WITTER DEAN DIVERSIFIED FUTURES FUND III L P - 10-Q Quarterly Report

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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, 2004 or

[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to__________________

Commission File Number 0-19116

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

(Exact name of registrant as specified in its charter)

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

Demeter Management Corporation
825 Third Avenue, 9th Floor
New York, NY 10022
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 310-6444

(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 DIVERSIFIED FUTURES FUND III L.P.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2004

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF FINANCIAL CONDITION

June 30, December 31,
2004 2003
$ $
(Unaudited)
ASSETS

Equity in futures interests trading accounts:
Cash 35,944,669 39,854,002

Net unrealized gain (loss) on open contracts (MSIL) (178,188) 894,963
Net unrealized gain (loss) on open contracts (MS&Co.) (2,308,872) 1,619,468

Total net unrealized gain (loss) on open contracts (2,487,060) 2,514,431

Total Trading Equity 33,457,609 42,368,433

Interest receivable (Morgan Stanley DW) 29,940 23,823

Total Assets 33,487,549 42,392,256

LIABILITIES AND PARTNERS' CAPITAL

Liabilities

Redemptions payable 392,867 335,337
Administrative expenses payable 137,821 134,617
Accrued management fees (MSFCM) 84,086 106,564

Total Liabilities 614,774 576,518

Partners' Capital

Limited Partners (17,561.085 and
18,459.689 Units, respectively) 32,487,670 41,349,447
General Partner (208.167 Units) 385,105 466,291

Total Partners' Capital 32,872,775 41,815,738

Total Liabilities and Partners' Capital 33,487,549 42,392,256

NET ASSET VALUE PER UNIT 1,849.98 2,239.99

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

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF OPERATIONS
(Unaudited)

For the Quarters Ended June 30,

2004 2003
$ $
REVENUES

Trading loss:
Realized (3,199,312) (1,980,857)
Net change in unrealized (4,880,716) (990,800)

Total Trading Results (8,080,028) (2,971,657)

Interest income (Morgan Stanley DW) 83,180 126,503

Total (7,996,848) (2,845,154)

EXPENSES
Brokerage commissions (Morgan Stanley DW) 566,178 777,617
Management fees (MSFCM) 274,711 431,405
Administrative expenses 32,000 38,000
Transaction fees and costs 26,702 38,645
Incentive fee (MSFCM) - 7,751

Total 899,591 1,293,418

NET LOSS (8,896,439) (4,138,572)

NET LOSS ALLOCATION

Limited Partners (8,794,282) (4,095,640)
General Partner (102,157) (42,932)

NET LOSS PER UNIT

Limited Partners (490.75) (213.83)
General Partner (490.75) (213.83)

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

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF OPERATIONS
(Unaudited)

For the Six Months Ended June 30,

2004 2003
$ $
REVENUES

Trading profit (loss):
Realized (432,526) 10,860,156
Net change in unrealized (5,001,491) (5,555,724)

Total Trading Results (5,434,017) 5,304,432

Interest income (Morgan Stanley DW) 161,350 261,352

Total (5,272,667) 5,565,784

EXPENSES
Brokerage commissions (Morgan Stanley DW) 1,024,261 1,538,215
Management fees (MSFCM) 603,753 894,345
Administrative expenses 62,000 78,000
Transaction fees and costs 47,352 68,198
Incentive fee (MSFCM) - 723,309

Total 1,737,366 3,302,067

NET INCOME (LOSS) (7,010,033) 2,263,717

NET INCOME (LOSS) ALLOCATION

Limited Partners (6,928,847) 2,177,084
General Partner (81,186) 86,633

NET INCOME (LOSS) PER UNIT

Limited Partners (390.01) 96.81
General Partner (390.01) 96.81

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

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Six Months Ended June 30, 2004 and 2003
(Unaudited)

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

Partners' Capital,
December 31, 2002 20,474.779 50,740,355 1,055,124 51,795,479

Net Income - 2,177,084 86,633 2,263,717

Redemptions (983.868) (2,270,708) (595,000) (2,865,708)

Partners' Capital,
June 30, 2003 19,490.911 50,646,731 546,757 51,193,488

Partners' Capital,
December 31, 2003 18,667.856 41,349,447 466,291 41,815,738

Net Loss - (6,928,847) (81,186) (7,010,033)

