FORM 10-Q





SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2004





[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the transition period from ___________ to ______________





Commission file number 814-00207



Venture Lending & Leasing III, Inc.

(Exact Name of Registrant as specified in its charter)



Maryland

77-0534084



(State or other jurisdiction of incorporation

(I.R.S. Employer

or  organization)

Identification No.)



2010 North First Street, Suite 310, San Jose, CA 95131

(Address of principal executive offices)

(Zip Code)



(408) 436-8577



(Registrant's telephone number, including area code)



Indicate by check mark whether the registrant has (i) 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 (ii) has been subject to such filing requirements for the past 90 days.

Yes ÖNo __



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)  Yes __No Ö





Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:



Class

Outstanding as of November  2, 2004

Common Stock, $.001 par value

100,000











VENTURE LENDING & LEASING III, INC.



INDEX





PART I -- FINANCIAL INFORMATION



Item 1.

Financial Statements



Condensed Statements of Financial Position (Unaudited)



As of September 30, 2004 and December 31, 2003



Condensed Statements of Operations (Unaudited)



For the Three and Nine Months Ended September 30, 2004 and 2003 (As restated)



Condensed Statement of Changes in Shareholder's Equity (Unaudited)



For the Nine Months Ended September 30, 2004



Condensed Statements of Cash Flows (Unaudited)



For the Nine Months Ended September 30, 2004 and 2003 (As restated)



Notes to Condensed Financial Statements (Unaudited)





Item 2.

Management's Discussion and Analysis of Financial



Condition and Results of Operations





Item 3.      Quantitative & Qualitative Disclosures About Market Risk



Item 4.

Disclosure Controls and Procedures





PART II -- OTHER INFORMATION

Item 1.

Legal Proceedings





Item 2.

Changes in Securities and Use of Proceeds





Item 3.

Defaults upon Senior Securities





Item 4.

Submission of Matters to a Vote of Security Holders





Item 5.

Other Information





Item 6.

Exhibits





SIGNATURES







VENTURE LENDING & LEASING III, INC.



CONDENSED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)

AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003

















See Notes to Condensed Financial Statements















VENTURE LENDING & LEASING III, INC.



CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)





















See Notes to Condensed Financial Statements

























VENTURE  LENDING & LEASING III, INC.



CONDENSED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY  (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004













































See Notes to Condensed Financial Statements

VENTURE LENDING & LEASING III, INC.



CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003









See Notes to Condensed Financial Statements





VENTURE LENDING & LEASING III, INC.



NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2004



1.

ORGANIZATION AND OPERATIONS OF THE FUND

Venture Lending & Leasing III, Inc., (the Fund), was incorporated in Maryland on February 1, 2000 as a nondiversified closed-end management investment company electing status as a business development company (BDC) under the Investment Company Act of 1940.  One hundred percent of the stock of the Fund is held by Venture Lending & Leasing III, LLC (the Company).  Prior to commencing its operations on May 19, 2000, the Fund had no operations other than the sale to the Company of 100,000 shares of common stock, $0.001 par value for $25,000.  This issuance of stock was a requirement in order to apply for a finance lender's license from the California Commissioner of Corporations.



In Management's opinion, the accompanying financial statements include all adjustments (consisting only of normal recurring adjustments, except as noted below in Note 2) necessary for a fair presentation of financial position and results of operations for interim periods. Certain information and note disclosures normally included in audited annual financial statements prepared in accordance with accounting principles generally accepted in The United States of America have been omitted; however, the Fund believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the three and nine months ended September 30, 2004 and 2003 are not necessarily indicative of what the results would be for a full year.  It is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Fund's Annual Report on Form 10-K/A for the year ended December 31, 2003.





2.

RESTATEMENT



Subsequent to the issuance of its financial statements for the year ended December 31, 2003, management of the Fund determined that the Funds methodology of accruing interest income one month after it had been earned resulted in accruals that were materially different from amounts that would have been accrued in accordance with accounting principles generally accepted in the United States of America.  As a result, interest on loans has been restated from amounts previously reported.



A summary of the significant effects of the restatement and the impact on the statements of operations is as follows:













3.

SUMMARY OF INVESTMENTS



Loans generally are made to borrowers pursuant to commitments whereby the Fund agrees to finance assets and provide working capital up to a specified amount for the term of the commitments, upon the terms and subject to the conditions specified by such commitment. As of September 30, 2004, the Fund's investments in loans are to companies based primarily within the United States and are diversified among borrowers in the industries shown below.  The percentage of shareholder's equity (net assets) that each industry group represents is shown with the industry totals below.  (The sum of the percentages does not equal 100 percent because the percentages are based on net assets as opposed to total loans.  Also, the sum of the percentages of net assets is greater than 100 percent due to the Fund's use of leverage (debt) as a means of financing investments.)



