UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                  FORM 10-K

[X]  Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995 or

[ ]      Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ______________ to __________________
Commission File Number 0-13299

                                      DEAN WITTER CORNERSTONE FUND III

 (Exact name of registrant as specified in its Limited Partnership Agreement)

                 NEW YORK                                   13-3190919
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation of organization)                         Identification No.)

c/o Demeter Management Corp.
Two World Trade Center, New York, N.Y. - 62nd Flr.             10048
(Address of principal executive offices)                    (Zip Code)
       
Registrant's telephone number, including area code        (212) 392-5454

Securities registered pursuant to Section 12(b) of the Act:

Title of each class                                     Name of each exchange
                                                        on which registered

                 None                                         None

Securities registered pursuant to Section 12(g) of the Act:

                                    Units of Limited Partnership Interest

                                              (Title of Class)
 

                                              (Title of Class)

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.        Yes    X        No        

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment of this Form 10K. [ X ]

State the aggregate market value of the Units of Limited Partnership Interest
held by non-affiliates of the registrant.  The aggregate market value shall be
computed by reference to the price at which units were sold, or the average bid
and asked prices of such units, as of a specified date within 60 days prior to
the date of filing: $46,954,013.46 at January 31, 1996.

                                     DOCUMENTS INCORPORATED BY REFERENCE
                                                (See Page 1)<PAGE>
<PAGE>
<TABLE>
                                  DEAN WITTER CORNERSTONE FUND III
                                 INDEX TO ANNUAL REPORT ON FORM 10-K
                                          DECEMBER 31, 1995

<CAPTION>
                                                                Page No. 
                                                                         
  <S>                                                               <C>

DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . .  1  
 

Part I .

    Item      1.  Business. . . . . . . . . . . . . . . . . . . . . . . .2-3

    Item      2.  Properties. . . . . . . . . . . . . . . . . . . . . . .  4

    Item      3.  Legal Proceedings. . . . . . . . . . . . . . . . . . . . 4

    Item      4.  Submission of Matters to a Vote of Security Holders  . . 4  
      

Part II.

    Item      5.  Market for the Registrant's Partnership Units and
                  Related Security Holder Matters . . . . . . . . . . . .  5  
            
    Item      6.  Selected Financial Data . . . . . .. . . . . . . . . .   6

    Item      7.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations. . . . . . . . . .7-11

    Item      8.  Financial Statements and Supplementary Data. . . . . .  11

    Item      9.  Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure. . . . . . . . . . .11

Part III.

    Item     10.  Directors, Executive Officers, Promoters and
                  Control Persons of the Registrant . . . . . . . . . . 12-15

    Item     11.  Executive Compensation . . . . . . . . . . . . . . . .   15

    Item     12.  Security Ownership of Certain Beneficial Owners
                  and Management . . . . . . . . . . . . . . . . . . . .   15

    Item     13.  Certain Relationships and Related Transactions . . . .   16

Part IV.        

    Item     14.  Exhibits, Financial Statement Schedules, and
                  Reports on Form 8-K . . . . . . . . . . . . . . . . . .  17
</TABLE>
    <PAGE>
<TABLE>
                                 DOCUMENTS INCORPORATED BY REFERENCE
 

Portions of the following documents are incorporated by reference as
follows:

<CAPTION>                                          
Documents Incorporated                          Part of Form 10-K
<S>                                                  <C>                 
     
         Partnership's Registration Statement
         on Form S-1, File No. 2-88587, as               I
         amended (including the Partnership's
         latest Prospectus dated May 2, 1994
         together with the Supplement to
         Prospectus and Disclosure Document
         dated August 7, 1995).

         Partnership's Annual Report on Form              IV
         10-K for the fiscal year ended
         September 30, 1984, File No. 2-88587

         Partnership's Annual Report on Form              IV
         10-K for the fiscal year ended
         September 30, 1986, File No. 2-88587

         Partnership's Annual Report on Form              IV
         10-K for the fiscal year-ended
         December 31, 1988, File No. 2-88587

         December 31, 1995 Annual Report               II and V
         for the Dean Witter Cornerstone Funds
         II, III and IV.


</TABLE>
<PAGE>
                                               PART I
Item 1.  BUSINESS
         (a) General Development of Business. Dean Witter Cornerstone Fund
III (the "Partnership") is a New York limited partnership formed to engage
in the speculative trading of commodity futures contracts and other
commodity interests, including, but not limited to, forward contracts on
foreign currencies.
         The Partnership's net asset value per unit, as of December 31, 1995,
was $2,508.68, representing an increase of 27.50 percent from the net
asset value per unit of $1,967.64 at December 31, 1994.
         (b) Financial Information about Industry Segments.  The
Partnership's business comprises only one segment for financial reporting
purposes, speculative trading of commodity futures contracts and other
commodity interests.  The relevant financial information is presented in
Items 6 and 8.
         (c) Narrative Description of Business.  The Partnership is in the
business of speculative trading in commodity futures contracts and other
commodity interests, pursuant to trading instructions provided by
independent trading advisors.  For a detailed description of the different
facets of the Partnership's business, see those portions of the
Partnership's latest Prospectus, dated May 2, 1994 together with the
supplement to Prospectus and Disclosure Document dated August 7, 1995 (the
"Supplement"), filed as part of the Registration Statement on Form S-1
(see "Documents Incorporated by Reference" Page 1), set forth on the next
page. 
<PAGE>

          Facets of Business
        1.  Summary                     1.   "Summary of the Prospectus"
                                             (Pages 3-12 of the Prospectus
                                             and Page 1 of the Sup-
                                             plement).

        2.  Commodity Markets           2.   "The Commodities Markets"
                                              (Pages 164-172).

        3.  Partnership's Commodity     3.   "Trading Policies" (Pages
            Trading Arrangements and          68-69) and "The Trading
            Policies                          Manager" (Pages 73-74,
                                              and 120-145 of the
                                              Prospectus and Pages
                                              12-13 and Pages T-12-T-16
                                              of the Supplement).
          
     4.  Management of the Part-        4.   "The Cornerstone Funds" (Pages
         nership                              30-61 of the Prospectus and
                                              Pages 1-3 of the Supplement).
                                             "The General Partner" Pages
                                              160-162 of the Prospectus and
                                              Page 14 of the Supplement
                                             "The Commodity Broker" (Pages
                                              162-164).  "The Limited
                                              Partnership Agreements"
                                             (Pages 174-178).
            
     5.  Taxation of the Partnership's    5.   "Federal Income Tax Aspects"
            Limited Partners                   and "State and Local Income
                                               Tax Aspects" (Pages 182-189).
                                                               
(d)      Financial Information About Foreign and Domestic Operations and Export
         Sales.  

   The Partnership has not engaged in any operations in foreign countries;
however, the Partnership (through the commodity broker) enters into forward
contract transactions where foreign banks are the contracting party and trades
in commodity interest contracts on foreign exchanges.
<PAGE>
Item 2.  PROPERTIES
         The executive and administrative offices are located within the
offices of Dean Witter Reynolds Inc. ("DWR").  The DWR offices utilized by
the Partnership are located at Two World Trade Center, 62nd Floor, New
York, NY 10048.
Item 3.  LEGAL PROCEEDINGS
         The General Partner, Demeter Management Corporation ("Demeter"), is
not aware of any material pending legal proceedings to which the
Partnership is a party or to which any of its assets are subject.
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         None.
<PAGE>
                                               PART II

Item 5.  MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED
         SECURITY HOLDER MATTERS

         There is no established public trading market for the Units of
Limited Partnership Interest in the Partnership.  The number of holders of
Units at December 31, 1995 was approximately 6,747.  No distributions have
been made by the Partnership since it commenced trading operations on
January 2, 1985.  Demeter has sole discretion to decide what
distributions, if any, shall be made to investors in the Partnership.  No
determination has yet been made as to future distributions.
         Limited Partnership Units were registered for sale to the public in
certain Canadian provinces.  
<PAGE>
<TABLE>

Item 6.  SELECTED FINANCIAL DATA (in dollars)



                                                                                                                     
<CAPTION>                                                                                                            
                                                                                                                     
                                                  For the Years Ended December 31,                                         
<S>                                    <C>                <C>                 <C>             <C>               <C>    
                                          1995              1994               1993             1992             1991      


Total Revenues
(including interest)                   16,882,940           1,307,961          4,632,967          292,863       17,346,323 


Net Income (Loss)                      11,031,694          (5,680,495)        (2,829,361)      (7,992,392)       8,234,451 


Net Income (Loss)
Per Unit (Limited
& General Partners)                        541.04             (219.67)           (109.91)         (286.23)          276.20 


Total Assets                           48,156,795          48,308,274         57,323,283       61,615,811       76,220,509 


Total Limited Partners'
Capital                                45,991,101          46,250,611         55,270,605       59,369,475       73,343,837 


Net Asset Value Per
Unit of Limited
Partnership Interest                     2,508.68            1,967.64           2,187.31         2,297.22         2,583.45 


