WITTER DEAN DIVERSIFIED FUTURES FUND III L P - 10-K Annual Report

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

FORM 10-K

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the year ended December 31, 2004 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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 Limited Partnership Agreement)

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

Demeter Management Corporation
330 Madison Avenue, 8th floor
New York, NY 10017
(Address of principal executive offices) (Zip Code)

Registrant?s telephone number, including area code (212) 905-2700

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered

None None

Securities registered pursuant to Section 12(g) of the Act:

Units of Limited Partnership Interest

(Title of Class)

Indicate by check-mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ______

Indicate by check-mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment of this Form 10-K. [X]

Indicate by check-mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _____ No X

State the aggregate market value of the Units of Limited Partnership Interest
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which Units were sold as of the last
business day of the registrant?s most recently completed second fiscal quarter:
$32,487,670 at June 30, 2004.

DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2004

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference
as follows:

Documents Incorporated Part of Form 10-K

Partnership?s Prospectus dated
June 30, 1992 I

Annual Report to Dean Witter
Diversified Futures Fund III L.P.
Limited Partners for the year
ended December 31, 2004 II, III, and IV

PART I
Item 1. BUSINESS

(a) General Development of Business. Dean Witter Diversified Fu-
tures Fund III L.P. (the ?Partnership?) is a Delaware limited
partnership organized in 1990 to engage primarily in the
speculative trading of futures and forward contracts on physical
commodities and other commodity interests, including, but not
limited to, foreign currencies, financial instruments, metals,
energy, and agricultural products. The Partnership commenced
trading operations on November 1, 1990.

The Partnership?s general partner is Demeter Management
Corporation (?Demeter?). The non-clearing commodity broker is
Morgan Stanley DW Inc. (?Morgan Stanley DW?). The clearing
commodity brokers are Morgan Stanley & Co. Incorporated (?MS &
Co.?) and Morgan Stanley & Co. International Limited (?MSIL?).
The trading manager is Morgan Stanley Futures & Currency
Management Inc. (?MSFCM? or the ?Trading Manager?). Demeter,
Morgan Stanley DW, MS & Co., MSIL, and MSFCM are wholly-owned
subsidiaries of Morgan Stanley.

The Partnership's net asset value per unit of limited partnership
interest (?Unit(s)?) as of December 31, 2004 was $2,142.78,
representing a decrease of 4.3 percent from the net asset value
per Unit of $2,239.99 at December 31, 2003. For a more
detailed description of the Partnership?s business, see
subparagraph (c).

(b) Financial Information about Segments. For financial infor-
mation reporting purposes, the Partnership is deemed to engage in
one industry segment, the speculative trading of futures and
forwards on such contracts. The relevant financial information is
presented in Items 6 and 8.

(c) Narrative Description of Business. The Partnership is in the
business of speculative trading of futures and forwards, pursuant
to trading instructions provided by the Trading Manager. For a
detailed description of the different facets of the Partnership?s
business, see those portions of the Partnership?s prospectus,
dated June 30, 1992 (the ?Prospectus?), incorporated by reference
in this Form 10-K, set forth below:
Facets of Business
1. Summary 1. ?Summary of the Prospectus?
(Pages 1-8 of the
Prospectus).

2. Commodities Markets 2. ?The Commodities Markets?
(Pages 52-59 of the
Prospectus).

3. Partnership's Commodity 3. ?Trading Policies? (Pages
Trading Arrangements and 48-49 of the Prospectus).
Policies ?The Trading Manager? (Pages
37-47 of the Prospectus).

4. Management of the 4. ?The Management Agreement?
Partnership (Pages 50-52 of the
Prospectus). ?The
General Partner? (Pages
33-35 of the Prospectus)
and ?The Commodity
Broker? (Pages 49-50 of
The Prospectus). ?The
Limited Partnership
Agreement? (Pages 61-65
of the Prospectus).

5. Taxation of the 5. ?Federal Income Tax
Partnership?s Limited Aspects? and ?State and
Partners Local Income Tax Aspects?
(Pages 70-77 of the
Prospectus).

(d) Financial Information about Geographic Areas. The Partnership
has not engaged in any operations in foreign countries;
however, the Partnership (through the commodity brokers) enters
into forward contract transactions where foreign banks are the
contracting party and trades futures and forwards on foreign
exchanges.

(e) Available Information. The Partnership files annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to these reports with the Securities
and Exchange Commission (?SEC?). You may read and copy any
document filed by the Partnership at the SEC?s Public Reference
Room at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for information on
the Public Reference Room. The Partnership does not maintain an
internet website, however, the SEC maintains a website that
contains annual, quarterly, and current reports, proxy statements,
and other information that issuers (including the Partnership)
file electronically with the SEC. The SEC?s website address is
http://www.sec.gov.

Item 2. PROPERTIES
The Partnership?s executive and administrative offices are
located within the offices of Morgan Stanley DW. The Morgan
Stanley DW offices utilized by the Partnership are located at 330
Madison Avenue, 8th Floor, New York, NY 10017.

Demeter changed its address in August 2004 from 825 Third Avenue,
9th Floor, New York, NY 10022 to 330 Madison Avenue, 8th Floor,
New York, NY 10017.

Item 3. LEGAL PROCEEDINGS
None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

PART II

Item 5. MARKET FOR THE REGISTRANT?S PARTNERSHIP UNITS AND RELATED
SECURITY HOLDER MATTERS

(a) Market Information. There is no established public trading
market for Units of the Partnership.

(b) Holders. The number of holders of Units at December 31, 2004
was approximately 2,467.

(c) Distributions. No distributions have been made by the
Partnership since it commenced trading operations on November 1,
1990. Demeter has sole discretion to decide what distributions,
if any, shall be made to investors in the Partnership. Demeter
currently does not intend to make any distributions of
Partnership?s profits.

Item 6. SELECTED FINANCIAL DATA (in dollars)

Item 7. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Liquidity. The Partnership deposits its assets with Morgan
Stanley DW as non-clearing broker, and MS & Co. and MSIL as
clearing brokers in separate futures and forwards trading
accounts established for the Trading Manager. Such assets are
used as margin to engage in trading and may be used as margin
solely for the Partnership?s trading. The assets are held in
either non-interest bearing bank accounts or in securities and
instruments permitted by the Commodity Futures Trading Commission
for investment of customer segregated or secured funds. Since the
Partnership?s sole purpose is to trade in futures and forwards,
it is expected that the Partnership will continue to own such
liquid assets for margin purposes.

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

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

There are no known material trends, demands, commitments, events,
or uncertainties at the present time that are reasonably likely to
result in the Partnership?s liquidity increasing or decreasing in
any material way.

Capital Resources. The Partnership does not have, nor expects to
have, any capital assets. Redemptions of Units in the future will
affect the amount of funds available for investments in futures
and forwards in subsequent periods. It is not possible to
estimate the amount, and therefore the impact, of future outflows
of Units.
There are no known material trends, favorable or unfavorable,
that would affect, nor any expected material changes to, the
Partnership?s capital resource arrangements at the present time.

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

Results of Operations.
General. The Partnership's results depend on the Trading Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements in the futures and forwards markets.
The following presents a summary of the Partnership?s operations
for each of the three years in the period ended December 31, 2004,
and a general discussion of its trading activities during each
period. It is important to note, however, that the Trading
Manager trades in various markets at different times and that
prior activity in a particular market does not mean that such
market will be actively traded by the Trading Manager or will be
profitable in the future. Consequently, the results of operations
of the Partnership are difficult to discuss other than in the
context of the Trading Manager?s trading activities on behalf of
the Partnership during the period in question. Past
performance is no guarantee of future results.

The Partnership?s results of operations set forth in the financial
statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require
the use of certain accounting policies that affect the amounts
reported in these financial statements, including the following:
The contracts the Partnership trades are accounted for on a trade-
date basis and marked to market on a daily basis. The difference
between their cost and market value is recorded on the
Statements of Operations as ?Net change in unrealized trading
profit (loss)? for open (unrealized) contracts, and recorded as
?Realized trading profit (loss)? when open positions are closed
out. The sum of these amounts, along with the ?Proceeds from
Litigation Settlement?, constitutes the Partnership?s trading
results. The market value of a futures contract is the settlement
price on the exchange on which that futures contract is traded on
a particular day. The value of foreign currency forward contracts
is based on the spot rate as of the close of business. Interest
income, as well as management fees, incentive fees, and brokerage
commission 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.

The Partnership recorded total trading results including interest
totaling $993,122 and expenses totaling $2,993,657, resulting in a
net loss of $2,000,535 for the year ended December 31, 2004. The
Partnership?s net asset value per Unit decreased from $2,239.99 at
December 31, 2003 to $2,142.78 at December 31, 2004. Total
redemptions for the year were $3,847,225 and the Partnership?s
ending capital was $35,967,978 at December 31, 2004, a decrease of
$5,847,760 from ending capital at December 31, 2003 of
$41,815,738.

