<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, 2004
Date of reporting period: August 31, 2004
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY LIQUID
ASSET FUND INC. 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 MARKET VALUES
OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND.
<Page>
FUND REPORT
For the year ended August 31, 2004
MARKET CONDITIONS
For most of the fiscal year ended August 31, 2004, the Federal Open Market
Committee maintained its target rate for federal funds at 1.00 percent, a
45-year low. On June 30, 2004, however, it raised that target to 1.25 percent,
the first increase in more than four years. That action was followed by another
increase, to 1.50 percent, on August 10.
PERFORMANCE ANALYSIS
As of August 31, 2004, Morgan Stanley Liquid Asset Fund had net assets of more
than $20.4 billion and an average portfolio maturity of 39 days. For the
12-month period ended August 31, 2004, the Fund returned 0.58 percent. For the
seven-day period also ended August 31, 2004, the Fund provided an effective
annualized yield of 0.96 percent and a current yield of 0.95 percent, while its
30-day moving average yield for August was 0.91 percent. During the final months
of the period, the Fund capitalized on rising interest rates by reinvesting a
portion of its concentration of short-term maturities at slightly higher yields.
PORTFOLIO COMPOSITION
<Table>
Commercial Paper 53.0%
U.S. Government & Agency Obligations 26.6
Certificates of Deposit 14.3
Bank Notes 6.1
</Table>
MATURITY SCHEDULE
<Table>
1- 30 Days 54.5%
31- 60 Days 32.3
61- 90 Days 7.1
91- 120 Days 2.1
121+ Days 4.0
</Table>
DATA AS OF AUGUST 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR
PORTFOLIO COMPOSITION AND MATURITY SCHEDULE ARE AS A PERCENTAGE OF TOTAL
INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
2
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INVESTMENT STRATEGY
THE FUND WILL INVEST IN HIGH-QUALITY, SHORT-TERM MONEY MARKET SECURITIES. THE
FUND'S INVESTMENT MANAGER, MORGAN STANLEY INVESTMENT ADVISORS INC., SEEKS TO
MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE PRICE REMAINING STABLE AT
$1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL VALUE OF YOUR INVESTMENT.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEBSITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEBSITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEBSITE, http://www.sec.gov. YOU MAY ALSO REVIEW
AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION
ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING
THE SEC AT (800)SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON
PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER
FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800)869-NEWS.
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 WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800)350-6414, 8:00 A.M. TO 8:00 P.M. ET. ONCE OUR CUSTOMER
SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL
COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
3
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 03/01/04 - 08/31/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
03/01/04 -
03/01/04 08/31/04 08/31/04
------------- ------------- ---------------
Actual (0.32% return) $ 1,000.00 $ 1,003.20 $ 2.92
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,022.32 $ 2.95
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.58%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
4
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MORGAN STANLEY LIQUID ASSET FUND INC.
