VENTURE LENDING & LEASING III INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ______________

Commission file number 814-00207

Venture Lending & Leasing III, Inc.

(Exact Name of Registrant as specified in its charter)

Maryland

77-0534084

(State or other jurisdiction of incorporation

(I.R.S. Employer

or organization)

Identification No.)

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

(Address of principal executive offices) (Zip Code)

(408) 436-8577

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant has (i) filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 Ö No __

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

Class Outstanding as of November 2, 2003

Common Stock, $.001 par value 100,000

VENTURE LENDING & LEASING III, INC.

INDEX

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

Statements of Financial Position

As of September 30, 2003 and December 31, 2002

Statements of Operations (Unaudited)

For the Three and Nine Months Ended September 30, 2003 and 2002

Statements of Changes in Shareholder's Equity

For the Year ended December 31, 2002 and the Nine Months

Ended September 30, 2003

Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2003 and 2002

Notes to Financial Statements

Item 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations

Item 3. Quantitative & Qualitative Disclosures About Market Risk

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

VENTURE LENDING & LEASING III, INC.

STATEMENTS OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

	September 30, 2003	December 31, 2002
	UNAUDITED
ASSETS
Loans at estimated fair value
(Cost of $139,453,936 and $189,208,933)	$128,863,409		$183,723,840
Cash and cash equivalents	13,991,461		9,863,882
Other assets	772,110		1,738,755
	________________		_______________
Total assets	$143,626,980		$195,326,477
	==============		=============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Borrowings under debt facilty	$43,986,520		$51,884,504
Accrued management fees	1,008,370		1,312,698
Accounts payable and other accrued liabilities	1,473,922		2,359,957
	________________		_______________
Total liabilities	46,468,812		55,557,159
	________________		_______________
Shareholder's equity:
Common stock: $0.001 par value, 200,000 shares authorized;
Issued and outstanding - 100,000 shares	100		100
Capital in excess of par value	155,004,400		155,004,400
Accumulated distributions	(59,917,366)		(11,935,264)
Accumulated earnings (deficit)	2,071,034		(3,299,918)
	________________		_______________
Total shareholder's equity	97,158,168		139,769,318
	________________		_______________
Total liabilities and shareholder's equity	$143,626,980		$195,326,477
	==============		=============

See Notes to Financial Statements

VENTURE LENDING & LEASING III, INC.

STATEMENTS OF OPERATIONS (UNAUDITED)

	For The Three	For The Three	For The Nine	For The Nine
	Months Ended	Months Ended	Months Ended	Months Ended
	September 30, 2003	September 30, 2002	September 30, 2003	September 30, 2002
	_____________	_____________	_____________	_____________
INVESTMENT INCOME:
Interest on loans	$5,613,053	$7,998,118	$18,965,658	$23,389,279
Interest on short-term investments
and other income	62,639	120,312	223,869	734,337
	_____________	_____________	_____________	_____________
Total investment income	5,675,692	8,118,430	19,189,527	24,123,616
	_____________	_____________	_____________	_____________
EXPENSES:
Management fees	897,669	1,268,678	3,075,440	5,327,403
Interest expense	528,748	766,575	1,728,596	2,594,793
Other operating expenses	537,113	730,672	2,126,905	2,102,566
	_____________	_____________	_____________	_____________
Total expenses	1,963,530	2,765,925	6,930,941	10,024,762
	_____________	_____________	_____________	_____________
Net investment income	3,712,162	5,352,505	12,258,586	14,098,854
	_____________	_____________	_____________	_____________
Net change in unrealized loss from investments and hedging activity	(2,494,542)	645,446	(4,755,146)	(7,501,879)
Net realized gain (loss) from investment transactions	82,122	(1,980,266)	(2,132,488)	(3,164,867)
	_____________	_____________	_____________	_____________
Net income	$1,299,742	$4,017,685	$5,370,952	$3,432,108
	============	============	============	============
Net income per share	$13.00	$40.18	$53.71	$34.32
	============	============	============	============
Weighted average shares outstanding	100,000	100,000	100,000	100,000

See Notes to Financial Statements

VENTURE LENDING & LEASING III, INC.

STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2002

AND THE NINE MONTHS ENDED SEPTEMBER 30, 2003

	Common Stock ____________________		Capital in		Accumulated
	Common Stock ____________________		Excess of		Earnings
	Shares	Par Value	Par Value	Distributions	(Deficit)	Total
	_________	_________	_________	_________	_________	_________
BALANCE, December 31, 2001	100,000	$100	$155,004,400	$(6,864,039)	$(7,817,109)	$140,323,352

Distributions				(5,071,225)		(5,071,225)
Net income					4,517,191	4,517,191
	_________	_________	_________	_________	_________	_________
BALANCE, December 31, 2002	100,000	$100	$155,004,400	$(11,935,264)	$(3,299,918)	$139,769,318
	_________	_________	_________	_________	_________	_________
Distributions				(47,982,102)		(47,982,102)
Net income					5,370,952	5,370,952
	_________	_________	_________	_________	_________	_________
BALANCE, September 30, 2003 (UNAUDITED)	100,000	$100	$155,004,400	$(59,917,366)	$2,071,034	$97,158,168
	_________	_________	_________	_________	_________	_________

See Notes to Financial Statements

VENTURE LENDING & LEASING III, INC.

STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

	For the Nine Months Ended September 30, 2003	For the Nine Months Ended September 30, 2002
	______________	_____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$5,370,952	$3,432,108
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized loss from investment transactions	2,132,488	3,164,867

Net change in unrealized loss from investments and hedging activities	4,755,146	7,501,879
Amortization of deferred assets	611,270	246,456
Decrease in other assets	419,834	143,628
Net increase in accounts payable, accrued liabilities, and accrued management fees	(840,074)	(2,129,951)
	______________	_____________
Net cash provided by operating activities	12,449,616	12,358,987
	______________	_____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans	(52,199,683)	(85,098,042)
Principal payments on loans	98,023,085	88,917,387
Acquisition of securities	(1,269,804)	(1,453,793)
	______________	_____________
Net cash provided by investing activities	44,553,598	2,365,552
	______________	_____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distribution to shareholder	(44,550,000)	-
Deemed distribution to shareholder	(363,191)	(156,599)
Payment of deferred bank and bank related fees	(64,460)	(340,700)
Borrowings under debt facility	35,839,518	1,983,865
Repayment of borrowings under debt facility	(43,737,502)	(24,711,663)
	______________	_____________
Net cash used in financing activities	(52,875,635)	(23,225,097)
	______________	_____________
Net increase (decrease) in cash and cash equivalents	4,127,579	(8,500,558)
CASH AND CASH EQUIVALENTS:
Beginning of period	9,863,882	20,175,836
	______________	_____________
End of period	$ 13,991,461	$ 11,675,278
	============	============
CASH PAID DURING THE PERIOD FOR:
Interest	$ 1,726,846	$ 2,687,939
NON-CASH ACTIVITIES:
Distributions of investment securities to shareholder	$ 3,068,911	$ 1,453,793

See Notes to Financial Statements

VENTURE LENDING & LEASING III, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2003

ORGANIZATION AND OPERATIONS OF THE FUND

Venture Lending & Leasing III, Inc., (the "Fund"), was incorporated in Maryland on February 1, 2000 as a nondiversified closed-end management investment company electing status as a business development company ("BDC") under the Investment Company Act of 1940. 100% of the stock of the Fund is held by Venture Lending & Leasing III, LLC (the "Company"). Prior to commencing its operations on May 19, 2000, the Fund had no operations other than the sale to the Company of 100,000 shares of common stock, $0.001 par value for $25,000. This issuance of stock was a requirement in order to apply for a lender's license. In the period between February 1, 2000 and May 19, 2000, the Fund was not subject to SEC reporting requirements. The Fund became subject to SEC reporting requirements on May 19, 2000.

In Management's opinion, the accompanying financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations for interim periods. Certain information and note disclosures normally included in audited annual financial statements prepared in accordance with accounting principles generally accepted in The United States of America have been omitted; however, the Fund believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the three and nine months ended September 30, 2003 and 2002 are not necessarily indicative of what the results would be for a full year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Fund's Annual Report on Form 10-K for the year ended December 31, 2002.

SUMMARY OF INVESTMENTS

Loans generally are made to borrowers pursuant to commitments whereby the Fund commits to finance assets up to a specified amount for the term of the commitments, upon the terms and subject to the conditions specified by such commitment. As of September 30, 2003, the Fund's investments in loans are to companies based primarily within the United States and are diversified among borrowers in the industries shown below. The percentage of shareholder's equity (net assets) that each industry group represents is shown with the industry totals below. (The sum of the percentages does not equal 100 percent because the percentages are based on net assets as opposed to total loans. Also, the sum of the percentages of net assets is greater than 100 percent due to the Fund's use of leverage (debt) as a means of financing investments.)

