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

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

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003 or

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

Commission File Number 0-19116

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Yes X No___________

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2003

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 OPERATIONS
(Unaudited)

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF CHANGES IN PARTNERS? CAPITAL
For the Six Months Ended June 30, 2003 and 2002
(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

June 30, 2003

(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, 2002 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 (collectively, ?futures
interests?).

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

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. Morgan Stanley DW pays interest on
these funds based on current 13-week U.S. Treasury bills. The
Partnership pays brokerage commissions to Morgan Stanley DW.
Management fees and incentive fees, if any, incurred by the
Partnership are paid to MSFCM.

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

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

which may significantly influence the market value of these
contracts, including interest rate volatility.

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

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

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

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

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

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

Net Unrealized Gains (Losses)
on Open Contracts Longest Maturities

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

Jun. 30, 2003 (1,304,360) 1,607,636 303,276 Mar. 2005 Sep. 2003

Dec. 31, 2002 1,281,277 4,577,723 5,859,000 Sep. 2004 Apr. 2003

The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership is involved is limited to the amounts
reflected in the Partnership?s statements of financial condition.

The Partnership also has credit risk because Morgan Stanley DW,
MS & Co. and MSIL act as the futures commission merchants or the
counterparties with respect to most of the Partnership?s assets.
Exchange-traded futures contracts are marked to market on a daily

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

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 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 contracts,
including an amount equal to the net unrealized gains (losses) on
all open futures contracts, which funds, in the aggregate,
totaled $49,968,055 and $47,781,722 at June 30, 2003 and December
31, 2002, respectively. With respect to the Partnership?s off-
exchange-traded forward currency contracts, there are no daily
settlements of variations in value nor is there any requirement
that an amount equal to the net unrealized gains (losses) on open
forward contracts be segregated. 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 of
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. 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. The Partnership?s assets held by the commodity
brokers may be used as margin solely for the Partnership?s
trading. 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.

The Partnership has never had illiquidity affect a material
portion of its assets. Furthermore, there are no material trends,
demands, commitments, events or uncertainties known at the present
time that will result in, or that are reasonably likely to result
in, the Partnership?s liquidity increasing or decreasing in any
material way.

Capital Resources. The Partnership does not have, nor expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest (?Unit(s)?) in the future will affect
the amount of funds available for investment in futures and
forwards in subsequent periods. It is not possible to estimate
the amount, and therefore the impact, of future redemptions of
Units.
There are no known material trends, favorable or
unfavorable, that would affect, nor any expected material changes
to, the Partnership?s capital resource arrangements at the present
time. The Partnership has no off-balance sheet arrangements, nor
contractual obligations or commercial commitments to make future
payments that would affect the Partnership?s liquidity or capital
resources. The contracts traded by the Partnership are accounted
for on a trade-date basis and marked to market on a daily basis.
The value of futures contracts is the settlement price on the
exchange on which that futures contract is traded on a particular
day and 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.

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 or other profit opportunities in the
futures and forwards markets. The following presents a summary of
the Partnership?s operations for the three and six month periods
ended June 30, 2003 and 2002, 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 and how
the Partnership has performed in the past.

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 profit/loss? for open
(unrealized) contracts, and recorded as ?Realized profit/loss?
when open positions are closed out, and the sum of these amounts
constitutes the Partnership?s trading revenues. Interest income
revenue, as well as management fees, incentive fees and brokerage
commissions expenses of the Partnership are recorded on an
accrual basis.

Demeter believes that, based on the nature of the operations of
the Partnership, no assumptions relating to the application of
critical accounting policies other than those presently used
could reasonably affect reported amounts.
For the Quarter and Six Months Ended June 30, 2003
For the quarter ended June 30, 2003, the Partnership recorded
total trading losses, net of interest income, of $2,845,154 and
posted a decrease in net asset value per Unit. The most
significant losses of approximately 5.0% were recorded in the
metals markets during April and May from short positions in
aluminum, nickel and copper futures as prices reversed higher amid
renewed optimism concerning future growth in industrial demand and
a rebound in U.S. equity prices. During June, losses in this
sector resulted from long positions in aluminum futures as prices
declined in anticipation of an interest rate cut by the U.S.
Federal Reserve. Additional losses of approximately 1.8% were
recorded in the energy markets from long positions in natural gas
futures as prices reversed sharply lower following news of larger
than expected U.S. reserves. Smaller losses of approximately 1.1%
were recorded in the agricultural markets during May from short
positions in corn futures as prices moved higher amid concerns of
weather related crop damage in the U.S. midwest. A portion of the
Partnership?s overall losses was offset by gains of approximately
0.9% in the currency markets primarily during April and May from
long positions in the Australian dollar versus the U.S. dollar as
the value of the Australian currency strengthened amid significant
interest rate differentials, uncertainty regarding the Bush
Administration?s economic policy, renewed fears of potential
terrorist attacks against American interests, and investor
preference for non-U.S. dollar denominated assets. Elsewhere in
the currency markets, gains were recorded from long
positions in the euro versus the Japanese yen and the British
pound as the value of the euro continued to trend higher following
the decision by the European Central Bank to leave interest rates
unchanged. Additional gains of approximately 0.9% in the global
stock index markets were recorded during May and June from long
positions in S&P 500 Index futures as equity prices rallied in
response to renewed expectations for a U.S. interest rate cut and
the release of positive economic data. Total expenses for the
three months ended June 30, 2003 were $1,293,418, resulting in a
net loss of $4,138,572. The net asset value of a Unit decreased
from $2,840.36 at March 31, 2003 to $2,626.53 at June 30, 2003.

For the six months ended June 30, 2003, the Partnership recorded
total trading revenues, including interest income, of $5,565,784
and posted an increase in net asset value per Unit. Gains of
approximately 7.0% were recorded in the energy markets, primarily
during January and February from long positions in natural gas
futures as prices trended higher in response to prolonged frigid
temperatures in the northeastern and midwestern United States.
Additional gains were recorded from long positions in crude oil
futures as prices increased amid the looming threat of military
action against Iraq and an overall decline in inventories. In the
currency markets, gains of approximately 5.3% were produced from
positions in the British pound versus the euro as the value of the
pound decreased due to weak economic data out of the U.K and an
interest rate cut by the Bank of England. Additional gains
were recorded from long positions in the Australian dollar versus
the U.S. dollar as the value of the Australian currency increased
on the heels of higher commodity prices. During May, gains
resulted from long positions in the euro versus the Japanese yen
as the value of the euro continued to trend higher following the
European Central Bank?s decision to leave interest rates
unchanged. Gains of approximately 2.7% were established in the
global interest rate markets from long positions in European and
U.S. interest rate futures as prices continued to trend higher
amid continued uncertainty in the global equity markets, investor
demand for fixed income investments and speculation of an interest
rate cut by the U.S. Federal Reserve. In the global stock index
markets, gains of approximately 1.0% resulted from long positions
in S&P 500 Index futures as equity prices rallied during May and
June in response to the prospect of lower interest rates, the
release of positive economic data, and renewed expectations for a
U.S. interest rate cut. A portion of the Partnership?s overall
gains was offset by losses of approximately 4.9% recorded in the
metals markets, primarily during May and June, from short
positions in aluminum, copper, and nickel futures resulted in
losses as prices reversed higher, buoyed by a rebound in U.S.
equity prices and hopes for increased industrial demand. In the
agricultural markets, losses of approximately 2.0% were
experienced during May from short positions in corn futures as
prices moved higher early in the month amid concerns of weather
related crop damage in the U.S. midwest. Total expenses
for the six months ended June 30, 2003 were $3,302,067, resulting
in net income of $2,263,717. The net asset value of a Unit
increased from $2,529.72 at December 31, 2002 to $2,626.53 at June
30, 2003.

For the Quarter and Six Months Ended June 30, 2002
For the quarter ended June 30, 2002, the Partnership recorded
total trading revenues, including interest income, of $9,311,988
and posted an increase in net asset value per Unit. The most
significant gains of approximately 26.8% were recorded in the
currency markets primarily during May and June from previously
established long positions in the Japanese yen, Swiss franc, euro
and Swedish krona relative to the U.S. dollar as the value of
these currencies strengthened against the U.S. dollar amid falling
equity prices, concerns regarding corporate accounting integrity
and weak U.S. economic data. Significant currency gains were also
recorded from long positions in the euro relative to the British
pound. Additional gains of approximately 5.1% were recorded in
the global interest rate futures markets primarily during June
from long positions in Japanese and German interest rate futures
as prices trended higher following weakness in U.S. equity
markets, geopolitical concerns and uncertainty surrounding a
global economic recovery. A portion of the Partnership?s gains
was offset by losses of approximately 7.2% recorded in the energy
markets primarily during May from previously established long
futures positions in crude oil and its related products as
prices moved lower on supply and demand concerns. Additional
losses of approximately 2.5% were recorded in the metals markets
primarily during April from short positions in aluminum futures as
prices climbed higher on sentiment that an improving U.S. economy
would boost demand. Total expenses for the three months ended
June 30, 2002 were $1,408,887, resulting in net income of
$7,903,101. The net asset value of a Unit increased from
$1,972.58 at March 31, 2002 to $2,342.38 at June 30, 2002.

