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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2004

OR

For the transition period from              to             

Commission file number: 000-29665

EXCELSIOR VENTURE PARTNERS III, LLC

(Exact Name of Registrant as Specified in Its Charter)

225 High Ridge Road

Stamford, CT 06905

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (203) 352-4400

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

UNITS OF MEMBERSHIP INTEREST WITHOUT PAR VALUE

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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 by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The registrant’s common stock is not listed on any exchange nor does it trade on any established securities market or other market.

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TABLE OF CON TENTS

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FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company’s prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the federal securities laws that also involve substantial uncertainties and risks. The Company’s future results may differ materially from its historical results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. Readers should pay particular attention to the considerations described in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers should also carefully review the risk factors described in the other documents the Company files, or has filed, from time to time with the Securities and Exchange Commission.

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PART I

ITEM 1. BUSINESS.

Overview

Excelsior Venture Partners III, LLC (the “Company” or the “Fund”) is a Delaware limited liability company organized on February 18, 2000. The Company is a non-diversified, closed-end management investment company operating as a business development company (“BDC”) under the Investment Company Act of 1940 (“Investment Company Act”), as amended, and, in connection with its initial offering of units, registered said offering of units under the Securities Act of 1933, as amended (the “Securities Act”). BDCs are a special type of investment company, as defined and regulated by the Investment Company Act, which focus primarily on investing in the privately issued securities of eligible portfolio companies, as defined by the Investment Company Act. A BDC must also make available significant managerial assistance to such companies. The Company’s investment objective is to achieve long-term capital appreciation by investing in domestic venture capital and other private companies and, to a lesser extent, domestic and international private funds, negotiated private investments in public companies and international direct investments that the Investment Advisers (defined herein) believe offer significant long-term capital appreciation.

U.S. Trust Company, N.A., acting through its registered investment advisory division, U.S. Trust Company, N.A. Asset Management Division, serves as Investment Adviser to the Company. United States Trust Company of New York, acting through its registered investment advisory division, U.S. Trust - New York Asset Management Division, serves Investment Sub-Adviser to the Company (together, the “Investment Advisers”). The Investment Advisers provide investment management services to the Company pursuant to an investment advisory agreement dated September 8, 2000 and an investment sub-advisory agreement dated September 8, 2000 (together the “Investment Agreements”). U.S. Trust Company, N.A. and United States Trust Company of New York are each a wholly-owned subsidiary of U.S. Trust Corporation, a registered bank holding company. U.S. Trust Corporation is an indirect wholly-owned subsidiary of The Charles Schwab Corporation. All officers of the Company are employees and/or officers of the Investment Advisers. The Investment Advisers are responsible for performing the management and administrative services necessary for the operation of the Company.

Pursuant to a Registration Statement on Form N-2 (File 333-30986), which was originally declared effective on September 7, 2000, the Company was authorized to offer an unlimited number of units of membership interest with no par value. The Company sold 295,210 units via a public offering, which closed on May 11, 2001, for gross proceeds totaling $147,605,000 (including one share purchased for $500 as of July 7, 2000 by David I. Fann, who was at the time the Company’s President and Co-Chief Executive Officer). Units of the Company were made available through Charles Schwab & Co., Inc., the Company’s principal distributor (the “Distributor”).

The Company incurred offering costs associated with the public offering totaling $1,468,218. Net proceeds to the Company from the public offering, after offering costs, totaled $146,136,782.

The Company’s Certificate of Formation provides that the duration of the Company will be ten years from the final subscription closing date, subject to the rights of the Board of Managers to extend the term for up to two additional two-year periods.

The following is a summary of the Company’s investment portfolio.

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INVESTMENTS HELD—PRIVATE

Description: Develops, manufactures, and markets diagnostic products for women’s reproductive healthcare. The company’s primary focus is on proprietary diagnostic tests to help physicians and patients determine the likelihood of pre-term delivery. The company’s product, the ffN test, is considered the “Gold Standard of Care” by the American College of Obstetricians and Gynecologists, and is now used in over 1000 U.S. hospitals.

