<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                 FORM 10-KSB/A

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
                        COMMISSION FILE NUMBER: 333-80537

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

             TEXAS                                      75-2822804
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
 incorporation or organization)

   8144 WALNUT HILL LANE., SUITE 680,
              DALLAS, TEXAS                               75231
(Address of principal executive offices)                (Zip code)

         Issuer's telephone number, including area code: (214) 360-9966

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

      Title of Class: NONE       Name of each exchange on which registered: NONE

        Securities registered pursuant to section 12(g) of the Act: NONE

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 [X] No [ ]

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 10KSB. [X]

State issuer's revenues for its most recent fiscal year: $1,207,300

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked price of such common equity as of a specified
date within the past 60 days: N/A

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of December 31, 2004, the issuer
had 1,000 shares of common stock outstanding.

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]

<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<S>                                                                                                                       <C>
PART I............................................................................................................         3

Item 1. Description of Business...................................................................................         3
Item 2. Description of Property...................................................................................         4
Item 3. Legal Proceedings.........................................................................................         4
Item 4. Submission of Matters to a Vote of Security Holders.......................................................         4

PART II...........................................................................................................         4

Item 5. Market for Common Equity and Related Stockholder Matters..................................................         4
Item 6. Management's Discussion and Analysis or Plan of Operations................................................         5
Item 7. Financial Statements and Supplementary Data...............................................................         7
Item 8. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure......................        19

PART III..........................................................................................................        19

Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(A) of the
         Exchange Act.............................................................................................        19
Item 10. Executive Compensation...................................................................................        20
Item 11. Security Ownership of Certain Beneficial Owners and Management Principal Stockholders....................        20
Item 12. Certain Relationships and Related Transactions...........................................................        21
Item 13. Exhibits and Reports on Form 8-K.........................................................................        22
Item 14. Principal Accountant Fees and Services...................................................................        22
</TABLE>

                                       2

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

      As of January 27, 2000, Transition Auto Finance III, Inc.'s (the
"Company") offering (the "Offering") of 11% Redeemable Secured Notes (the
"Notes") was declared effective by the United States Securities & Exchange
Commission (the "Commission"). As of December 31, 2004, the end of the period
covered by this Report, (i) the Company had sold Notes in an aggregate principal
amount of $6,786,000 and (ii) the Company's operating assets consisted of 159
leased vehicles and the lease contracts related thereto, and three vehicles were
held in inventory following repossession. Of the Company's 110 lease contracts
at December 31, 2004, all were leases newly originated by Transition Leasing
Management, Inc. ("Transition Leasing"). As of December 31, 2004 the Company had
337 and 99 leases that were terminated early for repossession and early payoff
respectively. As of December 31, 2004, the Company had paid as and when due, all
interest payments owed on the Notes since their issuance.

      The Company was incorporated under the laws of the State of Texas on June
8, 1999 as a wholly owned single-purpose corporate subsidiary of Transition
Leasing and is engaged in the business of purchasing new or late-model vehicles
and concurrently therewith entering into lease contracts of such vehicles to
customers.

      The Company was established for the sole purposes of purchasing vehicles
from third parties and leasing them to consumers pursuant to lease contracts,
collecting and servicing the lease contracts, obtaining capital through
borrowings or through sale of debt or equity securities to invest in such lease
contracts, remarketing the leased vehicles upon termination of their lease
contracts, and all related business activities. During the year ended December
31, 2004, all vehicles and lease contracts acquired by the Company were acquired
by the Company directly from lease originations by Transition Leasing.

      The funds necessary to purchase the lease contracts or leased vehicles
were initially provided solely from the sale of the Notes in the Offering. In
addition to the proceeds of the Offering, subject to the prior payment of
interest due upon the Notes and payment of certain allowed expenses, the
collection proceeds from the lease contracts have and will continue to be used
by the Company to purchase or acquire additional lease contracts until the
Sinking Fund Trigger Date. The Sinking Fund Trigger Date was originally December
31, 2002 but due to the economy and the events of September 11, the Company
requested and received a majority vote of the Noteholders that permitted the
extension of the Sinking Fund Trigger Date from December 31, 2002 until December
31, 2004. (See Management's Discussion and Analysis). During the period of the
extension of the Trigger Date, the Company is prohibited from engaging in any
business other than the purchase and acquisition of the leased vehicles and the
lease contracts, the collection and servicing of the lease contracts (including
repossession and resale of the leased vehicles collateral), remarketing of the
leased vehicles upon termination of the lease contracts, and from incurring any
additional indebtedness other than the allowed expenses permitted under the
Indenture and any other amounts incurred in the ordinary course of its business.

      The Contracts purchased or acquired by the Company relate primarily to
leased vehicles in the middle range of the new and late model automobile market,
where consumer retail prices typically range from $15,000 to $30,000. The
Company purchased most of the new lease contracts originated by Transition
Leasing. Transition Leasing originates automobile lease contracts through new
automobile franchise dealers, independent automobile dealers, independent
leasing companies, automobile auctions, and other sources. Transition Leasing
leases new and late model automobiles to individuals who do not have access to
other sources of consumer credit because they do not meet the credit standards
imposed by automobile retailers or banking institutions, generally because they
have past credit problems or non-prime credit ratings. Frequently, the reason
that such an individual may have a non-prime credit rating is that, at some time
in the past, he has defaulted on one or more financial obligations, or he has
filed for relief under the bankruptcy laws, or both.

