<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB


                  QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

                                -----------------







                       Commission file number: 33-49261-D


                        TRANSITION AUTO FINANCE II, INC.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)



                TEXAS                                 75-2753067
       (State of incorporation)          (I.R.S. employer 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

Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 [ ]

State the number of shares outstanding of each of the issuer's classes of Common
equity, as of the latest practicable date: As September 30, 2002, the issuer'
had 1,000 shares of common stock



    TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMS (CHECK ONE): YES [ ] NO [X]

================================================================================



<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                                   FORM 10-QSB

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2002


<TABLE>
<CAPTION>
                                                                                                           PAGE NO.
                                                                                                           --------
<S>                                                                                                        <C>
PART I.  FINANCIAL INFORMATION

         ITEM 1.  Financial Statements

                  Balance Sheets..................................................................................3
                    September 30, 2002 (Unaudited) and December 31, 2001

                  Statements of Income (Unaudited)................................................................5
                    Quarter and nine months ended September 30, 2002 and September 30, 2001

                  Statements of Cash Flows (Unaudited)............................................................6
                    Nine Months ended September 30, 2002 and September 30, 2001

                  Notes to Financial Statements (Unaudited).......................................................7

         ITEM 2.           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations.............................................................12

PART II. OTHER INFORMATION

         ITEM 1.  Legal Proceedings..............................................................................14

         ITEM 2.  Changes in Securities and Use of Proceeds......................................................14

         ITEM 3.  Defaults Upon Senior Securities................................................................14

         ITEM 4.  Submission of Matters to a Vote of Security Holders............................................14

         ITEM 5.  Other Information..............................................................................14

         ITEM 6.  Exhibits and Reports on Form 8-K...............................................................15


         Signatures..............................................................................................16
</TABLE>





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



                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                        TRANSITION AUTO FINANCE II, INC.

                                 BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>
                                                                         9 MONTHS ENDED         FYE
                                                                            9/30/2002        12/31/2001
                                                                           (UNAUDITED)      (SEE NOTE 1)
                                                                         --------------     ------------
<S>                                                                      <C>                <C>
CURRENT ASSETS
  Cash and cash equivalents                                                $   554,966       $   263,633
  Accounts receivable                                                          694,919           512,086
  Vehicles held for sale                                                       188,626           170,306
  Other Assets                                                                  33,972             2,082
                                                                           -----------       -----------
      Total Current Assets                                                   1,472,483           948,107
                                                                           -----------       -----------

PROPERTY, at cost
  Vehicles leased                                                            2,086,583         4,006,800
  Less accumulated depreciation                                             (1,123,562)       (1,570,410)
                                                                           -----------       -----------
      Net Property                                                             963,021         2,436,390
                                                                           -----------       -----------


OTHER ASSETS
  Debt issuance costs, net of amortization of $1,118,932 and $962,153              -0-           156,779
  Due from an affiliate                                                         15,876            52,255
                                                                           -----------       -----------
       Total other assets                                                       15,876           209,034
                                                                           -----------       -----------
TOTAL ASSETS                                                               $ 2,451,380       $ 3,593,531
                                                                           ===========       ===========
</TABLE>


See accompanying notes to financial statements.



                                       3
<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                           BALANCE SHEETS (Continued)

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                9 MONTHS ENDED          FYE
                                                  9/30/2002         12/31/2001
                                                 (UNAUDITED)       (SEE NOTE 1)
                                                --------------     ------------
<S>                                                <C>              <C>
CURRENT LIABILITIES
  Accrued liabilities                              $    24,947      $    72,603
  Investor notes payable                             6,280,000        6,736,000
  Current portion of deferred revenue                   57,841          196,932
                                                   -----------      -----------
        Total Current Liabilities                    6,362,788        7,005,535
                                                   -----------      -----------

OTHER LIABILITIES
  Due to affiliate                                      28,940          116,804
  Deferred revenue                                      57,536           84,432
                                                   -----------      -----------
      Total Other Liabilities                           86,476          201,236
                                                   -----------      -----------

TOTAL LIABILITIES                                    6,449,264        7,206,771
                                                   -----------      -----------

SUBORDINATED DEBT TO AFFILIATE                         371,330          371,330
                                                   -----------      -----------

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)                      (4,370,214)      (3,985,570)
                                                   -----------      -----------
       Total Stockholders' Equity (Deficit)         (4,369,214)      (3,984,570)
                                                   -----------      -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   (DEFICIT)                                       $ 2,451,380      $ 3,593,531
                                                   ===========      ===========
</TABLE>

Note 1: The balance sheet at December 31, 2001, as presented, is derived from
the audited financial statements at that date.

