLIOS                              
                                                                                              IN FUND                               
                           POSITION(S)  LENGTH OF                                             COMPLEX                               
NAME, AGE AND ADDRESS OF    HELD WITH      TIME    PRINCIPAL OCCUPATION(S) DURING            OVERSEEN   OTHER DIRECTORSHIPS HELD BY 
  INDEPENDENT TRUSTEE       REGISTRANT   SERVED*           PAST 5 YEARS                     BY TRUSTEE            TRUSTEE           
-------------------------  -----------  ---------  ---------------------------------------  ----------  ----------------------------
                                                                                                                                    
W. Allen Reed (59)         Trustee       Since     President and CEO of General Motors        187**     Director of GMAC            
c/o Kramer Levin Naftalis                [August   Asset Management; Chairman and                       (financial services),       
& Frankel LLP                            2006]     Chief Executive Officer of the GM Trust              GMAC Insurance              
Counsel to the                                     Bank and Corporate Vice President of                 Holdings, iShares, Inc.     
Independent Trustees                               General Motors Corporation (August                   (Exchange Traded Funds),    
1177 Avenue of the                                 1994-December 2005).                                 and Temple-Inland           
Americas                                                                                                Industries (Packaging,      
New York, NY 10036                                                                                      Banking and Forrest         
                                                                                                        Products); member of the    
                                                                                                        Board of Executives of the  
                                                                                                        New York Stock              
                                                                                                        Exchange, the Investment    
                                                                                                        Advisory Committee for      
                                                                                                        the New York State          
                                                                                                        Retirement System and       
                                                                                                        the Morgan Stanley          
                                                                                                        Capital International       
                                                                                                        Editorial Board; Director   
                                                                                                        of various investment fund  
                                                                                                        advisory boards.            

Fergus Reid (74)           Trustee      Since      Chairman of Lumelite Plastics              198       Trustee and Director of     
c/o Lumelite Plastics                   June 1992  Corporation; Chairman of the                         certain investment          
Corporation                                        Governance Committee and Director                    companies in the            
85 Charles Colman Blvd.                            or Trustee of the Retail Funds (since                JPMorgan Funds              
Pawling, NY 12564                                  July 2003) and the Institutional Funds               complex managed by          
                                                   (since June 1992).                                   J.P. Morgan Investment      
                                                                                                        Management Inc.             

----------                                                                      

*    This is the earliest date the Trustee began serving the Retail or          
   Institutional Funds. Each Trustee serves an indefinite term, until his or
her successor is elected.                                             

**   As of ________ 2006.                                                       

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   The Trustees who are affiliated with the Investment Adviser or affiliates
of the Investment Adviser (as set forth below) and executive officers of the    
Funds, their age, address, term of office and length of time served, their      
principal business occupations during the past five years, the number of        
portfolios in the Fund Complex overseen by each Management Trustee (as of       
December 31, 2005) and the other directorships, if any, held by the Trustee, are
shown below.                                                                    

                                                        [Enlarge/Download Table]

                                                                                   NUMBER OF                             
                                                                                  PORTFOLIOS                             
                                                                                    IN FUND                              
                                                                                    COMPLEX                              
                          POSITION(S)   LENGTH                                    OVERSEEN BY                            
NAME, AGE AND ADDRESS OF   HELD WITH   OF TIME   PRINCIPAL OCCUPATION(S) DURING    MANAGEMENT   OTHER DIRECTORSHIPS HELD 
    MANAGEMENT TRUSTEE     REGISTRANT  SERVED*           PAST 5 YEARS               TRUSTEE            BY TRUSTEE        
------------------------  -----------  -------  --------------------------------  -----------  --------------------------
                                                                                                                         
Charles A. Fiumefreddo      Trustee     Since   Director or Trustee of the            197      None.                     
(73)                                     July   Retail Funds (since July 1991)                                           
c/o Morgan Stanley Trust                 1991   and the Institutional Funds                                              
Harborside Financial                            (since July 2003); formerly                                              
Center,                                         Chairman of the Board of the                                             
Plaza Two,                                      Retail Funds (July 1991-July                                             
Jersey City, NJ 07311                           2006) and the Institutional                                              
                                                Funds (July 2003-July 2006) and                                          
                                                Chief Executive Officer of the                                           
                                                Retail Funds (until September                                            
                                                2002).                                                                   

James F. Higgins (58)       Trustee     Since   Director or Trustee of the            197      Director of AXA Financial,
c/o Morgan Stanley                       June   Retail Funds                                   Inc. and The Equitable    
Trust                                    2000   (since June 2000) and the                      Life Assurance Society of 
Harborside Financial                            Institutional                                  the United States         
Center,                                         Funds (since July 2003); Senior                (financial services).     
Plaza Two,                                      Advisor of Morgan Stanley (since                                         
Jersey City, NJ 07311                           August 2000).                                                            

----------                                                                      

*    This is the earliest date the Trustee began serving the Retail or          
   Institutional Funds. Each Trustee serves an indefinite term, until his or
her successor is elected.                                             

                                                        [Enlarge/Download Table]

                              POSITION(S)       LENGTH OF                                                    
   NAME, AGE AND ADDRESS       HELD WITH           TIME                   PRINCIPAL OCCUPATION(S) DURING     
   OF EXECUTIVE OFFICER        REGISTRANT        SERVED*                          PAST 5 YEARS**             
---------------------------  -------------  -----------------  ----------------------------------------------
                                                                                                             
Ronald E. Robison (67)       President and  President (since   President (since September 2005) and Principal
1221 Avenue of the Americas  Principal      September 2005)    Executive Officer (since May 2003) of funds in
New York, NY 10020           Executive      and Principal      the Fund Complex; President (since September  
                             Officer        Executive Officer  2005) and Principal Executive Officer (since  
                                            (since May 2003)   May 2003) of the Van Kampen Funds; Managing   
                                                               Director, Director and/or Officer of the      
                                                               Investment Adviser and various entities       
                                                               affiliated with the Investment Adviser;       
                                                               Director of Morgan Stanley SICAV (since May   
                                                               2004). Formerly, Executive Vice President     
                                                               (July 2003 to September 2005) of funds in the 
                                                               Fund Complex and the Van Kampen Funds;        
                                                               President and Director of the Institutional   
                                                               Funds (March 2001 to July 2003); Chief Global 
                                                               Operating Officer of Morgan Stanley Investment
                                                               Management Inc.; Chief Administrative Officer 
                                                               of Morgan Stanley Investment Advisors Inc.;   
                                                               Chief Administrative Officer of Morgan Stanley
                                                               Services Company Inc.                         

J. David Germany (53)        Vice           Since February     Managing Director and (since December 2005)   
Morgan Stanley Investment    President      2006               Chief Investment Officer -- Global Fixed      
Management Limited                                             Income of Morgan Stanley Investment           
25 Cabot Square                                                Management; Managing Director and Director of 
Canary Wharf, London                                           Morgan Stanley Investment Management Limited; 
United Kingdom E144QA                                          Vice President (since February 2006) of the   
                                                               Retail and Institutional Funds.               

----------                                                                      

*    This is the earliest date the Officer began serving the Retail or          
   Institutional Funds. Each Officer serves an indefinite term, until his or
her successor is elected.                                             

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                                                        [Enlarge/Download Table]

                               POSITION(S)         LENGTH OF                                                       
  NAME, AGE AND ADDRESS OF      HELD WITH             TIME                  PRINCIPAL OCCUPATION(S) DURING         
     EXECUTIVE OFFICER          REGISTRANT           SERVED*                       PAST 5 YEARS                    
---------------------------  ---------------  -------------------  ------------------------------------------------
                                                                                                                   
Dennis F. Shea (53)          Vice President   Since February 2006  Managing Director and (since February 2006)     
1221 Avenue of the Americas                                        Chief Investment Officer -- Global Equity of    
New York, NY 10020                                                 Morgan Stanley Investment Management; Vice      
                                                                   President (since February 2006) of the Retail   
                                                                   and Institutional Funds. Formerly, Managing     
                                                                   Director and Director of Global Equity Research 
                                                                   at Morgan Stanley.                              

Barry Fink (51)              Vice President   Since February 1997  Managing Director and General Counsel of Morgan 
1221 Avenue of the Americas                                        Stanley Investment Management; Managing Director
New York, NY 10020                                                 of the Investment Adviser and various entities  
                                                                   affiliated with the Investment Adviser; Vice    
                                                                   President of the Retail Funds and (since July   
                                                                   2003) the Institutional Funds. Formerly,        
                                                                   Secretary, General Counsel and/or Director of   
                                                                   the Investment Adviser and various entities     
                                                                   affiliated with the Investment Adviser;         
                                                                   Secretary and General Counsel of the Retail     
                                                                   Funds.                                          

Amy R. Doberman (44)         Vice President   Since July 2004      Managing Director and General Counsel, U.S.     
1221 Avenue of the Americas                                        Investment Management of Morgan Stanley         
New York, NY 10020                                                 Investment Management (since July 2004); Vice   
                                                                   President of the Retail Funds and the           
                                                                   Institutional Funds (since July 2004); Vice     
                                                                   President of the Van Kampen Funds (since August 
                                                                   2004); Secretary (since February 2006) and      
                                                                   Managing Director (since July 2004) of the      
                                                                   Investment Adviser and various entities         
                                                                   affiliated with the Investment Adviser.         
                                                                   Formerly, Managing Director and General Counsel 
                                                                   -- Americas, UBS Global Asset Management (July  
                                                                   2000 to July 2004).                             

Carsten Otto (42)            Chief            Since October 2004   Managing Director and U.S. Director of          
1221 Avenue of the Americas  Compliance                            Compliance for Morgan Stanley Investment        
New York, NY 10020           Officer                               Management (since October 2004); Managing       
                                                                   Director and Chief Compliance Officer of Morgan 
                                                                   Stanley Investment Management. Formerly,        
                                                                   Assistant Secretary and Assistant General       
                                                                   Counsel of the Retail Funds.                    

Stefanie V. Chang Yu (39)    Vice President   Since December 1997  Executive Director of the Investment Adviser and
1221 Avenue of the                                                 various entities affiliated with the Investment 
Americas                                                           Adviser; Vice President of the Retail Funds     
New York, NY 10020                                                 (since July 2002) and the Institutional Funds   
                                                                   (since December 1997). Formerly, Secretary of   
                                                                   various entities affiliated with the Investment 
                                                                   Adviser.                                        

Francis J. Smith (41)        Treasurer and    Treasurer since      Executive Director of the Investment Adviser and
c/o Morgan Stanley Trust     Chief Financial  July 2003 and Chief  various entities affiliated with the Investment 
Harborside Financial         Officer          Financial Officer    Adviser; Treasurer and Chief Financial Officer  
Center                                        since                of the Retail Funds (since July 2003). Formerly,
Plaza Two                                     September 2002       Vice President of the Retail Funds (September   
Jersey City, NJ 07311                                              2002 to July 2003).                             

Mary E. Mullin (39)          Secretary        Since June 1999      Executive Director of the Investment Adviser and
1221 Avenue of the Americas                                        various entities affiliated with the Investment 
New York, NY 10020                                                 Adviser; Secretary of the Retail Funds (since   
                                                                   July 2003) and the Institutional Funds (since   
                                                                   June 1999).                                     

