<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, 2004

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

                        Commission file number: 333-80537

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

              TEXAS                                   75-2822804
    (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, 2004, the issuer'
had 1,000 shares of common stock

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

<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                                   FORM 10-QSB

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2004

<TABLE>
<CAPTION>
                                                                                                               Page No.
                                                                                                               --------
<S>                                                                                                            <C>
PART I.  FINANCIAL INFORMATION

         ITEM 1.  Financial Statements

                  Balance Sheets..............................................................................    2
                    September 30, 2004 (Unaudited) and December 31, 2003

                  Statements of Income (Unaudited)............................................................    4
                   Quarter and nine months ended September 30, 2004 and September 30, 2003

                  Statements of Cash Flows (Unaudited)........................................................    5
                    Nine Months ended September 30, 2004 and September 30, 2003

                  Notes to Consolidated Financial Statements (Unaudited)......................................    6

         ITEM 2.           Management's Discussion and Analysis of Financial Condition and
                           Results of Operations .............................................................   11

         ITEM 3.           Controls and Procedures ...........................................................   12

PART II. OTHER INFORMATION

         ITEM 1.  Legal Proceedings...........................................................................   13

         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............................................................   14

         Signatures ..........................................................................................   15
</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.

<PAGE>

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                        TRANSITION AUTO FINANCE III, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                9 months ended FYE
                                                                                     9/30/2004          12/31/2003
                                                                                    (unaudited)       (See Note 1)
                                                                                    -----------       ------------
<S>                                                                             <C>                   <C>
                                        ASSETS
CURRENT ASSETS
 Cash and cash equivalents                                                         $    140,017        $    547,096
 Other Assets                                                                             5,426              28,370
 Accounts receivable, net of allowance for doubtful accounts of $385,000 and $
-0- respectively                                                                        314,208             242,455
  Vehicles held for sale                                                                176,519              41,132
                                                                                ---------------        ------------
      Total Current Assets                                                              636,170             859,053
                                                                                                       ------------
PROPERTY, at cost
  Vehicles leased                                                                     3,011,581           3,511,983
  Less accumulated depreciation                                                        (836,279)           (984,515)
                                                                                ---------------        ------------
      Net Property                                                                    2,175,302           2,527,468
                                                                                ---------------        ------------
OTHER ASSETS
  Debt issuance costs, net of amortization of $725,331 and $603,105                      40,742             162,969
  Due from Affiliates                                                                       -0-                 -0-
                                                                                ---------------        ------------
      Total Other Assets                                                                 40,742             162,969
                                                                                ---------------        ------------
TOTAL ASSETS                                                                       $  2,852,214        $  3,549,490
                                                                                   ============        ============
</TABLE>

                                       2
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                           BALANCE SHEETS (Continued)

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                  9 Months Ended        FYE
                                                    9/30/2004        12/31/2003
                                                   (Unaudited)      (See Note 1)
                                                   -----------      ------------
<S>                                               <C>               <C>
CURRENT LIABILITIES
  Accrued liabilities                             $    110,679      $    176,787
  Current portion of deferred revenue                  145,741           164,830
                                                  ------------      ------------
        Total Current Liabilities                      256,420           341,617
OTHER LIABILITIES
  Due to affiliate                                      16,580            13,640
  Deferred revenue                                     240,890           194,158
  Investor notes payable                             6,786,000         6,786,000
                                                  ------------      ------------
      Total Other Liabilities                        7,043,470         6,993,798
TOTAL LIABILITIES                                    7,299,890         7,335,415
                                                  ------------      ------------
STOCKHOLDERS' EQUITY (DEFICIT)
   Common stock, $.10 par value, 1,000 shares
authorized, issued and outstanding                         100               100
   Additional paid-in capital                              900               900
   Retained earnings (deficit)                      (4,448,676)       (3,786,925)
                                                  ------------      ------------
       Total Stockholders' Equity (Deficit)         (4,447,676)       (3,785,925)
                                                  ------------      ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   (DEFICIT)                                      $  2,852,214      $  3,549,490
                                                  ============      ============
</TABLE>

Note 1: The balance sheet at December 31, 2003, as presented, is derived from
the audited financial statements at that date.

See accompanying notes to financial statements.