2004 Activity: As of December, 2004, Adeza has had nine consecutive positive quarters. The company held its IPO on December 10, 2004, settling with a gain of 23.1 percent at $19.70 per share after pricing $16. UBS Investment Bank is the lead underwriter for the IPO. Adeza’s primary business of predictive pre-term delivery continues to grow. The company is developing several other products in order to expand its product platform to other areas, including cancer detection.

Investment: The Fund invested $3.0 million in September 2001. Enterprise Partners and Sprout Asset Management are also investors in Adeza.

Description: seeks to discover aptamer-based therapeutics in the inflammation and oncology areas using proprietary selected nucleic acid technology. The company expects to have its first product in clinical trials in 2004. In 2003, the company brought on a world class biotechnology entrepreneur, Errol De Souza, to further advance the company’s development.

2004 Activity: Cardiac drug Nuvelo’s development continues to progress and is currently (as of mid-December 2004) in a Phase I safety trial. The company expects to file several New Drug Applications (NDA) for newly developed classes of drugs. These drugs use aptamers to treat chronic diseases in the cardiac, pain and opthamology areas.

Investment: The Fund’s investment was staged into four tranches. The first tranche of $0.6 million was invested in August 2002 and the second tranche of $0.7 million was drawn in January 2003. In the 2004 fiscal year, a third tranche of $0.7 million was invested in November 2003. The fourth tranche of $0.2 million was drawn in March 2004. Schroder Ventures Life Sciences, Atlas Venture, Prospect Venture Partners, Care Capital, MDS Capital, and POSCO Bio Venture also invested in Archemix.

Description: Chips & Systems, founded in 2004, is positioned to lead the first significant integrated circuit (IC) technology development to market in 15 years. CHIPS is designing and developing the revolutionary “adaptive silicon platform”; the ideal IC solution for the high-growth multimedia market. Managed by a team

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of professionals, CHIPS will launch adaptive silicon hardware platforms enabled by unique computing technology architecture. The CHIPS platforms offer greater flexibility, higher performance, low power, a faster time-to-market and a substantial lowering of cost for new, state-of-the-art, feature-rich products.

2004 Activity: The company was founded by industry veteran Gordon Campbell on July 6, 2004. Its headquarters were established in Santa Clara, CA.

Investment: The Fund invested $3.5 million in March, 2004 in the Series A preferred round of financing.

Description: Developer and marketer of web analytics and data management software that provides detailed information about visitors on corporate or commercial websites, including paths taken and usage behavior. The company has over forty active customers including Citibank, Knight Ridder, and Macy’s.

2004 Activity: The company has expanded its offerings to online fraud management and Web forensics as a growth strategy. The company released a new product to the financial services industry in Dec 2004 and currently is in beta testing with select customers.

Investment: The Fund invested $0.5 million in August 2003 and $3.5 million in September 2003.

Description: Developer and manufacturer of embedded antennas for personal mobile devices. Its internal antenna technologies significantly enhance the signal quality, increase the range, and help extend the battery life of mobile devices. Embedded antennas are used by mobile phone, PDA, laptop, GPS, Bluetooth and Wireless LAN device manufacturers.

2004 Activity: The company has set up a new design center in Korea and is establishing some manufacturing capabilities in China. It has also completed beta testing of its next-generation antenna technologies that will improve performance up to 2x, as compared to current solutions. These new technologies are expected to be launched in the first quarter of 2005.

Investment: The Fund initially invested $3.5 million in June 2001, and invested an additional $1.2 million in the company in September 2002 and $1.0 million in July 2003. A follow-on investment of $1 million was added in May 2004. Sevin Rosen is a co-investor in Ethertronics.

Description: Developer of a breadth of services that focus on the challenges faced after a cancer diagnosis to make optimal treatment decisions and monitor disease.

2004 Activity: Genoptix’ personalized medicine initiative is building sales traction. The medical profession has lauded the company’s personalized chemotherapy treatment of patients with blood borne cancers, as the product has given better treatment and better outcomes.

