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

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### FORM 10-QSB

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(MARK ONE)

[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004[  ]
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT FOR THE TRANSITION FROM _________ TO __________


Commission File Number: 1-31730

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CapSource Financial, Inc.
(Name of Small Business Issuer as Specified in its charter)

Colorado
(State of incorporation)
84-1334453
(IRS Employer Identification No.)


2305 Canyon Boulevard, Suite 103Boulder, CO 80302
(Address of principal executive offices and Zip Code)

(303) 245-0515
(Registrants telephone number)

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

There were 9,871,454 shares of common stock outstanding at
November 12, 2004.

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



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|CapSource Financial, Inc. INDEX


Part I  Financial Information

Page No.
|--------------------------------------------------------------------------

|                            | Item 1. Unaudited Condensed Consolidated Financial Statements                                            |   
|--------------------------- | -------------------------------------------------------------------------------------------------------- | --
|                            | Balance Sheets as of September 30, 2004 and December 31, 2003                                            | 3 
|                            | Statements of Operations for the three-month and nine-month periods ended    September 30, 2004 and 2003 | 4 
|                            | Statements of Cash Flows for the nine-month periods ended    September 30, 2004 and 2003                 | 5 
|                            | Notes to Unaudited Condensed Consolidated Financial Statements                                           | 6 
|                            | Item 2. Managements Discussion and Analysis of Financial Condition and    Results of Operations         | 8 
|                            | Item 3. Controls and Procedures                                                                          | 12
|Part II  Other Information
|                            | Item 1. Legal Proceedings                                                                                | 12
|                            | Item 2. Changes in Securities                                                                            | 12
|                            | Item 3. Defaults Upon Senior Securities                                                                  | 12
|                            | Item 4. Submissions of Matters to a Vote of Security Holders                                             | 12
|                            | Item 5. Other Information                                                                                | 12
|                            | Item 6. Exhibits and Reports on Form 8-K                                                                 | 13
|Signature                   | 14                                                                                                      

2

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# Part I - Financial Information

# Item 1. Unaudited Condensed, Consolidated Financial Statements

# CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

|                                                 | September 30,2004 |  | December 31,2003
|------------------------------------------------ | ----------------- |  | ----------------
|                                                 |                   |  |                 
|Assets                                           |                   |  |                 
|Current assets:                                  |                   | 
|Cash and cash equivalents                        |                   |  | $               
|Rents and accounts receivable, net               |                   |  |                 
|Mexican value added taxes receivable             |                   |  |                 
|Inventory                                        |                   |  |                 
|Advances to vendors                              |                   |  |                 
|Prepaid insurance and other current assets       |                   |  |                 
|                                                 |                   |  |                 
|Total current assets                             |                   |  |                 
|Property and equipment, net                      |                   |  |                 
|Other assets                                     |                   |  |                 
|                                                 |                   |  |                 
|Total assets                                     |                   |  | $               
|                                                 |                   |  |                 
|                                                 |                   | 
|Liabilities and Stockholders' Equity             |                   | 
|Current liabilities:                             |                   | 
|Accounts payable and accrued expenses            |                   |  | $               
|Deposits and advance payments                    |                   |  |                 
|Notes payable                                    |                   |  |                 
|Convertible notes payable, net of discount       |                   |  |                 
|Payable to stockholder                           |                   |  |                 
|                                                 |                   |  |                 
|Total current liabilities                        |                   |  |                 
|Long-term debt, including payable to stockholder |                   |  |                 
|                                                 |                   |  |                 
|Total liabilities                                |                   |  |                 
|                                                 |                   |  |                 
|                                                 |                   | 
|Stockholders' equity:                            |                   | 
|Common stock and additional paid-in capital      |                   |  |                 
|Accumulated deficit                              |                   |  |                 
|                                                 |                   |  |                 
|Total stockholders' equity                       |                   |  |                 
|                                                 |                   | 
|Commitments and contingencies                    |                   | 
|                                                 |                   |  |                 
|Total liabilities and stockholders' equity       |                   |  | $               
|                                                 |                   |  |                 

See accompanying notes to unaudited condensed consolidated financial statements.

