WITTER DEAN DIVERSIFIED FUTURES FUND III L P - 10-K Annual Report

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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, 2001 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 0-19116

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

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

DELAWARE 13-3577501
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Demeter Management Corporation
c/o Managed Futures Department,
825 Third Avenue, 8th Floor,
New York, NY 10022
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (201) 876-4647

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 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 (section 229.405 of this chapter) 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]

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 a specified
date within 60 days prior to the date of filing: $43,369,210 at January 31,
2002.

DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2001

DOCUMENTS INCORPORATED BY REFERENCE

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

Documents Incorporated Part of Form 10-K

Partnership's Prospectus dated
June 30, 1992. I and IV

Annual Report to Dean Witter
Diversified Futures Fund III L.P.
Limited Partners for the year
ended December 31, 2001 II, III and IV

PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter Diversified
Futures Fund III L.P. (the "Partnership") is a Delaware limited
partnership organized to engage primarily in the speculative
trading of commodity futures contracts and forward contracts on
physical commodities, and other commodity interests. The
Partnership commenced operations on November 1, 1990.

The general partner for the Partnership 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. Inc. ("MS & Co.") and
Morgan Stanley & Co. International Limited ("MSIL"). The Trading
manager is Morgan Stanley Futures & Currency Management Inc.
("MSFCM" or the "Trading Manager"). Demeter, Morgan Stanley DW,
MS & Co., MSIL and MSFCM are wholly-owned subsidiaries of Morgan
Stanley Dean Witter & Co. ("MSDW").

Effective April 2, 2001, Dean Witter Reynolds Inc. changed its
name to Morgan Stanley DW Inc.

Effective November 8, 2001, Dean Witter Futures & Currency
Management Inc. changed its name to Morgan Stanley Futures &
Currency Management Inc.

The Partnership's net asset value per unit of limited partnership
interest ("Unit(s)") as of December 31, 2001, was $1,966.55,
representing an increase of 1.07 percent from the net asset value
per Unit of $1,945.81 at December 31, 2000. For a more detailed
description of the Partnership's business see subparagraph (c).

(b) Financial Information about Segments. For financial
information reporting purposes, the Partnership is deemed to
engage in one industry segment, the speculative trading of futures
and forwards. 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 and forwards, pursuant
to trading instructions provided by the Trading Manager. For a
detailed description of the different facets of the Partnership's
business, see those portions of the Partnership's prospectus,
dated June 30, 1992 (the "Prospectus"), incorporated by reference
in this Form 10-K, set forth below:
Facets of Business
1. Summary 1. "Summary of the Prospectus"
(Pages 1-8).

2. Commodities Markets 2. "The Commodities Markets"
(Pages 52-59).

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

4. Management of the Part- 4. "The Management Agreement"
nership (Pages 50-52). "The
General Partner" (Pages
33-35) and "The Commodity
Broker" (Pages 49-50).
"The Limited Partner-
ship Agreement" (Pages
61-65).

5. Taxation of the Partner- 5. "Federal Income Tax
ship's Limited Partners Aspects" and "State and
Local Income Tax Aspects"
(Pages 70-77).

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

Item 2. PROPERTIES
The 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 825 Third Avenue, 8th
Floor, New York, NY 10022.

Demeter changed its address from 2 World Trade Center, New York,
NY 10048.
Item 3. LEGAL PROCEEDINGS
In April 2001, the Appellate Division of New York State dismissed
the class action previously disclosed in the Partnership's Form

10-K for the year ended December 31, 2000. Because plaintiffs did
not exercise their right to appeal any further, this dismissal
constituted a final resolution of the case.

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

PART II

Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND
RELATED SECURITY HOLDER MATTERS

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

(b) Holders
The number of holders of Units at December 31, 2001 was
approximately 3,194.

(c) Distributions
No distributions have been made by the Partnership since it
commenced trading operations on November 1, 1990. Demeter has
sole discretion to decide what distributions, if any, shall be
made to investors in the Partnership. Demeter currently does not
intend to make any distribution of Partnership profits.

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 and forwards trading accounts
established for the Trading Manager, which assets are used as
margin to engage in 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. The
Partnership's assets held by the commodity brokers may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in futures and forwards, it
is expected that the Partnership will continue to own such liquid
assets for margin purposes.

The Partnership's investment in futures and forwards 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 contract has increased or decreased
by an amount equal to the daily limit, positions in that futures
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
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.

The Partnership has never had illiquidity affect a material
portion of its assets.

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

Results of Operations.
General. The Partnership's results depend on the Trading Manager
and the ability of the Trading Manager's trading programs to take

advantage of price movements or other profit opportunities in the
futures and forwards markets. The following presents a summary of
the Partnership's operations for the three years ended December
31, 2001, and a general discussion of the trading activities
during each period. It is important to note, however, that the
Trading Manager 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 Manager 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 Manager's trading activities on behalf of
the Partnership and how the Partnership has performed in the past.

At December 31, 2001, the Partnership's total capital was
$43,453,540, a decrease of $4,882,434 from the Partnership's total
capital of $48,335,974 at December 31, 2000. For the year ended
December 31, 2001, the Partnership generated net income of
$618,682 and total redemptions aggregated $5,501,116.

For the year ended December 31, 2001, the Partnership recorded
total trading revenues, including interest income, of $4,638,330
and posted an increase in net asset value per Unit. The most
significant gains of approximately 10.1% were recorded in the
global interest rate futures markets throughout a majority of the

first quarter from previously established long positions in U.S.
interest rate futures as prices trended higher amid a rattled
stock market, shaky consumer confidence, positive inflation data
and interest rate cuts by the U.S. Federal Reserve. Additional
gains were recorded primarily during August, September and
October from previously established long positions in short and
intermediate term U.S. and German interest rate futures as prices
continued trending higher following an interest rate cut by the
U.S. Federal Reserve and as investors sought a safe haven from
the decline in stock prices. In soft commodities, profits of
approximately 5.5% were recorded throughout a majority of the
first and second quarter from previously established short cotton
futures positions as prices continued moving lower on weak export
sales and low demand. A portion of the Partnership's overall
gains were partially offset by losses of approximately 6.6%
recorded in the currency markets primarily during July from
previously established short positions in the euro as the value
of the European common currency reversed higher versus the
British pound as hints of possible intervention by the European
central bank to support the euro remained. During December,
additional losses were recorded from previously established long
euro positions as its value reversed lower relative to the
British pound. In the energy markets, losses of approximately
2.5% were experienced throughout the first nine months of the
year from positions in crude oil futures and its related products

as a result of volatility in oil prices due to a continually
changing outlook for supply, production and demand. Total
expenses for the year were $4,019,648, resulting in net income of
$618,682. The net asset value of a Unit increased from $1,945.81
at December 31, 2000 to $1,966.55 at December 31, 2001.

