<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 811-21339
---------------------------------------------
MORGAN STANLEY INSTITUTIONAL LIQUIDITY FUNDS
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 AVENUE OF THE AMERICAS 22ND FLOOR NEW YORK, NY 10020
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
RONALD E. ROBISON
1221 AVENUE OF THE AMERICAS 33RD FLOOR NEW YORK, NY 10020
- -------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 1888 378-1630
----------------------------
Date of fiscal year end: 10/31/04
--------------------------
Date of reporting period: 4/30/04
-------------------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507.
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
The Fund's semi-annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows:
<Page>
2004 SEMI-ANNUAL REPORT
[MORGAN STANLEY LOGO] APRIL 30, 2004
MORGAN STANLEY INSTITUTIONAL LIQUIDITY FUNDS
MONEY MARKET PORTFOLIO
PRIME PORTFOLIO
TAX-EXEMPT PORTFOLIO
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004
TABLE OF CONTENTS
<Table>
SHAREHOLDER'S LETTER 3
STATEMENTS OF NET ASSETS
Money Market Portfolio 4
Prime Portfolio 6
Tax-Exempt Portfolio 9
STATEMENTS OF OPERATIONS 11
STATEMENTS OF CHANGES IN NET ASSETS 12
FINANCIAL HIGHLIGHTS 13
NOTES TO FINANCIAL STATEMENTS 14
TRUSTEE AND OFFICER INFORMATION 16
</Table>
This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Institutional Liquidity Funds. To receive a
prospectus and/or SAI, which contains more complete information such as charges,
expenses, policies for voting proxies, risk considerations, and describes in
detail each of the Portfolio's investment policies to the prospective investor,
please call 1 (888) 378-1630. Please read the prospectus carefully before you
invest or send money. Additionally, you can access portfolio information
including performance, yields, characteristics, and investment team commentary
through Morgan Stanley Investment Management's website:
www.morganstanley.com/im.
1
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
(This page has been left blank intentionally.)
2
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
SHAREHOLDER'S LETTER
Dear Shareholders:
OVERVIEW
We are pleased to present the Morgan Stanley Institutional Liquidity Funds
(MSILF) Semi-Annual Report for the period ended April 30, 2004. MSILF currently
offers three portfolios (Money Market, Prime, and Tax-Exempt) designed to
provide flexible cash management options. MSILF's portfolios provide investors
with a means to help them meet specific cash investment needs, whether they need
a rated fund, capital preservation, or tax-efficient returns.
PERFORMANCE
The seven-day current and seven-day effective yields (which assume an
annualization of the current yield with all dividends reinvested) as of April
30, 2004, were as follows:
<Table>
<Caption>
PORTFOLIO 7-DAY CURRENT YIELD 7-DAY EFFECTIVE YIELD
--------- ------------------- ---------------------
Money Market -- Institutional Class 1.05% 1.06%
Money Market -- Advisory Class 0.80% 0.81%
Prime -- Institutional Class 1.03% 1.03%
Prime -- Advisory Class* N/A N/A
Tax-Exempt -- Institutional Class 1.05% 1.06%
</Table>
* The Prime Portfolio offers both Institutional and Advisory Class Shares. The
seven-day current and seven-day effective yields are not shown for Advisory
Class Shares at April 30, 2004 due to an operational period of less than seven
days on that date.
The yield quotation more closely reflects the current earnings of the Portfolios
than the total return. As with all money market portfolios, yields will
fluctuate as market conditions change and the seven-day yields are not necessary
indicative of future performance.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
Executive Vice President--
Principal Executive Officer
June 2004
3
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENT OF NET ASSETS
MONEY MARKET PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (17.9%)
INTERNATIONAL BANKS (12.6%)
ANZ Banking Group Ltd.
1.025%, 5/4/04 $ 35,000 $ 35,000
Banque Nationale de Paris/New York
1.39%, 8/5/04 2,000 2,001
Barclays Bank plc/New York
1.025%, 3/31/05 (b)10,000 9,997
1.03%, 3/24/05 (b)10,000 9,998
Natexis Banque/New York
1.20%, 5/10/04 25,000 25,001
Rabobank Nederlander NV/New York
1.315%, 12/20/04 30,000 30,011
Royal Bank of Scotland/New York
1.03%, 4/20/05 (b)25,000 24,995
UBS AG
1.47%, 5/6/05 25,000 24,995
--------------------------------------------------------------------------------------
161,998
======================================================================================
MAJOR BANKS (5.3%)
First Tennessee Bank NA
1.03%, 5/12/04 - 5/17/04 35,000 35,000
State Street Bank & Trust Co.
1.04%, 6/28/04 17,500 17,500
US Bank National Association
1.19%, 11/29/04 15,000 15,000
--------------------------------------------------------------------------------------
67,500
======================================================================================
TOTAL CERTIFICATE OF DEPOSIT (COST $229,498) 229,498
======================================================================================
COMMERCIAL PAPER (56.5%)
ASSET BACKED -- AUTOMOTIVE (1.6%)
DaimlerChrysler Revolving Auto Conduit LLC
1.04%, 6/3/04 20,000 19,981
--------------------------------------------------------------------------------------
ASSET BACKED -- CONSUMER (7.4%)
Barton Capital Corp.
1.04%, 5/19/04 (a)15,000 14,992
Gemini Securitization Corp.
1.04%, 5/12/04 (a)25,000 24,992
Mont Blanc Capital Corp.
1.04%, 5/25/04 (a)35,000 34,976
Old Line Funding LLC
1.04%, 5/17/04 (a)20,059 20,050
--------------------------------------------------------------------------------------
95,010
======================================================================================
ASSET BACKED -- CORPORATE (5.8%)
Amsterdam Funding Corp.
1.04%, 5/4/04 (a)15,000 14,999
Asset Securitization Capital Co., LLC
1.05%, 5/12/04 - 5/24/04 (a)35,000 34,984
Atlantis One Funding Corp.
