<PAGE>
 
 
 

Diversified 
Futures 
Fund II




December 31, 1996 
Annual Report
                              [LOGO] DEAN WITTER
<PAGE>
 
DEAN WITTER
Two World Trade Center
62nd Floor
New York, NY 10048 
Telephone (212) 392-8899
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
ANNUAL REPORT
1996
 
Dear Limited Partner:
 
This marks the eighth annual report for the Dean Witter Diversified Futures
Fund II L.P. (the "Fund"). The Fund began the year at a Net Asset Value per
Unit of $2,534.82 and finished 1996 at $2,412.41, reflecting a loss of 4.8%.
The Fund has increased by 141.2% since it began trading in 1989 (a compound
annualized return of 11.6%).
 
Modest gains were recorded during January as short Japanese yen, German mark
and Swiss franc positions profited from a downward move. A majority of these
losses were offset by long positions in energy futures as gas and oil prices
reversed lower after an upward move late in 1995. Significant losses were
recorded in February as a result of a series of sharp trend reversals in the
value of the Japanese yen and major European currencies. Additional losses were
recorded in the energy markets, as a result of inconsistent price movement, and
in global interest rate futures as a result of a sharp reversal in the previous
upward move. Small gains were recorded in March from newly established long
positions in the energy markets as oil and gas futures prices finished the
month higher. Additional gains were recorded in the currency markets.
 
Trading gains posted during April were recorded from short positions in the
German mark and Swiss franc as the value of these currencies moved lower
relative to the U.S. dollar. Smaller gains were recorded from trading in the
agricultural and energy futures markets. Sharp trend reversals in a majority of
the markets traded resulted in losses during May. The most significant
<PAGE>
 
losses were recorded in metals from long copper futures positions as prices
moved dramatically lower on May 17 and 20. During June, global interest rate
and stock index futures prices moved in a choppy pattern, resulting in losses
for the Fund. Smaller losses were recorded in the agricultural markets. A
portion of these losses was offset by gains from short copper futures positions
as prices moved dramatically lower on news of significant losses in copper by
Sumitomo Corporation.
 
During July, long German mark and Swiss franc positions profited from an upward
move in the value of these currencies relative to the U.S. dollar. Additional
gains were recorded during July from long global interest rate futures
positions. Trend reversals and choppy movement in the currency markets resulted
in losses for the Fund during August. Smaller losses were recorded from trading
in agricultural commodities and metals. Gains from long energy futures
positions offset a portion of these losses. A strong upward move in global
interest rate futures prices during September resulted in gains for the Fund's
long positions. Additional gains were recorded in the energy markets as oil and
gas prices continued to trend higher.
 
Gains were recorded during October and November from long British pound
positions as the value of the pound surged higher relative to the U.S. dollar.
Additional gains were recorded as long global interest rate futures positions
profited from a continued upward price trend. A small portion of these gains
was offset by losses experienced during October in the energy markets, and
during November as a result of choppy movement in agricultural futures prices.
Losses were recorded during December as a result of sudden and dramatic
reversal in global interest rate futures prices early in the month. Additional
losses were recorded as the value of the British pound decreased sharply during
the first week of December.
<PAGE>
 
 
The intermediate to long-term trend following trading methodology of the Fund's
sole trading advisor, Dean Witter Futures & Currency Management Inc. ("DWFCM"),
was hurt by price volatility in energies and agricultural commodities during
much of 1996. This factor coupled with sharp trend reversals in currencies and
global bond futures in February and December when positions in these areas were
significant, resulted in overall losses for the year despite a better than 20%
increase during the three month period September-November. While such results
are frustrating, we remain confident in DWFCM's time tested methodology and in
its ability to rebound as it has over previous long-term periods.
 
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd Floor,
New York, NY 10048, or your Dean Witter Account Executive.
 
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is not a
guarantee of future results.
 
