Potomac Futures Fund (POTO) 10-Q 2006 Q2 Quarterly report

Table of Contents

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 June 30, 2006

Commission File Number 000-50735

SMITH BARNEY POTOMAC FUTURES FUND L.P.

(Exact name of registrant as specified in its charter)

New York			13-3937275
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification No.)

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

(Address and Zip Code of principal executive offices)

(212) 559-2011

(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition 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 Exchange Act).

Yes         No X

Table of Contents

SMITH BARNEY POTOMAC FUTURES FUND L.P.

FORM 10-Q

INDEX

									Page Number
PART I - Financial Information:
			Item 1.			Financial Statements:
						Statements of Financial Condition at June 30, 2006 and December 31, 2005 (unaudited).			3
						Statements of Income and Expenses and Partners' Capital for the three and six months ended June 30, 2006 and 2005 (unaudited).			4
						Statements of Cash Flows for the three and six months ended June 30, 2006 and 2005 (unaudited).			5
						Notes to Financial Statements, including the Financial Statements of CMF Campbell Master Fund L.P. (unaudited).			6 – 14
			Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations			15 – 17
			Item 3.			Quantitative and Qualitative Disclosures about Market Risk			18
			Item 4.			Controls and Procedures.			19
PART II - Other Information									20

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Table of Contents

PART I

Item 1. Financial Statements

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

			June 30, 2006						December 31, 2005
Assets:
Investment in Master, at fair value				$	256,375,165					$	231,467,408
Cash					19,570						12,705
				$	256,394,735					$	231,480,113
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Brokerage commissions				$	1,388,805					$	1,277,897
Management fees					424,952						391,002
Other					34,765						15,656
Redemptions Payable					3,913,532						1,878,905
					5,762,054						3,563,460
Partners' Capital:
General Partner 729.3902 Unit equivalent outstanding in 2006 and 2005					1,284,733						1,325,594
Limited Partners 141,563.9702 and 124,678.9436 Redeemable Units of Limited Partnership Interest outstanding in 2006 and 2005, respectively.					249,347,948						226,591,059
					250,632,681						227,916,653
				$	256,394,735					$	231,480,113

See accompanying Notes to Financial Statements.

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

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Income:
Realized gains (losses) on closed positions allocated from Master				$	(5,764,106	)				$	13,147,431					$	(9,384,497	)				$	7,431,813
Change in unrealized gains (losses) on open positions allocated from Master					(10,109,825	)					11,227,417						8,337,425						12,172,061
Interest income allocated from Master					2,451,243						959,721						4,527,931						1,741,665
Expenses allocated from Master					(50,332	)					(81,853	)					(121,476	)					(167,634	)
Net gains (losses) on trading of commodity interest:
Change in unrealized gains (losses) on open positions					—						—						—						(1,582,992	)
					(13,473,020	)					25,252,716						3,359,383						19,594,913
Expenses:
Brokerage commissions					4,231,810						3,049,211						8,287,246						5,777,653
Management fees					1,294,768						933,342						2,534,687						1,767,408
Incentive fees					—						—						1,237,713						—
Other					33,995						42,386						65,112						65,363
					5,560,573						4,024,939						12,124,758						7,610,424
Net income (loss)					(19,033,593	)					21,227,777						(8,765,375	)					11,984,489
Additions — Limited Partners					23,253,000						15,343,000						48,339,000						42,260,000
Redemptions — Limited Partners					(9,582,457	)					(6,215,912	)					(16,857,597	)					(9,598,122	)
Net increase (decrease) in Partners' Capital					(5,363,050	)					30,354,865						22,716,028						44,646,367
Partners' Capital, beginning of period					255,995,731						168,974,147						227,916,653						154,682,645
Partners' Capital, end of period				$	250,632,681					$	199,329,012					$	250,632,681					$	199,329,012
Net asset value per Redeemable Unit (142,293.3604 and 110,617.8983 Units outstanding at June 30, 2006 and 2005, respectively)				$	1,761.38					$	1,801.96					$	1,761.38					$	1,801.96
Net income (loss) per Redeemable Unit of Limited Partnership				$	(131.87	)				$	191.90					$	(56.02	)				$	102.17

