<PAGE>

                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                Washington, DC  20549
                                     FORM 10-KSB

                    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                          COMMISSION FILE NUMBER: 33-93492
                                               -----------

                            TRANSITION AUTO FINANCE, INC.
                  (Exact name of registrant as specified in charter)

                   TEXAS                             75-257965
      (State or other jurisdiction of            (I.R.S. Employer
       incorporation or organization)           Identification No.)


 5422 ALPHA ROAD, SUITE 100, DALLAS, TEXAS             75240
 (Address of principal executive offices)            (Zip Code)

  Registrant's telephone number, including area code          (972) 404-0042

             Securities registered pursuant to section 12(b) of the Act:

         Title of Class                Name of each exchange on which registered
           None                                     None
           ----                                     ----

             Securities registered pursuant to section 12(g) of the Act:
                                         None
                                         ----
                                   (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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                        No   X
    -----                     -----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part 10-KSB or any amendment to this
Form 10-KSB.   (X)

State issuer's revenues for its most recent fiscal year: $16,072
                                                        ---------------

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days: None of the issuer's securities are, or have been, publicly traded.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 1, 1998, the issuer had
1,000 shares of common stock outstanding.

                      Transitional Small Business Disclosure
                      Format (Check one):     Yes        No  X
                      Exhibit index appears on page
                                                       ------.

<PAGE>

                                  TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION                                          PAGE
-----------------------                                          ----
<S>                                                              <C>
PART I                                                            3

  ITEM 1. DESCRIPTION OF BUSINESS                                 3
  ITEM 2. DESCRIPTION OF PROPERTY                                 3
  ITEM 3. LEGAL PROCEEDINGS                                       3
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
          SECURITY HOLDERS                                        4

PART II                                                           4

  ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
          RELATED STOCKHOLDER MATTERS                             4
  ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION OR PLAN OF OPERATION                4
  ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA             5
  ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
          ON ACCOUNTING AND FINANCIAL DISCLOSURE                  5

PART III                                                          6

  ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
          CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
          OF THE EXCHANGE ACT                                     6
  ITEM 10. EXECUTIVE COMPENSATION                                 7
  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
           OWNERS AND MANAGEMENT                                  7
  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS         8
  ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                       9
</TABLE>



                                         -2-
<PAGE>

                                        PART I

ITEM 1. DESCRIPTION OF BUSINESS

     As of December 17, 1996, fourteen days before the end of the period covered
by this Report, the Company's offering (the "Offering") of Floating Rate
Redeemable Asset-Backed Notes (the "Notes") was declared effective by the United
States Securities & Exchange Commission (the "Commission").  As of December 31,
1996, the end of the period covered by this Report, (i) the Company had sold no
Notes and (ii) the Company's operating assets consisted of ten leased vehicles
and the lease contracts related thereto (the "Contributed Contracts"), which
vehicles and lease contracts had been contributed to the Company by Transition
Leasing Management, Inc. ("Transition Leasing").  The Company is a wholly-owned
single purpose subsidiary of Transition Leasing and, with the proceeds of the
Offering, will be engaged in the business of  purchasing new or late model
vehicles (the "Leased Vehicles") and concurrently therewith entering into leases
(the "Contracts") of such vehicles to customers.  Transition Leasing, the parent
of the Company, contributed (i) three (3) of the Contributed Contracts and the
related Leased Vehicles to the Company as of August 19, 1996 and (ii) the
remaining seven (7) of the Contributed Contracts and related Leased Vehicles to
the Company as of December 17, 1996, plus cash in the amount of the cash
proceeds of each Contributed Contract subsequent to October 31, 1996.  See, 
"Certain Relationships and Related Transactions."  One Contributed Contract went
in default, and the vehicle leased thereunder was wholesaled with the proceeds
thereof paid to the Company. 

     The Company was incorporated under the laws of the State of Texas on
December 8, 1994.  The Company is a subsidiary of Transition Leasing.  As of the
end of the period covered by this Report, the Company had no other subsidiaries.

ITEM 2. DESCRIPTION OF PROPERTY

     As of December 31, 1996, the Company's principal executive offices were
located within the offices of Transition Leasing at 5520 LBJ Freeway, Dallas,
Texas 75240 and its telephone number was (214) 490-4788.  In 1998, the Company
moved its executive offices, together with Transition Leasing, to 5422 Alpha
Rd., Suite 100,  Dallas, Texas 75240, and its telephone number is (972)
404-0042. 

     As of the end of the period covered by this Report the Company had, and as
of the date of this Report the Company has, no employees and its operations are
conducted through Transition Leasing, which services the vehicle leases pursuant
to which the Company leases and will lease vehicles. 

