WITTER DEAN CORNERSTONE FUND III - 10-Q Quarterly Report

Back to GetFilings.com

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 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
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 CORNERSTONE FUND III

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2004

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 OPERATIONS
(Unaudited)

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

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

DEAN WITTER CORNERSTONE FUND III
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 Cornerstone Fund III (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 Cornerstone Fund III is a New York limited partnership
organized 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
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").
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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. Morgan Stanley DW pays
interest on these funds based on 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
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 CORNERSTONE FUND III
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 CORNERSTONE FUND III
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
Off- Off-
Exchange- Exchange- Exchange- Exchange-
Date Traded Traded Total Traded Traded
$ $ $

Jun. 30, 2004 (748,374) (63,135) (811,509) Dec. 2005 Sep. 2004
Dec. 31, 2003 2,061,496 400,494 2,461,990 Jun. 2005 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, 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
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

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 $27,362,575 and $27,930,851 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, forwards and options trading
accounts established for each 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, 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 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, forwards
and options 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 Managers
and the ability of each Trading Manager's trading programs to take
advantage of price movements in the futures, forwards and options
markets. The following presents a summary of the Partnership's
operations for the three and six month periods ended June 30, 2004
and 2003, 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 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
$4,086,272 and expenses totaling $493,616, resulting in a net
loss of $4,579,888 for the quarter ended June 30, 2004. The
Partnership's net asset value per Unit decreased from $4,551.25
at March 31, 2004 to $3,895.39 at June 30, 2004.

The most significant trading losses of approximately 7.8% were
recorded in the global interest rate markets. Losses were
incurred from long U.S. and European interest rate futures
positions during April as fixed income prices tumbled following
the release of stronger than expected U.S. jobs data. Short
positions during May and June suffered losses as prices moved
higher amid conjecture that the U.S. Federal Reserve would
possibly hold off raising interest rates should U.S. economic
growth stall. Additional Partnership losses of approximately
3.2% stemmed primarily from long positions in both base and
precious metals during April as prices weakened due to the
strength of the U.S. dollar and fears of reduced demand from
China. Additionally, the U.S. dollar's move higher caused losses
in long gold and silver futures positions as precious metals
prices conversely moved lower. During May, short
positions in the metals complex generated losses as industrial
metals prices rebounded amid a weaker U.S. dollar and stronger
Asian demand. Gold prices also increased as investor interest
was reignited by the weak U.S. dollar and fears of potential
terrorist attacks. During June, losses stemmed from long futures
positions in copper as prices drifted lower on news of increased
supply from Chile and muted demand. Further losses of
approximately 2.9% were incurred in the currency markets
throughout the quarter. Long positions in the Japanese yen
versus the U.S. dollar generated losses during April as the
dollar surged following the release of stronger than expected
U.S. jobs data. The yen also weakened due to Japanese government
currency market intervention. During May, short positions in the
Japanese yen versus the U.S. dollar incurred losses as the
dollar's value declined in response to fears of potential
terrorist attacks, expanding energy prices, and the release of
weaker than expected economic data. Losses were also incurred on
long positions in the British pound versus the U.S. dollar amid
speculation for rising U.S. interest rates. During June, long
positions in the British pound versus the U.S. dollar incurred
losses as the dollar reversed higher amid strong U.S. consumer
confidence figures. Additional losses of approximately 1.1%
resulted from positions in the global stock index markets,
primarily during May. Long positions in U.S. and Japanese equity
index futures resulted in losses as equity prices were negatively
impacted by geopolitical concerns and expanding energy
prices. Newly established short positions then experienced
additional losses as prices rebounded later in May due to a
slight pullback in oil prices and strong earnings from technology
companies. A portion of the Partnership's overall losses for the
quarter was offset by gains of approximately 1.0% achieved in the
energy markets, primarily during May, from long futures positions
in crude oil and its related products. Crude oil prices surged
past $41 a barrel, reaching twenty-one year highs, amid fears of
terrorist attacks on Saudi Arabian oil facilities and disruptions
in Iraqi oil production.