Redemptions (898.604) (1,932,930) - (1,932,930)

Partners' Capital,
June 30, 2004 17,769.252 32,487,670 385,105 32,872,775

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

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)

For the Six Months Ended June 30,

2004 2003
$ $

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss) (7,010,033) 2,263,717
Noncash item included in net income (loss):
Net change in unrealized 5,001,491 5,555,724

(Increase) decrease in operating assets:
Interest receivable (Morgan Stanley DW) (6,117) 4,393
Due from Morgan Stanley DW - (12,490)

Increase (decrease) in operating liabilities:
Administrative expenses payable 3,204 (5,086)
Accrued management fees (MSFCM) (22,478) (1,754)

Net cash provided by (used for) operating activities (2,033,933) 7,804,504

CASH FLOWS FROM FINANCING ACTIVITIES

Increase (decrease) in redemptions payable 57,530 (166,826)
Redemptions of Units (1,932,930) (2,865,708)

Net cash used for financing activities (1,875,400) (3,032,534)

Net increase (decrease) in cash (3,909,333) 4,771,970

Balance at beginning of period 39,854,002 46,500,445

Balance at end of period 35,944,669 51,272,415

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

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS

June 30, 2004

(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 Diversified Futures Fund III L.P. (the
"Partnership"). The financial statements and condensed notes
herein should be read in conjunction with the Partnership's
December 31, 2003 Annual Report on Form 10-K.

1. Organization
Dean Witter Diversified Futures Fund III L.P. is a Delaware
limited partnership organized to engage primarily in the
speculative trading of futures and forward contracts on physical
commodities, and other commodity interests, including, but not
limited to, foreign currencies, financial instruments, metals,
energy, and agricultural products.

The Partnership'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").
The trading manager is Morgan Stanley Futures & Currency
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Management Inc. ("MSFCM" or the "Trading Manager"). Demeter,
Morgan Stanley DW, MS & Co., MSIL, and MSFCM are wholly-owned
subsidiaries of Morgan Stanley.

2. Related Party Transactions
The Partnership's cash is on deposit with Morgan Stanley DW, MS &
Co., and MSIL in futures and forwards trading accounts to meet
margin requirements as needed. Morgan Stanley DW pays interest on
these funds based on current 13-week U.S. Treasury bills. The
Partnership pays brokerage commissions to Morgan Stanley DW.
Management fees and incentive fees, if any, incurred by the
Partnership are paid to MSFCM.

3. Financial Instruments
The Partnership trades futures and forward contracts on physical
commodities and other commodity interests, including, but not
limited to, foreign currencies, financial instruments, metals,
energy, and agricultural products. 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.
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The market value of contracts is based on closing prices quoted
by the exchange, bank or clearing firm through which the
contracts are traded.

The Partnership's contracts are accounted for on a trade-date
basis and marked to market on a daily basis. The Partnership
accounts for its derivative investments in accordance with the
provisions of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 defines a derivative
as a financial instrument or other contract that has all three of
the following characteristics:

1) One or more underlying notional amounts or payment
provisions;
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in
market factors;
3) Terms require or permit net settlement.

Generally, derivatives include futures, forward, swaps or options
contracts, and other financial instruments with similar
characteristics such as caps, floors, and collars.
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The net unrealized gains (losses) 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 (Losses)
on Open Contracts Longest Maturities

Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $

Jun. 30, 2004 324,703 (2,811,763) (2,487,060) Mar. 2006 Sep. 2004

Dec. 31, 2003 2,370,257 144,174 2,514,431 Mar. 2004 Mar. 2004
The Partnership has credit risk associated with counterparty non-
performance. 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.

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 and forward 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 and forward 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

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

their commodity customers, all funds held by them with respect to
exchange-traded futures and forward contracts, including an
amount equal to the net unrealized gains (losses) on all open
futures and forward contracts, which funds, in the aggregate,
totaled $36,269,372 and $42,224,259 at June 30, 2004 and December
31, 2003, respectively. With respect to the Partnership's off-
exchange-traded forward currency contracts, there are no daily
exchange-required 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, however, MS &
Co. and Morgan Stanley DW will make daily settlements of losses
as needed. 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 and forwards trading accounts
established for the Trading Manager, which 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 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. 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 will result in, or 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 expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest ("Unit(s)") 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.
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 Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements in the futures and forwards markets.
The following presents a summary of the Partnership's operations
for the three and six month periods ended June 30, 2004 and 2003,
and a general discussion of its 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 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 were 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, and 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, New York City time, on
a given day. Interest income revenue, 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 Quarter and Six Months Ended June 30, 2004
The Partnership recorded losses net of interest income totaling
$7,996,848 and expenses totaling $899,591, resulting in a net loss
of $8,896,439 for the quarter ended June 30, 2004. The
Partnership's net asset value per Unit decreased from $2,340.73 at
March 31, 2004 to $1,849.98 at June 30, 2004.

