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 [No Fee Required]
For the year ended December 31, 2006 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

	MORGAN STANLEY CORNERSTONE FUND III L.P.

(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 or organization)		 	  	         Identification No.)

Demeter Management Corporation
330 Madison Avenue, 8th Floor
New York, NY								 	  10017
(Address of principal executive offices)		 		(Zip Code)

Registrant?s telephone number, including area code 	    (212) 905-2700

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

									  Name of each exchange
     Title of each class						   on which registered

		None								  None

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

	Units of Limited Partnership Interest

	(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.  Yes       No  X

Indicate by check mark if the registrant
is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.  Yes       No  X

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 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 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definitions of ?accelerated
filer and large accelerated filer? in Rule 12b-2 of the Exchange Act.  (Check
one):

Large accelerated filer___  Accelerated filer____  Non-accelerated filer __X__

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).  Yes       No  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 as of the last
business day of the registrant?s most recently completed second fiscal quarter:
$22,318,475 at June 30, 2006.

	DOCUMENTS INCORPORATED BY REFERENCE
	(See Page 1)




<page> <table> MORGAN STANLEY CORNERSTONE FUND III L.P.
(formerly, Dean Witter Cornerstone Fund III)
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2006
<caption>
                              Page No.

												<c>
DOCUMENTS INCORPORATED BY REFERENCE . . . . . . . . . . . . . . . . . 1

Part I .

  Item 1.   Business. . . . . . . . . . . . . . . . . . . . . . . . 2-5

  Item 1A.	 	Risk Factors . . . . . . . . . . . . . . . . . . . . . . .6

	Item 1B.			Unresolved Staff Comments . . . . . . . . . . . . . . . . 7

  Item 2.   Properties. . . . . . . . . . . . . . . . . . . . . . . . 7

  Item 3.   Legal Proceedings . . . . . . . . . . . . . . . . . . . . 7

  Item 4.   Submission of Matters to a Vote of Security Holders . . . 7

Part II.

  Item 5.   Market for Registrant's Partnership Units
            and Related Security Holder Matters . . . . . . . . . . . 8

  Item 6.   Selected Financial Data . . . . . . . . . . . . . . . . . 9

  Item 7.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations . . . . . . . . . 10-30

  Item 7A.  Quantitative and Qualitative Disclosures About
		 Market Risk . . . . . . . . . . . . . . . . . . . . . 30-44

  Item 8.   Financial Statements and Supplementary Data . . . . . 44-45

  Item 9.   Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure . . . . . . . . . .  45

  Item 9A.	 	Controls and Procedures . . . . . . . . . . . . . . . 45-48

	Item 9B.			Other Information . . . . . . . . . . . . . . . . . . . .48

Part III.

  Item 10.  Directors, Executive Officers and Corporate
        Governance . . . . . . . . . . . . . . . . . . . . . .49-56

  Item 11.  Executive Compensation. . . . . . . . . . . . . . . . .  56

  Item 12.  Security Ownership of Certain Beneficial Owners
            and Management and Related Security Holder Matters. . . .57

  Item 13.  Certain Relationships and Related Transactions, and
        Director Independence. . . . . . . . . . . . . . . . . . 57

  Item 14.  Principal Accountant Fees and Services. . . . . . . . 58-59
Part IV.
  Item 15.  Exhibits and Financial Statement Schedules . . . . . .60-61
</table>


<page>



	DOCUMENTS INCORPORATED BY REFERENCE


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


	     Documents Incorporated	      Part of Form 10-K

  Partnership's Prospectus dated
  August 28, 1996, together with
  the Supplement to the Prospectus
  dated May 14, 1999	      I

  Annual Report to the Morgan Stanley
  Cornerstone Funds II L.P., III L.P.,
  and IV L.P. (formerly, Dean Witter
  Cornerstone Funds II, III, and IV)
  Limited Partners for the year
  ended December 31, 2006  	II, III, and IV



	<page> PART I
Item 1.  BUSINESS

(a) General Development of Business. Morgan Stanley Cornerstone
Fund III L.P. (formerly known as Dean Witter Cornerstone Fund III)
(the "Partnership") is a New York limited partnership organized in
1983 to engage in the speculative trading of futures contracts,
options on futures contracts, and forward contracts on foreign
currencies and other commodity interests.  The Partnership
commenced trading operations on January 2, 1985.  The Partnership
is one of the Morgan Stanley Cornerstone Funds, comprised of the
Partnership, Morgan Stanley Cornerstone Fund II L.P. (formerly
known as Dean Witter Cornerstone Fund II), and Morgan Stanley
Cornerstone Fund IV L.P. (formerly known as Dean Witter Cornerstone
Fund IV).

Effective July 21, 2006, Dean Witter Cornerstone Fund III was
renamed to Morgan Stanley Cornerstone Fund III L.P.

The Partnership?s general partner is Demeter Management
Corporation (?Demeter?).  The non-clearing commodity broker is
Morgan Stanley DW Inc. (?Morgan Stanley DW?).  The clearing
commodity brokers are Morgan Stanley & Co. Incorporated
(?MS&Co.?) and Morgan Stanley & Co. International Limited
(?MSIL?).  MS&Co. acts as the counterparty on all of the foreign

- 2 -
<page> currency forward contracts.  In 2007, Morgan Stanley
intends to merge Morgan Stanley DW into MS&Co.  Upon completion
of the merger, the surviving entity, MS&Co., will be the
Partnership?s principal U.S. commodity broker?dealer.  Demeter,
Morgan Stanley DW, MS&Co., and MSIL are wholly-owned subsidiaries
of Morgan Stanley.  The trading managers to the Partnership are
Graham Capital Management, L.P. and Sunrise Capital Management,
Inc. (each individually, a ?Trading Manager?, or collectively,
the ?Trading Managers?).

The Partnership began the year at a net asset value per unit of
limited partnership interest ("Unit(s)") of $3,961.07 and returned
3.3% to $4,089.95 on December 31, 2006.  For a more detailed
description of the Partnership?s business, see subparagraph (c).

(b) Financial Information about Segments.  For financial infor-
mation reporting purposes, the Partnership is deemed to engage in
one industry segment, the speculative trading of futures, forwards,
and options.  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 of futures, forwards, and options
pursuant to trading instructions provided by the Trading Managers.
For a detailed description of the different facets of the
                               - 3 -
<page> Partnership's business, see those portions of the
Partnership's prospectus, dated August 28, 1996 (the "Prospectus"),
together with the Partnership?s supplement to the Prospectus dated
May 14, 1999 (the ?Supplement?), incorporated by reference in this
Form 10-K, set forth below.
	Facets of Business
	1.	Summary	                    1.	"Summary of the Prospectus"
				(Pages 1-9 of the Prospec-
				 tus).

	2.	Commodities Market         2.	"The Commodities Market"
				(Pages 80-84 of the
				 Prospectus).

	3.	Partnership's Commodity	3.	?Investment Program - Use
		Trading Arrangements and		 of Proceeds and Trading
		Policies		 Policies" (Pages 45-47
				 of the Prospectus) and
?The Trading Managers?
(Pages 51-74 of the
				 Prospectus and Pages
				 S-20 ? S-32 of the
				 Supplement).

    	4.	Management of the Part-	4.	"The Cornerstone Funds?
	       nership		(Pages 19-24 of the
				 Prospectus and Pages
				 S-2 ? S-5 of the Supple-
				 ment).  ?The General
 Partner? (Pages 77-79
 of the Prospectus and
 Pages S-32 ? S-34 of
	 the Supplement) and
	?The Commodity Brokers?
	 (Pages 79-80 of the
	 Prospectus and Pages
	 S-34 ? S-36 of the
	 Supplement).  ?The
	 Limited Partnership
	 Agreements? (Pages 86-
	 90 of the Prospectus).



- 4 -

<page>
	5.	Taxation of the Partner-	5. 	?Material Federal Income
       	ship?s Limited Partners		 Tax Considerations" and
				"State and Local Income
                         	 	 Tax Aspects" (Pages 92-
				 99 of the Prospectus and
				 Page S-37 of the Supple-
				 ment).


(d)	Financial Information about Geographic Areas. The Partnership
has not engaged in any operations in foreign countries; however,
the Partnership (through the commodity brokers) enters into
forward contract transactions where foreign banks are the
contracting party and trades futures, forwards, and options on
foreign exchanges.

(e) Available Information.  The Partnership files an annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to these reports with the Securities
and Exchange Commission (?SEC?). You may read and copy any document
filed by the Partnership at the SEC?s Public Reference Room at 100
F Street, N.E., Washington, D.C.  20549.  Please call the SEC at 1-
800-SEC-0330 for information on the Public Reference Room.  The
Partnership does not maintain an internet website, however, the SEC
maintains a website that contains annual, quarterly, and current
reports, proxy statements, and other information that issuers
(including the Partnership) file electronically with the SEC.  The
SEC?s website address is http://www.sec.gov.

- 5 -
<page> Item 1A.  RISK FACTORS
The following risk factors contain forward-looking statements
within the meaning of the safe harbor from civil liability provided
for such statements by the Private Securities Litigation
Reform Act of 1995 (set forth in Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in ?Quantifying the Partnership?s
Trading Value at Risk? in Item 7A ?Quantitative and Qualitative
Disclosures About Market Risk? are deemed to be forward-looking
statements for purposes of the safe harbor, except for statements
of historical fact.  The qualitative disclosures, except for (A)
those disclosures that are statements of historical fact and (B)
the descriptions of how the Partnership manages its primary market
risk exposure, in the ?Qualitative Disclosure Regarding Primary
Trading Risk Exposures? in Item 7A ?Quantitative and Qualitative
Disclosures About Market Risk? are deemed to be forward-looking
statements for purposes of the safe harbor.

The Partnership is in the business of speculative trading of
futures, forwards, and options.  For a detailed description of the
risks that may affect the business of the Partnership, see the
discussion of risk factors as set forth in Item 7 ?Management?s
Discussion and Analysis of Financial Condition and Results of
Operations? and Item 7A ?Quantitative and Qualitative Disclosures
About Market Risk?.
- 6 -
<page> Item 1B.  UNRESOLVED STAFF COMMENTS
Not applicable.

Item 2.  PROPERTIES
The Partnership?s executive and administrative offices are located
within the offices of Morgan Stanley DW.  The Morgan Stanley DW
offices utilized by the Partnership are located at 330 Madison
Avenue, 8th Floor, New York, NY 10017.

Item 3.  LEGAL PROCEEDINGS
None.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.











- 7 -
<page> PART II

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



(a) Market Information.  There is no established public trading
market for Units of the Partnership.

(b) Holders.  The number of holders of Units at December 31,
2006, was approximately 1,889.

(c) Distributions. 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.  Demeter
currently does not intend to make any distributions of the
Partnership?s profits.









- 8 -
<page> <table> Item 6.  SELECTED FINANCIAL DATA (in dollars)

<caption>




	       	   	 	     For the Years Ended December 31,
	                         2006          2005         2004         2003        2002


    
			  <c>			<c>		<c>		<c>		<c>


Total Trading Results
including interest
income			   2,726,129     	   45,356	4,341,373   4,783,736   6,926,335


Net Income (Loss)   	     729,626     (1,858,506)	2,128,735   2,379,915   4,360,649


Net Income (Loss)
Per Unit (Limited
& General Partners)    	      128.88	  (257.70)     309.46      317.10  	   546.37


Total Assets  		  21,099,563     23,385,885  28,397,216  28,347,638  28,211,319


Total Limited
Partners' Capital		  20,157,999     22,552,335  27,476,835  27,596,004  27,329,760


Net Asset Value
Per Unit         		    4,089.95       3,961.07    4,218.77    3,909.31    3,592.21




















- 9 -

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

Liquidity.  The Partnership deposits its assets with Morgan Stanley
DW as non-clearing broker, and MS&Co. and MSIL as clearing brokers
in separate futures, forwards, and options trading accounts
established for each Trading Manager.  Such assets are used as
margin to engage in trading and may be used as margin solely for
the Partnership?s trading.  The assets are held in either non-
interest bearing bank accounts or in securities and instruments
permitted by the Commodity Futures Trading Commission for
investment of customer segregated or secured funds.  Since the
Partnership?s sole purpose is to trade in futures, forwards, and
options, it is expected that the Partnership will continue to own
such liquid assets for margin purposes.

The Partnership?s investment in futures, forwards, and options may,
from time to time, be illiquid.  Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations referred
to as ?daily price fluctuations limits? or ?daily limits?.  Trades
may not be executed at prices beyond the daily limit.  If the price
for a particular futures or options contract has increased or
decreased by an amount equal to the daily limit, positions in that
futures or options contract can neither be taken nor liquidated
unless traders are willing to affect trades at or

- 10 -
<page> within the limit.  Futures prices have occasionally moved
the daily limit for several consecutive days with little or no
trading.  These market conditions could prevent the Partnership
from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.

There is no limitation on daily price moves in trading forward
contracts on foreign currencies.  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, subjecting it to substantial
losses.  Either of these market conditions could result in
restrictions on redemptions.  For the periods covered by this
report, illiquidity has not materially affected the Partnership?s
assets.

There are no known material trends, demands, commitments, events,
or uncertainties at the present time that are reasonably likely to
result in the Partnership?s liquidity increasing or decreasing in
any material way.

Capital Resources.  The Partnership does not have, nor does it
expect to have, any capital assets.  Redemptions of Units in the
                              - 11 -
<page> future will affect the amount of funds available for
investments in futures, forwards, and options in subsequent
periods.  It is not possible to estimate the amount, and therefore
the impact, of future outflows of Units.

There are no known material trends, favorable or unfavorable, that
would affect, nor any expected material changes to, the
Partnership?s capital resource arrangements at the present time.



Results of Operations
General.  The Partnership?s results depend on the Trading Managers
and the ability of each Trading Manager?s trading program(s) to
take advantage of price movements in the futures, forwards, and
options markets.  The following presents a summary of the
Partnership?s operations for each of the three years in the period
ended December 31, 2006, and a general discussion of its trading
activities during each period.  It is important to note, however,
that the Trading Managers trade in various markets at different
times and that prior activity in a particular market does not
mean that such market will be actively traded by the Trading
Managers or will be profitable in the future.  Consequently, the
results of operations of the Partnership are difficult to discuss
other than in the context of the Trading Managers' trading
activities on behalf of the Partnership during the period in
question.  Past performance is no guarantee of future results.
- 12 -
<page> The Partnership?s results of operations set forth in the
Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States of America,
which require the use of certain accounting policies that affect
the amounts reported in these Financial Statements, including the
following:  The contracts the Partnership trades are accounted
for on a trade-date basis and marked to market on a daily basis.
The difference between their cost and market value is recorded on
the Statements of Operations as ?Net change in unrealized trading
profit (loss)? for open (unrealized) contracts, and recorded as
?Realized trading profit (loss)? when open positions are closed
out.  The sum of these amounts, along with the ?Proceeds from
Litigation Settlement?, constitutes the Partnership?s trading
results.  The market value of a futures contract is the settlement
price on the exchange on which that futures contract is traded on a
particular day.  The value of a foreign currency forward contract
is based on the spot rate as of the close of business.  Interest
income, as well as management fees, incentive fees, brokerage
commissions, and transaction fees and costs of the Partnership
are recorded on an accrual basis.

Demeter believes that, based on the nature of the operations of
the Partnership, no assumptions relating to the application of
critical accounting policies other than those presently used
could reasonably affect reported amounts.
- 13 -
<page> The Partnership recorded total trading results including
interest income totaling $2,726,129 and expenses totaling
$1,996,503, resulting in net income of $729,626 for the year
ended December 31, 2006.  The Partnership?s net asset value per
Unit increased from $3,961.07 at December 31, 2005, to $4,089.95
at December 31, 2006. Total redemptions for the year were
$3,110,749 and the Partnership?s ending capital was $20,577,285
at December 31, 2006, a decrease of $2,381,123 from ending
capital at December 31, 2005, of $22,958,408.

