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, 2007

Date of reporting period: February 28, 2007

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, 2007

MARKET CONDITIONS

During the six-month period under review, the U.S. economy showed signs of
weakening. For November, the Institute for Supply Management (ISM) Manufacturing
Index fell below 50 for the first time since April 2003, a level traditionally
seen as an indicator of a contracting manufacturing sector. After rising briefly
in December, ISM fell back below 50 for January 2007. Gross domestic product
(GDP) growth was 2.2 percent in the fourth quarter of 2006, up only slightly
from 2.0 percent in the previous quarter and below the 2.6 percent and 5.6
percent growth rates for the second and first quarters of 2006, respectively.

Given signs of moderating economic growth, a cooling housing market and the
lagged effect of monetary policy action already taken, the Federal Open Market
Committee ("the Fed") left its federal funds target rate unchanged for the
six-month period under review. The Fed continues to state that "some inflation
risks remain" in the economy.

PERFORMANCE ANALYSIS

As of February 28, 2007, Morgan Stanley Liquid Asset Fund had net assets of
approximately $12 billion and an average portfolio maturity of 55 days. For the
six-month period ended February 28, 2007, the Fund provided a total return of
2.35 percent. For the seven-day period ended February 28, 2007, the Fund
provided an effective annualized yield of 4.92 percent and a current yield of
4.80 percent, while its 30-day moving average yield for February was 4.76
percent. Past performance is no guarantee of future results.

Our strategy in managing the Fund remained consistent with its long-term focus
on maintaining preservation of capital and liquidity. Over the past six months,
as the economic landscape has become more uncertain, we have further diversified
the maturity structure of the fund by decreasing the amount of investments that
mature near upcoming Fed meeting dates. As a result of purchasing these
longer-dated securities, we prudently extended the weighted average maturity of
the fund.

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 72.9%
Floating Rate Notes 14.5
Certificates of Deposit 11.3
Repurchase Agreement 1.3
</Table>

<Table>
<Caption>
MATURITY SCHEDULE

1 -- 30 Days 39.6%
31 -- 60 Days 20.2
61 -- 90 Days 21.2
91 -- 120 Days 12.0
121 + Days 7.0
</Table>

Data as of February 28, 2007. Subject to change daily. All percentages for
portfolio composition and maturity schedule are as a percentage of total
investments. These data are provided for informational purposes only and should
not be deemed a recommendation to buy or sell the securities mentioned. Morgan
Stanley is a full-service securities firm engaged in securities trading and
brokerage activities, investment banking, research and analysis, financing and
financial advisory services.

INVESTMENT STRATEGY

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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL
AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, 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 09/01/06 - 02/28/07.

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 *
------------- ------------- ---------------
09/01/06 -
09/01/06 02/28/07 02/28/07
------------- ------------- ---------------

Actual (2.35% return)....................................... $1,000.00 $1,023.50 $3.61
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,021.22 $3.61
</Table>

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

* Expenses are equal to the Fund's annualized expense ratio of 0.72%
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, 2007 (UNAUDITED)

