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, 2005





[  ] 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 or  organization) | (I.R.S. Employer  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, 2005

Common Stock, $.001 par value

100,000









1









VENTURE LENDING & LEASING III, INC.



INDEX





PART I -- FINANCIAL INFORMATION



Item 1.

Financial Statements



Condensed Statements of Assets and Liabilities (Unaudited)



As of September 30, 2005 and December 31, 2004



Condensed Statements of Operations (Unaudited)



For the Three and Nine Months Ended September 30, 2005 and 2004



Condensed Statements of Changes in Net Assets (Unaudited)



For the Three and Nine Months Ended September 30, 2005



Condensed Statements of Cash Flows (Unaudited)



For the Nine Months Ended September 30, 2005 and 2004



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.

Unregistered Sales of Equity 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 ASSETS AND LIABILITIES (UNAUDITED)

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004



|                                                         |  | September 30, 2005 |  | December 31, 2004
|-------------------------------------------------------- |  | ------------------ |  | -----------------
|                                                         |  |                    |  |                  
|ASSETS                                                   |  |                    |  |                  
|Loans at estimated fair value                            |  |                    |  |                  
|(Cost of $59,676,934 and $96,859,544)                    |  | $55,232,244        |  | $92,800,761      
|Cash and cash equivalents                                |  | 3,869,436          |  | 7,708,532        
|Other assets                                             |  | 688,139            |  | 1,408,045        
|                                                         |  |                    |  |                  
|Total assets                                             |  | 59,789,819         |  | 101,917,338      
|                                                         |  |                    |  |                  
|LIABILITIES                                              |  |                    |  |                  
|Borrowings under debt facilty                            |  | -                  |  | 44,827,921       
|Accrued management fees                                  |  | 474,984            |  | 756,894          
|Accounts payable and other accrued liabilities           |  | 165,072            |  | 343,218          
|                                                         |  |                    |  |                  
|Total liabilities                                        |  | 640,056            |  | 45,928,033       
|                                                         |  |                    |  |                  
|Net assets                                               |  | $59,149,763        |  | $55,989,305      
|                                                         |  |                    |  |                  
|Analysis of Net Assets:                                  |  |                    |  |                  
|                                                         |  |                    |  |                  
|Net capital paid in on shares of capital stock           |  | $155,004,500       |  | $155,004,500     
|                                                         |  |                    |  |                  
|Distributions in excess of earnings                      |  | (95,854,737)       |  | (99,015,195)     
|                                                         |  |                    |  |                  
|Net assets (equivalent to $591.50 and $559.89 per share, |  | $59,149,763        |  | $55,989,305      
|respectively based on 100,000 shares of capital stock    |  |                    |  |                  
|outstanding - See Note 4)                                |  |                    |  |                  
|                                                         |  |                    |  |                  
|                                                         |  |                    |  |                  









See Notes to Condensed Financial Statements

















VENTURE LENDING & LEASING III, INC.



CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004



|                                                                    |  | For the Three Months Ended September 30, 2005 |  | For the Three Months Ended September 30, 2004 |  | For the Nine
Months Ended September 30, 2005 |  | For the Nine Months Ended September 30, 2004
|------------------------------------------------------------------- |  | --------------------------------------------- |  | --------------------------------------------- |  | -------------------------------------------- |  | --------------------------------------------
|INVESTMENT INCOME:                                                  |  |                                               |  |                                               |  |                                              |  |                                             
|Interest on loans                                                   |  | $2,065,932                                    |  | $4,130,456                                    |  | $7,660,287                                   |  | $13,150,479                                 
|Interest on short-term investments                                  |  |                                               |  |                                               |  |                                              |  |                                             
|and other income                                                    |  | 37,397                                        |  | 88,589                                        |  | 139,387                                      |  | 220,982                                     
|Total investment income                                             |  | 2,103,329                                     |  | 4,219,045                                     |  | 7,799,674                                    |  | 13,371,461                                  
|                                                                    |  |                                               |  |                                               |  |                                              |  |                                             
|EXPENSES:                                                           |  |                                               |  |                                               |  |                                              |  |                                             
|Management fees                                                     |  | 373,686                                       |  | 737,450                                       |  | 1,349,202                                    |  | 2,263,488                                   
|Interest expense                                                    |  | 31,860                                        |  | 411,996                                       |  | 575,847                                      |  | 1,237,831                                   
|Legal and banking expense                                           |  | 284,450                                       |  | 461,081                                       |  | 787,688                                      |  | 1,396,621                                   
|Other operating expenses                                            |  | 38,808                                        |  | 66,804                                        |  | 86,148                                       |  | 183,298                                     
|Total expenses                                                      |  | 728,804                                       |  | 1,677,331                                     |  | 2,798,885                                    |  | 5,081,238                                   
|Net investment income                                               |  | 1,374,525                                     |  | 2,541,714                                     |  | 5,000,789                                    |  | 8,290,223                                   
|                                                                    |  |                                               |  |                                               |  |                                              |  |                                             
|Net change in unrealized loss from investments and hedging activity |  | (2,699)                                       |  | 1,151,012                                     |  | (297,903)                                    |  | (67,614)                                    
|Net realized loss from investment transactions                      |  | -                                             |  | (1,039,153)                                   |  | (164,358)                                    |  | (2,261,809)                                 
|Net increase in net assets resulting                                |  |                                               |  |                                               |  |                                              |  |                                             
|from operations                                                     |  | $1,371,826                                    |  | $2,653,573                                    |  | $4,538,528                                   |  | $5,960,800                                  
|Net increase in net assets resulting                                |  |                                               |  |                                               |  |                                              |  |                                             
|from operations per share                                           |  | $13.72                                        |  | $26.54                                        |  | $45.39                                       |  | $59.61                                      
|Weighted average shares outstanding                                 |  | 100,000                                       |  | 100,000                                       |  | 100,000                                      |  | 100,000                                     
|                                                                    |  |                                               |  |                                               |  |                                              |  |                                             
|                                                                    |  |                                               |  |                                               |  |                                              |  |                                             
|                                                                    |  |                                               |  |                                               |  |                                              |  |                                             
|                                                                    |  |                                               |  |                                               |  |                                              |  |                                             
|                                                                    |  |                                               |  |                                               |  |                                              |  |                                             









See Notes to Condensed Financial Statements











VENTURE  LENDING & LEASING III, INC.



CONDENSED STATEMENTS OF CHANGES IN NET ASSETS  (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004









|                                           |  | Three Months Ended |  | Three Months Ended |  | Nine Months Ended  |  | Nine Months Ended  |  |  |  
|------------------------------------------ |  | ------------------ |  | ------------------ |  | ------------------ |  | ------------------ |  |  | -
|                                           |  | September 30, 2005 |  | September 30, 2004 |  | September 30, 2005 |  | September 30, 2004 |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|Increase in net assets from operations     |  |                    |  |                    |  |                    |  |                    |  |  |  
|Investment income - net                    |  | $1,374,525         |  | $2,541,714         |  | $5,000,789         |  | $8,290,223         |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|Unrealized gain (loss) from investment     |  |                    |  |                    |  |                    |  |                    |  |  |  
|and hedging activities                     |  | (2,699)            |  | 1,151,012          |  | (297,903)          |  | (67,614)           |  |  |  
|Realized loss from investment transactions |  | -                  |  | (1,039,153)        |  | (164,358)          |  | (2,261,809)        |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|Net increase in net assets resulting       |  |                    |  |                    |  |                    |  |                    |  |  |  
|from operations                            |  | 1,371,826          |  | 2,653,573          |  | 4,538,528          |  | 5,960,800          |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|Distributions of income to shareholder     |  | (1,117,485)        |  | (853,103)          |  | (1,378,070)        |  | (6,335,765)        |  |  |  
|Tax return of capital to shareholder       |  | -                  |  | -                  |  | -                  |  | -                  |  |  |  
|Total increase                             |  | 254,341            |  | 1,800,470          |  | 3,160,458          |  | (374,965)          |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|Net assets                                 |  |                    |  |                    |  |                    |  |                    |  |  |  
|Beginning of period                        |  | 58,895,422         |  | 73,977,601         |  | 55,989,305         |  | 76,153,036         |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|End of period                              |  | $59,149,763        |  | $75,778,071        |  | $59,149,763        |  | $75,778,071        |  |  | `
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  
|                                           |  |                    |  |                    |  |                    |  |                    |  |  |  









See Notes to Condensed Financial Statements





VENTURE LENDING & LEASING III, INC.



CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004



|                                                                                                                            | For the Nine
Months Ended |  | For the Nine
Months Ended |  |  |  |  | 
|--------------------------------------------------------------------------------------------------------------------------- | ------------------------- |  | ------------------------- |  |  |  |  | 
|                                                                                                                            | September 30, 2005        |  | September 30, 2004        |  |  |  |  | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                       |                           |  |                           |  |  |  |  | 
|Net increase in net assets resulting from operations                                                                        | $4,538,528                |  | $5,960,800                |  |  |  |  | 
|Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: |                           |  |                           |  |  |  |  | 
|Net realized loss from investment transactions                                                                              | 164,358                   |  | 2,261,809                 |  |  |  |  | 
|                                                                                                                            |                           |  |                           |  |  |  |  | 
|Net change in unrealized loss from investments and hedging activities                                                       | 297,903                   |  | 67,614                    |  |  |  |  | 
|Amortization of deferred assets                                                                                             | 335,426                   |  | 249,258                   |  |  |  |  | 
|Decrease in other assets                                                                                                    | 446,288                   |  | 617,861                   |  |  |  |  | 
|Net decrease in accounts payable, accrued liabilities, and accrued management fees                                          | (433,860)                 |  | (318,855)                 |  |  |  |  | 
|Acquisition of loans                                                                                                        | (6,731,441)               |  | (56,701,672)              |  |  |  |  | 
|Principal payments on loans                                                                                                 | 43,749,693                |  | 71,811,518                |  |  |  |  | 
|Acquisition of securities                                                                                                   | (20,000)                  |  | (1,851,795)               |  |  |  |  | 
|Net cash provided by operating activities                                                                                   | 42,346,895                |  | 22,096,538                |  |  |  |  | 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                       |                           |  |                           |  |  |  |  | 
|Deemed distribution to shareholder                                                                                          | (358,070)                 |  | (464,306)                 |  |  |  |  | 
|Cash distribution to shareholder                                                                                            | (1,000,000)               |  | (3,500,000)               |  |  |  |  | 
|Borrowings under debt facility                                                                                              | -                         |  | 6,888,239                 |  |  |  |  | 
|Repayment of borrowings under debt facility                                                                                 | (44,827,921)              |  | (25,338,077)              |  |  |  |  | 
|Net cash used in financing activities                                                                                       | (46,185,991)              |  | (22,414,144)              |  |  |  |  | 
|Net decrease in cash and cash equivalents                                                                                   | (3,839,096)               |  | (317,606)                 |  |  |  |  | 
|                                                                                                                            |                           |  |                           |  |  |  |  | 
|CASH AND CASH EQUIVALENTS:                                                                                                  |                           |  |                           |  |  |  |  | 
|Beginning of period                                                                                                         | 7,708,532                 |  | 12,102,263                |  |  |  |  | 
|End of period                                                                                                               | $3,869,436                |  | $11,784,657               |  |  |  |  | 
|CASH PAID DURING THE PERIOD FOR:                                                                                            |                           |  |                           |  |  |  |  | 
|Interest                                                                                                                    | $604,007                  |  | $1,240,287                |  |  |  |  | 
|NON-CASH ACTIVITIES:                                                                                                        |                           |  |                           |  |  |  |  | 
|Distributions of investment securities to shareholder                                                                       | $20,000                   |  | $2,371,459                |  |  |  |  | 
|Receipt of security for loans                                                                                               | $-                        |  | $519,664                  |  |  |  |  | 



See Notes to Condensed Financial Statements





VENTURE LENDING & LEASING III, INC.



NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2005



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 and is managed by Westech Investment Advisors, Inc. (Management or Manager).  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) 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, 2005 and 2004 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 for the year ended December 31, 2004.Certain prior year amounts in the financial statements have been reclassified to conform to the current year presentation.





2.

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, 2005, 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 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, 2005 and 2004, the weighted average interest rate on performing loans was 14.1% and 16.0%, respectively.  For the nine month period ended September 30, 2005 and 2004, the weighted average interest rate on performing loans was 14.5% and 16.7%, 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.





Valuation Procedures



1) The Fund is a fair value reporter and therefore accounts for investment securities at fair value in accordance with the Valuation Methods below.  All valuations are determined under the direction of the





Manager of the Fund in accordance with this Policy.



2) The Funds assets are valued in connection with the issuance of its periodic financial statements, the issuance or repurchase of a Funds shares at a price equivalent to the current net asset value per share, and at such other times as required by law.  On a quarterly basis, Management will submit to the Board of Directors (Board) a Valuation Report, which details the rationale for the valuation of investments.



Valuation Methods



1) Venture loans are generally held to maturity as there is no secondary market for the loans.  In the absence of a secondary market, venture loans are valued at their original purchase price less amortization of principal, unless Management determines that amortized cost does not represent fair value.  Management determines whether to adjust the value of a loan based on a credit analysis of the borrower, which generally includes consideration of several factors, including but not limited to the borrowers payment history, available cash and burn rate, revenues, net income or loss, the likelihood that the borrower will be able to secure additional financing in the future, as well as an evaluation of the general interest rate environment.    The amount of any valuation adjustment is determined based upon an analysis of the expected recovery from the borrower, including consideration of factors such as the nature and quality of the Funds security interests in collateral, the estimated value of the Funds collateral, the size of the loan, and the estimated time that will elapse before the Fund achieves a recovery.



2) Warrants and equity securities are generally assigned an estimated fair value as determined by Management at the time of acquisition.  Thereafter all warrants and equity securities are immediately distributed to the shareholder.



3)  Money market funds and debt instruments held as Cash and Cash Equivalents are valued at their most recently posted net asset value, if available, or at amortized cost, provided such amount is not materially different from quoted price.



4) Debt securities held as Short-term Investments are valued based on current bid quotations of recognized dealers or, when market quotations are not readily available, based on appraisals received from a pricing service using a computerized matrix system, or based upon appraisals derived from information concerning the securities or similar securities received from recognized dealers in the securities.  Notwithstanding the foregoing, debt securities with remaining maturities of ninety (90) days or fewer generally are valued by amortizing the difference between their last available fair value and their par value, provided such amount is not materially different from quoted price.

Loans as of September 30, 2005 are in non-affiliates and consist of the following:



|Borrower               | Percentage of | Estimated Fair | Par Value  | Final        
|---------------------- | ------------- | -------------- | ---------- | -------------
|                       | Net Assets    | Value 9/30/05  | 9/30/05    | Maturity Date
|Biotechnology          |               |                |            |              
|Serenex                |               | $1,445,855     | $1,445,855 | 6/1/07       
|Trinity Biosystems     |               | 95,729         | 95,729     | 6/1/06       
|Subtotal:              | 2.6%          | $1,541,584     | $1,541,584 |              
|                       |               |                |            |              
|Carrier Networking     |               |                |            |              
|Arroyo Video Solutions |               | $987,572       | $987,572   | 9/1/07       
|Subtotal:              | 1.7%          | $987,572       | $987,572   |              
|                       |               |                |            |              





|Communication Service Providers  |       |             |             |        
|-------------------------------- | ----- | ----------- | ----------- | -------
|Everest Broadband                |       | $0          | $35,931     | *      
|MetroFi                          |       | 597,967     | 597,967     | 11/1/07
|Subtotal:                        | 1.0%  | $597,967    | $633,898    |        
|                                 |       |             |             |        
|Communications Equipment         |       |             |             |        
|Atrica                           |       | $84,120     | $84,120     | 1/1/06 
|Caymas Systems                   |       | 249,442     | 249,442     | 6/1/06 
|Subtotal:                        | 0.6%  | $333,562    | $333,562    |        
|                                 |       |             |             |        
|Computers & Peripherals          |       |             |             |        
|MaXXan Systems                   |       | $332,199    | $332,199    | 11/1/05
|ONStor [Claristor]               |       | 283,779     | 283,779     | 9/1/06 
|OQO                              |       | 1,560,703   | 1,560,703   | 5/1/08 
|Subtotal:                        | 3.7%  | $2,176,681  | $2,176,681  |        
|                                 |       |             |             |        
|Computers & Storage              |       |             |             |        
|Sierra Logic                     |       | $543,713    | $543,713    | 12/1/07
|Subtotal:                        | 0.9%  | $543,713    | $543,713    |        
|                                 |       |             |             |        
|Internet                         |       |             |             |        
|Coremetrics                      |       | $278,541    | $452,631    | *      
|Friendster                       |       | 5,625,293   | 5,625,293   | 5/1/08 
|MessageOne [Evergreen Assurance] |       | 187,704     | 187,704     | 5/1/06 
|Plaxo                            |       | 422,046     | 422,046     | 12/1/07
|Postini                          |       | 371,651     | 371,651     | 11/1/06
|Slam Dunk Networks               |       | 0           | 275,120     | *      
|Tribe.net                        |       | 986,019     | 986,019     | 12/1/08
|Subtotal:                        | 13.3% | $7,871,254  | $8,320,464  |        
|                                 |       |             |             |        
|Medical Devices                  |       |             |             |        
|AcuFocus                         |       | $2,278,135  | $2,278,135  | 6/1/07 
|Alere Medical                    |       | 1,513,862   | 1,513,862   | 12/1/06
|Evalve                           |       | 453,922     | 453,922     | 2/1/06 
|Inogen                           |       | 1,453,612   | 1,453,612   | 3/1/08 
|Neuronetics                      |       | 1,583,034   | 1,583,034   | 4/1/07 
|Ntero Surgical                   |       | 394,593     | 894,593     | *      
|Oculus Innovative Sciences       |       | 522,415     | 522,415     | 5/1/07 
|ROX Medical                      |       | 1,886,819   | 1,886,819   | 4/1/08 
|Volcano Corporation              |       | 2,004,669   | 2,004,669   | 9/1/06 
|Subtotal:                        | 20.4% | $12,091,061 | $12,591,061 |        
|                                 |       |             |             |        
|Other                            |       |             |             |        
|Ion America                      |       | $231,064    | $231,064    | 4/1/06 
|Subtotal:                        | 0.4%  | $231,064    | $231,064    |        





