**SECURITIES AND EXCHANGECOMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-K**

| **[X]** |   |   |   |   | **ANNUAL REPORT PURSUANT TO SECTION        13 OR 15(D)** |
|---------|--------|--------|--------|--------|----------------------------------------------------------|

|   |   |   |   |   |   |   |   |   | **OF THE SECURITIES EXCHANGE ACT OF        1934** |
|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------------------------------------------------|

|   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | **For the year ended December 31, 2001** |   |
|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------------------------------------|--------|

**OR**

| **[ ]** |   |   |   |   | **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 0-29591**VENTURE LENDING & LEASING III, INC.**(Exact name of registrant as specifiedin its charter)

|   |   |   |   |   |   |   |   | Maryland        ___________________                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 77-0534084         ______________    |
|--------|--------|--------|--------|--------|--------|--------|--------|-----------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------------------------------------|
|   |   |   |   |   |   |   |   | (State or other jurisdiction of        incorporation or organization) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (I.R.S. Employer Identification No.) |

2010 North First Street, Suite310, San Jose, CA 95131____________________________________________(Address of principal executive offices)(Zip Code)

Registrant’s telephonenumber, including area code: (408) 436-8577

| **Securities Registered Pursuant to        Section 12(b) of the Act**: |   |   |   | None |
|------------------------------------------------------------------------|--------|--------|--------|------|

| **Securities Registered Pursuant to        Section 12(g) of the Act**: |   |   |   | Common Stock, $0.001 par value |
|------------------------------------------------------------------------|--------|--------|--------|--------------------------------|

Indicate by check mark whether the registranthas (i) filed all reports required to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (ii) has beensubject to such filing requirements for the past 90 days: YesX No __

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or informationstatements incorporated be reference in Part II of this Form 10-Kor any amendment to this Form 10-K:___.

As the registrant’s shares are notpublicly-traded, the aggregate market value of the voting stockheld by non-affiliates of the registrant cannot be determined.

The number of shares outstanding of each of theissuer’s classes of common stock, as of March 15, 2002 was100,000.

**Documents Incorporated byReference**

| **Document Description        ___________________**                                                                                                    |   |   |   |   |   |   |   |   |   |   |   | **10-K Part        _________** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------------------------------|
| Specifically Identified Portions of        the Registrant’s Proxy Statement for the Annual        Meeting of Shareholders to be held May 15, 2002 |   |   |   |   |   |   |   |   |   |   |   | III                            |

**PART I**

**ITEM 1. BUSINESS**.

Introduction. 

Venture Lending & Leasing III, Inc. (theFund) was incorporated in Maryland on January 28, 2000, as anondiversified, closed-end management investment company electingstatus as a business development company under the InvestmentCompany Act of 1940. The Fund is a wholly owned subsidiary ofVenture Lending & Leasing III, LLC, a Delaware limitedliability company (the Company). The purpose of the Fund is toprovide asset-based financing to venture-capital-backed companiesin the form of secured loans. Prior to commencing its operationson May 19, 2000, the Fund had no operations other than thesale of 100,000 shares to Venture Lending andLeasing III, LLC for $25,000. As of December 31, 2001,the Fund meets the requirements, including diversificationrequirements, to qualify as a regulated investment company (RIC)under the Internal Revenue Code of 1986.

The Fund’s shares of Common Stock, $.001par value ("Shares") are held entirely by VentureLending & Leasing III, LLC. As capital is required to financethe acquisition of loans, additional capital is provided byVenture Lending & Leasing III, LLC.

Investment Program.

General. As a Business DevelopmentCompany (BDC), the Fund will invest at least 70% of its totalassets ("qualifying assets") in securities of companiesthat qualify as "eligible portfolio companies." Aneligible portfolio company generally is a United States companythat is not an investment company and that (i) does not have aclass of securities registered on an exchange or included in theFederal Reserve Board's over-the-counter margin list; (ii) isactively controlled by a BDC and has an affiliate of a BDC on itsboard of directors; or (iii) meets such other criteria as may beestablished by the SEC (See "Regulation"). The Fund mayinvest up to 30% of its total assets in non-qualifying assets,including companies that are not eligible portfolio companies(for example, because the Company's securities are listed on theNational Association of Securities Dealers' Automated QuotationSystem) and eligible portfolio companies as to which the Funddoes not offer to make available significant managerialassistance. The foregoing percentages are determined, in the caseof financings in which the Fund commits to provide financingprior to funding the commitment, by the amount of the Fund'stotal assets represented by the value of the maximum amount ofsecurities to be issued by the borrower to the Fund pursuant tosuch commitment.

Venture Loans. Venture loans generallyconsist of a promissory note secured by the equipment or otherassets of the borrower. The Fund generally obtains a securityinterest in the assets financed and receives periodic payments ofinterest and principal, and may receive a final paymentconstituting additional interest at the end of the transaction'sterm. The interest rate and amortization terms of venture loansare individually negotiated between the Fund and each borrower. 

Typically, loans are structured as commitmentsby the Fund to finance assets of the borrower over a specifiedperiod of time. The commitment of the Fund to finance futureasset acquisitions is typically subject to the absence of anydefault under the loan and compliance by the borrower withrequirements relating to, among other things, the type of assetsto be financed. Although the Fund's commitments generally providethat the Fund is not required to continue to fund additionalloans if there is a material adverse change in the borrower'sfinancial condition, it is possible that a borrower's financialcondition will not be as strong at the time the Fund finances anasset acquisition as it was at the time the commitment wasentered into. 

Warrants and Equity Securities. The Fundgenerally acquires warrants to purchase equity securities of theborrower in connection with asset financings. The terms of thewarrants, including the expiration date, exercise price and termsof the equity security for which the warrant may be exercised,are negotiated individually with each borrower. Substantially allthe warrants and underlying equity securities are restrictedsecurities under the 1933 Act at the time of issuance; the Fundgenerally negotiates registration rights with the borrower thatmay provide (i) "piggyback" registration rights, whichpermit the Fund under certain circumstances to include some orall of the securities owned by it in a registration statementfiled by the borrower or (ii) under rare circumstances,"demand" registration rights permitting the Fund undercertain circumstances to require the borrower to register thesecurities under the 1933 Act (in some cases at the Fund'sexpense). 

Investment Policies.

For purposes of these investment policies andunless otherwise specified, references to the percentage of theFund's total assets "invested" in securities of acompany will be deemed to refer, in the case of financings inwhich the Fund commits to provide financing prior to funding thecommitment, to the amount of the Fund's total assets representedby the value of the maximum amount of securities to be issued bythe borrower of the Fund pursuant to such commitment; the Fundwill not be required to divest securities in its portfolio ordecline to fund an existing commitment because of a subsequentchange in the value of securities the Fund has previouslyacquired or committed to purchase.

Diversification Standards. The Fund isclassified as a "non-diversified" closed-end investmentcompany under the 1940 Act. However the Fund seeks to qualify asa RIC, and therefore must meet diversification standards underthe Internal Revenue Code. 

To qualify as a RIC, the Fund must meet theissuer diversification standards under the Internal Revenue Codethat require that, at the close of each quarter of the Fund'staxable year, (i) not more than 25% of the market value of itstotal assets is invested in the securities of a single issuer and(ii) at least 50% of the market value of its total assets isrepresented by cash, cash items, government securities,securities of other RICs and other securities (with eachinvestment in such other securities limited so that not more than5% of the market value of the Fund's total assets is invested inthe securities of a single issuer and the Fund does not own morethan 10% of the outstanding voting securities of a singleissuer). For purposes of the diversification requirements underthe Internal Revenue Code, the percentage of the Fund's totalassets "invested" in securities of a company will bedeemed to refer, in the case of financings in which the Fundcommits to provide financing prior to funding the commitment, tothe amount of the Fund's total assets represented by the value ofthe securities issued by the borrower to the Fund at the timeeach portion of the commitment is funded. 

The Fund will generally invest no more than 25%of its total assets in securities of companies in any singleindustry. The broad industry categories in which the Fundanticipates that most of its investments will fall (and withineach of which there may be several "industries" forpurposes of the industry diversification policy) include computerand semiconductor-related, medical/biotechnology andcommunications.

Investment Guidelines. In selectinginvestments for the Fund's portfolio, Westech Investment Advisors(the Manager) will endeavor to meet the investment guidelinesestablished by the Fund's Board of Directors. The Fund may,however, make investments that do not conform to one or more ofthese guidelines when deemed appropriate by the Manager. Suchinvestments might be made if the Manager believes that a failureto conform in one area is offset by exceptional strength inanother or is compensated for by a higher yield, favorablewarrant issuance or other attractive transaction terms orfeatures. 

Leverage. The Fund is permitted toborrow money from and issue debt securities to banks, insurancecompanies and other lenders to obtain additional funds tooriginate venture loans. Under the 1940 Act, the Fund may notincur borrowings unless, immediately after the borrowing isincurred, such borrowings would have "asset coverage"of at least 200 percent. "Asset coverage" means theratio which the value of the Fund's total assets, less allliabilities not represented by the borrowings and any otherliabilities constituting "senior securities" under the1940 Act, bears to the aggregate amount of such borrowings andsenior securities. The practical effect of this limitation is tolimit the Fund's borrowings and other senior securities to 50% ofits total assets less its liabilities other than the borrowingsand other senior securities. 

The use of leverage increases investment risk.The Fund’s lenders require that the Fund pledge portfolioassets as collateral for loans. If the Fund is unable to servicethe borrowings, the Fund may risk the loss of such pledgedassets. Lenders also require that the Fund agree to loancovenants limiting the Fund's ability to incur additional debt orotherwise limiting the Fund's flexibility, and loan agreementsmay provide for acceleration of the maturity of the indebtednessif certain financial tests are not met.