      In originating the lease contracts, Transition Leasing takes a more
flexible approach and applies a more subjective analysis than those taken by
traditional automobile financing sources in determining an applicant's
suitability for loan approval. Transition Leasing endeavors to determine whether
the applicant's prior credit problems were a result of job displacement,
financial hardship beyond the applicant's control or other circumstances that
are not indicative of the applicant's current financial condition or payment
performance. In addition, Transition Leasing seeks customers that have stable
employment providing regular income and possess a strong need to acquire
transportation. The Company only purchases or acquires lease contracts that
satisfy the lease criteria established in the Indenture and the

                                       3

<PAGE>

lease Servicing Agreement between the Company and Transition Leasing (as
servicer), and believes that the quality and performance of the lease contracts
are enhanced through the consistent application by Transition Leasing of
predetermined purchasing, origination and collection criteria established in the
Indenture and the Servicing Agreement.

      Transition Leasing and the Company are required to obtain and maintain
certain licenses and qualifications to do business in Texas and other states.
Transition Leasing and the Company have obtained such licenses.

      There is substantial competition in the business of selling and leasing
motor vehicles and the financing thereof. In addition, a number of institutions,
including banks, have entered the automobile financing business with respect to
high risk, non-prime credit borrowers and compete against Transition Leasing and
the Company for the best high risk borrowers. The Company believes, however,
that it currently has few competitors in the leasing of new and late-model used
motor vehicles to individuals who have had prior credit problems. The Company
competes to some extent with providers of alternative financing services,
secondary finance companies such as used car dealer groups, or other firms with
greater financial and marketing resources than the Company.

      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 2. DESCRIPTION OF PROPERTY

      As of December 31, 2004, the Company's principal executive offices have
been located within the offices of Transition Leasing at 8144 Walnut Hill Lane,
Suite 680, Dallas, Texas 75231, and its telephone number is (214) 360-9966. As
of December 31, 2004, the offices were in suitable condition for the performance
of normal and customary activities of the Company. The offices are leased by the
Company from Prentiss Properties, on a term of three years for $3,626 per month.

ITEM 3. LEGAL PROCEEDINGS

      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, instituted 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 2004.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

      There is no market for the Company's 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. In accordance with the Trust
Indenture, no dividends are allowed.

      The company applied 90% of the gross proceeds from the sale of the Notes
to the purchase or acquisition of the Leased Vehicles and the contracts. The
Company paid to the Underwriter sales commissions of 6% of the principal amount
of the Notes sold by the Underwriter. Additionally, the Company reimbursed the
Underwriter for certain expenses incurred in connection with its due diligence
activities with regard to the Offering of 2% of the aggregate principal amount
of the Notes sold. The Company also used 2% of the gross proceeds from the sale
of the Notes to pay offering and organizational expenses, including filing and
registration fees, legal fees of the Company's counsel, accounting fees,
trustee's fees, escrow agent's fees, "blue sky" expenses and printing expenses.

                                       4

<PAGE>

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

General.

      As of December 31, 2004, the Company had sold $6,786,000 of its 11%
Redeemable Secured Notes and had a total of 110 leases with a net book value of
$2,007,591.

      The automobile finance industry continues to be negatively impacted by the
subsidization of consumer financing by the captive finance arms of major
automobile manufacturers. Low interest, or no interest, are terms that
traditional finance companies cannot compete with. Incentive financing increases
the number of new cars sold and as consumers trade in their used cars it creates
a glut on the used car market, which in turn lowers the value of all used cars.

      In addition, the recent recession and high unemployment rate in the Dallas
area has created financial upheaval among a large number of consumers,
especially those with sub-prime credit. People with damaged credit typically do
not have adequate savings to carry them through economic hard times. Sub-prime
lenders normally do not fare well in economic downturns.

Results of Operations

      For the year ended December 31, 2004, the Company had received monthly
contract lease payments of $924,590 and amortization of down payments of
$282,710 compared to $1,077,478 in monthly lease payments and $359,359 in
amortization of down payments for the same period in 2003.

      Operating costs including general and administrative expenses (excluding
depreciation) were $668,039 for the year ended December 31, 2004, compared to
$705,398 for the same period in 2003.

      Depreciation in fiscal 2004 was $734,899 compared to $834,823 for the same
period in 2003 The smaller amount of depreciation in 2004 was due to fewer
number of active leases in 2004.

      The operating loss for 2004 was $211,846 compared to $103,384 for the same
period in 2003. The increased loss in operating income for 2004 was due to the
decrease in total revenue for 2004 from 2003.

      Loss on sale of inventory for the year ended December 31, 2004 was
$226,385 compared to $392,209 in fiscal 2003. The smaller loss on sale of
property for 2004 was due to fewer number of vehicles being repossessed.

      Interest expense for the twelve months ended December 31, 2004 was
$746,916, the same as interest expense for the 2003 period.

      The net loss for fiscal 2004 was $1,281,538 compared to $1,230,884 for the
same period in 2003. The larger loss in 2004 was the loss of sales tax credits.
When a vehicle has been repossessed and sold, the full amount of the sales tax
was paid at the time of original purchase. Sales tax credits can only be used
against the sales taxes paid on additional vehicles purchased. Since the company
no longer leases vehicles, the tax credits have no value.