ITEM 3. LEGAL PROCEEDINGS

     On May 17, 1996, Ronald Craig ("Craig"), a 1/3 shareholder and one of the
original officers and directors of Transition Leasing, brought a suit (the
"Craig Litigation")in the 14th District Court of Texas, individually and
derivatively on behalf of Transition Leasing, against Transition Leasing, the
Company and other defendants, challenging, among other things, two transfers to
Prime Choice Incorporated ("Prime Choice").  Prime Choice, an affiliate of the
Company,  was engaged in the automobile leasing business and was owned by
Kenneth C. Lowe (one of the defendants, a 1/3 shareholder, director and an
officer of Transition Leasing and a director and officer of the Company), and
another person who was then a 1/3 shareholder, director, and officer of
Transition Leasing.  One challenged transfer was of all the stock of the
Company.  The other challenged transfer was of automobile leasing contracts,
including the Contributed Contracts, acquired by Transition Leasing with
financing from Gibson Merchandising Group, Inc.  ("Gibson Merchandising"), a
company controlled by defendant Richard Gibson ("Gibson"), which were assigned
first to Gibson Merchandising in cancellation of the financing debt and then to
Prime Choice in exchange for stock of Prime Choice.  The suit alleged mainly
that the transfers were for inadequate consideration, in breach of fiduciary
duty and without adequate notice to Craig.  The suit sought an injunction
against the transfers; a receiver for the Contributed Contracts, the stock of
the Company, and other former assets of Transition Leasing that had been
transferred; damages and other relief.  The court appointed a receiver and then
terminated the receiver conditioned on reversal of the challenged transfers and
payment of Craig's attorneys' fees by Transition Leasing.  The parties entered
into an agreement, dated as of July 10, 1996 agreeing to these terms and carried
out the reversal.  As a result, all of the Company's stock and the Contributed
Contracts have been returned to Transition Leasing and Transition Leasing's debt
to Gibson Merchandising has been acknowledged. See "Certain Relationships and
Related Transactions."

     The remainder of the Craig Litigation was settled in 1997.  Pursuant to a
Compromise Settlement Agreement and Release (the "Settlement Agreement")
relating to the litigation, Transition Leasing agreed (i) to pay Craig $20,000
by cashier's check promptly after execution of the Settlement Agreement and (ii)
to deliver to Craig a promissory note (the "Craig Note") in the principal amount
of $80,000, payable in monthly installments of $5,000 per month for sixteen (16)
months.  Craig agreed to transfer his stock in Transition Leasing to Transition
Leasing.  Transition Leasing advised the Company that it entered into the
Settlement Agreement to obtain Craig's stock in Transition Leasing and to avoid
the additional expenses of protracted litigation if the litigation has not been
settled and not because it believed that Craig's claims had merit.  The Company
is not required to make any payments pursuant to the Settlement Agreement.



                                         -3-
<PAGE>

     Except as set forth in the foregoing paragraph, the Company is not a party
to any material legal proceedings, and no material legal proceedings have been
threatened by or, to the best of the Company's knowledge, against the Company.

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

     No matters were submitted to a vote of the Company's sole stockholder
during the fourth quarter of 1996.

                                       PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS

Market for Common Stock

     There is no market for the Company's common stock (the "Common Stock"). 
All shares of the Common Stock are owned by Transition Leasing.  No cash
dividends have ever been declared with respect to the Common Stock.    


   ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
           OR PLAN OF OPERATION


General

     As of the date of this Report, the Company has had no operating history.
The net proceeds of the Offering (excluding a loan loss reserve of 3% of the
gross offering proceeds (the "Reserve")) will be employed to purchase Leased
Vehicles and Contracts. While the Notes remain outstanding, the Company will be
prohibited from engaging in any business other than the purchase or other
acquisition of leased vehicles and contracts, collection and servicing of the
Contracts (including possession and resale of the leased vehicles) and the
remarketing of the Leased Vehicles upon termination of the Contracts, and from
incurring any additional indebtedness other than expenses allowed under the
terms of the Trust Indenture pursuant to which the Notes are issued (the
"Allowed Expenses") and any other amounts incurred in the ordinary course of its
business.

     The Company's use of the net collection proceeds from the contracts will be
restricted to payments on the Notes and, so long as there is no event of
default, to payments of Allowed Expenses and, until the date on which the
Company is obligated, under the terms of the Trust Indenture, to deliver all
proceeds from the contracts to a sinking fund for payment of the Notes (the
"Sinking Fund Trigger Date"), to the purchase or acquisition of additional
eligible Contracts.

Capital Resources and Liquidity

     The Company's primary sources of funds for repayment of the Notes will be
proceeds from the contracts, any income on the reinvestment of such proceeds,
any proceeds from sale or refinancing of the remaining  contracts at the
maturity of the Notes and the Reserve. The Company does not have, nor is it
expected to have in the future, any significant source of capital for payment of
the Notes and the expenses incurred by it other than such sources. Payment of
the principal or interest on the Notes is not guaranteed by any other person or
entity.  Although management of the Company believes that the Company will
realize sufficient proceeds from the foregoing sources to pay all installments
of interest when due on the Notes and to satisfy the principal amount of the
Notes in full prior to or at maturity, there can be no assurance that such
sources will be sufficient to repay the Notes in full.

     The foregoing paragraph contains forward-looking information that is based
on a number of assumptions. These assumptions include certain risks and
uncertainties. A principal risk is that the Company has had no operations to
date, and Transition Leasing, the Company's parent, which is responsible for the
acquisition and servicing of the Company's Contracts, has limited operating
history to date upon which to base these assumptions.  A variation in any single
assumption could materially alter the ability of the Company to cover the
Allowed Expenses and pay all principal and interest due on the Notes. There is
no assurance that these assumptions, including, without limitation, an expected
implicit interest rate of 18% per annum with respect to the Contracts, will be
achieved. Accordingly, the ability of the Company to cover the Allowed Expenses
and pay all principal and interest on the Notes may differ materially from this
forward-looking information due to such risks and uncertainties.



                                         -4-
<PAGE>

   ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial statements of the Company are included beginning immediately
following the index to the consolidated financial statements. 


   INDEX TO FINANCIAL STATEMENTS

                                                            PAGE


   Report of Independent Certified Public Accountants        F-1

   Balance Sheets at December 31, 1996                       F-2

   Statements of Operations for the Four Months
   ended December 31, 1996                                   F-4

   Statement of Stockholders' Equity for the Four Months
   ended December 31, 1996                                   F-5

   Statements of Cash Flows for the Four Months
   ended December 31, 1996                                   F-6

   Notes to Financial Statements                             F-7

   All schedules have been omitted because they are not applicable or not
required, because the information is shown in the consolidated financial
statements or the notes thereto, or because the information is immaterial.


   ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE

   In 1997, the Company dismissed Lane Gorman Trubitt, L.L.P. ("LGT"), 
certified public accountants, as the Company's independent auditor and 
selected Sprouse & Winn, L.L.P., to audit and report on the Company's 
financial statements for the four months ended December 31, 1996, which date 
is the end of the Company's fiscal year. See Item 7. "Financial Statements 
and Supplementary Data."

   The board of directors has approved the change of auditors.

   The report of LGT on the Company's financial statements, consisting of 
consolidated balance sheets as of December 1995 and 1994, and August 31, 1996 
and the related statements of operations, statements of owners' equity, and 
cash flows for each of the two years in the period ended December 31, 1995, 
and for the eight months ended August 31, 1996, did not contain an adverse 
opinion or disclaimer of opinion and was not qualified or modified as to 
uncertainty, audit scope, or accounting principles.

   There were no disagreements with LGT on any matter of accounting 
principles or practices, financial statement disclosure, or auditing scope or 
procedure, which if not resolved to LGT's satisfaction, would have caused LGT 
to make reference to the subject matter of the disagreements in connection 
with its report.

                                         -5-
<PAGE>

   No consultations occurred between the Company and Sprouse & Winn, L.L.P. 
regarding the application of accounting principles to a specific completed or 
contemplated transaction, the type of audit opinion, or other information 
considered by the Company in reaching a decision as to an accounting, 
auditing, or financial reporting issue.

                                       PART III

   ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
           CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
           OF THE EXCHANGE ACT

   The following table sets forth information concerning the directors and
executive officers of the Company and their age and position with the Company.
Each director holds office until the next annual stockholders' meeting and
thereafter until the individual's successor is elected and qualified. Officers
serve at the pleasure of the board of directors.

          The names, ages, backgrounds and principal occupations of the
directors and executive officers of the Company as of December 31, 1996 are set
forth below:

          Gregory R. Grazioli, age 45, has served as Vice President-General
Manager of Prime Choice since October 1995. Mr. Grazioli served as President of
the Company and a director of the Company from October 1995 until July 1996. 
Mr. Grazioli has served as Director of Independent Leasing of Transition Leasing
and the Company since July 1996. Mr. Grazioli was Vice President/General Manager
of Superior Leasing, a division of VanTuyl Enterprises, in Richardson, Texas,
from October 1993 to September 1995. Mr. Grazioli also serves on the Board for
the National Vehicle Leasing Association, Texas Chapter, as Treasurer from June
1994 to present. Mr. Grazioli has held various positions in the last 20 years of
his experience in dealerships from General Sales Manager to Used Car Manager.
Mr. Grazioli was credit manager and sales trainer for Autoflex Leasing from June
1992 to October 1993. From August 1991 to June 1992, Mr. Grazioli was lease
manager for Bankston Nissan, Irving, Texas.

          Ken Lowe, age 61, has served as President and Secretary and a director
of Prime Choice since April 1995 and as a director and the Chief Financial
Officer and Secretary of the Company since December 1994 and as President of the
Company since August 1996. Mr. Lowe has served as a director, Vice President and
Secretary of Transition Leasing from October 1994 until July 1996 and as a
director, President and Secretary of Transition Leasing since July 1996. Since
1993, Mr. Lowe has been Vice President of Young & Lowe, Inc., a private
investment banking firm. From 1990 to 1992, Mr. Lowe was President of Custom
Data Services, a company that specialized in financial data processing and from
1988 to 1990, Mr. Lowe was President of Westside Communications, which provided
telephone equipment service to commercial customers. Mr. Lowe has a Master's of
Business Administration from Southern Methodist University and over 20 years of
experience in investment banking.

          Robert P. Kyker, age 45, has served as Vice President Sales and
Marketing for Transition Leasing and the Company since July 1996. From 1982 Mr.
Kyker has been the owner of R&D Sales & Leasing, which is engaged in the sale
and leasing of automobiles, includes sales and leases to people with non-prime
credit ratings. Mr. Kyker will assist the Company and Transition Leasing in
developing business with independent automobile dealers. Mr. Kyker has a Masters
of Education from Abilene Christian University.

          Neither the directors nor the executive officers anticipate receipt of
any compensation to be paid directly by the Company, other than reimbursement of
their reasonable Allowed Expenses incurred on behalf of the Company, prior to
satisfaction in full of the Notes.

          There are no family relationships among the directors and any of the
executive officers of the Company. Except as disclosed above, the Company's
directors do not hold any directorship in any Company with a class of securities
registered pursuant to Section 12 of the Exchange Act or subject to the
requirements of Section 15(d) of the Exchange Act or any company registered as
an investment Company under the Investment Company Act of 1940, as amended.
Except for the officers set forth above, there are no employees of the Company.


                                         -6-
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

     The executive officers and sole director of the Company receive no
compensation, cash or otherwise, from the Company.   The executive officers and
sole director of the Company are employed by Transition Leasing.
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT

PRINCIPAL STOCKHOLDERS

     The following table sets forth information, as of July 31, 1996, relating
to the beneficial ownership of the Company's Common Stock by any person or
"group," as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), known to the Company to own
beneficially 5% or more of the outstanding shares of Common Stock, and known to
the Company to be owned by each director of the Company and by all officers and
directors of the Company as a group. Except AS otherwise indicated, each of the
persons named below is believed by the Company to possess sole voting and
investment power with respect to the shares of Common Stock beneficially owned
by such person.


