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

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004 or

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

Commission File Number 0-19116

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

(Exact name of registrant as specified in its charter)

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

Demeter Management Corporation
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

825 Third Avenue, 9th Floor, New York, NY 10022

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

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

Yes X No___________

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

Yes No X

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2004

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

For the Three Months For the Nine Months
Ended September 30, Ended September 30,

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

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

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

September 30, 2004

(Unaudited)

The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Dean Witter Diversified Futures Fund III L.P. (the
"Partnership"). The financial statements and condensed notes
herein should be read in conjunction with the Partnership's
December 31, 2003 Annual Report on Form 10-K.

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

The Partnership's general partner is Demeter Management
Corporation ("Demeter"). The non-clearing commodity broker is
Morgan Stanley DW Inc. ("Morgan Stanley DW"). The clearing
commodity brokers are Morgan Stanley & Co. Incorporated ("MS &
Co.") and Morgan Stanley & Co. International Limited ("MSIL").
The trading manager is Morgan Stanley Futures & Currency
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

On February 27, 2002, the Partnership received notification of a
preliminary entitlement to payment from the Sumitomo Copper
Litigation Settlement Administrator, and the Partnership has
received settlement award payments in the amount of $1,107,007 as
of August 30, 2002 and $10,904 as of July 30, 2004. Any amounts
received are accounted for in the period received, for the benefit
of the limited partners at the date of receipt.

2. Related Party Transactions
The Partnership's cash is on deposit with Morgan Stanley DW, MS &
Co., and MSIL in futures and forwards trading accounts to meet
margin requirements as needed. Monthly, Morgan Stanley DW pays
the Partnership interest income equal to 80% of its average daily
Net Assets for the month at a rate equal to the average yield on
13-week U.S. Treasury bills. The Partnership pays brokerage
commissions to Morgan Stanley DW. Management fees and incentive
fees (if any) incurred by the Partnership are paid to MSFCM.

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

3. Financial Instruments
The Partnership trades futures and forward contracts on physical
commodities and other commodity interests, including, but not
limited to, foreign currencies, financial instruments, metals,
energy, and agricultural products. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified
date and price. Risk arises from changes in the value of these
contracts and the potential inability of counterparties to perform
under the terms of the contracts. There are numerous factors
which may significantly influence the market value of these
contracts, including interest rate volatility.

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

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.

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:

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

Net Unrealized Gains (Losses)
on Open Contracts Longest Maturities

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

Sep. 30, 2004 2,591,296 (609,950) 1,981,346 Jun. 2006 Jan. 2005

Dec. 31, 2003 2,370,257 144,174 2,514,431 Mar. 2004 Mar. 2004

The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership 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 and forward contracts are marked to market
on a daily basis, with variations in value settled on a daily
basis. Morgan Stanley DW, MS & Co., and MSIL, each as a futures
commission merchant for the Partnership's exchange-traded futures
and forward contracts, are required, pursuant to regulations of
the Commodity Futures Trading Commission ("CFTC"), to segregate
from their own assets, and for the sole benefit of their commodity
customers, all funds held by them with respect to exchange-traded
futures and forward contracts, including an amount equal to the
net unrealized gains (losses) on all open futures and forward
contracts, which funds, in the aggregate, totaled $33,284,283 and
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

$42,224,259 at September 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 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 and forwards trading accounts
established for the Trading Manager, which assets are used as
margin to engage in trading and may be used as margin solely for
the Partnership's trading. The assets are held in either non-
interest bearing bank accounts or in securities and instruments
permitted by the CFTC for investment of customer segregated or
secured funds. Since the Partnership's sole purpose is to trade
in futures and forwards, it is expected that the Partnership will
continue to own such liquid assets for margin purposes.

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

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

There are no known material trends, demands, commitments, events
or uncertainties at the present time that 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 investment in futures and forwards
in subsequent periods. It is not possible to estimate the amount,
and therefore the impact, of future redemptions of Units.
There are no known material trends, favorable or
unfavorable, that would affect, nor any expected material changes
to the Partnership's capital resource arrangements at the present
time.