</TABLE>

<PAGE>
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

         Liquidity.  The Partnership's assets are deposited in separate
commodity trading accounts with DWR, the commodity broker, and are used by
the Partnership as margin to engage in commodity futures contract trading. 
DWR holds such assets in either designated depositories or in securities
approved by the Commodity Futures Trading Commission ("CFTC") for
investment of customer funds.  The Partnership's assets held by DWR may be
used as margin solely for the Partnership's trading.  Since the
Partnership's sole purpose is to trade in commodity futures contracts and
other commodity interests, it is expected that the Partnership will
continue to own such liquid assets for margin purposes.
         The Partnership's investment in commodity futures contracts and
other commodity interests may be illiquid.  If the price for a futures
contract for a particular commodity has increased or decreased by an
amount equal to the "daily limit", positions in the commodity can neither
be taken nor liquidated unless traders are willing to effect trades at or
within the limit.  Commodity futures prices have occasionally moved the
daily limit for several consecutive days with little or no trading.  Such
market conditions could prevent the Partnership from promptly liquidating
its commodity futures positions.
         There is no limitation on daily price moves in trading forward
contracts on foreign currency.  The markets for some world currencies have
low trading volume and are illiquid which may prevent the Partnership from
trading in potentially profitable markets or prevent the Partnership from
promptly liquidating unfavorable positions in such markets and subjecting
it to substantial losses.
         Either of these market conditions could result in restrictions on
redemptions.
<PAGE>
         Market Risk.  The Partnership trades futures, options and forward
contracts in interest rates, stock indices, commodities and currencies. 
In entering into these contracts there exists a risk to the Partnership
(market risk) that such contracts may be significantly influenced by
market conditions, such as interest rate volatility, resulting in such
contracts being less valuable.  If the markets should move against all of
the commodity interest positions held by the Partnership at the same time,
and if the Trading Advisors were unable to offset commodity interest
positions of the Partnership, the Partnership could lose all of its
assets.  The Partnership has established Trading Policies for liquidity
and leverage which help control market risk.  Both the Trading Advisors
and Demeter monitor the Partnership's trading activities on a daily basis
to ensure compliance with the Trading Policies.  Demeter may (under terms
of the Management Agreements) override the trading instructions of a
Trading Advisor to the extent necessary to comply with the Partnership's
Trading Policies.
         Credit Risk.  In addition to market risk, the Partnership is subject
to credit risk in that a counterparty may not be able to meet its
obligations to the Partnership.  The counterparty of the Partnership for
futures contracts traded in the United States and most foreign exchanges
on which the Partnership trades is the clearinghouse associated with such
exchange.  In general, clearinghouses are backed by the membership of the
exchange and will act in the event of non-performance by one of its
members or one of its members' customers, and as such, should
significantly reduce this credit risk.  In cases where the Partnership
trades on exchanges where the clearinghouse is not backed by the
membership or when the Partnership enters into off-exchange contracts with
a counterparty, the sole recourse of the Partnership will be the 
<PAGE>
clearinghouse or the counterparty as the case may be.  With respect to
futures contracts, DWR, in its business as an international commodity
broker, constantly monitors the credit-worthiness of the exchanges and
clearing members of the foreign exchanges with which it does business for
clients, including the Partnership.  If DWR believes that there was a
problem with the credit-worthiness of an exchange on which the Partnership
deals, it would so advise Demeter.  With respect to forward contract
trading, the Partnership trades with only those counterparties which
Demeter, together with DWR, have determined to be creditworthy.  As set
forth in the Partnership's Trading Policies, in determining credit-
worthiness, Demeter and DWR consult with the Corporate Credit Department
of DWR.  Currently, the Partnership deals solely with DWR as its
counterparty on forward contracts.  While DWR and Demeter monitor credit-
worthiness and risk involved in dealing on the various exchanges and with
counterparties, there can be no assurance that an exchange or counterparty
will be able to meet its obligations to the Partnership. 
         Capital Resources.  The Partnership does not have, nor does it
expect to have, any capital assets.  Redemptions of additional Units in
the future will impact the amount of funds available for investments in
commodity futures, forward contracts on foreign currencies and other
commodity interests in subsequent periods.  As redemptions are at the
discretion of Limited Partners, it is not possible to estimate the amount
and therefore, the impact of future redemptions.
         Results of Operations.  As of December 31, 1995, the Partnership's
total capital was $46,949,674, a decrease of $52,779 from the
Partnership's total capital of $47,002,453 at December 31, 1994.  For the
year ended December 31, 1995, the Partnership generated net income of 

<PAGE>
$11,031,694, total subscriptions aggregated $49,000, and total redemptions
aggregated $11,133,473.
         For the year ended December 31, 1995, the Partnership's total
trading revenues including interest income were $16,882,940.  The
Partnership's total expenses for the year were $5,851,246 resulting in net
income of $11,031,694.  The value of an individual unit in the Partnership
increased from $1,967.64 at December 31, 1994 to $2,508.68    at December
31, 1995.
         As of December 31, 1994, the Partnership's total capital was
$47,002,453, a decrease of $9,154,240 from the Partnership's total capital
of $56,156,693 at December 31, 1993.  For the year ended December 31,
1994, the Partnership incurred a net loss of $5,680,495, total
subscriptions aggregated $5,299,578, and total redemptions aggregated
$8,773,323.
         For the year ended December 31, 1994, the Partnership's total
trading revenues including interest income were $1,307,961.  The
Partnership's total expenses for the year were $6,988,456 resulting in a 
net loss of $5,680,495.  The value of an individual unit in the
Partnership decreased from $2,187.31 at December 31, 1993 to $1,967.64 at
December 31, 1994.  
         As of December 31, 1993, the Partnership's total capital was
$56,156,693, a decrease of $4,143,394 from the Partnership's total capital
of $60,300,087 at December 31, 1992.  For the year ended December 31,
1993, the Partnership incurred a net loss of $2,829,361, total
subscriptions aggregated $9,819,616, and total redemptions aggregated
$11,133,649.
<PAGE>
         For the year ended December 31, 1993, the Partnership's total
trading revenues including interest income were $4,632,967.  The
Partnership's total expenses for the year were $7,462,328 resulting in a
net loss of $2,829,361.  The value of an individual unit in the
Partnership decreased from $2,297.22 at December 31, 1992 to $2,187.31 at
December 31, 1993.
         The Partnership's overall performance record represents varied
results of trading in different commodity markets.  For a further
description of results, refer to the letter to the Limited Partners in the
accompanying 1995 Annual Report to Partners, incorporated by reference in
this Form 10-K.  The Partnership's gains and losses are allocated among
its Limited Partners for income tax purposes.
Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         The information required by this Item appears in the attached 1995
Annual Report to Partners and is incorporated by reference in this Annual
Report on Form 10-K.
Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  
         ACCOUNTING AND FINANCIAL DISCLOSURE

         None.


<PAGE>

PART III

Item 10.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
          PERSONS OF THE REGISTRANT

General Partner
         Demeter, a Delaware corporation, was formed on August 18, 1977 to
act as a commodity pool operator and is registered with the CFTC as a
commodity pool operator and currently is a member of the National Futures
Association ("NFA") in such capacity.  Demeter is wholly-owned by Dean
Witter, Discover & Co. ("DWD") and is an affiliate of DWR.  DWD, DWR and
Demeter may each be deemed to be "promoters" and/or a "parent" of the
Partnership within the meaning of the federal securities laws.
Dean Witter Reynolds Inc.
         DWR is a financial services company which provides to its
individual, corporate and institutional clients services as a broker in
securities and commodity interest contracts, a dealer in corporate,
municipal and government securities, an investment banker, an investment
adviser and an agent in the sale of life insurance and various other
products and services.  DWR is a member firm of the New York Stock
Exchange, the American Stock Exchange, the Chicago Board Options Exchange,
and other major securities exchanges, and is a clearing member of the
Chicago Board of Trade, the Chicago Mercantile Exchange, the Commodity
Exchange Inc., and other major commodities exchanges.
         DWR is registered with the CFTC as a futures commission merchant and
is a member of the NFA in such capacity.  DWR is currently servicing its
clients through a network of 350 branch offices with approximately 8,500
account executives servicing individual and institutional client
accounts.                                         