The most significant trading gains of approximately 3.6% were
experienced within the global stock index sector primarily during
the fourth quarter from long positions in U.S., European, and
Pacific Rim equity index futures as prices advanced amid
declining energy prices and overall optimism about the direction
of the global economy.  Additionally, U.S. equity index futures
prices rose amid favorable government reports, which showed few
signs of increased inflationary pressure, as well as the U.S.
Federal Reserve?s decision to hold interest rates steady at the
FOMC monetary policy in October. Elsewhere, European equity index
futures prices moved higher throughout the fourth quarter due to
consistent merger and acquisition activity in the Euro-Zone,
while Pacific Rim stock markets increased on news that consumer
spending continued to pick up in China and Japan, the region?s
two biggest economies.  Additional gains of approximately 3.5%
                              - 14 -
<page> were recorded in the metals sector, primarily during the
first six months of the year, from long futures positions in
aluminum, copper, and zinc as base metals prices rallied on
strong global demand and on reports of falling inventories.  Long
positions in gold and silver futures experienced additional gains
within the metals sector as gold prices reached 25-year highs on
continued geopolitical concerns and inflation fears due to high
energy prices.  In addition, silver prices were pressured higher
after news that a silver-backed Exchange Traded Fund would
launch.  Within the energy markets, gains of approximately 0.3%
were experienced primarily during the fourth quarter from short
futures positions in crude oil and its related products.  During
October, prices weakened due to uncertainty regarding OPEC?s plan
to cut production, as well as a lower demand forecast.  Gains
were extended during December as prices declined due to mild
winter temperatures across the U.S. Northeast.  A portion of the
Partnership?s overall gains for the year was partially offset by
losses of approximately 3.2% incurred within the global interest
rate futures markets, primarily during July, August, and October
from long positions in U.S. and European fixed-income futures as
U.S. interest rate futures prices continued to decline after
government reports confirmed expectations that the U.S. economy
was still in a period of expansion, while European interest rate
futures prices declined on speculation of another European
Central Bank interest rate hike after government reports showed
                             - 15 -
<page> higher industrial production in France and Italy.
Elsewhere, long positions in Japanese fixed-income futures
incurred additional losses during September as prices fell after
the quarterly Tankan survey showed business confidence had
unexpectedly improved to a two-year high.  Losses were extended
during December from long positions in U.S. fixed-income futures
as prices fell after data indicated strong jobs creation in
November and another survey showed increased confidence in the
labor market.  Meanwhile, long positions in German and Japanese
fixed-income futures incurred losses as German interest rate
futures prices moved lower after the European Central Bank lifted
its benchmark interest rate to 3.5%, while Japanese interest rate
futures prices fell due to strength in the global equity markets.
Losses of approximately 2.4% were recorded in the currency
markets, during the first quarter, from long U.S. dollar
positions versus the Swiss franc, euro, and Japanese yen as the
value of the U.S. dollar reversed lower on expectations that a
string of increases in interest rates by the U.S. Federal Reserve
could possibly come to an end.  Also pushing the value of the
U.S. dollar lower against its rivals was speculation that foreign
central banks might move to diversify some of their U.S. dollar
based assets into other currencies.  Further losses were recorded
during April from short positions in the Swiss franc versus the
U.S. dollar as the value of the franc reversed higher on the
political tensions in the Middle East, which increased the demand
                               - 16 -
<page> for the safe-haven currency.  Finally, during July, losses
were recorded from short U.S. dollar positions against the euro
as the value of the U.S. dollar moved higher due to a narrower
than expected U.S. trade deficit. Furthermore, the value of the
euro moved lower after the European Central Bank decided to keep
interest rates unchanged.  Smaller losses of approximately 1.1%
were recorded within the agricultural markets, primarily during
June, from long positions in wheat futures as prices declined
amid positive weather forecasts in the U.S. wheat belt.
Elsewhere in the agricultural complex, losses were recorded from
both short and long positions in corn futures as prices moved
without consistent direction throughout a majority of the year
due to conflicting news regarding supply and demand.

The Partnership recorded total trading results including interest
income totaling $45,356 and expenses totaling $1,903,862,
resulting in a net loss of $1,858,506 for the year ended December
31, 2005.  The Partnership?s net asset value per Unit decreased
from $4,218.77 at December 31, 2004, to $3,961.07 at December 31,
2005.  Total redemptions for the year were $3,092,412 and the
Partnership?s ending capital was $22,958,408 at December 31,
2005, a decrease of $4,950,918 from ending capital at December
31, 2004, of $27,909,326.


- 17 -
<page> The most significant trading losses of approximately 6.5%
were recorded in the currency markets primarily during the first
quarter and in August.  During January, long positions in a
variety of foreign currencies, primarily the euro, South African
rand, and both the New Zealand and Australian dollars, recorded
losses after the U.S. dollar?s value reversed sharply higher amid
positive U.S. economic data and speculation for higher U.S.
interest rates.  The U.S. dollar?s value also advanced during
January in response to expectations that the Chinese government
would announce postponement of its re-valuation of the Chinese
yuan for the foreseeable future.  During February, losses stemmed
from short positions in the euro and South African rand against
the U.S. dollar as the U.S. dollar weakened due to concerns for
the considerable U.S. Current-Account deficit as expressed by
U.S. Federal Reserve Chairman Alan Greenspan.  The U.S. dollar
weakened further during the remainder of the month due to a
larger than expected drop in economic indicators and news that
South Korea?s Central Bank planned to reduce its U.S. dollar
currency reserves.  Short European currency positions resulted in
losses during early March as their values moved higher amid a
sharp rise in German industrial production.  Additional losses
were recorded from newly established long European currency
positions, as well as from existing long positions in the British
pound, versus the U.S. dollar.  During August, losses were
recorded from long U.S. dollar positions against the British
                                - 18 -
<page> pound and euro as the value of the U.S. dollar declined
amid higher crude oil prices, lower durable goods orders, the
U.S. trade imbalance, and economic warnings from U.S. Federal
Reserve Chairman Alan Greenspan.  Additional losses of
approximately 3.6% were recorded in the global interest rate
markets primarily during February and July from long positions in
U.S. interest rate futures.  During February, prices reversed
lower after positive economic data reduced investor demand for
fixed-income investments.  Prices fell further during July
following a rise in interest rates and after the U.S. Labor
Department released its June employment report.  Smaller losses
were incurred during November from short positions in U.S.
interest rate futures after prices moved higher early in the
month on strong demand at government debt auctions and then
advanced again later in the month on reduced inflation fears and
speculation that the U.S. Federal Reserve would potentially end
its cycle of hiking interest rates in early 2006. In the
agricultural markets, losses of approximately 0.9% were
experienced during the second and third quarters from long
futures positions in soybeans, its related products, and corn
after prices moved lower on news of greater crop yields.  During
July and August, losses resulted from long futures positions in
corn after prices declined from heavy rainfall in U.S. growing
regions and forecasts for growth in supply increases.  Losses of
approximately 0.2% resulted in the energy markets, primarily
                            - 19 -
during the second quarter from positions in crude oil and its
related products.  During April, long futures positions in crude
oil and its related products recorded losses as prices reversed
lower amid greater refinery production and slower growth in
demand.  Losses also resulted from long positions in natural gas
futures as prices declined with crude oil prices.  Short crude
oil futures positions also experienced losses during May after
prices increased due to news of weak supply.  Further losses were
recorded later in June from newly established long crude oil
positions as prices reversed lower on news of rising supplies and
solid refinery output.  A portion of the Partnership?s overall
losses for the year was offset by gains of approximately 4.3%
achieved in the metals markets primarily during the fourth
quarter from long futures positions in copper, aluminum, and
zinc, as prices increased on news of consistently strong demand
from India, China, and the Middle East, and news of weak global
supplies.  Gains of approximately 1.8% resulted in the global
stock indices sector primarily during the third quarter from long
positions in European and Pacific Rim stock index futures.
During July, long positions benefited as prices increased on
positive economic data out of the U.S. and Japan.  Prices
continued to strengthen after China reformed its U.S. dollar
currency peg policy.  Finally, strong corporate earnings out of
the European Union and the U.S. resulted in optimistic investor
sentiment and pushed prices higher.  During September, long
                             - 20 -
positions in Japanese stock index futures experienced gains as
prices increased on positive comments from Bank of Japan Governor
Toshihiko Fukui, who said the Japanese economy was in the process
of emerging from a soft patch.  Additional gains resulted during
September from long positions in European stock index futures.

The Partnership recorded total trading results including interest
income totaling $4,341,373 and expenses totaling $2,212,638,
resulting in net income of $2,128,735 for the year ended December
31, 2004.  The Partnership?s net asset value per Unit increased
from $3,909.31 at December 31, 2003, to $4,218.77 at December 31,
2004. Total redemptions for the year were $2,216,179 and the
Partnership?s ending capital was $27,909,326 at December 31, 2004,
a decrease of $87,444 from ending capital at December 31, 2003, of
$27,996,770.

The most significant trading gains of approximately 7.4% were
recorded in the energy markets from long futures positions in
crude oil and its related products as prices trended higher
throughout much of the year in response to low market supply,
falling inventory levels, and fears of terrorist attacks.
Additional gains of approximately 3.3% were recorded in the
metals markets, primarily during the first quarter, from long
futures positions in base metals, such as copper, as lower supply
and heightened demand from Asia caused prices to increase.
                             - 21 -
<page> During March, long futures positions in silver benefited
as prices moved higher amid central bank demand triggered by
lower currency values.  Gains of approximately 2.4% were recorded
in the agricultural markets from long futures positions in corn,
soybeans and its related products as prices trended higher during
the first and third quarters amid growing U.S. exports and
heightened demand from Asia.  Smaller gains of approximately 0.9%
recorded in the global stock index markets resulted primarily
during the first and fourth quarters of the year.  During
January, long positions in U.S. stock index futures provided
gains as prices rallied on reports of strong company earnings.
During December, long U.S. equity index futures positions
profited as equity prices trended higher due to stabilizing oil
prices, strong corporate earnings, and positive investor
sentiment regarding the future of the global economy.  A portion
of the Partnership?s overall gains for the year was offset by
losses of approximately 2.2% incurred in the currency markets
during the second and third quarters of the year.  During the
second quarter, long positions in the Japanese yen versus the
U.S. dollar experienced losses as the U.S. dollar advanced
following the release of stronger than expected U.S. jobs data,
while the yen weakened amid Japanese government currency market
intervention.  During the third quarter, short Japanese yen
positions versus the U.S. dollar incurred losses as the U.S.
dollar?s value declined amid fears of potential terrorist
                               - 22 -
<page> attacks, expanding energy prices, and the release of
weaker than expected economic data.  Short positions in the
Japanese yen versus the U.S. dollar also generated losses during
December as the U.S. dollar?s value depreciated against the yen
amid beliefs that the Bush Administration took no action to
hamper the decline in the U.S. dollar.  Long positions in the
British pound versus the U.S. dollar also produced losses as the
U.S. dollar strengthened during the third quarter amid upbeat
market sentiment. Relatively small Partnership losses of
approximately 0.4% were recorded in the global interest rate
sector, primarily during the second quarter, as long U.S.
interest rate futures positions experienced negative performance
during April after prices reversed sharply lower following the
release of stronger than expected U.S. jobs data.  Short
positions during May and June also experienced losses as prices
moved higher amid beliefs the U.S. Federal Reserve would delay
increasing interest rates in the face of slower U.S. economic
growth.

For an analysis of unrealized gains and (losses) by contract type
and a further description of 2006 trading results, refer to the
Partnership?s Annual Report to Limited Partners for the year ended
December 31, 2006, which is incorporated by reference to Exhibit
13.01 of this Form 10-K.

- 23 -
<page> The Partnership?s gains and losses are allocated among its
partners for income tax purposes.

Off-Balance Sheet Arrangements and Contractual Obligations.
The Partnership does not have any off-balance sheet arrangements,
nor does it have contractual obligations or commercial
commitments to make future payments that would affect its
liquidity or capital resources.

Market Risk.
The Partnership is a party to financial instruments with elements
of off-balance sheet market and credit risk.  The Partnership
trades futures contracts, options on futures contracts, and
forward contracts on foreign currencies and other commodity
interests.  In entering into these contracts, the Partnership is
subject to the 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 positions held by
the Partnership at the same time, and the Trading
Managers were unable to offset positions of the Partnership, the
Partnership could lose all of its assets and the limited partners
would realize a 100% loss.


- 24 -
<page> In addition to the Trading Managers? internal controls, the
Trading Managers must comply with the Partnership?s trading
policies that include standards for liquidity and leverage that
must be maintained.  The Trading Managers and Demeter monitor the
Partnership's trading activities to ensure compliance with the
trading policies and Demeter can require the Trading Managers to
modify positions of the Partnership if Demeter believes they
violate the Partnership's trading policies.

Credit Risk.
In addition to market risk, in entering into futures, forward, and
options contracts, there is a credit risk to the Partnership that
the counterparty on a contract will not be able to meet its
obligations to the Partnership. The ultimate counterparty or
guarantor of the Partnership for futures, forward, and options
contracts traded in the United States and most foreign exchanges on
which the Partnership trades is the clearinghouse associated with
such exchange.  In general, a clearinghouse is 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 member?s customers,
which should significantly reduce this credit risk.
There is no assurance that a clearinghouse, exchange, or other
exchange member will meet its obligations to the Partnership, and
Demeter and the commodity brokers will not indemnify the
Partnership against a default by such parties.  Further, the law
                               - 25 -
<page> is unclear as to whether a commodity broker has any
obligation to protect its customers from loss in the event of an
exchange or clearinghouse defaulting on trades affected for the
broker?s customers.  In cases where the Partnership trades off-
exchange forward contracts with a counterparty, the sole recourse
of the Partnership will be the forward contract?s counterparty.

Demeter deals with these credit risks of the Partnership in
several ways.  First, Demeter monitors the Partnership?s credit
exposure to each exchange on a daily basis.  The commodity
brokers inform the Partnership, as with all their customers, of
the Partnership?s net margin requirements for all its existing
open positions, and Demeter has installed a system which permits
it to monitor the Partnership?s potential net credit exposure,
exchange by exchange, by adding the unrealized trading gains on
each exchange, if any, to the Partnership?s margin liability
thereon.

Second, the Partnership?s trading policies limit the amount of its
Net Assets that can be committed at any given time to futures
contracts and require a minimum amount of diversification in the
Partnership?s trading, usually over several different products and
exchanges.  Historically, the Partnership?s exposure to any one
exchange has typically amounted to only a small percentage of its
total Net Assets and on those relatively few occasions where the
                               - 26 -
<page> Partnership?s credit exposure climbs above such level,
Demeter deals with the situation on a case by case basis,
carefully weighing whether the increased level of credit exposure
remains appropriate.  Material changes to the trading policies may
be made only with the prior written approval of the limited
partners owning more than 50% of Units then outstanding.

Third, with respect to forward contract trading, the Partnership
trades with only those counterparties which Demeter, together with
Morgan Stanley DW, have determined to be creditworthy.  The
Partnership presently deals with MS&Co. as the sole counterparty on
forward contracts.

For additional information, see the ?Financial Instruments?
section under ?Notes to Financial Statements? in the
Partnership?s Annual Report to Limited Partners for the year
ended December 31, 2006, which is incorporated by reference to
Exhibit 13.01 of this Form 10-K.

Inflation has not been a major factor in the Partnership?s
operations.

New Accounting Developments.
In July 2006, the Financial Accounting Standards Board (?FASB?)
issued Interpretation No. 48, ?Accounting for Uncertainty in
                              - 27 -
<page> Income Taxes ? an interpretation of FASB Statement 109?
(?FIN 48?).  FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position must
meet before being recognized in the financial statements.  FIN 48
is effective for fiscal years beginning after December 15, 2006.
The impact to the Partnership?s Financial Statements, if any, is
currently being assessed.

In September 2006, the FASB issued SFAS No. 157, ?Fair Value
Measurements? (?SFAS No. 157?). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS No. 157 is
effective for the Partnership as of January 1, 2008. The impact to
the Partnership?s Financial Statements, if any, is currently being
assessed.

In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, ?Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements? (?SAB No. 108?) to provide guidance
on how the effects of the carryover or reversal of prior year
unrecorded misstatements should be considered in quantifying a
current year misstatement.  SAB No. 108 requires a company to
apply an approach that considers the amount by which the current
year income statement is misstated (?rollover approach?) and an
approach that considers the cumulative amount by which the current
                               - 28 -
<page> year balance sheet is misstated (?iron-curtain approach?).
Prior to the issuance of SAB No. 108, many companies applied either
the rollover or iron-curtain approach for purposes of assessing
materiality of misstatements.  SAB No. 108 is effective for the
Partnership as of January 1, 2007.  Upon adoption, SAB No. 108
allows a one-time cumulative effect adjustment against Partners?
Capital for those prior year misstatements that were not material
under the Partnership?s prior approach, but that are deemed
material under the SAB No. 108 approach.  Demeter does not expect
the adoption of SAB No. 108 to have a material impact on the
Partnership?s Financial Statements.

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options.  The
market-sensitive instruments held by the Partnership are acquired
for speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss.  Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business
activity of the Partnership.

The futures, forwards, and options traded by the Partnership
involve varying degrees of related market risk.  Market risk is
often dependent upon changes in the level or volatility of
                              - 30 -
<page> interest rates, exchange rates, and prices of financial
instruments and commodities, factors that result in frequent
changes in the fair value of the Partnership?s open positions, and
consequently in its earnings, whether realized or unrealized, and
cash flow.  Gains and losses on open positions of exchange-traded
futures, exchange-traded forward, and exchange-traded futures-
styled options contracts are settled daily through variation
margin.  Gains and losses on off-exchange-traded forward currency
contracts are settled upon termination of the contract.  However,
the Partnership is required to meet margin requirements equal to
the net unrealized loss on open forward currency contracts in the
Partnership accounts with the counterparty, which is accomplished
by daily maintenance of the cash balance in a custody account held
at Morgan Stanley DW for the benefit of MS&Co.

The Partnership?s total market risk may increase or decrease as
it is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.

The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements.  Margin requirements generally range between 2% and
15% of contract face value.  Additionally, the use of leverage
                               - 31 -
<page> causes the face value of the market sector instruments held
by the Partnership typically to be many times the total
capitalization of the Partnership.

