WITTER DEAN CORNERSTONE FUND III - 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 March 31, 2005 or

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

Commission File No. 0-13299

DEAN WITTER CORNERSTONE FUND III

(Exact name of registrant as specified in its charter)

New York 13-3190919
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

(Former name, former address, and former fiscal year, if changed
since last report)

Indicate by check-mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No___________

Indicate by check-mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

DEAN WITTER CORNERSTONE FUND III

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2005

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION

DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF OPERATIONS
(Unaudited)

DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CHANGES IN PARTNERS? CAPITAL
For the Quarters Ended March 31, 2005 and 2004
(Unaudited)

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

DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Dean Witter Cornerstone Fund III (the ?Partnership?). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership?s December 31, 2004 Annual Report
on Form 10-K. Certain reclassifications have been made to the
prior year?s financial statements to conform to the current year
presentation. Such reclassifications have no impact on the
Partnership?s reported net income (loss).

1. Organization
Dean Witter Cornerstone Fund III is a New York limited partnership
organized in 1983 to engage in the speculative trading of futures
contracts, options on futures contracts, and forward contracts on
foreign currencies and other commodity interests. The Partnership
is one of the Dean Witter Cornerstone Funds, comprised of the
Partnership, Dean Witter Cornerstone Fund II, and Dean Witter
Cornerstone Fund IV.

The Partnership?s general partner is Demeter Management
Corporation (?Demeter?). The non-clearing commodity broker is

DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Morgan Stanley DW Inc. (?Morgan Stanley DW?). The clearing
commodity brokers are Morgan Stanley & Co. Incorporated (?MS &
Co.?) and Morgan Stanley & Co. International Limited (?MSIL?).
Demeter, Morgan Stanley DW, MS & Co., and MSIL are wholly-owned
subsidiaries of Morgan Stanley. The trading managers to the
Partnership are Graham Capital Management, L.P. and Sunrise
Capital Management, Inc. (individually, a ?Trading Manager?, or
collectively, the ?Trading Managers?).

2. Related Party Transactions
The Partnership?s cash is on deposit with Morgan Stanley DW, MS &
Co., and MSIL in futures, forwards, and options trading accounts
to meet margin requirements as needed. Monthly, Morgan Stanley DW
pays the Partnership interest income equal to 80% of its average
daily Net Assets at a rate equal to the average yield on 13-week
U.S. Treasury bills. The Partnership pays brokerage commissions to
Morgan Stanley DW.

3. Financial Instruments
The Partnership trades futures contracts, options on futures
contracts, and forward contracts on foreign currencies and other
commodity interests. Futures and forwards represent contracts for

DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

delayed delivery of an instrument at a specified date and price.
Risk arises from changes in the value of these contracts and the
potential inability of counterparties to perform under the terms
of the contracts. There are numerous factors which may
significantly influence the market value of these contracts,
including interest rate volatility.

The market value of exchange-traded contracts is based on the
settlement price quoted by the exchange on the day with respect
to which market value is being determined. If an exchange-traded
contract could not have been liquidated on such day due to the
operation of daily limits or other rules of the exchange, the
settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The
market value of off-exchange-traded contracts is based on the
fair market value quoted by the counterparty.

The Partnership?s contracts are accounted for on a trade-date
basis and marked to market on a daily basis. The Partnership
accounts for its derivative investments in accordance with the
provisions of Statement of Financial Accounting Standards No.
133, ?Accounting for Derivative Instruments and Hedging
Activities? (?SFAS No. 133?). SFAS No. 133 defines a derivative

DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

as a financial instrument or other contract that has all three of
the following characteristics:

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

Generally, derivatives include futures, forward, swaps or options
contracts, and other financial instruments with similar
characteristics such as caps, floors, and collars.

The net unrealized gains (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
Off- Off-
Exchange- Exchange- Exchange- Exchange-
Date Traded Traded Total Traded Traded
$ $ $

Mar. 31, 2005 298,219 (160,128) 138,091 Sep. 2006 Jun. 2005
Dec. 31, 2004 664,621 (203,093) 461,528 Jun. 2006 Mar. 2005

DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in

which the Partnership trades is limited to the amounts reflected
in the Partnership?s Statements of Financial Condition.

