SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, 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, 2004



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 814-00207

VENTURE LENDING & LEASING III, INC.

(Exact name of registrant as specified in its charter)



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









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

(Address of principal executive offices)

(Zip Code)



Registrants telephone number, 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 registrant has (i) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days: Yes XNo



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





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated be reference in Part II of this Form 10-K or any amendment to this Form 10-K:.



As the registrants shares are not publicly-traded, the aggregate market value of the voting stock held by non-affiliates of the registrant cannot be determined.



The number of shares outstanding of each of the issuers classes of common stock, as of March 15, 2005 was 100,000.



Documents Incorporated by Reference

Document Description

10-K Part

Specifically Identified Portions of the Registrants Proxy Statement for the Annual Meeting

of Shareholders held May 11, 2005

III









PART I



ITEM 1.

BUSINESS.



Introduction.



Venture Lending & Leasing III, Inc. (the Fund) was incorporated in Maryland on January 28, 2000, as a nondiversified, closed-end management investment company electing status as a business development company under the Investment Company Act of 1940 (1940 Act). The Fund is a wholly owned subsidiary of Venture Lending & Leasing III, LLC, a Delaware limited liability company (the Company). The purpose of the Fund is to provide asset-based financing to venture-capital-backed companies in the form of secured loans. Prior to commencing its operations on May 19, 2000, the Fund had no operations other than the sale of 100,000 shares to the Company for $25,000. As of December 31, 2004, the Fund meets the requirements, including diversification requirements, to qualify as a regulated investment company (RIC) under the Internal Revenue Code of 1986.

The Funds shares of Common Stock, $.001 par value (Shares) are held entirely by the Company.  As capital is required to finance the acquisition of loans, additional capital is provided by the Company.



Investment Program.



General.  As a Business Development Company (BDC), the Fund will invest at least 70% of its total assets (qualifying assets) in securities of companies that qualify as eligible portfolio companies.  An eligible portfolio company generally is a United States company that is not an investment company and that (i) does not have a class of securities registered on an exchange or included in the Federal Reserve Board's over-the-counter margin list; (ii) is actively controlled by 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 the Securities and Exchange Commission (SEC) (See Regulation).  The Fund may invest 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 the National Association of Securities Dealers' Automated Quotation System) and eligible portfolio companies as to which the Fund does not offer to make available significant managerial assistance.  The foregoing percentages are determined, in the case of financings in which the Fund commits to provide financing prior to funding the commitment, by the amount of the Fund's total assets represented by the value of the maximum amount of securities to be issued by the borrower to the Fund pursuant to such commitment.



Venture Loans.  Venture loans generally consist of a promissory note secured by the equipment or other assets of the borrower.  The Fund generally obtains a security interest in the assets financed and receives periodic payments of interest and principal, and may receive a final payment constituting additional interest at the end of the transaction's term.  The interest rate and amortization terms of venture loans are individually negotiated between the Fund and each borrower.



Typically, loans are structured as commitments by the Fund to finance assets of the borrower over a specified period of time.  The commitment of the Fund to finance future asset acquisitions is typically subject to the absence of any default under the loan and compliance by the borrower with requirements relating to, among other things, the type of assets to be financed.  Although the Fund's commitments generally provide that the Fund is not required to continue to fund additional loans if there is a material adverse change in the borrower's financial condition, it is possible that a borrower's financial condition will not be as strong at the time the Fund finances an asset acquisition as it was at the time the commitment was entered into.



Warrants and Equity Securities.  The Fund generally acquires warrants to purchase equity securities of the borrower in connection with asset financings.  The terms of the warrants, including the expiration date, exercise price and terms of the equity security for which the warrant may be exercised, are negotiated individually with each borrower.  Substantially all the warrants and underlying equity securities are restricted securities under the Securities Act of 1933 (1933 Act) at the time of issuance; the Fund generally negotiates registration rights with the borrower that may provide (i) "piggyback" registration rights, which permit the Fund under certain circumstances to include some or all of the securities owned by it in a registration statement filed by the borrower or (ii) under rare circumstances, "demand" registration rights permitting the Fund under certain circumstances to require the borrower to register the securities under the 1933 Act (in some cases at the Fund's expense).



Investment Policies.



For purposes of these investment policies and unless otherwise specified, references to the percentage of the Fund's total assets "invested" in securities of a company will be deemed to refer, in the case of financings in which the Fund commits to provide financing prior to funding the commitment, to the amount of the Fund's total assets represented by the value of the maximum amount of securities to be issued by the borrower of the Fund pursuant to such commitment; the Fund will not be required to divest securities in its portfolio or decline to fund an existing commitment because of a subsequent change in the value of securities the Fund has previously acquired or committed to purchase.



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



To qualify as a RIC, the Fund must meet the issuer diversification standards under the Internal Revenue Code that require that, at the close of each quarter of the Fund's taxable year, (i) not more than 25% of the market value of its total assets is invested in the securities of a single issuer and (ii) at least 50% of the market value of its total assets is represented by cash, cash items, government securities, securities of other RICs and other securities (with each investment in such other securities limited so that not more than 5% of the market value of the Fund's total assets is invested in the securities of a single issuer and the Fund does not own more than 10% of the outstanding voting securities of a single issuer).  For purposes of the diversification requirements under the Internal Revenue Code, the percentage of the Fund's total assets "invested" in securities of a company will be deemed to refer, in the case of financings in which the Fund commits to provide financing prior to funding the commitment, to the amount of the Fund's total assets represented by the value of the securities issued by the borrower to the Fund at the time each 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 single industry.  The broad industry categories in which the Fund anticipates that most of its investments will fall (and within each of which there may be several "industries" for purposes of the industry diversification policy) include computer and semiconductor-related, medical/biotechnology and communica­tions.



Investment Guidelines.  In selecting investments for the Fund's portfolio, Westech Investment Advisors (the Manager) will endeavor to meet the investment guidelines established by the Fund's Board of Directors.  The Fund may, however, make investments that do not conform to one or more of these guidelines when deemed appropriate by the Manager.   Such investments might be made if the Manager believes that a failure to conform in one area is offset by exceptional strength in another or is compensated for by a higher yield, favorable warrant issuance or other attractive transaction terms or features.



Leverage.  The Fund is permitted to borrow money from and issue debt securities to banks, insurance companies and other lenders to obtain additional funds to originate venture loans.  Under the 1940 Act, the Fund may not incur borrowings unless, immediately after the borrowing is incurred, such borrowings would have "asset coverage" of at least 200 percent.  "Asset cover­age" means the ratio which the value of the Fund's total assets, less all liabilities not represented by the borrowings and any other liabilities constituting "senior securities" under the 1940 Act, bears to the aggregate amount of such borrowings and senior securities.  The practical effect of this limitation is to limit the Fund's borrowings and other senior securities to 50% of its total assets less its liabilities other than the borrowings and other senior securities.



The use of leverage increases investment risk.  The Funds lenders require that the Fund pledge portfolio assets as collateral for loans.  If the Fund is unable to service the borrowings, the Fund may risk the loss of such pledged assets.  Lenders also require that the Fund agree to loan covenants limiting the Fund's ability to incur additional debt or otherwise limiting the Fund's flexibility, and loan agreements may provide for acceleration of the maturity of the indebtedness if certain financial tests are not met.



Temporary Investments.  Pending investment in asset financing transactions and pending distributions, the Fund invests excess cash in (i) securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, (ii) repurchase agreements fully collateralized by U.S. government securities or (iii) short-term high-quality debt instruments of U.S. corporations.  All such investments will mature in one year or less.  The U.S. government securities in which the Fund may invest include U.S. government securities backed by the full faith and credit of the U.S. government (such as Treasury bills, notes and bonds) as well as securities backed only by the credit of the issuing agency.  Corporate securities in which the Fund may invest include commercial paper, bankers' acceptances and certificates of deposit of domestic or foreign issuers.

The Fund also may enter into repurchase agreements that are fully collateralized by U.S. government securities with banks or recognized securities dealers, in which the Fund purchases a U.S. government security from the institution and simultaneously agrees to resell it to the seller at an agreed-upon date and price.  The repurchase price is related to an agreed-upon market rate of interest rather than the coupon of the debt security and, in that sense, these agreements are analogous to secured loans from the Fund to the seller.  Repurchase agreements carry certain risks not associated with direct investments in securities, including possible declines in the market value of the underlying securities and delays and costs to the Fund if the other party to the transaction defaults.