See accompanying Notes to Financial Statements

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

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Cash flows from operating activities:
Net income (loss)				$	(19,033,593	)				$	21,227,777					$	(8,765,375	)				$	11,984,489
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Changes in operating assets and liabilities:
Purchase of Investment in Master					(23,253,000	)					(15,343,000	)					(48,339,000	)					(196,942,646	)
Proceeds from Sale of Investment in Master					11,716,475						9,432,597						22,262,695						12,940,910
Net unrealized (appreciation) depreciation on Investment in Master					15,924,263						(24,293,270	)					1,168,548						(17,854,734	)
(Increase) decrease in restricted cash					—						—						—						19,775,170
Net unrealized (appreciation) depreciation on open futures positions					—						—						—						2,504,531
Unrealized appreciation on open forward contracts					—						—						—						9,444,675
(Increase) decrease in interest receivable					—						—						—						205,283
Unrealized depreciation on open forward contracts					—						—						—						(10,366,214	)
Accrued expenses:
Increase (decrease) in brokerage commissions					(23,835	)					130,722						110,908						204,148
Increase (decrease) in management fees					(7,274	)					40,086						33,950						62,510
Increase (decrease) in incentive fees					(1,237,713	)					—						—						—
Increase (decrease) in other					(12,008	)					(12,901	)					19,109						10,077
Net cash provided by (used in) operating activities					(15,926,685	)					(8,817,989	)					(33,509,165	)					(168,031,801	)
Cash flows from financing activities:
Proceeds from additions — Limited Partners					23,253,000						15,343,000						48,339,000						42,260,000
Payments for redemptions — Limited Partners					(7,338,883	)					(6,535,765	)					(14,822,970	)					(11,461,854	)
Net cash provided by (used in) financing activities					15,914,117						8,807,235						33,516,030						30,798,146
Net change in cash					(12,568	)					(10,754	)					6,865						(137,233,655	)
Cash, at beginning of period					32,138						82,923						12,705						137,305,824
Cash, at end of period				$	19,570					$	72,169					$	19,570					$	72,169
Non-Cash Financing Activities:
Contributions of open commodity futures and forward positions				$	—					$	—					$	—					$	(1,582,992	)

See accompanying Notes to Financial Statements

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Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

1.    General:

Smith Barney Potomac Futures Fund L.P. (the ‘‘Partnership’’) is a limited partnership which was organized on March 14, 1997 under the partnership laws of the State of New York 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 was authorized to sell an unlimited number of redeemable units of Limited Partnership Interest (‘‘Redeemable Units’’) during its initial offering period. The Partnership continues to offer Redeemable Units.

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.

Effective January 1, 2005, the Partnership allocated substantially all of its capital to the CMF Campbell Master Fund L.P., (the ‘‘Master’’), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 173,788.6446 Units of the Master with cash equal to $172,205,653 and a contribution of open commodity futures and forward positions with a fair value of $1,582,992. The Master was formed in order to permit accounts managed by Campbell & Company, Inc. (the ‘‘Advisor’’) using the FME Large Portfolio Program, the Advisor's proprietary trading program, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of the Master. Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be limited partners of the Master. The General Partner and the Advisor believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same and redemption rights are not affected.

As of June 30, 2006, the Partnership owned approximately 75.0% of the Master. It is the Partnership's intention to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Master's Statement of Financial Condition, Statement of Income and Expenses and Partners' Capital, Condensed Schedule of Investments and Statement of Cash Flows are included herein.

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 June 30, 2006 and December 31, 2005 and the results of its operations and cash flows for the three and six months ended June 30, 2006 and 2005. 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, 2005.

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.

The Master's Statement of Financial Condition and Condensed Schedule of Investments as of June 30, 2006 and Statement of Income and Expenses and Partners' Capital and Statement of Cash Flows for the three and six months ended June 30, 2006 and 2005 are presented below:

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Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

CMF Campbell Master Fund L.P.
Statement of Financial Condition
(Unaudited)