The Partnership?s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partner-
ship?s market risk is limited by the uncertainty of its speculative
trading.  The Partnership?s speculative trading and use of leverage
may cause future losses and volatility (i.e., ?risk of ruin?) that
far exceed the Partnership?s experiences to date under the
?Partnership?s Value at Risk in Different Market
Sectors? section and significantly exceed the Value at Risk (?VaR?)
tables disclosed.

Limited partners will not be liable for losses exceeding the
current net asset value of their investment.


Quantifying the Partnership?s Trading Value at Risk

The following quantitative disclosures regarding the Partner-
ship?s market risk exposures contain ?forward-looking statements?
within the meaning of the safe harbor from civil liability
provided for such statements by the Private Securities Litigation
Reform Act of 1995 (set forth in Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of

- 32 -
<page> 1934).  All quantitative disclosures in this section are
deemed to be forward-looking statements for purposes of the safe
harbor, except for statements of historical fact.

The Partnership accounts for open positions on the basis of mark
to market accounting principles.  Any loss in the market value of
the Partnership?s open positions is directly reflected in the
Partnership?s earnings and cash flow.

The Partnership?s risk exposure in the market sectors traded by the
Trading Managers is estimated below in terms of VaR.  The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
value of a trading portfolio.  The VaR model takes into account
linear exposures to risks including equity and commodity prices,
interest rates, foreign exchange rates, and correlation among these
variables. The hypothetical changes in portfolio value are
based on daily percentage changes observed in key market indices or
other market factors (?market risk factors?) to which the portfolio
is sensitive.  The one-day 99% confidence level of the
Partnership?s VaR corresponds to the negative change in portfolio
value that, based on observed market risk factors, would have been
exceeded once in 100 trading days, or one day in 100.  VaR

                                - 33 -
<page> typically does not represent the worst case outcome.
Demeter uses approximately four years of daily market data (1,000
observations) and re-values its portfolio (using delta-gamma
approximations) for each of the historical market moves that
occurred over this time period.  This generates a probability
distribution of daily ?simulated profit and loss? outcomes.  The
VaR is the appropriate percentile of this distribution.  For
example, the 99% one-day VaR would represent the 10th worst outcome
from Demeter?s simulated profit and loss series.

The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-exchange
dealer-based instruments.  They are also not based on exchange
and/or dealer-based maintenance margin requirements.

VaR models, including the Partnership?s, are continually evolving
as trading portfolios become more diverse and modeling techniques
and systems capabilities improve.  Please note that the VaR model
is used to numerically quantify market risk for historic reporting
purposes only and is not utilized by either Demeter or the Trading
Managers in their daily risk management activities.  Please further
note that VaR as described above may not be comparable to
similarly-titled measures used by other entities.

- 34 -
<page>
The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total Net Assets
by primary market risk category at December 31, 2006 and 2005. At
December 31, 2006 and 2005, the Partnership?s total capital-
ization was approximately $21 million and $23 million,
respectively.
Primary Market       December 31, 2006     December 31, 2005
Risk Category	        Value at Risk	     Value at Risk
Equity		  		  (2.44)%	 		   (1.24)%
Currency		         	  (1.66)      		   (1.16)
Interest Rate		  	  (0.64) 		  	   (0.44)
Commodity		         	  (1.04)	  		   (0.61)
Aggregate Value at Risk	  (2.95)%			   (2.27)%
The VaR for a market category represents the one-day downside risk
for the aggregate exposures associated with this market category.
The Aggregate Value at Risk listed above represents the VaR of the
Partnership?s open positions across all the market categories, and
is less than the sum of the VaRs for all such market categories due
to the diversification benefit across asset classes.

Because the business of the Partnership is the speculative
trading of futures, forwards, and options, the composition of its
trading portfolio can change significantly over any given time
                              - 35 -
<page> period, or even within a single trading day.  Such changes
could positively or negatively materially impact market risk as
measured by VaR.

The table below supplements the December 31, 2006, VaR set forth
above by presenting the Partnership?s high, low, and average VaR,
as a percentage of total Net Assets for the four quarter-end
reporting periods from January 1, 2006, through December 31,
2006.

Primary Market Risk Category	 High   	 Low 	Average
Equity	(2.44)%	(0.55)%	(1.46)%
Currency	(1.66)	(0.68)	(1.14)
Interest Rate	(5.57)	(0.64)	(2.22)
Commodity 	(1.11)	(0.21)	(0.67)
Aggregate Value at Risk 			(6.39)%	(1.67)%	(3.31)%

Limitations on Value at Risk as an Assessment of Market Risk

VaR models permit estimation of a portfolio?s aggregate market risk
exposure, incorporating a range of varied market risks, reflect
risk reduction due to portfolio diversification or hedging
activities, and can cover a wide range of portfolio assets.
However, VaR risk measures should be viewed in light of the
methodology?s limitations, which include, but may not be limited to
the following:
-	36 ?
<page>
*	past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
*	changes in portfolio value caused by market movements may
differ from those of the VaR model;
*	VaR results reflect past market fluctuations applied to current
trading positions while future risk depends on future
positions;
*	VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
*	the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.

In addition, the VaR tables above, as well as the past
performance of the Partnership, give no indication of the
Partnership?s potential ?risk of ruin?.

The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at December 31, 2005 and for the four quarter-end
reporting periods during calendar year 2006.  VaR is not
necessarily representative of the Partnership?s historic risk, nor
                               - 37 -
<page> should it be used to predict the Partnership?s future
financial performance or its ability to manage or monitor risk.
There can be no assurance that the Partnership?s actual losses on a
particular day will not exceed the VaR amounts indicated above or
that such losses will not occur more than once in 100 trading days.

Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances.  These balances and any market risk they may represent
are immaterial.

The Partnership also maintains a substantial portion of its
available assets in cash at Morgan Stanley DW; as of December 31,
2006, such amount is equal to approximately 90% of the
Partnership?s net asset value.  A decline in short-term interest
rates would result in a decline in the Partnership?s cash
management income. This cash flow risk is not considered to be
material.

Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality, and multiplier features of the Partnership?s market-

- 38 -
<page> sensitive instruments, in relation to the Partnership?s
Net Assets.

Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures ? except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures ? constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act.
The Partnership?s primary market risk exposures, as well as the
strategies used and to be used by Demeter and the Trading Managers
for managing such exposures, are subject to numerous uncertainties,
contingencies and risks, any one of which could cause the actual
results of the Partnership?s risk controls to differ materially
from the objectives of such strategies. Government interventions,
defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in
historical price relationships, an influx of new market
participants, increased regulation, and many other factors could
result in material losses, as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.

- 39 -
<page> The following were the primary trading risk exposures of the
Partnership at December 31, 2006, by market sector.  It may be
anticipated, however, that these market exposures will vary
materially over time.

Equity.  The largest market exposure of the Partnership at December
31, 2006, was to the global stock index sector, primarily
to equity price risk in the G-7 countries.  The G-7 countries
consist of France, the U.S., Britain, Germany, Japan, Italy, and
Canada.  The stock index futures traded by the Partnership are by
law limited to futures on broadly-based indices.  At December 31,
2006, the Partnership?s primary exposures were to the DAX
(Germany), Euro Stoxx 50 (Europe), S&P 500 (U.S.), TOPIX (Japan),
NIKKEI 225 (Japan), NASDAQ 100 (U.S.), CAC 40 (France), Hang Seng
(China), FTSE 100 (Britain), and Dow Jones (U.S.) stock indices.
The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the U.S., European, and Japanese stock
indices.  Static markets would not cause major market changes but
would make it difficult for the Partnership to avoid trendless
price movements, resulting in numerous small losses.

Currency.  The second largest market exposure of the Partnership at
December 31, 2006, was to the currency sector.  The Partnership?s
currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing
                              - 40 -
<page> relationships between different currencies and currency
pairs.  Interest rate changes, as well as political and general
economic conditions influence these fluctuations.  The Partnership
trades a large number of currencies including cross-rate ? i.e.,
positions between two currencies other than the U.S. dollar.  At
December 31, 2006, the Partnership?s major exposures were to euro,
Australian dollar, Japanese yen, Canadian dollar, and Swiss franc
currency crosses, as well as to outright U.S. dollar positions.
Outright positions consist of the U.S. dollar vs. other currencies.
 These other currencies include major and minor currencies.
Demeter does not anticipate that the risk associated with the
Partnership?s currency trades will change significantly in the
future.

Interest Rate. At December 31, 2006, the Partnership had market
exposure to the global interest rate sector.  This exposure was
primarily spread across the European, U.S., Japanese, and
Australian interest rate sectors.  Interest rate movements directly
affect the price of the sovereign bond futures positions held by
the Partnership and indirectly affect the value of its stock index
and currency positions.  Interest rate movements in one country, as
well as relative interest rate movements between countries,
materially impact the Partnership?s profitability.  The
Partnership?s interest rate exposure is generally to interest rate
fluctuations in the U.S. and the other G-7 countries.  However,
                                - 41 -
<page> the Partnership also takes futures positions in the
government debt of smaller countries - e.g., Australia.  Demeter
anticipates that the G-7 countries? interest rates and Australian
interest rates will remain the primary interest rate exposures of
the Partnership for the foreseeable future.  The speculative
futures positions held by the Partnership may range from short to
long-term instruments.  Consequently, changes in short, medium, or
long-term interest rates may have an effect on the Partnership.

Commodity.
Energy.  The third largest market exposure of the Partnership
at December 31, 2006, was to the energy sector.  The
Partnership?s primary energy exposure was to futures contracts
in crude oil and its related products.  Price
movements in these markets result from geopolitical
developments, particularly in the Middle East, as well as
weather patterns, and other economic fundamentals.
Significant profits and losses, which have been experienced in
the past, are expected to continue to be experienced in the
future.

Metals.	At December 31, 2006, the Partnership had market
exposure in the metals sector.  The Partnership?s metals
exposure was to fluctuations in the price of base metals,
such as aluminum and copper.  Economic forces, supply and
                          - 42 -
<page> demand inequalities, geopolitical factors and market
expectations influence price movements in these markets.
The Trading Managers utilize trading system(s) to take
positions when market opportunities develop, and Demeter
anticipates that the Partnership will continue to do so.

Soft Commodities and Agriculturals.  At December 31, 2006, the
Partnership had market exposure to the markets that comprise
these sectors.  Most of the exposure was to the sugar, coffee,
wheat, corn, cotton, and soybean meal markets. Supply and
demand inequalities, severe weather disruptions, and market
expectations affect price movements in these markets.

Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at December 31, 2006:

Foreign Currency Balances.  The Partnership?s primary foreign
currency balances at December 31, 2006, were in euros,
Japanese yen, Hong Kong dollars, British pounds, Swiss francs,
and Australian dollars.  The Partnership controls the non-
trading risk of foreign currency balances by regularly
converting them back into U.S. dollars upon liquidation of
their respective positions.

- 43 -
<page> Qualitative Disclosures Regarding Means of Managing Risk
Exposure
The Partnership and the Trading Managers, separately, attempt to
manage the risk of the Partnership?s open positions in essentially
the same manner in all market categories traded.  Demeter attempts
to manage market exposure by diversifying the Partnership?s assets
among different Trading Managers in a multi-manager Partnership,
each of whose strategies focus on different market sectors and
trading approaches, and by monitoring the performance of the
Trading Managers daily.  In addition, the Trading Managers
establish diversification guidelines, often set in terms of the
maximum margin to be committed to positions in any one market
sector or market-sensitive instrument.

Demeter monitors and controls the risk of the Partnership?s non-
trading instrument, cash.  Cash is the only Partnership
investment directed by Demeter, rather than the Trading Managers.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated by reference to the
Partnership's Annual Report, which is filed as Exhibit 13.01
hereto.



- 44 -
<page> Supplementary data specified by Item 302 of Regulation S-K:

Summary of Quarterly Results (Unaudited)

Quarter	  Total Trading Results        Net		   Net Income/
Ended		including interest income  Income/(Loss) (Loss) Per Unit

2006
March 31 		$ 1,291,113		$    779,825	   $ 136.77
June 30	    	  1,079,786	    	     568,272	      98.94
September 30	 (1,058,658)		  (1,564,207)	    (289.92)
December 31	  1,413,888		     945,736        183.09

Total		$ 2,726,129		$    729,626 	   $ 128.88


2005
March 31 		$(2,054,276)		$ (2,565,838)	   $(388.21)
June 30	    	   (180,405)	    	    (626,885)	     (95.55)
September 30	    582,225		     118,955	      21.41
December 31	  1,697,812		   1,215,262        204.65

Total		$    45,356		$ (1,858,506) 	   $(257.70)



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE


None.


Item 9A.  CONTROLS AND PROCEDURES
(a)	As of the end of the period covered by this annual report, the
President and Chief Financial Officer of Demeter, the general
partner of the Partnership, have evaluated the effectiveness
of the Partnership?s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act),
and have judged such controls and procedures to be effective.
- 45 -

<page>
     (b)	There have been no material changes during the period covered
by this annual report in the Partnership?s internal control
over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.

Management?s Report on Internal Control Over Financial Reporting
Demeter is responsible for the management of the Partnership.

Management of Demeter (?Management?) is responsible for
establishing and maintaining adequate internal control over
financial reporting.  The internal control over financial reporting
is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
Financial Statements for external purposes in accordance with
generally accepted accounting principles.

The Partnership?s internal control over financial reporting
includes those policies and procedures that:

*	Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Partnership;





-	46 ?
<page>
*	Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of Financial Statements in
accordance with generally accepted accounting principles, and
that the Partnership?s transactions are being made only in
accordance with authorizations of Management and directors;
and

*	Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the Partnership?s assets that could have a material effect on
the Financial Statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Partnership?s
internal control over financial reporting as of December 31,
2006.  In making this assessment, Management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.

 - 47 -
<page> Based on our assessment and those criteria, Management
believes that the Partnership maintained effective internal
control over financial reporting as of December 31, 2006.

Deloitte & Touche LLP, the Partnership?s independent registered
public accounting firm, has issued an attestation report on
Management?s assessment of the Partnership?s internal control over
financial reporting and on the effectiveness of the Partnership?s
internal control over financial reporting.  This report, which
expresses an unqualified opinion on Management?s assessment and on
the effectiveness of the Partnership?s internal control over
financial reporting, appears under ?Report of Independent
Registered Public Accounting Firm? in the Partnership?s Annual
Report to Limited Partners for the year ended December 31, 2006.

Item 9B.  OTHER INFORMATION
None.








- 48 -
<page> PART III

Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

There are no directors or executive officers of the Partnership.
The Partnership is managed by Demeter, its general partner.


Directors and Officers of the General Partner
The directors and executive officers of Demeter are as follows:

Effective May 1, 2006, Mr. Walter Davis, age 41, is a Director,
Chairman of the Board of Directors, and President of Demeter.  Mr.
Davis is an Executive Director of Morgan Stanley and the Director
of Morgan Stanley?s Managed Futures Department.  Prior to joining
Morgan Stanley in 1999, Mr. Davis worked for Chase Manhattan Bank?s
Alternative Investment Group.  Throughout his career, Mr. Davis has
been involved with the development, management, and marketing of a
diverse array of commodity pools, hedge funds, and other
alternative investment funds.  Mr. Davis received an MBA in Finance
and International Business from the Columbia University Graduate
School of Business in 1992 and a B.A. in Economics from the
University of the South in 1987.

Effective December 5, 2002, Mr. Frank Zafran, age 51, is a Director
of Demeter.  Mr. Zafran is a Managing Director of Morgan Stanley
and, in November 2005, was named Managing Director of Wealth
Solutions. Previously, Mr. Zafran was Chief Administrative Officer
of Morgan Stanley?s Client Solutions Division. Mr. Zafran
                             - 49 -
<page> joined the firm in 1979 and has held various positions in
Corporate Accounting and the Insurance Department, including Senior
Operations Officer ? Insurance Division, until his appointment in
2000 as Director of Retirement Plan Services, responsible for all
aspects of 401(k) Plan Services, including marketing, sales, and
operations.  Mr. Zafran received a B.S. degree in Accounting from
Brooklyn College, New York.

Effective March 31, 2003, Mr. Douglas J. Ketterer, age 41, is a
Director of Demeter.  Mr. Ketterer is a Managing Director of Morgan
Stanley and is head of Morgan Stanley?s Managed Money Group.  The
Managed Money Group is comprised of a number of departments
(including the Alternative Investments Group, Consulting Services
Group, and Mutual Fund Department) which offer products and
services through Morgan Stanley?s Global Wealth Management Group.
Mr. Ketterer joined Morgan Stanley in 1990 and has served in many
roles in the corporate finance/investment banking, asset
management, and distribution divisions of the firm. Mr. Ketterer
received his MBA from New York University?s Leonard N. Stern School
of Business and his B.S. in Finance from the University at Albany?s
School of Business.