----------                                                                      

*    This is the earliest date the Officer began serving the Retail or          
   Institutional Funds. Each Officer serves an indefinite term, until his or
her successor is elected.                                             

   In addition, the following individuals who are officers of the Investment
Adviser or its affiliates serve as assistant secretaries of each of the Funds:  
Joanne Antico, Joseph C. Benedetti, Daniel E. Burton, Joanne Doldo, Tara A.     
Farrelly, Alice J. Gerstel, Eric C. Griffith, Lou Anne D. McInnis, Edward J.    
Meehan, Elisa Mitchell, Elizabeth Nelson, Debra Rubano, Rita Rubin, Sheri L.    
Schreck and Julien H. Yoo.                                                      

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    For each Trustee, the dollar range of equity securities beneficially owned
by the Trustee in each of the Funds and in the Family of Investment Companies   
(Family of Investment Companies includes all of the registered investment       
companies advised by the Investment Adviser, Morgan Stanley Investment          
Management Inc. and Morgan Stanley AIP GP LP) for the calendar year ended       
December 31, 2005, is shown below.                                              

                                                        [Enlarge/Download Table]

                                                                   AGGREGATE DOLLAR RANGE OF EQUITY  
                                                                     SECURITIES IN ALL REGISTERED    
                                                                   INVESTMENT COMPANIES OVERSEEN BY  
                        DOLLAR RANGE OF EQUITY SECURITIES IN THE    TRUSTEE IN FAMILY OF INVESTMENT  
    NAME OF TRUSTEE          FUNDS (AS OF DECEMBER 31, 2005)      COMPANIES (AS OF DECEMBER 31, 2005)
----------------------  ----------------------------------------  -----------------------------------
                                                                                                     
INDEPENDENT:                                                                                         
Frank L. Bowman(1)                         n/a                                   None                
Michael Bozic                        over $100,000(3)                        over $100,000           
Kathleen A. Dennis(1)                      n/a                                   None                
Edwin J. Garn                              None                              over $100,000           
Wayne E. Hedien                      over $100,000(3)                        over $100,000           
Dr. Manuel H. Johnson                      None                              over $100,000           
Joseph J. Kearns(2)                        None                              over $100,000           
Michael F. Klein(1)                        n/a                               over $100,000           
Michael E. Nugent                          None                              over $100,000           
W. Allen Reed(1)                           n/a                                   None                
Fergus Reid(2)                             None                              over $100,000           
INTERESTED:                                                                                          
Charles A. Fiumefreddo               over $100,000(4)                        over $100,000           
James F. Higgins                  $50,001 - $100,000(4)                      over $100,000           

----------                                                                      

(1)  Messrs. Bowman, Klein and Reed and Ms. Dennis were elected to the Board of 
    each fund in the Fund Complex in August 2006 and therefore did not own any
equity securities in the Fund at December 31, 2005.                   

(2)  Includes the total amount of compensation deferred by the Trustee at his   
election pursuant to a deferred compensation plan. Such deferred      
   compensation is placed in a deferral account and deemed to be invested in
one or more of the Retail Funds or Institutional Funds (or portfolio  
thereof) that are offered as investment options under the plan. As of 
    December 31, 2005, the value (including interest) of the deferral accounts
 for Messrs. Kearns and Reid was of $786,542 and $766,622, respectively,
pursuant to the deferred compensation plan.                           

(3)  Active Assets Tax-Free Trust                                               

(4)  Active Assets Money Trust and Active Assets Tax-Free Trust                 

     As to each Independent Trustee and his imimediate family members, no person
owned beneficially or of record securities in an investment advisor or principal
underwriter of each Fund, or a person (other than a registered investment       
company) directly or indirectly controlling, controlled by or under common      
control with an investment adviser or principal underwriter of each Fund.       

    INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Retail 
Funds seek as Independent 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 Retail Funds' boards, such individuals 
may reject other attractive assignments because the Retail Funds make           
substantial demands on their time. All of the Independent Trustees serve as     
members of the Audit Committee. In addition, four Trustees, including three     
Independent Trustees, serve as members of the Insurance Committee, and three    
Independent Trustees serve as members of the Governance Committee.              

  The Independent 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 Trustees are required to select and nominate individuals to fill any
Independent Trustee vacancy on the board of any fund that has a Rule 12b-1 plan 
of distribution. Most of the Retail Funds have a Rule 12b-1 plan.               

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    The Board of Trustees has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange   
Act of 1934, as amended. The Audit Committee is charged with recommending to the
full Board the engagement or discharge of the Funds' independent registered     
public accounting firm; directing investigations into matters within the scope  
of the independent registered public accounting firm's duties, including the    
power to retain outside specialists; reviewing with the independent registered  
public accounting firm the audit plan and results of the auditing engagement;   
approving professional services provided by the independent registered public   
accounting firm and other accounting firms prior to the performance of the      
services; reviewing the independence of the independent registered public       
accounting firm; 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. Each Fund has adopted a 
formal, written Audit Committee Charter. During the Funds' fiscal year ended    
June 30, 2006, the Audit Committee held __ meetings.                            

The members of the Audit Committee of each Fund are currently Michael 
Bozic, Edwin J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Joseph J. Kearns, 
Michael E. Nugent and Fergus Reid. None of the members of the Funds' Audit      
Committee is an "interested person", as defined under the Investment Company    
Act, of each Fund (with such disinterested Trustees being "Independent Trustees"
or individually, "Independent Trustee"). Each Independent Trustee is also       
"independent" from each Fund under the listing standards of the New York Stock  
Exchange, Inc. (NYSE). The current Chairman of the Audit Committee of each Fund 
is Dr. Manuel H. Johnson.                                                       

  The Board of Trustees of each Fund also has a Governance Committee. Each
Governance Committee identifies individuals qualified to serve as Independent   
Trustees on the Funds' Board and on committees of such Board and recommends such
qualified individuals for nomination by the Funds' Independent Trustees as      
candidates for election as Independent Trustees, advises the Funds' Board with  
respect to Board composition, procedures and committees, develops and recommends
to the Funds' Board a set of corporate governance principles applicable to each 
Fund, monitors and makes recommendations on corporate governance matters and    
policies and procedures of the Fund's Board of Trustees and any Board committees
and oversees periodic evaluations of the Fund's Board and its committees. The   
members of the Governance Committee of each Fund are currently Michael Bozic,   
Edwin J. Garn and Fergus Reid, each of whom is an Independent Trustee. The      
current Chairman of the Governance Committee is Fergus Reid. During the Funds'  
fiscal year ended June 30, 2006, the Governance Committee held __ meetings.     

 The Funds do not have a separate nominating committee. While the Funds'
Governance Committee recommends qualified candidates for nominations as         
Independent Trustees, the Board of Trustees of the Funds believes that the task 
of nominating prospective Independent Trustees is important enough to require   
the participation of all current Independent Trustees, rather than a separate   
committee consisting of only certain Independent Trustees. [Accordingly, each   
current Independent Trustee (Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Dr. 
Manuel H. Johnson, Joseph J. Kearns, Michael E. Nugent and Fergus Reid)         
participates in the election and nomination of candidates for election as       
Independent Trustees for each Fund]. Persons recommended by the Funds'          
Governance Committee as candidates for nomination as Independent Trustees shall 
possess such knowledge, experience, skills, expertise and diversity so as to    
enhance the Board's ability to manage and direct the affairs and business of    
each Fund, including, when applicable, to enhance the ability of committees of  
the Board to fulfill their duties and/or to satisfy any independence            
requirements imposed by law, regulation or any listing requirements of the NYSE.
While the Independent Trustees of each Fund expects to be able to continue to   
identify from their own resources an ample number of qualified candidates for   
the Funds' Board as they deem appropriate, they will consider nominations from  
shareholders to the Board. Nominations from shareholders should be in writing   
and sent to the Independent Trustees as described below under the caption       
"Shareholder Communications."                                                   

  There were __ meetings of the Board of Trustees of each Fund held during
the fiscal year ended June 30, 2006. The Independent Trustees of each Fund also 
met __ times during that time, in addition to the __ meetings of the full Board.

     Finally, each Board has formed an Insurance Committee to review and monitor
the insurance coverage maintained by each Fund. The Insurance Committee         
currently consists of Messrs. Bozic, Fiumefreddo, Hedien and Nugent. Messrs.    
Bozic, Hedien and Nugent are Independent Trustees. The current Chairman of the  

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485APOS 68th Page of 96 TOC 1st Previous Next ↓Bottom Just 68th
Insurance Committee is Michael Bozic. During the Funds' fiscal year ended June  
30, 2006, the Insurance Committee held ___ meetings.                            

    ADVANTAGES OF HAVING SAME INDIVIDUALS AS TRUSTEES FOR THE RETAIL FUNDS AND
INSTITUTIONAL FUNDS. The Independent Trustees and the Funds' management believe 
that having the same Independent Trustees for each of the Retail Funds and      
Institutional Funds avoids the duplication of effort that would arise from      
having different groups of individuals serving as Independent Trustees for each 
of the Funds or even of sub-groups of Funds. They believe that having the same  
individuals serve as Independent Trustees of all the Retail Funds and           
Institutional 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    
Trustees arriving at conflicting decisions regarding operations and management  
of the funds and avoids the cost and confusion that would likely ensue. Finally,
having the same Independent Trustees serve on all fund boards enhances the      
ability of each fund to obtain, at modest cost to each separate fund, the       
services of Independent Trustees, of the caliber, experience and business acumen
of the individuals who serve as Independent Trustees of the Retail Funds and    
Institutional 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 each Fund.                                    

 SHAREHOLDER COMMUNICATIONS. Shareholders may send communications to the
Funds' Board of Trustees. Shareholders should send communications intended for  
the Funds' Board by addressing the communications directly to the Board (or     
individual Board members) and/or otherwise clearly indicating in the salutation 
that the communication is for the Board (or individual Board members) and by    
sending the communication to either the Funds' office or directly to such Board 
member(s) at the address specified for each Trustee previously noted. Other     
shareholder communications received by the Funds not directly addressed and sent
to the Board will be reviewed and generally responded to by management, and will
be forwarded to the Board only at management's discretion based on the matters  
contained therein.                                                              

C. COMPENSATION                                                                 

     Each Independent Trustee receives an annual fee of $180,000 for serving the
Retail Funds and the Institutional Funds. Prior to October 1, 2005, each        
Independent Trustee received an annual retainer fee of $168,000 for serving the 
Retail Funds and the Institutional Funds. In addition, each Independent Trustee 
received $2,000 for attending each of the four quarterly board meetings and two 
performance meetings that occur each year, so that an Independent Trustee who   
attended all six meetings received total compensation of $180,000 for serving   
the funds.                                                                      

    The Chairman of the Audit Committee receives an additional annual retainer
fee of $60,000. Other Committee Chairmen and the Deputy Chairman of the Audit   
Committee receive an additional annual retainer fee of $30,000. The aggregate   
compensation paid to each Independent Trustee is paid by the Retail Funds and   
the Institutional Funds, and is allocated on a pro rata basis among each of the 
operational funds/portfolios of the Retail Funds and the Institutional Funds    
based on the relative net assets of each of the funds/portfolios. As of July 1, 
2006, Mr. Fiumefreddo resigned as Chairman of the Board of the Retail Funds and 
the Institutional Funds and was succeeded by Mr. Nugent. Prior to July 1, 2006, 
Mr. Fiumefreddo received an annual fee for his services as Chairman of the      
Boards of the Retail Funds and the Institutional Funds and for administrative   
services provided to each Board. As of July 1, 2006, Mr. Nugent receives the    
annual fee of $360,000 for his services.                                        

Each of the Funds also reimburses such Trustees for travel and other  
out-of-pocket expenses incurred by them in connection with attending such       
meetings. Trustees of the Funds who are employed by the Investment Adviser or an
affiliated company receive no compensation or expense reimbursement from the    
Funds for their services as Trustee.                                            

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485APOS 69th Page of 96 TOC 1st Previous Next ↓Bottom Just 69th
  Effective April 1, 2004, each of the Funds began a Deferred Compensation
Plan (the "DC Plan"), which allows each Independent Trustee to defer payment of 
all, or a portion, of the fees he or she receives for serving on the Board of   
Trustees throughout the year. Each eligible Trustee generally may elect to have 
the deferred amounts credited with a return equal to the total return on one or 
more of the Retail Funds or Institutional Funds (or portfolios thereof) that are
offered as investment options under the DC Plan. At the Trustee's election,     
distributions are either in one lump sum payment, or in the form of equal annual
installments over a period of five years. The rights of an eligible Trustee and 
the beneficiaries to the amounts held under the DC Plan are unsecured and such  
amounts are subject to the claims of the creditors of the Fund.                 