			June 30, 2006						December 31, 2005
Assets:
Equity in commodity futures trading account:
Cash (restricted $19,668,262 and $42,476,193 in 2006 and 2005, respectively)				$	340,373,977					$	337,483,460
Net unrealized appreciation on open futures positions					3,692,895						—
Unrealized appreciation on open forward contracts					6,976,075						9,103,088
					351,042,947						346,586,548
Interest receivable					1,067,246						779,766
					352,110,193						347,366,314
Liabilities and Partners' Capital:
Liabilities:
Commodity options written at fair value (premium received $99,584 in 2006)				$	102,562					$	—
Net unrealized depreciation on open futures positions					—						607,801
Unrealized depreciation on open forward contracts					10,020,897						19,546,499
Accrued expenses:
Other					7,050						41,475
Distribution payable					1,067,246						779,766
					11,197,755						20,975,541
Partners' Capital:
Partners' Capital, 299,771.6713 and 286,601.7201 Units outstanding in 2006 and 2005, respectively					340,912,438						326,390,773
				$	352,110,193					$	347,366,314

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Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

CMF Campbell Master Fund L.P.
Condensed Schedule of Investments
June 30, 2006
(Unaudited)

Futures Contracts Purchased			Fair Value						% of Partners' Capital
Energy				$	1,030,937						0.30	%
Interest Rates Non-U.S.					(586,848	)					(0.17	)
Indices					39,875						0.01
Metals					634,827						0.19
Total futures contracts purchased					1,118,791						0.33
Futures Contracts Sold
Energy					146,410						0.04
Interest Rates Non-U.S.					2,789,382						0.82
Interest Rates U.S.					239,311						0.07
Indices					(363,549	)					(0.11	)
Metals					(237,450	)					(0.07	)
Total futures contracts sold					2,574,104						0.75
Unrealized Appreciation on Forward Contracts
Currencies					6,718,724						1.97
Metals					257,351						0.08
Total unrealized appreciation on forward contracts					6,976,075						2.05
Unrealized Depreciation on Forward Contracts
Currencies					(9,735,318	)					(2.86	)
Metals					(285,579	)					(0.08	)
Total unrealized depreciation on forward contracts					(10,020,897	)					(2.94	)
Options Written
Currencies					(102,562	)					(0.03	)
Total fair value				$	545,511						0.16	%

	Percentages are based on Partners' Capital of the Master unless otherwise indicated

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Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

CMF Campbell Master Fund L.P.
Condensed Schedule of Investments
December 31, 2005
(Unaudited)

			Fair Value						% of Partners' Capital
Futures Contracts Purchased
Energy				$	(2,956,926	)					(0.90	)%
Interest Rates Non-U.S.					128,183						0.04
Interest Rates U.S.					(22,312	)					(0.01	)
Indices					(193,762	)					(0.06	)
Metals					73,100						0.02
Total futures contracts purchased					(2,971,717	)					(0.91	)
Futures Contracts Sold
Interest Rates Non-U.S.					2,875,170						0.88
Interest Rates U.S.					(435,695	)					(0.14	)
Indices					(75,559	)					(0.02	)
Total futures contracts sold					2,363,916						0.72
Unrealized Appreciation on Forward Contracts
Currencies					9,018,132						2.76
Metals					84,956						0.03
Total unrealized appreciation on forward contracts					9,103,088						2.79
Unrealized Depreciation on Forward Contracts
Currencies					(19,539,120	)					(5.99	)
Metals					(7,379	)					(0.00	)*
Total unrealized depreciation on forward contracts					(19,546,499	)					(5.99	)
Total fair value				$	(11,051,212	)					(3.39	)%

	Percentages are based on Partners' Capital of the Master unless otherwise indicated

	* Due to rounding

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Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

CMF Campbell Master Fund L.P.
Statements of Income and Expenses and Partners' Capital
(Unaudited)

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions and foreign currencies				$	(7,644,567	)				$	19,502,500					$	(12,631,342	)				$	10,328,518
Change in unrealized gains (losses) on open positions					(13,667,663	)					17,579,466						11,696,307						16,386,889
					(21,312,230	)					37,081,966						(935,035	)					26,715,407
Interest income					3,292,428						1,481,454						6,166,362						2,747,368
					(18,019,802	)					38,563,420						5,231,327						29,462,775
Expenses:
Commissions including clearing fees of $42,566, $49,645, $45,242 and $85,463, respectively					61,189						111,595						153,418						237,149
Other					6,115						13,650						12,163						26,850
					67,304						125,245						165,581						263,999
Net income (loss)					(18,087,106	)					38,438,175						5,065,746						29,198,776
Additions — Limited Partners					23,718,000						15,343,000						48,804,000						307,113,300
Redemptions — Limited Partners					(17,135,309	)					(25,505,076	)					(33,181,719	)					(32,916,124	)
Distribution of interest to Feeder Funds					(3,292,428	)					(1,481,454	)					(6,166,362	)					(2,747,368	)
Net increase (decrease) in Partners' Capital					(14,796,843	)					26,794,645						14,521,665						300,648,584
Partners' Capital, beginning of period					355,709,281						273,853,939						326,390,773						—
Partners' Capital, end of period				$	340,912,438					$	300,648,584					$	340,912,438					$	300,648,584
Net asset value per Unit (299,771.6713 and 274,415.1242 Units outstanding at June 30, 2006 and 2005, respectively)				$	1,137.24					$	1,095.60					$	1,137.24					$	1,095.60
Net gain (loss) per Unit of Partners' Interest				$	(59.66	)				$	137.83					$	19.14					$	105.33

