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

	FORM 10-K

[X]	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the year ended December 31, 2006 or

[ ]	Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ________________to___________________

Commission File Number 0-23577

	MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

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

		DELAWARE		        				13-3461507
(State or other jurisdiction of			   	   (I.R.S. Employer
incorporation or organization)			 	  	  Identification No.)

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

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

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

									 Name of each exchange
    Title of each class  					  on which registered

		None								   None

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

	Units of Limited Partnership Interest

	(Title of Class)

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

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

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

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

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

Large accelerated filer___  Accelerated filer____  Non-accelerated filer __X__

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).  Yes       No  X

State the aggregate market value of the Units of Limited Partnership Interest
held by non-affiliates of the registrant.  The aggregate market value shall be
computed by reference to the price at which Units were sold as of the last
business day of the registrant?s most recently completed second fiscal quarter:
$35,243,842 at June 30, 2006.


	DOCUMENTS INCORPORATED BY REFERENCE
	(See Page 1)


	<page> <table> MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.
(formerly, Dean Witter Diversified Futures Fund Limited Partnership)
	INDEX TO ANNUAL REPORT ON FORM 10-K
	DECEMBER 31, 2006
<caption>
Page No.

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

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

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

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

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

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

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

Part II.

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

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

 	Item 7. 	Management's Discussion and Analysis of Financial
            Condition and Results of Operations. . . . . . . . . . 10-31

	Item	 7A. Quantitative and Qualitative Disclosures About
            Market Risk. . . . . . . . . . . . . . . . . . . . . . 31-44

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

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

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

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

Part III.

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

	Ite	m 11.	Executive Compensation . . . . . . . . . . . . . . . . . .56

	Item 12.	Security Ownership of Certain Beneficial Owners
            and Management and Related Security Holder Matters . . 56-57

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

	Item 14.	Principal Accountant Fees and Services. . . . . . . . .57-59
Part IV.
	Item 15.	Exhibits and Financial Statement Schedules . . . . . . 60-61

</table>


<page>




	DOCUMENTS INCORPORATED BY REFERENCE



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



         Documents Incorporated                 Part of Form 10-K


     Partnership?s Prospectus dated
     June 30, 1995                                      I

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

























<page> PART I
Item 1.  BUSINESS

(a) General Development of Business. Morgan Stanley Diversified
Futures Fund L.P. (formerly known as Dean Witter Diversified
Futures Fund Limited Partnership) (the ?Partnership?) is a
Delaware limited partnership organized in 1987 to engage primarily
in the speculative trading of futures and forward contracts, and
effective November 1, 2006, options on futures 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 April 14, 1988.

Effective July 20, 2006, Dean Witter Diversified Futures Fund
Limited Partnership was renamed to Morgan Stanley Diversified
Futures Fund L.P.

The Partnership?s general partner is Demeter Management
Corporation (?Demeter?).  The non-clearing commodity broker is
Morgan Stanley DW Inc. (?Morgan Stanley DW?).  The clearing
commodity brokers are Morgan Stanley & Co. Incorporated (?MS&Co.?)
and Morgan Stanley & Co. International Limited (?MSIL?).  MS&Co.
acts as the counterparty on all of the foreign currency forward
contracts.  In 2007, Morgan Stanley intends to merge Morgan
Stanley DW into MS&Co.  Upon completion of the merger, the
surviving entity, MS&Co., will be the Partnership?s principal U.S.
<page> commodity broker?dealer.  Prior to September 15, 2006, the
trading manager was VK Capital Inc. (?VK Capital?).  Demeter,
Morgan Stanley DW, MS&Co., MSIL, and VK Capital are wholly-owned
subsidiaries of Morgan Stanley.

Effective April 28, 2005, Morgan Stanley Futures & Currency
Management Inc. changed its name to VK Capital Inc.

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.

On October 9, 2006, Demeter entered into a management agreement
with Hyman Beck & Company Inc. (?Hyman Beck? or the ?Trading
Advisor?) to serve as the sole Trading Advisor to the Partnership
effective November 1, 2006, and trades the Net Assets of the
Partnership pursuant to its Global Portfolio trading program.

The Partnership began the year at a net asset value per unit of
limited partnership interest (?Unit(s)?) of $1,001.71 and returned
5.1% to $1,053.24 on December 31, 2006.  For a more detailed
description of the Partnership's business, see subparagraph (c).


<page>
(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.  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 its Trading Advisor.
For a detailed description of the different facets of the
Partnership?s business, see those portions of the Partnership?s
prospectus, dated June 30, 1995 (the ?Prospectus?), incorporated
by reference in this Form 10-K, set forth below:

	Facets of Business
     1. Summary                   	1. ?Summary of the Prospectus?
                              (Pages 2-10 of the
		Prospectus).

     2. Futures, Options, and     2. ?The Futures, Options and
        Forwards Markets              Forwards Markets? (Pages
                                      55-60 of the Prospectus).

     3.	Partnership's Trading    3. ?Trading Policies? (Pages
Arrangements and          	   52-53 of the Prospectus)
 Policies	                    ?The Trading Advisor? (Pages
        42-51 of the Prospectus).









      <page>
      4. Management of the 	   4. ?The Management Agree-
        Partnership				  ment? (Pages 54-55 of the
							  Prospectus).  ?The General
							  Partner? (Pages 37-39 of the
        Prospectus).  ?The Commodity
  							  Broker? (Pages 53-54 of the
        Prospectus) and ?The
        						  Limited Partnership
        Agreement? (Pages 61-65
        of the Prospectus).

    5. Taxation of the Partner-  5. ?Material Federal Income
       ship?s Limited Partners       Tax Considerations? and
                                    ?State and Local Income Tax
                                     Aspects? (Pages 69-77 of the
 	                                Prospectus).



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

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

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

The Partnership is in the business of speculative trading of
futures, forwards, and options.  For a detailed description of the
risks that may affect the business of the Partnership, see the
discussion of risk factors as set forth in Item 7 ?Management?s
<page> 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 Morgan Stanley DW. The Morgan
Stanley DW offices utilized by the Partnership are located at 330
Madison Avenue, 8th Floor, New York, NY 10017.

Item 3.  LEGAL PROCEEDINGS
None.

