----

----

**FORM10-Q**

**SECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|
|       |

For the quarterly period ending June 30,2001

 
| o      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|-----------------------------------------------------------------------------------------------|
|   |

Forthe transition period from _______________ to _________________

 

**Commission file number 0-29591**

**Venture Lending & Leasing III, Inc.**(Exact Name of Registrant as specified inits charter)

| **Maryland**                                               | **77-0534084**      |
|------------------------------------------------------------|---------------------|
| ****                                                       | ****                |
| (State or other  jurisdiction of incorporation or          | (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 theregistrant has (i) filed all reports required to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (ii) has been subject to such filing requirements for the past 90days.Yes ýNo o

             Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

| **Class**                     | **Outstanding  as of August 7, 2001** |
|-------------------------------|---------------------------------------|
| ****                          | ****                                  |
| Common Stock, $.001par  value | 100,000                               |

----

----

 

**VENTURE LENDING & LEASING III, INC.**

**INDEX**

|                                   |                                                              |   |
|----------------------------------------|-------------------------------------------------------------------|--------|
| PART I — FINANCIAL INFORMATION    |                                                              |
|                                   |                                                              |
| Item 1.                                | Financial Statements                                              |   |
|                                   |                                                              |   |
|                                   | Statement  of Financial Position (Unaudited)                      |   |
|                                   | As of June  30, 2001 and December 31, 2000                        |   |
|                                   |                                                              |   |
|                                   | Statement of  Operations (Unaudited)                              |   |
|                                   | For the Three and  Six Months Ended June 30, 2001 and the Period  |   |
|                                   | Ended June 30, 2000                                               |   |
|                                   |                                                              |   |
|                                   | Statement  of Changes in Shareholder’s Equity (Unaudited)    |   |
|                                   | For  the Period From May 19, 2001 (Commencement of Operations)    |   |
|                                   | Through  December 31, 2000 and the Six Months Ended June 30, 2001 |   |
|                                   |                                                              |   |
|                                   | Statement of Cash  Flows (Unaudited)                              |   |
|                                   | For the Six Months  Ended June 30, 2001 and the Period Ended      |   |
|                                   | June 30, 2000                                                     |   |
|                                   |                                                              |   |
|                                   | Notes to  Financial Statements                                    |   |
|                                   |                                                              |   |
| Item  2.                               | Management’s  Discussion and Analysis of Financial           |   |
|                                   | Condition  and Results of Operations                              |   |
|                                   |                                                              |   |
| Item  3.      | Quantitative  & Qualitative Disclosures About Market Risk     |   |
|                                   |                                                              |   |
| 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 & LEASINGIII, INC.**

**STATEMENT OF FINANCIAL POSITION(UNAUDITED)**

**AS OF JUNE 30, 2001 ANDDECEMBER 31, 2000**

 
|                                        | June 30, 2001                                                                                        |         | December 31, 2000 |         |
|---------------------------------------------|------------------------------------------------------------------------------------------------------|--------------|-------------------|--------------|
|                                        |                                                                                                      |         |                   |         |
| ***ASSETS***                                |                                                                                                 | *** *** |              | *** *** |
|                                        |                                                                                                 |         |              |         |
| Loans at estimated fair value               |                                                                                                 |         |              |         |
|                                        | (Cost of $160,024,043 and $77,086,690)                                                               | $            | 155,344,360       |         | $ | 77,086,690 |   |
| Cash and cash equivalents                   | 22,930,139                                                                                           |         | 9,720,784         |         |
| Other assets                                | 493,079                                                                                              |         | 292,930           |         |
|                                        |                                                                                                      |         |                   |         |
|                                        | Total assets                                                                                         | 178,767,578  |              | 87,100,404   |   |
|                                        |                                                                                                      |         |                   |         |
|                                        |                                                                                                 |         |              |         |
| ***LIABILITIES  AND SHAREHOLDER'S EQUITY*** |                                                                                                 | *** *** |              | *** *** |
|                                        |                                                                                                 |         |              |         |
| Liabilities:                                |                                                                                                 |         |              |         |
|                                        | Bank loans                                                                                           | 66,215,755   |              | 37,500,000   |   |
|                                        | Accrued management fees                                                                              | 3,277,770    |              | 2,161,680    |   |
|                                        | Accounts payable and other accrued liabilities                                                       | 3,149,602    |              | 2,396,942    |   |
|                                        |                                                                                                 |              |              |              |   |
|                                        | Total liabilities                                                                                    | 72,643,127   |              | 42,058,622   |   |
|                                        |                                                                                                      |         |                   |         |
|                                        |                                                                                                 |         |              |         |
| Shareholder's equity:                       |                                                                                                 |         |              |         |
|                                        | Common  stock: $0.001 par value, 200,000 shares authorized; Issued and outstanding -  100,000 shares | 100          |         | 100          |      |
|                                        | Capital in excess of par value                                                                       | 119,004,400  |              | 51,022,400   |   |
|                                        | Distributions                                                                                        | (4,746,632   | )                 | (2,396,740   | ) |
|                                        | Accumulated deficit                                                                                  | (8,133,417   | )                 | (3,583,978   | ) |
|                                        |                                                                                                 |              |              |              |   |
|                                        | Total shareholder's equity                                                                           | 106,124,451  |              | 45,041,782   |   |
|                                        |                                                                                                      |         |                   |         |
|                                        |                                                                                                 |         |              |         |
|                                        | Total liabilities and shareholder's equity                                                           | $            | 178,767,578       |         | $ | 87,100,404 |   |
|                                        |                                                                                                      |         |                   |         |
|                                             |                                                                                                      |              |                   |              |  |  |  |  |