1.08%, 7/20/04 (a)10,000 9,976
Blue Ridge Asset Funding Corp.
1.03%, 5/4/04 (a)15,000 14,999
--------------------------------------------------------------------------------------
74,958
======================================================================================
ASSET BACKED -- DIVERSIFIED (2.7%)
Jupiter Securitization Corp.
1.04%, 6/2/04 $ (a)35,000 $ 34,968
--------------------------------------------------------------------------------------
ASSET BACKED -- MORTGAGE (2.0%)
Mortgage Interest Networking Trust
1.04%, 5/20/04 25,000 24,986
--------------------------------------------------------------------------------------
ASSET BACKED -- SECURITIES (8.8%)
Beta Finance, Inc.
1.07%, 7/6/04 22,000 21,956
Cancara Asset Securitization Ltd.
1.04%, 5/27/04 40,000 39,970
CC USA, Inc.
1.27%, 10/20/04 (a)6,500 6,460
Clipper Receivables Co., LLC
1.04%, 5/24/04 20,000 19,987
Dorada Finance, Inc.
1.26%, 10/29/04 (a)25,000 24,842
--------------------------------------------------------------------------------------
113,215
======================================================================================
BANKING (1.1%)
HSBC USA, Inc.
1.03%, 5/12/04 14,500 14,496
--------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (1.5%)
General Electric Co.
1.32%, 12/6/04 20,000 19,839
--------------------------------------------------------------------------------------
FINANCE -- CORPORATE (3.1%)
CIT Group, Inc.
1.06%, 6/15/04 25,000 24,967
Moat Funding LLC
1.03%, 5/10/04 (a)15,000 14,996
--------------------------------------------------------------------------------------
39,963
======================================================================================
INSURANCE (1.6%)
Metlife Funding, Inc.
1.08%, 7/21/04 20,000 19,951
--------------------------------------------------------------------------------------
INTERNATIONAL BANKS (17.4%)
Bank of Ireland
1.14%, 8/23/04 18,500 18,434
Danske Corp.
1.04%, 6/1/04 25,000 24,978
Dexia Delaware LLC
1.05%, 6/23/04 40,000 39,938
HBOS Treasury Services plc
1.13%, 8/25/04 7,000 6,975
KFW International Finance
1.16%, 10/1/04 4,000 3,980
1.19%, 10/12/04 25,000 24,864
1.25%, 10/18/04 25,000 24,852
Nordea NA, Inc./Delaware
1.04%, 5/28/04 25,000 24,980
Societe Generale NA, Inc.
1.04%, 5/5/04 15,000 14,998
1.05%, 6/3/04 15,000 14,986
Westpac Banking Corp.
1.25%, 12/15/04 25,000 24,802
--------------------------------------------------------------------------------------
223,787
======================================================================================
</Table>
4 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENT OF NET ASSETS (CONT'D)
MONEY MARKET PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------
INVESTMENT BANKERS/BROKERS/SERVICES (3.5%)
Citigroup Global Markets Holdings, Inc.
1.03%, 5/20/04 $ 20,000 $ 19,989
1.04%, 6/17/04 25,000 24,966
--------------------------------------------------------------------------------------
44,955
======================================================================================
TOTAL COMMERCIAL PAPER (COST $726,109) 726,109
======================================================================================
CORPORATE NOTES (14.6%)
ASSET BACKED -- SECURITIES (3.9%)
Beta Finance, Inc.
1.04%, 3/29/05 (a)(b)7,500 7,499
CC USA, Inc.
1.195%, 4/25/05 (a)(b)25,000 25,019
Dorada Finance, Inc.
1.085%, 3/18/05 (a)(b)17,500 17,496
--------------------------------------------------------------------------------------
50,014
======================================================================================
DIVERSIFIED FINANCIAL SERVICES (1.3%)
General Electric Capital Corp.
1.235%, 3/15/05 (b)13,000 13,021
1.33%, 3/21/05 (a)(b)4,000 4,008
--------------------------------------------------------------------------------------
17,029
======================================================================================
FINANCE -- CONSUMER (2.0%)
American Express Credit Corp.
1.22%, 12/16/04 (b)25,000 25,025
--------------------------------------------------------------------------------------
INSURANCE (2.2%)
AIG SunAmerica Global Financing VIII
1.225%, 11/15/04 (a)(b)8,550 8,557
American General Finance Corp.
1.35%, 8/6/04 (b)20,000 20,012
--------------------------------------------------------------------------------------
28,569
======================================================================================
INTERNATIONAL BANKS (3.1%)
HBOS Treasury Services plc
1.16%, 3/14/05 (a)(b)25,000 25,022
Westpac Banking Corp./New York
1.14%, 4/25/05 (b)15,000 15,004
--------------------------------------------------------------------------------------
40,026
======================================================================================
INVESTMENT BANKERS/BROKERS/SERVICES (2.1%)
Goldman Sachs Group, Inc.
1.33%, 6/25/04 (b)10,000 10,004
Merrill Lynch & Co., Inc.
1.42%, 5/21/04 (b)17,500 17,504
--------------------------------------------------------------------------------------
27,508
======================================================================================
TOTAL CORPORATE NOTES (COST $188,171) 188,171
======================================================================================
REPURCHASE AGREEMENTS (11.0%)
CS First Boston LLC, 1.03%, dated 4/30/04,
due 5/3/04, repurchase price $71,316 (c)71,310 71,310
J.P. Morgan Securities, Inc., 1.03%,
dated 4/30/04, due 5/3/04,
repurchase price $70,006 (c)70,000 70,000
--------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (COST $141,310) 141,310
======================================================================================
<Caption>
VALUE
(000)
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%) (COST $1,285,088) $1,285,088
======================================================================================
<Caption>
AMOUNT
(000)
--------------------------------------------------------------------------------------
OTHER ASSETS (0.1%)
Cash $ 13
Interest Receivable 686
Receivable from Investment Adviser 35
Other 6 740
--------------------------------------------------------------------------------------
LIABILITIES (-0.1%)
Dividends Declared (819)
Payable for Administrative Fees (41)
Payable for Custodian Fees (2)
Service and Shareholder Administration
Plan Fees Payable -- Advisory Class (@--)
Other Liabilities (66) (928)
--------------------------------------------------------------------------------------
NET ASSETS (100%) $1,284,900
======================================================================================
NET ASSETS CONSIST OF:
Paid-in Capital $1,284,900
======================================================================================
INSTITUTIONAL CLASS:
NET ASSETS $1,284,391
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,284,391,371 outstanding $0.01 par
value shares of beneficial interest (unlimited
number of shares authorized) $ 1.00
======================================================================================
ADVISORY CLASS:
NET ASSETS $ 509
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 509,020 outstanding $0.01 par value
shares of beneficial interest (unlimited number of
shares authorized) $ 1.00
======================================================================================
</Table>
(a) 144A security -- certain conditions for public sale may exist.