Loan balances are summarized by borrower.   Typically a borrower's balance will be composed of several loans drawn under a commitment made by the Fund.  As each loan drawn under a commitment has a different maturity date and amount, the interest rate for the borrower changes each month.  For the three month period ended September 30, 2004 and 2003, the weighted average interest rate on performing loans was 16.0% and 16.7%, respectively. For the nine month period ended September 30, 2004 and 2003, the weighted average interest rate on performing loans was 16.8% and 16.5%, respectively.  Interest rates earned by the Fund will fluctuate based on many factors including volatility, early payoffs, and recovery of interest from non-performing assets.







Loans as of September 30, 2004 consist of the following:



|                                   | Percentage of | Estimated Fair | Final        
|---------------------------------- | ------------- | -------------- | -------------
|Borrower                           | Net Assets    | Value 9/30/04  | Maturity Date
|Biotechnology                      |               |                |              
|CancerVax                          |               | $1,720,019     | 11/01/06     
|Serenex                            |               | 1,979,964      | 06/01/07     
|Trinity Biosystems                 |               | 187,880        | 06/01/06     
|Subtotal:                          | 5.1%          | $3,887,863     |              
|                                   |               |                |              
|Carrier Networking                 |               |                |              
|Pedestal Networks                  |               | $1,847,298     | 09/01/06     
|Subtotal:                          | 2.4%          | $1,847,298     |              
|                                   |               |                |              
|Communication Service Providers    |               |                |              
|Everest Broadband Networks         |               | $7,312         | *            
|Masergy Communications             |               | 4,229,550      | 09/01/06     
|MetroFi                            |               | 396,935        | 07/01/07     
|Subtotal:                          | 6.1%          | $4,633,797     |              
|                                   |               |                |              
|Communications Equipment           |               |                |              
|Atrica                             |               | $1,893,423     | 01/01/06     
|Bivio Networks [Network Robots]    |               | 334,637        | *            
|Caymas Systems                     |               | 738,091        | 06/01/06     
|General Bandwidth                  |               | 565,996        | 06/01/05     
|Inkra Networks                     |               | 278,919        | 01/01/05     
|Nishan Systems                     |               | 104,753        | 07/01/05     
|Sandial Systems                    |               | 269,102        | 01/01/05     
|Sanera Systems                     |               | 188,892        | 07/01/05     
|Santera Systems                    |               | 223,794        | 04/01/05     
|Subtotal:                          | 6.1%          | $4,597,607     |              
|                                   |               |                |              
|Computers & Peripherals            |               |                |              
|3PARdata                           |               | $1,759,770     | 02/01/06     
|MaXXan Systems                     |               | 2,151,603      | 11/01/05     
|ONStor [Claristor]                 |               | 861,418        | 09/01/06     
|OQO                                |               | 1,899,259      | 08/01/07     
|Subtotal:                          | 8.8%          | $6,672,050     |              
|                                   |               |                |              
|Internet                           |               |                |              
|Coremetrics                        |               | $835,627       | *            
|Evergreen Assurance                |               | 649,468        | 05/01/06     
|Friendster                         |               | 5,748,692      | 10/01/07     
|Postini                            |               | 852,913        | 11/01/06     
|QuinStreet [Echo Online Networks]  |               | 22,752         | 11/01/04     
|Slam Dunk Networks                 |               | 0              | *            
|Tribe.net                          |               | 248,142        | 11/01/07     
|Subtotal:                          | 11.0%         | $8,357,594     |              
|                                   |               |                |              
|Medical Devices                    |               |                |              
|AcuFocus                           |               | $3,299,441     | 06/01/07     
|Alere Medical                      |               | 3,341,625      | 12/01/06     
|Evalve                             |               | 2,112,788      | 02/01/06     
|Inogen                             |               | 655,598        | 07/01/07     
|NeoGuide Systems                   |               | 87,134         | 02/01/05     
|Neomend                            |               | 58,415         | *            
|Neuronetics                        |               | 2,591,544      | 04/01/07     
|Ntero Surgical                     |               | 394,593        | *            
|Oculus Innovative Sciences         |               | 832,974        | 05/01/07     
|Volcano Therapeutics               |               | 3,451,139      | 09/01/06     
|Subtotal:                          | 22.2%         | $16,825,251    |              
|                                   |               |                |              