Other Investment Policies.  The Fund will not sell securities short, purchase securities on margin (except to the extent the Fund's permitted borrowings are deemed to constitute margin purchases), write puts or calls, purchase or sell commodities or commodity contracts or purchase or sell real estate.  The Fund will not underwrite the securities of other companies, except to the extent the Fund may be deemed an underwriter upon the disposition of restricted securities acquired in the ordinary course of the Fund's business.



The Fund's investment objective, investment policies and investment guidelines (other than its status as a BDC) are not fundamental policies and may be changed by the Fund's Board of Directors at any time without shareholder approval.







Regulation.

Generally, to be eligible to elect BDC status, a company must engage in the business of furnishing capital and offering significant managerial assistance to "eligible portfolio companies," as defined below.  More specifically, in order to qualify as a BDC, a company must (i) be a domestic company; (ii) have registered as a class of its securities or have filed a registration statement with the SEC pursuant to Section 12 of the Securities Exchange Act of 1934; (iii) operate for the purpose of investing in the securities of certain types of eligible portfolio companies; (iv) offer to extend significant managerial assistance to such eligible portfolio companies; (v) have a majority of disinterested directors; and (vi) file (or under certain circumstances, intend to file) a proper notice of election with the SEC.



"Making available significant managerial assistance" 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, significant guidance and counsel concerning the management, operations or business objectives of a portfolio company; or (ii) the exercise by a business development company of a controlling influence over the management or polices of the portfolio company by the business development company acting individually or as part of a group acting together which controls the portfolio company.  The officers of the Fund intend to offer to provide managerial assistance, including advice on equipment acquisition and financing, cash flow and expense management, general financing opportunities, acquisition opportunities and opportunities to access the public securities markets, to the great majority of companies to whom the Fund provides venture loans.  In some instances, officers of the Fund might serve on the board of directors of borrowers.



An "eligible portfolio company" generally is a United States company that is not an investment company and that (i) does not have a class of securities registered on an exchange or included in the Federal Reserve Board's over-the-counter margin list; (ii) is actively controlled by 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 the SEC.  Control under the 1940 Act is presumed to exist where a BDC owns more than 25% of the outstanding voting securities of the eligible portfolio company.



The 1940 Act prohibits or restricts companies subject to the 1940 Act from investing in certain types of companies, such as brokerage firms, insurance companies, investment banking firms, and investment companies.  Moreover, the 1940 Act limits the type of assets that BDCs may acquire to certain prescribed qualifying assets and certain assets necessary for its operations (such as office furniture, equipment, and facilities) if, at the time of acquisition, less than 70% of the value of BDC's assets consist of qualifying assets.  Qualifying assets include: (i) privately acquired securities of companies that were eligible portfolio companies at the time such BDC acquired their securities; (ii) securities of bankrupt or insolvent companies; (iii) securities of eligible portfolio companies controlled by a BDC; (iv) securities received in exchange for or distributed in or with respect to any of the foregoing; and (v) cash items, government securities and high-quality short-term debt.  The 1940 Act also places restrictions on the nature of transactions in which, and the persons from whom, securities can be purchased in order for the securities to be considered qualifying assets.  Such restrictions include limiting purchases to transactions not involving a public offering and the requirement that securities be acquired directly from either the portfolio company or its officers, directors or affiliates.



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



Many of the transactions involving a company and its affiliates (as well as affiliates of those affiliates) which were prohibited without the prior approval of the SEC under the 1940 Act prior to its amendment by the 1980 Provisions are permissible for BDCs, including the Fund, upon the prior approval of a majority of the Fund's disinterested directors and a majority of the directors having no financial interest in the transactions.  However, certain transactions involving certain persons related to the Fund, including its directors, officers, and the Managers, may still require the prior approval of the SEC.  In general, (i) any person who owns, controls, or holds power to vote, more than 5% of the Fund's outstanding Shares (ii) any director, executive officer, or general partner of that person; 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's disinterested directors, and, in some situations, the prior approval of the SEC, before engaging in certain transactions involving the person or any company controlled by the Fund.  The 1940 Act generally does not restrict transactions between the Fund and its eligible portfolio companies.  While a BDC may change the nature of its business so as to cease being a BDC (and in connection therewith withdraw its election to be treated as a BDC) only if authorized to do so by a majority vote (as defined by the 1940 Act) of its outstanding voting securities, shareholder approval of changes in other fundamental investment policies of a BDC is not required (in contrast to the general 1940 Act requirement, which requires shareholder approval for a change in any fundamental investment policy).



Dividends and Distributions.

The Fund intends to distribute to shareholders substantially all of its net investment income and net realized capital gains, if any, as determined for income tax purposes less appropriate reserves.  Applicable law, including provisions of the 1940 Act, may limit the amount of dividends and other distributions payable by the Fund.  Income dividends will generally be paid quarterly to shareholders of record on the last day of each preceding calendar quarter end.  Substantially all of the Fund's net capital gain (the excess of net long-term capital gain over net short-term capital loss) and net short-term capital gain, if any, will be distributed annually, or on a more frequent basis as determined by the Manager.



Until May 19, 2004, the Fund was able to reinvest the proceeds of matured, repaid or resold investments, net of required distributions to shareholders, principal payments on borrowings and expenses or other obligations of the Fund, in new loans.  Following that date, the Fund will distribute to investors all proceeds received from principal payments and sales of investments, net of reserves and expenses, principal repayments on the Fund's borrowings, amounts required to fund financing commitments entered into before such date, and any amounts paid on exercise of warrants.  Distributions of such amounts are likely to cause annual distributions to exceed the earnings and profits of the Fund available for distribution, in which case such excess will be considered a tax free return of capital to a shareholder to the extent of the shareholder's adjusted basis in his shares and then as capital gain. The Fund may borrow money to fund shareholder distributions, to the extent consistent with the 1940 Act and a prudent capital structure.



Competition.



Other entities and individuals compete for investments 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 the 1940 Act pertaining to BDCs and provisions of the Internal Revenue Code pertaining to RICs might restrict the Fund's flexibility as compared with its competitors.  The need to compete for investment opportunities may make it necessary for the Fund to offer borrowers more attractive transaction terms than otherwise might be the case.



Employees.



The Fund has no employees; all of its officers are officers and employees of the Manager or of Siguler Guff (Advisor to the Manager), and all of its required services are performed by officers and employees of the Manager or Advisor to the Manager.

ITEM 2.

PROPERTIES.



All of the Funds office space is provided by the Manager.



ITEM 3.

LEGAL PROCEEDINGS.



As discussed in note 10 to the financial statements, the Fund is currently involved in a legal dispute that was initiated by the Fund in an attempt to attach the collateral of a defaulted portfolio company.  The initial complaint was filed on September 22, 2003 in the Superior Court of California in Santa Clara County.  The cross complaint was filed October 25, 2004  for an unspecified amount of damages.



ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



No matters were submitted to a vote of the Funds security holders during the last quarter of the year ended December 31, 2004.



PART II.



ITEM 5.

MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS.



The Funds Common Stock is not listed on any securities exchange, and all holders of the Funds Common Stock are subject to agreements significantly restricting the transferability of their shares.



The number of holders of record of the Funds Common Stock at March 15, 2005 was 1.



The Fund has a policy of distributing securities as acquired.  The Fund values these securities at fair value at the time of acquisition in accordance with the Funds policy on valuation detailed in Note 2 to the financial statements.  In addition, some expenses of the Company may be paid by the Fund, and will be deemed as distributions to the Company.  The Fund has also established a policy of declaring dividends on a quarterly basis to the extent that taxable income of the fund less applicable reserves exceeds warrant distributions and deemed distributions.  Additionally, in 2003 the Fund made two additional special distributions to return capital to its shareholder.  As of December 31, 2004, the Fund had distributed  $114.04 million to its shareholder of which $94.05 million was in cash.



ITEM 6.

SELECTED FINANCIAL DATA.