The most significant trading losses of approximately 12.0% were
recorded in the currency markets from positions in the Japanese
yen versus the U.S. dollar, primarily during the first and second
quarter, from both long and short positions in the yen relative
to the U.S. dollar as the value of the yen experienced
significant short-term price volatility. Conflicting economic
data regarding a Japanese economic recovery, uncertainty
regarding currency market interventions by the Bank of Japan,
geopolitical concerns stemming from instability in Iraq, and
uncertainty regarding the direction of U.S. and Japanese interest
rates contributed to the yen?s trendless movements. Losses were
also recorded from positions in the Singapore dollar against the
U.S. dollar as the value of the Singapore dollar experienced
significant ?whipsawing? during the first and second
quarter in tandem with value of the Japanese yen. The price
volatility in the Japanese yen also resulted in losses from
cross-rate positions in the euro versus the Japanese yen for the
aforementioned reasons. In the third quarter, volatility in the
euro was responsible for losses in euro/Japanese yen cross-rate
positions as the value of the euro moved in a trendless pattern
due to higher energy prices and uncertainty about the direction
of the European economy. Finally, losses were recorded from long
positions in the British pound relative to the euro, primarily
during December, as the value of the pound reversed lower
following news that the Bank of England was considering an
interest rate cut and the release of weaker-than-expected British
economic data. Additional losses of approximately 2.9% were
incurred in the metals markets, primarily during April and
December, from long futures positions in gold as prices weakened
due to strength in the U.S. dollar and stronger-than-expected
economic data. Elsewhere in the metals markets, losses were
recorded primarily during July and September from short positions
in nickel futures as prices increased on continued demand from
China and reports of lower-than-expected inventories. Smaller
losses were experienced during December from positions in nickel
futures as prices moved without consistent direction due to
volatility in the currency markets and conflicting news regarding
supply and demand. A portion of the Partnership?s overall losses
for the year was offset by gains of approximately 5.7% in the
global interest rate futures markets from long positions
in European interest rate futures during February, March, August,
and September as prices trended higher on uncertainty in the
global equity markets, disappointing economic data, ?safe-haven?
buying amid major geopolitical concerns, and a surge in oil
prices. Further gains from long positions in European interest
rates were recorded in the fourth quarter as prices continued to
trend higher for the aforementioned reasons, in addition to the
rise in the value of the euro. Additional gains of approximately
4.9% were recorded in the energy markets. During much of the
year, long positions in crude oil and its related products
profited as prices trended higher due to consistent news of tight
supply, continuing geopolitical concerns in the Middle East,
concerns that top Russian oil producer, Yukos, may break up or
stop selling oil, major production disruptions in the Gulf of
Mexico, growing civil unrest in Nigeria, and the threat of a
national strike in Norway. In December, smaller gains resulted
from newly established short positions in crude oil as prices
declined on news of a full recovery in production within the Gulf
of Mexico, increased output from OPEC, warmer weather in the
U.S., and reports of abundant supply. Within the agricultural
sector, gains of approximately 1.9% were experienced during
January, March, and June from long positions in corn futures as
prices increased on news of strong demand from Asia. Further
gains were experienced during July and August from short
positions in corn futures as prices weakened due to ideal weather
conditions in the growing regions of the U.S. Midwest,
reports of increased inventories, and weaker export demand.
Elsewhere in the agricultural markets, gains were recorded from
short positions in cotton futures, primarily during March, April,
June, and July, as prices trended lower amid rising supplies and
news of a consistent decline in demand from China. Smaller gains
of approximately 1.7% were recorded in the global stock index
futures markets, primarily during December, from long positions
in Australian equity index futures as prices moved higher on
positive investor sentiment and speculation that interest rates
in that country would remain at current levels throughout 2005.
Gains were also recorded during December from long positions in
Hang Seng stock index futures as equity prices in Hong Kong moved
higher due to strong earnings from the technology sector and
optimism that the Japanese economy was finally in full recovery
and may, thereby, boost the entire Asian region.

The Partnership recorded total trading results including interest
totaling $295,035 and expenses totaling $5,485,173, resulting in a
net loss of $5,190,138 for the year ended December 31, 2003. The
Partnership's net asset value per Unit decreased from $2,529.72 at
December 31, 2002 to $2,239.99 at December 31, 2003. Total
redemptions for the year were $4,789,603 and the Partnership's
ending capital was $41,815,738 at December 31, 2003, a decrease of
$9,979,741 from ending capital at December 31, 2002 of
$51,795,479.

The most significant trading losses of approximately 7.7% were
recorded 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 resulted 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. Losses within this sector
continued during December as European bond prices increased in
value amid perceptions that the European Central Bank would
maintain low interest rates. Consequently, losses were recorded
on short positions in European interest rate futures. Additional
losses of approximately 6.2% were recorded in the agricultural
markets from positions in coffee and cotton futures as prices
experienced volatile price movements throughout a majority of the
year. Elsewhere in the agricultural markets, losses were
recorded during October from short positions in corn futures as
prices reversed higher due to news of decreased supply. In the
energy markets, losses of approximately 4.3% were recorded
primarily during October, as the Partnership entered the month
with short natural gas positions, which proved unprofitable as
prices rallied during the first part of the month. In response
to this rise in prices, the Partnership reversed its position
from short to long, only to see prices decline in the latter part
of the month. Additional losses were also incurred in the
energy sector from positions in crude oil futures as prices moved
erratically during October in response to geopolitical and
supply/demand factors. Losses were also experienced during
November and December as energy prices continued to trade in a
volatile fashion. A portion of the Partnership?s overall losses
for the year was offset by gains of approximately 10.7% in the
currency markets produced by long positions in the Australian
dollar versus the U.S. dollar during a majority of the year as
the value of the Australian currency increased versus the U.S.
dollar on the heels of higher commodity prices and a significant
interest rate differential between the two countries. Additional
gains resulted from long positions in the euro, Singapore dollar,
Swedish krona, and Swiss franc versus the U.S. dollar as the
value of the U.S. dollar declined throughout much of the year due
to geopolitical uncertainty and negative economic data.
Additional currency gains were recorded from long positions in
the euro versus the Japanese yen. Additional gains of
approximately 1.2% were recorded in the metals markets, primarily
during the fourth quarter, from long positions in copper and
nickel as base metal prices rallied in response to growing
investor sentiment that the global economy was on the path to
recovery and amid increased demand, especially from China.
Smaller gains of approximately 0.3% were experienced in the
global stock index futures markets primarily during December from
long positions in U.S. stock index futures as prices increased
due to strong manufacturing data and the strongest U.S.
quarterly growth rate in almost 20 years.

The Partnership recorded total trading results including interest
totaling $17,529,465 and expenses totaling $5,551,131, resulting
in net income of $11,978,334 for the year ended December 31,
2002. The Partnership's net asset value per Unit increased from
$1,966.55 at December 31, 2001 to $2,529.72 at December 31, 2002.
Total redemptions for the year were $3,636,395 and the
Partnership's ending capital was $51,795,479 at December 31, 2002,
an increase of $8,341,939 from ending capital at December 31, 2001
of $43,453,540.

The most significant trading gains of approximately 20.5% were
recorded from long positions in European, Japanese, and U.S.
interest rate futures during the period from June through
September, as well as in December, as prices trended higher amid
increased demand among investors seeking the safety of fixed
income investments. Additional gains of approximately 18.4% were
generated in the currency markets from long positions in the
Swiss franc, euro, Japanese yen, and Swedish krona relative to
the U.S. dollar as the U.S. dollar weakened due to continued
uncertainty regarding a U.S. economic recovery. Additional
currency gains were recorded from long positions in the euro
versus the British pound. A portion of the Partnership?s overall
gains was offset by losses of approximately 6.8% recorded in the
metals futures markets from positions in aluminum futures
as an uncertain economic outlook resulted in trendless price
activities among industrial metals throughout most of the year.
In the agricultural futures markets, losses of approximately 1.8%
were incurred from long positions in cotton futures as prices
moved without consistent direction during the first and third
quarter amid shifting supply and demand concerns.

For an analysis of unrealized gains and (losses) by contract type
and a further description of 2004 trading results, refer to the
Partnership?s Annual Report to Limited Partners for the year
ended December 31, 2004, which is incorporated by reference to
Exhibit 13.01 of this Form 10-K.

The Partnership's gains and losses are allocated among its
partners for income tax purposes.

Market Risk.
Financial Instruments. The Partnership is a party to financial
instruments with elements of off-balance sheet market and credit
risk. 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. In entering into these
contracts, the Partnership is subject to the market risk that such
contracts may be significantly influenced by market conditions,
such as interest rate volatility, resulting in such
contracts being less valuable. If the markets should move against
all of the positions held by the Partnership at the same time, and
if the Trading Manager was unable to offset positions of the
Partnership, the Partnership could lose all of its assets and the
limited partners would realize a 100% loss.

In addition to the Trading Manager's internal controls, the
Trading Manager must comply with the Partnership?s trading
policies that include standards for liquidity and leverage that
must be maintained. The Trading Manager and Demeter monitor the
Partnership's trading activities to ensure compliance with the
trading policies and Demeter can require the Trading Manager to
modify positions of the Partnership if Demeter believes they
violate the Partnership's trading policies.