Temporary Investments. Pendinginvestment in asset financing transactions and pendingdistributions, the Fund invests excess cash in (i) securitiesissued or guaranteed by the U.S. government, its agencies orinstrumentalities, (ii) repurchase agreements fullycollateralized by U.S. government securities or (iii) short-termhigh-quality debt instruments of U.S. corporations. All suchinvestments will mature in one year or less. The U.S. governmentsecurities in which the Fund may invest include U.S. governmentsecurities backed by the full faith and credit of the U.S.government (such as Treasury bills, notes and bonds) as well assecurities backed only by the credit of the issuing agency.Corporate securities in which the Fund may invest includecommercial paper, bankers' acceptances and certificates ofdeposit of domestic or foreign issuers.

The Fund also may enter into repurchaseagreements that are fully collateralized by U.S. governmentsecurities with banks or recognized securities dealers, in whichthe Fund purchases a U.S. government security from theinstitution and simultaneously agrees to resell it to the sellerat an agreed-upon date and price. The repurchase price is relatedto an agreed-upon market rate of interest rather than the couponof the debt security and, in that sense, these agreements areanalogous to secured loans from the Fund to the seller.Repurchase agreements carry certain risks not associated withdirect investments in securities, including possible declines inthe market value of the underlying securities and delays andcosts to the Fund if the other party to the transaction defaults.

Other Investment Policies. The Fund willnot sell securities short, purchase securities on margin (exceptto the extent the Fund's permitted borrowings are deemed toconstitute margin purchases), write puts or calls, purchase orsell commodities or commodity contracts or purchase or sell realestate. The Fund will not underwrite the securities of othercompanies, except to the extent the Fund may be deemed anunderwriter upon the disposition of restricted securitiesacquired in the ordinary course of the Fund's business.

*The Fund's investment objective, investmentpolicies and investment guidelines (other than its status as aBDC) are not fundamental policies and may be changed by theFund's Board of Directors at any time without shareholderapproval.*

 

Regulation.

Generally, to be eligible to elect BDC status,a company must engage in the business of furnishing capital andoffering significant managerial assistance to "eligibleportfolio companies," as defined below. More specifically,in order to qualify as a BDC, a company must (i) be a domesticcompany; (ii) have registered as a class of its securities orhave filed a registration statement with the SEC pursuant toSection 12 of the Securities Exchange Act of 1934; (iii) operatefor the purpose of investing in the securities of certain typesof eligible portfolio companies; (iv) offer to extend significantmanagerial assistance to such eligible portfolio companies; (v)have a majority of disinterested directors; and (vi) file (orunder certain circumstances, intend to file) a proper notice ofelection with the SEC.

"Making available significant managerialassistance" is defined under the 1940 Act, in relevant part,as (i) an arrangement whereby the business development company,through its officers, directors, employees or general partners,offers to provide and, if accepted, does provide, significantguidance and counsel concerning the management, operations orbusiness objectives of a portfolio company; or (ii) the exerciseby a business development company of a controlling influence overthe management or polices of the portfolio company by thebusiness development company acting individually or as part of agroup acting together which controls the portfolio company. Theofficers of the Fund intend to offer to provide managerialassistance, including advice on equipment acquisition andfinancing, cash flow and expense management, general financingopportunities, acquisition opportunities and opportunities toaccess the public securities markets, to the great majority ofcompanies to whom the Fund provides venture loans. In someinstances, officers of the Fund might serve on the board ofdirectors of borrowers.

An "eligible portfolio company"generally is a United States company that is not an investmentcompany and that (i) does not have a class of securitiesregistered on an exchange or included in the Federal ReserveBoard's over-the-counter margin list; (ii) is actively controlledby a BDC and has an affiliate of a BDC on its board of directors;or (iii) meets such other criteria as may be established by theSEC. Control under the 1940 Act is presumed to exist where a BDCowns more than 25% of the outstanding voting securities of theeligible portfolio company.

The 1940 Act prohibits or restricts companiessubject to the 1940 Act from investing in certain types ofcompanies, such as brokerage firms, insurance companies,investment banking firms, and investment companies. Moreover, the1940 Act limits the type of assets that BDCs may acquire tocertain prescribed qualifying assets and certain assets necessaryfor its operations (such as office furniture, equipment, andfacilities) if, at the time of acquisition, less than 70% of thevalue of BDC's assets consist of qualifying assets. Qualifyingassets include: (i) privately acquired securities of companiesthat were eligible portfolio companies at the time such BDCacquired their securities; (ii) securities of bankrupt orinsolvent companies; (iii) securities of eligible portfoliocompanies controlled by a BDC; (iv) securities received inexchange for or distributed in or with respect to any of theforegoing; and (v) cash items, government securities andhigh-quality short-term debt. The 1940 Act also placesrestrictions on the nature of transactions in which, and thepersons from whom, securities can be purchased in order for thesecurities to be considered qualifying assets. Such restrictionsinclude limiting purchases to transactions not involving a publicoffering and the requirement that securities be acquired directlyfrom either the portfolio company or its officers, directors oraffiliates.

The Fund, as a BDC, may sell its securities ata price that is below its net asset value per share, providedthat a majority of the Fund's disinterested directors hasdetermined that such sale would be in the best interests of theFund and its shareholders and upon the approval by the holders ofa majority of its outstanding voting securities, including amajority of the voting securities held by non-affiliated persons,of such policy or practice within one year of such sale. Amajority of the disinterested directors also must determine ingood faith, in consultation with the underwriters of the offeringif the offering is underwritten, that the price of the securitiesbeing sold is not less than a price which closely approximatesmarket value of the securities, less any distribution discountsor commissions. As defined in the 1940 Act, the term"majority of the outstanding voting securities" of theFund means the vote of (i) 67% or more of the Fund's Sharespresent at a meeting, if the holders of more than 50% of theoutstanding Shares are present or represented by proxy, or (ii)more than 50% of the Fund's outstanding Shares, whichever isless.

Many of the transactions involving a companyand its affiliates (as well as affiliates of those affiliates)which were prohibited without the prior approval of the SEC underthe 1940 Act prior to its amendment by the 1980 Provisions arepermissible for BDCs, including the Fund, upon the prior approvalof a majority of the Fund's disinterested directors and amajority of the directors having no financial interest in thetransactions. However, certain transactions involving certainpersons related to the Fund, including its directors, officers,and the Managers, may still require the prior approval of theSEC. In general, (i) any person who owns, controls, or holdspower to vote, more than 5% of the Fund's outstanding Shares (ii)any director, executive officer, or general partner of thatperson; and (iii) any person who directly or indirectly controls,is controlled by, or is under common control with, that person,must obtain the prior approval of a majority of the Fund'sdisinterested directors, and, in some situations, the priorapproval of the SEC, before engaging in certain transactionsinvolving the person or any company controlled by the Fund. The1940 Act generally does not restrict transactions between theFund and its eligible portfolio companies. While a BDC may changethe nature of its business so as to cease being a BDC (and inconnection therewith withdraw its election to be treated as aBDC) only if authorized to do so by a majority vote (as definedby the 1940 Act) of its outstanding voting securities,shareholder approval of changes in other fundamental investmentpolicies of a BDC is not required (in contrast to the general1940 Act requirement, which requires shareholder approval for achange in any fundamental investment policy).

Dividends and Distributions.

The Fund intends to distribute to shareholderssubstantially all of its net investment income and net realizedcapital gains, if any, as determined for income tax purposes.Applicable law, including provisions of the 1940 Act, may limitthe amount of dividends and other distributions payable by theFund. Income dividends will generally be paid quarterly toshareholders of record on the last day of each preceding calendarquarter end. Substantially all of the Fund's net capital gain(the excess of net long-term capital gain over net short-termcapital loss) and net short-term capital gain, if any, will bedistributed annually, or on a more frequent basis as determinedby the Manager. 

Until May 19, 2004, the Fund may reinvest theproceeds of matured, repaid or resold investments, net ofrequired distributions to shareholders, principal payments onborrowings and expenses or other obligations of the Fund, in newloans. Following that date, the Fund will begin to distribute toinvestors all proceeds received from principal payments and salesof investments, net of reserves and expenses, principalrepayments on the Fund's borrowings, amounts required to fundfinancing commitments entered into before such date, and anyamounts paid on exercise of warrants. Distributions of suchamounts are likely to cause annual distributions to exceed theearnings and profits of the Fund available for distribution, inwhich case such excess will be considered a tax free return ofcapital to a shareholder to the extent of the shareholder'sadjusted basis in his shares and then as capital gain. The Fundmay borrow money to fund shareholder distributions, to the extentconsistent with the 1940 Act and a prudent capital structure.

Competition.

Other entities and individuals compete forinvestments similar to those proposed to be made by the Fund,some of whom may have greater resources than the Fund.Furthermore, the Fund's need to comply with provisions of the1940 Act pertaining to BDCs and provisions of the InternalRevenue Code pertaining to RICs might restrict the Fund'sflexibility as compared with its competitors. The need to competefor investment opportunities may make it necessary for the Fundto offer borrowers more attractive transaction terms thanotherwise might be the case.

Employees.

The Fund has no employees; all of its officersare officers and employees of the Manager of the company or ofSiguler Guff (Advisor to the Manager), and all of its requiredservices are performed by officers and employees of the Manageror Advisor to the Manager.

**ITEM 2. PROPERTIES**.

All of the Fund’s office space is providedby the Manager.

**ITEM 3. LEGAL PROCEEDINGS**.

The Fund is not a party to any material legalproceedings.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**.

No matters were submitted to a vote of theFund’s security holders during the last quarter of the yearended December 31, 2001.

