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, 2005 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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes _____  No  X

Indicate by check-mark if the registrant
is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.  Yes _____  No  X

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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definitions of ?accelerated
filer and large accelerated filer? in Rule 12b-2 of the Exchange Act.  (Check
one):

Large accelerated filer___  Accelerated filer____  Non-accelerated filer   X

Indicate by check-mark whether the registrant is a shell company (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:
$27,301,407 at June 30, 2005.

	DOCUMENTS INCORPORATED BY REFERENCE
	(See Page 1)


<page> <table> DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2005
<caption>                     Page No.

												<c>
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . .  1

Part I .

  Item 1.	 Business . . . . . . . . . . . . . . . . . . . . . . .  2-5

  Item 1A.	  Risk Factors. . . . . . . . . . . . . . . . . . . . . . 5-6

  Item 1B.	 	Unresolved Staff Comments . . . . . . . . . . . . . . . . 6

  Item 2.	 Properties . . . . . . . . . . . . . . . . . . . . . . .  6

  Item 3.	 Legal Proceedings. . . . . . . . . . . . . . . . . . . .  6

  Item 4.	 Submission of Matters to a Vote of Security Holders. . .  6

Part II.

  Item 5. 	 Market for the Registrant's Partnership Units
            and Related Security Holder Matters. . . . . . . . . . .  7

  Item 6.	 Selected Financial Data. . . . . . . . . . . . . . . . .  8

  Item 7.	 Management's Discussion and Analysis of Financial
            Condition and Results of Operations. . . . . . . . . . 9-26

  Item 7A.  Quantitative and Qualitative Disclosures About
            Market Risk. . . . . . . . . . . . . . . . . . . . .  26-39

  Item 8.	 Financial Statements and Supplementary Data. . . . .  . .40

  Item 9.  	 Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure. . . . . . . . . . . 40

  Item 9A.	 	Controls and Procedures . . . . . . . . . . . . . . . 41-43

  Item 9B.	 	Other Information. . . .  . . . . . . . . . . . . . . . .43

Part III.
  Item 10.  Directors and Executive Officers of the Registrant . .44-49
  Item 11.  Executive Compensation . . . . . . . . . . . . . . . . . 49
  Item 12.  Security Ownership of Certain Beneficial Owners
            and Management . . . . . . . . . . . . . . . . . . . .49-50
  Item 13.  Certain Relationships and Related Transactions . . . . . 50

  Item 14.  Principal Accounting Fees and Services. . . . . . . . 50-51

Part IV.
  Item 15.  Exhibits and Financial Statement Schedules . . . . .. 52-53

</table>


<page>




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, 2005                     II, III, and IV





























<page> 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 VK
Capital Inc. (?VK Capital? or the ?Trading Manager?, formerly,
Morgan Stanley Futures & Currency Management Inc.).  Demeter,
Morgan Stanley DW, MS & Co., MSIL, and VK Capital are wholly-owned
subsidiaries of Morgan Stanley.

The Partnership began the year at a net asset value per unit of
limited partnership interest (?Unit(s)?) of $2,142.78 and returned
-21.9% to $1,672.98 on December 31, 2005.  For a more detailed
description of the Partnership?s business, see subparagraph (c).
<page> Effective April 28, 2005, Morgan Stanley Futures & Currency
Management Inc. changed its name to VK Capital Inc.

(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
forward 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).




<page>
     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 an annual report
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 100 F Street, N.E., 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 <page> 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 1A.  RISK FACTORS
The following risk factors contain forward looking statements
within the meaning of the safe harbor from civil liability provided
for such statements by the Private Securities Litigation Reform Act
of 1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934).  All
quantitative disclosures in ?Quantifying the Partnership?s Trading
Value at Risk? in Item 7A ?Quantitative and Qualitative Disclosures
About Market Risk? are deemed to be forward-looking statements for
purposes of the safe harbor, except for statements of historical
fact.  The qualitative disclosures, except for (A) those
disclosures that are statements of historical fact and (B) the
descriptions of how the Partnership manages its primary market risk
exposure, in the ?Qualitative Disclosure Regarding Primary Trading
Risk Exposures? in Item 7A ?Quantitative and Qualitative
Disclosures About Market Risk? are deemed to be forward looking
statements for purposes of the safe harbor.

The Partnership is in the business of speculative trading of
futures and forwards.  For a detailed description of the risks that
may affect the business of the Partnership, see the <page>
discussion of risk factors as set forth in Item 7 ?Management?s
Discussion and Analysis of Financial Condition and Results of
Operations? and Item 7A ?Quantitative and Qualitative Disclosures
About Market Risk?.

Item 1B.  UNRESOLVED STAFF COMMENTS
Not applicable.

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.

Item 3.  LEGAL PROCEEDINGS
None.

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













<page> 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, 2005
was approximately 2,008.

(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 the
Partnership?s profits.














<page> <table>
Item 6.  SELECTED FINANCIAL DATA (in dollars)


<caption>

                            ________________For the Years Ended December 31,
                                     2005         2004         2003         2002         2001  .


		<c>>	<c>	<c>	<c>	<c>
Total Trading Results
including interest
income		 (5,308,129)	993,122	295,035	 17,529,465
	4,638,330

Net Income (Loss)     	(7,658,671)    	(2,000,535)  (5,190,138)	11,978,334	618,682


Net Income (Loss)
Per Unit (Limited
& General Partners)	  (469.80)	        (97.21)     	(289.73)	     563.17	20.74


Total Assets          	23,503,284    	36,481,214	   42,392,256	   52,399,998	   44,099,605



Total Limited
Partners? Capital  	 22,584,804   	35,521,922  	41,349,447	   50,740,355	   42,633,308


Net Asset Value
Per Unit          	1,672.98      	2,142.78	  2,239.99  	2,529.72	     1,966.55















</table>














<page>
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 <page> trading.  These market conditions could
prevent the Partnership from promptly liquidating its futures
contracts and result in restrictions on redemptions.