Credit Risk.
In addition to market risk, in entering into futures and forward
contracts there is a credit risk to the Partnership that the
counterparty on a contract will not be able to meet its
obligations to the Partnership. The ultimate counterparty or
guarantor of the Partnership for futures and forward contracts
traded in the United States and most foreign exchanges on which
the Partnership trades is the clearinghouse associated with such
exchange. In general, a clearinghouse is backed by the membership
of the exchange and will act in the event of non-performance by
one of its members or one of its member?s customers, which
should significantly reduce this credit risk. There is no
assurance that a clearinghouse, exchange, or other exchange member
will meet its obligations to the Partnership, and Demeter and the
commodity brokers will not indemnify the Partnership against a
default by such parties. Further, the law is unclear as to whether
a commodity broker has any obligation to protect its customers
from loss in the event of an exchange or clearinghouse defaulting
on trades effected for the broker?s customers. In cases where the
Partnership trades off-exchange forward contracts with a
counterparty, the sole recourse of the Partnership will be the
forward contract?s counterparty.

Demeter deals with these credit risks of the Partnership in
several ways. First, it monitors the Partnership?s credit
exposure to each exchange on a daily basis. The commodity brokers
inform the Partnership, as with all their customers, of its net
margin requirements for all its existing open positions, and
Demeter has installed a system which permits it to monitor the
Partnership?s potential net credit exposure, exchange by exchange,
by adding the unrealized trading gains on each exchange, if any,
to the Partnership?s margin liability thereon.

Second, the Partnership?s trading policies limit the amount of its
net assets that can be committed at any given time to futures
contracts and require a minimum amount of diversification in the
Partnership?s trading, usually over several different
products and exchanges. Historically, the Partnership?s exposure
to any one exchange has typically amounted to only a small
percentage of its total net assets and on those relatively few
occasions where the Partnership?s credit exposure climbs above
such level, Demeter deals with the situation on a case by case
basis, carefully weighing whether the increased level of credit
exposure remains appropriate. Material changes to the trading
policies may be made only with the prior written approval of the
limited partners owning more than 50% of Units then outstanding.

Third, with respect to forward contract trading, the Partnership
trades with only those counterparties which Demeter, together with
Morgan Stanley DW, have determined to be creditworthy. The
Partnership presently deals with MS & Co. as the sole counterparty
on forward contracts.

For additional information, see the ?Financial Instruments?
section under ?Notes to Financial Statements? in the Partnership?s
Annual Report to Limited Partners for the year ended December 31,
2004, which is incorporated by reference to Exhibit 13.01 of this
Form 10-K.

Inflation has not been a major factor in the Partnership?s
operations.

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures and forwards. The market-sensitive
instruments held by the Partnership are acquired for speculative
trading purposes only and, as a result, all or substantially all
of the Partnership?s assets are at risk of trading loss. Unlike
an operating company, the risk of market-sensitive instruments is
inherent to the primary business activity of the Partnership.

The futures and forwards traded by the Partnership involve
varying degrees of related market risk. Market risk is often
dependent upon changes in the level or volatility of interest
rates, exchange rates, and prices of financial instruments and
commodities, factors that result in frequent changes in the fair
value of the Partnership?s open positions, and consequently in its
earnings, whether realized or unrealized, and cash flow. Gains
and losses on open positions of exchange-traded futures and
forwards are settled daily through variation margin. Gains and
losses on off-exchange-traded forward currency contracts are
settled upon termination of the contract, however, the Partnership
is required to meet margin requirements equal to the net
unrealized loss on open contracts in the Partnership accounts with
the counterparty, which is accomplished by daily maintenance of
the cash balance in a custody account held at Morgan
Stanley DW for the benefit of MS & Co.
The Partnership?s total market risk may increase or decrease as it
is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.

The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by the
Partnership to typically be many times the total capitalization of
the Partnership.

The Partnership?s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership?s
market risk is limited by the uncertainty of its speculative
trading. The Partnership?s speculative trading and use of
leverage may cause future losses and volatility (i.e., ?risk of
ruin?) that far exceed the Partnership?s experiences to date under
the ?Partnership?s Value at Risk in Different Market Sectors?
section and significantly exceed the Value at Risk (?VaR?) tables
disclosed.

Limited partners will not be liable for losses exceeding
the current net asset value of their investment.
Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partner-
ship?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 qualitative disclosures in this section are deemed to
be forward-looking statements for purposes of the safe harbor,
except for statements of historical fact.

The Partnership accounts for open positions on the basis of mark
to market accounting principles. Any loss in the market value of
the Partnership?s open positions is directly reflected in the
Partnership?s earnings and cash flow.

The Partnership?s risk exposure in the market sectors traded by
the Trading Manager is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
value of a trading portfolio. The VaR model takes into account
linear exposures to risks including equity and commodity prices,
interest rates, foreign exchange rates, and correlation among
these variables. The hypothetical changes in portfolio
value are based on daily percentage changes observed in key market
indices or other market factors (?market risk factors?) to which
the portfolio is sensitive. The one-day 99% confidence level of
the Partnership?s VaR corresponds to the negative change in
portfolio value that, based on observed market risk factors, would
have been exceeded once in 100 trading days or one day in 100.
VaR typically does not represent the worst case outcome. Demeter
uses approximately four years of daily market data (1,000
observations) and revalues its portfolio (using delta-gamma
approximations) for each of the historical market moves that
occurred over this time period. This generates a probability
distribution of daily ?simulated profit and loss? outcomes. The
VaR is the appropriate percentile of this distribution. For
example, the 99% one-day VaR would represent the 10th worst
outcome from Demeter?s simulated profit and loss series.

The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-exchange
dealer-based instruments. They are also not based on exchange
and/or dealer-based maintenance margin requirements.

VaR models, including the Partnership?s, are 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 December 31, 2004 and 2003. At
December 31, 2004 and 2003, the Partnership?s total capital-
ization was approximately $36 million and $42 million,
respectively.

Primary Market December 31, 2004 December 31, 2003
Risk Category Value at Risk Value at Risk

Currency (2.28)% (2.77)%

Equity (2.00) (0.61)

Interest Rate (0.58) (0.84)

Commodity (0.31) (1.93)

Aggregate Value at Risk (2.57)% (3.50)%

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

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

The table below supplements the December 31, 2004 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 January 1, 2004 through December 31, 2004.

Primary Market Risk Category High Low Average
Currency (2.28)% (1.04)% (1.70)%
Equity (2.00) - (0.54)
Interest Rate (2.14) (0.58) (1.65)
Commodity (4.40) (0.31) (1.98)
Aggregate Value at Risk (5.67)% (2.43)% (3.68)%

Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio?s aggregate market risk
exposure, incorporating a range of varied market risks; reflect risk
reduction due to portfolio diversification or hedging activities;
and can cover a wide range of portfolio assets. However, VaR risk
measures should be viewed in light of the methodology?s limitations,
which include, but may not be limited to the following:

* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past market fluctuations applied to
current trading positions while future risk depends on future
positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.

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

The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at December 31, 2003, and for the four quarter-end
reporting periods during calendar year 2004. VaR is not
necessarily representative of the Partnership?s historic risk, nor
should it be used to predict the Partnership?s future
financial performance or its ability to manage or monitor risk.
There can be no assurance that the Partnership?s actual losses on
a particular day will not exceed the VaR amounts indicated above
or that such losses will not occur more than once in 100 trading
days.

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

The Partnership also maintains a substantial portion
(approximately 86% as of December 31, 2004) of its available
assets in cash at Morgan Stanley DW. A decline in short-term
interest rates would result in a decline in the Partnership?s cash
management income. This cash flow risk is not considered to be
material.

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

Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures ? except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures -
constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. The Partnership?s primary market risk
exposures, as well as the strategies used and to be used by
Demeter and the Trading Manager for managing such exposures, are
subject to numerous uncertainties, contingencies and risks, any
one of which could cause the actual results of the Partnership?s
risk controls to differ materially from the objectives of such
strategies. Government interventions, defaults and expro-
priations, 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 December 31, 2004, 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
December 31, 2004 was to the currency sector. The Partnership?s
currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes, as well as political and general economic conditions
influence these fluctuations. The Partnership trades a number of
currencies, including cross-rates - i.e., positions between two
currencies other than the U.S. dollar. At December 31, 2004, the
Partnership?s major exposures were to the euro, British pound,
and Japanese yen currency crosses, as well as to outright U.S.
dollar positions. Outright positions consist of the U.S. dollar
vs. other currencies. These other currencies include major and
minor currencies. Demeter does not anticipate that the risk
associated with the Partnership?s currency trades will change
significantly in the future.

Equity. At December 31, 2004 the Partnership had market exposure
to equity price risk in the G-7 countries. The G-7 countries
consist of France, the U.S., Britain, Germany, Japan, Italy, and
Canada. The stock index futures traded by the Partnership are by
law limited to futures on broadly-based indices. At December 31,
2004, the Partnership?s primary exposures were to the CAC 40

(France), Hang Seng (China), and All Ordinaries Share Price
(Australia) stock indices. The Partnership is exposed to the
risk of adverse price trends or static markets in the European,
Chinese, and Australian stock indices. Static markets would not
cause major market changes but would make it difficult for the
Partnership to avoid trendless price movements, resulting in
numerous small losses.

Interest Rate. At December 31, 2004 the Partnership had market
exposure to the global interest rate sector. 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
interest rate exposure is generally to interest rate fluctuations
in the U.S. and the other G-7 countries. Demeter anticipates
that G-7 countries will remain the primary interest rate exposure
of the Partnership for the foreseeable future. The speculative
futures positions held by the Partnership may range from short to
long-term instruments. Consequently, changes in short, medium, or
long-term interest rates may have an effect on the Partnership.