(b) Variable/Floating Rate Security -- interest rate changes on these
instruments are based on changes in a designated base rate. The rates
shown are those in effect on April 30, 2004.
(c) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of this
statement of net assets.
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 5
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENT OF NET ASSETS
PRIME PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (9.4%)
MAJOR BANKS (9.4%)
Fifth Third Bank
1.075%, 9/20/04 $ 20,000 $ 20,001
First Tennessee Bank NA
1.03%, 5/12/04 - 5/28/04 105,000 105,000
State Street Bank & Trust Co.
1.04%, 6/28/04 17,500 17,500
US Bank National Association
1.19%, 11/29/04 15,000 15,000
1.20%, 3/11/05 35,000 34,942
Wells Fargo Bank NA
1.03%, 5/24/04 - 5/28/04 100,000 100,000
--------------------------------------------------------------------------------------
TOTAL CERTIFICATE OF DEPOSIT (COST $292,443) 292,443
======================================================================================
COMMERCIAL PAPER (65.7%)
ASSET BACKED -- AUTOMOTIVE (2.0%)
DaimlerChrysler Revolving Auto Conduit LLC
1.04%, 5/17/04 - 6/3/04 61,991 61,943
--------------------------------------------------------------------------------------
ASSET BACKED -- CONSUMER (13.4%)
Barton Capital Corp.
1.04%, 5/6/04 - 5/19/04 (a)75,000 74,970
Gemini Securitization Corp.
1.04%, 5/12/04 (a)25,000 24,992
1.04%, 6/1/04 50,122 50,077
Old Line Funding LLC
1.03%, 5/7/04 (a)38,035 38,028
1.04%, 5/17/04 - 6/7/04 (a)67,838 67,781
Receivables Capital Corp.
1.03%, 5/21/04 (a)25,000 24,986
Sheffield Receivables Co.
1.04%, 5/24/04 (a)50,000 49,967
Thames Asset Global Securitization
1.03%, 5/17/04 (a)20,319 20,310
1.04%, 5/12/04 - 5/20/04 (a)64,282 64,255
--------------------------------------------------------------------------------------
415,366
======================================================================================
ASSET BACKED -- CORPORATE (12.3%)
Amsterdam Funding Corp.
1.04%, 5/4/04 - 6/1/04 (a)70,000 69,974
Asset Securitization Capital Co., LLC
1.05%, 5/13/04 - 5/26/04 101,500 101,439
Atlantis One Funding Corp.
1.19%, 10/18/04 25,000 24,859
1.20%, 10/12/04 (a)49,424 49,154
CAFCO LLC
1.04%, 6/2/04 (a)35,500 35,467
Moat Funding LLC
1.04%, 5/19/04 (a)25,000 24,987
1.10%, 7/27/04 (a)33,000 32,912
Tulip Funding Corp.
1.04%, 5/24/04 (a)45,000 44,970
--------------------------------------------------------------------------------------
383,762
======================================================================================
ASSET BACKED -- DIVERSIFIED (7.0%)
CRC Funding LLC
1.03%, 5/7/04 $ (a)35,000 $ 34,994
Fairway Finance Corp.
1.03%, 5/3/04 (a)25,000 24,998
1.04%, 5/13/04 38,288 38,275
Jupiter Securitization Corp.
1.04%, 5/24/04 (a)44,052 44,023
Yorktown Capital LLC
1.03%, 5/12/04 75,000 74,976
--------------------------------------------------------------------------------------
217,266
======================================================================================
ASSET BACKED -- MORTGAGE (3.9%)
Mortgage Interest Networking Trust
1.04%, 5/20/04 35,000 34,981
1.05%, 6/16/04 85,000 84,886
--------------------------------------------------------------------------------------
119,867
======================================================================================
ASSET BACKED -- SECURITIES (8.8%)
Beta Finance, Inc.
1.07%, 7/6/04 25,000 24,950
1.26%, 10/29/04 43,000 42,728
Cancara Asset Securitization Ltd.
1.04%, 5/24/04 (a)38,079 38,054
1.04%, 5/27/04 50,000 49,962
1.11%, 7/27/04 (a)29,201 29,123
Clipper Receivables Co., LLC
1.04%, 5/24/04 30,000 29,980
1.05%, 6/14/04 - 6/25/04 45,000 44,936
Dorada Finance, Inc.
1.26%, 10/29/04 (a)14,000 13,911
--------------------------------------------------------------------------------------
273,644
======================================================================================
BANKING (1.4%)
HSBC USA, Inc.
1.03%, 5/12/04 45,000 44,986
--------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.8%)
General Electric Capital Corp.
1.21%, 10/4/04 25,000 24,869
--------------------------------------------------------------------------------------
FINANCE -- CORPORATE (7.0%)
CIT Group, Inc.
1.04%, 5/4/04 18,500 18,499
1.04%, 5/25/04 (a)40,000 39,972
1.05%, 6/2/04 30,000 29,972
1.06%, 6/15/04 37,500 37,450
Mont Blanc Capital Corp.