                                       3
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                              STATEMENTS OF INCOME

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                 Quarter Ended        Nine Months Ended      Quarter Ended       Nine Months Ended
                                              September 30, 2004       Sept. 30, 2004        Sept. 30, 2003        Sept 30, 2003
                                              ------------------       --------------        --------------        -------------
<S>                                           <C>                     <C>                    <C>                 <C>
REVENUES
  Vehicle monthly lease payments                $  233,384               $  720,119            $  232,953            $  844,186
   Amortization of down payments                    66,288                  222,943                87,719               282,065
                                              ------------            -------------          ------------        --------------
        Total Revenues                             299,672                  943,062               320,672             1,126,251
                                              ------------            -------------          ------------        --------------
OPERATING EXPENSES
  Operating costs                                   77,644                  220,119                52,492               107,674
  General and administrative                         9,124                   71,632                11,011                72,460
  Depreciation and amortization                    177,638                  563,233               193,626               641,470
                                              ------------            -------------          ------------        --------------
        Total Operating Expenses                   264,406                  854,984               257,129               821,604
                                              ------------            -------------          ------------        --------------
Operating Income (Loss)                             35,266                   88,078                63,543               304,647
                                              ------------            -------------          ------------        --------------
OTHER INCOME (EXPENSE)

Investment income                                      165                      755                 1,359                 3,081
Other income (expense)                                   3                       10                    18                    45
Interest expense                                  (186,729)                (560,187)             (186,729)             (560,187)
Loss on sale of inventory                          (83,369)                (190,408)              (53,837)             (291,767)
                                              ------------            -------------          ------------        --------------
        Total Other Income (Expense)              (269,930)                (749,830)             (239,189)             (848,828)
                                              ------------            -------------          ------------        --------------
Provision for Federal Income Taxes                     -0-                      -0-                   -0-                   -0-
                                              ------------            -------------          ------------        --------------
Net Loss                                        $ (234,664)              $ (661,752)           $ (175,646)           $ (544,181)
                                                ==========               ==========            ==========            ==========
Profit (Loss) per share (basic and diluted)     $  (234.67)              $  (661.75)           $  (175.65)           $  (544.18)
</TABLE>

See accompanying notes to financial statements.

                                       4
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                  9 Months Ended       9 Months Ended
                                                                September 30, 2004   September 30, 2003
                                                                ------------------   ------------------
<S>                                                             <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                           $   (661,752)        $   (544,181)
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization                                      563,233              641,470
     Amortization of down payments                                     (222,943)            (282,065)
     Impairment loss                                                        -0-                  -0-
     Provision for allowance for doubtful accounts                          -0-                  753
     (Gain) loss on sale of property                                    190,408              291,767
Net changes in operating assets and liabilities:
     Accounts receivable                                                (71,753)            (186,976)
    Other Assets                                                         22,944                3,075
    Accrued liabilities                                                 (66,108)              34,755
     Deferred revenue                                                   250,586               82,517
                                                                ---------------      ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                 4,615               41,115
                                                                ---------------      ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of fixed assets                                          (1,032,490)            (422,318)
   Cash proceeds from sale of property                                  617,855            1,001,749
                                                                ---------------      ---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES                              (414,635)             579,431
                                                                ---------------      ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Net advances (payments) to affiliates                                  2,941                4,030
   Debt issuance costs                                                      -0-                  -0-
   Proceeds from notes payable                                              -0-                  -0-
                                                                ---------------      ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                 2,941                4,030
                                                                ---------------      ---------------
NET INCREASE  (DECREASE) IN CASH                                       (407,079)             624,576
CASH AND CASH EQUIVALENTS, beginning of period                          547,096              383,300
                                                                ---------------      ---------------
CASH AND CASH EQUIVALENTS, end of period                           $    140,017         $  1,007,876
                                                                   ============         ============
CASH PAID DURING THE YEAR FOR
   Interest                                                        $    560,187         $    560,187
                                                                   ============         ============
   Income taxes                                                    $        -0-         $        -0-
                                                                   ============         ============
</TABLE>

See accompanying notes to financial statements.

NON-CASH INVESTING ACTIVITIES
Vehicles with a net book value of $135,387 were reclassified from vehicles
leased to vehicles held for resale as of September 30, 2004.

NON-CASH INVESTING ACTIVITIES
Vehicles with a net book value of $168,853 were reclassified from vehicles
leased to vehicles held for resale as of September 30, 2003.

                                       5
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS

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 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
                  to 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.

                                       6
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

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.

                                       7
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

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 approximately $1,288,000
            and $678,000 December 31, 2003 and 2002 (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 $3,787,000 and $2,349,000 as of December 31, 2003 and
            2002 respectively. The Company's NOL carry-forward expires between
            December 31, 2020 and 2022.