See accompanying notes to financial statements.



                                       4
<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                              STATEMENTS OF INCOME

                                   (Unaudited)


<TABLE>
<CAPTION>
                                           QUARTER ENDED       NINE MONTHS ENDED      QUARTER ENDED      NINE MONTHS ENDED
                                        SEPTEMBER 30, 2002    SEPTEMBER 30, 2002    SEPTEMBER 30, 2001   SEPTEMBER 30, 2001
                                        ------------------    ------------------    ------------------   ------------------
<S>                                     <C>                   <C>                   <C>                  <C>
REVENUES

  Vehicle monthly lease payments               $   156,439           $   604,035           $   364,005          $ 1,303,295
   Amortization of down payments                    33,797               184,060               150,623              573,384
                                               -----------           -----------           -----------          -----------

        Total Revenues                             190,236               788,095               514,628            1,876,679
                                               -----------           -----------           -----------          -----------

OPERATING EXPENSES

  Operating costs                                   22,349                55,833                74,875               66,588
  General and administrative                        28,771                82,383                71,988              120,158
  Depreciation and amortization                     97,838               531,967               308,161            1,035,780
  Impairment loss                                      -0-                   -0-                   -0-                  -0-
                                               -----------           -----------           -----------          -----------

        Total Operating Expenses                   148,958               670,183               455,024            1,222,526
                                               -----------           -----------           -----------          -----------

Operating Income (Loss)                             41,278               117,912                59,604              654,153
                                               -----------           -----------           -----------          -----------

OTHER INCOME (EXPENSE)

Investment income                                    1,042                 1,270                   678                3,479
Other income (expense)                                  22                    87                    34                  129
Interest expense                                       -0-              (301,602)             (204,522)            (680,405)
Loss on sale of inventory                          (43,374)             (202,311)              (64,137)            (311,539)
                                               -----------           -----------           -----------          -----------
        Total Other Income (Expense)               (42,310)             (502,556)             (267,947)            (988,336)
                                               -----------           -----------           -----------          -----------

Provision for Federal Income Taxes                     -0-                   -0-                   -0-                  -0-
                                               -----------           -----------           -----------          -----------
Net Loss                                       $    (1,032)          $  (384,644)          $  (208,343)         $  (334,183)
                                               ===========           ===========           ===========          ===========

Loss per share (basic and diluted)             $      1.03           $    384.64           $    208.34          $    334.18
                                               ===========           ===========           ===========          ===========
</TABLE>


See accompanying notes to financial statements.



                                       5
<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                  9 MONTHS ENDED         9 MONTHS ENDED
                                                                 SEPTEMBER 30, 2002    SEPTEMBER 30, 2001
                                                                 ------------------    ------------------
<S>                                                              <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                ($  384,644)          ($  334,183)
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization                                          531,967             1,035,780
     Amortization of down payments                                         (184,060)             (573,384)
     Impairment loss                                                            -0-                   -0-
     Provision for allowance for doubtful accounts                              -0-                   -0-
     (Gain) loss on sale of property                                        202,311               311,539
Net changes in operating assets and liabilities:
     Accounts receivable                                                   (182,833)              183,819
     Other Assets                                                            31,890                   -0-
     Accrued liabilities                                                    (47,657)             (107,003)
     Deferred revenue                                                        18,073               (52,247)
                                                                        -----------           -----------
Net cash provided (USED) by operating activities                            (14,953)              464,321
                                                                        -----------           -----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of fixed assets                                                    (800)                  -0-
   Cash proceeds from sale of property                                      814,571             1,689,258
                                                                        -----------           -----------
NET CASH (USED) BY INVESTING ACTIVITIES                                     813,771             1,689,258
                                                                        -----------           -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from issuance of common stock                                       -0-                   -0-
   Net advances (payments) to affiliates                                    (51,485)               18,086
   Debt issuance costs                                                          -0-                   -0-
   Proceeds from notes payable                                                  -0-                   -0-
   Payments of Notes Payable                                               (456,000)           (2,312,000)
                                                                        -----------           -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                  (507,485)
                                                                        -----------           -----------
                                                                                               (2,293,914)
NET INCREASE (DECREASE) IN CASH                                             291,333              (140,335)

CASH AND CASH EQUIVALENTS, beginning of period                              263,633               446,662
                                                                        -----------           -----------
CASH AND CASH EQUIVALENTS, end of period                                $   554,966           $   306,327
                                                                        ===========           ===========

CASH PAID DURING THE YEAR FOR
   Interest                                                             $   363,348           $   700,492
                                                                        ===========           ===========
   Income taxes                                                         $       -0-           $       -0-
                                                                        ===========           ===========
</TABLE>

NON-CASH INVESTING ACTIVITIES

Vehicle purchases during the nine months ended September 30, 2002 with a net
book value of $97,144 were reclassified from vehicles leased to vehicles held
for sale.

Vehicles purchased during the nine months ended September 30, 2001 with a net
book value of $235,118 were reclassified from vehicles leased to vehicles held
for sale.

See accompanying notes to financial statements.




                                       6
<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

                               SEPTEMBER 30, 2002

NOTE 1:  BUSINESS ACTIVITY

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

NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         CASH AND CASH EQUIVALENTS

         For purposes of the 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 these 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-two months. The leases are considered to be
         operating leases. At the end of the lease period, the lessee may
         purchase the equipment at the contractual residual value 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.

         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 book value or market value. Generally, these
         vehicles will be sold at auction by the Company.






                                       7
<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

                               SEPTEMBER 30, 2002


NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (CONTINUED)

         EQUIPMENT AND LEASED VEHICLES

         Equipment and leased vehicles are stated at cost less accumulated
         depreciation. Depreciation is provided in amounts sufficient to relate
         the cost of depreciable assets to operations over their estimated
         service lives using the straight-line-method. 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-two 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 June 30, 2002.

         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-two months.

         FAIR VALUE OF FINANCIAL INSTRUMENTS

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

         USE OF ESTIMATES

         In preparing the Company's financial statements, management is required
         to make estimates and assumptions that affect the reported amounts of
         assets and liabilities, the disclosure of contingent assets and
         liabilities at the date of the financial statements, and the reported
         amounts of revenues and expenses during the reporting period. Actual
         results could differ from these estimates.



                                       8
<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

                               SEPTEMBER 30, 2002


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.

         ACCOUNTING PRONOUNCEMENTS

         During 2001, the Financial Accounting Standards Board (FASB) issued
         SFAS No. 143, "Accounting for Asset Retirement Obligations," which is
         effective for financial statements issued for fiscal years beginning
         after June 15, 2002. The pronouncement addresses the recognition and
         re-measurement of obligations associated with the retirement of
         tangible long-lived assets. In 2001, the FASB issued SFAS No. 144,
         "Accounting for the Impairment of Disposal of Long-Lived Assets," which
         is effective for financial statements issued for fiscal years beginning
         after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121,
         "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
         Assets to be Disposed Of," and applies to all long-lived assets
         (including discontinued operations). The Company does not expect these
         standards to have a material impact on future financial statements or
         results of operations.

         In April 2002, the FASB issued Statement 145, Rescission of FASB
         Statements 4, 44 and 64 and Amendment of FASB 13. This Statement
         addresses financial accounting and reporting associated with the
         extinguishment of certain debts and leases. The Company does not
         believe that the adoption of this pronouncement will have a material
         effect on its financial statements.

         In June 2002, the FASB issued Statement 146, Accounting for Costs
         Associated with Exit or Disposal Activities. This Statement will be
         effective after December 31, 2002. The Company does not believe that
         the adoption of this pronouncement will have a material effect on its
         financial statements.

         In October 2002, the FASB issued Statement 147, Acquisitions of Certain
         Financial Institutions. This Statement will be effective October 1,
         2002, but will have no effect on the Company's financial statements.