Prior to April 1, 2004, the Institutional Funds maintained a similar  
Deferred Compensation Plan (the "Prior DC Plan"), which also allowed each       
Independent Trustee to defer payment of all, or a portion, of the fees he or she
received for serving on the Board of Trustees throughout the year. The DC Plan  
amends and supersedes the Prior DC Plan and all amounts payable under the Prior 
DC Plan are now subject to the terms of the DC Plan (except for amounts paid    
during the calendar year 2004, which remain subject to the terms of the Prior DC
Plan).                                                                          

The following table shows aggregate compensation payable to the Funds'
Trustees from each of the Funds for the fiscal year ended June 30, 2006 and the 
aggregate compensation payable to each of the Funds' Trustees by the Fund       
Complex (which includes all of the Retail and Institutional Funds) for the      
calendar year ended December 31, 2005.                                          

COMPENSATION

                                                        [Enlarge/Download Table]

                                                                                                    NUMBER OF                   
                                                                                                PORTFOLIOS IN THE               
                                                                                                   FUND COMPLEX        TOTAL    
                                                               ACTIVE ASSETS    ACTIVE ASSETS     FROM WHICH THE   COMPENSATION 
                               ACTIVE ASSETS   ACTIVE ASSETS    CALIFORNIA       GOVERNMENT      TRUSTEE RECEIVED  FROM THE FUND
NAME OF INDEPENDENT TRUSTEE:*   MONEY TRUST   TAX-FREE TRUST  TAX-FREE TRUST  SECURITIES TRUST   COMPENSATION(6)     COMPLEX(6) 
-----------------------------  -------------  --------------  --------------  ----------------  -----------------  -------------
                                                                                                                                
Michael Bozic(1)(2)(3)         $              $               $               $                        170            $180,000  
Edwin J. Garn(1)(3)                                                                                    170             178,000  
Wayne E. Hedien(1)(2)                                                                                  170             180,000  
Dr. Manuel H. Johnson(1)                                                                               170             240,000  
Joseph J. Kearns(1)(4)                                                                                 171             217,000  
Michael E. Nugent(1)(2)(5)                                                                             170             210,000  
Fergus Reid(1)(3)                                                                                      171             215,000  

NAME OF INTERESTED TRUSTEE:                                                                                                     
----------------------------                                                                                                    
Charles A. Fiumefreddo(2)(5)                                                                           170             360,000  
James F. Higgins                                                                                       170                   0  

----------                                                                      

*    Messrs. Bowman, Klein and Reed and Ms. Dennis were elected to the Board of 
each fund in the Fund Complex in August 2006 and therefore were not   
 compensated by such funds in the calendar year ended December 31, 2005.

(1)  Member of the Audit Committee. Dr. Johnson is the Chairman of the Audit    
 Committee and Mr. Kearns is the Deputy Chairman of the Audit Committee.

(2)  Member of the Insurance Committee. Mr. Bozic is the current Chairman of the
    Insurance Committee. Prior to July 1, 2006, Mr. Nugent was Chairman of the
Insurance Committee.                                                  

(3)  Member of the Governance Committee. Mr. Reid is the Chairman of the        
Governance Committee.                                                 

(4)  Includes amounts deferred at the election of the Trustee under the DC Plan.

(5)  As of July 1, 2006, Mr. Fiumefreddo resigned as Chairman of the Board of   
   the Retail Funds and Institutional Funds and was succeeded by Mr. Nugent.
As a result, Mr. Nugent receives the annual fee for this service as   
    Chairman of the Board of the Retail Funds and the Institutional Funds from
that date.                                                            

(6)  Because the funds in the Fund Complex have different fiscal year ends, the 
amounts shown in these columns are presented on a calendar year basis.

    Prior to December 31, 2003, 49 of the Retail Funds (the "Adopting Funds"),
including each of the Funds, had adopted a retirement program under which an    
Independent Trustee who retired after serving for at least five years as an     
Independent Trustee of any such fund (an "Eligible Trustee") would have been    
entitled to retirement payments, based on factors such as length of service,    
upon reaching the eligible retirement age. On December 31, 2003, the amount of  
accrued retirement benefits for each Eligible Director                          

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485APOS 70th Page of 96 TOC 1st Previous Next ↓Bottom Just 70th
was frozen, and will be payable, together with a return of 8% per annum, at or  
following each such Eligible Trustee's retirement as shown in the table below.  

The following tables illustrate the retirement benefits accrued to the
Funds' Independent Trustees by each of the Funds for the fiscal year ended June 
30, 2006 and by the Adopting Funds for the calendar year ended December 31,     
2005, and the estimated retirement benefits for the Independent Trustees, from  
the Adopting Funds for each calendar year following retirement. Only the        
Trustees listed below participated in the retirement program.                   

 ACTIVE ASSETS MONEY TRUST

                                                        [Enlarge/Download Table]

                               RETIREMENT BENEFITS ACCRUED      ESTIMATED ANNUAL BENEFITS  
                                    AS FUND EXPENSES                UPON RETIREMENT(1)     
                              ----------------------------   ------------------------------
                                                BY ALL                          FROM ALL   
NAME OF INDEPENDENT TRUSTEE:  BY THE FUND   ADOPTING FUNDS   FROM THE FUND   ADOPTING FUNDS
----------------------------  -----------   --------------   -------------   --------------
                                                                                           
Michael Bozic                 $                $ 19,439      $                   $46,871   
Edwin J. Garn                                   (10,738)(2)                       46,917   
Wayne E. Hedien                                  37,860                           40,020   
Dr. Manuel H. Johnson                            19,701                           68,630   
Michael E. Nugent                                35,471                           61,377   

ACTIVE ASSETS TAX-FREE TRUST

                                                        [Enlarge/Download Table]

                               RETIREMENT BENEFITS ACCRUED      ESTIMATED ANNUAL BENEFITS  
                                    AS FUND EXPENSES                UPON RETIREMENT(1)     
                              ----------------------------   ------------------------------
                                                BY ALL                          FROM ALL   
NAME OF INDEPENDENT TRUSTEE:  BY THE FUND   ADOPTING FUNDS   FROM THE FUND   ADOPTING FUNDS
----------------------------  -----------   --------------   -------------   --------------
                                                                                           
Michael Bozic                 $                $ 19,439      $                   $46,871   
Edwin J. Garn                                   (10,738)(2)                       46,917   
Wayne E. Hedien                                  37,860                           40,020   
Dr. Manuel H. Johnson                            19,701                           68,630   
Michael E. Nugent                                35,471                           61,377   

ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST 

                                                        [Enlarge/Download Table]

                               RETIREMENT BENEFITS ACCRUED      ESTIMATED ANNUAL BENEFITS  
                                    AS FUND EXPENSES                UPON RETIREMENT(1)     
                              ----------------------------   ------------------------------
                                                BY ALL                          FROM ALL   
NAME OF INDEPENDENT TRUSTEE:  BY THE FUND   ADOPTING FUNDS   FROM THE FUND   ADOPTING FUNDS
----------------------------  -----------   --------------   -------------   --------------
                                                                                           
Michael Bozic                 $                $ 19,439      $                   $46,871   
Edwin J. Garn                                   (10,738)(2)                       46,917   
Wayne E. Hedien                                  37,860                           40,020   
Dr. Manuel H. Johnson                            19,701                           68,630   
Michael E. Nugent                                35,471                           61,377   

 ACTIVE ASSETS GOVERNMENT SECURITIES TRUST

                                                        [Enlarge/Download Table]

                               RETIREMENT BENEFITS ACCRUED      ESTIMATED ANNUAL BENEFITS  
                                    AS FUND EXPENSES                UPON RETIREMENT(1)     
                              ----------------------------   ------------------------------
                                                BY ALL                          FROM ALL   
NAME OF INDEPENDENT TRUSTEE   BY THE FUND   ADOPTING FUNDS   FROM THE FUND   ADOPTING FUNDS
----------------------------  -----------   --------------   -------------   --------------
                                                                                           
Michael Bozic                 $                $ 19,439      $                   $46,871   
Edwin J. Garn                                   (10,738)(2)                       46,917   
Wayne E. Hedien                                  37,860                           40,020   
Dr. Manuel H. Johnson                            19,701                           68,630   
Michael E. Nugent                                35,471                           61,377   

----------                                                                      
(1)  Total compensation accrued under the retirement plan, together with a      
  return of 8% per annum, will be paid annually commencing upon retirement
and continuing for the remainder of the Trustee's life.               

(2)  Mr. Garn's retirement expense is negative due to the fact that his         
  retirement date has been extended to October 31, 2007, and therefore the
expense has been overaccrued.                                         

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485APOS 71st Page of 96 TOC 1st Previous Next ↓Bottom Just 71st
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES                         

     [As of October __, 2006, 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 each Fund's shares of      
beneficial interest outstanding.]                                               

V. INVESTMENT ADVISORY AND OTHER SERVICES                                       

A. INVESTMENT ADVISER AND ADMINISTRATOR                                         

   The Investment Adviser to each Fund is Morgan Stanley Investment Advisors
Inc., a Delaware corporation, whose address is 1221 Avenue of the Americas, New 
York, NY 10020. The Investment Adviser is a wholly-owned subsidiary of Morgan   
Stanley, a Delaware corporation. Morgan Stanley 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.           

Prior to November 1, 2004, pursuant to separate investment management 
agreements (the "Management Agreements") with the Investment Adviser, each Fund 
had retained the Investment Adviser to provide administrative services and to   
manage the investment of the Fund's assets, including the placing of orders for 
the purchase and sale of portfolio securities. Each Fund paid the Investment    
Adviser monthly compensation calculated daily by applying the following annual  
rates to the average daily net assets of the Fund, determined as of the close of
business on every business day.                                                 

   With respect to Active Assets California Tax-Free Trust and Active Assets
Government Securities Trust, the annual rates to the daily net assets were:     

-    0.50% of the daily net assets not exceeding $500 million;        

-    0.425% of the daily net assets exceeding $500 million but not    
exceeding $750 million;                                     

-    0.375% of the daily net assets exceeding $750 million but not    
exceeding $1 billion;                                       

   -    0.35% of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion;                                               

-    0.325% of the daily net assets exceeding $1.5 billion but not    
exceeding $2 billion;                                       

   -    0.30% of the daily net assets exceeding $2 billion but not exceeding
$2.5 billion;                                               

-    0.275% of the daily net assets exceeding $2.5 billion but not    
exceeding $3 billion; and                                   

-    0.25% of the daily net assets exceeding $3 billion.              