3

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# CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

|                                     | THREE MONTHS ENDED |  | NINE MONTHS ENDED
|------------------------------------ | ------------------ |  | -----------------
|                                     |                    |  |                  
|
|                                     |                    |  |                  
|Net sales and rental income          |                    |  | $                
|Cost of sales and operating leases   |                    |  |                  
|Selling, general and administrative  |                    |  |                  
|                                     |                    |  |                  
|Operating loss                       |                    |  |                  
|Interest, net                        |                    |  |                  
|Other income (expense), net          |                    |  |                  
|                                     |                    |  |                  
|Loss before income taxes             |                    |  |                  
|Income taxes                         |                    |  |                  
|                                     |                    |  |                  
|Net loss                             |                    |  | $                
|                                     |                    |  |                  
|                                     |                    | 
|Net loss per basic and diluted share |                    |  | $                
|                                     |                    |  |                  
|                                     |                    | 
|Weighted-average shares              |                    | 
|outstanding, basic and diluted       |                    |  |                  
|                                     |                    |  |                  

See accompanying notes to
unaudited condensed consolidated financial statements.

4

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# CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

|                                                          | NINE MONTHS ENDED
|--------------------------------------------------------- | -----------------
|                                                          |                  
|
|                                                          |                  
|Cash flows from operating activities:                     |                  
|Net loss                                                  |                  
|Adjustments to reconcile net loss to net cash used        |                  
|in operating activities:                                  |                  
|Provision for doubtful accounts                           |                  
|Depreciation                                              |                  
|Accretion of discount on convertible notes payable        |                  
|and payable to stockholder                                |                  
|Changes in operating assets and liabilities:              |                  
|Rents and other receivables                               |                  
|Inventory                                                 |                  
|Other current assets                                      |                  
|Accounts payable and accrued expenses                     |                  
|Deposits and advance payments                             |                  
|Other assets                                              |                  
|                                                          |                  
|Net cash used in operating activities                     |                  
|                                                          |                  
|                                                          |                  
|Cash flows from investing activities:                     |                  
|Purchase of property and equipment                        |                  
|Proceeds from disposition of property and equipment       |                  
|Deposits and other assets                                 |                  
|                                                          |                  
|Net cash provided by investing activities                 |                  
|                                                          |                  
|                                                          |                  
|Cash flows from financing activities:                     |                  
|Proceeds from payable to stockholder                      |                  
|Proceeds from notes payable and convertible notes payable |                  
|Reduction in notes payable and convertible notes payable  |                  
|Reduction in payable to stockholder                       |                  
|Proceeds from sale of common stock                        |                  
|Offering costs                                            |                  
|                                                          |                  
|Net cash provided by financing activities                 |                  
|                                                          |                  
|                                                          |                  
|Net increase (decrease) in cash and cash equivalents      |                  
|                                                          |                  
|Cash and cash equivalents, beginning of the period        |                  
|                                                          |                  
|                                                          |                  
|Cash and cash equivalents, end of the period              |                  
|                                                          |                  
|                                                          |                  
|Supplemental cash flow information:                       |                  
|Cash paid for interest                                    |                  
|                                                          |                  
|Cash paid for income taxes                                |                  
|                                                          |                  
|Common stock issued in exchange for prepaid expenses      |                  
|                                                          |                  
|Common stock issued in cancellation of debt               |                  
|                                                          |                  

See accompanying notes to unaudited condensed consolidated financial statements.

5

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# CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES

# Notes to Unaudited Condensed Consolidated Financial Statements

(1)    
          Nature of Operations CapSource Financial, Inc. (CapSource or the Company)
          is a U.S. corporation with its principal place of business in Boulder, Colorado.
          CapSource is a holding company that sells and leases dry van and refrigerated
          truck trailers through its wholly owned Mexican operating subsidiaries. The
          Company operates in one segment, the leasing and selling of trailers, and all
          operations currently are in Mexico.

(2)    
          Basis of presentationThe accompanying unaudited condensed consolidated
          financial statements include the accounts of CapSource and its wholly owned
          subsidiaries. All intercompany balances have been eliminated in consolidation.
          In the opinion of Company management, the accompanying unaudited condensed,
          consolidated financial statements contain all adjustments (consisting of only
          normal recurring adjustments, except as noted elsewhere in the notes to the
          condensed consolidated financial statements) necessary to present fairly the
          financial position of the Company as of September 30, 2004, and the results of
          operations and cash flows for the interim periods presented. These statements
          are condensed and, therefore, do not include all of the information and notes
          required by generally accepted accounting principles for complete financial
          statements. The statements should be read in conjunction with the consolidated
          financial statements and footnotes included in the Companys annual report
          on Form 10-KSB for the year ended December 31, 2003. The results of operations
          for the three months and nine months ended September 30, 2004, are not
          necessarily indicative of the results to be expected for the full year.

The financial statements of the
Companys Mexican subsidiaries are reported in the local currency, the Mexican peso.
However, as substantially all sales and leases are denominated in U.S. dollars, as well
as generally all other activities, the functional currency is designated as the U.S.
dollar. Those transactions denominated in the local currency are remeasured into the U.S.
dollar, creating foreign exchange gains and losses that are included in other income
(expense).

(3)    
          Liquidity Since its inception, the Company has generated losses from
          operations, and as of September 30, 2004, had an accumulated deficit of
          $9,020,968, and a working capital deficit of $819,886. Between January 1, 2004
          and September 30, 2004, the Companys Chairman and largest stockholder
          loaned $1,221,000 to the Company through short-term notes, of which $260,000 was
          repaid as of September 30, 2004. Subsequently, on October 14, 2004, he loaned
          the Company an additional $300,000 through a short-term note.

The Company currently is negotiating
with third party investors to supply additional debt and/or equity funding, although no
financing agreements have been finalized. In addition, the Companys Chairman and
largest stockholder has expressed his willingness and ability to continue to financially
support the Company, at least for the next eighteen months if needed, by way of
additional debt and/or equity contributions.

Management believes that the cash
expected to be generated by operations, plus the cash expected to be received from a
private debt and/or equity placement will provide the Company with sufficient funds for
the next eighteen months, and to satisfy obligations as they become due. If the Company
experiences occasional cash shortfalls, management expects to cover them with funds
provided by the Companys Chairman.

(4)    
          Recognition of revenue from equipment salesRevenue generated by the sale
          of trailer and semi-trailer equipment is recorded at the time the title to the
          equipment legally transfers to the buyer, provided the Company has evidence of
          an arrangement, the sale price is fixed or determinable and collectibility is
          probable.

(5)    
          Equipment leasing The Companys leases are classified as operating
          leases for all of the Companys leases and for all lease activity, as the
          lease contracts do not transfer substantially all of the benefits and risks of
          ownership of the equipment to the lessee and, accordingly, do not satisfy the
          criteria to be recognized as sales-type leases. In determining whether or not a
          lease qualifies as a sales-type lease, the Company must consider the estimated
          value of the equipment at lease termination or residual value. Residual values
          are estimated at lease inception equal to the estimated fair value of the
          equipment following termination of the initial lease (which in certain
          circumstances

6

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includes anticipated re-lease
proceeds) as determined by the Company. In estimating such values, the Company considers
various information and circumstances regarding the equipment and the lessee. Actual
results could differ significantly from initial estimates, which could in turn result in
impairment or other charges in future periods.

Leasing revenue consists principally
of monthly rentals and related charges due from lessees. Leasing revenue is recognized
ratably over the lease term. Deposits and advance rental payments are recorded as a
liability until repaid or earned by the Company. Operating lease terms range from
month-to-month rentals to five years. Initial direct costs (IDC) are capitalized and
amortized over the lease term in proportion to the recognition of rental income.
Depreciation expense and amortization of IDC are recorded as direct costs of trailers
under operating leases in the accompanying consolidated statements of operations on a
straight-line basis over the estimated useful life of the equipment.

(6)    
          Comprehensive income (loss)Comprehensive income (loss) includes all changes
          in stockholders equity (net assets) from non-owner sources during the
          reporting period. Since inception, the Companys comprehensive loss has
          been the same as its net loss.

(7)    
          Common stock issuanceOn March 15, 2004, we executed a contract with a
          public relations firm pursuant to which the Company issued 35,000 shares of
          Company common stock as partial compensation for the services to be provided.
          Under the contract, which was effective for six months, the shares vest
          immediately. We valued the shares issued under the contract, at $1.75 per share,
          which is equal to the price per share of the Companys recent most
          significant transaction for its stock, the Companys public stock offering,
          which concluded in 2003. Since the Companys stock has experienced only
          limited trading volume since it commenced public trading in January 2004, we
          determined that there was no relevant indication of a significant change in its
          market value since then, and correspondingly used the public offering price to
          value the shares issued under the contract. The resulting total estimated fair
          value of the shares, $61,250, was recorded as prepaid cost, and was amortized to
          sales, general and administrative expense over the six-month life of the
          contract. In the three months and nine months ended September 30, 2004, the
          Company recognized related expense of $25,522 and $61,250, respectively.

