Potomac Futures Fund (POTO) 10-Q 2007 Q3 Quarterly report

Table of Contents

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

FORM 10-Q

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

For the Quarterly Period ended September 30, 2007

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

For the Transition Period from to

Commission File Number 0-50735

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 of principal executive offices) (Zip Code)
(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

As of October 31, 2007, 100,126.4412 Limited Partnership Redeemable Units were outstanding.

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 September 30, 2007 and December 31, 2006 (unaudited)			3
						Statements of Income and Expenses and Partners’ Capital for the three and nine months ended September 30, 2007 and 2006 (unaudited)			4
						Statements of Cash Flows for the three and nine months ended September 30, 2007 and 2006 (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 – 19
			Item 4.			Controls and Procedures			20
PART II - Other Information									21 – 22

2

Table of Contents

PART I

Item 1. Financial Statements

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

			September 30, 2007						December 31, 2006
Assets:
Investment in Master, at fair value				$	178,129,387					$	242,863,259
Cash					34,372						1,686
				$	178,163,759					$	242,864,945
Liabilities and Partners’ Capital:
Liabilities:
Accrued expenses:
Brokerage fees				$	965,054					$	1,315,518
Management fees					295,290						402,534
Other fees					24,880						28,960
Redemptions payable					4,773,484						11,259,686
					6,058,708						13,006,698
Partners’ Capital:
General Partner 729.3902 Units equivalents outstanding in 2007 and 2006					1,183,676						1,345,411
Limited Partners 105,322.7023 and 123,884.2290 Redeemable Units of Limited Partnership Interest outstanding in 2007 and 2006, respectively					170,921,375						228,512,836
					172,105,051						229,858,247
				$	178,163,759					$	242,864,945

See accompanying notes to financial statements

3

Table of Contents

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2007						2006						2007						2006
Income:
Net realized losses on closed positions allocated from Master				$	(25,868,071	)				$	(5,078,356	)				$	(8,196,047	)				$	(14,462,853	)
Change in net unrealized gains (losses) on open positions allocated from Master					(6,449,818	)					(2,145,404	)					(9,045,694	)					6,192,021
Interest income allocated from Master					1,669,918						2,410,070						5,860,149						6,938,001
Expenses allocated from Master					(49,820	)					(90,158	)					(185,616	)					(211,634	)
					(30,697,791	)					(4,903,848	)					(11,567,208	)					(1,544,465	)
Expenses:
Brokerage commissions					2,993,966						4,007,969						10,212,120						12,295,215
Management fees					916,024						1,226,351						3,124,535						3,761,038
Incentive fees					—						—						—						1,237,713
Other fees					55,510						37,659						135,438						102,771
					3,965,500						5,271,979						13,472,093						17,396,737
Net loss					(34,663,291	)					(10,175,827	)					(25,039,301	)					(18,941,202	)
Additions — Limited Partners					173,000						1,140,807						2,568,000						49,479,807
Redemptions — Limited Partners					(10,442,520	)					(9,178,862	)					(35,281,895	)					(26,036,459	)
Net increase (decrease) in Partners’ Capital					(44,932,811	)					(18,213,882	)					(57,753,196	)					4,502,146
Partners’ Capital, beginning of period					217,037,862						250,632,681						229,858,247						227,916,653
Partners’ Capital, end of period				$	172,105,051					$	232,418,799					$	172,105,051					$	232,418,799
Net Asset Value per Redeemable Unit (106,052.0925 and 137,597.6242 Units outstanding at September 30, 2007 and 2006, respectively)				$	1,622.83					$	1,689.12					$	1,622.83					$	1,689.12
Net loss per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent				$	(308.19	)				$	(72.26	)				$	(221.74	)				$	(128.28	)