      On June 30, 2002 Transition Auto Finance II defaulted on its 11%
Redeemable Secured Notes and on December 31, 2004 Transition Auto Finance III
defaulted on its 11% Redeemable Secured Notes. Due to the recession and
September 11 events, TAF II and TAF III experienced a larger than normal number
of repossessions. The amount of time necessary to reinvest TAF III proceeds from
repossessions substantially reduced the positive impact of leverage. Leverage in
this context is the ability to turn cash into performing assets by investing in
leases.

                                       5

<PAGE>

Extension of Reinvestment Period

      In an attempt to offset this loss of leverage and to minimize the
possibility of a default, the Company requested that the Noteholders consent to
an amendment to the Indenture extending the reinvestment period from December
31, 2002 to December 31, 2004. The Consent Solicitation was approved by a
majority of the Noteholders and the Indenture was amended to reflect the
extended reinvestment period.

Although TAF III defaulted on its Notes on December 31, 2004 the Company
believes that the extension of the reinvestment period materially increased the
amount of funds that will ultimately be returned to TAF III noteholders.

Liquidity and Capital Resources

      During the twelve months ended December 31, 2004, the Company used
$339,830 in its investing activities and used $12,305 its financing activities.
This compares to cash of $108,905 in its investing activities and $10,940 in its
financing activities during fiscal 2003. The Company's only source of liquidity
in the future will be the sale of repossessed and returned vehicles.

The Company's portfolio included 436 leases which were the result of early
terminations. The information on the Company's experience with respect to early
terminations is set forth below:

<TABLE>
<CAPTION>
                                                                    Vehicle                                   Total
                # of     Gross Cost   Misc.    Total      Down        Sale    Sales Tax Warranty Marketing    Amount    Profit
              Contracts  Of Vehicle Expenses  Payments   Payment     Amount     Credit   Rebate   Fee Paid   Received   (Loss)
              ---------  ---------- -------- ---------- ---------- ---------- --------- -------- ---------- ---------- ---------
<S>           <C>        <C>        <C>      <C>        <C>        <C>        <C>       <C>      <C>        <C>        <C>
Repossession     337     $7,668,914 $195,790 $2,574,370 $1,463,168 $3,806,858 $ 168,538 $ 82,089 $  836,591 $7,258,432 ($606,272)
Early Payoff      99     $2,103,556 $  1,793 $1,110,935 $  414,207 $1,392,888 $  55,778 $  1,399 $  237,976 $2,737,232  $631,883
                 ---     ---------- -------- ---------- ---------- ---------- --------- -------- ---------- ---------- ---------
Total            436     $9,772,470 $197,583 $3,685,305 $1,877,375 $5,199,746 $ 224,316 $ 83,488 $1,074,567 $9,995,664  $ 25,611
</TABLE>

Note: The above results on early termination does not include any allowance for
interest expense

      Loss on repossessions in 2004 was $606,272 compared to $602,937 for the
same period in 2003. Higher numbers of repossession is due to the weak economy
and the effects of September 11th. The loss of an average of $1,799 per vehicle
in 2004 is less than the $2,138 loss per vehicle in 2003. The lower losses per
average vehicle for the 2004 and the 2003 periods is lower than most previous
periods and is due to the aging of the portfolio with defaults occurring later
in the lease.

      Early payoffs as of December 31, 2004 were 99 compared to 78 at December
31, 2003. Although most early payoffs result in a profit to the Company, a high
percentage of early payoffs is not considered a positive factor by the Company.
Early payoffs take a performing lease off the books and create cash, which until
it is reinvested, is a minimal earning asset.

      The Company believes that early payoffs generally occur as a result of the
customer performing on his lease and consequently rebuilding his credit. Many
times his improved credit will allow him to finance a new vehicle through
traditional sources by trading in his leased vehicle, payoff the lease balance,
and still have a more favorable payment than he currently has with his leased
vehicle with the Company.

This report contains various forward looking statements and information that are
based on management's belief as well as assumptions made by and information
currently available to management. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected. Among the key factors that may have a direct bearing on the Company's
operating results are fluctuations in the economy and in the level of activity
in the automobile and consumer finance industry, demand for the Company's
products, the impact of competition and interest rate fluctuations.

                                       6

<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

                                       7

<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               -----
<S>                                                                                            <C>
INDEPENDENT AUDITORS' REPORT                                                                       9

FINANCIAL STATEMENTS

Balance Sheets                                                                                    10

Statements of Income (Loss) and Changes in Retained Earnings (Deficit)                            11

Statements of Stockholders' Equity (Deficit)                                                      12

Statements of Cash Flows                                                                          13

Notes to Financial Statements                                                                  14-19
</TABLE>

                                       8

<PAGE>

Board of Directors
Transition Auto Finance III, Inc.

                          INDEPENDENT AUDITORS' REPORT

We have audited the accompanying balance sheets of Transition Auto Finance III,
Inc. (the Company) as of December 31, 2004 and 2003, and the related statements
of income (loss) and changes in retained earnings and cash flows for the years
then ended. 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 audits.

We conducted our audits in accordance with standards of the United States Public
Company Accounting Oversight Board. 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 audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003, and the results of their operations and their cash flows for the
years then in conformity with U.S. generally accepted accounting principles.

