(Exact name of registrant as specified in its charter)

(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

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, 2004 was 100,000.

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 Venture Lending and Leasing III, LLC for $25,000. As of December 31, 2003, 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 Venture Lending & Leasing III, LLC. As capital is required to finance the acquisition of loans, additional capital is provided by Venture Lending & Leasing III, LLC.

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 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 e xpense).

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 pri or 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.

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 F und 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 th e 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 may 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 begin to 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 of the company 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.

The Fund is not a party to any material legal proceedings.

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, 2001.

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

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, 2004 was 1.

The Fund has a policy of distributing warrants as acquired. 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, 2003, the Fund had distributed $68.55 million in cash to its shareholder.

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 have been derived from the audited financial statements.

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 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 and investments 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.

Total investment income for the year ended December 31, 2003 was $23.7 million, of which $23.4 million consisted of interest on venture loans outstanding. Total investment income for the year ended December 31, 2002 was $32.1 million, of which $31.2 million consisted of interest on venture loans outstanding. Total investment income for the year ended December 31, 2001 was $22.9 million, of which $22.2 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 increase in interest on venture loans from $22.2 million for the year ending December 31, 2001 to $31.2 million for the year ending December 31, 2002 was the result of the increase in the average performing loans outstanding from $141.9 million in 2001 to $190.5 million in 2002. Included in the 2002 investment income figures is approximately $1.6 million from the early payoff of several loans at a premium to the fair value of the loans; which is the biggest reason for the increase in interest rate from 15.6% to 16.4% during those same years. The decrease from $31.2 million for the year ended December 31, 2002 to $23.4 million for the year ended December 31, 2003 is due primarily from a decrease in performing loans from $190.5 million to $142.1 million during the same year. This was partially offset by a slight increase in interest rate over the year from 16.4% to 16.5% over the same years.

Expenses for the years ended December 31, 2003, 2002 and 2001 were $8.8 million, $12.6 million and $14.6 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 $3.9 million, $6.5 million and $9.9 million for the year ended December 31, 2003, 2002 and 2001 respectively. The decrease in management fees is due to passing the second year of the Fund's life in 2002, which causes 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 expense was also lower in 2003 as the asset base declined. Interest Expense was $2.1 million, $3.3 million and $3.3 million for the years ended December 31, 2003, 2002 and 2001. Interest expense remained consistent from 2001 to 2002 even though average debt outstanding increased from $59.1 million for the year ended December 31, 2001 to $66.6 million for the year ended December 31, 2002. Interest expense was offset due to the decrease in interest rates in general as well as replacing the warehouse facility with an expanded conduit facility in November 2002 at a lower interest rate. The average interest rate fell from 5.6% for the year ended December 31, 2001 to 4.9% for the year ended December 31, 2002 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 fe es, were $2.7, $2.8 million and $1.4 million for the years ended December 31, 2003, 2002 and 2001 respectively. An increase in insurance fees related to the debt facility made up a majority of the increase in other expenses from the year ended December 31, 2001 to the year ended December 31, 2002. A decrease in bank related fees was the majority of the decrease in other expenses from 2002 to 2003.

Net change in unrealized loss from investment transactions was $1.8 million, $(2.1) million and $(4.4) million for the years ended December 31, 2003, 2002 and 2001, of which $1.4 million, $(2.3) million and $(3.2) 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 $8.2 million, $12.8 million and $8.2 million for the years ended December 31, 2003, 2002 and 2001. The realized loss on investments was entirely composed of loans which were written off during the year, less any recovery.

Net income (loss) for the years ended December 31, 2003, 2002 and 2001 was $8.6 million, $4.5 million and $(4.2) million. On a per share basis, for the years ended December 31, 2003, 2002 and 2001 there was a net income (loss) of $85.79, $45.17 and $(42.33) respectively.

The Fund is owned entirely by Venture Lending & Leasing III, LLC. 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, 2002 the Company had received subscriptions for capital in the amount of $361.8 million, of which $162.8 million has been called and received. On April 2, 2003, the Managing Member of the Company reduced the committed capital of the company from $361.8 million to $217.1 million. As of December 31, 2003 and 2002 uncalled capital was $54.3 million and $199.0 million, respectively.

