10-Q 1 file001.htm QUARTERLY REPORT

FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter ended September 30, 2005

Commission File Number 0-26132

SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.

(Exact name of registrant as specified in its charter)

c/o Citigroup Managed Futures LLC
731 Lexington Ave - 25th Fl
New York, New York 10022

(Address and Zip Code of principal executive offices)

(212) 599-2011

(Registrant's telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).

Yes No X

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

Yes No X

SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
FORM 10-Q
INDEX


		Page Number
PART I – Financial Information:
Item 1.	Financial Statements:
	Statements of Financial Condition at September 30, 2005 and December 31, 2004 (unaudited)	3
	Condensed Schedules of Investments at September 30, 2005 and December 31, 2004 (unaudited)	4 – 5
	Statements of Income and Expenses and Partners' Capital for the three and nine months ended September 30, 2005 and 2004 (unaudited)	6
	Statements of Cash Flows for the three and nine months ended September 30, 2005 and 2004 (unaudited)	7
	Notes to Financial Statements (unaudited)	8 – 12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13 – 15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16 – 17
Item 4.	Controls and Procedures	18
PART II – Other Information		19

PART I

Item 1. Financial Statements

Smith Barney Diversified Futures Fund L.P.
Statements of Financial Condition
(Unaudited)


	September 30, 2005		December 31, 2004
ASSETS:
Investment in Partnerships, at fair value	$	43,843,614	$	16,141,889
Equity in commodity futures trading account:
Cash (restricted $1,050,620 and $8,098,048 in 2005 and 2004, respectively)		16,311,117		52,660,336
Net unrealized appreciation on open futures positions		171,369		1,601,032
Unrealized appreciation on open forward contracts		438,539		2,250,162
		60,764,639		72,653,419
Interest receivable		34,948		69,831
	$	60,799,587	$	72,723,250
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Unrealized depreciation on open forward contracts	$	230,435	$	1,925,334
Accrued expenses:
Commissions		273,807		329,810
Management fees		92,459		112,466
Incentive fees		–		78,926
Other		55,227		60,798
Redemptions payable		292,631		985,058
		944,559		3,492,392

Partners' Capital:
General Partner, 1,276.7484 Unit equivalents outstanding in 2005 and 2004		2,061,285		2,229,662
Limited Partners, 35,797.0534 and 38,366.2074 Redeemable Units of Limited Partnership Interest outstanding in 2005 and 2004, respectively		57,793,743		67,001,196
		59,855,028		69,230,858
	$	60,799,587	$	72,723,250


	See Accompanying Notes to Financial Statements.

Smith Barney Diversified Futures Fund L.P.
Condensed Schedule of Investments
September 30, 2005
(Unaudited)


Sector	Contract	Fair Value
Currencies
	Total Unrealized depreciation on forward contracts (0.12)%	$	(73,679	)
	Total Unrealized appreciation on forward contracts 0.31%		185,681
Total Currencies 0.19%			112,002

Energy 0.02%	Futures contracts purchased 0.02%		15,556

Grains
	Futures contracts sold 0.00%*		3,063
	Futures contracts purchased 0.00%*		575
Total Grains 0.00%*			3,638

U.S. Interest Rates
	Futures contracts sold 0.02%		9,390
	Futures contracts purchased (0.01)%		(4,234	)
Total U.S. Interest Rates 0.01%			5,156

Interest Rates Non - U.S.
	Futures contracts sold 0.01%		3,747
	Futures contracts purchased (0.01)%		(2,737	)
Total Interest Rates Non - U.S. 0.00%*			1,010

Metals
	Futures contracts purchased 0.03%		16,480

	Unrealized depreciation on forward contracts (0.26)%		(156,756	)
	Unrealized appreciation on forward contracts 0.42%		252,858
	Total forward contracts 0.16%		96,102
Total Metals 0.19%			112,582

Softs
	Futures contracts sold (0.00)%*		(166	)
	Futures contracts purchased 0.07%		39,155
Total Softs 0.07%			38,989

Indices 0.15%	Futures contracts purchased 0.15%		90,540

Investment in Partnerships	CMF Winton Master Fund LLC 26.82%		16,056,163
	CMF Campbell Master Fund LP 25.06%		14,998,415
	CMF Willowbridge Master Fund LP 21.37%		12,789,036
Total Investment in Partnerships 73.25%			43,843,614

Total Fair Value 73.88%		$	44,223,087


Country Composition	Investments at Fair Value		% of Investments at Fair Value
France		15,733		0.04	%
Germany		19,528		0.04
Hong Kong		3,951		0.01
Japan		17,690		0.04
Spain		14,612		0.03
United Kingdom		102,675		0.23
United States		44,048,898		99.61
		44,223,087		100.00	%


	Percentages are based on Partners' capital unless otherwise indicated.


