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 0-19116

	MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

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

           DELAWARE                                         13-3577501
(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:
$18,783,714 at June 30, 2007.

	DOCUMENTS INCORPORATED BY REFERENCE
	(See Page 1)


<page> <table> MORGAN STANLEY DIVERSIFIED FUTURES 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. . . . . . . . . . . . . . . . . . . . . . .5-6

  Item 1B.	 	Unresolved Staff Comments . . . . . . . . . . . . . . . . .6

  Item 2.	 Properties . . . . . . . . . . . . . . . . . . . . . . . . 6

  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. . . . . . . . . . 10-30

  Item 7A.  Quantitative and Qualitative Disclosures About
            Market Risk. . . . . . . . . . . . . . . . . . . . . . 30-43

  Item 8.	 Financial Statements and Supplementary Data. . . . .  .43-44

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

  Item 9A.	 	Controls and Procedures . . . . . . . . . . . . . . .  44-47

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

  Item 9B.	 	Other Information. . . .  . . . . . . . . . . . . . . . . 47

Part III.

  Item 10.  Directors, Executive Officers and Corporate
        Governance. . . . . . . . . . . . . . . . . . . . . . .48-55

  Item 11.  Executive Compensation . . . . . . . . . . . . . . . . .  55

  Item 12.  Security Ownership of Certain Beneficial Owners
            and Management and Related Stockholder Matters . . . . 55-56

  Item 13.  Certain Relationships and Related Transactions,
		 and Director Independence . . . . . . . . . . . . . . . . 56

  Item 14.  Principal Accountant Fees and Services. . . . . . . . .56-57
Part IV.
  Item 15.  Exhibits and Financial Statement Schedules. . . . . . .58-59
</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
     June 30, 1992                                      I

     Annual Report to Morgan Stanley
     Diversified Futures Fund III L.P.
     Limited Partners for the year
     Ended December 31, 2007    	    II, III, and IV



























<page> PART I
Item 1.  BUSINESS


(a) General Development of Business.  Morgan Stanley Diversified
Futures Fund III L.P. (the ?Partnership?) is a Delaware limited
partnership organized in 1990 to engage primarily in the
speculative trading of futures contracts, options on futures and
forward contracts, and forward contracts on physical commodities
and other commodity interests, including, but not limited to,
foreign currencies, financial instruments, metals, energy, and
agricultural products.  The Partnership commenced trading
operations on November 1, 1990.

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.  Morgan
Stanley Capital Group Inc. (?MSCG?) acts as the counterparty on
all trading of options on 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., MSIP, and MSCG are wholly-owned subsidiaries of
Morgan Stanley.  Hyman Beck & Company Inc. (?Hyman Beck? or the
?Trading Advisor?) is the trading advisor to the Partnership.

<page> 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 $1,755.97 and returned
(14.4)% to $1,503.20 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, forward,
and options on such contracts.  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 Advisor.
For a detailed description of the different facets of the
Partnership?s business, see those portions of the Partnership?s
<page> prospectus, dated June 30, 1992 (the ?Prospectus?),
incorporated by reference in this Form 10-K, set forth below:
   Facets of Business
     1.  Summary                  1.  ?Summary of the Prospectus?
                                      (Pages 1-8 of the Prospectus).

     2.  Commodities Markets      2.  ?The Commodities Markets?
                                      (Pages 52-59 of the
				 Prospectus).

     3.  Partnership's Commodity  3.  ?Trading Policies? (Pages
         Trading Arrangements          48-49 of the Prospectus).
         and Policies                 ?The Trading Manager? (Pages
				 37-47 of the Prospectus).

     4.  Management of the        4.  ?The Management Agreement?
         Partnership		 (Pages 50-52 of the
				 Prospectus).  ?The
                                       General Partner? (Pages
                                       33-35 of the Prospectus)
				 and ?The Commodity
                                       Broker? (Pages 49-50 of
				 The Prospectus).  ?The
                                       Limited Partnership
                                       Agreement? (Pages 61-65
				 of the Prospectus).

     5.  Taxation of the          5.  ?Federal Income Tax Aspects?
	         Partnership?s Limited         and ?State and Local Income
	         Partners                      Tax Aspects? (Pages 70-77
                                       of the Prospectus).


(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.


<page>
(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 0000863535.

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
<page> 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?.

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.

<page>
Item 3.  LEGAL PROCEEDINGS
None.

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







































<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 1,335.

(c) Distributions. No distributions have been made by the
Partnership since it commenced trading operations on November 1,
1990.  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.














<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		   (983,145)	2,574,902	   (5,308,129)     993,122	295,035


Net Income (Loss)          (2,500,011) 	1,145,365	   (7,658,671)  (	2,000,535) (5,190,138)


Net Income (Loss)
Per Unit (Limited
& General Partners)           (252.77)	82.99	     (469.80)	      (97.21)    	(289.73)


Total Assets               14,806,553    	19,864,048	23,503,284    	36,481,214	  42,392,256


Total Limited
Partners? Capital          13,551,395	19,301,779	 22,584,804    	35,521,922  	41,349,447


Net Asset Value
Per Unit                     1,503.20		1,755.97 	1,672.98      	2,142.78	    2,239.99







</table>






















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

Liquidity. The Partnership deposits its assets with Morgan Stanley
DW (through March 31, 2007), MS&Co., and MSIP as commodity brokers
in separate futures, forwards, and options trading accounts
established for the Trading Advisor.  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
within the limit.  Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
<page> 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
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.
<page> 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 Advisor
and the ability of the Trading Advisor's trading program 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 Advisor trades 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 Advisor 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 Advisor?s trading activities on
behalf of the Partnership during the period in question.  Past
performance is no guarantee of future results.

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
<page> 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 commission, 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.

The Partnership recorded total trading results including interest
income totaling $(983,145) and expenses totaling $1,516,866,
resulting in a net loss of $2,500,011 for the year ended December
31, 2007.  The Partnership?s net asset value per Unit decreased
<page> from $1,755.97 at December 31, 2006, to $1,503.20 at
December 31, 2007.  Total redemptions for the year were $3,280,748
and the Partnership?s ending capital was $13,732,030 at December
31, 2007, a decrease of $5,780,759 from ending capital at December
31, 2006, of $19,512,789.