Commodity.
Energy. The second largest market exposure of the
Partnership at December 31, 2004 was to the energy sector.
The Partnership?s energy exposure was primarily to futures
contracts in crude oil and natural gas. Price movements in
these markets result from geopolitical developments,
particularly in the Middle East, as well as weather patterns
and other economic fundamentals. Significant profits and
losses, which have been experienced in the past, are
expected to continue to be experienced in the future.
Natural gas has exhibited volatility in prices resulting
from weather patterns and supply and demand factors and will
likely continue in this choppy pattern.

Soft Commodities and Agriculturals. At December 31, 2004,
the Partnership had market exposure to the markets that
comprise these sectors. Most of the exposure was to the
cotton, coffee, cocoa, and corn markets. Supply and demand
inequalities, severe weather disruptions, and market
expectations affect price movements in these markets.

Metals. At December 31, 2004, the Partnership had market
exposure in the metals sector. The Partnership?s metals
exposure was to fluctuations in the price of base metals,
such as aluminum, copper, nickel, and zinc. Economic
forces, supply and demand inequalities, geopolitical
factors, and market expectations influence price movements
in these markets. The Trading Manager utilizes the trading
system(s) to take positions when market opportunities
develop, and Demeter anticipates that the Partnership will
continue to do so.

Qualitative Disclosures Regarding Non-Trading Risk Exposure

The following was the only non-trading risk exposure of the
Partnership at December 31, 2004:

Foreign Currency Balances. The Partnership?s primary
foreign currency balances at December 31, 2004 were in the
euros, Hong Kong dollars, and Australian dollars. The
Partnership controls the non-trading risk of foreign
currency balance by regularly converting them back into U.S.
dollars upon liquidation of their respective positions.

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

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

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated by reference to the
Partnership?s Annual Report, which is filed as Exhibit 13.01
hereto.

Supplementary data specified by Item 302 of Regulation S-K:

Summary of Quarterly Results (Unaudited)

Quarter Total Trading Results Net Net Income/
Ended including interest Income/(Loss) (Loss) Per Unit

2004
March 31 $ 2,724,181 $ 1,886,406 $ 100.74
June 30 (7,996,848) (8,896,439) (490.75)
September 30 809,028 191,038 11.51
December 31 5,456,761 4,818,460 281.29

Total $ 993,122 $(2,000,535) $ (97.21)

2003
March 31 $ 8,410,938 $ 6,402,289 $ 310.64
June 30 (2,845,154) (4,138,572) (213.83)
September 30 (4,191,111) (5,359,075) (277.38)
December 31 (1,079,638) (2,094,780) (109.16)

Total $ 295,035 $(5,190,138) $(289.73)

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this annual report,
the President and Chief Financial Officer of Demeter, the
general partner of the Partnership, have evaluated the
effectiveness of the Partnership?s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act), and have judged such controls and
procedures to be effective.

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

Management?s Report on Internal Control Over Financial Reporting
Demeter is responsible for the management of the Partnership.

Management of Demeter (?Management?) is responsible for
establishing and maintaining adequate internal control over
financial reporting. The internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.

The Partnership?s internal control over financial reporting
includes those policies and procedures that:

* Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Partnership;

* Provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that the Partnership?s transactions are being made only in
accordance with authorizations of Management and directors;
and

* Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the Partnership?s assets that could have a material effect on
the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Partnership?s
internal control over financial reporting as of December 31,
2004. In making this assessment, Management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.
Based on our assessment and those criteria, Management believes
that the Partnership maintained effective internal control over
financial reporting as of December 31, 2004.

Deloitte & Touche LLP, the Partnership?s independent registered
public accounting firm, has issued an audit report on Management?s
assessment of the Partnership?s internal control over financial
reporting and on the effectiveness of the Partnership?s internal
control over financial reporting. This report, which expresses
unqualified opinions on Management?s assessment and on the
effectiveness of the Partnership?s internal control over financial
reporting, appears under ?Report of Independent Registered Public
Accounting Firm? in the Partnership?s Annual Report to Limited
Partners for the year ended December 31, 2004.

Item 9B. OTHER INFORMATION
The Board of Directors of Demeter, the general partner of the
registrant, approved the engagement of Ernst & Young LLP as the
registrant?s principal accountant for tax purposes. Ernst & Young
LLP was engaged by the registrant on November 1, 2004. Deloitte &
Touche LLP will continue as the registrant?s principal accountant
and audit the financial statements of the registrant.
There have been no material disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

There are no directors or executive officers of the Partnership.
The Partnership is managed by Demeter.

Directors and Officers of the General Partner
The directors and executive officers of Demeter are as follows:

Mr. Jeffrey D. Hahn resigned his position as Chief Financial
Officer and Director of Demeter.

Mr. Jeffrey S. Swartz resigned his position as a Director of
Demeter.

Mr. Jeffrey A. Rothman, age 43, is the Chairman of the Board of
Directors and President of Demeter. Mr. Rothman is the Managing
Director of Morgan Stanley Managed Futures, responsible for
overseeing all aspects of the firm?s managed futures department.
Mr. Rothman has been with the managed futures department for
eighteen years. Throughout his career, Mr. Rothman has helped
with the development, marketing, and administration of
approximately 40 commodity pools. Mr. Rothman is an active member
of the Managed Funds Association and has recently served on its
Board of Directors. Mr. Rothman has a B.A. degree in Liberal Arts
from Brooklyn College, New York.

Mr. Richard A. Beech, age 53, is a Director of Demeter.
Mr. Beech has been associated with the futures industry for over
25 years. He has been at Morgan Stanley DW since August 1984 where
he is
presently an Executive Director and head of Futures, Forex &
Metals. Mr. Beech began his career at the Chicago Mercantile
Exchange, where he became the Chief Agricultural Economist doing
market analysis, marketing, and compliance. Prior to joining
Morgan Stanley DW, Mr. Beech worked at two investment banking
firms in operations, research, managed futures, and sales
management. Mr. Beech has a B.S. degree in Business
Administration from Ohio State University and an M.B.A. degree
from Virginia Polytechnic Institute and State University.

Mr. Raymond A. Harris, age 48, is a Director of Demeter. Mr.
Harris is currently Managing Director and head of Client Solutions
for Morgan Stanley Individual Investor Group (?IIG?), a Board
Member of Morgan Stanley DW Inc., and Director of Morgan Stanley
Trust. Mr. Harris joined Morgan Stanley in 1982 and served in
financial and operational assignments for Dean Witter Reynolds.
In 1994, he joined the Discover Financial Services division,
leading restructuring and product development efforts. Mr. Harris
became Chief Administrative Officer for Morgan Stanley Investment
Management in 1999. In 2001, he was named head of Global Products
and Services for Investment Management. Mr. Harris has an M.B.A.
in Finance from the University of Chicago and a B.A. degree
from Boston College.

Mr. Frank Zafran, age 50, is a Director of Demeter. Mr. Zafran is
an Executive Director of Morgan Stanley and, in September 2002,
was named Chief Administrative Officer of Morgan Stanley?s Client
Solutions Division. Mr. Zafran joined the firm in 1979 and has
held various positions in Corporate Accounting and the Insurance
Department, including Senior Operations Officer ? Insurance
Division, until his appointment in 2000 as Director of 401(k) Plan
Services, responsible for all aspects of 401(k) Plan Services
including marketing, sales, and operations. Mr. Zafran received a
B.S. degree in Accounting from Brooklyn College, New York.

Mr. Douglas J. Ketterer, age 39, is a Director of Demeter. Mr.
Ketterer is a Managing Director and has had responsibility for
managing a number of departments at Morgan Stanley over the years,
most recently as head of the Investment Solutions Group, which is
comprised of a number of departments which offer products and
services through Morgan Stanley?s IIG (including Managed Futures,
Alternative Investments, Insurance Services, Personal Trust,
Corporate Services, and others). Mr. Ketterer joined the firm in
1990 in the Corporate Finance Division as a part of the Retail
Products Group. He later moved to the origination side of
Investment Banking, and then, after the merger between Morgan
Stanley and Dean Witter, served in the Product Development Group
at Morgan Stanley Dean Witter Advisors (now known as Morgan
Stanley Funds). From the summer of 2000 to the summer of 2002, Mr.
Ketterer served as the Chief Administrative Officer for Morgan
Stanley Investment Management, where he headed the Strategic
Planning & Administrative Group. Mr. Ketterer received his M.B.A.
from New York University?s Leonard N. Stern School of Business and
his B.S. in Finance from the University at Albany?s School of
Business.

Mr. Todd Taylor, age 42, is a Director of Demeter. Mr. Taylor
began his career with Morgan Stanley in June 1987 as a Financial
Advisor in the Dallas office. In 1995, he joined the Management
Training Program in New York and was appointed Branch Manager of
the Missouri and southern Illinois branch offices in 1997. Three
years later, in 2000, Mr. Taylor was appointed to a newly created
position, Director of IIG Learning and Development, before
becoming the Director of IIG Strategy in 2002. Most recently, Mr.
Taylor has taken on a new role as the High Net Worth Segment
Director. Mr. Taylor graduated from Texas Tech University with a
B.B.A. in Finance.