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








<page>
                               PART II
Item 5.  MARKET FOR REGISTRANT'S PARTNERSHIP UNITS AND RELATED
          SECURITY HOLDER MATTERS


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

(b) Holders.  The number of holders of Units at December 31, 2006,
was approximately 3,464.

(c) Distributions. No distributions have been made by the
Partnership since it commenced trading operations on April 14,
1988.  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,
                             2006         2005      _  2004  _       2003  _       2002

	                      <c>	<c>	<c>	<c>	<c>
Total Trading Results
including interest
income                    4,284,581		   (9,153,083)   1,458,255      251,818	     31,397,106


Net Income (Loss)         2,005,478		  (13,159,747) 	 (3,604,724)  (9,172,404)	    21,236,293


Net Income (Loss)
Per Unit (Limited
& General Partners)           51.53		 (283.85)	      (61.65)     (181.61)	        338.35


Total Assets  	           31,855,882     39,446,509   62,468,965    73,003,365	    91,900,314


Total Limited
Partners? Capital     	   30,865,627     38,064,633	  	60,558,644    70,988,827    88,266,372


Net Asset Value
Per Unit               	    1,053.24       1,001.71     1,285.56      1,347.21      1,528.82









</table>





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


Liquidity. The Partnership deposits its assets with Morgan
Stanley DW as non-clearing broker, and MS&Co. and MSIL as clearing
brokers in separate futures, forwards, and options trading
accounts established for 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
<page> daily limit for several consecutive days with little or no
trading.  These market conditions could prevent the Partnership
from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.

There is no limitation on daily price moves in trading forward
contracts on foreign currencies.  The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to
substantial losses.  Either of these market conditions could
result in restrictions on redemptions.  For the periods covered by
this report, illiquidity has not materially affected the
Partnership?s assets.

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

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

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

Results of Operations.
General.  The Partnership's results depend on the Trading 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, 2006, 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
<page> generally accepted in the United States of America, which
require the use of certain accounting policies that affect the
amounts reported in these Financial Statements, including the
following: The contracts the Partnership trades are accounted for
on a trade-date basis and marked to market on a daily basis. The
difference between their cost and market value is recorded on the
Statements of Operations as ?Net change in unrealized trading
profit (loss)? for open (unrealized) contracts, and recorded as
?Realized trading profit (loss)? when open positions are closed
out.  The sum of these amounts, along with the ?Proceeds from
Litigation Settlement?, constitutes the Partnership?s trading
results.  The market value of a futures contract is the settlement
price on the exchange on which that futures contract is traded on
a particular day.  The value of a foreign currency forward
contract is based on the spot rate as of the close of business.
Interest income, as well as management fees, incentive fees,
brokerage commissions, and transaction fees and costs of the
Partnership are recorded on an accrual basis.

Demeter believes that, based on the nature of the operations of
the Partnership, no assumptions relating to the application of
critical accounting policies other than those presently used could
reasonably affect reported amounts.

The Partnership recorded total trading results including interest
income totaling $4,284,581 and expenses totaling $2,279,103,
<page> resulting in net income of $2,005,478 for the year ended
December 31, 2006.  The Partnership?s net asset value per Unit
increased from $1,001.71 at December 31, 2005, to $1,053.24 at
December 31, 2006. Total redemptions for the year were $9,269,914
and the Partnership?s ending capital was $31,207,135 at December
31, 2006, a decrease of $7,264,436 from ending capital at
December 31, 2005, of $38,471,571.

The most significant trading gains of approximately 9.5% 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
<page> 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 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 3.4%
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
<page> 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 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
<page> 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 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 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 indicating
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 <page>
campaign.  Smaller losses of approximately 1.0% 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.  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 $(9,153,083) and expenses totaling $4,006,664,
resulting in a net loss of $13,159,747 for the year ended December
31, 2005.  The Partnership?s net asset value per Unit decreased
from $1,285.56 at December 31, 2004, to $1,001.71 at December 31,
2005.  Total redemptions for the year were $9,689,976 and the
Partnership?s ending capital was $38,471,571 at December 31, 2005,
<page> a decrease of $22,849,723 from ending capital at December
31, 2004, of $61,321,294.

The most significant trading losses of approximately 19.9% 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.
<page> dollar positions against the euro, Swedish krona, and Swiss
franc as the value of the U.S. dollar declined amid higher crude
oil 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,
<page> uncertainty regarding the future interest rate policy of
the U.S. and the European Union, and volatility in energy prices.
Within the agricultural complex, losses of approximately 2.8% 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 3.4% 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 2.2% were experienced
in the energy markets during August from long futures positions in
<page> natural gas as prices 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 1.1% 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.
The Partnership recorded total trading results including interest
income totaling $1,458,255 and expenses totaling $5,062,979,
resulting in a net loss of $3,604,724 for the year ended December
31, 2004.  The Partnership?s net asset value per Unit decreased
from $1,347.21 at December 31, 2003, to $1,285.56 at December 31,
2004. Total redemptions for the year were $6,862,033 and the
Partnership?s ending capital was $61,321,294 at December 31, 2004,
a decrease of $10,466,757 from ending capital at December 31,
2003, of $71,788,051.

