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
For the fiscal year ended December 31, 2007 or

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
522 Fifth Avenue, 13th Floor
New York, NY								 	  10036
(Address of principal executive offices)		 		(Zip Code)

Registrant?s telephone number, including area code 	    (212) 296-1999

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 to
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 definition 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:
$19,374,839 at June 30, 2007.

	DOCUMENTS INCORPORATED BY REFERENCE
	(See Page 1)




<page> <table> MORGAN STANLEY CORNERSTONE FUND III L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2007
<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 Common Equity, Related
            Stockholder Matters and Issuer Purchases of
        Equity Securities . . . . . . . . . . . . . . . . . . . . 8

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

  Item 7.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations . . . . . . . . . 10-29

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

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

  Item 9.   Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure . . . . . . . . . .  44

  Item 9A.	 	Controls and Procedures . . . . . . . . . . . . . . . 45-47

	Item 9A(T).Controls and Procedures . . . . . . . . . . . . . . .   47

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

Part III.

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

  Item 11.  Executive Compensation. . . . . . . . . . . . . . . . 56-57

  Item 12.  Security Ownership of Certain Beneficial Owners
            and Management and Related Stockholder 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. Limited Partners for the
  year ended December 31, 2007  	II, III, and IV




























- 1 -
<page>	PART I
Item 1.  BUSINESS

(a) General Development of Business. Morgan Stanley Cornerstone
Fund III L.P. (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., and Morgan Stanley Cornerstone Fund IV L.P.

The Partnership?s general partner is Demeter Management
Corporation (?Demeter?).  The commodity brokers are Morgan
Stanley & Co. Incorporated (?MS&Co.?) and Morgan Stanley & Co.
International plc (?MSIP?).  MS&Co. also acts as the counterparty
on all trading of foreign currency forward contracts.  MSIP
serves as the commodity broker for trades on the London Metal
Exchange.  The commodity brokers prior to April 1, 2007, were
Morgan Stanley DW Inc. (?Morgan Stanley DW?), MS&Co., and MSIP.
Demeter, MS&Co., and MSIP are wholly-owned subsidiaries of Morgan
Stanley. The trading managers to the Partnership are Graham
Capital Management, L.P. and Sunrise Capital Management, Inc.
(?Sunrise?) (each individually, a ?Trading Manager?, or
collectively, the ?Trading Managers?).

- 2 -
<page> Effective December 31, 2007, Partnership?s assets managed
pursuant to Sunrise Diversified Program were reallocated to
Sunrise CIMCO Program.

Effective April 1, 2007, Morgan Stanley DW merged into MS&Co.
Upon completion of the merger, the surviving entity, MS&Co.,
became the Partnership?s principal U.S. commodity broker-dealer.

Effective April 13, 2007, Morgan Stanley & Co. International
Limited changed its name to Morgan Stanley & Co. International
plc.

The Partnership began the year at a net asset value per unit of
limited partnership interest ("Unit(s)") of $4,089.95 and returned
1.2% to $4,137.34 on December 31, 2007.  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.
- 3 -
<page> For a detailed description of the different facets of the
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 Partnership?s SEC filings are available to the public
from the EDGAR database on the SEC?s website at
?http://www.sec.gov?.  The Partnership?s CIK number is 0000737000.


- 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 MS&Co.  The MS&Co. offices utilized by the
Partnership are located at 522 Fifth Avenue, 13th Floor, New York,
NY 10036.

Demeter changed its address in June 2007 from 330 Madison Avenue,
8th Floor, New York, NY 10017 to 522 Fifth Avenue, 13th Floor, New
York, NY 10036.

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 COMMON EQUITY, RELATED
	   STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
	   SECURITIES



(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,
2007, was approximately 1,552.

(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,
	                         2007          2006         2005         2004        2003


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


Total Trading Results
including interest
income			    1,828,546	2,726,129      45,356 	4,341,373   4,783,736


Net Income (Loss)   	       86,637	  729,626  (1,858,506)	2,128,735   2,379,915


Net Income (Loss)
Per Unit (Limited
& General Partners)    	     	  47.39	   128.88	  (257.70)     309.46      317.10


Total Assets  		   18,022,728    21,099,563  23,385,885  28,397,216  28,347,638


Total Limited
Partners' Capital		   17,275,552    20,157,999  22,552,335  27,476,835  27,596,004


Net Asset Value
Per Unit		           4,137.34 	 4,089.95    3,961.07    4,218.77    3,909.31








</table>


















- 9 -
<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 (through March 31, 2007), MS&Co., and MSIP as commodity
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 effect 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, 2007, 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 $1,828,546 and expenses totaling
$1,741,909, resulting in net income of $86,637 for the year ended
December 31, 2007.  The Partnership?s net asset value per Unit
increased from $4,089.95 at December 31, 2006, to $4,137.34 at
December 31, 2007. Total redemptions for the year were $2,964,227
and the Partner-ship?s ending capital was $17,699,695 at December
31, 2007, a decrease of $2,877,590 from ending capital at December
31, 2006, of $20,577,285.

The most significant trading gains of approximately 5.1% were
experienced within the energy sector during January from short
futures positions in crude oil and its related products as prices
declined on skepticism that OPEC would cut production as much as
originally pledged. Additional gains were experienced during
July, September, October, and December from long futures
positions in crude oil and its related products as prices trended
higher due to geopolitical concerns regarding instability in Iraq
and Iran?s nuclear program.  Lastly, prices moved higher as a
weaker U.S. dollar resulted in bargain hunting by investors
regarding U.S. dollar-denominated investments. Additional gains
of approximately 1.4% were recorded in the global interest rate
sector during January, April, and June from short positions in
European and U.S. interest rate futures as prices trended lower
after consistently strong economic data out of the United Kingdom
                              - 14 -
<page> and the United States resulted in reduced demand for the
?safe haven? of fixed-income investments. Newly established long
positions in U.S. fixed-income futures recorded gains during
September and November as prices increased in a worldwide
?flight-to-quality? after volatility in the global equity
markets, spurred by losses in the U.S. sub-prime mortgage sector,
caused investors to seek the ?safety? of government bonds. In
addition, U.S. interest rate futures prices moved higher amid
speculation that continued credit market losses might lead the
U.S. Federal Reserve to cut interest rates in December. Gains of
approximately 1.3% were experienced within the currency sector
from long positions in the euro, Turkish lira, Brazilian real,
Canadian dollar, and New Zealand dollar versus the U.S. dollar
primarily during April and June as the value of the U.S. dollar
declined relative to these currencies amid news that foreign
central banks had diversified their currency holdings to non-U.S.
dollar-denominated assets and fears that an economic slowdown in
the United States might lead the U.S. Federal Reserve to lower
interest rates.  Meanwhile, the value of the Canadian dollar and
New Zealand dollar, also known as the ?commodity currencies?,
moved higher in the wake of consistently rising commodity prices.
During September, October, and December, the value of the U.S.
dollar continued to decline against the aforementioned currencies
leading up to and after the U.S. Federal Reserve?s decision to

- 15 -
<page> reduce its benchmark interest rate to 4.5%, as well as on
indications for further rate reductions in the near term. Smaller
gains of approximately 0.4% were experienced in the agricultural
complex during February from long futures positions in the
soybean complex as prices rose on speculative buying, news of
persistent global demand, and worries that drought conditions in
the U.S. South and flooding in the U.S. Midwest had damaged
crops. Additional gains were experienced during August and
September from long positions in wheat futures as prices
increased to a record high amid persistently strong international
demand and news from the U.S. Department of Agriculture that
global stockpiles would fall to the lowest level in 26 years.
Lastly, further gains were experienced from long positions in the
soybean complex during November and December as prices increased
amid speculation that the rising cost of oil would boost demand
for alternative biofuels made from the crops. A portion of the
Partnership?s overall gains for the year was partially offset by
losses of approximately 4.2% incurred within the global stock
index sector during February and March from long positions in
U.S. and Japanese stock index futures as prices reversed sharply
lower after a massive sell-off in the global equity markets that
began on February 27, 2007, following comments from former U.S.
Federal Reserve Chairman Alan Greenspan that the U.S. economy
could be due for a recession.  In addition, concerns that tighter

- 16 -
<page> credit conditions in China and Japan might dampen global
growth first sent Chinese stock markets plunging before the sell-
off spread to other equity markets. During July, August, and
November, long positions in U.S. equity index futures resulted in
further losses as prices fell sharply on concerns that a widening
credit crunch, sparked by U.S. sub-prime mortgage losses, would
erode global economic growth and corporate earnings.  Finally,
smaller losses of approximately 2.7% were incurred in the metals
sector during February, March, May, and June from long positions
in silver and gold futures as prices moved lower amid speculative
selling.  Additional losses were incurred during August from long
positions in gold futures as prices reversed lower amid temporary
strength in the U.S. dollar.  Elsewhere in the metals market,
losses were incurred from both short and long positions in
aluminum and copper futures as prices moved without consistent
direction throughout a majority of the year amid conflicting data
regarding supply and demand.

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

- 17 -
<page> 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%
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
                               - 18 -
<page> 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
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
                             - 19 -
<page> 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
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%
                               - 20 -
<page> 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.

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.
                              - 21 -


<page> 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 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
                               - 22 -


<page> 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 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
                              - 23 -
<page> 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 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.