Mr. William D. Seugling, age 35, is a Director of Demeter. Mr.
Seugling is a Managing Director at Morgan Stanley and currently
serves as Director of Client Solutions for U.S. Private Wealth
Management. Mr. Seugling joined Morgan Stanley in June 1993 as an
Associate in Equity Structured Products having previously worked
in research and consulting for Greenwich Associates from
October 1991 to June 1993. Since 1994, he has focused broadly on
analysis and solutions for wealthy individuals and families
culminating in his current role within the division. He was
named Vice President in 1996 and an Executive Director in 1999.
Mr. Seugling graduated cum laude from Bucknell University with a
B.S. in Management and a concentration in Chemistry.

Ms. Louise M. Wasso-Jonikas, age 51, is a Director of Demeter.
Ms. Wasso-Jonikas is a Managing Director of Morgan Stanley and
the Director of Alternative Investments for the IIG of Morgan
Stanley. Ms. Wasso-Jonikas was Co-Founder, President, and Chief
Operating Officer of Graystone Partners, an objective consulting
firm, from 1993 to 1999, when Graystone was acquired by Morgan
Stanley. Prior to founding Graystone, Ms. Wasso-Jonikas was a
Senior Vice President at Bessemer Trust and opened their Chicago
office. She also was a Vice President at the Northern Trust in
their Wealth Management Services Group where she worked
exclusively with their largest private clients and family offices
throughout the U.S. and abroad, serving their broad investment
and custody needs. Ms. Wasso-Jonikas also worked as an equity
block trader with Goldman Sachs and with Morgan Stanley advising
and managing money for private clients. Ms. Wasso-Jonikas? focus
is on developing a robust external manager platform utilizing
alternative managers for Morgan Stanley?s IIG private clients as
well as overseeing some of the Morgan Stanley?s largest client
relationships. Ms. Wasso-Jonikas holds a B.A. in
Economics from Mount Holyoke College and an M.B.A in Finance from
the University of Chicago Graduate School of Business.
Mr. Kevin Perry, age 35, is the Chief Financial Officer of
Demeter. Mr. Perry currently serves as an Executive Director and
Controller within the IIG at Morgan Stanley. Mr. Perry joined
Morgan Stanley in October 2000 and is also Chief Financial
Officer of Morgan Stanley Trust National Association, Van Kampen
Funds Inc., and Morgan Stanley Distribution, Inc. Prior to
joining Morgan Stanley, Mr. Perry worked as an auditor and
consultant in the financial services practice of Ernst & Young
LLP from October 1991 to October 2000. Mr. Perry received a B.S.
degree in Accounting from the University of Notre Dame in 1991
and is a Certified Public Accountant.

All of the foregoing directors have indefinite terms.

The Audit Committee
The Partnership is operated by its general partner, Demeter, and
does not have an audit committee. The entire Board of Directors
of Demeter serves as the audit committee. None of the directors
are considered to be ?independent? as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of
1934, as amended. The Board of Directors of Demeter has
determined that Mr. Kevin Perry is the audit committee financial
expert.
Code of Ethics
The Partnership has not adopted a code of ethics that applies to
the Partnership?s principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions. The Partnership is operated by its
general partner, Demeter. The President, Chief Financial Officer,
and each member of the Board of Directors of Demeter are
employees of Morgan Stanley and are subject to the code of ethics
adopted by Morgan Stanley, the text of which can be viewed on
Morgan Stanley?s website at http://www.morganstanley.com/
ourcommitment/codeofconduct.html.

Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers. As a
limited partnership, the business of the Partnership is managed by
Demeter, which is responsible for the administration of the
business affairs of the Partnership but receives no compensation
for such services.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners - At December
31, 2004, there were no persons known to be beneficial owners of
more than 5 percent of the Units.

(b) Security Ownership of Management - At December 31, 2004,
Demeter owned 208.167 Units of general partnership interest,
representing a 1.24 percent interest in the Partnership.

(c) Changes in Control ? None.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 ? ?Related Party Transactions? of ?Notes to
Financial Statements?, in the accompanying Annual Report to
Limited Partners for the year ended December 31, 2004, which is
incorporated by reference to Exhibit 13.01 of this Form 10-K. In
its capacity as the Partnership?s retail commodity broker, Morgan
Stanley DW received commodity brokerage commissions (paid and
accrued by the Partnership) of $1,660,757 for the year ended
December 31, 2004. In its capacity as the Partnership?s Trading
Manager, MSFCM received management fees of $1,115,412 for the year
ended December 31, 2004.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Partnership pays all accounting fees as discussed in Note 1,
?Operating Expenses? to Financial Statements in the Annual Report
to the Limited Partners for the year ended December 31, 2004.

(1) Audit Fees. The aggregate fees for professional services
rendered by Deloitte & Touche LLP in connection with their audit
of the Partnership?s financial statements and reviews of
the financial statements included in the Quarterly Reports on Form
10-Q, and in connection with statutory and regulatory filings for
the year ended December 31, 2004 were approximately $28,820 and
for the year ended December 31, 2003 were $27,369.

(2) Audit-Related Fees. There were no fees for assurance and
related services rendered by Deloitte & Touche LLP for the years
ended December 31, 2004 and 2003.

(3) Tax Fees. The aggregate fees for tax compliance services
rendered by Ernst & Young LLP were approximately $30,446 and
Deloitte & Touche LLP were $29,559 for the years ended December
31, 2004 and 2003, respectively.

(4) All Other Fees. None.

As of the date of this Report, the Board of Directors of Demeter
has not adopted pre-approval policies and procedures. As a
result, all services provided by Ernst & Young LLP and Deloitte &
Touche LLP must be directly pre-approved by the Board of Directors
of Demeter. Additionally, all services provided by Deloitte &
Touche LLP and Ernst & Young LLP must be communicated to Morgan
Stanley?s Audit Director.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

(a) 1. Listing of Financial Statements
The following financial statements and report of independent
registered public accounting firm, all appearing in the
accompanying Annual Report to Limited Partners for the year ended
December 31, 2004, are incorporated by reference to Exhibit 13.01
of this Form 10-K:
- - Report of Deloitte & Touche LLP, independent registered
public accounting firm, for the years ended December 31,
2004, 2003, and 2002.

- - Statements of Financial Condition, including the Schedules of
Investments, as of December 31, 2004 and 2003.

- - Statements of Operations, Changes in Partners' Capital, and
Cash Flows for the years ended December 31, 2004, 2003, and
2002.

- - Notes to Financial Statements.

With the exception of the aforementioned information and the
information incorporated in Items 7, 8, and 13, the Annual Report
to Limited Partners for the year ended December 31, 2004, is not
deemed to be filed with this report.

2. Listing of Financial Statement Schedules
No financial statement schedules are required to be filed with
this report.

(c) Exhibits
Refer to Exhibit Index on Pages E-1 to E-2.

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) 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

March 31, 2005 BY: /s/ Jeffrey A. Rothman
Jeffrey A. Rothman,
President

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

Demeter Management Corporation.

BY: /s/ Jeffrey A. Rothman March 31, 2005
Jeffrey A. Rothman, President

/s/ Richard A. Beech March 31, 2005
Richard A. Beech, Director

/s/ Raymond A. Harris March 31, 2005
Raymond A. Harris, Director

/s/ Frank Zafran March 31, 2005
Frank Zafran, Director

/s/ Douglas J. Ketterer March 31, 2005
Douglas J. Ketterer, Director

/s/ Todd Taylor March 31, 2005
Todd Taylor, Director

/s/ William D. Seugling March 31, 2005
William D. Seugling, Director

/s/ Louise M. Wasso-Jonikas March 31, 2005
Louise M. Wasso-Jonikas, Director

/s/ Kevin Perry March 31, 2005
Kevin Perry, Chief Financial Officer

EXHIBIT INDEX

ITEM

3.01 Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of May 14, 1990, is incorporated by
reference to Exhibit A of the Partnership?s Prospectus
dated June 30, 1992, filed with the Securities and
Exchange Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933 on July 14, 1992.

3.02 Amendment No. 1 to the Limited Partnership Agreement of the
Partnership, dated as of May 14, 1990, is incorporated by
reference to Exhibit 3.02 of the Partnership?s Quarterly
Report on Form 10-Q (File No. 0-19116) filed with the
Securities and Exchange Commission on August 14, 2002.

10.01 Management Agreement among the Partnership, Demeter
Management Corporation and Dean Witter Futures & Currency
Management Inc., dated as of July 12, 1990, is incorporated
by reference to Exhibit 10.02 of the Partnership's
Registration Statement on Form S-1 (File No. 33-34989)
filed with the Securities and Exchange Commission on May
21, 1990.

10.02 Amendment No. 1 to the Management Agreement, dated as of
June 30, 1992, is incorporated by reference to Exhibit
10.02 of the Partnership's Quarterly Report on Form 10-Q
(File No. 0-19116) filed with the Securities and Exchange
Commission on August 14, 2002.

10.03 Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW Inc., dated as of May 19,
2000, is incorporated by reference to Exhibit 10.01 of the
Partnership?s Form 8-K (File No. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.

10.04 Commodity Futures Customer Agreement between Morgan Stanley
& Co. Incorporated and the Partnership, and acknowledged
and agreed to by Morgan Stanley DW Inc., dated as of May 1,
2000, is incorporated by reference to Exhibit 10.02 of the
Partnership?s Form 8-K (File No. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.