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Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

CMF Campbell Master Fund L.P.
Statement of Cash Flows
(Unaudited)

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Cash flows from operating activities:
Net income (loss)				$	(18,087,106	)				$	38,438,175					$	5,065,746					$	29,198,776
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					15,102,505						(3,783,924	)					22,807,931						(35,609,335	)
(Increase) decrease in net unrealized appreciation on open futures positions					3,872,090						(3,875,002	)					(3,692,895	)					(4,639,786	)
(Increase) decrease in unrealized appreciation on open forward contracts					9,812,434						(6,184,387	)					2,127,013						1,611,087
(Increase) decrease in interest receivable					(20,541	)					(19,265	)					(287,480	)					(515,922	)
Increase (decrease) in commodity options written at fair value					73,425						—						102,562						—
Increase (decrease) in net unrealized depreciation on open futures positions					—						—						(607,801	)					—
Increase (decrease) in unrealized depreciation on open forward contracts					(49,331	)					(7,520,077	)					(9,525,602	)					(13,358,190	)
Accrued expenses:
Increase (decrease) in other					(40,473	)					13,650						(34,425	)					26,850
Net cash provided by (used in) operating activities					10,663,003						17,069,170						15,955,049						(23,286,520	)
Cash flows from financing activities:
Proceeds from additions					23,718,000						15,343,000						48,804,000						304,246,441
Payments for redemptions					(17,135,309	)					(25,505,076	)					(33,181,719	)					(32,916,124	)
Distribution of interest to feeder funds					(3,271,887	)					(1,462,189	)					(5,878,882	)					(2,231,446	)
Net cash provided by (used in) financing activities					3,310,804						(11,624,265	)					9,743,399						269,098,871
Net change in cash					13,973,807						5,444,905						25,698,448						245,812,351
Unrestricted cash, at beginning of period					306,731,908						240,367,446						295,007,267						—
Unrestricted cash, at end of period				$	320,705,715					$	245,812,351					$	320,705,715					$	245,812,351
Non cash financing activities: Contribution of open commodity futures and forwards positions				$	—					$	—					$	—					$	2,866,859

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Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

2.    Financial Highlights:

Changes in Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and six months ended June 30, 2006 and 2005 were as follows:

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Net realized and unrealized gains (losses)*				$	(139.61	)				$	192.12					$	(60.65	)				$	103.20
Interest income allocated from Master					16.99						8.73						32.58						16.23
Expenses**					(9.25	)					(8.95	)					(27.95	)					(17.26	)
Increase (decrease) for the period					(131.87	)					191.90						(56.02	)					102.17
Net Asset per Redeemable Unit, beginning of period					1,893.25						1,610.06						1,817.40						1,699.79
Net Asset per Redeemable Unit, end of period				$	1,761.38					$	1,801.96					$	1,761.38					$	1,801.96

*	Includes Partnership brokerage commissions and expenses allocated from the Master.