- 24 -
<page> For an analysis of unrealized gains and (losses) by
contract type and a further description of 2007 trading results,
refer to the Partnership?s Annual Report to Limited Partners for
the year ended December 31, 2007, which is incorporated by
reference to Exhibit 13.01 of this Form 10-K.

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
                             - 25 -
<page> 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.

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
                                - 26 -
<page> 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
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 of their customers,
of the Partnership?s net margin requirements for all of 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.
- 27 -
<page> 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 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
MS&Co., has determined to be creditworthy.  The Partnership
presently deals with MS&Co. as the sole counterparty on all
trading of 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, 2007, which is incorporated by reference to
Exhibit 13.01 of this Form 10-K.
- 28 -
<page> 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
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
became effective for the Partnership as of January 1, 2007.  The
Partnership has determined that the adoption of FIN 48 did not
have a material impact on the Partnership?s Financial Statements.
The Partnership files U.S. federal and state tax returns.  The
2004 through 2007 tax years generally remain subject to
examination by U.S. federal and most state tax authorities.

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.


- 29 -


<page>
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
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
                               - 30 -


<page> Partnership accounts with the counterparty, which is
accomplished by daily maintenance of the cash balance in a custody
account held at 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
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
                              - 31 -
<page> 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
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
                                - 32 -
<page> 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 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
                              - 33 -
<page> 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.

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, 2007 and 2006. At
December 31, 2007 and 2006, the Partnership?s total capital-
ization was approximately $18 million and $21 million,
respectively.










- 34 -
<page>
Primary Market       December 31, 2007     December 31, 2006
Risk Category	        Value at Risk	     Value at Risk
Currency		         	 (0.81)%      		   (1.66)%
Interest Rate		  	 (0.53) 		  	   (0.64)
Equity		  		 (0.27)	 		   (2.44)
Commodity		         	 (1.53)	  		   (1.04)
Aggregate Value at Risk	 (1.90)%			   (2.95)%

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
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, 2007, 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
                              - 35 ?
<page> reporting periods from January 1, 2007, through December
31, 2007.

Primary Market Risk Category	 High   	 Low 	Average
Currency	(1.62)%	(0.81)%	(1.33)%
Interest Rate	(1.48)	(0.50)	(0.81)
Equity	(1.97)	(0.27)	(0.93)
Commodity 	(2.40)	(0.31)	(1.21)
Aggregate Value at Risk 			(3.25)%	(1.90)%	(2.50)%

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:
*	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;


-	36 ?
<page>
*	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, 2006 and for the four quarter-end
reporting periods during calendar year 2007.  VaR is not
necessarily representative of the Partnership?s historic risk, nor
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.
- 37 -
<page> 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 MS&Co. (Morgan Stanley DW, prior to
April 1, 2007); as of December 31, 2007, such amount is equal to
approximately 93% 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-
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
                               - 38 ?
<page> 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.

The following were the primary trading risk exposures of the
Partnership at December 31, 2007, by market sector.  It may be
anticipated, however, that these market exposures will vary
materially over time.

Currency.  The second largest market exposure of the Partnership
at December 31, 2007, was to the currency sector.  The
Partnership?s currency exposure is to exchange rate fluctuations,
                              - 39 -
<page> primarily fluctuations which disrupt the historical pricing
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 number of currencies including cross-rate - i.e., positions
between two currencies other than the U.S. dollar.  At December
31, 2007, the Partnership?s major exposures were 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, 2007, the Partnership had market
exposure to the global interest rate sector.  This exposure was
primarily spread across the U.S., Japanese, European, 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.  The G-7
countries consist of France, the U.S., Britain, Germany, Japan,
Italy, and Canada.  Demeter anticipates that the G-7 countries?
                               - 40 -
<page> 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.

Equity.  At December 31, 2007, the Partnership had market exposure
to the global stock index sector, primarily to equity price risk
in the G-7 countries.  The stock index futures traded by the
Partnership are by law limited to futures on broadly-based
indices.  At December 31, 2007, the Partnership?s primary
exposures were to the NIKKEI 225 (Japan), TOPIX (Japan), DAX
(Germany), and NASDAQ 100 (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 Asian 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.
Commodity.
Energy.  The largest market exposure of the Partnership at
December 31, 2007, 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
                         - 41 -
<page> 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.  Natural gas has exhibited volatility in price
resulting from weather patterns and supply and demand factors
and will likely continue in this choppy pattern.

Metals.	 The third largest market exposure of the
Partnership at December 31, 2007, was to the metals sector.
The Partnership?s metals exposure was to fluctuations in the
price of base metals, such as aluminum, copper, and zinc. The
Partnership also had exposure to precious metals, such as
gold.  Economic forces, supply and 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 Trading Managers
will continue to do so.

Soft Commodities and Agriculturals.  At December 31, 2007,
the Partnership had market exposure to the markets that
comprise these sectors.  Most of the exposure was to the
coffee, soybean meal, live cattle, cotton, corn, wheat, and
sugar markets. Supply and demand inequalities, severe weather
disruptions, and market expectations affect price movements
in these markets.
- 42 -
<page> Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at December 31, 2007:

Foreign Currency Balances.  The Partnership?s primary foreign
currency balances at December 31, 2007, were in Japanese yen,
euros, Swiss francs, and British pounds.  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.


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, each of whose strategies focus
on different market sectors and trading approaches, in a multi-
manager Partnership, 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.


- 43 -
<page> 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.

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

2007
March 31 		$(1,611,642)		$ (2,050,634)	   $(415.50)
June 30	    	  3,194,486	    	   2,754,408	     572.40
September 30	 (2,157,957)		  (2,599,515)	    (557.21)
December 31	  2,403,659		   1,982,378        447.70

Total		$ 1,828,546		$     86,637 	   $  47.39


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



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

None.
- 44 -
<page> Item 9A.  CONTROLS AND PROCEDURES
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.

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;

-	45 ?
<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,
2007.  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.
                               - 46 -
<page> Based on our assessment and those criteria, Management
believes that the Partnership maintained effective internal
control over financial reporting as of December 31, 2007.

Attestation Report of the Registered Public Accounting Firm
Deloitte & Touche LLP, the Partnership?s independent registered
public accounting firm, has issued an attestation report on the
Partnership?s internal control over financial reporting.  This
report, which expresses an unqualified opinion on 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, 2007.

	Changes in Internal Control over Financial Reporting
     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.

Item 9A(T).  CONTROLS AND PROCEDURES
Not applicable.


- 47 -
<page>
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 42, is a Director,
Chairman of the Board of Directors, and President of Demeter.  Mr.
Davis is an Executive Director at 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 M.B.A
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 52, is a
Director of Demeter.  Mr. Zafran is a Managing Director at Morgan
Stanley and, in January 2007, was named Director of Annuity and
Insurance Services. Previously, Mr. Zafran was Director of the
Wealth Solutions Division. Mr. Zafran joined the firm in 1979 and
                              - 49 -
<page> 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.
Subsequently, he was named Chief Administrative Officer of Morgan
Stanley?s Client Solution Division in 2002.  Mr. Zafran received a
B.S. degree in Accounting from Brooklyn College, New York.

Effective March 31, 2003, Mr. Douglas J. Ketterer, age 42, is a
Director of Demeter.  Mr. Ketterer is a Managing Director of
Morgan Stanley and is head of the Client Solutions Group.  The
Client Solutions Group is comprised of a number of departments
(including, among others, the Alternative Investments Group,
Consulting Services Group, Annuities & Insurance Department,
Mutual Fund Department, and Retirement & Equity Solutions Group),
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 wealth
management divisions of the firm. Mr. Ketterer received his M.B.A
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.


- 50 -
<page> Effective May 1, 2005, Mr. Harry Handler, age 49, is a
Director of Demeter. Mr. Handler serves as an Executive Director
at Morgan Stanley in the Global Wealth Management Group.  Mr.
Handler works in the Capital Markets Division as Equity Risk
Officer. Additionally, Mr. Handler serves as Chairman of the
Global Wealth Management Group?s Best Execution Committee and
manages the 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 of 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 46, is a
Director of Demeter.  Mr. Gueren is an Executive Director, Retail
                             - 51 -
<page> Options and Transactional Futures of Morgan Stanley.  He is
responsible for marketing the options and futures product to the
firm?s approximately 600 offices and approximately 9,000 Financial
Advisors/Investment Representatives.  Mr. Gueren first joined Dean
Witter in August 1986, as a Compliance Analyst and in October 1987
became a member of the 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
Managing Directors Committee for the Chicago Board Options
Exchange, and the Retail Advisory Committees for the American
Stock Exchange, the Philadelphia Stock Exchange, the Pacific Stock
Exchange, and the International Securities Exchange. Mr. Gueren is
also an Industry Arbitrator for FINRA 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 degree
in Economics from the University of Hartford.

Effective May 1, 2006, Mr. Michael P. McGrath, age 39, is a
Director of Demeter.  Mr. McGrath is a Managing Director at Morgan
Stanley and currently serves as the Chief Operating Officer for
Private Wealth Management Americas, including Private Wealth
                               - 52 -
<page> Management North America and Private Wealth Management
Latin America. He is also the Chairman of the Global Wealth
Management Alternative Investments Due Diligence Committee.  Prior
to his current role, Mr. McGrath was the Director of Product
Development for Morgan Stanley?s Global Wealth Management Group.
Mr. McGrath joined Morgan Stanley in May 2004, from 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 Peter?s College in
1990 and his M.B.A in Finance from New York University in 1996.