Effective May 1, 2005, Mr. Harry Handler, age 48, is a Director of
Demeter. Mr. Handler serves as an Executive Director of Morgan
Stanley?s Global Wealth Management Group.  Mr. Handler works in
Morgan Stanley?s Capital Markets Division as Equity Risk Officer.
                              - 50 -
<page> Additionally, Mr. Handler also serves as Chairman of the
Morgan Stanley DW Best Execution Committee and manages the Global
Wealth Management Group?s Stock Lending business.  In his prior
position, Mr. Handler was a Systems Director in Information
Technology, in charge of Equity and Fixed Income Trading Systems
along with the Special Products, such as Unit Trusts, Managed
Futures, and Annuities.  Prior to his transfer to the Information
Technology Area, Mr. Handler managed the Foreign Currency and
Precious Metals Trading Desk for Dean Witter, a predecessor company
to Morgan Stanley.  He also held various positions in the Futures
Division where he helped to build the Precious Metals  Trading
Operation of Dean Witter.  Before joining Dean Witter, Mr. Handler
worked at Mocatta Metals as an Assistant to the Chairman. His roles
at Mocatta Metals included stints on the Futures Order Entry Desk
and the Commodities Exchange Trading Floor.  Additional work
included building a computerized Futures Trading System and writing
a history of the company.  Mr. Handler graduated on the Dean?s List
from the University of Wisconsin-Madison with a B.A. degree and a
double major in History and Political Science.

Effective May 1, 2006, Mr. Richard D. Gueren, age 45, is a Director
of Demeter.  Mr. Gueren is Executive Director, Retail
Options and Transactional Futures at Morgan Stanley.  He is
responsible for marketing the options product to the firm?s
approximately 400 offices and 8,000 Financial Advisors.  Mr. Gueren
first joined Dean Witter in August 1986, as a member of the
                             - 51 -
<page> Options Strategy/Trading team.  In 1997, Dean Witter merged
with Morgan Stanley.  Mr. Gueren is the firm?s Senior Registered
Options Principal.  He is a member of several Morgan Stanley
committees, including the firm?s National Error Committee and Best
Execution Committee.  He is an advisory member to the Credit & Risk
Committee.  Mr. Gueren is also an active member of several exchange
and industry committees, including the Retail Advisory committees
for the Chicago Board Options Exchange, the American Stock
Exchanges, the Philadelphia Stock Exchange, the Pacific Stock
Exchange, and the International Securities Exchange. Mr. Gueren is
also an Industry Arbitrator for the NASD and has been seated on
numerous industry cases over the past eight years. He has also been
asked to testify as an expert witness regarding
options on numerous occasions.  Mr. Gueren holds a Bachelor of
Science in Economics from the University of Hartford.

Effective May 1, 2006, Mr. Michael P. McGrath, age 38, is a
Director of Demeter.  Mr. McGrath is a Managing Director and the
Director of Product Development for Morgan Stanley?s Global Wealth
Management Group. In this role, Mr. McGrath oversees the flow of
new products and services being offered through Global Wealth
Management in the United States.  He coordinates the firm?s New
Product Committee as well as being a voting member on the
committee.  He is also a voting member of the Global Wealth
Management Alternative Investments Due Diligence Committee, the
Global Wealth Management Insurance Due Diligence Committee, and
                                - 52 -
<page> the Portfolio Architect Oversight Committee, and is a member
of the Global Advisor Research Due Diligence Committee.  Mr.
McGrath joined Morgan Stanley in 2004, after three years with
Nuveen Investments, a publicly traded investment management company
headquartered in Chicago, Illinois.  At Nuveen, Mr. McGrath served
as a Managing Director and oversaw the development of alternative
investment products catering to the ultra-high net worth investor.
Mr. McGrath received his B.A. degree from Saint Peters College in
1990 and his MBA in Finance from New York University in 1996.

Effective May 1, 2006, Mr. Andrew Saperstein, age 39, is a Director
of Demeter.  Mr. Saperstein is Chief Operating Officer of National
Sales for Morgan Stanley?s Global Wealth Management Group, and
serves as a member of the group?s Executive Committee.
One of the largest businesses of its kind in the world with $640
billion in client assets, the Global Wealth Management Group
provides a range of wealth management products and services to
individuals, businesses, and institutions.  These include brokerage
and investment advisory services, financial and wealth planning,
credit and lending, banking and cash management, annuities and
insurance, retirement and trust.  Prior to joining Morgan Stanley
in March 2006, Mr. Saperstein was with Merrill Lynch as First Vice
President and Chief Operating Officer of the Direct Division, and
served as a member of the Global Private Client Executive
Committee.  In this capacity, he was responsible for the oversight
of the online brokerage unit and the Financial
                             - 53 -
<page> Advisory Center, including the Retail Client Relationship
Management group, the Services, Operations and Technology group,
the Client Acquisition team, and the Business Development and
Analysis team.  Mr. Saperstein joined Merrill Lynch in November
2001.  Prior to Merrill Lynch, Mr. Saperstein was a partner in the
Financial Institutions group of McKinsey & Co.  Additionally, he
served as co-leader of both the North American Asset Management and
Brokerage Practice and North American Recruiting. Mr. Saperstein
graduated cum laude from Harvard Law School and summa cum laude
from the Wharton School/College of Arts and Sciences at the
University of Pennsylvania with a dual degree in Economics and
Finance.

Effective September 22, 2006, Mr. Jacques Chappuis, age 37, is a
Director of Demeter. Mr. Chappuis is a Managing Director of
Morgan Stanley and Head Of Alternative Investments of Morgan
Stanley?s Global Wealth Management Group.  Prior to joining
Morgan Stanley in 2006, Mr. Chappuis was Head of Alternative
Investments for Citigroup?s Global Wealth Management Group and
prior to that, a Managing Director at Citigroup Alternative
Investments.  Before joining Citigroup, Mr. Chappuis was a
consultant at the Boston Consulting Group, where he focused on
the financial services sector, and a corporate finance Associate
at Bankers Trust Company.  Mr. Chappuis received an MBA in
Finance, with honors, from the Columbia University Graduate
                              - 54 -
<page> School of Business in 1998 and a B.A. in finance from
Tulane University in 1991.

Effective November 6, 2006, Mr. Lee Horwitz, age 55, is the Chief
Financial Officer of Demeter and a Principal of Demeter.  Mr.
Horwitz currently serves as an Executive Director within Morgan
Stanley?s Financial Control Group.  Mr. Horwitz joined Morgan
Stanley in March 1984 and has held a variety of positions
throughout Morgan Stanley?s organization during his tenure.  Mr.
Horwitz received a B.A. degree from Queens College and an MBA
from Rutgers University.  Mr. Horwitz is a Certified Public
Accountant.
All of the foregoing directors have indefinite terms.

Effective May 1, 2006, Mr. Jeffrey A. Rothman resigned his position
as a Director of Demeter.

Effective May 1, 2006, Mr. Richard A. Beech resigned his position
as a Director of Demeter.

Effective May 1, 2006, Ms. Shelley Hanan resigned her position as a
Director of Demeter.

Effective November 6, 2006, Mr. Kevin Perry resigned his position
as Chief Financial Officer of Demeter.
- 55 -
<page> The Audit Committee
The Partnership is operated by its general partner, Demeter, and
has no audit committee and, thus, no audit committee financial
expert.

Code of Ethics
The Partnership has not adopted a code of ethics that applies to
the Partnership?s principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions.  The Partnership is operated by its
general partner, Demeter.  The President, Chief Financial Officer,
and each member of the Board of Directors of Demeter are employees
of Morgan Stanley and are subject to the code of ethics adopted by
Morgan Stanley, the text of which can be viewed on Morgan Stanley?s
website at http://www.morganstanley.com/ourcommitment/
codeofconduct.html.

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.




- 56 -

<page>
Item 12. 	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
		MANAGEMENT AND RELATED SECURITY HOLDER MATTERS

(a)	Security Ownership of Certain Beneficial Owners - At December
31, 2006, there were no persons known to be beneficial owners of
more than 5 percent of the Units.

(b)	Security Ownership of Management - At December 31, 2006,
Demeter owned 102.516 Units of general partnership interest,
representing a 2.04 percent interest in the Partnership.

(c)	Changes in Control ? None.

Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE


Refer to Note 2 - "Related Party Transactions" of "Notes to
Financial Statements?, in the accompanying Annual Report to Limited
Partners for the year ended December 31, 2006, which is
incorporated by reference to Exhibit 13.01 of this Form 10-K.  In
its capacity as the Partnership's retail commodity broker, Morgan
Stanley DW received commodity brokerage commissions (paid and
accrued by the Partnership) of $1,046,232 for the year ended
December 31, 2006.



- 57 -
<page> Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Partnership pays accounting fees as discussed in Note 1 to the
Financial Statements, ?Operating Expenses?, in the Annual Report to
the Limited Partners for the year ended December 31, 2006.

(1)  	Audit Fees.  The aggregate fees for professional services
rendered by Deloitte & Touche LLP in connection with their audit
of the Partnership?s Financial Statements and review of the
Financial Statements included in the Quarterly Reports on Form
10-Q, audit of Management assessment of the effectiveness of the
internal control over financial reporting, and in connection with
statutory and regulatory filings were approximately $44,107 for
the year ended December 31, 2006, and $41,596 for the year ended
December 31, 2005.

(2)	Audit-Related Fees.  None.




(3)	Tax Fees.  The Partnership did not pay Deloitte & Touche LLP
any amounts in 2006 and 2005 for professional services in
connection with tax compliance, tax advice, and tax planning.  The
Partnership engaged another unaffiliated professional firm to
provide services in connection with tax compliance, tax advice, and
tax planning.

(4)  All Other Fees.  None.
- 58 -
<page> Because the Partnership has no audit committee, the Board of
Directors of Demeter, its general partner, functions as the audit
committee with respect to the Partnership.  The Board of Directors
of Demeter has not established pre-approval policies and procedures
with respect to the engagement of audit or permitted non-audit
services rendered to the Partnership.  Consequently, all audit and
permitted non-audit services provided by Deloitte & Touche LLP are
approved by the Board of Directors of Demeter and communicated to
Morgan Stanley.
















- 59 -
<page> PART IV
Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


1. 	Listing of Financial Statements
The following Financial Statements and report of independent
registered public accounting firm, all appearing in the
accompanying Annual Report to Limited Partners for the year
ended December 31, 2006, are incorporated by reference to
Exhibit 13.01 of this Form 10-K:
-	Report of Deloitte & Touche LLP, independent registered
public accounting firm, for the years ended December 31,
2006, 2005, and 2004.

-	Statements of Financial Condition, including the
Schedules of Investments, as of December 31, 2006 and
2005.

-	Statements of Operations, Changes in Partners' Capital,
and Cash Flows for the years ended December 31, 2006,
2005, and 2004.


	   - Notes to Financial Statements.

With the exception of the aforementioned information and the
information incorporated in Items 7, 8, and 13, the Annual
Report to Limited Partners for the year ended December 31,
2006, 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.

- 60 -
<page>
3.	Exhibits
	For the exhibits incorporated by reference or filed herewith
to this report, refer to Exhibit Index on Pages E-1 to E-3.



























































- 61 -

<page>
SIGNATURES

Pursuant to the requirements 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.




					MORGAN STANLEY CORNERSTONE FUND III L.P.
						(Registrant)

					BY:  Demeter Management Corporation,
						General Partner


March 23, 2007			BY: /s/Walter Davis
						 Walter Davis,
						 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/ 	Walter Davis	                    		March 23, 2007
	  	Walter Davis, President

    /s/    Frank Zafran       	             		March 23, 2007
           Frank Zafran, Director

    /s/    Douglas J. Ketterer   	             		March 23, 2007
           Douglas J. Ketterer, Director

    /s/    Harry Handler		           		March 23, 2007
	    	Harry Handler, Director

    /s/ 	Richard Gueren        		         		March 23, 2007
	 	Richard Gueren, Director

    /s/	Michael McGrath		                 	March 23, 2007
	  	Michael McGrath, Director

    /s/  	Andrew Saperstein	                 	March 23, 2007
	    	Andrew Saperstein, Director

    /s/  	Jacques Chappuis		                 	March 23, 2007
	    	Jacques Chappuis, Director

    /s/  	Lee Horwitz			                 	March 23, 2007
	    	Lee Horwitz, Chief Financial Officer




<page> EXHIBIT INDEX
 	ITEM

3.01	   	Limited Partnership Agreement of the Partnership, dated
as of December 7, 	1983, as amended as of May 11, 1984,
is incorporated by reference to Exhibit 3.01 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended September 30, 1984 (File No. 0-13299).

3.02	   Certificate of Limited Partnership, dated August 13,
1991, is filed herewith.

3.02(a) Certificate of Amendment of the Certificate of Limited
Partnership, dated July 20, 2006 (changing its name from
Dean Witter Cornerstone Fund III) is incorporated by
reference to Exhibit 3.02 of the Partnership?s Form 8-K
(File No. 0-13299) filed with the Securities and
Exchange Commission on July 26, 2006.

10.01		   Management Agreement among the Partnership, Demeter, and
Sunrise Capital Management Inc. (formerly Sunrise
Commodities Inc.), dated as of November 15, 1983, is
incorporated by reference to Exhibit 10.03 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended September 30, 1984 (File No. 0-13299).

10.01(a)Amendment to Management Agreement between the Partnership
and Sunrise Capital Management, Inc., dated as of
November 30, 2000, is incorporated by reference to the
Partnership?s Form 8-K (File No. 0-13299) filed with the
Securities and Exchange Commission on January 3, 2001.

10.03	   Management Agreement among the Partnership, Demeter, and
Graham Capital Management, L.P., dated as of January 1,
2003, is incorporated by reference to Exhibit 10.01 of
the Partnership's Form 8-K (File No. 0-13299) filed with
the Securities and Exchange Commission on January 22,
2003.

10.04	   Dean Witter Cornerstone Funds Exchange Agreement, dated
as of May 31, 	1984, is incorporated by reference to
Exhibit 10.06 of the Partnership's Annual Report on Form
10-K for the fiscal year ended September 30, 1984 (File
No. 0-13299).





E-1


<page>
 10.05	  Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW Inc., dated as of June
22, 2000, is incorporated by reference to Exhibit 10.01
of the Partnership?s Form 8-K (File No. 0-13299) filed
with the Securities and Exchange Commission on November
13, 2001.

 10.06	  Commodity Futures Customer Agreement between Morgan
Stanley & Co. Incorporated and the Partnership, and
acknowledged and agreed to by Morgan Stanley DW Inc.,
dated as of May 1, 2000, is incorporated by reference to
Exhibit 10.02 of the Partnership?s Form 8-K (File No. 0-
13299) filed with the Securities and Exchange Commission
on November 13, 2001.

10.07  	Customer Agreement between the Partnership and Morgan
Stanley & Co. International Limited, dated as of May 1,
2000, is incorporated by reference to Exhibit 10.04 of
the Partnership?s Form 8-K (File No. 0-13299) filed with
the Securities and Exchange Commission on November 13,
2001.

10.08	  Foreign Exchange and Options Master Agreement between
Morgan Stanley & Co. Incorporated and the Partnership,
dated as of April 30, 2000, is incorporated by reference
to Exhibit 10.05 of the Partnership?s Form  8-K (File No.
0-13299) filed with the Securities and Exchange
Commission on November 13, 2001.

 10.11  	Securities Account Control Agreement among the
Partnership, Morgan Stanley & Co. Incorporated, and
Morgan Stanley DW Inc., dated as of May 1, 2000, is
incorporated by reference to Exhibit 10.03 of the
Partnership?s Form 8-K (File No. 0-13299) filed with the
Securities and Exchange Commission on November 13, 2001.

13.01  December 31, 2006, 	Annual Report to Limited Partners is
filed herewith.

31.01	  Certification of President of Demeter Management
Corporation, the general partner of the Partnership
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

31.02 Certification of Chief financial Officer of Demeter
Management Corporation, the general partner of the
Partnership pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.


E-2

<page>
32.01  	Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

32.02  	Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.



E-3

<PAGE>

                                                                    Cornerstone
                                                                          Funds

       December 31, 2006
       Annual Report

    [LOGO]
MORGAN STANLEY

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

HISTORICAL FUND PERFORMANCE

Presented below is the percentage change in Net Asset Value per Unit from the
start of each calendar year each Fund has traded. Also provided is the
inception-to-date return and the compound annualized return since inception for
each Fund. Past performance is no guarantee of future results.