In connection with our audit, nothing came to our attention that caused us to
believe the Company or Transition Leasing Management, Inc., as its servicer,
failed to comply with the terms, covenants, provisions or conditions of section
5.6 of the Indenture with Trust Management, Inc., as Trustee insofar as relate
to accounting matters. However, our audit was not directed primarily toward
obtaining knowledge of such noncompliance.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 6 to the
financial statements, the Company has suffered recurring losses from operations,
negative working capital, a negative equity position and has defaulted on
investor notes payable due in 2004. It is uncertain if or when the Company will
be able to repay the investor notes payable and this raises substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

SPROUSE & ANDERSON, L.L.P.        Digitally signed by SPROUSE & ANDERSON, L.L.P.
                                  DN: cn=SPROUSE & ANDERSON, L.L.P., c=US,
                                  email=lmonreal@sprousecpa.com
                                  Date: 2005.08.10 13:15:22 -05'00'
Austin, Texas
March 1, 2005

                                       9

<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                                 BALANCE SHEETS

                           DECEMBER 31, 2004 and 2003

<TABLE>
<CAPTION>
                                                                                          2004               2003
                                                                                      ------------       -----------
<S>                                                                                   <C>                <C>

                                                       ASSETS

CURRENT ASSETS
  Cash and cash equivalents (Restricted cash is $66,000 and $-0-)                     $     66,000       $   547,096
  Accounts receivable, net of an allowance for doubtful accounts
      Of $311,700 and $385,000                                                              91,845           242,455
  Vehicles held for sale                                                                    86,316            41,132
  Other assets                                                                               4,084            28,370
                                                                                      ------------       -----------
      Total Current Assets                                                                 248,245           859,053
                                                                                      ------------       -----------

PROPERTY, at cost
  Vehicles leased                                                                        2,759,772         3,511,983
  Less accumulated depreciation                                                           (752,181)         (984,515)
                                                                                      ------------       -----------
      Net Property                                                                       2,007,591         2,527,468
                                                                                      ------------       -----------

OTHER ASSETS
  Debt issuance costs, net of accumulated amortization of $766,073 and $603,105                -0-           162,969
                                                                                      ------------       -----------
TOTAL ASSETS                                                                          $  2,255,836       $ 3,549,490
                                                                                      ============       ===========
                                   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Accounts payable and accrued liabilities                                            $    163,255       $   176,787
  Current portion of deferred revenue                                                      153,201           164,830
  Investor Notes Payable                                                                 6,786,000         6,786,000
                                                                                      ------------       -----------
      Total Current Liabilities                                                          7,102,456         7,127,617
                                                                                      ------------       -----------

OTHER LIABILITIES
  Due to an affiliate                                                                        1,335            13,640
  Deferred revenue, net of current portion                                                 219,508           194,158
                                                                                      ------------       -----------
      Total Other Liabilities                                                              220,843           207,798
                                                                                      ------------       -----------

TOTAL LIABILITIES                                                                        7,323,299         7,335,415
                                                                                      ------------       -----------

STOCKHOLDERS' EQUITY (DEFICIT)
  Common stock, $.10 par value, 1,000 shares authorized, issued and outstanding                100               100
  Additional paid-in capital                                                                   900               900
  Retained earnings (deficit)                                                           (5,068,463)       (3,786,925)
                                                                                      ------------       -----------
      Total Stockholders' Equity (Deficit)                                              (5,067,463)       (3,785,925)
                                                                                      ------------       -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                  $  2,255,836       $ 3,549,490
                                                                                      ============       ===========
</TABLE>

                                       10

<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                              STATEMENTS OF INCOME

                  FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                        2004                   2003
                                                                     -----------            -----------
<S>                                                                  <C>                    <C>
REVENUES

  Vehicle monthly lease payments                                     $   924,590            $ 1,077,478
  Amortization of down payments                                          282,710                359,359
                                                                     -----------            -----------
      Total Revenues                                                   1,207,300              1,436,837
                                                                     -----------            -----------

OPERATING EXPENSES

  Operating costs                                                        270,857                234,254
  General and administrative                                             397,182                471,144
  Depreciation and amortization                                          734,899                834,823
  Impairment loss                                                         16,208                    -0-
                                                                     -----------            -----------
      Total Operating Expenses                                         1,419,146              1,540,221
                                                                     -----------            -----------

Operating Income (Loss)                                                 (211,846)              (103,384)
                                                                     -----------            -----------

OTHER INCOME (EXPENSE)

Investment income                                                            811                  4,038
Other income (expense)                                                         9                  7,587
Interest expense                                                        (746,916)              (746,916)
Loss on sales tax credits                                                (97,211)                    -0-
Loss on sale of property                                                (226,385)              (392,209)
                                                                     -----------            -----------
      Total Other Income (Expense)                                    (1,069,692)            (1,127,500)
                                                                     -----------            -----------

Provision for Federal Income Taxes                                           -0-                    -0-
                                                                     -----------            -----------

Net Loss                                                             $(1,281,538)           $(1,230,884)
</TABLE>

              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS

                                       11

<PAGE>
                        TRANSITION AUTO FINANCE III, INC.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


