PREHEAT oven to 350° F. Grease and flour two 9-inch-round cake pans.
COMBINE flour, granulated sugar, cocoa, baking powder, baking soda and salt in large mixer bowl. Add milk, water, vegetable oil, eggs and vanilla extract; blend until moistened. Beat for 2 minutes (batter will be thin). Pour into prepared pans. Sprinkle 1/3 cup morsels over each cake.
BAKE for 25 to 30 minutes or until wooden pick inserted in center comes out clean. Cool in pans on wire racks for 10 minutes; remove to wire racks to cool completely. Frost with Creamy Peanut Butter Milk Chocolate Frosting.
FOR CREAMY PEANUT BUTTER MILK CHOCOLATE FROSTING:
MICROWAVE remaining morsels in small, uncovered, microwave-safe bowl on MEDIUM-HIGH (70%) power for 1 minute; STIR. Morsels may retain some of their original shape. If necessary, microwave at additional 10 to 15-second intervals, stirring just until morsels are melted. Beat cream cheese, melted morsels, vanilla extract and salt in small mixer bowl until light and fluffy. Gradually beat in powdered sugar.