Effective May 1, 2006, Mr. Andrew Saperstein, age 41, is a
Director of Demeter.  Mr. Saperstein is Chief Operating Officer of
National Sales for the Global Wealth Management Group, and serves
as a member of the group?s Executive Committee. He is also a
member of the Morgan Stanley Management Committee.  One of the
largest businesses of its kind in the world with $690 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

- 53 -
<page> 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 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 38, is a
Director of Demeter.  Mr. Chappuis is a Managing Director of
Morgan Stanley and Head of Alternative Investments for the Global
Wealth Management Group.  Prior to joining Morgan Stanley in
August 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
                               - 54 -
<page> 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 M.B.A in Finance, with
honors, from the Columbia University Graduate School of Business
in 1998 and a B.A. in Finance from Tulane University in 1991.

Effective December 3, 2007, Mr. Christian Angstadt, age 46,
serves as Chief Financial Officer of Demeter.  He is an Executive
Director within Morgan Stanley?s Financial Control Group.  Mr.
Angstadt currently serves as Chief Financial Officer for Morgan
Stanley Trust FSB and Morgan Stanley Trust NA, and is responsible
for the governance and overall financial management of these
regulated banks (appointed Chief Financial Officer in May 2003).
 Since joining Morgan Stanley in April 1990, Mr. Angstadt has
held several positions within the firm?s Financial Control Group,
mostly supporting the Asset Management segment (including Chief
Financial Officer for Morgan Stanley Asset Management
Operations).  Mr. Angstadt received a B.A. in Accounting from
Montclair University.

All of the foregoing directors have indefinite terms.

- 55 -
<page> Effective December 3, 2007, Mr. Lee Horwitz no longer
serves as Chief Financial Officer of Demeter.

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.

The Audit Committee
The Partnership is operated by its general partner, Demeter, and
has no audit committee and, thus, no audit committee financial
expert.

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

- 56 -
<page> business affairs of the Partnership but receives no
compensation for such services.


Item 12. 	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
		MANAGEMENT AND RELATED STOCKHOLDER MATTERS

(a)	Security Ownership of Certain Beneficial Owners - At December
31, 2007, 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, 2007,
Demeter owned 102.516 Units of general partnership interest,
representing a 2.4 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, 2007, which is
incorporated by reference to Exhibit 13.01 of this Form 10-K.  In
its capacity as the Partnership's retail commodity broker, MS&Co.
received commodity brokerage commissions (paid and accrued by the
Partnership) of $935,482 for the year ended December 31, 2007.

- 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, 2007.

(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 $44,007 for
the year ended December 31, 2007, and $44,483 for the year ended
December 31, 2006.

(2)	Audit-Related Fees.  None.




(3)	Tax Fees.  The Partnership did not pay Deloitte & Touche LLP
any amounts in 2007 and 2006 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, 2007, 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, 2007, 2006, and 2005.

-	Statements of Financial Condition, including the
Schedules of Investments, as of December 31, 2007 and
2006.

-	Statements of Operations, Changes in Partners' Capital,
and Cash Flows for the years ended December 31, 2007,
2006, and 2005.


	   - 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,
2007, 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 28, 2008			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 28, 2008
	  	Walter Davis, President

    /s/    Frank Zafran       	             	   	   March 28, 2008
           Frank Zafran, Director

    /s/    Douglas J. Ketterer   	                	   March 28, 2008
           Douglas J. Ketterer, Director

    /s/    Harry Handler		                	   March 28, 2008
	    	Harry Handler, Director

    /s/ 	Richard D. Gueren     		         	   	   March 28, 2008
	 	Richard D. Gueren, Director

    /s/	Michael P. McGrath		              	   March 28, 2008
	  	Michael P. McGrath, Director

    /s/  	Andrew Saperstein	                    	   March 28, 2008
	    	Andrew Saperstein, Director

    /s/  	Jacques Chappuis		                    	   March 28, 2008
	    	Jacques Chappuis, Director

    /s/  	Christian Angstadt	                     	   March 28, 2008
	    	Christian Angstadt, 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 incorporated by reference to Exhibit 3.02 of
the Partnership?s Form 10-K for the fiscal year ended
December 31, 2006 (File No. 0-13299) filed with the
Securities and Exchange Commission on March 23, 2007.

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 plc, 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 between the
Partnership and Morgan Stanley & Co. Incorporated, 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, 2007, 	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, 2007
       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   2007    RETURN     RETURN
FUND          %     %      %        %          %
-----------------------------------------------------
<S>         <C>    <C>   <C>    <C>        <C>
Cornerstone
 Fund II... (19.4) (8.0) (3.1)    243.0       5.5
-----------------------------------------------------
Cornerstone
 Fund III.. (6.1)   3.3   1.2     324.3       6.5
-----------------------------------------------------
Cornerstone
 Fund IV... (19.3) (4.3) (14.1)   395.8       8.1

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

<PAGE>

DEMETER MANAGEMENT CORPORATION

522 Fifth Avenue, 13th Floor
New York, NY 10036
Telephone (212) 296-1999

MORGAN STANLEY CORNERSTONE FUNDS
ANNUAL REPORT
2007

Dear Limited Partner:

  This marks the twenty-third annual report for Morgan Stanley Cornerstone Fund
II L.P. and Morgan Stanley Cornerstone Fund III L.P. and the twenty-first
annual report for Morgan Stanley Cornerstone Fund IV L.P. The Net Asset Value
per Unit for each of the three Morgan Stanley Cornerstone Funds ("Fund(s)") as
of December 31, 2007 was as follows:

<TABLE>
<CAPTION>
                                                                       % CHANGE
FUNDS                                                         N.A.V.   FOR YEAR
-------------------------------------------------------------------------------
<S>                                                          <C>       <C>
Cornerstone Fund II                                          $3,344.64   -3.1%
-------------------------------------------------------------------------------
Cornerstone Fund III                                         $4,137.34    1.2%
-------------------------------------------------------------------------------
Cornerstone Fund IV                                          $4,833.63  -14.1%
-------------------------------------------------------------------------------
</TABLE>

  Since their inception in 1985, Cornerstone Fund II and Cornerstone Fund III
have returned 243.0% (a compound annualized return of 5.5%) and 324.3% (a
compound annualized return of 6.5%), respectively. Since its inception in 1987,
Cornerstone Fund IV has returned 395.8% (a compound annualized return of 8.1%).

  Detailed performance information for each Fund is located in the body of the
financial report. (Note: all returns are net of all fees). 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.

<PAGE>

  Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation, 522 Fifth Avenue, 13th Floor, New York,
NY 10036, 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.


 Managed futures investments are speculative, involve a high degree of risk,
use significant leverage, are generally illiquid, have substantial charges, are
subject to conflicts of interest, and are suitable only for the risk capital
portion of an investor's portfolio. Before investing in any managed futures
investment, qualified investors should read the prospectus or offering
documents carefully for additional information with respect to charges,
expenses, and risks. Past performance is no guarantee of future results.

 This report is based on information from multiple sources and Morgan Stanley
makes no representation as to the accuracy or completeness of information from
sources outside of Morgan Stanley.

<PAGE>

                      This page intentionally left blank.





<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.

                                    [CHART]

                              Year ended December 31, 2007
                              ----------------------------
Currencies                              -13.08%
Interest Rates                            7.14%
Stock Indices                             0.06%
Energies                                  1.38%
Metals                                    0.00%
Agriculturals                             0.00%


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

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  Trading losses were experienced in the currency markets throughout the year
   from both short and long positions in the South African rand versus the U.S.
   dollar as the value of the rand moved in a trendless pattern due to investor
   uncertainty regarding the status of the South African economy. Further
   losses were recorded from short positions in the Mexican peso versus the
   U.S. dollar primarily during March and April as the value of the Mexican
   peso moved higher amid speculation of an interest rate hike by the Bank of
   Mexico. Elsewhere, losses were experienced during August, November, and
   December from long positions in the British pound, euro, South African rand,
   Australian dollar, New Zealand dollar, and Mexican peso versus the U.S.
   dollar as the value of the U.S. dollar moved higher against its major rivals
   due to substantially stronger demand for U.S. dollar-denominated government
   bonds amid continuing credit market losses and a decline in global equity
   markets. In addition, the value of the U.S. dollar moved higher after a
   smaller-than-expected interest rate cut by the U.S. Federal Reserve in
   December. Furthermore, the value of the South African rand and Australian
   dollar declined against the U.S. dollar on concerns that a possible slowdown
   in the U.S. economy would negatively impact future demand for commodities,
   while the value of the Mexican peso declined against the U.S. dollar amid
   worries that a weakening U.S. economy would curb demand for Mexican exports.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.


FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
..  Trading gains were recorded within the global interest rate futures markets,
   primarily during January, May, June, and July from short positions in
   European and U.S. fixed-income futures as prices fell amid weakness in the
   equity markets and consistently strong economic data out of the Euro-Zone
   and United States, resulting in reduced demand for the "safe haven" of
   fixed-income investments. During August, October, and November, newly
   established long positions in U.S., British, and German fixed-income futures
   resulted in gains as prices reversed sharply higher in a worldwide
   "flight-to-quality" after the volatility in the global equity markets,
   spurred by losses in the U.S. sub-prime mortgage sector, caused investors to
   seek the "safety" of government bonds.