On June 29, 2004, the Company issued
45,455 shares of Company common stock pursuant to the exercise of warrants to purchase
Company common stock at $1.10 per share, for a total exercise price of $50,001. The
shares were issued in cancellation of Company debt totaling $50,001.

For the three months and nine months
ended September 30, 2004 and 2003, the Company did not issue any stock-based awards.
Therefore, there is no pro forma stock-based compensation disclosure presented herein.
All stock-based awards granted in previous periods were fully vested as of the issuance
date, except for warrants to purchase 34,834 shares of Company common stock at $2.45 per
share, which vested to the holder on August 29, 2004.

(8)    
          Shares outstanding / weighted-average shares The following summarizes the
          shares outstanding and weighted average common shares outstanding for the nine
          months ended September 30, 2004 and 2003.

|                                            | THREE MONTHS ENDED |  | NINE MONTHS ENDED
|------------------------------------------- | ------------------ |  | -----------------
|                                            |                    |  |                  
|
|                                            |                    |  |                  
|Common and common equivalent shares         |                    |  |                  
|outstanding at beginning of period          |                    |  |                  
|Common shares issued for cash               |                    |  |                  
|Common shares issued for services           |                    |  |                  
|Common shares issued for warrants exercised |                    |  |                  
|                                            |                    |  |                  
|Common and common equivalent shares         |                    | 
|outstanding at end of period                |                    |  |                  
|                                            |                    |  |                  
|                                            |                    | 
|Historical common equivalent shares         |                    | 
|outstanding at beginning of period          |                    |  |                  
|Weighted average common shares issued       |                    | 
|during period                               |                    |  |                  
|                                            |                    |  |                  
|Weighted average common shares              |                    | 
|outstanding - basic and diluted             |                    |  |                  
|                                            |                    |  |                  

7

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(9)    Supplemental balance sheet information

|                                         | September 30,2004 |  | December 31,2003
|---------------------------------------- | ----------------- |  | ----------------
|                                         |                   |  |                 
|Rents and accounts receivable, net:      |                   |  |                 
|Rents and accounts receivable            |                   |  | $               
|Allowance for doubtful accounts          |                   |  |                 
|                                         |                   |  |                 
|Total rents and accounts receivable, net |                   |  | $               
|                                         |                   |  |                 
|Property and equipment, net:             |                   | 
|Trailer and semi-trailer equipment       |                   |  | $               
|Vehicles                                 |                   |  |                 
|Furniture and computer equipment         |                   |  |                 
|                                         |                   |  |                 
|                                         |                   |  |                 
|Accumulated depreciation                 |                   |  |                 
|                                         |                   |  |                 
|Total property and equipment, net        |                   |  | $               
|                                         |                   |  |                 

(10)    
          CommitmentsAs of September 30, 2004, the Company had committed to purchase
          additional trailers in 2004 from Hyundai, towards which the Company had made a
          down payment of $286,566. Under the terms of the commitment, the remaining
          balance due of approximately $1,600,000 must be paid to Hyundai upon delivery of
          the trailers, which is expected to occur during the next four months, by January
          2005. In addition, the Company has begun to place orders for 2005 delivery, in
          an attempt to ensure an uninterrupted supply sufficient to meet anticipated
          customer demand.

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

This discussion contains
forward-looking statements, which we have made pursuant to the safe-harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect
our current views with respect to future events. Actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated. Without
limiting the foregoing, the words believes,anticipates, plans, expects, and
similar expressions, are intended to identify forward-looking statements. In addition,
forward- looking statements

8

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include, but are not limited to,
statements regarding future financing needs, future revenues, future profitability and
factors affecting future liquidity. A number of important factors could cause the Companys
actual results to differ materially from those indicated in the forward-looking
statements in this discussion, which include, without limitation, inability to obtain
sufficient additional financing when needed, inability to maintain a price advantage over
our competitors and adverse effects of general and international economic conditions. We
do not undertake to update any forward-looking statement that may be made from time to
time by us or on our behalf.