<PAGE>
Directors and Officers of the General Partner
         The directors and officers of Demeter as of December 31, 1995 are as
follows:
         Richard M. DeMartini, age 43, is the Chairman of the Board and a
Director of Demeter.  Mr. DeMartini is also the Chairman of the Board and
a Director of Dean Witter Futures & Currency Management Inc. ("DWFCM"), a
registered commodity trading advisor.  Mr. DeMartini has served as
President and Chief Operating Officer of Dean Witter Capital, a division
of DWR since January 1989.  From January 1988 until January 1989, Mr.
DeMartini served as President and Chief Operating Officer of the Consumer
Banking Division of DWD, and from May 1985 until January 1988 was
President and Chief Executive Officer of the Consumer Markets Division of
DWD.  Mr. DeMartini currently serves as a Director of DWD and DWR, and has
served as an officer of DWR for the past five years.  Mr. DeMartini has
been with DWD and its affiliates for 18 years.  While Mr. DeMartini has
extensive experience in the securities industry, he has no experience in
commodity interests trading.
         Mark J. Hawley, age 52, is President and a Director of Demeter.  Mr.
Hawley joined DWR in February 1989 as Senior Vice President and Director
of DWR's Managed Futures and Precious Metals Department.  Mr. Hawley also
serves as President of DWFCM.  From 1978 to 1989, Mr. Hawley was a member
of the senior management team at Heinold Asset Management, Inc., a
commodity pool operator, and was responsible for a variety of projects in
public futures funds.  From 1972 to 1978, Mr. Hawley was a Vice President
in charge of institutional block trading for the Mid-West at Kuhn Loeb &
Co.
         Lawrence Volpe, age 48, is a Director of Demeter and DWFCM.  Mr.
Volpe joined DWR as a Senior Vice President and Controller in September 
<PAGE>
1983, and currently holds those positions.  From July 1979 to September
1983, he was associated with E.F. Hutton & Company Inc. and prior to his
departure, held the positions of First Vice President and Assistant
Controller.  From 1970 to July 1979, he was associated with Arthur
Anderson & Co. and prior to his departure he served as audit manager in
the financial services division.
         Joseph G. Siniscalchi, age 50, is a Director of Demeter.  Mr.
Siniscalchi joined DWR in July 1984 as a First Vice President, Director of
General Accounting.  He is currently Senior Vice President and Controller
of the Financial Markets Division of DWR.  From February 1980 to July
1984, Mr. Siniscalchi was Director of Internal Audit at Lehman Brothers
Kuhn Loeb, Inc.
         Laurence E. Mollner, age 54, is a Director of Demeter.  Mr. Mollner
joined DWR in May 1979 as Vice President and Director of Commercial Sales. 
He is currently Executive Vice President and Deputy Director of the
Futures Markets Division of DWR.
         Edward C. Oelsner III, age 53, is a Director of Demeter.  Mr.
Oelsner joined DWR in March 1981 as a Managing Director in the Corporate
Finance Department.  He currently manages DWR's Retail Products Group
within the Corporate Finance Department.  While Mr. Oelsner has extensive
experience in the securities industry, he has no experience in commodity
interests trading.
         Robert E. Murray, age 35, is a Director of Demeter.  Mr. Murray is
currently a First Vice President of the DWR Managed Futures Division and
is a Director and the Senior Administrative Officer of DWFCM.  Mr. Murray
graduated from Geneseo State University in May 1983 with a B.A. degree in
Finance.  Mr. Murray began at DWR in 1984 and is currently the Director of
Product Development for the Managed Futures Division and is responsible 
<PAGE>
for the development and maintenance of the proprietary Fund Management
System utilized by Demeter and DWFCM for organizing information and
producing reports for monitoring investors' accounts.
         Patti L. Behnke, age 35, is Vice President and Chief Financial
Officer of Demeter.  Ms. Behnke joined DWR in 1991 as Assistant Vice
President of Financial Reporting and is currently First Vice President and
Director of Financial Reporting and Managed Futures Accounting in the
Capital Markets division of DWR.  From August 1988 to September 1990, Ms.
Behnke was Assistant Controller of L.F. Rothschild & Co. and from
September 1986 to August 1988, she was associated with Carteret Savings
Bank as Assistant Vice President - Financial Analysis.  From April 1982 to
September 1986, Ms. Behnke was an auditor at Arthur Andersen &
Co.
Item 11.   EXECUTIVE COMPENSATION
         The Partnership has no directors and executive officers.  As a
limited partnership, the business of the Partnership is managed by Demeter
which is responsible for the administration of the business affairs of the
Partnership but receives no compensation for such services. 
Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 
         (a)     Security Ownership of Certain Beneficial Owners - As of
December 31, 1995 there were no persons as beneficial owners of more than
5 percent of the Units of Limited Partnership Interest in the Partnership.
         (b)     Security Ownership of Management - At December 31, 1995,
Demeter owned 382.103 Units of General Partnership Interest representing
a 2.04 percent interest in the Partnership.
         (c)     Changes in Control - None

<PAGE>
Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         Refer to Note 2 - "Related Party Transactions" of "Notes to
Financial Statements", in the accompanying 1995 Annual Report to Partners,
incorporated by reference in this Form 10-K.  In its capacity as the
Partnership's retail commodity broker, DWR received commodity brokerage
commissions (paid and accrued by the Partnership) of $3,499,743 for the
year ended December 31, 1995.

<PAGE>

                                               PART IV
Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)      1. Listing of Financial Statements
         The following financial statements and reports of independent public
accountants, all appearing in the accompanying 1995 Annual Report to
Partners, are incorporated by reference in this Form 10-K:
     -       Report of Deloitte & Touche LLP, independent auditors, for the
             years ended December 31, 1995, 1994 and 1993.
         
     -       Statements of Financial Condition as of December 31, 1995 and
             1994.

     -       Statements of Operations, Changes in Partners' Capital, and
             Cash Flows for the years ended December 31, 1995, 1994 and
             1993.

     -       Notes to Financial Statements.
     With exception of the aforementioned information and the information
incorporated in Items 7, 8, and 13, the 1995 Annual Report to Partners is
not deemed to be filed with this report.

         2.  Listing of Financial Statement Schedules
         No financial statement schedules are required to be filed with this
report.
(b)      Reports on Form 8-K
         No reports on Form 8-K have been filed by the Partnership during the
last quarter of the period covered by this report.
(c)      Exhibits
         Refer to Exhibit Index on Page E-1 and E-2.


<PAGE>
                                                 SIGNATURES

         Pursuant to the requirement of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
                                  
                                          DEAN WITTER CORNERSTONE FUND III
                                                  (Registrant)

                                          BY:  Demeter Management Corporation,
                                                  General Partner

March 21, 1996                            BY: /s/ Mark J. Hawley               
                                                  Mark J. Hawley, Director and
                                                    President

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Demeter Management Corporation.

BY: /s/  Mark J. Hawley                                          March 21, 1996
            Mark J. Hawley, Director and
              President           

    /s/  Richard M. DeMartini                                   March 21, 1996
            Richard M. DeMartini, Director
              and Chairman of the Board


    /s/  Lawrence Volpe                                         March 21, 1996
            Lawrence Volpe, Director        
              

    /s/  Laurence E. Mollner                                    March 21, 1996
            Laurence E. Mollner, Director   
              

    /s/  Joseph G. Siniscalchi                                  March 21, 1996
            Joseph G. Siniscalchi, Director 

     
    /s/  Edward C. Oelsner III                                  March 21, 1996
            Edward C. Oelsner III, Director 


    /s/  Robert E. Murray                                       March 21, 1996
            Robert E. Murray, Director  


    /s/  Patti L. Behnke                                        March 21, 1996
            Patti L. Behnke, Chief Financial
              Officer


<PAGE>
                                                EXHIBIT INDEX
       
         ITEM                                              METHOD OF FILING

-  3.    Limited Partnership Agreement of
         the Partnership, dated as of
         December 7, 1983, as amended as                                 (1)
         of May 11, 1984.

- 10.    Management Agreement among the 
         Partnership, Demeter Management
         Corporation and Sunrise Commodities
         Inc. dated as of November 15, 1983.                             (2)

- 10.    Management Agreement among the
         Partnership, Demeter Management 
         Corporation and Computerized
         Commodity Advisory Inc. dated as 
         of June 18, 1986.                                               (3)

- 10.    Dean Witter Cornerstone Funds
         Exchange Agreement, dated as of
         May 31, 1984.                                                   (4)

- 10.    Customer Agreement Between the
         Partnership and Dean Witter
         Reynolds Inc., dated as of May 31, 1984.                        (5)

- 13.    December 31, 1995 Annual Report to Limited Partners.            (6)



(1)      Incorporated by reference to Exhibit 3.01 to Partnership's Annual
Report on Form 10-K for the fiscal year ended September 30, 1984.

(2)      Incorporated by reference to Exhibit 10.03 to the Partnership's
Annual Report on Form 10-K for the fiscal year ended September 30, 1984.

(3)      Incorporated by reference to Exhibit 10.04 to the Partnership's
Annual Report on Form 10-K for the fiscal year ended September 30, 1986.

(4)      Incorporated by reference to Exhibit 10.06 to the Partnership's
Annual Report on Form 10-K for the fiscal year ended September 30, 1984.

(5)      Incorporated by reference to Exhibit 10.07 to the Partnership's
Annual Report on Form 10-K for the fiscal year ended September 30, 1984.

(6)      Filed herewith.