..  Additional gains were achieved in the energy sector during January from
   short futures positions in oil related products as prices declined on
   skepticism that OPEC would cut production as much as originally pledged.
   Newly established long futures positions in crude oil and its related
   products resulted in gains during February, July, September, October, and
   November as prices moved higher due to geopolitical concerns regarding
   instability in Iraq and Iran's nuclear program. Furthermore, prices moved
   higher as a weaker U.S. dollar resulted in bargain hunting by investors
   regarding U.S. dollar-denominated investments.

..  Smaller gains were experienced in the global stock index sector, primarily
   during April, May, June, and September, from long positions in German equity
   index futures as prices increased amid solid German economic data and
   optimism that the Euro-Zone economy would be able to sustain growth after
   substantial credit losses related to sub-prime investments threatened
   corporate earnings. Furthermore, gains were recorded primarily during June,
   September, and October from long positions in Hang Seng and Taiwanese equity
   index futures as prices increased amid investor optimism regarding future
   earnings in the technology sector. Gains were also recorded primarily during
   October and December from short positions in Dow Jones 30 Index futures as
   prices moved lower as a slowing U.S. housing market and worse-than-expected
   corporate earnings reignited fears of a possible U.S. recession.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND III L.P.

                                    [CHART]

                              Year ended December 31, 2007
                              ----------------------------
Currencies                               1.32%
Interest Rates                           1.37%
Stock Indices                           -4.18%
Energies                                 5.09%
Metals                                  -2.69%
Agriculturals                            0.40%


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 energy sector
   during January from short futures positions in crude oil and its related
   products as prices declined on skepticism that OPEC would cut production as
   much as originally pledged. Additional gains were experienced during July,
   September, October, and December, from long futures positions in crude oil
   and its related products as prices trended higher due to geopolitical
   concerns regarding instability in Iraq and Iran's nuclear program. Lastly,
   prices moved higher as a weaker U.S. dollar resulted in bargain hunting by
   investors regarding U.S. dollar-denominated investments.

..  Additional gains were recorded in the global interest rate sector during
   January, April, and June from short positions in European and U.S. interest
   rate futures as prices trended lower after consistently strong economic data
   out of the United Kingdom and United States resulted in reduced demand for
   the "safe haven" of fixed-income investments. Newly established long
   positions in U.S. fixed-income futures recorded gains during September and
   November as prices increased in a worldwide "flight-to-quality" after
   volatility in the global equity markets, spurred by losses in the U.S.
   sub-prime mortgage sector, caused investors to seek the "safety" of
   government bonds. In addition, U.S. interest rate futures prices moved
   higher amid speculation that continued credit market losses might lead the
   U.S. Federal Reserve to cut interest rates in December.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND III L.P.


FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
..  Gains were experienced within the currency sector from long positions in the
   euro, Turkish lira, Brazilian real, Canadian dollar, and New Zealand dollar
   versus the U.S. dollar primarily during April and June as the value of the
   U.S. dollar declined relative to these currencies amid news that foreign
   central banks had diversified their currency holdings to non-U.S.
   dollar-denominated assets and fears that an economic slowdown in the United
   States would lead the U.S. Federal Reserve to lower interest rates.
   Meanwhile, the value of the Canadian dollar and New Zealand dollar, also
   known as the "commodity currencies", moved higher in the wake of
   consistently rising commodity prices. During September, October, and
   December, the value of the U.S. dollar continued to decline against the
   aforementioned currencies leading up to and after the U.S. Federal Reserve's
   decision to reduce its benchmark interest rate to 4.5%, as well as on
   indications for further rate reductions in the near term.

..  Smaller gains were experienced in the agricultural complex during February
   from long futures positions in the soybean complex as prices rose on
   speculative buying, news of persistent global demand, and worries that
   drought conditions in the U.S. South and flooding in the U.S. Midwest had
   damaged crops. Additional gains were experienced during August and September
   from long positions in wheat futures as prices increased to a record high
   amid persistently strong international demand and news from the U.S.
   Department of Agriculture that global stockpiles would fall to the lowest
   level in 26 years. Lastly, further gains were experienced from long
   positions in the soybean complex primarily during November and December as
   prices increased amid speculation that the rising cost of oil would boost
   demand for alternative biofuels made from the crops.

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  Trading losses were incurred within the global stock index sector during
   February and March from long positions in U.S. and Japanese stock index
   futures as prices reversed sharply lower after a massive sell-off in the
   global equity markets that began on February 27, 2007, following comments
   from former U.S. Federal Reserve Chairman Alan Greenspan that the U.S.
   economy could be due for a recession. In addition, concerns that tighter
   credit conditions in China and Japan might dampen global growth first sent
   Chinese stock markets plunging before the sell-off spread to other equity
   markets. During July, August, and November, long positions in U.S. equity
   index futures resulted in further losses as prices fell sharply on concerns
   that a widening credit crunch, sparked by U.S. sub-prime mortgage losses,
   would erode global economic growth and corporate earnings.

..  Smaller losses were incurred in the metals sector during February, March,
   May, and June from long positions in silver and gold futures as prices moved
   lower amid speculative selling. Additional losses were incurred during
   August from long positions in gold futures as prices reversed lower amid
   temporary strength in the U.S. dollar. Elsewhere in the metals market,
   losses were incurred from both short and long positions in aluminum and
   copper futures as prices moved without consistent direction throughout a
   majority of the year amid conflicting data regarding supply and demand.

<PAGE>

MORGAN STANLEY CORNERSTONE FUND IV L.P.

                                    [CHART]

                              Year ended December 31, 2007
                              ----------------------------
Australian dollar                        -0.55%
British pound                             0.10%
Euro                                      3.43%
Japanese yen                             -3.03%
Swiss franc                              -3.05%
Minor Currencies                        -11.07%


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, Norwegian krone, Chilean peso,
     and Russian ruble.

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  The most significant trading losses were experienced throughout a majority
   of the year from both short and long positions in the South African rand
   versus the U.S. dollar as the value of the rand moved in a trendless pattern
   due to investor uncertainty regarding the status of the South African
   economy. Meanwhile, short positions in the Swiss franc versus the U.S.
   dollar incurred losses primarily during February, March, July, August,
   October, and November as the value of the Swiss franc reversed higher
   against the U.S. dollar due to accelerating fears of inflation in
   Switzerland and speculation that the Swiss National Bank would raise
   interest rates. During December, newly established long positions in the
   Swiss franc versus the U.S. dollar incurred further losses as the value of
   the U.S. dollar moved higher against its major rivals during the first half
   of the month following a smaller-than-expected interest rate cut by the U.S.
   Federal Reserve. Losses were incurred during late February and early March
   from short positions in the Japanese yen versus the U.S. dollar as the value
   of the Japanese yen reversed sharply higher against the U.S. dollar in late
   February due to a combination of factors including an almost 10% drop in the
   Shanghai stock market and a warning from Rodrigo Rato, Managing Director of
   the International Monetary Fund, that a weak yen "could lead to more
   entrenched exchange rate misalignments that worsen global imbalances", which
   encouraged traders to unwind short positions in the Japanese yen against
   most of its major rivals. During July, August, and October,

<PAGE>

MORGAN STANLEY CORNERSTONE FUND IV L.P.

FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
  short positions in the Japanese yen versus the U.S. dollar resulted in further
  losses as the value of the Japanese yen corrected higher against most of its
  major rivals when traders reduced "carry-trade" positions after the sell-off
  in the global equity markets resulted in investors trimming "riskier" assets
  funded by loans in Japan. Finally, losses were experienced from both short
  and long positions in the Japanese yen versus the U.S. dollar during November
  and December as the value of the Japanese yen moved without consistent
  direction due to uncertainty regarding the future interest rate policy of the
  Bank of Japan. Losses were recorded from short positions in the Mexican peso
  versus the U.S. dollar as the value of the Mexican peso moved higher during
  March and April on increased speculation of an interest rate hike by the Bank
  of Mexico. Further losses were incurred during June, July, August, November,
  and December, from newly established long positions in the Mexican peso
  versus the U.S. dollar as the value of the Mexican peso reversed lower
  leading up to and after the Bank of Mexico's decision to hold interest rates
  steady at 7.25%. In addition, the value of the U.S. dollar reversed higher
  against its major rivals due to substantially stronger demand for U.S.
  dollar-denominated government bonds amid continuing credit market losses and
  a decline in global equity markets. Smaller losses were recorded primarily
  during January, February, August, November, and December, from long positions
  in the New Zealand dollar and Australian dollar versus the U.S. dollar as the
  value of the U.S. dollar reversed higher against most of its major rivals due
  to the aforementioned reasons regarding demand for U.S. dollar-denominated
  government bonds.

FACTORS INFLUENCING ANNUAL TRADING GAINS:
..  Trading gains were recorded primarily during March and April from long
   positions in the euro versus the U.S. dollar as the value of the euro moved
   higher against the U.S. dollar amid indications from European Central Bank
   member Klaus Liebscher that interest rates in the Euro-Zone would increase
   further if inflation continued to rise. During September and October,
   additional gains were experienced from long positions in the euro versus the
   U.S. dollar as the value of the U.S. dollar was pulled lower leading up to
   and following the U.S. Federal Reserve's decision to cut interest rates to
   4.50%. In November, long positions in the euro relative to the U.S. dollar
   experienced additional gains as the euro strengthened against the U.S.
   dollar after Gross Domestic Product in the Euro-Zone came in higher than
   expected. Additional gains were experienced throughout a majority of the
   year from long positions in the Brazilian real versus the U.S. dollar as the
   value of the Brazilian real trended higher as consistently strong economic
   data out of Brazil led to investor sentiment that the Central Bank of Brazil
   would continue to raise interest rates. Gains were recorded during April,
   June, July, September, and October from long positions in the Swedish krona
   versus the U.S. dollar as the value of the Swedish krona moved higher amid
   consistently strong economic data out of Sweden.