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

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

Capital Resources.  The Partnership does not have, nor expects to
have, any capital assets.  Redemptions of Units 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.
<page> 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, 2005,
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 <page> 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, brokerage
commission, and transaction fees and costs 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 <page>
critical accounting policies other than those presently used could
reasonably affect reported amounts.

The Partnership recorded total trading results including interest
income totaling $(5,308,129) and expenses totaling $2,350,542,
resulting in a net loss of $7,658,671 for the year ended December
31, 2005.  The Partnership?s net asset value per Unit decreased
from $2,142.78  at December 31, 2004 to $1,672.98 at December 31,
2005.  Total redemptions for the year were $5,476,623 and the
Partnership?s ending capital was $22,832,684 at December 31, 2005,
a decrease of $13,135,294 from ending capital at December 31, 2004
of $35,967,978.

The most significant trading losses of approximately 19.8% were
recorded in the currency markets from positions in the euro
relative to the British pound and the U.S. dollar.  During
January, long positions in the euro versus the British pound and
the U.S. dollar incurred losses as the value of the euro
reversed sharply lower in what many analysts described as a
?corrective? move after its strong upward trend during the
fourth quarter of 2004.  This decline in the value of the euro
was attributed to weak economic data out of the European Union
and a rebound in the value of its main rival, the U.S. dollar.
Additional losses were recorded during February and March from
both long and short positions in the euro against these
currencies as the value of the euro moved without consistent
direction amid conflicting economic data out of Germany.
<page> Elsewhere in the currency markets, losses resulted from
positions in the Singapore dollar, Swedish krona, South African
rand, and Swiss franc relative to the U.S dollar, primarily
during February and March, as the value of the U.S. dollar moved
in a trendless range amid speculation that China would re-value
its currency, negative comments by U.S. Federal Reserve Chairman
Alan Greenspan about the considerable U.S. Current-Account
deficit, and the U.S. Federal Reserve's announcement of a
quarter-point increase in the federal funds rate.  During
August, further losses were incurred from long U.S. dollar
positions against the euro, Swedish krona, and Swiss franc as
the value of the U.S. dollar declined amid higher crude oil
prices, lower durable goods orders data, the U.S. trade
imbalance, and economic warnings from U.S. Federal Reserve
Chairman Alan Greenspan.  Smaller losses in August were
experienced from long positions in the euro versus the British
pound cross-rate.  Finally, during September, losses were
incurred from short U.S. dollar positions against the euro,
Swiss franc, and Swedish krona as the value of the U.S. dollar
increased on expectations that the U.S. Federal Reserve would
most likely continue to raise interest rates.  Additional losses
of approximately 5.8% were recorded in the global interest rate
futures markets during March from short European interest rate
futures positions as prices reversed higher amid strength in the
euro towards the beginning of the month.  Prices were also
pushed higher on the expectations that Europe would continue to
maintain a low interest rate environment, as well as economic
<page> concerns stemming from surging energy prices.  Further
losses were experienced during February from long positions in
long-term U.S. interest rate futures as prices declined in
response to strong global economic data and congressional
testimony by U.S. Federal Reserve Chairman Alan Greenspan, which
supported Wall Street expectations for additional interest rate
hikes.  During the third quarter, losses were recorded from both
long and short positions in U.S., Australian, and European
fixed-income futures as prices moved without consistent
direction amid conflicting economic data, uncertainty regarding
the future interest rate policy of the U.S. and the European
Union, and volatility in energy prices.  Within the agricultural
complex, losses of approximately 2.7% were recorded from both
long and short positions in corn futures during March, April,
May, June, and December as prices moved without consistent
direction throughout most of the year due to conflicting news
regarding supply and demand and weather related factors in the
U.S. growing regions. Elsewhere in the agricultural markets,
losses were experienced from short positions in cotton futures
during January as prices moved higher early in the month due to
speculative buying and news of a decrease in supply.  Further
losses were incurred from long positions in cotton futures
during May as prices declined on news of weak demand in China.
Smaller losses were experienced during February, March, and
September from positions in cocoa futures.  A portion of the
Partnership?s overall losses for the year was offset by gains of
approximately 3.3% in the global stock index futures markets
<page> during May, June, July, September, and November from long
positions in European equity index futures as prices moved
higher on strength in the technology sector, strong corporate
earnings, and weakness in the euro.  Elsewhere gains were
recorded during the fourth quarter from long positions in
Japanese stock index futures as prices moved higher on a
reduction in energy prices and general investor optimism about
the future of the Japanese economy.  Additional gains of
approximately 2.1% were experienced in the energy markets during
August from long futures positions in natural gas as prices
climbed higher after Hurricane Katrina struck the U.S. Gulf
Coast.  Additional gains were experienced during September from
long positions in natural gas as prices continued to strengthen
in response to concern for the long-term effects on supplies in
the Gulf of Mexico after Hurricane Katrina.  Also pushing prices
higher was anticipation of strong demand in the coming winter
months and fears for the approach of Hurricane Rita and the
additional damage it could have caused to output in the Gulf of
Mexico.  Within the metals markets, gains of approximately 1.0%
were recorded during February, March, May, October, November,
and December from long positions in copper, nickel, aluminum,
and zinc futures as prices strengthened amid persistent demand
from China.

The Partnership recorded total trading results including interest
income totaling $993,122 and expenses totaling $2,993,657,
resulting in a net loss of $2,000,535 for the year ended December
<page> 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
<page> 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
<page> 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
<page> 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
income 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
<page> 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
<page> 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.

For an analysis of unrealized gains and (losses) by contract type
and a further description of 2005 trading results, refer to the
<page> Partnership?s Annual Report to Limited Partners for the
year ended December 31, 2005, 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 <page> 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 <page> 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, Demeter 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 the Partnership?s 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.
<page>
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, 2005,
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.