# Overview

CapSource
Financial, Inc. is a U.S. corporation engaged principally in the business of selling and
leasing over-the-road truck trailers. We conduct these businesses through our operations
of two wholly owned subsidiaries in Mexico.

Mexico
is now the United States second largest trading partner with an average of $650
million in goods crossing the border each day. The Federal Reserve Bank of Dallas has
reported that over the past fifteen years U.S. trade with Mexico has increased 400 percent
 from $48 billion to $239 billion. The vast majority of this trade moves by truck.
U.S. Customs Service statistics show that border crossings of trucks between the United
States and Mexico have increased almost 200% since the passage of NAFTA in 1994.

We
have invested in equipment essential to the Mexican trucking industry in the belief that
NAFTA fosters an environment of confidence and stability necessary to make long-term
investments. Through REMEX, our lease/rental subsidiary in Mexico, we own and manage a
lease/rental fleet of over-the-road truck trailers and related equipment, which are leased
to our customers under operating lease contracts that are denominated in U.S. dollars.
Through RESALTA, our trailer sales company, we have the exclusive right to sell Hyundai
truck trailers and related equipment in Mexico from Hyundai Translead, a subsidiary of the
Korean construction, engineering and manufacturing company. RESALTA markets and
distributes Hyundai trailer products through a number of locations in Mexico.

# Results of Operations

Consolidated
net sales and rental income for the third quarter ended September 30, 2004 was $1,965,790
compared with $1,972,579 for the same period last year. The 2004 sales were made up of two
components: trailer sales of $1,800,488, which grew by 1.1%, and lease/rental income of
$165,302, which declined 13.5%, offsetting each other, resulting in no growth in
consolidated sales. Trailer sales growth was driven by increased sales volume, resulting
from our continuing emphasis on expanding sales in Mexico. In January 2003, we intensified
our focus on developing our sales infrastructure by opening a new trailer sale and storage
facility in a strategic area of Mexico City, significantly improving customer awareness of
our operations and our products. In addition, the new facility strengthened our capacity
to respond more rapidly to customers. As we continue to direct our working capital towards
increased sales, we have reduced our equipment lease portfolio by approximately 10%
compared to the third quarter of last year, with the resulting decline in lease/rental
income.

For
the nine months ended September 30, 2004, consolidated net sales and rental income
increased 21.8% to $4,693,861, compared to $3,853,641 in the same period last year. This
increase was a result of increased trailer sales, partially offset by reduced lease/rental
income.

Gross
margin consists of net sales and rental income less cost of sales and operating leases.
For the third quarter ended September 30, 2004, gross margin declined 18.9% to $187,238
compared with $230,844 for the same period last year. This decline in gross margin was
due, in part, to pricing pressures on trailer sales, as well as the impact of the decline
in lease/rental sales and increases in operating costs of the leasing business.

For
the nine months ended September 30, 2004, gross margin increased 11.6% to $534,538
compared with $479,053 for the same period last year. This improvement resulted primarily
from the increase in consolidated net trailer sales, partially offset by the decline in
lease/rental sales.

9

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Selling,
general and administrative expense for the third quarter ended September 30, 2004 was
reduced by $117,085 or 20.0%, to $468,242 compared to $585,327 for the same period last
year. This decrease was due, in part, to our efforts in reducing corporate administrative
costs, including a voluntary salary reduction program for company executives in the U.S.
corporate offices, which was implemented on January 1, 2004. In addition, the 2003
expenses for the same period included additional costs incurred in connection with
complying with initial legal and regulatory requirements of being a public company.

For
the nine months ended September 30, 2004, selling, general and administrative expense
increased slightly by $3,865, or 0.3%, to $1,382,401 compared to $1,378,536 for the same
period last year. This increase was a result of the additional costs to operate our new
trailer sales/storage facility in Mexico City, offset by our expense reduction efforts.

Operating
loss consists of net sales and rental income less cost of sales and operating leases and
selling, general and administrative expenses. We recognized an operating loss of $281,003
for the third quarter ended September 30, 2004, compared with $354,483 for the same period
last year. This operating loss decrease of $73,480 resulted from the reduction of selling,
general and administrative expenses in 2004, partially offset by the decline in gross
margin.