The most significant trading losses of approximately 5.1% were
incurred within the currency sector from short positions in the
Japanese yen versus the euro, Australian dollar, British pound,
and Canadian dollar as the value of the Japanese yen corrected
higher against these currencies during February, March, July, and
August 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.  Furthermore,
losses were recorded during November from short positions in the
Japanese yen versus the British pound and euro as the value of the
Japanese yen reversed higher against these currencies following
news that the Japanese economy had expanded more than economists
had forecast during the third quarter.  Finally, smaller losses
were incurred from long positions in the Swedish krona and
Norwegian krone versus the U.S. dollar, primarily during August
and December, as the value of the U.S. dollar increased relative
to these currencies after continued volatility in the global
equity markets and widening credit losses tied to U.S. sub-prime
loans resulted in substantially stronger demand for U.S. dollar-
denominated government bonds.  Within the global interest rate
sector, losses of approximately 4.1% were experienced primarily
<page> during February, July, and August from short positions in
European and U.S. fixed-income futures as prices reversed sharply
higher in a worldwide ?flight-to-quality? after the significant
decline in the global equity markets resulted in substantially
higher demand for the ?safe haven? of government bonds.  During
September, October, and December, additional losses were recorded
from both long and short positions in European interest rate
futures as prices moved without consistent direction amid
uncertainty regarding the future direction of the global economy.
Within the global stock index sector, losses of approximately 3.5%
were incurred primarily during February and March from long
positions in European, U.S., and Japanese equity index futures as
prices reversed lower after former U.S. Federal Reserve Chairman
Alan Greenspan indicated that the U.S. economy could be headed for
a recession.  In addition, prices moved lower after worries 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.  Additional losses were
incurred during July, August, November, and December from long
positions in European, U.S., and Japanese equity index futures as
prices decreased on persistent concerns that a collapsing U.S.
sub-prime mortgage market and declining U.S. real estate prices
might pull the global economy into a recession.  Within the
agricultural markets, losses of approximately 2.1% were
experienced primarily during January, February, August, and
October from long futures positions in coffee as prices declined
amid technically based selling and rising supplies in Vietnam and
<page> Brazil, two of the world?s largest producers.  Elsewhere in
the agricultural complex, short positions in cotton futures
resulted in losses, primarily during September and December, as
prices moved higher due to news that excessive rain might delay
crop production in parts of India.  Additional losses of
approximately 0.7% were recorded within the metals sector,
primarily during March and April, from short positions in copper
futures as prices increased amid stronger-than-expected Chinese
industrial data and speculation that global demand for base metals
might rise.  Further losses were recorded during May, June, July,
and November from both long and short futures positions in
aluminum as prices moved without consistent direction due to
conflicting data regarding supply and demand.  Smaller losses of
approximately 0.2% were incurred within the energy markets,
primarily during March, April, and May, from long positions in
natural gas futures as prices decreased amid speculation that mild
weather in the U.S. might slow demand.  Finally, newly established
short futures positions in natural gas experienced losses during
October and December as prices reversed higher amid a decline in
U.S. inventories.

The Partnership recorded total trading results including interest
income totaling $2,574,902 and expenses totaling $1,429,537,
resulting in net income of $1,145,365 for the year ended December
31, 2006.  The Partnership?s net asset value per Unit increased
from $1,672.98 at December 31, 2005, to $1,755.97 at December 31,
2006. Total redemptions for the year were $4,465,260 and the
<page> Partnership?s ending capital was $19,512,789 at December
31, 2006, a decrease of $3,319,895 from ending capital at
December 31, 2005, of $22,832,684.

The most significant trading gains of approximately 9.6% were
experienced within the metals markets from long futures
positions in copper, aluminum, zinc, and nickel futures as
prices strengthened amid weak supplies, forecasts for continued
buying in China, and acceleration in demand from Japan, Europe,
and the U.S.  Elsewhere in the metals markets, long positions in
gold and silver futures resulted in gains as prices trended
higher on persistent demand from foreign central banks and
continued geopolitical concern.  Additional gains of
approximately 2.5% were recorded in the global interest rate
sector, primarily during March and April, from short positions
in European and U.S. fixed-income futures.  Rising equity prices
and strong economic growth out of the Euro-Zone pressured
European fixed-income futures prices lower, while U.S. fixed-
income futures prices declined following the release of
consistently strong economic data and investor sentiment that
the U.S. Federal Reserve would continue to increase interest
rates to combat inflation. Additional gains in the global
interest rate sector were recorded during August from long
positions in long-term Japanese and U.S. fixed-income futures as
prices increased on higher demand amid concerns of a slowing
global economy and news that Iran would continue its nuclear
<page> research program. Japanese fixed-income futures prices
also increased after lower-than-expected inflation data dampened
expectations for an interest rate hike by the Bank of Japan in
the near future, while U.S. interest rate futures prices were
supported higher by government reports showing soft inflation
data.  A portion of the Partnership?s gains for the year was
offset by losses of approximately 3.5% incurred in the energy
markets primarily during February from long positions in crude
oil futures as prices declined after an announcement by Chinese
government authorities that China would place an emphasis on
prospecting alternative energy sources in the future, reports of
larger-than-expected supplies from the International Energy
Agency, and mild weather in the U.S. Northeast.  Additional
losses were incurred in the energy markets during May from long
futures positions in crude oil and its related products as
prices fell on renewed optimism that the standoff between Iran
and the West could be resolved diplomatically.  In June, short
futures positions in crude oil and its related products incurred
further losses as prices reversed higher amid reports from the
U.S. Department of Energy showing lower-than-expected levels of
domestic gasoline inventories and fears of supply disruptions in
the Gulf of Mexico.  Additional losses of approximately 2.0%
were experienced within the currency sector from long U.S.
dollar positions versus the Australian dollar and Japanese yen
as the U.S. dollar?s value reversed lower during January on
expectations that the U.S. Federal Reserve?s interest rate
<page> tightening campaign would come to an end.  Also
pressuring the value of the U.S. dollar lower was speculation
that several major central banks would diversify some of their
assets away from the U.S. dollar.   Further losses in the
currency sector were experienced during February from short U.S.
dollar positions relative to the Australian dollar and Japanese
yen as the value of the U.S. dollar reversed higher after
declining U.S. unemployment and increased wage inflation data
led investors to predict that U.S. interest rates would continue
to increase.  The value of the Australian dollar also moved
lower in the wake of a temporary decline in gold prices.  During
June, long positions in the Japanese yen versus the U.S. dollar
recorded further losses as the U.S. dollar reversed higher
against most of its rivals amid diplomatic developments between
the U.S. and Iran regarding Iran?s nuclear research program, as
well as the news of the confirmed death of insurgent leader Abu
Musab al-Zarqawi in Iraq.  Furthermore, the value of the U.S.
dollar continued to move higher in the days leading up to the
U.S. Federal Reserve?s 17th consecutive interest rate hike.
Meanwhile, the value of the Japanese yen declined during the
first half of June relative to the U.S. dollar after comments
from Bank of Japan Governor Toshihiko Fukui implied that the
Bank of Japan would not raise interest rates in the near term,
thus continuing Japan?s ?zero-interest-rate policy?. Losses were
also experienced during July and May from short positions in the
British pound versus the euro and U.S. dollar as the British
<page> pound strengthened on solid housing and consumer-price
data out of the United Kingdom. During July and September,
losses were recorded from long and short positions in the U.S.
dollar against the Australian dollar, Swiss franc, and euro as
the value of the U.S. dollar moved in a trendless pattern amid
uncertainty regarding the future of the U.S. Federal Reserve?s
interest rate policy.  Finally in December, losses were recorded
from long positions in the Japanese yen, Swiss franc, and euro
versus the U.S. dollar as the value of the U.S. dollar
strengthened against these currencies after a government report
showed a drop in U.S. workers filing first-time jobless claims.
Additionally, the value of the Japanese yen weakened against the
U.S. dollar after news reports indicated that the Bank of Japan
would not increase interest rates, and news that real Gross
Domestic Product in Japan was weaker-than-expected.  Within the
global stock index sector, losses of approximately 1.1% were
recorded from long positions in U.S., European, and Hong Kong
stock index futures as prices declined during May due to
inflation concerns and uncertainty regarding global interest
rate policy.  Further losses in the global stock index sector
were incurred during June from short positions in U.S. and Hong
Kong stock index futures as prices reversed higher on hopes of a
pause in the U.S. interest rate tightening campaign.  Smaller
losses of approximately 0.9% were incurred in the agricultural
complex during May from short positions in corn futures as
prices rose on news of strong demand and bullish export data.
<page> Additional losses were incurred from short positions in
corn as prices continued to increase during July and August on
reports of low inventories and as demand remained high amid an
increase in ethanol production. Elsewhere in the agricultural
complex, losses were recorded, primarily during February, from
long positions in coffee futures as prices declined on news of
crop growth and higher harvest rates from Brazil. In addition,
losses were recorded in August from short positions in coffee
futures as prices increased on concerns of tight supplies amid
speculation of lower production and increased demand.
Meanwhile, losses were experienced from both long and short
positions in cocoa futures as prices moved without consistent
direction throughout a majority of the year amid conflicting
news regarding supply and demand.