**EXECUTIVE OFFICERS OF THE FUND**

> 
The following are the executive officers of    the Fund. All officers serve at the pleasure of the Board.

| **Name and        Position With Fund**                                   | **Age** | **Occupation        During Past Five Years**                                                        |
|--------------------------------------------------------------------------|---------|-----------------------------------------------------------------------------------------------------|
| Ronald W.        Swenson, Chairman, Director and Chief Executive Officer | 57      | Chairman,        CEO, Director, and other positions, Westech Investment        Advisors since 1994. |
| Salvador O.        Gutierrez, Director, President                        | 58      | President and        Director, and other positions, Westech Investment        Advisors since 1994.  |
| George W.        Siguler, Advisory Director                              | 54      | Managing        Director, Siguler Guff Advisers & affiliates since        1995.                 |
| Brian R.        Best, Vice President, CFO, and Secretary                 | 35      | Vice        President, CFO, and other positions - Westech Investment        Advisors since 1997.    |
| Donald P.        Spencer, Assistant Secretary                            | 46      | Managing        Director, Siguler Guff Advisers and affiliates since        1995.                   |

 

**PART II.**

**ITEM 5. MARKET FOR REGISTRANT’S COMMONSTOCK AND RELATED STOCKHOLDER MATTERS**.

The Fund’s Common Stock is not listed onany securities exchange, and all holders of the Fund’sCommon Stock are subject to agreements significantly restrictingthe transferability of their shares.

The number of holders of record of theFund’s Common Stock at March 15, 2002 was 1.

The Fund has a policy of distributing warrantsas acquired. In addition, some expenses of the company may bepaid by the Fund, and will be deemed as distributions to theCompany. The Fund has also established a policy of declaringdividends on a quarterly basis to the extent that income of thefund exceeds warrant distributions and deemed distributions.Since warrant distributions and deemed distributions haveexceeded the net income of the Fund, no quarterly distributionshave yet been made as of December 31, 2001.

**ITEM 6. SELECTED FINANCIAL DATA**.

The following table summarizes certainfinancial data and should be read in conjunction with the"Management’s Discussion and Analysis of FinancialCondition and Results of Operations" and the financialstatements and notes thereto included elsewhere in this Form10-K. The selected financial data set forth below have beenderived from the audited financial statements.

|                                                              |   |   |   |   |   |   |   |   |   |   | For the        Year Ended        December 31, 2001         |   |   | From        Inception,         (May 19, 2000) To         December 31, 2000 |
|-------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------|
| Statement of Operations Data:                                     |   |   |   |   |   |   |   |   |   |   |                                                       |   |   |                                                                       |
| Investment Income:                                                |   |   |   |   |   |   |   |   |   |   |                                                       |   |   |                                                                       |
| Interest on Loans                                                 |   |   |   |   |   |   |   |   |   |   | $22,195,707                                                |   |   | $1,568,076                                                                 |
| Interest on Short-Term investments                                |   |   |   |   |   |   |   |   |   |   | 741,564        ________________                            |   |   | 410,056        ________________                                            |
| Total Investment Income                                           |   |   |   |   |   |   |   |   |   |   | 22,937,271                                                 |   |   | 1,978,132                                                                  |
| Expenses:                                                         |   |   |   |   |   |   |   |   |   |   |                                                       |   |   |                                                                       |
| Management Fee to Managers                                        |   |   |   |   |   |   |   |   |   |   | 9,917,506                                                  |   |   | 4,752,659                                                                  |
| Interest Expense                                                  |   |   |   |   |   |   |   |   |   |   | 3,290,846                                                  |   |   | 422,488                                                                    |
| Other Operating Expenses                                          |   |   |   |   |   |   |   |   |   |   | 1,383,178        ________________                          |   |   | 386,963        ________________                                            |
| Total        Expenses                                             |   |   |   |   |   |   |   |   |   |   | 14,591,530        ________________                         |   |   | 5,562,110        ________________                                          |
| Net Investment Income (Loss)                                      |   |   |   |   |   |   |   |   |   |   | 8,345,741        ________________                          |   |   | (3,583,978)        ________________                                        |
| Net change in unrealized loss from        investment transactions |   |   |   |   |   |   |   |   |   |   | (4,399,807)                                                |   |   | 0                                                                          |
| Realized loss from investment        transactions                 |   |   |   |   |   |   |   |   |   |   | (8,179,065)        ================                        |   |   | 0        ================                                                  |
| Net Loss                                                          |   |   |   |   |   |   |   |   |   |   | (4,233,131)        ================                        |   |   | (3,583,978)        ================                                        |
|                                                              |   |   |   |   |   |   |   |   |   |   |                                                       |   |   |                                                                       |
| AMOUNTS PER COMMON SHARE:                                         |   |   |   |   |   |   |   |   |   |   |                                                       |   |   |                                                                       |
| Net Loss                                                          |   |   |   |   |   |   |   |   |   |   | $(42.33)        ================                           |   |   | $(35.84)        ================                                           |
| Weighted Average Shares Outstanding                               |   |   |   |   |   |   |   |   |   |   | 100,000        ================                            |   |   | 100,000        ================                                            |
|                                                              |   |   |   |   |   |   |   |   |   |   |                                                       |   |   |                                                                       |
| Balance Sheet Data:                                               |   |   |   |   |   |   |   |   |   |   | As of        December 31, 2001        ____________________ |   |   | As of        December 31, 2000        ____________________                 |
|                                                              |   |   |   |   |   |   |   |   |   |   |                                                       |   |   |                                                                       |
| Total Assets                                                      |   |   |   |   |   |   |   |   |   |   | $225,944,402                                               |   |   | $87,100,404                                                                |
| Bank Loans                                                        |   |   |   |   |   |   |   |   |   |   | $80,000,000                                                |   |   | $37,500,000                                                                |

 

**ITEM 7. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

**CRITICAL ACCOUNTING POLICIES**

We identified the most critical accountingprinciples upon which our financial statements depend. Wedetermined the critical accounting principles by consideringaccounting policies that involve the most complex or subjectivedecisions or assessments. We identified our only criticalaccounting policy to be that related to the valuation of loans. 

Loans are held at fair value as determined bymanagement, in accordance with the valuation methods described inthe valuation of loans and investments section of footnote 2(Summary of Significant Accounting Policies). Critical factors indetermining the fair value of a loan include payment history,collateral position, financial strength of borrower, prospectsfor future equity rounds, likelihood of sale or acquisition ofthe borrower, and length of expected holding period of the loan.The actual value of the loans may differ from management’sestimates, which would affect net income as well as assets.

 

**Results of Operations – For the yearended December 31, 2001 and the period from May 19, 2000(commencement of operations) through December 31, 2000**

Total investment income for the year endedDecember 31, 2001 was $22.9 million, of which $22.2 millionconsisted of interest on venture loans outstanding. Totalinvestment income for the period ended December 31, 2000 was $2.0million, of which $1.6 million consisted of interest on ventureloans outstanding. Remaining income consisted of interest on thetemporary investment of cash, pending investment in venture loansor application to the Fund’s expenses. Interest on loansincreased from $1.6 million for the period ending December 31,2000 to $22.2 million for the period ending December 31, 2001.This increase was the result of the increase in the average loansoutstanding from $38 million in 2000 to $140.7 million in 2001.Comparisons between the periods have limited use as the periodended December 31, 2000 was a partial year and included a ramp-upperiod for the Fund. As such, additional comparisons between theperiods will be of limited value.

Expenses for the periods ended December 31,2001 and 2000 were $14.6 million and $5.6 million respectively.Management fees are calculated based on the Company’scommitted capital for the first two years of the Fund’s lifeand thereafter as a percentage of Fund assets. Management feesfor the Fund were $9.9 million $4.8 million for the period endedDecember 31, 2001 and 2000 respectively. Interest Expense was$3.3 million and $0.4 million for the periods ended December 31,2001 and 2000. Interest expense increased as debt outstandingincreased from $37.5 million on December 31, 2000 to $80.0million as of December 31, 2001 Other operating expenses were$1.4 and $0.4 million for the periods ended December 31, 2001 and2000 respectively. An increase in legal fees made up a majorityof the increase in other expenses.

Net change in unrealized loss from investmenttransactions was $4.4 million and $0 for the periods endedDecember 31, 2001 and 2000. Net realized loss from investmenttransactions was $8.2 million and $0 for the periods endedDecember 31, 2001. The unrealized loss on investment transactionsis composed of adjustments to the fair value of certain loans andthe fair value of the Fund’s hedge transaction. The realizedloss on investments was entirely composed of loans which werewritten off during the period. 

Net loss for the periods ended December 31,2001 and 2000 was $4.2 million and $3.6 million. On a per sharebasis, for the periods ended December 31, 2001 and 2000 there wasa net loss of $42.33 and $35.84 respectively.

 

**Liquidity and Capital Resources -- December31, 2001 and 2000**

The Fund is owned entirely by Venture Lending& Leasing III, LLC. The Company is expected, but not requiredto make further contributions to the capital of the Fund to theextent of the Members’ capital commitment to the Company. Asof December 31, 2001 the Company has received subscriptions forcapital in the amount of $361.8 million, of which $162.8 millionhas been called and received. Uncalled capital as of December 31,2001 was $199.0 million. As of December 31, 2000 the Company hadreceived subscriptions for capital in the amount of $307.6million, of which $61.5 million had been called and received.Remaining uncalled capital of the Company at December 31, 2000was $246.1 million. 

The Fund had in place a $41.5 million revolvingdebt facility to finance asset-based loans. As of December 31,2001 and 2000, $0 and $37.5 million was outstanding under thisfacility. The facility expired in December 2001 and the Companyelected not to renew it. During the period ended December 31,2000 the Fund had also put in place a $25 million securitzationdebt facility. As of December 31, 2000, there was no balanceoutstanding under this facility. The Fund increased this facilityto $250 million during the year ended December 31, 2001 of whichthe Fund was eligible to borrow up to $170 million.