1.04%, 5/25/04 (a)90,000 89,938
--------------------------------------------------------------------------------------
215,831
======================================================================================
INSURANCE (2.4%)
American General Corp.
1.04%, 6/3/04 25,000 24,976
Metlife Funding, Inc.
1.08%, 7/21/04 50,000 49,878
--------------------------------------------------------------------------------------
74,854
======================================================================================
</Table>
6 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENT OF NET ASSETS (CONT'D)
PRIME PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------
INTERNATIONAL BANKS (1.6%)
UBS Finance, Inc./Delaware
1.24%, 12/23/04 $ 50,000 $ 49,594
--------------------------------------------------------------------------------------
INVESTMENT BANKERS/BROKERS/SERVICES (4.3%)
Citigroup Global Markets Holdings, Inc.
1.03%, 5/20/04 10,000 9,995
1.04%, 6/17/04 50,000 49,932
Goldman Sachs Group, Inc.
1.03%, 5/20/04 75,000 74,959
--------------------------------------------------------------------------------------
134,886
======================================================================================
MAJOR PHARMACEUTICALS (0.8%)
Pfizer, Inc.
1.23%, 10/13/04 (a)25,000 24,859
--------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST $2,041,727) 2,041,727
======================================================================================
CORPORATE NOTES (12.1%)
ASSET BACKED -- SECURITIES (5.5%)
Beta Finance, Inc.
1.04%, 3/29/05 (a)(b)50,000 49,991
CC USA, Inc.
1.035%, 3/29/05 (a)(b)22,000 21,995
1.195%, 4/25/05 (a)(b)75,000 75,058
1.335%, 8/13/04 (a)5,000 5,003
Dorada Finance, Inc.
1.085%, 3/18/05 (a)(b)20,000 19,996
--------------------------------------------------------------------------------------
172,043
======================================================================================
BANKING (0.6%)
Bank of America Corp.
6.63%, 6/15/04 3,500 3,524
Citigroup, Inc.
1.20%, 2/7/05 (b)15,000 15,016
--------------------------------------------------------------------------------------
18,540
======================================================================================
DIVERSIFIED FINANCIAL SERVICES (1.4%)
General Electric Capital Corp.
1.235%, 3/15/05 (b)8,000 8,013
1.30%, 2/4/05 (b)5,000 5,006
1.32%, 9/24/04 (b)25,000 25,021
1.33%, 3/21/05 (a)(b)4,000 4,008
--------------------------------------------------------------------------------------
42,048
======================================================================================
INSURANCE (3.0%)
AIG SunAmerica Global Financing VIII
1.225%, 11/15/04 (a)(b)18,500 18,516
AIG SunAmerica Global Financing XIII
1.36%, 5/23/05 (a)(b)48,000 48,120
Allstate Financial Global Funding
1.21%, 8/16/04 (a)(b)25,000 25,011
--------------------------------------------------------------------------------------
91,647
======================================================================================
INVESTMENT BANKERS/BROKERS/SERVICES (0.8%)
Goldman Sachs Group, Inc.
1.40%, 5/10/04 (b)3,500 3,500
Merrill Lynch & Co., Inc.
1.42%, 5/21/04 (b)22,500 22,505
--------------------------------------------------------------------------------------
26,005
======================================================================================
MAJOR BANKS (0.8%)
SunTrust Bank
1.08%, 4/1/05 $ (b)20,000 $ 19,998
Wells Fargo Bank NA
1.04%, 6/17/04 (b)5,000 5,000
--------------------------------------------------------------------------------------
24,998
======================================================================================
TOTAL CORPORATE NOTES (COST $375,281) 375,281
======================================================================================
REPURCHASE AGREEMENTS (13.3%)
CS First Boston LLC, 1.03%, dated 4/30/04,
due 5/3/04, repurchase price $209,623 (c)209,605 209,605
J.P. Morgan Securities, Inc., 1.03%,
dated 4/30/04, due 5/3/04,
repurchase price $205,018 (c)205,000 205,000
--------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (COST $414,605) 414,605
======================================================================================
TOTAL INVESTMENTS (100.5%) (COST $3,124,056) 3,124,056
======================================================================================
<Caption>
AMOUNT
(000)
--------------------------------------------------------------------------------------
OTHER ASSETS (0.0%)
Cash 6
Interest Receivable 826
Receivable from Investment Adviser 47
Other 7 886
--------------------------------------------------------------------------------------
LIABILITIES (-0.5%)
Payable for Investments Purchased (15,023)
Dividends Declared (1,552)
Payable for Administrative Fees (78)
Payable for Custodian Fees (2)
Service and Shareholder Administration
Plan Fees Payable -- Advisory Class (@--)
Other Liabilities (66) (16,721)
--------------------------------------------------------------------------------------
NET ASSETS (100%) $3,108,221
======================================================================================
NET ASSETS CONSIST OF:
Paid-in Capital $3,108,221
======================================================================================
INSTITUTIONAL CLASS:
NET ASSETS $3,096,061
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,096,060,862 outstanding $0.01 par
value shares of beneficial interest (unlimited
number of shares authorized) $ 1.00
======================================================================================
ADVISORY CLASS:
NET ASSETS $ 12,160
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 12,160,423 outstanding $0.01 par value
shares of beneficial interest (unlimited number of
shares authorized) $ 1.00
======================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 7
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENT OF NET ASSETS (CONT'D)
PRIME PORTFOLIO
(a) 144A security -- certain conditions for public sale may exist.
(b) Variable/Floating Rate Security -- interest rate changes on these
instruments are based on changes in a designated base rate. The rates
shown are those in effect on April 30, 2004.
(c) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of this
statement of net assets.
@ Amount is less than $500.