See accompanying notes to financial statements

4

Table of Contents

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2007						2006						2007						2006
Cash flows from operating activities:
Net loss				$	(34,663,291	)				$	(10,175,827	)				$	(25,039,301	)				$	(18,941,202	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Changes in operating assets and liabilities:
Purchase of investment in Master					(173,000	)					(1,140,807	)					(2,568,000	)					(49,479,807	)
Proceeds from sale of investment in Master					15,683,317						13,767,485						55,734,664						40,558,111
Net unrealized (appreciation) depreciation on investment in Master					30,697,791						4,903,848						11,567,208						1,544,465
Accrued expenses:
Increase (decrease) in brokerage commissions					(250,421	)					(94,972	)					(350,464	)					15,936
Increase (decrease) in management fees					(76,610	)					(29,018	)					(107,244	)					4,932
Increase (decrease) in other fees					(15,216	)					(27,856	)					(4,080	)					(8,747	)
Net cash provided by (used in) operating activities					11,202,570						7,202,853						39,232,783						(26,306,312	)
Cash flows from financing activities:
Proceeds from additions — Limited Partners					173,000						1,140,807						2,568,000						49,479,807
Payments for redemptions — Limited Partners					(11,399,057	)					(8,346,456	)					(41,768,097	)					(23,169,426	)
Net cash provided by (used in) financing activities					(11,226,057	)					(7,205,649	)					(39,200,097	)					26,310,381
Net change in cash					(23,487	)					(2,796	)					32,686						4,069
Cash, at beginning of period					57,859						19,570						1,686						12,705
Cash, at end of period				$	34,372					$	16,774					$	34,372					$	16,774

See accompanying notes to financial statements

5

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(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 indirectly traded by the Partnership through its investment in the Master 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.

On 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.

On September 30, 2007 and December 31, 2006, the Partnership owned approximately 71.9% and 74.0%, respectively, of the Master. The Partnership intends 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 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, 2007 and December 31, 2006 and the results of its operations and cash flows for the three and nine months ended September 30, 2007 and 2006. 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 (the ‘‘SEC’’) for the year ended December 31, 2006.

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.

Certain prior period amounts have been reclassified to conform to the presentation for the current period.

6

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(Unaudited)

The Master’s statements of financial condition and condensed schedule of investments as of September 30, 2007 and December 31, 2006 and Statements of Income and Expenses and Partners’ Capital and Statements of Cash Flows for the three and nine months ended September 30, 2007 and 2006 are presented below:

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

			September 30, 2007						December 31, 2006
Assets:
Equity in commodity futures trading account:
Cash (restricted $9,652,621 and $44,317,594 in 2007 and 2006, respectively)				$	240,684,257					$	308,294,750
Net unrealized appreciation on open futures positions					1,695,436						8,775,240
Unrealized appreciation on open forward contracts					24,271,523						20,584,058
Commodity options owned, at fair value (cost $199,463 and $164,395 in 2007 and 2006, respectively)					423,031						210,824
					267,074,247						337,864,872
Interest receivable					651,861						994,130
				$	267,726,108					$	338,859,002
Liabilities and Partners’ Capital:
Liabilities:
Commodity options written, at fair value (premium $114,487 and $97,503 in 2007 and 2006, respectively)				$	313,163					$	83,396
Unrealized depreciation on open forward contracts					19,680,538						10,679,753
Accrued expenses:
Professional fees					17,247						11,333
Distribution payable					651,861						994,130
					20,662,809						11,768,612
Partners’ Capital:
Limited Partners’ Capital, 221,956.7782 and 268,161.6187 Redeemable Units of Limited Partnership Interest outstanding in 2007 and 2006, respectively					247,063,299						327,090,390
				$	267,726,108					$	338,859,002

7

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(Unaudited)

CMF Campbell Master Fund L.P.
Condensed Schedule of Investments
September 30, 2007
(Unaudited)

			Fair Value						% of Partners’ Capital
Futures Contracts Purchased
Energy				$	(2,285	)					(0.00	)%*
Interest Rates U.S.					280,584						0.11
Interest Rates Non-U.S.					(504,194	)					(0.20	)
Indices					1,950,231						0.79
Metals					26,160						0.01
Total futures contracts purchased					1,750,496						0.71
Futures Contracts Sold
Energy					14,627						0.00	*
Interest Rates U.S.					(21,688	)					(0.01	)
Interest Rates Non-U.S.					(10,918	)					(0.00	)*
Indices					(36,591	)					(0.01	)
Metals					(490	)					(0.00	)*
Total futures contracts sold					(55,060	)					(0.02	)
Unrealized Appreciation on Forward Contracts
Currencies					24,144,481						9.77
Metals					127,042						0.05
Total unrealized appreciation on forward contracts					24,271,523						9.82
Unrealized Depreciation on Forward Contracts
Currencies					(19,073,030	)					(7.72	)
Metals					(607,508	)					(0.25	)
Total unrealized depreciation on forward contracts					(19,680,538	)					(7.97	)
Options Owned
Energy					423,031						0.17
Options Written
Energy					(313,163	)					(0.12	)
Total fair value				$	6,396,289						2.59	%

* Due to rounding

8

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(Unaudited)

CMF Campbell Master Fund L.P.
Condensed Schedule of Investments
December 31, 2006
(Unaudited)

			Fair Value						% of Partners’ Capital
Futures Contracts Purchased
Energy				$	(3,080,773	)					(0.94	)%
Interest Rates Non-U.S.					(339,745	)					(0.10	)
Indices					3,819,509						1.17
Total futures contracts purchased					398,991						0.13
Futures Contracts Sold
Energy					72,080						0.02
Interest Rates U.S.					2,734,573						0.84
Interest Rates Non-U.S.					5,660,416						1.73
Metals					(90,820	)					(0.03	)
Total futures contracts sold					8,376,249						2.56
Unrealized Appreciation on Forward Contracts
Currencies					20,233,076						6.19
Metals					350,982						0.11
Total unrealized appreciation on forward contracts					20,584,058						6.30
Unrealized Depreciation on Forward Contracts
Currencies					(10,161,006	)					(3.11	)
Metals					(518,747	)					(0.16	)
Total unrealized depreciation on forward contracts					(10,679,753	)					(3.27	)
Options Owned
Energy					210,824						0.06
Options Written
Energy					(83,396	)					(0.03	)
Total fair value				$	18,806,973						5.75	%

9

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(Unaudited)

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2007						2006						2007						2006
Income:
Net losses on trading of commodity interests:
Net realized losses on closed positions and foreign currencies				$	(35,954,683	)				$	(6,770,868	)				$	(11,535,869	)				$	(19,402,409	)
Change in net unrealized gains (losses) on open positions					(8,956,068	)					(2,866,718	)					(12,428,768	)					8,829,788
					(44,910,751	)					(9,637,586	)					(23,964,637	)					(10,572,621	)
Interest income					2,326,878						3,221,079						8,102,431						9,387,441
					(42,583,873	)					(6,416,507	)					(15,862,206	)					(1,185,180	)
Expenses:
Clearing fees					57,415						114,071						222,864						267,489
Professional fees					11,830						6,181						33,109						18,344
					69,245						120,252						255,973						285,833
Net loss					(42,653,118	)					(6,536,759	)					(16,118,179	)					(1,471,013	)
Additions — Limited Partners					173,000						1,140,807						3,269,328						49,944,807
Redemptions — Limited Partners					(17,935,672	)					(14,614,900	)					(59,075,809	)					(47,796,619	)
Distribution of interest to feeder funds					(2,326,878	)					(3,221,079	)					(8,102,431	)					(9,387,441	)
Net decrease in Partners’ Capital					(62,742,668	)					(23,231,931	)					(80,027,091	)					(8,710,266	)
Partners’ Capital, beginning of period					309,805,967						340,912,438						327,090,390						326,390,773
Partners’ Capital, end of period				$	247,063,299					$	317,680,507					$	247,063,299					$	317,680,507
Net Asset Value per Redeemable Unit (221,956.7782 and 287,914.4047 Units outstanding at September 30, 2007 and 2006, respectively)				$	1,113.11					$	1,103.39					$	1,113.11					$	1,103.39
Net loss per Redeemable Unit of Limited Partnership Interest				$	(184.66	)				$	(22.81	)				$	(73.30	)				$	(3.67	)

