<Page>
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, 2003
Date of reporting period: August 31, 2003
Item 1 - Report to Shareholders
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WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY LIQUID
ASSET FUND PERFORMED DURING THE ANNUAL 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 THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET
VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF
THE FUND SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN
LOSE MONEY INVESTING IN THIS FUND.
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Fund Report
For the year ended August 31, 2003
MARKET CONDITIONS
During the 12 months ended August 31, 2003, favorable economic trends began to
appear, especially during the past three months. However, the accommodative
monetary policy, stimulative fiscal policy, growth in productivity and gains in
the stock market have yet not produced meaningful gains in employment or a sharp
improvement in capital investment. Furthermore, geopolitical concerns and
instability continue to contribute to caution within the business community. The
manufacturing sector remains sluggish and, for most months so far in 2003,
non-farm payrolls have declined.
The Federal Reserve Open Market Committee (FOMC) maintained an accommodative
posture in an attempt to encourage a faster pace of economic activity. After
holding its target rate for federal funds at 1.25 percent for seven months, the
FOMC lowered its target to 1.00 percent, a 45-year low, on June 25, 2003. At
that meeting, the Fed repeated its formal economic assessment announced at the
previous month's meeting, which indicated that while the outlook for economic
growth was balanced, there remained a risk of a substantial further fall in
inflation. Against this backdrop, money market fund yield levels fell to record
lows.
PERFORMANCE ANALYSIS
As of August 31, 2003, Morgan Stanley Liquid Asset Fund had net assets of
approximately $23.1 billion. For the seven-day period ended August 31, 2003, the
Fund provided an effective annualized yield of 0.50 percent and a current
annualized yield of 0.50 percent, while its 30-day average annualized yield was
0.51 percent. For the 12-month period ended August 31, 2003, the Fund provided a
total return of 0.86 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS.
As of the end of August, the Fund's weighted average maturity was 57 days, and
87 percent of its holdings were due to mature within four months. Throughout the
past year, we continued our longstanding policy of purchasing only high quality,
very liquid money market securities. The Fund continued to serve as a useful
investment for liquidity and preservation of capital while generating a yield
reflecting prevailing money market conditions.
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH MONEY
MARKET FUNDS SEEK TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE,
IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THIS FUND.
2
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PORTFOLIO COMPOSITION
<Table>
Commercial Paper 46.3%
U.S. Government & Agency Obligations 32.0
U.S. Treasury Bills 13.5
Certificates of Deposit 5.8
Bank Notes 3.4
</Table>
MATURITY SCHEDULE
<Table>
1 - 30 Days 38.7%
31 - 60 Days 25.4
61 - 90 Days 15.0
91 - 120 Days 8.6
121+ Days 13.3
</Table>
SUBJECT TO CHANGE DAILY. ALL PERCENTAGES ARE AS A PERCENTAGE OF NET ASSETS.
PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED AS A
RECOMMENDATION TO BUY 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
1. THE FUND SEEKS TO PROVIDE HIGH CURRENT INCOME WHILE STRIVING TO PRESERVE
PRINCIPAL AND LIQUIDITY, BY INVESTING IN HIGH-QUALITY, SHORT-TERM DEBT
OBLIGATIONS. THE FUND'S PORTFOLIO DOES NOT CONTAIN ANY DERIVATIVE
SECURITIES.
2. THE PORTFOLIO MAY INCLUDE DEBT OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT, DEBT OBLIGATIONS OF U.S.-REGULATED BANKS AND SAVINGS AND LOAN
ASSOCIATIONS (INCLUDING CERTIFICATES OF DEPOSIT), HIGH-GRADE COMMERCIAL
PAPER, CERTIFICATES OF DEPOSIT OF BANKS AND SAVINGS INSTITUTIONS,
HIGH-GRADE CORPORATE OBLIGATIONS AND REPURCHASE AGREEMENTS.
ANNUAL 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 AND 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 AM TO 8:00 PM, ET.
ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN
SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
3
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MORGAN STANLEY LIQUID ASSET FUND INC.