|Other                              |               |                |              
|Ion America                        |               | $810,497       | 04/01/06     
|Nanosolar                          |               | 430,589        | 06/01/07     
|Subtotal:                          | 1.6%          | 1,241,086      |              
|                                   |               |                |              
|Other Technology                   |               |                |              
|Kiwi Networks                      |               | $857,853       | 06/01/07     
|Triformix                          |               | 514,964        | 06/01/07     
|Subtotal:                          | 1.8%          | $1,372,817     |              
|                                   |               |                |              
|Photonics                          |               |                |              
|Cenix                              |               | $691,081       | *            
|Covega [Quantum Photonics]         |               | 270,389        | 02/01/05     
|Inphi                              |               | 1,031,913      | 12/01/06     
|iolon                              |               | 232,662        | 02/01/05     
|NovX Microsystems                  |               | 112,541        | 04/01/05     
|Nufern                             |               | 785,770        | 08/01/05     
|Subtotal:                          | 4.1%          | $3,124,356     |              
|                                   |               |                |              
|Semiconductors                     |               |                |              
|Aeluros                            |               | $490,019       | 03/01/06     
|Ample Communications               |               | 147,333        | 02/01/05     
|Analogix Semiconductor             |               | 3,289,476      | 05/01/07     
|Aristos Logic                      |               | 6,711,714      | 12/01/07     
|Brion Technologies                 |               | 490,058        | 11/01/06     
|Ishoni Networks [HiQ Networks]     |               | 584,701        | *            
|Nexsil                             |               | 425,203        | 01/01/06     
|Scintera Networks                  |               | 1,086,070      | 10/01/06     
|Sierra Logic                       |               | 555,698        | 07/01/07     
|Sierra Monolithics                 |               | 114,326        | 03/01/05     
|Stretch                            |               | 1,922,614      | 12/01/06     
|T-Ram                              |               | 349,160        | 07/01/05     
|TriCN                              |               | 95,836         | 11/01/06     
|Subtotal:                          | 21.5%         | $16,262,208    |              
|                                   |               |                |              
|Semiconductors & Equipment         |               |                |              
|Fyre Storm                         |               | $428,939       | 02/01/06     
|Matrix Semiconductor               |               | 4,299,786      | 03/01/07     
|Molecular Imprints                 |               | 1,368,315      | 04/01/06     
|Universal Network Machines         |               | 1,354,782      | 03/01/07     
|Subtotal:                          | 9.8%          | $7,451,822     |              
|                                   |               |                |              
|Software                           |               |                |              
|Accruent                           |               | $1,171,906     | 01/01/07     
|Adaptive Planning                  |               | 365,792        | 02/01/07     
|Airgo Networks [Woodside Networks] |               | 1,618,521      | 04/01/06     
|Andale                             |               | 1,745,263      | 11/01/06     
|Arroyo Video Solutions             |               | 878,264        | 06/01/07     
|Avamar Technologies                |               | 2,684,928      | 03/01/07     
|Bang Networks                      |               | 0              | *            
|Ceon                               |               | 174,278        | 04/01/05     
|CiraNova                           |               | 279,143        | 09/01/05     
|CoWare                             |               | 872,984        | 06/01/07     
|Enkata Technologies                |               | 874,076        | 09/01/06     
|InterSan                           |               | 744,772        | 12/01/06     
|IP Wireless                        |               | 9,131,202      | 02/01/07     
|IXI Mobile                         |               | 3,212,195      | 07/01/06     
|KonaWare                           |               | 230,860        | 01/01/07     
|Merced Systems                     |               | 252,699        | 12/01/05     
|Net6 [WebUnwired]                  |               | 828,837        | 04/01/06     
|nLayers                            |               | 814,638        | 08/01/06     
|Pivia                              |               | 137,780        | 09/01/05     
|Platform Solutions                 |               | 428,903        | 12/01/06     
|Plaxo                              |               | 273,047        | 03/01/07     
|PSS Systems                        |               | 158,941        | 06/01/06     
|Rome                               |               | 1,027,200      | 03/01/07     
|Valchemy                           |               | 327,297        | 11/01/06     
|Subtotal:                          | 37.3%         | $28,233,526    |              
|                                   |               |                |              
|(Total:  Cost of $109,138,927)     | 137.9%        | $104,507,275   |              