The following table summarizes certain financial data and should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included elsewhere in this Form 10-K.  The selected financial data set forth below has been derived from the 2004, 2003, 2002 and 2001 audited financial statements and the 2000 unaudited financial statements.



|                                                                  |                    |                    |                    |                    |                   | 
|----------------------------------------------------------------- | ------------------ | ------------------ | ------------------ | ------------------ | ----------------- | 
|                                                                  |                    |                    |                    |                    | From Inception,   | 
|                                                                  | For the Year Ended | For the Year Ended | For the Year Ended | For the Year Ended | (May 19, 2000) To | 
|                                                                  | December 31, 2004  | December 31, 2003  | December 31, 2002  | December 31, 2001  | December 31, 2000 | 
|Statement of Operations Data:                                     |                    |                    |                    |                    |                   | 
|Investment Income:                                                |                    |                    |                    |                    |                   | 
|Interest on Loans                                                 | $16,572,162        | $22,584,642        | $30,929,357        | $23,853,786        | $2,456,109        | 
|Interest on Short - Term investments                              | 314,507            | 326,949            | 817,173            | 741,564            | 410,056           | 
|Total Investment Income                                           | 16,886,669         | 22,911,591         | 31,746,530         | 24,595,350         | 2,866,165         | 
|Expenses:                                                         |                    |                    |                    |                    |                   | 
|Management Fee to Managers                                        | 2,900,472          | 3,926,546          | 6,548,175          | 9,917,506          | 4,752,659         | 
|Interest Expense                                                  | 1,615,673          | 2,147,210          | 3,269,223          | 3,290,846          | 422,488           | 
|Other Operating Expenses                                          | 2,150,349          | 2,736,893          | 2,823,341          | 1,383,178          | 386,963           | 
|Total Expenses                                                    | 6,666,494          | 8,810,649          | 12,640,739         | 14,591,530         | 5,562,110         | 
|Net Investment Income (Loss)                                      | 10,220,175         | 14,100,942         | 19,105,791         | 10,003,820         | (2,695,945)       | 
|Net change in unrealized gain (loss) from investment transactions | 628,107            | 1,814,788          | (2,128,068)        | (4,399,807)        | -                 | 
|Net realized loss from investment transactions                    | (2,517,140)        | (8,152,936)        | (12,771,267)       | (8,179,065)        | -                 | 
|Net Income (Loss)                                                 | $8,331,142         | $7,762,794         | $4,206,456         | ($2,575,052)       | ($2,695,945)      | 
|                                                                  |                    |                    |                    |                    |                   | 
|AMOUNTS PER COMMON SHARE:                                         |                    |                    |                    |                    |                   | 
|Net Income (Loss)                                                 | $83.31             | $77.63             | $42.06             | ($25.75)           | ($26.96)          | 
|Weighted Average Shares Outstanding                               | 100,000            | 100,000            | 100,000            | 100,000            | 100,000           | 
|                                                                  |                    |                    |                    |                    |                   | 
|                                                                  | As of              | As of              | As of              | As of              | As of             | 
|                                                                  | 31-Dec-04          | 31-Dec-03          | 31-Dec-02          | 31-Dec-01          | 31-Dec-00         | 
|Balance Sheet Data:                                               |                    |                    |                    |                    |                   | 
|Total Assets                                                      | $101,917,338       | $137,595,895       | $197,561,854       | $228,490,514       | $87,988,437       | 
|Bank Loans                                                        | $44,827,921        | $59,155,025        | $51,884,504        | $80,000,000        | $37,500,000       | 











ITEM 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





Overview



The Fund is a financial services company providing financing and advisory services to a variety of carefully selected venture-backed companies throughout the United States with a focus on growth oriented companies. Our portfolio is well diversified and consists of companies in the communications, information services, media, and technology, including software and technology-enabled business services, bio-technology, and medical devices industry sectors, among others. Our capital is generally used by our portfolio companies to finance acquisitions of fixed assets and working capital. On May 19, 2000, we completed our first closing of capital, made our first investment, and became a non-diversified, closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940. The Fund elected to be treated for federal income tax purposes as a regulated investment company under the Internal Revenue Code with the filing of its federal corporate income tax return for 2000. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability.



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



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



CRITICAL ACCOUNTING POLICIES



The Funds manager (Manager or Westech) identified the most critical accounting estimates upon which the financial statements depend.  The Manager determined the critical accounting estimates by considering accounting policies that involve the most complex or subjective decisions or assessments.  The Manager identified the only critical accounting policy to be related to the valuation of loans.



Loans are held at fair value as determined by management, in accordance with the valuation methods described in the valuation of loans section of footnote 2 to the financial statements (Summary of Significant Accounting Policies). Critical factors in determining the fair value of a loan include payment history, collateral position, financial strength of borrower, prospects for future equity rounds, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan.   The actual value of the loans may differ from managements estimates, which would affect net income as well as assets.

Results of Operations  For the year ended December 31, 2004, 2003, and 2002

Total investment income for the year ended December 31, 2004 was $16.9 million, of which $16.6 million consisted of interest on venture loans outstanding.  Total investment income for the year ended December 31, 2003 was $22.9 million, of which $22.6 million consisted of interest on venture loans outstanding.  Total investment income for the year ended December 31, 2002 was $31.7 million, of which $30.9 million consisted of interest on venture loans outstanding. Remaining income consisted of interest and dividends on the temporary investment of cash, pending investment in venture loans or application to the Funds expenses.   The decrease in interest income on loans from $22.6 million for 2003 to $16.6 million for 2004 was due primarily to the decrease in the average outstanding loans from $142.1 million to $103.6 million.  This was slightly offset by a slight increase in interest rates from 15.9% to 16.0% during those same periods.  The decrease from $30.9 million for the year ended December 31, 2002 to $22.6 million for the year ended December 31, 2003 is due primarily to a decrease in performing loans from $190.5 million to $142.1 million during the same year.  This was further reduced by a slight decrease in interest rates over the year from 16.2% to 15.9% during those same years.



Expenses for the years ended December 31, 2004, 2003 and 2002 were $6.7 million, $8.8 million, and $12.6 million, respectively.  Management fees are calculated based on the Companys committed capital for the first two years of the Funds life and thereafter as a percentage of Fund assets.  Management fees for the Fund were $2.9 million, $3.9 million, and $6.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.  The decrease in management fees from $3.9 million in 2003 to $2.9 million in 2004 is due to the declining asset levels of the Fund.  The decrease in management fees from $6.5 million in 2002 to $3.9 million in 2003 is due to the passing of the second year of the Funds life in 2002, which caused management fees to be calculated based on total assets instead of the Companys committed capital.  Management fees were based on total assets for the period from May 19, 2002 through December 31, 2002 and for the entire year for 2003.  Management fee expense was also lower in 2003 as the asset base declined.  Interest expense was $1.6 million, $2.1 million, and $3.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.  Interest expense declined from $2.1 million in 2003 to $1.6 million in 2004 primarily due to the decline in average debt outstanding from $56.0 million in 2003 to $46.7 million in 2004.  Additionally, interest rates fell from 3.8% for 2003 to 3.5% in 2004.  Interest expense declined from $3.3 million for the year ended December 31, 2002 to $2.1 million for the year ended December 31, 2003. A majority of this decline was due to a decrease in average debt outstanding from $66.6 million to $56.0 million for those years.  Additionally average interest rates fell from 4.9% for the year ended December 31, 2002 to 3.8% for the year ended December 31, 2003 as interest rates in general continued to decline. Other operating expenses, a majority of which were legal and bank related fees, were $2.2 million, $2.7 million and $2.8 million for the years ended December 31, 2004, 2003 and 2002, respectively.  A decrease in insurance fees related to the debt facility made up a majority of the decrease in other expenses from the year ended December 31, 2003 to the year ended December 31, 2004.    In 2003, the Fund restructured its outstanding debt, and the cost savings of the revised facility less the restructuring costs was the majority of the decrease in other expenses from 2002 to 2003.



Net change in unrealized gain (loss) from investment transactions and hedging was $0.6 million, $1.8 million, and ($2.1) million for the years ended December 31, 2004, 2003 and 2002, respectively, of which less than $0.1 million, $1.4 million, and ($2.3) million, respectively reflected net adjustments to fair value of loans.  The remainder of the net change in unrealized loss is reflective of the adjustment of the fair value of the Funds hedge transactions.  Net realized loss from investment transactions was $2.5 million, $8.2 million, and $12.8 million for the years ended December 31, 2004, 2003 and 2002, respectively.  The net realized loss from investment transactions was entirely composed of loans which were written off during the year, less any recoveries.



Net income for the years ended December 31, 2004, 2003 and 2002 was $8.3 million,  $7.8 million, and $4.2 million, respectively.  On a per share basis, for the years ended December 31, 2004, 2003 and 2002 there was a net income of $83.31, $77.63, and $42.06, respectively.



Liquidity and Capital Resources - December 31, 2004 and 2003

The Fund is owned entirely by the Company.   The Company is expected, but not required, to make further contributions to the capital of the Fund to the extent of the Members capital commitment to the Company.  As of December 31, 2004 the Company had received subscriptions for capital in the amount of $217.1 million.  As of December 31, 2004 and 2003 uncalled capital was $54.3 million.  All of the uncalled capital commitments to the Company have expired and can no longer be called.