<Table>
<Caption>
                                              COMMON STOCK                                                     TOTAL
                                      -----------------------------      ADDITIONAL       RETAINED         STOCKHOLDERS'
                                                                          PAID-IN         EARNINGS            EQUITY
                                         SHARES           AMOUNT          CAPITAL         (DEFICIT)          (DEFICIT)
                                      ------------     ------------     ------------     ------------      ------------
<S>                                   <C>              <C>              <C>              <C>               <C>

Balance at December 31, 2002                 1,000     $        100     $        900     $ (2,556,041)     $ (2,555,041)

  Net Loss                                      --               --               --       (1,230,884)       (1,230,884)
                                      ------------     ------------     ------------     ------------      ------------

Balance at December 31, 2003                 1,000              100              900       (3,786,925)       (3,785,925)

  Net Loss                                      --               --               --       (1,281,538)       (1,281,538)
                                      ------------     ------------     ------------     ------------      ------------

Balance at December 31, 2004                 1,000     $        100     $        900     $ (5,068,463)     $ (5,067,463)
                                      ============     ============     ============     ============      ============
</Table>

              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS


                                       12
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                            STATEMENTS OF CASH FLOWS

                  FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                                   2004                    2003
                                                                                ------------            -----------
<S>                                                                             <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                        $ (1,281,538)           $(1,230,884)
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization                                                   734,899                834,823
     Amortization of down payments                                                  (282,710)              (359,359)
     Bad debt expense                                                                311,700                406,373
     Loss on sale of property                                                        226,385                392,209
     Loss on sales tax credits                                                        97,211                    -0-
     Impairment loss                                                                  16,208                    -0-
Net changes in operating assets and liabilities:
     Accounts receivable                                                            (232,715)              (317,892)
     Other assets                                                                     (1,300)               (21,660)
     Accounts Payable and accrued liabilities                                        (13,532)               109,121
     Deferred revenue                                                                296,431                231,220
                                                                                ------------            -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                           (128,961)                43,951
                                                                                ------------            -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of fixed assets                                                        (1,280,412)            (1,312,071)
  Proceeds from sale of property                                                     940,582              1,420,976
                                                                                ------------            -----------
NET CASH USED BY INVESTING ACTIVITIES                                               (339,830)               108,905
                                                                                ------------            -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net advances (payments) to affiliates                                              (12,305)                10,940
                                                                                ------------            -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                            (12,305)                10,940
                                                                                ------------            -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                (481,096)               163,796

CASH AND CASH EQUIVALENTS, beginning of year                                         547,096                383,300
                                                                                ------------            -----------

CASH AND CASH EQUIVALENTS, end of year                                          $     66,000            $   547,096
                                                                                ============            ===========
CASH PAID DURING THE YEAR FOR
  Interest                                                                      $    746,916            $   746,916
                                                                                ============            ===========
  Income taxes                                                                  $        -0-            $       -0-
                                                                                ============            ===========

NON-CASH INVESTING ACTIVITIES
Vehicles with a net book value of $102,524 were reclassified from vehicles
leased to vehicles held for sale at December 31, 2004.

Vehicles with a net book value of $41,112 were reclassified from vehicles
leased to vehicles held for sale at December 31, 2003.
</TABLE>

              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS

                                       13

<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 2004 AND 2003

NOTE 1:     BUSINESS ACTIVITY

                  Transition Auto Finance III, Inc. (the Company) is a Texas
            corporation organized on May 26, 1999. The Company was established
            to purchase motor vehicles and automobile lease contracts,
            collecting and servicing automobile lease contracts and remarketing
            motor vehicles upon termination of their leases. Transition Leasing
            Management, Inc. (Transition Leasing) owns 100% of the Company's
            common stock.

                  Trust Management, Inc. serves as the trustee for the Company
            under the Indenture Agreement. The Company defaulted on the investor
            notes administered by Trust Management, Inc. in December 2004. Upon
            the default of the investor notes payable, Trust Management, Inc.
            receives all receipts collected by the Company and approves all of
            the Company's disbursements. Trust Management, Inc. will pay note
            holders any unpaid principal, ratably, without preference as well as
            any other unpaid allowable costs incurred by the Company.

NOTE 2:     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            CASH AND CASH EQUIVALENTS

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

            The Company maintains cash balances at financial institutions in
            Dallas, Texas. Accounts at the institutions are insured by the
            Federal Deposit Insurance Corporation up to $100,000. The Company
            has not experienced any losses in such accounts and believes it is
            not exposed to any significant credit risk on cash and cash
            equivalents.

            All cash balances starting in 2005 are restricted in nature and
            managed by Trust Management, Inc. due to the Company being in
            default of their Indenture Agreement. All cash distributions from
            these accounts must be authorized by Trust Management, Inc. and are
            for the sole purpose of repaying investor notes payable after any
            authorized expenses have been paid.

                                       14

<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2004 AND 2003

NOTE 2:     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

            REVENUE

            The vehicles are leased to individuals under leases with terms
            ranging from thirty-six to forty-eight 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 plus any other outstanding items due. 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 initially recorded as deferred revenue and
            then recognized as income over the term of the leases on a
            straight-line basis.

            ACCOUNTS RECEIVABLE

            The Company provides for uncollectible accounts receivable using the
            allowance method of accounting for bad debts. Under this method of
            accounting, a provision for uncollectible accounts is charged to
            earnings. The allowance account is increased or decreased based on
            past collection history and management's evaluation of accounts
            receivable. All amounts considered uncollectible are charged against
            the allowance account and recoveries of previously charged-off
            accounts are added to the allowance.