The most significant trading losses of approximately 12.1% were
recorded in the currency markets from positions in the Japanese
yen versus the U.S. dollar.  These losses were experienced
<page> primarily during the first and second quarters from both
long and short positions in the yen relative to the U.S. dollar as
the value of the yen experienced significant short-term price
volatility.  Conflicting economic data regarding a Japanese
economic recovery, uncertainty regarding currency market
interventions by the Bank of Japan, geopolitical concerns stemming
from instability in Iraq, and uncertainty regarding the direction
of U.S. and Japanese interest rates contributed to the yen?s
trendless movements.  Losses were also recorded from positions in
the Singapore dollar against the U.S. dollar as the value of the
Singapore dollar experienced significant ?whipsawing? during the
first and second quarters in tandem with the value of the Japanese
yen.  The price volatility in the Japanese yen also resulted in
losses from cross-rate positions in the euro versus the Japanese
yen for the aforementioned reasons.  In the third quarter,
volatility in the euro was responsible for losses in euro/Japanese
yen cross-rate positions as the value of the euro moved in a
trendless pattern due to higher energy prices and uncertainty
about the direction of the European economy.  Finally, losses were
recorded from long positions in the British pound relative to the
euro, primarily during December, as the value of the pound
reversed lower following news that the Bank of England was
considering an interest rate cut and the release of weaker than
expected British economic data.  Additional losses of
approximately 2.9% were incurred in the metals markets, primarily
during April and December, from long futures positions in gold as
<pages> prices weakened due to strength in the U.S. dollar and
stronger than expected economic data.  Elsewhere in the metals
markets, losses were recorded primarily during July and September
from short positions in nickel futures as prices increased on
continued demand from China and reports of lower than expected
inventories. Smaller losses were incurred during December from
positions in nickel futures as prices moved without consistent
direction due to volatility in the currency markets and
conflicting news regarding supply and demand.  A portion of the
Partnership?s overall losses for the year was offset by gains of
approximately 5.6% in the global interest rate futures markets
from long positions in European interest rate futures during
February, March, August, and September as prices trended higher on
uncertainty in the global equity markets, disappointing economic
data, safe-haven buying amid major geopolitical concerns, and a
surge in oil prices.  Further gains from long positions in
European interest rates were recorded in the fourth quarter as
prices continued to trend higher for the aforementioned reasons,
in addition to the rise in the value of the euro.  Additional
gains of approximately 4.7% were recorded in the energy markets.
During much of the year long positions in crude oil and its
related products profited as prices trended higher due to
consistent news of tight supply, continuing geopolitical concerns
in the Middle East, concerns that top Russian oil producer, Yukos,
might break up or stop selling oil, major production disruptions
in the Gulf of Mexico, growing civil unrest in Nigeria, and the
<page> threat of a national strike in Norway. In December, smaller
gains resulted from newly established short positions in crude oil
as prices declined on news of a full recovery in production within
the Gulf of Mexico, increased output from OPEC, warmer weather in
the U.S., and reports of abundant supply.  Within the agricultural
sector, gains of approximately 2.1% were experienced during
January, March, and June from long positions in corn futures as
prices increased on news of strong demand from Asia.  Further
gains were experienced during July and August from short positions
in corn futures as prices weakened due to ideal weather conditions
in the growing regions of the U.S. Midwest, reports of increased
inventories, and weaker export demand.  Elsewhere in the
agricultural markets, gains were recorded from short positions in
cotton futures, primarily during March, April, June, and July, as
prices trended lower amid rising supplies and news of a consistent
decline in demand from China.  Smaller gains of approximately 1.6%
were recorded in the global stock index futures markets, primarily
during December, from long positions in Australian equity index
futures as prices moved higher on positive investor sentiment and
speculation that interest rates in that country would remain at
current levels throughout 2005.  Gains were also recorded during
December from long positions in Hang Seng stock index futures as
equity prices in Hong Kong moved higher due to strong earnings
from the technology sector and optimism that the Japanese economy
was finally in full recovery and may, thereby, boost the entire
Asian region.
<page>
For an analysis of unrealized gains and (losses) by contract type
and a further description of 2006 trading results, refer to the
Partnership?s Annual Report to Limited Partners for the year
ended December 31, 2006, which is incorporated by reference to
Exhibit 13.01 of this Form 10-K.

The Partnership?s gains and losses are allocated among its
partners for income tax purposes.

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

Market Risk.
The Partnership is a party to financial instruments with elements
of off-balance sheet market and credit risk.  The Partnership
trades futures contracts, options on futures contracts, and
forward contracts on 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,
<page> 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
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-
<page> 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.

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

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

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

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

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

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

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

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

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

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

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

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

The Partnership?s past performance is no guarantee of its future
results.  Any attempt to numerically quantify the 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
<page> Reform Act of 1995 (set forth in Section 27A of the
Securities  Act of 1933 and Section 21E of the Securities Exchange
Act of     1934).  All quantitative disclosures in this section
are deemed to be forward-looking statements for purposes of the
safe harbor, except for statements of historical fact.

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

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

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

VaR models, including the Partnership?s, are continually  evolving
as trading portfolios become more diverse and modeling techniques
and systems capabilities improve.  Please note that the VaR model
is used to numerically quantify market risk for historic reporting
purposes only and is not utilized by either Demeter or the Trading
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
<page> The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total Net Assets
by primary market risk category at December 31, 2006 and 2005. At
December 31, 2006 and 2005, the Partnership?s total capital-
ization was approximately $31 million and $38 million,
respectively.

Primary Market        December 31, 2006   December 31, 2005
Risk Category           Value at Risk       Value at Risk

Currency				   (0.90)%		  (0.52)%


Equity				   (0.65)	       	  (0.49)

Interest Rate			   (0.54)     		  (0.75)

Commodity                   (0.45)	    		  (1.17)

Aggregate Value at Risk     (1.20)%      	  (1.52)%

The VaR for a market category represents the one-day downside risk
for the aggregate exposures associated with this market category.
The Aggregate Value at Risk listed above represents the VaR of the
Partnership?s open positions across all the market categories, and
is less than the sum of the VaRs for all such market categories
due to the diversification benefit across asset classes.

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

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

Primary Market Risk Category        High       Low       Average
Currency						(0.90)%	   -		   (0.43)%
Equity						(1.12)	   -		   (0.44)
Interest Rate					(1.78)	   -		   (0.73)
Commodity						(0.72)	   -	  	   (0.42)
Aggregate Value at Risk		     (2.55)%	   -		   (1.14)%





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;
<page>
*	  changes in portfolio value caused by market movements may
  differ from those of the VaR model;
*	  VaR results reflect past market fluctuations applied to
  current trading positions while future risk depends on future
  positions;
*	  VaR using a one-day time horizon does not fully capture the
  market risk of positions that cannot be liquidated or hedged
  within one day; and
*	  the historical market risk factor data used for VaR
  estimation may provide only limited insight into losses that
  could be incurred under certain unusual market movements.

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

The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at December 31, 2005, and for the four quarter-end
reporting periods during calendar year 2006.  VaR is not
necessarily representative of the Partnership?s historic risk, nor
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
<page> that such losses will not occur more than once in 100
trading days.

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

The Partnership also maintains a substantial portion of its
available assets in cash at Morgan Stanley DW; as of December 31,
2006, such amount is equal to approximately 97% 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
<page> statements of historical fact and (B) the descriptions of
how the Partnership manages its primary market risk exposures -
constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. The Partnership?s primary market risk
exposures, as well as the strategies used and to be used by
Demeter and the Trading 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, 2006, by market sector.  It may be
anticipated, however, that these market exposures will vary
materially over time.

<page> Currency.  At December 31, 2006, the largest market
exposure of the Partnership was to the currency sector.  The
Partnership?s currency exposure is to exchange rate fluctuations,
primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs.
Interest rate changes, as well as political and general economic
conditions influence these fluctuations.  The Partnership trades a
large number of currencies, including cross-rates - i.e.,
positions between two currencies other than the U.S. dollar.  At
December 31, 2006, 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.

Equity.  The second largest market exposure of the Partnership at
December 31, 2006, was to the global stock index sector, primarily
to equity price risk in the G-7 countries.  The G-7 countries
consist of France, the U.S., Britain, Germany, Japan, Italy, and
Canada.  The stock index futures traded by the Partnership are by
law limited to futures on broadly?based indices.  At December 31,
2006, the Partnership?s primary exposures were to the NIKKEI 225
(Japan), CAC 40 (France), DAX (Germany), S&P 500 (U.S.), and FTSE
100 (Britain) stock indices.  The Partnership is exposed to the
<page> risk of adverse price trends or static markets in the
European, Asian, 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.

Interest Rate.  At December 31, 2006, the Partnership had market
exposure to the global interest rate sector.  Exposure was
primarily spread across European, U.S., Japanese, and Australian
interest rate sectors.  Interest rate movements directly affect
the price of the sovereign bond futures positions held by the
Partnership and indirectly affect the value of its stock index and
currency positions.  Interest rate movements in one country, as
well as relative interest rate movements between countries,
materially impact the Partnership?s profitability.  The
Partnership?s primary interest rate exposure is generally to
interest rate fluctuations in the U.S. and the other G-7
countries.  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 rate 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.

Commodity:
<page> Soft Commodities and Agriculturals.  The third largest
market exposure of the Partnership at December 31, 2006, was
to the markets that comprise these sectors.  Most of the
exposure was to the coffee, sugar, and cocoa markets.  Supply
and demand inequalities, severe weather disruptions, and
market expectations affect price movements in these markets.

Metals.	At December 31, 2006, the Partnership had market
exposure in the metals sector.  The Partnership's metals
exposure was to fluctuations in the price of base metals,
such as copper and precious metals, such as gold.  Economic
forces, supply and demand 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 Partnership will continue to do
so.

Energy.  At December 31, 2006, the Partnership?s third
largest market exposure was 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.


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

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

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.

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

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

Summary of Quarterly Results (Unaudited)


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

2006
March 31         $ 2,106,843      $  1,377,186          $ 37.38
June 30            1,307,821           644,527            12.27
September 30         (64,172)         (625,685)          (17.78)
December 31          934,089           609,450            19.66

Total            $ 4,284,581      $  2,005,478         $  51.53


2005
March 31         $(7,696,490)     $ (8,876,850)        $(187.59)
June 30             (387,174)       (1,458,663)          (30.53)
September 30        (874,074)       (1,801,442)          (40.86)
December 31         (195,345)       (1,022,792)          (24.87)

Total            $(9,153,083)     $(13,159,747)       $ (283.85)



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

	None.

<page>

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

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

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

Management of Demeter (?Management?) is responsible for
establishing and maintaining adequate internal control over
financial reporting.  The internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
<page> 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
<page> inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.

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

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

Item 9B.  OTHER INFORMATION
None.
<page>
PART III
Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Effective November 6, 2006, Mr. Kevin Perry resigned his position
as Chief Financial Officer of Demeter.

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

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

Item 11.  EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers.  As a
limited partnership, the business of the Partnership is managed by
Demeter, which is responsible for the administration of the
business affairs of the Partnership but receives no compensation
for such services.


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


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

(b)  Security Ownership of Management ? At December 31, 2006,
Demeter owned 324.245 Units of general partnership interest,
representing a 1.09 percent interest in the Partnership.

(c)	Changes in Control ? None.

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

Refer to Note 2 ? ?Related Party Transactions? of ?Notes to
Financial Statements?, in the accompanying Annual Report to
Limited Partners for the year ended December 31, 2006, which is
incorporated by reference to Exhibit 13.01 of this Form 10-K.  In
its capacity as the Partnership's retail commodity broker, Morgan
Stanley DW received commodity brokerage commissions (paid and
accrued by the Partnership) of $1,392,699 for the year ended
December 31, 2006.  In its capacity as the Partnership?s Trading
Advisor, Hyman Beck received management fees of $79,584 for two
months in the year ended December 31, 2006, and VK Capital
received management fees of $559,653 for eight and a half months
in the year ended December 31, 2006.

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

(1)  Audit Fees.  The aggregate fees for professional services
rendered by Deloitte & Touche LLP in connection with their audit
of the Partnership?s Financial Statements and review of the
Financial Statements included in the Quarterly Reports on Form
10-Q, audit of Management?s assessments on the effectiveness of
the internal control over financial reporting, and in connection
with statutory and regulatory filings were approximately $38,907
for the year ended December 31, 2006, and $36,596 for the year
ended December 31, 2005.

(2)	Audit-Related Fees. None.

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

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
















<page>

PART IV

Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


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

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

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

-	Notes to Financial Statements.



With the exception of the aforementioned information and the
information incorporated in Items 7, 8, and 13, the Annual
Report to Limited Partners for the year ended December 31,
2006, is not deemed to be filed with this report.

2. Listing of Financial Statement Schedules
<page> No Financial Statement schedules are required to be
filed with this report.

3. Exhibits
For the exhibits incorporated by reference or filed herewith
to this report, refer to Exhibit Index on Pages E-1 to E-2.






<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 L.P.
                                 (Registrant)

                            BY:  Demeter Management Corporation,
                                 General Partner

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

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


Demeter Management Corporation.


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

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

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

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

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

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

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

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

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




<page> EXHIBIT INDEX

ITEM

3.01 	Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of June 30, 1995, is incorporated
by reference to Exhibit 3.01 of the Partnership?s
Registration Statement on Form S-1 (File No. 33-90360).