The Fund had in place a $160 million and a $250 million securitzation debt facility as of December 31, 2003 and 2002, respectively, under which the Fund was eligible to borrow up to $160 million and $250 million, respectively. As of December 31, 2003 and 2002, $59.2 million and $51.9 million, respectively were outstanding under this facility.

The Fund entered into swap transactions to hedge its interest rate on the securitization debt facility with a total notional principal of $53.2 million and $51.0 million, respectively. The fair value of the swap at December 31, 2003 and 2002 was ($0.6) million and $(1.0) million, 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, 2003 and 2002, 9% 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 year. Amounts disbursed under the Fund's loan commitments was $69.9 million for the year ended December 31, 2003. Net loan amounts outstanding after amortization was approximately $122.9 million as of December 31, 2003. Unexpired unfunded commitments as of December 31, 2003 were $55.5 million.

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

The Fund seeks to meet the requirements to qualify for the special pass-through status available to "regulated investment companies" ("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 taxa ble 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.

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.

 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'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, 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.

See Item 14

Not applicable.

The information required by this item is contained in part under the caption "Executive Officers of the Fund" in Part I hereof, and the remainder is contained in the Fund's Proxy Statement filed in connection with the Annual Meeting of Shareholders to be held May 12, 2004 ("Proxy Statement") under the caption "Proposal 2 -- To Elect Seven Directors of the Fund" and is incorporated herein by reference.

The information required by this item is contained in the Fund's Proxy Statement filed in connection with the Annual Meeting of Shareholders to be held May 12, 2004 under the caption "Proposal 2 -- To Elect Seven Directors of the Fund" and is incorporated herein by reference.

The information required by this item is contained in the Fund's 2003 Proxy Statement under the caption "Annex A -- Beneficial Ownership of Fund Shares" and is incorporated herein by reference.

The information required by this item is contained in the Fund's 2003 Proxy Statement under the captions: "Other Information -- Managers" and is incorporated herein by reference.

Independent Auditors' Reports

Statements of Financial Position as of December 31, 2003 and 2002

Statements of Operations for the Years ended December 31, 2003, 2002 and 2001

Statements of Changes in Shareholder's Equity for the Years ended December 31, 2003, 2002 and 2001

Statements of Cash Flows for the Years ended December 31, 2003, 2002 and 2001

Notes to Financial Statements

Financial Statement Schedules for the Year Ended December 31, 2003 and 2002 included in Item 14(a):

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.

The Fund filed no reports on Form 8-K with the Commission during the fiscal quarter ended December 31, 2003.

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)

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.

INDEPENDENT AUDITORS' REPORT

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, 2003 and 2002, and the related statements of operations, changes in shareholder's equity, and cash flows for the years then ended. 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. The financial statements of the Fund for the year ended December 31, 2001 were audited by other auditors, who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 8, 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, 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 2003 and 2002 financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2003 and 2002, and the results of its operations, changes in its shareholder's equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/S/ Deloitte & Touche LLP

February 23, 2004

As of December 31, 2003 and 2002

For the Years Ended December 31, 2003, 2002 and 2001

See notes to financial statements.

Statements of Changes in Shareholder's Equity

For the Years Ended December 31, 2003, 2002 and 2001

See notes to financial statements.

For the Years Ended December 31, 2003, 2002 and 2001

The accompanying notes are an integral part of these statements.

December 31, 2003

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, 2003, the Fund meets the requirements, including diversification requirements, to qualify as a regulated investment company (RIC) under the Internal Revenue Code of 1986.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 consist of cash on hand and demand deposits in banks with maturities of 90 days or less.

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 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.

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 $7,547,196 and $7,249,794 and a cost of $11,651,014 and $12,734,888 have been classified as nonaccrual at December 31, 2003 and 2002, respectively.

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.

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 adopted SFAS No. 133 effective January 1, 2001.

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. As of December 31, 2003, the Fund has recorded a liability of $609,268 to reflect the value of the outstanding hedge transaction.

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). The effective date of FIN 46 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 46.

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 will adopt the IRR provisions of SOP 03-4 for the fiscal year ending 2004.

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.

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.

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, 2003 and 2002, 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).

* 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.

Loan balances as of December 31, 2002, are summarized by borrower below: