<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, 2002
                        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                            (I.R.S. Employer
of incorporation or organization)                       Identification Number)


    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: $2,220,957

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, 2002, 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..............................................................     6
Item 8. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.....................    18

PART III.........................................................................................................    18

Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(A) of the
         Exchange Act............................................................................................    18
Item 10. Executive Compensation..................................................................................    18
Item 11. Security Ownership of Certain Beneficial Owners and Management Principal Stockholders...................    18
Item 12. Certain Relationships and Related Transactions..........................................................    20
Item 13. Exhibits and Reports on Form 8-K........................................................................    21
</Table>

         In the opinion of management, all adjustments necessary to a fair
statement of the results for interim periods presented have been reflected in
these financial statements.


                                       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, 2002, 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 226
leased vehicles and the lease contracts related thereto, and thirteen vehicles
were held in inventory following repossession. Of the Company's 226 lease
contracts at December 31, 2002, all were leases newly originated by Transition
Leasing Management, Inc. ("Transition Leasing"). As of December 31, 2002 the
Company had 190 and 46 leases that were terminated early for repossession and
early payoff respectively. As of December 31, 2002, the Company had paid as and
when due all installment payments owed on the Notes since their issuance.

         The Company is 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 incorporated under the laws of the State of Texas on
June 8, 1999. The Company is a subsidiary of Transition Leasing.

         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, 2002, 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 Managements's Discussion and Analysis). While the Notes remain
outstanding, 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

                                       3
<PAGE>

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 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, 2002, 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, 2002, 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 $3,625.58 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 2002.


                                     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


                                       4
<PAGE>

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.

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

General.

         As of December 31, 2002, the Company had sold $6,786,000 of its 11%
Redeemable Secured Notes and had a total of 226 leases with a net book value of
$2,980,024.

Results of Operations

         For the year ended December 31, 2002, the Company had received monthly
contract lease payments of $1,601,180 and amortization of down payments of
$619,777 compared to $1,554,619 in monthly lease payments and $689,844 in
amortization of down payments for the same period in 2001.

         Operating cost including general and administrative expenses (excluding
depreciation) were $686,220 for the year ended December 31, 2001, compared to
$768,499 for the same period in 2002. Higher expenses of $82,279 in 2002 were
primarily due to an increase in general and administrative costs.

                Depreciation in fiscal 2002 was $1,181,745 compared to
$1,209,907 for the same period in 2001.

               Operating income for fiscal 2002 was $270, 712 compared to
$348,336 for the same period in 2001. The decrease in operating income for 2002
was also due to the increase in general and administrative costs.

                Loss on sale of property for the year ended December 31, 2001
was $470,901 compared to $470,080 in fiscal
2002.

          Investment income in fiscal 2001 was $25,893 compared to $1,100 for
the same period in 2002. The higher investment income in 2001 was due to
uninvested lease funds earning bank interest.

          Interest expense for the twelve months ended December 31, 2001 was
$749,729 compared to $746,829 for the same period in
2002.

                The net loss for fiscal 2002 was $945,200 compared to $843,698
for the same period in 2001. The larger loss in 2002 was due to higher expense
and a slight decrease in revenue.

                 On June 30, 2002 Transition Auto Finance II 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 which would extend 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.

Liquidity and Capital Resources

         During the twelve months ended December 31, 2001, the Company utilized
cash of $1,942,198 in its investing activities and received cash of $203,181
provided by financing activities. This compares to cash of $239,445 used by
investing activities and $31,114 used in its financing activities during fiscal
2002. The Company's only source of liquidity in the future will be from its
monthly lease payments after interest and other allowed expenses.


The Company's portfolio, which consisted of 226 active leases, and 236 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
                   # of       Gross Cost       Misc.       Total          Down           Sale
                Contracts     Of Vehicle     Expenses     Payments       Payment        Amount
                ----------    ----------    ----------    ----------    ----------    ----------
<S>              <C>     <C>        <C>      <C>        <C>       <C>         <C>       <C>
Repossession           190    $4,366,446    $  108,113    $1,102,498    $  843,621    $2,392,138
Early Payoff            46    $  985,773    $      817    $  373,105    $  202,216    $  747,203
                ----------    ----------    ----------    ----------    ----------    ----------
Total                  236    $5,352,219    $  108,930    $1,475,603    $1,045,837    $3,139,341
<Caption>
                                                            Total
                Sales Tax       Warranty     Marketing       Amount        Profit
                  Credit         Rebate       Fee Paid      Received       (Loss)
                ----------    ----------    ----------    ----------    ----------
<S>             <C>           <C>           <C>           <C>           <C>
Repossession    $  102,215    $   41,345    $  485,254    $3,996,563    $ (477,996)
Early Payoff    $   27,004    $    1,399    $  116,082    $1,234,845    $  248,256
                ----------    ----------    ----------    ----------    ----------
Total           $  129,219    $   42,744    $  601,336    $5,231,408    $ (229,740)
</Table>


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

         Loss on repossessions in 2002 was $477,996 compared to $312,565 for the
same period in 2001. Higher numbers of repossession is due to the weak economy
and the effects of September 11th. The loss of an average of $2,516 per vehicle
in 2002 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, 2002 were 46 compared to 16 at
December 31, 2001. 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.


ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


                                       6
<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 Cash Flows                                                    12

Notes to Financial Statements                                            13-17
</Table>


                                       7
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                              FINANCIAL STATEMENTS
                                       AND
                          INDEPENDENT AUDITORS' REPORT

                           DECEMBER 31, 2002 AND 2001






                                       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, 2002 and 2001, 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 U.S. 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 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,
2002 and 2001, 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.




Austin, Texas
February 14, 2003



                                       9
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                                 BALANCE SHEETS

                           DECEMBER 31, 2002 and 2001


<Table>
<Caption>
                                     ASSETS
                                                                                       2002            2001
                                                                                   -----------     -----------
<S>                                                                                <C>             <C>
CURRENT ASSETS
  Cash and cash equivalents                                                        $   383,300     $   181,867
  Accounts receivable, net of an allowance for doubtful accounts
     Of $276,000 and $34,252                                                           310,316         332,026
  Vehicles held for sale                                                               304,538
                                                                                                       398,709
  Other assets                                                                           6,710           2,583
                                                                                   -----------     -----------
      Total Current Assets                                                           1,004,864         915,185
                                                                                   -----------     -----------

PROPERTY, at cost
  Vehicles leased                                                                    4,711,054       5,568,662
  Less accumulated depreciation                                                     (1,274,023)       (976,390)
                                                                                   -----------     -----------
      Net Property                                                                   3,437,031       4,592,272
                                                                                   -----------     -----------

OTHER ASSETS
  Debt issuance costs, net of accumulated amortization of $440,137 and
    $277,170                                                                           325,936         488,904
  Due from an affiliate                                                                 20,620          39,061
                                                                                   -----------     -----------
       Total Other Assets                                                              346,556         527,965
                                                                                   -----------     -----------
TOTAL ASSETS                                                                       $ 4,788,451     $ 6,035,422
                                                                                   ===========     ===========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Accounts payable and accrued liabilities                                         $    67,666     $    93,915
  Current portion of deferred revenue                                                  213,921         282,821
                                                                                   -----------     -----------
       Total Current Liabilities                                                       281,587         376,736
                                                                                   -----------     -----------

OTHER LIABILITIES
  Due to an affiliate                                                                    2,700          52,255
  Deferred revenue, net of current portion                                             244,526         430,272
  Investor notes payable                                                             6,786,000       6,786,000
                                                                                   -----------     -----------
      Total Other Liabilities                                                        7,033,226       7,268,527
                                                                                   -----------     -----------

TOTAL LIABILITIES                                                                    7,314,813       7,645,263
                                                                                   -----------     -----------

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)                                                      (2,527,362)     (1,610,841)
                                                                                   -----------     -----------
       Total Stockholders' Equity (Deficit)                                         (2,526,362)     (1,609,841)
                                                                                   -----------     -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   (DEFICIT)                                                                       $ 4,788.451     $ 6,035,422
                                                                                   ===========     ===========
</Table>


                                       10
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                              STATEMENTS OF INCOME

                  FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001


<Table>
<Caption>
                                             2002            2001
                                         -----------     -----------
<S>                                      <C>             <C>
REVENUES

  Vehicle monthly lease payments         $ 1,601,180     $ 1,554,619
   Amortization of down payments             619,777         689,844
                                         -----------     -----------
        Total Revenues                     2,220,957       2,244,463
                                         -----------     -----------