At December 31, 2000, the Partnership's total capital was
$48,335,974, a decrease of $191,594 from the Partnership's total
capital of $48,527,568 at December 31, 1999. For the year ended
December 31, 2000, the Partnership generated net income of
$8,946,492, and total redemptions aggregated $9,138,086.

For the year ended December 31, 2000, the Partnership recorded
total trading revenues, including interest income, of $13,245,317
and posted an increase in net asset value per Unit. In the
energy sector, profits of approximately 18.3% resulted primarily
from long positions in the natural gas and crude oil futures
markets. Natural gas saw its price rise to record levels in
2000. Recent low inventory levels, sluggish supply and cold
winter weather combined to push prices to such high levels. In
the crude oil market, gains were realized from long positions
earlier in the year as prices rose to nine-year highs on a
combination of cold weather, declining inventories and increasing
demand. In addition, concerns about future output levels from
the world's leading producer countries added to the upward price

momentum. Later in the year, however, profits resulted from
short positions as the price of crude oil futures fell on
expectations that Iraqi oil exports would resume and on fears
that the slowdown in the economy would curb demand while at the
same time increase supply. In the currency markets, gains of
approximately 13.4% were recorded primarily from short positions
in the euro, Swiss franc and Swedish krona as the value of these
European currencies weakened relative to the U.S. dollar amid
skepticism about Europe's economic outlook. Strong economic data
out of the U.S. and interest rate hikes in the U.S. also boosted
the dollar and, subsequently, added to the euro's difficulties.
Later in the year as the bullish trend in the U.S. dollar
reversed, additional gains were recorded from long positions in
the euro, Swiss franc and Swedish krona versus the U.S. dollar as
a result of new confidence in the European economy and overall
skepticism regarding the U.S. economy. Profits of approximately
1.7% were recorded in the agricultural markets primarily from
short positions in the corn market during the middle of the year
as the price of corn trended lower on favorable weather
conditions that resulted in good prospects for high crop yields.
A portion of these gains was offset by losses experienced in the
metals, stock index and soft commodities markets. The majority of
losses, approximately 7.0%, were experienced in the metals
markets primarily from aluminum futures. From a technical
standpoint, the price of aluminum traded in a very volatile

pattern throughout the year leaving little opportunity for the
development of trends. In addition, long positions in this
market, particularly in the second half of the year, resulted in
losses as prices declined after concerns mounted that demand
would weaken amid a cooling of the U.S. economy. Losses of
approximately 5.5% were recorded in the global stock index
futures markets. The S&P 500 Index traded in a very choppy
pattern, resulting in losses for both long and short positions.
Contributing to this price pattern was uncertainty over the state
of the U.S. economy. Total expenses for the year were $4,298,825,
resulting in net income of $8,946,492. The net asset value of a
Unit increased from $1,595.11 at December 31, 1999 to $1,945.81
at December 31, 2000.

At December 31, 1999, the Partnership's total capital was
$48,527,568, a decrease of $16,361,170 from the Partnership's
total capital of $64,888,738 at December 31, 1998. For the year
ended December 31, 1999, the Partnership generated a net loss of
$6,483,053, and total redemptions aggregated $9,878,117.

For the year ended December 31, 1999, the Partnership recorded
total trading losses, net of interest income, of $1,033,483 and
posted a decrease in net asset value per Unit. The Partnership
experienced losses in the global interest rate futures markets of
approximately 9.82%, primarily from short Australian interest

rate futures positions as prices increased during July and August
on the temporary strength in U.S. bonds and weaker-than-expected
business spending data out of Australia. Additional losses were
recorded from short Japanese bond futures positions as prices
increased during the first and third quarters. In the currency
markets, losses of approximately 7.03% were recorded primarily
from Australian dollar positions. Throughout a majority of the
first quarter, losses were experienced from long Australian
dollar positions as its value dropped significantly relative to
the U.S. dollar on speculation regarding potential currency
devaluations in the Asian region. Early in the third quarter,
additional losses were recorded from long positions in this
currency due to depressed commodities prices, emerging market
concerns and ongoing talks that China may eventually devalue its
currency. Newly established short positions in the Australian
dollar resulted in losses during September as its value
strengthened relative to the U.S. dollar following the rally in
gold prices. Offsetting currency gains of 3.82% were recorded
from Japanese yen positions, primarily long positions. During
the third quarter, gains were recorded from long positions in the
Japanese yen as the value of the yen climbed to a 44-month high
versus the U.S. dollar due to continued optimism over Japan's
economic recovery. The energy markets produced gains of
approximately 7.31%. During March, gains were recorded from long
positions in oil futures as prices moved significantly higher on
news that both OPEC and non-OPEC countries had reached an
agreement to cut total output beginning April 1st. Gains were

also recorded in this market complex during the third quarter
after OPEC ministers confirmed that they would uphold their
global cutbacks until April of 2000. Total expenses for the year
were $5,449,570, resulting in a net loss of $6,483,053. The net
asset value of a Unit decreased from $1,783.35 at December 31,
1998 to $1,595.11 at December 31, 1999.

The Partnership's overall performance record represents varied
results of trading in different futures and forwards markets. For
a further description of 2001 trading results, refer to the letter
to the Limited Partners in the accompanying Annual Report to
Limited Partners for the year ended December 31, 2001, 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.