**	Excludes Partnership brokerage commissions and expenses allocated from the Master.

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Ratio to average net assets:***
Net investment loss before incentive fees****					(5.0	)%					(7.1	)%					(5.3	)%					(7.0	)%
Operating expenses					8.8	%					9.2	%					9.0	%					9.1	%
Incentive fees					—						—						0.5	%					—
Total expenses					8.8	%					9.2	%					9.5	%					9.1	%
Total return:
Total return before incentive fees					(7.0	)%					11.9	%					(2.6	)%					6.0	%
Incentive fees					—						—						(0.5	)%					—
Total return after incentive fees					(7.0	)%					11.9	%					(3.1	)%					6.0	%

***	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.

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Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

Financial Highlights of the Master:

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Net realized and unrealized gains (losses)*				$	(70.54	)				$	132.61					$	(1.55	)				$	95.69
Interest income					10.90						5.27						20.73						9.73
Expenses **					(0.02	)					(0.05	)					(0.04	)					(0.09	)
Increase (decrease) for the period					(59.66	)					137.83						19.14						105.33
Distributions					(10.90	)					(5.27	)					(20.73	)					(9.73	)
Net Asset Value per Unit, beginning of period					1,207.80						963.04						1,138.83						1,000.00
Net Asset Value per Unit, end of period				$	1,137.24					$	1,095.60					$	1,137.24					$	1,095.60
*Includes brokerage commissions
**Excludes brokerage commissions
Ratios to average net assets:***
Net investment gain ****					3.7	%					1.7	%					3.6	%					2.5	%
Operating expense					0.1	%					0.2	%					0.1	%					0.2	%
Total return					(4.9	)%					14.3	%					1.7	%					10.5	%

***	Annualized

****	Interest income less total expenses

	The above ratios may vary for individual investors based on the timing of capital transactions during the period.

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 and the Master and CGM gives the Partnership and the Master, respectively, the legal right to net unrealized gains and losses on open futures positions.

All of the commodity interests owned by the Master in 2006 (and owned by the Partnership in 2005) are held for trading purposes. The average fair values of these interests during the six and twelve months ended June 30, 2006 and December 31, 2005, based on a monthly calculation, were $41,761 and $11,094,108, respectively. The fair values of these commodity interests, including options written thereon, if applicable, at June 30, 2006 and December 31, 2005, were $545,511 and $(11,051,212), 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.

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Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

4.    Financial Instrument Risks:

In the normal course of its business, the Partnership through its investment in the Master, 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/Master 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/Master'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, through its investment in the Master, has credit risk and concentration risk because the sole counterparty or broker with respect to the Master's assets is CGM.

The General Partner monitors and controls the Partnership's/Master'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/Master 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, forward and option positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these instruments mature within one year of June 30, 2006. However, due to the nature of the Partnership's/Master's business, these instruments may not be held to maturity.

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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 investment in the Master and cash. The Master does not engage in the sale of goods or services. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership/Master. While substantial losses could lead to a substantial decrease in liquidity, no such losses occurred in the second quarter of 2006.

The Partnership's capital consists of capital contributions, as increased or decreased by its investment in the Master, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the six months ended June 30, 2006, Partnership capital increased 10.0% from $227,916,653 to $250,632,681. This increase was attributable to the additional sales of 26,193.7479 Redeemable Units of Limited Partnership Interest totaling $48,339,000, which was partially offset by a net loss from operations of $8,765,375, coupled with the redemption of 9,308.7213 Redeemable Units of Limited Partnership Interest totaling $16,857,597. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.

The Master'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, redemptions of Units and distributions of profits, if any.

For the six months ended June 30, 2006, the Master's capital increased 4.4% from $326,390,773 to $340,912,438. This increase was attributable to a net gain from operations of $5,065,746 coupled with the additional sales of 41,705.1956 units totaling $48,804,000, which was partially offset by the redemption of 28,535.2444 Units totaling $33,181,719 and distribution of interest totaling $6,166,362 to the limited partners of the Master. Future redemptions can impact the amount of funds available for investments 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 of the Master (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 value of the Partnership's investment in the Master reflects the Partnership's proportional interest in the Partners' capital of the Master. All of the income and expenses and unrealized and realized gains and losses from the commodity transactions of the Master are allocated pro rata among the investors at the time of such determination.

Foreign currency contracts are those contracts where the Partnership/Master 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/Master's net equity therein, representing

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unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the statements 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 second quarter of 2006 the net asset value per unit decreased 7.0% from $1,893.25 to $1,761.38 as compared to an increase of 11.9% in the second quarter of 2005. The Partnership experienced a net trading loss before brokerage commissions and related fees in the second quarter of 2006 of $15,873,931. Losses were primarily attributable to the trading of commodity futures in currencies and indices and were partially offset by gains in energy, U.S. and non-U.S. interest rates and metals. The Partnership experienced a net trading gain before brokerage commissions and related fees in the second quarter of 2005 of $24,374,848. Gains were primarily attributable to the trading of commodity futures in currencies and non-U.S. interest rates and were partially offset by losses in energy, U.S. interest rates, metals and indices.