OPERATING EXPENSES

  Operating costs                            392,755         546,159
  General and administrative                 375,744         140,061
  Depreciation and amortization            1,181,745       1,209,907
                                         -----------     -----------
        Total Operating Expenses           1,950,244       1,896,127
                                         -----------     -----------

Operating Income (Loss)                      270,712         348,336
                                         -----------     -----------

OTHER INCOME (EXPENSE)

Investment income                              1,100          25,893
Other income (expense)                          (104)          2,703
Interest expense                            (746,829)       (749,729)
Loss on sale of inventory                   (470,080)       (470,901)
                                         -----------     -----------
        Total Other Income (Expense)      (1,215,913)     (1,192,034)
                                         -----------     -----------

Provision for Federal Income Taxes               -0-             -0-
                                         -----------     -----------
Net Loss                                 $  (945,200)   $  (843,698)


Beginning retained earnings (deficit)     (1,610,841)       (767,143)
                                         -----------     -----------
Ending retained earnings (deficit)       $(2,556,041)    $(1,610,841)
                                         ===========     ===========
Loss per share (basic and diluted)       $       945     $       844
</Table>


              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS


                                       11
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                            STATEMENTS OF CASH FLOWS

                  FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001


<Table>
<Caption>
                                                                   2002           2001
                                                               -----------     -----------
<S>                                                            <C>             <C>
Cash flows from operating activities
Net loss                                                       $  (945,200)    $  (843,698)
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization                               1,181,745       1,209,907
     Amortization of down payments                                (619,777)       (689,844)
     Bad debt expense                                              276,523          82,296
     Loss on sale of property                                      470,080         470,901
Net changes in operating assets and liabilities:
     Accounts receivable                                          (254,813)       (257,592)
     Other assets                                                   (4,127)         (2,583)
     Accounts Payable and accrued liabilities                      (26,249)        (33,429)
     Deferred revenue                                              393,810         670,165
                                                               -----------     -----------
Net cash provided by operating activities                          471,992         606,123
                                                               -----------     -----------

Cash flows from investing activities
   Purchase of fixed assets                                     (1,830,940)     (3,441,318)
   Proceeds from sale of property                                1,591,495       1,499,120
                                                               -----------     -----------
Net cash used by investing activities                             (239,445)     (1,942,198)
                                                               -----------     -----------

Cash flows from financing activities
   Net advances (payments) to affiliates                           (31,114)        (69,019)
   Debt issuance costs                                                 -0-         (22,800)
   Proceeds from notes payable                                         -0-         295,000
                                                               -----------     -----------
                                                                  (31,114)         203,181
                                                               -----------     -----------
Net Increase (DECREASE)  In cash and cash equivalents              201,433      (1,132,894

CASH AND CASH EQUIVALENTS, beginning of year                       181,867       1,314,761
                                                               -----------     -----------

CASH AND CASH EQUIVALENTS, end of year                         $   383,300     $   181,867
                                                               ===========     ===========

Cash paid during the YEAR for
   Interest                                                    $   746,828     $   743,738
                                                               ===========     ===========
   Income taxes                                                $       -0-     $       -0-
                                                               ===========     ===========
</Table>

NON-CASH INVESTING ACTIVITIES

Vehicles purchased during 2002 with a net book value of $329,702 were
reclassified from vehicles leased to vehicles held for sale at December 31,
2002.

Vehicles purchased during 2001 with a net book value of $429,195 were
reclassified from vehicles leased to vehicles held for sale at December 31,
2001.

              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS


                                       12
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 2002 AND 2001

NOTE 1: BUSINESS ACTIVITY

         Transition Auto Finance III, Inc. (the Company) is a Texas corporation
         organized 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.

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.

         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.


                                       13
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2002 AND 2001


NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


         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
                  released or sold at auction by the Company with in a year.

         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 mature 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.


                                       14
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2002 AND 2001


NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONTINUED)


         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.

         CONCENTRATION OF CREDIT RISK

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

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 $678,000 and
                  $324,000 as of December 31, 2002 and 2001 (primarily from
                  net operating loss carryforward), which has been completely
                  offset by recognition of a valuation allowance.