Credit Risk.
Financial Instruments. The Partnership is a party to financial
instruments with elements of off-balance sheet market and credit
risk. The Partnership may trade futures and forwards in a
portfolio of agricultural commodities, energy products, foreign
currencies, interest rates, precious and base metals, soft
commodities and stock indices. In entering into these contracts,
the Partnership is subject to the market risk that such contracts
may be significantly influenced by market conditions, such as

interest rate volatility, resulting in such contracts being less
valuable. If the markets should move against all of the position
held by the Partnership at the same time, and if the Trading
Manager were unable to offset positions of the Partnership, the
Partnership could lose all of its assets and investors would
realize a 100% loss.

In addition to the Trading Manager's internal controls, the
Trading Manager must comply with the trading policies of the
Partnership. These trading policies include standards for
liquidity and leverage with which the Partnership must comply.
The Trading Manager and Demeter monitor the Partnership's trading
activities to ensure compliance with the trading policies.
Demeter may require the Trading Manager to modify positions of
the Partnership if Demeter believes they violate the
Partnership's trading policies.

In addition to market risk, in entering into futures and forward
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 contracts traded in the
United States and the foreign exchanges on which the Partnership
trades is the clearinghouse associated with such exchange. In
general, a clearinghouse is backed by the membership of the

exchange and will act in the event of non-performance by one of
its members or one of its member's customers, which should
significantly reduce this credit risk. For example, a
clearinghouse may cover a default by drawing upon a defaulting
member's mandatory contributions and/or non-defaulting members'
contributions to a clearinghouse guarantee fund, established
lines or letters of credit with banks, and/or the clearinghouse's
surplus capital and other available assets of the exchange and
clearinghouse, or assessing its members. In cases where the
Partnership trades off-exchange forward contracts with a
counterparty, the sole recourse of the Partnership will be the
forward contracts counterparty.

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. Any such obligation on the part of a broker appears
even less clear where the default occurs in a non-U.S.
jurisdiction.

Demeter deals with these credit risks of the Partnership in
several ways. First, it monitors the Partnership's credit
exposure to each exchange on a daily basis, calculating not only
the amount of margin required for it but also the amount of its
unrealized gains at each exchange, if any. The commodity brokers
inform the Partnership, as with all their customers, of its net
margin requirements for all its existing open positions, but do
not break that net figure down, exchange by exchange. Demeter,
however, has installed a system, which permits it to monitor the
Partnership's potential margin liability, exchange by exchange.
As a result, Demeter is able to monitor the Partnership's
potential net credit exposure to each exchange by adding the
unrealized trading gains on that 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, in addition, a minimum amount of
diversification in the Partnership's trading, usually over
several different products. One of the aims of such trading
policies has been to reduce the credit exposure of the
Partnership to a single exchange and, historically, the
Partnership's exposure to any one exchange has typically amounted
to only a small percentage of its total net assets. On those
relatively few occasions where the Partnership's credit exposure
may climb above that 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.

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

See "Financial Instruments" under Notes to Financial Statements
in the Partnership's Annual Report to Limited Partners for the
year ended December 31, 2001, which is incorporated by reference
to Exhibit 13.01 of this Form 10-K.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures and forwards. 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
central, not incidental, to the Partnership's main business
activities.

The futures and forwards 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. Fluctuations in market risk based upon these
factors result in frequent changes in the fair value of the
Partnership's open positions, and, consequently, in its earnings
and cash flow.

The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.

The Partnership's past performance is not necessarily indicative
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 may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.

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, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of exchange-
traded futures and forwards are settled daily through variation
margin.

The Partnership's risk exposure in the market sectors traded by
the Trading Manager is estimated below in terms of Value at Risk

("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the VaR
model include 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 historical observation period of the Partnership's
VaR is approximately four years. 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.

VaR models, including the Partnership's, are continuously
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 Manager in their daily risk management
activities.

The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership's open positions as a percentage of total net assets
by primary market risk category at December 31, 2001 and 2000.
At December 31, 2001 and 2000, the Partnership's total
capitalization was approximately $43 million and $48 million,
respectively.

Primary Market December 31, 2001 December 31, 2000
Risk Category Value at Risk Value at Risk

Currency (3.29)% (1.64)%
Interest Rate (0.98) (2.86)
Commodity (0.85) (1.15)
Equity - (0.11)
Aggregate Value at Risk (3.40)% (3.34)%

Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual market categories listed above. Aggregate VaR will be
lower as it takes into account correlation among different
positions and categories.

The table above represents the VaR of the Partnership's open
positions at December 31, 2001 and 2000 only and is not
necessarily representative of either the historic or future risk

of an investment in the Partnership. Because the Partnership's
only business is the speculative trading of futures and forwards,
the composition of its trading portfolio can change significantly
over any given time period, or even within a single trading day.
Any changes in open positions could positively or negatively
materially impact market risk as measured by VaR.

The table below supplements the December 31, 2001 VaR by
presenting the Partnership's high, low and average VaR as a
percentage of total net assets for the four quarterly reporting
periods from January 1, 2001 through December 31, 2001.

Primary Market Risk Category High Low Average
Currency (3.29)% (1.18)% (2.48)%
Interest Rate (2.16) (0.98) (1.51)
Commodity (2.29) (0.85) (1.46)
Equity (0.19) - (0.10)
Aggregate Value at Risk (3.88)% (2.18)% (3.33)%

Limitations on Value at Risk as an Assessment of Market Risk
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 value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other investments. The relative size of the
positions held may cause the Partnership to incur losses greatly
in excess of VaR within a short period of time, given the effects
of the leverage employed and market volatility. The VaR tables
above, as well as the past performance of the Partnership, give
no indication of such "risk of ruin". In addition, VaR risk
measures should be viewed in light of the methodology's
limitations, which include 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 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.

The VaR tables above 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, 2001 and 2000, and for the end of
the four quarterly reporting periods during calendar year 2001.
Since VaR is based on historical data, VaR should not be viewed
as predictive of 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 not needed for margin. These balances and any market
risk they may represent are immaterial.