<TABLE>
<CAPTION>


            1985  1986    1987   1988  1989  1990 1991  1992  1993   1994  1995 1996 1997 1998 1999  2000  2001  2002 2003 2004
FUND         %     %       %      %     %     %    %     %     %      %     %    %    %    %    %     %     %     %    %    %
---------------------------------------------------------------------------------------------------------------------------------
<S>         <C>  <C>    <C>      <C>  <C>    <C>  <C>  <C>    <C>   <C>    <C>  <C>  <C>  <C>  <C>   <C>   <C>   <C>  <C>  <C>
Cornerstone
 Fund II... 20.1 (17.6)   71.6   0.1  (15.1) 47.9 11.0 (1.3)   7.8  (8.9)  26.5 11.5 18.1 12.5 (5.4) 11.5  (1.3) 13.8 0.4  (6.5)
---------------------------------------------------------------------------------------------------------------------------------
Cornerstone
 Fund III.. 54.6 (8.0)    32.5   19.4 (11.4) 18.7 12.0 (11.1) (4.8) (10.0) 27.5 8.2  10.2 9.1  (6.8) (0.3)  0.3  17.9 8.8   7.9
---------------------------------------------------------------------------------------------------------------------------------
Cornerstone
 Fund IV...  --    --     10.6   37.5 (14.1) 57.8 33.5  10.4  (9.1) (14.3) 23.0 13.0 38.4 6.8  (1.1) 14.7  15.9  12.3 13.6 (8.3)
                        (8 mos.)
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                         INCEPTION-  COMPOUND
                          TO-DATE   ANNUALIZED
             2005  2006    RETURN     RETURN
FUND          %     %        %          %
----------------------------------------------
<S>         <C>    <C>   <C>        <C>
Cornerstone
 Fund II... (19.4) (8.0)   254.2       5.9
----------------------------------------------
Cornerstone
 Fund III.. (6.1)   3.3    319.5       6.7
----------------------------------------------
Cornerstone
 Fund IV... (19.3) (4.3)   477.0       9.3

----------------------------------------------
</TABLE>

<PAGE>

DEMETER MANAGEMENT CORPORATION

330 Madison Avenue, 8th Floor
New York, NY 10017
Telephone (212) 905-2700

MORGAN STANLEY CORNERSTONE FUNDS
ANNUAL REPORT
2006

Dear Limited Partner:
 This marks the twenty-second annual report for Morgan Stanley Cornerstone Fund
II L.P. (formerly Dean Witter Cornerstone Fund II) and Morgan Stanley
Cornerstone Fund III L.P. (formerly Dean Witter Cornerstone Fund III) and the
twentieth annual report for Morgan Stanley Cornerstone Fund IV L.P. (formerly
Dean Witter Cornerstone Fund IV). The Net Asset Value per Unit for each of the
three Morgan Stanley Cornerstone Funds ("Fund(s)") as of December 31, 2006 was
as follows:

<TABLE>
<CAPTION>
                                                                       % CHANGE
FUNDS                                                         N.A.V.   FOR YEAR
-------------------------------------------------------------------------------
<S>                                                          <C>       <C>
Cornerstone Fund II                                          $3,453.29   (8.0)%
-------------------------------------------------------------------------------
Cornerstone Fund III                                         $4,089.95    3.3 %
-------------------------------------------------------------------------------
Cornerstone Fund IV                                          $5,625.92   (4.3)%
-------------------------------------------------------------------------------
</TABLE>

 Since their inception in 1985, Cornerstone Fund II and Cornerstone Fund III
have returned 254.2% (a compound annualized return of 5.9%) and 319.5% (a
compound annualized return of 6.7%), respectively. Since its inception in 1987,
Cornerstone Fund IV returned 477.0% (a compound annualized return of 9.3%).

 Detailed performance information for each Fund is located in the body of the
financial report. For each Fund, we provide a trading results by sector chart
that portrays trading gains and trading losses for the year in each sector in
which the Fund participates. In the case of Cornerstone Fund IV, we provide the
trading gains and trading losses for the five major currencies in which the
Fund participates, and composite information for all other "minor" currencies
traded within the Fund.

 The trading results by sector charts indicate the year's composite percentage
returns generated by the specific assets dedicated to trading within each
market sector in which each Fund participates. Please note that there is not an
equal amount of assets in each market sector, and the specific allocations of
assets by a Fund to each sector will vary over time within a predetermined
range. Below each chart is a description of the factors that influenced trading
gains and trading losses within each Fund during the year.

 Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation, 330 Madison Avenue, 8th Floor, New
York, NY 10017 or your Morgan Stanley Financial Advisor.

 I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is no
guarantee of future results.

Sincerely,

/s/ Walter J. Davis
Walter J. Davis
Chairman of the Board of Directors and President
Demeter Management Corporation,
General Partner of
Morgan Stanley Cornerstone Fund II L.P.
Morgan Stanley Cornerstone Fund III L.P.
Morgan Stanley Cornerstone Fund IV L.P.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.

                                    [CHART]

                              Year ended December 31, 2006
                              ----------------------------
Currencies                              -9.46%
Interest Rates                          -2.43%
Stock Indices                            1.48%
Energies                                -2.56%
Metals                                   2.63%
Agriculturals                            0.14%


Note: Includes trading results and commissions but does not include other fees
      or interest income.

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  The most significant trading losses were experienced in the currency markets
   during January and February from short positions in the Japanese yen and
   Swiss franc versus the U.S. dollar as the value of the U.S. dollar moved
   lower on expectations that a string of increases in interest rates by the
   U.S. Federal Reserve could possibly come to an end. Additionally, the
   Japanese yen moved higher against the U.S. dollar during January and
   February as strong economic data out of the region increased speculation
   that the Bank of Japan would raise interest rates. During April, additional
   losses were incurred in the currency markets as the Japanese yen
   strengthened on continued speculation of an interest rate hike by the Bank
   of Japan, while the value of the Swiss franc moved higher against the U.S.
   dollar on political tensions in the Middle East, which increased the demand
   for the safe-haven currency. Additional losses were experienced during
   October from short positions in the Swiss franc versus the U.S. dollar as
   the value of the U.S. dollar declined after the U.S. Department of Commerce
   reported slower than expected growth in third quarter U.S. Gross Domestic
   Product, as well as a faster than expected decline in consumer core
   inflation. Elsewhere, losses were incurred from long positions in the
   Brazilian real versus the U.S. dollar during September as the value of the
   U.S. dollar increased against the real after government reports showed U.S.
   consumer

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.


FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
 confidence had rebounded during the month and the core consumer price
  expenditure index hit an 11-year high. Additional losses were experienced
  during November and December as the value of the Brazilian real declined
  after investors expressed concern that a military coup in Thailand would have
  a "ripple-effect" on other emerging-market currencies. Finally, smaller
  losses were incurred from both short and long positions in the Mexican peso
  versus the U.S. dollar as the value of the peso moved without consistent
  direction during the third quarter.

..  Within the energy markets, losses were incurred during February from long
   futures positions in crude oil and its related products as prices declined
   after an announcement by Chinese government authorities that China would
   place an emphasis on prospecting alternative energy sources in the future,
   reports of larger than expected supplies, and mild weather in the U.S.
   Northeast. Additional losses in the energy sector were recorded during March
   from short futures positions in the aforementioned markets as prices
   strengthened early in the month on supply fears fueled by news of
   geopolitical tensions in Nigeria and Iran. Further losses were incurred from
   long futures positions in crude oil and its related products in May and June
   as prices declined on reports of domestic inventory levels at eight-year
   highs, the news of the death of Iraqi insurgent leader Abu Musab al-Zarqawi,
   and positive steps taken regarding the nuclear standoff between the U.S. and
   Iran. During November, newly established short futures positions in crude
   oil and its related products resulted in additional losses as prices rose on
   supply concerns after a major Nigerian facility ceased production following
   a hostage situation, and BP's Prudhoe Bay, Alaska facility experienced a
   pipeline delay. Prices continued to move higher amid concern over OPEC's
   production cut after the U.S. Department of Energy reported a sharp fall in
   domestic inventories of distillate products.

..  Smaller losses were incurred during January, from both short and long
   positions in Japanese fixed-income futures as prices experienced short-term
   volatile price movement amid uncertainty regarding the future interest rate
   policy of the Bank of Japan. During July, losses were incurred within the
   global interest rate sector from short positions in British fixed-income
   futures as prices reversed higher on significant geopolitical concerns after
   North Korean long-range missile tests, terrorist bombings aboard commuter
   trains in Bombay, India, and fears of an escalating conflict in the Middle
   East. In addition, British fixed-income futures prices moved higher after
   the Bank of England kept interest rates unchanged in August. Additional
   losses were recorded from short positions in British fixed-income futures as
   prices reversed higher

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.

FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
 during September and October after second quarter U.K. Gross Domestic Product
  growth was revised downward. Elsewhere, losses were incurred from long
  positions in U.S. fixed-income futures as prices moved lower during the
  beginning of October amid overall strength in the equity markets. Additional
  losses were recorded during December as U.S. Treasury prices continued to
  fall after data indicated strong jobs creation and another survey showed
  increased confidence in the labor market.

FACTORS INFLUENCING ANNUAL TRADING GAINS:
..  Trading gains were experienced in the metals markets, primarily during the
   first and second quarters, from long futures positions in copper, aluminum,
   zinc, and nickel as prices strengthened amid news of weak supplies,
   forecasts for continued buying by China, and acceleration in demand from the
   U.S., Europe, and Japan. Elsewhere in the metals markets, gains were
   recorded from long futures positions in gold and silver as precious metals
   prices moved higher in January on persistent demand from foreign central
   banks.

..  Additional gains were experienced within the global stock index markets
   primarily during the fourth quarter from long positions in European and Hong
   Kong equity index futures as prices moved higher amid declining energy
   prices and overall optimism about the direction of the global economy.
   Further gains were recorded during October from long positions in European
   equity index futures as prices moved higher due to merger and acquisition
   speculation in the banking sector. Prices continued to rally during December
   after an unexpected improvement in the Ifo Business Confidence Index in
   Germany and news from the Office for National Statistics that worker
   productivity in the United Kingdom had reached its highest level in two
   years, resulting in additional gains from long positions. Meanwhile, long
   positions in Hong Kong equity index futures recorded further gains during
   December as prices moved higher on strength in the technology and banking
   sectors, as well as news that the Japanese economy was stronger than
   expected.

..  Smaller gains were experienced within the agricultural markets from long
   positions in sugar futures as prices trended higher during January, moving
   to their highest level since 1981 in response to a decline in inventories,
   as well as increased ethanol demand.

<PAGE>

                      This page intentionally left blank.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND III L.P.

                                    [CHART]

                              Year ended December 31, 2006
                              ----------------------------
Currencies                              -2.45%
Interest Rates                          -3.19%
Stock Indices                            3.59%
Energies                                 0.33%
Metals                                   3.47%
Agriculturals                           -1.09%


Note: Includes trading results and commissions but does not include other fees
      or interest income.

FACTORS INFLUENCING ANNUAL TRADING GAINS:
..  The most significant trading gains were experienced within the global stock
   index sector primarily during the fourth quarter from long positions in
   U.S., European, and Pacific Rim equity index futures as prices advanced amid
   declining energy prices and overall optimism about the direction of the
   global economy. Additionally, U.S. equity index futures prices rose amid
   favorable government reports, which showed few signs of increased
   inflationary pressure, as well as the U.S. Federal Reserve's decision to
   hold interest rates steady at the FOMC monetary policy in October.
   Elsewhere, European equity index futures prices moved higher throughout the
   fourth quarter due to consistent merger and acquisition activity in the
   Euro-Zone, while Pacific Rim stock markets increased on news that consumer
   spending continued to pick up in China and Japan, the region's two biggest
   economies.

..  Additional gains were recorded in the metals sector, primarily during the
   first six months of the year, from long futures positions in aluminum,
   copper, and zinc as base metals prices rallied on strong global demand and
   on reports of falling inventories. Long positions in gold and silver futures
   experienced additional gains within the metals sector as gold prices reached
   25-year highs on continued geopolitical concerns and inflation fears due to
   high energy prices. In addition, silver prices were pressured higher after
   news that a silver-backed Exchange Traded Fund would launch.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND III L.P.

FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
..  Within the energy markets, gains were experienced primarily during the
   fourth quarter from short futures positions in crude oil and its related
   products. During October, prices weakened due to uncertainty regarding
   OPEC's plan to cut production, as well as a lower demand forecast. Gains
   were extended during December as prices declined due to mild winter
   temperatures across the U.S. Northeast.

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  Trading losses were incurred within the global interest rate futures
   markets, primarily during July, August, and October from long positions in
   U.S. and European fixed-income futures as U.S. interest rate futures prices
   continued to decline after government reports confirmed expectations that
   the U.S. economy was still in a period of expansion, while European interest
   rate futures prices declined on speculation of another European Central Bank
   interest rate hike after government reports showed higher industrial
   production in France and Italy. Elsewhere, long positions in Japanese
   fixed-income futures incurred additional losses during September as prices
   fell after the quarterly Tankan survey showed business confidence had
   unexpectedly improved to a two-year high. Losses were extended during
   December from long positions in U.S. fixed-income futures as prices fell
   after data indicated strong jobs creation in November and another survey
   showed increased confidence in the labor market. Meanwhile, long positions
   in German and Japanese fixed-income futures incurred losses as German
   interest rate futures prices moved lower after the European Central Bank
   lifted its benchmark interest rate to 3.5%, while Japanese interest rate
   futures prices fell due to strength in the global equity markets.

..  Losses were recorded in the currency markets, during the first quarter, from
   long U.S. dollar positions versus the Swiss franc, euro, and Japanese yen as
   the value of the U.S. dollar reversed lower on expectations that a string of
   increases in interest rates by the U.S. Federal Reserve could possibly come
   to an end. Also pushing the value of the U.S. dollar lower against its
   rivals was speculation that foreign central banks might move to diversify
   some of their U.S. dollar based assets into other currencies. Further losses
   were recorded during April from short positions in the Swiss franc versus
   the U.S. dollar as the value of the franc reversed higher on the political
   tensions in the Middle East, which increased the demand for the safe-haven
   currency. Finally, during July, losses were recorded from short U.S. dollar
   positions against the euro as the value of the U.S. dollar moved higher due
   to a narrower-than-expected U.S. trade deficit. Furthermore, the value of
   the euro moved lower after the European Central Bank decided to keep
   interest rates unchanged.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND III L.P.

FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
..  Smaller losses were recorded within the agricultural markets, primarily
   during June, from long positions in wheat futures as prices declined amid
   positive weather forecasts in the U.S. wheat belt. Elsewhere in the
   agricultural complex, losses were recorded from both short and long
   positions in corn futures as prices moved without consistent direction
   throughout a majority of the year due to conflicting news regarding supply
   and demand.

<PAGE>

                      This page intentionally left blank.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND IV L.P.

                                    [CHART]

                              Year ended December 31, 2006
                              ----------------------------
Australian dollar                       -0.23%
British pound                            5.21%
Euro                                     0.25%
Japanese yen                            -3.20%
Swiss franc                             -6.22%
Minor Currencies                        -0.72%


Note: Includes trading results and commissions but does not include other fees
      or interest income.
      Minor currencies may include, but are not limited to, the South African
      rand, Thai baht, Singapore dollar, Mexican peso, New Zealand dollar,
      Polish zloty, Brazilian real, Czech koruna and Norwegian krone.

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  The most significant trading losses were from short positions in the Swiss
   franc and Japanese yen against the U.S. dollar. During January and February,
   the Swiss franc rose after strong economic data out of Switzerland, while
   the value of the Japanese yen increased on speculation that the Bank of
   Japan would raise interest rates in the following months. During April,
   further losses were recorded from short positions in the Swiss franc versus
   the U.S. dollar as the value of the Swiss franc strengthened on geopolitical
   tensions in the Middle East, while the value of the U.S. dollar was
   pressured lower on news that foreign central banks were beginning to
   diversify their currency reserves away from U.S. dollar-denominated assets.
   Further losses were experienced towards the end of October and during
   November from long positions in the U.S. dollar relative to the Swiss franc
   and Japanese yen as the value of the U.S. dollar declined after the U.S.
   Department of Commerce reported slower than expected growth in third quarter
   U.S. Gross Domestic Product, as well as a faster than expected decline in
   consumer core inflation. Meanwhile, the Japanese yen strengthened after the
   Swiss National Bank said it had raised its holdings of the Japanese currency
   in the previous quarter, while the Swiss franc strengthened in tandem with
   the euro.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND IV L.P.


FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
..  Additional losses were experienced primarily during May and June from long
   positions in the Brazilian real versus the U.S. dollar as the value of the
   Brazilian real moved lower on political uncertainty out of Brazil.

..  Finally, losses were recorded throughout the year from both short and long
   positions in the Mexican peso, Polish zloty, and Norwegian krone versus the
   U.S. dollar as the value of these currencies moved without consistent
   direction.

FACTORS INFLUENCING ANNUAL TRADING GAINS:
..  Trading gains were experienced from positions in the British pound, New
   Zealand dollar, and Singapore dollar versus the U.S. dollar. Long positions
   in the British pound versus the U.S. dollar experienced gains throughout the
   second half of the year as the value of the British pound increased on
   consistently strong economic data out of the United Kingdom, spurring the
   Bank of England to lift its key interest rate to 5.0% by the end of 2006.
   Also weighing on the U.S. dollar were concerns of a slowing U.S. economy
   after reports showed an increase in jobless claims, while consumer sentiment
   unexpectedly weakened. At the end of November, the U.S. dollar hit a 14-year
   low against the British pound due to merger and acquisition activity in the
   United Kingdom. Smaller gains resulted from long positions in the Singapore
   dollar relative to the U.S. dollar as the value of the Singapore dollar
   benefited from the U.S. dollar's weakness, particularly during April, May,
   and November. During the last quarter, the value of the U.S. dollar
   continued to move lower against most of its rivals on news that China, the
   world's largest holder of foreign-exchange reserves, would begin to more
   aggressively diversify its reserves away from the U.S. currency. Elsewhere
   in the currency markets, short positions in the New Zealand dollar versus
   the U.S. dollar experienced gains during March as the value of the New
   Zealand dollar moved lower on expectations of an economic slow-down in New
   Zealand. However, during the fourth quarter, gains were recorded from long
   positions in the New Zealand dollar versus the U.S. dollar as the value of
   the New Zealand dollar reversed higher after manufacturing sales figures
   added to evidence that the New Zealand economy was expanding fast enough to
   spur the Reserve Bank of New Zealand to raise interest rates in 2007.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

  Demeter Management Corporation ("Demeter"), the general partner of Morgan
Stanley Cornerstone Fund II L.P. (formerly Dean Witter Cornerstone Fund II),
Morgan Stanley Cornerstone Fund III L.P. (formerly Dean Witter Cornerstone Fund
III) and Morgan Stanley Cornerstone Fund IV L.P. (formerly Dean Witter
Cornerstone Fund IV) (collectively, the "Partnerships"), is responsible for the
management of the Partnerships.

