UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-02575

Morgan Stanley Liquid Asset Fund Inc.
(Exact name of registrant as specified in charter)

1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)

Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)

Registrant's telephone number, including area code: 212-762-4000

Date of fiscal year end: August 31, 2006

Date of reporting period: February 28, 2006

Item 1 - Report to Shareholders

Welcome, Shareholder:

In this report, you'll learn about how your investment in Morgan Stanley Liquid
Asset Fund Inc. performed during the semiannual period. We will provide an
overview of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.

THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.

MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT A MUTUAL FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN
INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND. PLEASE SEE THE PROSPECTUS FOR MORE
COMPLETE INFORMATION ON INVESTMENT RISKS.

FUND REPORT

For the six months ended February 28, 2006

MARKET CONDITIONS

During the six-month period ended February 28, 2006, the Federal Open Market
Committee (the "Fed") continued its pattern of raising short-term rates which it
began in June of 2004. Through 14 steps of 25 basis points each--including four
during the six months covered by this report--the Fed increased its target rate
for federal funds from 1.00 percent to 4.50 percent, a four-and-one-half year
high.

Short-term yields increased alongside the target rate and provided increased
return opportunities for money market investors.

PERFORMANCE ANALYSIS

As of February 28, 2006, the Morgan Stanley Liquid Asset Fund had net assets of
more than $17.1 billion and an average portfolio maturity of 49 days. For the
six-month period ended February 28, 2006, the Fund provided a total return of
1.77 percent. For the seven-day period ended February 28, 2006, the Fund
provided an effective annualized yield of 4.13 percent and a current annualized
yield of 4.05 percent, while its 30-day moving average annualized yield for
February was 4.02 percent. Past performance is no guarantee of future results.

Our strategy in managing the portfolio remained consistent with the Fund's
long-term focus on preservation of capital and liquidity. We adhered to a
conservative approach in managing the portfolio, emphasizing high-quality money
market obligations. We avoided the use of derivatives or structured
notes that might fluctuate excessively with changing interest rates. We also
took advantage of the rising yields available on the money market securities.
As short-term interest rates climbed, we reinvested the proceeds of maturing
short-term holdings into higher-yielding securities. Should rates continue to
rise during the months ahead, we intend to maintain this approach.

There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Fund in
the future.

<Table>
<Caption>
PORTFOLIO COMPOSITION

Commercial Paper 77.5%
U.S. Government Agencies 10.9
Certificates of Deposit 10.4
Bank Note 1.2
</Table>

<Table>
<Caption>
MATURITY SCHEDULE

1 -- 30 Days 40.6%
31 -- 60 Days 30.4%
61 -- 90 Days 14.4%
91 -- 120 Days 10.0%
121 + Days 4.6%
</Table>

Data as of February 28, 2006. Subject to change daily. All percentages for
portfolio composition and maturity schedule are as a percentage of total
investments.

INVESTMENT STRATEGY

THE FUND INVESTS IN HIGH QUALITY, SHORT-TERM DEBT OBLIGATIONS. IN SELECTING
INVESTMENTS, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS
INC., SEEKS TO MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE PRICE
REMAINING STABLE AT $1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL VALUE
OF YOUR INVESTMENT.

AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.

FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS

EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102.

HOUSEHOLDING NOTICE

TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.

EXPENSE EXAMPLE

As a shareholder of the Fund, you incur ongoing costs, including advisory fees;
distribution and service (12b-1) fees; and other Fund expenses. This example is
intended to help you understand your ongoing costs (in dollars) of investing in
the Fund and to compare these costs with the ongoing costs of investing in other
mutual funds.

The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 09/01/05 - 02/28/06.

ACTUAL EXPENSES

The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES

The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.

<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
------------- ------------- ---------------
09/01/05 -
09/01/05 02/28/06 02/28/06
------------- ------------- ---------------

Actual (1.77% return)....................................... $1,000.00 $1,017.70 $3.00
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,021.82 $3.01
</Table>

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

* Expenses are equal to the Fund's annualized expense ratio of 0.60%
multiplied by the average account value over the period, multiplied by
181/365 (to reflect the one-half year period).