10.05 Customer Agreement between the Partnership and Morgan
Stanley & Co. International Limited, dated as of May 1,
2000, is incorporated by reference to Exhibit 10.04 of the
Partnership?s Form 8-K (File No. 0-19116) filed with the
Securities and Exchange Commission on November 13, 2001.

10.06 Foreign Exchange and Options Master Agreement between
Morgan Stanley & Co. Incorporated and the Partnership,
dated as of April 30, 2000, is incorporated by reference to
Exhibit 10.05 of the Partnership?s Form 8-K (File No. 0-
19116) filed with the Securities and Exchange Commission on
November 13, 2001.

10.07 Securities Account Control Agreement among the Partnership,
Morgan Stanley & Co. Incorporated, and Morgan Stanley DW
Inc., dated as of May 1, 2000, is incorporated by reference
to Exhibit 10.03 of the Partnership?s Form 8-K (File No. 0-
19116) filed with the Securities and Exchange Commission on
November 13, 2001.

13.01 December 31, 2004 Annual Report to Limited Partners is
filed herewith.

31.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Diversified
Futures
Fund III

December 31, 2004
Annual Report

[LOGO] Morgan Stanley

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

HISTORICAL FUND PERFORMANCE

Presented below is the percentage change in Net Asset Value per Unit from the
start of each calendar year the Fund has traded. Also provided is the
inception-to-date return and the compound annualized return since inception for
the Fund. Past performance is no guarantee of future results.

INCEPTION-
TO-DATE
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 RETURN
FUND % % % % % % % % % % % % % % % %
- ------------------------------------------------------------------------------------------------------------------------------

Diversified Futures Fund III (1.7) 27.1 15.8 7.6 5.9 (4.0) (4.7) 12.3 5.4 (10.6) 22.0 1.1 28.6 (11.5) (4.3) 114.3
(2 mos.)
- ------------------------------------------------------------------------------------------------------------------------------

COMPOUND
ANNUALIZED
RETURN
FUND %
- ---------------------------------------

Diversified Futures Fund III 5.5

- ---------------------------------------

DEMETER MANAGEMENT CORPORATION

330 Madison Avenue, 8th Floor
New York, NY 10017
Telephone (212) 905-2700

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
ANNUAL REPORT
2004

Dear Limited Partner:

This marks the fifteenth annual report for the Dean Witter Diversified
Futures Fund III L.P. (the "Fund"). The Fund began the year at a Net Asset
Value per Unit of $2,239.99 and decreased by 4.3% to $2,142.78 on December 31,
2004. The Fund has increased by 114.3% since it began trading in November 1990
(a compound annualized return of 5.5%).

Detailed performance information for the Fund is located in the body of the
financial report. We provide a trading results by sector chart that portrays
trading gains and trading losses for the year in each sector in which the Fund
participates.

The trading results by sector chart indicates the year's composite percentage
returns generated by the specific assets dedicated to trading within each
market sector in which the Fund participates. Please note that there is not an
equal amount of assets in each market sector, and the specific allocations of
assets by the Fund to each sector will vary over time within a predetermined
range. Below the chart is a description of the factors that influenced trading
gains and trading losses within the Fund during the year.

Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation, 330 Madison Avenue, 8th Floor, New
York, New York 10017 or your Morgan Stanley Financial Advisor.

I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is no
guarantee of future results.

Sincerely,

/s/ Jeffrey A. Rothman
Jeffrey A. Rothman
Chairman of the Board of Directors and President
Demeter Management Corporation
General Partner for
Dean Witter Diversified Futures Fund III L.P.

DIVERSIFIED FUTURES FUND III L.P.

[CHART]

Year ended December 31, 2004
----------------------------
Currencies -11.98%
Interest Rates 5.70%
Stock Indices 1.68%
Energies 4.93%
Metals -2.93%
Agriculturals 1.89%

Note:Includes trading results and commissions but does not include other fees
or interest income.

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. In the currency markets, losses were recorded from positions in the Japanese
yen versus the U.S. dollar primarily during the first and second quarter
from both long and short positions in the yen relative to the U.S. dollar as
the value of the yen experienced significant short-term price volatility.
Conflicting economic data regarding a Japanese economic recovery,
uncertainty regarding currency market interventions by the Bank of Japan,
geopolitical concerns stemming from instability in Iraq, and uncertainty
regarding the direction of U.S. and Japanese interest rates contributed to
the yen's trendless movements. Losses were also recorded from positions in
the Singapore dollar against the U.S. dollar as the value of the Singapore
dollar experienced significant "whipsawing" during the first and second
quarter in tandem with the value of the Japanese yen. The price volatility
in the Japanese yen also resulted in losses from cross-rate positions in the
euro versus the Japanese yen for the aforementioned reasons. In the third
quarter, volatility in the euro was responsible for losses in euro/Japanese
yen cross-rate positions as the value of the euro moved in a trendless
pattern due to higher energy prices and uncertainty about the direction of
the European economy. Finally, losses were recorded from long positions in
the British pound relative to the euro, primarily during December, as the
value of the pound reversed lower following news that the Bank of England
was considering an interest rate cut and the release of weaker-than-expected
British economic data.

DIVERSIFIED FUTURES FUND III L.P.

.. In the metals markets, losses were incurred primarily during April and
December from long futures positions in gold as prices weakened due to
strength in the U.S. dollar and stronger-than-expected economic data.
Elsewhere in the metals markets, losses were recorded primarily during July
and September from short positions in nickel futures as prices increased on
continued demand from China and reports of lower-than-expected inventories.
Smaller losses were incurred during December from positions in nickel
futures as prices moved without consistent direction due to volatility in
the currency markets and conflicting news regarding supply and demand.

FACTORS INFLUENCING ANNUAL TRADING GAINS:

.. Gains were experienced in the global interest rate futures markets from long
positions in European interest rate futures during February, March, August,
and September as prices trended higher on uncertainty in the global equity
markets, disappointing economic data, "safe-haven" buying amid major
geopolitical concerns, and a surge in oil prices. Further gains from long
positions in European interest rates were recorded in the fourth quarter as
prices continued to trend higher for the aforementioned reasons, in addition
to the rise in the value of the euro.

.. Additional gains were recorded in the energy markets. During much of the
year, long positions in crude oil and its related products profited as
prices trended higher due to consistent news of tight supply, continuing
geopolitical concerns in the Middle East, concerns that top Russian oil
producer, Yukos, may break up or stop selling oil, major production
disruptions in the Gulf of Mexico, growing civil unrest in Nigeria, and the
threat of a national strike in Norway. In December, smaller gains resulted
from newly established short positions in crude oil as prices declined on
news of a full recovery in production within the Gulf of Mexico, increased
output from OPEC, warmer weather in the U.S., and reports of abundant supply.

.. Within the agricultural sector, gains were experienced during January,
March, and June from long positions in corn futures as prices increased on
news of strong demand from Asia. Further gains were experienced during July
and August from short positions in corn futures as prices weakened due to
ideal weather conditions in the growing regions of the U.S. Midwest, reports
of increased inventories, and weaker export demand. Elsewhere in the
agricultural markets, gains were recorded from short positions in cotton
futures, primarily during March, April, June, and July, as prices trended
lower amid rising supplies and news of a consistent decline in demand from
China.

.. Smaller gains were recorded in the global stock index futures markets,
primarily during December, from long positions in Australian equity index
futures as prices moved higher on positive investor sentiment and
speculation that interest rates in that country would remain at current
levels throughout 2005. Gains were also recorded during December from long
positions in Hang Seng stock index futures as equity prices in Hong Kong
moved higher due to strong earnings from the technology sector and optimism
that the Japanese economy was finally in full recovery and may, thereby,
boost the entire Asian region.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Demeter Management Corporation ("Demeter"), the general partner of Dean
Witter Diversified Futures Fund III L.P. (the "Partnership"), is responsible
for the management of the Partnership.

Management of Demeter ("Management") is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles.

The Partnership's internal control over financial reporting includes those
policies and procedures that:

.. Pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Partnership;

.. Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that the Partnership's transactions are
being made only in accordance with authorizations of Management and
directors; and

.. Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Partnership's assets
that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Partnership's internal control
over financial reporting as of December 31, 2004. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control--Integrated
Framework. Based on our assessment and those criteria, Management believes that
the Partnership maintained effective internal control over financial reporting
as of December 31, 2004.

Deloitte & Touche LLP, the Partnership's independent registered public
accounting firm, has issued an audit report on Management's assessment of the
Partnership's internal control over financial reporting and on the
effectiveness of the Partnership's internal control over financial reporting.
This report, which expresses unqualified opinions on Management's assessment
and on the effectiveness of the Partnership's internal control over financial
reporting, appears under "Report of Independent Registered Public Accounting
Firm" on the following page.