|                                   |       |            |             |        
|---------------------------------- | ----- | ---------- | ----------- | -------
|Other Technology                   |       |            |             |        
|Nanosolar                          |       | $436,544   | $436,544    | 11/1/07
|Triformix                          |       | 846,836    | 846,836     | 6/1/08 
|Subtotal:                          | 2.2%  | $1,283,380 | $1,283,380  |        
|                                   |       |            |             |        
|Photonics                          |       |            |             |        
|Cenix                              |       | $691,081   | $ 1,330,630 | *      
|Inphi                              |       | 216,745    | 216,745     | 12/1/06
|Subtotal:                          | 1.5%  | $907,826   | $1,547,375  |        
|                                   |       |            |             |        
|Semiconductors                     |       |            |             |        
|Analogix Semiconductor             |       | $1,818,892 | $1,818,892  | 5/1/07 
|Brion Technologies                 |       | 281,096    | 281,096     | 11/1/06
|Ishoni Networks [HiQ Networks]     |       | 584,701    | 2,984,701   | *      
|Nexsil                             |       | 8,774      | 428,774     | *      
|Scintera Networks                  |       | 390,923    | 390,923     | 10/1/06
|Stretch                            |       | 594,478    | 594,478     | 12/1/06
|Subtotal:                          | 6.2%  | $3,678,864 | $6,498,864  |        
|                                   |       |            |             |        
|Semiconductors & Equipment         |       |            |             |        
|Aeluros                            |       | $58,231    | $58,231     | 3/1/06 
|Aristos Logic                      |       | 5,692,230  | 5,692,230   | 12/1/07
|Fyre Storm                         |       | 27,314     | 27,314      | 2/1/06 
|Matrix Semiconductor               |       | 3,346,980  | 3,346,980   | 10/1/07
|Molecular Imprints                 |       | 385,199    | 385,199     | 4/1/06 
|Universal Network Machines         |       | 453,621    | 453,621     | 3/1/07 
|Subtotal:                          | 16.8% | $9,963,575 | $9,963,575  |        
|                                   |       |            |             |        
|Software                           |       |            |             |        
|Accruent                           |       | $510,632   | $510,632    | 1/1/07 
|Adaptive Planning                  |       | 175,852    | 175,852     | 2/1/07 
|Airgo Networks [Woodside Networks] |       | 147,777    | 147,777     | 4/1/06 
|Andale                             |       | 819,282    | 819,282     | 12/1/06
|Avamar Technologies                |       | 1,421,573  | 1,421,573   | 3/1/07 
|CoWare                             |       | 384,455    | 384,455     | 6/1/07 
|Enkata Technologies                |       | 267,770    | 267,770     | 9/1/06 
|InterSan [Finisar]                 |       | 444,063    | 444,063     | 12/1/06
|IP Wireless                        |       | 5,576,477  | 5,576,477   | 2/1/07 
|KonaWare                           |       | 92,872     | 92,872      | 1/1/07 
|Merced Systems                     |       | 4,779      | 4,779       | 12/1/05
|Net6 [WebUnwired]                  |       | 225,548    | 225,548     | 4/1/06 
|nLayers                            |       | 394,210    | 394,210     | 8/1/06 
|Platform Solutions                 |       | 245,706    | 245,706     | 12/1/06
|PSS Systems                        |       | 74,213     | 74,213      | 6/1/06 





|Rome                          |       | 616,649     | 616,649     | 3/1/07 
|----------------------------- | ----- | ----------- | ----------- | -------
|Valchemy                      |       | 138,354     | 138,354     | 11/1/06
|Subtotal:                     | 19.5% | $11,540,212 | $11,540,212 |        
|                              |       |             |             |        
|Wireless                      |       |             |             |        
|IXI Mobile                    |       | $1,483,929  | $1,483,929  | 7/1/06 
|Subtotal:                     | 2.5%  | $1,483,929  | $1,483,929  |        
|                              |       |             |             |        
|Total:  (Cost of $59,676,934) | 93.4% | $55,232,244 | $59,676,934 |        