The Partnership also has credit risk because Morgan Stanley DW, MS
& Co., and MSIL act as the futures commission merchants or the
counterparties, with respect to most of the Partnership?s assets.
Exchange-traded futures, forward, and futures-styled options
contracts are marked to market on a daily basis, with variations
in value settled on a daily basis. Morgan Stanley DW, MS & Co.,
and MSIL, each as a futures commission merchant for the
Partnership?s exchange-traded futures, forward, and futures-styled
options contracts, are required, pursuant to regulations of the
Commodity Futures Trading Commission (?CFTC?), to segregate from
their own assets, and for the sole benefit of their commodity
customers, all funds held by them with respect to exchange-traded
futures, forward, and futures-styled options contracts, including
an amount equal to the net unrealized gains (losses) on all open
futures, forward, and futures-styled options contracts, which
funds, in the aggregate, totaled $25,347,898 and $28,543,893 at
March 31, 2005 and December 31, 2004, respectively. With respect
to the Partnership?s off-exchange-traded forward currency
contracts, there are no daily exchange-required settlements of

DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

variation in value, nor is there any requirement that an amount
equal to the net unrealized gains (losses) on open forward
contracts be segregated. However, the Partnership is required to
meet margin requirements equal to the net unrealized loss on open
contracts in the Partnership accounts with the counterparty, which
is accomplished by daily maintenance of the cash balance in a
custody account held at Morgan Stanley DW for the benefit of MS &
Co. With respect to those off-exchange-traded forward currency
contracts, the Partnership is at risk to the ability of MS & Co.,
the sole counterparty on all such contracts, to perform. The
Partnership has a netting agreement with MS & Co. This agreement,
which seeks to reduce both the Partnership?s and MS & Co.?s
exposure on off-exchange-traded forward currency contracts, should
materially decrease the Partnership?s credit risk in the event of
MS & Co.?s bankruptcy or insolvency.

Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Liquidity. The Partnership deposits its assets with Morgan
Stanley DW as non-clearing broker, and MS & Co. and MSIL as
clearing brokers in separate futures, forwards, and options
trading accounts established for each Trading Manager. Such
assets are used as margin to engage in trading and may be used as
margin solely for the Partnership?s trading. The assets are held
in either non-interest bearing bank accounts or in securities and
instruments permitted by the CFTC for investment of customer
segregated or secured funds. Since the Partnership?s sole purpose
is to trade in futures, forwards, and options, it is expected that
the Partnership will continue to own such liquid assets for margin
purposes.

The Partnership?s investment in futures, forwards, and options
may, from time to time, be illiquid. Most U.S. futures exchanges
limit fluctuations in prices during a single day by regulations
referred to as ?daily price fluctuations limits? or ?daily
limits?. Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures or options contract
has increased or decreased by an amount equal to the daily limit,
positions in that futures or options contract can neither be taken
nor liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading.
These market conditions could prevent the Partnership from
promptly liquidating its futures or options contracts and result
in restrictions on redemptions.

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

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

Capital Resources. The Partnership does not have, nor expects to
have, any capital assets. Redemptions of units of limited
partnership interest (?Unit(s)?) in the future will affect the
amount of funds available for investments in futures, forwards,
and options in subsequent periods. It is not possible to estimate
the amount, and therefore the impact, of future outflows of Units.
There are no known material trends, favorable or
unfavorable, that would affect, nor any expected material changes
to, the Partnership?s capital resource arrangements at the
present time.

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

Results of Operations
General. The Partnership?s results depend on the Trading Managers
and the ability of each Trading Manager?s trading program(s) to
take advantage of price movements in the futures, forwards, and
options markets. The following presents a summary of the
Partnership?s operations for the three month periods ended March
31, 2005 and 2004, and a general discussion of its trading
activities during each period. It is important to note, however,
that the Trading Managers trade in various markets at different
times and that prior activity in a particular market does not mean
that such market will be actively traded by the Trading Managers
or will be profitable in the future. Consequently, the results of
operations of the Partnership are difficult to discuss other than
in the context of the Trading Managers? trading activities on
behalf of the Partnership during the period in question.
Past performance is no guarantee of future results.
The Partnership?s results of operations set forth in the financial
statements on pages 2 through 11 of this report are prepared in
accordance with accounting principles generally accepted in the
United States of America, which require the use of certain
accounting policies that affect the amounts reported in these
financial statements, including the following: The contracts the
Partnership trades are accounted for on a trade-date basis and
marked to market on a daily basis. The difference between their
cost and market value is recorded on the Statements of Operations
as ?Net change in unrealized trading profit (loss)? for open
(unrealized) contracts, and recorded as ?Realized trading profit
(loss)? when open positions are closed out. The sum of these
amounts constitutes the Partnership?s trading results. The market
value of a futures contract is the settlement price on the
exchange on which that futures contract is traded on a particular
day. The value of foreign currency forward contracts is based on
the spot rate as of the close of business. Interest income, as
well as management fees, incentive fees, and brokerage commissions
expenses of the Partnership are recorded on an accrual basis.