    Sincerely,
 
    /s/ Mark J. Hawley

    Mark J. Hawley
    President
    Demeter Management Corporation
    General Partner
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
INDEPENDENT AUDITORS' REPORT
 
The Limited Partners and the General Partner:
 
We have audited the accompanying statements of financial condition of Dean
Witter Diversified Futures Fund II L.P. (the "Partnership") as of December 31,
1996 and 1995 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, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Dean Witter Diversified Futures Fund II
L.P. as of December 31, 1996 and 1995 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
 
/s/ Deloitte & Touche LLP

February 17, 1997
New York, New York
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF FINANCIAL CONDITION
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                                  ---------------------
                                                     1996       1995
                                                  ---------- ----------
                                                      $          $
<S>                                               <C>        <C>
                                ASSETS
Equity in Commodity futures trading
 accounts:
 Cash                                             12,415,430 14,643,529
 Net unrealized gain on open contracts               160,193    852,419
                                                  ---------- ----------
 Total Trading Equity                             12,575,623 15,495,948
Interest receivable (DWR)                             42,043     54,267
                                                  ---------- ----------
 Total Assets                                     12,617,666 15,550,215
                                                  ========== ==========
                   LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
 Redemptions payable                                 297,904    781,248
 Accrued management fee (DWFCM)                       31,538     38,862
 Accrued brokerage fees (DWR)                         15,137    116,587
 Accrued transaction fees and costs                    2,330      5,241
 Accrued incentive fee (DWFCM)                           --       3,299
                                                  ---------- ----------
 Total Liabilities                                   346,909    945,237
                                                  ---------- ----------
PARTNERS' CAPITAL
 Limited Partners (4,982.521 and 5,657.751 Units,
   respectively)                                  12,019,867 14,341,357
 General Partner (104 Units)                         250,890    263,621
                                                  ---------- ----------
 Total Partners' Capital                          12,270,757 14,604,978
                                                  ---------- ----------
 Total Liabilities and Partners' Capital          12,617,666 15,550,215
                                                  ========== ==========
NET ASSET VALUE PER UNIT                            2,412.41   2,534.82
                                                  ========== ==========
</TABLE>
 
 
 
   The accompanying notes are an integral part of these financial statements.
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                       FOR THE YEARS
                                           ENDED
                                        DECEMBER 31,
                               --------------------------------
                                 1996        1995       1994
                               ---------  ----------  ---------
                                   $          $           $
<S>                            <C>        <C>         <C>
REVENUES
Trading Profit (Loss):
 Realized                        832,912   2,142,749  1,613,912
 Net change in unrealized       (692,226) (1,324,261)   861,395
                               ---------  ----------  ---------
 Total Trading Results           140,686     818,488  2,475,307
Interest income (DWR)            502,812     738,238    562,625
                               ---------  ----------  ---------
 Total Revenues                  643,498   1,556,726  3,037,932
                               ---------  ----------  ---------
EXPENSES
Brokerage fees (DWR)           1,004,389   1,522,301  1,502,699
Management fee (DWFCM)           383,830     507,434    500,900
Transaction fees and costs        82,386     132,583    129,572
Incentive fee (DWFCM)             (2,590)   (195,018)    51,320
                               ---------  ----------  ---------
 Total Expenses                1,468,015   1,967,300  2,184,491
                               ---------  ----------  ---------
NET INCOME (LOSS)               (824,517)   (410,574)   853,441
                               =========  ==========  =========
NET INCOME (LOSS) ALLOCATION:
Limited Partners                (811,786)   (402,714)   839,933
General Partner                  (12,731)     (7,860)    13,508
NET INCOME (LOSS) PER UNIT:
Limited Partners                 (122.41)     (75.58)    133.96
General Partner                  (122.41)     (75.58)    133.96
</TABLE>
 