The Partnership recorded revenues including interest income
totaling $1,100,374 and expenses totaling $1,105,896, resulting
in a net loss of $5,522 for the six months ended June 30, 2004.
The Partnership's net asset value per Unit decreased from
$3,909.31 at December 31, 2003 to $3,895.39 at June 30, 2004.

The most significant trading gains of approximately 3.4% were
recorded in the energy markets during February, April and May.
Long futures positions in crude oil and its related products
benefited during February from low market supply, falling
inventory levels, and production cut announcements from OPEC
caused prices to increase. Fears of terrorist attacks during
April and May forced crude oil prices above $41 per barrel and
generated additional gains for long futures positions.
Additional gains of approximately 3.3% were achieved in the
metals markets. During the first quarter, long futures positions
in base metals, such as copper, 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. Further Partnership gains of
approximately 1.9% resulted in the agricultural markets 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 first quarter. A
portion of the Partnership's gains during the first six months of
the year was offset by losses of approximately 3.6% incurred
during the second quarter in the global interest rate markets.
Losses resulted from long U.S. interest rate futures positions
during April as global fixed income prices tumbled following the
release of stronger than expected U.S. jobs data. Short
positions during May and June suffered losses as prices moved
higher amid conjecture that the U.S. Federal Reserve would
possibly hold off raising interest rates should U.S. economic
growth stall. Additional losses of 3.3% were experienced in the
currency markets. Long positions in the Japanese yen versus the
U.S. dollar generated losses during April as the dollar surged
following the release of stronger than expected U.S. jobs data.
The yen also weakened due to Japanese government currency market
intervention. Losses were also incurred on long positions in the
British pound versus the U.S. dollar amid speculation for
rising U.S. interest rates. Short positions in the Japanese yen
versus the U.S. dollar incurred losses during May as the dollar's
value declined in response to fears of potential terrorist
attacks, expanding energy prices, and the release of weaker than
expected economic data.

For the Quarter and Six Months Ended June 30, 2003
The Partnership recorded revenues including interest income
totaling $892,439 and expenses totaling $584,077, resulting in
net income of $308,362 for the quarter ended June 30, 2003. The
Partnership's net asset value per Unit increased from $3,789.16
at March 31, 2003 to $3,829.52 at June 30, 2003.

The most significant trading gains of approximately 4.3% were
recorded in the global interest rate markets during May from long
positions in U.S. and European interest rate futures as prices
trended higher amid speculation of an interest rate cut by the
U.S. Federal Reserve and lingering doubts concerning a global
economic recovery. Additional gains of approximately 3.3% were
recorded in the currency markets, primarily during April and May,
from long positions in the euro versus the U.S. dollar 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 were provided from long positions in
the euro versus the Japanese yen as the value of the euro also
increased against the yen. A portion of the Partnership's
overall gains for the quarter was offset by losses of
approximately 2.0% experienced in the global stock index markets
from short positions in European and U.S. stock index futures as
global equity prices rallied during April in response to positive
earnings announcements and the conclusion of the war in Iraq.
During May, losses in this sector were incurred from short
positions in Japanese stock index futures as prices reversed
higher on increased optimism that the Japanese government would
take steps to support that nation's stock market. In the
agricultural markets, losses of approximately 1.7% resulted from
long positions in cotton futures during April as prices declined
due to strong selling prompted by reports of lower exports and
shrinking Asian demand. Losses of approximately 1.5% were
recorded in the metals markets, primarily during June from long
positions in copper and aluminum futures as prices declined in
anticipation of an interest rate cut by the U.S. Federal Reserve.

The Partnership recorded revenues including interest income
totaling $3,135,512 and expenses totaling $1,279,128, resulting in
net income of $1,856,384 for the six months ended June 30, 2003.
The Partnership's net asset value per Unit increased from
$3,592.21 at December 31, 2002 to $3,829.52 at June 30, 2003.