Investment: The Fund invested $2.5 million in December 2001 and has invested an additional $0.4 million in July 2003 and $0.3 million in September 2003. In the 2004 fiscal year, two add-on investments were made in December 2003 ($.5 million) and August 2004 ($.3 million). Other investors include Alliance Technology Ventures, Enterprise Partners, Lotus Biosciences Investment Holdings, and Tullis-Dickerson & Co., Inc.

Description: Designer and manufacturer of MEMS (micro electro-mechanical systems) components for optical networks. LightConnect’s product is meeting the need for configurability in optical networks by enabling rapid dynamic bandwidth and circuit provisioning.

2004 Activity: The company is on target to at least double its revenues from 2003 and is considered to be the market leader in the VOA product lines. Customers of the company are large communications, networking and service providers in the United States, Europe and Asia.

Investment: The Fund invested $5.0 million in LightConnect in July 2001 and made a $1.0 million follow-on investment in December 2002. The other investors in LightConnect are Sevin Rosen, Incubic, Morgenthaler, and US Venture Partners.

Description: Provider of software and services that help enterprises develop better software applications and integrate them faster. The company’s patent-pending technology provides software development organizations with comprehensive, intuitive tools for effectively and efficiently capturing, understanding, leveraging and managing their software development assets.

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2004 Activity: Most notable among the company’s customer wins this year was the signing of a license to implement LogicLibrary program Logidex within IBM’s Software Development Group. In September, Logic Library announced its acquisition of BugScan, Inc., an affiliate of HBGary, LLC. BugScan’s breakthrough technology enables developers to easily conduct security scans on an application’s binaries without requiring the source code.

Investment: The Fund invested $2.0 million in LogicLibrary in January 2002 and invested an additional $0.7 million in August 2003. In May 2004, the Fund made a follow-on investment of $.7 million. Birchmere Ventures, Novak Biddle Venture Partners, and The Future Fund also invested in the company.

Description: Developer of advanced physical design software solutions for the semiconductor industry. Leading semiconductor companies have adopted Monterey’s products to dramatically increase their design productivity.

2004 Activity: In the fourth quarter of 2004, the company entered into a strategic sale with one of the largest Electronic Design Automation (“EDA”) vendors in the industry, whereby Monterey will become part of the larger entity in providing EDA tools to semiconductor companies.

Investment: The Fund invested $3.0 million in the company in December 2001, and made a follow-on investment in the amount of $4.8 million in the company in June 2003. Other investors include Sevin Rosen Funds, US Venture Partners, Rho Capital Partners, Vertex Partners, Information Technology Ventures, and LSI Logic.

Description: Designer and manufacturer of integrated optical components using nanotechnology manufacturing technology platforms. The company is replacing today’s discrete, costly, space-hungry bulk optics with a coherent family of functional optical building blocks called Modular Nano-Optics.

2004 Activity: The company is ramping up sales to meet the orders generated from large consumer electronics, cell phones and display manufacturers. The company recently hired a VP of Operations to help with building the firm’s manufacturing, testing and supply chain capabilities.

Investment: The Fund initially invested $2.0 million in NanoOpto in October 2001, and has followed on with two additional $0.2 million investments in March 2002 and September 2003. Four follow-on investments totaling $1 million were made in the 2004 fiscal year. Bessemer Venture Partners, Morgenthaler, and New Enterprise Associates are co-investors in NanoOpto.

Description: Develops, markets and manufactures Dense Wavelength Division Multiplexing (DWDM)-based optical networking equipment for deployment in long haul, regional metro networks carriers, and cable companies. OpVista’s ultra-DWDM products allow service providers to build flexible, scalable, and cost-effective networks while seamlessly integrating legacy networks. The company’s products are being successfully used by Time Warner cable.

2004 Activity: In 2004, the company was selected as a preferred vendor by one of the largest cable service providers and has won business with a number of divisions with other MSOs. Currently the focus is on building the manufacturing capabilities to deliver these orders by the end of the first quarter of 2005. The company has also expanded the management team, hiring a VP of Engineering and VP of Operations to grow the business to the next level.