The Partnership recorded total trading results including interest
income totaling $(5,308,129) and expenses totaling $2,350,542,
resulting in a net loss of $7,658,671 for the year ended December
31, 2005.  The Partnership?s net asset value per Unit decreased
from $2,142.78 at December 31, 2004, to $1,672.98 at December 31,
2005.  Total redemptions for the year were $5,476,623 and the
Partnership?s ending capital was $22,832,684 at December 31, 2005,
a decrease of $13,135,294 from ending capital at December 31,
2004, of $35,967,978.

<page> The most significant trading losses of approximately
19.8% were recorded in the currency markets from positions in
the euro relative to the British pound and the U.S. dollar.
During January, long positions in the euro versus the British
pound and the U.S. dollar incurred losses as the value of the
euro reversed sharply lower in what many analysts described as a
?corrective? move after its strong upward trend during the
fourth quarter of 2004.  This decline in the value of the euro
was attributed to weak economic data out of the European Union
and a rebound in the value of its main rival, the U.S. dollar.
Additional losses were recorded during February and March from
both long and short positions in the euro against these
currencies as the value of the euro moved without consistent
direction amid conflicting economic data out of Germany.
Elsewhere in the currency markets, losses resulted from
positions in the Singapore dollar, Swedish krona, South African
rand, and Swiss franc relative to the U.S dollar, primarily
during February and March, as the value of the U.S. dollar moved
in a trendless range amid speculation that China would re-value
its currency, negative comments by U.S. Federal Reserve Chairman
Alan Greenspan about the considerable U.S. Current-Account
deficit, and the U.S. Federal Reserve's announcement of a
quarter-point increase in the federal funds rate.  During
August, further losses were incurred from long U.S. dollar
positions against the euro, Swedish krona, and Swiss franc as
the value of the U.S. dollar declined amid higher crude oil
<page> prices, lower durable goods orders data, the U.S. trade
imbalance, and economic warnings from U.S. Federal Reserve
Chairman Alan Greenspan.  Smaller losses in August were
experienced from long positions in the euro versus the British
pound cross-rate.  Finally, during September, losses were
incurred from short U.S. dollar positions against the euro,
Swiss franc, and Swedish krona as the value of the U.S. dollar
increased on expectations that the U.S. Federal Reserve would
most likely continue to raise interest rates.  Additional losses
of approximately 5.8% were recorded in the global interest rate
futures markets during March from short European interest rate
futures positions as prices reversed higher amid strength in the
euro towards the beginning of the month.  Prices were also
pushed higher on expectations that Europe would continue to
maintain a low interest rate environment, as well as economic
concerns stemming from surging energy prices.  Further losses
were experienced during February from long positions in long-
term U.S. interest rate futures as prices declined in response
to strong global economic data and congressional testimony by
U.S. Federal Reserve Chairman Alan Greenspan, which supported
Wall Street expectations for additional interest rate hikes.
During the third quarter, losses were recorded from both long
and short positions in U.S., Australian, and European fixed-
income futures as prices moved without consistent direction amid
conflicting economic data, uncertainty regarding the future
interest rate policy of the U.S. and the European Union, and
<page> volatility in energy prices.  Within the agricultural
complex, losses of approximately 2.7% were recorded from both
long and short positions in corn futures during March, April,
May, June, and December as prices moved without consistent
direction throughout most of the year due to conflicting news
regarding supply and demand and weather related factors in the
U.S. growing regions. Elsewhere in the agricultural markets,
losses were experienced from short positions in cotton futures
during January as prices moved higher early in the month due to
speculative buying and news of a decrease in supply.  Further
losses were incurred from long positions in cotton futures
during May as prices declined on news of weak demand in China.
Smaller losses were experienced during February, March, and
September from positions in cocoa futures.  A portion of the
Partnership?s overall losses for the year was offset by gains of
approximately 3.3% in the global stock index futures markets
during May, June, July, September, and November from long
positions in European equity index futures as prices moved
higher on strength in the technology sector, strong corporate
earnings, and weakness in the euro.  Elsewhere gains were
recorded during the fourth quarter from long positions in
Japanese stock index futures as prices moved higher on a
reduction in energy prices and general investor optimism about
the future of the Japanese economy.  Additional gains of
approximately 2.1% were experienced in the energy markets during
August from long futures positions in natural gas as prices
<page> climbed higher after Hurricane Katrina struck the U.S.
Gulf Coast.  Additional gains were experienced during September
from long positions in natural gas as prices continued to
strengthen in response to concern for the long-term effects on
supplies in the Gulf of Mexico after Hurricane Katrina.  Also
pushing prices higher was anticipation of strong demand in the
coming winter months and fears for the approach of Hurricane
Rita and the additional damage it could have caused to output in
the Gulf of Mexico.  Within the metals markets, gains of
approximately 1.0% were recorded during February, March, May,
October, November, and December from long positions in copper,
nickel, aluminum, and zinc futures as prices strengthened amid
persistent demand from China.

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
<page> 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 and forward
contracts, and forward contracts on physical commodities and other
commodity interests, including, but not limited to, foreign
currencies, financial instruments, metals, energy, and
agricultural products. In entering into these contracts, the
Partnership is subject to the market risk that such contracts may
be significantly influenced by market conditions, such as interest
rate volatility, resulting in such contracts? being less valuable.
If the markets should move against all of the positions held by
the Partnership at the same time, and the Trading Advisor was
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 Advisor's internal controls, the
Trading Advisor must comply with the Partnership?s trading
policies that include standards for liquidity and leverage that
must be maintained.  The Trading Advisor and Demeter monitor the
Partnership's trading activities to ensure compliance with the
trading policies and Demeter can require the Trading Advisor to
<page> modify positions of the Partnership if Demeter believes
they violate the Partnership's trading policies.

Credit Risk.
In addition to market risk, in entering into futures, forward, and
options contracts, there is a credit risk to the Partnership that
the counterparty on a contract will not be able to meet its
obligations to the Partnership.  The ultimate counterparty or
guarantor of the Partnership for futures, forward, and options
contracts traded in the United States and most foreign exchanges
on which the Partnership trades is the clearinghouse associated
with such exchange.  In general, a clearinghouse is backed by the
membership of the exchange and will act in the event of non-
performance by one of its members or one of its member?s
customers, which should significantly reduce this credit risk.
There is no assurance that a clearinghouse, exchange, or other
exchange member will meet its obligations to the Partnership, and
Demeter and the commodity brokers will not indemnify the
Partnership against a default by such parties. Further, the law 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.

<page> 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.

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 and options on forward contract
trading, the Partnership trades with only those counterparties
<page> 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 foreign currency forward
contracts and MSCG as the sole counterparty on all trading of
options on foreign currency 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.