10

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(Unaudited)

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

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
			2007						2006						2007						2006
Cash flows from operating activities:
Net loss				$	(42,653,118	)				$	(6,536,759	)				$	(16,118,179	)				$	(1,471,013	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash					21,001,950						(11,932,879	)					34,664,973						10,875,052
(Increase) decrease in net unrealized appreciation on open futures positions					3,823,269						3,692,895						7,079,804						—
(Increase) decrease in unrealized appreciation on open forward contracts					(6,328,027	)					(3,738,393	)					(3,687,465	)					(1,611,380	)
(Increase) decrease in options owned, at fair value					(30,461	)					—						(212,207	)					—
(Increase) decrease in interest receivable					256,657						74,381						342,269						(213,099	)
Increase (decrease) in options written, at fair value					111,167						(74,627	)					229,767						27,935
Increase (decrease) in net unrealized depreciation on open futures positions					—						3,482,429						—						2,874,628
Increase (decrease) in unrealized depreciation on open forward contracts					11,444,656						(552,786	)					9,000,785						(10,078,388	)
Accrued expenses:
Increase (decrease) in professional fees					(4,182	)					(3,185	)					5,914						(37,610	)
Net cash provided by (used in) operating activities					(12,378,089	)					(15,588,924	)					31,305,661						366,125
Cash flows from financing activities:
Proceeds from additions — Limited Partners					173,000						1,140,807						3,269,328						49,944,807
Payments for redemptions — Limited Partners					(17,935,672	)					(14,614,900	)					(59,075,809	)					(47,796,619	)
Distribution of interest to feeder funds					(2,583,535	)					(3,295,460	)					(8,444,700	)					(9,174,342	)
Net cash used in financing activities					(20,346,207	)					(16,769,553	)					(64,251,181	)					(7,026,154	)
Net change in unrestricted cash					(32,724,296	)					(32,358,477	)					(32,945,520	)					(6,660,029	)
Unrestricted cash, at beginning of period					263,755,932						320,705,715						263,977,156						295,007,267
Unrestricted cash, at end of period				$	231,031,636					$	288,347,238					$	231,031,636					$	288,347,238

11

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(Unaudited)

2.    Financial Highlights:

Changes in Net Asset Value per Redeemable Unit for the three and nine months ended September 30, 2007 and 2006 were as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2007						2006						2007						2006
Net realized and unrealized losses allocated from Master*				$	(314.37	)				$	(80.32	)				$	(243.45	)				$	(140.97	)
Interest income allocated from Master					15.01						17.01						49.53						49.59
Expenses**					(8.83	)					(8.95	)					(27.82	)					(36.90	)
Decrease for the period					(308.19	)					(72.26	)					(221.74	)					(128.28	)
Net Asset Value per Redeemable Unit of Limited Partnership Interest, beginning of period					1,931.02						1,761.38						1,844.57						1,817.40
Net Asset Value per Redeemable Unit of Limited Partnership Interest, end of period				$	1,622.83					$	1,689.12					$	1,622.83					$	1,689.12

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

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2007						2006						2007						2006
Ratio to average net assets:***
Net investment loss before incentive fees****					(4.9	)%					(4.8	)%					(5.0	)%					(5.1	)%
Operating expenses					8.4	%					8.7	%					8.8	%					9.0	%
Incentive fees					—	%					—	%					—	%					0.5	%
Total expenses					8.4	%					8.7	%					8.8	%					9.5	%
Total return:
Total return before incentive fees					(16.0	)%					(4.1	)%					(12.0	)%					(6.6	)%
Incentive fees					—	%					—	%					—	%					(0.5	)%
Total return after incentive fees					(16.0	)%					(4.1	)%					(12.0	)%					(7.1	)%

*** Annualized (other than incentive fee)

**** Interest income allocated from Master less total expenses (exclusive of incentive fees, if applicable)

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.