8 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENT OF NET ASSETS
TAX-EXEMPT PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (98.5%)
COMMERCIAL PAPER (7.1%)
Broward County, FL, Sales Tax, Series A
1.08%, 5/7/04 $ 1,500 $ 1,500
Massachusetts, Series H
1.05%, 5/20/04 1,000 1,000
South Carolina Public Service Authority, Santee
Cooper, Series 1998
1.05%, 6/7/04 1,000 1,000
--------------------------------------------------------------------------------------
3,500
======================================================================================
DAILY VARIABLE RATE BONDS (15.0%)
Breckinridge County, KY, Kentucky Association of
Counties Leasing Trust 2002, Series A
1.10%, 2/1/32 1,000 1,000
Colorado Health Facilities Authority, National Jewish
Federation, Series 2003
1.10%, 9/1/33 600 600
Hapeville Development Authority, GA, Hapeville
Hotel Ltd., Series 1985
1.08%, 11/1/15 1,600 1,600
Harris County Health Facilities Development Corp., TX,
Methodist Hospital, Series 2002
1.10%, 12/1/32 1,660 1,660
Massachusetts Health & Educational Facilities
Authority, Capital Asset, Series D (MBIA)
1.08%, 1/1/35 100 100
Murray City, UT, IHC Health Services, Inc., Series 2003 C
1.10%, 5/15/36 600 600
University of Missouri, Series 2001 A
1.10%, 11/1/31 1,345 1,345
West Side Calhoun, TX, Sohio Chemical Co., Series 1985
1.10%, 12/1/15 500 500
--------------------------------------------------------------------------------------
7,405
======================================================================================
MUNICIPAL BONDS & NOTES (12.5%)
Collier County, FL, Gas Tax, Series 2003 (Ambac)
2.00%, 6/1/04 2,085 2,087
Illinois Finance Authority, Series 2004-A School Notes
1.80%, 12/1/04 1,000 1,003
Minot, ND, Certificates of Indebtedness of 2003
1.25%, 6/15/04 1,000 1,000
New Mexico, Series 1999
5.00%, 9/1/04 700 709
Puerto Rico, Series 2003 TRANs
2.00%, 7/30/04 400 401
West Palm Beach, FL, Utility System, Series 1996,
Prerefunded 10/1/04 @ 101 (MBIA)
5.75%, 10/1/27 450 464
Wisconsin, 1998, Series 2
5.00%, 5/1/04 500 500
--------------------------------------------------------------------------------------
6,164
======================================================================================
WEEKLY VARIABLE RATE BONDS (63.9%)
Allegheny County Hospital Development Authority, PA,
Presbyterian-University Health System, Inc.,
Series 2001A (MBIA)
1.09%, 3/1/20 1,200 1,200
American Public Energy Agency, NE, National Public
Gas Agency 2003, Series A
1.115%, 2/1/14 $ 1,500 $ 1,500
Bexar County Housing Finance Corp., TX, Multi-Family
PT-2082
1.13%, 1/20/10 1,500 1,500
California Statewide Communities Development
Authority, Kaiser Permanente, Series 2004 L
1.17%, 4/1/38 700 700
Charlotte, NC, Convention Facility, Series 2003 B COPs
1.15%, 12/1/21 1,300 1,300
Chesapeake Hospital Authority, VA, Chesapeake
General Hospital, Series 2001 A
1.13%, 7/1/31 1,150 1,150
Chicago, IL, Series 1997
1.08%, 1/1/12 1,810 1,810
Clayton County, GA, Delta Airlines Projects,
Series 2000 A
1.12%, 6/1/29 900 900
Colorado Health Facilities Authority, Sisters of
Charity of Leavenworth Health Systerm, Series 2002
1.09%, 12/1/32 1,200 1,200
Connecticut Health & Educational Facilities Authority,
Bradley Health Care, Inc. 1997, Series B
1.10%, 7/1/29 700 700
Franklin County, OH, Doctors Ohio-Health Corp.,
Series 1998
1.10%, 12/1/28 1,200 1,200
Hamilton County, OH, Twin Towers and Twin Lakes,
Series 2003 A
1.11%, 7/1/23 1,500 1,500
Harris County Industrial Development Corp., TX,
Baytank, Inc., Series 1998
1.08%, 2/1/20 1,500 1,500
Illinois Housing Development Authority, Illinois Center
Apartments, Series 1985
1.09%, 1/1/08 2,000 2,000
Illinois, Putters, Series 409
1.13%, 3/1/12 930 930
Mobile Industrial Development Board, AL,
Holnam, Inc., Series 1999 B
1.10%, 6/1/32 700 700
North Carolina Medical Care Commission, Mission-St.
Joseph's Health System, Series 2003
1.15%, 10/1/18 1,175 1,175
North East Independent School District, TX, Putters,
Series 393
1.13%, 2/1/12 700 700
Oak Forest, IL, Homewood South Suburban Mayors &
Managers Association, Series 1989
1.10%, 7/1/24 550 550
Oakland University, MI, Series 2001 (FGIC)
1.09%, 3/1/31 710 710
Omaha, NE, Eagle #2004-001, Class A
1.15%, 4/1/26 1,000 1,000
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 9
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENT OF NET ASSETS (CONT'D)
TAX-EXEMPT PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------
WEEKLY VARIABLE RATE BONDS (CONT'D)
Oregon Health Sciences University, OHSU Medical
Group, Series 2004 A
1.10%, 7/1/33 $ 1,400 $ 1,400
Palm Beach County, FL, Hospice of Palm Beach
County, Inc., Series 2001
1.10%, 10/1/31 1,500 1,500
Portland Housing Authority, OR, New Market West,
Series 2004
1.12%, 4/1/34 675 675
Sayre Health Care Facilities Authority, PA, VHA of
Pennsylvania, Inc., Capital Asset Financing,
Series 1985 B (Ambac)
1.10%, 12/1/20 1,600 1,600
Snohomish County Public Utility District No. 1, WA,
ROCs II-R, Series 4059 (FSA)
1.15%, 12/1/20 660 660
University of Minnesota Regents, Series 1999 A
1.12%, 1/1/34 1,120 1,120
Utah County, UT, IHC Health Services, Inc. 2002,
Series B
1.09%, 5/15/35 700 700
--------------------------------------------------------------------------------------
31,580
======================================================================================
TOTAL TAX-EXEMPT INSTRUMENTS (COST $48,649) 48,649
======================================================================================
TOTAL INVESTMENTS (98.5%) (COST $48,649) 48,649
======================================================================================
<Caption>
AMOUNT
(000)
--------------------------------------------------------------------------------------
OTHER ASSETS (1.7%)
Cash 45
Receivable for Investments Sold 700
Interest Receivable 95
Receivable from Investment Adviser 20 860
--------------------------------------------------------------------------------------
LIABILITIES (-0.2%)
Dividends Declared (32)
Payable for Custodian Fees (3)
Payable for Administrative Fees (2)
Payable for Trustees' Fees and Expenses (1)
Other Liabilities (77) (115)
--------------------------------------------------------------------------------------
NET ASSETS (100%) $49,394
======================================================================================
NET ASSETS CONSIST OF:
Paid-in Capital $49,394
======================================================================================
INSTITUTIONAL CLASS:
NET ASSETS $49,394
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 49,393,831 outstanding $0.01 par value
shares of beneficial interest (unlimited number of
shares authorized) $ 1.00
======================================================================================
</Table>
Ambac Ambac Assurance Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance Inc.