<page> 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
<page> 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
quantitative disclosures in this section are deemed to <page> 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 re-values
its portfolio (using delta-gamma approximations) for each of the
historical market moves that occurred over this time <page> 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, 2005 and 2004. At
December 31, 2005 and 2004, the Partnership?s total capital- <page>
ization was approximately $23 million and $36 million,
respectively.
Primary Market         December 31, 2005   	 December 31, 2004
Risk Category            Value at Risk      	   Value at Risk

Interest Rate			   (0.74)%                (0.58)%

Currency         		   (0.52)	            	 (2.28)

Equity				   (0.48)               	 (2.00)

Commodity                   (1.17)               	 (0.31)

Aggregate Value at Risk     (1.54)%            	 (2.57)%

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, 2005 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, 2005 through December 31, 2005.
<page>
Primary Market Risk Category        High        Low      Average
Interest Rate                      (1.85)%     (0.74)%    (1.42)%
Currency                           (1.27)      (0.52)     (1.02)
Equity	                           (2.91)      (0.48)     (1.71)
Commodity                          (4.45)      (0.40)     (1.66)
Aggregate Value at Risk            (6.79)%     (1.54)%    (3.30)%

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
<page>
*	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, 2004, and for the four quarter-end
reporting periods during calendar year 2005.  VaR is not
necessarily representative of the Partnership?s historic risk, nor
should it be used to predict the Partnership?s future financial
performance or its ability to manage or monitor risk.  There can be
no assurance that the Partnership?s actual losses on a particular
day will not exceed the VaR amounts indicated above or that such
losses will not occur more than once in 100 trading days.

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

<page> The Partnership also maintains a substantial portion of its
available assets in cash at Morgan Stanley DW; as of December 31,
2005, such amount is equal to approximately 96% of the
Partnership?s net asset value.  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 <page> 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, 2005, by market sector.  It may be
anticipated, however, that these market exposures will vary
materially over time.

Interest Rate.	  At December 31, 2005, the Partnership had market
exposure to the global interest rate sector.  Exposure was
primarily spread across U.S., European, Japanese, and Australian
interest rate sectors.  Interest rate movements directly affect
the price of the sovereign bond futures positions held by the
Partnership and indirectly affect the value of its stock index
and currency positions.  Interest rate movements in one country,
as well as relative interest rate movements between countries,
materially impact the Partnership?s profitability.  The <page>
Partnership?s primary interest rate exposure is generally to
interest rate fluctuations in the U.S. and the other G-7
countries.  The G-7 countries consist of France, the U.S.,
Britain, Germany, Japan, Italy, and Canada.  However, the
Partnership also takes futures positions in the government debt
of smaller countries ? e.g., Australia.  Demeter anticipates that
the G-7 countries interest rate will remain the primary interest
rate exposure of the Partnership for the foreseeable future.  The
speculative futures positions held by the Partnership may range
from short to long-term instruments.  Consequently, changes in
short, medium, or long-term interest rates may have an effect on
the Partnership.

Currency.  At December 31, 2005, the Partnership had market
exposure 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, 2005, the
Partnership?s major exposures were to the euro and British pound
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
<page> 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, 2005, the Partnership had market
exposure to the global stock index sector, primarily to equity
price risk in the G-7 countries.  The stock index futures traded
by the Partnership are by law limited to futures on broadly?based
indices.  At December 31, 2005, the Partnership?s primary
exposure was to the Nikkei (Japan) stock index.  The Partnership
is typically exposed to the risk of adverse price trends or
static markets in the Asian, U.S., and European 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.

Commodity.
Energy.  The largest market exposure of the Partnership at
December 31, 2005 was to the energy sector.  The
Partnership?s energy exposure was shared primarily by
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
<page> 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.  The second largest
market exposure of the Partnership at December 31, 2005 was
to the markets that comprise these sectors.  Most of the
exposure was to the cotton, sugar, cocoa, wheat, coffee,
soybean meal, soybeans, and corn markets.  Supply and demand
inequalities, severe weather disruptions, and market
expectations affect price movements in these markets.

Metals.	At December 31, 2005, the Partnership had market
exposure in the metals sector.  The Partnership's metals
exposure was to fluctuations in the price of base metals,
such as copper, aluminum, nickel, and zinc and precious
metals, such as silver and gold.  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, 2005:
<page> Foreign Currency Balances.  The Partnership?s primary
foreign currency balances at December 31, 2005 were in euros
and Australian dollars.  The Partnership controls the non-
trading risk of foreign currency balances by regularly
converting them back into U.S. dollars upon liquidation of
their respective positions.

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

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




<page> 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  Income/(Loss)  (Loss) Per Unit

2005
March 31       $(4,513,162)        $(5,203,618)        $(312.26)
June 30           (162,176)           (785,836)          (46.68)
September 30      (526,472)         (1,075,806)          (69.41)
December 31       (106,319)           (593,411)          (41.45)

Total          $(5,308,129)        $(7,658,671)        $(469.80)



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)



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


None.





<page>
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 control
over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) 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.
<page>
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.

<page> Management assessed the effectiveness of the Partnership?s
internal control over financial reporting as of December 31,
2005.  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, 2005.

Deloitte & Touche LLP, the Partnership?s independent registered
public accounting firm, has issued an attestation 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 an unqualified opinion 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, 2005.

Item 9B.  OTHER INFORMATION
None.





<page>

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:

Effective May 1, 2005, Mr. Raymond A. Harris resigned his position
as a Director of Demeter.

Effective May 1, 2005, Mr. Todd Taylor resigned his position as a
Director of Demeter.

Effective May 1, 2005, Mr. William D. Seugling resigned his
position as a Director of Demeter.

Effective May 1, 2005, Ms. Louise M. Wasso-Jonikas resigned her
position as a Director of Demeter.