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

Results of Operations
General. The Partnership's results depend on the Trading Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements in the futures and forwards markets.
The following presents a summary of the Partnership's operations
for the three and nine month periods ended September 30, 2004 and
2003, and a general discussion of its trading activities during
each period. It is important to note, however, that the Trading
Manager trades in various markets at different times and that
prior activity in a particular market does not mean that such
market will be actively traded by the Trading Manager or will be
profitable in the future. Consequently, the results of operations
of the Partnership are difficult to discuss other than in the
context of the Trading Manager's trading activities on behalf of
the Partnership during the period in question. Past
performance is no guarantee of future results.

The Partnership's results of operations set forth in the financial
statements on pages 2 through 11 of this report were prepared in
accordance with accounting principles generally accepted in the
United States of America, which require the use of certain
accounting policies that affect the amounts reported in these
financial statements, including the following: The contracts the
Partnership trades are accounted for on a trade-date basis and
marked to market on a daily basis. The difference between their
cost and market value is recorded on the Statements of Operations
as "Net change in unrealized trading profit (loss)" for open
(unrealized) contracts, and recorded as "Realized trading profit
(loss)" when open positions are closed out. The sum of these
amounts, along with the "Proceeds from Litigation Settlement",
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 Three and Nine Months Ended September 30, 2004
The Partnership recorded revenues including interest income
totaling $809,028 and expenses totaling $617,990, resulting in net
income of $191,038 for the three months ended September 30, 2004.
The Partnership's net asset value per Unit increased from
$1,849.98 at June 30, 2004 to $1,861.49 at September 30, 2004.

The most significant trading gains of approximately 5.0% were
generated in the energy markets, primarily during July and
September, from long positions in crude oil as prices
strengthened due to continuing fears about potential terrorist
attacks against the production and refining facilities in Saudi
Arabia and Iraq, concerns that top Russian oil producer, Yukos,
may break up or stop selling oil, major disruptions in oil
production in the Gulf of Mexico due to Hurricane Ivan, and
growing civil unrest in Nigeria. Elsewhere in the energy
markets, gains were recorded during August from short positions
in natural gas futures as prices drifted lower due to record
reserves and heavily reduced market demand. Additional gains of
approximately 1.8% were recorded in the global interest rate
futures markets, primarily during August and September, from long
positions in European interest rate futures as prices
trended higher, boosted by a surge in oil prices, uncertainty in
the global equity markets, and testimony by U.S. Federal Reserve
Chairman Alan Greenspan depicting a somewhat less optimistic view
about the immediate future of the U.S. economy. Smaller gains of
approximately 0.5% were experienced in the agricultural markets
during July and September from short positions in corn futures as
prices weakened due to ideal weather conditions in the growing
region of the U.S. midwest, reports of increased inventories by
the U.S. Department of Agriculture, and weak export demand. A
portion of the Partnership's overall gains for the quarter was
offset by losses of approximately 4.1% recorded in the currency
markets during July and September from positions in the
Australian dollar relative to the U.S. dollar as the value of the
Australian dollar moved without consistent direction due to
volatility in gold prices, geopolitical concerns regarding terror
warnings in the Pacific Rim, and the decision by the Reserve Bank
of Australia to raise interest rates. Elsewhere in the currency
markets, losses resulted from positions in the euro versus the
U.S. dollar and the Japanese yen as the value of the euro
experienced short-term price volatility throughout the quarter
due to higher energy prices and uncertainty about the direction
of the "euro-zone" economy. Smaller losses were incurred,
primarily during September, from short positions in the Swiss
franc against the U.S. dollar as the Swiss currency's "safe-
haven" status pushed its value higher in reaction to major
geopolitical concerns. Within the metals markets, losses of
approximately 1.8% were experienced during September from short
positions in nickel futures as base metals prices increased on
continued demand from China and reports of lower-than-expected
inventories. Elsewhere in the metals markets, losses were
recorded primarily during July from short positions in copper
futures as prices moved higher due to speculation of increased
demand and reduced supply from Mexico. Smaller losses of
approximately 0.4% were recorded in the global stock index
futures markets during July and August from short positions in
S&P 500 Index futures as prices temporarily bounced higher due to
better-than-expected U.S. economic data.

