10-Q 1 cs22.txt CORNERSTONE FUND 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2005 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 0-13298 DEAN WITTER CORNERSTONE FUND II (Exact name of registrant as specified in its charter) New York 13-3212871 (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 (Former name, former address, and former fiscal year, if changed since last report) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X DEAN WITTER CORNERSTONE FUND II INDEX TO QUARTERLY REPORT ON FORM 10-Q June 30, 2005

PART I. FINANCIAL INFORMATION Item 1. Financial Statements DEAN WITTER CORNERSTONE FUND II STATEMENTS OF FINANCIAL CONDITION

DEAN WITTER CORNERSTONE FUND II STATEMENTS OF OPERATIONS (Unaudited)

DEAN WITTER CORNERSTONE FUND II STATEMENTS OF CHANGES IN PARTNERS? CAPITAL For the Six Months Ended June 30, 2005 and 2004 (Unaudited)

DEAN WITTER CORNERSTONE FUND II STATEMENTS OF CASH FLOWS (Unaudited)

DEAN WITTER CORNERSTONE FUND II NOTES TO FINANCIAL STATEMENTS June 30, 2005 (Unaudited) The unaudited financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial condition of Dean Witter Cornerstone Fund II (the ?Partnership?). The financial statements and condensed notes herein should be read in conjunction with the Partnership's December 31, 2004 Annual Report on Form 10-K. Certain reclassifications have been made to the prior year?s financial statements to conform to the current year presentation. Such reclassifications have no impact on the Partnership?s reported net income (loss). 1. Organization Dean Witter Cornerstone Fund II is a New York limited partnership organized in 1983 to engage in the speculative trading of futures contracts, options on futures contracts, and forward contracts on foreign currencies and other commodity interests. The Partnership is one of the Dean Witter Cornerstone Funds, comprised of the Partnership, Dean Witter Cornerstone Fund III, and Dean Witter Cornerstone Fund IV. DEAN WITTER CORNERSTONE FUND II NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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?). Demeter, Morgan Stanley DW, MS & Co., and MSIL are wholly-owned subsidiaries of Morgan Stanley. The trading managers to the Partnership are Northfield Trading L.P. and John W. Henry & Company, Inc. (individually, a ?Trading Manager?, or collectively, the ?Trading Managers?). 2. Related Party Transactions The Partnership's cash is on deposit with Morgan Stanley DW, MS & Co., and MSIL in futures, forwards, and options trading accounts to meet margin requirements as needed. Monthly, Morgan Stanley DW pays the Partnership interest income equal to 80% of its average daily Net Assets at a rate equal to the average yield on 13-week U.S. Treasury bills. The Partnership pays brokerage commissions to Morgan Stanley DW. 3. Financial Instruments The Partnership trades futures contracts, options on futures contracts, and forward contracts on foreign currencies and other DEAN WITTER CORNERSTONE FUND II NOTES TO FINANCIAL STATEMENTS (CONTINUED) commodity 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 DEAN WITTER CORNERSTONE FUND II NOTES TO FINANCIAL STATEMENTS (CONTINUED) as a financial instrument or other contract that has all three of the following characteristics: 1) One or more underlying notional amounts or payment provisions; 2) Requires no initial net investment or a smaller initial net investment than would be required relative to changes in market factors; 3) Terms require or permit net settlement. Generally, derivatives include futures, forward, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars. The net unrealized gains on open contracts, 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: Net Unrealized Gains On Open Contracts Longest Maturities Exchange- Off-Exchange- Exchange- Off-Exchange- Date Traded Traded Total Traded Traded $ $ $ Jun. 30, 2005 74,321 798,817 873,138 Dec. 2006 Sep. 2005 Dec. 31, 2004 622,026 1,388,707 2,010,733 Dec. 2005 Mar. 2005 DEAN WITTER CORNERSTONE FUND II NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Partnership has credit risk associated with counterparty non- performance. 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. DEAN WITTER CORNERSTONE FUND II 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, forward, and 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, forward, and futures-styled options contracts, are required, pursuant to regulations of the Commodity Futures Trading Commission (?CFTC?), 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, forward, and futures-styled options contracts, including an amount equal to the net unrealized gains (losses) on all open futures, forward, and futures-styled options contracts, which funds, in the aggregate, totaled $13,169,559 and $17,301,303 at June 30, 2005 and December 31, 2004, respectively. With respect to the Partnership?s off-exchange-traded forward currency contracts, there are no daily exchange-required settlements of DEAN WITTER CORNERSTONE FUND II NOTES TO FINANCIAL STATEMENTS (CONCLUDED) variation in value, nor is there any requirement that an amount equal to the net unrealized gains (losses) on open forward contracts be segregated. However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open 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. Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Partnership deposits its assets with Morgan Stanley DW as non-clearing broker and MS & Co. and MSIL as clearing brokers in separate futures, forwards, and options trading accounts established for each Trading Manager. Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership?s trading. The assets are held in either non- interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds. Since the Partnership?s sole purpose is to trade in futures, forwards, and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership?s investment in futures, forwards, and options may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as ?daily price fluctuations limits? or ?daily limits?. Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or options contract has increased or decreased by an amount equal to the daily limit, positions in that futures or options contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no 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 expects to have, any capital assets. Redemptions of units of limited partnership interest (?Unit(s)?) in the future will affect the amount of funds available for investments in futures, forwards, and options in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future outflows of Units. 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. 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. Results of Operations General. The Partnership?s results depend on the Trading Managers and the ability of each Trading Manager?s trading program(s) to take advantage of price movements in the futures, forwards, and options markets. The following presents a summary of the Partnership?s operations for the three and six month periods ended June 30, 2005 and 2004, and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Managers trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Managers or will be profitable in the future. Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Managers? trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results. The Partnership?s results of operations set forth in the financial statements on pages 2 through 11 of this report are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: The contracts the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis. The difference between their cost and market value is recorded on the Statements of Operations as ?Net change in unrealized trading profit (loss)? for open (unrealized) contracts, and recorded as ?Realized trading profit (loss)? when open positions are closed out. The sum of these amounts 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 foreign currency forward contracts is based on the spot rate as of the close of business. Interest income, as well as management fees, incentive fees, and brokerage commissions expenses 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. For the Three and Six Months Ended June 30, 2005 The Partnership recorded total trading results including interest income totaling $(387,386) and expenses totaling $349,367, resulting in a net loss of $736,753 for the three months ended June 30, 2005. The Partnership?s net asset value per Unit decreased from $3,912.52 at March 31, 2005 to $3,725.69 at June 30, 2005. The most significant trading losses of approximately 10.3% were recorded in the energy sector primarily during April and June. During April, long futures positions in crude oil and its related products resulted in losses as prices reversed sharply lower after U.S. government data pointed to greater refinery production, slower demand growth forecasts, and news of growing supplies. Elsewhere in the energy markets, losses resulted from long natural gas positions as prices declined with crude oil prices. During June, losses were recorded from positions in natural gas, crude oil, and its related products as short futures positions held early in the month resulted in losses as prices strengthened on supply-related concerns. Later in June, long crude oil futures positions experienced losses after prices declined amid reports of slowing demand from China and reduced concerns for U.S. supply disruptions. News of negligible production interruptions from the Gulf of Mexico caused natural gas prices to rise, thus resulting in losses for short positions. Additional losses of approximately 2.9% were incurred in the metals markets during April and May from long futures positions in base and precious metals as prices fell due to news of increased supply, fears of weak demand due to slower economic growth, and strength in the U.S. dollar. Losses during June resulted from long futures positions in base metals, such as copper and nickel, as prices weakened in response to rumors of reduced demand from China. Short futures positions in precious metals also incurred losses after prices reversed higher at mid- month as demand increased in response to temporary U.S. dollar weakness. In the global stock indices, losses of approximately 2.1% were recorded primarily during April from long positions in Pacific Rim and European stock index futures as prices declined amid concerns for global economic growth and higher oil prices. Losses of approximately 1.9% experienced in the agricultural markets stemmed primarily from positions in corn. During April, long futures positions in corn experienced losses after prices fell amid favorable weather in U.S. growing regions. Losses incurred during May stemmed from short positions after corn prices increased due to weather-related concerns. Losses were also recorded during June from long futures positions in corn as prices dropped amid expectations of greater crop yields. A portion of the Partnership?s overall losses for the quarter was offset by gains of approximately 10.1% in the currency markets achieved primarily during May and June from short