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
<page> 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.

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 on such contracts 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
<page> 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 and forward currency options contracts are
settled upon termination of the contract.  However, the
Partnership is required to meet margin requirements equal to the
net unrealized loss on open forward currency contracts in the
Partnership accounts with the counterparty, which is accomplished
by daily maintenance of the cash balance in a custody account held
at 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
<page> 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 Partnership?s
market risk is limited by the uncertainty of its speculative
trading.  The Partnership?s speculative trading and use of
leverage may cause future losses and volatility (i.e., ?risk of
ruin?) that far exceed the Partnership?s experiences to date under
the ?Partnership?s Value at Risk in Different Market Sectors?
section and significantly exceed the Value at Risk (?VaR?) tables
disclosed.

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

Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partner-
ship?s market risk exposures contain ?forward-looking statements?
within the meaning of the safe harbor from civil liability
provided for such statements by the Private Securities Litigation
Reform Act of 1995 (set forth in Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
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.
<page>
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 Advisor is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
value of a trading portfolio.  The VaR model takes into account
linear exposures to risks including equity and commodity prices,
interest rates, foreign exchange rates, and correlation among
these variables. The hypothetical changes in portfolio value are
based on daily percentage changes observed in key market indices
or other market factors (?market risk factors?) to which the
portfolio is sensitive.  The one-day 99% confidence level of the
Partnership?s VaR corresponds to the negative change in portfolio
value that, based on observed market risk factors, would have been
exceeded once in 100 trading days, or one day in 100.  VaR
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
<page> ?simulated profit and loss? outcomes.  The VaR is the
appropriate percentile of this distribution.  For example, the 99%
one-day VaR would represent the 10th worst outcome from Demeter?s
simulated profit and loss series.

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

VaR models, including the Partnership?s, are continually evolving
as trading portfolios become more diverse and modeling techniques
and systems capabilities improve.  Please note that the VaR model
is used to numerically quantify market risk for historic reporting
purposes only and is not utilized by either Demeter or the Trading
Advisor 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-
<page> ization was approximately $14 million and $20 million,
respectively.

Primary Market         December 31, 2007   	 December 31, 2006
Risk Category            Value at Risk      	   Value at Risk

Currency         		   (1.70)%            	 (0.90)%

Interest Rate			   (1.17)		           (0.54)

Equity				   (0.27)	             	 (0.65)

Commodity                   (0.76)	             	 (0.44)

Aggregate Value at Risk     (2.61)%            	 (1.19)%



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 on such contracts, the composi-
tion 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,
<page> as a percentage of total Net Assets for the four quarter-
end reporting periods from January 1, 2007, through December 31,
2007.

Primary Market Risk Category      High        Low      Average
Currency                     	   (1.70)%	(0.77)%	 (1.15)%
Interest Rate 				   (1.17)		(0.65)	 (0.97)
Equity					   (0.62)		(0.09)	 (0.35)
Commodity 				   (0.78)		(0.37)	 (0.63)
Aggregate Value at Risk  	   (2.61)%	(1.37)%	 (1.75)%





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;


<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.
<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 94% 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 -
<page> constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act.  The Partnership?s primary market risk
exposures, as well as the strategies used and to be used by
Demeter and the Trading Advisor 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 expro-
priations, 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 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, primarily
<page> 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 large number of currencies, including cross-rates - i.e.,
positions between two currencies other than the U.S. dollar.  At
December 31, 2007, the Partnership?s major exposures were to the
euro, Japanese yen, and British pound currency crosses, as well as
to outright U.S. dollar positions.  Outright positions consist of
the U.S. dollar vs. other currencies.  These other currencies
include major and minor currencies.  Demeter does not anticipate
that the risk associated with the Partnership?s currency trades
will change significantly in the future.

Interest Rate.  The third largest market exposure of the
Partnership at December 31, 2007, was to the global interest rate
sector.  This exposure was primarily spread across European, U.S.,
Japanese, Canadian, 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 primary 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.
<page> However, the Partnership also takes futures positions in
the government debt of smaller countries ? e.g., Australia.
Demeter anticipates that the G-7 countries? interest rates will
remain the primary interest rate exposure 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) and S&P 500 (U.S.) stock
indices.  The Partnership is exposed to the risk of adverse price
trends or static markets in the Japanese and U.S. 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.
		Metals.	 The second 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 copper and zinc, and precious
metals, such as gold.  Economic forces, supply and demand
<page> inequalities, geopolitical factors, and market
expectations influence price movements in these markets.  The
Trading Advisor utilizes the trading system(s) to take
positions when market opportunities develop, and Demeter
anticipates that the Trading Advisor 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
soybean oil, cocoa, and corn markets.  Supply and demand
inequalities, severe weather disruptions, and market
expectations affect price movements in these markets.

		Energy.  At December 31, 2007, the Partnership had market
exposure to the energy sector.  The Partnership?s primary
energy exposure was to futures contracts in natural gas.
Natural gas has exhibited volatility in price resulting from
weather patterns and supply and demand factors and will
likely continue in this choppy pattern.

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 euros,
Japanese yen, British pounds, Australian dollars, Canadian
<page> dollars, Swiss francs, Mexican pesos, and Turkish
lira.  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 Advisor, 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 market sectors and trading approaches, and by
monitoring the performance of the Trading Advisor daily. In
addition, the Trading Advisor establishes diversification
guidelines, often set in terms of the maximum margin to be
committed to positions in any one market sector or market-
sensitive instrument.

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

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

Summary of Quarterly Results (Unaudited)


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

2007
March 31        $  (286,223)       $  (632,041)       $ (57.50)
June 30           2,349,902          1,734,234          165.27
September 30     (2,376,826)        (2,723,921)        (268.70)
December 31        (669,998)          (878,283)         (91.84)

Total           $  (983,145)      $ (2,500,011)       $(252.77)


2006
March 31        $ 1,233,356        $   790,038        $  60.23
June 30             818,817            408,277           23.85
September 30        (52,704)          (411,173)         (32.47)
December 31         575,433            358,223           31.38

Total           $ 2,574,902       $  1,145,365        $  82.99



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

None.

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.


<page>
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;


*	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
<page> 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.
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
<page> 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.

Item 9B.  OTHER INFORMATION
None.























<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
has held various positions in Corporate Accounting and the
<page> 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.

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
<page> 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 Executive Director, Retail
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
<page> 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
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
<page> 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 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,
<page> 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
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.

<page> 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.

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
<page> 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
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 120.167 Units of general partnership interest,
representing a 1.32 percent interest in the Partnership.

<page>
(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.
(Morgan Stanley DW, through March 31, 2007) received commodity
brokerage commissions (paid and accrued by the Partnership) of
$933,392 for the year ended December 31, 2007.

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?s assessment on the effectiveness of the
internal control over financial reporting, and in connection with
statutory and regulatory filings were approximately $35,795 for
<page> the year ended December 31, 2007, and $36,184 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.

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.



<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.

<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.



<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 DIVERSIFIED FUTURES 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	Amended and Restated Limited Partnership Agreement of
the Partnership, dated as of May 14, 1990, is
incorporated by reference to Exhibit A of the
Partnership?s Prospectus dated June 30, 1992, filed with
the Securities and Exchange Commission pursuant to Rule
424(b)(3) under the Securities Act of 1933 on July 14,
1992.