<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., Morgan Stanley Cornerstone Fund III L.P., and
Morgan Stanley Cornerstone Fund IV L.P. (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, 2007. 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, 2007.

  Deloitte & Touche LLP, the Partnerships' independent registered public
accounting firm, has issued an audit report on the Partnerships' internal
control over financial reporting. This report, which expresses unqualified
opinions on 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/ Christian M. Angstadt
Christian M. Angstadt
Chief Financial Officer
Demeter Management Corporation

New York, New York
March 20, 2008

<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 internal control over financial reporting of Morgan
Stanley Cornerstone Fund II L.P., Morgan Stanley Cornerstone Fund III L.P. and
Morgan Stanley Cornerstone Fund IV L.P. (collectively, the "Partnerships") as
of December 31, 2007, 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, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, 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, the Partnerships maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
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, 2007 of the Partnerships and our report dated
March 20, 2008 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

New York, New York
March 20, 2008

<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., Morgan Stanley Cornerstone Fund III L.P., and
Morgan Stanley Cornerstone Fund IV L.P. (collectively, the "Partnerships"),
including the schedules of investments, as of December 31, 2007 and 2006, 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, 2007. 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.,
Morgan Stanley Cornerstone Fund III L.P., and Morgan Stanley Cornerstone Fund
IV L.P. at December 31, 2007 and 2006, and the results of their operations,
changes in partners' capital, and their cash flows for each of the three years
in the period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.

<PAGE>

  As discussed in Note 1, the Partnerships modified their classification of
cash within the statements of financial condition and cash flows to conform to
2007 presentation.

  We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Partnerships' internal control
over financial reporting as of December 31, 2007, 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 20, 2008 expressed an unqualified opinion on the Partnerships' internal
control over financial reporting.

/s/ Deloitte & Touche LLP

New York, New York
March 20, 2008

<PAGE>

MORGAN STANLEY CORNERSTONE FUND II L.P.

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           -------------------
                                                             2007      2006
                                                           --------- ---------
                                                              $         $
 <S>                                                       <C>       <C>
                                    ASSETS
 Trading Equity:
  Unrestricted cash                                        6,584,973 8,267,036
  Restricted cash                                            444,742   588,953
                                                           --------- ---------
   Total Cash                                              7,029,715 8,855,989

  Net unrealized gain on open contracts (MS&Co.)              98,394   258,505
                                                           --------- ---------
   Total Trading Equity                                    7,128,109 9,114,494
 Interest receivable (MS&Co.)                                 15,021    29,322
 Due from MS&Co.                                               3,416    16,888
                                                           --------- ---------
   Total Assets                                            7,146,546 9,160,704
                                                           ========= =========

                      LIABILITIES AND PARTNERS' CAPITAL
 LIABILITIES
 Redemptions payable                                          92,051    86,657
 Accrued administrative expenses                              30,222    29,687
 Accrued management fees                                      20,756    26,632
                                                           --------- ---------
   Total Liabilities                                         143,029   142,976
                                                           --------- ---------
 PARTNERS' CAPITAL
 Limited Partners (2,025.388 and 2,525.775 Units,
  respectively)                                            6,774,185 8,722,240
 General Partner (68.567 and 85.567 Units, respectively)     229,332   295,488
                                                           --------- ---------
   Total Partners' Capital                                 7,003,517 9,017,728
                                                           --------- ---------
   Total Liabilities and Partners' Capital                 7,146,546 9,160,704
                                                           ========= =========
 NET ASSET VALUE PER UNIT                                   3,344.64  3,453.29
                                                           ========= =========
</TABLE>

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                 FOR THE YEARS ENDED DECEMBER 31,
                                                ---------------------------------
                                                  2007        2006        2005
                                                ---------  ----------  ----------
                                                    $           $           $
<S>                                             <C>        <C>         <C>
INVESTMENT INCOME
 Interest income (MS&Co.)                         288,143     393,410     367,313
                                                ---------  ----------  ----------

EXPENSES
 Brokerage commissions (MS&Co.)                   455,149     628,115     833,584
 Management fees                                  279,695     361,586     506,875
 Common administrative expenses                    49,000      50,000      41,000
 Transaction fees and costs                        28,518      40,840      48,642
                                                ---------  ----------  ----------
  Total Expenses                                  812,362   1,080,541   1,430,101
                                                ---------  ----------  ----------

NET INVESTMENT LOSS                              (524,219)   (687,131) (1,062,788)
                                                ---------  ----------  ----------

TRADING RESULTS
Trading profit (loss):
 Realized                                         411,841     (53,928) (1,007,388)
 Net change in unrealized                        (160,111)   (259,538) (1,492,690)
                                                ---------  ----------  ----------
                                                  251,730    (313,466) (2,500,078)
 Proceeds from Litigation Settlement                --         --           2,209
                                                ---------  ----------  ----------
  Total Trading Results                           251,730    (313,466) (2,497,869)
                                                ---------  ----------  ----------

NET LOSS                                         (272,489) (1,000,597) (3,560,657)
                                                =========  ==========  ==========

NET LOSS ALLOCATION:
Limited Partners                                 (265,258)   (970,621) (3,469,605)
General Partner                                    (7,231)    (29,976)    (91,052)

NET LOSS PER UNIT:
Limited Partners                                  (108.65)    (300.21)    (905.38)
General Partner                                   (108.65)    (300.21)    (905.38)

                                                  UNITS       UNITS       UNITS
                                                ---------  ----------  ----------
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING    2,351.802   2,936.644   3,708.410
</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,
                                                               ---------------------
                                                                  2007       2006
                                                               ---------- ----------
                                                                   $          $
<S>                                                            <C>        <C>
                                       ASSETS
Trading Equity:
 Unrestricted cash                                             15,925,629 17,796,766
 Restricted cash                                                1,251,653  2,668,811
                                                               ---------- ----------
   Total Cash                                                  17,177,282 20,465,577
                                                               ---------- ----------

 Net unrealized gain on open contracts (MS&Co.)                   741,994    489,311
 Net unrealized gain on open contracts (MSIP)                      54,095     42,675
                                                               ---------- ----------
   Total net unrealized gain on open contracts                    796,089    531,986
                                                               ---------- ----------
   Total Trading Equity                                        17,973,371 20,997,563
Interest receivable (MS&Co.)                                       36,546     67,511
Due from MS&Co.                                                    12,811     34,489
                                                               ---------- ----------
   Total Assets                                                18,022,728 21,099,563
                                                               ========== ==========

                         LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable                                               159,039    352,302
Accrued administrative expenses                                   111,753    108,753
Accrued management fees                                            52,241     61,223
                                                               ---------- ----------
   Total Liabilities                                              323,033    522,278
                                                               ---------- ----------
PARTNERS' CAPITAL
Limited Partners (4,175.524 and 4,928.664 Units, respectively) 17,275,552 20,157,999
General Partner (102.516 Units)                                   424,143    419,286
                                                               ---------- ----------
   Total Partners' Capital                                     17,699,695 20,577,285
                                                               ---------- ----------
   Total Liabilities and Partners' Capital                     18,022,728 21,099,563
                                                               ========== ==========
NET ASSET VALUE PER UNIT                                         4,137.34   4,089.95
                                                               ========== ==========
</TABLE>

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                          FOR THE YEARS ENDED DECEMBER 31,
                                         ----------------------------------
                                            2007        2006        2005
                                         ----------  ----------  ----------
                                              $           $           $
    <S>                                  <C>         <C>         <C>
    INVESTMENT INCOME
     Interest income (MS&Co.)               671,543     845,718     602,016
                                         ----------  ----------  ----------

    EXPENSES
     Brokerage commissions (MS&Co.)         935,482   1,046,232     948,366
     Management fees                        652,165     778,821     833,891
     Common administrative expenses          98,000      94,000      70,000
     Transaction fees and costs              56,262      77,450      51,605
                                         ----------  ----------  ----------
       Total Expenses                     1,741,909   1,996,503   1,903,862
                                         ----------  ----------  ----------

    NET INVESTMENT LOSS                  (1,070,366) (1,150,785) (1,301,846)
                                         ----------  ----------  ----------

    TRADING RESULTS
    Trading profit (loss):
     Realized                               892,900   2,219,556    (992,550)
     Net change in unrealized               264,103    (339,145)    409,603
                                         ----------  ----------  ----------
                                          1,157,003   1,880,411    (582,947)
     Proceeds from Litigation Settlement     --          --          26,287
                                         ----------  ----------  ----------
       Total Trading Results              1,157,003   1,880,411    (556,660)
                                         ----------  ----------  ----------

    NET INCOME (LOSS)                        86,637     729,626  (1,858,506)
                                         ==========  ==========  ==========

    NET INCOME (LOSS) ALLOCATION:
    Limited Partners                         81,780     716,413  (1,832,088)
    General Partner                           4,857      13,213     (26,418)