* As of September 30, 2005, loans with a cost basis of $6.4 million and a fair value of $2.0 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, 2004, are in non-affiliates and consist of the following:



|                                | Percentage of | Estimated Fair | Par Value  | Final        
|------------------------------- | ------------- | -------------- | ---------- | -------------
|Borrower                        | Net Assets    | Value12/31/04  | 12/31/04   | Maturity Date
|                                |               |                |            |              
|Biotechnology                   |               |                |            |              
|Net6 [WebUnwired]               |               | $657,277       | $657,277   | 4/1/06       
|Serenex                         |               | 1,979,549      | 1,979,549  | 6/1/07       
|Trinity Biosystems              |               | 166,013        | 166,013    | 6/1/06       
|Subtotal:                       | 5.0%          | $2,802,839     | $2,802,839 |              
|Carrier Networking              |               |                |            |              
|Arroyo Video Solutions          |               | $1,294,221     | $1,294,221 | 9/1/07       
|Pedestal Networks               |               | 1,452,705      | 1,452,705  | 9/1/06       
|Subtotal:                       | 4.9%          | $2,746,926     | $2,746,926 |              
|Communication Service Providers |               |                |            |              
|Everest Broadband               |               | $0             | $70,024    | *            
|Masergy Communications          |               | 3,669,682      | 3,669,682  | 9/1/06       
|MetroFi                         |               | 1,014,129      | 1,014,129  | 11/1/07      
|Subtotal:                       | 8.4%          | $4,683,811     | $4,753,835 |              
|Communications Equipment        |               |                |            |              
|Atrica                          |               | $1,325,306     | $1,325,306 | 1/1/06       
|Bivio Networks [Network Robots] |               | 184,637        | 184,637    | *            
|Caymas Systems                  |               | 618,433        | 618,433    | 6/1/06       
|General Bandwidth               |               | 226,396        | 226,396    | 6/1/05       
|Inkra Networks                  |               | 134,602        | 134,602    | 1/1/05       
|Nishan Systems                  |               | 23,692         | 23,692     | 7/1/05       
|Sanera Systems                  |               | 99,557         | 99,557     | 7/1/05       
|Santera Systems                 |               | 86,638         | 86,638     | 4/1/05       
|Subtotal:                       | 4.8%          | $2,699,261     | $2,699,261 |              





|Computers & Peripherals    |       |             |             |        
|-------------------------- | ----- | ----------- | ----------- | -------
|3PARdata                   |       | $1,211,770  | $1,211,770  | 2/1/06 
|MaXXan Systems             |       | 1,723,359   | 1,723,359   | 11/1/05
|ONStor [Claristor]         |       | 731,195     | 731,195     | 9/1/06 
|OQO                        |       | 2,098,738   | 2,098,738   | 3/1/08 
|Subtotal:                  | 10.3% | $5,765,062  | $5,765,062  |        
|Internet                   |       |             |             |        
|Coremetrics                |       | $591,901    | $765,991    | *      
|Friendster                 |       | 5,315,075   | 5,315,075   | 10/1/07
|MessageOne, Inc.           |       | 527,946     | 527,946     | 5/1/06 
|Postini                    |       | 739,089     | 739,089     | 11/1/06
|Slam Dunk Networks         |       | 0           | 275,120     | *      
|Tribe.net                  |       | 1,164,097   | 1,164,097   | 11/1/07
|Subtotal:                  | 14.9% | $8,338,108  | $8,787,318  |        
|Medical Devices            |       |             |             |        
|AcuFocus                   |       | $3,203,929  | $3,203,929  | 6/1/07 
|Alere Medical              |       | 2,913,155   | 2,913,155   | 12/1/06
|Evalve                     |       | 1,720,944   | 1,720,944   | 2/1/06 
|Inogen                     |       | 1,798,854   | 1,798,854   | 10/1/07
|NeoGuide Systems           |       | 35,164      | 35,164      | 2/1/05 
|Neomend                    |       | 36,415      | 36,415      | *      
|Neuronetics                |       | 2,350,945   | 2,350,945   | 4/1/07 
|Ntero Surgical             |       | 394,593     | 894,593     | *      
|Oculus Innovative Sciences |       | 759,471     | 759,471     | 5/1/07 
|Volcano Therapeutics       |       | 3,107,748   | 3,107,748   | 9/1/06 
|Subtotal:                  | 29.2% | $16,321,218 | $16,821,218 |        
|Other                      |       |             |             |        
|Ion America                |       | $673,221    | $673,221    | 4/1/06 
|Nanosolar                  |       | 599,064     | 599,064     | 11/1/07
|Subtotal:                  | 2.3%  | $1,272,285  | $1,272,285  |        
|Other Technology           |       |             |             |        
|Kiwi Networks              |       | $1,290,796  | $1,290,796  | 6/1/07 
|Triformix                  |       | 479,228     | 479,228     | 6/1/07 
|Subtotal:                  | 3.2%  | $1,770,024  | $1,770,024  |        
|Photonics                  |       |             |             |        
|Cenix                      |       | $691,081    | $1,330,630  | *      
|Covega [Quantum Photonics] |       | 108,822     | 108,822     | 2/1/05 
|Inphi                      |       | 574,501     | 574,501     | 12/1/06
|iolon                      |       | 56,579      | 56,579      | 2/1/05 
|Nufern                     |       | 574,020     | 574,020     | 8/1/05 
|Subtotal:                  | 3.6%  | $2,005,003  | $2,644,552  |        
|Semiconductors             |       |             |             |        
|Aeluros                    |       | $377,925    | $377,925    | 3/1/06 
|Ample Communications       |       | 87,407      | 87,407      | 2/1/05 