The most significant trading losses of approximately 9.6% were
generated in the currency markets from positions in the Japanese
yen and Singapore dollar versus the U.S. dollar. These losses
were experienced throughout the quarter from both long and short
positions in the Japanese yen relative to the dollar as the value
of the yen experienced significant short-term price volatility
due to conflicting economic data regarding a Japanese economic
recovery, uncertainty regarding a currency market intervention by
the Bank of Japan, geopolitical concerns stemming from terror
warnings and instability in Iraq, and uncertainty regarding the
direction of U.S. and Japanese interest rates. Losses were also
recorded from positions in the Singapore dollar against the U.S.
dollar as the value of the Singapore dollar experienced
significant "whipsawing" throughout the quarter in tandem with
the Japanese yen. Elsewhere in the currency markets, losses
were recorded primarily during May and June from positions in the
euro relative to the British pound. During May, losses
were recorded from long positions in the euro versus the pound as
the value of the euro moved lower against the pound following the
Bank of England's decision to raise interest rates. Further
losses were recorded during June as the value of the euro
experienced short-term volatile price movement against most major
currencies. In the global interest rate futures markets, losses
of approximately 5.8% were recorded during April from long
European, Japanese, and Australian interest rate futures
positions as prices tumbled following the release of stronger-
than-expected U.S. jobs data. Losses continued in May from short
positions in Japanese interest rate futures as prices were pushed
higher by the Bank of Japan's decision to maintain current
interest rate levels and strong results from an auction of
Japanese Government bonds. Smaller losses were experienced
during June from short positions in European interest rate
futures as prices increased due to weaker-than-expected economic
reports and diminished expectations for the U.S. Federal Reserve
to maintain an aggressive policy towards tightening interest
rates. In the metals markets, losses of approximately 2.4% were
recorded during April from long futures positions in gold and
copper as both precious and base metals prices weakened due to
the strength in the U.S. dollar. Smaller losses were incurred
during May from short positions in aluminum futures as prices
increased due to a weaker U.S. dollar and news of strong demand
from Asia. Within the energy markets, losses of approximately
2.2% were recorded during April and June from long
positions in natural gas futures as prices reversed sharply lower
due to news of increased supply. In the agricultural sector,
losses of approximately 1.2% were incurred, primarily during May,
from short positions in coffee futures as prices strengthened due
to technically-based buying and reports of cold temperatures in
the growing regions of Brazil. Additional losses were incurred
from newly established long coffee positions during June as
prices reversed lower due to larger crop expectations.

The Partnership recorded losses net of interest income totaling
$5,272,667 and expenses totaling $1,737,366, resulting in a net
loss of $7,010,033 for the six months ended June 30, 2004. The
Partnership's net asset value per Unit decreased from $2,239.99 at
December 31, 2003 to $1,849.98 at June 30, 2004.

