PRUDENTIAL BACHE DIVERSIFIED FUTURES FUND L P - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarter ended June 30, 2002

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from _______________________ to ______________________

Commission file number: 0-17592

PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Delaware 13-3464456
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

One New York Plaza, 13th Floor, New York, New York 10292
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 778-7866

N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.

Indicate by check CK 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 _CK_ No __

Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

2

PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
CONDENSED SCHEDULES OF INVESTMENTS
(Unaudited)

3

PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
(Unaudited)

STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)

4

PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)

A. General

These financial statements have been prepared without audit. In the opinion
of Seaport Futures Management, Inc. (the 'General Partner'), the financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to state fairly the financial position of
Prudential-Bache Diversified Futures Fund L.P. (the 'Partnership') as of June
30, 2002 and the results of its operations for the six and three months ended
June 30, 2002 and 2001. However, the operating results for the interim periods
may not be indicative of the results expected for the full year.

Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. It is suggested that
these financial statements be read in conjunction with the financial statements
and notes thereto included in the Partnership's annual report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
2001.

John W. Henry & Company, Inc. ('JWH'), the Partnership's trading manager,
terminated its World Financial Perspective trading program. Effective May 23,
2002, the General Partner reallocated all of the Partnership's assets that had
been traded according to the World Financial Perspective trading program to
JWH's Financial and Metals Portfolio Program, which was already being used to
trade a portion of the Partnership's assets.

B. Related Parties

The General Partner and its affiliates perform services for the Partnership
which include, but are not limited to: brokerage services; accounting and
financial management; registrar, transfer and assignment functions; investor
communications, printing and other administrative services. A portion of the
general and administrative expenses of the Partnership for the six and three
months ended June 30, 2002 and 2001 was borne by Prudential Securities
Incorporated ('PSI'), an affiliate of the General Partner, and its affiliates.

Costs and expenses charged to the Partnership for these services for the six
and three months ended June 30, 2002 and 2001 were:

Expenses payable to the General Partner and its affiliates (which are
included in accrued expenses payable) as of June 30, 2002 and December 31, 2001
were $1,872 and $3,298, respectively.

The Partnership's assets are maintained either in trading or cash accounts
with PSI, the Partnership's commodity broker and an affiliate of the General
Partner, or, for margin purposes, with the various exchanges on which the
Partnership is permitted to trade.

The Partnership, acting through its trading manager, may execute
over-the-counter, spot, forward and/or option foreign exchange transactions with
PSI. PSI then engages in back-to-back trading with an affiliate,
Prudential-Bache Global Markets Inc. ('PBGM'). PBGM attempts to earn a profit on
such transactions. PBGM keeps its prices on foreign currency competitive with
other interbank currency trading desks. All over-the-counter currency
transactions are conducted between PSI and the Partnership pursuant to a line of
credit. PSI may require that collateral be posted against the marked-to-market
positions of the Partnership.

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C. Derivative Instruments and Associated Risks

The Partnership is exposed to various types of risk associated with the
derivative instruments and related markets in which it invests. These risks
include, but are not limited to, risk of loss from fluctuations in the value of
derivative instruments held (market risk) and the inability of counterparties to
perform under the terms of the Partnership's investment activities (credit
risk).

Market risk

Trading in futures and forward contracts (including foreign exchange)
involves entering into contractual commitments to purchase or sell a particular
commodity at a specified date and price. The gross or face amount of the
contracts, which is typically many times that of the Partnership's net assets
being traded, significantly exceeds the Partnership's future cash requirements
since the Partnership intends to close out its open positions prior to
settlement. As a result, the Partnership is generally subject only to the risk
of loss arising from the change in the value of the contracts. As such, the
Partnership considers the 'fair value' of its derivative instruments to be the
net unrealized gain or loss on the contracts. The market risk associated with
the Partnership's commitments to purchase commodities is limited to the gross or
face amount of the contracts held. However, when the Partnership enters into a
contractual commitment to sell commodities, it must make delivery of the
underlying commodity at the contract price and then repurchase the contract at
prevailing market prices. Since the repurchase price to which a commodity can
rise is unlimited, entering into commitments to sell commodities exposes the
Partnership to unlimited risk.

Market risk is influenced by a wide variety of factors including government
programs and policies, political and economic events, the level and volatility
of interest rates, foreign currency exchange rates, the diversification effects
among the derivative instruments the Partnership holds and the liquidity and
inherent volatility of the markets in which the Partnership trades.