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (46.3%)
BANKING (5.7%)
$ 100,000 Bank One Corp. 1.05 % 09/16/03 $ 99,950,417
750,000 Citicorp 1.02 - 1.06 09/04/03 - 10/30/03 749,550,167
220,000 J.P. Morgan Chase & Co. 1.04 09/08/03 219,942,800
250,000 Wells Fargo & Co. 1.07 09/29/03 249,777,083
----------------
1,319,220,467
----------------
CHEMICALS: MAJOR DIVERSIFIED (0.4%)
100,000 DuPont (E.I.) de Nemours & Co. 1.05 11/17/03 99,769,583
----------------
FINANCE - AUTOMOTIVE (0.4%)
100,000 Toyota Motor Credit Corp. 1.06 10/02/03 99,902,833
----------------
FINANCE - CONSUMER (2.2%)
495,000 New Center Asset Trust 1.02 - 1.04 09/05/03 - 10/09/03 494,676,989
----------------
FINANCE - CORPORATE (0.5%)
100,000 CIESCO, LLC 1.05 09/26/03 99,921,250
----------------
FINANCIAL CONGLOMERATES (9.5%)
1,120,000 General Electric Capital Corp. 1.03 - 1.09 09/22/03 - 12/22/03 1,117,716,278
1,080,000 Mortgage Interest Networking Trust 1.02 - 1.07 09/16/03 - 10/27/03 1,078,910,724
----------------
2,196,627,002
----------------
INTERNATIONAL BANKS (25.9%)
250,000 ANZ (DE) Inc. 1.05 - 1.06 10/14/03 - 11/07/03 249,564,625
90,000 BNP Paribas Finance Inc. 1.03 09/02/03 89,992,275
780,000 Barclays U.S. Funding Corp. 1.02 - 1.04 09/10/03 - 10/15/03 779,354,078
200,000 CBA (Delaware) Finance Inc. 1.06 11/06/03 199,599,555
325,000 Canadian Imperial Holdings Inc. 1.03 - 1.05 09/09/03 - 10/10/03 324,720,521
700,000 Deutsche Bank Financial LLC 1.02 09/15/03 - 09/19/03 699,630,250
840,000 ING (U.S.) Funding LLC 1.02 - 1.06 10/09/03 - 11/19/03 838,456,450
1,100,000 Royal Bank of Scotland PLC 1.02 - 1.06 09/26/03 - 10/29/03 1,098,540,166
1,100,000 Societe Generale N.A. Inc. 1.04 09/02/03 - 10/06/03 1,099,475,667
600,000 UBS Finance (Delaware) LLC 1.03 09/12/03 - 09/15/03 599,760,111
----------------
5,979,093,698
----------------
INVESTMENT BANKS/BROKERS (1.7%)
395,000 Goldman Sachs Group, Inc. (The) 1.03 10/20/03 - 10/24/03 394,389,868
----------------
TOTAL COMMERCIAL PAPER
(COST $10,683,601,690) 10,683,601,690
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
4
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<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (45.4%)
$ 2,570,000 Federal Home Loan Banks 0.88 - 1.05% 09/10/03 - 01/21/04 $ 2,565,854,342
3,143,000 Federal National Mortgage Assoc. 0.95 - 1.18 09/17/03 - 04/30/04 3,136,343,470
1,690,000 Freddie Mac 1.15 - 1.24 09/04/03 - 02/17/04 1,685,409,978
3,100,000 U.S. Treasury Bills 0.82 - 1.17 09/11/03 - 02/26/04 3,091,350,930
----------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS
(COST $10,478,958,720) 10,478,958,720
----------------
CERTIFICATES OF DEPOSIT (5.8%)
300,000 Branch Banking & Trust Co., N.C. 1.04 10/07/03 300,000,000
200,000 State Street Bank & Trust Co. 1.05 09/03/03 200,000,000
850,000 Wells Fargo Bank, N.A. 1.04 - 1.06 10/01/03 - 11/21/03 850,000,000
----------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $1,350,000,000) 1,350,000,000
----------------
SHORT-TERM BANK NOTES (3.4%)
200,000 LaSalle Bank, N.A. 1.03 09/08/03 200,000,000
595,000 Standard Federal Bank, N.A. 1.03 - 1.07 09/09/03 - 09/29/03 595,000,000
----------------
TOTAL SHORT-TERM BANK NOTES
(COST $795,000,000) 795,000,000
----------------
REPURCHASE AGREEMENT (0.1%)
10,799 The Bank of New York
(dated 08/29/03; proceeds
$10,800,756) (a)
(COST $10,799,706) 0.875 09/02/03 10,799,706
----------------
TOTAL INVESTMENTS
(COST $23,318,360,116) (b) 101.0% 23,318,360,116
LIABILITIES IN EXCESS OF OTHER ASSETS (1.0) (237,407,554)
----- ----------------
NET ASSETS 100.0% $ 23,080,952,562
===== ================
</Table>
- ----------
(a) COLLATERALIZED BY U.S. TREASURY BOND 6.125% DUE 08/15/29 VALUED AT
$11,015,757.