 

Theaccompanying notes are an integral part of these statements

**VENTURELENDING & LEASING III, INC.**

**STATEMENT OF OPERATIONS (UNAUDITED)**

 

|                                                        | For  the Three Months Ended June 30, 2001 |      | *For  the   Period Ended June 30, 2000 |     | For  the Six Months Ended June 30, 2001 |      | *For  the Period Ended June 30, 2000 |     |
|-------------------------------------------------------------|-------------------------------------------|-----------|----------------------------------------|----------|-----------------------------------------|-----------|--------------------------------------|----------|
|                                                        |                                           |      |                                        |     |                                         |      |                                      |     |
|                                                        |                                      |      |                                   |     |                                    |      |                                 |     |
| ***INVESTMENT  INCOME:***                                   |                                      |      |                                   |     |                                    |      |                                 |     |
|                                                        | Interest on loans                         | $         | 4,680,353                              |     | $                                       | 6,889     |                                 | $        | 7,692,184 |   | $ | 6,889 |   |
|                                                        | Interest on short-term investments        | 166,066   |                                   | 66,355   |                                    | 418,706   |                                 | 66,355   |   |
|                                                        |                                      |           |                                   |          |                                    |           |                                 |          |   |
|                                                        | Total investment income                   | 4,846,419 |                                   | 73,244   |                                    | 8,110,890 |                                 | 73,244   |   |
|                                                        |                                      |           |                                   |          |                                    |           |                                 |          |   |
|                                                        |                                      |      |                                   |     |                                    |      |                                 |     |
| ***EXPENSES:***                                             |                                      |      |                                   |     |                                    |      |                                 |     |
|                                                        | Management fees                           | 3,277,770 |                                   | 717,820  |                                    | 5,356,826 |                                 | 717,820  |   |
|                                                        | Interest expense                          | 840,832   |                                   | -        |                                    | 1,579,666 |                                 | -        |   |
|                                                        | Other operating expenses                  | 467,343   |                                   | 280,431  |                                    | 761,894   |                                 | 280,431  |   |
|                                                        |                                      |           |                                   |          |                                    |           |                                 |          |   |
|                                                        | Total expenses                            | 4,585,945 |                                   | 998,251  |                                    | 7,698,386 |                                 | 998,251  |   |
|                                                        |                                           |      |                                        |     |                                         |      |                                      |     |
|                                                        |                                      |      |                                   |     |                                    |      |                                 |     |
|                                                        | Net investment income (loss)              | 260,474   |                                   | (925,007 | )                                       | 412,504   |                                 | (925,007 | ) |
|                                                        |                                      |           |                                   |          |                                    |           |                                 |          |   |
| Net change in unrealized loss from investment  transactions | (1,610,092                                | )         | -                                      |     | (4,961,943                              | )         | -                                    |     |
|                                                        |                                           |      |                                        |     |                                         |      |                                      |     |
|                                                        | Net loss                                  | $         | (1,349,618                             | )        | $                                       | (925,007  | )                                    | $        | (4,549,439 | ) | $ | (925,007 | ) |
|                                                        |                                      |           |                                   |          |                                    |           |                                 |          |   |
| Net loss per share                                          | $                                         | (13.50    | )                                      | $        | 9.25                                    |      | $                                    | (45.49   | ) | $ | 9.25 |   |
|                                                        |                                           |      |                                        |     |                                         |      |                                      |     |
| Weighted average shares outstanding                         | 100,000                                   |      | 100,000                                |     | 100,000                                 |      | 100,000                              |     |
|                                                             |                                           |           |                                        |          |                                         |           |                                      |          |  |  |  |  |  |  |  |