The Partnership recorded losses net of interest income totaling
$4,463,639 and expenses totaling $2,355,356, resulting in a net
loss of $6,818,995 for the nine months ended September 30, 2004.
The Partnership's net asset value per Unit decreased from
$2,239.99 at December 31, 2003 to $1,861.49 at September 30, 2004.

The most significant trading losses of approximately 18.3% were
recorded in the currency markets from positions in the Japanese
yen versus the U.S. dollar. These losses were experienced
primarily during the first and second quarters from both long and
short positions in the yen relative to the U.S. dollar as the
value of the yen experienced significant short-term price
volatility. Conflicting economic data regarding a Japanese
economic recovery, uncertainty regarding a currency market
intervention by the Bank of Japan, geopolitical concerns stemming
from instability in Iraq, and uncertainty regarding the direction
of U.S. and Japanese interest rates contributed to the yen's
trendless price movement. Losses were also recorded from
positions in the Singapore dollar against the U.S. dollar as the
value of the Singapore dollar experienced significant
"whipsawing" during the first and second quarters in tandem with
the Japanese yen. The price volatility in the Japanese yen also
resulted in losses from crossrate positions in the euro versus
the Japanese yen for the aforementioned reasons. In the third
quarter, however, volatility in the euro was responsible for
losses in euro/Japanese yen crossrate positions as the value of
the euro moved in a trendless pattern throughout the quarter due
to higher energy prices and uncertainty about the direction of
the "euro-zone" economy. Additional losses of approximately 2.5%
were incurred in the metals markets, primarily during April, from
long futures positions in gold as precious metals prices weakened
due to the strength in the U.S. dollar. Elsewhere in the metals
markets, losses were recorded primarily during September from
short positions in nickel futures as base metals prices increased
on continued demand from China and reports of lower-than-expected
inventories. Smaller losses of approximately 0.6% were recorded
in the global stock index futures markets during March and May
from long positions in S&P 500 Index futures as equity prices
decreased on geopolitical concerns. During July and August,
short positions in S&P 500 Index futures resulted in
further losses as prices temporarily bounced higher due to
better-than-expected U.S. economic data. A portion of the
Partnership's overall losses for the first nine months of the
year was offset by gains of approximately 3.4% in the energy
markets. During February, May, July, and September, long
positions in crude oil profited as prices trended higher due to
consistent news of tight supply, continuing geopolitical concerns
in the Middle East, concerns that top Russian oil producer,
Yukos, may break up or stop selling oil, major disruptions in oil
production in the Gulf of Mexico due to Hurricane Ivan, and
growing civil unrest in Nigeria. Additional gains of
approximately 2.4% were experienced in the agricultural markets
during January, March, and June from long positions in corn
futures as prices increased on news of strong demand from Asia.
Further gains were experienced during July and August from short
positions in corn futures as prices weakened due to ideal weather
conditions in the growing regions of the U.S. midwest, reports of
increased inventories by the U.S. Department of Agriculture, and
weaker export demand. Elsewhere in the agricultural complex,
gains were recorded from short positions in cotton futures,
primarily during March, April, June, and July, as prices trended
lower amid rising supplies and news of a consistent decline in
demand from China. Smaller gains of approximately 1.0% were
recorded in the global interest rate futures markets from long
positions in European interest rate futures during February,
March, August, and September as prices rallied on
uncertainty in the global equity markets, disappointing economic
data, "safe-haven" buying amid major geopolitical concerns, and a
surge in oil prices.