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                              UNITS OF
                             PARTNERSHIP  LIMITED    GENERAL
                              INTEREST    PARTNERS   PARTNER    TOTAL
                             ----------- ----------  -------  ----------
                                             $          $         $
<S>                          <C>         <C>         <C>      <C>
Partners' Capital, December
31, 1993                      7,048.887  17,109,409  346,701  17,456,110
Net Income                          --      839,933   13,508     853,441
Redemptions                    (556.592) (1,273,337) (88,728) (1,362,065)
                              ---------  ----------  -------  ----------
Partners' Capital,
December 31, 1994             6,492.295  16,676,005  271,481  16,947,486
Net Loss                            --     (402,714)  (7,860)   (410,574)
Redemptions                    (730.544) (1,931,934)     --   (1,931,934)
                              ---------  ----------  -------  ----------
Partners' Capital,
December 31, 1995             5,761.751  14,341,357  263,621  14,604,978
Net Loss                            --     (811,786) (12,731)   (824,517)
Redemptions                    (675.230) (1,509,704)     --   (1,509,704)
                              ---------  ----------  -------  ----------
Partners' Capital,
December 31, 1996             5,086.521  12,019,867  250,890  12,270,757
                              =========  ==========  =======  ==========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                    FOR THE YEARS
                                                        ENDED
                                                     DECEMBER 31,
                                           ----------------------------------
                                              1996        1995        1994
                                           ----------  ----------  ----------
                                               $           $           $
<S>                                        <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                            (824,517)   (410,574)    853,441
Noncash item included in net income
  (loss):
 Net change in unrealized                     692,226   1,324,261    (861,395)
(Increase) decrease in
  operating assets:
 Interest receivable (DWR)                     12,224      12,917     (30,869)
Increase (decrease) in
  operating liabilities:
 Accrued management fee (DWFCM)                (7,324)     (5,406)       (862)
 Accrued brokerage fees (DWR)                (101,450)    (16,216)     (2,587)
 Accrued transaction fees and costs            (2,911)      2,068        (426)
 Accrued incentive fee (DWFCM)                 (3,299)   (210,269)     (4,382)
                                           ----------  ----------  ----------
Net cash provided by (used for) operating
  activities                                 (235,051)    696,781     (47,080)
                                           ----------  ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions
  payable                                    (483,344)    412,306     171,494
Redemptions of units                       (1,509,704) (1,931,934) (1,362,065)
                                           ----------  ----------  ----------
Net cash used for financing activities     (1,993,048) (1,519,628) (1,190,571)
                                           ----------  ----------  ----------
Net decrease in cash                       (2,228,099)   (822,847) (1,237,651)
Balance at beginning of period             14,643,529  15,466,376  16,704,027
                                           ----------  ----------  ----------
Balance at end of period                   12,415,430  14,643,529  15,466,376
                                           ==========  ==========  ==========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
ORGANIZATION--Dean Witter Diversified Futures Fund II L.P. (the "Partnership")
was organized to engage in the speculative trading of commodity futures
contracts and futures related contracts including forward contracts on foreign
currencies. The general partner is Demeter Management Corporation ("Demeter").
The commodity broker is Dean Witter Reynolds Inc. ("DWR"). The Trading Manager
is Dean Witter Futures & Currency Management Inc. ("DWFCM"). DWR, DWFCM and
Demeter are wholly-owned subsidiaries of Dean Witter, Discover & Co. ("DWD").
 
Demeter is required to maintain a 1% minimum interest in the equity of the
Partnership and income (losses) are shared by the General and Limited Partners
based upon their proportional ownership interests.
 
BASIS OF ACCOUNTING--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
 
REVENUE RECOGNITION--Commodity futures contracts and other commodity interests
are open commitments until settlement date. They are valued at market and the
resulting unrealized gains and losses are reflected in income. Monthly, DWR
pays the Partnership interest income based upon 80% of the average daily Net
Assets for the month at a rate equal to the average yield on 13-Week U.S.
Treasury Bills issued during such month. For purposes of such interest
payments, Net Assets do not include monies due the Partnership on forward
contracts and other commodity interests, but not actually received.
 
NET INCOME (LOSS) PER UNIT--Net income (loss) per Unit is computed using the
weighted average number of units outstanding during the period.
 
EQUITY IN COMMODITY FUTURES TRADING ACCOUNTS--The Partnership's asset "Equity
in Commodity futures trading accounts" consists of cash on deposit at DWR to be
used as margin for trading and the net asset or liability related to unrealized
gains or losses on open contracts. The asset or liability related to the
unrealized gains or losses on forward contracts is presented as a net amount
because the Partnership has a master netting agreement with DWR.
 
BROKERAGE FEES AND RELATED TRANSACTION FEES AND COSTS--Prior to September 1,
1996, the monthly brokerage fee was equal to 4/5 of 1% per month of the
Partnership's adjusted month-end Net Assets, as defined in the Limited
Partnership Agreement.
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
Effective September 1, 1996, brokerage commissions are accrued on a half-turn
basis at 80% of DWR's published non-member rates, to a maximum of 13/20 of 1%
per month inclusive of transaction fees and costs of the Partnership's month-
end Net Assets (as defined in the Limited Partnership Agreement).
 