|Analogix Semiconductor             |        | 2,939,324   | 2,939,324   | 5/1/07 
|---------------------------------- | ------ | ----------- | ----------- | -------
|Aristos Logic                      |        | 6,577,507   | 6,577,507   | 12/1/07
|Brion Technologies                 |        | 440,339     | 440,339     | 11/1/06
|Ishoni Networks [HiQ Networks]     |        | 584,701     | 2,984,701   | *      
|Nexsil                             |        | 434,944     | 434,944     | 1/1/06 
|Scintera Networks                  |        | 930,155     | 930,155     | 10/1/06
|Sierra Logic                       |        | 739,434     | 739,434     | 12/1/07
|Sierra Monolithics                 |        | 69,091      | 69,091      | 3/1/05 
|Stretch                            |        | 1,609,545   | 1,609,545   | 12/1/06
|T-Ram                              |        | 174,787     | 174,787     | 7/1/05 
|TriCN                              |        | 86,252      | 86,252      | 11/1/06
|Subtotal:                          | 26.9%  | $15,051,411 | $17,451,411 |        
|Semiconductors & Equipment         |        |             |             |        
|Fyre Storm                         |        | $299,822    | $299,822    | 2/1/06 
|Matrix Semiconductor               |        | 3,654,947   | 3,654,947   | 3/1/07 
|Molecular Imprints                 |        | 1,123,395   | 1,123,395   | 4/1/06 
|Universal Network Machines         |        | 1,091,401   | 1,091,401   | 3/1/07 
|Subtotal:                          | 11.0%  | $6,169,565  | $6,169,565  |        
|Software                           |        |             |             |        
|Accruent                           |        | $1,016,129  | $1,016,129  | 1/1/07 
|Adaptive Planning                  |        | 320,587     | 320,587     | 2/1/07 
|Airgo Networks [Woodside Networks] |        | 1,050,213   | 1,050,213   | 4/1/06 
|Andale                             |        | 1,526,059   | 1,526,059   | 11/1/06
|Avamar Technologies                |        | 2,384,762   | 2,384,762   | 3/1/07 
|Ceon                               |        | 98,484      | 98,484      | 4/1/05 
|CiraNova                           |        | 206,992     | 206,992     | 9/1/05 
|CoWare                             |        | 758,933     | 758,933     | 6/1/07 
|Enkata Technologies                |        | 730,862     | 730,862     | 9/1/06 
|InterSan                           |        | 673,707     | 673,707     | 12/1/06
|IP Wireless                        |        | 8,288,239   | 8,288,239   | 2/1/07 
|KonaWare                           |        | 198,125     | 198,125     | 1/1/07 
|Merced Systems                     |        | 116,675     | 116,675     | 12/1/05
|nLayers                            |        | 714,556     | 714,556     | 8/1/06 
|Platform Solutions                 |        | 385,286     | 385,286     | 12/1/06
|Plaxo                              |        | 564,557     | 564,557     | 12/1/07
|PSS Systems                        |        | 139,050     | 139,050     | 6/1/06 
|Rome                               |        | 914,036     | 914,036     | 3/1/07 
|Valchemy                           |        | 283,087     | 283,087     | 11/1/06
|Subtotal:                          | 36.4%  | $20,370,339 | $20,370,339 |        
|Wireless                           |        |             |             |        
|IXI Mobile                         |        | $2,804,909  | $2,804,909  | 7/1/06 
|Subtotal:                          | 5.0%   | $2,804,909  | $2,804,909  |        
|                                   |        |             |             |        
|Total: (Cost of $96,859,544)       | 165.7% | $92,800,761 | $96,859,544 |        









* As of December 31, 2004 loans with a cost basis of $6.5 million and a fair value of $2.5 million have been classified as non-accrual.  These loans have been accelerated from original maturity and are 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, 2005, the Fund had no unfunded unexpired commitments.

3.

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.

4.

CAPITAL STOCK AND PAYOFF OF DEBT FACILITY

As of September 30, 2005 and December 31, 2004, there were 10,000,000 shares of $0.001 par value common stock authorized and 100,000 shares issued and outstanding.

In March 2003, the Fund restructured its debt facility by lowering its borrowing capacity from $250.0 million to $160.0 million.  The facility was fully repaid in September 2005.  On April 2, 2003, Westech Investment Advisors, 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 three and nine month periods ended September 30, 2005, the Fund made deemed distributions to its shareholder in the amount of $117,485 and $358,070, respectively.  During the three and nine month periods ended September 30, 2005, the Fund made distributions of securities to its shareholder in the amount of $20,000.

5.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



In December 2003, 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 Fund) has been deferred pending a decision by the FASB concerning whether to exempt such entities from applying the provisions of FIN 46R.

6.

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, 2005 and 2004.  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:

|                                              |                    |  |                    |  |                    |  |                   
|--------------------------------------------- | ------------------ |  | ------------------ |  | ------------------ |  | ------------------
|                                              | Three Months Ended |  | Three Months Ended |  | Nine Months Ended  |  | Nine Months Ended 
|                                              | September 30, 2005 |  | September 30, 2004 |  | September 30, 2005 |  | September 30, 2004
|                                              |                    |  |                    |  |                    |  |                   
|                                              |                    |  |                    |  |                    |  |                   
|Total Return *                                | 9.43%              |  | 14.43%             |  | 10.87%             |  | 11.03%            
|                                              |                    |  |                    |  |                    |  |                   
|Per Share Amounts:                            |                    |  |                    |  |                    |  |                   
|Net asset value, beginning of period          | $588.95            |  | $739.78            |  | $559.89            |  | $761.53           
|Net investment income                         | 13.75              |  | 25.42              |  | 50.01              |  | 82.90             
|Net realized loss & change in unrealized loss | (0.03)             |  | 1.12               |  | (4.62)             |  | (23.29)           
|Total income                                  | 13.72              |  | 26.54              |  | 45.39              |  | 59.61             
|Tax return of capital                         | -                  |  | -                  |  | -                  |  | -                 
|Distributions of income to shareholder        | (11.17)            |  | (8.54)             |  | (13.78)            |  | (63.36)           
|                                              |                    |  |                    |  |                    |  |                   
|Net asset value, end of period                | $591.50            |  | $757.78            |  | $591.50            |  | $757.78           
|                                              |                    |  |                    |  |                    |  |                   
|Net assets, end of period                     | $59,149,763        |  | $75,778,071        |  | $59,149,763        |  | $75,778,071       
|                                              |                    |  |                    |  |                    |  |                   
|Ratios to average net assets:                 |                    |  |                    |  |                    |  |                   
|                                              |                    |  |                    |  |                    |  |                   
|Expenses *                                    | 5.04%              |  | 9.07%              |  | 6.53%              |  | 9.07%             
|Net investment income  *                      | 9.50%              |  | 13.75%             |  | 11.67%             |  | 14.79%            
|                                              |                    |  |                    |  |                    |  |                   
|* Annualized                                  |                    |  |                    |  |                    |  |                   
|                                              |                    |  |                    |  |                    |  |                   