            VEHICLES HELD FOR SALE

            Vehicles held for sale are leased vehicles in which the lease term
            has expired or that have been repossessed. Vehicles held for sale
            are valued at the lower of cost or fair value. The cost is the net
            book value of the vehicle after it has been returned to the Company
            either through repossession or early termination of the lease.
            Generally these vehicles will be re-leased or sold at auction by the
            Company within a year.

            The Company implemented Financial Accounting Standards Board issued
            Statement No. 144, Impaired Long-Lived Assets and Long-Lived Assets
            to Be Disposed of, which requires impairment losses to be recorded
            on long-lived assets used in operation when indicators of impairment
            are present. An impairment loss of $16,208 has been recorded for two
            vehicles held for sale in these financial statements for the year
            ended December 31, 2004. The impairment was determined based on
            their fair market value and ultimate sales price in 2005.

                                       15

<PAGE>
                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2004 AND 2003

NOTE 2:     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

            PROPERTY

            Property consists of leased vehicles, which 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.
            Leased vehicle 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-eight months.

            OTHER ASSETS

            Other assets include debt issuance costs incurred in connection with
            the Company's offering of securities 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
            matured on December 31, 2004.

            DEFERRED REVENUE

            Deferred revenue consists of down payments made by lessees at the
            inception of the lease. The down payments are amortized over the
            lease term. Lease terms range from thirty-six to forty-eight 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 statements, and
            the reported amounts of revenues and expenses during the reporting
            period. Actual results could differ from these estimates.

                                       16

<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2004 AND 2003

NOTE 2:     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

            CONCENTRATION OF CREDIT RISK

            A majority of the lessees are residents of the Dallas/Fort Worth
            Metroplex. Vehicles are used as collateral for leases.

            RECLASSIFICATION

            Certain amounts from the prior year have been reclassified for
            comparative purposes.

NOTE 3:     INCOME TAXES

            The Company is a corporation subject to federal and state income
            taxes. The Company and its parent intend 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.

            The Company has a deferred tax asset as of approximately $1,720,000
            and $1,288,000 December 31, 2004 and 2003 (primarily from net
            operating loss carry-forward), which has been completely offset by
            recognition of a valuation allowance.

            The Company has a net operating loss (NOL) carry-forward of
            approximately $5,787,000 and $4,680,000 as of December 31, 2004 and
            2003 respectively. The Company's NOL carry-forward expires between
            December 31, 2020 and 2022.

NOTE 4:     INVESTOR NOTES PAYABLE

            The Company has issued $6,786,000 of fixed rate redeemable
            asset-backed notes (Investor Notes) as of December 31, 2004 and
            2003.

            These Investor Notes were issued pursuant to a public offering on
            Form SB-2 under the Securities Act of 1933. The Investor Notes bared
            interest at the rate of 11%. Interest payments ceased after the 2004
            default.

                                       17

<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2004 AND 2003

NOTE 4:     INVESTOR NOTES PAYABLE (CONTINUED)

            The Investor Notes were issued at various times during 2001 and
            2000, however the maturity date for all of the Investor Notes is
            December 31, 2004. The Investor Notes are collateralized by the
            following:

                  1.    Automobile contracts for the leasing of new or late
                        model automobiles.

                  2.    The leased vehicles.

            The following table represents Investor Notes outstanding at
            December 31, 2004 and 2003:

<TABLE>
<CAPTION>
                                          Number of
Origination Date                            Notes                    Note Amount
----------------                          ---------                  -----------
<S>                                       <C>                        <C>
February 2000                                 53                     $   827,000
March 2000                                   136                       1,453,000
April 2000                                    57                         622,000
May 2000                                      35                         354,000
June 2000                                     37                         427,000
July 2000                                     53                         722,000
August 2000                                   40                         332,000
September 2000                                28                         290,000
October 2000                                  33                         311,000
November 2000                                 59                         509,000
December 2000                                 72                         644,000
January 2001                                  30                         295,000
                                                                     -----------
                                                                     $ 6,786,000
                                                                     ===========
</TABLE>

            The Investor Notes matured on December 31, 2004, and the Company was
            unable to pay the remaining debt. The Company defaulted on the
            investor notes as of December 31, 2004. As of that date, all income
            from leasing activities is used to repay Investor Notes. All Company
            disbursements require approval of Trust Management, Inc.

                                       18

<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2004 AND 2003

NOTE 5:     RELATED PARTIES

            The Company has entered into a Servicing Agreement with Transition
            Leasing. Transition Leasing will be entitled to a servicing fee of
            $20 per month per contract and a payment of $150 per contract
            purchased. Transition Leasing will receive, as a marketing fee,
            57.5% of the down payment made by the customers with respect to
            contracts it originates. Transition Leasing will receive from the
            Company a Releasing Fee of 57.5% of the down payment with respect to
            a new contract following repossession of a leased vehicle. The
            Company paid Transition Leasing $243,480 in 2004 and $217,310 in
            2003 for servicing, documenting and marketing fees. The Company has
            a payable to an affiliate for $1,335 and $13,640 as of December 31,
            2004 and 2003, respectively.

            In addition, during the year the Company purchases warranty related
            services from a related party amounted to $13,050 and $33,969 for
            2004 and 2003, respectively. There was also a related party
            receivable of $33,636 and $25,586 as of December 31, 2004 and 2003,
            respectively.