MBIA MBIA Insurance Corporation
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE/TERRITORY
(UNAUDITED)
<Table>
<Caption>
PERCENT
VALUE OF NET
STATE/TERRITORY (000) ASSETS
--------------------------------------------------------------------------------------
Alabama $ 700 1.4%
California 700 1.4
Colorado 1,800 3.7
Connecticut 700 1.4
Florida 5,551 11.2
Georgia 2,500 5.1
Illinois 6,293 12.8
Kentucky 1,000 2.0
Massachusetts 1,100 2.2
Michigan 710 1.5
Minnesota 1,120 2.3
Missouri 1,345 2.7
Nebraska 2,500 5.1
New Mexico 709 1.4
North Carolina 2,475 5.0
North Dakota 1,000 2.0
Ohio 2,700 5.5
Oregon 2,075 4.2
Pennsylvania 2,800 5.7
Puerto Rico 401 0.8
South Carolina 1,000 2.0
Texas 5,860 11.9
Utah 1,300 2.6
Virgina 1,150 2.3
Washington 660 1.3
Wisconsin 500 1.0
--------------------------------------------------------------------------------------
$ 48,649 98.5%
======================================================================================
</Table>
10 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENTS OF OPERATIONS
For the Period from February 2, 2004* to April 30, 2004
<Table>
<Caption>
MONEY TAX-
MARKET PRIME EXEMPT
PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000)
---------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $1,501 $2,518 $ 75
---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees 210 355 11
Administrative Fees 70 118 4
Shareholder Reporting Fees 50 50 50
Professional Fees 9 9 9
Custodian Fees 4 5 4
Trustees' Fees and Expenses 1 1 1
Service and Shareholder Administration Plan Fees -- Advisory Class** @-- @-- --
Other Expenses 23 23 23
---------------------------------------------------------------------------------------------------------------------------
Total Expenses 367 561 102
---------------------------------------------------------------------------------------------------------------------------
Waiver of Investment Advisory Fees (210) (355) (11)
Expenses Reimbursed by Adviser (126) (146) (90)
---------------------------------------------------------------------------------------------------------------------------
Net Expenses 31 60 1
---------------------------------------------------------------------------------------------------------------------------
Net Investment Income 1,470 2,458 74
---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,470 $2,458 $ 74
===========================================================================================================================
</Table>
* Commencement of Operations
** Reflects activity from February 6, 2004 and April 29, 2004 (dates the
Portfolios' Advisory Classes were funded), for the Money Market and
Prime Portfolios, respectively.
@ Amount is less than $500.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 11
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
STATEMENTS OF CHANGES IN NET ASSETS
For the Period from February 2, 2004* to April 30, 2004
<Table>
<Caption>
MONEY MARKET PRIME TAX-EXEMPT
PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000)
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,470 $ 2,458 $ 74
----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
INSTITUTIONAL CLASS:
Net Investment Income (1,469) (2,457) (74)
ADVISORY CLASS: **
Net Investment Income (1) (1) --
----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1,470) (2,458) (74)
----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
INSTITUTIONAL CLASS:
Subscribed 1,844,664 4,466,605 117,250
Distributions Reinvested 168 501 2
Redeemed (560,441) (1,371,145) (67,858)
ADVISORY CLASS: **
Subscribed 1,571 12,490 --
Redeemed (1,062) (330) --
----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Capital Share Transactions 1,284,900 3,108,121 49,394
----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 1,284,900 3,108,121 49,394
NET ASSETS:
Beginning of Period -- 100 --
----------------------------------------------------------------------------------------------------------------------------
End of Period $1,284,900 $ 3,108,221 $ 49,394
============================================================================================================================
(1) CAPITAL SHARE TRANSACTIONS:
INSTITUTIONAL CLASS:
Shares Subscribed 1,844,664 4,466,605 117,250
Shares Issued on Distributions Reinvested 168 501 2
Shares Redeemed (560,441) (1,371,145) (67,858)
----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Institutional Class Shares Outstanding 1,284,391 3,095,961 49,394
============================================================================================================================
ADVISORY CLASS: **
Shares Subscribed 1,571 12,490 --
Shares Redeemed (1,062) (330) --
----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Advisory Class Shares Outstanding 509 12,160 --
============================================================================================================================
</Table>
* Commencement of Operations
** Reflects activity from February 6, 2004 and April 29, 2004 (dates the
Portfolios' Advisory Classes were funded), for the Money Market and
Prime Portfolios, respectively.