Loan balances are summarized by borrower. Typically a borrower's balance will be composed of several loans drawn under a commitment made by the Fund. As each loan drawn under a commitment has a different maturity date and amount, the interest rate for the borrower changes each month. For the three and nine month period ended September 30, 2003, the weighted average interest rate on performing loans was 17.3% and 16.9% respectively. Interest rates for the three and nine month period ended September 30, 2002 were 16.6% and 16.1% respectively. Interest rates earned by the Fund will fluctuate based on many factors including volatility, early payoffs, and recovery of interest from non-performing assets.

Loans as of September 30, 2003 consist of the following:

	Percentage of	Estimated Fair	Final
Borrower	Net Assets	Value 9/30/03	Maturity Date
Application Service Providers
BlueStar Solutions [eOnline]		$677,924	8/1/04
Ultrabridge		353,704	*
Subtotal:	1.1%	$1,031,628
Biotechnology
CancerVax		$3,616,775	11/1/06
Trinity Biosystems		268,216	6/1/06
Zyomyx		686,256	7/1/04
Subtotal:	4.7%	$4,571,247
Communication Service Providers
Everest Broadband Networks		$52,354	*
Subtotal:	0.1%	$52,354
Communications Equipment
Atrica		$3,952,441	1/1/06
Bivio Networks [Network Robots]		934,637	*
Calient Networks		1,262,348	12/1/04
Caymas		1,179,897	6/1/06
Coriolis Networks		2,242,934	3/1/07
General Bandwidth		1,608,805	6/1/05
Gluon Networks		1,611,280	3/1/05
Inkra Networks		2,851,418	4/1/05
Nishan Systems		380,312	7/1/05
Nokia [Amber Networks]		1,917,391	7/1/04
Pedestal Networks		3,269,716	9/1/06
Sandial Systems		1,741,848	6/1/06
Sanera Systems		1,463,122	7/1/05
Santera Systems		772,061	4/1/05
ServGate Technologies		1,130,790	11/1/05
Valo		145,884
Subtotal:	27.2%	$26,464,884
Computers & Peripherals
3PARdata		$3,745,857	2/1/06
MaXXan Systems		4,224,602	11/1/05
Nauticus Networks		4,350,615	2/1/06
Onstor [Claristor]		1,333,019	9/1/06
Spinnaker Networks		1,856,508	4/1/06
Subtotal:	16.0%	$15,510,601
Internet
BridgeSpan [ezClose.com]		$714,588	6/1/04
Coremetrics		1,288,258	*
ECtone		46,792	*
Evergreen Assurance		1,093,959	5/1/06
Postini		1,470,473	8/1/06
QuinStreet [Echo Online Networks]		428,326	11/1/04
Slam Dunk Networks		17,509	*
Subtotal:	5.2%	$5,059,905
Medical Devices
Alere Medical		$3,063,753	6/1/06
CardioNOW		326,368	3/1/05
Coalescent Surgical		4,342,620	2/1/06
Confirma [Merlin Dataworks]		894,283	6/1/04
Evalve		3,542,143	2/1/06
NeoGuide Systems		513,427	*
Neomend		226,415	*
Ntero Surgical		421,685	*
Volcano Therapeutics		4,613,167	9/1/06
Subtotal:	18.5%	$17,943,861
Other
Ion America		$1,313,815	4/1/06
Kiwi Networks		1,263,929	7/1/06
Lumenare [Avulet]		295,589	9/1/04
Nanosolar		248,182	8/1/06
Subtotal:	3.2%	$3,121,515
Photonics
AcceLight Networks		$156,713	*
Cenix		1,330,630	*
Ceyba		1,023,654	*
Covega [Quantum Photonics]		761,908	2/1/05
E2O Communications		1,996,212	3/1/05
Gemfire		534,928	*
Infinera [Zepton Networks]		6,281,852	10/1/05
Inphi		2,373,651	4/1/06
IoLon		1,421,002	2/1/05
Network Elements		1,494,611	6/1/04
NovX Microsystems		296,514	4/1/05
Nufern		2,488,717	2/1/05
Optinel Systems		752,222	9/1/04
Tsunami Optics [Stratos Lightwave]		118,069	5/1/04
Subtotal:	21.6%	$21,030,683
Semiconductor Equipment
Molecular Imprints		$2,262,001	4/1/06
Subtotal:	2.3%	$2,262,001
Semiconductors
Aeluros		$897,843	3/1/06
Ample Communications		1,682,863	2/1/05
Aristos Logic		621,059	9/1/06
Brion Technologies		368,352	7/1/06
Fyre Storm		895,507	2/1/06
Intel [VxTel]		429,690	1/1/04
Ishoni Networks [HiQ Networks]		2,027,577	*
Kineto Wireless [BluZona]		1,313,931	5/1/05
Matrix Semiconductor		3,114,314	3/1/06
Nexsil		807,161	1/1/06
Scintera Networks		1,060,247	7/1/06
Sierra Monolithics		1,346,534	3/1/05
Stretch		2,548,964	7/1/06
T-Ram		1,271,121	7/1/05
TriCN		96,920	8/1/06
Universal Network Machines		1,937,226	9/1/06
Subtotal:	21.0%	$20,419,309
Software
Airgo Networks [Woodside Networks]		$3,689,813	4/1/06
Avamar Technologies		977,054	9/1/06
Bang Networks		226,994	*
Ceon		452,482	4/1/05
Chordiant Software [On Demand]		175,418	9/1/04
CiraNova		540,767	9/1/05
CoWare		604,124	6/1/06
Enkata Technologies		1,391,909	9/1/06
InterSan		1,024,820	4/1/06
Merced Systems		747,780	12/1/05
Net6 [WebUnwired]		772,432	12/1/05
netForensics		244,147	8/1/04
Pivia		316,874	9/1/05
PSS Systems		230,807	6/1/06
Subtotal:	11.7%	$11,395,421
Total: (Cost of $139,453,936)	132.6%	$128,863,409