<TABLE>
<CAPTION>
                                                                      Amount and Nature of Beneficial Ownership (1)
----------------------------------------------------------------------------------------------------------------------------
 NAME OF DIRECTOR OR EXECUTIVE
 OFFICER OR NAME AND ADDRESS OF                              NUMBER OF SHARES                        PERCENTAGE OF CLASS
 BENEFICIAL OWNER                                                                                        OUTSTANDING
----------------------------------------------------------------------------------------------------------------------------
 <S>                                                         <C>                                     <C>
 Transition Leasing Management,                                 1,000 (2)                                   100%
 Inc.
 5422 Alpha Road
 Suite 100
 Dallas, Texas 75240
                                                                    0
 Gregory R. Grazioli                                                   0 (2) (3)
 Kenneth C. Lowe                                                    0
 Byron Dobbs                                                        0
 Robert Kyker                                                          0 (2) (3)
 All current executive officers and
 directors as a group (4 persons)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)   The information as to beneficial ownership of Common Stock has been
      furnished by the respective shareholders, directors and officers of the
      Company.

(2)   The directors of Transition Leasing could be deemed to share voting and
      investment powers over the shares of Common Stock owned of record by
      Transition Leasing. The sole director of Transition Leasing is Ken Lowe.
      Mr. Lowe owns 33.3% of Transition Leasing's capital stock. Pursuant to an
      agreement with Gibson Merchandising Group, Inc. ("Gibson Merchandising")
      and Richard Gibson ("Gibson"), the principal shareholder and president of
      Gibson Merchandising, Transition Leasing has issued preferred stock to
      them such that Gibson Merchandising and Gibson own in the aggregate 50%
      of Transition Leasing's capital stock, Ken Lowe owns 16.7% of Transition
      Leasing's capital stock, and Richard Gibson has been elected to the Board
      of Directors of Transition Leasing. See "Certain Relationships and
      Related Transactions." Gibson, age 59, has been the Chairman and Chief
      Executive Officer of Gibson Merchandising since 1980. Gibson is also a
      member of the Board of Trustees of Harding College located in Search,
      Arkansas.

(3)   This amount excludes shares of Common Stock owned directly by Transition
      Leasing. Mr. Lowe owns 33.3% of the common stock of Transition Leasing
      and serves as a director of Transition Leasing.


                                         -7-
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Transition Leasing owns l00% of the Company's Common Stock. The officers
of the Company (except for Mr. Lowe) are also vice presidents of Prime Choice
and Transition Leasing. Mr. Lowe is President and Secretary and a director of
Prime Choice and Transition Leasing and a director and the President, Chief
Financial Officer and Secretary of the Company. These officers will devote so
much of their time to the business of the Company as, in their judgment, is
reasonably required. The Company, Prime Choice and Transition Leasing have real
and ongoing conflicts of interest in allocating management time, services,
overhead and functions among the Company, Prime Choice and Transition Leasing.
Management of Prime Choice and Transition Leasing intends to resolve any such
conflicts in a manner that is fair and equitable to the Company, particularly in
light of the fact that the Company is presently the only subsidiary of
Transition Leasing. However, there can be no assurance that Transition Leasing
will not form additional subsidiaries engaged in the same business as the
Company or that any particular conflict may be resolved in a manner that
adversely affects Noteholders. Neither Prime Choice nor Transition Leasing has
guaranteed or is otherwise liable for the debts and liabilities of the Company.
Transition Leasing has agreed  to contribute the Contributed Contracts to the
Company. In addition, Transition Leasing has agreed to purchase certain 
contracts from the Company, including the contracts which were the Defaulted 
contracts.

      The terms of the agreement (the "Servicing Agreement") pursuant to which
Transition Leasing provides lease purchasing, administration and collection
services were not negotiated at arm's-length but were determined unilaterally by
the management of Transition Leasing. Thus, there are real and ongoing conflicts
of interest with respect to the Servicing Agreement The Company did not and does
not intend to seek competitive bids from other providers of lease purchasing,
administration and collection services. There has been no independent
determination of the fairness and reasonableness of the terms of these
transactions and relationships. Thus, there is no assurance that such services
could not have been obtained from an unaffiliated third party in arm's-length
negotiations on terms more favorable to the Company. Under the terms of the
Servicing Agreement, Transition Leasing will be paid a servicing fees and a
releasing fee and be entitled to reimbursement for its expenses incurred in
connection with the repossession, remarketing, repair and resale of leased
vehicles out of the proceeds from such resales. Transition Leasing will retain
the fees as compensation and reimbursement for its services in administering the
purchase of  contracts and Noteholder relations. The Company may terminate the
Servicing Agreement, but it is unlikely that the Company will do so in light of
the control of the Company by Leasing.

      The terms of the existing Prime Choice  contracts that may be purchased
by the Company from Prime Choice have not been negotiated at arm's length but
have been determined unilaterally by the management of Prime Choice. Prime
Choice may use certain funds received from the Company to purchase the Prime
Choice  contracts, which will use such funds to make payments with respect to
the principal of and interest on a line of credit facility provided by a
financial institution.

      In addition, the terms of the new  contracts to be purchased or acquired
by the Company that are originated by Transition Leasing will not be negotiated
at arm's-length but will be determined unilaterally by Transition Leasing. With
respect to such new  contracts originated by Transition Leasing, Transition
Leasing will receive 57.5% of each customer's down payment with respect to the
Contract as a Marketing Fee.