                                                     E-1


<PAGE>
 
 
    Cornerstone
    Funds
 
 
 
 
    December 31, 1995
    Annual Report
 
 
                                                              [LOGO] DEAN WITTER
<PAGE>
 
DEAN WITTER
Two World Trade Center
62nd Floor
NEW YORK, NY 10048
TELEPHONE (212) 392-8899
 
CORNERSTONE FUNDS
ANNUAL REPORT
1995
 
Dear Limited Partner:
 
This marks the eleventh annual report for Cornerstone Funds II and III and the
ninth for Cornerstone Fund IV. The Net Asset Value per Unit for the three
Cornerstone Funds on December 31, 1995 was as follows:
 
<TABLE>
<CAPTION>
                                                                                               % CHANGE
 FUNDS                              N.A.V.                                                     FOR 1995
 -----                             ---------                                                   --------
<S>                                <C>                                                         <C>
Fund II                            $2,830.65                                                    26.5%
Fund III                           $2,508.68                                                    27.5%
Fund IV                            $2,836.73                                                    23.0%
</TABLE>
 
Cornerstone Fund IV, the currency Fund, recorded net losses during January as a
decline in the value of the U.S. dollar relative to most major world currencies
resulted in losses. As January progressed, the advisors to the Fund reversed
positions only to experience additional losses when the U.S. dollar
strengthened sharply on January 31. Significant gains were recorded during
February and March due to a trend higher in the value of the Japanese yen and
most major European currencies relative to the U.S. dollar. As a result,
trading gains were recorded from long positions in the Japanese yen, German
mark, as well as the Swiss and French francs and Norwegian krone.
 
In April, Fund IV continued to record gains from the upward trend in the value
of the Japanese yen relative to the U.S. dollar, as well as from transactions
involving the Australian and New Zealand dollars. A reversal in the downward
trend in the value of the U.S. dollar versus most major European currencies and
the Japanese yen during May resulted in losses from transactions involving the
German mark, French franc, Norwegian krone and
<PAGE>
 
Japanese yen. In June, small losses were recorded from transactions involving
the Japanese yen, British pound and French franc as the value of most major
world currencies moved in a trendless range versus the U.S. dollar and one
another. These losses were partially offset by gains from trading in the German
mark and Australian dollar.
 
During July, Fund IV sustained losses as most foreign currencies, particularly
the Australian and New Zealand dollars, as well as the German mark, continued
to move in a trendless pattern relative to the U.S. dollar and one another.
Trading gains were recorded during August as the Fund's previously established
short positions in the Japanese yen profited from a sharp downward move in the
value of the Japanese yen relative to the U.S. dollar. During September, the
Fund recorded small net losses primarily as a result of a reversal in an upward
move in the value of the U.S. dollar relative to most major European
currencies, as well as the Japanese yen, on September 20 and 21. This sudden
reversal resulted in losses from transactions involving the German mark, French
franc and British pound. However, gains recorded from trading in the Japanese
yen earlier in the month, offset a majority of Fund losses for the month.
 
Fund IV began the fourth quarter by recording net gains as the Fund's short yen
positions profited from the continued decline of the Japanese yen relative to
the U.S. dollar. Net losses were recorded during November due primarily to
trendless movement in the value of world currencies, particularly the
Australian dollar, German mark and French franc, relative to the U.S. dollar.
Trading in the Japanese yen also resulted in losses as the previous downward
trend in the value of the yen versus the U.S. dollar subsided during the month.
During December, Fund IV recorded small net losses as the value of the British
pound relative to the U.S. dollar moved sharply
<PAGE>
 
higher late in the month. As a result, losses were recorded from the Fund's
previously established short British pound positions. Trading gains from
transactions involving the Japanese yen and German mark offset a majority of the
losses experienced in the British pound.
 
Cornerstone Fund II, a diversified fund, recorded losses during January as a
result of the aforementioned currency activity, as well as from trading in
financial and agricultural futures. Fund II profited significantly during
February and March as the value of most major world currencies relative to the
U.S. dollar increased, resulting in profits for the Fund's long positions in
major European currencies, as well as the Japanese yen. Additional gains were
recorded from long positions in global bond futures positions as prices moved
higher during this period as well as in crude oil futures trading.
 
In April, a continued upward trend in global financial futures prices resulted
in gains for Fund II's previously established long stock index and bond futures
positions. Additional gains were recorded for the Fund's long Japanese yen
positions as the value of the yen continued to move higher versus the U.S.
dollar. Small net losses were recorded during May as trading losses in
traditional commodities, such as energy, agricultural and metals futures, as
well as in currencies, more than offset gains recorded from long positions in
global financial futures. During June, Fund II recorded small net losses as the
previous upward trend in international interest rate futures prices pulled back
during the month. These losses, coupled with smaller losses in the currency and
agricultural futures markets, offset gains recorded in the energy and coffee
futures markets.
 
During July, Fund II posted net losses as a result of trading in both U.S. and
international bond futures. Additional Fund losses were recorded in the
currency markets as the value of most major world
<PAGE>
 
currencies moved in a narrow trading range relative to the U.S. dollar and one
another. During August, losses were recorded in global bond futures,
particularly in U.S. Treasury bond futures, as bond futures prices experienced
a period of short-term volatile movement. These losses, coupled with losses
recorded in soft commodities and silver futures, more than offset gains
recorded from transactions involving the Japanese yen. Fund II also recorded
losses in September due primarily to erratic price movement in global interest
rate and stock index futures. Losses were also recorded in energy futures
trading, as oil and gas prices reversed dramatically, and in metals futures
trading, as both precious and base metals prices remained relatively trendless.
 
Small net losses were recorded during October as trendless price movement was
commonplace in several of the markets traded by the Fund, including cotton,
crude oil and overseas interest rate futures. However, trading profits were
recorded from short Japanese yen positions, as well as from trading in the
agricultural and metals markets. During November, profits were recorded as
global bond futures prices increased during the month, resulting in gains in
U.S., European and Japanese interest rate futures. Additional gains were
recorded from short coffee futures positions as prices declined during the
month. In December, Fund II was profitable primarily due to trading in the
energy markets, as long positions in crude and heating oil profited from
increasing oil prices, and in soft commodities, as gains were recorded as a
result of trading in both sugar and coffee futures. Increasing soybean and corn
prices during the month resulted in additional gains for the Fund's long
soybean and corn futures positions.
 
Cornerstone Fund III, also a diversified fund, experienced losses during
January due to trading in the currency, financial and agricultural markets.
During February and March, significant gains were recorded as a
<PAGE>
 
result of trading in the currency markets as the value of the U.S. dollar moved
lower versus most world currencies. Strong gains were also recorded from long
positions in global bond futures, as prices in these markets increased during
this two month period.
 
Trading in global financial futures was profitable during April and May as both
U.S. and international interest rate futures prices continued to trend higher.
Additional gains were recorded in stock index futures, specifically from
trading Nikkei and S&P 500 Index futures. Small net gains were recorded during
June as trading in base metals, energy and soft commodities futures more than
offset trading losses recorded in international interest rate futures,
currencies and livestock futures.
 
During July, trading losses were recorded in financial futures as global
interest rate futures prices retreated from their previous upward trend.
Additional losses were recorded in Japanese stock index futures as a sharp
reversal in Japanese stock prices resulted in losses for the Fund's previously
established short Nikkei Index futures positions. In August, gains were
recorded from short positions in the Japanese yen, as the value of the yen
moved lower relative to the U.S. dollar, and from long positions in Nikkei
Index and corn futures as prices in both of these markets moved higher. In
September, net gains were recorded as long positions in Japanese, European and
Australian interest rate futures profited from increasing global bond prices.
Smaller gains in agricultural futures and soft commodities contributed to the
Fund's gains for the month.
 
 
Net losses were recorded during October due to losses in soft commodities
trading as cotton and coffee prices moved in a trendless pattern, as well as
from trading in currencies and global financial futures. During November,
profits were recorded primarily from long positions in global interest rate
<PAGE>
 
and S&P 500 Index futures, as prices moved higher. Smaller gains were recorded
in soft commodities and energy futures trading. Fund III ended 1995 with strong
gains during December as a result of trading in energy futures as long gas and
oil positions profited from a dramatic price move higher. Agricultural futures
trading resulted in additional gains as long positions in corn, soybean meal
and soybean futures also benefited from rising prices.
 
Overall, each of the Cornerstone Funds was able to record significant profits
during the calendar year of 1995. Cornerstone Funds II and III recorded profits
primarily due to price trends in the global financial futures and currency
markets. Cornerstone Fund IV profited as it was able to capitalize on currency
trends in the first half of the year. Since their inception in 1985,
Cornerstone Fund II has increased by 190.3% (a compound annualized return of
10.2%) and Cornerstone Fund III has increased by 157.3% (a compound annualized
return of 9.0%). Cornerstone Fund IV, since its inception in 1987, has
increased by 185.8% (a compound annualized return of 12.9%).
 
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd Floor,
New York, NY 10048 or your Dean Witter Account Executive.
 
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete.
 