positions in the euro, Japanese yen, and Swiss franc versus the U.S. dollar as the U.S. dollar?s value increased after China downplayed rumors of a move toward a flexible exchange rate. Later in the month, the euro?s value declined further on weaker-than-expected French economic news, while below-consensus Japanese economic data pushed the yen?s value lower. Gains were also experienced during May from long positions in the Mexican peso and Brazilian real versus the U.S. dollar as the values of these currencies moved higher after Mexico?s Central Bank representatives declined to change Mexico?s monetary policy and Brazil?s Minister of Finance reported increased foreign investment in Brazil. Short positions in the euro, as well as the Japanese yen, benefited during June as euro weakness resulted from market pessimism for the future of Europe?s integration while weakness in the yen, stemmed from data indicating economic weakness. Additional gains of approximately 3.3% were recorded in the global interest rate markets primarily during May from long positions in European interest rate futures as fixed income prices trended higher amid greater demand for safe-haven investments due to uncertainty regarding significant hedge fund trading losses, European Central Bank rejections for increases in European interest rates, and concerns for Europe?s integration process. The Partnership recorded total trading results including interest income totaling $(2,954,223) and expenses totaling $757,337, resulting in a net loss of $3,711,560 for the six months ended June 30, 2005. The Partnership?s net asset value per Unit decreased from $4,658.88 at December 31, 2004 to $3,725.69 at June 30, 2005. The most significant trading losses of approximately 8.9% were experienced in the currency markets primarily during the first quarter. During January, long positions in a variety of foreign currencies, primarily the South African rand, Swiss franc, euro, and Singapore dollar, recorded losses after the U.S. dollar?s value reversed higher amid positive U.S. economic data and speculation for higher U.S. interest rates. During February, long positions in the Singapore dollar against the U.S. dollar experienced losses as the U.S. dollar?s value rose in response to positive sentiment for the Bush Administration?s budget proposal. Relaxed speculation that China would revalue its currency following the Group of Seven (?G-7?) countries meetings also boosted the U.S. dollar. The G-7 countries consist of France, the U.S., Britain, Germany, Japan, Italy and Canada. Additional losses were recorded from newly-established short positions in the Singapore dollar, as well as from existing short positions in the South African rand, Swiss franc, and euro, against the U.S. dollar as the U.S. dollar weakened due to U.S. Current-Account deficit concerns. In early March, short European currency positions resulted in losses as their values moved higher amid a sharp rise in German industrial production. Additional losses were recorded from newly-established long euro positions, as well as from existing long positions in the British pound and the Singapore dollar, versus the U.S. dollar after the value of the U.S. dollar reversed sharply higher amid an increase in U.S. interest rates and consumer prices. Additional Partnership losses of approximately 6.6% established in the energy markets occurred during January, April, and June. During January, short futures positions in crude oil incurred losses after prices increased amid speculation that OPEC would move to cut production. Forecasts for cold winter weather in the Northeastern U.S. resulted in further losses. Newly-established long futures positions in crude oil experienced additional losses after prices declined later during January on new rumors that OPEC would not cut production, thereby increasing global supply. Long futures positions in crude oil and its related products continued to incur losses during April as prices reversed sharply lower amid rising supplies and slower demand. Additional losses within the energy markets resulted from long natural gas positions as prices declined with crude oil prices. During June, losses were recorded from futures positions in natural gas, crude oil, and its related products as prices remained volatile due to concerns regarding supply and demand. Losses of approximately 4.2% resulted in the metals markets throughout the first and second quarters from positions in both precious and base metals as prices in the markets experienced choppiness amid volatility in the value of the U.S. dollar and a negative outlook in demand. Losses of approximately 1.6% incurred in the global stock indices resulted primarily during April from long positions in Pacific Rim and European stock index futures as equity prices declined amid concerns for global economic growth and higher oil prices. Losses of approximately 1.5% were recorded in the agricultural markets during the second quarter from positions in corn futures. During April, long futures positions in corn experienced losses after prices fell amid favorable weather in U.S. growing regions. Losses incurred during May stemmed from short futures positions in corn and long futures positions in cotton after corn prices increased due to weather-related concerns. Losses were also recorded during June from long futures positions in corn and cocoa after corn prices dropped amid expectations of greater crop yields. A portion of the Partnership?s overall losses was offset by gains of approximately 0.5% achieved in the global interest rate markets, largely during May, from long positions in European interest rate futures as fixed income prices increased amid greater demand for safe-haven investments amid uncertainty regarding hedge fund trading, European Central Bank rejections for increases in interest rates, and concerns for Europe?s integration process. For the Three and Six Months Ended June 30, 2004 The Partnership recorded total trading results including interest income totaling $(3,578,242) and expenses totaling $480,091, resulting in a net loss of $4,058,333 for the three months ended June 30, 2004. The Partnership?s net asset value per Unit decreased from $4,977.27 at March 31, 2004 to $4,033.75 at June 30, 2004. The most significant trading losses of approximately 11.1% were incurred in the currency markets from positions in the Japanese yen, Singapore dollar, and European currencies versus the U.S. dollar. Speculation for increases in U.S. interest rates and the release of mixed U.S. economic data caused erratic trading patterns in the value of the U.S. dollar. Better-than- anticipated improvements in Japanese economic data encouraged speculation for an increase in Japanese interest rates and caused choppy trading in the yen also. Finally, positions in the South African rand versus the U.S. dollar also contributed losses as long positions were hurt during April as the dollar moved higher in response to rising interest rate outlooks. During May, short rand positions suffered losses as the rand?s value benefited from strengthening gold prices. Losses of approximately 4.0% were recorded in the global interest rates markets, primarily during June, from positions in Japanese interest rate futures. Long positions experienced losses as prices first decreased amid anticipation that the Bank of Japan would raise interest rates during June. Later in the month, additional losses were recorded from newly-established short positions as prices rose following the Japanese Central Bank?s decision to leave their interest rate policy unchanged. Long European and Australian interest rate futures positions also incurred losses as fixed income prices tumbled following the release of stronger-than-expected U.S. jobs data during early April. Further Partnership losses of approximately 3.9% were experienced in the global stock indices. During May, long positions in Japanese and European equity index futures resulted in losses as equity prices declined in response to geopolitical concerns and expanding energy prices. Newly- established short positions in these markets, as well as in U.S. stock indices, experienced additional losses as prices rebounded later in May. During June, losses from short positions in Japanese stock indices were incurred as prices strengthened on renewed investor sentiment regarding the Japanese economic recovery. Short positions in European stock indices followed as prices benefited from the release of positive economic data. In the metals markets, losses of approximately 3.2% were experienced from positions in both precious and base metals. During April, prices weakened from a stronger U.S. dollar and a decline in Asian demand. During May, short futures positions in copper, nickel and gold accounted for the majority of sector losses. The Partnership recorded total trading results including interest income totaling $(3,043,753) and expenses totaling $1,018,727, resulting in a net loss of $4,062,480 for the six months ended June 30, 2004. The Partnership?s net asset value per Unit decreased from $4,981.39 at December 31, 2003 to $4,033.75 at June 30, 2004. The most significant trading losses of approximately 19.8% were incurred in the currency markets from short positions in the Japanese yen, South African rand, and euro versus the U.S. dollar. Short Japanese yen positions experienced losses during March as the yen reversed higher due to speculation that the Bank of Japan was relaxing its efforts to weaken the yen. Short euro positions suffered losses also during March as expectations for an interest rate reduction by the European Central Bank dissipated. During February, short positions in the South African rand produced losses as the value of the rand reversed upwards following the release of positive South African economic data. During April, May, and June, losses stemmed from positions in the Japanese yen, Singapore dollar, and European currencies versus the U.S. dollar. Speculation for increases in U.S. interest rates and the release of mixed U.S. economic data caused erratic trading patterns in the value of the dollar. Additional losses of approximately 3.6% stemmed from the global stock index markets. During May, long positions in Japanese and European equity index futures resulted in losses as equity prices declined in response to geopolitical concerns and expanding energy prices. Newly-established short positions in these markets, as well as in U.S. stock indices, experienced additional losses as prices rebounded later in May. During June, losses from short positions in Japanese stock indices were incurred as prices strengthened on renewed investor sentiment regarding the Japanese economic recovery. Short positions in European stock indices followed as prices benefited from the release of positive economic data. Additional losses of approximately 0.9% were incurred from the global interest rate markets, primarily during June, from positions in Japanese interest rate futures. Long positions experienced losses as prices first decreased amid anticipation that the Bank of Japan would raise interest rates. Later in the month, additional