The Fund entered into swap transactions tohedge its interest rate on the securitization debt facility witha total notional principal of $90 million. The Fund did not enterinto any interest rate swap transactions to hedge its interestrate on the debt facility in 2000. The fair value of the swap atDecember 31, 2001 and 2000 was ($1.2) million and $0. The effectof the interest rate swap transactions is to convert the variableLIBOR rate into a fixed rate on the contract notional value. 

As of December 31, 2001 and 2000, 9% and 11% ofthe Fund’s assets consisted of cash and cash equivalents.The Fund continued to invest its assets in venture loans duringthe period. Amounts disbursed under the Fund’s loancommitments was $211.9 million for the period ended December 31,2001. Net loan amounts outstanding after amortization wasapproximately $204.2 million. Unfunded commitments as of December31, 2001 were $292.4 million; of which $133.3 million remainedunexpired. 

| Year Ending                                                                                  | Amount Disbursed | Principal Amortization | Balance Outstanding | Unfunded Commitments |
|----------------------------------------------------------------------------------------------|------------------|------------------------|---------------------|----------------------|
| Year ended        December 31, 2001                                                          | $297.8 million   | $93.6 million          | $204.2 million      | $292.4 million       |
| Period from        May 19, 2000 (Commencemnt of operations) through December        31, 2000 | $85.9 million    | $8.8 million           | $77.1 million       | $294.7 million       |

Because venture loans are privately negotiatedtransactions, investments in these assets are relativelyilliquid. It is the company’s experience that not allunfunded commitments will be used by borrowers.

The Fund seeks to meet the requirements toqualify for the special pass-through status available to"regulated investment companies" ("RICs")under the Internal Revenue Code, and thus to be relieved offederal income tax on that part of its net investment income andrealized capital gains that it distributes to its shareholder. Toqualify as a RIC, the Fund must distribute to its shareholder foreach taxable year at least 90% of its investment company taxableincome (consisting generally of net investment income and netshort-term capital gain) ("Distribution Requirement").To the extent that the terms of the Fund’s venture loansprovide for the receipt by the Fund of additional interest at theend of the loan term or provide for the receipt by the Fund of apurchase price for the asset at the end of the loan term("residual income"), the Fund would be required toaccrue such residual income over the life of the loan, and toinclude such accrued income in its gross income for each taxableyear even if it receives no portion of such residual income inthat year. Thus, in order to meet the Distribution Requirementand avoid payment of income taxes or an excise tax onundistributed income, the Fund may be required in a particularyear to distribute as a dividend an amount in excess of the totalamount of income it actually receives. Those distributions willbe made from the Fund's cash assets, from amounts receivedthrough amortization of loans or from borrowed funds.

 

**Quarterly Results**

This information has been derived fromunaudited financial statements that, in the opinion ofmanagement, include all normal recurring adjustments necessaryfor a fair presentation of such information. The operatingresults for any quarter are not necessarily indicative of resultsfor any future period.

 

**December 31, 2001 (Unaudited)**

|   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Three Months Ended        _______________________________________________________________________ |
|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------|

|                                                              |   |   |   |   | March 31, 2001                   |   |   | June 30, 2001                    |   | September 30, 2001              |   |   | December 31, 2001               |
|-------------------------------------------------------------------|--------|--------|--------|--------|----------------------------------|--------|--------|----------------------------------|--------|---------------------------------|--------|--------|---------------------------------|
| Investment Income:                                                |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
| Interest on Loans                                                 |   |   |   |   | $3,011,831                       |   |   | $4,680,353                       |   | $5,976,657                      |   |   | $8,526,866                      |
| Interest on Short-Term Investments                                |   |   |   |   | 252,641        ____________      |   |   | 166,066        ____________      |   | 231,555        ____________     |   |   | 91,302        ____________      |
| Total Investment Income                                           |   |   |   |   | 3,264,472        ____________    |   |   | 4,846,419        ____________    |   | 6,208,212        ____________   |   |   | 8,618,168        ____________   |
| Expenses:                                                         |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
| Management Fees                                                   |   |   |   |   | 2,079,057                        |   |   | 3,277,770                        |   | 2,280,340                       |   |   | 2,280,339                       |
| Interest Expense                                                  |   |   |   |   | 738,834                          |   |   | 840,832                          |   | 926,611                         |   |   | 784,569                         |
| Other Operating Expenses                                          |   |   |   |   | 294,551        ____________      |   |   | 467,343        ____________      |   | 217,903        ____________     |   |   | 403,381        ____________     |
| Total Expenses                                                    |   |   |   |   | 3,112,442        ____________    |   |   | 4,585,945        ____________    |   | 3,424,854        ____________   |   |   | 3,468,289        ____________   |
|                                                              |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
| Net Investment Income                                             |   |   |   |   | 152,030        ____________      |   |   | 260,474        ____________      |   | 2,783,358        ____________   |   |   | 5,149,879        ____________   |
| Net change in unrealized loss from        investment transactions |   |   |   |   | (3,351,851)        ____________  |   |   | (1,610,092)        ____________  |   | (2,871,572)        ____________ |   |   | 3,433,708        ____________   |
|                                                              |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
| Net realized loss                                                 |   |   |   |   | 0        ============            |   |   | 0        ============            |   | 0        ============           |   |   | (8,179,065)        ============ |
|                                                              |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
| Net income (loss)                                                 |   |   |   |   | $(3,199,821)        ============ |   |   | $(1,349,618)        ============ |   | $(88,214)        ============   |   |   | $404,522        ============    |
|                                                              |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
| Amount per common share:                                          |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
|                                                              |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
| Net income (loss)                                                 |   |   |   |   | $(32.00)        ============     |   |   | $(13.50)        ============     |   | $(0.88)        ============     |   |   | $4.05        ============       |
|                                                              |   |   |   |   |                             |   |   |                             |   |                            |   |   |                            |
| Weighted Average Shares Outstanding                               |   |   |   |   | 100,000        ============      |   |   | 100,000        ============      |   | 100,000        ============     |   |   | 100,000        ============     |

 

**December 31, 2000 (Unaudited)**

 

|   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Three Months Ended        ________________________________________________________________ |
|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------------------------------------------------------------------------------------------|

|                                |   |   |   |   | June 30, 2000* |   |   |   | September 30, 2000 |   |   |   | December 31, 2000 |
|-------------------------------------|--------|--------|--------|--------|----------------|--------|--------|--------|--------------------|--------|--------|--------|-------------------|
| Investment Income:                  |   |   |   |   |           |   |   |   |               |   |   |   |              |
| Interest on Loans                   |   |   |   |   | $6,889         |   |   |   | $187,039           |   |   |   | $1,374,148        |
| Interest on Short-Term Investments  |   |   |   |   | 66,355         |   |   |   | 196,072            |   |   |   | 147,629           |
|                                |   |   |   |   | _________      |   |   |   | _________          |   |   |   | _________         |
| Total Investment Income             |   |   |   |   | 73,244         |   |   |   | 383,111            |   |   |   | 1,521,777         |
|                                |   |   |   |   | _________      |   |   |   | _________          |   |   |   | _________         |
| Expenses:                           |   |   |   |   |           |   |   |   |               |   |   |   |              |
| Management Fees                     |   |   |   |   | 717,820        |   |   |   | 1,873,159          |   |   |   | 2,161,680         |
| Interest Expense                    |   |   |   |   | -              |   |   |   | 3,387              |   |   |   | 419,101           |
| Other Operating Expenses            |   |   |   |   | 280,431        |   |   |   | 90,848             |   |   |   | 15,684            |
|                                |   |   |   |   | _________      |   |   |   | _________          |   |   |   | _________         |
| Total Expenses                      |   |   |   |   | 998,251        |   |   |   | 1,967,394          |   |   |   | 2,596,465         |
|                                |   |   |   |   | _________      |   |   |   | _________          |   |   |   | _________         |
|                                |   |   |   |   |           |   |   |   |               |   |   |   |              |
| Net Investment Loss                 |   |   |   |   | (925,007)      |   |   |   | (1,584,283)        |   |   |   | (1,074,688)       |
|                                |   |   |   |   | _________      |   |   |   | _________          |   |   |   | _________         |
|                                |   |   |   |   |           |   |   |   |               |   |   |   |              |
|                                |   |   |   |   |           |   |   |   |               |   |   |   |              |
| Net Loss                            |   |   |   |   | $(925,007)     |   |   |   | $(1,584,283)       |   |   |   | $(1,074,688)      |
|                                |   |   |   |   | ========       |   |   |   | ========           |   |   |   | ========          |
|                                |   |   |   |   |           |   |   |   |               |   |   |   |              |
| Amount per common share:            |   |   |   |   |           |   |   |   |               |   |   |   |              |
|                                |   |   |   |   |           |   |   |   |               |   |   |   |              |
| Net Loss                            |   |   |   |   | $(9.25)        |   |   |   | $(15.84)           |   |   |   | $(10.75)          |
|                                |   |   |   |   | ========       |   |   |   | ========           |   |   |   | ========          |
|                                |   |   |   |   |           |   |   |   |               |   |   |   |              |
| Weighted Average Shares Outstanding |   |   |   |   | 100,000        |   |   |   | 100,000            |   |   |   | 100,000           |
|                                |   |   |   |   | ========       |   |   |   | ========           |   |   |   | ========          |
|                                |   |   |   |   |           |   |   |   |               |   |   |   |              |
|                                |   |   |   |   |           |   |   |   |               |   |   |   |              |

*** From May 19, 2000 (Commencement ofoperations) through June 30, 2000**

 

**ITEM 7A -****Quantitative andQualitative Disclosures About Market Risk**

 

The Fund's business activities contain elementsof risk. The Fund considers the principal types of market risk tobe interest rate risk and valuation risk. The Fund considers themanagement of risk essential to conducting its businesses and tomaintaining profitability. Accordingly, the Fund's riskmanagement procedures are designed to identify and analyze theFund's risks, to set appropriate policies and limits and tocontinually monitor these risks and limits by means of reliableadministrative and information systems and other policies andprograms. 

