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 March 31, 2005 or

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

Commission File 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

(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

March 31, 2005

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)

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF CHANGES IN PARTNERS? CAPITAL
For the Quarters Ended March 31, 2005 and 2004
(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

March 31, 2005

(Unaudited)

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

1. Organization
Dean Witter Diversified Futures Fund III L.P. is a Delaware
limited partnership organized in 1990 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
Management Inc. (?MSFCM? or the ?Trading Manager?). Demeter,
Morgan Stanley DW, MS & Co., MSIL, and MSFCM are wholly-owned
subsidiaries of Morgan Stanley.

2. Related Party Transactions
The Partnership?s cash is on deposit with Morgan Stanley DW, MS &
Co., and MSIL in futures and forwards trading accounts to meet
margin requirements as needed. 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.

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
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, forwards, swaps or
options contracts, and other financial instruments with similar
characteristics such as caps, floors, and collars.

The net unrealized gains (losses) on open contracts, reported as a
component of ?Equity in futures interests trading accounts? on the
Statements of Financial Condition, and their longest contract
maturities were as follows:

Net Unrealized Gains (Losses)
on Open Contracts Longest Maturities

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

Mar. 31, 2005 1,650,603 (2,958,583) (1,307,980) Dec. 2006 Jul. 2005

Dec. 31, 2004 2,066,811 1,178,972 3,245,783 Sep. 2005 Mar. 2005

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
$33,211,409 and $35,250,318 at March 31, 2005 and December 31,
2004, respectively. With respect to the Partnership?s off-
exchange-traded forward currency contracts, there are no daily
exchange-required settlements of 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
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

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. Such assets are used as
margin to engage in trading and may be used as margin solely for
the Partnership?s trading. The assets are held in either non-
interest bearing bank accounts or in securities and instruments
permitted by the CFTC for investment of customer segregated or
secured funds. Since the Partnership?s sole purpose is to trade
in futures 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 outflows of Units.
There are no known material trends, favorable or
unfavorable, that would affect, nor any expected material changes
to, the Partnership?s capital resource arrangements at the present
time.

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

Results of Operations
General. The Partnership?s results depend on the Trading 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 month periods ended March 31, 2005 and 2004, and a
general discussion of its trading activities during each period.
It is important to note, however, that the Trading 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 are prepared in
accordance with accounting principles generally accepted in the
United States of America, which require the use of certain
accounting policies that affect the amounts reported in these
financial statements, including the following: The contracts the
Partnership trades are accounted for on a trade-date basis and
marked to market on a daily basis. The difference between their
cost and market value is recorded on the Statements of Operations
as ?Net change in unrealized trading profit (loss)? for open
(unrealized) contracts, and recorded as ?Realized trading profit
(loss)? when open positions are closed out. The sum of these
amounts constitutes the Partnership?s trading results. The market
value of a futures contract is the settlement price on the
exchange on which that futures contract is traded on a particular
day. The value of foreign currency forward contracts is based on
the spot rate as of the close of business. Interest income, as
well as management fees, incentive fees, and brokerage commissions
expenses of the Partnership are recorded on an accrual basis.

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

For the Quarter Ended March 31, 2005
The Partnership recorded total trading results including interest
income totaling $(4,513,162) and expenses totaling $690,456,
resulting in net loss of $(5,203,618) for the quarter ended March
31, 2005. The Partnership?s net asset value per Unit decreased
from $2,142.78 at December 31, 2004 to $1,830.52 at March 31,
2005.

The most significant trading losses of approximately 15.4% were
recorded in the currency markets from positions in the euro
relative to the British pound and the U.S. dollar. During
January long positions in the euro versus the British pound and
the U.S. dollar incurred losses as the value of the euro reversed
sharply lower in what many analysts described as a ?corrective?
move after its strong upward trend during the fourth quarter of
2004. This decline in the value of the euro was attributed to
weak economic data out of the European Union and a rebound in the
value of its main rival, the U.S. dollar. Additional losses were
recorded during February and March from both long and short
positions in the euro against these currencies as the value of
the euro moved without consistent direction amid conflicting
economic data out of Germany, the European Union?s largest
economy. Elsewhere in the currency markets, losses
resulted from positions in the Singapore dollar, Swedish krona,
South African rand, and Swiss franc relative to the U.S dollar,
primarily during February and March, as the value of the U.S.
dollar moved in a trendless pattern amid speculation that China
would revalue its currency, negative comments by Federal Reserve
Chairman Alan Greenspan about the considerable U.S. Current-
Account deficit and U.S. dependence on foreign investment, and
the U.S. Federal Reserve's announcement of a quarter-point
increase in the federal funds rate. Additional losses of
approximately 1.8% were recorded in the global interest rate
futures markets, primarily during March, from short European
interest rate futures positions as prices reversed higher amid
strength in the euro towards the beginning of the month as
investors feared that continued strength in the currency could
restrict foreign exports. Prices were also pushed higher on the
expectations that Europe would continue to maintain a low-
interest rate environment, as well as economic concerns stemming
from surging energy prices. Further losses were experienced
during February from long positions in long-term U.S. interest
rate futures as prices declined in response to strong global
economic data and congressional testimony by Federal Reserve
Chairman Alan Greenspan, which supported Wall Street expectations
for additional interest rate hikes. Smaller losses of
approximately 0.2% were recorded in the global stock index
futures markets, primarily during January and March, from long
positions in Hang Seng stock index futures as equity
prices in Hong Kong moved lower due to weakness in the technology
sector and fears that higher energy prices will restrict the
economic growth of the region. A portion of the Partnership?s
overall losses for the quarter was offset by gains of
approximately 2.8% in the energy markets during March from long
futures positions in natural gas as prices moved higher in tandem
with rising crude oil prices. Within the crude oil markets,
gains were recorded from long futures positions in February and
March as prices trended higher amid news of increased demand from
China, fears of terror attacks against production facilities in
the Middle East, cold weather in the Northeastern U.S., and
predictions from analysts at Goldman Sachs that oil prices could
reach $105 a barrel. Smaller gains of approximately 0.2% were
recorded in the metals markets during February and March from
long positions in copper and aluminum as prices increased due
news of continued strong demand from the developing economies of
Asia.

For the Quarter Ended March 31, 2004
The Partnership recorded total trading results including interest
income totaling $2,724,181 and expenses totaling $837,775,
resulting in net income of $1,886,406 for the quarter ended March
31, 2004. The Partnership?s net asset value per Unit increased
from $2,239.99 at December 31, 2003 to $2,340.73 at March 31,
2004.

The most significant trading gains of approximately 5.4% were
generated in the global interest rate markets from long positions
in European and U.S. interest rate futures during February and
March. During February, global bond prices rallied after central
banks, such as the European Central Bank and U.S. Federal Reserve,
reported no need to raise interest rates due to a lack of
inflation. During March, prices trended higher due to uncertainty
in the global equity markets, disappointing U.S. economic data,
and safe haven buying following the terrorist attack in Madrid.
Additional gains of approximately 3.1% were recorded in the
agricultural markets from long futures positions in corn as
growing U.S. exports and heightened demand from Asia pushed prices
higher during the quarter. Elsewhere in the agricultural markets,
gains were experienced from short cotton futures positions,
primarily during March, as prices trended lower due to rising
supply and technically-based selling. In the metals markets,
gains of approximately 1.7% were recorded throughout the quarter
from long futures positions in copper and aluminum as industrial
metals prices trended higher in response to greater demand from
Asia driven by a declining U.S. dollar. Smaller gains of
approximately 0.6% were experienced in the energy markets,
primarily during February, from long futures positions in crude
oil as low market supply, falling inventory levels, and
production-cut announcements from OPEC caused prices to increase.
A portion of the Partnership?s overall gains for the quarter was
offset by losses of approximately 5.8% in the currency
sector from positions in the Japanese yen and Singapore dollar
versus the U.S. dollar. During February, losses were recorded
from long positions in the Japanese yen against the U.S. dollar as
the value of the yen reversed sharply lower after the elevation of
Japan?s national security alert and market intervention by the
Bank of Japan, which performed U.S. dollar buybacks after the
release of economic data demonstrating Japan?s improving Gross
Domestic Product. Long positions in the Singapore dollar versus
the U.S. dollar recorded losses as the value of the Singapore
dollar weakened in tandem with the value of the yen. Further
losses were incurred during March from newly established short
positions in the Japanese yen versus the U.S. dollar as the yen
reversed higher due to speculation that the Bank of Japan would be
relaxing its efforts to weaken the yen in the future. Short
positions in the Singapore dollar experienced losses during March
as its value again moved in sympathy with the yen. Elsewhere in
the currency markets, losses were recorded, primarily in March,
from positions in the euro against the Japanese yen as the euro
experienced significant short-term price volatility.

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
forwards 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 March 31, 2005 and 2004. At
March 31, 2005 and 2004, the Partnership?s total capitalization
was approximately $30 million and $43 million, respectively.

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

Equity (2.79)% (0.15)%
Interest Rate (1.78) (2.07)
Currency (1.16) (2.14)
Commodity (4.45) (4.40)
Aggregate Value at Risk (6.79)% (5.67)%

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 April 1, 2004 through March 31, 2005.

Primary Market Risk Category High Low Average
Equity (2.79)% ? % (1.20)%

Interest Rate (2.14) (0.58) (1.58)

Currency (2.28) (1.04) (1.45)

Commodity (4.45) (0.31) (1.99)

Aggregate Value at Risk (6.79)% (2.43)% (3.96)%

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

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

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

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

The Partnership also maintains a substantial portion
(approximately 100% as of March 31, 2005) of its available assets
in cash at Morgan Stanley DW. A decline in short-term interest
rates would result in a decline in the Partnership?s cash
management income. This cash flow risk is not considered to be
material.

Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality, and multiplier features of the Partnership?s market-
sensitive instruments, in relation to the Partnership?s net
assets.
Qualitative Disclosures Regarding Primary Trading Risk
Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures - constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act.
The Partnership?s primary market risk exposures, as well as the
strategies used and to be used by Demeter and the Trading 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 March 31, 2005, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.

Equity. The primary market exposure of the Partnership at March
31, 2005 was to equity price risk in the G-7 countries. The G-7
countries consist of France, the U.S., Britain, Germany, Japan,
Italy, and Canada. The stock index futures traded by the
Partnership are by law limited to futures on broadly-based
indices. The Partnership?s primary exposure were to the DAX
(Germany), S&P 500 (U.S.), Hang Seng (China), and SPI 200
(Australian) stock indices. The Partnership is exposed to the risk
of adverse price trends or static markets in the European, U.S.,
Chinese, and Australian 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.

Interest Rate. The second largest market exposure of the
Partnership at March 31, 2005 was to the global interest rate
sector. Exposure was primarily spread across the Japanese, U.S.,
European, and Australian 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. However, the Partnership also takes
futures positions in the government debt of smaller countries ?
e.g., Australia. Demeter anticipates that the G-7 countries 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 third largest market exposure of the Partnership at
March 31, 2005 was 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. The Partnership?s major
exposures were to the euro, British pound, and Japanese yen
currency crosses, as well as to outright U.S. dollar positions.
Outright positions consist of the U.S. dollar vs. other
currencies. These other currencies include major and minor
currencies. Demeter does not anticipate that the risk associated
with the Partnership?s currency trades will change
significantly in the future.

Commodity.
Energy. At March 31, 2005, the Partnership had market
exposure in the energy sector. The Partnership?s energy
exposure was primarily to 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.

Soft Commodities and Agriculturals. At March 31, 2005, the
Partnership had market exposure to the markets that comprise
these sectors. Most of the exposure was to the cotton, corn,
soybean, and coffee markets. Supply and demand inequalities,
severe weather disruptions, and market expectations affect
price movements in these markets.

Metals. At March 31, 2005, the Partnership had market
exposure in the metals sector. The Partnership's metals
exposure was to fluctuations in the price of base metals,
such as copper, aluminum, nickel, and zinc. 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.

Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at March 31, 2005:

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

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

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

Item 4. CONTROLS AND PROCEDURES

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

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

PART II. OTHER INFORMATION

Item 5. OTHER INFORMATION

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

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

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

Item 6. EXHIBITS
3.01 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 Section 302 of the Sarbanes-Oxley Act of
2002.
31.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

SIGNATURE

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

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

By: Demeter Management Corporation
(General Partner)

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

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

- - 7 -

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

? 21 ?