7.

SUBSEQUENT EVENT

At a board meeting held November 9, 2005, the Board of Directors of the Fund approved the termination of BDC status as well as a liquidation plan for the Fund.  The Board of Directors has authorized a special meeting of the sole shareholder of Venture Lending & Leasing III, Inc. (the Company) be held on Tuesday, December 20, 2005, commencing at 9:00 a.m., Pacific Daylight Time, at the offices of Westech Investment Advisors, Inc. (Westech), 2010 North First Street, Suite 310, San Jose, California 95131.  If the plan of liquidation is approved and the BDC election is terminated, the Fund will distribute all of its assets to the Company and cease operations.







Item 2.

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





General



Venture Lending & Leasing III, Inc. (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 Funds 10,000,000 total authorized shares. 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.





Overview



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 shareholder as dividends, allowing the Funds shareholder to substantially reduce or eliminate its 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 for the year ended December 31, 2004 (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, 2005 and 2004



Total investment income for the three months ended September 30, 2005 and 2004 was $2.1 million and $4.2 million, respectively, of which $2.1 million and $4.1 million, respectively, consisted of interest on venture loans outstanding during the period.  Total investment income for the nine months ended September 30, 2005 and 2004 was $7.8 million and $13.4 million, respectively, of which $7.7 million and $13.2 million, respectively, consisted of interest on venture loans outstanding during the period. The remaining income consisted of payment of late fees from customers 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 $103.1 million and $105.3 million for the three and nine months ended September 30, 2004 and $58.6 million and $70.5 million for the three and nine months ended September 30, 2005.  The decline in outstanding performing loans is a result of the Fund having ceased making commitments as of the quarter ended June 30, 2004 which has decreased the amount of new fundings.   Interest revenue was further reduced by the decrease in average interest yield on loans from 16.0% and 16.7% for the three and nine months ended September 30, 2004 to 14.1% and 14.5% for the three and nine months ended September 30, 2005.  The decrease in interest yield was due in a large part to a lower amount of prepayments from certain borrowers paying a premium in order to pay off their loans.



Total expenses were $0.7 million and $1.7 million for the three months ended September 30, 2005 and 2004, respectively.  Total expenses were $2.8 million and $5.1 million for the nine months ended September 30, 2005 and 2004, respectively.  Management fees were the largest expense.  Management fees for the three months ended September 30, 2005 and 2004 were $0.4 million and $0.7 million respectively.  Management fees for the nine months ended September 30, 2005 and 2004 were $1.3 million and $2.3 million respectively.  Management fees were lower for the three and nine months ended September 30, 2005 because such fees are calculated from the Funds asset base, which continued to decline from $118.0 million as of September 30, 2004 to $59.8 million as of September 30, 2005.







Interest expense was less than $0.1 million and was $0.4 million for the three months ended September 30, 2005 and 2004, respectively.  Interest expense was $0.6 million and $1.2 million for the nine months ended September 30, 2005 and 2004, respectively.  Included in these amounts are the settled portion of the Fund's interest hedge transactions of less than $0.1 million and $0.2 million for the three months ended September 30, 2005 and 2004, respectively and less than $0.1 million and $0.5 million for the nine months ended September 30, 2005 and 2004, respectively.  Interest expense declined as average outstanding bank debt declined from $44.8 million and $47.2 million for the three and nine months ended September 30, 2004, respectively to $4.6 million and $19.6 million for the three and nine months ended September 30, 2005, respectively.  This amount was slightly offset because rates increased from 3.7% for the nine months ended September 30, 2004 to 3.9% for the nine months ended September 30, 2005.  The increase in rates was primarily due to interest rate increases in general.  As of September 30, 2005, all outstanding bank debt has been repaid.





Total banking and legal fees were $0.3 million and $0.5 million for the three months ended September 30, 2005 and 2004, respectively.  Total banking and legal fees were $0.8 million and $1.4 million for the nine months ended September 30, 2005 and 2004, respectively.  Banking and legal fees declined as the average outstanding bank debt declined from $44.8 million and $47.2 million for the three and nine months ended September 30, 2004, respectively to $4.6 million and $19.6 million for the three and nine months ended September 30, 2005, respectively.  The decrease in banking and legal fees was primarily brought about due to the continued reduction of the facility size of the conduit from $160 million as of September 30, 2004 to $0 as of September 30, 2005.  This reduction was slightly offset by increased legal fees, much of which related to bank matters.



Total other operating expenses for the three months ended September 30, 2005 and 2004 were less than $0.1 million and $0.1 million, respectively.  Total other operating expenses for the nine months ended September 30, 2005 and 2004 were $0.1 million and $0.2 million, respectively.  Director fees and audit and tax related fees comprised a majority of the other operating expenses for the three and nine months ended September 30, 2005 and 2004.  The decrease in operating expenses was a result of the Funds stage in its lifecycle.  Most operating expenses are decreasing as the company has ceased making new loans and has started winding down its operations.