During the Partnership's six months ended June 30, 2006 the net asset value per Redeemable unit decreased 3.1% from $1,817.40 to $1,761.38 as compared to an increase of 6.0% for the six months ended June 30, 2005. The Partnership experienced a net trading loss before brokerage commissions and related fees for the six months ended June 30, 2006 of $1,047,072. Losses were primarily attributable to the trading of commodity futures in currencies and non-U.S. interest rates, and were partially offset by gains in energy, U.S. interest rates, indices and metals. The Partnership experienced a net trading gain before brokerage commissions and related fees during the six months ended June 30, 2005 of $19,603,874. Gains were primarily attributable to the trading of commodity futures in currencies, energy, U.S. and non-U.S. interest rates and metals and were partially offset by losses in indices.

The second quarter 2006 was challenging for the Partnership's Advisor as both financial and commodity markets entered a highly volatile period. Gains in interest rates, metals and energy trading were not sufficient to offset substantial losses in currency and stock index trading.

Energy trading was profitable as long positions were helped by rising petroleum prices supported by continuing geopolitical disturbance and short positions benefited from deteriorating fundamentals in natural gas. Trends in the metal sector extended from the first quarter and remained strong for the first half of the second quarter. The substantial gains accumulated from record gold, silver and base metal price trends were more than enough to cover losses during the metals correction in May. Trading in global fixed income markets was also profitable as global rates continued to rise to combat inflation pressure.

The lack of direction in the currency sector was a result of speculation relating to U.S. interest rate policy coupled global inflation concerns. Losses in the equity sector were attributable to global economic slowdown as most of the major equity indices experienced a material correction in May after reaching multi-year highs.

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 (and the Master) depends on the existence of major price trends and the ability of the Advisor 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 Advisor is able to identify them, the Partnership (and the Master) expects to increase capital through operations.

Interest income on 80% of the Partnership's daily average equity allocated to it by the Master was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Master's assets in cash and/or place all of the Master'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

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interest earned on Treasury bills. Interest income allocated from the Master for the three and six months ended June 30, 2006 increased by $1,491,522 and $2,786,266, respectively as compared to the corresponding periods in 2005. The increase in interest income is primarily due to higher net assets and higher interest rates during the three and six months ended June 30, 2006 as compared to the corresponding periods in 2005.

Brokerage commissions are calculated on the Partnership's adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Commissions for the three and six months ended June 30, 2006 increased by $1,182,599 and $2,509,593, respectively as compared to the corresponding periods in 2005. The increase in brokerage commissions and fees is due to higher net assets during the three and six months ended June 30, 2006 as compared to the corresponding periods in 2005.

Management fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and six months ended June 30, 2006 increased by $361,426 and $767,279, respectively as compared to the corresponding periods in 2005. The increase in management fees is due to higher net assets during the three and six months ended June 30, 2006 as compared to the corresponding period in 2005.

Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter as defined in the advisory agreements between the Partnership, the General Partner and the Advisor. Trading performance for the three and six months ended June 30, 2006 resulted in incentive fees of $0 and $1,237,713, respectively. There were no incentive fees earned for the three and six months ended June 30, 2005.

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Item. 3    Quantitative and Qualitative Disclosures about Market Risk

All of the Partnership's assets are subject to the risk of trading loss through its investment in the Master. The Master 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 Master'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 Master's main line of business.

Market movements result in frequent changes in the fair market value of the Master's open positions and, consequently, in its earnings and cash flow. The Master'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 market value of financial instruments and contracts, the diversification effects among the Master's open positions and the liquidity of the markets in which it trades.

The Master 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 Master's past performance is not necessarily indicative of its future results.

Value at Risk is a measure of the maximum amount which the Master could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Master's speculative trading and the recurrence in the markets traded by the Master of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Master'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 Master's losses in any market sector will be limited to Value at Risk or by the Master's attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Master 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 Master's open positions by market category as of June 30, 2006 and the highest, lowest and average values during the three months ended June 30, 2006. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. As of June 30, 2006, the Master's total capitalization was $340,912,438. There have been no material changes 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, 2005.