  With respect to Active Assets Money Trust, the annual rates to the daily
net assets were:                                                                

-    0.50% of the daily net assets not exceeding $500 million;        

-    0.425% of the daily net assets exceeding $500 million but not    
exceeding $750 million;                                     

-    0.375% of the daily net assets exceeding $750 million but not    
exceeding $1 billion;                                       

   -    0.35% of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion;                                               

-    0.325% of the daily net assets exceeding $1.5 billion but not    
exceeding $2 billion;                                       

   -    0.30% of the daily net assets exceeding $2 billion but not exceeding
$2.5 billion;                                               

-    0.275% of the daily net assets exceeding $2.5 billion but not    
exceeding $3 billion;                                       

   -    0.25% of the daily net assets exceeding $3 billion but not exceeding
$15 billion;                                                

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485APOS 72nd Page of 96 TOC 1st Previous Next ↓Bottom Just 72nd
     -    0.249% of the daily net assets exceeding $15 billion but not exceeding
$17.5 billion;                                              

-    0.248% of the daily net assets exceeding $17.5 billion but not   
exceeding $25 billion;                                      

     -    0.247% of the daily net assets exceeding $25 billion but not exceeding
$30 billion; and                                            

-    0.246% of the daily net assets exceeding $30 billion.            

     With respect to Active Assets Tax-Free Trust, the annual rates to the daily
net assets were:                                                                

-    0.50% of the daily net assets not exceeding $500 million;        

-    0.425% of the daily net assets exceeding $500 million but not    
exceeding $750 million;                                     

-    0.375% of the daily net assets exceeding $750 million but not    
exceeding $1 billion;                                       

   -    0.35% of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion;                                               

-    0.325% of the daily net assets exceeding $1.5 billion but not    
exceeding $2 billion;                                       

   -    0.30% of the daily net assets exceeding $2 billion but not exceeding
$2.5 billion;                                               

-    0.275% of the daily net assets exceeding $2.5 billion but not    
exceeding $3 billion;                                       

   -    0.25% of the daily net assets exceeding $3 billion but not exceeding
$15 billion; and                                            

-    0.249% of the daily net assets exceeding $15 billion.            

The Board of Trustees of each Fund approved amending and restating,   
effective November 1, 2004, the Management Agreements to remove the             
administration services component from the Management Agreements and to reduce  
the investment advisory fee.                                                    

   With respect to Active Assets California Tax-Free Trust and Active Assets
Government Securities Trust, the annual rates to the daily net assets are:      

-    0.45% of the daily net assets not exceeding $500 million;        

-    0.375% of the daily net assets exceeding $500 million but not    
exceeding $750 million;                                     

-    0.325% of the daily net assets exceeding $750 million but not    
exceeding $1 billion;                                       

   -    0.30% of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion;                                               

-    0.275% of the daily net assets exceeding $1.5 billion but not    
exceeding $2 billion;                                       

   -    0.25% of the daily net assets exceeding $2 billion but not exceeding
$2.5 billion;                                               

-    0.225% of the daily net assets exceeding $2.5 billion but not    
exceeding $3 billion; and                                   

-    0.20% of the daily net assets exceeding $3 billion.              

  With respect to Active Assets Money Trust, the annual rates to the daily
net assets are:                                                                 

-    0.45% of the daily net assets not exceeding $250 million;        

-    0.375% of the daily net assets exceeding $250 million but not    
exceeding $750 million;                                     

-    0.325% of the daily net assets exceeding $750 million but not    
exceeding $1.25 billion;                                    

-    0.30% of the daily net assets exceeding $1.25 billion but not    
exceeding $1.5 billion;                                     

-    0.275% of the daily net assets exceeding $1.5 billion but not    
exceeding $1.75 billion;                                    

-    0.25% of the daily net assets exceeding $1.75 billion but not    
exceeding $2.25 billion;                                    

-    0.225% of the daily net assets exceeding $2.25 billion but not   
exceeding $2.75 billion;                                    

-    0.20% of the daily net assets exceeding $2.75 billion but not    
exceeding $15 billion;                                      

     -    0.199% of the daily net assets exceeding $15 billion but not exceeding
$17.5 billion;                                              

-    0.198% of the daily net assets exceeding $17.5 billion but not   
exceeding $25 billion;                                      

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485APOS 73rd Page of 96 TOC 1st Previous Next ↓Bottom Just 73rd
     -    0.197% of the daily net assets exceeding $25 billion but not exceeding
$30 billion; and                                            

-    0.196% of the daily net assets exceeding $30 billion.            

     With respect to Active Assets Tax-Free Trust, the annual rates to the daily
net assets are:                                                                 

-    0.45% of the daily net assets not exceeding $500 million;        

-    0.375% of the daily net assets exceeding $500 million but not    
exceeding $750 million;                                     

-    0.325% of the daily net assets exceeding $750 million but not    
exceeding $1 billion;                                       

   -    0.30% of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion;                                               

-    0.275% of the daily net assets exceeding $1.5 billion but not    
exceeding $2 billion;                                       

   -    0.25% of the daily net assets exceeding $2 billion but not exceeding
$2.5 billion;                                               

-    0.225% of the daily net assets exceeding $2.5 billion but not    
exceeding $3 billion;                                       

   -    0.20% of the daily net assets exceeding $3 billion but not exceeding
$15 billion; and                                            

-    0.199% of the daily net assets exceeding $15 billion.            

The administration services previously provided to the Funds by the   
Investment Adviser are being provided by Morgan Stanley Services Company Inc.   
("Administrator"), a wholly-owned subsidiary of the Investment Adviser, pursuant
to separate administration agreements ("Administration Agreements") entered into
by each Fund with the Administrator. Such change resulted in a 0.05% reduction  
in the investment advisory fee concurrent with the implementation of a 0.05%    
administration fee pursuant to the new administration agreements. Under the     
terms of the Administration Agreements, the Administrator provides the same     
administrative services previously provided by the Investment Adviser. The      
Funds' Investment Adviser continues to provide investment advisory services     
under separate Amended and Restated Investment Advisory Agreements ("Investment 
Advisory Agreements").                                                          

For the fiscal years ended June 30, 2004, 2005 and 2006, Active Assets
Money Trust accrued to the Investment Adviser total compensation under its      
Management Agreement and Investment Advisory Agreement in the amounts of        
$59,855,766, $51,429,944 and $______, respectively.                             

For the fiscal years ended June 30, 2004, 2005 and 2006, Active Assets
Tax-Free Trust accrued to the Investment Adviser total compensation under its   
Management Agreement and Investment Advisory Agreement in the amounts of        
$10,917,193, $9,683,965 and $______, respectively.                              

For the fiscal years ended June 30, 2004, 2005 and 2006, Active Assets
California Tax-Free Trust accrued to the Investment Adviser total compensation  
under its Management Agreement and Investment Advisory Agreement in the amounts 
of $3,560,342, $3,157,024 and $______, respectively.                            

For the fiscal years ended June 30, 2004, 2005 and 2006, Active Assets
Government Securities Trust accrued to the Investment Adviser total compensation
under its Management Agreement and Investment Advisory Agreement in the amounts 
of $5,457,114, $4,483,980 and $______, respectively.                            

  For the period November 1, 2004 through June 30, 2005 and for the fiscal
year ended June 30, 2006, Active Assets Money Trust accrued to the Administrator
total compensation under its Administration Agreement in the amount of          
$7,470,138 and $______, respectively.                                           

  For the period November 1, 2004 through June 30, 2005 and for the fiscal
year ended June 30, 2006, Active Assets Tax-Free Trust accrued to the           
Administrator total compensation under its Administration Agreement in the      
amount of $973,325 and $______, respectively.                                   

  For the period November 1, 2004 through June 30, 2005 and for the fiscal
year ended June 30, 2006, Active Assets California Tax-Free Trust accrued to the
Administrator total compensation under its Administration Agreement in the      
amount of $233,626 and $______, respectively.                                   

  For the period November 1, 2004 through June 30, 2005 and for the fiscal
year ended June 30, 2006, Active Assets Government Securities Trust accrued to  
the Administrator total compensation under its Administration Agreement in the  
amount of $366,942 and $______, respectively.                                   

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   Although the entities providing administrative services to the Funds have
changed, the Morgan Stanley personnel performing such services remain the same. 
Furthermore, the changes have not resulted in any increase in the amount of     
total combined fees paid by the Funds for investment advisory and administrative
services, or any decrease in the nature or quality of the investment advisory or
administrative services received by the Funds.                                  

B. PRINCIPAL UNDERWRITER                                                        

  Each Fund's principal underwriter is the Distributor (which has the same
address as the Investment Adviser). In this capacity, each Fund's shares are    
distributed by the Distributor. The Distributor has entered into a selected     
dealer agreement with Morgan Stanley DW, which through its own sales            
organization sells shares of each Fund. The Distributor, a Delaware corporation,
is a wholly-owned subsidiary of Morgan Stanley.                                 

     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 ADVISER AND ADMINISTRATOR                

The Investment Adviser manages the investment of each Fund's assets,  
including the placing of orders for the purchase and sale of portfolio          
securities. The Investment Adviser 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 objectives.                          

Under the terms of each Administration Agreement, the Administrator   
maintains certain of each Fund's books and records and furnishes, at its own    
expense, the office space, facilities, equipment, clerical help and bookkeeping 
as each Fund may reasonably require in the conduct of its business. The         
Administrator also assists in 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 the independent registered
public accounting firm and attorneys is, in the opinion of the Administrator,   
necessary or desirable). The Administrator also bears the cost of telephone     
service, heat, light, power and other utilities provided to the Funds.          

Expenses not expressly assumed by the Investment Adviser under each   
Investment Advisory Agreement or by the Administrator under each Administration 
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 of each Fund and its shares 
under federal and state securities laws; the cost and expense of printing,      
including typesetting, and distributing prospectuses of each Fund and           
supplements thereto to the Funds' shareholders; 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 Adviser or any corporate affiliate of the Investment Adviser; all    
expenses incident to any dividend, withdrawal or redemption options; charges and
expenses of any outside service used for pricing of the Funds' shares; fees and 
expenses                                                                        

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485APOS 75th Page of 96 TOC 1st Previous Next ↓Bottom Just 75th
of legal counsel, including counsel to the Trustees who are not interested      
persons of the Funds or of the Investment Adviser (not including compensation or
expenses of attorneys who are employees of the Investment Adviser); fees and    
expenses of the Funds' independent registered public accounting firm; membership
dues of industry associations; interest on Fund borrowings; postage; insurance  
premiums on property or personnel (including officers and Trustees) of the Funds
which inure to their 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 each Fund's operation.                

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

    Each Investment Advisory Agreement will remain in effect from year to year
thereafter, provided continuance of the Investment Advisory 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 Independent Trustees.                 