* As of September 30, 2004, loans with a cost basis of $7.5 million and a fair value of $2.9 million, have been classified as non-accrual.  These loans have been accelerated from original maturity and are due in their entirety.

Loans as of December 31, 2003, consisted of the following



|                                   | Percentage of | Estimated Fair | Final        
|---------------------------------- | ------------- | -------------- | -------------
|Borrower                           | Net Assets    | Value12/31/03  | Maturity Date
|Application Service Providers      |               |                |              
|BlueStar Solutions [eOnline]       |               | $489,346       | 8/1/04       
|Ultrabridge                        |               | 353,704        | *            
|Subtotal:                          | 1.1%          | $843,050       |              
|Biotechnology                      |               |                |              
|CancerVax                          |               | $3,173,681     | 11/1/06      
|Trinity Biosystems                 |               | 249,153        | 6/1/06       
|Zyomyx                             |               | 425,431        | 7/1/04       
|Subtotal:                          | 5.1%          | $3,848,265     |              
|Communication Service Providers    |               |                |              
|Everest Broadband Networks         |               | $49,047        | *            
|Masergy Communications             |               | 2,627,113      | 4/1/06       
|Subtotal:                          | 3.5%          | $2,676,160     |              
|Communications Equipment           |               |                |              
|Atrica                             |               | $3,467,988     | 1/1/06       
|Bivio Networks [Network Robots]    |               | 784,637        | *            
|Caymas Systems                     |               | 1,074,723      | 6/1/06       
|Coriolis Networks                  |               | 2,255,489      | 3/1/07       
|General Bandwidth                  |               | 1,366,659      | 6/1/05       
|Gluon Networks                     |               | 1,005,427      | *            
|Inkra Networks                     |               | 1,993,572      | 4/1/05       
|Nishan Systems                     |               | 309,829        | 7/1/05       
|Nokia [Amber Networks]             |               | 1,247,252      | 7/1/04       
|Pedestal Networks                  |               | 2,947,306      | 9/1/06       
|Sandial Systems                    |               | 1,548,977      | 6/1/06       
|Sanera Systems                     |               | 921,480        | 7/1/05       
|Santera Systems                    |               | 650,187        | 4/1/05       
|ServGate Technologies              |               | 1,005,580      | 11/1/05      
|Valo                               |               | 145,884        | *            
|Subtotal:                          | 27.2%         | $20,724,990    |              
|Computers & Peripherals            |               |                |              
|3PARdata                           |               | $3,278,596     | 2/1/06       
|MaXXan Systems                     |               | 3,536,414      | 11/1/05      
|Nauticus Networks                  |               | 3,841,522      | 2/1/06       
|ONStor [Claristor]                 |               | 1,223,086      | 9/1/06       
|Spinnaker Networks                 |               | 1,689,057      | 4/1/06       
|Subtotal:                          | 17.8%         | $13,568,675    |              
|Internet                           |               |                |              
|BridgeSpan [ezClose.com]           |               | $459,806       | 6/1/04       
|Coremetrics                        |               | 1,148,987      | *            
|Evergreen Assurance                |               | 988,775        | 5/1/06       
|Postini                            |               | 1,184,434      | 11/1/06      
|QuinStreet [Echo Online Networks]  |               | 349,679        | 11/1/04      
|Slam Dunk Networks                 |               | 6,268          | *            
|Subtotal:                          | 5.4%          | $4,137,949     |              
|Medical Devices                    |               |                |              
|Alere Medical                      |               | $4,839,782     | 12/1/06      
|CardioNOW                          |               | 258,306        | 3/1/05       
|Coalescent Surgical                |               | 4,940,092      | 12/1/06      
|Confirma                           |               | 570,775        | 6/1/04       
|Evalve                             |               | 3,204,493      | 2/1/06       
|NeoGuide Systems                   |               | 238,974        | 2/1/05       
|Neomend                            |               | 193,415        | *            
|Ntero Surgical                     |               | 394,593        | *            
|Volcano Therapeutics               |               | 4,413,968      | 9/1/06       
|Subtotal:                          | 25.0%         | $19,054,398    |              
|Other                              |               |                |              
|Ion America                        |               | $1,194,520     | 4/1/06       
|Kiwi Networks                      |               | 1,194,621      | 12/1/06      
|Lumenare [Avulet]                  |               | 227,124        | 9/1/04       
|Nanosolar                          |               | 233,208        | 8/1/06       
|Subtotal:                          | 3.7%          | $2,849,473     |              
|Photonics                          |               |                |              
|Cenix                              |               | $1,330,630     | *            
|Covega [Quantum Photonics]         |               | 688,897        | 2/1/05       
|E2O Communications                 |               | 1,606,802      | 3/1/05       
|Infinera [Zepton Networks]         |               | 5,524,246      | 10/1/05      
|Inphi                              |               | 2,205,514      | 12/1/06      
|iolon                              |               | 1,112,851      | 2/1/05       
|Network Elements                   |               | 526,387        | 6/1/04       
|NovX Microsystems                  |               | 253,395        | 4/1/05       
|Nufern                             |               | 2,063,973      | 2/1/05       
|Optinel Systems                    |               | 513,371        | 9/1/04       
|Tsunami Optics [Stratos Lightwave] |               | 46,282         | 5/1/04       
|Subtotal:                          | 20.8%         | $15,872,348    |              
|Semiconductor Equipment            |               |                |              
|Molecular Imprints                 |               | $2,050,833     | 4/1/06       
|Subtotal:                          | 2.7%          | 2,050,833      |              
|Semiconductors                     |               |                |              
|Aeluros                            |               | $801,654       | 3/1/06       
|Ample Communications               |               | 1,010,218      | 2/1/05       
|Aristos Logic                      |               | 593,957        | 9/1/06       
|Brion Technologies                 |               | 629,878        | 11/1/06      
|Fyre Storm                         |               | 785,928        | 2/1/06       
|Intel [VxTel]                      |               | 188,295        | 1/1/04       
|Ishoni Networks [HiQ Networks]     |               | 2,027,577      | *            
|Kineto Wireless [BluZona]          |               | 1,014,109      | 5/1/05       
|Matrix Semiconductor               |               | 3,715,743      | 12/1/06      
|Nexsil                             |               | 715,996        | 1/1/06       
|Scintera Networks                  |               | 1,520,668      | 10/1/06      
|Sierra Monolithics                 |               | 919,381        | 3/1/05       
|Stretch                            |               | 2,780,161      | 12/1/06      
|T-Ram                              |               | 1,014,255      | 7/1/05       
|TriCN                              |               | 122,612        | 11/1/06      
|Universal Network Machines         |               | 1,765,879      | 9/1/06       
|Subtotal:                          | 25.7%         | $19,606,311    |              
|Software                           |               |                |              
|Accruent                           |               | $1,458,449     | 10/1/06      
|Airgo Networks [Woodside Networks] |               | 3,200,765      | 4/1/06       
|Andale                             |               | 2,178,747      | 11/1/06      
|Avamar Technologies                |               | 2,940,150      | 9/1/06       
|Bang Networks                      |               | 107,030        | *            
|Ceon                               |               | 386,507        | 4/1/05       
|Chordiant Software [On Demand]     |               | 119,647        | 9/1/04       
|CiraNova                           |               | 479,198        | 9/1/05       
|CoWare                             |               | 942,628        | 12/1/06      
|Enkata Technologies                |               | 1,273,066      | 9/1/06       
|InterSan                           |               | 934,282        | 12/1/06      
|KonaWare                           |               | 265,632        | 4/1/06       
|MAE Software                       |               | 448,999        | 11/1/06      
|Merced Systems                     |               | 630,979        | 12/1/05      
|Net6 [WebUnwired]                  |               | 1,525,398      | 4/1/06       
|NetForensics                       |               | 149,126        | 8/1/04       
|Pivia                              |               | 274,909        | 9/1/05       
|Plaxo                              |               | 164,535        | 11/1/06      
|PSS Systems                        |               | 213,929        | 6/1/06       
|Subtotal:                          | 23.2%         | $17,693,976    |              
|                                   |               |                |              
|Total: (Cost of $127,030,246)      | 161.4%        | $122,926,428   |              
|                                   |               |                |              