12 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
FINANCIAL HIGHLIGHTS
INSTITUTIONAL CLASS
<Table>
<Caption>
MONEY
MARKET PRIME TAX-EXEMPT
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
FEBRUARY 2, FEBRUARY 2, FEBRUARY 2,
2004** TO 2004** TO 2004** TO
APRIL 30, APRIL 30, APRIL 30,
SELECTED PER SHARE DATA AND RATIOS 2004 2004 2004
---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000
===========================================================================================================================
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.003+ 0.003+ 0.002+
---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.003) (0.003) (0.002)
---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000
===========================================================================================================================
TOTAL RETURN 0.26%# 0.25%# 0.24%#
===========================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,284,391 $3,096,061 $49,394
Ratio of Expenses to Average Net Assets(1) 0.02%* 0.03%* 0.02%*
Ratio of Net Investment Income to Average Net Assets(1) 1.05%* 1.03%* 0.99%*
---------------------------------------------------------------------------------------------------------------------------
(1) RATIOS BEFORE EXPENSE LIMITATION:
Expenses to Average Net Assets 0.26%* 0.24%* 1.38%*
Net Investment Income to Average Net Assets 0.81%* 0.82%* (0.37)%*
---------------------------------------------------------------------------------------------------------------------------
</Table>
ADVISORY CLASS
<Table>
<Caption>
MONEY
MARKET PRIME
PORTFOLIO PORTFOLIO
--------------------------------
PERIOD FROM PERIOD FROM
FEBRUARY 6, APRIL 29,
2004^ TO 2004^ TO
APRIL 30, APRIL 30,
SELECTED PER SHARE DATA AND RATIOS 2004 2004
---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000
===========================================================================================================================
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.002+ 0.000+~
---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM AND/OR IN EXCESS OF:
Net Investment Income (0.002) (0.000)~
---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000
===========================================================================================================================
TOTAL RETURN 0.19%# 0.00%#
===========================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 509 $12,160
Ratio of Expenses to Average Net Assets(2) 0.27%* 0.28%*
Ratio of Net Investment Income to Average Net Assets(2) 0.80%* 0.78%*
---------------------------------------------------------------------------------------------------------------------------
(2) RATIOS BEFORE EXPENSE LIMITATION:
Expenses to Average Net Assets 0.51%* 0.49%*
Net Investment Income to Average Net Assets 0.56%* 0.57%*
---------------------------------------------------------------------------------------------------------------------------
</Table>
+ Per share amount is based on average shares outstanding.
~ Amount is less than $0.0005 per share.
# Not Annualized
* Annualized
** Commencement of Operations
^ Date the Portfolio's Advisory Class was funded.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 13
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
NOTES TO FINANCIAL STATEMENTS
Morgan Stanley Institutional Liquidity Funds (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a Massachusetts
business trust. The Fund is comprised of three separate, active,
diversified portfolios (individually referred to as a "Portfolio",
collectively as the "Portfolios"). Each Portfolio currently offers three
classes of shares - Advisory Class, Institutional Class and Investor Class.
All classes of shares have identical voting rights (except that
shareholders of a Class have exclusive voting rights regarding any matter
relating solely to that Class of shares), dividend, liquidation and other
rights.
For detailed descriptions of the investment objectives of each of the
Portfolios and other related information, please refer to the Prospectuses
of the Fund. Generally, the investment objective of the Portfolios is to
seek preservation of capital, daily liquidity and maximum current income
(exempt from federal income tax in the case of Tax-Exempt Portfolio).
A. ACCOUNTING POLICIES: The following significant accounting policies are
in conformity with accounting principles generally accepted in the United
States. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Accounting principles generally
accepted in the United States may require management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: Securities owned by the Portfolios are stated at
amortized cost which approximates market value.
2. REPURCHASE AGREEMENTS: The Portfolios may enter into repurchase
agreements under which a Portfolio lends excess cash and takes
possession of securities with an agreement that the counterparty will
repurchase such securities. In connection with transactions in
repurchase agreements, a bank as custodian for the Fund takes
possession of the underlying securities which are held as collateral,
with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent
that any repurchase transaction exceeds one business day, the value of
the collateral is marked-to-market on a daily basis to determine the
adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and
apply the proceeds in satisfaction of the obligation. In the event of
default or bankruptcy by the counterparty to the agreement,
realization and/or retention of the collateral or proceeds may be
subject to legal proceedings. The Portfolios, along with other
affiliated investment companies, may utilize a joint trading account
for the purpose of entering into repurchase agreements.
3. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses on the
sale of investment securities are determined on a "first-in-first-out"
basis. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased
are amortized over their respective lives. Most expenses of the Fund
can be directly attributed to a particular Portfolio. Expenses which
cannot be directly attributed are apportioned among the Portfolios
based upon relative net assets. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are
allocated to each class of shares based upon their relative net
assets. Dividends to the shareholders of the Portfolios are accrued
daily and are distributed on the last business day of each month.
B. INVESTMENT ADVISORY FEES: Morgan Stanley Investment Management, Inc.
(the "Adviser" or "MS Investment Management"), a wholly-owned subsidiary of
Morgan Stanley, provides the Fund with investment advisory services under
the terms of an Investment Advisory and Management Agreement (the
"Agreement") at the annual rates of average daily net assets indicated
below. The Adviser has voluntarily agreed to reduce its advisory fee and/or
absorb other expenses so that the total operating expenses of each share
class will not exceed the amounts noted below in the first year of
operations. After the first year of operations, this fee and expense waiver
may be discontinued at the sole discretion of the Adviser at any time.
<Table>
<Caption>
MAXIMUM
EXPENSE RATIO
-------------------------------------
ADVISORY INSTITUTIONAL INVESTOR ADVISORY
PORTFOLIO FEE CLASS CLASS CLASS
----------------------------------------------------------------------
Money Market 0.15% 0.20% 0.30% 0.45%
Prime 0.15 0.20 0.30 0.45
Tax-Exempt 0.15 0.20 0.30 0.45
</Table>
The Ratio of Expenses to Average Net Assets disclosed in the Portfolios'
Financial Highlights are lower than the maximum ratios indicated in the
table above due to additional voluntary expense limitations imposed by the
Adviser. The Adviser may terminate these additional voluntary limitations
at any time at its sole discretion.