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (53.5%)
ASSET-BACKED - AUTO (1.9%)
$ 335,000 FCAR Owner Trust 1.46 - 1.65% 09/16/04 - 11/18/04 $ 334,583,564
50,000 New Center Asset Trust 1.51 10/06/04 49,927,083
-----------------
384,510,647
-----------------
ASSET-BACKED - MORTGAGE (1.3%)
100,000 Mortgage Interest Networking Trust
Series A1 P1 1.65 10/25/04 99,752,500
165,000 Mortgage Interest Networking Trust
Series A1+P1 1.40 - 1.52 09/13/04 164,920,400
-----------------
264,672,900
-----------------
BANKING (2.6%)
525,000 Citicorp 1.45 - 1.64 09/07/04 - 11/01/04 524,514,965
-----------------
FINANCE - AUTOMOTIVE (0.2%)
50,000 Toyota Motor Credit Corp. 1.56 10/07/04 49,922,000
-----------------
FINANCIAL CONGLOMERATES (5.0%)
1,019,000 General Electric Capital Corp. 1.26 - 2.05 09/03/04 - 05/06/05 1,014,434,812
-----------------
INTERNATIONAL BANKS (40.9%)
480,000 ABN-AMRO North America Finance Inc. 1.07 - 1.40 09/07/04 - 09/16/04 479,793,200
475,000 ANZ (DE) Inc. 1.41 - 1.52 09/15/04 - 10/07/04 474,608,125
850,000 Barclays U.S. Funding Corp. 1.38 - 1.46 09/10/04 - 09/29/04 849,282,083
600,000 Calyon North America Inc. 1.40 - 1.53 09/03/04 - 10/12/04 599,390,597
250,000 Canadian Imperial Holdings Inc. 1.43 09/22/04 249,791,458
235,000 Danske Corp. 1.07 - 1.62 09/21/04 - 10/25/04 234,710,349
350,000 Deutsche Bank Financial LLC 1.25 - 1.45 09/09/04 - 09/24/04 349,776,471
350,000 Dexia Delaware LLC 1.50 - 1.57 09/23/04 - 10/18/04 349,361,778
100,000 HBOS Treasury Services plc 1.07 09/08/04 99,979,389
475,000 Natexis Banques Populaires
U.S. Finance LLC 1.40 - 1.63 09/13/04 - 10/28/04 474,106,042
225,000 Nordea North America Inc. 1.49 - 1.62 09/29/04 - 10/26/04 224,638,986
700,000 Rabobank USA Financial Corp. 1.46 - 1.47 09/23/04 - 09/27/04 699,341,556
250,000 Royal Bank of Canada 1.57 10/15/04 249,523,333
935,000 Royal Bank of Scotland plc 1.44 - 1.66 09/21/04 - 11/01/04 933,517,018
1,000,000 Societe Generale N.A. Inc. 1.41 - 1.44 09/17/04 - 09/24/04 999,157,403
115,000 Toronto-Dominion Holdings (USA) Inc. 1.28 - 1.44 09/09/04 - 09/23/04 114,917,605
1,002,000 UBS Finance (Delaware) LLC 1.23 - 1.61 09/03/04 - 12/31/04 1,001,373,248
-----------------
8,383,268,641
-----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
5
<Page>
<Table>
<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT BANKS/BROKERS (1.6%)
$ 338,000 Citigroup Global Markets Holdings Inc. 1.52 - 1.53% 09/13/04 - 10/14/04 $ 337,540,145
-----------------
TOTAL COMMERCIAL PAPER
(COST $10,958,864,110) 10,958,864,110
-----------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (26.9%)
1,440,000 Federal Home Loan Banks 1.03 - 1.88 09/02/04 - 04/25/05 1,437,423,313
2,003,000 Federal National Mortgage Assoc. 1.04 - 1.83 09/01/04 - 01/19/05 1,998,204,113
1,869,000 Freddie Mac 1.04 - 1.78 09/20/04 - 01/18/05 1,863,779,809
200,000 U.S. Treasury Bill 1.37 11/26/04 199,347,833
-----------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $5,498,755,068) 5,498,755,068
-----------------
CERTIFICATES OF DEPOSIT (14.4%)
550,000 Branch Banking & Trust Co., N.C. 1.54 - 1.58 09/28/04 - 10/07/04 550,000,000
450,000 First Tennessee Bank, N.A. 1.46 - 1.62 09/22/04 - 10/25/04 450,000,000
1,008,000 State Street Bank & Trust Co. 1.39 - 1.57 09/10/04 - 10/12/04 1,008,000,000
950,000 Wells Fargo Bank, N.A. 1.53 - 1.54 09/22/04 - 09/29/04 950,000,000
-----------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $2,958,000,000) 2,958,000,000
-----------------
SHORT-TERM BANK NOTES (6.1%)
1,000,000 Bank of America, N.A. 1.38 - 1.62 09/08/04 - 10/21/04 1,000,000,000
250,000 Standard Federal Bank, N.A. 1.49 09/28/04 250,000,000
-----------------
TOTAL SHORT-TERM BANK NOTES
(COST $1,250,000,000) 1,250,000,000
-----------------
REPURCHASE AGREEMENT (0.1%)
9,823 The Bank of New York (dated 08/31/04;
proceeds $9,823,913) (a)
(COST $9,823,555) 1.313 09/01/04 9,823,555
-----------------
TOTAL INVESTMENTS
(COST $20,675,442,733) (b) 101.0% 20,675,442,733
LIABILITIES IN EXCESS OF OTHER ASSETS (1.0) (200,685,182)
----- -----------------
NET ASSETS 100.0% $ 20,474,757,551
===== =================
</Table>
- ----------
(a) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 4.20% DUE 03/01/34
VALUED AT $10,020,026.