Credit risk

When entering into futures or forward contracts, the Partnership is exposed
to credit risk that the counterparty to the contract will not meet its
obligations. The counterparty for futures contracts traded on United States and
most foreign futures exchanges is the clearinghouse associated with the
particular exchange. In general, clearinghouses are backed by their corporate
members who are required to share any financial burden resulting from the
nonperformance by one of their members and, as such, should significantly reduce
this credit risk. In cases where the clearinghouse is not backed by the clearing
members (i.e., some foreign exchanges), it is normally backed by a consortium of
banks or other financial institutions. On the other hand, if the Partnership
enters into forward transactions, the sole counterparty is PSI, the
Partnership's commodity broker. The Partnership has entered into a master
netting agreement with PSI and, as a result, when applicable, presents
unrealized gains and losses on open forward positions as a net amount in the
statements of financial condition. The amount at risk associated with
counterparty nonperformance of all of the Partnership's contracts is the net
unrealized gain included in the statements of financial condition; however,
counterparty nonperformance on only certain of the Partnership's contracts may
result in greater loss than nonperformance on all of the Partnership's
contracts. There can be no assurance that any counterparty, clearing member or
clearinghouse will meet its obligations to the Partnership.

The General Partner attempts to minimize both credit and market risks by
requiring the Partnership and its trading manager to abide by various trading
limitations and policies. The General Partner monitors compliance with these
trading limitations and policies which include, but are not limited to:
executing and clearing all trades with creditworthy counterparties; limiting the
amount of margin or premium required for any one commodity or all commodities
combined; and generally limiting transactions to contracts which are traded in
sufficient volume to permit the taking and liquidating of positions.
Additionally, pursuant to the advisory agreement among the Partnership, the
General Partner and the trading manager, the General Partner has the right,
among other rights, to terminate the trading manager if the net asset value
allocated to the trading manager declines by 50% from the value at the beginning
of any year or 40% since the commencement of trading activities. Furthermore,
the Partnership Agreement provides that the Partnership will liquidate its
positions, and eventually dissolve, if the Partnership experiences a decline in
the net asset value to less than 50% of the value at commencement of trading
activities. In each case, the decline in net asset value is after giving effect
for distributions and redemptions. The General Partner may impose

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additional restrictions (through modifications of trading limitations and
policies) upon the trading activities of the trading manager as it, in good
faith, deems to be in the best interests of the Partnership.

PSI, when acting as the Partnership's futures commission merchant in
accepting orders for the purchase or sale of domestic futures and options
contracts, is required by Commodity Futures Trading Commission ('CFTC')
regulations to separately account for and segregate as belonging to the
Partnership all assets of the Partnership relating to domestic futures and
options trading and is not allowed to commingle such assets with other assets of
PSI. At June 30, 2002, such segregated assets totalled $4,985,952 Part 30.7 of
the CFTC regulations also requires PSI to secure assets of the Partnership
related to foreign futures and options trading which totalled $2,096,709 at June
30, 2002. There are no segregation requirements for assets related to forward
trading.

As of June 30, 2002, all open futures and forward contracts mature within one
year.

D. Financial Highlights

These financial highlights represent the overall results of the Partnership
during the six and three month periods ended June 30, 2002 and 2001,
respectively. An individual Partner's actual results may differ depending on the
timing of redemptions.

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PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Partnership commenced operations on October 19, 1988 with gross proceeds
of $30,107,800. After accounting for organizational and offering costs, the
Partnership's net proceeds were $29,387,470.

At June 30, 2002, 100% of the Partnership's total net assets was allocated to
commodities trading. A significant portion of the net asset value was held in
U.S. Treasury bills (which represented approximately 72% of the net asset value
prior to redemptions payable) and cash, which are used as margin for the
Partnership's trading in commodities. Inasmuch as the sole business of the
Partnership is to trade in commodities, the Partnership continues to own such
liquid assets to be used as margin.

The percentage that U.S. Treasury bills bears to the total net assets varies
each day, and from month to month, as the market values of commodity interests
change. The balance of the net assets is held in cash. All interest earned on
the Partnership's interest-bearing funds is paid to the Partnership.

The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in certain commodity futures contract
prices during a single day by regulations referred to as 'daily limits.' During
a single day, no trades may be executed at prices beyond the daily limit. Once
the price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its commodity
futures positions.

Since the Partnership's business is to trade futures and forward contracts,
its capital is at risk due to changes in the value of these contracts (market
risk) or the inability of counterparties to perform under the terms of the
contracts (credit risk). The Partnership's exposure to market risk is influenced
by a number of factors including the volatility of interest rates and foreign
currency exchange rates, the liquidity of the markets in which the contracts are
traded and the relationships among the contracts held. The inherent uncertainty
of the Partnership's speculative trading as well as the development of drastic
market occurrences could result in monthly losses considerably beyond the
Partnership's experience to date and could ultimately lead to a loss of all or
substantially all of investors' capital. The General Partner attempts to
minimize these risks by requiring the Partnership and its trading manager to
abide by various trading limitations and policies, which include limiting margin
amounts, trading only in liquid markets and permitting the use of stop loss
provisions. See Note C to the financial statements for a further discussion of
the credit and market risks associated with the Partnership's futures and
forward contracts.