      In May 1995, Prime Choice acquired all of the issued and outstanding
common stock of the Company from Transition Leasing for $1,000. Mr. Lowe, a
shareholder, director and officer of Prime Choice, is a shareholder and officer
of Transition Leasing. Initially, the Contributed Contracts were owned by
Transition Leasing. In March 1996, Transition Leasing agreed to transfer the
Contributed Contracts to Gibson Merchandising in exchange for the cancellation
of a loan in the principal amount of $350,000 by Gibson Merchandising to
Transition Leasing in connection with the acquisition of such Contributed
Contracts. In March 1996, Gibson Merchandising agreed to transfer the
Contributed Contracts to Prime Choice in exchange for certain shares of capital
stock of Prime Choice. As a result of certain litigation, Prime Choice has
transferred all of the issued and outstanding common stock of the Company to
Transition Leasing and the agreement by Transition Leasing to transfer the
Contributed Contracts to Gibson was rescinded. See "Litigation."

      In August 1996, Gibson made an unsecured loan in the principal amount of
$50,000 to Transition Leasing pursuant to a convertible note. In August 1996,
Transition Leasing executed a new convertible note to Gibson Merchandising in
the principal amount of $350,000 in consideration for Gibson Merchandising
waiving certain defaults by Transition Leasing with respect to its previous loan
to Transition Leasing and forgiving past due interest with respect thereto. The
new note to Gibson Merchandising was collateralized by


                                         -8-
<PAGE>

all of the assets of Transition Leasing, including the Contributed Contracts.
The notes (collectively, the "Gibson Notes") issued to Gibson Merchandising and
to Gibson bear interest at the annual rate of 10% and are due on August 1, 1997.

      The Gibson Notes automatically converted into 666 shares and 333 shares
respectively, of Transition Leasing's Series A Redeemable Convertible Preferred
Stock (the "Preferred Stock") upon the filing with the Commission of Amendment
No.2 to the Registration Statement relating to the Offering.  Transition
Leasing, which has 999 shares of common stock, par value $.0 1 per share,
outstanding, has the right to redeem from funds legally available for such
purpose, up to 666 shares of the Preferred Stock at a per share price of
$1,126.13. Transition Leasing has agreed with Gibson not to redeem his shares of
Preferred Stock without his consent. At the time when Transition Leasing has
redeemed 666 shares of Preferred Stock, each remaining share of Preferred Stock
shall automatically convert to one share of Transition Leasing common stock. The
holders of the Preferred Stock have the right to nominate and elect one director
to the Transition Leasing Board of Directors. As of August 19, 1996, pursuant to
the terms of the Notes, the Notes automatically converted into 999 shares of
Preferred Stock, which represented 50% of the capital stock of Transition
Leasing upon the filing of Amendment No.2 to the Registration Statement with the
Commission, and Gibson, the President and principal shareholder of Gibson
Merchandising, was elected as a director of Transition Leasing. See "Security
Ownership of Certain Beneficial Owners and Management."

      Upon the automatic conversion of the Gibson Note held by Gibson
Merchandising to Preferred Stock as described above, the security interest of
Gibson Merchandising in the assets of Transition Leasing, including the
Contributed Contracts, terminated. Simultaneously with such conversion and
termination of the security interest in the Contributed Contracts, Transition
Leasing transferred the three (3) initial Contributed Contracts to the Company
pursuant to the Contribution Agreement.

      Transition Leasing does not currently provide purchase and collection
services for any other party, including affiliates. Transition Leasing, however,
may agree in the future, to purchase and service  contracts for itself, its
affiliates and other unrelated parties. The Company has the right to purchase
additional contracts originated by Transition Leasing from the net collection
proceeds on its existing  contracts until an Event of Default or the Sinking
Fund Trigger Date. Management of Transition Leasing will have real and ongoing
conflicts of interest in determining whether to make available to the Company
any automobile lease  contracts that it originates or to retain or acquire the 
contracts for its own benefit or for the benefit of affiliated parties,
including future subsidiaries to be engaged in the same business as the Company.
Transition Leasing has determined that all automobile lease contracts purchased
or originated by it that satisfy the Company's contract criteria will be made
available to the Company, to the extent that the Company has funds available for
such purchases. 

      The Company will use up to 1.5% of the gross proceeds from the sale of
the Notes to reimburse Transition Leasing, the Company's parent, for offering
and organizational expenses paid by it. The maximum reimbursement will range
from $11,250 for the minimum offering of $750,000 to $150,000 for the maximum
offering of $10,000,000. Transition Leasing has agreed to pay any such expenses
to the extent they exceed 1.5% of the gross proceeds from the sale of the Notes.
It is expected that such expenses will exceed 1.5% of the gross proceeds from
the sale of the Notes, even if the maximum offering is achieved.

      The Company has joined in a Tax Sharing Agreement with Transition
Leasing. In general, under the terms of this agreement, Transition Leasing is
responsible for making all payments of federal income taxes due with respect to
the Affiliated Group to the Internal Revenue Service and all payments of state
and local consolidated, combined and unitary income taxes due with respect to
the Affiliated Group to the applicable state and local authorities. Under
applicable federal tax laws; however, if Transition Leasing fails to make such
payments of tax, the other members of the Affiliated Group, including the
Company, would be responsible for making such payments.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

a) 1. FINANCIAL STATEMENTS

        The following financial statements are filed as a part of this 
Form 10-KSB:

  The Index to Consolidated Financial Statements is set out in Item 7 herein.