Investment: The Fund invested $4.0 million in OpVista in July 2001 and subsequently, a follow-on investment in the amount of $2.5 million was made in September 2003. Sevin Rosen and Incubic are investors in OpVista.

Description: Developer and marketer of enterprise business performance management and business intelligence analytics software. Pilot currently has over 400 active customers including several Global 1000 companies such as United States Government GSA, Swiss Life, Nokia, and Noro Nordisk.

2004 Activity: The company launched a new product suite of performance management software (PilotWorks). Pilot also opened up two new channels in Europe, further enhancing their penetration outside of the United States.

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Investment: The Fund’s initial investment of $3.0 in May 2002 was followed by a $1.0 million investment in April 2003. The Fund made three follow-on investments totaling $750,000 in 2004. Other investors include G51.

Description: Provider of silicon and software solutions that enable IP-based storage area networks and data center systems.

2004 Activity: The company had a number of design wins with storage and networking vendors and is planning to increase revenues in 2005.

Investment: Initially, the Fund invested $1.4 million in Silverback in February 2002. Subsequent rounds of financing include a $1.5 million follow-on investment in March 2003, a $1.5 million follow-on investment in September 2003 and a $.3 million follow-on investment in April 2004. Other investors include J.P. Morgan Partners, Newbury Ventures, Pitango Venture Capital, and Gemini Israel Funds.

Description: Tensys Medical, Inc. designs, develops, manufactures, and markets a continuous, non-invasive arterial blood pressure management systems.

2004 Activity: Tensys is set to launch a second-generation product to provide real-time, beat-to-beat blood pressure in surgeries where, currently, a blood pressure cuff is used. This product will give the anesthesiologist better information about the patient’s status, thereby allowing the surgical team to more quickly respond to changes in patient condition—thus providing better surgical outcomes. We expect Tensys to launch this new product in the first quarter of 2005.

Investment: The Fund invested $5.0 million in Tensys in March 2002. A follow-on investment of $1.4 million was made in May 2004. Other investors include Crosspoint Venture Partners, Enterprise Partners, Versant Ventures, and Sofinnova Ventures.

Description: Supplier of semiconductor intellectual property and process technology to manufacturers and designers of systems-on-chip. Virtual Silicon has licensed and delivered its Silicon Ready^® library products to hundreds of customers including semiconductor manufacturers, foundries, ASSP designers, and systems developers.

2004 Activity: The company successfully expanded into low power management market segments and is receiving excellent customer feedback on their new product offerings. Sample customers include large consumer electronics, semiconductor and cell phone manufacturing companies.

Investment: The Fund invested $5.0 million in the company in December 2001. A follow-on investment in the amount of $.1 million was made in October 2004. Infinity Capital, Walden International, Gemini Investors, Pacific Venture Group, and SCP Private Equity Partners are also investors in Virtual Silicon.

INVESTMENTS HELD—PUBLIC

Description: Defines, designs, and markets highly differentiated data plane solutions that enable the global infrastructure of networking and optical communications to achieve the highest performance and functionality. NetLogic also provides multi-processor search interfaces and software drivers that accelerate design and development of leading-edge networking equipment.

2004 Activity: In July 2004, the company went public and is currently traded under the NASDAQ symbol NETL.

Investment: The Fund invested $5.0 million in August 2001 in NetLogic Microsystems. Sevin Rosen is a co-investor in NetLogic Microsystems. The Fund’s initial lockup expires in early January 2005.

Description: Senomyx seeks to be the leader in discovering new and improved proprietary flavor and fragrance molecules for use in a wide range of consumer products. The Company has four strategic collaborations with Coca Cola, Nestle, Kraft Foods, and Campbell Soup.

2004 Activity: The company announced an exclusive five-year discovery and development collaboration with Nestle SA for the discovery and commercialization of novel favor ingredients in the coffee field. The company made several discoveries in the area of novel bitter taste modulators.

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Investment: The Fund invested $1.5 million in Senomyx in November 2001. Other investors include Prospect Venture Partners, Rho Ventures, Merrill Lynch, Avalon Ventures, Domain Associates, and Bay City Capital. The Fund’s initial lockup expired on 12/18/04.