Transaction fees and costs are accrued on a half-turn basis.
 
OPERATING EXPENSES--The Partnership incurs a monthly management fee and may
incur an incentive fee. Demeter and/or DWR bear all other operating expenses.
 
INCOME TAXES--No provision for income taxes has been made in the accompanying
financial statements, as partners are individually responsible for reporting
income or loss based upon their respective share of the Partnership's revenues
and expenses for income tax purposes.
 
DISTRIBUTIONS--Distributions, other than on redemptions of Units, are made on a
pro-rata basis at the sole discretion of Demeter. No distributions have been
made to date.
 
REDEMPTIONS--Limited Partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit effective as of the last day of any calendar
quarter upon five business days advance notice by redemption form to Demeter.
 
DISSOLUTION OF THE PARTNERSHIP--The Partnership will terminate on December 31,
2025 or at an earlier date if certain conditions set forth in the Limited
Partnership Agreement occur.
 
2. RELATED PARTY TRANSACTIONS
 
Under its Customer Agreement with DWR, the Partnership pays a monthly brokerage
fee to DWR as described in Note 1. The Partnership's cash is on deposit with
DWR in commodity trading accounts to meet margin requirements as needed. DWR
pays interest on these funds as described in Note 1.
 
Demeter, on behalf of the Partnership and itself, has entered into a Management
Agreement with DWFCM to make all trading decisions for the Partnership.
 
Compensation to DWFCM by the Partnership consists of a management fee and an
incentive fee as follows:
 
MANAGEMENT FEE--The management fee is accrued daily at the rate of 1/4 of 1%
per month of adjusted Net Assets, as defined in the Management Agreement, at
each month-end.
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
INCENTIVE FEE--The Partnership will pay an annual incentive fee to DWFCM equal
to 15% of the "Trading Profits", as defined in the Management Agreement, earned
by the Partnership as of the end of each annual incentive period ending January
31. 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 will be reduced.
 
3. FINANCIAL INSTRUMENTS
 
The Partnership trades futures and forward contracts in interest rates, stock
indices, commodities, currencies, petroleum, and precious metals. 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. At December 31, 1996 and 1995, open contracts were:
<TABLE>
<CAPTION>
                         CONTRACT OR NOTIONAL AMOUNT
                         ---------------------------
                             1996          1995
                         ------------- -------------
                               $             $
<S>                      <C>           <C>
EXCHANGE-TRADED CONTRACTS
Financial Futures:
 Commitments to Purchase           --     68,504,000
 Commitments to Sell               --            --
Commodity Futures:
 Commitments to Purchase     2,026,000    32,009,000
 Commitments to Sell         6,083,000     4,857,000
Foreign Futures:
 Commitments to Purchase     6,629,000    50,355,000
 Commitments to Sell        11,748,000     3,536,000
OFF-EXCHANGE-TRADED FORWARD
  CURRENCY CONTRACTS
 Commitments to Purchase    33,150,000    49,215,000
 Commitments to Sell        42,844,000    55,478,000
</TABLE>
 
A portion of the amounts indicated as off-balance-sheet risk in forward
currency contracts is due to offsetting forward commitments to purchase and to
sell the same currency on the same date in the future. These commitments are
economically offsetting, but are not offset in the forward market until the
settlement date.
 
The unrealized gains on open contracts are reported as a component of "Equity
in Commodity futures trading accounts" on the Statements of Financial Condition
and totaled $160,193 and $852,419 at December 31, 1996 and 1995, respectively.
 
Of the $160,193 net unrealized gain on open contracts at December 31, 1996,
$423,229 related to exchange-traded futures contracts and $(263,036) related to
off-
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
exchange-traded forward currency contracts. Of the $852,419 net unrealized gain
on open contracts at December 31, 1995, $1,413,016 related to exchange-traded
futures contracts and $(560,597) related to off-exchange-traded forward
currency contracts.
 