                                       9
<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

                               SEPTEMBER 30, 2002

NOTE 3:  INVESTOR NOTES PAYABLE

         The Company has issued fixed rate redeemable asset-backed notes
         (Investor Notes) as of December 1999 in the amount of $10,000,000.
         During the second quarter ended June 30, 2002 approximately $319,000
         was repaid to investors. The remaining balance as of June 30, 2002 was
         $6,280,000. As of September 30, 2002 the Trustee, for the benefit of
         note-holders, was holding $479,335 in cash.

         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.

         The Investor Notes were issued at various times during 1999 and 1998,
         however the maturity date for all of the Investor Notes is June 30,
         2002. The Investor Notes, are collateralized by the following:

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

                  2.       The leased vehicles.

         On June 30, 2002, TAF II, Inc. defaulted on its $10,000,000 11%
         Redeemable Secured Notes. At the time of the default the company had
         paid to investors a total of $7,058,413. This figure is comprised of
         $3,338,413 in interest and $3,720,000 of principal. The Company
         estimates that its remaining lease portfolio will generate
         approximately $1,150,000 in additional funds. The exact amount of
         additional funds is indeterminable since the number of leases that will
         go to term is unknown at this time.

NOTE 4:  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 December 31, 2001 and 2000
         (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 $5,400,000 and $1,450,000 for the year ended December 31,
         2001 and the year ended December 31, 2000, respectively. The Company's
         NOL carry forward expires between December 31, 2013 and December 31,
         2021.



                                       10
<PAGE>

                        TRANSITION AUTO FINANCE II, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

                               SEPTEMBER 30, 2002



NOTE 5:  RELATED PARTIES

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


NOTE 6:  SUBORDINATED DEBT TO AFFILIATE

         The Company assumed a liability of $371,330 due to TLMI. This debt is
         subordinated to all other Company liabilities and cannot be repaid
         before any other creditors or investors.

NOTE 7:  GOING CONCERN

         The accompanying consolidated 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 TAF II has substantial
         investor notes payable in 2002. Management of TAF II intends to attempt
         to continue leasing vehicles, raise additional capital and or secure
         additional financing in order to continue repayment of 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 TAF II's ability to continue
         as a going concern. TLMI and its other subsidiaries in the consolidated
         group are not responsible or obligated to repay any investor notes
         payable that TAF II cannot repay.



                                       11
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS



         The following discussions and analysis relates to factors that have
affected the operating results of the Company for the quarter ended and
nine-month period ended September 30, 2002. The balance sheet at December 31,
2001, as presented, is derived from the audited financial statements at that
date.

General.

         As of December 31, 1999, the Company had sold $10,000,000 of its 11%
Redeemable Secured Notes. In February of 1999 the Company also purchased 116
lease contracts from Transition Auto Finance, Inc. for $2,883,000.

         On June 30, 2002 Transition Auto Finance II, Inc. defaulted on its
$10,000,000 11% Redeemable Secured Notes.

Results of Operations: Three months ended September 30, 2002, compared to three
months ended September 30,2001.

         For the three months ended September 30, 2002 the company had received
monthly contract lease payments of $156,439 and amortization of down payments of
$33,797. For the same period in 2001, the Company had contract lease income of
$364,005 and amortization of down payments of $150,623. The drop in monthly
contract lease payments of $207,566 for the three month period ended September,
30, 2002, compared to the same period in 2001, was the result of a decline in
the number of active leases due to increased repossessions, early terminations
and matured leases. Until the economy improves, the company believes that
increased levels of repossessions will continue.

         Operating costs including general and administrative expenses were
$51,120 for the third quarter of 2002 compared to $146,863 for the same period
in 2001. The higher operating costs for the 2001 period were due to $58,000 in
additional marketing fees and $37,000 in bad debt expense.

         Depreciation and amortization was $97,838 for the three months ended
September 30, 2002, compared to $308,161 for the same period in 2001. The
decline of $210,323 for the third quarter of 2002 was due to fewer active
leases, the result of repossessions, early terminations and matured leases.

         Interest expense for the three months ended September 30, 2002, was
zero ($0) compared to $204,522 for the same period in 2001. The reduction in
interest expense for the third quarter of 2002 was due to the Company's default
June 30, 2002 on its 11% notes. No distributions have been made to note-holders
since the default.