At December 31, 2001 the Partnership's cash balance at Morgan
Stanley DW was approximately 96% its total net asset value. A
decline in short-term interest rates will 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.
- - 27 -
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 Manager for managing such exposures are
subject to numerous uncertainties, contingencies and risks, any
one of which could cause the actual results of the Partnership's
risk controls to differ materially from the objectives of such
strategies. Government interventions, defaults and
expropriations, illiquid markets, the emergence of dominant
fundamental factors, political upheavals, changes in historical
price relationships, an influx of new market participants,
increased regulation and many other factors could result in
material losses as well as in material changes to the risk
exposures and the risk management strategies of the Partnership.
Investors must be prepared to lose all or substantially all of
their investment in the Partnership.

The following were the primary trading risk exposures of the
Partnership at December 31, 2001, 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
December 31, 2001 was to the currency sector. The Partnership's
currency exposure was 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 in a large
number of currencies, including cross-rates - i.e., positions
between two currencies other than the U.S. dollar. At December
31, 2001, the Partnership's major exposures were to the euro
currency crosses and 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 profile of the Partnership's
currency sector will change significantly in the future. The
currency trading VaR figure includes foreign margin amounts
converted into U.S. dollars with an incremental adjustment to
reflect the exchange rate risk inherent to the dollar-based
Partnership in expressing VaR in a functional currency other than
dollars.

Interest Rate. The second largest market exposure at December 31,
2001 was to the global interest rate complex. Exposure was
primarily spread across the German and U.S. 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 United States and the other G-7 countries.
The G-7 countries consist of France, U.S., Britain, Germany,
Japan, Italy and Canada. However, the Partnership also takes
futures positions in the government debt of smaller nations -
e.g. Australia. Demeter anticipates that G-7 and Australian
interest rates will remain the primary interest rate exposure of
the Partnership for the foreseeable future. The speculative
futures positions held by the Partnership may range from short to
long-term instruments. Consequently, changes in short, medium or
long-term interest rates may have an effect on the Partnership.

Commodity.
Metals. The Partnership's metals exposure at December 31,
2001 was to fluctuations in the price of precious metals,
such as gold, and base metals, such as copper. Economic
forces, supply and demand inequalities, geopolitical factors

and market expectations influence price movement in these
markets. The Trading Manager has, from time to time, taken
positions as market opportunities develop. Demeter
anticipates that the Partnership will continue to be exposed
to the precious and base metals markets.

Energy. At December 31, 2001, the Partnership's energy
exposure was shared primarily by futures contracts in the
natural gas markets. Price movements in these markets
result from political developments in the Middle East,
weather patterns and other economic fundamentals. It is
possible that volatility will remain high. Significant
profits and losses, which have been experienced in the past,
are expected to be experienced in these markets. Natural
gas has exhibited volatility in prices resulting from
weather patterns and supply and demand factors and may
continue in this choppy pattern.

Soft Commodities and Agriculturals. At December 31, 2001,
the Partnership had exposure to the markets that comprise
these sectors. Most of the exposure was to the coffee, corn
and cocoa markets. Supply and demand inequalities, severe
weather disruption 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 December 31, 2001:

Foreign Currency Balances. The Partnership's primary
foreign currency balances at December 31, 2001 were in
euros, British pounds and Japanese yen. The Partnership
controls the non-trading risk of these 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 Manager, separately, attempts 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 monitoring the performance of the Trading Manager
daily. In addition, the Trading Manager establishes
diversification guidelines, often set in terms of the maximum
margin to be committed to positions in any one market sector or
market-sensitive instrument.

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

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)

Net Income/
(Loss) Per
Quarter Revenue Net Unit of Limited
Ended (Net Trading Loss) Income/(Loss) Partnership Interest

2001
March 31 $ 3,664,910 $ 2,708,834 $ 113.20
June 30 (474,713) (1,606,782) (66.76)
September 30 1,823,207 757,661 32.53
December 31 (375,074) (1,241,031) (58.23)

Total $ 4,638,330 $ 618,682 $ 20.74

2000
March 31 $ 2,949,521 $ 1,698,560 $ 58.82
June 30 1,974,514 918,169 32.17
September 30 (2,958,401) (3,861,960) (143.16)
December 31 11,279,683 10,191,723 402.87

Total $13,245,317 $ 8,946,492 $ 350.70

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

None.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

Robert E. Murray, age 41, is the Executive Director of Morgan
Stanley DW's Managed Futures Department, a leading commodity pool
operator with approximately $1.4 billion in assets across a
variety of U.S. and international public and private managed
futures funds. In this capacity, Mr. Murray is responsible for
overseeing all aspects of Morgan Stanley DW's Managed Futures
Department. Mr. Murray began at Dean Witter in 1984 and has been
closely involved in the growth of managed futures at the firm
over the last 17 years. He is also the Chairman and President of
Morgan Stanley Futures & Currency Management Inc. ("MSFCM")
(formerly known as Dean Witter Futures & Currency Management
Inc.), Morgan Stanley's internal commodity trading advisor, and
is Chairman and President of Demeter Management Corporation, the
entity which acts as a general partner for Morgan Stanley DW's
managed futures funds. Mr. Murray has served as the Vice
Chairman and a Director of the Board of the Managed Futures

Association and is currently a member of the Board of Directors
of the National Futures Association. Mr. Murray received a
Bachelors Degree in Finance from Geneseo State University in
1983.

Mitchell M. Merin, age 48, is a Director of Demeter. Mr. Merin
is also a Director of MSFCM. Mr. Merin was appointed the Chief
Operating Officer of Individual Asset Management for MSDW in
December 1998 and the President and Chief Executive Officer of
Morgan Stanley Dean Witter Advisors in February 1998. He has
been an Executive Vice President of Morgan Stanley DW since 1990,
during which time he has been Director of Morgan Stanley DW's
Taxable Fixed Income and Futures divisions, Managing Director in
Corporate Finance and Corporate Treasurer. Mr. Merin received
his Bachelors degree from Trinity College in Connecticut and his
M.B.A. degree in Finance and Accounting from the Kellogg Graduate
School of Management of Northwestern University in 1977.