	* Due to rounding

See Accompanying Notes to Financial Statements.

Smith Barney Diversified Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2004


Sector	Contract	Fair Value
Currencies
	Futures contracts purchased 0.61%	$	423,469
	Unrealized appreciation on forward contracts 2.85%		1,969,858
	Unrealized depreciation on forward contracts (2.38)%		(1,645,688	)
	Total forward contracts 0.47%		324,170
Total Currencies 1.08%			747,639
Energy
	Futures contracts purchased (0.06)%		(43,173	)
	Futures contracts sold 0.42%		293,267
Total Energy 0.36%			250,094
Grains
	Futures contracts purchased (0.12)%		(80,231	)
	Futures contracts sold (0.00)%*		(703	)
Total Grains (0.12)%			(80,934	)
Interest Rates U.S.
	Futures contracts purchased 0.09%		62,139
	Futures contracts sold 0.10%		69,596
Total Interest Rates U.S. 0.19%			131,735
Interest Rates Non-U.S.
	Futures contracts purchased 0.43%		294,324
	Futures contracts sold 0.00%*		325
Total Interest Rates Non-U.S. 0.43%			294,649
Livestock 0.02%	Futures contracts purchased 0.02%		16,491
Metals
	Futures contracts purchased (0.03)%		(22,450	)
	Unrealized appreciation on forward contracts 0.40%		280,304
	Unrealized depreciation on forward contracts (0.40)%		(279,646	)
	Total forward contracts 0.00%*		658
Total Metals (0.03)%			(21,792	)
Softs
	Futures contracts purchased 0.14%		93,622
	Futures contracts sold (0.02)%		(12,420	)
Total Softs 0.12%			81,202
Indices
	Futures contracts purchased 0.73%		505,676
	Futures contracts sold 0.00%*		1,100
Total Indices 0.73%			506,776
Investment in Partnership 23.32%	CMF Winton Master Fund L.P. 23.32%		16,141,889
Total Fair Value 26.10%		$	18,067,749


Country Composition	Investments at Fair Value			% of Investments at Fair Value
Australia	$	737			0.00*	%
Canada		(725	)		(0.00)	*
France		(1,582	)		(0.01	)
Germany		176,133			0.97
Hong Kong		257			0.00	*
Japan		72,974			0.40
Spain		53,523			0.30
United Kingdom		167,316			0.93
United States		17,599,116			97.41
	$	18,067,749			100.00	%


	Percentages are based on Partners' capital unless otherwise indicated


	* Due to rounding

See accompanying notes to Financial Statements.

Smith Barney Diversified Futures Fund L.P.
Statements of Income and Expenses and Partners' Captial
(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions	$	1,046,890		$	(5,189,578	)	$	(5,873,127	)	$	3,838,093
Change in unrealized gains (losses) on open positions and investment in Partnerships		385,838			4,545,762			4,045,538			(2,182,310	)
		1,432,728			(643,816	)		(1,827,589	)		1,655,783
Interest income		105,552			172,145			389,842			438,467
		1,538,280			(471,671	)		(1,437,747	)		2,094,250
Expenses:
Brokerage commissions including clearing fees of $4,882, $26,601, $37,336 and $87,401 respectively		854,677			939,449			2,611,889			3,098,581
Management fees		284,934			302,918			862,793			1,007,824
Incentive fees		—			—			296,368			1,880,089
Other expenses		17,667			20,442			63,415			64,679
		1,157,278			1,262,809			3,834,465			6,051,173
Net income (loss)		381,002			(1,734,480	)		(5,272,212	)		(3,956,923	)
Additions—Limited Partners		—			—			—			1,995
Redemptions—Limited Partners		(1,491,293	)		(1,171,949	)		(4,103,618	)		(4,641,088	)
Net decrease in Partners' capital		(1,110,291	)		(2,906,429	)		(9,375,830	)		(8,596,016	)
Partners' capital, beginning of period		60,965,319			66,037,759			69,230,858			71,727,346
Partners' capital, end of period	$	59,855,028		$	63,131,330		$	59,855,028		$	63,131,330
Net asset value per Redeemable Unit (37,073.8018 and 40,994.5419 Redeemble Units outstanding at September 30, 2005 and 2004, respectively)	$	1,614.48		$	1,539.99		$	1,614.48		$	1,539.99
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent	$	9.92		$	(41.39	)	$	(131.88	)	$	(96.65	)

See Accompanying Notes to Financial Statements.