For the six months ended June 30, 2002, the Partnership recorded
total trading revenues, including interest income, of $10,346,140
and posted an increase in net asset value per Unit. The most
significant gains of approximately 16.8% were recorded in the
currency markets primarily during May and June from previously
established long positions in the Japanese yen, Swiss franc, euro
and Swedish krona relative to the U.S. dollar as the value of
these currencies strengthened against the U.S. dollar amid falling
equity prices, concerns regarding corporate accounting integrity
and weak U.S. economic data. Significant currency gains were also
recorded from long positions in the euro relative to the British
pound. Additional gains of approximately 4.6% were recorded in
the global interest rate futures markets primarily during June
from long positions in Japanese and German interest rate futures
as prices trended higher following weakness in U.S. equity
markets, geopolitical concerns and uncertainty surrounding a
global economic recovery. Gains of approximately 1.4% were
recorded in the energy markets primarily during March from
previously established long positions in crude oil futures as
prices trended higher amid escalating Middle East tensions and
supply and demand factors. A portion of the Partnership?s gains
was offset by losses of approximately 3.0% recorded in the metals
markets primarily during April from short positions in aluminum
futures as prices climbed higher on sentiment that an improving
U.S. economy would boost demand. Total expenses for the six
months ended June 30, 2002 were $2,306,733, resulting in net
income of $8,039,407. The net asset value of a Unit increased
from $1,966.55 at December 31, 2001 to $2,342.38 at June 30, 2002.

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 central, not incidental, to the
Partnership?s main business activities.

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. Fluctuations in market risk based upon these
factors result in frequent changes in the fair value of the
Partnership?s open positions, and consequently, in its earnings
and cash flow.

The Partnership?s total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership?s open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the
market risk associated with the Partnership.

The Partnership?s past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership?s market risk is limited by the uncertainty of its
speculative trading. The Partnership?s speculative trading may
cause future losses and volatility (i.e., ?risk of ruin?) that
far exceed the Partnership?s experience to date or any reasonable
expectations based upon historical changes in market value.

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, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of
exchange-traded futures and forwards are settled daily through
variation margin.

The Partnership?s risk exposure in the market sectors traded by
the Trading Manager is estimated below in terms of Value at Risk
(?VaR?). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership?s
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the
VaR model include 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 historical observation period of the Partnership?s
VaR is approximately four years. 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. In other
words, one-day VaR for a portfolio is a number such that losses
in this portfolio are estimated to exceed the VaR only one
day in 100. VaR typically does not represent the worst case
outcome.

VaR is calculated using historical simulation. 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-traded instruments and are also not based on exchange
and/or dealer-based margin requirements.

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

The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total net assets
by primary market risk category at June 30, 2003 and 2002. At
June 30, 2003 and 2002, the Partnership?s total capitalization
was approximately $51 million and $50 million, respectively.

Primary Market June 30, 2003 June 30, 2002
Risk Category Value at Risk Value at Risk

Interest Rate (2.05)% (3.00)%
Currency (0.80) (2.73)
Equity (0.37) (0.16)
Commodity (1.91) (0.97)
Aggregate Value at Risk (2.92)% (4.16)%

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 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.

The table above represents the VaR of the Partnership?s
open positions at June 30, 2003 and 2002 only and is not
necessarily representative of either the historic or future risk
of an investment in the Partnership. Because the Partnership?s
only business 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.
Any changes in open positions could positively or negatively
materially impact market risk as measured by VaR.

The table below supplements the quarter-end VaR by presenting the
Partnership?s high, low and average VaR, as a percentage of total
net assets for the four quarterly reporting periods from July 1,
2002 through June 30, 2003.

Primary Market Risk Category High Low Average
Interest Rate (2.48)% (1.16)% (1.75)%

Currency (3.35) (0.80) (1.99)

Equity (0.37) ? (0.10)

Commodity (2.47) (1.75) (2.09)

Aggregate Value at Risk (4.72)% (2.84)% (3.48)%

Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of
leverage causes the face value of the market sector instruments
held by the Partnership to typically be many times the total
capitalization of the Partnership. The value of the Partnership?s
open positions thus creates a ?risk of ruin? not typically found
in other investments. The relative size of the positions held may
cause the Partnership to incur losses greatly in excess of VaR
within a short period of time, given the effects of the leverage
employed and market volatility. The VaR tables above, as well as
the past performance of the Partnership, give no indication of
such ?risk of ruin?. In addition, VaR risk measures should be
viewed in light of the methodology?s limitations, which include
the following:
* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past trading positions while future risk
depends on future positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.