3.02 	Certificate of Limited Partnership, dated November 25,
1987, is filed herewith.

3.02(a)	Certificate of Amendment to the Certificate of Limited
Partnership, dated July 20, 2006 (changing its name from
Dean Witter Diversified Futures Fund Limited
Partnership) is incorporated by reference to Exhibit
3.02 of the Partnership?s Form 8-K (File No. 0-23577)
filed with the Securities and Exchange Commission on
July 26, 2006.

10.01	Management Agreement among the Partnership, Demeter, 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. 0-23577) 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. 0-23577) filed
with the Securities and Exchange Commission on November
13, 2001.

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-
23577) filed with the Securities and Exchange Commission
on November 13, 2001.

10.04	  Customer Agreement between the Partnership and Morgan
Stanley & Co. International Limited, dated as of May 1,
2000, is incorporated by reference to Exhibit 10.04 of
the Partnership?s Form 8-K (File No. 0-23577) filed with
the Securities and Exchange Commission on November 13,
2001.




E-1

<page>
  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-
23577) filed with the Securities and Exchange Commission on
November 13, 2001.

10.06	Securities Account Control Agreement among the Partnership,
Morgan Stanley & Co. Incorporated, and Morgan Stanley DW
Inc., dated as of May 1, 2000, is incorporated by reference
to Exhibit 10.03 of the Partnership?s Form 8-K (File No. 0-
23577) filed with the Securities and Exchange Commission on
November 13, 2001.

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

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

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

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

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


E?2

<PAGE>

                                                                    Diversified
                                                                        Futures
                                                                           Fund

          December 31, 2006
          Annual Report

    [LOGO]

Morgan Stanley

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND 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>


                             1988     1989 1990 1991 1992 1993 1994 1995  1996  1997 1998  1999  2000 2001 2002  2003  2004
FUND                          %        %    %    %    %    %    %    %     %     %    %     %     %    %    %     %     %
-----------------------------------------------------------------------------------------------------------------------------
<S>                      <C>          <C>  <C>  <C>  <C>  <C>  <C>  <C>   <C>   <C>  <C>  <C>    <C>  <C>  <C>  <C>    <C>
Diversified Futures Fund     31.8     18.2 50.4 23.9 16.7 6.6  7.7  (4.6) (2.7) 12.0 6.2  (11.1) 22.0 1.3  28.4 (11.9) (4.6)
                         (8 1/2 mos.)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                     INCEPTION-  COMPOUND
                                      TO-DATE   ANNUALIZED
                          2005  2006   RETURN     RETURN
FUND                       %     %       %          %
----------------------------------------------------------
<S>                      <C>    <C>  <C>        <C>
Diversified Futures Fund (22.1) 5.1    317.6       7.9

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

<PAGE>

DEMETER MANAGEMENT CORPORATION

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

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.
ANNUAL REPORT
2006

Dear Limited Partner:

  This marks the nineteenth annual report for the Morgan Stanley Diversified
Futures Fund L.P. (formerly Dean Witter Diversified Futures Fund Limited
Partnership) (the "Fund"). The Fund began the year at a Net Asset Value per
Unit of $1,001.71 and returned 5.1% to $1,053.24 on December 31, 2006. The Fund
returned 317.6% since it began trading in April 1988 (a compound annualized
return of 7.9%).

  Detailed performance information for the Fund is located in the body of the
financial report. 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.

  Effective September 15, 2006, Demeter Management Corporation ("Demeter"), the
general partner of the Fund, decided to remove VK Capital, Inc. ("VK Capital")
as the sole trading manager to the Fund. Consequently, VK Capital ceased all
futures interests trading on behalf of the Fund as of that date. On October 9,
2006, Demeter and Hyman Beck & Company, Inc. ("Hyman Beck") entered into a
management agreement in which Hyman Beck, as of November 1, 2006, trades the
Fund's assets pursuant to its Global Portfolio trading program. The Fund pays
Hyman Beck a monthly management fee equal to  1/12 of 1.5% (a 1.5% annual
rate), as well as an incentive fee equal to 20% of the trading profits earned
by the Fund as of the end of each calendar quarter.

<PAGE>

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

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

Sincerely,

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

                                     [CHART]

                     Year ended December 31, 2006
                     ----------------------------
Currencies                    -1.98%
Interest Rates                -2.55%
Stock Indices                  1.12%
Energies                      -3.41%
Metals                         9.52%
Agriculturals                 -0.97%


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

FACTORS INFLUENCING ANNUAL TRADING GAINS:
..  The most significant trading gains were experienced within the 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 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
   research program. Japanese fixed-income futures prices also increased after
   lower than expected

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)

 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.

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  Trading losses were 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 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 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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)

 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 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 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 indicating 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 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 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. 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.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

  Demeter Management Corporation ("Demeter"), the general partner of Morgan
Stanley Diversified Futures Fund L.P. (formerly Dean Witter Diversified Futures
Fund Limited Partnership) (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, 2006. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control--Integrated
Framework. Based on our assessment and those criteria, Management believes that
the Partnership maintained effective internal control over financial reporting
as of December 31, 2006.

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

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

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

New York, New York
March 9, 2007

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Limited Partners and the General Partner:

  We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Morgan
Stanley Diversified Futures Fund L.P. (formerly Dean Witter Diversified Futures
Fund Limited Partnership) (the "Partnership") maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control--Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The 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. Our responsibility is to express an opinion
on management's assessment and an opinion on the effectiveness of 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, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

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

<PAGE>

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

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

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

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

/s/ Deloitte & Touche LLP

New York, New York
March 9, 2007

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND 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 L.P. (formerly Dean Witter Diversified Futures
Fund Limited Partnership) (the "Partnership"), including the schedules of
investments, as of December 31, 2006 and 2005, and the related statements of
operations, changes in partners' capital, and cash flows for each of the three
years in the period ended December 31, 2006. These financial statements are the
responsibility of the 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
L.P. (formerly Dean Witter Diversified Futures Fund Limited Partnership) at
December 31, 2006 and 2005, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States
of America.