3.02	Amendment No. 1 to the Limited Partnership Agreement of
the Partnership, dated as of May 14, 1990, is
incorporated by reference to Exhibit 3.02 of the
Partnership?s Quarterly Report on Form 10-Q (File No. 0-
19116) filed with the Securities and Exchange Commission
on August 14, 2002.

3.03	Certificate of Limited Partnership, dated May 14, 1990,
is incorporated by reference to Exhibit 3.03 of the
Partnership?s Form 10-K (File No. 0-19116) for fiscal
year ended December 31, 2006, filed with the Securities
and Exchange Commission on March 23, 2007.

3.03(a)	Certificate of Amendment to the Certificate of Limited
Partnership, dated July 20, 2006 (changing its name from
Dean Witter Diversified Futures Fund III L.P.), is
incorporated by reference to Exhibit 3.03 of the
Partnership?s Form 8-K (File No. 0-19116) filed with the
Securities and Exchange Commission on July 26, 2006.

10.01	Management Agreement among the Partnership, Demeter
Management Corporation, and Hyman Beck & Company, Inc.
dated as of November 1, 2006, is incorporated by
reference to Exhibit 10.01 of the Partnership's Form 8-K
(File No. 0-19116) filed with the Securities and Exchange
Commission on October 13, 2006.

10.02	Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW Inc., dated as of May
19, 2000, is incorporated by reference to Exhibit 10.01
of the Partnership?s Form 8-K (File No. 0-19116) filed
with the Securities and Exchange Commission on November
13, 2001.






E-1
<page>
10.03	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. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.

10.04	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. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.

10.05	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-
19116) filed with the Securities and Exchange Commission on
November 13, 2001.

10.06	Securities Account Control Agreement among 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. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.

10.07	Foreign Exchange and Options Master Agreement between
Morgan Stanley Capital Group Inc. and the Partnership,
dated October 17, 2006, is incorporated by reference to
Exhibit 10.07 of the Partnership?s Form 8-K (File No. 0-
19116) filed with the Securities and Exchange Commission on
May 11, 2007.

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.

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.

E-2
<page>
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>

                                                                    Diversified
                                                                        Futures
                                                                       Fund III
         December 31, 2007
         Annual Report


    [LOGO]

Morgan Stanley

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

HISTORICAL FUND PERFORMANCE

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

<TABLE>
<CAPTION>


                               1990   1991 1992 1993 1994 1995  1996  1997 1998  1999  2000 2001 2002  2003  2004   2005  2006
FUND                            %      %    %    %    %    %     %     %    %     %     %    %    %     %     %      %     %
-------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>  <C>  <C>  <C>  <C>   <C>   <C>  <C>  <C>    <C>  <C>  <C>  <C>    <C>   <C>    <C>
Diversified Futures Fund III  (1.7)   27.1 15.8 7.6  5.9  (4.0) (4.7) 12.3 5.4  (10.6) 22.0 1.1  28.6 (11.5) (4.3) (21.9) 5.0
                             (2 mos.)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                    INCEPTION-  COMPOUND
                                     TO-DATE   ANNUALIZED
                              2007    RETURN     RETURN
FUND                           %        %          %
---------------------------------------------------------
<S>                          <C>    <C>        <C>
Diversified Futures Fund III (14.4)    50.3       2.4

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

<PAGE>

DEMETER MANAGEMENT CORPORATION

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

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.
ANNUAL REPORT
2007

Dear Limited Partner:

 This marks the eighteenth annual report for the Morgan Stanley Diversified
Futures Fund III L.P. (the "Fund"). The Fund began the year at a Net Asset
Value per Unit of $1,755.97 and returned -14.4% to $1,503.20 on December 31,
2007. Since its inception in November 1990, the Fund has returned 50.3% (a
compound annualized return of 2.4%).

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

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

 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 Diversified Futures Fund III 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>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.


                             [CHART]

                        Year ended December 31, 2007
                        ----------------------------
Currencies                          -5.12%
Interest Rates                      -4.05%
Stock Indices                       -3.55%
Energies                            -0.19%
Metals                              -0.73%
Agriculturals                       -2.12%

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

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  The most significant trading losses were incurred within the currency sector
   from short positions in the Japanese yen versus the euro, Australian dollar,
   British pound, and Canadian dollar as the value of the Japanese yen
   corrected higher against these currencies during February, March, July, and
   August when traders reduced "carry-trade" positions after the sell-off in
   the global equity markets led investors to trim "riskier" assets funded by
   loans in Japan. Furthermore, losses were recorded during November from short
   positions in the Japanese yen versus the British pound and euro as the value
   of the Japanese yen reversed higher against these currencies following news
   that the Japanese economy had expanded more than economists had forecast
   during the third quarter. Finally, smaller losses were incurred from long
   positions in the Swedish krona and Norwegian krone versus the U.S. dollar,
   primarily during August and December, as the value of the U.S. dollar
   increased relative to these currencies after continued volatility in the
   global equity markets and widening credit losses tied to U.S. sub-prime
   loans resulted in substantially stronger demand for U.S. dollar-denominated
   government bonds.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.


FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
..  Within the global interest rate sector, losses were experienced primarily
   during February, July, and August from short positions in European and U.S.
   fixed-income futures as prices reversed sharply higher in a worldwide
   "flight-to-quality" after the significant decline in the global equity
   markets resulted in substantially higher demand for the "safe haven" of
   government bonds. During September, October, and December, additional losses
   were recorded from both long and short positions in European interest rate
   futures as prices moved without consistent direction amid uncertainty
   regarding the future of the global economy.

..  Within the global stock index sector, losses were incurred primarily during
   February and March, from long positions in European, U.S., and Japanese
   equity index futures as prices reversed lower after former U.S. Federal
   Reserve Chairman Alan Greenspan indicated that the U.S. economy could be
   headed for a recession. In addition, prices moved lower after worries 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. Additional losses were incurred during July, August,
   November, and December, from long positions in European, U.S., and Japanese
   equity index futures as prices decreased on persistent concerns that a
   collapsing U.S. sub-prime mortgage market and declining U.S. real estate
   prices might pull the global economy into a recession.

..  Within the agricultural markets, losses were experienced primarily during
   January, February, August, and October from long futures positions in coffee
   as prices declined amid technically based selling and rising supplies in
   Vietnam and Brazil, two of the world's largest producers. Elsewhere in the
   agricultural complex, short positions in cotton futures resulted in losses,
   primarily during September and December, as prices moved higher due to news
   that excessive rain might delay crop production in parts of India.

..  Additional losses were recorded within the metals sector, primarily during
   March and April, from short positions in copper futures as prices increased
   amid stronger-than-expected Chinese industrial data and speculation that
   global demand for base metals might rise. Further losses were recorded
   during May, June, July, and November, from both long and short futures
   positions in aluminum as prices moved without consistent direction due to
   conflicting data regarding supply and demand.

..  Smaller losses were incurred within the energy markets, primarily during
   March, April, and May, from long positions in natural gas futures as prices
   decreased amid speculation that mild weather in the U.S. might slow demand.
   Finally, newly established short futures positions in natural gas
   experienced losses during October and December as prices reversed higher
   amid a decline in U.S. inventories.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

  Demeter Management Corporation ("Demeter"), the general partner of Morgan
Stanley Diversified Futures Fund III L.P. (the "Partnership"), 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;

..  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.