For the Three and Nine Months Ended September 30, 2003
The Partnership recorded losses net of interest income totaling
$4,191,111 and expenses totaling $1,167,964, resulting in a net
loss of $5,359,075 for the three months ended September 30, 2003.
The Partnership's net asset value per Unit decreased from
$2,626.53 at June 30, 2003 to $2,349.15 at September 30, 2003.

The most significant trading losses of approximately 5.9% were
recorded in the global interest rate markets primarily during
September from short positions in Japanese, European, and U.S.
interest rate futures as bond prices reversed higher due to
renewed skepticism regarding a global economic recovery and lower
global equity prices. Additional losses of approximately 2.5%
were recorded in the agricultural markets, primarily during
September, from short coffee futures positions, as weak coffee
crop estimates coupled with dry Brazilian weather caused prices
to reverse higher. Elsewhere in the agricultural markets, losses
were recorded from positions in cotton futures, primarily during
August, as prices moved without consistent direction. Losses of
approximately 0.9% were recorded in the currency markets, from
long positions in the Australian dollar versus the U.S. dollar
during July as the value of the U.S. currency strengthened
amid better-than-expected U.S. earnings data. In the metals
markets, losses of approximately 0.9% resulted during August from
long futures positions in aluminum and copper as base metal
prices were weighed down by heavy technically-based selling and
expectations for increased output during the year 2004. Smaller
losses of approximately 0.6% were recorded in the global stock
index markets during early August and late September from long
positions in S&P 500 Index futures as global equity prices
retreated amid a broad-based sell-off prompted by a steady stream
of economic data that raised concerns about the strength of the
global economy.

The Partnership recorded revenues including interest income
totaling $1,374,673 and expenses totaling $4,470,031, resulting
in a net loss of $3,095,358 for the nine months ended September
30, 2003. The Partnership's net asset value per Unit decreased
from $2,529.72 at December 31, 2002 to $2,349.15 at September 30,
2003.

The most significant trading losses of approximately 5.7% were
incurred in the metals markets during May and June from short
positions in aluminum and copper futures as prices reversed
higher, buoyed by a rebound in U.S. equity prices and hopes for
increased industrial demand. During August, long futures
positions in aluminum and copper experienced losses as prices
were weighed down by heavy technically-based selling and
expectations for increased output during the year 2004.
Additional losses of approximately 4.4% were recorded in the
agricultural markets from positions in coffee and cotton futures
as prices experienced short-term volatile movement throughout a
majority of the year. Smaller losses of approximately 3.4% were
experienced in the global interest rate markets from short
positions in Japanese, Australian, and European interest rate
futures during September as bond prices reversed higher due to
renewed skepticism regarding a global economic recovery and lower
equity prices. Further losses in this sector stemmed from long
positions in Australian interest rate futures during March as
prices reversed sharply lower amid reports of advancing Coalition
forces in the Persian Gulf region. A portion of the Partnership's
overall losses during the first nine months of the year was
offset by gains of approximately 7.0% in the energy markets
stemming from long positions in natural gas futures as prices
trended higher during January and February in response to
prolonged frigid temperatures in the northeastern and midwestern
U. S. Additional gains in the energy markets were recorded
during the same time period from long positions in crude oil
futures as prices increased amid the looming threat of military
action against Iraq and an overall decline in inventories.
During July, short positions in natural gas futures yielded gains
as prices declined amid increased reserves and mild summer
weather conditions. In the currency markets, gains of
approximately 4.4% were produced from long positions in the euro
versus the British pound during January as the value of the pound
decreased due to weak economic data out of the U.K. and an
interest rate cut by the Bank of England. Additional currency
gains were recorded from long positions in the Australian dollar
versus the U.S. dollar during January, February, April, and May
as the value of the Australian currency increased on the heels of
higher commodity prices and a significant interest rate
differential between the two countries. During May, gains
resulted from long positions in the euro versus the Japanese yen
as the value of the euro continued to trend higher following the
European Central Bank's decision to leave interest rates
unchanged.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures and forwards. The market-
sensitive instruments held by the Partnership are acquired for
speculative trading purposes only and, as a result, all or
substantially all of the Partnership's assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business activity
of the Partnership.