(b) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
SEE NOTES TO FINANCIAL STATEMENTS
5
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MORGAN STANLEY LIQUID ASSET FUND INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2003
<Table>
ASSETS:
Investments in securities, at value (cost $23,318,360,116) $ 23,318,360,116
Cash 90,001
Receivable for:
Interest 1,468,653
Capital stock sold 857,105
Prepaid expenses and other assets 286,448
------------------
TOTAL ASSETS 23,321,062,323
------------------
LIABILITIES:
Payable for:
Capital stock redeemed 233,129,809
Investment management fee 4,848,565
Distribution fee 1,850,546
Accrued expenses and other payables 280,841
------------------
TOTAL LIABILITIES 240,109,761
------------------
NET ASSETS $ 23,080,952,562
==================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 23,080,252,006
Accumulated undistributed net investment income 700,556
------------------
NET ASSETS $ 23,080,952,562
==================
Net Asset Value Per Share,
23,080,923,117 shares outstanding
(50,000,000,000 SHARES AUTHORIZED OF $.01 PAR VALUE) $ 1.00
==================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
6
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2003
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 332,250,701
------------------
EXPENSES
Investment management fee 61,813,600
Transfer agent fees and expenses 45,498,053
Distribution fee 22,936,254
Shareholder reports and notices 684,538
Custodian fees 461,062
Registration fees 304,455
Insurance 288,221
Professional fees 54,585
Directors' fees and expenses 46,146
Other 83,183
------------------
TOTAL EXPENSES 132,170,097
------------------
NET INVESTMENT INCOME $ 200,080,604
==================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2003 AUGUST 31, 2002
-------------------- --------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 200,080,604 $ 414,504,458
Net realized gain -- 97,747
-------------------- --------------------
NET INCREASE 200,080,604 414,602,205
-------------------- --------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (200,068,427) (414,506,401)
Net realized gain -- 97,747
-------------------- --------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (200,068,427) (414,604,148)
-------------------- --------------------
Net increase (decrease) from capital stock transactions (849,967,415) 744,137,984
-------------------- --------------------
NET INCREASE (DECREASE) (849,955,238) 744,136,041
NET ASSETS:
Beginning of period 23,930,907,800 23,186,771,759
-------------------- --------------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME OF $700,556 AND $688,462, RESPECTIVELY) $ 23,080,952,562 $ 23,930,907,800
==================== ====================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
MORGAN STANLEY LIQUID ASSET FUND INC.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003
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.
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 MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of the daily net assets not exceeding $500
million; 0.425% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of the daily net assets
exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of the
daily net assets exceeding $1 billion but not exceeding $1.35 billion; 0.325% to
the portion of the daily net assets exceeding $1.35 billion but not exceeding
$1.75 billion;
9
<Page>
0.30% to the portion of the daily net assets exceeding $1.75 billion but not
exceeding $2.15 billion; 0.275% to the portion of the daily net assets exceeding
$2.15 billion but not exceeding $2.5 billion; 0.25% to the portion of the daily
net assets exceeding $2.5 billion but not exceeding $15 billion; 0.249% to the
portion of the daily net assets exceeding $15 billion but not exceeding $17.5
billion; 0.248% to the portion of the daily net assets exceeding $17.5 billion
but not exceeding $25 billion; 0.247% to the portion of daily net assets in
excess of $25 billion but not exceeding $30 billion; and 0.246% to the portion
of the daily net assets exceeding $30 billion.