Smith Barney Diversified Futures Fund L.P.
Statements of Cash Flows
(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Cash flows from operating activities:
Net gain (loss)	$	381,002		$	(1,734,480	)	$	(5,272,212	)	$	(3,956,923	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash		5,393,223			(2,584,548	)		7,047,428			3,699,700
(Increase) decrease in investment in Partnership at fair value		(11,274,601	)		—			(27,701,725	)		—
(Increase) decrease in net unrealized appreciation on open futures positions		1,333,396			(3,122,358	)		1,429,663			554,845
(Increase) decrease in unrealized appreciation on open forward contracts		113,511			(812,292	)		1,811,623			2,950,471
(Increase) decrease in interest receivable		18,581			(14,779	)		34,883			(21,133	)
Increase (decrease) in unrealized depreciation on open futures positions		—			(509,608	)		—			—
Increase (decrease) in unrealized depreciation on open forward contracts		(171,067	)		(101,504	)		(1,694,899	)		(1,323,006	)
Accrued expenses:
Increase (decrease) in commissions		(5,520	)		(16,166	)		(56,003	)		(56,365	)
Increase (decrease) in management fees		(1,457	)		(6,285	)		(20,007	)		(21,718	)
Increase (decrease) in incentive fees		(142,694	)		—			(78,926	)		(761,281	)
Increase (decrease) in other		(18,997	)		12,902			(5,571	)		35,563
Net cash provided by (used in) operating activities		(4,374,623	)		(8,889,118	)		(24,505,746	)		1,100,153
Cash flows from financing activities:
Proceeds from additions—Limited Partners		—			—			—			1,995
Payments for redemptions—Limted Partners		(1,433,605	)		(1,841,996	)		(4,796,045	)		(5,080,026	)
Net cash provided by (used in) financing activities		(1,433,605	)		(1,841,996	)		(4,796,045	)		(5,078,031	)
Net change in cash		(5,808,228	)		(10,731,114	)		(29,301,791	)		(3,977,878	)
Unrestricted cash, at beginning of period		21,068,725			61,357,416			44,562,288			54,604,180
Unrestricted cash, at end of period	$	15,260,497		$	50,626,302		$	15,260,497		$	50,626,302

See Accompanying Notes to Financial Statements.

Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2005
(Unaudited)

1. General:

Smith Barney Diversified Futures Fund L.P. (the "Partnership") is a limited partnership organized under the laws of the State of New York on August 13, 1993 to engage in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options and forward contracts. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk. The Partnership commenced trading operations on January 12, 1994.

Citigroup Managed Futures LLC acts as the general partner (the "General Partner") of the Partnership. The Partnership's commodity broker is Citigroup Global Markets Inc. ("CGM"). CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. ("CGMHI"), which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc. ("Citigroup"). As of September 30, 2005, all trading decisions are made for the Partnership by Campbell & Company, Inc. ("Campbell"), Willowbridge Associates, Inc. ("Willowbridge"), Winton Capital Management Limited ("Winton") and Graham Capital Management L.P. ("Graham") (each an "Advisor" and collectively, the "Advisors").

The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership's financial condition at September 30, 2005 and December 31, 2004 and the results of its operations and cash flows for the three and nine months ended September 30, 2005 and 2004. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership's annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2004.

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

2. Financial Highlights:

Changes in Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and nine months ended September 30, 2005 and 2004 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30
	2005			2004			2005			2004
Net realized and unrealized gains (losses)*	$	15.10		$	(37.75	)	$	(110.35	)	$	(38.41	)
Interest income		2.80			4.15			10.10			10.34
Expenses **		(7.98	)		(7.79	)		(31.63	)		(68.58	)
Increase (decrease) for the period		9.92			(41.39	)		(131.88	)		(96.65	)
Net Asset Value per Redeemable Unit, beginning of period		1,604.56			1,581.38			1,746.36			1,636.64
Net Asset Value per Redeemable Unit, end of period	$	1,614.48		$	1,539.99		$	1,614.48		$	1,539.99


*	Includes brokerage commissions.


**	Excludes brokerage commissions.

Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2005
(Unaudited)

Financial Highlights (continued):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Ratio to average net assets: ***
Net investment loss before incentive fees ****		(6.9	)%		(6.8	)%		(6.8	)%		(7.1	)%
Operating expenses		7.6	%		7.9	%		7.6	%		8.0	%
Incentive fees		—	%		—	%		0.5	%		2.7	%
Total expenses		7.6	%		7.9	%		8.1	%		10.7	%
Total return:
Total return before incentive fees		0.6	%		(2.6	)%		(7.1	)%		(3.1	)%
Incentive fees		—	%		—	%		(0.5	)%		(2.8	)%
Total return after incentive fees		0.6	%		(2.6	)%		(7.6	)%		(5.9	)%


***	Annualized (other than incentive fees).


****	Interest income less total expenses (exclusive of incentive fees).

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners' share of income, expenses and average net assets.

3. Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership's trading activities are shown in the Statements of Income and Expenses and Partners' Capital and are discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Customer Agreement between the Partnership and CGM gives the Partnership the legal right to net unrealized gains and losses on open futures positions.

All of the commodity interests owned by the Partnership are held for trading purposes. The average fair values of these interests during the nine and twelve months ended September 30, 2005 and December 31, 2004, based on a monthly calculation, were $588,927 and $2,973,373, respectively. The fair values of these commodity interests, including options thereon, if applicable, at September 30, 2005 and December 31, 2004, were $379,473 and $1,925,860, respectively. Fair values for exchange traded commodity futures and options are based on quoted market prices for those futures and options. Fair values for all other financial instruments for which market quotations are not readily available are based on calculations approved by the General Partner.

4. Investment in Partnerships:

Effective November 1, 2004, the Partnership allocated capital for trading to the CMF Winton Master Fund L.P., a limited partnership organized under the partnership laws of New York State (the "Winton Master"). The partnership purchased 15,054.1946 Units of the Winton Master with cash equal to $14,251,586, and a contribution of open commodity futures and forward positions with a fair value of $802,609. The Winton Master was formed in order to permit commodity pools managed now or in the future by Winton, to invest together in one trading vehicle. The General Partner is the Managing Member of the Winton Master. Individual and pooled accounts currently managed by Winton, including the

Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2005
(Unaudited)

Partnership (collectively, the "Feeder Funds"), are permitted to be a non-managing member of the Winton Master. The General Partner and Winton believe that trading through this structure should promote efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Winton Master are approximately the same and redemption rights are not affected.

Effective January 1, 2005, the assets allocated to Campbell for trading were invested in the CMF Campbell Master Fund L.P. ("Campbell Master"), a limited liability partnership organized under the partnership laws of the State of New York. The Partnership purchased 19,621.1422 Units of Campbell Master with cash equal to $19,428,630, and a contribution of open commodity futures and forward positions with a fair value of $192,512. Campbell Master was formed in order to permit commodity pools managed now or in the future using Campbell's Financials Metals and Energy ("FME") Portfolio, to invest together in one trading vehicle. The General Partner is the Managing Member of Campbell Master. Individual and pooled accounts currently managed by Campbell, including the Partnership (collectively, the "Feeder Funds"), are permitted to be a non-managing member of Campbell Master. The General Partner and Campbell believe that trading through this structure should promote efficiency and economy in the trading process. Expenses to investors as a result of the investment in Campbell Master are approximately the same and redemption rights are not affected.

Effective July 1, 2005, the assets allocated to Willowbridge for trading were invested in the CMF Willowbridge Master Fund L.P. ("Willowbridge Master"), a limited liability partnership organized under the partnership laws of the State of New York. The partnership purchased 12,259.3490 Units of Willowbridge Master with cash equal to $11,118,119, and a contribution of open commodity futures and forward positions with a fair value of $1,141,230. Willowbridge Master was formed in order to permit commodity pools managed now or in the future by using Willowbridge's Argo Trading Program, to invest together in one trading vehicle. The General Partner is the Managing member of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership (collectively, the "Feeder Funds"), are permitted to be a non-managing member of Willowbridge Master. The General Partner and Willowbridge believe that trading through this master/feeder structure should promote efficiency and economy in the trading process. Expenses to investors as a result of the investment in Willowbridge Master are approximately the same and redemption rights are not affected.

The Winton Master's, Campbell Master's and Willowbridge Master's trading of futures, forwards and options contracts, if applicable, on commodities is done primarily on United States of America commodity exchanges and foreign commodity exchanges. The Masters all engage in such trading through commodity brokerage accounts maintained with CGM.

A non-managing member/limited partner may withdraw all or part of its capital contribution and undistributed profits, if any, from the Winton Master, Campbell Master and Willowbridge Master (the "Master Funds") in multiples of the net asset value per unit of limited partnership interest as of the last day of a month after a request for redemption has been made to the managing Member/General Partner at least 3 days in advance of month-end.

Management and incentive fees are not directly charged to the investments presented below. These fees are charged at the Partnership level. All exchange, clearing, user, give-up, floor brokerage and National Futures Association fees are borne by the Master Funds. All other fees, including CGM's direct brokerage commission, are charged at the Partnership level.