The Adviser has entered into a Sub-Advisory Agreement with Morgan Stanley
Investment Advisors Inc. (the "Sub-Adviser"), a wholly-owned subsidiary of
Morgan Stanley. The Sub-Adviser, subject to the control and supervision of
the Fund, its officers, Trustees and the Adviser, and in accordance with
the investment objectives, policies and restrictions of the Portfolios,
makes day-to-day investment decisions for the Portfolios and places the
Portfolios' purchase and sales orders. The Adviser pays the Sub-Adviser on
a monthly basis a portion of the net advisory fees the Adviser receives
from the Portfolios.
14
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
NOTES TO FINANCIAL STATEMENTS (CONT'D)
C. ADMINISTRATOR: MS Investment Management (the "Administrator") also
provides the Fund with administrative services pursuant to an
administrative agreement for a monthly fee which on an annual basis equals
0.05% of the average daily net assets of each Portfolio, plus reimbursement
of out-of-pocket expenses. Under an agreement between the Administrator and
J.P. Morgan Investor Services Co. ("JPMIS"), a corporate affiliate of
JPMorgan Chase Bank, JPMIS provides certain administrative services to the
Fund. For such services, the Administrator pays JPMIS a portion of the fee
the Administrator receives from the Fund. An employee of JPMIS is an
officer of the Fund.
D. DISTRIBUTOR: Morgan Stanley & Co. Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley, and an affiliate of MS
Investment Management, serves as the distributor of the Fund. The Fund has
entered into an Administration Plan with respect to its Investor Class
shares pursuant to which its Investor Class shares pays the Distributor a
monthly or quarterly fee at an annual rate of up to 0.10% of the average
daily net assets of such class of shares, to compensate certain financial
intermediaries who provide administrative services to shareholders. The
Fund has also entered into a Service and Shareholder Administration Plan
with respect to its Advisory Class shares pursuant to which its Advisory
Class shares pays the Distributor a monthly or quarterly fee at an annual
rate of up to 0.25% of the average daily net assets of such class of
shares, to compensate certain financial intermediaries who provide
administrative services, personal and account maintenance services to
shareholders.
E. CUSTODIAN: JPMorgan Chase Bank serves as custodian for the Fund in
accordance with a custodian agreement. The Custodian holds cash,
securities, and other assets of the Fund as required by the 1940 Act.
F. FEDERAL INCOME TAXES: It is each Portfolio's intention to qualify as a
regulated investment company and distribute all of its taxable and
tax-exempt income. Accordingly, no provision for Federal income taxes is
required in the financial statements.
G. CONTRACTUAL OBLIGATIONS: The Fund enters into contracts that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be
remote.
H. OTHER: A portion of the securities of the Tax-Exempt Portfolio are
insured by certain companies specializing in the insurance of municipal
debt obligations. At April 30, 2004, approximately 14.0% of the net assets
of the Tax-Exempt Portfolio are covered by such insurance. The insurers and
their obligations are as follows:
<Table>
<Caption>
PERCENTAGE OF
INSURER NET ASSETS
---------------------------------------
Ambac 7.5%
FSA 1.3
MBIA 3.8
FGIC 1.4
</Table>
At April 30, 2004, certain Portfolios had otherwise unaffiliated record
owners of 10% or greater. Investment activities of these shareholders could
have a material impact on these Port-folios.These Portfolios and the
aggregate percentage of such owners were as follows:
<Table>
<Caption>
PERCENTAGE OF OWNERSHIP
-----------------------------------------
INSTITUTIONAL INVESTOR ADVISORY
PORTFOLIO CLASS CLASS CLASS
-----------------------------------------------------------
Money Market 56.4% --% 100.0%
Prime 35.1 -- 100.0
Tax-Exempt 99.7 -- --
</Table>
15
<Page>
2004 SEMI-ANNUAL REPORT
April 30, 2004 (unaudited)
TRUSTEE AND OFFICER INFORMATION
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael Nugent
Fergus Reid
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, NY 10020
DISTRIBUTOR
Morgan Stanley & Co., Incorporated
1221 Avenue of the Americas
New York, NY 10020
CUSTODIAN
JPMorgan Chase Bank
270 Park Avenue
New York, NY 10017
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
Joseph J. McAlinden
VICE PRESIDENT
Stefanie V. Chang
VICE PRESIDENT
James W. Garrett
TREASURER AND CHIEF FINANCIAL OFFICER
Michael J. Leary
ASSISTANT TREASURER
Mary E. Mullin
SECRETARY
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
This report is authorized for distribution only when preceded or
accompanied by a prospectus of the Morgan Stanley Institutional Liquidity
Funds which describes in detail each Investment Portfolio's investment
policies, risks, fees and expenses. Please read the prospectus carefully
before you invest or send money. For additional information, including
information regarding the investments comprising the Portfolio, please
visit our website at www.morganstanley.com/im or call 1 (888) 378-1630.
Additionally, a description of the Fund's proxy voting policies and
procedures is available without charge at our website at
www.morganstanley.com/im/legal, at the SEC's website at www.sec.gov or by
calling 1 (888) 378-1630.
16
<Page>
Printed in U.S.A.
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, NY 10020
MSILF: (888) 378-1630
(C) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
<Page>
ITEM 2. CODE OF ETHICS. Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable for semi-annual
reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable for semi-annual
reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable for semi-annual
reports.
ITEM 6. [Reserved]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. Not applicable for semi-annual reports.
ITEM 8. [Reserved]
ITEM 9. CONTROLS AND PROCEDURES.
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.
ITEM 10. EXHIBITS.
(a) Code of Ethics - Not applicable for semi-annual reports.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer attached hereto as part of EX-99.CERT.
<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.
(Registrant) The Morgan Stanley Institutional Liquidity Funds, Inc.
By: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: June 22, 2004
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.
By: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: June 22, 2004
By: /s/ James W. Garrett
Name: James W. Garrett
Title: Principal Financial Officer
Date: June 22, 2004