* As of December 31, 2003 loans with a cost basis of $11.7 million and a fair value of $7.5 million had been classified as non-accrual.  These loans had been accelerated from original maturity and were due in their entirety.



The Fund provides asset-based financing primarily to start-up and emerging growth venture-capital-backed companies.  These loans are generally secured by assets of the borrowers.  As a result, the Fund is subject to general credit risk associated with such companies. At September 30, 2004, the Fund had unfunded unexpired commitments of $22.1 million.

4.

EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income (loss) by the weighted average common shares outstanding.  Diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average common shares outstanding, including the dilutive effects of potential common shares (e.g., stock options).  The Fund has no instruments that would be potential common shares; thus, reported basic and diluted earnings (loss) per share are the same.



5.

RESTRUCTURE OF DEBT FACILITY AND CAPITAL REDUCTION

In March 2003, the Fund restructured its debt facility lowering its borrowing capacity from $250.0 million to $160.0 million.  On April 2, 2003, Westech Investment Advisers, the Managing Member of the Company, reduced the committed capital of the Company from $361.9 million to $217.1 million, of which $162.8 million has been called and received.  The remaining $54.3 million in committed capital has expired and can no longer be called.



During the nine month period ended September 30, 2004, the Fund distributed $6.3 million to its investor.



6.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46R,Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46R).  The effective date of FIN 46R for non-registered investment companies (such as the Company) has been deferred pending a decision by the FASB concerning whether to exempt such entities from applying the provisions of FIN 46R.



In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-4 which provided guidance on the application of certain provisions of the AICPA Audit and Accounting Guide, Audits of Investment Companies, and SOP 95-2, Financial Reporting by Nonpublic Investment Partnerships.  SOP 03-4 requires non-registered investment companies that meet certain criteria to disclose, as a financial highlight, an annual Internal Rate of Return (IRR) in place of the Total Return disclosure previously required.  SOP 03-4 requires the IRR disclosure in annual financial statements issued for fiscal years beginning after December 15, 2003.  The Fund will adopt the IRR provisions of SOP 03-4 as of December 31, 2004.



7.

SUBSEQUENT EVENT:



Subsequent to September 30, 2004, the Fund reduced its debt facility from $160 million to $50 million.

8.

FINANCIAL HIGHLIGHTS

Accounting principles generally accepted in the United States of America require disclosure of financial highlights of the Fund for the periods presented, the three and nine months ended September 30, 2004 and 2003.  The total rate of return is defined as the return based on the change in value during the period of a theoretical investment made at the beginning of the period. The total rate of return assumes a constant rate of return for the Fund during the period reported and weights each cash flow by the amount of time held in the Fund. This required methodology differs from an internal rate of return.

The ratios of expenses and net investment income to average net assets, calculated below, are annualized and are computed based upon the aggregate weighted average net assets of the Fund for the periods presented.  Net investment income is inclusive of all investment income net of expenses, and excludes realized or unrealized gains and losses.

Beginning and ending net asset values per share are based on the beginning and ending number of shares outstanding. Other per share information is calculated based upon the aggregate weighted average net assets of the Fund for the periods presented.







The following per share data and ratios have been derived from the information provided in the financial statements:





Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations





General



The Fund is 100% owned by Venture Lending & Leasing III, LLC (the Company).  The Fund's shares of Common Stock, $.001 par value were sold to its shareholder under a stock purchase agreement.  The Fund has issued 100,000 of the 200,000 shares that were authorized. The Fund's shareholder may make additional capital contributions to the Fund.