The futures and forwards traded by the Partnership involve
varying degrees of related market risk. Market risk is often
dependent upon changes in the level or volatility of interest
rates, exchange rates, and prices of financial instruments and
commodities, factors that result in frequent changes in the fair
value of the Partnership's open positions, and consequently in
its earnings, whether realized or unrealized, and cash flow.
Gains and losses on open positions of exchange-traded futures and
forward contracts are settled daily through variation margin.
Gains 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 Manager 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 Manager in their daily risk management
activities. Please further note that VaR as described above may
not be comparable to similarly titled measures used by other
entities.

The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership's open positions as a percentage of total net assets
by primary market risk category at September 30, 2004 and 2003.
At September 30, 2004 and 2003, the Partnership's total
capitalization was approximately $32 million and $45 million,
respectively.

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

Interest Rate (1.81)% (0.08)%
Currency (1.04) (1.95)
Equity - -
Commodity (2.56) (2.02)
Aggregate Value at Risk (4.04)% (2.98)%

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

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

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

Primary Market Risk Category High Low Average
Interest Rate (2.14)% (0.84)% (1.72)%

Currency (2.77) (1.04) (1.82)

Equity (0.61) - (0.19)

Commodity (4.40) (0.64) (2.38)

Aggregate Value at Risk (5.67)% (2.43)% (3.91)%

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 September 30, 2004 and 2003, and for the four
quarter-end reporting periods from October 1, 2003 through
September 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. These balances and any market risk they may represent
are immaterial.

The Partnership also maintains a substantial portion
(approximately 96% as of September 30, 2004) of its available
assets in cash at Morgan Stanley DW. A decline in short-term
interest rates would result in a decline in the Partnership's cash
management income. This cash flow risk is not considered to be
material.

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

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

The following were the primary trading risk exposures of
the Partnership at September 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
September 30, 2004 was to the global interest rate futures sector.
Exposure was primarily spread across the European, Japanese, and
U.S. interest rate sectors. Interest rate movements directly
affect the price of the sovereign bond futures positions held by
the Partnership and indirectly affect the value of its stock index
and currency positions. Interest rate movements in one country,
as well as relative interest rate movements between countries,
materially impact the Partnership's profitability. The
Partnership's primary interest rate exposure is generally to
interest rate fluctuations in the U.S. and the other G-7
countries. The G-7 countries consist of France, the U.S.,
Britain, Germany, Japan, Italy, and Canada. However, the
Partnership also takes futures positions in the government debt of
smaller countries - e.g., Australia. Demeter anticipates that the
G-7 countries and Australian interest rates will remain the
primary interest rate exposure of the Partnership for the
foreseeable future. The speculative futures positions held by the
Partnership may range from short to long-term instruments.
Consequently, changes in short, medium or long-term interest rates
may have an effect on the Partnership.

Currency. The second largest market exposure of the Partnership
at September 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
number of currencies, including cross-rates - i.e., positions
between two currencies other than the U.S. dollar. At September
30, 2004, the Partnership's major exposures were to the euro,
Japanese yen, and British pound currency crosses, as well as to
outright U.S. dollar positions. Outright positions consist of the
U.S. dollar vs. other currencies. These other currencies include
major and minor currencies. Demeter does not anticipate that the
risk associated with the Partnership's currency trades will change
significantly in the future.

Commodity.
Energy. The Partnership's energy exposure at September 30,
2004 was shared primarily by futures contracts in crude oil
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 September 30,
2004 was to fluctuations in the price of precious metals,
such as gold, and base metals, such as copper, aluminum,
zinc, and nickel. Economic forces, supply and demand
inequalities, geopolitical factors, and market expectations
influence price movements in these markets. The Trading
Manager utilizes the trading system(s) to take positions when
market opportunities develop, and Demeter anticipates that
the Partnership will continue to do so.