      The following exhibits are filed as exhibits to this report on 
Form 10-KSB:

<TABLE>
         <C>         <S>
         3.1*    -   Articles of Incorporation of Transition Auto Finance Inc.

         3.2*    -   Bylaws of Transition Auto Finance Inc.


                                         -9-
<PAGE>

<CAPTION>

         <C>         <S>
         4.1**   -   Form of Indenture between Transition Auto Finance Inc. and
                     Texas Commerce Bank National Association, as Trustee

         4.2**   -   Form of Floating Rate Secured Note Due __________,1999
                     (included in Article Two of Indenture filed as Exhibit 4.1)

         10.1**  -   Form of Master Contract Purchase Agreement between Y&L Auto
                     Leasing, Inc. and Transition Auto Finance Inc.

         10.2**  -   Form of Servicing Agreement between Y&L Auto Leasing, Inc.
                     and Transition Auto Finance Inc.

         10.3**  -   Form of Tax Sharing Agreement by and between Y&L Auto
                     Leasing and Transition Auto Finance Inc.

         10.4**  -   Form of Custodial Agreement between Transition Auto
                     Finance, Inc. and Texas Commerce Bank National Association

         10.5**  -   Contribution Agreement between Transition Leasing 
                     Management, Inc. and Transition Auto Finance, Inc. 

         27.1 ***-   Financial Data Schedules
</TABLE>
-----------------------------------------

   *    Incorporated by reference from Registration Statement on Form SB-2 of
        Transition Auto Finance, Inc., Registration No. 33-93492-D filed June
        15, 1995.

   **   Incorporated by reference from Amendment No. 4 to Registration
        Statement on Form SB-2 of Transition Auto Finance, Inc., Registration
        No.  33-93492-D filed December 16, 1996.

   ***  Filed electronically herewith.


b)   REPORTS ON FORM 8-K

       No reports on Form 8-K were filed during the last quarter of 1996.


                                      SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                (Registrant) TRANSITION LEASING MANAGEMENT, INC.
                             ------------------------------------------
                         By  /s/ Kenneth C. Lowe
                             -------------------
                             Kenneth C. Lowe, President/ Chief Operating Officer
                       Date  September 3, 1998
                             ------------------------------------------


In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.


                                         -10-
<PAGE>

                         By  /s/ Kenneth C. Lowe
                             -------------------
                             Kenneth C. Lowe, Chief Financial Officer
                       Date  September 3, 1998
                             ------------------------------------------


                         By  /s/ Kenneth C. Lowe
                             -------------------
                             Kenneth C. Lowe, Director
                       Date  September 3, 1998
                             ------------------------------------------








                                         -11-
<PAGE>

Board of Directors
Transition Auto Finance, Inc.



                             INDEPENDENT AUDITORS' REPORT


We have audited the accompanying balance sheet of Transition Auto Finance, 
Inc. (the Company) as of December 31, 1996, and the related statements of 
operations, stockholders' equity, and cash flows for the period September 1, 
1996 through December 31, 1996.  These financial statements are the 
responsibility of the Company's management.  Our responsibility is to express 
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing 
standards. 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.  
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 audit provides a 
reasonable basis for opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1996, and the results of their operations and their cash flows for the four
months then ended in conformity with generally accepted accounting principles.


                                                  SPROUSE & WINN, L.L.P.


August 31, 1998



                                         F-1
<PAGE>

                            TRANSITION AUTO FINANCE, INC.

                                    BALANCE SHEET

                                  DECEMBER 31, 1996


                                        ASSETS

<TABLE>
<CAPTION>
     <S>                                                              <C>
     CURRENT ASSETS                                                    $    110
                                                                       --------
       Cash

     PROPERTY COST
       Vehicles leased                                                  199,304
       Less accumulated depreciation                                    (60,418)
                                                                       --------
           Net Property                                                 138,886
                                                                       --------

     OTHER ASSETS
       Debt pre-issuance costs                                          151,105
                                                                       --------

     TOTAL ASSETS                                                      $290,101
                                                                       --------
                                                                       --------
                    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

     OTHER LIABILITIES
       Due to parent                                                   $135,866
       Deferred revenue                                                  11,098
                                                                       --------
           Total Other Liabilities                                      146,964
                                                                       --------

     COMMITMENTS

     STOCKHOLDERS' EQUITY (DEFICIT)
     Common stock, $.01 par value, 1,000,000 shares authorized;
                                                                             10


       999 shares issued and outstanding
     Additional paid-in capital                                         143,596
     Retained earnings (deficit)                                           (469)
                                                                       --------
           Total Stockholders' Equity                                   143,137
                                                                       --------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $290,101
                                                                       --------
                                                                       --------
</TABLE>


                                         F-2
<PAGE>

                 SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS








                                         F-3
<PAGE>

                            TRANSITION AUTO FINANCE, INC.

                              STATEMENT OF OPERATIONS

                     FOR THE FOUR MONTHS ENDED DECEMBER 31, 1996


<TABLE>
          <S>                                                       <C>
          REVENUES

            Vehicle monthly lease payments                           $ 13,334
            Amortization of down payments                               2,738
                                                                     --------

               Total Revenues                                          16,072

          OPERATING EXPENSES

            Operating costs                                            32,588
            Depreciation and amortization                               6,512
                                                                     --------

               Total Expenses                                          39,100


          Operating Loss                                              (23,028)

          Provision for Federal Income Taxes                              -0-

          Net Loss                                                   $(23,028)
                                                                     --------
</TABLE>












                 SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS

                                         F-4
<PAGE>

                            TRANSITION AUTO FINANCE, INC.