INVESTMENTS HELD— THIRD PARTY INVESTMENT FUNDS

For additional information concerning the Company’s investments, see the financial statements beginning on page 13 of this report.

Competition

The Company encounters competition from other entities and individuals having similar investment objectives. Primary competition for desirable investments comes from investment partnerships, venture capital affiliates of large industrial and financial companies, investment companies and wealthy individuals. Some of the competing entities and individuals have investment managers or advisers with greater experience, resources and managerial capabilities than the Company and may therefore be in a stronger position than the Company to obtain access to attractive investments. To the extent that the Company can compete for such investments, it may not be able to do so on terms as favorable as those obtained by larger, more established investors.

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Employees

At October 31, 2004, the Company had no full-time employees. All personnel of the Company are employed by and compensated by the Investment Advisers pursuant to the Investment Agreements.

ITEM 2. PROPERTIES.

The Company does not own or lease any physical properties.

ITEM 3. LEGAL PROCEEDINGS.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

The Company has an unlimited number of no par value units authorized. As of October 31, 2004, 295,210 units of membership interest were issued and outstanding. There is no established public trading market for the Company’s units of membership interest.

Holders

There were 256 holders of units of membership interest as of December 31, 2004.

Dividends and Distributions

Fiscal Year Ended October 31, 2004. There were no dividends or distributions paid during fiscal year 2004.

Fiscal Year Ended October 31, 2003. There were no dividends or distributions paid during fiscal year 2003.

For additional information concerning the payment of dividends, see “Significant Accounting Policies” in the notes to the financial statements of the Company included in Item 8 hereof.

ITEM 6. SELECTED FINANCIAL DATA.

($ in 000’s except for per unit data)

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

Liquidity and Capital Resources

The Company focuses its investments in the securities of privately-held venture capital companies, and to a lesser extent in venture capital, buyout and other private equity funds managed by third parties. The Company may offer managerial assistance to certain of such privately-held venture capital companies. The Company invests its available cash in short-term investments of marketable securities pending distribution to investors.

At October 31, 2004, the Company held $0 in cash and cash equivalents and $45,526,196 in short-term investments as compared to $3,738,154 in cash and cash equivalents and $53,514,005 in short-term investments at October 31, 2003. The decrease in cash and short-term investments from October 31, 2003 was due to new and follow-on investments in private companies as well as capital invested in private investment funds. The Company, during this period funded additional capital per its commitments to Advanced Technology Ventures VII, L.P., Burrill Life Sciences Capital Fund, CHL Medical Partners II, L.P., CMEA Ventures VI, L.P., Morgenthaler Partners VII, L.P., Prospect Venture Partners II, L.P., Tallwood II, L.P., and Valhalla Partners, L.P., each a private investment fund. The Company has committed capital to one additional private investment fund, Sevin Rosen Fund IX, L.P, during fiscal year ended October 31, 2004. In connection with the Company’s total commitments to private funds in the amount of $25,700,000 since inception, the Company, through October 31, 2004, has contributed $6,724,661 or 26.2% of the total capital committed to nine private investment funds.

During the fiscal year ended October 31, 2004, the Company participated in follow-on financing rounds for many of its private companies, including: i) Archemix Corporation Series A preferred for $685,714 and Series B preferred for $466,666, ii) Genoptix, Inc. Series B-2 preferred for $515,148 and Series 1-C preferred for $277,089, iii) Gyration, Inc. bridge note and warrants for $2,800,000, iv) NanoOpto Corporation Series B preferred for $1,048,655, v) Silverback Systems Series C preferred for $333,333, vi) Ethertronics Series B preferred for $1,000,000, vii) LogicLibrary Series A preferred for $704,225, viii) Pilot Software bridge note for $750,000, ix) Tensys Medical Series D preferred for $1,425,000, and x) Virtual Silicon bridge note for $88,738. The Company also funded one new private company investment in Chips & Systems for $3,500,000

The Company believes that its liquidity and capital resources are adequate to satisfy its operational needs as well as the continuation of its investment program.