Morgan Stanley Liquid Asset Fund Inc.
PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2006 (UNAUDITED)

<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- ----------------------------------------------------------------------------------------------------------

Commercial Paper (78.6%)
Banking (12.1%)
$ 685,000 Bank of America Corp. .................... 4.43-4.92% 03/13/06-08/23/06 $ 682,633,486
544,000 Citigroup Funding Inc. ................... 4.51-4.88 04/03/06-08/16/06 539,723,371
500,000 J.P. Morgan Chase & Co. .................. 4.53-4.56 03/28/06-04/04/06 498,130,708
100,000 LaSalle Bank Corp. ....................... 4.51 03/06/06 99,937,639
250,000 Wells Fargo & Co. ........................ 4.44 03/01/06 250,000,000
---------------
2,070,425,204
---------------
Finance - Automotive (0.5%)
93,000 Toyota Motor Credit Corp. ................ 4.53-4.59 05/18/06-06/14/06 91,923,511
---------------
Finance - Consumer (1.2%)
159,000 American Express Credit Corp. ............ 4.52-4.59 05/04/06-05/15/06 157,671,611
50,000 HSBC Finance Corp. ....................... 4.57 04/25/06 49,654,722
---------------
207,326,333
---------------
Financial Conglomerates (4.4%)
756,500 General Electric Capital Corp. ........... 3.55-4.97 03/02/06-11/10/06 750,246,738
---------------
Insurance (0.9%)
150,000 Prudential Funding LLC.................... 4.59 04/12/06 149,202,000
---------------
International Banks (59.5%)
250,000 ANZ (DE) Inc. ............................ 4.44 03/20/06 249,420,764
750,000 Abbey National North America LLC.......... 4.43-4.66 03/09/06-05/01/06 746,367,715
325,000 BNP Paribas Finance, Inc. ................ 4.54-4.73 04/18/06-05/31/06 321,418,285
725,000 Barclays U.S. Funding Corp. .............. 4.42-4.67 03/08/06-05/02/06 723,010,167
250,000 CBA (Delaware) Finance Inc. .............. 4.42-4.46 03/03/06-03/31/06 249,424,361
760,000 Calyon North America, Inc. ............... 4.42-4.89 03/09/06-08/21/06 753,869,855
450,000 Deutsche Bank Financial LLC............... 4.49-4.76 04/10/06-10/03/06 444,037,778
700,000 Dexia Delaware LLC........................ 4.59-4.62 04/11/06-04/18/06 696,053,722
550,000 DnB NOR Bank ASA.......................... 4.43-4.49 03/10/06-04/05/06 548,690,000
700,000 HBOS Treasury Services plc................ 4.44-4.69 03/17/06-05/15/06 695,959,764
378,000 ING (U.S.) Funding LLC.................... 4.50-4.62 03/14/06-06/27/06 374,873,101
568,000 Natexis Banques Populaires U.S. Finance
Co. LLC................................. 4.43-4.81 03/21/06-07/14/06 564,439,890
403,000 Nordea North America, Inc. ............... 4.49-4.55 04/28/06-05/25/06 399,323,872
600,000 Royal Bank of Canada...................... 4.63-4.65 04/25/06-04/27/06 595,665,688
750,000 Royal Bank of Scotland plc................ 4.42-4.53 03/03/06-03/24/06 748,633,000
290,000 Sanpaolo IMI U.S. Finance Co. ............ 4.41-4.59 03/06/06-04/28/06 289,220,450
500,000 Societe Generale N.A., Inc. .............. 4.48-4.63 03/07/06-04/26/06 497,457,875
277,000 Spintab AB................................ 4.38-4.65 03/02/06-05/03/06 276,450,110
</Table>

See Notes to Financial Statements
5

Morgan Stanley Liquid Asset Fund Inc.
PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2006 (UNAUDITED) continued