Joseph G. Siniscalchi, age 56, is a Director of Demeter. Mr.
Siniscalchi joined Morgan Stanley DW in July 1984 as a First Vice
President, Director of General Accounting and served as a Senior
Vice President and Controller for Morgan Stanley DW's Securities
Division through 1997. He is currently Managing Director,
responsible for the Client Support Service Division of Morgan
Stanley DW. From February 1980 to July 1984, Mr. Siniscalchi was
Director of Internal Audit at Lehman Brothers Kuhn Loeb, Inc.

Edward C. Oelsner, III, age 60, is a Director of Demeter. Mr.
Oelsner is currently an Executive Vice President and head of the
Product Development Group at Morgan Stanley Dean Witter Advisors,
an affiliate of Morgan Stanley DW. Mr. Oelsner joined Morgan
Stanley DW in 1981 as a Managing Director in Morgan Stanley DW's
Investment Banking Department specializing in coverage of
regulated industries and, subsequently, served as head of the
Morgan Stanley DW Retail Products Group. Prior to joining Morgan
Stanley DW, Mr. Oelsner held positions at The First Boston
Corporation as a member of the Research and Investment Banking
Departments from 1967 to 1981. Mr. Oelsner received his M.B.A.
in Finance from the Columbia University Graduate School of
Business in 1966 and an A.B. in Politics from Princeton
University in 1964.

Richard A. Beech, age 50, is a Director of Demeter. Mr. Beech
has been associated with the futures industry for over 24 years.
He has been at Morgan Stanley DW since August 1984 where he is
presently an Executive Director and head of Branch Futures. Mr.
Beech began his career at the Chicago Mercantile Exchange, where
he became the Chief Agricultural Economist doing market analysis,
marketing and compliance. Prior to joining Morgan Stanley DW,
Mr. Beech also had worked at two investment banking firms in
operations, research, managed futures and sales management.

Raymond A. Harris, age 45, is currently Managing Director in
Asset Management Services. He previously served as CAO of Morgan
Stanley Dean Witter Asset Management. From July 1982 to July
1994, Mr. Harris served in financial, administrative and other
assignments at Dean Witter Reynolds, Inc. and Dean Witter,
Discover & Co. From August 1994 to January 1999, he worked in
Discover Financial Services and the firm's Credit Service
business units. Mr. Harris has been with Morgan Stanley Dean
Witter & Co. and its affiliates since July 1982. He has a B.A.
degree from Boston College and an M.B.A. in finance from the
University of Chicago.

Anthony J. DeLuca, age 39, became a Director of Demeter on
September 14, 2000. Mr. DeLuca is also a Director of MSFCM. Mr.
DeLuca was appointed the Controller of Asset Management for MSDW
in June 1999. Prior to that, Mr. DeLuca was a partner at the
accounting firm of Ernst & Young LLP, where he had MSDW as a
major client. Mr. DeLuca had worked continuously at Ernst &
Young LLP ever since 1984, after he graduated from Pace
University with a B.B.A. degree in Accounting.

Raymond E. Koch, age 46, is Chief Financial Officer of Demeter.
Mr. Koch began his career at MSDW in 1988, has overseen the
Managed Futures Accounting function since 1992, and is currently
an Executive Director in Investment Management Controllers. From

November 1979 to June 1988, Mr. Koch held various positions at
Thomson McKinnon Securities, Inc. culminating as Manager, Special
Projects in the Capital Markets Division. From August 1977 to
November 1979 he was an auditor, specializing in financial
services at Deloitte Haskins & Sells. Mr. Koch received his
B.B.A. in accounting from Iona College in 1977, an M.B.A. in
finance from Pace University in 1984 and is a Certified Public
Accountant.

All of the foregoing directors have indefinite terms.

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

(a) Security Ownership of Certain Beneficial Owners - At
December 31, 2001, 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, 2001,
Demeter owned 417.091 Units of General Partnership Interest
representing a 1.89 percent interest in the Partnership.

(c) Changes in Control - None

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 2001, 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 $2,387,626 for the year ended
December 31, 2001. In its capacity as the Partnership's Trading
Manager, MSFCM received management fees of $1,419,604 for the year
ended December 31, 2001.

PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K

(a) 1. Listing of Financial Statements
The following financial statements and report of independent
auditors, all appearing in the accompanying Annual Report to
Limited Partners for the year ended December 31, 2001, are
incorporated by reference to Exhibit 13.01 of this Form 10-K:
- - Report of Deloitte & Touche LLP, independent auditors,
for the years ended December 31, 2001, 2000 and 1999.

- - Statements of Financial Condition as of December 31,
2001 and 2000.

- - Schedule of investments as of December 31, 2001.

- - Statements of Operations, Changes in Partners' Capital,
and Cash Flows for the years ended December 31, 2001,
2000 and 1999.

- - 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,
2001, is not deemed to be filed with this report.

2. Listing of Financial Statement Schedules
No financial statement schedules are required to be filed
with this report.

(b) Reports on Form 8-K

During the quarter ended December 31, 2001, the Current
Report on Form 8-K was filed by the Partnership on November
13, 2001 for the purpose of reporting, under Item 5, the
relocation of offices of the Partnership and Demeter; the
transfer of futures and options clearing of the Partnership
to MS & Co.; and the replacement by MS & Co. as counterparty
on all foreign currency forward contracts for the
Partnership.

(c) Exhibits
Refer to Exhibit Index on Page E-1 to E-2.

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.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
(Registrant)

BY: Demeter Management Corporation,
General Partner

March 27, 2002 BY: /s/ Robert E. Murray
Robert E. Murray, Director,
Chairman of the Board and
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/ Robert E. Murray March 27, 2002
Robert E. Murray, Director,
Chairman of the Board and
President

/s/ Mitchell M. Merin March 27, 2002
Mitchell M. Merin, Director

/s/ Joseph G. Siniscalchi March 27, 2002
Joseph G. Siniscalchi, Director

/s/ Edward C. Oelsner III March 27, 2002
Edward C. Oelsner III, Director

/s/ Richard A. Beech March 27, 2002
Richard A. Beech, Director

/s/ Raymond A. Harris March 27, 2002
Raymond A. Harris, Director

/s/ Anthony J. DeLuca March 27, 2002
Anthony J. DeLuca, Director

/s/ Raymond E. Koch March 27, 2002
Raymond E. Koch, Chief
Financial Officer and Principal
Accounting Officer

EXHIBIT INDEX

ITEM

3.01 Limited Partnership Agreement of the Partnership, dated as of
July 12, 1990, is incorporated by reference to Exhibit 3.01
and Exhibit 3.02 of the Partnership's Registration Statement
on Form S-1, File No. 33-34989, filed on May 21, 1990.