Each Administration Agreement provides that in the absence of willful 
misfeasance, bad faith, gross negligence or reckless disregard of its           
obligations thereunder, the Administrator is not liable to each Fund or any of  
its investors for any act or omission by the Administrator or for any losses    
sustained by each Fund or its investors. Each Administration Agreement will     
continue unless terminated by either party by written notice delivered to the   
other party within 30 days.                                                     

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 Morgan Stanley DW's 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.                                                                 

Morgan Stanley DW Financial Advisors are paid an annual residual      
commission, currently a residual of up to 0.15% of the current value of the     
respective accounts for which they are the Financial Advisor of record. The     
residual is a charge which reflects residual commissions paid by Morgan Stanley 
DW to its Financial Advisors and Morgan Stanley DW's expenses associated with   
the servicing of shareholders' accounts, including the expenses of operating    
Morgan Stanley DW's 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.                                                                       

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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 
Adviser 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.                                              

For the fiscal year ended June 30, 2006, Active Assets Money Trust    
reimbursed $_____ to the Distributor pursuant to the Plan which amounted to     
0.10% of 1% of the Fund's average daily net assets. 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 of 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 Morgan Stanley DW for expenses substantially all of which relate to          
compensation of sales personnel and associated overhead expenses -- $_____. No  
payments under the Plan were made for interest, carrying or other financing     
charges.                                                                        

For the fiscal year ended June 30, 2006, Active Assets Tax-Free Trust 
reimbursed $_____ to the Distributor pursuant to the Plan which amounted to     
0.10% of 1% of the Fund's average daily net assets. 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 of 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 Morgan Stanley DW for expenses substantially all of which relate to          
compensation of sales personnel and associated overhead expenses -- $_____. No  
payments under the Plan were made for interest, carrying or other financing     
charges.                                                                        

    For the fiscal year ended June 30, 2006, Active Assets California Tax-Free
Trust reimbursed $_____ to the Distributor pursuant to the Plan which amounted  
to 0.10% of 1% of the Fund's average daily net assets. 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 of 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 Morgan Stanley DW for expenses substantially all of which relate to 
compensation of sales personnel and associated overhead expenses -- $_____. No  
payments under the Plan were made for interest, carrying or other financing     
charges.                                                                        

For the fiscal year ended June 30, 2006, Active Assets Government     
Securities Trust reimbursed $_____ to the Distributor pursuant to the Plan which
amounted to 0.10% of 1% of the Fund's average daily net assets. 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 of 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 Morgan Stanley DW for expenses substantially all of  
which relate to compensation of sales personnel and associated overhead expenses
-- $_____. 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.                                                       

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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.       

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 Adviser, Morgan Stanley DW, Morgan Stanley 
Services 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 Morgan Stanley DW's branch offices made possible by the 12b-1 fees, Morgan   
Stanley DW 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 30 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 Trust 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, 2nd Floor, Jersey City, NJ 07311.                                          

(2) CUSTODIAN AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM       

The Bank of New York, 100 Church Street, New York, NY 10286 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.                                   

   ________________, is the independent registered public accounting firm of
each Fund. The Funds' independent registered public accounting firm is          
responsible for auditing the annual financial statements.                       

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(3) AFFILIATED PERSONS                                                

The Transfer Agent is an affiliate of the Investment Adviser and 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 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 Adviser 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.                   

G. PROXY VOTING POLICY AND PROXY VOTING RECORD                                  

 The Board of Trustees believes that the voting of proxies on securities
held by each Fund is an important element of the overall investment process. As 
such, the Trustees have delegated the responsibility to vote such proxies to    
Morgan Stanley Investment Management and its advisory affiliates ("MSIM"). The  
following is a summary of MSIM's Proxy Voting Policy ("Proxy Policy").          

    MSIM uses its best efforts to vote proxies on securities held in each Fund
as part of its authority to manage, acquire and dispose of Fund assets. In this 
regard, MSIM has formed a Proxy Review Committee ("Committee") comprised of     
senior investment professionals that is responsible for creating and            
implementing the Proxy Policy. The Committee meets monthly but may meet more    
frequently as conditions warrant. The Proxy Policy provides that MSIM will vote 
proxies in the best interests of clients consistent with the objective of       
maximizing long-term investment returns. The Proxy Policy provides that MSIM    
will generally vote proxies in accordance with pre-determined guidelines        
contained in the Proxy Policy. MSIM may vote in a manner that is not consistent 
with the pre-determined guidelines, provided that the vote is approved by the   
Committee.                                                                      

The Proxy Policy provides that, unless otherwise determined by the    
Committee, votes will be cast in the manner described below:                    

   -    Generally, routine proposals will be voted in support of management.

     -    With regard to the election of directors, where no conflict exists and
         where no specific governance deficiency has been noted, votes will be
cast in support of management's nominees.                   

 -    MSIM will vote in accordance with management's recommendation with
respect to certain non-routine proposals (i.e., reasonable  
    capitalization changes, stock repurchase programs, stock splits,
         certain compensation-related matters, certain anti-takeover measures,
etc.).                                                      

-    MSIM will vote against certain non-routine proposals (i.e.,      
unreasonable capitalization changes, requiring supermajority
          shareholder votes to amend by-laws, indemnification of auditors, etc.)
(notwithstanding management support).                       

   -    MSIM will vote in its discretion with respect to certain non-routine
         proposals (i.e., mergers, acquisitions, take-overs, spin-offs, etc.),
        which may have a substantive financial or best interest impact on an
issuer.                                                     

   -    MSIM will vote for certain proposals it believes call for reasonable
         charter provisions or corporate governance practices (i.e., requiring
          auditors to attend annual shareholder meetings, requiring that members
    of compensation, nominating and audit committees be independent,
     reducing or eliminating supermajority voting requirements, etc.).

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-    MSIM will vote against certain proposals it believes call for    
     unreasonable charter provisions or corporate governance practices
     (i.e., proposals to require a company to prepare reports that are
  costly to provide or that would require duplicative efforts or
     expenditure that are of a non-business nature or would provide no
pertinent information from the perspective of institutional 
shareholders, etc.).                                        

  -    Certain other proposals (i.e., proposals requiring directors to own
         large amounts of company stock to be eligible for election, proposals
   requiring diversity of board membership relating to broad based
        social, religious or ethnic groups, etc.) generally are evaluated by
    the Committee based on the nature of the proposal and the likely
impact on shareholders.                                     

     While the proxy voting process is well-established in the United States and
other developed markets with a number of tools and services available to assist 
an investment adviser, voting proxies of non-U.S. companies located in certain  
jurisdictions, particularly emerging markets, may involve a number of problems  
that may restrict or prevent MSIM's ability to vote such proxies. As a result,  
non-U.S. proxies will be voted on a best efforts basis only, after weighing the 
costs and benefits to the respective Fund of voting such proxies.               

CONFLICTS OF INTEREST                                                           

If the Committee determines that an issue raises a potential material 
conflict of interest, or gives rise to the appearance of a potential material   
conflict of interest, the Committee will request a special committee to review, 
and recommend a course of action with respect to, the conflict in question.     

THIRD PARTIES                                                                   

To assist in its responsibility for voting proxies, MSIM may retain   
third-party services as experts in the proxy voting and corporate governance    
area. These proxy research providers are referred to herein as "Research        
Providers." The services provided to MSIM by the Research Providers include     
in-depth research, global issuer analysis, and voting recommendations. While    
MSIM may review and utilize recommendations made by the Research Providers in   
making proxy voting decisions, it is in no way obligated to follow such         
recommendations. In addition to research, Institutional Shareholder Services    
provides vote execution, reporting, and recordkeeping. The Committee carefully  
monitors and supervises the services provided by the Research Providers.        

FURTHER INFORMATION                                                             

     A copy of the Proxy Policy, as well as each Fund's most recent proxy voting
record for the 12-month period ended June 30, filed with the SEC, are available 
without charge on our web site at www.morganstanley.com/funds. Each Fund's proxy
voting record is also available without charge on the SEC's web site at         
www.sec.gov.                                                                    

H. REVENUE SHARING                                                              

The Investment Adviser and/or Distributor may pay compensation, out of
their own funds and not as an expense of the Funds, to Morgan Stanley DW and    
certain unaffiliated brokers, dealers or other financial intermediaries         
("Intermediaries") in connection with the sale or retention of Fund shares      
and/or shareholder servicing. For example, the Investment Adviser or the        
Distributor may pay additional compensation to Morgan Stanley DW and to         
Intermediaries for the purpose of promoting the sale of Fund shares, maintaining
share balances and/or for sub-accounting, administrative or shareholder         
processing services. Such payments are in addition to any distribution fees,    
service fees and/or transfer agency fees that may be payable by the Funds. The  
additional payments may be based on factors, including level of sales (based on 
gross or net sales or some specified minimum sales or some other similar        
criteria related to sales of the Funds and/or some or all other Morgan Stanley  
Funds), amount of assets invested by the Intermediary's customers (which could  
include current or aged assets of the Funds and/or some or all other Morgan     
Stanley Funds), the Funds' advisory fees, some other agreed upon amount, or     
other measures as determined from time to time by the Investment Adviser and/or 
Distributor. The amount of these payments may be different for different        
Intermediaries.                                                                 

   The Funds' Investment Adviser, out of its own assets, pays Morgan Stanley
DW and other Intermediaries an amount up to 0.18% annually of the value of the  
shares of the following money market funds (except shares; if any, held by      
participants in the Morgan Stanley Fund Solution(SM) Program, the               

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Morgan Stanley Personal Portfolio(SM) Program, the Morgan Stanley Funds         
Portfolio Architect(SM) Program and Morgan Stanley Corporate Retirement         
Solutions): New York Municipal Money Market Trust; Tax-Free Daily Income Trust; 
U.S. Government Money Market Trust; Liquid Asset Fund Inc., Active Assets       
California Tax-Free Trust; Active Assets Government Securities Trust; Active    
Assets Tax-Free Trust; Active Assets Money Trust; and California Tax-Free Daily 
Income Trust.                                                                   

   The Funds' Investment Adviser, out of its own assets, pays Morgan Stanley
DW an amount equal to 0.20% annually of the value of Fund shares held through   
401(k) platforms in Morgan Stanley Corporate Retirement Solutions.              

   The prospect of receiving, or the receipt of, additional compensation, as
described above, by Morgan Stanley DW or other Intermediaries may provide Morgan
Stanley DW or other Intermediaries and/or Financial Advisors and other          
salespersons with an incentive to favor sales of shares of the Funds over other 
investment options with respect to which Morgan Stanley DW or an Intermediary   
does not receive additional compensation (or receives lower levels of additional
compensation). These payment arrangements, however, will not change the price   
that an investor pays for shares of a Fund. Investors may wish to take such     
payment arrangements into account when considering and evaluating any           
recommendations relating to Fund shares.                                        

You should review carefully and disclosure by such brokers, dealers or
other Intermediaries as to their compensation.                                  

VI. BROKERAGE ALLOCATION AND OTHER PRACTICES                                    

A. BROKERAGE TRANSACTIONS                                                       

    Subject to the general supervision of the Trustees, the Investment Adviser
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 OTC 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, 2004, 2005 and 2006, 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 Morgan Stanley DW. Each   
Fund will limit its transactions with Morgan Stanley DW 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 Morgan Stanley DW only 
when the price available from Morgan Stanley DW is better than that available   
from other dealers.                                                             

    [During the fiscal years ended June 30, 2004, 2005 and 2006, the Funds did
not effect any principal transactions with Morgan Stanley DW.]                  

 Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Morgan Stanley DW, 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          

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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 Adviser by any amount of the brokerage
commissions it may pay to an affiliated broker or dealer.                       