Mr. Jeffrey A. Rothman, age 44, is the Chairman of the Board of
Directors and President of Demeter. Mr. Rothman is the Managing
Director of Morgan Stanley Alternative Investments Group,
responsible for overseeing all aspects of the firm?s Managed <page>
Futures Department. Mr. Rothman has been with the Managed Futures
Department for nineteen 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 54, 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 in the Fixed Income Department.
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.

Ms. Shelley Hanan, age 45, is a Director of Demeter.  Ms. Hanan
joined Morgan Stanley in 1984.  She eventually became the Regional
Manager of the Southwest for Private Wealth Management and a Senior
Representative for the Morgan Stanley Foundation in Southern
California.  Her focus was senior relationship management
<page> of the firm?s largest private clients in the Southwest.
Since January 2005, Ms. Hanan has held the position of Chief
Operating Officer of the U.S. Client Coverage Group and is a
Managing Director.  Ms. Hanan graduated from the University of
California at San Diego with a B.A. in Psychology.

Mr. Frank Zafran, age 51, is a Director of Demeter.  Mr. Zafran is
a Managing Director of Morgan Stanley and, in November 2005, was
named Managing Director of Wealth Solutions.  Previously, Mr.
Zafran was 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 40, is a Director of Demeter.  Mr.
Ketterer is a Managing Director at Morgan Stanley and is head of
the Managed Money Group.  The Managed Money Group is comprised of a
number of departments (including the Alternative Investments Group,
Consulting Services Group, and Mutual Fund Department) which offer
products and services through Morgan Stanley?s Global Wealth
Management Group.  Mr. Ketterer joined Morgan Stanley in 1990 and
has served in many roles in the corporate finance/investment
banking, asset management, and distribution <page> divisions of the
firm. 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. Harry Handler, age 47, is a Director of Demeter. Mr. Handler
serves as an Executive Director for Morgan Stanley in the Global
Wealth Management Group.  Mr. Handler works in the Investment
Solutions Division as Chief Infrastructure and Risk Officer.
Additionally, Mr. Handler also serves as Chairman of the Morgan
Stanley DW Best Execution Committee and manages the Global Wealth
Management Group Stock Lending business.  In his prior position,
Mr. Handler was a Systems Director in Information Technology, in
charge of Equity and Fixed Income Trading Systems along with the
Special Products, such as Unit Trusts, Managed Futures, and
Annuities.  Prior to his transfer to the Information Technology
Area, Mr. Handler managed the Foreign Currency and Precious Metals
Trading Desk for Dean Witter, a predecessor company to Morgan
Stanley.  He also held various positions in the Futures Division
where he helped to build the Precious Metals Trading Operation of
Dean Witter.  Before joining Dean Witter, Mr. Handler worked at
Mocatta Metals as an Assistant to the Chairman.  His roles at
Mocatta Metals included stints on the Futures Order Entry Desk and
the Commodities Exchange Trading Floor.  Additional work included
building a computerized Futures Trading System and writing a
history of the company.  Mr. Handler graduated on the Dean?s List
<page> from the University of Wisconsin-Madison with a B.A. degree
and a double major in History and Political Science.

Mr. Kevin Perry, age 36, is the Chief Financial Officer of
Demeter.  Mr. Perry currently serves as an Executive Director and
Controller within the Global Wealth Management Group at Morgan
Stanley.  Mr. Perry joined Morgan Stanley in October 2000 and is
also Chief Financial Officer of Morgan Stanley Trust National
Association.  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.
<page>


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


<page>
(a)	 Security Ownership of Certain Beneficial Owners - At December
31, 2005, 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, 2005,
Demeter owned 148.167 Units of general partnership interest,
representing a 1.09 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, 2005, 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 $1,334,953 for the year ended
December 31, 2005.  In its capacity as the Partnership?s Trading
Manager, VK Capital received management fees of $829,323 for the
year ended December 31, 2005.

Item 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
<page> The Partnership pays accounting fees as discussed in Note 1
to the Financial Statements, ?Operating Expenses?, in the Annual
Report to the Limited Partners for the year ended December 31,
2005.

(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 review of the Financial
Statements included in the Quarterly Reports on Form  10-Q, audit
of Management?s assessment on the effectiveness of the internal
control over financial reporting, and in connection with statutory
and regulatory filings were approximately $34,155 for the year
ended December 31, 2005 and $34,355 for the year ended December 31,
2004.

(2)	 Audit-Related Fees. None.

(3)	Tax Fees.  The Partnership did not pay Deloitte & Touche LLP
any amounts in 2005 and 2004 for professional services in
connection with tax compliance, tax advice, and tax planning.  The
Partnership engaged another unaffiliated professional firm to
provide services in connection with tax compliance, tax advice, and
tax planning.

(4)  All Other Fees.  None.

<page> The Board of Directors of Demeter serves as the audit
committee with respect to the Partnership.  The Board of Directors
of Demeter has not established pre-approval policies and procedures
with respect to the engagement of audit or permitted non-audit
services rendered to the Partnership.  Consequently, all audit and
permitted non-audit services provided by Deloitte & Touche LLP are
approved by the Board of Directors of Demeter and communicated to
Morgan Stanley.


















<page> PART IV

Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


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, 2005, 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,
2005, 2004, and 2003.

-	Statements of Financial Condition, including the
Schedules of Investments, as of December 31, 2005 and
2004.

-	Statements of Operations, Changes in Partners' Capital,
and Cash Flows for the years ended December 31, 2005,
2004, and 2003.

  -	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,
2005, 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.

<page>
3.	Exhibits
For the exhibits incorporated by reference or filed herewith
to this report, refer to Exhibit Index on Pages E-1 to E-2.


<page> 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, 2006		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, 2006
	  	Jeffrey A. Rothman, President

    /s/    Richard A. Beech                      		March 31, 2006
           Richard A. Beech, Director

    /s/    Shelley Hanan   	              	March 31, 2006
           Shelley Hanan, Director

    /s/    Frank Zafran		           		March 31, 2006
	    	Frank Zafran, Director

    /s/ 	Douglas J. Ketterer                 		March 31, 2006
	 	Douglas J. Ketterer, Director

    /s/	Harry Handler		                 	March 31, 2006
	  	Harry Handler, Director

    /s/  	Kevin Perry			                 	March 31, 2006
	    	Kevin Perry, Chief Financial Officer





<page>	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 VK Capital Inc. (formerly known as Morgan
Stanley 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.

10.01(a)	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.

10.01(b)	Amendment No. 2 to the Management Agreement among the
Partnership, Demeter, and VK Capital Inc. (formerly known as
Morgan Stanley Futures & Currency Management Inc.), dated as
of January 31, 2006, is filed herewith.

10.02	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.





E-1

<page>
10.03	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.

10.04	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.

10.05	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.

10.06	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, 2005 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.



E-2









<page>


<PAGE>

                                                                    Diversified
                                                                        Futures
                                                                       Fund III

         December 31, 2005
         Annual Report








[LOGO] Morgan Stanley

<PAGE>

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.

<TABLE>
<CAPTION>


                               1990   1991 1992 1993 1994 1995  1996  1997 1998  1999  2000 2001 2002  2003  2004   2005
FUND                            %      %    %    %    %    %     %     %    %     %     %    %    %     %     %      %
--------------------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>  <C>  <C>  <C>  <C>   <C>   <C>  <C>  <C>    <C>  <C>  <C>  <C>    <C>   <C>
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) (21.9)
                             (2 mos.)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                             INCEPTION-  COMPOUND
                              TO-DATE   ANNUALIZED
                               RETURN     RETURN
FUND                             %          %
--------------------------------------------------
<S>                          <C>        <C>
Diversified Futures Fund III    67.3       3.5

--------------------------------------------------
</TABLE>

<PAGE>

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
2005

Dear Limited Partner:

  This marks the sixteenth 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 $2,142.78 and returned -21.9% to $1,672.98 on December 31,
2005. The Fund has increased by 67.3% since it began trading in November 1990
(a compound annualized return of 3.5%).

  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.

  Effective February 1, 2006, the monthly management fee payable to VK Capital
Inc. will be reduced from 1/4 of 1% (a 3% annual rate) to 1/6 of 1% (a 2%
annual rate). Also, effective February 1, 2006, the quarterly incentive fee
payable to VK Capital Inc. will be increased from 15% to 20%.

  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.

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

                                     [CHART]

                    Year ended December 31, 2005
                    ----------------------------
Currencies                 -19.85%
Interest Rates              -5.80%
Stock Indices                3.33%
Energies                     2.14%
Metals                       1.00%
Agriculturals               -2.72%



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

FACTORS INFLUENCING ANNUAL TRADING LOSSES:
..  Significant losses were recorded in the currency markets from positions in
   the euro relative to the British pound and the U.S. dollar. During January,
   long positions in the euro versus the British pound and the U.S. dollar
   incurred losses as the value of the euro reversed sharply lower in what many
   analysts described as a "corrective" move after its strong upward trend
   during the fourth quarter of 2004. This decline in the value of the euro was
   attributed to weak economic data out of the European Union and a rebound in
   the value of its main rival, the U.S. dollar. Additional losses were
   recorded during February and March from both long and short positions in the
   euro against these currencies as the value of the euro moved without
   consistent direction amid conflicting economic data out of Germany.
   Elsewhere in the currency markets, losses resulted from positions in the
   Singapore dollar, Swedish krona, South African rand, and Swiss franc
   relative to the U.S dollar, primarily during February and March, as the
   value of the U.S. dollar moved in a trendless range amid speculation that
   China would re-value its currency, negative comments by U.S. Federal Reserve
   Chairman Alan Greenspan about the considerable U.S. Current-Account deficit,
   and the U.S. Federal Reserve's announcement of a quarter-point increase in
   the federal funds rate. During August, further losses were incurred from
   long U.S. dollar positions against the euro, Swedish krona, and Swiss franc
   as the value of the U.S. dollar declined amid higher crude oil prices, lower
   durable goods orders data, the U.S. trade imbalance, and economic warnings
   from U.S. Federal Reserve Chairman Alan Greenspan. Smaller losses in August
   were experienced from long positions in the euro versus the British pound
   cross-rate. Finally, during September, losses were incurred from short U.S.
   dollar positions against the euro, Swiss franc, and Swedish krona as the
   value of the U.S. dollar increased on expectations that the U.S. Federal
   Reserve would most likely continue to raise interest rates.

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)


..  Additional losses were recorded in the global interest rate futures markets
   during March from short European interest rate futures positions as prices
   reversed higher amid strength in the euro towards the beginning of the
   month. Prices were also pushed higher on the expectations that Europe would
   continue to maintain a low interest rate environment, as well as economic
   concerns stemming from surging energy prices. Further losses were
   experienced during February from long positions in long-term U.S. interest
   rate futures as prices declined in response to strong global economic data
   and congressional testimony by U.S. Federal Reserve Chairman Alan Greenspan,
   which supported Wall Street expectations for additional interest rate hikes.
   During the third quarter, losses were recorded from both long and short
   positions in U.S., Australian, and European fixed-income futures as prices
   moved without consistent direction amid conflicting economic data,
   uncertainty regarding the future interest rate policy of the U.S. and the
   European Union, and volatility in energy prices.

..  Within the agricultural complex, losses were recorded from both long and
   short positions in corn futures during March, April, May, June, and December
   as prices moved without consistent direction throughout most of the year due
   to conflicting news regarding supply and demand and weather related factors
   in the U.S. growing regions. Elsewhere in the agricultural markets, losses
   were experienced from short positions in cotton futures during January as
   prices moved higher early in the month due to speculative buying and news of
   a decrease in supply. Further losses were incurred from long positions in
   cotton futures during May as prices declined on news of weak demand in
   China. Smaller losses were experienced during February, March, and September
   from positions in cocoa futures.

FACTORS INFLUENCING ANNUAL TRADING GAINS:
..  In the global stock index futures markets, gains were recorded during May,
   June, July, September, and November from long positions in European equity
   index futures as prices moved higher on strength in the technology sector,
   strong corporate earnings, and weakness in the euro. Elsewhere gains were
   recorded during the fourth quarter from long positions in Japanese stock
   index futures as prices moved higher on a reduction in energy prices and
   general investor optimism about the future of the Japanese economy.

..  Additional gains were experienced in the energy markets during August from
   long futures positions in natural gas as prices climbed higher after
   Hurricane Katrina struck the U.S. Gulf Coast. Additional gains were
   experienced during September from long positions in natural gas as prices
   continued to strengthen in response to concern for the long-term effects on
   supplies in the Gulf of Mexico after Hurricane Katrina. Also pushing prices
   higher was anticipation of strong demand in the coming winter months and
   fears for the approach of Hurricane Rita and the additional damage it could
   have caused to output in the Gulf of Mexico.

..  Within the metals markets, gains were recorded during February, March, May,
   October, November, and December from long positions in copper, nickel,
   aluminum, and zinc futures as prices strengthened amid persistent demand
   from China.

Managed futures investments are speculative, involve a high degree of risk, use
significant leverage, are generally illiquid, have substantial charges, are
subject to conflicts of interest, and are suitable only for the risk capital
portion of an investor's portfolio. Before investing in any managed futures
investment, qualified investors should read the prospectus or offering
documents carefully for additional information with respect to charges,
expenses, and risks. Past performance is no guarantee of future results.

<PAGE>

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.

<PAGE>

  Management assessed the effectiveness of the Partnership's internal control
over financial reporting as of December 31, 2005. 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, 2005.

  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.

/s/ Jeffrey A. Rothman
Jeffrey A. Rothman
President

/s/ Kevin Perry
Kevin Perry
Chief Financial Officer

New York, New York
March 21, 2006

<PAGE>

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, 2005,
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

<PAGE>

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, 2005, 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, 2005, 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, 2005 of the Partnership and our report dated
March 21, 2006 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP
New York, New York
March 21, 2006

<PAGE>

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, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2005,
in conformity with accounting principles generally accepted in the United
States of America.

  As discussed in Note 1, in 2005 the Partnership modified its classification
of cash within the statements of financial condition and the related statements
of cash flows.

  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,
2005, 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 21, 2006 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 21, 2006

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                    ---------------------
                                                       2005       2004
                                                    ---------- ----------
                                                        $          $
     <S>                                            <C>        <C>
                                    ASSETS
     Equity in futures interests trading accounts:
       Unrestricted cash                            19,688,933 29,612,253
       Restricted cash                               1,585,195  3,571,254
                                                    ---------- ----------
         Total Cash                                 21,274,128 33,183,507
                                                    ---------- ----------
       Net unrealized gain on open contracts
        (MS&Co.)                                     1,755,494  3,295,646
       Net unrealized gain (loss) on open
        contracts (MSIL)                               411,181    (49,863)
                                                    ---------- ----------
         Total net unrealized gain on open
          contracts                                  2,166,675  3,245,783
                                                    ---------- ----------
         Total Trading Equity                       23,440,803 36,429,290
     Interest receivable (Morgan Stanley DW)            62,481     51,924
                                                    ---------- ----------
         Total Assets                               23,503,284 36,481,214
                                                    ========== ==========

                      LIABILITIES AND PARTNERS' CAPITAL

     LIABILITIES
     Redemptions payable                               510,592    314,739
     Administrative expenses payable                   100,980    106,750
     Accrued management fees (VK Capital)               59,028     91,747
                                                    ---------- ----------
         Total Liabilities                             670,600    513,236
                                                    ---------- ----------

     PARTNERS' CAPITAL
     Limited Partners (13,499.786 and
      16,577.488 Units, respectively)               22,584,804 35,521,922
     General Partner (148.167 and
      208.167 Units, respectively)                     247,880    446,056
                                                    ---------- ----------
         Total Partners' Capital                    22,832,684 35,967,978
                                                    ---------- ----------
         Total Liabilities and Partners' Capital    23,503,284 36,481,214
                                                    ========== ==========

     NET ASSET VALUE PER UNIT                         1,672.98   2,142.78
                                                    ========== ==========
</TABLE>

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

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                           FOR THE YEARS ENDED DECEMBER 31,
                                          ----------------------------------
                                             2005        2004        2003
                                          ----------  ----------  ----------
                                              $           $           $
   <S>                                    <C>         <C>         <C>
   INVESTMENT INCOME
     Interest income (Morgan Stanley DW)     697,298     399,102     429,917
                                          ----------  ----------  ----------

   EXPENSES
     Brokerage commissions
      (Morgan Stanley DW)                  1,334,953   1,660,757   2,906,478
     Management fees (VK Capital)            829,323   1,115,412   1,581,440
     Administrative expenses                 113,000     138,000     144,000
     Transaction fees and costs               73,266      79,488     129,946
     Incentive fee (VK Capital)               --          --         723,309
                                          ----------  ----------  ----------
      Total Expenses                       2,350,542   2,993,657   5,485,173
                                          ----------  ----------  ----------

   NET INVESTMENT LOSS                    (1,653,244) (2,594,555) (5,055,256)
                                          ----------  ----------  ----------