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

<PAGE>

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

/s/ Deloitte & Touche LLP

New York, New York
March 9, 2007

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                     ---------------------
                                                        2006       2005
                                                     ---------- ----------
                                                         $          $
      <S>                                            <C>        <C>
                                    ASSETS
      Equity in futures interests trading accounts:
        Unrestricted cash                            30,147,827 34,746,433
        Restricted cash                               1,421,435  2,710,691
                                                     ---------- ----------
          Total Cash                                 31,569,262 37,457,124
                                                     ---------- ----------
        Net unrealized gain on open contracts
         (MS&Co.)                                       101,838  1,179,435
        Net unrealized gain on open contracts
         (MSIL)                                          77,188    709,610
                                                     ---------- ----------
          Total net unrealized gain on open
           contracts                                    179,026  1,889,045
                                                     ---------- ----------
          Total Trading Equity                       31,748,288 39,346,169
      Interest receivable (Morgan Stanley DW)           107,594    100,340
                                                     ---------- ----------
          Total Assets                               31,855,882 39,446,509
                                                     ========== ==========

                       LIABILITIES AND PARTNERS' CAPITAL

      LIABILITIES
      Redemptions payable                               491,468    745,648
      Accrued incentive fee                              64,875     --
      Administrative expenses payable                    52,917    127,837
      Accrued management fees                            39,487    101,453
                                                     ---------- ----------
          Total Liabilities                             648,747    974,938
                                                     ---------- ----------

      PARTNERS' CAPITAL
      Limited Partners (29,305.386 and
       37,999.829 Units, respectively)               30,865,627 38,064,633
      General Partner (324.245 and
       406.245 Units, respectively)                     341,508    406,938
                                                     ---------- ----------
          Total Partners' Capital                    31,207,135 38,471,571
                                                     ---------- ----------
          Total Liabilities and Partners' Capital    31,855,882 39,446,509
                                                     ========== ==========

      NET ASSET VALUE PER UNIT                         1,053.24   1,001.71
                                                     ========== ==========
</TABLE>

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                           FOR THE YEARS ENDED DECEMBER 31,
                                         -----------------------------------
                                            2006           2005        2004
                                         ----------    -----------  ----------
                                             $              $           $
  <S>                                    <C>           <C>          <C>
  INVESTMENT INCOME
    Interest income
     (Morgan Stanley DW)                  1,354,793      1,075,980     600,427
                                         ----------    -----------  ----------

  EXPENSES
    Brokerage commissions
     (Morgan Stanley DW)                  1,392,699      2,316,531   2,857,725
    Management fees                         639,237      1,433,609   1,905,592
    Administrative expenses                  97,000        131,000     163,000
    Transaction fees and costs               83,527        125,524     136,662
    Incentive fee                            66,640         --          --
                                         ----------    -----------  ----------
     Total Expenses                       2,279,103      4,006,664   5,062,979
                                         ----------    -----------  ----------

  NET INVESTMENT LOSS                      (924,310)    (2,930,684) (4,462,552)
                                         ----------    -----------  ----------

  TRADING RESULTS
  Trading profit (loss):
    Realized                              4,639,807     (8,480,219)   (317,446)
    Net change in unrealized             (1,710,019)    (1,778,968)  1,154,150
                                         ----------    -----------  ----------
                                          2,929,788    (10,259,187)    836,704
    Proceeds from Litigation Settlement      --             30,124      21,124
                                         ----------    -----------  ----------
     Total Trading Results                2,929,788    (10,229,063)    857,828
                                         ----------    -----------  ----------

  NET INCOME (LOSS)                       2,005,478    (13,159,747) (3,604,724)
                                         ==========    ===========  ==========

  NET INCOME (LOSS) ALLOCATION:
  Limited Partners                        1,986,721    (12,998,039) (3,568,150)
  General Partner                            18,757       (161,708)    (36,574)

  NET INCOME (LOSS) PER UNIT:
  Limited Partners                            51.53        (283.85)     (61.65)
  General Partner                             51.53        (283.85)     (61.65)
</TABLE>

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

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

<TABLE>
<CAPTION>
                           UNITS OF
                          PARTNERSHIP   LIMITED     GENERAL
                           INTEREST     PARTNERS    PARTNER     TOTAL
                          ----------- -----------  --------  -----------
                                           $           $          $
       <S>                <C>         <C>          <C>       <C>
       Partners' Capital,
       December 31, 2003  53,286.575   70,988,827   799,224   71,788,051
       Net loss               --       (3,568,150)  (36,574)  (3,604,724)
       Redemptions        (5,586.394)  (6,862,033)    --      (6,862,033)
                          ----------  -----------  --------  -----------
       Partners' Capital,
       December 31, 2004  47,700.181   60,558,644   762,650   61,321,294
       Net loss               --      (12,998,039) (161,708) (13,159,747)
       Redemptions        (9,294.107)  (9,495,972) (194,004)  (9,689,976)
                          ----------  -----------  --------  -----------
       Partners' Capital,
       December 31, 2005  38,406.074   38,064,633   406,938   38,471,571
       Net income             --        1,986,721    18,757    2,005,478
       Redemptions        (8,776.443)  (9,185,727)  (84,187)  (9,269,914)
                          ----------  -----------  --------  -----------
       Partners' Capital,
       December 31, 2006  29,629.631   30,865,627   341,508   31,207,135
                          ==========  ===========  ========  ===========
</TABLE>

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                       FOR THE YEARS ENDED DECEMBER 31,
                                     ------------------------------------
                                        2006         2005         2004
                                     ----------  -----------  -----------
                                         $            $            $
     <S>                             <C>         <C>          <C>
     CASH FLOWS FROM
      OPERATING ACTIVITIES
     Net income (loss)                2,005,478  (13,159,747)  (3,604,724)
     Noncash item included in net
      income (loss):
       Net change in unrealized       1,710,019    1,778,968   (1,154,150)
     (Increase) decrease in
      operating assets:
       Restricted cash                1,289,256    3,455,664    1,425,209
       Interest receivable
        (Morgan Stanley DW)              (7,254)     (23,511)     (36,467)
       Due from Morgan Stanley
        DW                               --            1,576       (1,576)
     Increase (decrease) in
      operating liabilities:
       Accrued incentive fee             64,875       --           --
       Administrative expenses
        payable                         (74,920)     (16,333)     (37,170)
       Accrued management fees          (61,966)     (48,701)     (28,994)
                                     ----------  -----------  -----------
     Net cash provided by (used for)
      operating activities            4,925,488   (8,012,084)  (3,437,872)
                                     ----------  -----------  -----------

