Table of Contents





# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

---

### FORM 10-QSB

---

(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, 2005
|- | ------------------------------------------------------------------------------------------------------------------------------------

|o | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION FROM _________ TO __________
|- | ---------------------------------------------------------------------------------------------------------------------------

# Commission file number 1-31730

---

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

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

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

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

---

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 o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o     No x

There were 11,235,800 shares of common stock outstanding at November 16, 2005.

# Transitional Small Business Disclosure Format (Check one):      Yes o       No x







---

# CapSource Financial, Inc.

# INDEX

Part I  Financial Information

| | Page No.                                                                                             
| | -----------------------------------------------------------------------------------------------------
| | Item 1.    Unaudited Condensed Consolidated Financial Statements                                     
|
| | Balance Sheets as of September 30, 2005 and December 31, 2004                                        
|
| | Statements of Operations for the three-month and nine-month periods ended September 30, 2005 and 2004
|
| | Statements of Cash Flows for the nine-month periods ended September 30, 2005 and 2004                
|
| | Notes to Unaudited Condensed Consolidated Financial Statements                                       
|
| | Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations     
|
| | Item 3.    Controls and Procedures                                                                   

Part II  Other Information

|          | Item 1.    Legal Proceedings                                           | 13
|--------- | ---------------------------------------------------------------------- | --
|         
|          | Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds | 13
|         
|          | Item 3.    Defaults Upon Senior Securities                             | 13
|         
|          | Item 4.    Submissions of Matters to a Vote of Security Holders        | 13
|         
|          | Item 5.    Other Information                                           | 13
|         
|          | Item 6.    Exhibits                                                    | 13
|         
|Signature | 14                                                                    

2

---

Table of Contents

# Part I  Financial Information

|Item 1. | UNAUDITED CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
|------- | ------------------------------------------------------

CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

|                                           | September 30
2005 |  | December 31
2004
|------------------------------------------ | ----------------- |  | ----------------
|                                           |                   |  |                 
|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 |                   |  |                 
|                                           |                   |  |                 
|Total current liabilities                  |                   |  |                 
|                                           |                   |  |                 
|                                          
|Long-term liabilities:                     |                   | 
|Notes payable                              |                   |  |                 
|Payable to stockholder, net of discount    |                   |  |                 
|                                           |                   |  |                 
|Total long-term liabilities                |                   |  |                 
|                                           |                   |  |                 
|Total liabilities                          |                   |  |                 
|                                           |                   |  |                 
|                                          
|Commitments and contingencies              |                   | 
|                                          
|Stockholders equity:                      |                   | 
|Common stock                               |                   |  |                 
|Additional paid-in capital                 |                   |  |                 
|Accumulated deficit                        |                   |  |                 
|                                           |                   |  |                 
|Total stockholders' equity                 |                   |  |                 
|                                           |                   |  |                 
|Total liabilities and stockholders equity |                   |  | $               
|                                           |                   |  |                 

See accompanying notes to unaudited
condensed consolidated financial statements.

3

---

Table of Contents

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 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

---

Table of Contents

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                                |                  
|Accretion of discount on payable to stockholder           |                  
|converted to equity prior to maturity                     |                  
|Gain on disposal of assets                                |                  
|Common stock issued for services                          |                  
|Changes in operating assets and liabilities:              |                  
|Rents and other receivables                               |                  
|Inventory                                                 |                  
|Advances to vendors and 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       |                  
|                                                          |                  
|Net cash (used in) provided by investing activities       |                  
|                                                          |                  
|Cash flows from financing activities:                     |                  
|Proceeds from payable to stockholder                      |                  
|Proceeds from notes payable and convertible notes payable |                  
|Repayment of notes payable and convertible notes payable  |                  
|Repayment of payable to stockholder                       |                  
|                                                          |                  
|Net cash provided by financing activities                 |                  
|                                                          |                  
|Net increase 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                                |                  
|                                                          |                  
|Stockholder and other debt converted to common stock      |                  
|                                                          |                  

See accompanying notes to unaudited
condensed consolidated financial statements.

5

---

Table of Contents

# 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, 2005, 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, 2004. The results of operations
          for the three months and nine months ended September 30, 2005, 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, 2005, had an accumulated deficit of
          $10,853,539, and working capital of $850,374. On February 18, 2005, the
          Companys Chairman and largest stockholder converted $1,100,000 of Company
          notes payable into Company common stock. During the nine months ended September
          30, 2005, he loaned an additional $1,623,000 to the Company through a note
          maturing October 15, 2006, of which $589,351 was repaid prior to September 30,
          2005.