     [During the fiscal years ended June 30, 2004, 2005 and 2006, 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 Adviser effects
transactions with those brokers and dealers who the Investment Adviser believes 
provide the most favorable prices and are capable of providing efficient        
executions. If the Investment Adviser 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 Adviser. 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 Adviser from  
brokers and dealers may be utilized by the Investment Adviser and any of its    
asset management affiliates in the management of accounts of some of their 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 Adviser and thereby reduce its expenses, it is of indeterminable     
value and the Funds do not reduce the management fee they pay to the Investment 
Adviser by any amount that may be attributable to the value of such services.   

  The Investment Adviser and certain of its affiliates, currently serve as
investment adviser to a number of clients, including other investment companies,
and may in the future act as investment adviser to others. It is the practice of
the Investment Adviser and its affiliates to cause purchase and sale            
transactions to be allocated among clients whose assets they manage (including  
the Funds) in such manner they deem equitable. In making such allocations among 
the Funds and other client accounts, various factors may be considered,         
including the respective Fund's 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. The Investment Adviser and its affiliates may operate one
or more order placement facilities and each facility will implement order       
allocation in accordance with the procedures described above. From time to time,
each facility may transact in a security at the same time as other facilities   
are trading in that security.                                                   

D. DIRECTED BROKERAGE                                                           

[During the fiscal year ended June 30, 2006, 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, 2006, Active Assets Money Trust
purchased securities issued by Banc of America Securities LLC, Barclays Capital 
Inc., Citigroup Global Markets, Goldman Sachs Group Inc., Morgan (J.P.)         
Securities Inc., Prudential Securities Inc. and UBS Securities LLC, which       
issuers were among the top ten brokers or dealers which executed transactions   
for or with Active Assets Money Trust in the largest dollar amounts during the  
year. At June 30, 2006, Active Assets Money Trust held securities issued by UBS 
Securities LLC, Royal Bank of Scotland, Banc of America Securities LLC,         
Citigroup Global Markets, Barclays Capital Inc. and JPMorgan Chase & Co. with   
market values of $___________, $___________, $___________, $___________,        
$___________ and $___________, respectively.]                                   

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    [During the fiscal year ended June 30, 2006, Active Assets Tax-Free Trust,
Active Assets California Tax-Free Trust and Active Assets Government Securities 
Trust did not purchase securities issued by brokers or dealers that were among  
the ten brokers or the ten dealers which executed transactions for or with the  
Funds in the largest dollar amounts during the year. At June 30, 2006, the Funds
did not own any securities issued by any of such issuers.]                      

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% 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.                                                   

     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 is liable for its own negligence and not for the
default or negligence of its correspondents or for losses in transit. The Fund  
is not liable for any default or negligence of the Transfer Agent, the          
Distributor or any authorized broker-dealer.                                    

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B. OFFERING PRICE                                                               

    The price of each Fund's shares, called "net asset value," is based on the
value of each respective 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 a 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 marked-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 a 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 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.                               

 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                                                                      

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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 Adviser 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.                   

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 will also make distributions of 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. The
tax treatment of the investment activities of a Fund will affect the            

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amount, timing and character of the distributions made by the Fund. The         
following discussion is only a summary of certain tax considerations generally  
affecting the Funds and shareholders of the Funds and is not intended as a      
substitute for careful tax planning. 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 continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of 
1986, as amended. 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   
timely 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 capital gains in any year for reinvestment. In such event, the Fund will 
pay federal income tax (and possibly excise tax) on such retained gains.        

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

Under certain tax rules, the Active Assets Money Trust and the Active 
Assets Government Securities Trust may be required to accrue a portion of any   
discount at which certain securities are purchased as income each year even     
though the Funds receive no payments in cash on the security during the year. To
the extent that the Funds invest in such securities, they would be required to  
pay out such income as an income distribution in order to avoid taxation at the 
Fund level. Such distributions will be made from available cash of the Funds or 
by liquidation of portfolio securities if necessary. If a distribution of cash  
necessitates the liquidation of portfolio securities, the Investment Adviser    
will select which securities to sell. The Funds may realize gain or loss from   
such sales. In the event the Funds realize net capital gains from such          
transactions, their shareholders may receive a larger capital gain distribution,
if any, than they would in the absence of such transactions.                    

     All or a portion of any of Active Assets Tax-Free Trust's and Active Assets
California Tax-Free Trust'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 Active Assets Tax-Free Trust and the Active    
Assets 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                                  

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in calculating their alternative minimum taxable income in situations where the 
"adjusted current earnings" of the corporation exceeds its alternative minimum  
taxable income.                                                                 

  Shareholders normally 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 regardless of whether the           
shareholder receives such payments in additional shares or cash. Under current  
law, a portion of the ordinary income dividends received by a shareholder may be
taxed at the same rates as long-term capital gains. However, even if income     
received in the form of ordinary income dividends is taxed at the same rates as 
long-term capital gains, such income will not be considered long-term capital   
gains for other federal income tax purposes. For example, you generally will not
be permitted offset ordinary income dividends with capital losses when          
calculating your net capital gains or losses. Short-term capital gain           
distributions will continue to be taxed at ordinary income rates.               

    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 and regardless of whether the distribution is received in         
additional shares or in cash. Under current law, the maximum tax rate on        
long-term capital gains available to non-corporate shareholders generally is    
15%. Without future congressional action, the maximum tax rate on long-term     
capital gains will return to 20% in 2011, and all dividends will be taxed at    
ordinary income rates.                                                          

 Shareholders are generally taxed on any income 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 to shareholders of record of such month in January then such  
amounts will be treated for tax purposes as received by the shareholders on     
December 31.                                                                    

 Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of U.S. tax on           
distributions made by a Fund of any taxable interest income and short-term      
capital gains. Recently enacted legislation amends certain rules relating to    
regulated investment companies. This legislation, among other things, modifies  
the federal income tax treatment of certain distributions to foreign investors. 
The Funds is not required to withhold any amounts with respect to distributions 
to foreign shareholders that are properly designated by the Funds as            
"interest-related dividends" or "short-term capital gain dividends," provided   
that the income would not be subject to federal income tax if earned directly by
the foreign shareholder. However, the Fund will withhold these amounts          
regardless of the fact that it is not required to do so. Any amounts withheld   
from payments made to a shareholder may be refunded or credited against the     
shareholder's U.S. federal income tax liability, if any, provided that the      
required information is furnished to the IRS. The provisions discussed above    
relating to distributions to foreign persons generally would apply to           
distributions with respect to taxable years of regulated investment companies   
beginning before January 1, 2008. Distributions attributable to gains from "U.S.
real property interests" (including certain U.S. real property holding          
corporations) will generally be subject to federal withholding tax and may give 
rise to an obligation on the part of the foreign shareholder to file a U.S. tax 
return. Also, such gain may be subject to a 30% branch profit tax in the hands  
of a foreign shareholder that is a corporation. Prospective investors are urged 
to consult their tax advisors regarding the specific tax consequences discussed 
above.                                                                          

    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, for shareholders of ACTIVE ASSETS TAX-FREE TRUST and ACTIVE ASSETS   
CALIFORNIA TAX-FREE TRUST, 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. 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 at the time 
of such sale or redemption will, for tax purposes, generally result in          
short-term capital gains or losses and those held for more than one year will   
generally result in long-term capital gains or losses. Under current law, the   
maximum tax rate on long-term capital gains available to non-corporate          
shareholders generally is 15%. Without future congressional                     

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action, the maximum tax rate on long-term capital gains would return to 20% in  
2009. However, as each Fund intends to maintain its share price at $1.00,       
preserving the principal value of a shareholder's investment, a shareholder     
generally will not realize gain or loss on the sale or redemption of shares in a
Fund.                                                                           

   Gain or loss on the sale or redemption of shares in a Fund is measured by
the difference between the amount received and the adjusted 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.                                                   

    OTHER CONSIDERATIONS. 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 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 Treasury Regulations Section  
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 BE UPDATED] Individual shareholders of Active
Assets California Tax-Free Trust who reside in California will not be subject to
California personal income tax on distributions received from the Fund to the   
extent such distributions are attributable to interest received by the Fund     
during its taxable year on obligations, the interest on which (when held by an  
individual) is exempt from taxation under California law.                       

To the extent that dividends 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 issuers 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.                                                                       

 The portion of dividends constituting exempt-interest dividends is that
portion derived from interest on obligations which pay interest excludable from 
California personal income under California law. The total amount of California 
exempt-interest dividends paid by the Fund to all of its shareholders with      
respect to any taxable year cannot exceed the amount of interest received by the
Fund during such year on such obligations less any expenses and expenditures    
(including dividends paid to corporate 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.                                                           

     Because, unlike federal law, California law does not impose personal income
tax on an individual's Social Security benefits, the receipt of California      
exempt-interest dividends will have no effect on an individual's California     
personal income tax.                                                            

    Individual shareholders will normally be subject to federal and California
personal income tax on dividends paid from interest income derived from taxable 
securities and distributions of net capital gains. In addition, distributions   
other than exempt-interest dividends to such shareholders are includable in     
income subject to the California alternative minimum tax. For federal income tax
and California personal income tax purposes, distributions of long-term capital 
gains, if any, are taxable to shareholders as long-term capital gains,          
regardless of how long a shareholder has held shares of the fund and regardless 
of whether the distribution is received in additional shares or in cash. The    
maximum federal capital gains rate for individuals is 20% with respect to       
capital assets held more than 12 months. The maximum capital gains rate for     
corporate shareholders is the same as the maximum tax rate for ordinary income. 
In addition, unlike federal law, the shareholders of the Fund will not be       
subject to tax, or receive a credit for tax paid by the Fund, on undistributed  
capital gains, if any.                                                          

 Interest on indebtedness incurred by shareholders or related parties to
purchase or carry shares of an investment company paying exempt-interest        
dividends, such as the Fund, generally will not be deductible by the investor   
for federal or state personal income tax purposes. In addition, as a result of  

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California's incorporation of certain provisions of the Code, a loss realized by
a shareholder upon the sale of shares held for six months or less may be        
disallowed to the extent of any exempt-interest dividends received with respect 
to such shares. Moreover, any loss realized upon the redemption of shares within
six months from the date of purchase of such shares and following receipt of    
long-term capital gains distribution will be treated as long-term capital loss  
to the extent of such long-term capital gains distribution. Finally, any loss   
realized upon the redemption of shares within 30 days before or after the       
acquisition of other shares of the Fund may be disallowed under the "wash sale" 
rules.                                                                          

     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 investment income and capital gains, including exempt-interest dividends,  
may be subject to California franchise tax for corporate shareholders. In       
addition, distributions from investment income and capital gains may be subject 
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. PERFORMANCE DATA                                                            

  Active Assets Money Trust's current yield for the seven days ending June
30, 2006 was ___%. The seven day effective annual yield on June 30, 2006 was    
___%, assuming daily compounding.                                               

     Active Assets Tax-Free Trust's current yield for the seven days ending June
30, 2006 was ___%. The seven day effective annual yield on June 30, 2006 was    
___%, assuming daily compounding. Based upon a federal personal income tax      
bracket of [35.00%,] Active Assets Tax-Free Trust's tax-equivalent yield for the
seven days ending June 30, 2006 was ___%.                                       

    Active Assets California Tax-Free Trust's current yield for the seven days
ending June 30, 2006 was ___%. The seven day effective annual yield on June 30, 
2006 was ___%, assuming daily compounding. Based upon a combined federal and    
California personal income tax bracket of [41.05%,] Active Assets California    
Tax-Free Trust's tax-equivalent yield for the seven days ended June 30, 2006 was
___%.                                                                           

 Active Assets Government Securities Trust's current yield for the seven
days ending June 30, 2006 was ___%. The seven day effective annual yield on June
30, 2006 was ___%, assuming daily compounding.                                  