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

Commercial Paper (73.6%)
Asset-Backed - Auto (3.2%)
$327,251 DaimlerChrysler Revolving Auto Conduit
LLC Series I.......................... 5.30 - 5.32% 03/12/07 - 05/25/07 $ 325,209,939
58,550 DaimlerChrysler Revolving Auto Conduit
LLC Series II......................... 5.30 - 5.31 03/12/07 - 04/26/07 58,193,031
---------------
383,402,970
---------------
Asset-Backed - Consumer (12.1%)
50,000 Barton Capital LLC*..................... 5.32 - 5.33 06/13/07 - 07/13/07 49,115,770
110,458 Bryant Park Funding LLC*................ 5.31 - 5.32 03/29/07 - 05/21/07 109,756,717
553,500 Gemini Securitization Corp., LLC*....... 5.31 - 5.32 03/12/07 - 05/25/07 549,753,036
98,149 Mont Blanc Capital Corp.*............... 5.31 - 5.35 03/21/07 - 05/16/07 97,519,536
75,000 Park Avenue Receivables Co., LLC*....... 5.30 03/13/07 74,868,500
358,301 Regency Markets No. 1 LLC*.............. 5.31 - 5.34 03/20/07 - 05/18/07 355,200,987
20,000 Sheffield Receivables Corp.*............ 5.32 04/24/07 19,842,500
145,462 Thames Asset Global Securitization*..... 5.30 - 5.32 03/07/07 - 03/23/07 145,087,965
45,000 Three Rivers Funding Corp.*............. 5.29 03/05/07 - 03/07/07 44,969,258
---------------
1,446,114,269
---------------
Asset-Backed - Corporate (14.3%)
407,413 Atlantis One Funding*................... 5.31 - 5.35 03/21/07 - 06/12/07 405,285,014
125,000 CAFCO LLC*.............................. 5.31 05/04/07 - 05/24/07 123,690,667
50,000 CIESCO LLC*............................. 5.31 04/04/07 49,752,556
194,000 Eureka Securitization, Inc.*............ 5.30 - 5.32 04/25/07 - 05/31/07 191,824,900
610,000 Kaiserplatz Funding (Delaware) LLC*..... 5.31 - 5.34 03/01/07 - 05/15/07 607,907,987
42,340 Nieuw Amsterdam Receivables Corp.*...... 5.32 - 5.34 03/15/07 - 03/20/07 42,244,544
288,212 Simba Funding Corp.*.................... 5.31 - 5.34 03/12/07 - 05/16/07 286,872,513
---------------
1,707,578,181
---------------
Asset-Backed - Diversified (0.2%)
26,984 Yorktown Capital LLC*................... 5.33 03/07/07 26,960,277
---------------
Asset-Backed - Mortgages (2.8%)
335,535 Sydney Capital Corp.*................... 5.30 - 5.36 03/22/07 - 05/17/07 332,444,468
---------------
Asset-Backed - Securities (10.8%)
160,000 Amstel Funding Corp.*................... 5.31 - 5.33 03/29/07 - 05/25/07 159,127,014
75,683 Cancara Asset Securitization LLC*....... 5.32 - 5.33 03/28/07 - 05/23/07 74,971,484
295,000 Curzon Funding LLC*..................... 5.31 - 5.34 03/19/07 - 05/01/07 293,972,677
45,000 Galaxy Funding Inc.*.................... 5.31 04/24/07 - 04/25/07 44,641,821
74,000 Galleon Capital LLC*.................... 5.32 03/01/07 74,000,000
280,000 Grampian Funding LLC*................... 5.32 - 5.35 05/15/07 - 08/03/07 274,823,346
</Table>

See Notes to Financial Statements
6

Morgan Stanley Liquid Asset Fund Inc.
PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued

$ 26,313 Scaldis Capital LLC*.................... 5.31 - 5.32% 05/16/07 - 06/05/07 $ 25,975,301
348,920 Solitaire Funding LLC*.................. 5.31 - 5.32 03/30/07 - 06/01/07 346,125,070
---------------
1,293,636,713
---------------
Asset-Backed - Structured Investment Vehicles (1.5%)
40,000 Atlas Capital Funding Corp.*............ 5.34 08/07/07 39,079,567
20,000 Beta Finance*........................... 5.34 03/14/07 19,961,903
120,000 Cullinan Finance Corp.*................. 5.31 05/21/07 - 05/22/07 118,573,651
---------------
177,615,121
---------------
Banking (6.2%)
345,000 Bank of America Corp. .................. 5.31 - 5.32 04/20/07 - 06/11/07 340,896,290
400,000 Citigroup Funding Inc. ................. 5.31 - 5.34 03/09/07 - 06/12/07 395,847,564
---------------
736,743,854
---------------
Finance - Automotive (0.3%)
40,000 Toyota Motor Credit Corp. .............. 5.44 03/13/07 39,929,733
---------------
Finance - Consumer (0.5%)
65,000 HSBC Finance Corp. ..................... 5.31 03/16/07 - 03/19/07 64,843,400
---------------
Financial Conglomerates (0.8%)
97,000 General Electric Capital Corp. ......... 5.30 - 5.36 03/12/07 - 06/18/07 95,552,977
---------------
Insurance (4.9%)
586,100 Irish Life & Permanent plc*............. 5.31 - 5.35 03/14/07 - 08/03/07 581,954,115
---------------
International Banks (16.0%)
65,000 Abbey National North America LLC........ 5.29 03/02/07 64,990,575
30,000 Australia and New Zealand Banking Group,
Ltd.*................................. 5.32 06/18/07 29,526,758
30,000 Calyon North America, Inc. ............. 5.31 03/14/07 29,943,450
399,726 DEPFA Bank plc*......................... 5.31 - 5.32 04/16/07 - 06/21/07 394,719,749
25,000 Dexia Delaware LLC ..................... 5.34 08/09/07 24,418,611
226,900 HBOS Treasury Services plc.............. 5.31 - 5.33 04/24/07 - 07/06/07 224,405,718
289,750 IXIS Commercial Paper Corp.*............ 5.31 - 5.32 04/04/07 - 05/24/07 286,665,824
200,000 Nordea North America, Inc. ............. 5.29 03/22/07 - 03/23/07 199,378,292
118,000 Rabobank USA Financial Corp. ........... 5.30 03/01/07 118,000,000
150,000 Sanpaolo IMI U.S. Financial Co. ........ 5.33 03/01/07 150,000,000
246,315 Societe Generale N.A., Inc. ............ 5.32 - 5.33 03/29/07 - 06/20/07 243,550,929
150,000 Svenska Handelsbanken Inc. ............. 5.32 03/08/07 149,847,458
---------------
1,915,447,364
---------------
Total Commercial Paper (Cost $8,802,223,442)............................... 8,802,223,442
---------------
</Table>

See Notes to Financial Statements
7

Morgan Stanley Liquid Asset Fund Inc.
PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued

Floating Rate Notes (14.6%)
Asset-Backed - Structured Investment Vehicles (7.8%)
$345,000 Cullinan Finance Corp.*................. 5.32+% 03/01/07++ $ 344,969,202
585,000 Links Finance LLC*...................... 5.32 - 5.33+ 03/28/07 - 05/15/07++ 584,951,058
---------------
929,920,260
---------------
Banking (1.2%)
62,400 Wachovia Corp. ......................... 5.43+ 05/08/07++ 62,446,336
82,035 Wells Fargo & Co. ...................... 5.42+ 03/28/07++ 82,079,806
---------------
144,526,142
---------------
Domestic Banks (2.2%)
100,000 American Express Centurion Bank......... 5.32+ 03/19/07++ 100,013,891
136,445 U.S. Bank, N.A., Cincinnati............. 5.38 - 5.39+ 03/12/07 - 04/02/07++ 136,500,852
30,000 Wachovia Bank, N.A...................... 5.36+ 03/01/07++ 30,006,558
---------------
266,521,301
---------------
Financial Conglomerates (0.7%)
81,680 General Electric Capital Corp. ......... 5.41+ 04/15/07++ 81,742,583
---------------
International Banks (1.4%)
75,000 Credit Suisse - NY...................... 5.33+ 05/29/07++ 75,000,000
33,085 HSBC Bank USA N.A....................... 5.44+ 03/21/07++ 33,105,875
55,000 Westpac Banking Corp. .................. 5.32+ 04/30/07++ 54,997,017
---------------
163,102,892
---------------
Investment Banks/Brokers (1.3%)
75,000 Bear Stearns & Companies Inc., (The).... 5.38+ 03/01/07++ 75,000,000
90,000 Goldman Sachs Group, Inc. (The) ........ 5.47 - 5.49+ 03/01/07 - 04/05/07++ 90,079,339
---------------
165,079,339
---------------
Total Floating Rate Notes (Cost $1,750,892,517)............................ 1,750,892,517
---------------
Certificates of Deposit (11.4%)
Domestic Banks (0.9%)
100,000 Washington Mutual Bank, F.A............. 5.34 03/21/07 100,000,000
---------------
International Banks (10.5%)
50,000 Bank of Ireland - NY.................... 5.35 08/09/07 49,998,219
200,000 Barclays Bank plc....................... 5.32 04/10/07 - 07/09/07 200,000,000
100,000 BNP Paribas............................. 5.34 07/23/07 100,000,000
175,000 DEPFA Bank plc.......................... 5.32 - 5.35 05/31/07 - 08/16/07 175,000,000
50,000 Deutsche Bank AG........................ 5.35 08/07/07 50,000,000
32,950 Fortis Bank - NY........................ 5.32 06/21/07 32,949,604
</Table>