The Fund had in place a $50 million and a $160 million securitzation debt facility as of December 31, 2004 and 2003, respectively, to finance the acquisition of asset-based loans.  As of December 31, 2004 and 2003, $44.8 million and $59.2 million, respectively, were outstanding under this facility.  During 2004 and 2003 the Fund was in compliance with its asset coverage requirements under the 1940 Act.  Loans can no longer be drawn on the credit facility and the size of the credit facility will automatically be reduced each month by the amount of principal amount repaid on the loans outstanding.  The facility has a program termination date of December 2005, at which time no new loans can be added to the borrowing base.



The required aggregate debt payments are as follows as of December 31, 2004:

|Year                 | Principal Payments
|-------------------- | ------------------
|Less than One Year   | $25,470,977       
|One to Three Years   | 19,356,944        
|Three to Five Years  | 0                 
|More than Five Years | 0                 
|                     | $44,827,921       





The Fund entered into swap transactions to hedge its interest rate on the securitization debt facility with a total notional principal of $40.4 million and $53.2 million, respectively.  The fair value of the swap at December 31, 2004 and 2003 was ($26.2) thousand and ($609.3) thousand, respectively.  The effect of the interest rate swap transactions is to convert the variable LIBOR rate into a fixed rate on the contract notional value.



As of December 31, 2004 and 2003, 8% and 9% of the Funds assets consisted of cash and cash equivalents. The Fund continued to invest its assets in venture loans during the year.  Amounts disbursed under the Funds loan commitments were $61.9 million for the year ended December 31, 2004. Net loan amounts outstanding after amortization was approximately $92.8 million as of December 31, 2004. Unexpired unfunded commitments as of December 31, 2004 were $10.8 million.



|Year Ended        | Amount Disbursed | Principal Amortization | Balance Outstanding | Unexpired
Unfunded Commitments
|----------------- | ---------------- | ---------------------- | ------------------- | ------------------------------
|December 31, 2004 | $548.8 million   | $456.0 million         | $92.8 million       | $10.8 million                 
|December 31, 2003 | $486.9 million   | $364.0 million         | $122.9 million      | $55.5 million                 









Because venture loans are privately negotiated transactions, investments in these assets are relatively illiquid.  It is the Funds experience that not all unfunded commitments will be used by borrowers.



During the years ended December 31, 2004 and 2003 the Fund acquired loans in the amount of $61.9 million and $69.9 million, respectively.  Loan repayments were $89.0 million and $121.5 million for the years ended December 31, 2004 and 2003, respectively.  Cash distributions to the Funds shareholder were $25.5 million and $68.6 million for the years ended December 31, 2004 and 2003, respectively.



The Fund seeks to meet the requirements to qualify for the special pass-through status available to RICs under the Internal Revenue Code, and thus to be relieved of federal income tax on that part of its net investment income and realized capital gains that it distributes to its shareholder.   To qualify as a RIC, the Fund must distribute to its shareholder for each taxable year at least 90% of its investment company taxable income (consisting generally of net investment income and net short-term capital gain) (Distribution Requirement).  To the extent that the terms of the Funds venture loans provide for the receipt by the Fund of additional interest at the end of the loan term or provide for the receipt by the Fund of a purchase price for the asset at the end of the loan term (residual income), the Fund would be required to accrue such residual income over the life of the loan, and to include such accrued income in its gross income for each taxable year even if it receives no portion of such residual income in that year.  Thus, in order to meet the Distribution Requirement and avoid payment of income taxes or an excise tax on undistributed income, the Fund may be required in a particular year to distribute as a dividend an amount in excess of the total amount of income it actually receives.  Those distributions will be made from the Fund's cash assets, from amounts received through amortization of loans or from borrowed funds.





ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk





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



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



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



The Fund's sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities. The Fund utilizes various methods to assess interest rate risk in terms of the potential effect on interest income net of interest expense, the value of net assets and the value at risk in an effort to ensure that the Fund is insulated from any significant adverse effects from changes in interest rates.  Based on the model used for the sensitivity of interest income net of interest expense, if the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 100 basis point change in interest rates would have affected net income by less than 1% for the year ended December 31, 2004.



Although management believes that this measure is indicative of the Fund's sensitivity to interest rate changes, it makes estimates to adjust for potential changes in credit quality, size and composition of the balance sheet and other business developments that could affect net income.  Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.



ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly Results

This information has been derived from unaudited financial statements that, in the opinion of management, include all normal recurring adjustments necessary for a fair presentation of such information. The operating results for any quarter are not necessarily indicative of results for any future year.



December 31, 2003 (Unaudited)



|                                                           | Three Months Ended
|---------------------------------------------------------- | ------------------
|                                                           | March 31, 2003    
|                                                           |                   
|Investment Income:                                         |                   
|Interest on Loans                                          | $6,472,510        
|Interest on Short Term Investments                        | 63,881            
|Total Investment Income                                    | 6,536,391         
|Expenses:                                                  |                   
|Management Fees                                            | 1,127,795         
|Interest Expense                                           | 535,538           
|Other Operating Expenses                                   | 1,078,139         
|Total Expenses                                             | 2,741,472         
|Net Investment Income                                      | 3,794,919         
|Net change in unrealized loss from investment transactions | (3,117,748)       
|Net realized gain (loss)                                   | (1,140,285)       
|Net income (loss)                                          | ($463,114)        
|Amount per common share:                                   |                   
|Net income (loss)                                          | ($4.63)           
|Weighted Average Shares Outstanding                        | 100,000           



December 31, 2004 (Unaudited)



|                                                           | Three Months Ended
|---------------------------------------------------------- | ------------------
|                                                           | March 31, 2004    
|                                                           |                   
|Investment Income:                                         |                   
|Interest on Loans                                          | $4,878,630        
|Interest on Short Term Investments                        | 46,629            
|Total Investment Income                                    | 4,925,259         
|Expenses:                                                  |                   
|Management Fees                                            | 752,900           
|Interest Expense                                           | 443,587           
|Other Operating Expenses                                   | 511,414           
|Total Expenses                                             | 1,707,901         
|Net Investment Income                                      | 3,217,358         
|Net change in unrealized loss from investment transactions | (2,495,264)       
|Net realized gain (loss)                                   | (126,031)         
|Net income (loss)                                          | $596,063          
|Amount per common share:                                   |                   
|Net income (loss)                                          | $5.96             
|Weighted Average Shares Outstanding                        | 100,000           









See Item 15 for audited financial statements.



ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



Not applicable.



ITEM 9.A.  DISCLOSURE CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



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



Changes in Internal Controls



There were no significant changes in the Fund's internal controls or in other factors that could significantly affect these controls during the fiscal quarter ended December 31, 2004.



ITEM 9.B.  OTHER INFORMATION

Not applicable.



PART III



ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



EXECUTIVE OFFICERS OF THE FUND



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



|Name and Position With Fund                                          | Age | Occupation During Past Five Years                                                                                                                                        
|-------------------------------------------------------------------- | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                     |     |                                                                                                                                                                          
|Ronald W. Swenson, Chairman, Director and Chief Executive Officer    | 60  | Chairman, CEO, Director, and other positions for Westech Investment Advisors since 1994.                                                                                 
|                                                                     |     |                                                                                                                                                                          
|Salvador O. Gutierrez, Director, President , Chief Financial Officer | 61  | President, Chief Financial Officer, and Director, and other positions for Westech Investment Advisors since 1994.                                                        
|                                                                     |     |                                                                                                                                                                          
|George W. Siguler, Advisory Director                                 | 58  | Managing Director, Siguler Guff Advisers & affiliates since 1995.                                                                                                        
|Brian R. Best
Vice President, and Secretary                          | 39  | Vice President, Secretary and other positions for Westech Investment Advisors since 1997.                                                                                
|                                                                     |     |                                                                                                                                                                          
|Jay L. Cohan
Vice President                                          | 40  | Vice President and other positions for Westech Investment Advisors since 1999.                                                                                           
|                                                                     |     |                                                                                                                                                                          
|Maurice C. Werdegar
Vice President                                   | 40  | Vice President and other positions for Westech Investment Advisors since 2001, Venture Partner, Outlook Ventures 2000  2001; CIO and Fund Manager, MetaMarkets.com 2000.
|                                                                     |     |                                                                                                                                                                          



The information required by this item concerning the directors of the Fund and Section 16(a) compliance is contained in the Funds Proxy Statement filed in connection with the Annual Meeting of Shareholders to be held on May 11, 2005 (Proxy Statement) under the captions Proposal 1 -- To Elect Six Directors of the Fund and Section 16(a) Beneficial Ownership Reporting Compliance and is incorporated herein by reference.