NOTE 6:     GOING CONCERN

            The accompanying financial statements have been prepared in
            conformity with U.S. generally accepted accounting principles, which
            contemplates continuation of the Company as a going concern. The
            Company has sustained recurring losses from operations, negative
            working capital, a negative equity position and has defaulted on
            investor notes payable due in 2004. Management will attempt to
            service existing leases and raise additional capital and/or secure
            additional financing in order to repay the investor notes payable.
            Management recognizes that full repayment may take several years to
            complete and that full repayment may not occur. This situation
            raises substantial doubt about the Company's ability to continue as
            a going concern.

                                       19

<PAGE>

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

      None.

ITEM 8 (a). CONTROLS AND PROCEDURES

      EVALUATION OF DISCLOSURE CONTROLS

      We evaluated the effectiveness of our disclosure controls and procedures
("Disclosure Controls") as of the end of the 2004 fiscal year. This evaluation
("Controls Evaluation") was done with the participation of our president and
chief executive officer ("CEO") and chief financial officer ("CFO").

      Disclosure Controls are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 ("Exchange Act") is
recorded processed, summarized and reported within the time periods specified in
the SEC's rules and forms. Disclosure Controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.

      LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

      Our management, including our CEO and CFO, does not expect that our
Disclosure Controls or our internal controls over financial reporting ("Internal
Controls") will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, but not absolute,
assurance that the objectives of a control system are met. Further, any control
system reflects limitations on resources, and the benefits of a control system
must be considered relative to its costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of a control. A design of a control system is also based upon certain
assumptions about potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and may not be detected.

      CONCLUSIONS

      Based upon the Controls Evaluation, our CEO and CFO have concluded that,
subject to the limitations noted above, the Disclosure Controls are effective in
providing reasonable assurance that material information relating to Company is
made known to management on a timely basis during the period when our periodic
reports are being prepared.

      Internal control over financial reporting is a framework incorporating
processes designed to assure that transactions are booked properly initially and
find their way to the appropriate place on the company's financial statements.
There were no changes in our internal control over financial reporting that
occurred during the fourth quarter of 2004 that have materially affected, or are
reasonably likely to materially affect our internal control over financial
reporting.

                                    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.

                                       20

<PAGE>

      The names, ages, backgrounds and principal occupations of the directors
and executive officers of the Company as of December 31, 2004 are set forth
below:

      Kenneth C. "Ken" Lowe, age 69, has served as our sole director, President
and Secretary since our inception. 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.

      Randall K. Lowe, age 36, has served as our Vice President since our
inception and Vice President of Transition Leasing since July 1998. Prior to
joining us and since 1994, Mr. Lowe served as a credit analyst for Bank One in
New Orleans, Louisiana and Dallas, Texas. From 1991 to 1994 Mr. Lowe was a
credit analyst and branch office manager for Whitney National Bank, N.A. in New
Orleans. Mr. Lowe holds a Bachelor of Science degree from Tulane University.
Randall Lowe is the son of Ken Lowe.

      William H. Dreger, age 61, joined us in September 1999 and serves as our
Controller and Chief Accounting Officer. Prior to joining the Company, Mr.
Dreger was Chief Financial Officer and Chief Information Officer for Down to
Earth, Inc. in Garland, Texas from 1994 to 1999. From 1985 to 1992, Mr. Dreger
was President of Stephenson Financial Services, Inc. in North Hollywood,
California. Mr. Dreger has a Bachelor of Business Administration from the
University of North Texas at Denton, is a Certified Public Accountant and has
over 30 years of experience in accounting and systems.

      None of the directors or the executive officers receives any compensation
from the Company, other than reimbursement of their expenses incurred on behalf
of the Company. All the officers and directors are paid by Transition Leasing.

      Except as disclosed above, there are no family relationships among the
directors and any of the executive officers of the Company. 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.

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 December 31, 2004,
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>
                                                 Shares of Common Stock            Percentage of Common
        Name of Shareholder                               (1)                             Stock
-------------------------------------            ----------------------            --------------------
<S>                                              <C>                               <C>
Transition Leasing Management, Inc.                      1000                              100%
8144 Walnut Hill Lane
Suite 680
Dallas, Texas 75231

Kenneth C. Lowe                                             0 (2)                            0
Randall K. Lowe                                             0                                0
William H. Dreger                                           0                                0

Total                                                    1000                              100%

All officers and directors as a group                       0                              100%
</TABLE>

                                       21

<PAGE>

----------
(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 Kenneth C.
      Lowe. The sole owners of the common stock of Transition Leasing are
      Kenneth C. Lowe and Randall K. Lowe. Transition Leasing has a number of
      preferred shareholders, who have limited voting rights and who may convert
      their preferred shares into shares of Transition Leasing common stock. The
      preferred shareholders, on a fully diluted basis, will not own more than
      20% of Transition Leasing's voting securities.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Transition Leasing owns 100% of our Common Stock. Our officers are also
officers of Transition Leasing. Mr. Kenneth Lowe is President and Secretary and
a director of Transition Leasing and a director, the President, Chief Financial
Officer and Secretary of our company, Transition Auto Finance II, and Transition
Auto Finance IV. These officers will devote as much of their time to our
business as, in their judgment, is reasonably required. We have real and ongoing
conflicts of interest with Transition Auto Finance II, Transition Auto finance
IV and Transition Leasing in allocating management time, services, overhead and
functions among ourselves, Transition Auto Finance II and Transition Leasing.
Management of Transition Auto Finance II and Transition Leasing intends to
resolve any such conflicts in a manner that is fair and equitable to us.
However, there can be no assurance that Transition Leasing will not form
additional subsidiaries engaged in the same business as Transition Auto Finance
III or that any particular conflict may be resolved in a manner that does not
adversely affect the noteholders. Neither Transition Auto Finance II nor
Transition Leasing has guaranteed or is otherwise liable for the debts and
liabilities of the Company.