$ 320,000 Svenska Handelsbanken Inc. ............... 4.47-4.59% 04/03/06-06/15/06 $ 317,602,283
45,000 Swedbank.................................. 4.54 03/27/06 44,853,425
655,000 UBS Finance (Delaware) LLC................ 4.52-4.68 03/15/06-06/01/06 651,566,747
---------------
10,188,338,852
---------------
Total Commercial Paper (Cost $13,457,462,638).............................. 13,457,462,638
---------------
U.S. Government Agencies (11.1%)
803,000 Federal National Mortgage Assoc. ......... 4.37-4.76 03/22/06-08/09/06 797,720,751
1,106,000 Freddie Mac............................... 3.55-4.81 03/07/06-10/23/06 1,094,238,366
---------------
Total U.S. Government Agencies (Cost $1,891,959,117)....................... 1,891,959,117
---------------
Certificates of Deposit (10.5%)
450,000 Branch Banking & Trust Co., N.C. ......... 4.46-4.65 03/10/06-04/28/06 450,000,000
205,000 Citibank, N.A. ........................... 4.48-4.77 04/06/06-05/26/06 205,000,000
700,000 First Tennessee Bank, N.A. ............... 4.52-4.68 03/14/06-05/03/06 700,000,000
350,000 Washington Mutual Bank F.A. .............. 4.68-4.70 05/03/06-05/09/06 350,000,000
100,000 Wells Fargo Bank, N.A. ................... 4.48 03/07/06 100,000,000
---------------
Total Certificates of Deposit (Cost $1,805,000,000)........................ 1,805,000,000
---------------
Short-Term Bank Note (1.2%)
200,000 World Savings Bank, FSB (Cost
$200,000,000)........................... 4.62 04/19/06 200,000,000
---------------
Repurchase Agreement (0.1%)
9,452 The Bank of New York (dated 02/28/06;
proceeds $9,452,768) (a)
(Cost $9,451,619)....................... 4.375 03/01/06 9,451,619
---------------
</Table>

<Table>

Total Investments (Cost $17,363,873,374) (b).................... 101.5% 17,363,873,374

Liabilities in Excess of Other Assets........................... (1.5) (248,663,002)
----- ---------------
Net Assets...................................................... 100.0% $17,115,210,372
===== ===============
</Table>

- ---------------------
(a) Collateralized by Federal National Mortgage Assoc. 5.50% due 08/01/35
valued at $9,640,652.
(b) Cost is the same for federal income tax purposes.

See Notes to Financial Statements
6

Morgan Stanley Liquid Asset Fund Inc.
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
February 28, 2006 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $17,363,873,374).................................... $17,363,873,374
Cash........................................................ 90,000
Receivable for:
Interest................................................ 4,333,564
Capital stock sold...................................... 186,301
Prepaid expenses and other assets........................... 317,168
---------------
Total Assets............................................ 17,368,800,407
---------------
Liabilities:
Payable for:
Capital stock redeemed.................................. 247,783,141
Investment advisory fee................................. 2,858,811
Distribution fee........................................ 1,317,569
Administration fee...................................... 658,784
Transfer agent fee...................................... 287,427
Accrued expenses and other payables......................... 684,303
---------------
Total Liabilities....................................... 253,590,035
---------------
Net Assets.............................................. $17,115,210,372
===============
Composition of Net Assets:
Paid-in-capital............................................. $17,114,517,426
Accumulated undistributed net investment income............. 692,946
---------------
Net Assets.............................................. $17,115,210,372
===============
Net Asset Value Per Share
17,115,188,600 shares outstanding (50,000,000,000 shares
authorized of $.01 par value)............................... $1.00
===============
</Table>

See Notes to Financial Statements
7

Morgan Stanley Liquid Asset Fund Inc.
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended February 28, 2006 (unaudited)

<Table>

Net Investment Income:
Interest Income............................................. $ 357,984,412
-------------
Expenses
Transfer agent fees and expenses............................ 19,382,334
Investment advisory fee..................................... 18,808,489
Distribution fee............................................ 8,463,874
Administration fee.......................................... 4,341,243
Shareholder reports and notices............................. 318,132
Custodian fees.............................................. 195,769
Directors' fees and expenses................................ 114,989
Registration fees........................................... 96,228
Professional fees........................................... 50,213
Other....................................................... 637,041
-------------
Total Expenses.......................................... 52,408,312
-------------
Net Investment Income....................................... $ 305,576,100
=============
</Table>