         Loss on sale of inventory for the third quarter of 2002 was $43,374
compared to a loss of $64,137 for the same period in 2001. Loss on sale of
inventory occurs when the book value of the asset exceeds the market value of
the repossessed vehicle.

         The net loss for the third quarter ended September 30, 2002 was $1,032
compared to a loss of $208,343 for the same period in 2001. The nominal loss in
2002 is primarily the result of fewer active leases than for the same period in
2001.

Results of Operations: Nine- month period ended September 30, 2002 compared to
nine months ended September 30, 2001.

         Total revenue for the nine months ended September 30, 2002 was $788,095
compared to $1,876,679 for the same period in 2001. The decrease in revenue for
the 2002 period was the result of fewer leases on the books resulting in lower
monthly payments and amortization of down payments.

         Operating costs and expenses were $138,216 for the nine-month period
ended September 30, 2002 compared to $186,746 for the same period in 2001. The
decrease in operating costs in 2002 was primarily the result of lower cost of
processing and collections on the smaller number of active leases in the third
quarter.



                                       12
<PAGE>

         Depreciation and amortization for the nine months ended September 30,
2002 was $531,967, compared to $1,035,780 for the same period in 2001. The
decrease in depreciation for the 2002 period was due to a smaller portfolio of
leases.

         Interest expense for the nine months ended September 30, 2002 was
$301,602 compared to $680,405 for the same period in 2001. The decrease in
interest expense of $378,803 for the 2002 period was due to a reduction of notes
outstanding at June 30, 2002 and the default on the notes subsequent to June 30,
2002.

         Loss on sale of inventory for the nine month ended September 30, 2002
was $202,311 compared to $311,539 loss for the same period in 2001. The decrease
of $109,228 for the third quarter of 2002 was the result of a smaller number of
vehicles being repossessed in the 2002 period.

         The Company had a loss of $384,644 for the nine months ended September
30, 2002 compared to a loss of $334,183 for the same period in 2001. The
increased loss of $50,461 in the 2002 period was due to a decline in revenue
because of fewer active leases.

         On June 30, 2002, TAF II, Inc. defaulted on its $10,000,000 11%
Redeemable Secured Notes. At the time of the default the company had paid to
investors a total of $7,058,413. This figure is comprised of $3,338,413 in
interest and $3,720,000 of principal. The Company estimates that its remaining
lease portfolio will generate approximately $1,150,000 in additional funds. The
exact amount of additional funds is indeterminable since the number of leases
that will go to term is unknown at this time. The trustee, for the benefit of
note-holders, currently holds $594,335 in cash.

         The adverse economic effects of the current recession and events of
September 11, resulted in an unusually high number of early lease payoffs and
automobile repossessions. The major reasons for the excessive early payoffs and
repossessions appear to have been (1) the weak economy, and (2) low-cost
incentive financing (such as "zero financing") offered by new car manufacturers.
The weak economy hurt the personal finances of many customers causing an
increased number of repossessions, while low-cost incentive financing enticed
many other customers to purchase new cars, which resulted in these customers
paying off their leases early. Additionally, low-cost financing negatively
impacted used car prices by flooding the market with late model cars.

         The early payoffs and repossessions were not, by themselves,
extraordinary. What was extraordinary - and unprecedented - was the pace and
rate at which these early payoffs and repossessions occurred. Most damaging,
however, was the timing of the excessive early payoffs and repossessions, which
began to accelerate in September 2000. Under the terms of the indenture that
governs the notes, all payments after August 2000, from early payoffs and
repossessions had to be returned to the note-holders rather than retained by the
company for further investment. This "sinking fund" provision in the indenture
had a devastating effect on the company's capital, and stripped the company of
its ability to generate sufficient cash flow to repay the notes.

         The company has worked on a plan that would extend the maturity of the
notes and the reinvestment period, and lower the interest rate. The effect of
these changes should have increased the ultimate amount of funds available for
note repayment but since these modifications would require 100% approval of the
note-holders, it is unlikely that the plan will be submitted.

Liquidity and Capital Resources


         During the nine months ended September 30, 2002 the Company used cash
of $813,771 in its investing activities from the sale of property and used
$507,485 in its financing activities. For the same period in 2001, the Company
utilized cash of $1,689,258 in its investing activities and used $2,293,914 in
its financing activities. For the nine months ended September 30, 2002, the
Company purchased no additional vehicles and reduced its notes payable by
$456,000. For the same period in 2001, the Company reduced its notes payable by
$2,312,000.