Redemptions by limited partners were $889,147 and $447,043 for the six and
three months ended June 30, 2002, respectively, and General Partner redemptions
for the six and three months ended June 30, 2002, totalled $9,124 and $4,685,
respectively. Redemptions recorded from commencement of operations (October 19,
1988) through June 30, 2002 totalled $50,640,580 and $1,115,930 for the limited
partners and General Partner, respectively. Limited partners may redeem units as
of the last business day of any calendar quarter at the then current net asset
value per Unit. Future redemptions will impact the amount of funds available for
investment in commodity contracts in subsequent periods.

The Partnership does not have, nor does it expect to have, any capital
assets.

John W. Henry & Company, Inc. ('JWH'), the Partnership's trading manager,
terminated its World Financial Perspective trading program. Effective May 23,
2002, the General Partner reallocated all of the Partnership's assets that had
been traded according to the World Financial Perspective trading program to
JWH's Financial and Metals Portfolio Program, which was already being used to
trade a portion of the Partnership's assets.

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Results of Operations

The net asset value per Unit as of June 30, 2002 was $390.43, an increase of
17.62% from the December 31, 2001 net asset value per Unit of $331.94 and an
increase of 31.94% from the March 31, 2002 net asset value per unit of $295.92.
Past performance is not necessarily indicative of future results.

The Partnership's gross trading gains were approximately $1,466,000 and
$2,083,000 during the six and three months ended June 30, 2002, respectively,
compared to losses of $281,000 and $1,362,000 for the corresponding periods in
the prior year. Due to the nature of the Partnership's trading activities, a
period to period comparison of its trading results is not meaningful. However, a
detailed discussion of the Partnership's current quarter trading results is
presented below.

Quarterly Market Overview

Despite reports by the Federal Reserve Board (the 'Fed') indicating that
overall economic activity expanded at a moderate pace during the second quarter
of 2002, investor sentiment remained bleak. Most major U.S. equity indices
reached new lows as investor confidence worldwide was battered by reports of
corporate leadership misconduct and accounting irregularities. Continued
uncertainty in the Middle East and weaker than expected second quarter corporate
earnings added to investor uncertainty. The U.S. dollar fell against most major
foreign currencies during the quarter, while the price of interest rate
instruments rose. In the U.S., residential real estate markets generally
remained robust, but weakness persisted in most commercial markets. Retail sales
were generally flat and labor markets remained weak. Consumer spending and
manufacturing activity, which helped boost U.S. economic growth in previous
quarters, remained stagnant at a relatively high level. Additionally, continued
softness in the labor markets helped weaken consumer confidence. European and
Asian economic activity mirrored that of the U.S., but to a lesser extent.

Global equity markets moved sharply lower throughout the quarter as investor
confidence collapsed in response to concerns about accounting transparency at
some firms, heightened tension in the Middle East, and decreased corporate sales
and profits. This resulted in investors re-evaluating their outlook for a
near-term economic recovery. In the U.S., concerns that unannounced accounting
problems will eliminate expected corporate profits continued to keep equity
markets down. At quarter-end, the year-to-date returns for the S&P 500, the
NASDAQ and the London FTSE were -14%, -25% and -10.75%, respectively.

In bond markets, prices rose as interest rates fell in the U.S. on concerns
regarding a weak economic recovery and declines in the equity markets.
Additionally, declining equity markets led investors to switch allocations from
equity markets to fixed income markets, which are perceived as the current safe
haven for wealth. The Fed left interest rates unchanged at 1.75% in its two
meetings this quarter, declaring that its economic outlook for the near future
remained 'uncertain'. Other central banks, including the European Central Bank
and the Bank of Japan, generally followed the lead of the Fed leaving rates
unchanged and foreign bond markets rose as well.

In foreign exchange markets, the U.S. dollar moved sharply lower against most
major currencies throughout the quarter, falling to new lows against some
currencies. Weak U.S. economic growth in relation to other economies and
concerns regarding accounting irregularities in major U.S. corporations drove
the dollar downward. Additionally, the decline in U.S. equity markets and
investor confidence decreased the desire to hold U.S. assets driving the U.S.
dollar lower against the euro, British pound, Swiss franc and Japanese yen.

Gold and other precious metals soared throughout most of the quarter in
response to weaknesses in the U.S. dollar and global equity markets and
instability in the Middle East. Gold prices reversed at quarter-end as a result
of profit taking by traders and sentiment that the U.S. dollar would be
supported by U.S. and Japanese central banks.