(b) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
SEE NOTES TO FINANCIAL STATEMENTS
6
<Page>
MORGAN STANLEY LIQUID ASSET FUND INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2004
<Table>
ASSETS:
Investments in securities, at value (cost $20,675,442,733) $ 20,675,442,733
Cash 90,000
Receivable for:
Interest 5,017,611
Capital stock sold 414,014
Prepaid expenses and other assets 378,032
-----------------
TOTAL ASSETS 20,681,342,390
-----------------
LIABILITIES:
Payable for:
Capital stock redeemed 199,290,408
Investment management fee 4,762,074
Distribution fee 1,805,173
Accrued expenses and other payables 727,184
-----------------
TOTAL LIABILITIES 206,584,839
-----------------
NET ASSETS $ 20,474,757,551
=================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 20,474,070,051
Accumulated undistributed net investment income 687,500
-----------------
NET ASSETS $ 20,474,757,551
=================
NET ASSET VALUE PER SHARE,
20,474,741,225 shares outstanding (50,000,000,000 SHARES
AUTHORIZED OF $.01 PAR VALUE) $ 1.00
=================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
7
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2004
<Table>
NET INVESTMENT INCOME:
INTEREST INCOME $ 247,233,207
---------------
EXPENSES
Investment management fee 57,183,008
Transfer agent fees and expenses 43,805,034
Distribution fee 21,419,855
Shareholder reports and notices 1,139,046
Custodian fees 448,902
Directors' fees and expenses 297,719
Professional fees 96,461
Other 465,975
---------------
TOTAL EXPENSES 124,856,000
---------------
NET INVESTMENT INCOME 122,377,207
NET REALIZED GAIN 1,006
---------------
NET INCREASE $ 122,378,213
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
8
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2004 AUGUST 31, 2003
---------------- ----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 122,377,207 $ 200,080,604
Net realized gain 1,006 --
---------------- ----------------
NET INCREASE 122,378,213 200,080,604
---------------- ----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (122,390,326) (200,068,427)
Net realized gain (1,006) --
---------------- ----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (122,391,332) (200,068,427)
---------------- ----------------
Net decrease from capital stock transactions (2,606,181,892) (849,967,415)
---------------- ----------------
NET DECREASE (2,606,195,011) (849,955,238)
NET ASSETS:
Beginning of period 23,080,952,562 23,930,907,800
---------------- ----------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$687,500 AND $700,556, RESPECTIVELY) $ 20,474,757,551 $ 23,080,952,562
================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
MORGAN STANLEY LIQUID ASSET FUND INC.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004
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; 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;
10
<Page>
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 the 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, 2004, the distribution fee
was accrued at the annual rate of 0.10%.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities of portfolio securities
for the year ended August 31, 2004, aggregated $91,542,984,694 and
$94,400,784,323, respectively. Morgan Stanley Trust, an affiliate of the
Investment Manager and Distributor, is the Fund's transfer agent. At August 31,
2004, the Fund had transfer agent fees and expenses payable of approximately
$228,700.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation.
Aggregate pension costs for the year ended August 31, 2004 included in
Directors' fees and expenses in the Statement of Operations amounted to $7,535.
At August 31, 2004, the Fund had an accrued pension liability of $61,523 which
is included in accrued expenses in the Statement of Assets and Liabilities. On
December 2, 2003, the Directors voted to close the plan to new participants and
eliminate the future benefits growth due to increases to compensation after July
31, 2003.
Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan
(the "Compensation Plan") which allows each independent Director to defer
payment of all, or a portion, of the fees he receives for serving on the Board
of Directors. Each eligible Director generally may elect to have the deferred
amounts credited with a return equal to the total return on one or more of the
Morgan Stanley funds that are offered as investment options under the
Compensation Plan. Appreciation/depreciation
11
<Page>
and distributions received from these investments are recorded with an
offsetting increase/decrease in the deferred compensation obligation and do not
affect the net asset value of the Fund.
5. CAPITAL STOCK
Transactions in capital stock, at $1.00 per share, were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2004 AUGUST 31, 2003
--------------- ---------------
Shares sold 58,528,750,330 55,318,997,385
Shares issued in reinvestment of dividends and distributions 122,175,653 199,710,575
--------------- ---------------
58,650,925,983 55,518,707,960
Shares redeemed (61,257,107,875) (56,368,675,375)
--------------- ---------------
Net decrease (2,606,181,892) (849,967,415)
=============== ===============
</Table>
6. FEDERAL INCOME TAX STATUS
As of August 31, 2004, the Fund had permanent book/tax differences attributable
to nondeductible expenses. To reflect reclassifications arising from these
differences, paid-in-capital was charged and accumulated undistributed net
investment income was credited $63.
7. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges that defendants, including the Fund,
violated their statutory disclosure obligations and fiduciary duties by failing
properly to disclose (i) that the Investment Manager and certain affiliates of
the Investment Manager allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Manager or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Manager or its affiliates, including
the Fund, allegedly paid excessive commissions to brokers in return for their
efforts to recommend these funds to investors. The complaint seeks, among other
things, unspecified compensatory damages, rescissionary damages, fees and costs.
The defendants have moved to dismiss the action and intend to otherwise
vigorously defend it. While the Fund believes that it has meritorious defenses,
the ultimate outcome of this matter is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of this matter.
12
<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,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
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 0.006 0.009 0.018 0.051 0.055
Less dividends from net investment
income (0.006)+ (0.009) (0.018)+ (0.051)+ (0.055)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
TOTAL RETURN 0.58% 0.86% 1.78% 5.24% 5.69%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.58% 0.56% 0.56% 0.57% 0.58%
Net investment income 0.57% 0.85% 1.76% 5.04% 5.51%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 20,475 $ 23,081 $ 23,931 $ 23,187 $ 19,628
</Table>
- ----------
+ INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001.
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
MORGAN STANLEY LIQUID ASSET FUND INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, 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, 2004, 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, 2004
2004 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the
fiscal year ended August 31, 2004, 10.99% 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.
14
<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 PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS HELD
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY DIRECTOR*** BY DIRECTOR
- -------------------------- ----------- -------------- -------------------------------------- -------------- ------------------------
Michael Bozic (63) Director Since April Private Investor; Director or 208 Director of Weirton
c/o Kramer Levin Naftalis 1994 Trustee of the Retail Funds (since Steel Corporation.
& Frankel LLP April 1994) and the Institutional
Counsel to the Funds (since July 2003); formerly
Independent Directors Vice Chairman of Kmart Corporation
919 Third Avenue (December 1998-October 2000),
New York, NY Chairman and Chief Executive
Officer of Levitz Furniture
Corporation (November 1995-
November 1998) and President and
Chief Executive Officer of Hills
Department Stores (May 1991-July
1995); formerly variously Chairman,
Chief Executive Officer, President
and Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of Sears, Roebuck
& Co.
Edwin J. Garn (71) Director Since January Managing Director of Summit 208 Director of Franklin
c/o Summit Ventures LLC 1993 Ventures LLC; Director or Trustee Covey (time management
1 Utah Center of the Retail Funds (since January systems), BMW Bank of
201 S. Main Street 1993) and the Institutional Funds North America, Inc.
Salt Lake City, UT (since July 2003); member of the (industrial loan
Utah Regional Advisory Board of corporation), United
Pacific Corp.; formerly United Space Alliance (joint
States Senator (R-Utah) (1974-1992) venture between
and Chairman, Senate Banking Lockheed Martin and
Committee (1980-1986), Mayor of the Boeing Company)
Salt Lake City, Utah (1971-1974), and Nuskin Asia
Astronaut, Space Shuttle Discovery Pacific (multilevel
(April 12-19, 1985), and Vice marketing); member of
Chairman, Huntsman Corporation the board of various
(chemical company). civic and charitable
organizations.