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

For the Quarter Ended March 31, 2005
The Partnership recorded total trading results including interest
income totaling $(2,054,276) and expenses totaling $511,562,
resulting in a net loss of $2,565,838 for the quarter ended March
31, 2005. The Partnership?s net asset value per Unit decreased
from $4,218.77 at December 31, 2004 to $3,830.56 at March 31,
2005.

The most significant trading losses of approximately 7.1% were
recorded in the currency markets throughout the quarter from
positions in European currencies versus the U.S. dollar. During
January, long positions in the euro and Swiss franc versus the
U.S. dollar resulted in losses after the U.S. dollar?s value
reversed sharply higher amid conflicting economic data,
improvements in the U.S. trade deficit data, and speculation for
higher U.S. interest rates. The U.S. dollar?s value also
advanced in response to expectations that the Chinese government
would announce postponement of its revaluation of the Chinese
yuan for the foreseeable future. Short European currency
positions against the U.S. dollar experienced additional losses
during February as the U.S. dollar weakened in response to
concerns for the considerable U.S. Current-Account deficit as
expressed by Federal Reserve Chairman Alan Greenspan. The U.S.
dollar?s value weakened further after a larger-than-expected drop
in leading economic indicators and news that South Korea?s
Central Bank planned to reduce its U.S. dollar currency
reserve. During March, reestablished long European currency
positions versus the U.S. dollar incurred losses after the value
of the U.S. dollar reversed sharply higher amid an increase in
U.S. interest rates and consumer prices. Additional Partnership
losses of approximately 0.8% recorded in the global interest rate
markets resulted during February from long positions in European
and U.S. interest rate futures as prices reversed lower after
positive economic data reduced investor demand for fixed-income
investments. Partnership losses of approximately 0.8% were also
incurred in the global stock index markets during January and
March from long positions in U.S. stock index futures. During
January, long positions experienced losses after prices finished
the month lower amid weak consumer confidence data, concerns
about higher U.S. interest rates, and the potential for
deceleration in corporate profit growth. Long positions
experienced additional losses during March after prices weakened
throughout the month in response to higher U.S. interest rates
and fears that rising energy prices would negatively impact U.S.
economic growth. Smaller Partnership losses of approximately
0.2% recorded in the energy markets resulted during January,
first from short futures positions in crude oil and its related
products after prices reversed higher amid speculation that OPEC
would move to cut production. Forecasts for cold winter weather
in the Northeastern U.S. resulted in further losses from short
crude oil positions, as well as in natural gas. Later during
January, newly established long futures positions in crude
oil experienced additional losses after prices declined on new
rumors that OPEC would not cut production and maintain existing
supply levels. A portion of the Partnership?s overall losses for
the quarter was offset by gains of approximately 0.1% in the
agricultural sector achieved primarily during March from long
futures positions in coffee, which benefited from higher prices
triggered by speculative buying and concerns for dry weather in
Brazilian growing regions.

For the Quarter Ended March 31, 2004
The Partnership recorded total trading results including interest
income totaling $5,186,646 and expenses totaling $612,280,
resulting in net income of $4,574,366 for the quarter ended March
31, 2004. The Partnership?s net asset value per Unit increased
from $3,909.31 at December 31, 2003 to $4,551.25 at March 31,
2004.