                          STATEMENT OF STOCKHOLDERS' EQUITY

                         FOUR MONTHS ENDED DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                                                                              RETAINED                 TOTAL
                                                                         ADDITIONAL           EARNINGS             STOCKHOLDERS'
                                          COMMON STOCK                  PAID-IN STOCK        (DEFICIT)                EQUITY
                               ------------------------------------    ---------------      -----------          -----------------


                                   SHARES               AMOUNT
                                   ------               ------
<S>                                <C>                  <C>            <C>                  <C>                  <C>
Balance at August 31, 1996           999                 $10               $ 21,514            $22,559                $ 44,083


Contributed vehicles                 -0-                 -0-                122,082                -0-                 122,082

Net loss                             -0-                 -0-                    -0-            (23,028)                (23,028)
                                    ----                ----               --------            -------                --------

Balance at December 31, 1996         999                 $10               $143,596            $  (469)               $143,137
                                    ----                ----               --------            -------                --------
</TABLE>





                                         F-5
<PAGE>

                 SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS

                            TRANSITION AUTO FINANCE, INC.


                               STATEMENT OF CASH FLOWS


FOUR MONTHS ENDED DECEMBER 31, 1996


<TABLE>
          <S>                                                        <C>
          CASH FLOWS FROM OPERATING ACTIVITIES
            Net loss                                                 $(23,028)
          Adjustments to reconcile net to net cash provided 
                      by operating activities
            Depreciation and amortization                               6,512
            Amortization of deferred revenue                           (2,738)
            (Gain) loss on sale of vehicles                            19,164
            NET CASH PROVIDED BY OPERATING ACTIVITIES                     (90)
                                                                     --------

          CASH FLOWS FROM INVESTING ACTIVITIES
            Purchase of fixed assets
            Proceeds from vehicle sales
          NET CASH (USED) BY INVESTING ACTIVITIES


          CASH FLOWS FROM FINANCING ACTIVITIES
            Due to parent                                                (800)
                                                                     --------

          NET INCREASE (DECREASE) IN CASH                                (890)

          CASH AND CASH EQUIVALENTS, beginning of period                1,000
                                                                     --------


                                         F-6
<PAGE>

<CAPTION>
          <S>                                                        <C>
          CASH AND CASH EQUIVALENTS, end of period                   $    110
                                                                     --------
                                                                     --------

          CASH PAID DURING THE YEAR FOR
            Interest                                                 $    -0-
                                                                     --------
                                                                     --------
            Income taxes                                             $    -0-
                                                                     --------
                                                                     --------
</TABLE>

          NON-CASH ACTIVITIES:

          Debt pre-issuance costs of $151,105 were paid by parent company, 
          resulting in a due to parent liability

          Vehicles with a net book value of $122,082 were contributed as of 
          October 31, 1996.




                 SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS

                            TRANSITION AUTO FINANCE, INC.

                            NOTES TO FINANCIAL STATEMENTS


                                  DECEMBER 31, 1996


NOTE 1:   BUSINESS ACTIVITY

          The Company was established to purchase motor vehicles and automobile
          lease contracts, collect and service automobile lease contracts and
          remarket motor vehicles upon termination of their leases. A summary of
          the significant accounting policies consistently applied in the
          preparation of the accompanying financial statements follows. 
          Transition Leasing Management, Inc. (TLMI) owns 100% of the Company's
          common stock.

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          CASH AND CASH EQUIVALENTS

          For purposes of the statements of cash flows, the Company considers
          all highly liquid investments with a maturity of three months or less
          when purchased to be cash equivalents.

          REVENUE


                                         F-7

<PAGE>

          The vehicles are leased to individuals under leases with terms ranging
          from thirty-six to forty-two months.  The leases are considered to be
          operating leases.  At the end of the lease period, the lessee may
          purchase the equipment at the contractual residual value.  Monthly
          lease payments are recognized as revenue in the month that the
          payments are due. The vehicle leases require a down payment from the
          lessee at the inception of the lease.

          The down payments are recognized as income over the term of the leases
          on a straight-line basis. 

          EQUIPMENT AND LEASED VEHICLES

          Equipment and leased vehicles are stated at cost less accumulated
          depreciation.  Depreciation is provided in amounts sufficient to
          relate the cost of depreciable assets to operations over their
          estimated service lives using the straight-line-method.  For equipment
          service lives range from three to five years.  For leased vehicles,
          depreciation is calculated over the term of the vehicle lease, using
          the cost of the vehicle less the estimated residual value of the
          vehicle at the end of the lease.  Present leases have terms ranging
          from thirty-six to forty-two months.



                                         F-8
<PAGE>

                            TRANSITION AUTO FINANCE, INC.

                            NOTES TO FINANCIAL STATEMENTS


                                     (Continued)

                                  DECEMBER 31, 1996


NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

          (CONTINUED)

          The Company adopted Financial Accounting Standards Board issued
          Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
          AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment
          losses to be recorded on long-lived assets used in operations when
          indicators of impairment are present and undiscounted cash flows
          estimated to be generated by those assets are less than the assets'
          carrying amount.  There has been no impairment recorded in the current
          year financial statements.

          OTHER ASSETS

          Other assets include debt pre-issuance costs incurred in connection 
          with the Company's offering of securities by Registration 
          No. 33-393492-D filed with the Securities and Exchange Commission.  
          These costs are being amortized, on a straight-line basis over 
          the term of the debt securities which mature on December 31, 2000.

          DEFERRED REVENUE

          Deferred revenue consists of down payments made by leasees at the
          inception of the lease.  The down payments are amortized over the
          lease term.  Lease terms range from thirty-six to forty-two months.