3.02 Form of Amendment No. 1 to the Limited Partnership Agreement
of the Partnership is incorporated by reference to Exhibit
3.01(a) of the Partnership's Registration Statement on Form
S-1, File No. 33-47797, filed on May 11, 1992.

10.01 Management Agreement among the Partnership, Demeter Manage-
ment Corporation and Dean Witter Futures & Currency
Management Inc., dated as of July 12, 1990, is incorporated
by reference to Exhibit 10.02 of the Partnership's
Registration Statement on Form S-1, File No. 33-34989, filed
on May 21, 1990.

10.02 Form of Amendment No. 1 to the Management Agreement is
incorporated by reference to Exhibit 10.02 (a) of the
Partnership's Registration Statement on Form S-1, File no.
33-47797, filed on May 11, 1992.

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

10.04 Commodity Futures Customer Agreement between Morgan Stanley &
Co. Incorporated and the Partnership, and acknowledged and
agreed to by Morgan Stanley DW Inc., dated as of May 1, 2000,
is incorporated by reference to Exhibit 10.02 of the
Partnership's Form 8-K (File No. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.

10.05 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. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.

10.06 Foreign Exchange and Options Master Agreement between Morgan
Stanley & Co. Incorporated and the Partnership, dated as of
April 30, 2000, is incorporated by reference to Exhibit 10.05
of the Partnership's Form 8-K (File No. 0-19116) filed with
the Securities and Exchange Commission on November 13, 2001.

10.07 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-
19116) filed with the Securities and Exchange Commission on
November 13, 2001.

13.01 Annual Report of Limited Partners for the year ended December
31, 2001 is filed herewith.

Diversified
Futures
Fund III

December 31, 2001
Annual Report

[LOGO] Morgan Stanley

Dean Witter Diversified Futures Fund III L.P.

Historical Fund Performance

Presented below is the percentage change in Net Asset Value per Unit from the
start of each calendar year the Fund has traded. Also provided is the
inception-to-date return and the annualized return since inception for the
Fund. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Year Return
- ---- ------

1990 (2 months) -1.7%
1991 27.1%
1992 15.8%
1993 7.6%
1994 5.9%
1995 -4.0%
1996 -4.7%
1997 12.2%
1998 5.3%
1999 -10.6%
2000 22.0%
2001 1.1%

Inception-to-Date Return: 96.7%
Annualized Return: 6.2%

Demeter Management Corporation
c/o Managed Futures Department,
825 Third Avenue, 8th Floor,
New York, NY 10022
Telephone (201) 876-4647

Dean Witter Diversified Futures Fund III L.P.
Annual Report
2001

Dear Limited Partner:

This marks the twelfth annual report for the Dean Witter Diversified Futures
Fund III L.P. (the "Fund"). The Fund began the year at a Net Asset Value per
Unit of $1,945.81 and increased by 1.1% to $1,966.55 on December 31, 2001. The
Fund has increased by 96.7% since it began trading in November 1990 (a compound
annualized return of 6.2%). A review of trading results for the year is
provided in the Annual Report of the Trading Manager located on the next page
of this report.

Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation, c/o Managed Futures Department, 825
Third Avenue, 8th Floor, New York, NY 10022 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 not a
guarantee of future results.

Sincerely,
/s/ Robert E. Murray
Robert E. Murray
Chairman
Demeter Management Corporation
General Partner

Dean Witter Diversified Futures Fund III L.P.

Annual Report of the Trading Manager

During the year, the Fund recorded an increase in Net Asset Value per Unit. The
most significant gains were recorded primarily in the global interest rate
futures markets primarily in the first and third quarters from previously
established long positions in U.S. and European interest rate futures as prices
trended higher amid shaky consumer confidence and interest rate cuts. In soft
commodities, gains were recorded throughout a majority of the first and second
quarter from previously established short cotton futures positions as prices
continued moving lower on weak export sales and low demand. A portion of the
Fund's overall gains were partially offset by losses recorded in the currency
markets primarily during July from previously established short positions in
the euro as the value of the European common currency reversed higher versus
the British pound as hints of possible intervention by the European Central
Bank to support the euro remained. During December, additional losses were
recorded from previously established long euro positions as its value reversed
lower relative to the British pound. In the energy markets, losses were
experienced throughout the first nine months of the year from positions in
crude oil futures and its related products as a result of volatility in oil
prices due to a continually changing outlook for supply, production and demand.

We appreciate your continued investment in Dean
Witter Diversified Futures Fund III L.P.

Morgan Stanley Futures & Currency Management Inc.

Dean Witter Diversified Futures Fund III 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 III L.P. (the "Partnership") as of December 31,
2001 and 2000, including the schedule of investments as of December 31, 2001,
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, 2001.
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 auditing standards generally
accepted in the United States of America. 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 III
L.P. at December 31, 2001 and 2000 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States
of America.

/s/ Deloitte & Touche LLP

New York, New York
February 15, 2002
(February 27, 2002 as to Note 6)

Dean Witter Diversified Futures Fund III L.P.
Statements of Financial Condition

December 31,
----------------------
2001 2000
---------- ----------
$ $

ASSETS
Equity in futures interests trading accounts:
Cash 43,450,856 42,644,762

Net unrealized gain on open contracts
(MS&Co.) 1,699,966 7,351,597
Net unrealized loss on open contracts
(MSIL) (1,104,116) (986,218)
---------- ----------
Total net unrealized gain on
open contracts 595,850 6,365,379
---------- ----------
Total Trading Equity 44,046,706 49,010,141

Interest receivable (Morgan Stanley DW) 52,899 180,960
---------- ----------
Total Assets 44,099,605 49,191,101
========== ==========

LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 422,181 666,041
Administrative expenses payable 113,277 65,338
Accrued management fees (MSFCM) 110,607 123,748
---------- ----------
Total Liabilities 646,065 855,127
---------- ----------
PARTNERS' CAPITAL
Limited Partners (21,679.185 and 24,423.985
Units, respectively) 42,633,308 47,524,395
General Partner (417.091 Units) 820,232 811,579
---------- ----------
Total Partners' Capital 43,453,540 48,335,974
---------- ----------
Total Liabilities and
Partners' Capital 44,099,605 49,191,101
========== ==========
NET ASSET VALUE PER UNIT 1,966.55 1,945.81
========== ==========

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

Dean Witter Diversified Futures Fund III L.P.