Results of Operations

Investment Income and Expenses

For the fiscal year ended October 31, 2004, the Company had investment income of $540,784, primarily from investments in short-term securities, and net operating expenses of $2,859,165, resulting in a net investment loss of ($2,318,381). For the fiscal year ended October 31, 2003, the Company had investment income of $844,930, primarily from investments in short-term securities, and net operating expenses of $2,922,068, resulting in a net investment loss of ($2,077,138) as compared to investment income of $1,742,304 and net operating expenses of $3,401,295, resulting in a net investment loss of ($1,658,991) for the fiscal year ended October 31, 2002. The decline in investment income is due to a decline in interest earned on short-term securities, as well as a decrease in the level of assets invested in short-term securities due to the Company’s investment in private companies and private investment funds. Net operating expenses decreased during fiscal 2004 compared to fiscal 2003 due to reduced management fees paid to the Investment Advisers. Net operating expenses decreased during fiscal 2003 compared to fiscal 2002 due to reduced management fees paid to the Investment Advisers, as well as a reduction in legal fees.

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For the fiscal year ended October 31, 2004, the Investment Advisers earned $2,402,059 in management fees. For the fiscal year ended October 31, 2003, the Investment Advisers earned $2,530,840 in management fees, whereas for the year ended October 31, 2002, the Investment Advisers earned $2,881,830 in management fees. This decrease is a result of the fact that net assets for the periods of calculation of management fees during fiscal 2004 were lower than those for similar periods during the fiscal years ended October 31, 2003 and October 31, 2002. The Investment Advisers provide investment management and administrative services required for the operation of the Company. In consideration of the services rendered by the Investment Advisers, the Company pays a management fee based upon a percentage of the net assets of the Company. This fee is determined and payable quarterly.

Net Assets

The Company’s net assets were $116,079,433, or a net asset value per unit of $393.21, at October 31, 2004. This represents a decline of $6,378,420, or ($21.61) per unit, from net assets of $122,457,853, or $414.82 per unit, at October 31, 2003. This decline in net asset value per unit is comprised of a net investment loss totaling ($2,318,381), or ($7.85) per unit, and a net change in realized and unrealized depreciation on investments of ($4,060,039), or ($13.76) per unit. The net realized loss of ($2,555,211), or ($8.66) per unit, was attributable Gyration, Inc. and Ancile Pharmaceuticals. The net change in unrealized depreciation of ($1,504,828), or ($5.10) per unit, was principally the result of declines in the valuations of Monterey Design Systems and NetLogic Microsystems, Inc. (NASDAQ: NETL), offset by unrealized appreciation related to Ancile Pharmaceuticals, LightConnect, and Senomyx (NASDAQ: SNMX), as described below.

The Company’s net assets were $122,457,853, or a net asset value per unit of $414.82 at October 31, 2003, down ($54.32) per unit from the net assets of $138,495,015, or a net asset value per unit of $469.14, at October 31, 2002. This decline in net asset value per unit is comprised of a net investment loss totaling ($2,077,138), or ($7.04) per unit, and a net change in realized and unrealized depreciation on investments of ($13,960,024),or ($47.28) per unit, comprised of a $44 net realized gain on investments and a ($13,960,068) net change in unrealized depreciation of investments due to the Company’s write-off of Ancile Pharmaceuticals and MIDAS Vision Systems, as well as the write-downs of Genoptix, Monterey Design Systems and NanoOpto.

Realized and Unrealized Gains and Losses from Portfolio Investments

The realized loss for the fiscal year ended October 31, 2004 was principally the result of the conclusion of Ancile Pharmaceuticals’ general assignment for the benefit of creditors, where the assets of the business have been sold and its affairs wound up. The Company received no further distributions and accordingly reclassified $3,850,000 of unrealized depreciation to net realized loss on investments. This loss was offset by one of the Company’s investments, Gyration, Inc., which entered into a merger agreement. On August 19, 2004, the Company received proceeds totaling $6,948,069 as a cash consideration for its investment in Gyration, Inc. and expects to receive an additional $1,136,322 being held in escrow. In August, 2004, the Company recorded a realized gain on the transaction of $1,284,391.