    NET INCOME (LOSS) PER UNIT:
    Limited Partners                          47.39      128.88     (257.70)
    General Partner                           47.39      128.88     (257.70)

                                            UNITS       UNITS       UNITS
                                         ----------  ----------  ----------
    WEIGHTED AVERAGE NUMBER
     OF UNITS OUTSTANDING                 4,655.090   5,418.723   6,245.909
</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,
                                                         ----------------------
                                                            2007          2006
                                                         ----------    ----------
                                                             $             $
 <S>                                                     <C>           <C>
                                    ASSETS
 Trading Equity:
  Unrestricted cash                                      34,224,360    49,580,010
  Restricted cash                                           836,349       427,000
                                                         ----------    ----------
   Total Cash                                            35,060,709    50,007,010

  Net unrealized gain (loss) on open contracts (MS&Co.)    (393,917)    1,429,548
                                                         ----------    ----------
   Total Trading Equity                                  34,666,792    51,436,558
 Interest receivable (MS&Co.)                                70,792       159,151
 Due from MS&Co.                                             17,409        49,185
                                                         ----------    ----------
   Total Assets                                          34,754,993    51,644,894
                                                         ==========    ==========

                       LIABILITIES AND PARTNERS' CAPITAL
 LIABILITIES
 Redemptions payable                                        487,407     1,326,233
 Accrued administrative expenses                            118,118       109,708
 Accrued management fees                                    101,024       150,311
                                                         ----------    ----------
   Total Liabilities                                        706,549     1,586,252
                                                         ----------    ----------
 PARTNERS' CAPITAL
 Limited Partners (6,939.595 and 8,793.380
  Units, respectively)                                   33,543,431    49,470,851
 General Partner (104.479 Units)                            505,013       587,791
                                                         ----------    ----------
   Total Partners' Capital                               34,048,444    50,058,642
                                                         ----------    ----------
   Total Liabilities and Partners' Capital               34,754,993    51,644,894
                                                         ==========    ==========
 NET ASSET VALUE PER UNIT                                  4,833.63      5,625.92
                                                         ==========    ==========
</TABLE>

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                        FOR THE YEARS ENDED DECEMBER 31,
                                      -----------------------------------
                                         2007        2006        2005
                                      ----------  ----------  -----------
                                           $           $           $
      <S>                             <C>         <C>         <C>
      INVESTMENT INCOME
       Interest income (MS&Co.)        1,470,242   2,038,843    1,848,451
                                      ----------  ----------  -----------

      EXPENSES
       Management fees                 1,472,326   1,903,186    2,619,089
       Brokerage commissions (MS&Co.)  1,435,974   2,033,041    2,714,539
       Common administrative expenses    173,000     175,000      139,000
                                      ----------  ----------  -----------
         Total Expenses                3,081,300   4,111,227    5,472,628
                                      ----------  ----------  -----------

      NET INVESTMENT LOSS             (1,611,058) (2,072,384)  (3,624,177)
                                      ----------  ----------  -----------

      TRADING RESULTS
      Trading loss:
       Realized                       (2,963,468)   (597,044) (10,036,703)
       Net change in unrealized       (1,823,465)   (544,339)  (4,373,970)
                                      ----------  ----------  -----------
         Total Trading Results        (4,786,933) (1,141,383) (14,410,673)
                                      ----------  ----------  -----------

      NET LOSS                        (6,397,991) (3,213,767) (18,034,850)
                                      ==========  ==========  ===========

      NET LOSS ALLOCATION:
      Limited Partners                (6,315,213) (3,182,959) (17,820,295)
      General Partner                    (82,778)    (30,808)    (214,555)

      NET LOSS PER UNIT:
      Limited Partners                   (792.29)    (254.06)   (1,407.53)
      General Partner                    (792.29)    (254.06)   (1,407.53)

                                         UNITS       UNITS       UNITS
                                      ----------  ----------  -----------
      WEIGHTED AVERAGE NUMBER
       OF UNITS OUTSTANDING            7,973.971   9,911.917   12,176.938
</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, 2007, 2006, AND 2005

<TABLE>
<CAPTION>
                                    UNITS OF
                                   PARTNERSHIP  LIMITED    GENERAL
                                    INTEREST    PARTNERS   PARTNER     TOTAL
                                   ----------- ----------  -------  ----------
                                                   $          $          $
 <S>                               <C>         <C>         <C>      <C>
 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
 Net loss                               --       (265,258)  (7,231)   (272,489)
 Redemptions                         (517.387) (1,682,797) (58,925) (1,741,722)
                                    ---------  ----------  -------  ----------
 Partners' Capital, December 31,
 2007                               2,093.955   6,774,185  229,332   7,003,517
                                    =========  ==========  =======  ==========
</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, 2007, 2006, AND 2005

                                    UNITS OF
                                   PARTNERSHIP  LIMITED    GENERAL
                                    INTEREST    PARTNERS   PARTNER     TOTAL
                                   ----------- ----------  -------  ----------
                                                   $          $          $
 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
 Net income                             --         81,780    4,857      86,637
 Redemptions                         (753.140) (2,964,227)    --    (2,964,227)
                                    ---------  ----------  -------  ----------
 Partners' Capital, December 31,
 2007                               4,278.040  17,275,552  424,143  17,699,695
                                    =========  ==========  =======  ==========
</TABLE>

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

<PAGE>

MORGAN STANLEY CORNERSTONE FUND IV L.P.

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

<TABLE>
<CAPTION>
                                 UNITS OF
                                PARTNERSHIP   LIMITED     GENERAL
                                 INTEREST     PARTNERS    PARTNER      TOTAL
                                ----------- -----------  ---------  -----------
                                                 $           $           $
<S>                             <C>         <C>          <C>        <C>
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
Net loss                            --       (6,315,213)   (82,778)  (6,397,991)
Redemptions                     (1,853.785)  (9,612,207)     --      (9,612,207)
                                ----------  -----------  ---------  -----------
Partners' Capital, December
31, 2007                         7,044.074   33,543,431    505,013   34,048,444
                                ==========  ===========  =========  ===========
</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,
                                           ----------------------------------
                                              2007        2006        2005
                                           ----------  ----------  ----------
                                               $           $           $
  <S>                                      <C>         <C>         <C>
  CASH FLOWS FROM
   OPERATING ACTIVITIES
  Net loss                                   (272,489) (1,000,597) (3,560,657)
  Noncash item included in net loss:
    Net change in unrealized                  160,111     259,538   1,492,690
  (Increase) decrease in operating assets:
    Restricted cash                           144,211     791,855   1,448,295
    Interest receivable (MS&Co.)               14,301       6,154      (8,347)
    Due from MS&Co.                            13,472      (5,178)     50,678
  Increase (decrease) in operating
   liabilities:
    Accrued administrative expenses               535      (2,521)     (5,084)
    Accrued management fees                    (5,876)    (11,254)    (16,779)
                                           ----------  ----------  ----------
  Net cash provided by (used for)
   operating activities                        54,265      37,997    (599,204)
                                           ----------  ----------  ----------

  CASH FLOWS FROM
   FINANCING ACTIVITIES
  Cash paid for redemptions of Units       (1,736,328) (2,846,464) (2,175,467)
                                           ----------  ----------  ----------
  Net cash used for financing activities   (1,736,328) (2,846,464) (2,175,467)
                                           ----------  ----------  ----------

  Net decrease in unrestricted cash        (1,682,063) (2,808,467) (2,774,671)

  Unrestricted cash at beginning of period  8,267,036  11,075,503  13,850,174
                                           ----------  ----------  ----------

  Unrestricted cash at end of period        6,584,973   8,267,036  11,075,503
                                           ==========  ==========  ==========
</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,
                                              ----------------------------------
                                                 2007        2006        2005
                                              ----------  ----------  ----------
                                                  $           $           $
<S>                                           <C>         <C>         <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES
Net income (loss)                                 86,637     729,626  (1,858,506)
Noncash item included in net
 income (loss):
  Net change in unrealized                      (264,103)    339,145    (409,603)
(Increase) decrease in operating assets:
  Restricted cash                              1,417,158    (988,707)  1,743,314
  Interest receivable (MS&Co.)                    30,965      (5,859)    (20,356)
  Due from MS&Co.                                 21,678       6,721     (26,090)
Increase (decrease) in operating liabilities:
  Accrued management fees                         (8,982)     (6,658)    (14,595)
  Accrued administrative expenses                  3,000      (3,607)     (7,310)
                                              ----------  ----------  ----------
Net cash provided by (used for)
 operating activities                          1,286,353      70,661    (593,146)
                                              ----------  ----------  ----------

CASH FLOWS FROM
 FINANCING ACTIVITIES
Cash paid for redemptions of Units            (3,157,490) (3,005,683) (3,130,920)
                                              ----------  ----------  ----------
Net cash used for financing activities        (3,157,490) (3,005,683) (3,130,920)
                                              ----------  ----------  ----------

Net decrease in unrestricted cash             (1,871,137) (2,935,022) (3,724,066)

Unrestricted cash at beginning of period      17,796,766  20,731,788  24,455,854
                                              ----------  ----------  ----------