12

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(Unaudited)

Financial Highlights of the Master:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2007						2006						2007						2006
Net realized and unrealized losses*				$	(194.83	)				$	(33.84	)				$	(106.50	)				$	(35.39	)
Interest income					10.23						11.04						33.34						31.77
Expenses **					(0.06	)					(0.01	)					(0.14	)					(0.05	)
Decrease for the period					(184.66	)					(22.81	)					(73.30	)					(3.67	)
Distribution of interest to feeder funds					(10.23	)					(11.04	)					(33.34	)					(31.77	)
Net Asset Value per Unit, beginning of period					1,308.00						1,137.24						1,219.75						1,138.83
Net Asset Value per Unit, end of period				$	1,113.11					$	1,103.39					$	1,113.11					$	1,103.39

* Includes clearing fees.

** Excludes clearing fees.

			Three Months Ended September 30,														Nine Months Ended September 30,
			2007							2006							2007							2006
Ratios to average net assets:***
Net investment gain ****					3	.3	%					3	.7	%					3	.6	%					3	.6	%
Operating expense					0	.1	%					0	.1	%					0	.1	%					0	.1	%
Total return					(14	.1	)%					(2	.0	)%					(6	.0	)%					(0	.3	)%

*** Annualized

**** Interest income less total expenses

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 limited partners’ income, expenses and average net assets.

3.    Trading Activities:

The Partnership was formed for the purpose of trading contracts through its investment in Master in variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Master’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 2007 are held for trading purposes. The average fair values of these interests during the nine and twelve months ended September 30, 2007 and December 31, 2006, based on a monthly calculation, were $7,543,060 and $3,493,466, respectively. The fair values of these commodity interests, including options written thereon, if applicable, at September 30, 2007 and December 31, 2006, were $6,396,289 and $18,806,973, respectively. Fair values for exchange

13

Table of Contents

Smith Barney Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2007
(Unaudited)

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 other measures of fair value deemed appropriate by the General Partner.

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. The Master may trade commodity options. Specific market movements of the commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer, or seller, of an option has unlimited risk. 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 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 by the Master.

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 Master’s risk of loss in the event of counterparty default is typically limited to the amounts recognized 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 the inception date. However, due to the nature of the Master’s business, these instruments may not be held to maturity.

14

Table of Contents

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 Master and cash. The Master does not engage in the sale of goods or services. Its only assets are its equity in commodity futures account consisting of cash, net unrealized appreciation on open futures positions, unrealized appreciation on open 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/Master. While substantial losses could lead to a substantial decrease in liquidity, no such losses occurred in the third quarter of 2007.

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

For the nine months ended September 30, 2007, Partnership capital decreased 25.1% from $229,858,247 to $172,105,051. This decrease was attributable to a net loss from operations of $25,039,301 coupled with the redemption of 19,974.6200 Redeemable Units of Limited Partnership Interests totaling $35,281,895, which was partially offset by additional sales of 1,413.0933 Redeemable Units of Limited Partnership Interest totaling $2,568,000. Future redemptions can impact the amount of funds available for investment in the Master 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 nine months ended September 30, 2007, Master’s capital decreased 24.5% from $327,090,390 to $247,063,299. This decrease was attributable to a net loss from operations of $16,118,179 coupled with the redemption of 48,938.1379 Units totaling $59,075,809 and the distribution of interest income totaling $8,102,431, which was partially offset by additional sales of 2,733.2974 Units totaling $3,269,328 to the limited partners of the Master. 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 U.S. generally accepted accounting principles 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 options owned and written 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, including certain option contracts. 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 gains (losses) 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 Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency

15

Table of Contents

contracts are valued daily, and the Master’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 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 gains (losses) 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.