The Fund manages its market risk by maintaininga portfolio that is diverse by industry, size of investment,stage of development, and borrower. The Fund has limited exposureto public market price fluctuations as the Fund primarily investsin private business enterprises and the Fund distributes allequity investments upon receipt.

The Fund's sensitivity to changes in interestrates is regularly monitored and analyzed by measuring thecharacteristics of assets and liabilities. The Fund utilizesvarious methods to assess interest rate risk in terms of thepotential effect on interest income net of interest expense, thevalue of net assets and the value at risk in an effort to ensurethat the Fund is insulated from any significant adverse effectsfrom changes in interest rates. Based on the model used for thesensitivity of interest income net of interest expense, if thebalance sheet were to remain constant and no actions were takento alter the existing interest rate sensitivity, a hypotheticalimmediate 100 basis point change in interest rates would haveaffected net income by approximately 7% for the year endedDecember 31, 2001.

Although management believes that this measureis indicative of the Fund's sensitivity to interest rate changes,it makes estimates to adjust for potential changes in creditquality, size and composition of the balance sheet and otherbusiness developments that could affect net income. Accordingly,no assurances can be given that actual results would not differmaterially from the potential outcome simulated by theseestimates.

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

See Item 14

**ITEM 9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

Not applicable.

**PART III**

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

The information required by this item iscontained in part under the caption "Executive Officers ofthe Fund" in Part I hereof, and the remainder is containedin the Fund’s Proxy Statement filed in connection with theAnnual Meeting of Shareholders to be held May 15, 2002("Proxy Statement") under the caption "Proposal 2-- To Elect Seven Directors of the Fund" and is incorporatedherein by reference.

**ITEM 11. EXECUTIVE COMPENSATION**

The information required by this item iscontained in the Fund’s Proxy Statement filed in connectionwith the Annual Meeting of Shareholders to be held May 15, 2002under the caption "Proposal 2 -- To Elect Seven Directors ofthe Fund" and is incorporated herein by reference.

**ITEM 12. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

The information required by this item iscontained in the Fund’s 2001 Proxy Statement under thecaption "Annex A -- Beneficial Ownership of FundShares" and is incorporated herein by reference.

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

The information required by this item iscontained in the Fund’s 2001 Proxy Statement under thecaptions: "Other Information -- Managers" and isincorporated herein by reference.

**PART IV.**

**ITEM 14. EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K**

**(a) 1. Index to Financials Statements andFinancial Statement Schedules**

Report of Independent Public Accountants 

Statements of Financial Position as of December31, 2001 and 2000 

Statements of Operations for the Year endedDecember 31, 2001 and the Period from May 19, 2000 (commencementof operations), through December 31, 2000 

Statement of Changes in Shareholder’sEquity for the Year ended December 31, 2001 and the Period fromMay 19, 2000 (commencement of operations), through December 31,2000 

Statements of Cash Flows for the Year endedDecember 31, 2001 and the Period from May 19, 2000 (commencementof operations), through December 31, 2000 

Notes to Financial Statements

Financial Statement Schedules for the YearEnded December 31, 2001 and 2000 included in Item 14(a):

No schedules are required because the requiredinformation is not present or not present in amounts sufficientto require submission of the schedule, or because the requiredinformation is included in the financial statements and the notesthereto. 

| **(a)** |   |   |   |   |   | **2.** |   | **Exhibits** |
|---------|--------|--------|--------|--------|--------|--------|--------|--------------|

 

**Exhibit Title**

| **Exhibit** |   |   |   |   |   | **Exhibit**                                                                                                                                                                                                                                                                               |
|-------------|--------|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 Limited Liability Company, , Incorporated by        reference to the Fund’s Registration Statement on        Form 10 filed with the Securities and Exchange Commission        on February 17, 2000.                       |
|        |   |   |   |   |   |                                                                                                                                                                                                                                                                                      |
| 10.1        |   |   |   |   |   | Form of Custodian Agreement between        the Fund and Investors Bank & Trust, Incorporated by        reference to the Fund’s Registration Statement on        Form 10 filed with the Securities and Exchange Commission        on February 17, 2000.                           |
|        |   |   |   |   |   |                                                                                                                                                                                                                                                                                      |
| 10.2        |   |   |   |   |   | Form of Intercreditor Agreement        between the Fund and Venture Lending & Leasing, Inc,        Incorporated by reference to the Fund’s Registration        Statement on Form 10 filed with the Securities and        Exchange Commission on February 17, 2000.               |
|        |   |   |   |   |   |                                                                                                                                                                                                                                                                                      |
| 10.3        |   |   |   |   |   | Form of Management Agreement between        the Fund, the Manager and the Adviser to the Manager, ,        Incorporated by reference to the Fund’s Registration        Statement on Form 10 filed with the Securities and        Exchange Commission on February 17, 2000.           |

 

| **(b)** |   |   |   |   |   | **Reports on Form 8-K** |
|---------|--------|--------|--------|--------|--------|-------------------------|

The Fund filed no reports on Form 8-K with theCommission during the fiscal quarter ended December 31, 2001.

> 
**Signatures**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

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: March 28, 2002                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Date: March 28, 2002       |   |

> 
 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

|   |   |   | NAME                          |   |   |   |   |   | TITLE                    |   |   |   |   |   | DATE           |
|--------|--------|--------|-------------------------------|--------|--------|--------|--------|--------|--------------------------|--------|--------|--------|--------|--------|----------------|
|   |   |   |                          |   |   |   |   |   |                     |   |   |   |   |   |           |
| By:    |   |   | /S/J. Michael Egan__________  |   |   |   |   |   | Director                 |   |   |   |   |   | March 28, 2002 |
|   |   |   | J. Michael Egan               |   |   |   |   |   |                     |   |   |   |   |   |           |
|   |   |   |                          |   |   |   |   |   |                     |   |   |   |   |   |           |
| By:    |   |   | /S/Salvdor O. Gutierrez _____ |   |   |   |   |   | President & Director |   |   |   |   |   | March 28, 2002 |
|   |   |   | Salvador O. Gutierrez         |   |   |   |   |   |                     |   |   |   |   |   |           |
|   |   |   |                          |   |   |   |   |   |                     |   |   |   |   |   |           |
| By:    |   |   | /S/Scott C. Malpass _________ |   |   |   |   |   | Director                 |   |   |   |   |   | March 28, 2002 |
|   |   |   | Scott C. Malpass              |   |   |   |   |   |                     |   |   |   |   |   |           |
|   |   |   |                          |   |   |   |   |   |                     |   |   |   |   |   |           |
| By:    |   |   | /S/Michael G. McCaffery _____ |   |   |   |   |   | Director                 |   |   |   |   |   | March 28, 2002 |
|   |   |   | Michael G. McCaffery          |   |   |   |   |   |                     |   |   |   |   |   |           |
|   |   |   |                          |   |   |   |   |   |                     |   |   |   |   |   |           |
| By:    |   |   | /S/Roger V. Smith___________  |   |   |   |   |   | Director                 |   |   |   |   |   | March 28, 2002 |
|   |   |   | Roger V. Smith                |   |   |   |   |   |                     |   |   |   |   |   |           |
|   |   |   |                          |   |   |   |   |   |                     |   |   |   |   |   |           |
| By:    |   |   | /S/Arthur C. Spinner          |   |   |   |   |   | Director                 |   |   |   |   |   | March 28, 2002 |
|   |   |   | Arthur C. Spinner             |   |   |   |   |   |                     |   |   |   |   |   |           |
|   |   |   |                          |   |   |   |   |   |                     |   |   |   |   |   |
| By:    |   |   | /S/Ronald W. Swenson          |   |   |   |   |   | CEO & Director       |   |   |   |   |   | March 28, 2002 |
|   |   |   | Ronald W. Swenson             |   |   |   |   |   |                     |   |   |   |   |   |           |

 

**Report of Independent Public Accountants**

 

 

To the Shareholders of Venture Lending & Leasing III, Inc.:

We have audited the accompanying statements offinancial position of Venture Lending & Leasing III, Inc. (aMaryland corporation) (the Fund) as of December 31, 2001 and2000, and the related statements of operations, changes inshareholder’s equity and cash flows for the year endedDecember 31, 2001, and for the period from May 19, 2000(commencement of operations), through December 31, 2000.These financial statements are the responsibility of theFund’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance withauditing standards generally accepted in the United States. Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, the financial statementsreferred to above present fairly, in all material respects, thefinancial position of Venture Lending & Leasing III, Inc. asof December 31, 2001 and 2000, and the results of itsoperations and its cash flows for the year endedDecember 31, 2001, and for the period from May 19, 2000(commencement of operations), through December 31, 2000, inconformity with accounting principles generally accepted in theUnited States.