Statements of Operations

For the Years Ended
December 31,
---------------------------------
2001 2000 1999
---------- ---------- ----------
$ $ $

REVENUES
Trading profit (loss):
Realized 9,125,249 6,754,178 (3,300,101)
Net change in unrealized (5,769,529) 4,405,551 189,989
---------- ---------- ----------
Total Trading Results 3,355,720 11,159,729 (3,110,112)
Interest income
(Morgan Stanley DW) 1,282,610 2,085,588 2,076,629
---------- ---------- ----------
Total 4,638,330 13,245,317 (1,033,483)
---------- ---------- ----------
EXPENSES
Brokerage commissions
(Morgan Stanley DW) 2,387,626 2,687,957 3,442,621
Management fees (MSFCM) 1,419,604 1,366,025 1,687,248
Transaction fees and costs 113,418 153,843 246,701
Administrative expenses 99,000 91,000 73,000
---------- ---------- ----------
Total 4,019,648 4,298,825 5,449,570
---------- ---------- ----------
NET INCOME (LOSS) 618,682 8,946,492 (6,483,053)
========== ========== ==========
Net Income (Loss) Allocation:
Limited Partners 610,029 8,800,221 (6,404,542)
General Partner 8,653 146,271 (78,511)

Net Income (Loss) per Unit:
Limited Partners 20.74 350.70 (188.24)
General Partner 20.74 350.70 (188.24)

Statements of Changes in Partners' Capital
For the Years Ended December 31, 2001, 2000 and 1999

Units of
Partnership Limited General
Interest Partners Partner Total
----------- ---------- ------- ----------
$ $ $

Partners' Capital,
December 31, 1998 36,385.865 64,144,919 743,819 64,888,738
Net loss -- (6,404,542) (78,511) (6,483,053)
Redemptions (5,963.246) (9,878,117) -- (9,878,117)
---------- ---------- ------- ----------
Partners' Capital,
December 31, 1999 30,422.619 47,862,260 665,308 48,527,568
Net income -- 8,800,221 146,271 8,946,492
Redemptions (5,581.543) (9,138,086) -- (9,138,086)
---------- ---------- ------- ----------
Partners' Capital,
December 31, 2000 24,841.076 47,524,395 811,579 48,335,974
Net income -- 610,029 8,653 618,682
Redemptions (2,744.800) (5,501,116) -- (5,501,116)
---------- ---------- ------- ----------
Partners' Capital,
December 31, 2001 22,096.276 42,633,308 820,232 43,453,540
========== ========== ======= ==========

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

Dean Witter Diversified Futures Fund III L.P.

Statements of Cash Flows

For the Years Ended
December 31,
-----------------------------------
2001 2000 1999
---------- ---------- -----------
$ $ $

CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 618,682 8,946,492 (6,483,053)
Noncash item included in net
income (loss):
Net change in unrealized 5,769,529 (4,405,551) (189,989)
(Increase) decrease in
operating assets:
Interest receivable
(Morgan Stanley DW) 128,061 (2,502) 17,365
Increase (decrease) in
operating liabilities:
Administrative expenses
payable 47,939 (3,894) (28,119)
Accrued management fees
(MSFCM) (13,141) (1,466) (39,733)
---------- ---------- -----------
Net cash provided by (used
for) operating activities 6,551,070 4,533,079 (6,723,529)
---------- ---------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Increase (decrease) in
redemptions payable (243,860) (529,049) 658,740
Redemptions of Units (5,501,116) (9,138,086) (9,878,117)
---------- ---------- -----------
Net cash used for financing
activities (5,744,976) (9,667,135) (9,219,377)
---------- ---------- -----------

Net increase (decrease) in cash 806,094 (5,134,056) (15,942,906)

Balance at beginning of period 42,644,762 47,778,818 63,721,724
---------- ---------- -----------
Balance at end of period 43,450,856 42,644,762 47,778,818
========== ========== ===========

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

[THIS PAGE INTENTIONALLY LEFT BLANK]

Dean Witter Diversified Futures Fund III L.P.

Schedule of Investments

December 31, 2001

Partnership Net Assets: $43,453,540

Net
Long Short Unrealized Percentage of # of Contracts/
Futures and Forward Contracts: Gain/(Loss) Gain/(Loss) Gain/(Loss) Net Assets Notional Amounts
- ------------------------------ ----------- ----------- ----------- ------------- ----------------
$ $ $ %

Foreign currency (1,473,968) 1,237,593 (236,375) (0.54) 2,188,563,000
Commodity (903,403) 295,223 (608,180) (1.40) 980
Interest rate -- 274,250 274,250 0.63 740
---------- --------- --------- -----
Grand Total: (2,377,371) 1,807,066 (570,305) (1.31)
========== ========= =====
Unrealized Currency Gain 1,166,155
---------
Total Net Unrealized Gain per Statement of
Financial Condition 595,850
=========

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

Dean Witter Diversified Futures Fund III L.P.

Notes to Financial Statements

1. Summary of Significant Accounting Policies

Organization--Dean Witter Diversified Futures Fund III L.P. (the "Partnership")
is a limited partnership organized to engage primarily in the speculative
trading of futures contracts and forward contracts on physical commodities and
other commodity interests (collectively, "futures interests").