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

Foreign Currency Balances. The Partnership's primary
foreign currency balances at September 30, 2004 were in the
Japanese yen and Australian dollar. The Partnership controls
the non-trading risk of foreign currency balances by
regularly converting them back into U.S. dollars upon
liquidation of their respective positions.

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

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

Item 4. CONTROLS AND PROCEDURES

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

(b) There have been no significant changes during the period
covered by this quarterly report in the Partnership's
internal controls or in other factors that could
significantly affect these controls subsequent to the
date of their evaluation.

PART II. OTHER INFORMATION

Item 5. OTHER INFORMATION

Management. The following changes have been made to the Board
of Directors and Officers of Demeter:

Mr. Kevin Perry, Chief Financial Officer of Demeter, was confirmed
as a principal of Demeter by the National Futures Association on
September 3, 2004.

Mr. William D. Seugling, Director of Demeter, was confirmed as a
principal of Demeter by the National Futures Association on
October 11, 2004.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

3.01 Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of May 14, 1990, is incorporated by
reference to Exhibit A of the Partnership's prospectus
dated June 30, 1992, filed with the Securities and
Exchange Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933 on July 14, 1992.
3.02 Amendment No. 1 to the Limited Partnership Agreement of
the Partnership dated as of May 14, 1990, is incorporated
by reference to Exhibit 3.02 of the Partnership's
Quarterly Report on Form 10-Q (File No. 0-19116) filed
with the Securities and Exchange Commission on August 14,
2002.
10.01 Management Agreement among the Partnership, Demeter
Management Corporation and Dean Witter Futures & Currency
Management Inc., dated as of July 12, 1990, is
incorporated by reference to Exhibit 10.02 of the
Partnership's Registration Statement on Form S-1 (File
No. 33-34989) filed with the Securities and
Exchange Commission on May 21, 1990.
10.02 Amendment No. 1 to the Management Agreement, dated as of
June 30, 1992, is incorporated by reference to Exhibit
10.02 of the Partnership's Quarterly Report on Form 10-Q
(File No. 0-19116) filed with the Securities and Exchange
Commission on August 14, 2002.
10.03 Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW Inc., dated as of May
19, 2000, is incorporated by reference to Exhibit 10.01
of the Partnership's Form 8-K (File No. 0-19116) filed
with the Securities and Exchange Commission on November
13, 2001.
10.04 Commodity Futures Customer Agreement between Morgan
Stanley & Co. Incorporated and the Partnership, and
acknowledged and agreed to by Morgan Stanley DW Inc.,
dated as of May 1, 2000, is incorporated by reference to
Exhibit 10.02 of the Partnership's Form 8-K (File No. 0-
19116) filed with the Securities and Exchange Commission
on November 13, 2001.
10.05 Customer Agreement between the Partnership and Morgan
Stanley & Co. International Limited, dated as of May 1,
2000, is incorporated by reference to Exhibit 10.04 of
the Partnership's Form 8-K (File No. 0-19116) filed with
the Securities and Exchange Commission on November 13,
2001.
10.06 Foreign Exchange and Options Master Agreement between
Morgan Stanley & Co. Incorporated and the Partnership,
dated as of April 30, 2000, is incorporated by reference
to Exhibit 10.05 of the Partnership's Form 8-K (File No.
0-19116) filed with the Securities and Exchange
Commission on November 13, 2001.
10.07 Securities Account Control Agreement among the
Partnership, Morgan Stanley & Co. Incorporated, and
Morgan Stanley DW Inc., dated as of May 1, 2000, is
incorporated by reference to Exhibit 10.03 of the
Partnership's Form 8-K (File No. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.
31.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to rules 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

31.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to rules 13a-15(e) and 15d-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(B) Reports on Form 8-K - None.

SIGNATURE

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

Dean Witter Diversified Futures Fund III L.P.
(Registrant)

By: Demeter Management Corporation
(General Partner)

November 15, 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.

- - 7 -

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