   TRADING RESULTS
   Trading profit (loss):
     Realized                             (4,945,888)   (148,236)  3,209,687
     Net change in unrealized             (1,079,108)    731,352  (3,344,569)
                                          ----------  ----------  ----------
                                          (6,024,996)    583,116    (134,882)
   Proceeds from Litigation Settlement        19,569      10,904      --
                                          ----------  ----------  ----------
      Total Trading Results               (6,005,427)    594,020    (134,882)
                                          ----------  ----------  ----------

   NET LOSS                               (7,658,671) (2,000,535) (5,190,138)
                                          ==========  ==========  ==========

   NET INCOME (LOSS) ALLOCATION:
   Limited Partners                       (7,564,423) (1,980,300) (5,196,305)
   General Partner                           (94,248)    (20,235)      6,167

   NET LOSS PER UNIT:
   Limited Partners                          (469.80)     (97.21)    (289.73)
   General Partner                           (469.80)     (97.21)    (289.73)
</TABLE>

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

<TABLE>
<CAPTION>
                           UNITS OF
                          PARTNERSHIP  LIMITED     GENERAL
                           INTEREST    PARTNERS    PARTNER      TOTAL
                          ----------- ----------  ---------  ----------
                                          $           $           $
       <S>                <C>         <C>         <C>        <C>
       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
       Net loss               --      (7,564,423)   (94,248) (7,658,671)
       Redemptions        (3,137.702) (5,372,695)  (103,928) (5,476,623)
                          ----------  ----------  ---------  ----------
       Partners' Capital,
       December 31, 2005  13,647.953  22,584,804    247,880  22,832,684
                          ==========  ==========  =========  ==========
</TABLE>

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

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                        FOR THE YEARS ENDED DECEMBER 31,
                                       ----------------------------------
                                          2005        2004        2003
                                       ----------  ----------  ----------
                                           $           $           $
     <S>                               <C>         <C>         <C>
     CASH FLOWS FROM
      OPERATING ACTIVITIES
     Net loss                          (7,658,671) (2,000,535) (5,190,138)
     Noncash item included in
      net loss:
       Net change in unrealized         1,079,108    (731,352)  3,344,569
     (Increase) decrease in
      operating assets:
       Restricted cash                  1,986,059     788,840   1,572,565
       Interest receivable
        (Morgan Stanley DW)               (10,557)    (28,101)     16,730
     Increase (decrease) in
      operating liabilities:
       Administrative expenses
        payable                            (5,770)    (27,867)     21,365
       Accrued management fees
        (VK Capital)                      (32,719)    (14,817)    (25,049)
                                       ----------  ----------  ----------
     Net cash used for operating
      activities                       (4,642,550) (2,013,832)   (259,958)
                                       ----------  ----------  ----------

     CASH FLOWS FROM
      FINANCING ACTIVITIES
     Cash paid from redemptions of
      Units                            (5,280,770) (3,867,823) (4,813,920)
                                       ----------  ----------  ----------
     Net cash used for financing
      activities                       (5,280,770) (3,867,823) (4,813,920)
                                       ----------  ----------  ----------

     Net decrease in unrestricted cash (9,923,320) (5,881,655) (5,073,878)

     Unrestricted cash at beginning of
      period                           29,612,253  35,493,908  40,567,786
                                       ----------  ----------  ----------

     Unrestricted cash at end of
      period                           19,688,933  29,612,253  35,493,908
                                       ==========  ==========  ==========
</TABLE>

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

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

SCHEDULES OF INVESTMENTS

DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                  LONG UNREALIZED  PERCENTAGE   SHORT UNREALIZED  PERCENTAGE
FUTURES AND FORWARD CONTRACTS:                                      GAIN/(LOSS)   OF NET ASSETS   GAIN/(LOSS)    OF NET ASSETS
------------------------------                                    --------------- ------------- ---------------- -------------
2005 PARTNERSHIP NET ASSETS: $22,832,684                                 $              %              $               %
<S>                                                               <C>             <C>           <C>              <C>
Commodity                                                              615,931         2.71          (62,327)        (0.27)
Equity                                                                 169,609         0.74            --              --
Foreign currency                                                       383,967         1.68           52,988          0.23
Interest rate                                                          (15,065)       (0.07)             600           --
                                                                     ---------        -----         --------         -----
  Grand Total:                                                       1,154,442         5.06           (8,739)        (0.04)
                                                                     =========        =====         ========         =====
  Unrealized Currency Gain

  Total Net Unrealized Gain per Statement of Financial Condition


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

</TABLE>
<TABLE>
<CAPTION>
                                                                  NET UNREALIZED
FUTURES AND FORWARD CONTRACTS:                                     GAIN/(LOSS)
------------------------------                                    --------------
2005 PARTNERSHIP NET ASSETS: $22,832,684                                $
<S>                                                               <C>
Commodity                                                             553,604
Equity                                                                169,609
Foreign currency                                                      436,955
Interest rate                                                         (14,465)
                                                                    ---------
  Grand Total:                                                      1,145,703

  Unrealized Currency Gain                                          1,020,972
                                                                    ---------
  Total Net Unrealized Gain per Statement of Financial Condition    2,166,675
                                                                    =========

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
                                                                    =========
</TABLE>

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

<PAGE>

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 VK Capital Inc. ("VK Capital" or the "Trading
Manager"), formerly, Morgan Stanley Futures & Currency Management Inc. Demeter,
Morgan Stanley DW, MS&Co., MSIL, and VK Capital are wholly-owned subsidiaries
of Morgan Stanley .
  Effective April 28, 2005, Morgan Stanley Futures & Currency Management Inc.
changed its name to VK Capital Inc.
  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.

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


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 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.
  The Partnership's functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are translated
into U.S. dollars at the rates in effect at the date of the Statements of
Financial Condition. Income and expense items denominated in currencies other
than the U.S. dollar are translated into U.S. dollars at the rates in effect
during the period. Gains and losses resulting from the translation to U.S.
dollars are reported in income currently.