As of September 30, 2005 and December 31, 2004 the Partnership owned 9.0% and 14.0%, respectively of the Winton Master. At September 30, 2005, the Partnership owned 4.9% of Campbell Master. At September 30, 2005, the Partnership owned 7.6% of Willowbridge Master. It is Winton's, Campbell's and Willowbridge's intention to continue to invest the assets allocated to each by the Partnership in the Winton Master, Campbell Master and Willowbridge Master. The performance of the partnership is directly affected by the performance of the Master Funds.

Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2005
(Unaudited)

Summarized information reflecting the total assets, liabilities and capital for the Master Funds are shown in the following tables.


	September 30, 2005
	Investments' Total Assets		Investments' Total Liabilities		Investments' Total Capital		Investment Objective	Redemptions Permitted
Campbell Master	$	327,642,354	$	20,278,272	$	307,364,082	FME Portfolio		Monthly
Winton Master		178,028,295		473,861		177,554,434	Commodity Portfolio		Monthly
Willowbridge Master		167,925,751		367,651		167,558,100	Commodity Portfolio		Monthly
Total	$	673,596,400	$	21,119,784	$	652,476,616


	December 31, 2004
	Investments' Total Assets		Investments' Total Liabilities		Investments' Total Capital		Investment Objective	Redemptions Permitted
Winton Master	$	116,230,069	$	1,104,740	$	115,125,329	Commodity Portfolio		Monthly

Summarized information reflecting the Partnership's investment in, and the operations of the Master Funds are as shown in the following tables.


	September 30, 2005					For the three months ended September 30, 2005
Investment	% of Partnership's Net Assets			Fair Value		Income (loss)			Expenses Commissions		Other		Net Income (Loss)			Investment Objective	Redemptions Permitted
Campbell Master		25.06	%	$	14,998,415	$	27,321		$	5,680	$	686	$	20,955		FME Portfolio		Monthly
Winton Master		26.82	%		16,056,163		(154,146	)		34,418		1,613		(190,177	)	Commodity Portfolio		Monthly
Willowbridge Master		21.37	%		12,789,036		706,653			15,831		1,153		689,669		Commodity Portfoilo		Monthly
Total		73.25	%	$	43,843,614	$	579,828		$	55,929	$	3,452	$	520,447


	September 30, 2005					For the nine months ended September 30, 2005
Investment	% of Partnership's Net Assets			Fair Value		Income (loss)		Expenses Commissions		Other		Net Income (Loss)		Investment Objective	Redemptions Permitted
Campbell Master		25.06	%	$	14,998,415	$	1,563,164	$	20,621	$	2,395	$	1,540,148	FME Portfolio		Monthly
Winton Master		26.82	%		16,056,163		2,119,232		85,386		5,481		2,028,365	Commodity Portfolio		Monthly
Willowbridge Master		21.37	%		12,789,036		706,653		15,831		1,153		689,669	Commodity Portfoilo		Monthly
Total		73.25	%	$	43,843,614	$	4,389,049	$	121,838	$	9,029	$	4,258,182
	For the year December 31, 2004													Investment Objective	Redemptions Permitted
	% of Partnership's Net Assets			Fair Value										Investment Objective	Redemptions Permitted
Winton Master		23.32	%	$	16,141,889	$	—							Commodity Portfolio		Monthly

Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2005
(Unaudited)

5. Financial Instrument Risks:

In the normal course of its business, the Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures and options, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter ("OTC"). Exchange-traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract.

Market risk is the potential for changes in the value of the financial instruments traded by the Partnership due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership's risk of loss in the event of counterparty default is typically limited to the amounts recognized as unrealized appreciation in the statements of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership has credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership's assets is CGM.

The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these instruments mature within one year of September 30, 2005. However, due to the nature of the Partnership's business, these instruments may not be held to maturity.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in the sale of goods or services. Its only assets are its equity in its commodity futures trading account, consisting of cash, net unrealized appreciation on open futures and forward contracts and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a decrease in liquidity, no such losses occurred during the third quarter of 2005.

The Partnership's capital consists of the capital contributions of the partners as increased or decreased by realized and/or unrealized gains or losses on commodity futures trading, expenses, interest income, additions and redemptions of Redeemable Units and distributions of profits, if any.

For the nine months ended September 30, 2005, Partnership capital decreased 13.5% from $69,230,858 to $59,855,028. This decrease was attributable to a net loss from operations of $5,272,212 coupled with the redemption of 2,569.1540 Redeemable Units totaling $4,103,618. Persons investing $1,000,000 or more will pay a reduced brokerage fee, receiving the differential in the form of additional Redeemable Units. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

All commodity interests (including derivative financial instruments and derivative commodity instruments) are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statements of financial condition at fair value on the last business day of the period, which represents market value for those commodity interests for which market quotations are readily available or other measures of fair value deemed appropriate by management of the General Partner for those commodity interests and foreign currencies for which market quotations are not readily available. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the last business day of the period. Realized gains (losses) and changes in unrealized values on open positions are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests. The investment in other Partnerships are recorded at fair value, based upon the Partnership's proportionate interest held.

Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the date of entry into the contracts and the forward rates at the reporting dates, is included in the statement of financial condition. Realized gains (losses) and changes in unrealized values on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the statements of income and expenses and partners' capital.

Results of Operations

During the Partnership's third quarter of 2005 the net asset value per Redeemable Unit increased 0.6% from $1,604.56 to $1,614.48 as compared to a decrease of 2.6% in the third quarter of 2004. The Partnership experienced a net trading gain before brokerage commissions and related fees in the third quarter of 2005 of $1,432,728. Gains were primarily attributable to the trading of commodity futures in

energy, grains, metals and indices and were partially offset by losses in currencies, U.S. interest rates and non-U.S interest rates, livestock, softs and lumber. The Partnership experienced a net trading loss before brokerage commissions and related fees in the third quarter of 2004 of $643,816. Losses were primarily attributable to the trading of commodity futures in currencies, U.S. interest rates, livestock, metals, softs and indices and were partially offset by gains in energy, grains, non-U.S. interest rates and lumber.

Third Quarter results reflect strong trends and profitable trading in the energy and stock index markets with directionless and volatile prices in interest rates and currencies producing losses. Periodic trading opportunities in metals and softs generated small gains. The overall net result was positive for the quarter.

The quarter started with reversing trends in U.S. and European fixed income instruments as yields began to rise prompted by U.S. central bank rate increases. This volatility continued through the remainder of the quarter and led to the greatest sector loss for the Partnership. The most profitable trends for the quarter, however, were in the energy markets as crude oil and natural gas prices rose to historic levels. Substantial profits were made in trading these markets which saw recent trends exacerbated by the impact of the two Gulf Coast hurricanes.

Prospects of improving economic conditions in Japan led to strong profits in Nikkei stock index trading and combined with solid second quarter corporate profits led to profits in U.S. stock index trading as well. Offsetting profitable stock index trading were losses in foreign currency trading. The most notable event in this markets was the Chinese government decision to unpeg the yuan from the U.S. dollar and the yuan's subsequent upward revaluation. This led to near continuous adjustments in the relation of the major currencies throughout the quarter and range-bound trading in the U.S. dollar. While other commodity markets produced lackluster price trends, precious metals, particularly gold rose to over $400 an ounce, its highest level in 15 years and produced additional profits for the Partnership's Advisors.

During the Partnership's nine months ended September 30, 2005, the net asset value per Redeemable Unit decreased 7.6% from $1,746.36 to $1,614.48 as compared to a decrease of 5.9% for the nine months ended September 30, 2004. The Partnership experienced a net trading loss before commissions and related fees for the nine months ended September 30, 2005 of $1,827,589. Losses were primarily attributable to the trading of commodity futures in currencies, grains, U.S interest rates, livestock, metals and softs and were partially offset by gains in energy, non-U.S. interest rates, indices and lumber. The Partnership experienced a net trading gain before brokerage commissions and related fees for the nine months ended September 30, 2004 of $1,655,783. Gains were primarily attributable to the trading of commodity futures in energy, grains, non-U.S. interest rates, livestock and lumber and were partially offset by losses in currencies, U.S. interest rates, metals, softs and indices.

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisors are able to identify them, the Partnership expects to increase capital through operations.

Interest income on 80% of the Partnership's daily equity maintained in cash was earned at the monthly average 30-day U.S. Treasury bill rate determined weekly by CGM based on the non-competitive yield on three month U.S. Treasury bills maturing 30 days from the date in which such weekly rate is determined. CGM may continue to maintain the Partnership's assets in cash and/or place all of the Partnership's assets in 90-day Treasury bills and pay the Partnership 80% of the interest earned on the Treasury bills purchased. CGM will retain 20% of any interest earned on Treasury bills. Interest income for the three and nine months ended September 30, 2005 decreased by $66,593 and $48,625, respectively, as compared to the corresponding periods in 2004. The decrease in interest income is primarily due to lower average net assets during the three and nine months ended September 30, 2005 as compared to the corresponding periods in 2004.

Brokerage commissions are calculated on the Partnership's net asset value as of the last day of each month and are affected by trading performance and redemptions. Accordingly, they must be compared in relation to the fluctuations in monthly net asset values. Commissions and fees for the three and nine months ended September 30, 2005 decreased by $84,772 and $486,692, respectively, as compared to the corresponding periods in 2004. The decrease in brokerage commissions is due to lower average net assets during the three and nine months ended September 30, 2005 as compared to the corresponding periods in 2004.