The most significant trading gains of approximately 6.8% were
recorded in the metals markets. Long futures positions in base
metals, such as copper and aluminum, supplied gains as lower
supply and heightened demand from Asia caused prices to increase.
During March, long futures positions in silver benefited as
prices consistently moved higher amid central bank demand
triggered by lower currency values. Additional gains of
approximately 4.6% were recorded in the global interest rate
markets from long positions in European and U.S. interest
rate futures. Bond prices benefited from the January release of
weak U.S. economic data and February comments from global central
banks regarding non-inflationary economic environments that did
not warrant an increase in interest rates. Profits of
approximately 2.3% were recorded in the energy markets, primarily
during February, from long futures positions in crude oil and its
related products as low market supply, falling inventory levels,
and production cut announcements from OPEC caused prices to
increase. In the agricultural markets, gains of approximately
2.1% were generated from long futures positions in soybeans,
soybean-related products, and corn. Growing U.S. exports and
heightened demand from Asia pushed prices for these commodities
higher during the quarter. Further Partnership?s overall gains
of approximately 1.4% were achieved in the global stock index
markets. During March, long positions in Japanese stock index
futures returned gains as Japanese equity prices rallied higher
in response to positive economic data that reflected the steady
pace of Japan?s economic recovery. During January, long
positions in U.S. stock index futures provided gains as prices
rallied on reports of strong company earnings. A portion of the
Partnership?s overall gains for the quarter was offset by losses
of approximately 0.4% in the currency sector. The majority of
the sector losses were incurred during March from short Japanese
yen positions against the U.S. dollar as the value of the yen
reversed higher due to speculation that the Bank of Japan
was relaxing its efforts to weaken the Japanese currency.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options. The
market-sensitive instruments held by the Partnership are acquired
for speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business activity
of the Partnership.

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

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

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

The Partnership?s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership?s
market risk is limited by the uncertainty of its speculative
trading. The Partnership?s speculative trading and use of
leverage may cause future losses and volatility (i.e., ?risk of
ruin?) that far exceed the Partnership?s experience to date under
the ?Partnership?s Value at Risk in Different Market Sectors?
section and significantly exceed the Value at Risk (?VaR?)
tables disclosed.
Limited partners will not be liable for losses exceeding the
current net asset value of their investment.

Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partnership?s
market risk exposures contain ?forward-looking statements? within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act of
1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.

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

The Partnership?s risk exposure in the market sectors traded by
the Trading Managers is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
value of a trading portfolio. The VaR model takes into
account linear exposures to risk including equity and commodity
prices, interest rates, foreign exchange rates, and correlation
among these variables. The hypothetical changes in portfolio
value are based on daily percentage changes observed in key
market indices or other market factors (?market risk factors?) to
which the portfolio is sensitive. The one-day 99% confidence
level of the Partnership?s VaR corresponds to the negative change
in portfolio value that, based on observed market risk factors,
would have been exceeded once in 100 trading days, or one day in
100. VaR typically does not represent the worst case outcome.
Demeter uses approximately four years of daily market data (1,000
observations) and revalues its portfolio (using delta-gamma
approximations) for each of the historical market moves that
occurred over this time period. This generates a probability
distribution of daily ?simulated profit and loss? outcomes. The
VaR is the appropriate percentile of this distribution. For
example, the 99% one-day VaR would represent the 10th worst
outcome from Demeter?s simulated profit and loss series.

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

VaR models, including the Partnership?s, are continually
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Managers in their daily risk management
activities. Please further note that VaR as described above may
not be comparable to similarly titled measures used by other
entities.

The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total net assets
by primary market risk category at March 31, 2005 and 2004. At
March 31, 2005 and 2004, the Partnership?s total capitalization
was approximately $25 million and $32 million, respectively.

Primary Market March 31, 2005 March 31, 2004
Risk Category Value at Risk Value at Risk

Equity (1.74)% (0.70)%
Currency (1.01) (0.24)
Interest Rate (0.54) (2.18)
Commodity (1.08) (1.25)
Aggregate Value at Risk (2.54)% (2.42)%

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

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

The table below supplements the quarter-end VaR set forth above
by presenting the Partnership?s high, low, and average VaR, as a
percentage of total net assets for the four quarter-end reporting
periods from April 1, 2004 through March 31, 2005.

Primary Market Risk Category High Low Average
Equity (2.46)% (0.38)% (1.28)%

Currency (2.49) (0.40) (1.15)

Interest Rate (3.34) (0.54) (1.51)

Commodity (1.11) (0.49) (0.87)

Aggregate Value at Risk (3.58)% (1.17)% (2.68)%

Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio?s aggregate
market risk exposure, incorporating a range of varied market
risks; reflect risk reduction due to portfolio diversification or
hedging activities; and can cover a wide range of portfolio
assets. However, VaR risk measures should be viewed in light of
the methodology?s limitations, which include, but may not be
limited to the following:
* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past market fluctuations applied to current
trading positions while future risk depends on future
positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.