     CASH FLOWS FROM
      FINANCING ACTIVITIES
     Cash paid for redemptions of
      Units                          (9,524,094)  (9,797,675)  (6,863,512)
                                     ----------  -----------  -----------
     Net cash used for financing
      activities                     (9,524,094)  (9,797,675)  (6,863,512)
                                     ----------  -----------  -----------

     Net decrease in unrestricted
      cash                           (4,598,606) (17,809,759) (10,301,384)

     Unrestricted cash at beginning
      of period                      34,746,433   52,556,192   62,857,576
                                     ----------  -----------  -----------

     Unrestricted cash at end
      of period                      30,147,827   34,746,433   52,556,192
                                     ==========  ===========  ===========
</TABLE>

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

SCHEDULES OF INVESTMENTS

DECEMBER 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                  LONG UNREALIZED  PERCENTAGE   SHORT UNREALIZED  PERCENTAGE
FUTURES AND FORWARD CONTRACTS:                                      GAIN/(LOSS)   OF NET ASSETS   GAIN/(LOSS)    OF NET ASSETS
------------------------------                                    --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $31,207,135                                 $              %              $               %
<S>                                                               <C>             <C>           <C>              <C>
Commodity                                                               83,712         0.27           88,033          0.28
Equity                                                                 152,030         0.48            --              --
Foreign currency                                                        52,612         0.17          (24,884)        (0.08)
Interest rate                                                         (262,014)       (0.84)          89,200          0.29
                                                                     ---------        -----         --------         -----
  Grand Total:                                                          26,340         0.08          152,349          0.49
                                                                     =========        =====         ========         =====
  Unrealized Currency Gain

  Total Net Unrealized Gain per Statement of Financial Condition


2005 PARTNERSHIP NET ASSETS: $38,471,571
Commodity                                                            1,068,764         2.78         (110,248)        (0.29)
Equity                                                                 294,879         0.76            --              --
Foreign currency                                                       665,362         1.73           91,758          0.24
Interest rate                                                          (27,190)       (0.07)            (342)          --
                                                                     ---------        -----         --------         -----
  Grand Total:                                                       2,001,815         5.20          (18,832)        (0.05)
                                                                     =========        =====         ========         =====
  Unrealized Currency Loss

  Total Net Unrealized Gain per Statement of Financial Condition

</TABLE>
<TABLE>
<CAPTION>
                                                                  NET UNREALIZED
FUTURES AND FORWARD CONTRACTS:                                     GAIN/(LOSS)
------------------------------                                    --------------
2006 PARTNERSHIP NET ASSETS: $31,207,135                                $
<S>                                                               <C>
Commodity                                                             171,745
Equity                                                                152,030
Foreign currency                                                       27,728
Interest rate                                                        (172,814)
                                                                    ---------
  Grand Total:                                                        178,689

  Unrealized Currency Gain                                                337
                                                                    ---------
  Total Net Unrealized Gain per Statement of Financial Condition      179,026
                                                                    =========

2005 PARTNERSHIP NET ASSETS: $38,471,571
Commodity                                                             958,516
Equity                                                                294,879
Foreign currency                                                      757,120
Interest rate                                                         (27,532)
                                                                    ---------
  Grand Total:                                                      1,982,983

  Unrealized Currency Loss                                            (93,938)
                                                                    ---------
  Total Net Unrealized Gain per Statement of Financial Condition    1,889,045
                                                                    =========
</TABLE>
  The accompanying notes are an integral part of these financial statements.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION.   Morgan Stanley Diversified Futures Fund L.P. (formerly Dean
Witter Diversified Futures Fund Limited Partnership) (the "Partnership") is a
limited partnership organized to engage primarily in the speculative trading of
futures and forward contracts, and, effective November 1, 2006, options on
futures 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 L.P. was
renamed to Morgan Stanley Diversified Futures Fund L.P.
  The Partnership's general partner is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc.
("Morgan Stanley DW''). The clearing commodity brokers are Morgan Stanley & Co.
Incorporated ("MS&Co.") and Morgan Stanley & Co. International Limited
("MSIL"). MS&Co. acts as the counterparty on all of the foreign currency
forward contracts. In 2007, Morgan Stanley intends to merge Morgan Stanley DW
into MS&Co. Upon completion of the merger, the surviving entity, MS&Co., will
be the Partnership's principal U.S. commodity broker-dealer. Prior to September
15, 2006, the trading manager was VK Capital Inc. ("VK Capital"). Demeter,
Morgan Stanley DW, MS&Co., MSIL, and VK Capital are wholly-owned subsidiaries
of Morgan Stanley.
  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. On October 9, 2006, Demeter entered
into a management agreement with Hyman Beck & Company Inc. ("Hyman Beck" or the
"Trading Advisor") 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.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

  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.

USE OF ESTIMATES.  The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the reported
amounts in the financial statements and related disclosures. Management
believes that the estimates utilized in the preparation of the financial
statements are prudent and reasonable. Actual results could differ from those
estimates.

REVENUE RECOGNITION.  Futures Interests are open commitments until settlement
date, at which time they are realized. They are valued at market on a daily
basis and the resulting net change in unrealized gains and losses is reflected
in the change in unrealized trading profit (loss) on open contracts from one
period to the next on the Statements of Operations. Monthly, Morgan Stanley DW
pays the Partnership interest income on 80% of its average daily Net Assets for
the month at a prevailing rate for 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 the prevailing rate for 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 the prevailing
rate for U.S. Treasury bills. For purposes of such interest payments, Net
Assets do not include monies owed to the Partnership on Futures Interests.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

  The Partnership's functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are translated
into U.S. dollars at the rates in effect at the date of the Statements of
Financial Condition. Income and expense items denominated in currencies other
than the U.S. dollar are translated into U.S. dollars at the rates in effect
during the period. Gains and losses resulting from the translation to U.S.
dollars are reported in income currently.