The net change in unrealized depreciation for the fiscal year ended October 31, 2004 was principally the result of a decrease in the valuation of Monterey Design Systems, a private company investment, by ($4,800,000), a decrease in the value of NetLogic Microsystems, Inc. (NASDAQ: NETL) by ($3,293,078), a decrease in the valuation of OpVista, a private company investment, by ($1,500,000), and other net unrealized losses related to the Company’s investments totaling ($1,289,192). Offsetting the losses was the reclassification of $3,850,000 of unrealized depreciation to net realized loss on its investment in Ancile Pharmaceuticals. In addition, the Company recorded unrealized appreciation in the amount of $4,051,437 related to its investment in LightConnect and $1,476,005 related to Senomyx (NASDAQ: SNMX), a public company investment. The Company utilized a discount of 30% in the valuation of both of its public holdings as of October 31, 2004. The discount utilized reflects the inability of the Company to sell its shares due to contractual lock-up agreements in place after initial public offerings of common shares of both companies.

The realized gain of $44 for the fiscal year ended October 31, 2003 was principally the result of sales of short-term securities. The net change in unrealized depreciation of ($13,960,068) for the fiscal year ended October 31,

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2003 is due to the write-off of Ancile Pharmaceuticals and MIDAS Vision Systems, together totaling ($8,904,960). The Company also recorded write-downs of Genoptix, Monterey Design Systems and NanoOpto, all private company investments, during the fiscal year ended October 31, 2003. The Company’s $3,850,000 million investment in Ancile Pharmaceuticals was written off as the company is currently conducting an orderly liquidation of its assets through a voluntary General Assignment for the Benefit of Creditors. The Company also wrote off its $5,054,960 million investment in MIDAS Vision Systems due impaired performance and prospects for the company. Genoptix, Monterey Design Systems and NanoOpto were each written down as well. These write-downs were due to financing events which effectively reduced the valuation of the Company’s investment.

Application of Critical Accounting Policies

Under the supervision of the Company’s Valuation and Audit Committees, consisting of the independent Managers of the Company, the Investment Advisers make certain critical accounting estimates with respect to the valuation of private portfolio investments. These estimates could have a material impact on the presentation of the Company’s financial condition because in total, they currently represent 56.5% of the Company’s net assets. For the private investments held at October 31, 2004, changes to these estimates, i.e. changes in the valuations of these private investments, resulted in a $3.5 million decrease in net asset value from October 31, 2003.

The value for securities for which no public market exists is difficult to determine. Generally speaking, such investments will be valued on a “going concern” basis without giving effect to any disposition costs. There is a range of values that is reasonable for such investments at any particular time. Because of the inherent uncertainty of valuation, the estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.

Initially, direct private company investments are valued based upon their original cost until developments provide a sufficient basis for use of a valuation other than cost. Upon the occurrence of developments providing a sufficient basis for a change in valuation, direct private company investments will be valued by the “private market” or “appraisal” methods of valuation. The private market method shall only be used with respect to reliable third party transactions by sophisticated, independent investors. The appraisal method shall be based upon such factors affecting the company such as earnings, net worth, reliable private sale prices of the company’s securities, the market prices for similar securities of comparable companies, an assessment of the company’s future prospects or, if appropriate, liquidation value. The values for the investments referred to in this paragraph will be estimated regularly by the Investment Adviser or a committee of the Board, both under the supervision of the Board, and, in any event, not less frequently than quarterly. However, there can be no assurance that such value will represent the return that might ultimately be realized by the Company from the investments.

The valuation of the Company’s private funds is based upon the its pro-rata share of the value of the assets of a private fund as determined by such private fund, in accordance with its partnership agreement, constitutional or other documents governing such valuation, on the valuation date. If such valuation with respect to the Company’s investments in private funds is not available by reason of timing or other event on the valuation date, or are deemed to be unreliable by the Investment Advisers, the Investment Advisers, under supervision of the Board, shall determine such value based on its judgment of fair value on the appropriate date, less applicable charges, if any.