Wayne E. Hedien (70) Director Since Retired; Director or Trustee of the 208 Director of The PMI
c/o Kramer Levin Naftalis September 1997 Retail Funds (since September 1997) Group Inc. (private
& Frankel LLP and the Institutional Funds (since mortgage insurance);
Counsel to the Independent July 2003); formerly associated Trustee and Vice
Directors with the Allstate Companies Chairman of The Field
919 Third Avenue (1966-1994), most recently as Museum of Natural
New York, NY Chairman of The Allstate History; director of
Corporation (March 1993-December various other business
1994) and Chairman and Chief and charitable
Executive Officer of its organizations.
wholly-owned subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
15
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS HELD
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY DIRECTOR*** BY DIRECTOR
- -------------------------- ----------- -------------- -------------------------------------- -------------- ------------------------
Dr. Manuel H. Johnson (55) Director Since July Senior Partner, Johnson Smick 208 Director of NVR, Inc.
c/o Johnson Smick 1991 International, Inc., a consulting (home construction);
International, Inc. firm; Chairman of the Audit Chairman and Trustee
2099 Pennsylvania Committee and Director or Trustee of the Financial
Avenue, N.W. of the Retail Funds (since July Accounting Foundation
Suite 950 1991) and the Institutional Funds (oversight
Washington, D.C. (since July 2003); Co-Chairman and organization of the
a founder of the Group of Seven Financial Accounting
Council (G7C), an international Standards Board);
economic commission; formerly Vice Director of RBS
Chairman of the Board of Governors Greenwich Capital
of the Federal Reserve System and Holdings (financial
Assistant Secretary of the U.S. holding company).
Treasury.
Joseph J. Kearns (62) Director Since July President, Kearns & Associates LLC 209 Director of Electro
PMB754 2003 (investment consulting); Deputy Rent Corporation
23852 Pacific Chairman of the Audit Committee and (equipment leasing),
Coast Highway Director or Trustee of the Retail The Ford Family
Malibu, CA Funds (since July 2003) and the Foundation, and the
Institutional Funds (since August UCLA Foundation.
1994); previously Chairman of the
Audit Committee of the
Institutional Funds (October 2001-
July 2003); formerly CFO of the
J. Paul Getty Trust.
Michael E. Nugent (68) Director Since July General Partner of Triumph Capital, 208 Director of various
c/o Triumph Capital, L.P. 1991 L.P., a private investment business organizations.
445 Park Avenue partnership; Chairman of the
New York, NY Insurance Committee and Director or
Trustee of the Retail Funds (since
July 1991) and the Institutional
Funds (since July 2001); formerly
Vice President, Bankers Trust
Company and BT Capital Corporation
(1984-1988).
Fergus Reid (72) Director Since July Chairman of Lumelite Plastics 209 Trustee and Director
c/o Lumelite Plastics 2003 Corporation; Chairman of the of certain investment
Corporation Governance Committee and Director companies in the
85 Charles Colman Blvd. or Trustee of the Retail Funds JPMorgan Funds complex
Pawling, NY (since July 2003) and the managed by J.P. Morgan
Institutional Funds (since June Investment Management
1992). Inc.
</Table>
16
<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 PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS HELD
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY DIRECTOR*** BY DIRECTOR
- -------------------------- ----------- -------------- -------------------------------------- -------------- ------------------------
Charles A. Chairman of Since July Chairman and Director or Trustee of 208 None
Fiumefreddo (71) the Board 1991 the Retail Funds (since July 1991)
c/o Morgan Stanley Trust and and the Institutional Funds (since
Harborside Financial Director July 2003); formerly Chief
Center, Executive Officer of the Retail
Plaza Two, Funds (until September 2002).