XII. FINANCIAL STATEMENTS                                                       

    The Funds' audited financial statements for the fiscal year ended June 30,
2006, including notes thereto and the report of ________________, are herein    
incorporated by reference from the Funds' annual reports. Copies of the Funds'  
ANNUAL REPORTS TO SHAREHOLDERS must accompany the delivery of this STATEMENT OF 
ADDITIONAL INFORMATION.                                                         

XIII. FUND COUNSEL                                                              

     Clifford Chance US LLP, located at 31 West 52nd Street, New York, NY 10019,
acts as the Funds' legal counsel.                                               

***** 

    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.                                                                            

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ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST 
PART C
OTHER INFORMATION 

ITEM 23. EXHIBITS                                                               

(a).    Declaration of Trust of the Registrant, dated July 9, 1991, is          
  incorporated herein by reference to Exhibit 1(a) of Post-Effective
    Amendment No. 5 to the Registration Statement on Form N-1A, filed on
August 29, 1995.                                                

(b).    Amended and Restated By-Laws of the Registrant, dated April 24, 2003, is
 incorporated herein by reference to Exhibit (b) of Post-Effective
     Amendment No. 14 to the Registration Statement on Form N-1A, filed on
August 29, 2003.                                                

(c).    Not Applicable.                                                         

(d).    Amended and Restated Investment Advisory Agreement, dated November 1,   
2004, is incorporated herein by reference to Exhibit (d) of     
    Post-Effective Amendment No. 3 to the Registration Statement on Form
      N-1A of Morgan Stanley Small-Mid Special Value Fund, filed on June 24,
2005.                                                           

(e)(1). Amended and Restated Distribution Agreement, dated May 31, 1997, is     
incorporated herein by reference to Exhibit 6 of Post-Effective 
    Amendment No. 7 to the Registration Statement on Form N-1A, filed on
August 22, 1997.                                                

  (2). Selected Dealers Agreement between Morgan Stanley Distributors Inc. and
     Morgan Stanley DW Inc. is incorporated herein by reference to Exhibit
       e(2) of Post-Effective Amendment No. 4 to the Registration Statement on
        Form N-1A of Morgan Stanley Fundamental Value Fund, filed on January 25,
2006.                                                           

(f).    Second Amended and Restated Retirement Plan of Non-Interested Directors 
     or Trustees is incorporated herein by reference to Exhibit 6 of Post-
     Effective Amendment No. 9 to the Registration Statement on Form N-1A,
filed on June 16, 1999.                                         

(g)(1). Custody Agreement between The Bank of New York and the Registrant is    
incorporated herein by reference to Exhibit 8 of Post-Effective 
    Amendment No. 5 to the Registration Statement on Form N-1A, filed on
August 29, 1995.                                                

  (2). Amendment dated April 17, 1996 to the Custody Agreement is incorporated
     herein by reference to Exhibit 8 of Post-Effective Amendment No. 8 to
  the Registration Statement on Form N-1A, filed on August 20, 1998.

  (3). Amendment to the Custody Agreement dated June 15, 2001, is incorporated
      herein by reference to Exhibit 7(c) of Post-Effective Amendment No. 12
     to the Registration Statement on Form N-1A, filed on August 27, 2001.

 (4). Foreign Custody Manager Agreement dated June 15, 2001, is incorporated
      herein by reference to Exhibit 7(d) of Post-Effective Amendment No. 12
     to the Registration Statement on Form N-1A, filed on August 27, 2001.

(h)(1). Amended and Restated Transfer Agency and Service Agreement, dated       
    November 1, 2004, between the Registrant and Morgan Stanley Services
       Company Inc., is incorporated herein by reference to Exhibit (h) (1) of
     Post-Effective Amendment No. 16 to the Registration Statement on Form
N-1A of Morgan Stanley Growth Fund, filed on May 27, 2005.      

   (2). Administration Agreement, dated November 1, 2004, between the Registrant
   and Morgan Stanley Services Company Inc., is incorporated herein by
      reference to Exhibit (h) (2) of Post-Effective Amendment No. 16 to the
        Registration Statement on Form N-1A of Morgan Stanley Growth Fund, filed
on May 27, 2005.                                                

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(i)(1). Opinion of Clifford Chance US LLP, is incorporated herein by reference  
        to Exhibit (i)(1) of Post-Effective Amendment No. 15 to the Registration
Statement on Form N-1A, filed on August 30, 2004.               

(2). Consent of Clifford Chance US LLP, to be filed by further amendment. 

   (3). Opinion of Dechert LLP, Massachusetts Counsel, is incorporated herein by
     reference to Exhibit (i)(2) of Post-Effective Amendment No. 15 to the
Registration Statement on Form N-1A, filed on August 30, 2004.  

(j).    Consent of Independent Registered Public Accounting Firm, to be filed by
further amendment.                                              

(k).    Not Applicable.                                                         

(l).    Not Applicable.                                                         

(m).    Amended and Restated Plan of Distribution pursuant to Rule 12b-1, is    
incorporated herein by reference to Exhibit 15 of Post-Effective
     Amendment No. 19 to the Registration Statement on Form N-1A, filed on
August 22, 1997.                                                

(n).    Not Applicable.                                                         

(o).    Not Applicable.                                                         

(p)(1). Code of Ethics of Morgan Stanley Investment Management, is incorporated 
      herein by reference to Exhibit (p) (1) of Post-Effective Amendment No.
      16 to the Registration Statement on Form N-1A of Morgan Stanley Growth
Fund, filed on May 27, 2005.                                    

(2). Code of Ethics of Morgan Stanley Funds, is incorporated herein by    
      reference to Exhibit (p) (2) of Post-Effective Amendment No. 16 to the
        Registration Statement on Form N-1A of Morgan Stanley Growth Fund, filed
on May 27, 2005.                                                

(q)     Powers of Attorney of Trustees, dated April 25, 2006, is incorporated   
        herein by reference to Exhibit (q) of Post-Effective Amendment No. 23 to
   the Registration Statement on Form N-1A of Morgan Stanley Utilities
Fund, filed on April 26, 2006.                                  

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, neither
the Investment Adviser 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. Pursuant to Section 9 of the Registrant's Investment  
Advisory Agreement, in the absence of willful misfeasance, bad faith, gross     
negligence or reckless disregard of its obligations under the Agreement, the    
Investment Adviser shall not be liable to the Registrant or any of its investors
for any error of judgment or mistake of law or for any act or omission by the   
Investment Adviser or for any losses sustained by the Registrant or its         
investors. Pursuant to Section 7 of the Registrant's Administration Agreement,  
the Administrator will use its best efforts in the                              

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performance of administrative activities on behalf of each fund, but in the     
absence of willful misfeasance, bad faith, gross negligence or reckless         
disregard of its obligations hereunder, the Administrator shall not be liable to
the Fund or any of its investors for any error of judgment or mistake of law or 
for any act or omission by the Administrator or for any losses sustained by the 
Fund or its investors.                                                          

Pursuant to Section 7 of the Registrant's Underwriting Agreement, the 
Registrant shall indemnify and hold harmless the Underwriter and each person, if
any, who controls the Underwriter against any loss, liability, claim, damage or 
expense (including the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel fees incurred  
in connection therewith) arising by reason of any person acquiring any Shares,  
which may be based upon the 1933 Act, or on any other statute or at common law, 
on the grounds that the Registration Statement or related Prospectus and        
Statement of Additional Information, as from time to time amended and           
supplemented, or the annual or interim reports to shareholders of the           
Registrant, includes an untrue statement of a material fact or omits to state a 
material fact required to be stated therein or necessary in order to make the   
statements therein not misleading, unless such statement or omission was made in
reliance upon, and in conformity with, information furnished to the Registrant  
in connection therewith by or on behalf of the Underwriter; provided, however,  
that in no case (i) is the indemnity of the Registrant in favor of the          
Underwriter and any such controlling persons to be deemed to protect the        
Underwriter or any such controlling persons thereof against any liability to the
Registrant or its security holders to which the Underwriter or any such         
controlling persons would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason of  
reckless disregard of its obligations and duties under this Agreement; or (ii)  
is the Registrant to be liable under its indemnity agreement contained in this  
paragraph with respect to any claim made against the Underwriter or any such    
controlling persons, unless the Underwriter or any such controlling persons, as 
the case may be, shall have notified the Registrant in writing within a         
reasonable time after the summons or other first legal process giving           
information of the nature of the claim shall have been served upon the          
Underwriter or such controlling persons (or after the Underwriter or such       
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Registrant of any such claim shall not relieve
it from any liability which it may have to the person against whom such action  
is brought otherwise than on account of its indemnity agreement contained in    
this paragraph.                                                                 

     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     
("Investment Company Act"), so long as the interpretation of Sections 17(h) and 
17(i) of such Act remains in effect.                                            

The Registrant, in conjunction with the Investment Adviser, the       
Registrant's Trustees, and other registered investment management companies     
managed by the Investment Adviser, maintains insurance on behalf of any person  
who is or was a Trustee, officer, employee, or agent of the Registrant, or who  
is or was serving at the request of the 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 the Registrant itself is not permitted to 
indemnify him.                                                                  

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER                   

See "Fund Management" in the Prospectus regarding the business of the 
investment adviser. The following information is given regarding directors and  
officers of Morgan Stanley Investment Advisors Inc. ("Morgan                    

485APOS 92nd Page of 96 TOC 1st Previous Next ↓Bottom Just 92nd
Stanley Investment Advisors"). Morgan Stanley Investment Advisors is a          
wholly-owned subsidiary of Morgan Stanley & Co. Incorporated.                   

    Set forth below is the name and principal business address of each company
for which each director or officer of Morgan Stanley Investment Advisors Serves 
as a director, officer or employee:                                             

MORGAN STANLEY DISTRIBUTION, INC.                                               
MORGAN STANLEY DISTRIBUTORS INC.                                                
MORGAN STANLEY DW INC.                                                          
MORGAN STANLEY INVESTMENT ADVISORS                                              
MORGAN STANLEY INVESTMENT MANAGEMENT INC.                                       
VAN KAMPEN ADVISORS INC.                                                        
VAN KAMPEN INVESTMENT ASSET MANAGEMENT INC.                                     
VAN KAMPEN INVESTMENTS INC.                                                     
VAN KAMPEN INVESTMENT MANAGEMENT                                                
VAN KAMPEN INVESTOR SERVICES INC.                                               
1221 Avenue of the Americas, New York, New York 10020                           

MORGAN STANLEY SERVICES COMPANY INC.                                            
MORGAN STANLEY TRUST COMPANY                                                    
Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311           

Listed below are the officers and Trustees of Morgan Stanley Investment Advisors
Inc.                                                                            

NAME AND POSITION WITH MORGAN              OTHER SUBSTANTIAL BUSINESS,  
STANLEY INVESTMENT ADVISORS INC.              PROFESSION, OR VOCATION     
-------------------------------------   ----------------------------------------
Owen D. Thomas                          President and Chief Operating Officer of
President, Chief Operating Officer      Van Kampen Advisors, Inc., Van Kampen   
and Director                            Asset Management, Van Kampen Investments
                               Inc., Morgan Stanley Investment
                                  Management Inc. and Morgan Stanley
                     Services Company Inc.