The most significant trading losses of approximately 14.8% were
recorded in the currency markets from positions in the Japanese
yen and Singapore dollar versus the U.S. dollar. These losses
were experienced throughout the year from both long and short
positions in the Japanese yen relative to the U.S. dollar as the
value of the yen experienced significant short-term price
volatility due to conflicting economic data regarding a Japanese
economic recovery, uncertainty regarding an intervention by Bank
of Japan in the currency markets, geopolitical concerns stemming
from terror warnings and instability in Iraq, and uncertainty
regarding the direction of U.S. and Japanese interest
rates. Losses were also recorded from positions in the Singapore
dollar against the U.S. dollar as the value of the Singapore
dollar experienced significant "whipsawing" throughout the year
in tandem with the Japanese yen. This price volatility in the
Japanese yen also resulted in losses from crossrate positions in
the euro versus the Japanese yen as the yen experienced volatile
price movement against most major currencies for the
aforementioned reasons. Elsewhere in the currency markets,
losses were experienced during May and June from positions in the
euro versus the British pound. During May, losses were recorded
from long positions in the euro versus the British pound as the
value of the euro moved lower against the pound following the
Bank of England's decision to raise interest rates. Further
losses were recorded during June as the value of the euro
experienced short-term volatile price movement against most major
currencies. Within the energy markets, losses of approximately
1.6% were recorded during April and June from long positions in
natural gas futures as prices reversed sharply lower due to news
of increased supply. Additional losses of approximately 0.8%
were incurred in the global interest rate futures markets from
long positions in Japanese and Australian interest rate futures
during April as global bond prices reversed lower following the
release of stronger-than-expected U.S. jobs data. Additional
losses were recorded during May from newly established short
positions in Japanese interest rate futures as prices were pushed
higher by the Bank of Japan's decision to maintain current
interest rate levels and strong results from an auction of
Japanese Government bonds. Within the metals markets, losses of
approximately 0.7% were experienced, primarily during April, from
long futures positions in gold as precious metals prices weakened
due to the strength in the U.S. dollar. A portion of the
Partnership's overall losses was offset by gains of approximately
1.9% recorded in the agricultural markets from long futures
positions in corn as growing U.S. exports and heightened demand
from Asia pushed prices higher during January and March.
Elsewhere in the agricultural markets, gains were experienced
from short cotton futures positions, primarily during March, as
prices trended lower due to rising supply and technically-based
selling.

For the Quarter and Six Months Ended June 30, 2003
The Partnership recorded losses net of interest income totaling
$2,845,154 and expenses totaling $1,293,418, resulting in a net
loss of $4,138,572 for the quarter ended June 30, 2003. The
Partnership's net asset value per Unit decreased from $2,840.36
at March 31, 2003 to $2,626.53 at June 30, 2003.

The most significant trading losses of approximately 5.0% were
recorded in the metals markets during April and May from short
positions in aluminum, nickel, and copper futures as prices
reversed higher amid renewed optimism concerning future growth in
industrial demand and a rebound in U.S. equity prices.
During June, losses in this sector resulted from long positions in
aluminum futures as prices declined in anticipation of an interest
rate cut by the U.S. Federal Reserve. Additional losses of
approximately 1.8% were recorded in the energy markets from long
positions in natural gas futures as prices reversed sharply lower
following news of larger than expected U.S. reserves. Smaller
losses of approximately 1.1% were recorded in the agricultural
markets during May from short positions in corn futures as prices
moved higher amid concerns of weather related crop damage in the
U.S. midwest. A portion of the Partnership's overall losses was
offset by gains of approximately 0.9% in the currency markets
primarily during April and May from long positions in the
Australian dollar versus the U.S. dollar as the value of the
Australian currency strengthened amid significant interest rate
differentials, uncertainty regarding the Bush Administration's
economic policy, renewed fears of potential terrorist attacks
against American interests, and investor preference for non-U.S.
dollar denominated assets. Elsewhere in the currency markets,
gains were recorded from long positions in the euro versus the
Japanese yen and the British pound as the value of the euro
continued to trend higher following the decision by the European
Central Bank to leave interest rates unchanged. Additional gains
of approximately 0.9% in the global stock index markets were
recorded during May and June from long positions in S&P 500 Index
futures as equity prices rallied in response to renewed
expectations for a U.S. interest rate cut and the release of
positive economic data.

The Partnership recorded revenues including interest income
totaling $5,565,784 and expenses totaling $3,302,067, resulting
in net income of $2,263,717 for the six months ended June 30,
2003. The Partnership's net asset value per Unit increased from
$2,529.72 at December 31, 2002 to $2,626.53 at June 30, 2003.