Unrestricted cash at end of period            15,925,629  17,796,766  20,731,788
                                              ==========  ==========  ==========
</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,
                                         -------------------------------------
                                             2007         2006         2005
                                         -----------  -----------  -----------
                                              $            $            $
<S>                                      <C>          <C>          <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES
Net loss                                  (6,397,991)  (3,213,767) (18,034,850)
Noncash item included in net loss:
  Net change in unrealized                 1,823,465      544,339    4,373,970
(Increase) decrease in operating assets:
  Restricted cash                           (409,349)    (224,000)     445,902
  Interest receivable (MS&Co.)                88,359       11,166      (47,477)
  Due from MS&Co.                             31,776        6,565      (23,388)
Increase (decrease) in operating
 liabilities:
  Accrued administrative expenses              8,410       (1,180)     (12,326)
  Accrued management fees                    (49,287)     (42,814)     (87,016)
                                         -----------  -----------  -----------
Net cash used for operating activities    (4,904,617)  (2,919,691) (13,385,185)
                                         -----------  -----------  -----------

CASH FLOWS FROM
 FINANCING ACTIVITIES
Cash paid for redemptions of Units       (10,451,033) (11,422,372) (11,712,375)
                                         -----------  -----------  -----------
Net cash used for financing activities   (10,451,033) (11,422,372) (11,712,375)
                                         -----------  -----------  -----------
Net decrease in unrestricted cash        (15,355,650) (14,342,063) (25,097,560)

Unrestricted cash at beginning
 of period                                49,580,010   63,922,073   89,019,633
                                         -----------  -----------  -----------

Unrestricted cash at end of period        34,224,360   49,580,010   63,922,073
                                         ===========  ===========  ===========
</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, 2007 AND 2006

<TABLE>
<CAPTION>
                                        LONG UNREALIZED  PERCENTAGE   SHORT UNREALIZED  PERCENTAGE   NET UNREALIZED
FUTURES AND FORWARD CONTRACTS:            GAIN/(LOSS)   OF NET ASSETS   GAIN/(LOSS)    OF NET ASSETS  GAIN/(LOSS)
------------------------------          --------------- ------------- ---------------- ------------- --------------
2007 PARTNERSHIP NET ASSETS: $7,003,517        $              %              $               %             $
<S>                                     <C>             <C>           <C>              <C>           <C>
      Commodity                               5,659          0.08          (1,460)         (0.02)         4,199
      Equity                                 17,639          0.25          (3,360)         (0.05)        14,279
      Foreign currency                      (23,706)        (0.34)        (45,218)         (0.65)       (68,924)
      Interest rate                          24,883          0.36          30,805           0.44         55,688
                                            -------         -----         -------          -----        -------
        Grand Total:                         24,475          0.35         (19,233)         (0.28)         5,242
                                            =======         =====         =======          =====
       Unrealized Currency Gain                                                                          93,152
                                                                                                        -------
       Total Net Unrealized Gain                                                                         98,394
                                                                                                        =======

2006 PARTNERSHIP NET ASSETS: $9,017,728
      Commodity                                --             --           33,387           0.37         33,387
      Equity                                 25,871          0.29            --              --          25,871
      Foreign currency                      102,080          1.13          76,510           0.85        178,590
      Interest rate                         (82,786)        (0.92)         89,408           0.99          6,622
                                            -------         -----         -------          -----        -------
        Grand Total:                         45,165          0.50         199,305           2.21        244,470
                                            =======         =====         =======          =====
       Unrealized Currency Gain                                                                          14,035
                                                                                                        -------
       Total Net Unrealized Gain                                                                        258,505
                                                                                                        =======
</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, 2007 AND 2006

<TABLE>
<CAPTION>
                                         LONG UNREALIZED  PERCENTAGE   SHORT UNREALIZED  PERCENTAGE   NET UNREALIZED
FUTURES AND FORWARD CONTACTS:              GAIN/(LOSS)   OF NET ASSETS   GAIN/(LOSS)    OF NET ASSETS  GAIN/(LOSS)
-----------------------------            --------------- ------------- ---------------- ------------- --------------
2007 PARTNERSHIP NET ASSETS: $17,699,695        $              %              $               %             $
<S>                                      <C>             <C>           <C>              <C>           <C>
      Commodity                              413,874          2.34          53,390           0.30        467,264
      Equity                                  22,161          0.13          92,328           0.52        114,489
      Foreign currency                      (119,794)        (0.68)        190,608           1.07         70,814
      Interest rate                          163,283          0.92          (2,579)         (0.01)       160,704
                                            --------         -----         -------          -----        -------
        Grand Total:                         479,524          2.71         333,747           1.88        813,271
                                            ========         =====         =======          =====
        Unrealized Currency Loss                                                                         (17,182)
                                                                                                         -------
       Total Net Unrealized Gain                                                                         796,089
                                                                                                         =======

2006 PARTNERSHIP NET ASSETS: $20,577,285
      Commodity                               23,088          0.11         169,297           0.82        192,385
      Equity                                 234,490          1.14            --              --         234,490
      Foreign currency                       (37,575)        (0.18)        144,851           0.70        107,276
      Interest rate                          (65,141)        (0.32)        154,876           0.75         89,735
                                            --------         -----         -------          -----        -------
        Grand Total:                         154,862          0.75         469,024           2.27        623,886
                                            ========         =====         =======          =====
        Unrealized Currency Loss                                                                         (91,900)
                                                                                                         -------
       Total Net Unrealized Gain                                                                         531,986
                                                                                                         =======
</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, 2007 AND 2006

<TABLE>
<CAPTION>
                                         LONG UNREALIZED PERCENTAGE OF SHORT UNREALIZED PERCENTAGE OF NET UNREALIZED
FUTURES AND FORWARD CONTRACTS:             GAIN/(LOSS)    NET ASSETS     GAIN/(LOSS)     NET ASSETS    GAIN/(LOSS)
------------------------------           --------------- ------------- ---------------- ------------- --------------
2007 PARTNERSHIP NET ASSETS: $34,048,444        $              %              $               %             $
<S>                                      <C>             <C>           <C>              <C>           <C>
   Foreign currency                         (686,274)        (2.02)        292,357          0.86         (393,917)
                                            --------         -----         -------          ----        ---------
     Grand Total:                           (686,274)        (2.02)        292,357          0.86         (393,917)
                                            ========         =====         =======          ====
    Unrealized Currency Gain/(Loss)                                                                         --
                                                                                                        ---------
     Total Net Unrealized Loss                                                                           (393,917)
                                                                                                        =========

2006 PARTNERSHIP NET ASSETS: $50,058,642
   Foreign currency                          603,922          1.21         825,626          1.65        1,429,548
                                            --------         -----         -------          ----        ---------
     Grand Total:                            603,922          1.21         825,626          1.65        1,429,548
                                            ========         =====         =======          ====
    Unrealized Currency Gain/(Loss)                                                                         --
                                                                                                        ---------
     Total Net Unrealized Gain                                                                          1,429,548
                                                                                                        =========
</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. ("Cornerstone II"),
Morgan Stanley Cornerstone Fund III L.P. ("Cornerstone III"), and Morgan
Stanley Cornerstone Fund IV L.P. ("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 for each Partnership is Demeter Management Corporation
("Demeter"). The commodity brokers for Cornerstone II and Cornerstone III are
Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley & Co.
International plc ("MSIP"). Cornerstone IV's sole commodity broker is MS&Co.
MS&Co. acts as the counterparty on all trading of foreign currency forward
contracts. Demeter, MS&Co., and MSIP are wholly-owned subsidiaries of Morgan
Stanley.
  On April 1, 2007, Morgan Stanley merged Morgan Stanley DW Inc. ("Morgan
Stanley DW") into MS&Co. Upon completion of the merger, the surviving entity,
MS&Co., became the Partnerships' principal U.S. commodity broker-dealer.
  On April 13, 2007, Morgan Stanley & Co. International Limited changed its
name to Morgan Stanley & Co. International plc.
  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, MS&Co. pays each
Partnership interest income on 80% of its average daily Net Assets for the
month at a rate equal to the monthly 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, the
Partnerships may transact 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 became effective for the Partnerships as of
January 1, 2007. The Partnerships have determined that the adoption of FIN 48
did not have a material impact on the Partnerships' financial statements. The
Partnerships file U.S. federal and state tax returns. The 2004 through 2007 tax
years generally remain subject to examination by U.S. federal and most state
tax authorities.
  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.

TRADING EQUITY.  The Partnerships' asset "Trading Equity," reflected on the
Statements of Financial Condition, consists of (A) cash on deposit with MS&Co.
and MSIP for Cornerstone II and Cornerstone III, and with MS&Co. for
Cornerstone IV, to be used as margin for trading; (B) net unrealized gains or
losses on futures and forward contracts, which are valued at market and
calculated as the difference between original contract value and market value;
and, if any, (C) options purchased at fair value. Options written at fair value
are recorded in Liabilities.
  The Partnerships, in their normal course of business, enter into various
contracts with MS&Co. and/or MSIP acting as their commodity brokers. Pursuant
to brokerage agreements with MS&Co. and/or MSIP, 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.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)

  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., as 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 MS&Co.
charges retail commodity customers and parties that are not clearinghouse
members, respectively. 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.

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.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


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 a settlement
award payment in the amount of $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.

RESTRICTED AND UNRESTRICTED CASH.  As reflected on the Partnerships' Statements
of Financial Condition, restricted cash represents cash on deposit to satisfy
margin requirements for trading. These amounts of restricted cash are
maintained separately. Cash that is not on deposit to satisfy the margin
requirements for trading is reflected as unrestricted cash.