    Sincerely,
 
    /s/ Mark J. Hawley
    Mark J. Hawley
    President
    Demeter Management Corporation
    General Partner
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
INDEPENDENT AUDITORS' REPORT
 
The Limited Partners and the General Partner of
Dean Witter Cornerstone Fund II
Dean Witter Cornerstone Fund III
Dean Witter Cornerstone Fund IV:
 
We have audited the accompanying statements of financial condition of Dean
Witter Cornerstone Fund II, Dean Witter Cornerstone Fund III and Dean Witter
Cornerstone Fund IV (collectively, the "Partnerships") as of December 31, 1995
and 1994 and the related statements of operations, changes in partners'
capital, and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Partnerships' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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, such financial statements present fairly, in all material
respects, the financial position of Dean Witter Cornerstone Fund II, Dean
Witter Cornerstone Fund III and Dean Witter Cornerstone Fund IV as of December
31, 1995 and 1994 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
 
/s/ Deloitte & Touche LLP
February 21, 1996
New York, New York
<PAGE>
 
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                     ---------------------
                                                        1995       1994
                                                     ---------- ----------
                                                         $          $
 <S>                                                 <C>        <C>
                       ASSETS
 Equity in Commodity futures trading
  accounts:
  Cash                                               28,057,189 27,570,984
  Net unrealized gain on open contracts               3,368,107  4,316,080
                                                     ---------- ----------
  Total Trading Equity                               31,425,296 31,887,064
 Interest receivable (DWR)                              107,485    124,668
 Receivable from DWR                                     25,525     50,385
                                                     ---------- ----------
  Total Assets                                       31,558,306 32,062,117
                                                     ========== ==========
               LIABILITIES AND PARTNERS' CAPITAL
 LIABILITIES
 Accrued incentive fees                                 307,567        --
 Redemptions payable                                    134,889    386,099
 Accrued management fees                                104,238    105,860
 Accrued brokerage commissions (DWR)                     94,453     81,268
 Common administrative expenses payable                  81,314    111,168
 Accrued transaction fees and costs                       6,957      5,720
                                                     ---------- ----------
  Total Liabilities                                     729,418    690,115
                                                     ---------- ----------
 PARTNERS' CAPITAL
 Limited Partners (10,673.698 and 13,802.050 Units,
   respectively)                                     30,213,505 30,885,515
 General Partner (217.400 Units)                        615,383    486,487
                                                     ---------- ----------
  Total Partners' Capital                            30,828,888 31,372,002
                                                     ---------- ----------
  Total Liabilities and Partners'
    Capital                                          31,558,306 32,062,117
                                                     ========== ==========
 NET ASSET VALUE PER UNIT                              2,830.65   2,237.75
                                                     ========== ==========
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
                                   1995        1994       1993
                                ----------  ----------  ---------
<S>                             <C>         <C>         <C>
                                    $           $           $
REVENUES
Trading Profit (Loss):
 Realized                       11,081,716    (878,688) 2,539,342
 Net change in unrealized         (947,973)    556,567  2,029,459
                                ----------  ----------  ---------
  Total Trading Results         10,133,743    (322,121) 4,568,801
Interest income (DWR)            1,471,022   1,153,003    694,085
                                ----------  ----------  ---------
  Total Revenues                11,604,765     830,882  5,262,886
                                ----------  ----------  ---------
EXPENSES
Brokerage commissions (DWR)      1,864,093   2,336,047  1,773,947
Management fees                  1,307,872   1,346,905  1,157,221
Incentive fees                     381,720         --      19,886
Transaction fees and costs         160,238     194,384    141,974
Common administrative expenses       8,183      49,101     68,511
                                ----------  ----------  ---------
  Total Expenses                 3,722,106   3,926,437  3,161,539
                                ----------  ----------  ---------
NET INCOME (LOSS)                7,882,659  (3,095,555) 2,101,347
                                ==========  ==========  =========
Net Income (Loss) Allocation:
Limited Partners                 7,753,763  (3,050,650) 2,057,120
General Partner                    128,896     (44,905)    44,227
Net Income (Loss) per Unit:
Limited Partners                    592.90     (219.47)    178.05
General Partner                     592.90     (219.47)    178.05
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
<PAGE>
 
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                     ---------------------
                                                        1995       1994
                                                     ---------- ----------
                                                         $          $
 <S>                                                 <C>        <C>       
                       ASSETS
 Equity in Commodity futures trading
  accounts:
  Cash                                               42,294,365 42,884,780
  Net unrealized gain on open contracts               5,578,294  5,016,857
                                                     ---------- ----------
  Total Trading Equity                               47,872,659 47,901,637
 Interest receivable (DWR)                              159,680    193,048
 Receivable from DWR                                    124,456    213,589
                                                     ---------- ----------
  Total Assets                                       48,156,795 48,308,274
                                                     ========== ==========
               LIABILITIES AND PARTNERS' CAPITAL
 LIABILITIES
 Redemptions payable                                    639,349    666,178
 Common administrative expenses payable                 222,036    266,405
 Accrued brokerage commissions (DWR)                    166,128    200,604
 Accrued management fees                                158,630    158,895
 Accrued transaction fees and costs                      20,978     13,739
                                                     ---------- ----------
  Total Liabilities                                   1,207,121  1,305,821
                                                     ---------- ----------
 PARTNERS' CAPITAL
 Limited Partners (18,332.818 and 23,505.598 Units,
   respectively)                                     45,991,101 46,250,611
 General Partner (382.103 Units)                        958,573    751,842
                                                     ---------- ----------
  Total Partners' Capital                            46,949,674 47,002,453
                                                     ---------- ----------
  Total Liabilities and Partners'
    Capital                                          48,156,795 48,308,274
                                                     ========== ==========
 NET ASSET VALUE PER UNIT                              2,508.68   1,967.64
                                                     ========== ==========
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
 
<TABLE>
<CAPTION>
                                   1995       1994        1993
                                ---------- ----------  ----------
<S>                             <C>        <C>         <C>       
                                    $          $           $
REVENUES
Trading Profit (Loss):
 Realized                       14,260,042    913,869    (627,751)
 Net change in unrealized          561,437 (1,350,056)  3,815,157
                                ---------- ----------  ----------
  Total Trading Results         14,821,479   (436,187)  3,187,406
Interest income (DWR)            2,061,461  1,744,148   1,445,561
                                ---------- ----------  ----------
  Total Revenues                16,882,940  1,307,961   4,632,967
                                ---------- ----------  ----------
EXPENSES
Brokerage commissions (DWR)      3,499,743  4,417,718   4,587,865
Management fees                  1,828,013  2,014,028   2,375,033
Transaction fees and costs         502,332    434,287     348,493
Common administrative expenses      21,158    122,423     150,937
                                ---------- ----------  ----------
  Total Expenses                 5,851,246  6,988,456   7,462,328
                                ---------- ----------  ----------
NET INCOME (LOSS)               11,031,694 (5,680,495) (2,829,361)
                                ========== ==========  ==========
Net Income (Loss) Allocation:
Limited Partners                10,824,963 (5,594,569) (2,784,837)
General Partner                    206,731    (85,926)    (44,524)
Net Income (Loss) per Unit:
Limited Partners                    541.04    (219.67)    (109.91)
General Partner                     541.04    (219.67)    (109.91)
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
<PAGE>
 
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                     -----------------------
                                                        1995        1994
                                                     ----------- -----------
                                                          $           $
 <S>                                                 <C>         <C>
                       ASSETS
 Equity in Commodity futures trading
  accounts:
  Cash                                               104,927,961 111,508,180
  Net unrealized gain on open contracts                   70,143     268,291
                                                     ----------- -----------
  Total Trading Equity                               104,998,104 111,776,471
 Interest receivable (DWR)                               364,747     434,153
 Receivable from DWR                                         --          --
                                                     ----------- -----------
  Total Assets                                       105,362,851 112,210,624
                                                     =========== ===========
 LIABILITIES AND PARTNERS' CAPITAL
 LIABILITIES
 Redemptions payable                                   1,044,804   1,589,622
 Accrued management fees                                 349,039     371,606
 Common administrative expenses payable                  267,788     357,130
 Accrued brokerage commissions (DWR)                      32,580         --
 Accrued transaction fees and costs                        1,629         --
                                                     ----------- -----------
  Total Liabilities                                    1,695,840   2,318,358
                                                     ----------- -----------
 PARTNERS' CAPITAL
 Limited Partners (35,905.625 and 46,994.002 Units,
   respectively)                                     101,854,654 108,418,306
 General Partner (638.889 Units)                       1,812,357   1,473,960
                                                     ----------- -----------
  Total Partners' Capital                            103,667,011 109,892,266
                                                     ----------- -----------
  Total Liabilities and Partners'
    Capital                                          105,362,851 112,210,624
                                                     =========== ===========
 NET ASSET VALUE PER UNIT                               2,836.73    2,307.07
                                                     =========== ===========
</TABLE>
 