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

The VaR tables provided present the results of the
Partnership?s VaR for each of the Partnership?s market risk
exposures and on an aggregate basis at March 31, 2005, and for the
four quarter-end reporting periods from April 1, 2004 through
March 31, 2005. VaR is not necessarily representative of the
Partnership?s historic risk, nor should it be used to predict the
Partnership?s future financial performance or its ability to
manage or monitor risk. There can be no assurance that the
Partnership?s actual losses on a particular day will not exceed
the VaR amounts indicated above or that such losses will not occur
more than once in 100 trading days.

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

The Partnership also maintains a substantial portion
(approximately 97% as of March 31, 2005) of its available assets
in cash at Morgan Stanley DW. A decline in short-term interest
rates would result in a decline in the Partnership?s cash
management income. This cash flow risk is not considered to be
material.

Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the
leverage, optionality, and multiplier features of the
Partnership?s market-sensitive instruments, in relation to the
Partnership?s net assets.

Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures - constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act.
The Partnership?s primary market risk exposures, as well as the
strategies used and to be used by Demeter and the Trading Managers
for managing such exposures, are subject to numerous
uncertainties, contingencies and risks, any one of which could
cause the actual results of the Partnership?s risk controls to
differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of
new market participants, increased regulation, and many other
factors could result in material losses, as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.

The following were the primary trading risk exposures of the
Partnership at March 31, 2005, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.
Equity. The Partnership?s primary market exposure at March 31,
2005 was to equity price risk in the G-7 countries. The G-7
countries consist of France, the U.S., Britain, Germany, Japan,
Italy, and Canada. The stock index futures traded by the
Partnership are by law limited to futures on broadly-based
indices. At March 31, 2005, the Partnership?s primary exposures
were to the DAX (Germany), TOPIX (Japan), and S&P 500 (U.S.)
stock indices. The Partnership is primarily exposed to the risk
of adverse price trends or static markets in the U.S., European,
and Japanese stock indices. Static markets would not cause major
market changes, but would make it difficult for the Partnership to
avoid trendless price movements, resulting in numerous small
losses.

Currency. The second largest market exposure of the Partnership
at March 31, 2005 was to the currency sector. The Partnership?s
currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes, as well as political and general economic conditions
influence these fluctuations. The Partnership trades a large
number of currencies including cross-rate ? i.e., positions
between two currencies other than the U.S. dollar. At March 31,
2005, the Partnership?s major exposures were to Canadian dollar
and Japanese yen currency crosses, as well as to outright U.S.
dollar positions. Outright positions consist of the U.S. dollar
vs. other currencies. These other currencies include major and
minor currencies. Demeter does not anticipate that the risk
associated with the Partnership?s currency trades will change
significantly in the future.

Interest Rate. At March 31, 2005, the Partnership had market
exposure to global interest rate sector. Exposure was primarily
spread across the U.S. and European 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 interest rate
exposure is generally to interest rate fluctuations in the U.S.
and the other G-7 countries. However, the Partnership also takes
futures positions in the government debt of smaller countries -
e.g., Australia. Demeter anticipates that the G-7 countries and
Australian interest rates will remain the primary interest rate
exposures of the Partnership for the foreseeable future. The
speculative futures positions held by the Partnership may range
from short to long-term instruments. Consequently, changes
in short, medium, or long-term interest rates may have an effect
on the Partnership.

Commodity.
Metals. At March 31, 2005, the Partnership had market
exposure in the metals sector. The Partnership's metals
exposure at March 31, 2005 was to fluctuations in the price
of base metals, such as copper, aluminum, zinc, and nickel,
and precious metals, such as gold. Economic forces, supply
and demand inequalities, geopolitical factors, and market
expectations influence price movements in these markets. The
Trading Managers utilize the trading system(s) to take
positions when market opportunities develop, and Demeter
anticipates that the Partnership will continue to do so.

Energy. At March 31, 2005, the Partnership had market
exposure in the energy markets. The Partnership?s energy
exposure at March 31, 2005 was shared primarily by futures
contracts in crude oil and its related products, and natural
gas. Price movements in these markets result from
geopolitical developments, particularly in the Middle East,
as well as weather patterns and other economic fundamentals.
Significant profits and losses, which have been experienced
in the past, are expected to continue to be experienced in
the future. Natural gas has exhibited volatility in
price resulting from weather patterns and supply and demand
factors and will likely continue in this choppy pattern.

