<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 JUNE 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 June 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 JUNE 30, 2004

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

         ITEM 1.  Financial Statements

                  Balance Sheets..............................................................................      3
                    June 30, 2004 (Unaudited) and December 31, 2003

                  Statements of Income (Unaudited)............................................................      5
                    Quarter and six months ended June 30, 2004 and June 30, 2003

                  Statements of Cash Flows (Unaudited)........................................................      6
                    Six Months ended June 30, 2004 and June 30, 2003

                  Notes to Consolidated 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...........................................................................     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.

                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                        TRANSITION AUTO FINANCE III, INC.

                                 BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                               6 months ended        FYE
                                                                                  6/30/2004       12/31/2003
                                                                                 (unaudited)     (See Note 1)
                                                                               --------------    ------------
<S>                                                                             <C>              <C>
CURRENT ASSETS
 Cash and cash equivalents                                                      $    326,267     $    547,096
 Other Assets
 Accounts receivable, net of allowance for doubtful accounts of $385,000 and           4,552           28,370
 $276,000 respectively                                                               260,684          242,455
  Vehicles held for sale                                                             153,185           41,132
                                                                                ------------     ------------
      Total Current Assets                                                           744,688          859,053
                                                                                ------------     ------------

PROPERTY, at cost
  Vehicles leased                                                                  3,011,243        3,511,983
  Less accumulated depreciation                                                     (843,462)        (984,515)
                                                                                ------------     ------------
      Net Property                                                                 2,167,781        2,527,468
                                                                                ------------     ------------

OTHER ASSETS
  Debt issuance costs, net of amortization of $684,589 and $603,105                   81,484          162,969
  Due from Affiliates                                                                    -0-              -0-
                                                                                ------------     ------------
      Total Other Assets                                                              81,484          162,969
                                                                                ------------     ------------

TOTAL ASSETS                                                                    $  2,993,953     $  3,549,490
                                                                                ============     ============
</TABLE>

                                       3
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                           BALANCE SHEETS (Continued)

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                            6 Months Ended        FYE
                                                              6/30/2004        12/31/2003
                                                              (Unaudited)     (See Note 1)
                                                            --------------    ------------
<S>                                                         <C>               <C>
CURRENT LIABILITIES
  Accrued liabilities                                        $     62,669     $    176,787
  Current portion of deferred revenue                             136,839          164,830
  Investor Notes Payable                                        6,786,000        6,786,000
                                                             ------------     ------------
        Total Current Liabilities                               6,985,508        7,127,617

OTHER LIABILITIES
  Due to affiliate                                                  4,730           13,640
  Deferred revenue                                                216,727          194,158
                                                             ------------     ------------
      Total Other Liabilities                                     221,457          207,798
                                                             ------------     ------------

TOTAL LIABILITIES                                               7,206,965        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)                                 (4,214,012)      (3,786,925)
                                                             ------------     ------------
       Total Stockholders' Equity (Deficit)                    (4,213,012)      (3,785,925)
                                                             ------------     ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   (DEFICIT)                                                 $  2,993,953     $  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.

                                       4
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                              STATEMENTS OF INCOME

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                 Quarter Ended    Six Months Ended     Quarter Ended     Six Months Ended
                                                 June 30, 2004      June 30, 2004      June 30, 2003       June 30, 2003
                                                 -------------    ----------------     -------------     ----------------
<S>                                              <C>              <C>                  <C>               <C>
REVENUES

  Vehicle monthly lease payments                   $  228,635         $  486,736         $  290,974         $  611,233
  Amortization of down payments                        83,337            156,654             91,055            194,346
                                                   ----------         ----------         ----------         ----------
        Total Revenues                                311,972            643,390            382,029            805,579
                                                   ----------         ----------         ----------         ----------

OPERATING EXPENSES

  Operating costs                                      49,647            142,475             31,530             55,181
  General and administrative                           14,784             62,508             46,313             61,449
  Depreciation and amortization                       182,473            385,595            208,094            447,843
                                                   ----------         ----------         ----------         ----------
        Total Operating Expenses                      246,904            590,578            285,937            564,473
                                                   ----------         ----------         ----------         ----------

Operating Income (Loss)                                65,068             52,812             96,092            241,106
                                                   ----------         ----------         ----------         ----------