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
 
<TABLE>
<CAPTION>
                                    1995          1994           1993
                                 ----------    -----------    -----------
<S>                              <C>           <C>            <C>       
                                     $              $              $
REVENUES
Trading Profit (Loss):
 Realized                        27,041,974    (10,447,878)    (4,335,118)
 Net change in unrealized          (198,148)    (1,726,877)       717,487
                                 ----------    -----------    -----------
  Total Trading Results          26,843,826    (12,174,755)    (3,617,631)
Interest income (DWR)             4,912,698      4,129,344      2,937,637
                                 ----------    -----------    -----------
  Total Revenues                 31,756,524     (8,045,411)      (679,994)
                                 ----------    -----------    -----------
EXPENSES
Management fees                   4,575,372      4,952,206      4,945,676
Brokerage commissions (DWR)       2,776,225      5,336,659      6,634,741
Transaction fees and costs          168,718        339,083        398,959
Common administrative expenses       39,890        228,633        223,551
Incentive fees                          --           7,659      1,400,473
                                 ----------    -----------    -----------
  Total Expenses                  7,560,205     10,864,240     13,603,400
                                 ----------    -----------    -----------
NET INCOME (LOSS)                24,196,319    (18,909,651)   (14,283,394)
                                 ==========    ===========    ===========
Net Income (Loss) Allocation:
Limited Partners                 23,857,922    (18,664,384)   (14,156,711)
General Partner                     338,397       (245,267)      (126,683)
Net Income (Loss) per Unit:
Limited Partners                     529.66        (383.89)       (270.10)
General Partner                      529.66        (383.89)       (270.10)
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
 
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
 
<TABLE>
<CAPTION>
                              UNITS OF
                             PARTNERSHIP    LIMITED    GENERAL
                              INTEREST     PARTNERS    PARTNER     TOTAL
                             -----------  -----------  -------  -----------
                                               $          $          $
DEAN WITTER CORNERSTONE FUND II
<S>                          <C>          <C>          <C>      <C>
Partners' Capital, December
 31, 1992                    11,661.781    26,013,019  566,146   26,579,165
Continuous Offering           2,936.402     7,100,239      --     7,100,239
Net Income                          --      2,057,120   44,227    2,101,347
Redemptions                  (1,599.188)   (3,839,378)     --    (3,839,378)
                             ----------   -----------  -------  -----------
Partners' Capital, December
 31, 1993                    12,998.995    31,331,000  610,373   31,941,373
Continuous Offering           2,948.327     7,098,104      --     7,098,104
Net Loss                            --     (3,050,650) (44,905)  (3,095,555)
Redemptions                  (1,927.872)   (4,492,939) (78,981)  (4,571,920)
                             ----------   -----------  -------  -----------
Partners' Capital, December
 31, 1994                    14,019.450    30,885,515  486,487   31,372,002
Offerings of Units               70.020       178,837               178,837
Net Income                                  7,753,763  128,896    7,882,659
Redemptions                  (3,198.372)   (8,604,610)           (8,604,610)
                             ----------   -----------  -------  -----------
Partners' Capital, December
 31, 1995                    10,891.098    30,213,505  615,383   30,828,888
                             ==========   ===========  =======  ===========
<CAPTION>
DEAN WITTER CORNERSTONE FUND III
<S>                          <C>          <C>          <C>      <C>
Partners' Capital, December
 31, 1992                    26,249.121    59,369,475  930,612   60,300,087
Continuous Offering           4,324.292     9,819,616      --     9,819,616
Net Loss                            --     (2,784,837) (44,524)  (2,829,361)
Redemptions                  (4,899.608)  (11,133,649)     --   (11,133,649)
                             ----------   -----------  -------  -----------
Partners' Capital, December
 31, 1993                    25,673.805    55,270,605  886,088   56,156,693
Continuous Offering           2,630.127     5,299,578      --     5,299,578
Net Loss                            --     (5,594,569) (85,926)  (5,680,495)
Redemptions                  (4,416.231)   (8,725,003) (48,320)  (8,773,323)
                             ----------   -----------  -------  -----------
Partners' Capital, December
 31, 1994                    23,887.701    46,250,611  751,842   47,002,453
Offerings of Units               25.778        49,000      --        49,000
Net Income                          --     10,824,963  206,731   11,031,694
Redemptions                  (5,198.558)  (11,133,473)     --   (11,133,473)
                             ----------   -----------  -------  -----------
Partners' Capital, December
 31, 1995                    18,714.921    45,991,101  958,573   46,949,674
                             ==========   ===========  =======  ===========
</TABLE>
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
 
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
 
<TABLE>
<CAPTION>
                              UNITS OF
                             PARTNERSHIP    LIMITED     GENERAL
                              INTEREST     PARTNERS     PARTNER      TOTAL
                             -----------  -----------  ---------  -----------
                                               $           $           $
DEAN WITTER CORNERSTONE FUND IV
<S>                          <C>          <C>          <C>        <C>
Partners' Capital, December
 31, 1992                     35,130.725  102,678,152  1,345,910  104,024,062
Continuous Offering           15,029.077   45,950,637    500,000   46,450,637
Net Loss                             --   (14,156,711)  (126,683) (14,283,394)
Redemptions                   (3,633.498) (10,990,675)       --   (10,990,675)
                             -----------  -----------  ---------  -----------
Partners' Capital, December
 31, 1993                     46,526.304  123,481,403  1,719,227  125,200,630
Continuous Offering            8,032.577   20,753,129        --    20,753,129
Net Loss                             --   (18,664,384)  (245,267) (18,909,651)
Redemptions                   (6,925.990) (17,151,842)       --   (17,151,842)
                             -----------  -----------  ---------  -----------
Partners' Capital, December
 31, 1994                     47,632.891  108,418,306  1,473,960  109,892,266
Offerings of Units                77.319      212,691        --       212,691
Net Income                           --    23,857,922    338,397   24,196,319
Redemptions                  (11,165.696) (30,634,265)       --   (30,634,265)
                             -----------  -----------  ---------  -----------
Partners' Capital, December
 31, 1995                     36,544.514  101,854,654  1,812,357  103,667,011
                             ===========  ===========  =========  ===========
</TABLE>
 
 
 
   The accompanying notes are an integral part of these financial statements.
<PAGE>
 
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                    FOR THE YEARS
                                                        ENDED
                                                     DECEMBER 31,
                                           ----------------------------------
                                              1995        1994        1993
                                           ----------  ----------  ----------
                                               $           $           $
<S>                                        <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                           7,882,659  (3,095,555)  2,101,347
Noncash item included in net income
  (loss):
 Net change in unrealized                     947,973    (556,567) (2,029,459)
(Increase) decrease in
  operating assets:
 Interest receivable (DWR)                     17,183     (61,279)     (4,984)
 Receivable from DWR                           24,860     (42,174)     (5,264)
Increase (decrease) in
  operating liabilities:
 Accrued incentive fees                       307,567     (15,336)     15,336
 Accrued management fees                       (1,622)     (1,443)     16,994
 Accrued brokerage commissions (DWR)           13,185        (972)        360
 Common administrative expenses payable       (29,854)    (14,074)     62,518
 Accrued transaction fees
   and costs                                    1,237         (52)       (415)
                                           ----------  ----------  ----------
Net cash provided by (used for) operating
  liabilities                               9,163,188  (3,787,452)    156,433
                                           ----------  ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units                             178,837   7,098,104   7,100,239
Increase (decrease) in redemptions
  payable                                    (251,210)    151,917    (279,349)
Redemptions of units                       (8,604,610) (4,571,920) (3,839,378)
                                           ----------  ----------  ----------
Net cash provided by (used for) financing
  activities                               (8,676,983)  2,678,101   2,981,512
                                           ----------  ----------  ----------
Net increase (decrease) in cash               486,205  (1,109,351)  3,137,945
Balance at beginning of period             27,570,984  28,680,335  25,542,390
                                           ----------  ----------  ----------
Balance at end of period                   28,057,189  27,570,984  28,680,335
                                           ==========  ==========  ==========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
<PAGE>
 
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                   FOR THE YEARS
                                                       ENDED
                                                    DECEMBER 31,
                                         ------------------------------------
                                            1995         1994        1993
                                         -----------  ----------  -----------
                                              $           $            $
<S>                                      <C>          <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                         11,031,694  (5,680,495)  (2,829,361)
Noncash item included in net loss:
 Net change in unrealized                   (561,437)  1,350,056   (3,815,157)
(Increase) decrease in operating
  assets:
 Interest receivable (DWR)                    33,368     (79,962)      21,271
 Receivable from DWR                          89,133    (213,589)      32,428
Increase (decrease) in operating
  liabilities:
 Common administrative expenses payable      (44,369)     11,260      137,662
 Accrued brokerage commissions (DWR)         (34,476)     77,852      (65,492)
 Accrued management fees                        (265)    (30,263)     (14,483)
 Accrued transaction fees
   and costs                                   7,239       4,810       (5,129)
                                         -----------  ----------  -----------
Net cash provided by (used for)
  operating activities                    10,520,887  (4,560,331)  (6,538,261)
                                         -----------  ----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units                             49,000   5,299,578    9,819,616
Increase (decrease) in redemptions pay-
  able                                       (26,829)     75,572     (201,692)
Redemptions of units                     (11,133,473) (8,773,323) (11,133,649)
                                         -----------  ----------  -----------
Net cash used for financing activities   (11,111,302) (3,398,173)  (1,515,725)
                                         -----------  ----------  -----------
Net decrease in cash                        (590,415) (7,958,504)  (8,053,986)
Balance at beginning of period            42,884,780  50,843,284   58,897,270
                                         -----------  ----------  -----------
Balance at end of period                  42,294,365  42,884,780   50,843,284
                                         ===========  ==========  ===========
</TABLE>
   The accompanying notes are an integral part of these financial statements.
<PAGE>
 