The
operating loss for the nine months ended September 30, 2004 was reduced by $51,620 to
$847,863 compared with $899,483 for the same period last year. This decrease resulted from
the higher sales and gross margin.

Net
interest expense for the three and nine months ended September 30, 2004 was $67,065 and
$184,007, compared with $140,895 and $419,374, respectively, for the same periods last
year. These reductions are associated with lower debt levels in 2004, resulting from the
conversion of stockholder debt into Company common stock on October 21, 2003.

Other
expense (net), which primarily is foreign exchange gains/(losses), was a gain of $18,724
in the third quarter of 2004, compared to a loss of $23,943 in the same period last year.
This improvement of $42,667 was due to fluctuations of the Mexican peso exchange rate in
relation to the US dollar during the quarter, which benefited our conversion of the
foreign currency financial results into the US dollar based financial statements this
year. For the nine months ended September 30, 2004, other expenses (net) was a loss of
$5,861, compared to a loss of $76,196 for the same period last year. The improvement in
2004 resulted from the offset of the gain in the third quarter against the losses incurred
in the first six months of the year. The exchange rate fluctuations in the first nine
months of 2003 were less beneficial to our monetary position than in 2004, resulting in
greater foreign exchange losses.

Income
taxes of $7,982 and $24,521 were accrued for the three and nine months ended September 30,
2004, respectively, compared with $4,930 and $14,709, respectively, in the same periods
last year. This tax, which is an alternative tax incurred by our Mexican subsidiaries, is
applicable to most Mexican corporations that otherwise have no taxable income.

We
recognized a net loss of $337,326 or $0.03 per diluted share, for the third quarter ended
September 30, 2004, compared with a net loss of $524,251, or $0.06 per diluted share, for
the same period last year. The reduction in net loss was due to lower selling, general and
administrative expenses and reduced interest expense, partially offset by the decline in
gross margin.

For
the nine months ended September 30, 2004, our net loss was $1,062,252 or $0.11 per diluted
share compared with a net loss of $1,409,762, or $0.18 per diluted share, for the same
period last year. This reduction in net loss was due to higher net sales and gross
margins, coupled with reduced interest expense and foreign exchange losses.

Liquidity and Capital Resources

10

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Our
principal sources of liquidity are from borrowings, primarily from our majority
stockholder. In addition, through our initial public offering that concluded in July 2003,
we added approximately $219,000 to equity. Our principal uses of capital have been to fund
our operating losses and to expand our operations pursuant to our strategic business plan,
increasing sales by adding to equipment inventory and adding to our lease equipment
portfolio.

Net
cash used in operating activities was $1,101,891 for the first nine months of 2004,
compared with $1,588,379 for the same period last year. Net operating cash used in the
current period decreased compared to the same period of last year, primarily due to
decrease in the net loss, the reduction of inventory and the increase in accounts payable,
partially offset by the increase in rents and other receivables. As we sold trailers
during the first nine months of 2004, we reduced inventory levels. However, the majority
of sales made in September 2004 were with credit terms to be paid in October, resulting in
a large increase in accounts receivable.

During
the nine months ended September 30, 2004, we acquired property and equipment of $32,625,
offset by proceeds of $102,464 from disposals, which were primarily equipment from the
lease/rental pool that were removed from lease as their lease terms expired. This compares
to $88,198 and $295,129, respectively, for the nine months ended September 30, 2003. As a
result, net cash provided by investing activities was $69,839 for the nine months ended
September 30, 2004, compared to $191,677 for the nine months ended September 30, 2003.

During
the nine months ended September 30, 2004, we received proceeds from the issuance of debt
totaling $1,237,610, which was partially offset by debt repayment of $260,000. During the
same period last year, we received proceeds from the issuance of debt of $1,217,433, which
was partially offset by repayments of debt totaling $100,581. In addition, we received
proceeds of $609,593 from the sale of common stock which were partially offset by offering
costs of $182,016. As a result, net cash provided by financing activities for the nine
months ended September 30, 2004 and 2003 was $977,610 and $1,544,429, respectively.