See Notes to Financial Statements
8

Morgan Stanley Liquid Asset Fund Inc.
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 2006 AUGUST 31, 2005
----------------- ---------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 305,576,100 $ 381,295,276
Net realized gain........................................... -- 117
--------------- ---------------
Net Increase............................................ 305,576,100 381,295,393
--------------- ---------------
Dividends and Distributions to Shareholders from:
Net investment income....................................... (305,565,538) (381,300,392)
Net realized gain........................................... -- (117)
--------------- ---------------
Total Dividends and Distributions....................... (305,565,538) (381,300,509)
--------------- ---------------

Net decrease from capital stock transactions................ (956,473,957) (2,403,078,668)
--------------- ---------------
Net Decrease............................................ (956,463,395) (2,403,083,784)
Net Assets:
Beginning of period......................................... 18,071,673,767 20,474,757,551
--------------- ---------------
End of Period
(Including accumulated undistributed net investment income
of $692,946 and $682,384, respectively)..................... $17,115,210,372 $18,071,673,767
=============== ===============
</Table>

See Notes to Financial Statements
9

Morgan Stanley Liquid Asset Fund Inc.
NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2006 (UNAUDITED)

1. Organization and Accounting Policies

Morgan Stanley Liquid Asset Fund Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objectives are
high current income, preservation of capital and liquidity. The Fund was
incorporated in Maryland on September 3, 1974 and commenced operations on
September 22, 1975.

The following is a summary of significant accounting policies:

A. Valuation of Investments -- Portfolio securities are valued at amortized
cost, which approximates market value, in accordance with Rule 2a-7 of the
Investment Company Act of 1940.

B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.

C. Repurchase Agreements -- The Fund may invest directly with institutions in
repurchase agreements. The Fund's custodian receives the collateral, which is
marked-to-market daily to determine that the value of the collateral does not
decrease below the repurchase price plus accrued interest.

D. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.

E. Dividends and Distributions to Shareholders -- The Fund records dividends and
distributions to shareholders as of the close of each business day.

F. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.

2. Investment Advisory/Administration Agreements

Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), the Fund pays the Investment Adviser
an advisory fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.45% to the portion of the daily net assets not exceeding $250
million; 0.375% to the portion of the daily net assets exceeding $250 million
but not

Morgan Stanley Liquid Asset Fund Inc.
NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2006 (UNAUDITED) continued

exceeding $750 million; 0.325% to the portion of the daily net assets exceeding
$750 million but not exceeding $1.25 billion; 0.30% to the portion of the daily
net assets exceeding $1.25 billion but not exceeding $1.5 billion; 0.275% to the
portion of the daily net assets exceeding $1.5 billion but not exceeding $1.75
billion; 0.25% to the portion of the daily net assets exceeding $1.75 billion
but not exceeding $2.25 billion; 0.225% to the portion of the daily net assets
exceeding $2.25 billion but not exceeding $2.75 billion; 0.20% to the portion of
the daily net assets exceeding $2.75 billion but not exceeding $15 billion;
0.199% to the portion of the daily net assets exceeding $15 billion but not
exceeding $17.5 billion; 0.198% to the portion of the daily net assets exceeding
$17.5 billion but not exceeding $25 billion; 0.197% to the portion of daily net
assets exceeding $25 billion but not exceeding $30 billion; and 0.196% to the
portion of the daily net assets in excess of $30 billion.

Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.05% to the Fund's daily net assets.

3. Plan of Distribution

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

Reimbursements for these expenses are made in monthly payments by the Fund to
the Distributor, which will in no event exceed an amount equal to a payment at
the annual rate of 0.15% of the Fund's average daily net assets during the
month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal
year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the six months ended February 28, 2006, the
distribution fee was accrued at the annual rate of 0.10%.

4. Security Transactions and Transactions with Affiliates

The cost of purchases and proceeds from sales/maturities of portfolio securities
for the six months ended February 28, 2006, aggregated $45,494,483,045 and
$46,682,654,636, respectively.

Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.

The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Directors of the Fund who will have served as independent
Directors for at least five years at the

Morgan Stanley Liquid Asset Fund Inc.
NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2006 (UNAUDITED) continued

time of retirement. Benefits under this plan are based on factors which include
years of service and compensation. The Directors voted to close the plan to new
participants and eliminate the future benefits growth due to increases to
compensation after July 31, 2003. Aggregate pension costs for the six months
ended February 28, 2006 included in Directors' fees and expenses in the
Statement of Operations amounted to $3,712. At February 28, 2006, the Fund had
an accrued pension liability of $63,703 which is included in accrued expenses in
the Statement of Assets and Liabilities.