The Company currently is negotiating
with third party investors to supply additional debt or equity funding, although no
financing agreements have been completed. The Company is, and has been, dependent on
its Chairman and largest stockholder to provide cash through loans, some of which have
been subsequently converted to equity. On November 4, 2005, the Companys Chairman
and largest stockholder expressed, in writing to the Companys President/CEO, his
willingness and ability to continue to financially support the Company, at least through
November 4, 2006, if needed, by way of additional debt and/or equity contributions. In
that same writing, he also committed to convert a sufficient amount of Company debt that
he currently holds, into equity before December 31, 2005, in order that the Company will
avoid a negative equity position as of that date. Should the Chairman fail to convert such
debt, or otherwise fail to provide financial support to the Company, or should the Company
be unsuccessful in obtaining funding from third parties, the Company would be forced to
dramatically scale back its operations and activities.

Management believes that the cash on
hand at September 30, 2005, together with cash expected to be received from a private
placement of debt/equity and cash expected to be generated by operations, will provide
sufficient operational funds for the next twelve months, and satisfy obligations as they
become due. If the Company experiences occasional cash shortfalls, the Companys
Chairman has committed to continue to provide the funds necessary to cover such
shortfalls.

(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.

6

---

Table of Contents

(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 capital leases. In determining whether or not a
          lease qualifies as a capital lease, the Company must consider the estimated
          value of the equipment at lease termination or residual value.

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. At
September 30, 2005, the Company had no capitalized IDC. 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. 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 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. At September 30, 2005, the Company had not recognized any
impairment of 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 February 18, 2005, the Companys majority
          stockholder converted a Company note of $1,100,000 into 1,375,000 shares of
          Company common stock at the conversion price of $0.80 per share, pursuant to the
          terms of the convertible note. The consolidated statement of operations for the
          nine months ended September 30, 2005 includes a charge of $353,100 to interest
          expense that represents the accretion of the beneficial conversion feature
          discount in connection with the convertible stockholder note.

For the three months and nine months
ended September 30, 2005 and 2004, 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.

7

---

Table of Contents

(8)    
          Earnings per share The following summarizes the weighted-average common
          shares issued and outstanding for the three months and nine months ended
          September 30, 2005 and 2004:

|                                              |  | Three Months Ended |  | Nine Months Ended
|--------------------------------------------- |  | ------------------ |  | -----------------
|
|
|
|                                              |  |                    |  |                  
|Common and common equivalent shares           |  |                    |  |                  
|outstanding at beginning of period            |  |                    |  | 11,235,800       
|Common shares issued for conversion of debt   |  |                    |  |                 
|Common shares issued for exercise of warrants |  |                    |  |                 
|Common shares issued for services             |  |                    |  |                 
|                                              |  |                    |  |                  
|Common and common equivalent shares           |  |                   
|outstanding at end of period                  |  |                    |  | 11,235,800       
|                                              |  |                    |  |                  
|                                             
|Historical common equivalent shares           |  |                   
|outstanding at beginning of period            |  |                    |  | 11,235,800       
|Weighted average common shares issued         |  |                   
|during period                                 |  |                    |  |                 
|                                              |  |                    |  |                  
|Weighted average common shares                |  |                   
|outstanding  basic and diluted               |  |                    |  | 11,235,800       
|                                              |  |                    |  |                  

Basic loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding. Diluted
loss per share is computed by dividing net loss by the weighted average number of common
shares outstanding increased for potentially dilutive common shares outstanding during the
period. The dilutive effect of equity instruments is calculated using the treasury stock
method.

Warrants to purchase 887,334 and
749,834 common shares as of September 30, 2005 and 2004, respectively, were excluded from
the treasury stock calculation because they were anti-dilutive due to the Companys
net losses.

(9)    
          Supplemental balance sheet information

|                                         |  | September 30,2005 |   | December 31,2004
|---------------------------------------- |  | ----------------- | - | ----------------
|                                         |  |                   |   |                 
|Rents and accounts receivable, net:      |  |                   |   |                 
|Rents and accounts receivable            |  |                   | $ | 1,254,603       
|Allowance for doubtful accounts          |  |                   |   | (6,820          
|                                         |  |                   |   |                 
|Total rents and accounts receivable, net |  |                   | $ | 1,247,783       
|                                         |  |                   |   |                 
|                                        
|Property and equipment, net:             |  |                  
|Trailer and semi-trailer equipment       |  |                   | $ | 2,051,808       
|Vehicles                                 |  |                   |   | 68,230          
|Furniture and computer equipment         |  |                   |   | 140,477         
|                                         |  |                   |   |                 
|                                         |  |                   |   | 2,260,515       
|Accumulated depreciation                 |  |                   |   | (956,683        
|                                         |  |                   |   |                 
|Total property and equipment, net        |  |                   | $ | 1,303,832       
|                                         |  |                   |   |                 