<PAGE>

  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. Based on our assessment and those criteria, Management believes that
the Partnership maintained effective internal control over financial reporting
as of December 31, 2007.

  Deloitte & Touche LLP, the Partnership's independent registered public
accounting firm, has issued an audit 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" 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 DIVERSIFIED FUTURES FUND III L.P.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Limited Partners and the General Partner:

  We have audited the internal control over financial reporting of Morgan
Stanley Diversified Futures Fund III L.P. (the "Partnership") 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 Partnership's 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 Partnership's 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 the maintenance of records that, in reasonable detail,

<PAGE>

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 Partnership 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 Partnership 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 DIVERSIFIED FUTURES FUND III L.P.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Limited Partners and the General Partner:

  We have audited the accompanying statements of financial condition of Morgan
Stanley Diversified Futures Fund III L.P. (the "Partnership"), 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 Partnership's 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 Diversified Futures Fund III
L.P. at December 31, 2007 and 2006, and the results of its operations, changes
in partners' capital, and its 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.

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

<PAGE>

  We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Partnership's 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 Partnership's internal
control over financial reporting.

/s/ Deloitte & Touche LLP

New York, New York
March 20, 2008


<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                     ---------------------
                                                        2007          2006
                                                     ----------    ----------
                                                         $             $
      <S>                                            <C>           <C>
                        ASSETS
      Trading Equity:
        Unrestricted cash                            12,738,549    18,700,362
        Restricted cash                               1,206,610       987,186
                                                     ----------    ----------
          Total Cash                                 13,945,159    19,687,548
                                                     ----------    ----------
        Net unrealized gain on open contracts
         (MS&Co.)                                       115,371        61,824
        Net unrealized gain on open contracts
         (MSIP)                                           3,696        48,152
                                                     ----------    ----------
          Total net unrealized gain on open
           contracts                                    119,067       109,976
        Options purchased (proceeds paid
         $912,005 and $0, respectively)                 712,956            --
                                                     ----------    ----------
          Total Trading Equity                       14,777,182    19,797,524
      Interest receivable (MS&Co.)                       29,371        66,524
                                                     ----------    ----------
          Total Assets                               14,806,553    19,864,048
                                                     ==========    ==========

               LIABILITIES AND PARTNERS'
                        CAPITAL

      LIABILITIES
      Options written (premiums received
       $892,922 and $0, respectively)                   712,956        --
      Redemptions payable                               257,379       200,481
      Administrative expenses payable                    86,719        88,668
      Accrued management fees                            17,469        24,889
      Accrued incentive fee                              --            37,221
                                                     ----------    ----------
          Total Liabilities                           1,074,523       351,259
                                                     ----------    ----------

      PARTNERS' CAPITAL
      Limited Partners (9,015.012 and
       10,992.085 Units, respectively)               13,551,395    19,301,779
      General Partner (120.167 Units)                   180,635       211,010
                                                     ----------    ----------
          Total Partners' Capital                    13,732,030    19,512,789
                                                     ----------    ----------
          Total Liabilities and Partners' Capital    14,806,553    19,864,048
                                                     ==========    ==========

      NET ASSET VALUE PER UNIT                         1,503.20      1,755.97
                                                     ==========    ==========
</TABLE>

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                          FOR THE YEARS ENDED DECEMBER 31,
                                         ----------------------------------
                                            2007          2006          2005
                                         ----------    ----------    ----------
                                              $             $             $
    <S>                                  <C>           <C>           <C>
    INVESTMENT INCOME
     Interest income (MS&Co.)               629,288       842,387       697,298
                                         ----------    ----------    ----------

    EXPENSES
     Brokerage commissions (MS&Co.)         933,392       833,925     1,334,953
     Management fees                        261,717       389,850       829,323
     Incentive fee                          190,517        37,802        --
     Administrative expenses                105,000       118,000       113,000
     Transaction fees and costs              26,240        49,960        73,266
                                         ----------    ----------    ----------
       Total Expenses                     1,516,866     1,429,537     2,350,542
                                         ----------    ----------    ----------

    NET INVESTMENT LOSS                    (887,578)     (587,150)   (1,653,244)
                                         ----------    ----------    ----------

    TRADING RESULTS
    Trading profit (loss):
     Realized                            (1,602,441)    3,789,214    (4,945,888)
     Net change in unrealized                (9,992)   (2,056,699)   (1,079,108)
                                         ----------    ----------    ----------
                                         (1,612,433)    1,732,515    (6,024,996)
     Proceeds from Litigation Settlement     --            --            19,569
                                         ----------    ----------    ----------
       Total Trading Results             (1,612,433)    1,732,515    (6,005,427)
                                         ----------    ----------    ----------

    NET INCOME (LOSS)                    (2,500,011)    1,145,365    (7,658,671)
                                         ==========    ==========    ==========

    NET INCOME (LOSS) ALLOCATION:
    Limited Partners                     (2,469,636)    1,130,059    (7,564,423)
    General Partner                         (30,375)       15,306       (94,248)

    NET INCOME (LOSS) PER UNIT:
    Limited Partners                        (252.77)        82.99       (469.80)
    General Partner                         (252.77)        82.99       (469.80)

                                            UNITS         UNITS         UNITS
                                         ----------    ----------    ----------
    WEIGHTED AVERAGE NUMBER
     OF UNITS OUTSTANDING                10,181.027    12,273.174    15,374.378
</TABLE>

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  16,785.655  35,521,922   446,056  35,967,978
        Net loss               --      (7,564,423)  (94,248) (7,658,671)
        Redemptions        (3,137.702) (5,372,695) (103,928) (5,476,623)
                           ----------  ----------  --------  ----------
        Partners' Capital,
        December 31, 2005  13,647.953  22,584,804   247,880  22,832,684
        Net income             --       1,130,059    15,306   1,145,365
        Redemptions        (2,535.701) (4,413,084)  (52,176) (4,465,260)
                           ----------  ----------  --------  ----------
        Partners' Capital,
        December 31, 2006  11,112.252  19,301,779   211,010  19,512,789
        Net loss               --      (2,469,636)  (30,375) (2,500,011)
        Redemptions        (1,977.073) (3,280,748)    --     (3,280,748)
                           ----------  ----------  --------  ----------
        Partners' Capital,
        December 31, 2007   9,135.179  13,551,395   180,635  13,732,030
                           ==========  ==========  ========  ==========
</TABLE>

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES 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)                 (2,500,011)  1,145,365     (7,658,671)
     Noncash item included in net
      income (loss):
       Net change in unrealized             9,992   2,056,699      1,079,108
     (Increase) decrease in
      operating assets:
       Restricted cash                   (219,424)    922,009      1,802,059
       Net option premiums                (19,083)     --             --
       Interest receivable (MS&Co.)        37,153      (4,043)       (10,557)
     Increase (decrease) in
      operating liabilities:
       Administrative expenses
        payable                            (1,949)    (12,312)        (5,770)
       Accrued management fees             (7,420)    (34,139)       (32,719)
       Accrued incentive fee              (37,221)     37,221         --
                                       ----------  ----------    -----------
     Net cash provided by (used for)
      operating activities             (2,737,963)  4,110,800     (4,826,550)
                                       ----------  ----------    -----------

     CASH FLOWS FROM
      FINANCING ACTIVITIES
     Cash paid for redemptions
      of Units                         (3,223,850) (4,775,371)    (5,280,770)
                                       ----------  ----------    -----------
     Net cash used for financing
      activities                       (3,223,850) (4,775,371)    (5,280,770)
                                       ----------  ----------    -----------