Loans as of December 31, 2002 were comprised of the following:

Estimated Fair Value

Final Maturity

December 31, 2002

Date

Borrower

Application Service Providers:

Asera

373,890

BlueStar Solutions [eOnline]

2,148,849

8/1/04

Ultrabridge

353,704

3/1/04

Total (2.1% and 10.9% of net assets)

2,876,443

Biotechnology:

Acusphere [Polymers for Medicine]

1,650,416

4/1/04

CancerVax

4,358,904

2/1/06

Zyomyx

1,561,646

7/1/04

Total (5.4% of net assets)

7,570,966

Communication Service Providers:

Appgenesys

Everest Broadband Networks

138,309

Total (0.1% of net assets)

138,309

Communications Equipment:

Atrica

5,133,655

1/1/06

Bivio Networks [Network Robots]

2,179,008

3/1/05

Calient Networks

2,035,441

12/1/04

Calix Networks

1,470,588

Caymas

660,594

12/1/05

Coriolis Networks

2,207,647

3/1/07

General Bandwidth

2,269,290

6/1/05

Gluon Networks

3,015,432

1/1/05

Inkra Networks

5,723,945

4/1/05

Network Photonics

2,654,510

9/1/05

Nishan Systems

571,809

7/1/05

Nokia [Amber Networks]

3,793,666

7/1/04

Polaris Networks

2,852,759

8/1/05

Rapid 5 Networks

1,859,077

Sandial Systems

1,052,675

10/1/05

Sanera Systems

3,657,139

7/1/05

Santera Systems

1,106,681

4/1/05

Valo

1,452,402

12/1/05

Total (31.3% of net assets)

43,696,318

Computers & Peripherals:

3PARdata

4,850,600

9/1/05

Andes Networks [BeeLine Networks]

169,675

11/1/03

Claristor [Agile Storage, Inc.]

1,053,940

12/1/05

InfiniSwitch

3,037,666

7/1/05

Intruvert Networks

989,059

8/1/05

IronPort Systems

1,100,252

12/1/05

Kuokoa Networks

1,144,488

9/1/05

MaXXan Systems

6,127,989

11/1/05

Nauticus Networks

1,763,560

6/1/05

Spinnaker Networks

1,529,023

12/1/05

Total (15.6% of net assets)

21,766,252

Internet:

BridgeSpan [ezClose.com]

1,820,833

6/1/04

Coremetrics

1,601,618

ECtone

46,792

Evergreen Assurance

605,155

12/1/05

Postini

819,877

6/1/04

QuinStreet [Echo Online Networks]

1,448,602

11/1/04

RivalWatch

23,669

4/1/03

Slam Dunk Networks

18,777

Total (4.6% of net assets)