The Fund has adopted a Code of Ethics that is applicable to all of its officers.  A free copy of the Code of Ethics may be requested by contacting the Chief Financial Officer of the Fund.



ITEM 11.

EXECUTIVE COMPENSATION



The information required by this item is contained in the Funds Proxy Statement under the caption Proposal 1 -- To Elect Six Directors of the Fund and is incorporated herein by reference.



ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information required by this item is contained in the Funds Proxy Statement under the caption Annex A -- Beneficial Ownership of Fund Shares and is incorporated herein by reference.



ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this item is contained in the Funds Proxy Statement under the captions: Other Information -- Managers and is incorporated herein by reference.



ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item is contained in the Funds Proxy Statement under the captions: Other Information  Independent Auditors and is incorporated herein by reference.









PART IV.



ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a)

1.

Index to Financials Statements and Financial Statement Schedules





Report of Independent Registered Public Accounting Firm





Statements of Financial Position as of December 31, 2004 and 2003





Statements of Operations for the Years ended December 31, 2004, 2003 and 2002



Statements of Changes in Shareholders Equity for the Years ended December 31, 2004, 2003 and  2002



Statements of Cash Flows for the Years ended December 31, 2004, 2003 and 2002





Notes to Financial Statements





No schedules are required because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the required information is included in the financial statements and the notes thereto.



(a)

2.

Exhibits





Exhibit

Exhibit Title



3(i)

Articles of Incorporation of the Fund filed with the Maryland Secretary of State on January 1, 2000, Incorporated by reference to the Funds Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 17, 2000.



3(ii)

Certificate of Correction of the Fund filed with the Maryland Secretary of State on February 11, 2000, Incorporated by reference to the Funds Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 17, 2000.



3(iii)

Bylaws of the Fund as of February 1, 2000, Incorporated by reference to the Funds Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 17, 2000.



4.1

Form of Purchase Agreement between the Fund and the Company, Incorporated by reference to the Funds Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 17, 2000.



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.



31.1  32.2

Certifications pursuant to The Sarbanes-Oxley Act of 2002





(b)

Reports on Form 8-K

The Fund filed no reports on Form 8-K with the Commission during the fiscal quarter ended December 31, 2004.





Signatures



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



VENTURE LENDING & LEASING III, INC.

(Registrant)



|By:
/S/Ronald W. Swenson             | By:
/S/Salvador O. Gutierrez
|------------------------------------ | ----------------------------
|Ronald W. Swenson                    | Salvador O. Gutierrez       
|Chairman and Chief Executive Officer | Chief Financial Officer     
|Date:   March 25, 2005               | Date:      March 25, 2005   







Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|NAME                           | TITLE                | DATE          
|------------------------------ | -------------------- | --------------
|                               |                      |               
|By:
/S/Salvdor O. Gutierrez    | President & Director | March 25, 2005
|Salvador O. Gutierrez          |                      |               
|                               |                      |               
|By:
/S/Scott C. Malpass        | Director             | March 25, 2005
|Scott C. Malpass               |                      |               
|                               |                      |               
|By:
/S/Louis W. Moelchert, Jr. | Director             | March 25, 2005
|Louis W. Moelchert, Jr.        |                      |               
|                               |                      |               
|By:
/S/Roger V. Smith          | Director             | March 25, 2005
|Roger V. Smith                 |                      |               
|                               |                      |               
|By:
/S/Arthur C. Spinner       | Director             | March 25, 2005
|Arthur C. Spinner              |                      |               
|                               |                      |               
|By:
/S/Ronald W. Swenson       | CEO & Director       | March 25, 2005
|Ronald W. Swenson              |                      |               





5







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of Venture Lending & Leasing III, Inc.:

We have audited the accompanying statements of financial position of Venture Lending & Leasing III, Inc. (the Fund) as of December 31, 2004 and 2003, and the related statements of operations, changes in shareholders equity, and cash flows for each of the three years in the period ended December 31, 2004.  These financial statements are the responsibility of the Funds management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds internal control over financial reporting. Accordingly, we express no such opinion.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  Our procedures included confirmation of loans as of December 31, 2004 and 2003, by correspondence with the borrowers or by other appropriate auditing procedures where replies from borrowers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2004 and 2003, and the results of its operations, changes in its shareholders equity and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.





/S/Deloitte & Touche, LLP



San Francisco, CA
March 4, 2005









6







VENTURE LENDING & LEASING III, INC.

Statements of Financial Position

As of December 31, 2004 and 2003





|                                                              |  | December 31, 2004 |  | December 31, 2003
|------------------------------------------------------------- |  | ----------------- |  | -----------------
|                                                              |  |                   |  |                  
|ASSETS                                                        |  |                   |  |                  
|Loans at estimated fair value                                 |  |                   |  |                  
|(Cost of $96,859,544 and $127,030,246)                        |  | $92,800,761       |  | $122,926,428     
|Cash and cash equivalents                                     |  | 7,708,532         |  | 12,102,263       
|Other assets                                                  |  | 1,408,045         |  | 2,567,204        
|                                                              |  |                   |  |                  
|Total assets                                                  |  | $101,917,338      |  | $137,595,895     
|                                                              |  |                   |  |                  
|LIABILITIES AND SHAREHOLDER'S EQUITY                          |  |                   |  |                  
|Liabilities:                                                  |  |                   |  |                  
|Borrowings under debt facilty                                 |  | $44,827,921       |  | $59,155,025      
|Accrued management fees                                       |  | 756,894           |  | 965,323          
|Accounts payable and other accrued liabilities                |  | 343,218           |  | 1,322,511        
|                                                              |  |                   |  |                  
|Total liabilities                                             |  | 45,928,033        |  | 61,442,859       
|                                                              |  |                   |  |                  
|Shareholder's equity:                                         |  |                   |  |                  
|Common stock: $0.001 par value, 10,000,000 shares authorized; |  |                   |  |                  
|Issued and outstanding - 100,000 shares                       |  | 100               |  | 100              
|Capital in excess of par value                                |  | 155,004,400       |  | 155,004,400      
|Accumulated distributions                                     |  | (114,044,590)     |  | (85,549,717)     
|Accumulated earnings                                          |  | 15,029,395        |  | 6,698,253        
|Total shareholder's equity                                    |  | 55,989,305        |  | 76,153,036       
|                                                              |  |                   |  |                  
|Total liabilities and shareholder's equity                    |  | $101,917,338      |  | $137,595,895     
|                                                              |  |                   |  |                  





See notes to financial statements.



7







VENTURE LENDING & LEASING III, INC.

Statements of Operations

For the Years Ended December 31, 2004, 2003 and 2002





|                                                                           |  | For the Year Ended December 31, 2004 |  | For the Year Ended December 31, 2003 |  | For the Year Ended December 31, 2002
|-------------------------------------------------------------------------- |  | ------------------------------------ |  | ------------------------------------ |  | ------------------------------------
|INVESTMENT INCOME:                                                         |  |                                      |  |                                      |  |                                     
|Interest on loans                                                          |  | $16,572,162                          |  | $22,584,642                          |  | $30,929,357                         
|Interest on short-term investments                                         |  |                                      |  |                                      |  |                                     
|and other income                                                           |  | 314,507                              |  | 326,949                              |  | 817,173                             
|Total investment income                                                    |  | 16,886,669                           |  | 22,911,591                           |  | 31,746,530                          
|                                                                           |  |                                      |  |                                      |  |                                     
|EXPENSES:                                                                  |  |                                      |  |                                      |  |                                     
|Management fees                                                            |  | 2,900,472                            |  | 3,926,546                            |  | 6,548,175                           
|Interest expense                                                           |  | 1,615,673                            |  | 2,147,210                            |  | 3,269,223                           
|Other operating expenses                                                   |  | 2,150,349                            |  | 2,736,893                            |  | 2,823,341                           
|Total expenses                                                             |  | 6,666,494                            |  | 8,810,649                            |  | 12,640,739                          
|Net investment income                                                      |  | 10,220,175                           |  | 14,100,942                           |  | 19,105,791                          
|                                                                           |  |                                      |  |                                      |  |                                     
|Net change in unrealized gain (loss) from investments and hedging activity |  | 628,107                              |  | 1,814,788                            |  | (2,128,068)                         
|Net realized loss from investment transactions                             |  | (2,517,140)                          |  | (8,152,936)                          |  | (12,771,267)                        
|Net income                                                                 |  | $8,331,142                           |  | $7,762,794                           |  | $4,206,456                          
|Net income per share                                                       |  | $83.31                               |  | $77.63                               |  | $42.06                              
|Weighted average shares outstanding                                        |  | 100,000                              |  | 100,000                              |  | 100,000                             
|                                                                           |  |                                      |  |                                      |  |                                     
|                                                                           |  |                                      |  |                                      |  |                                     







See notes to financial statements.