New York, New York
March 11, 2005

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Limited Partners and the General Partner:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Dean
Witter Diversified Futures Fund III L.P. (the "Partnership") maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Partnership's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Partnership's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly

reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that the Partnership maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Partnership
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the financial statements as of and
for the year ended December 31, 2004 of the Partnership and our report dated
March 11, 2005 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP
New York, New York
March 11, 2005

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Limited Partners and the General Partner:

We have audited the accompanying statements of financial condition of Dean
Witter Diversified Futures Fund III L.P. (the "Partnership"), including the
schedules of investments, as of December 31, 2004 and 2003, and the related
statements of operations, changes in partners' capital, and cash flows for each
of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Dean Witter Diversified Futures Fund III
L.P. at December 31, 2004 and 2003, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2004,
in conformity with accounting principles generally accepted in the United
States of America.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Partnership's internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 11, 2005 expressed an unqualified opinion
on management's assessment of the effectiveness of the Partnership's internal
control over financial reporting and an unqualified opinion on the
effectiveness of the Partnership's internal control over financial reporting.

/s/ Deloitte & Touche LLP
New York, New York
March 11, 2005

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31,
----------------------
2004 2003
---------- ----------
$ $

ASSETS
Equity in futures interests trading accounts:
Cash 33,183,507 39,854,002
Net unrealized gain on open contracts
(MS&Co.) 3,295,646 1,619,468
Net unrealized gain (loss) on open
contracts (MSIL) (49,863) 894,963
---------- ----------
Total net unrealized gain on open
contracts 3,245,783 2,514,431
---------- ----------
Total Trading Equity 36,429,290 42,368,433
Interest receivable (Morgan Stanley DW) 51,924 23,823
---------- ----------
Total Assets 36,481,214 42,392,256
========== ==========

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES
Redemptions payable 314,739 335,337
Administrative expenses payable 106,750 134,617
Accrued management fees (MSFCM) 91,747 106,564
---------- ----------
Total Liabilities 513,236 576,518
---------- ----------

PARTNERS' CAPITAL
Limited Partners (16,577.488 and
18,459.689 Units, respectively) 35,521,922 41,349,447
General Partner (208.167 Units) 446,056 466,291
---------- ----------
Total Partners' Capital 35,967,978 41,815,738
---------- ----------
Total Liabilities and Partners' Capital 36,481,214 42,392,256
========== ==========

NET ASSET VALUE PER UNIT 2,142.78 2,239.99
========== ==========

The accompanying notes are an integral part of these financial statements.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2004 2003 2002
---------- ---------- ----------
$ $ $

INVESTMENT INCOME
Interest income (Morgan Stanley DW) 399,102 429,917 618,816
---------- ---------- ----------

EXPENSES
Brokerage commissions
(Morgan Stanley DW) 1,660,757 2,906,478 2,582,647
Management fees (MSFCM) 1,115,412 1,581,440 1,461,168
Administrative expenses 138,000 144,000 155,000
Transaction fees and costs 79,488 129,946 121,110
Incentive fees (MSFCM) -- 723,309 1,231,206
---------- ---------- ----------
Total Expenses 2,993,657 5,485,173 5,551,131
---------- ---------- ----------

NET INVESTMENT LOSS (2,594,555) (5,055,256) (4,932,315)
---------- ---------- ----------

TRADING RESULTS
Trading profit (loss):
Realized (148,236) 3,209,687 10,540,492
Net change in unrealized 731,352 (3,344,569) 5,263,150
---------- ---------- ----------
583,116 (134,882) 15,803,642
Proceeds from Litigation Settlement 10,904 -- 1,107,007
---------- ---------- ----------
Total Trading Results 594,020 (134,882) 16,910,649
---------- ---------- ----------

NET INCOME (LOSS) (2,000,535) (5,190,138) 11,978,334
========== ========== ==========

NET INCOME (LOSS) ALLOCATION:
Limited Partners (1,980,300) (5,196,305) 11,743,442
General Partner (20,235) 6,167 234,892

NET INCOME (LOSS) PER UNIT:
Limited Partners (97.21) (289.73) 563.17
General Partner (97.21) (289.73) 563.17

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
----------- ---------- --------- ----------
$ $ $

Partners' Capital,
December 31, 2001 22,096.276 42,633,308 820,232 43,453,540
Net income -- 11,743,442 234,892 11,978,334
Redemptions (1,621.497) (3,636,395) -- (3,636,395)
---------- ---------- --------- ----------
Partners' Capital,
December 31, 2002 20,474.779 50,740,355 1,055,124 51,795,479
Net income (loss) -- (5,196,305) 6,167 (5,190,138)
Redemptions (1,806.923) (4,194,603) (595,000) (4,789,603)
---------- ---------- --------- ----------
Partners' Capital,
December 31, 2003 18,667.856 41,349,447 466,291 41,815,738
Net loss -- (1,980,300) (20,235) (2,000,535)
Redemptions (1,882.201) (3,847,225) -- (3,847,225)
---------- ---------- --------- ----------
Partners' Capital,
December 31, 2004 16,785.655 35,521,922 446,056 35,967,978
========== ========== ========= ==========

The accompanying notes are an integral part of these financial statements.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2004 2003 2002
---------- ---------- ----------
$ $ $

CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) (2,000,535) (5,190,138) 11,978,334
Noncash item included in net
income (loss):
Net change in unrealized (731,352) 3,344,569 (5,263,150)
(Increase) decrease in
operating assets:
Interest receivable
(Morgan Stanley DW) (28,101) 16,730 12,346
Increase (decrease) in
operating liabilities:
Administrative expenses
payable (27,867) 21,365 (25)
Accrued management fees
(MSFCM) (14,817) (25,049) 21,006
---------- ---------- ----------
Net cash provided by (used for)
operating activities (2,802,672) (1,832,523) 6,748,511
---------- ---------- ----------

CASH FLOWS FROM
FINANCING ACTIVITIES
Decrease in redemptions payable (20,598) (24,317) (62,527)
Redemptions of Units (3,847,225) (4,789,603) (3,636,395)
---------- ---------- ----------
Net cash used for financing
activities (3,867,823) (4,813,920) (3,698,922)
---------- ---------- ----------

Net increase (decrease) in cash (6,670,495) (6,646,443) 3,049,589

Balance at beginning of period 39,854,002 46,500,445 43,450,856
---------- ---------- ----------

Balance at end of period 33,183,507 39,854,002 46,500,445
========== ========== ==========

The accompanying notes are an integral part of these financial statements.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

SCHEDULES OF INVESTMENTS

DECEMBER 31, 2004 AND 2003

LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2004 PARTNERSHIP NET ASSETS: $35,967,978 $ % $ %

Commodity 480,552 1.33 (322,576) (0.90)
Equity 514,216 1.43 -- --
Foreign currency 1,330,696 3.70 -- --
Interest rate 92,423 0.26 74,750 0.21
--------- ----- -------- -----
Grand Total: 2,417,887 6.72 (247,826) (0.69)
========= ===== ======== =====
Unrealized Currency Gain

Total Net Unrealized Gain per Statement of Financial Condition

2003 PARTNERSHIP NET ASSETS: $41,815,738
Commodity 1,400,203 3.35 (246,885) (0.59)
Equity 272,300 0.65 -- --
Foreign currency 144,175 0.34 -- --
Interest rate (156,214) (0.37) -- --
--------- ----- -------- -----
Grand Total: 1,660,464 3.97 (246,885) (0.59)
========= ===== ======== =====
Unrealized Currency Gain

Total Net Unrealized Gain per Statement of Financial Condition

NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ --------------
2004 PARTNERSHIP NET ASSETS: $35,967,978 $

Commodity 157,976
Equity 514,216
Foreign currency 1,330,696
Interest rate 167,173
---------
Grand Total: 2,170,061

Unrealized Currency Gain 1,075,722
---------
Total Net Unrealized Gain per Statement of Financial Condition 3,245,783
=========

2003 PARTNERSHIP NET ASSETS: $41,815,738
Commodity 1,153,318
Equity 272,300
Foreign currency 144,175
Interest rate (156,214)
---------
Grand Total: 1,413,579

Unrealized Currency Gain 1,100,852
---------
Total Net Unrealized Gain per Statement of Financial Condition 2,514,431
=========

The accompanying notes are an integral part of these financial statements.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Dean Witter Diversified Futures Fund III L.P. (the
"Partnership") is a 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"). The trading manager is Morgan Stanley Futures & Currency Management
Inc. ("MSFCM"). Demeter, Morgan Stanley DW, MS&Co., MSIL, and MSFCM are
wholly-owned subsidiaries of Morgan Stanley .
Effective June 20, 2002 Morgan Stanley Dean Witter & Co. changed its name to
Morgan Stanley.
Demeter is required to maintain a 1% minimum interest in the equity of the
Partnership and income (losses) are shared by Demeter and the limited partners
based upon their proportional ownership interests.

USE OF ESTIMATES. The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the reported
amounts in the financial statements and related disclosures. Management
believes that the estimates utilized in the preparation of the financial
statements are prudent and reasonable. Actual results could differ from those
estimates.

REVENUE RECOGNITION. Futures Interests are open commitments until settlement
date, at which time they are realized. They are valued at market on a daily
basis and the resulting net change in unrealized gains and losses is reflected
in the change in unrealized trading

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

profit (loss) on open contracts from one period to the next on the Statements
of Operations. Monthly, Morgan Stanley DW pays the Partnership interest income
equal to 80% of its average daily Net Assets for the month at a rate equal to
the average yield on 13-week U.S. Treasury bills. For purposes of such interest
payments, Net Assets do not include monies owed to the Partnership on Futures
Interests.

NET INCOME (LOSS) PER UNIT. Net income (loss) per unit of limited partnership
interest ("Unit(s)") is computed using the weighted average number of Units
outstanding during the period.

CONDENSED SCHEDULES OF INVESTMENTS. In December 2003, the American Institute
of Certified Public Accountants' Accounting Standards Executive Committee
issued Statement of Position 03-4 ("SOP 03-4") "Reporting Financial Highlights
and Schedule of Investments by Nonregistered Investment Partnerships: An
Amendment to the Audit and Accounting Guide Audits Of Investment Companies and
AICPA Statement of Position 95-2, Financial Reporting By Nonpublic Investment
Partnerships". SOP 03-4 requires commodity pools to disclose the number of
contracts, the contracts' expiration dates, and the cumulative unrealized
gains/(losses) on open futures contracts, when the cumulative unrealized
gains/(losses) on an open futures contract exceeds 5% of Net Assets, taking
long and short positions into account separately. SOP 03-4 also requires ratios
for net investment income/(losses), expenses before and after incentive fees,
and net income/(losses) based on average net assets, and ratios for total
return before and after incentive fees based on average units outstanding to be
disclosed in Financial Highlights. SOP 03-4 was effective for fiscal years
ending after December 15, 2003.

EQUITY IN FUTURES INTERESTS TRADING ACCOUNTS. The Partnership's asset "Equity
in futures interests trading accounts," reflected on the Statements of
Financial Condition, consists of (A) cash on deposit with Morgan Stanley DW,
MS&Co., and MSIL to be used as margin for trading and (B) net unrealized gains
or losses on open contracts, which are valued at market and calculated as the
difference between original contract value and market value.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

The Partnership, in the normal course of business, enters into various
contracts with MS&Co. and MSIL acting as its commodity brokers. Pursuant to
brokerage agreements with MS&Co. and MSIL, to the extent that such trading
results in unrealized gains or losses, the amounts are offset and reported on a
net basis on the Partnership's Statements of Financial Condition.
The Partnership has offset the fair value amounts recognized for forward
contracts executed with the same counterparty as allowable under the terms of
its master netting agreement with MS&Co., the sole counterparty on such
contracts. The Partnership has consistently applied its right to offset.

BROKERAGE COMMISSIONS AND RELATED TRANSACTION FEES AND COSTS. The Partnership
accrues brokerage commissions and transaction fees and costs on a half-turn
basis at 80% and 100%, respectively, of the rates Morgan Stanley DW charges
parties that are not clearinghouse members. Brokerage commissions and
transaction fees and costs combined are capped at 13/20 of 1% per month (a
maximum 7.8% annual rate) of the Partnership's Net Assets as of the last day of
each month.

OPERATING EXPENSES. The Partnership bears all operating expenses related to
its trading activities, to a maximum of 3/5 of 1% annually of the
Partnership's average month-end Net Assets. These include filing fees,
clerical, administrative, auditing, accounting, mailing, printing, and other
incidental operating expenses as permitted by the Limited Partnership
Agreement. In addition, the Partnership incurs a monthly management fee and may
incur an incentive fee. Demeter bears all other operating expenses.

INCOME TAXES. No provision for income taxes has been made in the accompanying
financial statements, as partners are individually responsible for reporting
income or loss based upon their respective share of the Partnership's revenues
and expenses for income tax purposes.

DISTRIBUTIONS. Distributions, other than redemptions of Units, are made on a
pro-rata basis at the sole discretion of Demeter. No distributions have been
made

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

to date. Demeter does not intend to make any distributions of the Partnership's
profits.

REDEMPTIONS. Limited partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit as of the last day of any month upon five business
days advance notice by redemption form to Demeter.

DISSOLUTION OF THE PARTNERSHIP. The Partnership will terminate on December 31,
2025 or at an earlier date if certain conditions set forth in the Limited
Partnership Agreement occur.

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

RECLASSIFICATIONS. Certain reclassifications have been made to the prior
years' financial statements to conform to the current year presentation. Such
reclassifications have no impact on the Partnership's reported net income
(loss).

- --------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS
The Partnership pays brokerage commissions to Morgan Stanley DW as described in
Note 1. The Partnership's cash is on deposit with Morgan Stanley DW, MS&Co.,
and MSIL in futures interests trading accounts to meet margin requirements as
needed. Morgan Stanley DW pays interest on these funds as described in Note 1.
Management fees and incentive fees (if any) incurred by the Partnership are
paid to MSFCM.

- --------------------------------------------------------------------------------
3. TRADING MANAGER
Demeter, on behalf of the Partnership, has entered into a Management Agreement
with MSFCM to make all trading decisions for the Partnership.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

Compensation to MSFCM by the Partnership consists of a management fee and an
incentive fee as follows:

MANAGEMENT FEE. The management fee is accrued daily at the rate of 1/4 of 1%
per month (a 3% annual rate) of adjusted Net Assets, as defined in the
Management Agreement, at each month-end.

INCENTIVE FEE. The Partnership pays a quarterly incentive fee to MSFCM equal
to 15% of the trading profits earned by the Partnership as of the end of each
calendar quarter. Trading profits represent the amount by which profits from
futures and forwards trading exceed losses after brokerage commissions,
management fees, transaction fees and costs, and administrative expenses are
deducted. Such incentive fee is accrued in each month in which trading profits
occur. In those months in which trading profits are negative, previous
accruals, if any, during the incentive period are reduced. In those instances
in which limited partners redeem Units, incentive fees earned (through the date
of such redemptions) are paid to MSFCM on those Units redeemed in the month of
such redemptions.

- --------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
The Partnership trades Futures Interests. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified date and price.
Risk arises from changes in the value of these contracts and the potential
inability of counterparties to perform under the terms of the contracts. There
are numerous factors which may significantly influence the market value of
these contracts, including interest rate volatility.

The market value of exchange-traded contracts is based on the settlement
price quoted by the exchange on the day with respect to which market value is
being determined. If an exchange-traded contract could not have been liquidated
on such day due to the operation of daily limits or other rules of the
exchange, the settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The market value of
off-exchange-traded contracts is based on the fair market value quoted by the
counterparty.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

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.
The net unrealized gains on open contracts at December 31, 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
----------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- --------- --------- --------- --------- ---------
$ $ $

2004 2,066,811 1,178,972 3,245,783 Sep. 2005 Mar. 2005
2003 2,370,257 144,174 2,514,431 Mar. 2004 Mar. 2004

The Partnership has credit risk associated with counterparty nonperformance.
The credit risk associated with the instruments in which the Partnership trades
is limited to the amounts reflected in the Partnership's Statements of
Financial Condition.
The Partnership also has credit risk because Morgan Stanley DW, MS&Co., and
MSIL act as the futures commission merchants or the counterparties, with

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

respect to most of the Partnership's assets. Exchange-traded futures and
forward contracts are marked to market on a daily basis, with variations in
value settled on a daily basis. Morgan Stanley DW, MS&Co., and MSIL, each as a
futures commission merchant for the Partnership's exchange-traded futures and
forward contracts, are required, pursuant to regulations of the Commodity
Futures Trading Commission, to segregate from their own assets, and for the
sole benefit of their commodity customers, all funds held by them with respect
to exchange-traded futures and forward contracts, including an amount equal to
the net unrealized gains (losses) on all open futures contracts, which funds,
in the aggregate, totaled $35,250,318 and $42,224,259 at December 31, 2004 and
2003, respectively. With respect to the Partnership's off-exchange-traded
forward currency contracts, there are no daily exchange-required settlements of
variation in value, nor is there any requirement that an amount equal to the
net unrealized gains (losses) on open forward contracts be segregated. However,
the Partnership is required to meet margin requirements equal to the net
unrealized loss on open contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the cash balance in
a custody account held at Morgan Stanley DW for the benefit of MS&Co. With
respect to those off-exchange-traded forward currency contracts, the
Partnership is at risk to the ability of MS&Co., the sole counterparty on all
such contracts, to perform. The Partnership has a netting agreement with MS&Co.
This agreement, which seeks to reduce both the Partnership's and MS&Co.'s
exposure on off-exchange-traded forward currency contracts, should materially
decrease the Partnership's credit risk in the event of MS&Co.'s bankruptcy or
insolvency.

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(concluded)

- --------------------------------------------------------------------------------
5. FINANCIAL HIGHLIGHTS

PER UNIT:
---------

NET ASSET VALUE, JANUARY 1, 2004: $2,239.99
---------
NET OPERATING RESULTS:
Interest Income 22.47
Expenses (168.56)
Realized Profit 7.09
Unrealized Profit 41.18
Proceeds from Litigation Settlement 0.61
---------
Net Loss (97.21)
---------
NET ASSET VALUE, DECEMBER 31, 2004: $2,142.78
=========
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (7.1)%
Expenses before Incentive Fees 8.2 %
Expenses after Incentive Fees 8.2 %
Net Loss (5.5)%

TOTAL RETURN BEFORE INCENTIVE FEES (4.3)%
TOTAL RETURN AFTER INCENTIVE FEES (4.3)%
INCEPTION-TO-DATE RETURN 114.3 %
COMPOUND ANNUALIZED RETURN 5.5 %

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PERMIT #374
LANCASTER, PA
Demeter Management Corporation
330 Madison Avenue, 8th Floor
New York, NY 10017
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