                  The Company has a net operating loss (NOL) carryforward of
                  approximately $2,349,000 and $1,670,000 as of December 31,
                  2002 and 2001 respectively. The Company's NOL carryforward
                  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, 2002
                  and 2001.

                  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 rate of 11%. Interest is payable
                  monthly on the 15th day of each month.


                                       15
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2002 AND 2001

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, 2002:

<Table>
<Caption>
                    Origination Date      Number of 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>

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 $349,800 in 2002 and $514,870 in 2001 for servicing,
                  documentation and marketing fees. The Company has a receivable
                  from Transition Leasing at December 31, 2002 and 2001 for
                  $20,620 and $39,061, respectively. The Company has a payable
                  to an affiliate for $2,700 and $52,255 as of December 31, 2002
                  and 2001, respectively.


                                       16
<PAGE>


                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

                           DECEMBER 31, 2002 AND 2001



NOTE 6: DEFERRED REVENUE

Current year deferred revenue is as follows:

<Table>
<S>                                                                 <C>
              Deferred revenues as of January 1, 2000               $     -0-
                 Down payments received in 2000                       962,885
                 Amortization of down payments and forfeitures       (230,113)
                                                                    ---------
              Deferred revenue as of December 31, 2000                732,772
                 Down payments received in 2001                       670,165
                 Amortization of down payments and forfeitures       (689,844)
                                                                    ---------
              Deferred Revenue as of December 31, 2001                713,093
              Less current portion                                   (282,821)
                                                                    ---------
                Deferred revenue, net of current portion            $ 430,272
                                                                    =========
</Table>



                                       17
<PAGE>


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

         Not Applicable.


                                    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, 2002 are set forth
below:

         Kenneth C. "Ken" Lowe, age 67, 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 34, 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 59, 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 25 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, 2002,
relating to the beneficial ownership of


                                       18
<PAGE>

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>

(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.



                                       19
<PAGE>


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 and Transition Auto Finance II. 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 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
resales. 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

         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) carryforward of approximately $4,400,000 and $2,000,000 as
of December 31, 2002 and 2001 respectively. The Company's NOL carryforward
expires between December 31, 2020 and 2022.



                                       20
<PAGE>


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 2002.


                                   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.

                         (Registrant) Transition Auto Finance III, Inc.


                         By  /s/ Kenneth C. Lowe
                             --------------------------------------------------
                             Kenneth C. Lowe, President/Chief Executive Officer

                        Date     March 25, 2003
                             --------------------------------------------------

         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.


                         By  /s/ Kenneth C. Lowe
                             --------------------------------------------------
                             Kenneth C. Lowe, President/Chief Financial Officer

                        Date     March 25, 2003
                             --------------------------------------------------


                         By  /s/ Kenneth C. Lowe
                             --------------------------------------------------
                             Kenneth C. Lowe, Director

                        Date     March 25, 2003
                             --------------------------------------------------


                                       21
<PAGE>


           CERTIFICATE OF CHIEF EXECUTIVE AND CHIEF FINANCIAL OFFICER

I, Kenneth C. Lowe, certify that:

1. I have reviewed this quarterly report on Form 10-KSB of Transition Auto
Finance III (TAF III).

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.

3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all material
respects, the financial condition, results of operations and cash flows of TAF
III as of, and for, the periods presented in this quarterly report.

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

         a. designed such disclosure controls and procedures to ensure that
         material information relating to TAF III, including its consolidated
         subsidiaries, is made known to us by others within those entities,
         particularly during the period in which this quarterly report is being
         prepared;

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

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

5. TAF III's other certifying officers and I have disclosed, based on our most
recent evaluation, to our auditors and TAF III's Board of Directors:

         a. all significant deficiencies in the design or operation of internal
         controls which could adversely affect TAF III's ability to record,
         process, summarize and report financial data and have identified for
         TAF III's auditors any material weaknesses in internal controls; and

         b. any fraud, whether or not material, that involves management or
         other employees who have a significant role in TAF III's internal
         controls.

6. TAF III's other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:    March 25, 2003
         --------------

/s/ Kenneth C. Lowe
-------------------------------------------
Kenneth C. Lowe,
Chief Executive and Chief Financial Officer


                                       22
<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. **

99.1     Certification of Reporting Officer
</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.