6,385,323

Medical Devices:

Alere Medical

2,758,080

12/1/05

Cameron Health

916,026

11/1/04

Cardica [Vascular Innovations]

7,052,761

6/1/05

CardioNOW

509,948

3/1/05

Confirma [Merlin Dataworks]

1,786,068

6/1/04

NeoGuide Systems

642,795

3/1/05

Neomend [Advanced Closure Systems]

340,671

6/1/04

Ntero Surgical

917,446

5/1/04

Total (10.7% of net assets)

14,923,795

Other:

Chahaya Optronics

678,552

Lumenare [Avulet]

486,206

9/1/04

Total (0.8% of net assets)

1,164,758

Photonics:

AcceLight Networks

$ 5,699,668

10/1/04

Cenix

3,020,949

10/1/04

Ceyba

7,313,124

4/1/05

E2O Communications

3,215,550

3/1/05

Gemfire

672,100

Infinera [Zepton Networks]

8,357,487

10/1/05

Inphi

3,134,876

12/1/05

IoLon

2,267,816

2/1/05

LaserSharp

274,527

Network Elements

4,469,172

6/1/04

NovX Microsystems

413,579

4/1/05

Nufern

3,664,501

2/1/05

Onix Microsystems

1,664,084

6/1/04

Optinel Systems

1,412,604

9/1/04

Quantum Photonics

2,370,285

9/1/04

Sparkolor

115,564

Tsunami Optics [Stratos Lightwave]

665,371

5/1/04

Total (34.9% of net assets)

48,731,257

Semiconductor Equipment:

Molecular Imprints

868,259

10/1/05

Total (0.6%of net assets)

868,259

Semiconductors:

Aeluros

983,487

11/1/05

Ample Communications

3,530,969

2/1/05

Fyre Storm

647,485

6/1/05

Intel [VxTel]

1,110,704

1/1/04

Ishoni Networks [HiQ Networks]

3,501,324

8/1/04

Kineto Wireless [BluZona]

2,145,766

5/1/05

Matrix Semiconductor

2,703,793

9/1/05

Scintera Networks

856,027

11/1/05

Sierra Monolithics

2,522,067

3/1/05

T-Ram

1,984,383

7/1/05

Universal Network Machines

1,312,494

1/1/06

Total (15.2% of net assets)

21,298,499

Software:

Airgo Networks [Woodside Networks, Inc.]

$ 4,726,457

12/1/05

Alopa Networks

1,610,078

10/1/04

Bang Networks

1,933,634

7/1/04

Ceon

858,995

2/1/04

Chordiant Software [On Demand]

427,555

9/1/04

InterSan

276,113

10/1/05

Merced Systems

1,072,037

12/1/05

Net6 [WebUnwired]

1,138,962

12/1/05

netForensics

503,823

8/1/04

Pivia

432,809

9/1/05

Steeleye Technology

28,741

12/1/04

Syndeo

1,294,457

3/1/04

Total (10.2% of net assets)

14,303,661

TOTAL LOANS (Cost: $189,208,933)

$ 183,723,840

* As of September 30, 2003 and December 31, 2002 loans with a cost basis of $19.9 million and $12.7 million respectively and a fair value of $9.3 million and $7.2 million, respectively, have been classified as non-accrual. These loans have been accelerated from original maturity and are due in their entirety.

The Fund provides asset-based financing primarily to start-up and emerging growth venture-capital-backed companies. These loans are generally secured by assets of the borrowers. As a result, the Fund is subject to general credit risk associated with such companies. At September 30, 2003, the Fund has unfunded commitments to borrowers of $298.8 million. Of these commitments $41.0 million remain unexpired at September 30, 2003.

EARNINGS PER SHARE

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

RESTRUCTURE OF DEBT FACILITY AND CAPITAL REDUCTION

In March 2003, the Fund restructured its debt facility lowering its borrowing capacity from $250 million to $160 million. On April 2, 2003, the Managing Member of the Company reduced the committed capital of the Company from $361,880,000 to $217,128,000.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. In October 2003 the implementation of the consolidation requirements of FIN 46 were delayed by the FASB until the first interim or annual period ending after December 15, 2003 to variable interest entities created after January 31, 2003.