Management fees are calculated on the portion of the Partnership's net asset value allocated to each Advisor at the end of the month and, therefore, are affected by trading performance and redemptions. Management fees for the three and nine months ended September 30, 2005 decreased by $17,984 and $145,031, respectively as compared to the corresponding periods in 2004. The decrease in management fees is due to lower average net assets during the three and nine months ended September 30, 2005 as compared to the corresponding periods in 2004.

Incentive fees are based on the new trading profits generated by each Advisor at the end of the quarter as defined in the advisory agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three and nine months ended September 30, 2005 resulted in incentive fees of $0 and $296,368, respectively. Trading performance for the three and nine months ended September 30, 2004 resulted in incentive fees of $0 and $1,880,089, respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Partnership's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's main line of business.

Market movements result in frequent changes in the fair value of the Partnership's open positions and, consequently, in its earnings and cash flow. The Partnership's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the value of financial instruments and contracts, the diversification effects among the Partnership's open positions and the liquidity of the markets in which it trades.

The Partnership rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership's past performance is not necessarily indicative of its future results.

Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership's experience to date (i.e., "risk of ruin"). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

The following table indicates the trading Value at Risk associated with the Partnership's open positions by market category as of September 30, 2005 and the highest, lowest and average value during the three months ended September 30, 2005. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of September 30, 2005, the Partnership's total capitalization was $59,855,028. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2004.

September 30, 2005
(Unaudited)


						Three Months Ended September 30, 2005
Market Sector	Value at Risk		% of Total Capitalization			High Value at Risk		Low Value at Risk		Average Value at Risk*
Currencies:
OTC	$	256,063		0.43	%	$	828,490	$	61,678	$	385,443
Energy		86,500		0.14	%		366,000		49,000		124,833
Grains		6,250		0.01	%		43,300		6,250		15,823
Interest Rates U.S.		10,224		0.02	%		226,950		1,535		14,604
Interest Rates Non -U.S.		20,220		0.03	%		315,275		17,060		48,943
Metals
Exchange Traded Contracts		16,000		0.03	%		16,000		—		5,333
OTC		63,320		0.11	%		95,160		10,686		79,087
Softs		46,297		0.08	%		61,240		9,784		41,592
Indices		432,784		0.72	%		1,153,800		288,758		746,007
Total	$	937,658		1.57	%


*	Average of month-end Values at Risk.

Item 4. Controls and Procedures

The General Partner of the Partnership, with the participation of the General Partner's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) with respect to the Partnership as of the end of the period covered by the report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls during the registrant's last fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The following information supplements and amends our discussion set forth under Item, 3 "Legal Proceedings" in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2004 and under Part II, Item 1, "Legal Proceedings" in the Partnership's Quarterly Report on Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005.

Enron Corp.

On August 4, 2005, a breach of contract action was filed in the United States District Court for the Southern District of New York, WESTPAC BANKING CORPORATION v. CITIBANK, N.A. The complaint alleges that Citibank breached a representation and warranty in a Credit Default Swap agreement entered into in December 2000 concerning Enron.

On August 26, 2005, a group of 15 plaintiffs filed an action in the United States District Court for the Southern District of Texas, AVENUE CAPITAL MANAGEMENT II, L.P., ET AL. v. J.P. MORGAN-CHASE & CO., ET AL. The complaint names as defendants Citigroup Inc., Citibank, N.A., Citigroup Global Markets Inc., and several J.P. Morgan entities and alleges fraud, breach of fiduciary duty and breach of contract arising out of Enron bank debt incurred under two syndicated revolving credit facilities and a syndicated letter of credit facility.

WorldCom, Inc.

In STURM, ET AL. v. CITIGROUP, ET AL., an NASD arbitration seeking very significant compensatory and punitive damages, Claimants' common law claims, including fraud, arising out of alleged research analyst conflicts of interest related to SSB research coverage of WorldCom, were heard this quarter.

Citigroup, along with other financial institution defendants, entered into a settlement in NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM v. EBBERS, ET AL., resolving all claims against the Citigroup-related defendants in this WorldCom-related action, which was brought by a plaintiff that opted out of the settlement of the WorldCom class action. The settlement amount is covered by existing litigation reserves.