 

 

*FromMay 19, 2000 (Commencement of Operations) through June 30, 2000

 

 

Theaccompanying notes are an integral part of these statements

 

**VENTURE  LENDING & LEASING III, INC.**

**STATEMENT OF CHANGES INSHAREHOLDER’S EQUITY (UNAUDITED)****FOR THE PERIOD ENDED DECEMBER 31, 2000 *ANDTHE SIX MONTHS ENDED JUNE 30, 2001**

 

 

|                        |                     |     |        |     |                               |       |            |       |                   |       |    |       |
|-----------------------------|--------------------------|----------|-------------|----------|------------------------------------|------------|-----------------|------------|------------------------|------------|---------|------------|
|                        | *Common Stock*           |     |        |     |                               |       |            |       |                   |       |
|                        | **                       |     |        |     |                               |       |            |       |                   |       |
|                        | *Shares*                 | * * | *Par Value* | * * | *Capital in  Excess of  Par Value* | * *   | *Distributions* | * *   | *Accumulated  deficit* | * *   | *Total* | * *   |
|                        | **                       |     |
| BALANCE,  May 19, 2000      | 100,000                  |     | $           | 100      |                               | $          | 24,900          |       | $                      | -          |    | $          | - |   | $ | 25,000 |   |
|                        |                     |     |        |     |                               |       |            |       |                   |       |    |       |
|                        | Contribution  of capital | -        |        | -        |                               | 50,997,500 |            | -          | * *               | -          |    | 50,997,500 |   |
|                        |                     |     |        |     |                               |       |            |       |                   |       |    |       |
|                        | Distributions            | -        |        | -        |                               | -          |            | (2,396,740 | )                      | -          |    | (2,396,740 | ) |
|                        |                     |     |        |     |                               |       |            |       |                   |       |    |       |   |
|                        | Net  loss                | -        |        | -        |                               | -          |            | -          |                   | (3,583,978 | )       | (3,583,978 | ) |
|                        |                          |
| BALANCE,  December 31, 2000 | 100,000                  |     | $           | 100      |                               | $          | 51,022,400      |       | $                      | (2,396,740 | )       | $          | (3,583,978 | ) | $ | 45,041,782 |   |
|                        |                          |
|                        |                     |
|                        | Contribution  of capital |     |        |     |                               |       | $               | 67,982,000 |                   |       |    |       |   | 67,982,000 |   |
|                        |                     |     |        |     |                               |       |            |       |                   |       |    |       |   |
|                        | Distributions            |     |        |     |                               |       |            |       | $                      | (2,349,892 | )       |       |   | (2,349,892 | ) |
|                        |                     |     |        |     |                               |       |            |       |                   |       |    |       |   |
|                        | Net  loss                |     |        |     |                               |       |            |       |                   |       | $       | (4,549,439 | ) | (4,549,439 | ) |
|                        |                          |
| BALANCE,  June 30, 2001     | 100,000                  |     | $           | 100      |                               | $          | 119,004,400     |       | $                      | (4,746,632 | )       | $          | (8,133,417 | ) | $ | 106,124,451 |   |
|                        |                          |

 

*FORTHE PERIOD FROM MAY 19, 2000 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31,2000

 

Theaccompanying notes are an integral part of these statements

 