     Net decrease in unrestricted cash (5,961,813)   (664,571)   (10,107,320)

     Unrestricted cash at beginning
      of period                        18,700,362  19,364,933     29,472,253
                                       ----------  ----------    -----------

     Unrestricted cash at end of
      period                           12,738,549  18,700,362     19,364,933
                                       ==========  ==========    ===========
</TABLE>

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES 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 CONTRACTS:             GAIN/(LOSS)   OF NET ASSETS   GAIN/(LOSS)    OF NET ASSETS  GAIN/(LOSS)
------------------------------           --------------- ------------- ---------------- ------------- --------------
2007 PARTNERSHIP NET ASSET: $13,732,030         $              %              $               %             $
<S>                                      <C>             <C>           <C>              <C>           <C>
Commodity                                     (1,488)        (0.01)        166,480           1.21         164,992
Equity                                         --              --           43,628           0.32          43,628
Foreign currency                            (146,258)        (1.06)         51,836           0.38         (94,422)
Interest rate                                 (4,927)        (0.04)         23,387           0.17          18,460
                                            --------         -----         -------          -----        --------
 Grand Total:                               (152,673)        (1.11)        285,331           2.08         132,658
                                            ========         =====         =======          =====
 Unrealized Currency Loss                                                                                 (32,674)
                                                                                                         --------
 Total Net Unrealized Gain                                                                                 99,984
                                                                                                         ========

2006 PARTNERSHIP NET ASSET: $19,512,789
Commodity                                     51,227          0.26          57,507           0.30         108,734
Equity                                        93,775          0.48            --              --           93,775
Foreign currency                              32,161          0.16         (15,574)         (0.08)         16,587
Interest rate                               (164,756)        (0.84)         55,457           0.28        (109,299)
                                            --------         -----         -------          -----        --------
 Grand Total:                                 12,407          0.06          97,390           0.50         109,797
                                            ========         =====         =======          =====
 Unrealized Currency Gain                                                                                     179
                                                                                                         --------
 Total Net Unrealized Gain                                                                                109,976
                                                                                                         ========
</TABLE>

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION.  Morgan Stanley Diversified Futures Fund III L.P. (the
"Partnership") is a limited partnership organized to engage primarily in the
speculative trading of futures contracts, options on futures and forward
contracts, and forward contracts on physical commodities and other commodity
interests, including, but not limited to, foreign currencies, financial
instruments, metals, energy, and agricultural products (collectively, "Futures
Interests").
  Effective July 20, 2006, Dean Witter Diversified Futures Fund III L.P. was
renamed to Morgan Stanley Diversified Futures Fund III L.P.

  The Partnership may buy or write put and call options through listed
exchanges and the over-the-counter market. The buyer has the right to purchase
(in the case of a call option) or sell (in the case of a put option) a
specified quantity of a specific Futures Interest or underlying asset at a
specified price prior to or on a specified expiration date. The writer of an
option is exposed to the risk of loss if the market price of the underlying
asset declines (in the case of a put option) or increases (in the case of a
call option). The writer of an option can never profit by more than the premium
paid by the buyer but can lose an unlimited amount.

  Premiums received/paid from writing/purchasing options are recorded as
liabilities/assets on the Statements of Financial Condition and are
subsequently adjusted to current values. The difference between the current
value of an option and the premium received/paid is treated as an unrealized
gain or loss.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


  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. acts as
the counterparty on all trading of foreign currency forward contracts. Morgan
Stanley Capital Group Inc. ("MSCG") acts as the counterparty on all trading of
options on foreign currency forward contracts. Demeter, MS&Co., MSIP, and MSCG
are wholly-owned subsidiaries of Morgan Stanley.

  Prior to September 15, 2006, the trading manager to the Partnership was VK
Capital Inc. ("VK Capital"). Demeter terminated the management agreement with
VK Capital as of September 15, 2006. Consequently, VK Capital ceased all
futures interest trading on behalf of the Partnership as of September 15, 2006,
and trading terminated within the Partnership as of such date. VK Capital was a
wholly-owned subsidiary of Morgan Stanley. It was dissolved as of October 19,
2007.

  On October 9, 2006, Demeter entered into a management agreement with Hyman
Beck & Company Inc. ("Hyman Beck") to serve as the sole trading advisor to the
Partnership effective November 1, 2006, and trade the Net Assets of the
Partnership pursuant to its Global Portfolio trading program.
  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 Partnership's 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 the
Partnership and income (losses) are shared by Demeter and the limited partners
based upon their proportional ownership interests.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

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 the
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 the period from September 15, 2006, to November 1, 2006, when Hyman
Beck commenced trading, Morgan Stanley DW paid the Partnership interest income
on 100% of its average Net Assets for the month at a rate equal to the average
yield on 13-week U.S. Treasury bills. Effective November 1, 2006, Morgan
Stanley DW resumed paying the Partnership interest income on 80% of its daily
Net Assets for the month at a rate equal to the average yield on 13-week U.S.
Treasury bills. For purposes of such interest payments, Net Assets do not
include monies owed to the Partnership on Futures Interests.

  The Partnership's functional currency is the U.S. dollar; however, the
Partnership 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.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


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.

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.

TRADING EQUITY.  The Partnership's asset "Trading Equity," reflected on the
Statements of Financial Condition, consists of (A) cash on deposit with MS&Co.
and MSIP 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.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


  The Partnership, in the normal course of business, enters into various
contracts with MS&Co. and MSIP acting as its commodity brokers. Pursuant to
brokerage agreements with MS&Co. and 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 Partnership's Statements of Financial Condition.

  The Partnership has offset the fair value amounts recognized for forward
contracts executed with the same counterparty as allowable under the terms of
its master netting agreement with MS&Co., as the counterparty on such
contracts. The Partnership has consistently applied its right to offset.

BROKERAGE COMMISSIONS AND RELATED TRANSACTION FEES AND COSTS.  The Partnership
accrues brokerage commissions and transaction fees and costs 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 are
capped at  13/20 of 1% per month (a maximum 7.8% annual rate) of the
Partnership's Net Assets as of the last day of each month. The Partnership did
not pay any brokerage commissions from September 16, 2006, through October 31,
2006, given the absence of futures interest trading during this period.

OPERATING EXPENSES.  The Partnership bears all operating expenses related to
its trading activities. Such fees are capped at a maximum of  3/5 of 1%
annually of the Partnership's average month-end Net Assets. These include
filing fees, clerical, administrative, auditing, accounting, mailing, printing,
and other incidental operating expenses as permitted by the Limited Partnership
Agreement. In addition, the Partnership incurs 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 five business
days advance notice by redemption form to Demeter.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


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
Partnership's 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 the Partnership's revenues
and expenses for income tax purposes.

DISSOLUTION OF THE PARTNERSHIP.  The Partnership will terminate on December 31,
2025, or at an earlier date if certain conditions set forth in the Limited
Partnership Agreement occur.

LITIGATION SETTLEMENT.  The Partnership received notification of a preliminary
entitlement to payment from the Sumitomo Copper Litigation Settlement
Administrator, and the Partnership received a settlement award payment in the
amount of $19,569 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 Partnership's 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. Certain prior year amounts relating to options were
reclassified on the Statements of Financial Condition to conform to 2007
presentation. Such reclassifications have no impact on the Partnership's
reported net income (loss).