The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Director to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Directors. Each eligible
Director generally may elect to have the deferred amounts credited with a return
equal to the total return on one or more of the Morgan Stanley funds that are
offered as investment options under the Compensation Plan.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund.

5. Capital Stock

Transactions in capital stock, at $1.00 per share, were as follows:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 2006 AUGUST 31, 2005
----------------- ---------------
(unaudited)

Shares sold................................................. 25,084,529,784 51,455,651,164
Shares issued in reinvestment of dividends and
distributions............................................. 305,073,508 380,704,220
--------------- ---------------
25,389,603,292 51,836,355,384
Shares redeemed............................................. (26,346,077,249) (54,239,434,052)
--------------- ---------------
Net decrease................................................ (956,473,957) (2,403,078,668)
=============== ===============
</Table>

6. Legal Matters

The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to

Morgan Stanley Liquid Asset Fund Inc.
NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2006 (UNAUDITED) continued

investors rather than funds managed by other companies, and (ii) that the funds
advised by the Investment Adviser or its affiliates, including the Fund,
allegedly paid excessive commissions to brokers in return for their efforts to
recommend these funds to investors. The complaint seeks, among other things,
unspecified compensatory damages, rescissionary damages, fees and costs. The
defendants have moved to dismiss the action and intend to otherwise vigorously
defend it. On March 9, 2005, Plaintiffs sought leave to supplement their
complaint to assert claims on behalf of other investors, which motion defendants
opposed. While the Fund and Adviser believe that each has meritorious defenses,
the ultimate outcome of this matter is not presently determinable and no
provision has been made in the Fund's financial statements for the effect, if
any, of this matter.

Morgan Stanley Liquid Asset Fund Inc.
FINANCIAL HIGHLIGHTS

Selected ratios and per share data for a share of capital stock outstanding
throughout each period:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED AUGUST 31,
MONTHS ENDED ----------------------------------------------------
FEBRUARY 28, 2006 2005 2004 2003 2002 2001
----------------- -------- -------- -------- -------- --------
(unaudited)

Selected Per Share Data:

Net asset value, beginning of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------

Net income from investment operations........ 0.018 0.020 0.006 0.009 0.018 0.051

Less dividends from net investment income.... (0.018) (0.020)+ (0.006)+ (0.009) (0.018)+ (0.051)+
------ ------ ------ ------ ------ ------

Net asset value, end of period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======

Total Return................................. 1.77%(1) 2.03% 0.58% 0.86% 1.78% 5.24%

Ratios to Average Net Assets:
Expenses..................................... 0.60%(2) 0.59% 0.58% 0.56% 0.56% 0.57%

Net investment income........................ 3.52%(2) 1.98% 0.57% 0.85% 1.76% 5.04%

Supplemental Data:
Net assets, end of period, in millions....... $17,115 $18,072 $20,475 $23,081 $23,931 $23,187
</Table>

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

<Table>

+ Includes capital gain distribution of less than $0.001.
(1) Not annualized.
(2) Annualized.
</Table>

See Notes to Financial Statements
14

(This Page Intentionally Left Blank)

DIRECTORS

Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid

OFFICERS

Charles A. Fiumefreddo
Chairman of the Board

Ronald E. Robison
President and Principal Executive Officer

J. David Germany
Vice President

Dennis F. Shea
Vice President

Barry Fink
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

Stefanie V. Chang Yu
Vice President

Francis J. Smith
Treasurer and Chief Financial Officer

Thomas F. Caloia
Vice President

Mary E. Mullin
Secretary

TRANSFER AGENT

Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281

INVESTMENT ADVISER

Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020

The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.

This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its directors. It is available, without charge, by calling (800) 869-NEWS.

This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.

Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.

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MORGAN STANLEY FUNDS

Morgan Stanley
Liquid Asset Fund

Semiannual Report
February 28, 2006

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37925RPT-RA06-00317P-T02/06

Item 2. Code of Ethics.