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                   FOR THE YEARS
                                                       ENDED
                                                   DECEMBER 31,
                                        -------------------------------------
                                           1995         1994         1993
                                        -----------  -----------  -----------
                                             $            $            $
<S>                                     <C>          <C>          <C>
CASH FLOWS FROM
  OPERATING ACTIVITIES
Net income (loss)                        24,196,319  (18,909,651) (14,283,394)
Noncash item included in net income
  (loss):
 Net change in unrealized                   198,148    1,726,877     (717,487)
(Increase) decrease in operating
  assets:
 Interest receivable (DWR)                   69,406     (184,980)     (18,641)
Increase (decrease) in operating
  liabilities:
 Accrued management fees                    (22,567)     (41,612)      51,567
 Common administrative expenses payable     (89,342)       8,605      206,517
 Accrued brokerage commissions (DWR)         32,580          --      (120,420)
 Accrued transaction fees and costs           1,629          --        (6,924)
 Accrued incentive fees                         --           --    (3,722,665)
                                        -----------  -----------  -----------
Net cash provided by (used for)
  operating activities                   24,386,173  (17,400,761) (18,611,447)
                                        -----------  -----------  -----------
CASH FLOWS FROM
  FINANCING ACTIVITIES
Offering of units                           212,691   20,753,129   46,450,637
Increase (decrease) in redemptions
  payable                                  (544,818)     519,604      321,383
Redemptions of units                    (30,634,265) (17,151,842) (10,990,675)
                                        -----------  -----------  -----------
Net cash provided by (used for)
  financing activities                  (30,966,392)   4,120,891   35,781,345
                                        -----------  -----------  -----------
Net increase (decrease) in cash          (6,580,219) (13,279,870)  17,169,898
Balance at beginning of period          111,508,180  124,788,050  107,618,152
                                        -----------  -----------  -----------
Balance at end of period                104,927,961  111,508,180  124,788,050
                                        ===========  ===========  ===========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
ORGANIZATION--Dean Witter Cornerstone Fund II, Dean Witter Cornerstone Fund III
and Dean Witter Cornerstone Fund IV (individually, a "Partnership", or
collectively, the "Partnerships") are limited partnerships organized to engage
in the speculative trading of commodity futures contracts and forward contracts
on foreign currencies. The general partner for each Partnership is Demeter
Management Corporation (the "General Partner"). The commodity broker is Dean
Witter Reynolds Inc. ("DWR"). Both DWR and the General Partner are wholly-owned
subsidiaries of Dean Witter, Discover & Co.
 
The General Partner is required to maintain a 1% minimum interest in the equity
of each Partnership and income (losses) are shared by the General and Limited
Partners based upon their proportional ownership interests.
 
BASIS OF ACCOUNTING--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
 
REVENUE RECOGNITION--Commodity futures contracts and forward contracts on
foreign currencies are open commitments until settlement date. They are valued
at market and the resulting unrealized gains and losses are reflected in
income. Monthly, DWR pays each Partnership interest income based upon 80% of
its average daily Net Assets at a rate equal to the average yield on 13-Week
U.S. Treasury Bills issued during such month. For purposes of such interest
payments in Dean Witter Cornerstone Fund IV, Net Assets do not include monies
due the Partnership on forward contracts and other commodity interests, but not
actually received.
 
NET INCOME (LOSS) PER UNIT--Net income (loss) per Unit is computed using the
weighted average number of units outstanding during the period.
 
EQUITY IN COMMODITY FUTURES TRADING ACCOUNTS-- The Partnerships' assets "Equity
in Commodity futures trading accounts" consists of cash on deposit at DWR to be
used as margin for trading and the net asset or liability related to unrealized
gains or losses on open contracts. The asset or liability related to the
unrealized gains or losses on forward contracts is presented as a net amount
because each Partnership has a master netting agreement with DWR.
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
BROKERAGE COMMISSIONS AND RELATED TRANSACTION FEES AND COSTS--Brokerage
commissions for each Partnership are accrued at 80% of DWR's published non-
member rates on a half-turn basis.
 
Through March 31, 1995, brokerage commissions were capped at 1% per month of
the adjusted Net Assets allocated to each trading program employed by a Trading
Advisor. Effective April 1, 1995, the cap was reduced to 3/4 of 1%.
 
Related transaction fees and costs are accrued on a half-turn basis.
 
OPERATING EXPENSES--Each Partnership has entered into an exchange agreement
pursuant to which certain common administrative expenses (i.e., legal,
auditing, accounting, filing fees and other related expenses) are shared by
each of the Partnerships based upon the number of Units of each Partnership
outstanding during the month in which such expenses are incurred. In addition,
the Partnerships incur monthly management fees and may incur incentive fees.
The General Partner bears all other operating expenses.
 
INCOME TAXES--No provision for income taxes has been made in the accompanying
financial statements,
as partners are individually responsible for reporting income or loss based
upon their respective share of each Partnership's revenues and expenses for
income tax purposes.
 
DISTRIBUTIONS--Distributions, other than on redemptions of Units, are made on a
pro-rata basis at the sole discretion of the General Partner. No distributions
have been made to date.
 
CONTINUING OFFERING--Through September 26, 1994, Units of each Partnership were
offered at a price equal to 107.625% of the Net Asset Value per Unit as of the
opening of business on the first day of the month, which price included a 5%
selling commission and a 2.5% charge for expenses relating to the continuing
offering of Units. These expenses were shared by the Partnerships. Any funds
received by DWR as a result of the Continuing Offering Expense charges that
were in excess of the Continuing Offering Expenses incurred, were contributed
pro-rata to the Partnerships, as a contribution of capital to the Partnerships
for which no Units were issued. On September 26, 1994, the Continuing Offering
was discontinued.
 
REDEMPTIONS--After an initial 180-day period, Limited Partners may redeem some
or all of their Units at 100% of the Net Asset Value per Unit as of the last
day of any month upon fifteen days advance notice by redemption form to the
General Partner.
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
If the proceeds of a redemption are reinvested in any of the Partnerships
within 180 days, the General Partner will waive the selling commissions and
continuous offering expense charges on the amount reinvested.
 
EXCHANGES--On the last day of the first month, which occurs more than 180 days
after a person first becomes a Limited Partner in any of the Partnerships, and
the end of each month thereafter, Limited Partners may transfer their
investment among the Partnerships (subject to certain restrictions outlined in
the Limited Partnership Agreement) without paying additional charges.
 
DISSOLUTION OF THE PARTNERSHIP--Each Partnership will terminate on September
30, 2025 regardless of its financial condition at such time, upon a decline in
Net Assets to less than $250,000, a decline in the Net Asset Value per Unit to
less than $250, or under certain other circumstances defined in the Limited
Partnership Agreement.
 
2. RELATED PARTY TRANSACTIONS
 
Each Partnership pays brokerage commissions to DWR on trades executed on its
behalf as described in Note 1. Each Partnership's cash is on deposit with DWR
in commodity trading accounts to meet margin requirements as needed. DWR pays
interest on these funds as described in Note 1.
 
3. TRADING ADVISORS
 
The General Partner, on behalf of each Partnership, retains certain commodity
trading advisors to make all trading decisions for the Partnerships. The
trading advisors for each Partnership as of December 31, 1995 were as follows:
 
Dean Witter Cornerstone Fund II
 Abacus Asset Management Inc.
 John W. Henry & Co., Inc.
 
Dean Witter Cornerstone Fund III
 CCA Capital Management, Inc.
 Sunrise Capital Management
 
Dean Witter Cornerstone Fund IV
 John W. Henry & Co., Inc.
 Sunrise Capital Management
 
Each trading advisor owns at least ten Units in its respective Partnership.
Compensation to the trading
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
advisors by the Partnerships consists of a management fee and an incentive fee
as follows:
 
MANAGEMENT FEE--The management fee is accrued at the rate of 1/3 of 1% per
month of the Net Assets
under management by each trading advisor at each month end.
 
INCENTIVE FEE--Each Partnership will pay an annual incentive fee equal to 15%
of the "New Appreciation" in Net Assets as of the end of each annual incentive
period ending December 31, except for Dean Witter Cornerstone Fund IV, which
will pay incentive fees at the end of each annual incentive period ending May
31. Such incentive fee is accrued in each month in which "New Appreciation"
occurs. In those months in which "New Appreciation" is negative, previous
accruals, if any, during the incentive period will be reduced. In those
instances in which a Limited Partner redeems an investment, the incentive fee
(if earned through a redemption date) is to be paid on those redemptions to the
trading advisor in the month of such redemption.
 