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


--------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS
The Partnership pays brokerage commissions to MS&Co. (Morgan Stanley DW,
through March 31, 2007) as described in Note 1. The Partnership's cash is on
deposit with Morgan Stanley DW (through March 31, 2007), MS&Co., and MSIP 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. Management fees and incentive fees (if any) incurred by
the Partnership were paid to VK Capital through September 15, 2006.

--------------------------------------------------------------------------------
3. TRADING ADVISOR
Prior to September 15, 2006, VK Capital was the trading manager to the
Partnership. Effective October 9, 2006, Demeter, on behalf of the Partnership
and itself, entered into a Management Agreement with Hyman Beck to make all
trading decisions for the Partnership.
  Compensation by the Partnership to VK Capital (prior to September 15, 2006)
and to Hyman Beck (effective November 1, 2006) consists of a management fee and
an incentive fee as follows:

MANAGEMENT FEE.  Prior to February 1, 2006, the monthly management fee was paid
to VK Capital and accrued daily at a rate of  1/4 of 1% (a 3% annual rate) of
the Partnership's Adjusted Net Assets, as defined in the Limited Partnership
Agreement, as of the last day of each month.
  From February 1, 2006, through September 15, 2006, the monthly management fee
was reduced to  1/6 of 1% (a 2% annual rate) of the Partnership's Adjusted Net
Assets, as defined in the Limited Partnership Agreement, as of the last day of
each month.
  No management fee was paid from September 16, 2006, through October 31, 2006,
given the absence of futures interest trading during this period.
  Effective November 1, 2006, the Partnership pays to Hyman Beck a monthly
management fee equal to  1/8 of 1% per month (a 1.5% annual rate) of the
Partnership's Net Assets as of the opening of business on the first day of each
calendar month.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


INCENTIVE FEE.  Prior to February 1, 2006, the Partnership paid a quarterly
incentive fee to VK Capital equal to 15% of the trading profits earned by the
Partnership as of the end of each calendar quarter.
  From February 1, 2006, through September 15, 2006, the quarterly incentive
fee was increased to 20% of the trading profits earned by the Partnership as of
the end of each calendar quarter.
  No incentive fee was paid from September 16, 2006, through October 31, 2006,
given the absence of futures interest trading during this period.
  Effective November 1, 2006, the Partnership pays to Hyman Beck a quarterly
incentive fee equal to 20% of the trading profits earned by the Partnership as
of the end of each calendar quarter. The initial incentive fee period began
November 1, 2006, the date the Partnership began to receive trading advice from
Hyman Beck, and continued until the end of the calendar quarter, December 31,
2006. Each subsequent incentive fee period is calculated through the end of
each calendar quarter. The Partnership pays an incentive fee based upon the
performance of Hyman Beck beginning November 1, 2006, without regard to any
losses previously incurred by the prior trading advisor. Trading profits
represent the amount by which profits from futures, options on futures and
forwards, and forwards trading exceed losses after brokerage commissions,
management fees, transaction fees and costs, and administrative expenses are
deducted. Such incentive fee is accrued in each month in which trading profits
occur. In those months in which trading profits are negative, previous
accruals, if any, during the incentive period are reduced. In those instances
in which limited partners redeem Units, incentive fees (earned through the date
of such redemptions) are paid to Hyman Beck (VK Capital, prior to September 15,
2006) on those Units redeemed in the month of such redemptions.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


--------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
The Partnership trades 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 Partnership's contracts are accounted for on a trade-date basis and
marked to market on a daily basis. The 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 DIVERSIFIED FUTURES FUND III L.P.

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 were as follows:
<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  248,029    (148,045)  99,984 Sep. 2008 Aug. 2008
              2006   93,389      16,587  109,976 Sep. 2007 Mar. 2007
</TABLE>
  The Partnership has credit risk associated with counterparty nonperformance.
As of the date of the financial statements, the credit risk associated with the
instruments in which the Partnership trades is limited to the amounts reflected
in the Partnership's Statements of Financial Condition.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

  The Partnership also has credit risk because MS&Co. MSIP, and/or MSCG act as
the futures commission merchants or the counterparties, with respect to most of
the Partnership's 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
MSIP, each as a futures commission merchant for the 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-traded 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 $14,193,188 and $19,780,937 at
December 31, 2007 and 2006, respectively. With respect to the Partnership's
off-exchange-traded forward currency contracts and forward currency options
contracts, there are no daily settlements of variation in value, nor is there
any requirement that an amount equal to the net unrealized gains (losses) on
such contracts be segregated. However, the Partnership is required to meet
margin requirements equal to the net unrealized loss on open forward currency
contracts in the Partnership accounts with the counterparty, which is
accomplished by daily maintenance of the cash balance in a custody account held
at MS&Co. With respect to those off-exchange-traded forward currency contracts,
the Partnership is at risk to the ability of MS&Co., the sole counterparty on
all such contracts, to perform. With respect to those off-exchange-traded
forward currency options contracts, the Partnership is at risk to the ability
of MSCG, the sole counterparty on all such contracts, to perform. The
Partnership has a netting agreement with each counterparty. These agreements,
which seek to reduce both the Partnership's and the counterparties' exposure on
off-exchange-traded forward currency contracts, should materially decrease the
Partnership's credit risk in the event of MS&Co.'s or MSCG's bankruptcy or
insolvency.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS
(concluded)


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

<TABLE>
<CAPTION>
                                             2007       2006       2005
                                          ---------  ---------  ---------
      <S>                                 <C>        <C>        <C>
      PER UNIT OPERATING
       PERFORMANCE:
      NET ASSET VALUE, JANUARY 1:         $1,755.97  $1,672.98  $2,142.78
                                          ---------  ---------  ---------
      NET OPERATING RESULTS:
         Interest Income                      61.81      68.64      45.35
         Expenses                           (148.99)   (116.48)   (152.89)
         Realized Profit (Loss)/(1)/        (164.61)    298.41    (293.34)
         Unrealized Loss                      (0.98)   (167.58)    (70.19)
         Proceeds from Litigation
          Settlement                                        --       1.27
                                          ---------  ---------  ---------
         Net Income (Loss)                  (252.77)     82.99    (469.80)
                                          ---------  ---------  ---------
      NET ASSET VALUE,
       DECEMBER 31:                       $1,503.20  $1,755.97  $1,672.98
                                          =========  =========  =========
      FOR THE CALENDAR YEAR:
      RATIOS TO AVERAGE NET
       ASSETS:
         Net Investment Loss                 (5.2)%     (2.8)%     (6.1)%
         Expenses before Incentive Fees       7.8 %      6.5 %      8.7 %
         Expenses after Incentive Fees        8.9 %      6.7 %      8.7 %
         Net Income (Loss)                  (14.7)%      5.4 %    (28.5)%
      TOTAL RETURN BEFORE
       INCENTIVE FEES                       (13.3)%      5.1 %    (21.9)%
      TOTAL RETURN AFTER
       INCENTIVE FEES                       (14.4)%      5.0 %    (21.9)%

      INCEPTION-TO-DATE RETURN               50.3 %
      COMPOUND ANNUALIZED
       RETURN                                 2.4 %
</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>

                    Demeter Management Corporation
                    522 Fifth Avenue, 13th Floor
                    New York, NY 10036
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Morgan Stanley

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