In addition to the historical information contained herein, this Quarterly Report on Form 10-Q contains certain forward-looking statements. The readers of this Quarterly Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome.  The Fund's actual results could differ materially from those suggested by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments and competition. This entire Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Fund's business.



Restatement

Subsequent to the issuance of its financial statements for the year ended December 31, 2003, management of the Fund determined that the Funds methodology of accruing interest income one month after it had been earned resulted in accruals that were materially different from amounts that would have been accrued in accordance with accounting principles generally accepted in the United States of America.  As a result, interest on loans has been restated from amounts previously reported.  This managements discussion and analysis gives effect to that restatement.



For further information of the impact of the restatement on the condensed statement of operations for the three and nine month periods ended September 30, 2003, see note 2 to the condensed financial statements.



Overview



Venture Lending & Leasing III, Inc. (the Fund) is a financial services company providing financing and advisory services to a variety of carefully selected venture-backed companies throughout the United States with a focus on growth oriented companies. The Funds portfolio is well diversified and consists of companies in the communications, information services, media, and technology, including software and technology-enabled business services, bio-technology, and medical devices industry sectors, among others. The Fund has ceased making commitments as of the quarter ended June 30, 2004 and as the loans pay off, the portfolio will become less diverse.  The Funds capital is generally used by the Funds portfolio companies to finance acquisitions of fixed assets and working capital. On May 19, 2000, the Fund completed its first closing of capital, made its first investment, and became a non-diversified, closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940. The Fund elected to be treated for federal income tax purposes as a regulated investment company under the Internal Revenue Code with the filing of its federal corporate income tax return for 2000. Pursuant to this election, the Fund generally will not have to pay corporate-level taxes on any income it distributes to the stockholder as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability.



The Fund's investment objective is to achieve a high total return. The Fund seeks to achieve its investment objective by providing debt financing to portfolio companies.   Historically, the Fund's investing activities have focused primarily on private debt securities.  The Fund generally receives warrants to acquire equity securities in connection with its portfolio investments.  The Fund generally distributes these warrants to its shareholder upon receipt.  The Fund also has guidelines for the percentages of total assets which will be invested in different types of assets.



The portfolio investments of the Fund consist of debt financing to early and late stage venture capital backed technology companies.  The borrowers ability to repay their loans may be adversely impacted by a number of factors, and as a result the loan may not fully be repaid.  Furthermore, the Funds security interest in any collateral over the borrowers assets may be insufficient to make up any shortfall in payments.



Critical Accounting Policies



We identified the most critical accounting principles upon which our financial statements depend.  We determined the critical accounting principles by considering accounting policies that involve the most complex or subjective decisions or assessments.  We identified our only critical accounting policy to be that related to the valuation of loans.



Loans are held at estimated fair value as determined by management, in accordance with the valuation methods described in the valuation of loans section of Note 2 of the Fund's Annual Report on Form 10-K/A for the year ended December 31, 2003 (Summary of Significant Accounting Policies). Critical factors in determining the fair value of a loan include payment history, collateral position, financial strength of the borrower, prospects for the borrower's raising future equity rounds, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan. The actual value of the loans may differ from management's estimates, which would affect net income as well as net assets.



Results of Operations For the Three and Nine Months ended September 30, 2004 and 2003



Total investment income for the three months ended September 30, 2004 and 2003 was $4.2 million and $5.4 million, respectively, of which $4.1 million and $5.3 million, respectively, consisted of interest on venture loans outstanding during the period.  Total investment income for the nine months ended September 30, 2004 and 2003 was $13.4 million and $18.4 million, respectively, of which $13.2 million and $18.2 million, respectively, consisted of interest on venture loans outstanding during the period.  The remaining income consisted of payment of late fees from customers, income from expiration of commitments for which the Fund had received a commitment fee, and interest on the temporary investment of cash.   The cash is held pending investment in venture loans. The decrease in investment income is due primarily to the decline in outstanding performing loans, which averaged $147.0 million for the nine months ended September 30, 2003 and $105.3 million for the nine months ended September 30, 2004.  The decline in outstanding performing loans is a result of the Fund having ceased making commitments as of the quarter ended June 30, 2004, as noted above.   This impact was partially offset by the increase in average interest yield on loans from 16.5% for the nine months ended September 30, 2003 to 16.7% for the nine months ended September 30, 2004.  The increase in interest yield was due primarily to borrowers who paid a premium in order to pay off their loans early.



Total expenses were $1.7 million and $2.0 million for the three months ended September 30, 2004 and 2003, respectively.  Total expenses were $5.1 million and $6.9 million for the nine months ended September 30, 2004 and 2003, respectively.  Management fees were the largest expense.  Management fees for the three months ended September 30, 2004 and 2003 were $0.7 million and $0.9 million respectively.  Management fees for the nine months ended September 30, 2004 and 2003 were $2.3 million and $3.1 million, respectively.  Management fees were lower for the three and nine months ended September 30, 2004 because the asset base declined from $145.1 million as of September 30, 2003 to $118.0 million as of September 30, 2004.