NOTE 4: INVESTOR NOTES PAYABLE

            The Company has issued $6,786,000 of fixed rate redeemable
            asset-backed notes (Investor Notes) as of September 30, 2004 and
            December 31, 2003.

            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.

                                       8
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

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, 2003 and September 30, 2004:

<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 $217,310 in 2003
      and $204,810 for the 9 months ending September 30, 2004 for servicing,
      documentation and marketing fees. The Company had a payable to an
      affiliate for $13,640 at December 31, 2003 and $16,580 at September 30,
      2004.

                                       9
<PAGE>

NOTE 6: GOING CONCERN

      THE ACCOMPANYING FINANCIAL STATEMENTS HAVE BEEN PREPARED IN CONFORMITY
      WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, WHICH CONTEMPLATES
      CONTINUATION OF THE COMPANY AS A GOING CONCERN. THE COMPANY HAS SUSTAINED
      RECURRING LOSSES FROM OPERATIONS, NEGATIVE WORKING CAPITAL, A NEGATIVE
      EQUITY POSITION AND HAS INVESTOR NOTES PAYABLE DUE IN 2004. MANAGEMENT
      WILL ATTEMPT TO SERVICE EXISTING LEASES AND RAISE ADDITIONAL CAPITAL
      AND/OR SECURE ADDITIONAL FINANCING IN ORDER TO REPAY THE INVESTOR NOTES
      PAYABLE WHEN MATURE. MANAGEMENT RECOGNIZES THAT FULL REPAYMENT MAY TAKE
      SEVERAL YEARS TO COMPLETE AND THAT FULL REPAYMENT MAY NOT OCCUR. THIS
      SITUATION RAISES SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE
      AS A GOING CONCERN.

                                       10
<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 September
30, 2004. The balance sheet at December 31, 2003, as presented, is derived from
the audited financial statements at that date.

General.

      As of September 30, 2004, the Company had sold $6,786,000 of its 11%
Redeemable Secured Notes and had 120 active leases with a net book value of
$2,175,302.

      Results of Operations: Three months ended September 30, 2004, compared to
three months ended September 30, 2003.

      For the three months ended September 2004, the company had received
monthly contract lease payments of $233,384 and amortization of down payments of
$66,288. This compares to contract lease payments of $232,953 and amortization
of down payments of $87,719 for the same period in 2003. The decrease in monthly
contract lease payments for the third quarter of 2004 was primarily the result
of fewer active leases for the 2004 period.

      Operating costs including general and administrative expenses were $86,768
for the three-month period ended September 30, 2004. This compares to $63,503
for the same period in 2003. The increase in operating expenses for the third
quarter of 2004 compared to the same period for 2003 was due to higher marketing
fees on more expensive vehicles than for the 2003 period.

      Depreciation and amortization was $177,638 for the three months ended
September 30, 2004 compared to $193,626 for the third quarter of 2003. The fewer
number of active leases in the 2004 period resulted in lower rates of
depreciation.

      Interest expense for the three months ended September 30, 2004, was
$186,729 compared to $186,729 for the same period in 2003.

      Loss on sale of inventory for the quarter ended September 30, 2004, was
$83,369 compared to $53,837 for the third quarter of 2003. The increased loss on
sale of inventory for the 2004 period was due to the write off of a vehicle that
disappeared and is believed to have been stolen. This matter is currently under
criminal investigation..

      The net loss for the quarter ended September 30, 2004, was $234,664
compared to $175,646 for the same period in 2003. The increased loss for the
2004 period was primarily the result of lower revenue and higher expenses for
the 2004 period.

      On June 30, 2002, Transition Auto Finance II, Inc. defaulted on $6,280,000
of 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
new leases.

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 note-holders agree to
extend the reinvestment period from December 31, 2002 to December 31, 2004. The
consent solicitation was approved by a majority of the note-holders and the
indenture was amended to reflect the extended reinvestment period. Between
January 2003 and May 2003, no new leases were contracted, pending the approval
of the consent solicitation. Since May 2003 the Company has added 64 net leases
(after early terminations). Although this increased the total lease portfolio by
approximately 100% at the end of the third quarter of 2004, it is not possible
at this time to determine the ultimate financial impact from these additional
leases.

Results of Operations: Nine- month period ended September 30, 2004, compared to
nine months ended September 30, 2003.

                                       11
<PAGE>

      Total revenue for the nine-months ended September 30, 2004 was $943,062
compared to $1,126,251 for the same period in 2003. The decrease in 2004 revenue
was due to lower lease volume in that period.