The general partner for the Partnership 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.,
Inc. ("MS&Co.") and Morgan Stanley & Co. International Limited ("MSIL"). The
trading manager is Morgan Stanley Futures & Currency Management Inc. ("MSFCM or
the "Trading Manager"). Demeter, Morgan Stanley DW, MSFCM, MS&Co. and MSIL are
wholly-owned subsidiaries of Morgan Stanley Dean Witter & Co.

Effective April 2, 2001, Dean Witter Reynolds Inc. changed its name to Morgan
Stanley DW Inc.

Effective November 8, 2001, Dean Witter Futures & Currency Management Inc.
changed its name to Morgan Stanley Futures & Currency Management Inc.

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. 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 profit
(loss) on open contracts from one period to the next in the statements of
operations. Monthly, Morgan Stanley DW pays the Partnership interest income
based upon 80% of its average daily Net Assets for the month at a prevailing
rate for U.S. Treasury bills. For purposes of such interest payments, Net
Assets do not include monies due the Partnership on futures interests, but not
actually received.

Dean Witter Diversified Futures Fund III L.P.

Notes to Financial Statements--(Continued)

Net Income (Loss) per Unit--Net income (loss) per unit of limited partnership
interest ("Unit(s)") is computed using the weighted average number of Units
outstanding during the period.

Condensed Schedule of Investments--In March 2001, the American Institute of
Certified Public Accountants' Accounting Standards Executive Committee issued
Statement of Position ("SOP") 01-1, "Amendment to the Scope of Statement of
Position 95-2, Financial Reporting by Nonpublic Investment Partnerships, to
Include Commodity Pools" effective for fiscal years ending after December 15,
2001. Accordingly, commodity pools are now required to include a condensed
schedule of investments identifying those investments which constitute more
than 5% of net assets, taking long and short positions into account separately.
Equity in Futures Interests Trading Accounts--The Partnership's asset "Equity
in futures interests trading accounts," reflected in 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 and (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.

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 in the Partnership's statements of financial condition.

The Partnership has offset the fair value amounts recognized for forward
contracts executed with the same counterparty as allowable under terms of the
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--Brokerage
commissions are accrued at 80% of Morgan Stanley DW's published non-member
rates on a half-turn basis. Transaction fees and costs are accrued on a
half-turn basis. Brokerage commissions and transaction fees combined are capped
at 13/20 of 1% per month (a maximum 7.8% annual rate) of the Partnership's Net
Assets as of the last day of each month.

Operating Expenses--The Partnership bears all operating expenses related to its
trading activities, to a maximum of 3/5 of 1% annually of the Partnership's
average month-end Net Assets. These include filing fees, clerical,
administrative, auditing, accounting, mailing, printing and other incidental
operat-

Dean Witter Diversified Futures Fund III L.P.

Notes to Financial Statements--(Continued)

ing expenses as permitted by the Limited Partnership Agreement. In addition,
the Partnership incurs monthly management fees and may incur incentive fees.
Demeter bears 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 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 as of the end of any month 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

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.

Demeter, on behalf of the Partnership and itself, has entered into a Management
Agreement with MSFCM to make all trading decisions for the Partnership.

Compensation to MSFCM by the Partnership consists of a management fee and an
incentive fee as follows:

Management Fee--The monthly management fee is accrued daily at the rate of 1/4
of 1% per month of the Net Assets (a 3% annual rate), as defined in the
Management Agreement, at each month-end.

Incentive Fee--The Partnership pays a quarterly incentive fee to MSFCM equal to
15% of the trading profits earned by the Partnership as of the end of each
calendar quarter. Trading profits represent the amount by which profits from
futures and forward trading exceed losses after brokerage commissions,
management fees, transaction fees and costs and administrative expenses are
deducted. Such incentive fee is

Dean Witter Diversified Futures Fund III L.P.

Notes to Financial Statements--(Continued)

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.

3. Financial Instruments

The Partnership trades futures contracts and forward contracts on physical
commodities and other 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 Partnership accounts for its derivative investments in accordance with the
provisions of Statement of Financial Accounting Standard 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.

The net unrealized gains (losses) 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:

Net Unrealized Gains/
(Losses) on Open Contracts Longest Maturities
------------------------------ --------------------
Off- Off-
Exchange- Exchange- Exchange- Exchange-
Year Traded Traded Total Traded Traded
---- --------- --------- --------- --------- ----------
$ $ $

2001 832,227 (236,377) 595,850 June 2003 April 2002
2000 4,504,930 1,860,449 6,365,379 June 2002 March 2001

The Partnership has credit risk associated with counterparty nonperformance.
The credit risk associated with the instruments in which the Partnership is
involved is limited to the amounts reflected in the Partnership's statements of
financial condition.

Dean Witter Diversified Futures Fund III 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 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 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 contracts, including
an amount equal to the net unrealized gains (losses) on all open futures
contracts, which funds, in the aggregate totaled, $44,283,083 and $47,149,692
at December 31, 2001 and 2000, 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 gains (losses) 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 MS&Co., the sole counterparty on all
of 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.

4. Financial Highlights

PER UNIT:
---------

NET ASSET VALUE, JANUARY 1, 2001: $1,945.81
---------
NET OPERATING RESULTS:
Realized Profit 384.35
Unrealized Loss (246.62)
Interest Income 54.83
Expenses (171.82)
---------
Net Income 20.74
---------

NET ASSET VALUE, DECEMBER 31, 2001: $1,966.55
=========

Expense Ratio 8.7%
Net Income Ratio 1.3%

TOTAL RETURN 1.1%

5. Legal Matters

In April 2001, the Appellate Division of New York State dismissed the class
action previously disclosed in the Partnership's Annual Report for the year
ended December 31, 2000. Because plaintiffs did not exercise their right to
appeal any further, the dismissal constituted a final resolution of the case.

Dean Witter Diversified Futures Fund III L.P.

Notes to Financial Statement--(Concluded)

6. Subsequent Event

On February 27, 2002, the Partnership received notification of a preliminary
entitlement to payment from the Sumitomo Copper Litigation Settlement
Administrator. Such preliminary award, however, is subject to a court hearing
scheduled on April 10, 2002 and is entirely contingent on the court's final
approval. Any amount ultimately received will be accounted for in the period
received, for the benefit of the limited partners at the date of receipt.

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