8







VENTURE LENDING & LEASING III, INC.

Statements of Changes in Shareholders Equity

For the Years Ended December 31, 2004, 2003 and 2002



|                           |              |           | Capital in   |                |              |             
|-------------------------- | ------------ | --------- | ------------ | -------------- | ------------ | ------------
|                           | Common Stock |           | Excess of    |                | Accumulated  |             
|                           | Shares       | Par Value | Par Value    | Distributions  | Earnings     | Total       
|                           |              |           |              |                |              |             
|                           |              |           |              |                |              |             
|BALANCE, December 31, 2001 | 100,000      | $100      | $155,004,400 | $(6,864,039)   | $(5,270,997) | $142,869,464
|Distributions              |              |           |              | (5,071,225)    |              | (5,071,225) 
|Net income                 |              |           |              |                | 4,206,456    | 4,206,456   
|BALANCE, December 31, 2002 | 100,000      | 100       | 155,004,400  | (11,935,264)   | (1,064,541)  | 142,004,695 
|Distributions              |              |           |              | (73,614,453)   |              | (73,614,453)
|Net income                 |              |           |              |                | 7,762,794    | 7,762,794   
|                           |              |           |              |                |              |             
|BALANCE, December 31, 2003 | 100,000      | 100       | 155,004,400  | (85,549,717)   | 6,698,253    | 76,153,036  
|Distributions              |              |           |              | (28,494,873)   |              | (28,494,873)
|Net income                 |              |           |              |                | 8,331,142    | 8,331,142   
|BALANCE, December 31, 2004 | 100,000      | $100      | $155,004,400 | $(114,044,590) | $15,029,395  | $55,989,305 
|                           |              |           |              |                |              |             











See notes to financial statements.









9







VENTURE LENDING & LEASING III, INC.

Statements of Cash Flows

For the Years Ended December 31, 2004, 2003 and 2002



|                                                                                   | For the Year Ended |   | For the Year Ended |  | For the Year Ended
|---------------------------------------------------------------------------------- | ------------------ | - | ------------------ |  | ------------------
|                                                                                   | December 31, 2004  |   | December 31, 2003  |  | December 31, 2002 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |                    |   |                    |  |                   
|Net income                                                                         | $8,331,142         |   | $7,762,794         |  | $4,206,456        
|Adjustments to reconcile net income to net cash provided by operating activities:  |                    |   |                    |  |                   
|Net realized loss from investment transactions                                     | 2,517,140          |   | 8,152,936          |  | 12,771,267        
|                                                                                   |                    |   |                    |  |                   
|Net change in unrealized loss (gain) from investments and hedging activities       | (628,107)          |   | (1,814,788)        |  | 2,128,068         
|Amortization of deferred assets                                                    | 332,341            |   | 694,356            |  | 349,247           
|Decrease in other assets                                                           | 826,816            |   | 777,034            |  | 88,887            
|Net decrease in accounts payable, accrued liabilities, and accrued management fees | (604,648)          |   | (951,309)          |  | (1,794,724)       
|Acquisition of loans                                                               | (61,884,627)       |   | (69,940,464)       |  | (119,171,122)     
|Principal payments on loans                                                        | 89,018,525         |   | 121,481,256        |  | 122,903,713       
|Acquisition of securities                                                          | (1,851,795)        |   | (2,087,921)        |  | (3,072,847)       
|Net cash provided by operating activities                                          | 36,056,787         | - | 64,073,894         |  | 18,408,945        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |                    |   |                    |  |                   
|Cash distribution to shareholder                                                   | (25,500,000)       |   | (68,550,000)       |  | -                 
|Deemed distribution to shareholder                                                 | (623,414)          |   | (491,574)          |  | (264,703)         
|Payment of deferred bank and bank related fees                                     | -                  |   | (64,460)           |  | (340,700)         
|Borrowings under debt facility                                                     | 13,850,440         |   | 57,177,917         |  | 2,770,352         
|Repayment of borrowings under debt facility                                        | (28,177,544)       |   | (49,907,396)       |  | (30,885,848)      
|Net cash used in financing activities                                              | (40,450,518)       |   | (61,835,513)       |  | (28,720,899)      
|Net increase (decrease) in cash and cash equivalents                               | (4,393,731)        |   | 2,238,381          |  | (10,311,954)      
|                                                                                   |                    |   |                    |  |                   
|CASH AND CASH EQUIVALENTS:                                                         |                    |   |                    |  |                   
|Beginning of year                                                                  | 12,102,263         |   | 9,863,882          |  | 20,175,836        
|End of year                                                                        | $7,708,532         |   | $12,102,263        |  | $9,863,882        
|CASH PAID DURING THE PERIOD FOR:                                                   |                    |   |                    |  |                   
|Interest                                                                           | $1,607,036         |   | $2,142,399         |  | $3,366,726        
|NON-CASH ACTIVITIES:                                                               |                    |   |                    |  |                   
|Distributions of investment securities to shareholder                              | $2,371,459         |   | $4,572,880         |  | $4,806,522        
|Receipt of security for loans                                                      | $519,664           |   | -                  |  | -                 
|                                                                                   |                    |   |                    |  |                   













See notes to financial statements.



10







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 investment company electing status as a business development company under the Investment Company Act of 1940. The Fund is a wholly owned subsidiary of Venture Lending & Leasing III, LLC, a Delaware limited liability company (the Company). The purpose of the Fund is to provide asset-based financing to venture-capital-backed companies in the form of secured loans. Prior to commencing its operations on May 19, 2000, the Fund had no operations other than the sale of 100,000 shares to Venture Lending and Leasing III, LLC for $25,000. As of December 31, 2004, the Fund meets the requirements, including diversification requirements, 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 financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, money markets, and demand deposits in banks with maturities of 90 days or less.

Valuation of Loans

Venture loans are privately negotiated transactions, and there is no established trading market in which such loans can be sold. Investments in loans are valued at their original cost less amortization of principal unless, pursuant to procedures established by the Funds Board of Directors, the Funds Managers determine that amortized cost does not represent fair value, in which case loans will be adjusted to their fair value as determined by the Board of Directors.  Interest income on loans is recognized using the effective interest method.

Warrants

Warrants that are received in connection with loan transactions generally will be assigned a fair value at the time of acquisition. Warrants are then distributed by the Fund to the Company at the assigned value.

Nonaccrual Loans

The Funds policy is to place a loan on nonaccrual status when the loan stops performing and management deems that it is unlikely that the loan will return to performing status.  When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed for the quarter in which the loan was placed on nonaccrual status. Any uncollected interest related to quarters prior to when the loan was placed on nonaccrual status is added to the principal balance, and the aggregate balance of the principal and interest is evaluated in accordance with the valuation of loans.

Loans with a fair value of $2,483,327 and $7,547,196 and a cost of $6,542,110 and $11,651,014 have been classified as nonaccrual at December 31, 2004 and 2003, respectively.

Commitment Fees

Unearned income and commitment fees on loans are recognized using the effective-interest method over the term of the loan. Commitment fees are carried as liabilities when received for commitments upon which no draws have been made. When the first draw is made, the fee is treated as unearned income and is recognized as described above.  If a draw is never made, the commitment fee less any applicable legal costs becomes recognized as other income.

Interest Rate Swaps

The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. For investment companies such as the Fund, SFAS No. 133 requires that changes in the derivatives fair value be recognized currently in earnings.

The Fund enters into interest rate swap transactions to hedge its interest rate on its bank loans.  As of December 31, 2004 and 2003, the Fund had an interest rate swap transaction with a notional principal amount of $40,375,408 and $53,239,522, respectively. The net interest received or paid on the transactions is included in interest expense. The fair value of the swap is recorded in other assets or other liabilities and the change in the fair value is recorded as a change in unrealized gain (loss) from investment transactions.  As of December 31, 2004 and 2003, the Fund has recorded a liability of $26,196 and $609,268, respectively, to reflect the value of the outstanding hedge transaction.

Recently Issued Accounting Pronouncements



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

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

Tax Status

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

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on previously reported net income or shareholders equity.

3.

SUMMARY OF INVESTMENTS

Loans generally are made to borrowers pursuant to commitments whereby the Fund commits to finance the borrower up to a specified amount for the term of the commitment, upon the terms and subject to the conditions specified by such commitment. As of December 31, 2004 and 2003, the Funds investments in loans are primarily within the United States and are diversified among the following industries. The percentage of net assets (shareholders equity) that each industry group represents is shown with the industry totals. (The sum of the percentages does not equal 100 percent because the percentages are based on net assets as opposed to total loans.  Also, the sum of the percentages of net assets is greater than 100 percent due to the Funds use of leverage (debt) as a means of financing investments).

Loan balances are summarized by borrower.  Typically a borrowers balance will be composed of several loans drawn under a commitment made by the Fund.  As each loan drawn under a commitment has a different maturity date and amount, the interest rate for the borrower may change each month.  For the year ended December 31, 2004 and 2003, the weighted average interest rate on performing loans was 16.0% and 15.9%, respectively.  Interest rates earned by the Fund will fluctuate based on many factors including volatility, early payoffs, and recovery of interest on non-performing assets.





|                                   | Percentage of | Estimated Fair | Final        
|---------------------------------- | ------------- | -------------- | -------------
|Borrower                           | Net Assets    | Value12/31/04  | Maturity Date
|                                   |               |                |              
|Biotechnology                      |               |                |              
|Net6 [WebUnwired]                  |               | $657,277       | 4/1/06       
|Serenex                            |               | 1,979,549      | 6/1/07       
|Trinity Biosystems                 |               | 166,013        | 6/1/06       
|Subtotal:                          | 5.0%          | $2,802,839     |              
|Carrier Networking                 |               |                |              
|Arroyo Video Solutions             |               | $1,294,221     | 9/1/07       
|Pedestal Networks                  |               | 1,452,705      | 9/1/06       
|Subtotal:                          | 4.9%          | $2,746,926     |              
|Communication Service Providers    |               |                |              
|Everest Broadband                  |               | $0             | *            
|Masergy Communications             |               | 3,669,682      | 9/1/06       
|MetroFi                            |               | 1,014,129      | 11/1/07      
|Subtotal:                          | 8.4%          | $4,683,811     |              
|Communications Equipment           |               |                |              
|Atrica                             |               | $1,325,306     | 1/1/06       
|Bivio Networks [Network Robots]    |               | 184,637        | *            
|Caymas Systems                     |               | 618,433        | 6/1/06       
|General Bandwidth                  |               | 226,396        | 6/1/05       
|Inkra Networks                     |               | 134,602        | 1/1/05       
|Nishan Systems                     |               | 23,692         | 7/1/05       
|Sanera Systems                     |               | 99,557         | 7/1/05       
|Santera Systems                    |               | 86,638         | 4/1/05       
|Subtotal:                          | 4.8%          | $2,699,261     |              
|Computers & Peripherals            |               |                |              
|3PARdata                           |               | $1,211,770     | 2/1/06       
|MaXXan Systems                     |               | 1,723,359      | 11/1/05      
|ONStor [Claristor]                 |               | 731,195        | 9/1/06       
|OQO                                |               | 2,098,738      | 3/1/08       
|Subtotal:                          | 10.3%         | $5,765,062     |              
|Internet                           |               |                |              
|Coremetrics                        |               | $591,901       | *            
|Friendster                         |               | 5,315,075      | 10/1/07      
|MessageOne, Inc.                   |               | 527,946        | 5/1/06       
|Postini                            |               | 739,089        | 11/1/06      
|Slam Dunk Networks                 |               | 0              | *            
|Tribe.net                          |               | 1,164,097      | 11/1/07      
|Subtotal:                          | 14.9%         | $8,338,108     |              
|Medical Devices                    |               |                |              
|AcuFocus                           |               | $3,203,929     | 6/1/07       
|Alere Medical                      |               | 2,913,155      | 12/1/06      
|Evalve                             |               | 1,720,944      | 2/1/06       
|Inogen                             |               | 1,798,854      | 10/1/07      
|NeoGuide Systems                   |               | 35,164         | 2/1/05       
|Neomend                            |               | 36,415         | *            
|Neuronetics                        |               | 2,350,945      | 4/1/07       
|Ntero Surgical                     |               | 394,593        | *            
|Oculus Innovative Sciences         |               | 759,471        | 5/1/07       
|Volcano Therapeutics               |               | 3,107,748      | 9/1/06       
|Subtotal:                          | 29.2%         | $16,321,218    |              
|Other                              |               |                |              
|Ion America                        |               | $673,221       | 4/1/06       
|Nanosolar                          |               | 599,064        | 11/1/07      
|Subtotal:                          |               | $1,272,285     |              
|Other Technology                   | 2.3%          |                |              
|Kiwi Networks                      |               | $1,290,796     | 6/1/07       
|Triformix                          |               | 479,228        | 6/1/07       
|Subtotal:                          | 3.2%          | $1,770,024     |              
|Photonics                          |               |                |              
|Cenix                              |               | $691,081       | *            
|Covega [Quantum Photonics]         |               | 108,822        | 2/1/05       
|Inphi                              |               | 574,501        | 12/1/06      
|iolon                              |               | 56,579         | 2/1/05       
|Nufern                             |               | 574,020        | 8/1/05       
|Subtotal:                          | 3.6%          | $2,005,003     |              
|Semiconductors                     |               |                |              
|Aeluros                            |               | $377,925       | 3/1/06       
|Ample Communications               |               | 87,407         | 2/1/05       
|Analogix Semiconductor             |               | 2,939,324      | 5/1/07       
|Aristos Logic                      |               | 6,577,507      | 12/1/07      
|Brion Technologies                 |               | 440,339        | 11/1/06      
|Ishoni Networks [HiQ Networks]     |               | 584,701        | *            
|Nexsil                             |               | 434,944        | 1/1/06       
|Scintera Networks                  |               | 930,155        | 10/1/06      
|Sierra Logic                       |               | 739,434        | 12/1/07      
|Sierra Monolithics                 |               | 69,091         | 3/1/05       
|Stretch                            |               | 1,609,545      | 12/1/06      
|T-Ram                              |               | 174,787        | 7/1/05       
|TriCN                              |               | 86,252         | 11/1/06      
|Subtotal:                          | 26.9%         | $15,051,411    |              
|Semiconductors & Equipment         |               |                |              
|Fyre Storm                         |               | $299,822       | 2/1/06       
|Matrix Semiconductor               |               | 3,654,947      | 3/1/07       
|Molecular Imprints                 |               | 1,123,395      | 4/1/06       
|Universal Network Machines         |               | 1,091,401      | 3/1/07       
|Subtotal:                          | 11.0%         | $6,169,565     |              
|Software                           |               |                |              
|Accruent                           |               | $1,016,129     | 1/1/07       
|Adaptive Planning                  |               | 320,587        | 2/1/07       
|Airgo Networks [Woodside Networks] |               | 1,050,213      | 4/1/06       
|Andale                             |               | 1,526,059      | 11/1/06      
|Avamar Technologies                |               | 2,384,762      | 3/1/07       
|Ceon                               |               | 98,484         | 4/1/05       
|CiraNova                           |               | 206,992        | 9/1/05       
|CoWare                             |               | 758,933        | 6/1/07       
|Enkata Technologies                |               | 730,862        | 9/1/06       
|InterSan                           |               | 673,707        | 12/1/06      
|IP Wireless                        |               | 8,288,239      | 2/1/07       
|KonaWare                           |               | 198,125        | 1/1/07       
|Merced Systems                     |               | 116,675        | 12/1/05      
|nLayers                            |               | 714,556        | 8/1/06       
|Platform Solutions                 |               | 385,286        | 12/1/06      
|Plaxo                              |               | 564,557        | 12/1/07      
|PSS Systems                        |               | 139,050        | 6/1/06       
|Rome                               |               | 914,036        | 3/1/07       
|Valchemy                           |               | 283,087        | 11/1/06      
|Subtotal:                          | 36.4%         | $20,370,339    |              
|Wireless                           |               |                |              
|IXI Mobile                         |               | $2,804,910     | 7/1/06       
|Subtotal:                          | 5.0%          | $2,804,910     |              
|                                   |               |                |              
|Total: (Cost of $96,859,544)       | 165.7%        | $92,800,761    |              



* As of December 31, 2004 loans with a cost basis of $6.5 million and a fair value of $2.5 million have been classified as non-accrual.  These loans have been accelerated from original maturity and are due in their entirety.







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



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



The Fund provides asset-based financing primarily to start-up and emerging growth venture-capital-backed companies. These loans are generally secured by assets of the borrower.  As a result, the Fund is subject to general credit risk associated with such companies.  The receivables under these loans are used by the Fund as collateral for borrowings of the Fund.  At December 31, 2004 and 2003, the Fund has unfunded commitments to borrowers of $284,649,324 and $313,968,365, respectively.  Only $10,796,231 of these commitments remain unexpired as of December 31, 2004.

Included in the net change in unrealized gain (loss) from investment transactions for the years ended December 31, 2004, 2003, and 2002 is an unrealized gain (loss) on loans of $45,035, $1,381,275, and ($2,281,741),   respectively. This amount represents the net change in estimated fair value of loans determined by the Funds Managers in accordance with the procedures established by the Funds Board of Directors.  The unrealized gain (loss) figure includes amounts which represent the reversal of previously adjusted loans which have been written off during the year.

For the years ended December 31, 2004, 2003, and 2002 the Fund distributed $2,371,459, $4,572,880, and $4,806,522, respectively of investment securities to the Company, respectively.

4.

LONG-TERM DEBT FACILITY

As of December 31, 2004 and 2003, the Fund had in place a securitization debt facility of $50.0 million and $160.0 million, respectively, to finance the acquisition of asset-based loans. As of December 31, 2004 and 2003, the Fund had borrowed $44.8 million and $59.2 million, respectively, under this facility. Loans can no longer be drawn on the credit facility and the size of the facility will automatically be reduced each month by the amount of principal amounts repaid on the loans outstanding. The interest rate on this facility is the Cost of Funds Rate plus 0.50 percent, which at December 31, 2004, was 2.90 percent. The facility has a program termination date of December 2005, at which time the amortizing loans which serve as collateral can no longer be replaced.



Borrowings under this facility are collateralized by loans of the Fund with assignment to the financial institution, plus other assets of the Fund. The amortization schedule for each borrowing under the facility is expected to correspond to the amortization of the loans supporting each borrowing. The Fund pays a commitment fee of 0.20 percent annually based on the total commitment related to the facility.

As a condition of the expansion of the facility in 2002, the Fund has taken out an insurance policy insuring the repayment of the loans under this facility to the banks. Total fees are recognized on a straight-line basis over the life of the policy.

Costs of $150,000 were incurred in connection with initially procuring the facility. These costs have been capitalized and are being amortized over three years. Costs of $767,016 were incurred in order to expand the facility. These costs were capitalized and are being amortized over the life of the facility.  Costs of $340,700 were incurred in order to maximize the availability under the facility in 2002.  These costs have been capitalized and are being amortized over the life of the facility.  In early 2003, the Fund decreased the size of the debt facility, and expensed $328,538 which represented the unamortized cost of the fees related to the cancelled portion of the facility.  Additionally, costs of $64,460 were incurred during 2003 which have been capitalized and are being expensed over the remaining life of the facilty.

The required aggregate debt payments for the remaining three years are as follows:



|Year | Principal Payments
|---- | ------------------
|2005 | $25,470,977       
|2006 | 15,696,621        
|2007 | 3,660,323         
|     | $44,827,921       





5.

INTEREST RATE SWAPS

At December 31, 2004 and 2003, the Fund had an interest rate swap transaction with a notional principal amount of $40.4 million and $53.2 million, respectively, to convert floating rate liabilities to fixed rates. The Fund pays a fixed rate of 3.049 percent and receives from the counterparty a floating 30-day LIBOR rate. Payments are made monthly and the notional amount continues to amortize until it reaches $0 on June 26, 2006.  The fair value of swap transactions at December 31, 2004 and 2003, was ($26,196) and ($609,268), respectively, which is included in other liabilities.

6.

CAPITAL STOCK

As of December 31, 2004 and 2003, there were 200,000 shares of $0.001 par value common stock authorized, and 100,000 shares issued and outstanding.

7.

EARNINGS PER SHARE

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

8.

MANAGEMENT

Westech Investment Advisors (the Manager) serves as the investment manager for the Fund. As compensation for its services to the Fund, the Manager receives a management fee (the Management fee) computed and paid at the end of each quarter at an annual rate of 2.5 percent of the Funds committed equity capital (regardless of when or if the capital is called) as of the last day of each fiscal quarter in a two-year period commencing with the first capital closing. Following this two-year period, Management fees are calculated and paid at the end of each quarter at an annual rate of 2.5 percent of the Funds total assets (including amounts derived from borrowed funds) as of the last day of each quarter.  Management feesof $2,900,472, $3,926,546, and $6,548,175 were recognized as expenses for the years ended December 31, 2004, 2003, and 2002, respectively.

For the year ended December 31, 2004, 2003, and 2002, expenses of $623,414, $491,574, and $264,703, respectively were allocated to the Company by the Fund and treated as deemed distributions. These expenses were primarily composed of management fees, accounting and tax fees, and bank custodial fees.

Certain officers and directors of the Fund also serve as officers and directors of Westech Investment Advisors.

9.

FINANCIAL HIGHLIGHTS

Accounting principles generally accepted in the United States require disclosure of financial highlights of the Fund.



The total rate of return is defined as the return based on the change in value during the period of a theoretical investment made at the beginning of the period.  The total rate of return assumes a constant rate of return for the Fund during the period reported and weights each cash flow by the amount of time held in the Fund.  This required methodology differs from an internal rate of return.



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



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

|                                              |                   |  |                   |  |                   |  | 
|--------------------------------------------- | ----------------- |  | ----------------- |  | ----------------- |  | 
|                                              | Year Ended        |  | Year Ended        |  | Year Ended        |  | 
|                                              | December 31, 2004 |  | December 31, 2003 |  | December 31, 2002 |  | 
|                                              |                   |  |                   |  |                   |  | 
|                                              |                   |  |                   |  |                   |  | 
|Total Return                                  | 12.1%             |  | 8.3%              |  | 3.0%              |  | 
|                                              |                   |  |                   |  |                   |  | 
|Per Share Amounts:                            |                   |  |                   |  |                   |  | 
|Net Asset Value, Beginning of Period          | $761.53           |  | $1,420.04         |  | $1,428.69         |  | 
|Net Investment Income                         | 102.20            |  | 141.01            |  | 191.06            |  | 
|Net Realized Loss & Change in Unrealized Loss | (18.89)           |  | (63.38)           |  | (149.00)          |  | 
|Total Income                                  | 83.31             |  | 77.63             |  | 42.06             |  | 
|Capital Distributions                         | (284.95)          |  | (736.14)          |  | (50.71)           |  | 
|                                              |                   |  |                   |  |                   |  | 
|Net Asset Value, End of year                  | $559.89           |  | $761.53           |  | $1,420.04         |  | 
|                                              |                   |  |                   |  |                   |  | 
|Net Assets, End of year                       | $55,989,305       |  | $76,153,036       |  | $142,004,695      |  | 
|                                              |                   |  |                   |  |                   |  | 
|Ratios to Average Net Assets:                 |                   |  |                   |  |                   |  | 
|                                              |                   |  |                   |  |                   |  | 
|Expenses                                      | 5%                |  | 8%                |  | 9%                |  | 
|Net Investment Income                         | 8%                |  | 13%               |  | 13%               |  | 



10.

LITIGATION

The Fund is currently involved in a matter where a borrower (Ishoni Networks) failed to make payments as scheduled.  The Fund initiated legal action against Ishoni Networks.  One of the assets of Ishoni Networks was a note from their former Chief Executive Officer.

The former Chief Executive Officer filed a counterclaim against the Company which management and the attorneys for management feel is without merit.  The claim states that the Company conspired with a majority shareholder (Phillips) in order to obtain the intellectual property of Ishoni Networks for a price less than fair value. Management is in the process of vigorously defending the cross complaint and continues its collection action.



It is the present opinion of Management that the outcome of any claim will not have a material adverse impact on the financial position or results of operations of the Fund.











11







Exhibit 31.1

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



I, Salvador O. Gutierrez, certify that:



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



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



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



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



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



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



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



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



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



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



Date: March 25, 2005



/S/ Salvador O. Gutierrez



Salvador O. Gutierrez

Chief Financial Officer



12







Exhibit 31.2

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



I, Ronald W. Swenson, certify that:



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



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



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



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



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



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



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



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



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



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



Date: March 25, 2005



/S/ Ronald W. Swenson



Ronald W. Swenson

Chief Executive Officer

Exhibit 32.1

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

In connection with the Annual Report of Venture Lending & Leasing III, Inc. (the "Fund") on Form 10-K for the year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald W. Swenson, Chief Executive Officer of the Fund, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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



/S/ Ronald W. Swenson



Ronald W. Swenson
Chief Executive Officer
March 25, 2005





13









Exhibit 32.2



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

In connection with the Annual Report of Venture Lending & Leasing III, Inc. (the "Fund") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Salvador O. Gutierrez, Chief Financial Officer of the Fund, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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



/S/ Salvador O. Gutierrez



Salvador O. Guterrez

Chief Financial Officer
March 25, 2005













14