The most significant trading gains of approximately 7.0% were
recorded in the energy markets, primarily during January and
February from long positions in natural gas futures as prices
trended higher in response to prolonged frigid temperatures in
the northeastern and midwestern United States. Additional gains
were recorded from long positions in crude oil futures as prices
increased amid the looming threat of military action against Iraq
and an overall decline in inventories. In the currency markets,
gains of approximately 5.3% were produced from positions in the
British pound versus the euro as the value of the pound decreased
due to weak economic data out of the U.K and an interest rate cut
by the Bank of England. Additional gains were recorded from long
positions in the Australian dollar versus the U.S. dollar as the
value of the Australian currency increased on the heels of higher
commodity prices. During May, gains resulted from long positions
in the euro versus the Japanese yen as the value of the euro
continued to trend higher following the European Central Bank's
decision to leave interest rates unchanged. Gains of
approximately 2.7% were established in the global interest rate
markets from long positions in European and U.S. interest rate
futures as prices continued to trend higher amid continued
uncertainty in the global equity markets, investor demand for
fixed income investments and speculation of an interest rate cut
by the U.S. Federal Reserve. In the global stock index markets,
gains of approximately 1.0% resulted from long positions in S&P
500 Index futures as equity prices rallied during May and June in
response to the prospect of lower interest rates, the release of
positive economic data, and renewed expectations for a U.S.
interest rate cut. A portion of the Partnership's overall gains
was offset by losses of approximately 4.9% recorded in the metals
markets, primarily during May and June, from short positions in
aluminum, copper, and nickel futures resulted in losses as prices
reversed higher, buoyed by a rebound in U.S. equity prices and
hopes for increased industrial demand. In the agricultural
markets, losses of approximately 2.0% were experienced during May
from short positions in corn futures as prices moved higher early
in the month amid concerns of weather related crop damage in the
U.S. midwest.

Item 3. 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 inherent to the primary business activity
of the Partnership.

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, 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 and
forward contracts are settled daily through variation margin.
Gains/losses on off-exchange-traded forward currency contracts
are settled at the termination of the contract or more
frequently, as agreed upon with each counterparty.

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 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 may cause future
losses and volatility (i.e., "risk of ruin") that far exceed the
Partnership's experience to date or any reasonable expectations
based upon historical changes in market value.

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 Manager is estimated below in terms of Value at Risk
("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 Manager 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, 2004 and 2003.
At June 30, 2004 and 2003, the Partnership's total
capitalization was approximately $33 million and $51 million,
respectively.
Primary Market June 30, 2004 June 30, 2003
Risk Category Value at Risk Value at Risk

Interest Rate (2.14)% (2.05)%
Currency (1.33) (0.80)
Equity - (0.37)
Commodity (0.64) (1.91)
Aggregate Value at Risk (2.43)% (2.92)%

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 and forwards, 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, 2003 through June 30, 2004.
Primary Market Risk Category High Low Average
Interest Rate (2.14)% (0.08)% (1.28)%

Currency (2.77) (1.33) (2.05)

Equity (0.61) - (0.19)

Commodity (4.40) (0.64) (2.25)

Aggregate Value at Risk (5.67)% (2.43)% (3.65)%

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 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.

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, 2004 and 2003, and for the four
quarter-end reporting periods from July 1, 2003 through June 30,
2004. 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 not needed for margin. These balances and any market
risk they may represent are immaterial.

The Partnership also maintains a substantial portion
(approximately 102% as of June 30, 2004) 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 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 June 30, 2004, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.

Interest Rate. The Partnership's primary market exposure
at June 30, 2004 was to the global interest rate futures sector.
Exposure was primarily spread across the Japanese, European, 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 U.S. and the other G-7
countries. The G-7 countries consist of France, the U.S.,
Britain, Germany, Japan, Italy, and Canada. 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 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.

Currency. The second largest market exposure of the Partnership
at June 30, 2004 was to the currency sector. The Partnership's
currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest
rate changes, as well as political and general economic conditions
influence these fluctuations. The Partnership trades a large
number of currencies, including cross-rates - i.e., positions
between two currencies other than the U.S. dollar. At June 30,
2004, the Partnership's major exposures were to the euro, Japanese
yen, and British pound currency crosses, as well as to outright
U.S. dollar positions. Outright positions consist of the U.S.
dollar vs. other currencies. These other currencies include major
and minor currencies. Demeter does not anticipate that the risk
profile of the Partnership's currency sector will change
significantly in the future.

Commodity.
Metals. The Partnership's metals exposure at June 30, 2004
was to fluctuations in the price of base metals, such as
copper, aluminum, zinc, and nickel. Economic forces, supply
and demand inequalities, geopolitical factors, and market
expectations influence price movements in these markets. The
Trading Manager, from time to time, takes positions when
market opportunities develop, and Demeter anticipates that
the Partnership will continue to do so.