  Management of Demeter ("Management") is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles.

  The Partnerships' internal control over financial reporting includes those
policies and procedures that:

..  Pertain to the maintenance of records that, in reasonable detail, accurately
   and fairly reflect the transactions and dispositions of the assets of the
   Partnerships;

..  Provide reasonable assurance that transactions are recorded as necessary to
   permit preparation of financial statements in accordance with generally
   accepted accounting principles, and that the Partnerships' transactions are
   being made only in accordance with authorizations of Management and
   directors; and

..  Provide reasonable assurance regarding prevention or timely detection of
   unauthorized acquisition, use or disposition of the Partnerships' assets
   that could have a material effect on the financial statements.

  Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

<PAGE>

  Management assessed the effectiveness of each Partnership's internal control
over financial reporting as of December 31, 2006. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control--Integrated
Framework. Based on our assessment and those criteria, Management believes that
each Partnership maintained effective internal control over financial reporting
as of December 31, 2006.

  Deloitte & Touche LLP, the Partnerships' independent registered public
accounting firm, has issued an audit report on Management's assessment of the
Partnerships' internal control over financial reporting and on the
effectiveness of the Partnerships' internal control over financial reporting.
This report, which expresses unqualified opinions on Management's assessment
and on the effectiveness of the Partnerships' internal control over financial
reporting, appears under "Report of Independent Registered Public Accounting
Firm" on the following page.

/s/ Walter J. Davis
Walter J. Davis
President
Demeter Management Corporation

/s/ Lee Horwitz
Lee Horwitz
Chief Financial Officer
Demeter Management Corporation

New York, New York
March 9, 2007

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Limited Partners and the General Partner of
Morgan Stanley Cornerstone Fund II L.P.
Morgan Stanley Cornerstone Fund III L.P.
Morgan Stanley Cornerstone Fund IV L.P. :

  We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Morgan
Stanley Cornerstone Fund II L.P. (formerly Dean Witter Cornerstone Fund II),
Morgan Stanley Cornerstone Fund III L.P. (formerly Dean Witter Cornerstone Fund
III), and Morgan Stanley Cornerstone Fund IV L.P. (formerly Dean Witter
Cornerstone Fund IV) (collectively, the "Partnerships") maintained effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The
Partnerships' management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Partnerships' internal control over financial reporting based on our audit.

  We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

  A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to

<PAGE>

the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.

  Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

  In our opinion, management's assessment that the Partnerships maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Partnerships
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

  We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the financial statements as of and
for the year ended December 31, 2006 of the Partnerships and our report dated
March 9, 2007 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

New York, New York
March 9, 2007

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Limited Partners and the General Partner of
Morgan Stanley Cornerstone Fund II L.P.
Morgan Stanley Cornerstone Fund III L.P.
Morgan Stanley Cornerstone Fund IV L.P.:

  We have audited the accompanying statements of financial condition of Morgan
Stanley Cornerstone Fund II L.P. (formerly Dean Witter Cornerstone Fund II),
Morgan Stanley Cornerstone Fund III L.P. (formerly Dean Witter Cornerstone Fund
III), and Morgan Stanley Cornerstone Fund IV L.P. (formerly Dean Witter
Cornerstone Fund IV) (collectively, the "Partnerships"), including the
schedules of investments, as of December 31, 2006 and 2005, 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, 2006. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements 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 Morgan Stanley Cornerstone Fund II L.P.
(formerly Dean Witter Cornerstone Fund II), Morgan Stanley Cornerstone Fund III
L.P. (formerly Dean Witter Cornerstone Fund III), and Morgan Stanley
Cornerstone Fund IV L.P. (formerly Dean Witter Cornerstone Fund IV) at December
31, 2006 and 2005, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.

<PAGE>

  As discussed in Note 1, in 2006 and 2005, the Partnerships modified their
classification of cash within the statements of cash flows.

  We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Partnerships' internal control over financial reporting as of December 31,
2006, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 9, 2007 expressed an unqualified opinion
on management's assessment of the effectiveness of the Partnerships' internal
control over financial reporting and an unqualified opinion on the
effectiveness of the Partnerships' internal control over financial reporting.

/s/ Deloitte & Touche LLP

New York, New York
March 9, 2007

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                           --------------------
                                                             2006       2005
                                                           --------- ----------
                                                              $          $
 <S>                                                       <C>       <C>
                                    ASSETS
 Equity in futures interests trading accounts:
  Unrestricted cash                                        8,331,036 11,242,503
  Restricted cash                                            524,953  1,213,808
                                                           --------- ----------
   Total Cash                                              8,855,989 12,456,311
                                                           --------- ----------

  Net unrealized gain on open contracts (MS&Co.)             258,505    344,900
  Net unrealized gain on open contracts (MSIL)                --        173,143
                                                           --------- ----------
   Total net unrealized gain on open contracts               258,505    518,043
                                                           --------- ----------
   Total Trading Equity                                    9,114,494 12,974,354
 Interest receivable (Morgan Stanley DW)                      29,322     35,476
 Due from Morgan Stanley DW                                   16,888     11,710
                                                           --------- ----------
   Total Assets                                            9,160,704 13,021,540
                                                           ========= ==========

                       LIABILITIES AND PARTNERS' CAPITAL
 LIABILITIES
 Redemptions payable                                          86,657    333,219
 Accrued administrative expenses                              29,687     32,208
 Accrued management fees                                      26,632     37,886
                                                           --------- ----------
   Total Liabilities                                         142,976    403,313
                                                           --------- ----------
 PARTNERS' CAPITAL
 Limited Partners (2,525.775 and 3,261.160 Units,
  respectively)                                            8,722,240 12,240,749
 General Partner (85.567 and 100.567 Units, respectively)    295,488    377,478
                                                           --------- ----------
   Total Partners' Capital                                 9,017,728 12,618,227
                                                           --------- ----------
   Total Liabilities and Partners' Capital                 9,160,704 13,021,540
                                                           ========= ==========
 NET ASSET VALUE PER UNIT                                   3,453.29   3,753.50
                                                           ========= ==========
</TABLE>

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                 FOR THE YEARS ENDED DECEMBER 31,
                                                ----------------------------------
                                                   2006        2005        2004
                                                ----------  ----------  ----------
                                                    $           $           $
<S>                                             <C>         <C>         <C>
INVESTMENT INCOME
 Interest income (Morgan Stanley DW)               393,410     367,313     208,174
                                                ----------  ----------  ----------

EXPENSES
 Brokerage commissions (Morgan Stanley DW)         628,115     833,584   1,104,683
 Management fees                                   361,586     506,875     672,937
 Common administrative expenses                     50,000      41,000      56,000
 Transaction fees and costs                         40,840      48,642      83,591
 Incentive fee                                      --          --           2,250
                                                ----------  ----------  ----------
  Total Expenses                                 1,080,541   1,430,101   1,919,461
                                                ----------  ----------  ----------

NET INVESTMENT LOSS                               (687,131) (1,062,788) (1,711,287)
                                                ----------  ----------  ----------

TRADING RESULTS
Trading profit (loss):
 Realized                                          (53,928) (1,007,388)   (545,606)
 Net change in unrealized                         (259,538) (1,492,690)    712,273
                                                ----------  ----------  ----------
                                                  (313,466) (2,500,078)    166,667
 Proceeds from Litigation Settlement                --           2,209         755
                                                ----------  ----------  ----------
  Total Trading Results                           (313,466) (2,497,869)    167,422
                                                ----------  ----------  ----------

NET LOSS                                        (1,000,597) (3,560,657) (1,543,865)
                                                ==========  ==========  ==========

NET LOSS ALLOCATION:
Limited Partners                                  (970,621) (3,469,605) (1,511,432)
General Partner                                    (29,976)    (91,052)    (32,433)

NET LOSS PER UNIT:
Limited Partners                                   (300.21)    (905.38)    (322.51)
General Partner                                    (300.21)    (905.38)    (322.51)
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND III L.P.

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         ---------------------
                                                            2006       2005
                                                         ---------- ----------
                                                             $          $
 <S>                                                     <C>        <C>
                                    ASSETS
 Equity in futures interests trading accounts:
  Unrestricted cash                                      18,056,766 21,002,788
  Restricted cash                                         2,408,811  1,409,104
                                                         ---------- ----------
   Total Cash                                            20,465,577 22,411,892
                                                         ---------- ----------

  Net unrealized gain on open contracts (MS&Co.)            489,311    271,196
  Net unrealized gain on open contracts (MSIL)               42,675    599,935
                                                         ---------- ----------
   Total net unrealized gain on open contracts              531,986    871,131
                                                         ---------- ----------
   Total Trading Equity                                  20,997,563 23,283,023
 Interest receivable (Morgan Stanley DW)                     67,511     61,652
 Due from Morgan Stanley DW                                  34,489     41,210
                                                         ---------- ----------
   Total Assets                                          21,099,563 23,385,885
                                                         ========== ==========

                      LIABILITIES AND PARTNERS' CAPITAL
 LIABILITIES
 Redemptions payable                                        352,302    247,236
 Accrued administrative expenses                            108,753    112,360
 Accrued management fees                                     61,223     67,881
                                                         ---------- ----------
   Total Liabilities                                        522,278    427,477
                                                         ---------- ----------
 PARTNERS' CAPITAL
 Limited Partners (4,928.664 and 5,693.493 Units,
  respectively)                                          20,157,999 22,552,335
 General Partner (102.516 Units)                            419,286    406,073
                                                         ---------- ----------
   Total Partners' Capital                               20,577,285 22,958,408
                                                         ---------- ----------
   Total Liabilities and Partners' Capital               21,099,563 23,385,885
                                                         ========== ==========
 NET ASSET VALUE PER UNIT                                  4,089.95   3,961.07
                                                         ========== ==========
</TABLE>

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             FOR THE YEARS ENDED DECEMBER 31,
                                            ----------------------------------
                                               2006        2005        2004
                                            ----------  ----------  ----------
                                                $           $           $
 <S>                                        <C>         <C>         <C>
 INVESTMENT INCOME
  Interest income (Morgan Stanley DW)          845,718     602,016     306,275
                                            ----------  ----------  ----------

 EXPENSES
  Brokerage commissions (Morgan Stanley DW)  1,046,232     948,366   1,084,092
  Management fees                              778,821     833,891     982,868
  Common administrative expenses                94,000      70,000      88,000
  Transaction fees and costs                    77,450      51,605      57,678
                                            ----------  ----------  ----------
    Total Expenses                           1,996,503   1,903,862   2,212,638
                                            ----------  ----------  ----------

 NET INVESTMENT LOSS                        (1,150,785) (1,301,846) (1,906,363)
                                            ----------  ----------  ----------

 TRADING RESULTS
 Trading profit (loss):
  Realized                                   2,219,556    (992,550)  6,007,562
  Net change in unrealized                    (339,145)    409,603  (2,000,462)
                                            ----------  ----------  ----------
                                             1,880,411    (582,947)  4,007,100
  Proceeds from Litigation Settlement           --          26,287      27,998
                                            ----------  ----------  ----------
    Total Trading Results                    1,880,411    (556,660)  4,035,098
                                            ----------  ----------  ----------

 NET INCOME (LOSS)                             729,626  (1,858,506)  2,128,735
                                            ==========  ==========  ==========

 NET INCOME (LOSS) ALLOCATION:
 Limited Partners                              716,413  (1,832,088)  2,097,010
 General Partner                                13,213     (26,418)     31,725

 NET INCOME (LOSS) PER UNIT:
 Limited Partners                               128.88     (257.70)     309.46
 General Partner                                128.88     (257.70)     309.46
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND IV L.P.

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         ---------------------
                                                            2006       2005
                                                         ---------- ----------
                                                             $          $
 <S>                                                     <C>        <C>
                                    ASSETS
 Equity in futures interests trading accounts:
  Unrestricted cash                                      50,007,010 64,125,073
  Restricted cash                                            --         --
                                                         ---------- ----------
   Total Cash                                            50,007,010 64,125,073

  Net unrealized gain on open contracts (MS&Co.)          1,429,548  1,973,887
                                                         ---------- ----------
   Total Trading Equity                                  51,436,558 66,098,960
 Interest receivable (Morgan Stanley DW)                    159,151    170,317
 Due from Morgan Stanley DW                                  49,185     55,750
                                                         ---------- ----------
   Total Assets                                          51,644,894 66,325,027
                                                         ========== ==========

                      LIABILITIES AND PARTNERS' CAPITAL
 LIABILITIES
 Redemptions payable                                      1,326,233  1,232,662
 Accrued management fees                                    150,311    193,125
 Accrued administrative expenses                            109,708    110,888
                                                         ---------- ----------
   Total Liabilities                                      1,586,252  1,536,675
                                                         ---------- ----------
 PARTNERS' CAPITAL
 Limited Partners (8,793.380 and 10,902.992
  Units, respectively)                                   49,470,851 64,109,338
 General Partner (104.479 and 115.479 Units,
  respectively)                                             587,791    679,014
                                                         ---------- ----------
   Total Partners' Capital                               50,058,642 64,788,352
                                                         ---------- ----------
   Total Liabilities and Partners' Capital               51,644,894 66,325,027
                                                         ========== ==========
 NET ASSET VALUE PER UNIT                                  5,625.92   5,879.98
                                                         ========== ==========
</TABLE>

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             FOR THE YEARS ENDED DECEMBER 31,
                                           -----------------------------------
                                              2006         2005        2004
                                           ----------  -----------  ----------
                                               $            $           $
<S>                                        <C>         <C>          <C>
INVESTMENT INCOME
 Interest income (Morgan Stanley DW)        2,038,843    1,848,451     969,606
                                           ----------  -----------  ----------

EXPENSES
 Brokerage commissions (Morgan Stanley DW)  2,033,041    2,714,539   2,978,359
 Management fees                            1,903,186    2,619,089   3,269,250
 Common administrative expenses               175,000      139,000     178,000
 Incentive fee                                 --           --          (6,682)
                                           ----------  -----------  ----------
   Total Expenses                           4,111,227    5,472,628   6,418,927
                                           ----------  -----------  ----------

NET INVESTMENT LOSS                        (2,072,384)  (3,624,177) (5,449,321)
                                           ----------  -----------  ----------

TRADING RESULTS
Trading profit (loss):
 Realized                                    (597,044) (10,036,703) (7,816,724)
 Net change in unrealized                    (544,339)  (4,373,970)  3,301,580
                                           ----------  -----------  ----------
   Total Trading Results                   (1,141,383) (14,410,673) (4,515,144)
                                           ----------  -----------  ----------

NET LOSS                                   (3,213,767) (18,034,850) (9,964,465)
                                           ==========  ===========  ==========

NET LOSS ALLOCATION:
Limited Partners                           (3,182,959) (17,820,295) (9,861,124)
General Partner                               (30,808)    (214,555)   (103,341)

NET LOSS PER UNIT:
Limited Partners                              (254.06)   (1,407.53)    (656.22)
General Partner                               (254.06)   (1,407.53)    (656.22)
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

<TABLE>
<CAPTION>
                                    UNITS OF
                                   PARTNERSHIP  LIMITED    GENERAL
                                    INTEREST    PARTNERS   PARTNER     TOTAL
                                   ----------- ----------  -------  ----------
                                                   $          $          $
 <S>                               <C>         <C>         <C>      <C>
 Partners' Capital, December 31,
 2003                               4,426.356  21,548,446  500,963  22,049,409
 Net loss                               --     (1,511,432) (32,433) (1,543,865)
 Redemptions                         (427.607) (1,875,861)    --    (1,875,861)
                                    ---------  ----------  -------  ----------
 Partners' Capital, December 31,
 2004                               3,998.749  18,161,153  468,530  18,629,683
 Net loss                               --     (3,469,605) (91,052) (3,560,657)
 Redemptions                         (637.022) (2,450,799)    --    (2,450,799)
                                    ---------  ----------  -------  ----------
 Partners' Capital,
 December 31, 2005                  3,361.727  12,240,749  377,478  12,618,227
 Net loss                               --       (970,621) (29,976) (1,000,597)
 Redemptions                         (750.385) (2,547,888) (52,014) (2,599,902)
                                    ---------  ----------  -------  ----------
 Partners' Capital, December 31,
 2006                               2,611.342   8,722,240  295,488   9,017,728
                                    =========  ==========  =======  ==========
</TABLE>

MORGAN STANLEY CORNERSTONE FUND III L.P.