FINANCIAL HIGHLIGHTS

Accounting principles generally accepted in the United States of America require disclosure of financial highlights of the Fund for the periods presented, the three and nine months ended September 30, 2003 and 2002. The total rate of return is defined as the return based on the change in value during the period of a theoretical investment made at the beginning of the period. The total rate of return assumes a constant rate of return for the Fund during the period reported and weights each cash flow by the amount of time held in the Fund. This required methodology differs from an internal rate of return.

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

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

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

	Three Months Ended		Nine Months Ended

	9/30/03	9/30/02	9/30/03	9/30/02
	____________	___________	__________	___________
Total Return *	5.3%	11.6%	7.6%	3.3%
	============	===========	==========	==========
Per Share Amounts:
Net Asset Value, Beginning of Period	$999.05	$1,387.67	$1,397.69	$1,403.23
	___________	___________	__________	___________
Net Investment Income	37.12	53.53	122.59	140.99
Net Realized Loss & Change in Unrealized Loss	(24.12)	(13.35)	(68.88)	(106.67)
	___________	___________	__________	___________
Total Income	13.00	40.18	53.71	34.32
Capital Contributions	0.00	0.00	0.00	0.00
Capital Distributions	(40.47)	(6.40)	(479.82)	(16.10)
	___________	___________	__________	___________
Net Asset Value, End of period	$971.58	$1,421.45	$971.58	$1,421.45
	============	===========	==========	===========
Net Assets, End of period	$97,158,168	$142,145,068	$97,158,168	$142,145,068
	============	===========	==========	===========
Ratios to Average Net Assets:

Expenses *	8%	8%	8%	10%
Net Investment Income *	15%	15%	15%	13%

*Annualized

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Venture Lending & Leasing III, Inc. (the "Fund") is a closed-end, non-diversified management investment company electing status as a business development company under the Investment Company Act of 1940 ("1940 Act"). The Fund is 100% owned by Venture Lending & Leasing III, LLC (the "Company"). The Fund's investment objective is to achieve a high total return. The Fund provides asset-based financing to carefully selected venture capital-backed companies, in the form of secured loans. 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's shares of Common Stock, $.001 par value are sold to its shareholder under a stock purchase agreement. The Fund has issued 100,000 of the 200,000 shares that were authorized. The Fund's shareholder may make additional capital contributions to the Fund.

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

Critical Accounting Policies

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

Loans are held at estimated fair value as determined by management, in accordance with the valuation methods described in the valuation of loans section of footnote 2 of the Fund's Annual Report on Form 10-K for the year ended December 31, 2002 (Summary of Significant Accounting Policies). Critical factors in determining the fair value of a loan include payment history, collateral position, financial strength of the borrower, prospects for the borrower's raising future equity rounds, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan. The actual value of the loans may differ from management's estimates, which would affect net income as well as net assets.

Results of Operations For the Three and Nine Months ended September 30, 2003 and 2002

Total investment income for the three months ending September 30, 2003 and 2002 was $5.7 million and $8.1 million respectively, of which $5.6 million and $8.0 million respectively, consisted of interest on venture loans outstanding during the period. The remaining income consisted of payment of late fees from customers, income from expiration of commitments for which the Fund had received a commitment fee, and interest on the temporary investment of cash. The cash is held pending investment in venture loans. The majority of the decrease in investment income is due primarily to the decrease in average monthly outstanding performing loans from $192.4 million for the three months ended September 30, 2002 to $129.8 million for the three months ended September 30, 2003. This decrease was partially offset by the increase in average interest rate from 16.6% for the three months ended September 30, 2002 to 17.3% for the three months ended September 30, 2003. Total investment income for the nine months end ing September 30, 2003 and 2002 was $19.2 million and $24.1 million respectively, of which $19.0 million and $23.4 million respectively, consisted of interest on venture loans outstanding during the period. The remaining income consisted of payment of late fees from customers, income from expiration of commitments for which the Fund had received a commitment fee, and interest on the temporary investment of cash. The cash is held pending investment in venture loans. The majority of the decrease in investment income is due primarily to the decrease in average monthly outstanding performing loans from $193.5 million for the nine months ended September 30, 2002 to $150.0 million for the nine months ended September 30, 2003. This decrease was partially offset by the increase in average interest rate from 16.1 % for the nine months ended September 30, 2002 to 16.9% for the nine months ended September 30, 2003.

Total expenses were $2.0 million and $2.8 million for the three months ending September 30, 2003 and 2002, respectively. Total expenses for the nine months ended September 30, 2003 and 2002 were $6.9 million and $10.0 million, respectively. Management fees were the largest expense. Management fees for the three months ended September 30, 2003 and 2002 were $0.9 million and $1.3 million respectively. Management fees were lower for the three months ended September 30, 2003 because the asset base declined from $203.0 million as of September 30, 2002 to $143.6 million as of September 30, 2003. Management fees for the nine months ended September 30, 2003 and 2002 were $3.1 million and $5.3 million, respectively. Management fees were lower for the nine months ended September 30, 2003 because the Fund has passed its second anniversary on May 19, 2002, the basis for calculation of management fees subsequent to this date has changed to a percentage of Fund assets as opposed to a percentage of committed capital. This change in the basis of calculation in management fees decreased the expense for management fees for the nine months ended September 30, 2003 because the dollar value of assets under management was lower than the dollar value of committed capital.

Interest expense was $0.5 million and $0.8 million for the three months ended September 30, 2003 and 2002 respectively. Included in these amounts are the settled portion of the Fund's interest hedge transactions of $0.3 million and $0.4 million for the three months ended September 30, 2003 and 2002 respectively. The decrease in interest expense for the three months ended September 30, 2003 is due to the lowering of general interest rates during these periods, as well as a decrease in average principal balance of loan outstanding from $62.9 million for the three months ended September 30, 2002 to $57.8 million for the three months ended September 30, 2003. Interest expense was $1.7 million and $2.6 million for the nine months ended September 30, 2003 and 2002 respectively. Included in these amounts are the settled portion of the Fund's interest hedge transactions of $0.9 million and $1.3 million for the nine months ended September 30, 2003 and 2002 respectively. The decrease in interest expense for the nine months ended September 30, 2003 is due to the decrease in average principal balance of loan outstanding from $70.2 million for the nine months ended September 30, 2002 to $61.0 million for the nine months ended September 30, 2003 as well as the lowering of general interest rates during these periods.

Total other operating expenses for the three months ending September 30, 2003 and 2002 were $0.5 million and $0.7 million respectively. Legal and banking related fees comprised a majority of the other operating expenses for the three months ended September 30, 2003 and 2002. The majority of the decrease in total other operating expenses was the result of the decrease in credit insurance fees due to the banking restructure which was completed in March, 2003. Total other operating expenses for the nine months ending September 30, 2003 and 2002 were $2.1 million and $2.1 million respectively. Legal and banking related fees comprised a majority of the other operating expenses for the nine months ended September 30, 2003 and 2002. An increase in legal and banking fees, including an increase of $0.3 million in deferred banking fees which were written off during the nine months ended September 30, 2003 due to the restructuring of the bank facility in March 2003 was offset by a decrease in other banking r elated fees which resulted from the restructure.

Net investment income for the three months ending September 30, 2003 and 2002 was $3.7 million and $5.4 million, respectively. Net investment income for the nine months ending September 30, 2003 and 2002 was $12.3 million and $14.1 million, respectively

The Fund incurred an unrealized gain (loss) from investments and hedging activity of $(2.5) million and $0.6 million for the three months ended September 30, 2003 and 2002, respectively. The change in unrealized gain (loss) from investments and hedging activity was due primarily to an adjustment to fair value of loans from borrowers of $(2.8) million and $0.8 million for the three months ended September 30, 2003 and 2002 respectively. Included in the unrealized gain (loss) for the three months ended September, 2003 and 2002 is a $0.3 million unrealized gain (loss) and a $(0.2) million unrealized gain (loss) resulting from interest rate hedging transactions. The Fund incurred an unrealized loss from investments of $4.8 million and $7.5 million for the nine months ended September 30, 2003 and 2002, respectively. The change in unrealized loss from investments was due primarily to an adjustment to fair value of loans from borrowers of $5.1 million and $7.4 million for the nine months ended September 30, 2003 and 2002 respectively. Included in the unrealized loss for the nine months ended September 30, 2003 and 2002 is a $0.3 million unrealized gain and a $(0.1) million unrealized loss, respectively resulting from interest rate hedging transactions.

The Fund incurred a realized loss from investment transactions of $0.1 million and $2.0 million for the three months ended September 30, 2003 and 2002 respectively. These realized losses were from the writing off of certain loans deemed to be uncollectible less small recoveries of previously written off loans. The Fund incurred a realized loss from investment transactions of $2.1 million and $3.2 million for the nine months ended September 30, 2003 and 2002 respectively. These realized losses were from the writing off of certain loans deemed to be uncollectible less small recoveries of previously written off loans.