Interest expense was $0.4 million and $0.5 million for the three months ended September 30, 2004 and 2003, respectively. Interest expense was $1.2 million and $1.7 million for the nine months ended September 30, 2004 and 2003, respectively.  Included in these amounts are the settled portion of the Fund's interest hedge transactions of $0.2 million and $0.3 million for the three months ended September 30, 2004 and 2003, respectively and $0.6 million and $0.9 million for the nine months ended September 30, 2004 and 2003, respectively.   Interest expense declined as average outstanding bank debt declined from $59.3 million for the nine months ended September 30, 2003 to $47.2 million for the nine months ended September 30, 2004, interest expense declined further during the period because rates dropped from 3.9% to 3.5% during the same period.  This was primarily due to interest rate declines in general; however interest rates appear to be trending upwards as the average interest rate for the 3 months ended September 30, 2004 was 3.7%, which was up from 3.5%, the average interest rate for the nine months ended September 30, 2004..



Total other operating expenses for the three months ended September 30, 2004 and 2003 were $0.5 million and $0.5 million, respectively.  Total other operating expenses for the nine months ended September 30, 2004 and 2003 were $1.6 million and $2.1 million, respectively.  Legal and banking related fees comprised a majority of the other operating expenses for the three and nine months ended September 30, 2004 and 2003.  The expense for the nine months ended September 30, 2003 included a $0.3 million charge for unamortized bank facility fees due to the reduction in the debt facility.  The majority of the remaining decrease in total other operating expenses from the nine months ended September 30, 2003 to the nine months ended September 30, 2004 was a result of the reduction of the banking and legal fees.



The Fund incurred a net unrealized gain (loss) from investments and hedging activity of $1.2 million and $(2.5) million for the three months ended September 30, 2004 and 2003, respectively.  The change in unrealized gain (loss) from investments and hedging activity was due primarily to changes in the fair value of loans from borrowers of $1.1 million and $(2.8) million for the three months ended September 30, 2004 and 2003, respectively.  Included in the unrealized gain (loss) for the three months ended September 30, 2004 and 2003 is a $0.1 million unrealized gain and a $0.3 million unrealized gain, respectively resulting from interest rate hedging transactions. The Fund incurred a net unrealized gain (loss) from investments and hedging activity of $(0.1) million and $(4.8) million for the nine months ended September 30, 2004 and 2003, respectively.  The change in unrealized gain (loss) from investments and hedging activity was due to changes in the fair value of loans from borrowers of $(0.5) million and $(5.1) million for the nine months ended September 30, 2004 and 2003, respectively.  Included in the unrealized gain (loss) for the nine months ended September 30, 2004 and 2003 is a $0.5 million unrealized gain and a $0.4 million unrealized gain, respectively, resulting from interest rate hedging transactions.





The Fund incurred a net realized gain (loss) from investment transactions of $(1.0) million and $0.1 million for the three months ended September 30, 2004 and 2003, respectively.  The Fund incurred a net realized loss from investment transactions of $(2.3) million and $(2.1) million for the nine months ended September 30, 2004 and 2003, respectively. These realized losses were the result of writing off certain loans deemed to be uncollectible less small recoveries of previously written off loans.







Liquidity and Capital Resources  September 30, 2004 and December 31, 2003



Total capital contributed to the Fund was approximately $155.0 million at September 30, 2004.  Committed capital to the Company at September 30, 2004 was $217.1 million, of which $162.8 million has been called and received.  The remaining $54.3 million in committed capital has expired and can no longer be called.



As of September 30, 2004 and December 31, 2003, the Fund had in place a $160.0 million debt facility to finance the acquisition of asset-based loans.  As of September 30, 2004 and December 31, 2003, $40.7 million and $59.2 million was outstanding under this facility, respectively.  Subsequent to September 30, 2004, the debt facility was reduced from $160.0 million to $50.0 million.



At September 30, 2004 and December 31, 2003 the Fund had interest rate swap transactions outstanding with a total notional principal amount of $35.3 million and $53.2 million.  The effect of these swap transactions is to convert the floating rate bank debt into a fixed rate on the contract notional value.  The amortization schedule for each borrowing under the facility is expected to correspond to the amortization of the loans supporting each borrowing.



As of September 30, 2004 and December 31, 2003, 10.0% and 8.8%, respectively, of the Fund's assets consisted of cash and cash equivalents.  The Fund continued to invest its assets in venture loans during the nine months ended September 30, 2004. Amounts disbursed under the Fund's loan commitments increased by approximately $56.7 million during the nine months ended September 30, 2004. Net loan amounts outstanding after amortization decreased by approximately $18.4 million for the same period. Unexpired, unfunded commitments decreased by approximately $33.4 million for the nine months ended September 30, 2004.





|As of              | Amount Disbursed | Principal Reductions | Balance Outstanding | Unexpired Unfunded Commitments
|------------------ | ---------------- | -------------------- | ------------------- | ------------------------------
|September 30, 2004 | $543.6 million   | $439.1 million       | $104.5 million      | $22.1 million                 
|December 31, 2003  | $486.9 million   | $364.0 million       | $122.9 million      | $55.5 million                 





Venture loans are privately negotiated transactions.  Investments in these assets are relatively illiquid.