The Fund incurred a net unrealized gain (loss) from investments and hedging activity of less than $(0.1) million and $1.1 million for the three months ended September 30, 2005 and 2004, respectively.  The net change in unrealized loss from investments and hedging activity was due primarily to net increase (decrease) in the fair value of loans from borrowers of $0.0 million and $1.1 million for the three months ended September 30, 2005 and 2004, respectively.  Included in the net unrealized loss for the three months ended September 30, 2005 and 2004 is a less than $0.1 million unrealized loss and a less than $0.1 million unrealized gain, respectively resulting from interest rate hedging transactions. The Fund incurred a net unrealized loss from investments and hedging activity of $(0.3) million and less than $(0.1) million for the nine months ended September 30, 2005 and 2004, respectively.  The net change in unrealized loss from investments and hedging activity was due to net increase (decrease) in the fair value of loans from borrowers of $(0.4) million and $(0.5) million for the nine months ended September 30, 2005 and 2004, respectively.  Included in the net unrealized loss for the nine months ended September 30, 2005 and 2004 is less than $0.1 million and a $0.5 million unrealized gain, respectively resulting from interest rate hedging transactions.





The Fund incurred a net realized loss from investment transactions of $0 and $1.0 million for the three months ended September 30, 2005 and 2004, respectively.  The Fund incurred a net realized loss from investment transactions of $0.2 million and $2.3 million for the nine months ended September 30, 2005 and 2004, respectively.  These realized losses were the result of writing off certain loans deemed to be uncollectible less small recoveries of previously written off loans.



The Fund had a net increase in net assets resulting from operations of $1.4 million and $2.7 million for the three months ended September 30, 2005 and 2004, respectively.  This translates to a net increase in net assets resulting





from operations per share of $13.72 and $26.54 for the three months ended September 30, 2005 and 2004, respectively.  The Fund had a net increase in net assets resulting from operations of $4.5 million and $6.0 million for the nine months ended September 30, 2005 and 2004, respectively.  This translates to a net increase in net assets resulting from operations per share of $45.39 and $59.61 for the nine months ended September 30, 2005 and 2004, respectively.









Liquidity and Capital Resources  September 30, 2005 and December 31, 2004



Total capital contributed to the Fund was approximately $155.0 million at September 30, 2005.  Committed capital to the Company at September 30, 2005 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, 2005 and December 31, 2004, the Fund had in place a debt facility of $0 and $50.0 million, respectively to finance the acquisition of asset-based loans.  As of September 30, 2005 and December 31, 2004, $0 and $44.8 million were outstanding under this facility, respectively. The debt facility has now been fully repaid.



At September 30, 2005 and December 31, 2004 the Fund had interest rate swap transactions outstanding with a total notional principal amount of $19.9 million and $40.4 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 was expected to correspond to the amortization of the loans supporting each borrowing, however as of September 30, 2005, the Fund is over hedged due to rapid pay down of the bank facility.  Subsequent to quarter end, the Fund liquidated its hedge position and realized a small gain.



As of September 30, 2005 and December 31, 2004, respectively, 6.5% and 7.6% of the Fund's assets consisted of cash and cash equivalents.  The Fund continued to invest its assets in venture loans during the three months ended September 30, 2005.   Amounts disbursed under the Fund's loan commitments increased by approximately $6.7 million during the nine months ended September 30, 2005. Net loan amounts outstanding after amortization decreased by approximately $37.6 million for the same period. Unexpired, unfunded commitments decreased by $10.8 million for the nine months ended September 30, 2005.  As of September 30, 2005, the Fund is no longer obligated to fund additional commitments as all commitments have expired.





|As of              | Amount Disbursed | Principal Reductions | Balance Outstanding | Unexpired Unfunded Commitments
|------------------ | ---------------- | -------------------- | ------------------- | ------------------------------
|September 30, 2005 | $555.5 million   | $500.3 million       | $55.2 million       | $0                            
|December 31, 2004  | $548.8 million   | $456.0 million       | $92.8 million       | $10.8 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 generally distributes all equity securities to the Company 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 and $0.1 million for the three and nine months ended September 30, 2005.  This translates to 3.6% and 3.3% for the three and nine months ended September 30, 2005, respectively. 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





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.   Unregiserted Sales of Equity Securities and Use of Proceeds



Not applicable



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



None









|Exhibit Number | Description                                                                                                                                                                                                                                             
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i)           | Articles of Incorporation of the Fund filed with the Maryland Secretary of State on January 1, 2000, Incorporated by reference to the Funds Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 17, 2000.  
|3 (ii)         | Certificate of Correction of the Fund filed with the Maryland Secretary of State on February 11, 2000, Incorporated by reference to the Funds Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 17, 2000.
|3(iii)         | Bylaws of the Fund as of February 1, 2000, Incorporated by reference to the Funds Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 17, 2000.                                                            
|4.1            | Form of Purchase Agreement between the Fund and the Company, Incorporated by reference to the Funds Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 17, 2000.                                          
|31.1  32.2    | 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/ Martin D. Eng



Ronald W. Swenson

Martin D. Eng

Chairman and Chief Executive Officer

Chief Financial Officer

Date:

November 11, 2005

Date:

November 11, 2005





Exhibit 31.1

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



I, Martin D. Eng, 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, 2005



/S/ Martin D. Eng



Martin D. Eng

Chief Financial Officer





Exhibit 31.2

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, 2005



/S/ Ronald W. Swenson



Ronald W. Swenson

Chief Executive Officer





Exhibit 32.1



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, 2005 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, 2005









Exhibit 32.2



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, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Martin D. Eng, 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/ Martin D. Eng



Martin D. Eng

Chief Financial Officer
November 11, 2005