3. PLAN OF DISTRIBUTION
Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, is the distributor of the Fund's shares and in accordance
with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act,
finances certain expenses in connection 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 year ended August 31, 2003, the distribution fee
was accrued at the annual rate of 0.10%.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFLILIATES
The cost of purchases and proceeds from sales/maturities of portfolio securities
for the year ended August 31, 2003, aggregated $133,556,665,986 and
$134,666,868,762, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At August 31, 2003, the Fund had transfer agent fees
and expenses payable of approximately $37,800.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended August 31, 2003 included
in Directors' fees and expenses in the Statement of Operations amounted to
$7,312. At August 31, 2003, the Fund had an accrued pension liability of
$60,001, which is included in accrued expenses in the Statement of Assets and
Liabilities.
10
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5. CAPITAL STOCK
Transactions in capital stock, at $1.00 per share, were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2003 AUGUST 31, 2002
----------------- -----------------
Shares sold 55,318,997,385 58,498,672,250
Shares issued in reinvestment of dividends and distributions 199,710,575 413,734,875
----------------- -----------------
55,518,707,960 58,912,407,125
Shares redeemed (56,368,675,375) (58,168,269,141)
----------------- -----------------
Net increase (decrease) (849,967,415) 744,137,984
================= =================
</Table>
11
<Page>
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 YEAR ENDED AUGUST 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net income from investment operations 0.009 0.018 0.051 0.055 0.046
Less dividends from net investment income (0.009) (0.018)+ (0.051)+ (0.055) (0.046)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
TOTAL RETURN 0.86% 1.78% 5.24% 5.69% 4.74%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.56% 0.56% 0.57% 0.58% 0.59%
Net investment income 0.85% 1.76% 5.04% 5.51% 4.61%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 23,081 $ 23,931 $ 23,187 $ 19,628 $ 17,875
</Table>
- ----------
+ INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001.
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
MORGAN STANLEY LIQUID ASSET FUND INC.
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
MORGAN STANLEY LIQUID ASSET FUND INC.:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Liquid Asset Fund Inc. (the "Fund"), including the portfolio of
investments, as of August 31, 2003, and the related statements of operations for
the year then ended and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 2003, by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Liquid Asset Fund Inc. as of August 31, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
OCTOBER 15, 2003
2003 FEDERAL TAX NOTICE (UNAUDITED)
OF THE FUND'S ORDINARY INCOME DIVIDENDS PAID DURING THE
FISCAL YEAR ENDED AUGUST 31, 2003, 15.42% WAS ATTRIBUTABLE
TO QUALIFYING FEDERAL OBLIGATIONS. PLEASE CONSULT YOUR TAX
ADVISOR TO DETERMINE IF ANY PORTION OF THE DIVIDENDS YOU
RECEIVED IS EXEMPT FROM STATE INCOME TAX.
13
<Page>
MORGAN STANLEY LIQUID ASSET FUND INC.
DIRECTOR AND OFFICER INFORMATION
INDEPENDENT DIRECTORS:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- ------------------------ ----------- ------------ --------------------------------------------- -------------- ---------------------
Michael Bozic (62) Director Since Retired; Director or Trustee of the Retail 216 Director of Weirton
c/o Mayer, Brown, April 1994 Funds and TCW/DW Term Trust 2003 (since Steel Corporation.
Rowe & Maw LLP April 1994) and the Institutional Funds
Counsel to the (since July 2003); formerly Vice Chairman of
Independent Directors Kmart Corporation (December 1998-October
1675 Broadway 2000), Chairman and Chief Executive Officer
New York, NY 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.