**VENTURELENDING & LEASING III, INC.STATEMENT OF CASH FLOWS (UNAUDITED)**

| ***CASH FLOWS  FROM OPERATING ACTIVITIES:*** |                                                                                          |           |                           |           |
|----------------------------------------------|-----------------------------------------------------------------------------------------------|----------------|--------------------------------|----------------|
|                                         | For the Six Months   Ended 6/30/01                                                            |      | *For the Period  Ended 6/30/00 |      |
|                                         |                                                                                               |           |                                |           |
|                                         | Net loss                                                                                      | $              | (4,549,439                     | )              | $ | (925,007 | ) |
|                                         | Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |           |                      |           |      |
|                                         | Net  change in unrealized loss from investment transactions                                   | 4,961,943      |                      | -              |      |
|                                         | Decrease in deferred assets (net of  amortization)                                            | 17,027         |                           | -              |   |
|                                         | Increase in other assets                                                                      | (217,176       | )                              | (62,980        | ) |
|                                         | Net  increase in accounts payable, accrued liabilities, and accrued management  fees          | 1,586,489      |                      | 731,252        |      |
|                                         |                                                                                               |           |                                |           |
|                                         | Net cash provided by (used in) operating  activities                                          | 1,798,844      |                           | (256,735       | ) |
|                                         |                                                                                               |           |                                |           |
| ***CASH FLOWS  FROM INVESTING ACTIVITIES:*** |                                                                                          |           |                           |           |
|                                         |                                                                                          |           |                           |           |
|                                         | Acquisition of loans                                                                          | (104,435,755   | )                              | (2,213,139     | ) |
|                                         | Principal payments on loans                                                                   | 21,498,402     |                           | 196,724        |   |
|                                         | Acquisition of securities                                                                     | (2,349,891     | )                              | (75,900        | ) |
|                                         |                                                                                               |           |                                |           |
|                                         | Net cash used in investing activities                                                         | (85,287,244    | )                              | (2,092,315     | ) |
|                                         |                                                                                               |           |                                |           |
| ***CASH FLOWS  FROM FINANCING ACTIVITIES:*** |                                                                                          |           |                           |           |
|                                         |                                                                                          |           |                           |           |
|                                         | Contribution of capital                                                                       | 67,982,000     |                           | 20,267,500     |   |
|                                         | Loan from bank                                                                                | 47,636,130     |                           | -              |   |
|                                         | Repayment of bank loans                                                                       | (18,920,375    | )                              | -              |   |
|                                         |                                                                                               |           |                                |           |
|                                         | Net cash provided by financing activities                                                     | 96,697,755     |                           | 20,267,500     |   |
|                                         |                                                                                          |                |                           |                |   |
|                                         | Net increase in cash and cash equivalents                                                     | 13,209,355     |                           | 17,918,450     |   |
|                                         |                                                                                          |           |                           |           |
| ***CASH AND  CASH EQUIVALENTS:***            |                                                                                          |           |                           |           |
|                                         |                                                                                          |           |                           |           |
|                                         | Beginning of period                                                                           | 9,720,784      |                           | 25,000         |   |
|                                         |                                                                                          |                |                           |                |   |
|                                         | End of period                                                                                 | $              | 22,930,139                     |           | $ | 17,943,450 |   |
|                                         |                                                                                               |           |                                |           |
| ***CASH PAID  DURING THE PERIOD FOR:***      |                                                                                          |           |                           |           |
|                                         |                                                                                          |           |                           |           |
|                                         | Interest                                                                                      | $              | 1,722,413                      |           | $ | - |   |
|                                         |                                                                                          |           |                           |           |   |
| ***NON-CASH  FINANCING ACTIVITIES:***        |                                                                                          |           |                           |           |
|                                         |                                                                                          |           |                           |           |
|                                         | In-kind distributions to shareholder                                                          | $              | 2,349,891                      |           | $ | 75,900 |   |
|                                         | Unrealized loss on hedging activities                                                         | $              | 282,260                        |           | $ | - |   |
|                                              |                                                                                               |                |                                |                |  |  |  |  |

 

* From commencement of operations, May 19, 2000to June 30, 2000

Theaccompanying notes are an integral part of these statements.

**VENTURE LENDING & LEASINGIII, INC.**

**NOTES TO FINANCIAL STATEMENTS(UNAUDITED)****JUNE 30, 2001**

**1.**          **ORGANIZATIONAND OPERATIONS OF THE FUND**

VentureLending & Leasing III, Inc., (the “Fund”), was incorporated in Maryland onFebruary 1, 2000 as a nondiversified closed-end management investment companyelecting status as a business development company (“BDC”) under the InvestmentCompany Act of 1940.  100% of the stockof the Fund is held by Venture Lending & Leasing III, LLC (the“Company”).  Prior to commencing itsoperations on May 19, 2000, the Fund had no operations other than the sale tothe Company of 100,000 shares of common stock, $0.001 par value for$25,000.  This issuance of stock was arequirement in order to apply for a lender’s license. In the period betweenFebruary 1, 2000 and May 19, 2000, the Fund was not subject to SEC reportingrequirements.  The Fund became subjectto SEC reporting requirements on May 19, 2000.