Soft Commodities and Agriculturals. At June 30, 2004, the
Partnership had exposure to the markets that comprise these
sectors. Most of the exposure was to the cotton, cocoa, and
corn 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, 2004:

Foreign Currency Balances. The Partnership's primary foreign
currency balance at June 30, 2004 was in the 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 Manager, separately, attempt to
manage the risk of the Partnership's open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership's assets among different market sectors and trading
approaches, and by monitoring the performance of the Trading
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 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 significant changes during the period
covered by this quarterly report in the Partnership's
internal controls 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. Effective June 21, 2004, the following changes have
been made to the Board of Directors and Officers of Demeter:

Mr. Jeffrey D. Hahn resigned the position of Chief Financial
Officer and Director of Demeter.

Mr. Todd Taylor, age 41, is a Director of Demeter. Mr. Taylor
began his career with Morgan Stanley in June 1987 as a Financial
Advisor in the Dallas office. In 1995, he joined the Management
Training Program in New York and was appointed Branch Manager in
St. Louis in 1997. Three years later, in 2000, Mr. Taylor was
appointed to a newly created position, Director of Individual
Investor Group ("IIG") Learning and Development, before becoming
the Director of IIG Strategy in 2002. Most recently, Mr. Taylor
has taken on a new role as the High Net Worth Segment Director.
Currently a member of the firm's E-Learning Council, Mr. Taylor
is also a current member of the Securities Industry/Regulatory
Council on Continuing Education. Mr. Taylor graduated from Texas
Tech University with a B.B.A. in Finance.

Mr. William D. Seugling, age 34, will become a Director of
Demeter once he has registered with the National Futures
Association ("NFA") as a principal, which registration is
currently pending. Mr. Seugling is an Executive Director at
Morgan Stanley and currently serves as Director of Client
Solutions for US Private Wealth Management. Mr. Seugling joined
Morgan Stanley in June 1993 as an Associate in Equity Structured
Products having previously worked in research and consulting for
Greenwich Associates from October 1991 to June 1993. Since 1994,
he has focused broadly on analysis and solutions for wealthy
individuals and families culminating in his current role within
the division. He was named Vice President in 1996 and an
Executive Director in 1999. Mr. Seugling graduated cum laude
from Bucknell University with a B.S. in Management and a
concentration in Chemistry.

Mr. Kevin Perry, age 35, is the Chief Financial Officer of
Demeter. His registration with the NFA as a principal is
currently pending. He currently serves as an Executive Director
and Controller of Client Solutions at Morgan Stanley. Mr. Perry
joined Morgan Stanley in October 2000 and is also Chief Financial
Officer of Morgan Stanley Trust National Association, Van Kampen
Funds Inc. and Morgan Stanley Distribution, Inc. Prior to
joining Morgan Stanley, Mr. Perry worked as an auditor and
consultant in the financial services practice of Ernst & Young
from October 1991 to October 2000. Mr. Perry received a B.S.
degree in Accounting from the University of Notre Dame in 1991
and is a Certified Public Accountant.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

3.01 Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of May 14, 1990, is incorporated by
reference to Exhibit A of the Partnership's prospectus
dated June 30, 1992, filed with the Securities and
Exchange Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933 on July 14, 1992.
3.02 Amendment No. 1 to the Limited Partnership Agreement of
the Partnership dated as of May 14, 1990, is incorporated
by reference to Exhibit 3.02 of the Partnership's
Quarterly Report on Form 10-Q (File No. 0-19116) filed
with the Securities and Exchange Commission on August 14,
2002.
10.01 Management Agreement among the Partnership, Demeter
Management 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 with the Securities and Exchange
Commission on May 21, 1990.
10.02 Amendment No. 1 to the Management Agreement, dated as of
June 30, 1992, is incorporated by reference to Exhibit
10.02 of the Partnership's Quarterly Report on Form 10-Q
(File No. 0-19116) filed with the Securities and Exchange
Commission on August 14, 2002.
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.
31.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to rules 13a-15(e) and 15d-15(e), as adopted
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 rules 13a-15(e) and 15d-15(e),
as adopted 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.
(B) Reports on Form 8-K - None.

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 Diversified Futures Fund III L.P.
(Registrant)

By: Demeter Management Corporation
(General Partner)

August 16, 2004 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.

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