                                       13
<PAGE>

         The Company's portfolio, which consisted of 426 leases, included 338
leases which resulted in 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>
Repossession     204      $4,900,602  $  117,364  $2,218,338  $  964,342  $2,249,782
Early Payoff     134      $2,937,438  $    3,944  $1,476,313  $  621,224  $1,950,258
                 ---      ----------  ----------  ----------  ----------  ----------
Total            338      $7,838,040  $  121,308  $3,694,651  $1,585,566  $4,200,040
</TABLE>

[CONTINUATION OF TABLE BELOW]

<TABLE>
<CAPTION>
                                                      TOTAL
                SALES TAX    WARRANTY   MARKETING     AMOUNT      PROFIT
                  CREDIT      REBATE     FEE PAID    RECEIVED     (LOSS)
                ----------  ----------  ----------  ----------  ----------
<S>             <C>         <C>         <C>         <C>         <C>
Repossession    $  104,308  $   52,631  $  534,366  $5,055,037  $   37,070
Early Payoff    $   94,693  $   15,805  $  340,271  $3,818,022  $  876,640
                ----------  ----------  ----------  ----------  ----------
Total           $  199,001  $   68,436  $  874,637  $8,873,059  $  913,710
</TABLE>



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


         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.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS

         Although the Company is not a party to any material legal proceedings,
it is possible that one or more note-holders may institute legal action against
the company in light of the default of the company's notes.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

         (a) Not Applicable

         (b) Not Applicable

         (c) Not Applicable

         (d) 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 2.5% of the aggregate principal amount of the
         Notes sold. The Company also used 1.5% 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 3. DEFAULTS UPON SENIOR SECURITIES

         On June 30, 2002, the Company defaulted on its $10,000,000 11%
Redeemable Secured Notes.

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 Third quarter of 2002.


ITEM 5. OTHER INFORMATION

None



                                       14
<PAGE>

ITEM 6. 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-QSB.

(b)      Reports on Form 8-K

         No reports on Form 8-K were filed during the nine months ended
         September 30, 2002



                                       15
<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 II, INC.
                                        ----------------------------------------
                                                    (Registrant)


Date:   November 14, 2002                      /s/ KENNETH C. LOWE
      ---------------------             ----------------------------------------
                                           Kenneth C. Lowe, President/
                                                Chief Executive Officer


Date:   November 14, 2002                      /s/ KENNETH C. LOWE
      ---------------------             ----------------------------------------
                                           Kenneth C. Lowe, President/
                                                Chief Operating Officer


Date:   November 14, 2002                      /s/ KENNETH C. LOWE
      ---------------------             ----------------------------------------
                                           Kenneth C. Lowe, President/
                                                Chief Financial Officer




                                       16
<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-Q of Transition Auto Finance
II (TAF II).

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
II as of, and for, the periods presented in this quarterly report.

4. TAF II'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 II and we have:

         a. designed such disclosure controls and procedures to ensure that
         material information relating to TAF II, 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 II'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 II's other certifying officers and I have disclosed, based on our most
recent evaluation, to our auditors and TAF II's Board of Directors:

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

6. TAF II'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:

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


<PAGE>


                                INDEX TO EXHIBITS

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

3.2      Bylaws of Transition Auto Finance II, Inc.*

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

4.2      Form of Secured Note Due June 30, 2002 (included in Article Two of
         Indenture filed as Exhibit 4.1)

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

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

99.1     Certification of Reporting Officer

</TABLE>


*        Incorporated by reference from Registration Statement on Form SB-2 of
         Transition Auto Finance II, Inc. Registration No. 33-49261-D, filed
         April 2, 1998.

**       Incorporated by reference from Amendment No. 1 to Registration
         Statement on Form SB-2 of Transition Auto Finance II, Inc.,
         Registration No. 33-49261-D, filed June 19, 1998.

***      Incorporated by reference from Amendment No. 2 to Registration
         Statement on Form SB-2 of Transition Auto Finance II, Inc.,
         Registration No. 33-49261-D, filed July 9, 1998.