Theaccompanying  financial statements inManagement's opinion, include all adjustments (consisting only of normal recurring adjustments) necessary for a fairpresentation of financial position and results of operations for interim periods.Certain information and note disclosures normally included in audited annualfinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted; however, the Fund believes that the disclosuresmade are adequate to make the information presented not misleading. The interimresults for the three and six months ended June 30, 2001 are not necessarilyindicative of what the results would be for the full year.  It is suggested that these financialstatements be read in conjunction with the financial statements and the notesincluded in the Fund’s Annual Report for the year ended December 31, 2000.

**2.          SUMMARY OFINVESTMENTS:**

Loans generally are made to borrowerspursuant to commitments whereby the Fund commits to finance assets up to aspecified amount for the term of the commitments, upon the terms and subject tothe conditions specified by such commitment. The Fund’s investments in loans are entirely within the United Statesand are diversified among the industries shown below.  The percentage of shareholder’s equity (net assets) that eachindustry group represents is shown with the industry totals below.  (The sum of the percentages does not equal100 percent because the percentages are based on net assets as opposed to totalloans).

 
| **Application Service Providers** |                |      |
|-----------------------------------|---------------------|-----------|
|                              | Access360           | $         | 5,033,235 |   |
|                              | Asera               | 2,702,931 |   |
|                              | eOnline             | 4,172,369 |   |
|                              | Jamcracker          | 507,596   |   |
|                              | Ultrabridge  (CA)   | 1,081,266 |   |
|                              |                |           |   |
|                              | **Subtotal:** 12.7% | $         | 13,497,397 |   |
|                                   |                     |           |  |  |  |

 

| **Biotechnology** |               |   |
|-------------------|--------------------|--------|
|              | Zyomyx             | $      | 3,066,086 |   |
|              |               |        |   |
|              | **Subtotal:** 2.9% | $      | 3,066,086 |   |
|                   |                    |        |  |  |  |

 

| **Communication Equipment** |                         |      |
|-----------------------------|------------------------------|-----------|
|                        | Amber  Networks              | $         | 6,962,852 |   |
|                        | Astral  Point Communications | 1,732,422 |   |
|                        | Calient  Networks            | 1,775,431 |   |
|                        | Calix  Networks              | 4,156,538 |   |
|                        | Coriolis  Networks           | 6,563,902 |   |
|                        | Gluon  Networks              | 5,265,505 |   |
|                        | Inkra  Networks              | 2,544,661 |   |
|                        | Network  Robots              | 970,622   |   |
|                        | Nexsi                        | 519,061   |   |
|                        | Sanera  Systems              | 3,463,479 |   |
|                        | Taqua                        | 1,874,341 |   |
|                        |                         |           |   |
|                        | **Subtotal:** 33.8%          | $         | 35,828,814 |   |
|                             |                              |           |  |  |  |

 

| **Communication Service Providers** |                        |      |
|-------------------------------------|-----------------------------|-----------|
|                                | Appgenesys                  | $         | 4,526,733 |   |
|                                | Coreon                      | 1,261,223 |   |
|                                | Everest  Broadband Networks | 3,046,001 |   |
|                                | Totality                    | 1,960,950 |   |
|                                | UM  Communications          | 1,299,860 |   |
|                                |                        |           |   |
|                                | **Subtotal:** 11.4%         | $         | 12,094,767 |   |
|                                     |                             |           |  |  |  |

 

| **Computers & Peripherals** |               |   |
|---------------------------------|--------------------|--------|
|                            | Andes  Networks    | $      | 516,909 |   |
|                            |               |        |   |
|                            | **Subtotal:** 0.5% | $      | 516,909 |   |
|                                 |                    |        |  |  |  |

 

| **Internet** |                |      |
|--------------|---------------------|-----------|
|         | BridgeSpan          | $         | 4,206,519 |   |
|         | Coremetrics         | 3,482,560 |   |
|         | ECtone              | 1,120,230 |   |
|         | Postini             | 1,747,336 |   |
|         | QuinStreet          | 5,625,119 |   |
|         | RivalWatch          | 146,194   |   |
|         | Slam  Dunk Networks | 432,203   |   |
|         | Viquity             | 727,495   |   |
|         |                |           |   |
|         | **Subtotal:** 16.5% | $         | 17,487,656 |   |
|              |                     |           |  |  |  |