The most significant trading gains of approximately 5.7% were
experienced in the global interest rate markets from long
positions in U.S. and European interest rate futures during
January, February and May as prices trended higher amid investor
demand for fixed income investments due to uncertainty in global
equity markets and lingering doubts concerning a global economic
recovery. In the currency markets, gains of approximately 4.6%
were experienced from long positions in the euro versus the U.S.
dollar and the Japanese yen as the value of the euro trended
higher during January and early in the second quarter following
the decision by the European Central Bank to leave interest rates
unchanged. Gains of approximately 4.1% were recorded in the
energy markets during January and February from long positions in
natural gas futures as prices continued to trend higher in
response to prolonged frigid temperatures in the northeastern and
midwestern United States. Additional gains resulted from long
positions in crude oil futures as prices rallied during the same
period amid the looming threat of military action against Iraq and
an overall decline in inventories. A portion of the Partnership's
overall gains was offset by losses of approximately 2.3% in the
metals markets from positions in aluminum and copper futures as
prices whipsawed throughout a majority of the first half of the
year, thus resulting in trendless markets. Additional losses of
approximately 1.5% experienced in the global stock index markets
resulted from short positions in U.S. stock index futures during
April as global equity prices rallied in response to positive
earnings announcements and the conclusion of the war in Iraq.
Losses of approximately 1.4% in the agricultural markets were
incurred from short positions in corn futures during May as
prices moved higher 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, 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. Gain/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 Managers 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 Managers in their daily risk management activities.
Please further note that VaR as described above may not be
comparable to similarly titled measures used by other entities.

The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership's open positions as a percentage of total net assets
by primary market risk category at June 30, 2004 and 2003.
At June 30, 2004 and 2003, the Partnership's total capitalization
was approximately $27 million and $28 million, respectively.

Primary Market June 30, 2004 June 30, 2003
Risk Category Value at Risk Value at Risk

Interest Rate (0.70)% (1.55)%
Equity (0.55) (1.12)
Currency (0.40) (1.09)
Commodity (0.49) (1.41)
Aggregate Value at Risk (1.17)% (2.45)%

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

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

The table below supplements the quarter-end VaR set forth above
by presenting the Partnership's high, low and average VaR, as a
percentage of total net assets for the four quarter-end reporting
periods from July 1, 2003 through June 30, 2004.

Primary Market Risk Category High Low Average
Interest Rate (2.18)% (0.33)% (0.89)%

Equity (2.23) (0.55) (1.24)

Currency (1.46) (0.24) (0.88)

Commodity (1.73) (0.49) (1.26)

Aggregate Value at Risk (3.19)% (1.17)% (2.38)%

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 99% 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
Managers for managing such exposures, are subject to numerous
uncertainties, contingencies and risks, any one of which could
cause the actual results of the Partnership's risk controls to
differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of
new market participants, increased regulation and many other
factors could result in material losses, as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.

The following were the primary trading risk exposures of the
Partnership at June 30, 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 sector. Exposure was
primarily spread across the U.S., Japanese 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. 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
exposures of the Partnership for the foreseeable future. The
speculative futures positions held by the Partnership may range
from short to long-term instruments. Consequently, changes in
short, medium or long-term interest rates may have an effect on
the Partnership.

Equity. The second largest market exposure of the Partnership at
June 30, 2004 was to equity price risk in the G-7 countries. The
stock index futures traded by the Partnership are by law limited
to futures on broadly-based indices. At June 30, 2004, the
Partnership's primary exposures were to the DAX (Germany), CAC 40
(France), TOPIX (Japan), Nikkei (Japan), and NASDAQ (U.S.) stock
indices. The Partnership is primarily exposed to the risk of
adverse price trends or static markets in the U.S., Japanese and
European stock indices. Static markets would not cause major
market changes but would make it difficult for the Partnership to
avoid trendless price movements, resulting in numerous
small losses.

Currency. The third 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-rate - 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, British
pound, Australian and Canadian dollar 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.
Energy. The Partnership's energy exposure at June 30, 2004
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.

Metals. The Partnership's metals exposure at June 30, 2004
was to fluctuations in the price of precious metals, such as
gold and base metals, such as aluminum, copper, and zinc.
Economic forces, supply and demand inequalities, geopolitical
factors, and market expectations influence price movements in
these markets. The Trading Managers, from time to time, take
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 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 June 30, 2004:

Foreign Currency Balances. The Partnership's primary foreign
currency balances at June 30, 2004 were in euros, Japanese
yen and Australian dollars. 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, 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 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 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 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 Cornerstone Fund III
(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.