In July 2006, the Financial Accounting Standards Board (the ‘‘FASB’’) released FASB Interpretation No. 48 ‘‘Accounting for Uncertainty in Income Taxes’’ (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements.  FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are ‘‘more-likely-than-not’’ of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Partnership adopted FIN 48 as of January 1, 2007 and the application of this standard did not impact the financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (‘‘SFAS’’) No. 157, ‘‘Fair Value Measurements’’. This accounting standard establishes a single authoritative definition of fair value sets out a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and the interim periods within those fiscal years. As of September 30, 2007, the Partnership is still evaluating the impact the adoption of SFAS No. 157 will have on the financial statement amounts; however, additional disclosures will be required about the inputs used to develop the measurements and the effect of certain measurements on changes in Partners’ Capital for the period.

Results of Operations

During the Partnership’s third quarter of 2007 the Net Asset Value per Redeemable Unit decreased 16.0% from $1,931.02 to $1,622.83 as compared to a decrease of 4.1% in the third quarter of 2006. The Partnership experienced a net trading loss (comprised of net realized losses on closed positions allocated from Master and change in net unrealized gains (losses) on open positions allocated from Master) before brokerage commissions and related fees in the third quarter of 2007 of $32,317,889. Losses were primarily attributable to the trading of commodity futures in currencies, energy, U.S. and non-U.S. interest rates, metals and indices. The Partnership experienced a net trading loss before brokerage commissions and related fees in the third quarter of 2006 of $7,223,760. Losses were primarily attributable to the trading of commodity futures in energy, U.S. and non-U.S. interest rates and metals and were partially offset by gains in currencies and indices.

Third quarter results were impacted by widespread economic concerns related to sub-prime mortgage lending issues resonated throughout the capital and commodity markets. The Master registered losses in currencies, fixed-income, energy, metals and stock indices.

In the currencies, losses were primarily incurred in Japanese Yen and Australian Dollar trades. High non-directional volatility was seen especially in Japanese Yen due to the brief unwinding of the currency carry trade. In the fixed income sector, losses were caused by reversal of well-established trends due to widespread uncertainty as the markets speculated the future direction of the interest rates. In the energy sector, losses were incurred due to trades in crude oil as the prices reversed from historic highs before reaching exchange-listed record highs again later in the quarter. In the metals sector, trading in copper and zinc contributed to the losses due to widespread selling and reversal of technical trends. Losses were also encountered in the stock indices as concerns of economic weakness dominated the markets and previously established long-term trends were broken.

During the Partnership’s nine months ended September 30, 2007 the Net Asset Value per Redeemable Unit decreased 12.0% from $1,844.57 to $1,622.83 as compared to a decrease of 7.1% for the nine months ended September 30, 2006. The Partnership experienced a net trading loss (comprised of net realized losses on closed positions allocated from Master and change in net unrealized gains (losses) on

16

Table of Contents

open positions allocated from Master) before brokerage commissions and related fees for the nine months ended September 30, 2007 of $17,241,741. Losses were primarily attributable to the trading of commodity futures in losses were primarily attributable to the trading of commodity futures in currencies, energy, U.S. interest rates, metals and indices and were partially offset by gains in non-U.S. interest rates. The Partnership experienced a net trading loss before brokerage commissions and related fees during the nine months ended September 30, 2006 of $8,270,832. Losses were primarily attributable to the trading of commodity futures in currencies, energy and non-U.S. interest rates and were partially offset by gains in U.S. interest rates, indices and metals.

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 interest earned on Treasury bills. Interest income allocated from the Master for the three and nine months ended September 30, 2007 decreased by $740,152 and $1,077,852, respectively, as compared to the corresponding periods in 2006. The decrease in interest income is primarily due to lower net assets during the three and nine months ended September 30, 2007 as compared to the corresponding periods in 2006.

Brokerage fees 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. Brokerage and fees for the three and nine months ended September 30, 2007 decreased by $1,014,003 and $2,083,095, respectively, as compared to the corresponding periods in 2006. The decrease in brokerage and fees is due to lower net assets during the three and nine months ended September 30, 2007 as compared to the corresponding periods in 2006.