June 30, 2006
(Unaudited)

															Three Months ended June 30, 2006
Market Sector			Value at Risk						% of Total Capitalization						High Value at Risk						Low Value at Risk						Average Value at Risk*
Currencies:
— OTC Traded Contracts				$	6,224,029						1.83	%				$	16,376,992					$	5,102,819					$	8,637,465
Energy					3,042,575						0.89	%					3,933,850						1,491,285						2,679,025
Interest Rates U.S.					2,309,162						0.68	%					6,692,051						2,309,162						4,649,329
Interest Rates Non-U.S.					4,463,586						1.31	%					7,579,057						2,772,722						5,654,588
Metals
— Exchange Traded Contracts					174,150						0.05	%					453,600						—						306,450
— OTC Traded Contracts					1,212,500						0.35	%					1,612,500						439,700						707,233
Indices					2,233,564						0.66	%					7,293,805						1,883,142						3,871,154
Total				$	19,659,566						5.77	%

	* Average of Month-end Values at Risk

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Item 4.    Controls and Procedures

The General Partner of the Partnership, with the participation of the General Partner's Chief Executive Officer and 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. There was no change in the Partnership's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

The following information supplements and amends our discussion set forth under Part I, Item 3 ‘‘Legal Proceedings’’ in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2005 and under Part II, Item I, ‘‘Legal Proceedings’’ in the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

Enron Corp.

On May 24, 2006, the District Court gave final approval to Citigroup's settlement of the securities class action (NEWBY, ET AL. V. ENRON CORP., ET AL.).

Research

On May 12, 2006, the District Court preliminarily approved the class action settlements in IN RE SALOMON ANALYST LEVEL 3 LITIGATION, IN RE SALOMON ANALYST XO LITIGATION, and IN RE SALOMON ANALYST WILLIAMS LITIGATION.

On May 18, 2006, the District Court gave final approval to the settlement in NORMAN v. SALOMON SMITH BARNEY.

On June 20, 2006, the District Court certified the plaintiff class in IN RE SALOMON ANALYST METROMEDIA LITIGATION.

On June 26, 2006, the United States Supreme Court granted plaintiffs' petition for a writ of certiorari, vacated the opinion of the United States Court of Appeals for the Seventh Circuit in DISHER v. CITIGROUP GLOBAL MARKETS INC., and then remanded the case to the Seventh Circuit for further proceedings in light of the Supreme Court's decision in Kircher v. Putnam Funds Trust.

Adelphia Communications Corporation

Without admitting any liability, CGMI and numerous other financial institution defendants have agreed to settle IN RE ADELPHIA COMMUNICATIONS CORPORATION SECURITIES AND DERIVATIVE LITIGATION for a total of $250 million, subject to final court approval. On June 15, 2006, the court granted its preliminary approval of the settlement and set November 10, 2006 for a final hearing. CGMI's share of the settlement is covered by existing reserves.

Item 1A.    Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. ‘‘Risk Factors’’ in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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

For the three months ended June 30, 2006, there were additional sales of 12,438.9132 Redeemable Units of Limited Partnership totaling $23,253,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder.

Proceeds from the sale of additional Redeemable Units are used in the trading of commodity interests including futures contracts, options and forwards contracts.

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

Period			(a) Total Number of Units Purchased*						(b) Average Price Paid per Unit**						(c) Total Number of Units Purchased as Part of Publicly Announced Plans or Programs						(d) Maximum Number (or Approximate Dollar Value) of Units that May Yet Be Purchased Under the Plans or Programs
April 1, 2006 - April 30, 2006					1,547.4288					$	1,839.43						N/A						N/A
May 1, 2006 - May 31, 2006					1,591.0854					$	1,773.97						N/A						N/A
June 1, 2006 - June 30, 2006					2,221.8558					$	1,761.38						N/A						N/A
					5,360.3700					$	1,791.59						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-1 are incorporated herein by reference to the exhibit index of the Annual Report on Form 10-K for the period ended December 31, 2005.

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).

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SIGNATURES

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

SMITH BARNEY POTOMAC FUTURES FUND L.P.
By:			Citigroup Managed Futures LLC (General Partner)
By:			/s/ David J. Vogel David J. Vogel, President and Director
Date:   August 14, 2006
By:			/s/ Daniel R. McAuliffe, Jr.         Daniel R. McAuliffe, Jr. Chief Financial Officer and Director
Date: August 14, 2006

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