Soft Commodities and Agriculturals. At March 31, 2005, the
Partnership had market exposure to the markets that comprise
these sectors. Most of the exposure was to cotton, coffee,
and wheat 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 March 31, 2005:

Foreign Currency Balances. The Partnership?s primary foreign
currency balances at March 31, 2005 were in euros, Australian
dollars, Japanese yen, and Swiss francs. The Partnership
controls the non-trading risk of foreign currency balances by
regularly converting them back into U.S. dollars upon
liquidation of their respective positions.

Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Managers, separately, attempt to
manage the risk of the Partnership?s open positions in essentially
the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership?s
assets among different Trading Managers in a multi-manager
Partnership each of whose strategies focus on different market
sectors and trading approaches, and by monitoring the performance
of the Trading Managers daily. In addition, the Trading Managers
establish diversification guidelines, often set in terms of the
maximum margin to be committed to positions in any one market
sector or market-sensitive instrument.

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

Item 4. CONTROLS AND PROCEDURES

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

(b) There have been no material changes during the period
covered by this quarterly report in the Partnership?s
internal 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

Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers.

At a meeting of the Board of Directors of Demeter held on March
30, 2005, the following Directors of Demeter resigned, and the
Board of Directors accepted such resignations effective May 1,
2005: Ms. Louise M. Wasso-Jonikas and Messrs. Raymond A. Harris,
Todd Taylor, and William D. Seugling.

At that March 30, 2005 meeting of the Board of Directors of
Demeter, the Board of Directors elected two new Directors
effective May 1, 2005, subject to approval by and registration
with the National Futures Association: Ms. Shelley Hanan and Mr.
Harry Handler.

Item 6. EXHIBITS

3.01 Limited Partnership Agreement of the Partnership, dated
as of December 7, 1983, as amended as of May 11, 1984, is
incorporated by reference to Exhibit 3.01 of the
Partnership?s Annual Report on Form 10-K for the fiscal
year ended September 30, 1984 (File No. 0-13299).

10.01 Management Agreement among the Partnership, Demeter and
Sunrise Capital Management Inc. (formerly Sunrise
Commodities Inc.), dated as of November 15, 1983, is
incorporated by reference to Exhibit 10.03 of the
Partnership?s Annual Report on Form 10-K for the fiscal
year ended September 30, 1984 (File No. 0-13299).
10.02 Management Agreement among the Partnership, Demeter and
Welton Investment Systems Corporation, dated as of July
1, 1996, is incorporated by reference to Exhibit 10.02 of
the Partnership?s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 0-13299).
10.03 Management Agreement among the Partnership, Demeter and
Graham Capital Management, L.P. dated as of January 1,
2003, is incorporated by reference to Exhibit 10.01 of
the Partnership?s Form 8-K (File No. 0-13299) filed with
the Securities and Exchange Commission on January 22,
2003.
10.04 Dean Witter Cornerstone Funds Exchange Agreement, dated
as of May 31, 1984, is incorporated by reference to
Exhibit 10.06 of the Partnership?s Annual Report on Form
10-K for the fiscal year ended September 30, 1984 (File
No. 0-13299).
10.05 Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW Inc., dated as of June
22, 2000, is incorporated by reference to Exhibit 10.01
of the Partnership?s Form 8-K (File No. 0-13299) filed
with the Securities and Exchange Commission on November
13, 2001.
10.06 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-
13299) filed with the Securities and Exchange Commission
on November 13, 2001.
10.07 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. 0-13299) filed with
the Securities and Exchange Commission on November 13,
2001.

10.08 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. 0-13299) filed with the Securities and Exchange
Commission on November 13, 2001.
10.09 Amendment to Management Agreement between the Partnership
and Welton Investment Corporation, dated as of November
30, 2000, is incorporated by reference to Exhibit 10.1 of
the Partnership?s Form 8-K (File No. 0-13299) filed with
the Securities and Exchange Commission on January 3,
2001.
10.10 Amendment to Management Agreement between the Partnership
and Sunrise Capital Management, Inc., dated as of
November 30, 2000, is incorporated by reference to the
Partnership?s Form 8-K (File No. 0-13299) filed with the
Securities and Exchange Commission on January 3, 2001.
10.11 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. 0-13299) filed with the
Securities and Exchange Commission on November 13, 2001.
31.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

Dean Witter Cornerstone Fund III
(Registrant)

By: Demeter Management Corporation
(General Partner)

May 16, 2005 By: /s/Kevin Perry
Kevin Perry
Chief Financial Officer

The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.

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