Net income for the three months ended September 30, 2003 and 2002 was $1.3 million and $4.0 million, respectively. On a per share basis, the net income was $13.00 and $40.18 for the three months ended September 30, 2003 and 2002 respectively. Net income for the nine months ended September 30, 2003 and 2002 was $5.4 million and $3.4 million, respectively. On a per share basis, the net income was $53.71 and $34.32 for the nine months ended September 30, 2003 and 2002 respectively.

Liquidity and Capital Resources -- September 30, 2003 and December 31, 2002

Total capital contributed to the Fund was approximately $155.0 million at September 30, 2003 and December 31, 2002. Committed capital to the Company at September 30, 2003 and December 31, 2002 was $217.1 million and $361.9 million, respectively of which $162.8 million has been called and received.

As of September 30, 2003, the Fund has in place a $160.0 million debt facility to finance the acquisition of asset-based loans. In March, 2003, the Fund had reduced the debt facility from $250.0 million which was available as of December 31, 2002. As of September 30, 2003 and December 31, 2002, $44.0 million and $51.9 million were outstanding under this facility.

At September 30, 2003 and December 31, 2002, the Fund had interest rate swap transactions outstanding with a total notional principal amount of $51.7 million and $51.0 million respectively. The effect of these swap transactions is to convert the floating rate bank debt into a fixed rate on the contract notional value. The amortization schedule for each borrowing under the facility is expected to correspond to the amortization of the loans supporting each borrowing.

As of September 30, 2003 and December 31, 2002, 10% and 5% of the Fund's assets consisted of cash and cash equivalents. The Fund continued to invest its assets in venture loans during the period. Amounts disbursed under the Fund's loan commitments increased by approximately $52.2 million during the nine months ending September 30, 2003. Net loan amounts outstanding after amortization decreased by approximately $54.8 million for the same period. Unexpired, unfunded commitments decreased by approximately $16.0 million for the nine months ended September 30, 2003.

	Amount Disbursed	Principal Reductions	Balance Outstanding	Unexpired Unfunded Commitments
September 30, 2003	$469.2 million	$340.3 million	$128.9 million	$41.0 million
December 31, 2002	$417.0 million	$233.3 million	$183.7 million	$57.0 million

Because venture loans are privately negotiated transactions, investments in these assets are relatively illiquid.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Based on the model used for the sensitivity of interest income net of interest expense, if the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 100 basis point change in interest rates would have affected net income by less than $0.1 million. This translates to approximately 1.5% for the three months ended September 30, 2003. Although management believes that this measure is indicative of the Fund's sensitivity to interest rate changes, it makes estimates to adjust for potential changes in credit quality, size and composition of the balance sheet and other business developments that could affect net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Within 90 days prior to the filing of this report, under the supervision and with the participation of the Fund's management, including the Fund's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation of the effectiveness of the Fund's disclosure controls and procedures was performed. Based on this evaluation, the CEO and CFO have concluded that the Fund's disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management of the Fund on a timely basis in order to comply with the Fund's disclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder.

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 subsequent to the date of the evaluation.

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.

VENTURE LENDING & LEASING III, INC.

(Registrant)

By: /S/ Ronald W. Swenson	By: /S/ Brian R. Best
Ronald W. Swenson	Brian R. Best
Chairman and Chief Executive Officer	Chief Financial Officer
Date: November 13, 2003	Date: November 13, 2003

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

I, Brian Best, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures 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 quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the

registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2003

/S/ Brian R. Best

Brian Best

Chief Financial Officer

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

I, Ronald W. Swenson, certify that:

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

statements were made, not misleading with respect to the period covered by this quarterly report;

the registrant as of, and for, the periods presented in this quarterly report;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

equivalent functions):

registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: November 13, 2003

/S/ Ronald W. Swenson

Ronald W. Swenson

Chief Executive Officer

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

In connection with the Quarterly Report of Venture Lending & Leasing III, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald W. Swenson, Chief Executive Officer of the Company, 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 Company.

/S/ Ronald W. Swenson

Ronald W. Swenson
Chief Executive Officer
November 13, 2003

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

In connection with the Quarterly Report of Venture Lending & Leasing III, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian Best, Chief Financial Officer of the Company, 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 Company.

/S/ Brian R. Best

Brian R. Best
Chief Financial Officer
November 13, 2003

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