losses were recorded from newly-established short positions as prices rose following the Japanese Central Bank?s decision to leave their interest rate policy unchanged. Losses in the metals markets of approximately 0.8% resulted from positions in both precious and base metals. During April, industrial metals prices profited from a weaker U.S. dollar and strong Asian demand. Gold prices also increased as investor interest was reignited by a weaker U.S. dollar and fears of potential terrorist attacks. During May, short futures positions in copper, nickel, and gold accounted for the majority of sector losses. A portion of the Partnership?s overall losses for the first six months of the year was offset by gains of approximately 5.5% recorded in the energy markets, primarily during February, April, and May, from long futures positions in crude oil and its related products as low market supply, falling inventory levels, production cut announcements from OPEC, and fears of potential terrorist activity in Saudi Arabia pushed prices higher. In the agricultural markets, gains of approximately 1.4% were generated from long futures positions in corn, soybeans, and soybean related products. Growing U.S. exports and heightened demand from Asia pushed prices for these commodities higher during the first quarter. During April, short futures positions in cotton gained as prices trended lower due to news of a decrease in demand from China and a landmark decision by the World Trade Organization that denounced U.S. and European cotton subsidies. Long futures positions in live cattle supplemented sector gains as inflationary concerns lifted agricultural commodity prices higher. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction The Partnership is a commodity pool engaged primarily in the speculative trading of futures, forwards, and options. The market- sensitive instruments held by the Partnership are acquired for speculative trading purposes only and, as a result, all or substantially all of the Partnership?s assets are at risk of trading loss. Unlike an operating company, the risk of market- sensitive instruments is inherent to the primary business activity of the Partnership. The futures, forwards, and options traded by the Partnership involve varying degrees of related market risk. Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities, factors that result in frequent changes in the fair value of the Partnership?s open positions, and consequently in its earnings, whether realized or unrealized, and cash flow. Gains and losses on open positions of exchange- traded futures, forwards, and options 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 contracts in the Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at Morgan Stanley DW for the benefit of MS & Co. The Partnership?s total market risk may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Partnership?s open positions, the volatility present within the markets, and the liquidity of the markets. The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership to typically 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 experience 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 Partnership?s market risk exposures contain ?forward-looking statements? within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward- looking statements for purposes of the safe harbor, except for statements of historical fact. The Partnership accounts for open positions on the basis of mark to market accounting principles. Any loss in the market value of the Partnership?s open positions is directly reflected in the Partnership?s earnings and cash flow. The Partnership?s risk exposure in the market sectors traded by the Trading Managers is estimated below in terms of VaR. The 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 risk including equity and commodity prices, interest rates, foreign exchange rates, and correlation among these variables. The hypothetical changes in portfolio value are based on daily percentage changes observed in key market indices or other market factors (?market risk factors?) to which the portfolio is sensitive. The one-day 99% confidence level of the Partnership?s VaR corresponds to the negative change in portfolio value that, based on observed market risk factors, would have been exceeded once in 100 trading days, or one day in 100. VaR typically does not represent the worst case outcome. Demeter uses approximately four years of daily market data (1,000 observations) and revalues its portfolio (using delta-gamma approximations) for each of the historical market moves that occurred over this time period. This generates a probability distribution of daily ?simulated profit and loss? outcomes. The VaR is the appropriate percentile of this distribution. For example, the 99% one-day VaR would represent the 10th worst outcome from Demeter?s simulated profit and loss series. The Partnership?s VaR computations are based on the risk representation of the underlying benchmark for each instrument or contract and do not distinguish between exchange and non-exchange dealer-based instruments. They are also not based on exchange and/or dealer-based maintenance margin requirements. VaR models, including the Partnership?s, are continually evolving as trading portfolios become more diverse and modeling techniques and systems capabilities improve. Please note that the VaR model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either Demeter or the Trading Managers in their daily risk management activities. Please further note that VaR as described