          Fair Value of Financial Instruments

          Fair values of financial instruments are estimated to approximate the
          related book value, unless otherwise indicated, based on market
          information available to the Company.

          USE OF ESTIMATES

          In preparing the Company's financial statements, management is
          required to make estimates and assumptions that affect the reported
          amounts of assets and liabilities, the disclosure of contingent assets
          and liabilities at the date of the financial


                                         F-9
<PAGE>

          statements, and the reported amounts of revenues and expenses during
          the reporting period.  Actual results could differ from these
          estimates.












                                         F-10
<PAGE>

                            TRANSITION AUTO FINANCE, INC.

                            NOTES TO FINANCIAL STATEMENTS

                                     (Continued)

                                  DECEMBER 31, 1996


NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

          (CONTINUED)

          Concentration of Credit Risk

          At present all of the lessees are residents of the Dallas Fort Worth
          Metroplex.

NOTE 3:   INCOME TAXES

          The Company is a corporation subject to federal and state income
          taxes.  The Company and its parent intends to file a consolidated tax
          return.  Each company in the consolidated group determines its taxable
          income or loss, on a separate company basis, and the consolidated tax
          liability is allocated to each company with taxable income in
          proportion to the total of the taxable income amounts.  To date, the
          Company has had no federal taxable income.  Also, under a tax
          allocation agreement signed by TLMI and the Company, TLMI has agreed
          to pay all federal income tax liability of the affiliated group as it
          becomes due and payable.  If TLMI fails to make such payments, the
          Company would be responsible for making such payments.

          The Company has a net loss carryforward (NOL) of approximately $400. 
          The Company's NOL carryforward expires on December 31, 2011.

NOTE 4:   RELATED PARTIES

          The Company has entered into a Servicing Agreement with TLMI.  TLMI
          will be entitled to a servicing fee of $20 per month per contract and
          a payment of $150 per contract purchased.  TLMI will receive, as a
          marketing fee, 57.5% of the down payment made by the customers with
          respect to contracts it originates.  TLMI will receive from the
          Company a Releasing Fee of 15% of the down payment with respect to a
          new contract following repossession of a leased vehicle. 


NOTE 5:   SUBSEQUENT EVENT 


                                         F-11
<PAGE>

          The Company issued $2,883,000 of floating rate redeemable asset-backed
          notes (Investor Notes) during 1997.  These Investor Notes were issued
          pursuant to a public offering on Form SB-2 under the Securities Act of
          1933.

          The Investor Notes bear interest at the initial interest rate of 12%,
          but are subject to adjustment.  Interest is payable quarterly on the
          15th day of each month.





                                         F-12
<PAGE>

                            TRANSITION AUTO FINANCE, INC.

                            NOTES TO FINANCIAL STATEMENTS

                                     (Continued)

                                  DECEMBER 31, 1996


          The Investor Notes were issued at various times during 1997, however
          the maturity date for all of the Investor Notes is December 31, 2000. 
          The Investor Notes are collateralized by the following:

               _____________________________________   Automobile contracts for
                            the leasing of new or late model automobiles.
               _____________________________________   The leased vehicles.

          The following table represents Investor Notes outstanding at
          December 31, 1997:

<TABLE>
<CAPTION>
                Origination Date
                                      Number of Notes      Note Amount
                <S>                   <C>                  <C>
                    April 1997                  84             $   934,000
                    May 1997                    25                 436,000
                    June 1997                   19                 173,000
                    July 1997                   14                 128,000
                    August 1997                 13                  75,000
                    September 1997              33                 352,000
                    October 1997                20                 156,000
                    November 1997               21                 212,000
                    December 1997               43                 417,000

                       Totals                  272              $2,883,000
                                               ---              ----------
</TABLE>



                                         F-13
<PAGE>

                             EXHIBIT INDEX TO FORM 10KSB

                                          of

                            TRANSITION AUTO FINANCE, INC.


<TABLE>
          <C>          <S>
          3.1*     -   Articles of Incorporation of Transition Auto Finance Inc.

          3.2*     -   Bylaws of Transition Auto Finance Inc.

          4.1**    -   Form of Indenture between Transition Auto Finance Inc.
                       and Texas Commerce Bank National Association, as Trustee

          4.2**    -   Form of Floating Rate Secured Note Due __________,1999
                       (included in Article Two of Indenture filed as
                       Exhibit 4.1)

          10.1**   -   Form of Master Contract Purchase Agreement between Y&L
                       Auto Leasing, Inc. and Transition Auto Finance Inc.

          10.2**   -   Form of Servicing Agreement between Y&L Auto Leasing,
                       Inc. and Transition Auto Finance Inc.

          10.3**   -   Form of Tax Sharing Agreement by and between Y&L Auto
                       Leasing and Transition Auto Finance Inc.

          10.4**   -   Form of Custodial Agreement between Transition Auto
                       Finance, Inc. and Texas Commerce Bank National
                       Association

          10.5**   -   Contribution Agreement between Transition Leasing
                       Management, Inc.and Transition Auto Finance, Inc. 

          27.1 *** -   Financial Data Schedules
</TABLE>
-----------------------------------------

   *      Incorporated by reference from Registration Statement on Form SB-2 of
          Transition Auto Finance, Inc., Registration No. 33-93492-D filed June
          15, 1995.

   **     Incorporated by reference from Amendment No. 4 to Registration
          Statement on Form SB-2 of Transition Auto Finance, Inc., Registration
          No.  33-93492-D filed December 16, 1996.

   ***    Filed electronically herewith.