The VaR tables above present the results of the Partnership?s VaR
for each of the Partnership?s market risk exposures and on an
aggregate basis at June 30, 2003 and 2002, and for the end of the
four quarterly reporting periods from July 1, 2002 through June
30, 2003. Since VaR is based on historical data, VaR should not
be viewed as predictive of the Partnership?s future financial
performance or its ability to manage or monitor risk. There can
be no assurance that the Partnership?s actual losses on a
particular day will not exceed the VaR amounts indicated above or
that such losses will not occur more than once in 100 trading
days.

Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. These balances and any market
risk they may represent are immaterial.

At June 30, 2003, the Partnership?s cash balance at Morgan Stanley
DW was approximately 102% of its total net asset value. A decline
in short-term interest rates will result in a decline in the
Partnership?s cash management income. This cash flow risk is not
considered to be material.

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

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

The following were the primary trading risk exposures of the
Partnership at June 30, 2003, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.

Interest Rate. The primary market exposure at June 30, 2003 was
to the global interest rate complex. Exposure was primarily
spread across the Japanese, European and U.S. interest rate
sectors. Interest rate movements directly affect the price of the
sovereign bond futures positions held by the Partnership and
indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country, as well as
relative interest rate movements between countries, materially
impact the Partnership?s profitability. The Partnership?s primary
interest rate exposure is generally to interest rate fluctuations
in the U.S. and the other G-7 countries. The G-7 countries
consist of France, the U.S., Britain, Germany, Japan, Italy and
Canada. However, the Partnership also takes futures positions in
the government debt of smaller nations - e.g., Australia. Demeter
anticipates that G-7 countries and Australian interest rates will
remain the primary interest rate exposure of the Partnership for
the foreseeable future. The speculative futures positions held by
the Partnership may range from short to long-term instruments.
Consequently, changes in short, medium or long-term interest rates
may have an effect on the Partnership.

Currency. The second largest market exposure of the Partnership
at June 30, 2003 was to the currency sector. The Partnership?s
currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes as well as political and general economic conditions
influence these fluctuations. The Partnership trades a large
number of currencies, including cross-rates - i.e., positions
between two currencies other than the U.S. dollar. At June 30,
2003, the Partnership?s major exposures were to the euro, Japanese
yen and British pound currency crosses as well as outright U.S.
dollar positions. Outright positions consist of the U.S. dollar
vs. other currencies. These other currencies include major and
minor currencies. Demeter does not anticipate that the risk
profile of the Partnership?s currency sector will change
significantly in the future. The currency trading VaR figure
includes foreign margin amounts converted into U.S. dollars with
an incremental adjustment to reflect the exchange rate risk
inherent to the U.S.-based Partnership in expressing VaR in a
functional currency other than U.S. dollars.

Equity. The Partnership?s equity exposure at June 30, 2003 was
primarily to equity price risk in the G-7 countries. The stock
index futures traded by the Partnership are by law limited to
futures on broadly-based indices. At June 30, 2003, the
Partnership?s exposure was primarily to the S&P 500 (U.S.)
stock index. The Partnership is exposed to the risk of adverse
price trends or static markets in the U.S. and Japanese stock
indices. Static markets would not cause major market changes but
would make it difficult for the Partnership to avoid being
?whipsawed? into numerous small losses.

Commodity.
Energy. At June 30, 2003, the Partnership?s energy exposure
was primarily to futures contracts in crude oil. Price
movements in this market result from political developments
in the Middle East, 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.

Soft Commodities and Agriculturals. At June 30, 2003, the
Partnership had exposure to the markets that comprise these
sectors. Most of the exposure was to the coffee and corn
markets. Supply and demand inequalities, severe weather
disruptions and market expectations affect price movements in
these markets.

Metals. The Partnership's metals exposure at June 30, 2003
was to fluctuations in the price of base metals, such as
zinc. Economic forces, supply and demand inequalities,
geopolitical factors and market expectations influence
price movements in these markets. The Trading Manager, from
time to time, takes positions as 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 June 30, 2003:

Foreign Currency Balances. The Partnership?s primary foreign
currency balance at June 30, 2003 was in 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 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 the
general partner, Demeter, 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 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 1. LEGAL PROCEEDINGS
None.

Item 5. OTHER INFORMATION
Changes in Management. The following changes have been made to
the Board of Directors and Officers of Demeter:

Mr. Robert E. Murray resigned the position of Chairman of the
Board of Directors of Demeter.

Mr. Jeffrey A. Rothman, President and Director of Demeter, was
named Chairman of the Board of Directors of Demeter.

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 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 13(a)-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 13(a)-15(e) and 15d-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

(B) Reports on Form 8-K ? None.

SIGNATURE

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

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

By: Demeter Management Corporation
(General Partner)

August 12, 2003 By: /s/Jeffrey D. Hahn
Jeffrey D. Hahn
Director and Chief Financial Officer

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

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