      Due to excessive cost, and oftentimes dealer fraud, the Company no longer
purchases extended warranties from dealers who refer customers to the Company
when used cars are involved. The Company now purchases extended warranties from
Newcastle Services, Inc. where the cost of the warranty is substantially less
and the potential for dealer fraud is eliminated. Dealer fraud is a common
problem on extended warranties. The Company does not anticipate that extended
warranties will be purchased in large quantities since the majority of its
leases involve new vehicles that are covered by the stated manufacturers
warranty. Newcastle Services, Inc. is owned by Ken Lowe, the majority owner of
Transition Leasing Management, Inc., who owns 100% of the stock of the Company.

      Under the terms of the Servicing Agreement and the Purchasing Agreement,
Transition Leasing will be paid various fees and be entitled to reimbursement
for its expenses incurred in connection with the repossession, remarketing,
repair and resale of vehicles out of the proceeds from such re-sales. The terms
of the Servicing Agreement and the Purchasing Agreement 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
these agreements. We did not and do 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 us.

      In addition, the terms of the lease contracts to be originated by
Transition Leasing will not have been negotiated at arm's-length but will be
determined unilaterally by Transition Leasing. Transition Leasing will receive
57.5% of each customer's down payment as a marketing fee.

      Transition Leasing currently provides purchase and collection services for
Transition Auto Finance II, Inc., but does not provide such services to any
other party, including affiliates. Transition Leasing, however, may agree in the
future, to purchase and service lease contracts for itself, its affiliates and
other

                                       22

<PAGE>

      The Company used 2% or $135,720 of the gross proceeds from the Offering to
reimburse Transition Leasing, the Company's parent, for offering and
organizational expenses paid by it.

      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. The Company has a net operating loss (NOL)
carry-forward of approximately $5,787,000 and $4,680,000 as of December 31, 2004
and 2003 respectively. The Company's NOL carry-forward expires between December
31, 2020 and 2022.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Financial Statements

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

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

      Exhibits

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

            The information required is set forth in the Index to Exhibits
      accompanying this Form 10-KSB.

(b)   Reports on Form 8-K

      No reports on Form 8-K were filed during the last quarter of 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      Audit Fees

      The aggregate fees billed to the Company by Sprouse & Anderson, L.L.P. for
the audit of the Company's annual financial statements included in the 10KSB and
for the review of the financial statements included in its quarterly reports on
Form 10-Q for the fiscal years ended December 31, 2004 and 2003 totaled $17,296
and $14,180 respectively.

                                       23

<PAGE>

                                   SIGNATURES

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

                                           TRANSITION AUTO FINANCE III, INC.
                                       -----------------------------------------
                                                      (Registrant)

Date: August 24, 2005                             /s/ Kenneth C. Lowe
                                       -----------------------------------------
                                               Kenneth C. Lowe, President/
                                                 Chief Executive Officer

Date: August 24, 2005                             /s/ Kenneth C. Lowe
                                       -----------------------------------------
                                               Kenneth C. Lowe, President/
                                                 Chief Operating Officer

Date: August 24, 2005                             /s/ Kenneth C. Lowe
                                       -----------------------------------------
                                               Kenneth C. Lowe, President/
                                                 Chief Financial Officer

                                       24

<PAGE>


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                DESCRIPTION
<S>         <C>
3.1         Articles of Incorporation of Transition Auto Finance III, Inc. *

3.2         Bylaws of Transition Auto Finance III, Inc. *

4.1         Form of Indenture between Transition Auto Finance III, Inc. and
            Trust Management, Inc., as Trustee ***

4.2         Form of Secured Note Due December 31, 2004 (included in Article Two
            of Indenture filed as Exhibit 4.1)

10.1        Form of Master Contract Purchase Agreement between Transition Auto
            Finance III, Inc. and Transition Leasing Management, Inc.**

10.2        Form of Servicing Agreement between Transition Leasing Management,
            Inc. and Transition Auto Finance III, Inc. **

31          Certification of Reporting Officer Pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002

32          Certification of Reporting Officer Pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002
</TABLE>

*        Incorporated by reference from Registration Statement on Form SB-2 of
         Transition Auto Finance III, Inc. Registration No. 333-80537, filed
         January 24, 2000.

**       Incorporated by reference from Amendment No. 1 to Registration
         Statement on Form SB-2 of Transition Auto Finance III, Inc.
         Registration No. 333-80537 filed January 24, 2000.

***      Incorporated by reference from Amendment No. 3 to Registration
         Statement on Form SB-2 of Transition Auto Finance III, Inc.
         Registration No. 333-80537 filed January 24, 2000.

                                       25