Citigroup along with other financial institutions and other defendants, entered into a settlement resolving all claims against the Citigroup-related defendants in 32 individual actions filed by a single law firm on behalf of 70 institutional plaintiffs that have opted out of the WorldCom class action settlement. Plaintiffs in these actions asserted various claims under federal and state law, including, among other things, federal and state securities claims, fraud, negligent misrepresentation and breach of fiduciary duty, in connection with the Citigroup-related defendants' research coverage, and underwriting of WorldCom securities. The settlement amount is covered by existing litigation reserves.

Global Crossing

On September 12, 2005, Citigroup entered into a settlement with the Global Crossing Estate Representative, resolving all claims pending in United States Bankruptcy Court for the Southern District of New York against the Citigroup-related defendants. The settlement amount is covered by existing litigation reserves.

Research

On September 27, 2005, Citigroup entered into a memorandum of agreement settling all claims against the Citigroup-related defendants in IN RE SALOMON ANALYST AT&T LITIGATION, a putative class action alleging research analyst conflicts of interest. The settlement amount is covered by existing litigation reserves. The settlement is subject to judicial approval.

On September 22, 2005, Citigroup reached an agreement-in-principle to settle all claims against the Citigroup-related defendants in NORMAN v. SALOMON SMITH BARNEY, ET AL., a putative class

action asserting violations of the Investment Advisers Act of 1940 and various common law claims in connection with certain investors who maintained guided portfolio management accounts at Smith Barney. The settlement amount is covered by existing litigation reserves. The settlement is subject to judicial approval.

On August 17, 2005, in DISHER v. CITIGROUP GLOBAL MARKETS INC., the United States Court of Appeals for the Seventh Circuit reversed the district court's grant of plaintiffs' motion to remand the case to state court, and directed the district court to dismiss the case as preempted under the Securities Litigation Uniform Standards Act ("SLUSA"). The United States Supreme Court has granted review in another case involving SLUSA that may affect the Seventh Circuit's dismissal of the Disher matter.

Adelphia

In May and July of 2005, the United States District Court for the Southern District of New York granted motions to dismiss several claims, based on the running of applicable statute of limitations, asserted in the putative class and individual actions being coordinated under IN RE ADELPHIA COMMUNICATIONS CORPORATION SECURITIES AND DERIVATIVE LITIGATION. With the exception of one individual action that was dismissed with prejudice, the court granted the putative class and individual plaintiffs leave to re-plead certain of those claims the court found to be time-barred. Additional motions to dismiss the class complaint and the remaining individual complaints on other grounds remain pending.

IPO Securities Litigation

On June 30, 2005, the United States Court of Appeals for the Second Circuit entered an order in IN RE INITIAL PUBLIC OFFERING SECURITIES LITIGATION agreeing to review the district court's order granting plaintiffs' motion for class certification.

IPO Antitrust Litigation

On September 28, 2005 the United States Court of Appeals for the Second Circuit in IN RE INITIAL PUBLIC OFFERING ANTITRUST LITIGATION vacated the district court's order dismissing these actions and remanded for further proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Additional Redeemable Units offered represent a reduced brokerage fee to existing limited partners who invested $1,000,000 or more.

The following chart sets forth the purchases of Redeemable Units by the Partnership.



Period	(a) Total Number of Shares (or Units) Purchased*		(b) Average Price Paid per Share (or Unit)**		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2005 – July 31, 2005		240.2938	$	1,552.59		N/A		N/A
August 1, 2005 – August 31, 2005		499.6361	$	1,652.37		N/A		N/A
September 1, 2005 – September 30, 2005		181.2538	$	1,614.48		N/A		N/A
Total		921.1837	$	1,606.48		N/A		N/A

Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days' notice to the General Partner. Under certain circumstances, the General Partner can compel redemption but, to date, the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership's business in connection with effecting redemptions for Limited Partners.


**	Redemptions of Redeemable Units are effected as of the last day of each month at the Net Asset Value per Redeemable Unit as of that day.

Item 3. Defaults Upon Senior Securities — None

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

Item 5. Other Information — None

Item 6. Exhibits

The exhibits required to be filed by Item 601 of Regulation S-K are incorporated herein by reference to the exhibit index of the Partnership's Annual Report on Form 10-K for the year ended December 31, 2004.

Exhibit - 31.1 — Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director).

Exhibit - 31.2 — Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director).

Exhibit - 32.1 — Section 1350 Certification (Certification of President and Director).

Exhibit - 32.2 — Section 1350 Certification (Certification of Chief Financial Officer and Director).

SIGNATURES

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


SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
By:				Citigroup Managed Futures LLC
				(General Partner)
By:				/s/ David J. Vogel
				David J. Vogel President and Director
Date:				November 14, 2005
By:				/s/ Daniel R. McAuliffe, Jr.
				Daniel R. McAuliffe, Jr. Chief Financial Officer and Director
Date:				November 14, 2005

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)