Ronald E. Robison                       Managing Director of Van Kampen Asset   
Managing Director and Director          Management, Van Kampen Investments Inc.,
                                 Director and Chief Administrative
                                    Officer of Morgan Stanley Investment
                                  Management Inc. and Morgan Stanley
                                  Services Company Inc., Director of
                                        Morgan Stanley Distributors Inc., Morgan
                             Stanley Trust, Morgan Stanley
                                 Distribution, Inc. and Van Kampen
                      Investor Services Inc.

Amy R. Doberman                         Managing Director and General Counsel of
Managing Director and Secretary         Morgan Stanley Investment Management    

Dennis F. Shea                          Managing Director and Chief Investment  
Managing Director and Chief             Officer-Global Equity Group of Morgan   
Investment Officer-Global Equity        Stanley Asset Management                
Group                                                                           

J. David Germany                        Managing Director and Chief Investment  
Managing Director and Chief             Officer-Global Fixed Income Group of    
Investment Officer-Global Fixed         Morgan Stanley Asset Management         
Income Group                                                                    

Carsten Otto                            Managing Director and Chief Compliance  
Managing Director and Chief             Officer of Morgan Stanley Investment    
Compliance Officer                      Management Inc., Van Kampen Advisors    
                                     Inc. and Van Kampen Asset Management,
                                      Chief Compliance Officer of Van Kampen
                                     Investor Services Inc. and Van Kampen
                Investments Inc.

Kenneth Castiglia                       Managing Director, Chief Financial      
Managing Director, Chief Financial      Officer and Treasurer of Morgan Stanley 
Officer and Treasurer                   Asset Management.                       

For information as to the business, profession, vocation or employment of a     
substantial nature of additional officers of the Investment Adviser, reference  
is made to the Investment Adviser's current Form ADV (File No. 801-42061) filed 
under the Investment Advisers Act of 1940, incorporated herein by reference.    

485APOS 93rd Page of 96 TOC 1st Previous Next ↓Bottom Just 93rd
ITEM 27. PRINCIPAL UNDERWRITERS                                                 

(a) Morgan Stanley Distributors Inc., a Delaware corporation, is the principal  
underwriter of the Registrant. Morgan Stanley 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 Government Securities Trust                    

(4)  Active Assets Institutional Money Trust                                    

(5)  Active Assets Money Trust                                                  

(6)  Active Assets Tax-Free Trust                                               

(7)  Morgan Stanley Aggressive Equity Fund                                      

(8)  Morgan Stanley Allocator Fund                                              

(9)  Morgan Stanley Balanced Fund                                               

(10) Morgan Stanley California Tax-Free Daily Income Trust                      

(11) Morgan Stanley California Tax-Free Income Fund                             

(12) Morgan Stanley Capital Opportunities Trust                                 

(13) Morgan Stanley Convertible Securities Trust                                

(14) Morgan Stanley Developing Growth Securities Trust                          

(15) Morgan Stanley Dividend Growth Securities Inc.                             

(16) Morgan Stanley Equally-Weighted S&P 500 Fund                               

(17) Morgan Stanley European Equity Fund Inc.                                   

(18) Morgan Stanley Financial Services Trust                                    

(19) Morgan Stanley Flexible Income Trust                                       

(20) Morgan Stanley Fundamental Value Fund                                      

(21) Morgan Stanley Global Advantage Fund                                       

(22) Morgan Stanley Global Dividend Growth Securities                           

(23) Morgan Stanley Growth Fund                                                 

(24) Morgan Stanley Health Sciences Trust                                       

(25) Morgan Stanley High Yield Securities Inc.                                  

(26) Morgan Stanley Income Trust                                                

(27) Morgan Stanley International Fund                                          

(28) Morgan Stanley International SmallCap Fund                                 

(29) Morgan Stanley International Value Equity Fund                             

(30) Morgan Stanley Japan Fund                                                  

(31) Morgan Stanley Limited Duration Fund                                       

(32) Morgan Stanley Limited Duration U.S. Treasury Trust                        

(33) Morgan Stanley Limited Term Municipal Trust                                

(34) Morgan Stanley Liquid Asset Fund Inc.                                      

(35) Morgan Stanley Mid-Cap Value Fund                                          

485APOS 94th Page of 96 TOC 1st Previous Next ↓Bottom Just 94th
(36) Morgan Stanley Mortgage Securities Trust                                   

(37) Morgan Stanley Multi-Asset Class Fund                                      

(38) Morgan Stanley Nasdaq-100 Index Fund                                       

(39) Morgan Stanley Natural Resource Development Securities Inc.                

(40) Morgan Stanley New York Municipal Money Market Trust                       

(41) Morgan Stanley New York Tax-Free Income Fund                               

(42) Morgan Stanley Pacific Growth Fund Inc.                                    

(43) Morgan Stanley Prime Income Trust                                          

(44) Morgan Stanley Real Estate Fund                                            

(45) Morgan Stanley S&P 500 Index Fund                                          

(46) Morgan Stanley Select Dimensions Investment Series                         

(47) Morgan Stanley Small-Mid Special Value Fund                                

(48) Morgan Stanley Special Growth Fund                                         

(49) Morgan Stanley Special Value Fund                                          

(50) Morgan Stanley Strategist Fund                                             

(51) Morgan Stanley Tax-Exempt Securities Trust                                 

(52) Morgan Stanley Tax-Free Daily Income Trust                                 

(53) Morgan Stanley Technology Fund                                             

(54) Morgan Stanley Total Market Index Fund                                     

(55) Morgan Stanley Total Return Trust                                          

(56) Morgan Stanley U.S. Government Money Market Trust                          

(57) Morgan Stanley U.S. Government Securities Trust                            

(58) Morgan Stanley Utilities Fund                                              

(59) Morgan Stanley Value Fund                                                  

(60) Morgan Stanley Variable Investment Series                                  

(b) The following information is given regarding directors and officers of      
Morgan Stanley Distributors not listed in Item 25 above. The principal address  
of Morgan Stanley Distributors is 1221 Avenue of the Americas, New York, New    
York 10020. None of the following persons has any position or office with the   
Registrant.                                                                     

NAME AND PRINCIPAL   POSITIONS AND OFFICES WITH   POSITIONS AND OFFICES         
BUSINESS ADDRESS            UNDERWRITER             WITH REGISTRANT           
------------------   --------------------------   ---------------------         
Ronald E. Robison    Director                     President and Principal       
                                      Executive  Officer

Kenneth Castiglia    Director, Chief Financial    None                          
Officer and Treasurer                 

Michael Kiley        Director, Chief Executive    None                          
Officer and President                 

Brian Binder         Chief Administrative         None                          
Officer                               

Stefanie Chang Yu    Secretary                    Vice President                

Winston McLaughlin   Chief Compliance Officer     None                          

Gina Gallagher       Chief AML Office             None                          

Pat Behnke           Financial and Operations     None                          
Principal                             

(c) Not applicable.                                                             

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ITEM 28. LOCATION OF ACCOUNTS AND RECORDS                                       

    Books or other documents required to be maintained by Section 31(a) of the
Investment Company Act, and the rules promulgated thereunder, are maintained as 
follows:                                                                        

The Bank of New York                  
100 Church Street                     
New York, New York 10286              
         (records relating to its function as custodian)

 Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas           
New York, New York 10020              
                  (records relating to its function as investment adviser)

Morgan Stanley Trust                  
Harborside Financial Center, Plaza Two
2nd Floor                             
Jersey City, New Jersey 07311         
                 (records relating to its function as transfer agent and
dividend disbursing agent)            

Morgan Stanley Services Company Inc.  
Harborside Financial Center, Plaza Two
7th Floor                             
Jersey City, New Jersey 07311         
             (records relating to its function as administrator)

ITEM 29. MANAGEMENT SERVICES                                                    

    Registrant is not a party to any such management-related service contract.

ITEM 30. UNDERTAKINGS                                                           

None.                                                                 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the    
Investment Company Act of 1940, the Registrant 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 28th day of August, 2006.                          

                                       ACTIVE ASSETS CALIFORNIA TAX-FREE TRUST

                         By: /s/ RONALD E. ROBISON
                                            ------------------------------------
                         Ronald E. Robison
                                         President and Principal Executive
               Officer

Pursuant to the requirements of the Securities Act of 1933, this      
Post-Effective Amendment No. 18 has been signed below by the following persons  
in the capacities and on the dates indicated.                                   

                                                                [Download Table]

             SIGNATURES                          TITLE                 DATE     
-------------------------------------   -----------------------  ---------------
                                                                                
(1) Principal Executive Officer         President and Principal                 
                                        Executive Officer                       

By: /s/ RONALD E. ROBISON                                                       
    ---------------------------------                                           
    Ronald E. Robison                                            August 28, 2006

(2) Principal Financial Officer         Chief Financial Officer                 

By: /s/ FRANCIS J. SMITH                                                        
    ---------------------------------                                           
    Francis J. Smith                                             August 28, 2006

(3) Majority of the Trustees                                                    
    Charles A. Fiumefreddo                                                      
    James F. Higgins                                                            

By: /s/ BARRY FINK                                                              
    ---------------------------------                                           
    Barry Fink                                                                  
    Attorney-in-Fact                                             August 28, 2006

Michael Bozic       Joseph J. Kearns                                            
Edwin J. Garn       Michael E. Nugent (Chairman)                                
Wayne E. Hedien     Fergus Reid                                                 
Manuel H. Johnson                                                               

By: /s/ CARL FRISCHLING                                                         
    ---------------------------------                                           
    Carl Frischling                                                             
    Attorney-in-Fact                                             August 28, 2006

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘485APOS’ Filing	Date	First	Last	Other Filings

	1/1/08	86
	10/31/07	70		485BPOS
	12/31/06	47		N-CSRS, NSAR-A
	10/31/06	1	33	485BPOS
	10/1/06	48
	9/30/06	8	21	N-Q
Filed on:	8/28/06	1	96	N-PX
	7/1/06	68	69
	6/30/06	9	88	24F-2NT, N-CSR, N-PX, NSAR-B
	4/26/06	90
	4/25/06	90
	2/1/06	46
	1/25/06	89
	1/10/06	45
	1/1/06	43
	12/31/05	8	70	N-CSRS, NSAR-A
	11/21/05	5
	11/15/05	47	50
	10/10/05	5
	10/3/05	51
	10/1/05	68
	7/11/05	45
	7/7/05	45
	7/1/05	41
	6/30/05	45	81	24F-2NT, N-CSR, N-PX, NSAR-B
	6/24/05	89
	5/27/05	89	90
	11/3/04	42
	11/1/04	71	89	497
	8/30/04	90		24F-2NT, 485BPOS
	7/1/04	47
	6/30/04	73	81	24F-2NT, N-CSR, N-PX, NSAR-B
	4/1/04	69
	3/2/04	47
	2/23/04	44
	1/1/04	50
	12/31/03	69		N-CSRS, NSAR-A
	8/29/03	89		485BPOS
	4/24/03	89
	9/11/01	41
	8/27/01	89		485BPOS
	6/15/01	89
	6/16/99	89		485APOS
	8/20/98	89		485BPOS
	8/22/97	89	90	485BPOS
	5/31/97	89
	4/17/96	89
	8/29/95	89		485BPOS
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Filing Submission 0001047469-06-011322 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Active Assets California Tax Free Trust, et al. – ‘485APOS’ on 8/28/06

On: Monday, 8/28/06, at 4:01pm ET · Accession #: 1047469-6-11322 · File #s: 33-41685, 811-06350

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Dates Referenced Herein and Documents Incorporated by Reference

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