RECLASSIFICATIONS.  Certain prior year amounts relating to cash balances were
reclassified on the Statements of Financial Condition and Cash Flows to conform
to 2007 presentation. Such reclassifications have no impact on the
Partnerships' reported net income (loss).

--------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS
Each Partnership pays brokerage commissions to MS&Co. (Morgan Stanley DW
through March 31, 2007) as described in Note 1. Cornerstone II and Cornerstone
III's cash is on deposit with Morgan Stanley DW (through March 31, 2007),
MS&Co., and MSIP, and Cornerstone IV's cash is on deposit with Morgan Stanley
DW (through March 31, 2007) and MS&Co., in futures interests trading accounts
to meet margin requirements as needed. MS&Co. (Morgan Stanley DW through March
31, 2007) pays interest on these funds as described in Note 1.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


--------------------------------------------------------------------------------
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, 2007, 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
7/24 of 1% per month (a 3.5% annual rate) of the Net Assets under management by
each trading manager at each month end.

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.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


--------------------------------------------------------------------------------
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.
  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, swap or options contracts,
and other financial instruments with similar characteristics such as caps,
floors, and collars.

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(continued)


  The net unrealized gains (losses) on open contracts at December 31, reported
as a component of "Trading Equity" on the Statements of Financial Condition,
and their longest contract maturities are as follows:

CORNERSTONE II

<TABLE>
<CAPTION>
                   NET UNREALIZED GAINS/(LOSSES)
                        ON OPEN CONTRACTS        LONGEST MATURITIES
                   ---------------------------   -------------------
                                 OFF-                        OFF-
                   EXCHANGE-   EXCHANGE-         EXCHANGE- EXCHANGE-
              YEAR  TRADED      TRADED    TOTAL   TRADED    TRADED
              ---- ---------   --------- ------- --------- ---------
                       $           $        $
              <S>  <C>         <C>       <C>     <C>       <C>
              2007  160,568     (62,174)  98,394 Dec. 2008 Mar. 2008
              2006   65,559     192,946  258,505 Dec. 2007 Mar. 2007
</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>
              2007  725,294    70,795  796,089 Jun. 2009 Mar. 2008
              2006  413,691   118,295  531,986 Jun. 2008 Mar. 2007
</TABLE>

CORNERSTONE IV

<TABLE>
<CAPTION>
                  NET UNREALIZED GAINS/(LOSSES)
                        ON OPEN CONTRACTS        LONGEST MATURITIES
                 ------------------------------  -------------------
                             OFF-                            OFF-
                 EXCHANGE- EXCHANGE-             EXCHANGE- EXCHANGE-
            YEAR  TRADED    TRADED      TOTAL     TRADED    TRADED
            ---- --------- ---------  ---------  --------- ---------
                     $         $          $
            <S>  <C>       <C>        <C>        <C>       <C>
            2007    --      (393,917)  (393,917)    --     Mar. 2008
            2006    --     1,429,548  1,429,548     --     Mar. 2007
</TABLE>

  The Partnerships have credit risk associated with counterparty
nonperformance. As of the date of the financial statements, 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 MS&Co. and/or MSIP 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. MS&Co. and/or
MSIP, 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, 2007 and 2006 respectively, $7,190,283
and $8,921,548 for Cornerstone II and $17,902,576 and $20,879,268 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, each 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 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>
                                             2007       2006       2005
                                          ---------  ---------  ---------
      <S>                                 <C>        <C>        <C>
      PER UNIT OPERATING
       PERFORMANCE:
      NET ASSET VALUE, JANUARY 1:         $3,453.29  $3,753.50  $4,658.88
                                          ---------  ---------  ---------
      NET OPERATING RESULTS:
         Interest Income                     122.52     133.97      99.05
         Expenses                           (345.42)   (367.95)   (385.64)
         Realized Profit (Loss)/(1)/         182.33      22.15    (216.88)
         Unrealized Loss                     (68.08)    (88.38)   (402.51)
         Proceeds from Litigation
          Settlement                          --         --          0.60
                                          ---------  ---------  ---------
         Net Loss                           (108.65)   (300.21)   (905.38)
                                          ---------  ---------  ---------
      NET ASSET VALUE,
       DECEMBER 31:                       $3,344.64  $3,453.29  $3,753.50
                                          =========  =========  =========
      FOR THE CALENDAR YEAR:
      RATIOS TO AVERAGE NET
       ASSETS:
         Net Investment Loss                 (6.7)%     (6.8)%     (7.5)%
         Expenses before Incentive Fees      10.4 %     10.7 %     10.0 %
         Expenses after Incentive Fees       10.4 %     10.7 %     10.0 %
         Net Loss                            (3.5)%     (9.9)%    (25.0)%
      TOTAL RETURN BEFORE
       INCENTIVE FEES                        (3.1)%     (8.0)%    (19.4)%
      TOTAL RETURN AFTER
       INCENTIVE FEES                        (3.1)%     (8.0)%    (19.4)%

      INCEPTION-TO-DATE RETURN              243.0 %
      COMPOUND ANNUALIZED
       RETURN                                 5.5 %
</TABLE>

CORNERSTONE III
<TABLE>
<CAPTION>
                                             2007       2006       2005
                                          ---------  ---------  ---------
      <S>                                 <C>        <C>        <C>
      PER UNIT OPERATING
       PERFORMANCE:
      NET ASSET VALUE, JANUARY 1:         $4,089.95  $3,961.07  $4,218.77
                                          ---------  ---------  ---------
      NET OPERATING RESULTS:
         Interest Income                     144.26     156.07      96.39
         Expenses                           (374.19)   (368.45)   (304.82)
         Realized Profit (Loss)/(1)/         220.59     403.85    (119.06)
         Unrealized Profit (Loss)             56.73     (62.59)     65.58
         Proceeds from Litigation
          Settlement                          --         --          4.21
                                          ---------  ---------  ---------
         Net Income (Loss)                    47.39     128.88    (257.70)
                                          ---------  ---------  ---------
      NET ASSET VALUE,
       DECEMBER 31:                       $4,137.34  $4,089.95  $3,961.07
                                          =========  =========  =========
      FOR THE CALENDAR YEAR:
      RATIOS TO AVERAGE NET
       ASSETS:
         Net Investment Loss                 (5.8)%     (5.2)%     (5.5)%
         Expenses before Incentive Fees       9.5 %      9.1 %      8.1 %
         Expenses after Incentive Fees        9.5 %      9.1 %      8.1 %
         Net Income (Loss)                    0.5 %      3.3 %     (7.9)%
      TOTAL RETURN BEFORE
       INCENTIVE FEES                         1.2 %      3.3 %     (6.1)%
      TOTAL RETURN AFTER
       INCENTIVE FEES                         1.2 %      3.3 %     (6.1)%

      INCEPTION-TO-DATE RETURN              324.3 %
      COMPOUND ANNUALIZED
       RETURN                                 6.5 %
</TABLE>

<PAGE>

MORGAN STANLEY CORNERSTONE FUNDS

NOTES TO FINANCIAL STATEMENTS
(concluded)


CORNERSTONE IV

<TABLE>
<CAPTION>
                                            2007       2006       2005
                                         ---------  ---------  ----------
     <S>                                 <C>        <C>        <C>
     PER UNIT OPERATING
      PERFORMANCE:
     NET ASSET VALUE, JANUARY 1:         $5,625.92  $5,879.98  $ 7,287.51
                                         ---------  ---------  ----------
     NET OPERATING RESULTS:
        Interest Income                     184.38     205.70      151.80
        Expenses                           (386.42)   (414.78)    (449.43)
        Realized Profit (Loss)/(1)/        (361.57)      9.94     (750.70)
        Unrealized Loss                    (228.68)    (54.92)    (359.20)
                                         ---------  ---------  ----------
        Net Loss                           (792.29)   (254.06)  (1,407.53)
                                         ---------  ---------  ----------
     NET ASSET VALUE,
      DECEMBER 31:                       $4,833.63  $5,625.92  $ 5,879.98
                                         =========  =========  ==========
     FOR THE CALENDAR YEAR:
     RATIOS TO AVERAGE NET
      ASSETS:
        Net Investment Loss                 (3.9)%     (3.9)%      (4.9)%
        Expenses before Incentive Fees       7.5 %      7.7 %       7.4 %
        Expenses after Incentive Fees        7.5 %      7.7 %       7.4 %
        Net Loss                           (15.6)%     (6.0)%     (24.5)%
     TOTAL RETURN BEFORE
      INCENTIVE FEES                       (14.1)%     (4.3)%     (19.3)%
     TOTAL RETURN AFTER
      INCENTIVE FEES                       (14.1)%     (4.3)%     (19.3)%

     INCEPTION-TO-DATE RETURN              395.8 %
     COMPOUND ANNUALIZED
      RETURN                                 8.1 %
</TABLE>

(1)Realized Profit (Loss) is a balancing amount necessary to reconcile the
   change in Net Asset Value per Unit with the other per Unit information.

<PAGE>

                                   PRESORTED
                                   STANDARD
                                 U.S. POSTAGE
                                     PAID
                                  PERMIT #374
                                 LANCASTER, PA
                    Demeter Management Corporation
                    522 Fifth Avenue, 13th Floor
                    New York, NY 10036

[LOGO]
MORGAN STANLEY

ADDRESS SERVICE REQUESTED


[LOGO] printed on recycled paper

























-4-
-4-

- 62 -