Edwin J. Garn (70) Director Since Director or Trustee of the Retail Funds and 216 Director of Franklin
c/o Summit Ventures LLC January 1993 TCW/DW Term Trust 2003 (since January 1993) Covey (time
1 Utah Center and the Institutional Funds (since July management systems),
201 S. Main Street 2003); member of the Utah Regional Advisory BMW Bank of North
Salt Lake City, UT Board of Pacific Corp.; formerly United America, Inc.
States Senator (R-Utah) (1974-1992) and (industrial loan
Chairman, Senate Banking Committee corporation), United
(1980-1986), Mayor of Salt Lake City, Utah Space Alliance (joint
(1971-1974), Astronaut, Space Shuttle venture between
Discovery (April 12-19, 1985), and Vice Lockheed Martin and
Chairman, Huntsman Corporation (chemical the Boeing Company)
company). and Nuskin Asia
Pacific (multilevel
marketing); member of
the board of various
civic and charitable
organizations.
Wayne E. Hedien (69) Director Since Retired; Director or Trustee of the Retail 216 Director of The PMI
c/o Mayer, Brown, September Funds and TCW/DW Term Trust 2003; (Since Group Inc. (private
Rowe & Maw LLP 1997 September 1997) and the Institutional Funds mortgage insurance);
Counsel to the (since July 2003); formerly associated with Trustee and Vice
Independent Directors the Allstate Companies (1966-1994), most Chairman of The Field
1675 Broadway recently as Chairman of The Allstate Museum of Natural
New York, NY Corporation (March 1993-December 1994) and History; director of
Chairman and Chief Executive Officer of its various other
wholly-owned subsidiary, Allstate Insurance business and
Company (July 1989-December 1994). charitable
organizations.
</Table>
14
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- ------------------------ ----------- ------------ --------------------------------------------- -------------- ---------------------
Dr. Manuel H. Johnson Director Since Chairman of the Audit Committee and Director 216 Director of NVR, Inc.
(54) July 1991 or Trustee of the Retail Funds and TCW/DW (home construction);
c/o Johnson Smick Term Trust 2003 (since July 1991) and the Chairman and Trustee
International, Inc. Institutional Funds (since July 2003); Senior of the Financial
2099 Pennsylvania Partner, Johnson Smick International, Inc., Accounting Foundation
Avenue, N.W. a consulting firm; Co-Chairman and a founder (oversight
Suite 950 of the Group of Seven Council (G7C), an organization of the
Washington, D.C. international economic commission; formerly Financial Accounting
Vice Chairman of the Board of Governors of Standards Board);
the Federal Reserve System and Assistant Accounting Standards
Secretary of the U.S. Treasury. Board); Director of
RBS Greenwich Capital
Holdings (financial
holding company).
Joseph J. Kearns (61) Director Since Deputy Chairman of the Audit Committee and 217 Director of Electro
PMB754 July 2003 Director or Trustee of the Retail Funds and Rent Corporation
23852 Pacific Coast TCW/DW Term Trust 2003 (since July 2003) and (equipment leasing),
Highway the Institutional Funds (since August 1994); The Ford Family
Malibu, CA previously Chairman of the Audit Committee Foundation, and the
of the Institutional Funds UCLA Foundation.
(October 2001-July 2003); President, Kearns &
Associates LLC (investment consulting);
formerly CFO of the J. Paul Getty Trust.
Michael E. Nugent (67) Director Since Chairman of the Insurance Committee and 216 Director of various
c/o Triumph July 1991 Director or Trustee of the Retail Funds and business
Capital, L.P. TCW/DW Term Trust 2003 (since July 1991) and organizations.
445 Park Avenue the Institutional Funds (since July 2001);
New York, NY General Partner of Triumph Capital, L.P., a
private investment partnership; formerly
Vice President, Bankers Trust Company and BT
Capital Corporation (1984-1988).