Quarterly Partnership Performance

The following is a summary of performance for the major sectors in which the
Partnership traded:

Currencies (+): Long Japanese yen/U.S. dollar, British pound/U.S. dollar,
euro/U.S. dollar, Swiss franc/U.S. dollar and Australian dollar/U.S. dollar
cross-rate positions resulted in gains as a weak U.S. economy and falling equity
markets caused the U.S. dollar to fall.

Interest rates (+): Global bond markets rose as interest rates declined
during the quarter in response to poor equity market performance. Long positions
in Japanese and European bonds resulted in gains.

9

Indices (+): Short positions in the London FTSE, NASDAQ and Euro DAX resulted
in gains as equity indices fell amid concerns regarding U.S. economic recovery,
accounting irregularities and weaker than expected corporate earnings.

Metals (-): Short copper positions incurred losses as copper rallied as a
result of supply cutbacks initiated by some producers. Short aluminum positions
incurred losses at the start of the quarter as industrial metals rallied in
anticipation of a U.S. economic recovery.

Energies (-): Energy prices declined amid increased U.S. inventory suggesting
ample supply for the summer season and anticipation that Russia would
discontinue output restrictions. Long crude and heating oil positions incurred
losses.

Softs (-): Long sugar positions resulted in losses as prices fell in
anticipation of increasing global sugar supplies. Decreased Vietnamese exports
and increased demand resulted in losses for short coffee positions.

Interest income is earned on the Partnership's investment in U.S. Treasury
bills and varies monthly according to interest rates, as well as the effect of
trading performance and redemptions on the level of interest-bearing funds.
Interest income from U.S. Treasury bills decreased by approximately $112,000 and
$52,000 for the six and three months ended June 30, 2002 as compared to the
corresponding periods in 2001. These declines in interest income were
principally due to lower interest rates during the six and three months ended
June 30, 2002 versus the corresponding periods in 2001. Additionally, interest
income decreased from lower overall investment in U.S. Treasury bills primarily
due to the effect of redemptions and unfavorable trading performance during 2001
and the first quarter of 2002 on the monthly net asset values.

Commissions paid to PSI are calculated on the Partnership's net asset value
on the first day of each month and, therefore, vary monthly according to trading
performance and redemptions. Commissions decreased by $93,000 and $57,000 for
the six and three months ended June 30, 2002 as compared to the corresponding
periods in 2001. The decrease was primarily due to the effect of redemptions and
unfavorable trading performance during 2001 and the first quarter of 2002 on the
monthly net asset values.

All trading decisions for the Partnership are made by John W. Henry &
Company, Inc. (the 'Trading Manager'). Management fees are calculated on the
Partnership's net asset value as of the end of each month and, therefore, are
affected by trading performance and redemptions. Management fees decreased by
$20,000 and $8,000 for the six and three months ended June 30, 2002 as compared
to the corresponding periods in 2001 primarily due to fluctuations in monthly
net asset values as further discussed above.

Incentive fees are based on the 'New High Net Trading Profits' generated by
the Trading Manager, as defined in the advisory agreement among the Partnership,
the General Partner and the Trading Manager. No incentive fees were incurred
during the six and three months ended June 30, 2002 or 2001.

General and administrative expenses include audit, tax and legal fees as well
as printing and postage costs. General and administrative expenses for the six
and three months ended June 30, 2002 were relatively comparable to the
corresponding periods in 2001.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding quantitative and qualitative disclosures about market
risk is not required pursuant to Item 305(e) of Regulation S-K.

10

PART II. OTHER INFORMATION

Item 1. Legal Proceedings--There are no material legal proceedings pending by or
against the Registrant or the General Partner.

Item 2. Changes in Securities--None

Item 3. Defaults Upon Senior Securities--None

Item 4. Submission of Matters to a Vote of Security Holders--None

Item 5. Other Information-- Effective May 2002, Steven Weinreb was elected by
the Board of Directors of Seaport Futures
Management, Inc. as Chief Financial Officer
replacing Barbara Brooks.

Item 6. (a) Exhibits

4.1 Agreement of Limited Partnership of the Registrant, dated as of
May 25, 1988 as amended and restated as of July 12, 1988
(incorporated by reference to Exhibit 3.1 and 4.1 of
Registrant's Annual Report on Form 10-K for the period ended
December 31, 1988)

4.2 Subscription Agreement (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on
Form S-1, File No. 33-22100)

4.3 Request for Redemption (incorporated by reference to
Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1, File No. 33-22100)

99.1 Certificate pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the SARBANES-OXLEY Act of 2002
(filed herewith)

(b) Reports on Form 8-K--None

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SIGNATURES

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

PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.

By: Seaport Futures Management, Inc.
A Delaware corporation, General Partner

By: /s/ Steven Weinreb Date: August 14, 2002
----------------------------------------
Steven Weinreb
Chief Financial Officer

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