 

 

 

/S/Arthur Andersen LLP

San Francisco, CaliforniaFebruary 8, 2002

 

 

 

 

**Venture Lending& Leasing III, Inc.**

Statements of Financial PositionAs of December 31, 2001 and 2000

 

|  

                                                                                                      | **2001**                                     | **2000**                                    |
|--------------------------------------------------------------------------------------------------------------------|----------------------------------------------|---------------------------------------------|
| ASSETS                                                                                                             |                                         |                                        |
| Loans,        at estimated fair value (cost of $207,446,465 and        $77,086,690 in 2001 and 2000, respectively) | $ 204,243,113                                | $ 77,086,690                                |
| Cash        and cash equivalents                                                                                   | 20,175,836                                   | 9,720,784                                   |
| Other        assets                                                                                                | 1,525,453        ________________            | 292,930        ________________             |
| Total assets                                                                                                       | $        225,944,402        ================ | $        87,100,404        ================ |
| LIABILITIES AND SHAREHOLDER’S        EQUITY                                                                   |                                         |                                        |
| LIABILITIES:                                                                                                       |                                         |                                        |
| Bank        Loans                                                                                                  | $ 80,000,000                                 | $ 37,500,000                                |
| Accrued        management fees                                                                                     | 2,280,340                                    | 2,161,680                                   |
| Accounts        payable, accrued and other liabilities and deferred fees                                           | 3,340,710        ________________            | 2,396,942        ________________           |
| Total liabilities                                                                                                  | 85,621,050        ________________           | 42,058,622        ________________          |
| SHAREHOLDER’S        EQUITY:                                                                                  |                                         |                                        |
| Common        stock, $0.001 par value:                                                                             |                                         |                                        |
| Authorized        - 200,000 shares                                                                                 |                                         |                                        |
| Issued        and outstanding - 100,000 shares                                                                     | 100                                          | 100                                         |
| Capital        in excess of par value                                                                              | 155,004,400                                  | 51,022,400                                  |
| Distributions                                                                                                      | (6,864,039)                                  | (2,396,740)                                 |
| Accumulated        deficit                                                                                         | (7,817,109)        ________________          | (3,583,978)        ________________         |
| Total            shareholder’s equity                                                                         | 140,323,352        ________________          | 45,041,782        ________________          |
| Total liabilities and            shareholder’s equity                                                         | $ 225,944,402        ================        | $ 87,100,404        ================        |

The accompanying notes are anintegral part of these statements.

 

**Venture Lending& Leasing III, Inc.**

Statements of OperationsFor the Year Ended December 31, 2001, and for the PeriodFrom May 19, 2000 (Commencement of Operations),Through December 31, 2000

 

|                                                              | **2001**                            | **2000**                           |
|-------------------------------------------------------------------|-------------------------------------|------------------------------------|
|                                                              |                                |                               |
| INVESTMENT        INCOME:                                         |                                |                               |
| Interest        on loans                                          | $ 22,195,707                        | $ 1,568,076                        |
| Interest        on short-term investments                         | 741,564        ______________       | 410,056        ______________      |
| Total investment            income                                | 22,937,271        ______________    | 1,978,132        ______________    |
| EXPENSES:                                                         |                                |                               |
| Management        fees                                            | 9,917,506                           | 4,752,659                          |
| Interest        expense                                           | 3,290,846                           | 422,488                            |
| Other        operating expenses                                   | 1,383,178        ______________     | 386,963        ______________      |
| Total expenses                                                    | 14,591,530        ______________    | 5,562,110        ______________    |
| Net investment income            (loss)                           | 8,345,741                           | (3,583,978)                        |
| NET        CHANGE IN UNREALIZED LOSS FROM INVESTMENT TRANSACTIONS | (4,399,807)                         | –                             |
| NET        REALIZED LOSS FROM INVESTMENT TRANSACTIONS             | (8,179,065)        ______________   | –        ______________       |
| Net loss                                                          | $ (4,233,131)        ============== | $ (3,583,978)        ============= |
|                                                              |                                |                               |
| AMOUNTS        PER COMMON SHARE: Net loss                         | $(42.33)        ==============      | $(35.84)        =============      |
|                                                              |                                |                               |
| WEIGHTED        AVERAGE SHARES OUTSTANDING                        | 100,000        ==============       | 100,000        =============       |

The accompanying notes are anintegral part of these statements.

 

**Venture Lending& Leasing III, Inc.**

Statements of Changes inShareholder’s EquityFor the Year Ended December 31, 2001, and for the PeriodFrom May 19, 2000 (Commencement of Operations),Through December 31, 2000

|                                   |                         |                        |                                      |                               |                               |                               |
|----------------------------------------|------------------------------|-----------------------------|-------------------------------------------|------------------------------------|------------------------------------|------------------------------------|
|                                   |                         |                        |  
                              |                               |                               |                               |
|                                   | **Common stock**             |  
                |                                      |  
                       |                               |
|                                   | **Shares**                   | **Amount**                  | **Capital in        excess of Par Value** | **Distributions**                  | **Accumulated deficit**            | **Total**                          |
|                                   |                         |                        |                                      |                               |                               |                               |
| BALANCE,        MAY 19, 2000      | 100,000                      | $ 100                       | $ 24,900                                  | $ –                           | $ –                           | $ 25,000                           |
| Contributions                          | –                       | –                      | 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                         |
| Contributions                          | –                       | –                      | 103,982,000                               | –                             | –                             | 103,982,000                        |
| Distributions                          | –                       | –                      | –                                    | (4,467,299)                        | –                             | (4,467,299)                        |
| Net        loss                        | –        _____________  | –        _____________ | –        _____________               | –        _____________        | (4,233,131)        _____________   | (4,233,131)        _____________   |
| BALANCE,        DECEMBER 31, 2001 | 100,000        ============= | $ 100        =============  | $ 155,004,400        =============        | $ (6,864,039)        ============= | $ (7,817,109)        ============= | $ 140,323,352        ============= |

The accompanying notes are anintegral part of these statements.

 

 

 

**Venture Lending& Leasing III, Inc.**

Statements of Cash FlowsFor the Year Ended December 31, 2001, and for the PeriodFrom May 19, 2000 (Commencement of Operations),Through December 31, 2000

 

|                                                                                                     | **2001**                            | **2000**                           |
|----------------------------------------------------------------------------------------------------------|-------------------------------------|------------------------------------|
|                                                                                                     |                                |                               |
| CASH        FLOWS FROM OPERATING ACTIVITIES:                                                             |                                |                               |
| Net        Loss                                                                                          | $ (4,233,131)                       | $ (3,583,978)                      |
| Adjustments        to reconcile net loss to net cash provided by operating        activities:            |                                |                               |
| Net realized loss from            investment transactions                                                | 8,179,065                           | –                             |
| Net change in            unrealized loss from investment transactions                                    | 4,399,807                           | –                             |
| Increase in deferred            assets, net of amortization                                              | (433,971)                           | –                             |
| Increase in other            assets                                                                      | (151,834)                           | (67,409)                           |
| Net increase            (decrease) in accounts payable, accrued liabilities            and deferred fees | (134,028)        ______________     | 4,558,622        ______________    |
| Net cash provided                by operating activities                                                 | 7,625,908        ______________     | 907,235        ______________      |
| CASH        FLOWS FROM INVESTING ACTIVITIES:                                                             |                                |                               |
| Acquisition        of loans                                                                              | (211,924,293)                       | (85,887,316)                       |
| Principal        payments on loans                                                                       | 73,385,453                          | 8,800,626                          |
| Acquisition        of warrants and stock                                                                 | (4,411,299)        ______________   | (2,216,335)        ______________  |
| Net cash used in                investing activities                                                     | (142,950,139)        ______________ | (79,303,025)        ______________ |
| CASH        FLOWS FROM FINANCING ACTIVITIES:                                                             |                                |                               |
| Deemed        distribution                                                                               | (56,000)                            | (180,405)                          |
| Contribution        of capital                                                                           | 103,982,000                         | 50,997,500                         |
| Loan        from bank                                                                                    | 114,585,470                         | 37,500,000                         |
| Increase        in deferred bank facility fees, net of amortization                                      | (646,717)                           | (225,521)                          |
| Repayment        of bank loans                                                                           | (72,085,470)        ______________  | –        ______________       |
| Net cash provided                by financing activities                                                 | 145,779,283        ______________   | 88,091,574        ______________   |
| Net increase in                cash and cash equivalents                                                 | 10,455,052                          | 9,695,784                          |
| CASH        AND CASH EQUIVALENTS:                                                                        |                                |                               |
| Beginning        of period                                                                               | 9,720,784        ______________     | 25,000        ______________       |
| End        of period                                                                                     | $ 20,175,836        ==============  | $ 9,720,784        ==============  |
|                                                                                                     |                                |                               |
| CASH        PAID DURING THE PERIOD FOR INTEREST                                                          | $ 3,343,702                         | $ 257,147                          |
|                                                                                                     |                                |                               |
| NONCASH        TRANSACTIONS:                                                                             |                                |                               |
| Distributions        of warrants and stock to shareholder                                                | 4,411,299                           | 2,216,335                          |

The accompanying notes are anintegral part of these statements.

**Venture Lending& Leasing III, Inc.**

Notes to Financial Statements

 

| **1.** |   |   |   | **Organization and        Operations of the Company** |
|--------|--------|--------|--------|-------------------------------------------------------|

Venture Lending & Leasing III,Inc. (the Fund) was incorporated in Maryland on January 28,2000, as a nondiversified, closed-end management investmentcompany electing status as a business development company underthe Investment Company Act of 1940. The Fund is a wholly ownedsubsidiary of Venture Lending & Leasing III, LLC, a Delawarelimited liability company (the Company). The purpose of the Fundis to provide asset-based financing to venture-capital-backedcompanies in the form of secured loans. Prior to commencing itsoperations on May 19, 2000, the Fund had no operations otherthan the sale of 100,000 shares to Venture Lending andLeasing III, LLC for $25,000. As of December 31, 2001,the Fund meets the requirements, including diversificationrequirements, to qualify as a regulated investment company (RIC)under the Internal Revenue Code of 1986.

| **2.** |   |   |   | **Summary of Significant        Accounting Policies** |
|--------|--------|--------|--------|-------------------------------------------------------|

**Basis of Accounting**

The preparation of financialstatements in conformity with accounting principles generallyaccepted in the United States requires management to makeestimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates.

**Cash and Cash Equivalents**

Cash and cash equivalents consistof cash on hand and demand deposits in banks with originalmaturities of 90 days or less.

**Valuation of Loans**

Venture loans are privatelynegotiated transactions, and there is no established tradingmarket in which such loans can be sold. Investments in loans arevalued at their original cost less amortization of principalunless, pursuant to procedures established by the Fund’sBoard of Directors, the Fund’s Managers determine thatamortized cost does not represent fair value, in which case loanswill be adjusted to their fair value as determined by the Boardof Directors.