      Operating costs and expenses were $291,751 for the nine-month period ended
September 30, 2004 compared to $180,134 for the same period in 2003. The
increase in expenses for the 2004 period was primarily due to higher marketing
fees paid on more expensive vehicles than for the 2003 period.

      Depreciation and amortization for the nine-months ended September 30, 2004
was $563,233 compared to $641,470 for the same period in 2003 .The lower
depreciation and amortization for the 2004 period was due to a smaller lease
portfolio than for the 2003 period.

      Interest expense for the nine months ended September 30, 2004 was $560,187
compared to $560,187 for the same period in 2003.

      Loss on sale of inventory for the nine-months ended September 30, 2004 was
$190,408 compared to $291,767 loss for the same period in 2003. The decrease in
loss on sale of inventory for the nine-months ended September 30, 2004 was the
result of a lower number of vehicles sold than in the 2003 period.

      The Company had a loss of $661,752 for the nine-months ended September 30,
2004 compared to a loss of $544,181 for the same period in 2003. The increased
loss for the 2004 period was primarily the result of lower revenue without a
corresponding decrease in expenses for the 2004 period.

Liquidity and Capital Resources

      During the nine months ended September 30, 2004, the Company used $414,635
in its investing activities and received $2,941 from its financing activities.
For the same period in 2003, the Company used $579,431 in its investing
activities and $4,030 in its financing activities.

      The Company's only source of liquidity in the future will be from proceeds
from the sale of repossessed vehicles, early terminations, and its monthly lease
payments after interest and other allowed expenses.

      The Company's portfolio, which consisted of 541 leases, included 421
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                                     Total
                # of   Gross Cost   Misc.      Total      Down        Sale    Sales Tax  Warranty  Marketing     Amount     Profit
              Contract Of Vehicle  Expenses  Payments    Payment     Amount     Credit    Rebate    Fee Paid    Received    (Loss)
              -------------------  --------  --------    -------     ------     ------    ------    --------    --------    ------
<S>           <C>      <C>         <C>      <C>        <C>         <C>         <C>        <C>      <C>         <C>        <C>
Repossession    325    $7,402,480  $192,031 $2,465,551 $1,411,280  $3,685,658  $163,632   $77,929  $  812,020  $6,992,030 ($602,481)
Early Payoff     96    $2,039,867  $  1,793 $1,069,301 $  405,019  $1,350,209  $ 55,216   $ 1,399  $  232,693  $2,648,451  $606,791
                 --    ----------   ------  ---------- ----------  ----------  --------   -------  ----------  ----------  --------
Total           421    $9,442,347  $193,824 $3,534,852 $1,816,299  $5,035,867  $218,848   $79,328  $1,044,713  $9,640,481  $  4,310
</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.

ITEM 3. CONTROLS AND PROCEDURES

      Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the design and operation of

                                       12
<PAGE>

our disclosure controls and procedures, as defined in Rules 13a-14(C) and 15d
under the Securities Exchange Act of 1934, within 90 days of the filing date of
this report (the "Evaluation Date"). Based upon this evaluation, our principal
executive and principal financial officers concluded as of the Evaluation Date
that our disclosure controls and procedures were effective such that the
material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to the
Company.

      In addition, there were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date. We have not identified any significant deficiencies or
material weaknesses in our internal controls and therefore, there were no
corrective actions taken.

PART II. OTHER INFORMATION

ITEM 1. 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.

                                       13
<PAGE>

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% of the aggregate principal amount of the Notes sold. The Company
      also used 2% of the gross proceeds from the sale of the Notes to pay
      offering and organizational expenses, including filing and registration
      fees, legal fees of the Company's counsel, accounting fees, trustee's
      fees, escrow agent's fees, "blue sky" expenses and printing expenses.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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 2004.

ITEM 5. OTHER INFORMATION

None

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 three months ended September
30, 2004

                                       14
<PAGE>

                                   SIGNATURES

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

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

Date: November 6, 2004                    /s/ Kenneth C. Lowe
                                ------------------------------------------------
                                           Kenneth C. Lowe, President/
                                           Chief Executive Officer

Date: November 6, 2004                    /s/ Kenneth C. Lowe
                                ------------------------------------------------
                                           Kenneth C. Lowe, President/
                                           Chief Operating Officer

Date: November 6, 2004                    /s/ Kenneth C. Lowe
                                ------------------------------------------------
                                           Kenneth C. Lowe, President/
                                           Chief Financial Officer

                                       15
<PAGE>

                                INDEX TO EXHIBITS

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

3.2           Bylaws of Transition Auto Finance III, Inc. *

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

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

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

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

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

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

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

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

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

                                       16