OTHER INCOME (EXPENSE)

Investment income                                         159                590                980              1,722
Other income (expense)                                      4                  8                  6                 26
Interest expense                                     (186,729)          (373,458)          (186,692)          (373,458)
Loss on sale of inventory                             (58,699)          (107,039)          (119,787)          (237,931)
                                                   ----------         ----------         ----------         ----------
        Total Other Income (Expense)                 (245,265)          (479,899)          (305,493)          (609,641)
                                                   ----------         ----------         ----------         ----------

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

Net Loss                                           $ (180,197)        $ (427,087)        $ (209,401)        $ (368,537)
                                                   ==========         ==========         ==========         ==========

Profit (Loss) per share (basic and diluted)        $  (180.20)        $  (427.09)        $  (209.40)        $  (368.54)
</TABLE>

                See accompanying notes to financial statements.

                                       5
<PAGE>

                        TRANSITION AUTO FINANCE III, INC.

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                6 Months Ended     6 Months Ended
                                                                June 30, 2004      June 30, 2003
                                                                --------------     -------------
<S>                                                             <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                         $   (427,087)      $   (368,537)
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization                                    385,595            447,843
     Amortization of down payments                                   (156,655)          (194,346)
     Provision for allowance for doubtful accounts                        -0-                753
     (Gain) loss on sale of property                                  107,039            237,931
Net changes in operating assets and liabilities:
     Accounts receivable                                              (18,229)          (146,314)

    Other Assets                                                       23,818              2,223
    Accrued liabilities                                              (114,118)            57,843
     Deferred revenue                                                 151,233             18,939
                                                                 ------------       ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                      (48,404)            56,339
                                                                 ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of fixed assets                                          (638,592)           (93,123)
   Cash proceeds from sale of property                                475,077            766,891
                                                                 ------------       ------------
NET CASH (USED) BY INVESTING ACTIVITIES                              (163,515)           673,768
                                                                 ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net advances (payments) to affiliates                               (8,910)            13,187
   Proceeds from notes payable                                            -0-                -0-
                                                                 ------------       ------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                              (8,910)            13,187
                                                                 ------------       ------------

NET INCREASE (DECREASE) IN CASH                                      (220,829)           743,294
CASH AND CASH EQUIVALENTS, beginning of period                        547,096            383,300
                                                                 ------------       ------------

CASH AND CASH EQUIVALENTS, end of period                         $    326,267       $  1,126,594
                                                                 ============       ============

CASH PAID DURING THE YEAR FOR
   Interest                                                      $    373,458       $    186,729
                                                                 ============       ============
   Income taxes                                                  $        -0-       $        -0-
                                                                 ============       ============
</TABLE>

See accompanying notes to financial statements.

      NON-CASH INVESTING ACTIVITIES

      Vehicles with a net book value of $112,053 were reclassified from vehicles
      leased to vehicles held for resale as of June 30, 2004.

      NON-CASH INVESTING ACTIVITIES

      Vehicles with a net book value of $230,893 were reclassified from vehicles
      leased to vehicles held for resale as of June 30, 2003.

                                       6
<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.

                                       7
<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 thity-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.

                                       8
<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 June 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.

                                       9
<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 June 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 $131,548 FOR THE 6 MONTHS ENDING JUNE 30, 2004 FOR SERVICING,
      DOCUMENTATION AND MARKETING FEES. THE COMPANY HAS A PAYABLE TO AN
      AFFILIATE FOR $13,640 AT DECEMBER 31, 2003 AND $4,730 AT JUNE 30, 2004.

                                       10
<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.

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

General.

      As of June 30, 2004, the Company had sold $6,786,000 of its 11% Redeemable
Secured Notes and had 162 active leases with a net book value of $2,320,966.

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

      For the three months ended June 30, 2004, the company had received monthly
contract lease payments of $228,635 and amortization of down payments of
$83,337. This compares to contract lease payments of $290,974 and amortization
of down payments of $91,055 for the same period in 2003. The decrease in monthly
contract lease payments for the second quarter of 2004 was primarily the result
of fewer active leases than in the second quarter of 2003.

      Operating costs including general and administrative expenses were $64,431
for the three-month period ended June 30, 2004. This compares to $77,843 for the
same period in 2003. The higher operating expenses for the second quarter of
2003, compared to the same period for 2004, was due to more reposessions for
2003, and the cost associated with those repossessions.