Fergus Reid (71) Director Since Chairman of the Governance Committee and 217 Trustee and Director
85 Charles Colman Blvd. July 2003 Director or Trustee of the Retail Funds and of certain investment
Pawling, NY TCW/DW Term Trust 2003 (since July 2003) and companies in the
the Institutional Funds (since June 1992); JPMorgan Funds
Chairman of Lumelite Plastics Corporation. complex managed by
JP Morgan Investment
Management Inc.
</Table>
15
<Page>
INTERESTED DIRECTORS:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF OVERSEEN OTHER DIRECTORSHIPS
INTERESTED DIRECTOR REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- ------------------------ ----------- ------------ --------------------------------------------- -------------- ---------------------
Charles A. Fiumefreddo Chairman of Since Chairman and Director or Trustee of the 216 None
(70) the Board July 1991 Retail Funds and TCW/DW Term Trust 2003
c/o Morgan Stanley Trust and (since July 1991) and the Institutional Funds
Harborside Financial Director (since July 2003); formerly Chief Executive
Center, Officer of the Retail Funds and the TCW/DW
Plaza Two, Term Trust 2003 (until September 2002).
Jersey City, NJ
James F. Higgins (55) Director Since Director or Trustee of the Retail Funds and 216 Director of AXA
c/o Morgan Stanley Trust June 2000 TCW/DW Term Trust 2003 (since June 2000) and Financial, Inc. and
Harborside Financial the Institutional Funds (since July 2003); The Equitable Life
Center, Senior Advisor of Morgan Stanley (since Assurance Society of
Plaza Two, August 2000); Director of the Distributor and the United States
Jersey City, NJ Dean Witter Realty Inc.; previously (financial services).
President and Chief Operating Officer of the
Private Client Group of Morgan Stanley
(May 1999-August 2000), and President and
Chief Operating Officer of Individual
Securities of Morgan Stanley (February
1997-May 1999).
Philip J. Purcell (59) Director Since Director or Trustee of the Retail Funds and 216 Director of American
1585 Broadway April 1994 TCW/DW Term Trust 2003 (since April 1994) and Airlines, Inc. and
New York, NY the Institutional Funds (since July 2003); its parent company,
Chairman of the Board of Directors and Chief AMR Corporation.
Executive Officer of Morgan Stanley and
Morgan Stanley DW Inc.; Director of the
Distributor; Chairman of the Board of
Directors and Chief Executive Officer of
Novus Credit Services Inc.; Director and/or
officer of various Morgan Stanley
subsidiaries.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE DIRECTOR BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY INVESTMENTS LP AND
MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST
DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS
AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT
INC. AND MORGAN STANLEY INVESTMENTS LP).
16
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------ ----------------- ------------- ------------------------------------------------------------------
Mitchell M. Merin (50) President Since President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas May 1999 Investment Management Inc.; President, Director and Chief
New York, NY Executive Officer of the Investment Manager and Morgan Stanley
Services; Chairman, Chief Executive Officer and Director of the
Distributor; Chairman and Director of the Transfer Agent;
Director of various Morgan Stanley subsidiaries; President Morgan
Stanley Investments LP (since February 2003); President of the
Institutional Funds (since July 2003) and President of the Retail
Funds and TCW/DW Term Trust 2003 (since May 1999); Trustee (since
July 2003) and President (since December 2002) of the Van Kampen
Closed-End Funds; Trustee (since May 1999) and President (since
October 2002) of the Van Kampen Open-End Funds.
Ronald E. Robison (64) Executive Vice Since Chief Global Operations Officer and Managing Director of Morgan
1221 Avenue of the Americas President and April 2003 Stanley Investment Management Inc.; Managing DIrector of Morgan
New York, NY Principal Stanley & Co. Incorporated; Managing DIrector of Morgan Stanley;
Executive Officer Managing Director, Chief Administrative Officer and Director of
the Investment Manager and Morgan Stanley Services; Chief
Executive Officer and Director of the Transfer Agent; Executive
Vice President and Principal Executive Officer of the
Institutional Funds (since July 2003); and the TCW/DW Term Trust
2003 (since April 2003); previously President of the Institutional
Funds (March 2001-July 2003) and Director of the Institutional
Funds (March 2001-July 2003).