above may not be comparable to similarly titled measures used by other entities. The Partnership?s Value at Risk in Different Market Sectors The following table indicates the VaR associated with the Partnership?s open positions as a percentage of total Net Assets by primary market risk category at June 30, 2005 and 2004. At June 30, 2005 and 2004, the Partnership?s total capitalization was approximately $14 million and $17 million, respectively. Primary Market June 30, 2005 June 30, 2004 Risk Category Value at Risk Value at Risk Currency (3.31)% (1.80)% Interest Rate (1.15) (0.90) Equity (1.15) (0.73) Commodity (2.58) (2.14) Aggregate Value at Risk (4.49)% (3.01)% 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, which could positively or negatively materially impact market risk as measured by VaR. The table below supplements the quarter-end 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 July 1, 2004 through June 30, 2005. Primary Market Risk Category High Low Average Currency (3.31)% (1.28)% (2.66)% Interest Rate (1.58) (0.89) (1.15) Equity (1.15) (0.95) (1.04) Commodity (4.71) (1.62) (3.27) Aggregate Value at Risk (5.74)% (3.85)% (4.71)% Limitations on Value at Risk as an Assessment of Market Risk VaR models permit estimation of a portfolio?s aggregate market risk exposure, incorporating a range of varied market risks; reflect risk reduction due to portfolio diversification or hedging activities; and can cover a wide range of portfolio assets. However, VaR risk measures should be viewed in light of the methodology?s limitations, which include, but may not be limited to the following: * past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements; * changes in portfolio value caused by market movements may differ from those of the VaR model; * 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 June 30, 2005, and for the four quarter-end reporting periods from July 1, 2004 through June 30, 2005. VaR is not necessarily representative of the Partnership?s historic risk, nor should it be used to predict the Partnership?s future financial performance or its ability to manage or monitor risk. There can be no assurance that the Partnership?s actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days. 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 (approximately 88% as of June 30, 2005) of its available assets in cash at Morgan Stanley DW. A decline in short-term interest rates would result in a decline in the Partnership?s cash management income. This cash flow risk is not considered to be material. Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality and multiplier features of the Partnership?s market- sensitive instruments, in relation to the Partnership?s Net Assets. Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Partnership?s market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership?s primary market risk exposures, as well as the strategies used and to be used by Demeter and the Trading Managers for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership?s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership. Investors must be prepared to lose all or substantially all of their investment in the Partnership. The following were the primary trading risk exposures of the Partnership at June 30, 2005, by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Currency. The primary market exposure of the Partnership at June 30, 2005 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?s primary exposure at June 30, 2005 was to outright U.S. dollar positions. Outright positions consist of the U.S. dollar vs. other currencies. These other currencies include major and minor currencies. Demeter does not anticipate that the risk associated with the Partnership?s currency trades will change significantly in the future. Interest Rate. At June 30, 2005, the Partnership had market exposure to the global interest sector. Exposure was primarily spread across the U.S., European, and Japanese 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 and Australian interest rates will remain the primary interest rate exposures of the Partnership for the foreseeable future. The speculative futures positions held by the Partnership may range from short to long-term instruments. Consequently, changes in short, medium, or long-term interest rates may have an effect on the Partnership. Equity. At June 30, 2005, the Partnership had market exposure to equity sector. Exposure was to equity price risk in the G-7 countries. The stock index futures traded by the Partnership are by law limited to futures on broadly-based indices. At June 30, 2005, the Partnership?s primary exposures were to the DAX (Germany), S&P 500 (U.S.), MIB (Italy), and NIKKEI (Japan) stock indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the U.S. and European stock indices. Static markets would not cause major market changes, but would make it difficult for the Partnership to avoid trendless price movements, resulting in numerous small losses. Commodity. Energy. The second largest market exposure of the Partnership at June 30, 2005 was to the energy sector. Exposure was primarily to futures contracts in crude oil and its related products, and natural gas. Price movements in these markets result from geopolitical developments, particularly in the Middle East, as well as weather patterns and other economic fundamentals. Significant profits and losses, which have been experienced in the past, are expected to continue to be experienced in the future. Natural gas has exhibited volatility in price resulting from weather patterns and supply and demand factors and will likely continue in this choppy pattern. Metals. At June 30, 2005, the Partnership had market exposure in the metals sector. Exposure was to fluctuations in the price of base metals, such as copper, nickel, aluminum, and zinc, 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 Managers utilize the trading system(s) to take positions when market opportunities develop, and Demeter anticipates that the Partnership will continue to do so. Soft Commodities and Agriculturals. At June 30, 2005, the Partnership had market exposure to the markets that comprise these sectors. Most of the exposure was to the coffee, sugar, cotton, corn, and cocoa markets. Supply and demand inequalities, severe weather disruptions, and market expectations affect price movements in these markets. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposure of the Partnership at June 30, 2005: Foreign Currency Balances. The Partnership?s primary foreign currency balances at June 30, 2005 were in Hong Kong dollars, euros, and Japanese yen. The Partnership controls the non-trading risk of foreign currency balances by regularly converting them back into U.S. dollars upon liquidation of their respective positions. Qualitative Disclosures Regarding Means of Managing Risk Exposure The Partnership and the Trading Managers, separately, attempt to manage the risk of the Partnership?s open positions in essentially the same manner in all market categories traded. Demeter attempts to manage market exposure by diversifying the Partnership?s assets among different Trading Managers in a multi-manager Partnership, each of whose strategies focus on different market sectors and trading approaches, and by monitoring the performance of the Trading Managers daily. In addition, the Trading Managers establish diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument. Demeter monitors and controls the risk of the Partnership?s non- trading instrument, cash. Cash is the only Partnership investment directed by Demeter, rather than the Trading Managers. Item 4. CONTROLS AND PROCEDURES (a) As of the end of the period covered by this quarterly 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 quarterly 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. PART II. OTHER INFORMATION Item 5. OTHER INFORMATION Management. The following changes have been made to the Board of Directors and Officers of Demeter: Mr. Harry Handler and Ms. Shelley Hanan were approved as Directors of Demeter by the National Futures Association as of May 12, 2005 and June 30, 2005, respectively. Item 6. EXHIBITS 3.01 Limited Partnership Agreement of the Partnership, dated December 7, 1983, as amended as of May 11, 1984, is incorporated by reference to Exhibit 3.01 of the Partnership?s Annual Report on Form 10-K for the fiscal year ended September 30, 1984 (File No. 0-13298). 10.01 Management Agreement among the Partnership, Demeter and John W. Henry & Company, Inc., dated November 15, 1983, is incorporated by reference to Exhibit 10.03 of the Partnership?s Annual Report on Form 10-K for the fiscal year ended September 30, 1984 (File No. 0-13298). 10.02 Dean Witter Cornerstone Funds Exchange Agreement, dated as of May 31, 1984, is incorporated by reference to Exhibit 10.04 of the Partnership?s Annual Report on Form 10-K for the fiscal year ended September 30, 1984 (File No. 0- 13298). 10.03 Management Agreement among the Partnership, Demeter and Northfield Trading L.P., dated as of April 16, 1997, is incorporated by reference to Exhibit 10.03 of the Partnership?s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13298). 10.04 Amended and Restated Customer Agreement between the Partnership and Morgan Stanley DW Inc., dated as of June 22, 2000, is incorporated by reference to Exhibit 10.01 of the Partnership?s Form 8-K (File No. 0-13298) filed with the Securities and Exchange Commission on November 13, 2001. 10.05 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. 0-13298) filed with the Securities and Exchange Commission on November 13, 2001. 10.06 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. 0-13298) filed with the Securities and Exchange Commission on November 13, 2001. 10.07 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- 13298) filed with the Securities and Exchange Commission on November 13, 2001. 10.08 Amendment to Management Agreement between the Partnership and John W. Henry & Company, Inc., dated as of November 30, 2000, is incorporated by reference to Exhibit 10.1 of the Partnership?s Form 8-K (File No. 0-13298) filed with the Securities and Exchange Commission on January 3, 2001. 10.09 Amendment to Management Agreement between the Partnership and Northfield Trading L.P., dated as of November 30, 2000, is incorporated by reference to Exhibit 10.2 of the Partnership?s Form 8-K (File No. 0-13298) filed with the Securities and Exchange Commission on January 3, 2001. 10.10 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- 13298) filed with the Securities and Exchange Commission on November 13, 2001. 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. SIGNATURE Pursuant to the requirements 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. Dean Witter Cornerstone Fund II (Registrant) By: Demeter Management Corporation (General Partner) August 15, 2005 By: /s/Kevin Perry Kevin Perry Chief Financial Officer The General Partner which signed the above is the only party authorized to act for the Registrant. The Registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.

WITTER DEAN CORNERSTONE FUND II 10-Q