Under
an agreement between CapSource and Hyundai Precision America, Inc. (now, Hyundai
Translead), we have exclusive rights to distribute Hyundai truck trailers and related
equipment in Mexico. The agreement is for a period of four years expiring in November
2004, and is renewable. We currently are negotiating with Hyundai to extend the contract.
The initial agreement required us to fulfill certain minimum annual purchase requirements,
as well as to develop certain facilities to sell and service Hyundai products. To date, we
have not met the purchase requirements, and Hyundai has chosen not to enforce them.
However, there is no assurance that Hyundai will continue its current position of not
enforcing the minimum purchase requirements of the agreement. If Hyundai chooses to
enforce the minimum purchase requirements, we could be required to purchase Hyundai
trailers for which we may have no immediate need, or face the possible termination of the
exclusivity of the Hyundai Agreement.

As
of September 30, 2004, we had committed to purchase additional trailers in 2004 from
Hyundai for sale or lease, for which we had made partial advance payments of $286,566.
Under the terms of the commitment, we must pay Hyundai the remaining balance due of
approximately $1,600,000, upon taking delivery of the trailers, which we expect to occur
during the next four months, by January 2005. In addition, we have begun to place orders
for 2005 delivery, in order to ensure an uninterrupted supply sufficient to meet our
anticipated customer demand in 2005.

On
a long-term basis, liquidity is dependent on the continuation and expansion of our
operations, the sale of equipment, the renewal of leases and the receipt of revenue, as
well as additional infusions of equity and debt capital. We are currently negotiating with
third party investors to provide us with additional debt and/or equity funding, although
no financing agreements have been finalized. In addition, the Companys Chairman and
largest stockholder has expressed his willingness and ability to continue to financially
support the Company, at least for the next eighteen months if needed, by way of additional
debt and/or equity funding.

As
of September 30, 2004, our net working capital was $92,377, compared to $794,493 as of
December 31, 2003. This change of $702,000 is due, in part, to the shift of approximately
$950,000 of debt to short-term from long-term, as well as additional net loss incurred
during the nine months ended September 30, 2004, partially offset by the increase in rents
and accounts receivable. We believe that the cash expected to be generated by operations,
plus the cash expected to be received from private debt and/or equity placements, will
provide us with sufficient funds for the next eighteen months, and to satisfy obligations
as they become due. If we experience occasional cash shortfalls, we expect to cover them
with funds provided by the Companys Chairman.

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# Item 3. CONTROLS AND PROCEDURES

(a)                 Evaluation
of disclosure controls and procedures

Company
management, under the supervision and with the participation of the Chief Executive
Officer (CEO) and the person performing the functions of Chief Financial
Officer (CFO), has evaluated the effectiveness the Companys disclosure
controls and procedures as defined in Securities and Exchange Commission (SEC)
Rule 13a-15(e) as of the end of the period covered by this report. Based upon that
evaluation, management has concluded that the Companys disclosure controls and
procedures are effective to ensure that information required to be disclosed in reports
filed or submitted under the Securities Exchange Act is communicated to management,
including the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms.

(b)                 Changes
in internal controls

During
the fiscal quarter covered by this report, there have been no significant changes in
internal control over financial reporting that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.

# PART II OTHER INFORMATION

# Item 1.    LEGAL PROCEEDINGS

None

# Item 2.    CHANGES IN SECURITIES

None.

# Item 3.    DEFAULTS UPON SENIOR SECURITIES

None.

# ITEM 4.    SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

# Item 5.    OTHER INFORMATION

None.

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# Item 6. EXHIBITS AND REPORTS ON FORM 8-K

# LIST OF EXHIBITS

The following exhibits are filed
with this Form 10-QSB:

|Exhibit No. | Description
|----------- | -----------
|*3.1        |            
|*3.1.1      |            
|*3.1.2      |            
|*3.2        |            
|**31.1      |            
|**31.2      |            
|**32.1      |            
|**32.2      |            
|*           |            
|**          |            
|            |            

The financial statements filed as
part of this report are listed separately in the Index to Financial Statements.

The Company did not file, nor was it
required to file, any reports on Form 8-K during the third quarter ended September 30,
2004.

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# SIGNATURE

In
accordance with the requirements of the Securities Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                           |                                                                    |                           |  |                         | 
|-------------------------- | ------------------------------------------------------------------ | ------------------------- |  | ----------------------- | 
|                           |                                                                    | CAPSOURCE FINANCIAL, INC.
|Dated:   November 15, 2004 |                                                                    | By:                       |  | /s/   Fred C. Boethling | 
|                           |                                                                   
|                           | Fred C. Boethling,
President, Chief Executive Officer
and Director |                          

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