 
| **Medical Devices** |               |   |
|---------------------|--------------------|--------|
|                | Neomend            | $      | 638,272 |   |
|                |               |        |   |
|                | **Subtotal:** 0.6% | $      | 638,272 |   |
|                     |                    |        |  |  |  |

 
| **Other** |               |    |
|-----------|--------------------|---------|
|      | AtomicTangerine    | $       | 3,235,466 |   |
|      | Lumenare           | 532,291 |   |
|      |               |         |   |
|      | **Subtotal:** 3.6% | $       | 3,767,757 |   |
|           |                    |         |  |  |  |

 
| **Photonics** |                |       |
|---------------|---------------------|------------|
|          | Calmar  Optcom      | $          | 2,084,597 |   |
|          | E2O  Communications | 1,759,936  |   |
|          | Gemfire             | 1,959,950  |   |
|          | IoLon               | 482,097    |   |
|          | LaserSharp          | 2,379,106  |   |
|          | Network  Elements   | 3,606,299  |   |
|          | Novera  Optics      | 14,098,873 |   |
|          | Onix  Microsystems  | 3,900,607  |   |
|          | Optinel  Systems    | 2,178,219  |   |
|          | Quantum  Photonics  | 463,679    |   |
|          | Sparkolor           | 34,099     |   |
|          | Tsunami  Optics     | 1,569,756  |   |
|          |                |            |   |
|          | **Subtotal:** 32.5% | $          | 34,517,218 |   |
|               |                     |            |  |  |  |

 
| **Semiconductors** |                              |      |
|--------------------|-----------------------------------|-----------|
|               | Ishoni  Networks                  | $         | 4,390,811 |   |
|               | MorphICs  Technology              | 2,554,712 |   |
|               | Optim  Networks                   | 440,243   |   |
|               | Pacific  Broadband Communications | 5,199,662 |   |
|               | Summit  MicroElectronics          | 4,794,545 |   |
|               | VxTel                             | 2,297,251 |   |
|               |                              |           |   |
|               | **Subtotal:**18.5%                | $         | 19,677,224 |   |
|                    |                                   |           |  |  |  |

 
| **Software** |                |      |
|--------------|---------------------|-----------|
|         | Bang  Networks      | $         | 3,129,862 |   |
|         | Believe             | 2,425,648 |   |
|         | Ceon                | 1,822,406 |   |
|         | eTime  Capital      | 2,116,726 |   |
|         | North  Systems      | 172,659   |   |
|         | OnDemand            | 565,049   |   |
|         | Syndeo              | 4,019,910 |   |
|         |                |           |   |
|         | **Subtotal:** 13.4% | $         | 14,252,260 |   |
|         |                |      |   |
|         | **Total:** 146.4%   | $         | 155,344,360 |   |
|              |                     |           |  |  |  |

The Fund provides asset-based financingprimarily to start-up and emerging growth venture-capital-backedcompanies.  As a result, the Fund issubject to general credit risk associated with such companies. At June 30,2001, the Fund has unfunded commitments to borrowers of $320.3 million.  Some of these commitments will expire priorto funding.

As of June 30, 2001 loans with a costbasis of $6.2 million and a fair value of $1.5 million have been classified asnon-accrual.

**3.          EARNINGS PERSHARE**

Basic earnings per share are computed bydividing net income, less dividends on preferred stock, by the weighted averagecommon shares outstanding.  Dilutedearnings per share are computed by dividing net income, less dividends onpreferred stock, by the weighted average common shares outstanding, including thedilutive effects of potential common shares (e.g., stock options).  The Fund has no preferred stock orinstruments that would be potential common shares; thus, reported basic anddiluted earnings are the same.

**4.  IMPLEMENTATION OFFINANCIAL ACCOUNTING STANDARDS:**

In June 1998, the FinancialAccounting Standards Board (FASB) issued SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  SFAS No. 133 establishes accounting and reporting standardsrequiring that every derivative instrument (including certain derivativeinstruments embedded in other contracts) be recorded in the balance sheet aseither an asset or liability measured at its fair value.  SFAS No. 133 requires that changes in thederivative’s fair value be recognized currently in earnings.

SFAS No. 133 is effective for fiscalyears beginning after June 15, 2000, and the Fund has adopted itsprovisions effective July 1, 2000. Derivatives that are used to hedge thecompany’s floating rate debt are now marked to market.  The resulting gain or loss is recorded as anincrease or decrease in unrealized gains from other security transactions.  The market value of the instrument istreated either an asset or as a liability depending on if its value is negativeor positive.