Exchange-traded futures contracts held by the Partnership at December 31, 1996
and 1995 mature through June 1997 and September 1996, respectively. Off-
exchange-traded forward currency contracts held by the Partnership at December
31, 1996 and 1995 mature through February 1997 and February 1996, respectively.
The contract amounts in the above table represent the Partnership's extent of
involvement in the particular class of financial instrument, but not the credit
risk associated with counterparty nonperformance. The credit risk associated
with these instruments is limited to the amounts reflected in the Partnership's
Statements of Financial Condition.
 
The Partnership also has credit risk because DWR acts as the futures commission
merchant or the sole counterparty, with respect to most of the Partnership's
assets. Exchange-traded futures contracts are marked to market on a daily
basis, with variations in value settled on a daily basis. DWR, as the futures
commission merchant for all of the Partnership's exchange-traded futures
contracts, is required pursuant to regulations of the Commodity Futures Trading
Commission to segregate from its own assets, and for the sole benefit of its
commodity customers, all funds held by DWR with respect to exchange-traded
futures contracts including an amount equal to the net unrealized gain on all
open futures contracts, which funds totaled $12,838,659 and $16,056,545 at
December 31, 1996 and 1995, respectively. With respect to the Partnership's
off-exchange-traded forward currency contracts, there are no daily settlements
of variations in value nor is there any requirement that an amount equal to the
net unrealized gain on open forward contracts be segregated. With respect to
those off-exchange-traded forward currency contracts, the Partnership is at
risk to the ability of DWR, the counterparty on all of such contracts, to
perform.
 
For the years ended December 31, 1996 and 1995, the average fair value of
financial instruments held for trading purposes was as follows:
<TABLE>
<CAPTION>
                                                         1996
                                                ----------------------
                                                  ASSETS   LIABILITIES
                                                ---------- -----------
                                                    $           $
EXCHANGE-TRADED CONTRACTS:
<S>                                             <C>        <C>
 Financial Futures                              15,923,000  8,572,000
 Commodity Futures                               7,188,000  5,152,000
 Foreign Futures                                22,067,000  8,118,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS  37,689,000 41,562,000
</TABLE>
<PAGE>
 
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
<TABLE>
<CAPTION>
                                                         1995
                                                ----------------------
                                                  ASSETS   LIABILITIES
                                                ---------- -----------
                                                    $           $
EXCHANGE-TRADED CONTRACTS:
<S>                                             <C>        <C>
 Financial Futures                              25,157,000 13,498,000
 Commodity Futures                              13,763,000  6,544,000
 Foreign Futures                                28,482,000  9,500,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS  38,007,000 47,623,000
</TABLE>
 
4. LEGAL MATTERS
 
On September 6, 10, and 20, 1996, similar purported class actions were filed in
the Superior Court of the State of California, County of Los Angeles, on behalf
of all purchasers of interests in limited partnership commodity pools sold by
DWR. Named defendants include DWR, Demeter, DWFCM, DWD (all such parties
referred to hereafter as the "Dean Witter Parties"), the Partnership, certain
other limited partnership commodity pools of which Demeter is the general
partner, and certain trading advisors to those pools. Similar purported class
actions were also filed on September 18 and 20, 1996 in the Supreme Court of
the State of New York, New York County and on November 14, 1996 in the Superior
Court of the State of Delaware, Newcastle County, against the Dean Witter
Parties and certain trading advisors on behalf of all purchasers of interests
in various limited partnership commodity pools, including the Partnership, sold
by DWR. Generally, these complaints allege, among other things, that the
defendants committed fraud, deceit, misrepresentation, breach of fiduciary
duty, fraudulent and unfair business practices, unjust enrichment, and
conversion in connection with the sale and operation of the various limited
partnership commodity pools. The complaints seek unspecified amounts of
compensatory and punitive damages and other relief. It is possible that
additional similar actions may be filed and that, in the course of these
actions, other parties could be added as defendants. The Dean Witter Parties
believe that they and the Partnership have strong defenses to, and they will
vigorously contest, the actions. Although the ultimate outcome of legal
proceedings cannot be predicted with certainty, it is the opinion of management
of the Dean Witter Parties that the resolution of the actions will not have a
material adverse effect on the financial condition or the results of operations
of any of the Dean Witter Parties or the Partnership.
<PAGE>
 
DEAN WITTER REYNOLDS INC.
 
Two World Trade Center
 
62nd Floor
 
New York, NY 10048
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