4. FINANCIAL INSTRUMENTS
 
The Partnerships trade futures and forward contracts in interest rates, stock
indices, commodities, currencies, petroleum and precious metals. Risk arises
from changes in the value of these contracts and the potential inability of
counterparties to perform under the terms of the contracts. There are numerous
factors which may significantly influence the market value of these contracts,
including interest rate volatility. At December 31, 1995 and 1994, open
contracts were:
 
<TABLE>
<CAPTION>
                                                     CORNERSTONE II
                                            -------------------------------
                                              CONTRACT OR NOTIONAL AMOUNT
                                            -------------------------------
                                               1995                1994
                                            -----------         -----------
                                                 $                   $
 <S>                                        <C>                 <C>   
 EXCHANGE-TRADED CONTRACTS                             
 Financial Futures:                                    
  Commitments to Purchase                   140,924,000           7,734,000
  Commitments to Sell                         3,298,000                 --
 Commodity Futures:                                    
  Commitments to Purchase                    53,994,000          23,692,000
  Commitments to Sell                        10,484,000          14,973,000
 Foreign Futures:                                      
  Commitments to Purchase                    51,681,000           8,655,000
  Commitments to Sell                         1,656,000         161,925,000
 OFF-EXCHANGE-TRADED FORWARD CURRENCY CON-             
   TRACTS                                              
  Commitments to Purchase                    15,585,000          28,327,000
  Commitments to Sell                        44,881,000          32,192,000
</TABLE>
<PAGE>
 
 
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                      CORNERSTONE III
                                              -------------------------------
                                                CONTRACT OR NOTIONAL AMOUNT
                                              -------------------------------
                                                 1995                1994
                                              -----------         -----------
                                                   $                   $
 <S>                                          <C>                 <C>      
 EXCHANGE-TRADED CONTRACTS                               
 Financial Futures:                                      
  Commitments to Purchase                     239,465,000         54,158,0000
  Commitments to Sell                          39,640,000         204,207,000
 Commodity Futures:                                      
  Commitments to Purchase                     115,420,000          48,926,000
  Commitments to Sell                          19,794,000          14,006,000
 Foreign Futures:                                        
  Commitments to Purchase                     139,878,000         116,919,000
  Commitments to Sell                          22,202,000         169,271,000
 OFF-EXCHANGE-TRADED FORWARD CURRENCY CON-               
   TRACTS                                                
  Commitments to Purchase                             --           29,664,000
  Commitments to Sell                                 --           84,416,000
<CAPTION>
                                                      CORNERSTONE IV
                                              -------------------------------
                                                CONTRACT OR NOTIONAL AMOUNT
                                              -------------------------------
                                                 1995                1994
                                              -----------         -----------
                                                   $                   $
 <S>                                          <C>                 <C> 
 EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS             
 Commitments to Purchase                       31,917,000                 --
 Commitments to Sell                           70,298,000                 --
 OFF-EXCHANGE-TRADED FORWARD CURRENCY CON-               
   TRACTS                                                
 Commitments to Purchase                      116,547,000         504,027,000
 Commitments to Sell                          170,990,000         645,892,000
</TABLE>
 
A portion of the amounts indicated as off-balance-sheet risk in forward foreign
currency contracts is due to offsetting forward commitments to purchase and to
sell the same currency on the same date in the future. These commitments are
economically offsetting, but are not offset in the forward market until the
settlement date.
 
The unrealized gains on open contracts are reported as a component of "Equity
in Commodity futures trading accounts" on the Statements of Financial Condition
and totaled at December 31, 1995 and 1994, respectively, $3,368,107 and
$4,316,080 for Cornerstone II, $5,578,294 and $5,016,857 for Cornerstone III
and $70,143 and $268,291 for Cornerstone IV.
 
For Cornerstone II, of the $3,368,107 net unrealized gain on open contracts at
December 31, 1995,
$3,448,812 related to exchange-traded futures contracts and ($80,705) related
to off-exchange-traded forward currency contracts. Of the $4,316,080 net
unrealized gain on open contracts at December 31, 1994, $4,296,011 related to
exchange-traded futures contracts and $20,069 related to off-exchange-traded
forward currency contracts.
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
For Cornerstone III, net unrealized gain on open contracts at December 31, 1995
related entirely to exchange traded futures. Of the $5,016,857 net unrealized
gain on open contracts at December 31, 1994, $5,788,691 related to exchange-
traded futures contracts and ($771,834) related to off-exchange-traded forward
currency contracts.
 
For Cornerstone IV, of the $70,143 net unrealized gain on open contracts at
December 31, 1995, $534,487 related to exchange-traded futures contracts and
$(464,344) related to off-exchange-traded forward currency contracts. The net
unrealized gain on open contracts at December 31, 1994, related entirely to
off-exchange-traded forward currency contracts.
 
The contract amounts in the above table represent the Partnership's extent of
involvement in the particular class of financial instrument, but not the credit
risk associated with counterparty nonperformance. The credit risk associated
with these instruments is limited to the amounts reflected in the Partnerships'
Statements of Financial Condition.
 
Exchange-traded contracts and off-exchange-traded forward currency contracts
held by the Partnerships at December 1995 and 1994 mature as follows:
 
<TABLE>
<CAPTION>
                                                      1995           1994
                                                  ------------- --------------
 <S>                                              <C>           <C>
 CORNERSTONE II
 Exchange-Traded Contracts                        December 1996 September 1995
 Off-Exchange-Traded Forward Currency Contracts   December 1996   March 1995
 CORNERSTONE III
 Exchange-Traded Contracts                        December 1996    May 1995
 Off-Exchange-Traded Forward Currency Contracts   January 1996    March 1995
 CORNERSTONE IV
 Exchange-Traded Contracts                         March 1996         --
 Off-Exchange-Traded Forward Currency Contracts   January 1996    March 1995
</TABLE>
 
The Partnerships also have credit risk because the sole counterparty, with
respect to most of the Partnerships' assets, is DWR. Exchange-traded futures
contracts are marked to market on a daily basis, with variations in value
settled on a daily basis. DWR, as the futures commission merchant of all of the
Partnership's exchange-traded futures contracts, is required pursuant to
regulations of the Commodity Futures Trading Commission to segregate from its
own assets, and for the sole benefit of its commodity customers, all funds held
by DWR with respect to exchange-traded futures contracts including an amount
equal to the net
<PAGE>
 
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
 
unrealized gain on all open futures contracts which funds totaled at December
31, 1995 and 1994 respectively, $31,506,001 and $31,866,995 for Cornerstone II,
$47,872,659 and $48,673,471 for Cornerstone III, $105,462,448 and $111,508,180
for Cornerstone IV. With respect to the Partnership's off-exchange-traded
forward currency contracts, there are no daily settlements of variations in
value nor is there any requirement that an amount equal to the net unrealized
gain on open forward contracts be segregated. With respect to those off-
exchange-traded forward currency contracts, the Partnerships are at risk to the
ability of DWR, the counterparty on all of such contracts, to perform.
 
For the year ended December 31, 1995 the average fair value of financial
instruments held for trading purposes was as follows:
<TABLE>
<CAPTION>
                                                    CORNERSTONE II
                                                -----------------------
                                                  ASSETS    LIABILITIES
                                                ----------- -----------
                                                     $           $
<S>                                             <C>         <C>
EXCHANGE-TRADED CONTRACTS:
 Financial Futures                               75,146,000   7,443,000
 Commodity Futures                               36,847,000  12,456,000
 Foreign Futures                                 62,270,000  57,113,000
OFF-EXCHANGE-TRADED FOREIGN CURRENCY CONTRACTS   16,455,000  23,929,000
<CAPTION>
                                                    CORNERSTONE III
                                                -----------------------
                                                  ASSETS    LIABILITIES
                                                ----------- -----------
                                                     $           $
<S>                                             <C>         <C>
EXCHANGE-TRADED CONTRACTS:
 Financial Futures                              125,222,000  74,782,000
 Commodity Futures                               67,127,000  16,871,000
 Foreign Futures                                122,725,000  68,993,000
OFF-EXCHANGE-TRADED FOREIGN CURRENCY CONTRACTS    8,899,000  25,325,000
<CAPTION>
                                                    CORNERSTONE IV
                                                -----------------------
                                                  ASSETS    LIABILITIES
                                                ----------- -----------
                                                     $           $
<S>                                             <C>         <C>
EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS      10,215,000  22,213,000
OFF-EXCHANGE-TRADED FOREIGN CURRENCY CONTRACTS  273,150,000 311,898,000
</TABLE>
 
<PAGE>
 
DEAN WITTER REYNOLDS INC.
 
Two World Trade Center
 
62nd Floor
 
New York, NY 10048
                                FIRST-CLASS MAIL
                                ZIP + 4 PRESORT
                               U.S. POSTAGE PAID
                                  BROOKLYN, NY
                                 PERMIT NO. 148