 

 

 

Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

**General**

             VentureLending & Leasing III, Inc. (“Fund”) is a closed-end, non-diversifiedmanagement investment company electing status as a business development companyunder the Investment Company Act of 1940 (“1940 Act”).  The Fund is 100% owned by Venture Lending& Leasing III, LLC (“Company”).  TheFund's investment objective is to achieve a high total return.  The Fund will provide asset-based financingto carefully selected venture capital-backed companies, in the form of securedloans.  The Fund generally will receivewarrants to acquire equity securities in connection with its portfolioinvestments.  The Fund generallydistributes these warrants to its shareholder upon receipt.

             TheFund’s shares of Common Stock, $.001 par value are sold to its shareholderunder a stock purchase agreement.  TheFund has issued 100,000 of the 200,000 shares that were authorized. The Fund’sshareholder may make additional capital contributions to the Fund.

             In addition to the historicalinformation contained herein, this Quarterly Report contains certainforward-looking statements. The reader of this Quarterly Report shouldunderstand that all such forward-looking statements are subject to variousuncertainties and risks that could affect their outcome.  The Fund's actual results could differmaterially from those suggested by such forward-looking statements.  Factors that could cause or contribute tosuch differences include, but are not limited to, variances in the actualversus projected growth in assets, return on assets, loan losses, expenses,rates charged on loans and earned on securities investments and competitioneffects as well as other factors. This entire Quarterly Report should be readto put such forward-looking statements in context and to gain a more completeunderstanding of the uncertainties and risks involved in the Fund's business.

**Results of Operations –****For the Three and Six Monthsended June 30, 2001**

             Total investment income for thethree and six months ending June 30, 2001 was $4.8 million and $8.1 million respectively,of which $4.7 million and $7.7 million respectively, consisted of interest onventure loans outstanding during the period. The majority of the remainingincome consisted of interest on the temporary investment of cash.  The cash is held pending investment inventure loans.   Revenues are expectedto increase in the future as additional investments are made during futureperiods.  Because the period ended June30, 2000 was only a partial period, there is limited benefit in discussingcomparisons between years, and as such will not be discussed or analyzedfurther in this section.

             Totalexpenses were $4.6 million and $7.7 million for the three and six months endingJune 30, 2001.  Management fees were thelargest expense and are based on committed capital to the Company for the firsttwo years of the Fund’s life, thereafter they will be charged based upon the Fund’stotal assets.  For purposes of calculatingthe management fee, any capital committed to the Company at a closingsubsequent to the first closing (regardless of when or if such committedcapital is called) shall be deemed to have been committed as of the firstclosing.  As a result, management feesfor the three and six months ended June 30, 2001 include the retroactivetreatment of capital contributed during these periods.

             InterestExpense was $0.8 million and $1.6 million for the three and six months endedJune 30, 2001.  Included in these amountsare the realized portion of the interest hedge transactions.

             Totalother operating expenses for the three and six months ending June 30, 2001 were$0.5 million and $0.8 million respectively. Legal and banking fee comprised a majority of the other operatingexpenses for the three and six months ended June 30, 2001.  Net investment income for the three and sixmonths ending June 30, 2001 was $0.3 million and $0.4 million respectively.

             The Fund incurred no realized gainsor losses during the period.  The Fundincurred an unrealized loss from investment transactions of $1.6 million and$5.0 million for the three and six months ended June 30, 2001.  This unrealized loss was due to anadjustment to fair value of loans from two borrowers due to credit problems aswell as a loss resulting from interest rate hedging transactions during theperiod.    For the three and six monthsended June 30, 2001, the unrealized loss from hedging was $44 thousand and $282thousand respectively.  Net loss for thethree and six months ended June 30, 2001 was $1.3 million and $4.5 millionrespectively. On a per share basis, the net loss was $13.50 and $45.49 for thethree and six months ended June 30, 2001.

 

**Liquidityand Capital Resources —**   **June 30, 2001**

             Totalcapital contributed to the Fund was approximately $119.0 million at June30, 2001. Committed capital to the Company at June 30, 2001 was $361.9 million, ofwhich $144.8 million has been called. As of July 31, 2001 the Company has received all of the capital that it hascalled.