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

<TABLE>
 <S>                               <C>         <C>         <C>      <C>
 FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

                                    UNITS OF
                                   PARTNERSHIP  LIMITED    GENERAL
                                    INTEREST    PARTNERS   PARTNER     TOTAL
                                   ----------- ----------  -------  ----------
                                                   $          $          $
 Partners' Capital, December 31,
 2003                               7,161.569  27,596,004  400,766  27,996,770
 Net income                             --      2,097,010   31,725   2,128,735
 Redemptions                         (546.057) (2,216,179)    --    (2,216,179)
                                    ---------  ----------  -------  ----------
 Partners' Capital, December 31,
 2004                               6,615.512  27,476,835  432,491  27,909,326
 Net loss                               --     (1,832,088) (26,418) (1,858,506)
 Redemptions                         (819.503) (3,092,412)    --    (3,092,412)
                                    ---------  ----------  -------  ----------
 Partners' Capital,
 December 31, 2005                  5,796.009  22,552,335  406,073  22,958,408
 Net income                             --        716,413   13,213     729,626
 Redemptions                         (764.829) (3,110,749)    --    (3,110,749)
                                    ---------  ----------  -------  ----------
 Partners' Capital, December 31,
 2006                               5,031.180  20,157,999  419,286  20,577,285
                                    =========  ==========  =======  ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND IV L.P.

STATEMENT OF CHANGES IN PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

<TABLE>
<CAPTION>
                                 UNITS OF
                                PARTNERSHIP   LIMITED     GENERAL
                                 INTEREST     PARTNERS    PARTNER      TOTAL
                                ----------- -----------  ---------  -----------
                                                 $           $           $
<S>                             <C>         <C>          <C>        <C>
Partners' Capital,
December 31, 2003               14,154.830  111,191,238  1,250,971  112,442,209
Net loss                            --       (9,861,124)  (103,341)  (9,964,465)
Redemptions                     (1,123.370)  (7,510,855)     --      (7,510,855)
                                ----------  -----------  ---------  -----------
Partners' Capital, December
31, 2004                        13,031.460   93,819,259  1,147,630   94,966,889
Net loss                            --      (17,820,295)  (214,555) (18,034,850)
Redemptions                     (2,012.989) (11,889,626)  (254,061) (12,143,687)
                                ----------  -----------  ---------  -----------
Partners' Capital,
December 31, 2005               11,018.471   64,109,338    679,014   64,788,352
Net loss                            --       (3,182,959)   (30,808)  (3,213,767)
Redemptions                     (2,120.612) (11,455,528)   (60,415) (11,515,943)
                                ----------  -----------  ---------  -----------
Partners' Capital, December
31, 2006                         8,897.859   49,470,851    587,791   50,058,642
                                ==========  ===========  =========  ===========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                              FOR THE YEARS ENDED DECEMBER 31,
                                             ----------------------------------
                                                2006        2005        2004
                                             ----------  ----------  ----------
                                                 $           $           $
<S>                                          <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                     (1,000,597) (3,560,657) (1,543,865)
Noncash item included in net loss:
 Net change in unrealized                       259,538   1,492,690    (712,273)
(Increase) decrease in operating assets:
 Restricted cash                                688,855   1,418,295     312,473
 Interest receivable (Morgan Stanley DW)          6,154      (8,347)    (14,057)
 Due from Morgan Stanley DW                      (5,178)     50,678         311
Decrease in operating liabilities:
 Accrued administrative expenses                 (2,521)     (5,084)     (8,679)
 Accrued management fees                        (11,254)    (16,779)    (10,248)
                                             ----------  ----------  ----------
Net cash used for operating activities          (65,003)   (629,204) (1,976,338)
                                             ----------  ----------  ----------

CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for redemptions of Units           (2,846,464) (2,175,467) (1,959,376)
                                             ----------  ----------  ----------
Net cash used for financing activities       (2,846,464) (2,175,467) (1,959,376)
                                             ----------  ----------  ----------

Net decrease in unrestricted cash            (2,911,467) (2,804,671) (3,935,714)

Unrestricted cash at beginning of period     11,242,503  14,047,174  17,982,888
                                             ----------  ----------  ----------

Unrestricted cash at end of period            8,331,036  11,242,503  14,047,174
                                             ==========  ==========  ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND III L.P.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                              FOR THE YEARS ENDED DECEMBER 31,
                                             ----------------------------------
                                                2006        2005        2004
                                             ----------  ----------  ----------
                                                 $           $           $
<S>                                          <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                               729,626  (1,858,506)  2,128,735
Noncash item included in net income (loss):
 Net change in unrealized                       339,145    (409,603)  2,000,462
(Increase) decrease in operating assets:
 Restricted cash                               (999,707)  1,706,314     783,002
 Interest receivable (Morgan Stanley DW)         (5,859)    (20,356)    (25,003)
 Due from Morgan Stanley DW                       6,721     (26,090)    (15,120)
Increase (decrease) in operating
 liabilities:
 Accrued administrative expenses                 (3,607)     (7,310)    (29,848)
 Accrued management fees                         (6,658)    (14,595)        231
                                             ----------  ----------  ----------
Net cash provided by (used for) operating
 activities                                      59,661    (630,146)  4,842,459
                                             ----------  ----------  ----------

CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for redemptions of Units           (3,005,683) (3,130,920) (2,049,540)
                                             ----------  ----------  ----------
Net cash used for financing activities       (3,005,683) (3,130,920) (2,049,540)
                                             ----------  ----------  ----------

Net increase (decrease) in unrestricted cash (2,946,022) (3,761,066)  2,792,919

Unrestricted cash at beginning of period     21,002,788  24,763,854  21,970,935
                                             ----------  ----------  ----------

Unrestricted cash at end of period           18,056,766  21,002,788  24,763,854
                                             ==========  ==========  ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND IV L.P.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                            FOR THE YEARS ENDED DECEMBER 31,
                                         -------------------------------------
                                             2006         2005         2004
                                         -----------  -----------  -----------
                                              $            $            $
<S>                                      <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                  (3,213,767) (18,034,850)  (9,964,465)
Noncash item included in net loss:
 Net change in unrealized                    544,339    4,373,970   (3,301,580)
(Increase) decrease in operating assets:
 Restricted cash                              --           12,902      (12,902)
 Interest receivable (Morgan Stanley DW)      11,166      (47,477)     (61,319)
 Due from Morgan Stanley DW                    6,565      (23,388)     (32,362)
Decrease in operating liabilities:
 Accrued management fees                     (42,814)     (87,016)     (50,454)
 Accrued administrative expenses              (1,180)     (12,326)     (53,805)
 Accrued incentive fee                        --           --           (6,682)
                                         -----------  -----------  -----------
Net cash used for operating activities    (2,695,691) (13,818,185) (13,483,569)
                                         -----------  -----------  -----------

CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for redemptions of Units       (11,422,372) (11,712,375)  (7,276,887)
                                         -----------  -----------  -----------
Net cash used for financing activities   (11,422,372) (11,712,375)  (7,276,887)
                                         -----------  -----------  -----------
Net decrease in unrestricted cash        (14,118,063) (25,530,560) (20,760,456)

Unrestricted cash at beginning of period  64,125,073   89,655,633  110,416,089
                                         -----------  -----------  -----------

Unrestricted cash at end of period        50,007,010   64,125,073   89,655,633
                                         ===========  ===========  ===========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.

SCHEDULES OF INVESTMENTS

DECEMBER 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                  LONG UNREALIZED  PERCENTAGE   SHORT UNREALIZED  PERCENTAGE
FUTURES AND FORWARD CONTRACTS:                                      GAIN/(LOSS)   OF NET ASSETS   GAIN/(LOSS)    OF NET ASSETS
------------------------------                                    --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $9,017,728                                  $              %              $               %
<S>                                                               <C>             <C>           <C>              <C>
Commodity                                                                --             --            33,387          0.37
Equity                                                                 25,871          0.29            --              --
Foreign currency                                                      102,080          1.13           76,510          0.85
Interest rate                                                         (82,786)        (0.92)          89,408          0.99
                                                                      -------         -----         --------         -----
  Grand Total:                                                         45,165          0.50          199,305          2.21
                                                                      =======         =====         ========         =====
  Unrealized Currency Gain

  Total Net Unrealized Gain per Statement of Financial Condition


2005 PARTNERSHIP NET ASSETS: $12,618,227
Commodity                                                              98,649          0.78         (112,434)        (0.89)
Equity                                                                 59,908          0.48            --              --
Foreign currency                                                      (47,986)        (0.38)         322,181          2.56
Interest rate                                                           3,713          0.03          (34,872)        (0.28)
                                                                      -------         -----         --------         -----
  Grand Total:                                                        114,284          0.91          174,875          1.39
                                                                      =======         =====         ========         =====
  Unrealized Currency Gain

  Total Net Unrealized Gain per Statement of Financial Condition

</TABLE>
<TABLE>
<CAPTION>
                                                                  NET UNREALIZED
FUTURES AND FORWARD CONTRACTS:                                     GAIN/(LOSS)
------------------------------                                    --------------
2006 PARTNERSHIP NET ASSETS: $9,017,728                                 $
<S>                                                               <C>
Commodity                                                             33,387
Equity                                                                25,871
Foreign currency                                                     178,590
Interest rate                                                          6,622
                                                                     -------
  Grand Total:                                                       244,470

  Unrealized Currency Gain                                            14,035
                                                                     -------
  Total Net Unrealized Gain per Statement of Financial Condition     258,505
                                                                     =======

2005 PARTNERSHIP NET ASSETS: $12,618,227
Commodity                                                            (13,785)
Equity                                                                59,908
Foreign currency                                                     274,195
Interest rate                                                        (31,159)
                                                                     -------
  Grand Total:                                                       289,159

  Unrealized Currency Gain                                           228,884
                                                                     -------
  Total Net Unrealized Gain per Statement of Financial Condition     518,043
                                                                     =======
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND III L.P.

SCHEDULES OF INVESTMENTS

DECEMBER 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                  LONG UNREALIZED  PERCENTAGE   SHORT UNREALIZED  PERCENTAGE
FUTURES AND FORWARD CONTACTS:                                       GAIN/(LOSS)   OF NET ASSETS   GAIN/(LOSS)    OF NET ASSETS
-----------------------------                                     --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $20,577,285                                 $              %              $               %
<S>                                                               <C>             <C>           <C>              <C>
Commodity                                                              23,088          0.11         169,297           0.82
Equity                                                                234,490          1.14            --              --
Foreign currency                                                      (37,575)        (0.18)        144,851           0.70
Interest rate                                                         (65,141)        (0.32)        154,876           0.75
                                                                     --------         -----         -------          -----
  Grand Total:                                                        154,862          0.75         469,024           2.27
                                                                     ========         =====         =======          =====
  Unrealized Currency Loss

  Total Net Unrealized Gain per Statement of Financial Condition


2005 PARTNERSHIP NET ASSETS: $22,958,408
Commodity                                                             873,591          3.81         (10,356)         (0.05)
Equity                                                                (15,962)        (0.07)           --              --
Foreign currency                                                     (196,636)        (0.86)        330,718           1.44
Interest rate                                                          10,772          0.05          41,064           0.18
                                                                     --------         -----         -------          -----
  Grand Total:                                                        671,765          2.93         361,426           1.57
                                                                     ========         =====         =======          =====
  Unrealized Currency Loss

  Total Net Unrealized Gain per Statement of Financial Condition

</TABLE>
<TABLE>
<CAPTION>
                                                                  NET UNREALIZED
FUTURES AND FORWARD CONTACTS:                                      GAIN/(LOSS)
-----------------------------                                     --------------
2006 PARTNERSHIP NET ASSETS: $20,577,285                                $
<S>                                                               <C>
Commodity                                                             192,385
Equity                                                                234,490
Foreign currency                                                      107,276
Interest rate                                                          89,735
                                                                    ---------
  Grand Total:                                                        623,886

  Unrealized Currency Loss                                            (91,900)
                                                                    ---------
  Total Net Unrealized Gain per Statement of Financial Condition      531,986
                                                                    =========

2005 PARTNERSHIP NET ASSETS: $22,958,408
Commodity                                                             863,235
Equity                                                                (15,962)
Foreign currency                                                      134,082
Interest rate                                                          51,836
                                                                    ---------
  Grand Total:                                                      1,033,191

  Unrealized Currency Loss                                           (162,060)
                                                                    ---------
  Total Net Unrealized Gain per Statement of Financial Condition      871,131
                                                                    =========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>


MORGAN STANLEY CORNERSTONE FUND IV L.P.

SCHEDULES OF INVESTMENTS

DECEMBER 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                  LONG UNREALIZED PERCENTAGE OF SHORT UNREALIZED PERCENTAGE OF
FUTURES AND FORWARD CONTRACTS:                                      GAIN/(LOSS)    NET ASSETS     GAIN/(LOSS)     NET ASSETS
------------------------------                                    --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $50,058,642                                 $              %              $               %
<S>                                                               <C>             <C>           <C>              <C>
Foreign currency                                                      603,922          1.21          825,626         1.65
                                                                     --------         -----        ---------         ----
  Grand Total:                                                        603,922          1.21          825,626         1.65
                                                                     ========         =====        =========         ====
  Unrealized Currency Gain/(Loss)

  Total Net Unrealized Gain per Statement of Financial Condition


2005 PARTNERSHIP NET ASSETS: $64,788,352
Foreign currency                                                     (325,055)        (0.50)       2,298,942         3.55
                                                                     --------         -----        ---------         ----
  Grand Total:                                                       (325,055)        (0.50)       2,298,942         3.55
                                                                     ========         =====        =========         ====
  Unrealized Currency Gain/(Loss)

  Total Net Unrealized Gain per Statement of Financial Condition

</TABLE>
<TABLE>
<CAPTION>
                                                                  NET UNREALIZED
FUTURES AND FORWARD CONTRACTS:                                     GAIN/(LOSS)
------------------------------                                    --------------
2006 PARTNERSHIP NET ASSETS: $50,058,642                                $
<S>                                                               <C>
Foreign currency                                                    1,429,548
                                                                    ---------
  Grand Total:                                                      1,429,548

  Unrealized Currency Gain/(Loss)                                      --
                                                                    ---------
  Total Net Unrealized Gain per Statement of Financial Condition    1,429,548
                                                                    =========

2005 PARTNERSHIP NET ASSETS: $64,788,352
Foreign currency                                                    1,973,887
                                                                    ---------
  Grand Total:                                                      1,973,887

  Unrealized Currency Gain/(Loss)                                      --
                                                                    ---------
  Total Net Unrealized Gain per Statement of Financial Condition    1,973,887
                                                                    =========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION.  Morgan Stanley Cornerstone Fund II L.P. (formerly Dean Witter
Cornerstone Fund II) ("Cornerstone II"), Morgan Stanley Cornerstone Fund III
L.P. (formerly Dean Witter Cornerstone Fund III) ("Cornerstone III"), and
Morgan Stanley Cornerstone Fund IV L.P. (formerly Dean Witter Cornerstone Fund
IV) ("Cornerstone IV") (individually, a "Partnership", or collectively, the
"Partnerships"), are limited partnerships organized to engage in the
speculative trading of futures contracts, options on futures contracts, and
forward contracts on foreign currencies and other commodity interests
(collectively, "Futures Interests").
  Effective July 21, 2006, Dean Witter Cornerstone Fund II, Dean Witter
Cornerstone Fund III, and Dean Witter Cornerstone Fund IV, were renamed to
Morgan Stanley Cornerstone Fund II L.P., Morgan Stanley Cornerstone Fund III
L.P., and Morgan Stanley Cornerstone Fund IV L.P., respectively.
  The general partner of each Partnership is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc.
("Morgan Stanley DW"). The clearing commodity brokers for Cornerstone II and
Cornerstone III are Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan
Stanley & Co. International Limited ("MSIL"). Cornerstone IV's sole clearing
commodity broker is MS&Co. MS&Co. acts as the counterparty on all of the
foreign currency forward contracts. In 2007, Morgan Stanley intends to merge
Morgan Stanley DW into MS&Co. Upon completion of the merger, the surviving
entity, MS&Co., will be the Partnerships' principal U.S. commodity
broker-dealer. Demeter, Morgan Stanley DW, MS&Co., and MSIL are wholly-owned
subsidiaries of Morgan Stanley.
  Demeter is required to maintain a 1% minimum interest in the equity of each
Partnership and income (losses) are shared by Demeter and the limited partners
based upon their proportional ownership interests.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


USE OF ESTIMATES.  The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the reported
amounts in the financial statements and related disclosures. Management
believes that the estimates utilized in the preparation of the financial
statements are prudent and reasonable. Actual results could differ from those
estimates.
REVENUE RECOGNITION.  Futures Interests are open commitments until settlement
date, at which time they are realized. They are valued at market on a daily
basis and the resulting net change in unrealized gains and losses is reflected
in the change in unrealized trading profit (loss) on open contracts from one
period to the next on the Statements of Operations. Monthly, Morgan Stanley DW
pays each Partnership interest income on 80% of its average daily Net Assets at
a rate equal to the average yield on 13-week U.S. Treasury bills. For purposes
of such interest payments to Cornerstone IV, Net Assets do not include monies
owed to the Partnership on Futures Interests.
  The Partnerships' functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are translated
into U.S. dollars at the rates in effect at the date of the Statements of
Financial Condition. Income and expense items denominated in currencies other
than the U.S. dollar are translated into U.S. dollars at the rates in effect
during the period. Gains and losses resulting from the translation to U.S.
dollars are reported in income currently.