**Warrants**

Warrants that are received inconnection with loan transactions generally will be assigned anominal value at the time of acquisition. Warrants are thendistributed by the Fund to the Company at the assigned value.

**Nonaccrual Loans**

The Fund’s policy is to placea loan on nonaccrual status when either principal or interest hasbecome past due for 90 days or more, or when managementdeems that the borrower has ceased operations and the possibilityof acquisition and/or additional financing is remote. When a loanis placed on nonaccrual status, all interest previously accruedbut not collected is reversed for the quarter in which the loanwas placed on nonaccrual status. Any uncollected interest relatedto quarters prior to when the loan was placed on nonaccrualstatus is added to the principal balance, and the aggregatebalance of the principal and interest is evaluated in accordancewith the valuation of loans.

Loans with a fair value of$2,876,733 and $0 and a cost of $6,080,085 and $0 have beenclassified as nonaccrual at December 31, 2001 and 2000,respectively.

**Commitment Fees**

Unearned income and commitmentfees on loans are recognized using the effective-interest methodover the term of the loan. Commitment fees are carried asliabilities when received for commitments upon which no drawshave been made. When the first draw is made, the fee is treatedas unearned income and is recognized as described above.

**Interest Rate Swaps**

The Financial Accounting StandardsBoard (FASB) Statement of Financial Accounting Standards (SFAS)No. 133, "Accounting for Derivative Instruments andHedging Activities," as amended by SFAS No. 138,establishes accounting and reporting standards requiring thatevery derivative instrument (including certain derivativeinstruments embedded in other contracts) be recorded in thebalance sheet as either an asset or liability measured at itsfair value. For investment companies such as the Fund, SFASNo. 133 requires that changes in the derivative’s fairvalue be recognized currently in earnings. The Fund adopted SFASNo. 133 effective January 1, 2001.

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

**Tax Status**

As long as the Fund qualifies as aRIC, it will not pay any federal or state corporate income tax onincome that is distributed to shareholders (pass-through status).Should the Fund lose its qualification as a RIC, it could betaxed as an ordinary corporation on its taxable income for thatyear (even if that income is distributed to its shareholders),and all distributions out of its earnings and profits will betaxable to shareholders as ordinary income.

**Reclassifications**

Certain amounts in the prior yearfinancial statements have been reclassified to conform to thecurrent financial statement presentation. These reclassificationshad no impact on previously reported net income orshareholders’ equity.

| **3.** |   |   |   | **Summary of Investments** |
|--------|--------|--------|--------|----------------------------|

Loans generally are made toborrowers pursuant to commitments whereby the Fund commits tofinance the borrower up to a specified amount for the term of thecommitment, upon the terms and subject to the conditionsspecified by such commitment. As of December 31, 2001 and2000, the Fund’s investments in loans are entirely withinthe United States and are diversified among the followingindustries. The percentage of net assets (shareholder’sequity) that each industry group represents is shown with theindustry totals. (The sum of the percentages does not equal100 percent because the percentages are based on net assetsas opposed to total loans.)

|                                                                                         | **Estimated        Fair Value**     |
|----------------------------------------------------------------------------------------------|-------------------------------------|
|                                                                                         | **2001**                            | **2000** |
|                                                                                         |                                |   |
| Application        service providers:                                                        |                                |   |
| Access360                                                                                    | $ 5,892,777                         | $ 2,469,528 |
| Asera                                                                                        | 4,087,352                           | – |
| BlueStar        Solutions (Eonline)                                                          | 4,092,956                           | 2,628,737 |
| Jamcracker                                                                                   | 417,428                             | 443,692 |
| Ultrabridge                                                                                  | 867,262                             | 811,955 |
| Total application            service providers (10.9% and 14.1%             of net assets)   | 15,357,775                          | 6,353,912 |
| Biotechnology:                                                                               |                                |   |
| Acusphere                                                                                    | $ 2,455,199                         | $ – |
| Zyomyx                                                                                       | 2,601,953                           | 1,443,322 |
| Total biotechnology            (3.6% and 3.2% of net assets)                                 | 5,057,152                           | 1,443,322 |
| Communications        service providers:                                                     |                                |   |
| Appgenesys                                                                                   | 1,201,748                           | 5,134,410 |
| Coreon                                                                                       | –                              | 1,499,785 |
| Everest        Broadband Networks                                                            | 2,098,895                           | 3,679,836 |
| UM        Communications                                                                     | 427,986                             | 5,256,236 |
| Total communications            service providers (2.7% and 34.6%             of net assets) | 3,728,629                           | 15,570,267 |
| Communications        equipment:                                                             |                                |   |
| Astral        Point                                                                          | 1,454,173                           | 1,982,178 |
| Calient        Networks                                                                      | 1,639,218                           | – |
| Calix        Networks                                                                        | 3,715,076                           | – |
| Coriolis        Networks                                                                     | 5,562,145                           | – |
| General        Bandwidth                                                                     | 1,942,128                           | – |
| Gluon        Networks                                                                        | 4,778,725                           | 1,202,992 |
| Inkra        Networks                                                                        | 3,991,007                           | – |
| Network        Photonics                                                                     | 2,848,162                           | – |
| Network        Robots                                                                        | 3,214,920                           | – |
| Nexsi                                                                                        | 842,631                             | – |
| Nishan        Systems                                                                        | 334,994                             | – |
| Nokia        (Amber Networks)                                                                | 6,010,265                           | – |
| Rapid        5 Networks                                                                      | 2,805,154                           | – |
| Sanera        Systems                                                                        | 4,867,352                           | – |
| Santera        Systems                                                                       | 741,494                             | – |
| Taqua                                                                                        | 564,000        ______________       | –        ______________ |
| Total communications            equipment (32.3% and 7.1% of net assets)                | 45,311,444        ______________    | 3,185,170        ______________ |
| Computers        and peripherals:                                                            |                                |   |
| Afara        WebSystems                                                                      | 3,381,914                           | – |
| Andes        Networks (BeeLine Networks                                                      | 412,012                             | 612,300 |
| Intruvert        Networks                                                                    | 681,892                             | – |
| Kuokoa        Networks                                                                       | 1,095,897                           | – |
| Maxxan        Systems                                                                        | 1,475,761        ______________     | –        ______________ |
| Total computers and            peripherals (5.0% and 1.4% of net assets)                | 7,047,476        ______________     | 612,300        ______________ |
| Internet:                                                                                    |                                |   |
| BridgeSpan                                                                                   | $ 3,478,061                         | $ 3,483,412 |
| Coremetrics                                                                                  | 2,906,913                           | 3,009,962 |
| Ectone                                                                                       | 874,403                             | 1,144,447 |
| Postini                                                                                      | 1,462,724                           | 1,947,481 |
| QuinStreet                                                                                   | 4,464,063                           | 6,166,174 |
| RivalWatch                                                                                   | 108,805                             | 180,505 |
| Slam        Dunk Networks, Inc.                                                              | 374,508                             | – |
| Viquity                                                                                      | –        ______________        | 632,932        ______________ |
| Total Internet (9.7%            and 36.8% of net assets)                                     | 13,669,477        ______________    | 16,564,913        ______________ |
| Medical        devices:                                                                      |                                |   |
| Cameron        Health                                                                        | 1,445,356                           | – |
| Cardica                                                                                      | 2,903,884                           | – |
| Confirma                                                                                     | 2,725,534                           | – |
| Neomend                                                                                      | 545,493                             | – |
| Ntero        Surgical                                                                        | 1,351,909        ______________     | –        ______________ |
| Total medical devices            (6.4% and 0% of net assets)                                 | 8,972,176        ______________     | –        ______________ |
| Other:                                                                                       |                                |   |
| AtomicTangerine                                                                              | 483,000                             | 3,934,551 |
| Chahaya        Optronics                                                                     | 1,570,333                           | – |
| Lumenare                                                                                     | 709,193        ______________       | –        ______________ |
| Total other (2.0% and            8.7% of net assets)                                         | 2,762,526        ______________     | 3,934,551        ______________ |
| Photonics:                                                                                   |                                |   |
| Cenix                                                                                        | 4,172,992                           | – |
| E2O        Communications                                                                    | 4,664,310                           | – |
| Gemfire                                                                                      | 2,494,837                           | – |
| Inphi                                                                                        | 2,401,687                           | – |
| IoLon                                                                                        | 2,735,904                           | – |
| LaserSharp                                                                                   | 2,137,094                           | – |
| Network        Elements                                                                      | 8,428,183                           | 4,188,558 |
| Novera        Optics (Ultraband Fiber Optics)                                                | 13,200,716                          | 5,743,500 |
| Nufern                                                                                       | 4,476,475                           | – |
| Onix        Microsystems                                                                     | 3,211,544                           | – |
| Optinel        Systems                                                                       | 2,176,207                           | – |
| Quantum        Photonics                                                                     | 3,461,443                           | – |
| Sparkolor                                                                                    | 6,384,778                           | – |
| Tsunami        Optics, Inc                                                                   | 1,292,148                           | 1,566,904 |
| Zepton        Networks                                                                       | 771,161        ______________       | –        ______________ |
| Total photonics (44.2%            and 25.5% of net assets)                                   | 62,009,479        ______________    | 11,498,962        ______________ |
| Semiconductors:                                                                              |                                |   |
| Ample        Communications                                                                  | $ 4,384,637                         | $ – |
| BigSur        Communications                                                                 | 444,107                             | – |
| Ishoni        Networks                                                                       | 6,296,825                           | 3,483,928 |
| Kineto        Wireless                                                                       | 449,635                             | – |
| Matrix        Semiconductor                                                                  | 914,153                             | – |
| MorphIC’s        Technology                                                             | 2,531,729                           | – |
| Optim        Networks                                                                        | 384,043                             | – |
| Sierra        Monolithics                                                                    | 3,356,745                           | – |
| Summit        MicroElectronics                                                               | 3,696,677                           | 5,723,822 |
| T-Ram                                                                                        | 1,025,650                           | – |
| VxTel                                                                                        | 1,925,901        ______________     | 2,586,977        ______________ |
| Total semiconductors            (18.1% and 26.2% of net assets)                              | 25,410,102        ______________    | 11,794,727        ______________ |
| Software:                                                                                    |                                |   |
| Alopa        Networks                                                                        | 2,796,701                           | – |
| Bang        Networks                                                                         | 3,476,906                           | – |
| Believe                                                                                      | 2,135,039                           | 678,160 |
| Ceon                                                                                         | 1,529,649                           | 1,032,269 |
| eTime        Capital                                                                         | 200,000                             | – |
| NetForensics                                                                                 | 798,034                             | – |
| North        Systems                                                                         | –                              | 1,803,726 |
| OnDemand                                                                                     | 713,137                             | – |
| Pivia                                                                                        | 57,109                              | – |
| Steeleye        Technology                                                                   | 36,306                              | – |
| Syndeo                                                                                       | 3,173,996        ______________     | 2,614,411        ______________ |
| Total software (10.6%            and 13.6% of net assets)                                    | 14,916,877        ______________    | 6,128,566        ______________ |
| Total loans (cost:            $207,446,465 and $77,086,690)                                  | $ 204,243,113        ============== | $ 77,086,690        ============== |

