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

Back to GetFilings.com

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

FORM 10-Q

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

September 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 Nine Months Ended September 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

September 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.

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.

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
which may significantly influence the market value of these
contracts, including interest rate volatility.
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

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

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

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

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

The net unrealized gains 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
on Open Contracts Longest Maturities

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

Sep. 30, 2003 1,320,141 1,363,043 2,683,184 Jun. 2004 Dec. 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
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,

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

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 on all open
futures contracts, which funds, in the aggregate, totaled
$44,022,889 and $47,781,722 at September 30, 2003 and December
31, 2002, respectively. With respect to the Partnership's off-
exchange-traded forward currency contracts, there are no daily
exchange-required settlements of variations in value nor is there
any requirement that an amount equal to the net unrealized gains
on open forward contracts be segregated, however, MS & Co. and
Morgan Stanley DW will make daily settlements of losses as
needed. With respect to those off-exchange-traded forward
currency contracts, the Partnership is at risk to the ability of
MS & Co., the sole counterparty on all such contracts, to
perform. The Partnership has a netting agreement with MS & Co.
This agreement, which seeks to reduce both the Partnership's and
MS & Co.'s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership's credit
risk in the event of MS & Co.'s bankruptcy or insolvency.

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

Liquidity. The Partnership deposits its assets with Morgan
Stanley DW as non-clearing broker and MS & Co. and MSIL as
clearing brokers in separate futures 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, and no expected material changes
to the Partnership's capital resource arrangements at the present
time. 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. The contracts the Partnership
trades 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. 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 nine month periods
ended September 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 Nine Months Ended September 30, 2003
For the quarter ended September 30, 2003, the Partnership
recorded total trading losses, net of interest income, of
$4,191,111 and posted a decrease in net asset value per Unit.
The most significant 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. Total
expenses for the three months ended September 30, 2003 were
$1,167,964, resulting in a net loss of $5,359,075. The net asset
value of a Unit decreased from $2,626.53 at June 30, 2003 to
$2,349.15 at September 30, 2003.

For the nine months ended September 30, 2003, the Partnership
recorded total trading revenues, including interest income, of
$1,374,673 and, after expenses, posted a decrease in net asset
value per Unit. The most significant 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 through a
majority of the first nine months 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 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. Total expenses for the nine months ended September
30, 2003 were $4,470,031, resulting in a net loss of $3,095,358.
The net asset value of a Unit decreased from $2,529.72 at
December 31, 2002 to $2,349.15 at September 30, 2003.

For the Quarter and Nine Months Ended September 30, 2002
For the quarter ended September 30, 2002, the Partnership recorded
total trading revenues, including interest income, of $8,031,500
and posted an increase in net asset value per Unit. The most
significant gains of approximately 18.6% were recorded in the
global interest rate markets from previously established long
positions in German and U.S. interest rate futures, as prices
trended higher throughout the quarter due to investors seeking a
safe haven from falling equity prices and increased pessimism
regarding a global economic recovery. Additional gains of
approximately 1.6% were recorded in the energy markets, primarily
during August and September, from long positions in crude oil
futures as prices trended higher on the increasing possibility of
military action against Iraq. A portion of the Partnership's
overall gains was offset by losses of approximately 6.4% in the
currency markets from previously established long positions in the
Swedish krona and Swiss franc relative to the U.S. dollar as these
currencies weakened against the dollar due to the emphasis on a
"strong dollar" policy by the Bush Administration during
July and the persistence of trendless price activity during August
and September. On February 27, 2002, the Partnership received
notification of a preliminary entitlement to payment from the
Sumitomo Copper Litigation Settlement Administration. The
Partnership received payment of this settlement award in the
amount of $1,107,007 as of August 30, 2002. Total expenses for the
three months ended September 30, 2002 were $1,980,574, resulting
in net income of $6,050,926. The net asset value of a Unit
increased from $2,342.38 at June 30,2002 to $2,630.98 at September
30, 2002.

For the nine months ended September 30, 2002, the Partnership
recorded total trading revenues, including interest income, of
$18,377,640 and posted an increase in net asset value per Unit.
The most significant gains of approximately 24.0% were recorded
from long positions in the global interest rate futures markets as
prices trended higher during a majority of the second and third
quarters due to uncertainty regarding a global economic recovery.
In the currency markets, gains of approximately 9.3% were
recorded, primarily during May and June, from previously
established long positions in the Japanese yen, Swiss franc, and
euro relative to the U.S. dollar as the value of these currencies
strengthened against the U.S. dollar amid falling U.S. equity
prices and increased tensions in the Israeli-Palestinian conflict.
Gains of approximately 3.0% were recorded in the energy markets
from long positions in crude oil futures as prices trended
higher during March, August, and September due to escalating
tensions in the Middle East. A portion of the Partnership's
overall gain was offset by losses of approximately 3.9% in the
metals markets from positions in aluminum and zinc futures as
trendless price activity persisted throughout the period. Total
expenses for the nine months ended September 30, 2002 were
$4,287,307, resulting in net income of $14,090,333. The net asset
value of a Unit increased from $1,966.55 at December 31, 2001 to
$2,630.98 at September 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, but not limited to, 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
for a 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
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, 2003 and 2002.
At September 30, 2003 and 2002, the Partnership's total
capitalization was approximately $45 million and $55 million,
respectively.

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

Currency (1.95)% (2.25)%
Interest Rate (0.08) (1.16)
Equity - (0.03)
Commodity (2.02) (2.47)
Aggregate Value at Risk (2.98)% (3.46)%

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.

The table above represents the VaR of the Partnership's
open positions at September 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 only 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. 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 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, 2002 through September 30, 2003.

Primary Market Risk Category High Low Average
Currency (3.35)% (0.80)% (1.91)%

Interest Rate (2.48) (0.08) (1.49)

Equity (0.37) - (0.09)

Commodity (2.25) (1.75) (1.98)

Aggregate Value at Risk (4.72)% (2.84)% (3.36)%

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 September 30, 2003 and 2002, and for the four
quarter-end reporting periods from October 1, 2002 through
September 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.

The Partnership also maintains a substantial portion
(approximately 90% as of September 30, 2003) of its available
assets in cash at Morgan Stanley DW. 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 September 30, 2003, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.

Currency. The primary market exposure of the Partnership at
September 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 September
30, 2003, the Partnership's major exposures were to the euro,
Japanese yen and British pound currency crosses and 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.

Interest Rate. The second largest market exposure at September
30, 2003 was to the global interest rate complex, primarily to the
U.S. sector. 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. Demeter anticipates that the G-7 countries 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.

Commodity.
Energy. At September 30, 2003, 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 prices 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,
2003 was to fluctuations in the price of precious metals,
such as gold, and base metals, such as copper and nickel.
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.

Soft Commodities and Agriculturals. At September 30, 2003,
the Partnership had exposure to the markets that comprise
these sectors. Most of the exposure was to the corn and
cotton 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, 2003:

Foreign Currency Balances. The Partnership's primary foreign
currency balance at September 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 Partner-
ship'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
Management. The following individuals were named to the Board of
Directors of Demeter in the quarter ended March 31, 2003 and were
subsequently confirmed as principals of Demeter by the National
Futures Association:

Mr. Douglas J. Ketterer was confirmed as a principal of Demeter
by the National Futures Association on October 27, 2003.

Mr. Jeffrey S. Swartz was confirmed as a principal of Demeter by
the National Futures Association on October 23, 2003.

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's, 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 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 14, 2003 By: /s/Jeffrey D. Hahn
Jeffrey D. Hahn
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.

EXHIBIT 31.01

CERTIFICATIONS

I, Jeffrey A. Rothman, President of Demeter Management Corporation
("Demeter"), the general partner of the registrant, certify that:

1. I have reviewed this quarterly report on Form 10-Q of the
registrant;

2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;

b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and

c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of Demeter's board of
directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.

Date: November 14, 2003 /s/Jeffrey A. Rothman
Jeffrey A. Rothman
President,
Demeter Management Corporation,
general partner of the registrant

EXHIBIT 31.02

CERTIFICATIONS

I, Jeffrey D. Hahn, Chief Financial Officer of Demeter Management
Corporation ("Demeter"), the general partner of the registrant,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of the
registrant;

2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;

b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and

c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of Demeter's board of directors (or
persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.

Date: November 14, 2003 /s/Jeffrey D. Hahn
Jeffrey D. Hahn
Chief Financial Officer,
Demeter Management Corporation,
general partner of the registrant

EXHIBIT 32.01

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dean Witter Diversified
Futures Fund III L.P. (the "Partnership") on Form 10-Q for the
period ended September 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Jeffrey
A. Rothman, President, Demeter Management Corporation, the general
partner of the Partnership, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and
results of operations of the Partnership.

By: /s/ Jeffrey A. Rothman

Name: Jeffrey A. Rothman
Title: President

Date: November 14, 2003

EXHIBIT 32.02

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dean Witter Diversified
Futures Fund III L.P. (the "Partnership") on Form 10-Q for the
period ended September 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Jeffrey
D. Hahn, Chief Financial Officer, Demeter Management Corporation,
the general partner of the Partnership, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and
results of operations of the Partnership.

By: /s/ Jeffrey D. Hahn

Name: Jeffrey D. Hahn
Title: Chief Financial Officer

Date: November 14, 2003