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 nine months ended September 30, 2007 decreased by $310,327 and $636,503, respectively, as compared to the corresponding periods in 2006. The decrease in management fees is due to lower net assets during the three and nine months ended September 30, 2007 as compared to the corresponding periods in 2006.

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. There were no incentive fees earned for the three and nine months ended September 30, 2007. Trading performance for the three and nine months ended September 30, 2006 resulted in incentive fees of $0 and $1,237,713, respectively.

17

Table of Contents

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.

18

Table of Contents

The following table indicates the trading Value at Risk associated with the Master’s open positions by market category as of September 30, 2007 and the highest, lowest and average values during the three months ended September 30, 2007. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. As of September 30, 2007, the Master’s total capitalization was $247,063,299. There has been no material change in the trading Value at Risk information previously disclosed in the Partnerships Annual Report on Form 10-K for the year ended December 31, 2006.

September 30, 2007
(Unaudited)

															Three Months ended September 30, 2007
Market Sector			Value at Risk						% of Total Capitalization						High Value at Risk						Low Value at Risk						Average Value at Risk*
Currencies:
— OTC Contracts				$	2,977,018						1.21	%				$	8,378,918					$	1,553,365					$	3,319,376
Energy					201,562						0.08	%					1,324,000						201,562						343,021
Interest Rates U.S.					494,470						0.20	%					3,568,400						18,410						643,803
Interest Rates Non-U.S.					1,217,172						0.49	%					7,069,845						1,082,448						1,811,710
Metals:
— Exchange Traded Contracts					70,000						0.03	%					282,000						2,000						50,000
— OTC Contracts					725,862						0.29	%					1,408,820						309,870						574,809
Indices					3,354,297						1.36	%					12,222,425						1,694,853						3,673,196
Total				$	9,040,381						3.66	%

* Average of Month-end Values at Risk

19

Table of Contents

Item 4.    Controls and Procedures

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

Management is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.

The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2007 and, based on that evaluation, the CEO and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.

The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. These controls include policies and procedures that:

	•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;

	•	provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and

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

There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended September 30, 2007 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

20

Table of Contents

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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as updated by our Quarterly Report on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007.

Enron-Related Civil Actions

On August 27, 2007, the District Court for the Southern District of New York in In Re. Enron Corp. reversed the rulings of the federal bankruptcy court that certain bankruptcy claims held by Citigroup transferees could be equitably subordinated or disallowed solely because of the alleged misconduct of Citigroup, and remanded for further proceedings.

IPO Regulatory Inquiries

On August 14, 2007, plaintiffs filed amended complaints in the six focus cases as well as amended master allegations for all cases in the coordinated proceedings. On September 27, 2007, plaintiffs filed a motion to certify new classes in the six focus cases.

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, 2006 and under Part II, Item 1A, ‘‘Risk Factors’’ in the Partnership’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007.

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

For the three months ended September 30, 2007, there were additional sales of 93.6534 Redeemable Units totaling $173,000. 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.

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

Period			(a) Total Number of Redeemable Units Purchased*						(b) Average Price Paid per Redeemable Unit**						(c) Total Number of Redeemable Units Purchased as Part of Publicly Announced Plans or Programs						(d) Maximum Number (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the Plans or Programs
July 1, 2007 - July 31, 2007					683.5683					$	1,717.15						N/A						N/A
August 1, 2007 - August 31, 2007					2,812.1656					$	1,598.50						N/A						N/A
September 1, 2007 - September 30, 2007					2,941.4563					$	1,622.83						N/A						N/A
					6,437.1902					$	1,646.16

* 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.

21

Table of Contents

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 Annual Report on Form 10-K for the period ended December 31, 2006.

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).

22

Table of Contents

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/ Jerry Pascucci
			Jerry Pascucci
			President and Director
Date:   November 14, 2007
By:			/s/ Jennifer Magro
			Jennifer Magro
			Chief Financial Officer and Director
Date: November 14, 2007

23