             TheFund has in place $75.0 million in debt facilities to finance the acquisitionof asset-based loans.  As of June 30,2001, lenders had committed $66.5 million toward these facilities. As of June30, 2001, $66.2 million was outstanding under these facilities.  At June 30, 2001, the Fund had interest rateswap transactions outstanding with a total notional principal amount of $25million.  The effect of these swap transactionsis to convert the variable commercial paper rate into a fixed rate on thecontract notional value.  Theamortization schedule for each borrowing under the facility is expected tocorrespond to the amortization of the loans supporting each borrowing.

             As of June30, 2001, 13% of the Fund’s assetsconsisted of cash and cash equivalents. The Fund continued to invest its assets in venture loans and during theperiod.  Amounts disbursed under theFund’s loan commitments increased by approximately $104.4 million during thesix months ending June 30, 2001. Net loan amounts outstanding afteramortization increased by approximately $82.9 million for the same six monthperiod. Unfunded commitments increased by approximately $38.6 million for thesix months ended June 30, 2001.  Some ofthe unfunded commitments will expire prior to funding.

                           

|              | Amount  Disbursed |          | Principal  Reductions |   | Balance  Outstanding |   | Unfunded  Commitments |          |
|-------------------|-------------------|---------------|-----------------------|--------|----------------------|--------|-----------------------|---------------|
|              |                   |          |                       |   |                      |   |                       |          |
| June 30, 2001     | $                 | 190.3 million |                  | $      | 30.3 million         |   | $                     | 160.0 million |   | $ | 320.3 million |   |
|              |                   |          |                       |   |                      |   |                       |          |
| December 31, 2000 | $                 | 85.9 million  |                  | $      | 8.8 million          |   | $                     | 77.1 million  |   | $ | 281.7 million |   |
|              |                   |          |                       |   |                      |   |                       |          |

 

             Becauseventure loans are privately negotiated transactions, investments in theseassets are relatively illiquid.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

             TheFund's business activities contain elements of risk. The Fund considers theprincipal types of market risk to be interest rate risk and valuation risk. TheFund considers the management of risk essential to conducting its businessesand to maintaining profitability. Accordingly, the Fund's risk managementprocedures are designed to identify and analyze the Fund's risks, to setappropriate policies and limits and to continually monitor these risks andlimits by means of reliable administrative and information systems and otherpolicies and programs.

             TheFund manages its market risk by maintaining a portfolio that is diverse byindustry, size of investment, stage of development, and borrower.  The Fund has limited exposure to publicmarket price fluctuations as the Fund primarily invests in private businessenterprises and the Fund distributes all equity upon receipt.

             The Fund's sensitivity to changes ininterest rates is regularly monitored and analyzed by measuring thecharacteristics of assets and liabilities. The Fund utilizes various methods toassess interest rate risk in terms of the potential effect on interest incomenet of interest expense, the value of net assets and the value at risk in aneffort to ensure that the Fund is insulated from any significant adverseeffects from changes in interest rates.

             Basedon the model used for the sensitivity of interest income net of interestexpense, if the balance sheet were to remain constant and no actions were takento alter the existing interest rate sensitivity, a hypothetical immediate 100basis point change in interest rates would have affected net income by 1.4% forthe six months ended June 30, 2001. Although management believes that thismeasure is indicative of the Fund's sensitivity to interest rate changes, itmakes estimates to adjust for potential changes in credit quality, size andcomposition of the balance sheet and other business developments that couldaffect net income.  Accordingly, noassurances can be given that actual results would not differ materially fromthe potential outcome simulated by these estimates.

 

PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

 

             TheFund may become party to certain lawsuits from time to time in the normalcourse of business.  While the outcomeof these legal proceedings cannot at this time be predicted with certainty, theFund does not expect these proceedings will have a material effect upon theFund’s financial condition or results of operation.

Item 2.   Changes in Securities and Use ofProceeds

 

             None

Item 3.   Defaults Upon Senior Securities

 

             Notapplicable

Item 4.  Submission of Matters to a Vote of SecurityHolders

 

None

Item 5.  Other Information

 

             None

Item 6.  Exhibits

 

             None

SIGNATURES

             Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned dulyauthorized.

| VENTURE LENDING &  LEASING III, INC. |   |                    |
|------------------------------------------|--------|-------------------------|
| (Registrant)                             |   |                    |
|                                     |   |                    |
| By: /S/ Ronald W.  Swenson               |   | By: /S/ Brian R. Best   |
|                                          |   |                         |
| Ronald W. Swenson                        |   | Brian R. Best           |
| Chairman and Chief  Executive Officer    |   | Chief Financial Officer |
| Date: August 10, 2001                    |   | Date: August 10, 2001   |