(10)    
          CommitmentsAs of September 30, 2005, the Company had committed to purchase
          additional trailers from Hyundai Translead and other suppliers during the
          remainder of 2005. The total purchase commitment was approximately $4,925,000,
          towards which the Company had made cash down payments totaling $590,321 as of
          September 30, 2005. Under the terms of the Companys sales and distribution
          agreement with Hyundai Translead, Hyundai provides a credit facility of
          $1,000,000 to facilitate the Companys purchase of the trailers.

8

---

Table of Contents

|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 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
total revenue for the third quarter ended September 30, 2005 was $6,080.492 compared with
$1,965,789 for the same period last year, an increase of 209.3%. Total revenue is made up
of two components: trailer sales/service revenues, which grew in the third quarter of 2005
by $4,142,881 an increase of 230.1% over the same period of 2004; and lease/rental income,
which declined by $28,179, a reduction of 17.1% compared to the same period last year.
Trailer sales growth was driven by our continued emphasis on expanding our trailer sales
volume in Mexico. We have continued to concentrate our working capital in trailer sales
inventory and facilities. In addition, we were able to obtain sufficient trailer inventory
during the first nine months of 2005, as most trailer manufacturers were able to produce
an adequate supply of trailers. During the third quarter of 2004, as well as during the
remainder of the year, we suffered a shortage of trailer inventory available for sale, as
most trailer manufacturers experienced a strong unexpected growth in demand. Due to the
resulting delays and shortages, we had to forego certain sales opportunities in 2004. As
we continue to direct our working capital towards increased trailer sales, we have reduced
our equipment lease portfolio, with the resulting decline in lease/rental income.

For
the nine months ended September 30, 2005, our consolidated total revenue increased 226.3%
to $15,317,032, compared to $4,693,861 in the same period last year. This increase was a
result of increased trailer sales, partially offset by reduced lease/rental income.

9

---

Table of Contents

Gross
profit consists of total revenue less cost of sales and operating leases. For the third
quarter ended September 30, 2005, gross profit increased 118.8% to $409,589 compared to
$187,239 for the same period last year. This increase in gross profit was due, in part, to
the increase in trailer sales, partially offset by lower profit margins resulting from
pricing pressures on trailer sales during 2005, as well as the impact of the decline
in lease/rental income.

For
the nine months ended September 30, 2005, gross profit increased 89.8% to $1,014,611
compared to $534,538 for the same period last year. This improvement resulted from the
increase in trailer sales, partially offset by lower profit margins resulting from
pricing pressures on trailer sales during 2005, as well as the impact of the decline
in lease/rental sales.

Selling,
general and administrative expense for the third quarter ended September 30, 2005 was
$539,620 compared to $468,242 for the same period last year. This increase of 15.2% was
due, in part, to cost increases associated with operating our trailer sales/storage
facilities in Mexico, as well as additional investor and public relations expenses
incurred in connection with being a public company.

For
the nine months ended September 30, 2005, selling, general and administrative expense
increased to $1,629,435 compared to $1,382,401 for the same period last year. This
increase of 17.9% was due, in part, to cost increases associated with operating our
trailer sales/storage facilities in Mexico, as well as additional investor and public
relations expenses incurred in connection with being a public company.

Operating
loss consists of total revenue less cost of sales and operating leases and selling,
general and administrative expenses. We recognized an operating loss of $130,031 in the
third quarter ended September 30, 2005, compared to $281,003 for the same period last
year. This operating loss improvement of $150,972 resulted from the growth in trailer
sales and gross profit, partially offset by the increase in selling, general and
administrative expense.

For
the nine months ended September 30, 2005, our operating loss was $614,824, compared to
$847,863 for the same period last year. This operating loss improvement of $223,039
resulted from the growth in trailer sales and gross profit, partially offset by the
increase in selling, general and administrative expense.

Net
interest expense for the third quarter and nine months ended September 30, 2005 was
$98,755 and $611,366, compared to $67,065 and $184,007, respectively, for the same periods
last year. The first nine months of 2005 included a one-time non-cash charge of $353,100,
which represents the accretion of the beneficial conversion feature discount related to
$1,100,000 of Company debt that was converted into equity by the Companys majority
stockholder on February 18, 2005. Excluding the one-time charge, net interest expense in
the first nine months of 2005 was $258,266. The increases in 2005 are associated with
higher debt levels related to our increase in trailer inventory.