Barry Fink (48) Vice President Since General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas and General February 1997 December 2000) of Morgan Stanley Investment Management; Managing
New York, NY Counsel Director (since December 2000), Secretary (since February 1997)
and Director (since July 1998) of the Investment Manager and
Morgan Stanley Services; Assistant Secretary of Morgan Stanley DW;
Chief Legal Officer of Morgan Stanley Investments LP (since July
2002); Vice President of the Institutional Funds (since July
2003); Vice President and Secretary of the Distributor; previously
Secretary of the Retail Funds (February 1997-July 2003);
previously Vice President and Assistant General Counsel of the
Investment Manager and Morgan Stanley Services (February
1997-December 2001).
Joseph J. McAlinden (60) Vice President Since Managing Director and Chief Investment Officer of the Investment
1221 Avenue of the Americas July 1995 Manager, Morgan Stanley Investment Management Inc. and Morgan
New York, NY Stanley Investments LP; Director of the Transfer Agent, Chief
Investment Officer of the Van Kampen Funds; Vice President of the
Institutional Funds (since July 2003) and the Retail Funds (since
July 1995).
Stefanie V. Chang (36) Vice President Since Executive Director of Morgan Stanley & Co. and Morgan Stanley
1221 Avenue of the Americas July 2003 Investment Management Inc. and Vice President of the
New York, NY Institutional Funds (since December 1997) and the Retail Funds
(since July 2003); formerly practiced law with the New York law
firm of Rogers & Wells (now Clifford Chance LLP).
</Table>
17
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------ ----------------- ------------- ------------------------------------------------------------------
Francis Smith (38) Treasurer and Treasurer Executive Director of the Investment Manager and Morgan Stanley
c/o Morgan Stanley Trust Chief Financial since July Services (since December 2001); previously Vice President of the
Harborside Financial Center, Officer 2003 and Retail Funds (September 2002-July 2003); previously Vice President
Plaza Two, Chief of the Investment Manager and Morgan Stanley Services
Jersey City, NJ Financial (August 2000-November 2001) and Senior Manager at
Officer since PricewaterhouseCoopers LLP (January 1998-August 2000).
September
2002
Thomas F. Caloia (57) Vice President Since Executive Director (since December 2002) and Assistant Treasurer
c/o Morgan Stanley Trust July 2003 of the Investment Manager, the Distributor and Morgan Stanley
Harborside Financial Center, Services; previously Treasurer of the Retail Funds
Plaza Two, (April 1989-July 2003); formerly First Vice President of the
Jersey City, NJ Investment Manager, the Distributor and Morgan Stanley Services.
Mary E. Mullin (36) Secretary Since Vice President of Morgan Stanley & Co. Incorporated and Morgan
1221 Avenue of the Americas July 2003 Stanley Investment Management Inc.; Secretary of the
New York, NY Institutional Funds (since June 1999) and the Retail Funds (since
July 2003); formerly practiced law with the New York law firms of
McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom
LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE
OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
18
<Page>
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
Philip J. Purcell
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Barry Fink
VICE PRESIDENT and GENERAL COUNSEL
Joseph J. McAlinden
VICE PRESIDENT
Stefanie V. Chang
VICE PRESIDENT
Francis 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 AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
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.
(C) 2003 Morgan Stanley
[MORGAN STANLEY LOGO]
12362J03-ANP-10/03
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
LIQUID ASSET FUND
ANNUAL REPORT
AUGUST 31, 2003
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Directors has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Directors: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Directors
in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services
Applicable only for reports covering fiscal years ending on or after December
15, 2003.
<Page>
Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. [Reserved.]
Item 9 - Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
<Page>
Item 10 Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Liquid Asset Fund Inc.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2003
/s/ Francis Smith
Francis Smith
Principal Financial Officer
October 20, 2003
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Liquid Asset Fund Inc.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
December 8, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
December 8, 2003
/s/ Francis Smith
Francis Smith
Principal Financial Officer
December 8, 2003