Item 3.  Quantitative and Qualitative Disclosures About Market Risk





The Fund's business activities contain elements of risk. The Fund considers the principal types of market risk to be interest rate risk and credit risk. The Fund considers the management of risk essential to conducting its business and to maintaining profitability. Accordingly, the Fund's risk management procedures are designed to identify and analyze the Fund's risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.



The Fund manages its credit risk by maintaining a portfolio that is diverse by industry, size of investment, stage of development, and borrower.  The Fund has limited exposure to public market price fluctuations as the Fund primarily invests in private business enterprises and the Fund distributes all equity securities upon receipt.



The Fund enters into interest rate swap transactions to hedge its interest rate on its bank loans. The net interest received or paid on the transactions is included in interest expense. The fair value of the swap is recorded in other assets or other liabilities and the change in the fair value is recorded as a change in unrealized gain (loss) from investment transactions.





The Fund's sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities. The Fund utilizes various methods to assess interest rate risk in terms of the potential effect on interest income net of interest expense, the value of net assets and the value at risk in an effort to ensure that the Fund is insulated from any significant adverse effects from changes in interest rates.



Based on the model used for the sensitivity of interest income net of interest expense, if the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 100 basis point change in interest rates would have affected net income by less than $0.1 million.  This translates to less than 1% for the nine months ended September 30, 2004. Although management believes that this measure is indicative of the Fund's sensitivity to interest rate changes, it makes estimates to adjust for potential changes in credit quality, size and composition of the balance sheet and other business developments that could affect net income.  Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.





ITEM 4.   DISCLOSURE CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures





As of the end of the period covered by this quarterly report on Form 10-Q, the Fund's chief executive officer and chief financial officer conducted an evaluation of the Fund's disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based upon this evaluation, the Fund's chief executive officer and chief financial officer concluded that the Fund's disclosure controls and procedures were effective in timely alerting them of any material information relating to the Fund that is required to be disclosed by the Fund in the reports it files or submits under the Securities Exchange Act of 1934.



Changes in internal controls



As of June 30, 2004, the Fund re-evaluated its internal controls and documented the processes, policies, and assumptions over financial reporting.  Senior Management and the Audit Committee determined that the accounting policies were consistent and appropriate under accounting principles generally accepted in the United States of America.



There were no significant changes in the Fund's internal controls or in other factors that could significantly affect these controls during the period covered by this quarterly report on form 10-Q.



PART II -- OTHER INFORMATION



Item 1.   Legal Proceedings



The Fund may become party to certain lawsuits from time to time in the normal course of business.  While the outcome of these legal proceedings cannot at this time be predicted with certainty, the Fund does not expect these proceedings will have a material effect upon the Fund's financial condition or results of operation.



Item 2.   Changes in Securities and Use of Proceeds



None



Item 3.   Defaults Upon Senior Securities



Not applicable



Item 4.

Submission of Matters to a Vote of Security Holders



None



Item 5.  Other Information



None



Item 6.  Exhibits and Reports on Form 8-K





|Exhibit Number | Description                                      
|-------------- | -------------------------------------------------
|32.1  32.4    | Certifications Pursuant to 18 U.S.C. Section 1350





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 duly authorized.



VENTURE LENDING & LEASING III, INC.

(Registrant)



By:

/S/ Ronald W. Swenson

By:

/S/ Douglas D. Reed



Ronald W. Swenson

Douglas D. Reed

Chairman and Chief Executive Officer

Chief Financial Officer

Date:

November 11, 2004

Date:

November 11, 2004





Exhibit 32.1

CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TO 
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Douglas D. Reed, certify that:



1. I have reviewed this quarterly report on Form 10-Q of Venture Lending & Leasing III, Inc.;



2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:



a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



c) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the period covered by the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and



5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):



a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and



b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.



Date: November 11, 2004



/S/ Douglas D. Reed



Douglas D. Reed

Chief Financial Officer





Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TO 
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Ronald W. Swenson, certify that:



1. I have reviewed this quarterly report on Form 10-Q of Venture Lending & Leasing III, Inc.;



2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:



a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



c) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the period covered by the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and



5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):



a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and



b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.



Date: November 11, 2004



/S/ Ronald W. Swenson



Ronald W. Swenson

Chief Executive Officer

Exhibit 32.3



CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TO 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Venture Lending & Leasing III, Inc. (the "Fund") on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald W. Swenson, Chief Executive Officer of the Fund, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Fund.



/S/ Ronald W. Swenson



Ronald W. Swenson
Chief Executive Officer
November 11, 2004









Exhibit 32.4



CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TO 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Venture Lending & Leasing III, Inc. (the "Fund") on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas D. Reed, Chief Financial Officer of the Fund, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Fund.



/S/ Douglas D. Reed



Douglas D. Reed

Chief Financial Officer
November 11, 2004