Other
expense, net, which primarily is foreign exchange gains/(losses), was a loss of $21,316
and $53,395 in the third quarter and nine months ended September 30, 2005, respectively,
compared to a gain of $18,724 and a loss of $5,861, respectively, for the same periods of
2004. The foreign exchange losses incurred in 2005 were not significantly different from
those incurred in the same periods of 2004 because the exchange rate fluctuations of the
Mexican peso in relation to the US dollar were similar during the same periods of both
years.

Income
taxes of $18,096 and $39,075 were accrued for the three and nine months ended September
30, 2005, respectively, compared to $7,982 and $24,521, respectively in the same periods
last year. This tax, which is an alternative tax on assets incurred by our Mexican
subsidiaries, is applicable to most Mexican corporations that otherwise have no taxable
income.

We
recognized a net loss of $268,198, or $0.02 per diluted share for the third quarter ended
September 30, 2005, compared with a net loss of $337,326, or $0.03 per diluted share for
the same period last year. The improvement in the net loss resulted from the growth in
trailer sales and gross profit, partially offset by the increase in selling, general and
administrative expense and in net interest expense.

10

---

Table of Contents

For
the nine months ended September 30, 2005, our net loss was $1,318,660, or $0.12 per
diluted share. Excluding the one-time interest charge of $353,100 in the first nine months
of 2005, our net loss was $965,560, or $0.09 per diluted share, compared to a net loss of
$1,062,252, or $0.11 per diluted share for the same period last year. This reduction in
net loss was a result of the growth in trailer sales and gross profit, partially offset by
the increase in selling, general and administrative expense and in net interest expense.

Liquidity and Capital
Resources

Our
principal sources of liquidity are from borrowings, primarily from our majority
stockholder, as well as through our initial public offering that concluded in July 2003.
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.

Net
cash used in operating activities was $2,025,731 for the first nine months of 2005,
compared to $1,101,891 for the same period last year. Net operating cash used in the
current period increased compared to the same period of last year, primarily due to the
growth in inventory, partially offset by the increase in accounts payable and deposits and
advance payments. As our sales orders increased for trailers to be delivered in the second
half of 2005, we increased the levels of inventory and accounts payable.

During
the nine months ended September 30, 2005, we acquired property and equipment of $155,751,
offset by proceeds of $151,196 from disposals, which were primarily equipment from the
lease/rental pool that were removed from lease as the lease terms expired. This compares
to $32,625 and $102,464, respectively, for the nine months ended September 30, 2004. As a
result, net cash used for investing activities was $4,555 for the nine months ended
September 30, 2005, compared to net cash provided by investing activities of $69,839 for
the nine months ended September 30, 2004.

During
the nine months ended September 30, 2005, we received proceeds from the issuance of debt
totaling $3,039,725 which was partially offset by repayments of $1,039,351. During the
same period last year, we received proceeds from the issuance of debt of $1,237,610, which
was partially offset by debt repayments totaling $260,000. As a result, net cash provided
by financing activities for the nine months ended September 30, 2005 and 2004 was
$2,000,374 and $977,610, respectively.

On
February 18, 2005, the Companys Chairman and largest stockholder converted
$1,100,000 of Company notes payable into 1,375,000 shares of the Companys common
stock.

On
February 15, 2005, the Company entered into a new agreement with Hyundai Translead to
extend its contract to sell and distribute Hyundai trailers in Mexico. The previous
agreement expired by its terms in November 2004. Under the terms of the new contract,
Hyundai Translead provides a credit facility of $1,000,000 to facilitate the
Companys inventory of Hyundai trailers in Mexico.

As
of September 30, 2005, we had committed to purchase additional trailers in 2005 from
Hyundai and other suppliers, for which we had made partial advance payments of $590,321.
Under the terms of the commitment, we must pay the suppliers the remaining balance due of
approximately $4,925,000 upon taking delivery of the trailers, which we expect to
occur by December 2005. In addition, we have begun to place orders for delivery during
2006, in order to ensure an uninterrupted supply sufficient to meet our anticipated
customer demand in 2006.