      Depreciation and amortization was $182,473 for the three months ended June
30, 2004 compared to $208,094 for the second 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 June 30, 2004, was $186,729
compared to $186,692 for the same period in 2003.

      Loss on sale of inventory for the quarter ended June 30, 2004, was $58,699
compared to $119,787 for the second quarter of 2003. The decreased loss on sale
of inventory for the 2004 period was primarily due to more favorable used
vehicle prices in the 2004 period and aging of the portfolio. When vehicles age
they generally depreciate at a slower rate.

      The net loss for the quarter ended June 30, 2004 was $180,197 compared to
$209,401 for the same period in 2003. The decrease in loss for the quarter ended
June 30, 2004 was primarily due to a decrease in expenses and a smaller loss on
sale of inventory for the 2004 period.

Extension of Reinvestment Period

      On June 30, 2002, Transition Auto Finance II. 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. In
an attempt to minimize the possibility of a default by TAF III, the Company
requested that the note-holders consent to an amendment to the Indenture, which
would extend the reinvestment period from December 31, 2002 to December 31,
2004. The consent solicitation was approved by a majority of the 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.

Results of Operations: Six-month period ended June 30, 2004, compared to six-
months ended June 30, 2003

      Total revenue for the six months ended June 30, 2004 was $643,390 compared
to $805,579 for the same period in 2003. The decrease in 2004 revenue was due to
a substantial decrease in the cost of vehicles leased which in turn generates
lower monthly lease payments and a decrease in the amounts of down payments and
the amortization of those down payments.

                                       12
<PAGE>


      Operating costs and expenses were $204,983 for the six month period ended
June 30, 2004 compared to $116,630 for the same period in 2003. The higher
expense for the 2004 period was due to increased marketing fees paid in the 2004
period.

      Depreciation and amortization for the six months ended June 30, 2004 was
$385,595 compared to $447,843 for the same period in 2003. The lower
depreciation and amortization for the 2004 period was due to a large number of
repossessions which reduced the size of the overall portfolio.

      Loss on sale of inventory for the six months ended June 30, 2004 was
$107,039 compared to $237,931 for the same period in 2003. The smaller loss on
sale of inventory for the 2004 period was due to an improved market for used
vehicles and aging of the portfolio.

      The Company had a loss of $427,087 for the six months ended June 30, 2004
compared to a loss of $368,537 for the same period in 2003. The larger loss for
the 2004 period was primarily due to lower revenue than in the 2003 period and
aging of the portfolio.

Liquidity and Capital Resources

      During the six months ended June 30, 2004, the Company used cash of
$163,515 in its investing activities and used $8,910 from its financing
activities. For the same period in 2003, the Company provided $673,768 in its
investing activities and provided $13,187 from 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 544 leases, included 405
leases, which resulted in early terminations and six have gone to term. 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            313    $ 7,185,152    $   185,007    $ 2,385,056    $ 1,378,479    $ 3,590,958
Early Payoff             92    $ 1,974,185    $     1,793    $ 1,034,814    $   389,909    $ 1,310,405
                -----------    -----------    -----------    -----------    -----------    -----------
Total                   405    $ 9,159,337    $   186,800    $ 3,419,870    $ 1,768,388    $ 4,901,363
</TABLE>

<TABLE>
<CAPTION>
                                                                    Total
                     Sales Tax       Warranty      Marketing       Amount         Profit
                       Credit         Rebate       Fee Paid       Received        (Loss)
<S>                 <C>            <C>            <C>            <C>           <C>
Repossession        $   158,369    $    72,506    $   793,159    $ 6,792,209   ($   577,950)
Early Payoff        $    53,269    $     1,399    $   224,005    $ 2,565,791    $   589,813
                    -----------    -----------    -----------    -----------   ------------
Total               $   211,638    $    73,905    $ 1,017,164    $ 9,358,000    $    11,863
</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

      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 second 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 June
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: August 6, 2004                           /s/
                                       -----------------------------------------
                                              Kenneth C. Lowe, President/
                                                Chief Executive Officer

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

Date: August 6, 2004                           /s/
                                       -----------------------------------------
                                              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