The Fund provides asset-basedfinancing primarily to start-up and emerging growthventure-capital-backed companies. As a result, the Fund issubject to general credit risk associated with such companies. AtDecember 31, 2001 and 2000, the Fund has unfundedcommitments to borrowers of $292,367,060 and $294,746,184,respectively.

Included in the net change inunrealized loss from investment transactions for the year endedDecember 31, 2001, and for the period from May 19, 2000(commencement of operations), through December 31, 2000, isan unrealized loss on loans of $3,203,352 and $0, respectively.This amount represents a reduction in the estimated fair value ofloans determined by the Fund’s Managers in accordance withthe procedures established by the Fund’s Board of Directors.

For the year endedDecember 31, 2001, the Fund distributed $4,411,299 ofwarrants and stocks to the Company. For the period fromMay 19, 2000 (commencement of operations), throughDecember 31, 2000, the Fund distributed $2,216,335 ofwarrants to the Company.

| **4.** |   |   |   | **Long-Term Debt        Facility** |
|--------|--------|--------|--------|------------------------------------|

As of December 31, 2000, theFund had in place a securitization debt facility of $25 millionto finance the acquisition of asset-based loans. The Fundexpanded this facility to $250 million inNovember 2001. Under this expanded facility, the Fund iscurrently eligible to borrow up to $170 million and$25 million as of December 31, 2001 and 2000. As ofDecember 31, 2001 and 2000, the Fund had borrowed$80 million and $0, respectively, under this facility. Loanscan be drawn on the credit facility at a minimum of$5 million and in $1 million increments in excessthereof. The interest rate on this facility is the "Cost ofFunds Rate" plus 0.50 percent, which atDecember 31, 2001, was 2.09 percent. The facility isdue to expire in December 2005.

Borrowings under this facility arecollateralized by loans of the Fund with assignment to thefinancial institution, plus other assets of the Fund. Theamortization schedule for each borrowing under the facility isexpected to correspond to the amortization of the loanssupporting each borrowing. The Fund pays a commitment fee of0.20 percent monthly based on the total commitment relatedto the facility.

As a condition of the expansion ofthe facility, the Fund has taken out an insurance policy insuringthe repayment of the loans under this facility to the banks.Those fees are recognized on a straight-line basis over fiveyears.

Expenses of $150,000 were incurredin connection with initially procuring the facility. Theseexpenses have been capitalized and are being amortized over threeyears. Expenses of $767,016 were incurred in order to expand thefacility. These expenses have been capitalized and are beingamortized over four years.

The required aggregate debtpayments for the remaining four years are as follows:

| **Year** |   | **Principal        Payments**       |
|----------|--------|-------------------------------------|
|     |   |                                |
| 2002     |   | $ 27,800,614                        |
| 2003     |   | 35,881,824                          |
| 2004     |   | 15,591,493                          |
| 2005     |   | 726,069        _______________      |
|     |   | $ 80,000,000        =============== |

As of December 31, 2000, theFund had in place a $41.5 million revolving credit warehousefacility to finance asset-based loans. Outstanding balances boreinterest at either the financial institution’s prime rate orLIBOR plus 1.5 percent, which at December 31, 2000, was6.565 percent. The Fund paid a commitment fee of0.125 percent quarterly on the total average amount ofunused commitment with respect to this facility. This facilitywas paid off in December 2001, and the Fund elected not torenew it.

Borrowings under this facilitywere collateralized by the receivables of the Fund under loanswith assignment to the financial institution plus other assets ofthe Fund. As of December 31, 2000, the Company had$37.5 million outstanding under this facility.

| **5.** |   |   |   | **Interest Rate Swaps** |
|--------|--------|--------|--------|-------------------------|

At December 31, 2001 and2000, the Fund had an interest rate swap transaction with anotional principal amount of $90.0 million and $0,respectively, to convert floating rate liabilities to fixedrates. The Fund pays a fixed rate of 4.08 percent andreceives from the counterparty a floating 30-day LIBOR rate.Payments are made monthly and terminate on March 25, 2005.The fair value of swap transactions at December 31, 2001 and2000, was $(1.2) million and $0, respectively.

| **6.** |   |   |   | **Capital Stock** |
|--------|--------|--------|--------|-------------------|

As of December 31, 2001 and2000, there were 200,000 shares of $0.001 par valuecommon stock authorized, and 100,000 shares are issued andoutstanding.

| **7.** |   |   |   | **Earnings Per Share** |
|--------|--------|--------|--------|------------------------|

Basic earnings per share arecomputed by dividing net income (loss) by the weighted-averagecommon shares outstanding. Diluted earnings per share arecomputed by dividing net income by the weighted-average commonshares outstanding, including the dilutive effects of potentialcommon shares (e.g., stock options). The Fund has no stockoptions or other equity instruments that would be potentialcommon shares; thus, reported basic and diluted earnings are thesame.

| **8.** |   |   |   | **Management** |
|--------|--------|--------|--------|----------------|

Westech Investment Advisors servesas investment manager for the Fund. As compensation for itsservices to the Fund, the Manager receives a management fee (theManagement Fee) computed and paid at the end of each quarter atan annual rate of 2.5 percent of the Fund’s committedequity capital (regardless of when or if the capital is called)as of the last day of each fiscal quarter in a two-year periodcommencing with the first capital closing. Fees******of$9,917,506 and $4,752,659 were recognized as of December 31,2001 and 2000. Following this two-year period, Management Feeswill be calculated and paid at the end of each quarter at anannual rate of 2.5 percent of the Fund’s total assets(including amounts derived from borrowed funds) as of the lastday of each quarter.

For the year endedDecember 31, 2001 and 2000, expenses of $56,000 and $180,405were allocated to the Company by the Fund and treated as a deemeddistribution. These expenses were primarily composed oforganizational costs, accounting and tax fees, and bank custodialfees. 

Certain officers and directors ofthe Fund also serve as officers and directors of WestechInvestment Advisors. 

| **9.** |   |   |   | **Financial Highlights** |
|--------|--------|--------|--------|--------------------------|

Accounting principles generallyaccepted in the United States require disclosure of financialhighlights of the Fund for the year ended December 31, 2001,and for the period from May 19, 2000 (commencement ofoperations), through December 31, 2000. The total rate ofreturn is defined as the return based on the change in valueduring the period of a theoretical investment made at thebeginning of the period. The total rate of return assumes aconstant rate of return for the Fund during the period reportedand weights each cash flow by the amount of time held in theFund. This required methodology differs from an internal rate ofreturn. 

Net investment income (loss) isinclusive of all investment income, net of expenses. The ratiosof expenses and net investment income to average net assetscalculated below are annualized and are computed based upon theaggregate weighted average net assets of the Fund for the periodspresented. 

Beginning and ending net assetvalues are based on the beginning and ending number of sharesoutstanding. Other per share information is calculated based uponthe aggregate weighted average net assets of the Fund for theperiods presented.

|                                                                                   | **Year Ended        December 31, 2001** | **Period from                May 19, 2000 (Commencement of Operations), Through        December 31, 2000** |
|----------------------------------------------------------------------------------------|----------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                                                                   |                                         |                                                                                                                 |
| Total        return                                                                    | (4.70%)                                      | (13.60%)                                                                                                             |
| Per        share operating performance:                                                |                                         |                                                                                                                 |
| Net        asset value, beginning of period                                            | $ 450        _______________________         | $ –        _______________________                                                                              |
| Net        investment income (loss)                                                    | 84                                           | (36)                                                                                                                 |
| Realized        loss and change in unrealized loss from investment        transactions | (126)        _______________________         | –        _______________________                                                                                |
| Total loss                                                                             | (42)                                         | (36)                                                                                                                 |
| Capital        contributions                                                           | 1,040                                        | 510                                                                                                                  |
| Distributions                                                                          | (45)        _______________________          | (24)        _______________________                                                                                  |
| Net        asset value, end of period                                                  | $ 1,403        =======================       | $ 450        =======================                                                                                 |
|                                                                                   |                                         |                                                                                                                 |
| Ratios        to average net assets:                                                   |                                         |                                                                                                                 |
| Expenses                                                                               | 14%                                          | 23%                                                                                                                  |
| Net        investment income (loss)                                                    | 8%                                           | (15%)                                                                                                                |