On a long-term basis, liquidity is
dependent on an adequate supply of inventory available for sale, continuation and
expansion of 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 currently are
negotiating with third party investors to provide us with additional debt and/or equity
funding, although no financing agreements have been completed. We are, and have been,
dependent on our Chairman and largest stockholder to provide cash through loans, some of
which have been subsequently converted to equity. On November 4, 2005, the Companys
Chairman and largest stockholder expressed, in writing to the Companys
President/CEO, his willingness and ability to continue to financially support the Company,
at least through November 4, 2006, if needed, by way of additional debt and/or equity
contributions. In that same writing, he also committed to convert a sufficient amount of
Company debt that he currently holds, into equity before December 31, 2005, in order that
the Company will avoid a negative equity position as of that date. Should the Chairman
fail to convert such debt, or otherwise fail to provide financial support to the Company,
or should we be unsuccessful in obtaining funding from third parties, the Company would be
forced to dramatically scale back its operations and activities.

11

---

Table of Contents

As of September 30, 2005, we had an
accumulated deficit of $10,853,539, and working capital of $850,374. We believe that the
cash on hand at September 30, 2005, together with cash expected to be received from a
private placement of debt/equity and cash expected to be generated by operations, will
provide us with sufficient operational funds for the next twelve months, and satisfy
obligations as they become due. If we experience occasional cash shortfalls, our
Chairman has committed to continue to provide the funds necessary to cover such
shortfalls.

|Item 3. | CONTROLS AND PROCEDURES
|------- | -----------------------

As
of the end of the period covered by this report, the Company conducted an evaluation,
under the supervision and with the participation of the principal executive officer and
principal financial officer, of the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)). Based on this evaluation, the principal executive officer and
principal financial officer concluded that the Companys disclosure controls and
procedures are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange
Commission rules and forms.

There
was no change in the Companys internal control over financial reporting during the
Companys most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial
reporting.

All
internal control systems no matter how well designed have inherent limitations. Therefore,
even those systems determined to be effective may not prevent or detect misstatements and
can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.

Compliance with
Section 404 of Sarbanes-Oxley Act

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), beginning
with our Annual Report on Form 10-KSB for the fiscal year ending December 31, 2007, we
will be required to furnish a report by our management on our internal control over
financial reporting. This report will contain, among other matters, an assessment of the
effectiveness of our internal control over financial reporting as of the end of our fiscal
year, including a statement as to whether or not our internal control over financial
reporting is effective. This assessment must include disclosure of any material weaknesses
in our internal control over financial reporting identified by management. If we identify
one or more material weaknesses in our internal control over financial reporting, we will
be unable to assert that our internal control over financial reporting is effective. This
report will also contain a statement that our independent registered public accountants
have issued an attestation report on managements assessment of such internal
controls and a conclusion on the operating effectiveness of those controls.

Management acknowledges its responsibility for internal controls over
financial reporting and seeks to continually improve those controls. In order to achieve
compliance with Section 404 of the Act within the prescribed period, we will shortly
commence performing the system and process documentation and evaluation needed to comply
with Section (404.)

12

---

Table of Contents

# Part II  Other Information

|Item 1. |  | LEGAL
PROCEEDINGS
|------- |  | -----------------

| |  | None
| |  | ----

|Item 2. |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------------------------

| |  | 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
| |  | ----

|Item 6. |  | EXHIBITS
|------- |  | --------

# LIST OF EXHIBITS

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

|Exhibit No. |  | Description
|----------- |  | -----------

|*3.1 |  |  | Articles
of Incorporation
|---- |  |  | -------------------------

|*3.1.1 |  |  | Articles
of Amendment to the Articles of Incorporation (Name Change)
|------ |  |  | --------------------------------------------------------------------

|*3.1.2 |  |  | Articles
of Amendment to the Articles of Incorporation (Authorized Capital)
|------ |  |  | ---------------------------------------------------------------------------

|*3.2 |  |  | By-laws
|---- |  |  | -------

|**31.1 |  |  | Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|------ |  |  | -----------------------------------------------------------------------

|**31.2 |  |  | Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|------ |  |  | -----------------------------------------------------------------------

|**32.1 |  |  | Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|------ |  |  | -----------------------------------------------------------------------

|**32.2 |  |  | Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|------ |  |  | -----------------------------------------------------------------------

|* |  |  | Incorporated
by reference to the Companys Registration Statement on Form SB-2 filed October 7, 2002,
                  as amended by the Companys Amendment No. 1 to Form SB-2 filed December
9, 2002.
|- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  |  | Filed
herewith.
|-- |  |  | ---------------

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

13

---

Table of Contents

# 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.                      
|----- | -----------------------------------------------
|     
|     
|Date: | November 16, 2005                              
|      | Fred C. Boethling                              
|      | President, Chief Executive Officer
and Director

14

---