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

NEW ACCOUNTING DEVELOPMENTS.  In July 2006, the Financial Accounting Standards
Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement 109" ("FIN 48"). FIN 48
clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position must meet before being recognized in the
financial statements. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The impact to the Partnership's Financial Statements, if
any, is currently being assessed.
  In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for the Partnership as of January 1, 2008. The impact
to the Partnership's Financial Statements, if any, is currently being assessed.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

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

EQUITY IN FUTURES INTERESTS TRADING ACCOUNTS.  The Partnership's asset "Equity
in futures interests trading accounts," reflected on the Statements of
Financial Condition, consists of (A) cash on deposit with Morgan Stanley DW,
MS&Co., and MSIL to be used as margin for trading; (B) net unrealized gains or
losses on open contracts, which are valued at market and calculated as the
difference between original contract value and market value; and (C) net option
premiums, which represent the net of all monies paid and/or received for such
option premiums.
  The Partnership, in the normal course of business, enters into various
contracts with MS&Co. and MSIL acting as its commodity brokers. Pursuant to
brokerage agreements with MS&Co. and MSIL, to the extent that such trading
results in unrealized gains or losses, the amounts are offset and reported on a
net basis on the Partnership's Statements of Financial Condition.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

  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., the sole 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 Morgan Stanley DW and MS&Co.,
respectively, charge parties that are not clearinghouse members. 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 first 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 expenses related to its trading
activities. Such fees are capped at a maximum of  1/4 of 1% annually of the
Partnership's average monthly Net Assets as of the first day of each month.
These operating expenses include legal, auditing, accounting, mailing,
printing, filing fees, and other 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.

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.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


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 its 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 settlement award payments in the
amount of $21,124 during July 2004, and $30,124 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.

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

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

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


--------------------------------------------------------------------------------
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 to VK Capital and Hyman Beck by the Partnership 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
beginning of the month Net Assets.
  From February 1, 2006 through September 15, 2006, the monthly management fee
was reduced to  1/6 of 1% (a 2% annual rate) of beginning of the month Net
Assets.
  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 monthly management fee is paid to Hyman Beck
and accrued daily at the rate of  1/12 of 1.5% (a 1.5% annual rate) of
beginning of the month Net Assets, as defined in the Management Agreement.

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.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

  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 will be calculated through the end
of each calendar quarter. The Partnership paid an incentive fee based upon the
performance of the Partnership beginning November 1, 2006, without regard to
any losses previously incurred by the Partnership. Trading profits represent
the amount by which profits from futures 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. Prior to September 15, 2006, in those instances in which limited
partners redeemed Units, incentive fees earned (through the date of such
redemptions) were paid to VK Capital on those Units redeemed in the month of
such redemptions.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND 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, swaps or options contracts,
and other financial instruments with similar characteristics such as caps,
floors, and collars.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

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

<TABLE>
<CAPTION>
                      NET UNREALIZED GAINS
                        ON OPEN CONTRACTS       LONGEST MATURITIES
                  ----------------------------- -------------------
                              OFF-                          OFF-
                  EXCHANGE- EXCHANGE-           EXCHANGE- EXCHANGE-
             YEAR  TRADED    TRADED     TOTAL    TRADED    TRADED
             ---- --------- --------- --------- --------- ---------
                      $         $         $
             <S>  <C>       <C>       <C>       <C>       <C>
             2006   151,298   27,728    179,026 Sep. 2007 Mar. 2007
             2005 1,240,235  648,810  1,889,045 Sep. 2006 Mar. 2006
</TABLE>
  The Partnership has credit risk associated with counterparty nonperformance.
As of the date of the financial statement, 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 L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

  The Partnership also has credit risk because Morgan Stanley DW, MS&Co., and
MSIL 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. Morgan Stanley DW, MS&Co., and MSIL, 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 $31,720,560
and $38,697,359 at December 31, 2006 and 2005, respectively. With respect to
the Partnership's off-exchange-traded forward currency contracts, there are no
daily settlements of variation in value, nor is there any requirement that an
amount equal to the net unrealized gains (losses) on such contracts be
segregated. However, the Partnership is required to meet margin requirements
equal to the net unrealized loss on open forward currency contracts in the
Partnership accounts with the counterparty, which is accomplished by daily
maintenance of the cash balance in a custody account held at Morgan Stanley DW
for the benefit of MS&Co. With respect to those off-exchange-traded forward
currency contracts, the Partnership is at risk to the ability of MS&Co., the
sole counterparty on all such contracts, to perform. The Partnership has a
netting agreement with MS&Co. This agreement, which seeks to reduce both the
Partnership's and MS&Co.'s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership's credit risk in the
event of MS&Co.'s bankruptcy or insolvency.

<PAGE>

MORGAN STANLEY DIVERSIFIED FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS
(concluded)


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

<TABLE>
<CAPTION>
                                             2006       2005       2004
                                          ---------  ---------  ---------
      <S>                                 <C>        <C>        <C>
      PER UNIT OPERATING
       PERFORMANCE:
      NET ASSET VALUE, JANUARY 1:         $1,001.71  $1,285.56  $1,347.21
                                          ---------  ---------  ---------
      NET OPERATING RESULTS:
         Interest Income                      39.97      24.59      11.83
         Expenses                            (67.24)    (91.55)    (99.79)
         Realized Profit (Loss)              129.25    (176.93)      3.14
         Unrealized Profit ( Loss)           (50.45)    (40.65)     22.75
         Proceeds from Litigation
          Settlement                              -       0.69       0.42
                                          ---------  ---------  ---------
         Net Income (Loss)                    51.53    (283.85)    (61.65)
                                          ---------  ---------  ---------
      NET ASSET VALUE,
       DECEMBER 31:                       $1,053.24  $1,001.71  $1,285.56
                                          =========  =========  =========
      FOR THE CALENDAR YEAR:
      RATIOS TO AVERAGE NET
       ASSETS:
         Net Investment Loss                 (2.6)%     (6.4)%     (7.1)%
         Expenses before Incentive Fees       6.3 %      8.7 %      8.1 %
         Expenses after Incentive Fees        6.5 %      8.7 %      8.1 %
         Net Income (Loss)                    5.7 %    (28.7)%     (5.8)%
      TOTAL RETURN BEFORE
       INCENTIVE FEES                         5.3 %    (22.1)%     (4.6)%
      TOTAL RETURN AFTER
       INCENTIVE FEES                         5.1 %    (22.1)%     (4.6)%
      INCEPTION-TO-DATE RETURN              317.6 %
      COMPOUND ANNUALIZED
       RETURN                                 7.9 %
</TABLE>

<PAGE>


                    Demeter Management Corporation
                    330 Madison Avenue, 8th Floor
                    New York, NY 10017

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