NET INCOME (LOSS) PER UNIT.  Net income (loss) per unit of limited partnership
interest ("Unit(s)") is computed using the weighted average number of Units
outstanding during the period.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


NEW ACCOUNTING DEVELOPMENTS.  In July 2006, the Financial Accounting Standards
Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement 109" ("FIN 48"). FIN 48
clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position must meet before being recognized in the
financial statements. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The impact to the Partnerships' Financial Statements, if
any, is currently being assessed.
  In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for the Partnerships as of January 1, 2008. The
impact to the Partnerships' Financial Statements, if any, is currently being
assessed.
  In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108") to provide guidance on how the effects of the
carryover or reversal of prior year unrecorded misstatements should be
considered in quantifying a current year misstatement. SAB No. 108 requires a
company to apply an approach that considers the amount by which the current
year income statement is misstated ("rollover approach") and an approach that
considers the cumulative amount by which the current year balance sheet is
misstated ("iron-curtain approach"). Prior to the issuance of SAB No. 108, many
companies applied either the rollover or iron-curtain approach for purposes of
assessing materiality of misstatements. SAB No. 108 is effective for the
Partnerships as of January 1, 2007. Upon adoption, SAB No. 108 allows a
one-time cumulative effect adjustment against Partners' Capital for those prior
year misstatements that were not material under the Partnerships' prior
approach, but that are deemed material under the SAB No. 108 approach. Demeter
does not expect the adoption of SAB No. 108 to have a material impact on the
Partnerships' Financial Statements.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


EQUITY IN FUTURES INTERESTS TRADING ACCOUNTS.  The Partnerships' asset "Equity
in futures interests trading accounts", reflected on the Statements of
Financial Condition, consists of (A) cash on deposit with Morgan Stanley DW,
MS&Co., and MSIL for Cornerstone II and Cornerstone III, and with Morgan
Stanley DW and MS&Co. for Cornerstone IV, to be used as margin for trading; (B)
net unrealized gains or losses on open contracts, which are valued at market
and calculated as the difference between original contract value and market
value; and (C) net option premiums, which represent the net of all monies paid
and/or received for such option premiums.
  The Partnerships, in their normal course of business, enter into various
contracts with MS&Co. and/or MSIL acting as their commodity brokers. Pursuant
to brokerage agreements with MS&Co. and/or MSIL, to the extent that such
trading results in unrealized gains or losses, these amounts are offset and
reported on a net basis on the Partnerships' Statements of Financial Condition.
  The Partnerships have offset the fair value amounts recognized for forward
contracts executed with the same counterparty as allowable under the terms of
their master netting agreements with MS&Co., the sole counterparty on such
contracts. The Partnerships have consistently applied their right to offset.

BROKERAGE COMMISSIONS AND RELATED TRANSACTION FEES AND COSTS.  Brokerage
commissions and related transaction fees and costs for each Partnership are
accrued on a half-turn basis at 80% and 100%, respectively, of the rates Morgan
Stanley DW and MS&Co., respectively, charge parties that are not clearinghouse
members. Brokerage commissions and transaction fees and costs combined for each
Partnership are capped at  13/20 of 1% per month (a 7.8% maximum annual rate)
of the adjusted Net Assets allocated to each trading program employed by the
Partnerships' trading managers.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


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 outstanding Units of each
Partnership during the month in which such expenses are incurred. In addition,
the Partnerships incur a monthly management fee and may incur an incentive fee.
Demeter bears all other operating expenses.

REDEMPTIONS.  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 Demeter.

DISTRIBUTIONS.  Distributions, other than redemptions of Units, are made on a
pro-rata basis at the sole discretion of Demeter. No distributions have been
made to date. Demeter does not intend to make any distributions of the
Partnerships' profits.

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.

DISSOLUTION OF THE PARTNERSHIPS.  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 each Limited
Partnership Agreement.

LITIGATION SETTLEMENT.  Cornerstone II and Cornerstone III received
notification of a preliminary entitlement to payment from the Sumitomo Copper
Litigation Settlement Administrator, and each Partnership received settlement
award payments in the amount of $755 and $27,998, respectively, during July
2004 and $2,209 and $26,287, respectively, during November 2005. Any amounts
received are accounted for in the period received, for the benefit of the
limited partners at the date of receipt.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


RECLASSIFICATIONS.  Certain prior year amounts relating to cash balances were
reclassified on the Statements of Cash Flows to conform to 2006 and 2005
presentation. Such reclassifications have no impact on the Partnerships'
reported net income (loss).

--------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS
Each Partnership pays brokerage commissions to Morgan Stanley DW as described
in Note 1. Cornerstone II and Cornerstone III's cash is on deposit with Morgan
Stanley DW, MS&Co., and MSIL, and Cornerstone IV's cash is on deposit with
Morgan Stanley DW and MS&Co., in futures interests trading accounts to meet
margin requirements as needed. Morgan Stanley DW pays interest on these funds
as described in Note 1.

--------------------------------------------------------------------------------
3. TRADING MANAGERS
Demeter, on behalf of each Partnership, retains certain commodity trading
managers to make all trading decisions for the Partnerships. The trading
managers for each Partnership at December 31, 2006 were as follows:

Morgan Stanley Cornerstone Fund II L.P.
  John W. Henry & Company, Inc.
  Northfield Trading L.P.

Morgan Stanley Cornerstone Fund III L.P.
  Graham Capital Management, L.P.
  Sunrise Capital Management, Inc.

Morgan Stanley Cornerstone Fund IV L.P.
  John W. Henry & Company, Inc.
  Sunrise Capital Management, Inc.

Compensation to the trading managers by the Partnerships consists of a
management fee and an incentive fee as follows:

MANAGEMENT FEE.  Each Partnership's management fee is accrued at the rate of
1/12 of 3.5% per month (a 3.5% annual rate) of the Net Assets under management
by each trading manager at each month end.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


INCENTIVE FEE.  Each Partnership pays an annual incentive fee equal to 15% of
the new appreciation in Net Assets, as defined in the Limited Partnership
Agreements, as of the end of each annual incentive period ending December 31,
except for Cornerstone IV, which pays an incentive fee at the end of each
annual incentive period ending May 31. New appreciation represents the amount
by which Net Assets are increased by profits from futures, forwards, and
options trading that exceed losses after brokerage commissions, management
fees, transaction fees and costs, and common administrative expenses are
deducted. 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 are reduced. In those instances
in which a limited partner redeems an investment, the incentive fee (if earned
through a redemption date) is paid on that redemption to the trading manager in
the month of such redemption.

--------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
The Partnerships trade Futures Interests. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified date and price.
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.

  The market value of exchange-traded contracts is based on the settlement
price quoted by the exchange on the day with respect to which market value is
being determined. If an exchange-traded contract could not have been liquidated
on such day due to the operation of daily limits or other rules of the
exchange, the settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The market value of
off-exchange-traded contracts is based on the fair market value quoted by the
counterparty.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


  The Partnerships' contracts are accounted for on a trade-date basis and
marked to market on a daily basis. Each Partnership accounts for its derivative
investments in accordance with the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (''SFAS No. 133"). SFAS No. 133 defines a derivative as a
financial instrument or other contract that has all three of the following
characteristics:

(1)One or more underlying notional amounts or payment provisions;

(2)Requires no initial net investment or a smaller initial net investment than
   would be required relative to changes in market factors;

(3)Terms require or permit net settlement.

  Generally, derivatives include futures, forward, swaps or options contracts,
and other financial instruments with similar characteristics such as caps,
floors, and collars.

  The net unrealized gains on open contracts at December 31, reported as a
component of "Equity in futures interests trading accounts" on the Statements
of Financial Condition, and their longest contract maturities are as follows:

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


CORNERSTONE II

<TABLE>
<CAPTION>
                      NET UNREALIZED GAINS
                        ON OPEN CONTRACTS      LONGEST MATURITIES
                   --------------------------- -------------------
                               OFF-                        OFF-
                   EXCHANGE- EXCHANGE-         EXCHANGE- EXCHANGE-
              YEAR  TRADED    TRADED    TOTAL   TRADED    TRADED
              ---- --------- --------- ------- --------- ---------
                       $         $        $
              <S>  <C>       <C>       <C>     <C>       <C>
              2006   65,559   192,946  258,505 Dec. 2007 Mar. 2007
              2005  239,383   278,660  518,043 Dec. 2006 Mar. 2006
</TABLE>

CORNERSTONE III

<TABLE>
<CAPTION>
                      NET UNREALIZED GAINS
                        ON OPEN CONTRACTS      LONGEST MATURITIES
                   --------------------------- -------------------
                               OFF-                        OFF-
                   EXCHANGE- EXCHANGE-         EXCHANGE- EXCHANGE-
              YEAR  TRADED    TRADED    TOTAL   TRADED    TRADED
              ---- --------- --------- ------- --------- ---------
                       $         $        $
              <S>  <C>       <C>       <C>     <C>       <C>
              2006  413,691   118,295  531,986 Jun. 2008 Mar. 2007
              2005  730,649   140,482  871,131 Jun. 2007 Mar. 2006
</TABLE>

CORNERSTONE IV

<TABLE>
<CAPTION>
                      NET UNREALIZED GAINS
                        ON OPEN CONTRACTS       LONGEST MATURITIES
                  ----------------------------- -------------------
                              OFF-                          OFF-
                  EXCHANGE- EXCHANGE-           EXCHANGE- EXCHANGE-
             YEAR  TRADED    TRADED     TOTAL    TRADED    TRADED
             ---- --------- --------- --------- --------- ---------
                      $         $         $
             <S>  <C>       <C>       <C>       <C>       <C>
             2006    --     1,429,548 1,429,548    --     Mar. 2007
             2005    --     1,973,887 1,973,887    --     Mar. 2006
</TABLE>

  The Partnerships have credit risk associated with counterparty
nonperformance. As of the date of the financial statement, the credit risk
associated with the instruments in which the Partnerships trade is limited to
the amounts reflected in the Partnerships' Statements of Financial Condition.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


  The Partnerships also have credit risk because Morgan Stanley DW, MS&Co.,
and/or MSIL act as the futures commission merchants or the counterparties, with
respect to most of the Partnerships' assets. Exchange-traded futures,
exchange-traded forward, and exchange-traded futures-styled options contracts
are marked to market on a daily basis, with variations in value settled on a
daily basis. Morgan Stanley DW, MS&Co., and/or MSIL, each as a futures
commission merchant for each Partnership's exchange-traded futures,
exchange-traded forward, and exchange-traded futures-styled options contracts,
are required, pursuant to regulations of the Commodity Futures Trading
Commission, to segregate from their own assets, and for the sole benefit of
their commodity customers, all funds held by them with respect to
exchange-traded futures, exchange-traded forward, and exchange-trade
futures-styled options contracts, including an amount equal to the net
unrealized gains (losses) on all open exchange-traded futures, exchange-traded
forward, and exchange-traded futures-styled options contracts, which funds, in
the aggregate, totaled at December 31, 2006 and 2005 respectively, $8,921,548
and $12,695,694 for Cornerstone II and $20,879,268 and $23,142,541 for
Cornerstone III. With respect to each Partnership's off-exchange-traded forward
currency contracts, there are no daily settlements of variation in value nor is
there any requirement that an amount equal to the net unrealized gains (losses)
on such contracts be segregated. However, the Partnership is required to meet
margin requirements equal to the net unrealized loss on open forward currency
contracts in the Partnership accounts with the counterparty, which is
accomplished by daily maintenance of the cash balance in a custody account held
at Morgan Stanley DW for the benefit of MS&Co. With respect to those
off-exchange-traded forward currency contracts, the Partnerships are at risk to
the ability of MS&Co., the sole counterparty on all such contracts, to perform.
Each Partnership has a netting agreement with MS&Co. These agreements, which
seek to reduce both the Partnerships' and MS&Co.'s exposure on
off-exchange-traded forward currency contracts, should materially decrease the
Partnerships' credit risk in the event of MS&Co.'s bankruptcy or insolvency.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


--------------------------------------------------------------------------------
5. FINANCIAL HIGHLIGHTS

CORNERSTONE II

<TABLE>
<CAPTION>
                                                                        2006       2005       2004
                                                                     ---------  ---------  ---------
<S>                                                                  <C>        <C>        <C>
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1:                                          $3,753.50  $4,658.88  $4,981.39
                                                                     ---------  ---------  ---------
NET OPERATING RESULTS:
  Interest Income                                                       133.97      99.05      49.43
  Expenses                                                             (367.95)   (385.64)   (455.79)
  Realized Profit (Loss)                                                 22.15    (216.88)    (85.46)
  Unrealized Profit (Loss)                                              (88.38)   (402.51)    169.13
  Proceeds from Litigation Settlement                                       --       0.60       0.18
                                                                     ---------  ---------  ---------
  Net Loss                                                             (300.21)   (905.38)   (322.51)
                                                                     ---------  ---------  ---------
NET ASSET VALUE, DECEMBER 31:                                        $3,453.29  $3,753.50  $4,658.88
                                                                     =========  =========  =========
FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
  Net Investment Loss                                                   (6.8)%     (7.5)%     (9.0)%
  Expenses before Incentive Fees                                        10.7 %     10.0 %     10.1 %
  Expenses after Incentive Fees                                         10.7 %     10.0 %     10.1 %
  Net Loss                                                              (9.9)%    (25.0)%     (8.1)%
TOTAL RETURN BEFORE INCENTIVE FEES                                      (8.0)%    (19.4)%     (6.5)%
TOTAL RETURN AFTER INCENTIVE FEES                                       (8.0)%    (19.4)%     (6.5)%
INCEPTION-TO-DATE RETURN                                               254.2 %
COMPOUND ANNUALIZED RETURN                                               5.9 %

CORNERSTONE III
                                                                        2006       2005       2004
                                                                     ---------  ---------  ---------
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1:                                          $3,961.07  $4,218.77  $3,909.31
                                                                     ---------  ---------  ---------
NET OPERATING RESULTS:
  Interest Income                                                       156.07      96.39      44.43
  Expenses                                                             (368.45)   (304.82)   (321.01)
  Realized Profit (Loss)                                                403.85    (119.06)    872.21
  Unrealized Profit (Loss)                                              (62.59)     65.58    (290.23)
  Proceeds from Litigation Settlement                                       --       4.21       4.06
                                                                     ---------  ---------  ---------
  Net Income (Loss)                                                     128.88    (257.70)    309.46
                                                                     ---------  ---------  ---------
NET ASSET VALUE, DECEMBER 31:                                        $4,089.95  $3,961.07  $4,218.77
                                                                     =========  =========  =========
FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
  Net Investment Loss                                                   (5.2)%     (5.5)%     (6.9)%
  Expenses before Incentive Fees                                         9.1 %      8.1 %      8.0 %
  Expenses after Incentive Fees                                          9.1 %      8.1 %      8.0 %
  Net Income (Loss)                                                      3.3 %     (7.9)%      7.7 %
TOTAL RETURN BEFORE INCENTIVE FEES                                       3.3 %     (6.1)%      7.9 %
TOTAL RETURN AFTER INCENTIVE FEES                                        3.3 %     (6.1)%      7.9 %
INCEPTION-TO-DATE RETURN                                               319.5 %
COMPOUND ANNUALIZED RETURN                                               6.7 %
</TABLE>

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(concluded)


CORNERSTONE IV

<TABLE>
<CAPTION>
                                                                        2006       2005        2004
                                                                     ---------  ----------  ---------
<S>                                                                  <C>        <C>         <C>
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1:                                          $5,879.98  $ 7,287.51  $7,943.73
                                                                     ---------  ----------  ---------
NET OPERATING RESULTS:
  Interest Income                                                       205.70      151.80      71.21
  Expenses                                                             (414.78)    (449.43)   (471.41)
  Realized Profit (Loss)                                                  9.94     (750.70)   (498.49)
  Unrealized Profit (Loss)                                              (54.92)    (359.20)    242.47
                                                                     ---------  ----------  ---------
  Net Loss                                                             (254.06)  (1,407.53)   (656.22)
                                                                     ---------  ----------  ---------
NET ASSET VALUE, DECEMBER 31:                                        $5,625.92  $ 5,879.98  $7,287.51
                                                                     =========  ==========  =========

FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
  Net Investment Loss                                                   (3.9)%      (4.9)%     (5.9)%
  Expenses before Incentive Fees                                         7.7 %       7.4 %      6.9 %
  Expenses after Incentive Fees                                          7.7 %       7.4 %      6.9 %
  Net Loss                                                              (6.0)%     (24.5)%    (10.8)%

TOTAL RETURN BEFORE INCENTIVE FEES                                      (4.3)%     (19.3)%     (8.3)%
TOTAL RETURN AFTER INCENTIVE FEES                                       (4.3)%     (19.3)%     (8.3)%
INCEPTION-TO-DATE RETURN                                               477.0 %
COMPOUND ANNUALIZED RETURN                                               9.3 %
</TABLE>

<PAGE>

                                   PRESORTED
                                   STANDARD
                                 U.S. POSTAGE
                                     PAID
                                  PERMIT #374
                                 LANCASTER, PA
                    Demeter Management Corporation
                    330 Madison Avenue, 8th Floor
                    New York, NY 10017

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