Jersey City, NJ
James F. Higgins (56) Director Since June Director or Trustee of the Retail 208 Director of AXA
c/o Morgan Stanley Trust 2000 Funds (since June 2000) and the Financial, Inc. and
Harborside Financial Institutional Funds (since July The Equitable Life
Center, 2003); Senior Advisor of Morgan Assurance Society of
Plaza Two, Stanley (since August 2000); the United States
Jersey City, NJ Director of the Distributor and (financial services).
Dean Witter Realty Inc.; previously
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).
</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. 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.).
17
<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 (51) President Since May 1999 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY Director and Chief Executive Officer of the
Investment Manager and Morgan Stanley Services;
Chairman and Director of the Distributor; Chairman
and Director of the Transfer Agent; Director of
various Morgan Stanley subsidiaries; President of
the Institutional Funds (since July 2003) and
President of the Retail Funds (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.
Barry Fink (49) Vice President Since February 1997 General Counsel (since May 2000) and Managing
1221 Avenue of the Americas Director (since December 2000) of Morgan Stanley
New York, NY Investment Management; Managing Director (since
December 2000), Secretary (since February 1997)
and Director (since July 1998) of the Investment
Manager and Morgan Stanley Services; Vice
President of the Retail Funds; Assistant Secretary
of Morgan Stanley DW; Vice President of the
Institutional Funds (since July 2003); Managing
Director, Secretary and Director of the
Distributor; previously Secretary (February 1997-
July 2003) and General Counsel (February
1997-April 2004) of the Retail Funds; Vice
President and Assistant General Counsel of the
Investment Manager and Morgan Stanley Services
(February 1997-December 2001).
Ronald E. Robison (65) Executive Vice Since April 2003 Principal Executive Officer-Office of the Funds
1221 Avenue of the Americas President and (since November 2003); Managing Director of Morgan
New York, NY Principal Executive Stanley & Co. Incorporated, Managing Director of
Officer Morgan Stanley; Managing Director, Chief
Administrative Officer and Director of the
Investment Manager and Morgan Stanley Services;
Chief Executive Officer and Director of the
Transfer Agent; Managing Director and Director of
the Distributor; Executive Vice President and
Principal Executive Officer of the Institutional
Funds (since July 2003) and the Retail Funds
(since April 2003); Director of Morgan Stanley
SICAV (since May 2004); previously President and
Director of the Retail Funds (March 2001-July
2003) and Chief Global Operations Officer and
Managing Director of Morgan Stanley Investment
Management Inc.
Joseph J. McAlinden (61) Vice President Since July 1995 Managing Director and Chief Investment Officer of
1221 Avenue of the Americas the Investment Manager and Morgan Stanley
New York, NY Investment Management Inc., 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).
Amy R. Doberman (42) Vice President Since July 2004 Managing Director and General Counsel, U.S.
1221 Avenue of the Americas Investment Management; Managing Director of Morgan
New York, NY Stanley Investment Management Inc. and the
Investment Manager, Vice President of the
Institutional and Retail Funds (since July 2004);
previously, Managing Director and General Counsel
- Americas, UBS Global Asset Management (July 2000
- July 2004) and General Counsel, Aeltus
Investment Management, Inc. (January 1997 - July
2000).
Stefanie V. Chang (37) Vice President Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY Inc., and the Investment Manager; Vice President
of the 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 US LLP).
</Table>
18
<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 J. Smith (39) Treasurer and Treasurer since July Executive Director of the Investment Manager and
c/o Morgan Stanley Trust Chief Financial 2003 and Chief Morgan Stanley Services (since December 2001);
Harborside Financial Center, Officer Financial Officer previously, Vice President of the Retail Funds
Plaza Two, since September 2002 (September 2002-July 2003), and Vice President of
Jersey City, NJ the Investment Manager and Morgan Stanley Services
(August 2000-November 2001) and Senior Manager at
PricewaterhouseCoopers LLP (January 1998-August
2000).
Thomas F. Caloia (58) Vice President Since July 2003 Executive Director (since December 2002) and
c/o Morgan Stanley Trust Assistant Treasurer of the Investment Manager, the
Harborside Financial Center, Distributor and Morgan Stanley Services;
Plaza Two, previously Treasurer of the Retail Funds (April
Jersey City, NJ 1989-July 2003); formerly First Vice President of
the Investment Manager, the Distributor and Morgan
Stanley Services.
Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY Inc. and the Investment Manager; Secretary of the
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.
19
<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
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
Joseph J. McAlinden
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT 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) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
37925RPT-RA04-00641P-Y08/04
[MORGAN STANLEY FUNDS LOGO]
MORGAN STANLEY
LIQUID ASSET FUND
ANNUAL REPORT
AUGUST 31, 2004
[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.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 30,716 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 5,067,400(2)
TAX FEES $ 6,031(3) $ 545,053(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 6,483 $ 5,612,453
TOTAL $ 37,199 $ 5,612,453
</Table>
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 29,050 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684(2) $ 1,086,576(2)
TAX FEES $ 4,739(3) $ 252,500(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 5,423 $ 1,339,076
TOTAL $ 34,473 $ 1,339,076
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the
Adviser that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided
that are reasonably related to the performance of the audit of the
financial statements of the Covered Entities' and funds advised by the
Adviser or its affiliates, specifically data verification and
agreed-upon procedures related to asset securitizations and
agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review of the
Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered Entities'
tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED JULY 31, 2003(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval
of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit
Committee believes that the combination of these two approaches in this Policy
will result in an effective and efficient procedure to pre-approve services
performed by the Independent Auditors. As set forth in this Policy, unless a
type of service has received general pre-approval, it will require specific
pre-approval by the Audit Committee (or by any member of the Audit Committee to
which pre-approval authority has been delegated) if it is to be provided by the
Independent Auditors. Any proposed services exceeding pre-approved cost levels
or budgeted amounts will also require specific pre-approval by the Audit
Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and
All Other services that have the general pre-approval of the Audit Committee.
The term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supercedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by
which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes
that implementation of the Policy will not adversely affect the Independent
Auditors' independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may
delegate either type of pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the
Independent Auditors to be able to form an opinion on the Fund's financial
statements. These other procedures include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit. The Audit
Committee will approve, if necessary, any changes in terms, conditions and fees
resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1.
All other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
<Page>
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and, to the extent they are Covered Services, the Covered
Entities or that are traditionally performed by the Independent Auditors.
Because the Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor and is consistent with
the SEC's rules on auditor independence, the Audit Committee may grant general
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "Audit services"; assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities; agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in
Appendix B.2. All other Audit-related services not listed in Appendix B.2 must
be specifically pre-approved by the Audit Committee (or by any member of the
Audit Committee to which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved
the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
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The Audit Committee has pre-approved the All Other services in Appendix
B.4. Permissible All Other services not listed in Appendix B.4 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be
provided by the Independent Auditors will be established annually by the Audit
Committee. Any proposed services exceeding these levels or amounts will require
specific pre-approval by the Audit Committee. The Audit Committee is mindful of
the overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the
Independent Auditors that do not require specific approval by the Audit
Committee will be submitted to the Fund's Chief Financial Officer and must
include a detailed description of the services to be rendered. The Fund's Chief
Financial Officer will determine whether such services are included within the
list of services that have received the general pre-approval of the Audit
Committee. The Audit Committee will be informed on a timely basis of any such
services rendered by the Independent Auditors. Requests or applications to
provide services that require specific approval by the Audit Committee will be
submitted to the Audit Committee by both the Independent Auditors and the Fund's
Chief Financial Officer, and must include a joint statement as to whether, in
their view, the request or application is consistent with the SEC's rules on
auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to
monitor the performance of all services provided by the Independent Auditors and
to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an
annual basis to meet its responsibility to oversee the work of the Independent
Auditors and to assure the auditor's independence from the Fund, such as
reviewing a formal written statement from the Independent Auditors delineating
all relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No.
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1, and discussing with the Independent Auditors its methods and procedures for
ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Directors has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and
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Covered Entities is compatible with maintaining the auditors' independence in
performing audit services.
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. Schedule of Investments
Refer to Item 1.
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. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10 - 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.
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(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.
Item 11 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, 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.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
October 20, 2004