The Investment Advisers also make estimates regarding discounts on market prices of publicly traded securities where appropriate. For securities which have legal, contractual or practical restrictions on transfer, a discount of 10% to 40% from the public market price will be applied.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Equity Price Risk

The Company anticipates that a majority of its investment portfolio will consist of securities in private companies and private investment funds, currently representing 56.5% of net assets, which are not publicly traded. These investments are recorded at fair value as determined by the Investment Advisers in accordance with valuation guidelines adopted by the Board of Managers. This method of valuation does not result in increases or decreases in the fair value of these securities in response to changes in market prices. Thus, these securities are not subject to equity price risk normally associated with public equity markets, except that to the extent that the private investment

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funds hold underlying public securities, the Company is indirectly exposed to equity price risk associated with the public markets. Nevertheless, the Company is exposed to equity price risk through its investments in the equity securities of two public companies, NetLogic Microsystems, Inc. (NASDAQ: NETL), and Senomyx, Inc. (NASDAQ: SNMX). During the fiscal year ended October 31, 2004, both of these companies successfully completed public offerings of their common stock. At October 31, 2004, these publicly traded equity securities were valued at $4,682,927, and a 30% discount to the closing market price at that date, representing 4.0% of the Company’s net assets. Thus, there is exposure to equity price risk, estimated as the potential loss in fair value due to a hypothetical 10% decrease in quoted market prices, representing a decrease in the value of these securities of $468,293. At October 31, 2003, the Company held no publicly traded equity securities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

Portfolios of Investments at October 31, 2004 and October 31, 2003

Statements of Assets and Liabilities at October 31, 2004, and October 31, 2003

Statements of Operations for the years ended October 31, 2004, October 31, 2003 and October 31, 2002

Statements of Changes in Net Assets for the years ended October 31, 2004, October 31, 2003 and October 31, 2002

Statements of Cash Flows for the years ended October 31, 2004, October 31, 2003 and October 31, 2002

Financial Highlights for the years ended October 31, 2004, October 31, 2003, October 31, 2002 and period April 5, 2001 (commencement of operations) through October 31, 2001

Notes to Financial Statements

Note - All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Members and Board of Managers of

Excelsior Venture Partners III, LLC

We have audited the accompanying statement of assets and liabilities of Excelsior Venture Partners III, LLC (which was formerly known as Excelsior Private Equity Fund III, LLC, the “Fund”), including the portfolio of investments, as of October 31, 2004 and 2003, and the related statements of operations, cash flows, changes in net assets and financial highlights for each of the years then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The statements of operations, changes in net assets and cash flows for the year ended October 31, 2002 and the financial highlights for the year ended October 31, 2002 and for the period April 5, 2001 (commencement of operations) to October 31, 2002 were audited by other auditors whose report, dated December 17, 2002, expressed an unqualified opinion on such statements and financial highlights.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 securities owned as of October 31, 2004 and 2003, with the custodian and the management of the private investment funds; where responses were not received for the private investment funds, we performed other auditing procedures. 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.

As discussed in Note 1(A), the financial statements include investment securities valued at $65,522,013 and $65,986,308 as of October 31, 2004 and 2003, respectively, representing 56.45% and 53.90%, respectively, of net assets, whose values have been estimated by the Investment Advisor, under the supervision of the Board of Managers, in the absence of readily ascertainable market values. We have reviewed the procedures used by the Investment Advisor in preparing the valuations of investment securities and have inspected the underlying documentation, and in the circumstances we believe the procedures are reasonable and the documentation appropriate. However, in the case of those securities with no readily ascertainable market value, because of the inherent uncertainty of valuation, the Investment Advisor’s estimate of values may differ significantly from the values that would have been used had a ready market existed for the securities and the differences could be material.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Excelsior Venture Partners III, LLC as of October 31, 2004 and 2003, the results of its operations, its cash flows, changes in its net assets and the financial highlights for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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Excelsior Venture Partners III, LLC

Portfolio of Investments October 31, 2004