See Notes to Financial Statements
8

Morgan Stanley Liquid Asset Fund Inc.
PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued

$ 50,000 NATIXIS................................. 5.32% 08/17/07 $ 50,003,734
572,000 Norinchukin Bank........................ 5.28 - 5.35 03/06/07 - 07/10/07 571,999,167
30,252 Westpac Banking Corp. .................. 5.31 07/31/07 30,246,833
---------------
1,260,197,557
---------------
Total Certificates of Deposit (Cost $1,360,197,557)........................ 1,360,197,557
---------------
Repurchase Agreement (1.3%)
155,000 Barclays Capital Inc. (dated 02/28/07;
proceeds $155,022,949) (a) (Cost
$155,000,000)......................... 5.33 03/01/07 155,000,000
---------------
</Table>

<Table>

Total Investments (Cost $12,068,313,516) (b).................... 100.9% 12,068,313,516

Liabilities in Excess of Other Assets........................... (0.9) (103,244,281)
----- ---------------
Net Assets...................................................... 100.0% $11,965,069,235
===== ===============
</Table>

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

<Table>

* Resale is restricted to qualified institutional investors.
+ Rate shown is the rate in effect at February 28, 2007.
++ Date of next interest rate reset.
(a) Collateralized by Federal National Mortgage Assoc.
5.00% - 6.00% due 07/01/33 - 10/01/36 valued at $155,728,723
and Freddie Mac 6.00% due 07/01/36 valued at $2,371,278.
(b) Cost is the same for federal income tax purposes.
</Table>

See Notes to Financial Statements
9

Morgan Stanley Liquid Asset Fund Inc.
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
February 28, 2007 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $12,068,313,516).................................... $12,068,313,516
Receivable for:
Interest................................................ 22,797,114
Capital stock sold...................................... 1,112,441
Prepaid expenses and other assets........................... 168,354
---------------
Total Assets............................................ 12,092,391,425
---------------
Liabilities:
Payable for:
Capital stock redeemed.................................. 120,480,121
Investment advisory fee................................. 2,108,650
Transfer agent fee...................................... 1,027,376
Distribution fee........................................ 941,654
Administration fee...................................... 470,827
Payable to bank............................................. 1,306,323
Accrued expenses and other payables......................... 987,239
---------------
Total Liabilities....................................... 127,322,190
---------------
Net Assets.............................................. $11,965,069,235
===============
Composition of Net Assets:
Paid-in-capital............................................. $11,964,382,532
Accumulated undistributed net investment income............. 686,703
---------------
Net Assets.............................................. $11,965,069,235
===============
Net Asset Value Per Share
11,965,049,294 shares outstanding (50,000,000,000 shares
authorized of $.01 par value)............................... $1.00
===============
</Table>

See Notes to Financial Statements
10

Morgan Stanley Liquid Asset Fund Inc.
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended February 28, 2007 (unaudited)

<Table>

Net Investment Income:
Interest Income............................................. $381,751,944
------------
Expenses
Transfer agent fees and expenses............................ 16,552,939
Investment advisory fee..................................... 15,586,991
Distribution fee............................................ 7,055,320
Shareholder reports and notices............................. 6,833,141
Administration fee.......................................... 3,533,079
Custodian fees.............................................. 198,934
Directors' fees and expenses................................ 113,265
Registration fees........................................... 100,836
Professional fees........................................... 51,778
Other....................................................... 519,140
------------
Total Expenses.......................................... 50,545,423

Less: expense offset........................................ (65,117)
------------
Net Expenses............................................ 50,480,306
------------
Net Investment Income....................................... $331,271,638
============
</Table>

See Notes to Financial Statements
11

Morgan Stanley Liquid Asset Fund Inc.
FINANCIAL STATEMENTS continued

Statements of Changes in Net Assets

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 2007 AUGUST 31, 2006
----------------- ---------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 331,271,638 $ 689,940,978
Dividends to shareholders from net investment income........ (331,264,956) (689,943,341)
Net decrease from capital stock transactions................ (4,920,855,983) (1,185,752,868)
--------------- ---------------
Net Decrease............................................ (4,920,849,301) (1,185,755,231)
Net Assets:
Beginning of period......................................... 16,885,918,536 18,071,673,767
--------------- ---------------
End of Period
(Including accumulated undistributed net investment income
of $686,703 and $680,021, respectively)..................... $11,965,069,235 $16,885,918,536
=============== ===============
</Table>

See Notes to Financial Statements
12

Morgan Stanley Liquid Asset Fund Inc.
NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2007 (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 under the
Act.

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

C. 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, 2007 (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 the 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, 2007, 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, 2007, aggregated $38,046,713,802 and
$43,404,960,164, 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, 2007 (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, 2007, included in Directors' fees and expenses in the
Statement of Operations amounted to $1,227. At February 28, 2007, the Fund had
an accrued pension liability of $62,401 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 or she 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, 2007 AUGUST 31, 2006
----------------- ---------------
(unaudited)

Shares sold................................................. 12,403,145,898 50,899,093,960
Shares issued in reinvestment of dividends.................. 330,687,776 688,878,298
--------------- ---------------
12,733,833,674 51,587,972,258
Shares redeemed............................................. (17,654,694,069) (52,773,725,126)
--------------- ---------------
Net decrease................................................ (4,920,860,395) (1,185,752,868)
=============== ===============
</Table>

6. Expense Offset

The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent.

7. Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years

Morgan Stanley Liquid Asset Fund Inc.
NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued

beginning after December 15, 2006 and is to be applied to all open tax years as
of the effective date. The impact to the Fund's financial statements, if any is
currently being assessed.

In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.

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, 2007 2006 2005 2004 2003 2002
----------------- -------- -------- -------- -------- --------
(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........ 0.023 0.040 0.020 0.006 0.009 0.018

Less dividends from net investment income.... (0.023) (0.040) (0.020)+ (0.006)+ (0.009) (0.018)+
------ ------ ------ ------ ------ ------

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

Total Return................................. 2.35%(2) 4.10% 2.03% 0.58% 0.86% 1.78%

Ratios to Average Net Assets:
Total expenses (before expense offset)....... 0.72%(1)(3) 0.60% 0.59% 0.58% 0.56% 0.56%

Net investment income........................ 4.69%(3) 3.99% 1.98% 0.57% 0.85% 1.76%

Supplemental Data:
Net assets, end of period, in millions....... $11,965 $16,886 $18,072 $20,475 $23,081 $23,931
</Table>

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

<Table>

+ Includes capital gain distribution of less than $0.001.
(1) Does not reflect the effect of expense offset of 0.01%.
(2) Not annualized.
(3) Annualized.
</Table>

See Notes to Financial Statements
17

Morgan Stanley Liquid Asset Fund Inc.
RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED)

On August 1, 2006, a Special Meeting of Shareholders of the Fund was scheduled
in order to vote on the proposals set forth below. The proposals failed to
achieve the quorum necessary in order to hold the meeting, and therefore, the
meeting was adjourned several times, most recently to November 30, 2006 to
permit further solicitation of proxies. The meeting was held on November 30,
2006 and the voting results with respect to these proposals were as follows:

(1) Election of Directors:

<Table>
<Caption>
FOR WITHHELD ABSTAIN BNV*
-----------------------------------------------------------

Frank L. Bowman................................... 7,629,415,695 416,380,484 16,016,628 0
Kathleen A. Dennis................................ 7,626,467,434 419,328,745 16,016,628 0
James F. Higgins.................................. 7,625,474,397 420,321,782 16,016,628 0
Joseph J. Kearns.................................. 7,627,618,009 418,178,170 16,016,628 0
Michael F. Klein.................................. 7,627,032,049 418,764,130 16,016,628 0
W. Allen Reed..................................... 7,620,510,916 425,285,263 16,016,628 0
Fergus Reid....................................... 7,614,179,402 431,616,777 16,016,628 0
</Table>

The following Directors were not standing for reelection at this meeting:
Michael Bozic, Dr. Manuel H. Johnson and Michael E. Nugent.

(2) Elimination of certain fundamental investment restrictions:

<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
------------------------------------------------------------------

Elimination of the fundamental policy
restricting purchases of securities on
margin................................... 7,253,418,327 492,654,091 303,254,798 12,485,591
Elimination of the fundamental policy
prohibiting investments in oil, gas, and
other types of minerals or mineral
leases................................... 7,282,470,872 458,722,456 308,133,888 12,485,591
Elimination of the fundamental policy
regarding investments in warrants........ 7,304,786,911 455,904,309 288,635,996 12,485,591
Elimination of the fundamental policy
prohibiting or restricting the purchase
of securities of issuers in which
Directors or Officers have an interest... 7,295,449,509 472,490,159 281,387,548 12,485,591
Elimination of the fundamental policy
prohibiting investments for purposes of
exercising control....................... 7,325,536,479 441,727,046 282,063,691 12,485,591
Elimination of the fundamental policy
prohibiting the purchase of common stocks
and other instrument..................... 7,352,395,850 417,389,042 279,542,324 12,485,591
Elimination of the fundamental policy
regarding investments in unseasoned
companies................................ 7,280,307,855 479,028,850 289,990,511 12,485,591
Elimination of the fundamental policy
prohibiting participation in joint
securities accounts...................... 7,333,097,915 425,624,359 290,604,942 12,485,591
</Table>

Morgan Stanley Liquid Asset Fund Inc.
RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED) continued

(3) Modify certain fundamental investment restrictions:

<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
------------------------------------------------------------------

Modify fundamental policy regarding
diversification.......................... 7,342,911,794 422,391,115 284,024,307 12,485,591
Modify fundamental policy regarding
borrowing money.......................... 7,287,428,752 483,013,231 278,885,233 12,485,591
Modify fundamental policy regarding
loans.................................... 7,300,004,927 468,322,042 281,000,247 12,485,591
Modify fundamental policy regarding
investment in commodities, commodity
contracts and futures contracts.......... 7,290,233,136 474,859,316 284,234,764 12,485,591
Modify fundamental policy regarding
issuance of senior securities............ 7,321,495,160 443,764,690 284,067,366 12,485,591
</Table>

(4) Reclassify certain fundamental policies as non-fundamental policies:

<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
------------------------------------------------------------------

Reclassification as non-fundamental the
fundamental policy regarding the short
sale of securities....................... 7,285,454,618 474,600,153 289,272,445 12,485,591
Reclassification as non-fundamental the
fundamental policy prohibiting
investments in other investment
companies................................ 7,311,164,387 453,428,493 284,734,336 12,485,591
Reclassification as non-fundamental the
fundamental policy prohibiting or
limiting investments in illiquid or
restricted securities.................... 7,285,814,435 474,111,458 289,401,323 12,485,591
Reclassification as non-fundamental the
fundamental policy on the purchase or
sale of puts, calls, and combinations
thereof.................................. 7,286,732,673 471,661,841 290,932,702 12,485,591
</Table>

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

<Table>

* Broker "non-votes" are shares held in street name for which
the broker indicates that instructions have not been
received from the beneficial owners or other persons
entitled to vote and for which the broker does not have
discretionary voting authority.
</Table>

DIRECTORS

Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid

OFFICERS

Michael E. Nugent
Chairperson of the Board

Ronald E. Robison
President and Principal Executive Officer

J. David Germany
Vice President

Dennis F. Shea
Vice President

Barry Fink
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

Stefanie V. Chang Yu
Vice President

Francis J. Smith
Treasurer and Chief Financial Officer

Mary E. Mullin
Secretary

TRANSFER AGENT

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

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

LEGAL COUNSEL

Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019

COUNSEL TO THE INDEPENDENT DIRECTORS

Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036

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.

Morgan Stanley Distributors Inc., member NASD

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Liquid Asset Fund

Semiannual Report
February 28, 2007

[MORGAN STANLEY LOGO]

ILASAR-IU07-00467P-T02/07

Item 2. Code of Ethics.