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.


<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

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.
  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 and MS&Co.,
respectively, 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. Such fees are capped at 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.

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.

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


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

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.

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, $10,904 during
July 2004, and $19,569 during November 2005. Any amounts received are accounted
for in the period received, for the benefit of the limited partners at the date
of receipt.

RECLASSIFICATIONS.  Certain prior year amounts relating to cash balances were
reclassified on the Statements of Financial Condition and the related
Statements of Cash Flows to conform to 2005 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 VK Capital.

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)


--------------------------------------------------------------------------------
3. TRADING MANAGER
Demeter, on behalf of the Partnership and itself, has entered into a Management
Agreement with VK Capital to make all trading decisions for the Partnership.
  Compensation to VK Capital by the Partnership consists of a management fee
and an incentive fee as follows:
MANAGEMENT FEE.  The monthly management fee is accrued daily at the rate of
1/4 of 1% (a 3% annual rate) of the Partnership's month-end Adjusted Net
Assets, as defined in the Management Agreement.
  Effective February 1, 2006, the monthly management fee will be reduced to
1/6 of 1% (a 2% annual rate) of the Partnership's month-end Adjusted Net Assets.
INCENTIVE FEE.  The Partnership pays a quarterly incentive fee to VK Capital
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 VK Capital on those Units redeemed in the
month of such redemptions.
  Effective February 1, 2006, the quarterly incentive fee will be increased to
20% of the trading profits earned by the Partnership as of the end of each
calendar quarter.

--------------------------------------------------------------------------------
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.

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

  The market value of exchange-traded contracts is based on the settlement
price quoted by the exchange on the day with respect to which market value is
being determined. If an exchange-traded contract could not have been liquidated
on such day due to the operation of daily limits or other rules of the
exchange, the settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The market value of
off-exchange-traded contracts is based on the fair market value quoted by the
counterparty.
  The Partnership's contracts are accounted for on a trade-date basis and
marked to market on a daily basis. The Partnership accounts for its derivative
investments in accordance with the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 defines a derivative as a
financial instrument or other contract that has all three of the following
characteristics:

(1) One or more underlying notional amounts or payment provisions;

(2) Requires no initial net investment or a smaller initial net investment than
    would be required relative to changes in market factors;

(3) Terms require or permit net settlement.

  Generally, derivatives include futures, 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:
<TABLE>
<CAPTION>
                      NET UNREALIZED GAINS
                        ON OPEN CONTRACTS       LONGEST MATURITIES
                  ----------------------------- -------------------
                              OFF-                          OFF-
                  EXCHANGE- EXCHANGE-           EXCHANGE- EXCHANGE-
             YEAR  TRADED    TRADED     TOTAL    TRADED    TRADED
             ---- --------- --------- --------- --------- ---------
                      $         $         $
             <S>  <C>       <C>       <C>       <C>       <C>
             2005 1,792,468   374,207 2,166,675 Sep. 2006 Mar. 2006
             2004 2,066,811 1,178,972 3,245,783 Sep. 2005 Mar. 2005
</TABLE>

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(continued)

  The Partnership has credit risk associated with counterparty nonperformance.
As of the date of the financial statement, the credit risk associated with the
instruments in which the Partnership trades is limited to the amounts reflected
in the Partnership's Statements of Financial Condition.
  The Partnership also has credit risk because Morgan Stanley DW, MS&Co., and
MSIL act as the futures commission merchants or the counterparties, with
respect to most of the Partnership's assets. Exchange-traded futures and
forward contracts are marked to market on a daily basis, with variations in
value settled on a daily basis. Morgan Stanley DW, MS&Co., and MSIL, each as a
futures commission merchant for the Partnership's exchange-traded futures and
forward contracts, are required, pursuant to regulations of the Commodity
Futures Trading Commission, 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 $23,066,596 and $35,250,318 at December 31, 2005 and
2004, respectively. With respect to the Partnership's off-exchange-traded
forward currency contracts, there are no daily exchange-required settlements of
variation in value, nor is there any requirement that an amount equal to the
net unrealized gains (losses) on open forward contracts be segregated. However,
the Partnership is required to meet margin requirements equal to the net
unrealized loss on open contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the cash balance in
a custody account held at Morgan Stanley DW for the benefit of MS&Co. With
respect to those off-exchange-traded forward currency contracts, the
Partnership is at risk to 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.

<PAGE>

DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.

NOTES TO FINANCIAL STATEMENTS
(concluded)


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

<TABLE>
               <S>                                    <C>
               PER UNIT OPERATING PERFORMANCE:
               NET ASSET VALUE, JANUARY 1, 2005:      $2,142.78
                                                      ---------
               NET OPERATING RESULTS:
                 Interest Income                          45.35
                 Expenses                               (152.89)
                 Realized Loss                          (293.34)
                 Unrealized Loss                         (70.19)
                 Proceeds from Litigation Settlement       1.27
                                                      ---------
                 Net Loss                               (469.80)
                                                      ---------
               NET ASSET VALUE, DECEMBER 31, 2005:    $1,672.98
                                                      =========

               FOR THE 2005 CALENDAR YEAR:
               RATIOS TO AVERAGE NET ASSETS:
                 Net Investment Loss                     (6.1)%
                 Expenses before Incentive Fees           8.7 %
                 Expenses after Incentive Fees            8.7 %
                 Net Loss                               (28.5)%
               TOTAL RETURN BEFORE INCENTIVE FEES       (21.9)%
               TOTAL RETURN AFTER INCENTIVE FEES        (21.9)%

               INCEPTION-TO-DATE RETURN                  67.3 %
               COMPOUND ANNUALIZED RETURN                 3.5 %
</TABLE>

<PAGE>

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                                 LANCASTER, PA
                    Demeter Management Corporation
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                    New York, NY 10017
                             [LOGO] Morgan Stanley

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