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# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 MARCH 31, 2006
|- | -------------------------------------------------------------------------------------------------------------------------------

|o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 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                 | 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

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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 19,558,321 shares of common stock outstanding at May 15,
2006.

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





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# CapSource Financial, Inc.

# INDEX

|                                                                                                | Page No.
|----------------------------------------------------------------------------------------------- | --------
|Part I  Financial Information                                                                  |         
|                                                                                               
|Item 1.   Unaudited Condensed Consolidated Financial Statements                                 |         
|                                                                                               
|Balance Sheets as of March 31, 2006 and December 31, 2005                                       |         
|                                                                                               
|Statements of Operations for the three-month periods ended March 31, 2006 and 2005              |         
|                                                                                               
|Statements of Cash Flows for the three-month periods ended March 31, 2006 and 2005              |         
|                                                                                               
|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                                                                     |         
|                                                                                               
|Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                           |         
|                                                                                               
|Item 3.   Defaults Upon Senior Securities                                                       |         
|                                                                                               
|Item 4.   Submissions of Matters to a Vote of Security Holders                                  |         
|                                                                                               
|Item 5.   Other Information                                                                     |         
|                                                                                               
|Item 6.   Exhibits                                                                              |         
|                                                                                               
|Signature                                                                                       |         

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

|                                           | March 31,2006 |  | December 31,2005
|------------------------------------------ | ------------- |  | ----------------
|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                              |               |  |                 
|Payable to stockholder                     |               |  |                 
|                                           |               |  |                 
|Total current liabilities                  |               |  |                 
|Long-term debt                             |               |  |                 
|                                           |               |  |                 
|Total liabilities                          |               |  |                 
|                                           |               |  |                 
|                                          
|Commitments and contingencies (Note 8)     |               | 
|                                          
|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.

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CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations

|                                                       | THREE 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.

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CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows

|                                                                                 | THREE 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                                            |                   
|Loss on disposal of assets                                                       |                   
|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                                                       |                   
|                                                                                 |                   
|Net cash provided by financing activities                                        |                   
|                                                                                 |                   
|Net (decrease) 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 debt converted to common stock                                       |                   
|                                                                                 |                   

See accompanying notes to unaudited condensed consolidated financial statements.

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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. In addition, on May 1, 2006, the Company acquired, and began
operating, the truck trailer sales business of Prime Time Equipment, Inc., a California based authorized dealer for Hyundai
Translead trailers. The Companys current report on Form 8-K filed May 5, 2006, as amended by Amendment No. 1 filed May 9,
2006, reporting this event is incorporated by reference. The Company operates in one business segment, the leasing and selling of
trailers, currently operating in the United States and Mexico.

(2)    Basis of presentation   The
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 March 31, 2006, 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, 2005. The results of operations for the three months ended March 31, 2006, 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 March 31, 2006, had an accumulated deficit of $11,557,754
and a working capital deficit of $759,659.

On May 1, 2006, the Company increased its equity by selling 5,000,000 shares
of common stock for $2,000,000. In addition, the Companys Chairman and largest stockholder, converted $871,866 of debt owed
to him by the Company, into 2,179,664 shares of Company common stock. The Companys current report on Form 8-K filed May
5, 2006, as amended by Amendment No. 1 filed May 9, 2006, reporting this event is incorporated by reference.

Also on May 1, 2006, through its wholly owned United States subsidiary,
CapSource Equipment Company, Inc., the Company acquired the trailer sales business and the related operating assets of Prime Time
Equipment, Inc., a California based truck trailer dealer, for a total purchase price of approximately $1.7 million, of which
approximately $700,000 was funded by the assumption of certain liabilities, and the remainder paid or to be paid in cash. In
conjunction with this acquisition, the Company obtained Floor Plan financing of approximately $3,000,000, to finance the purchase
of new and used truck trailer inventory. The Companys current report on Form 8-K filed May 5, 2006, as amended by Amendment
No. 1 filed May 9, 2006, reporting this event is incorporated by reference.

In addition to the new debt and equity financing obtained by the Company as
of May 1, 2006, the Companys Chairman and largest stockholder has expressed his willingness and ability to continue to
financially support the Company, at least through March 31, 2007 if needed, by way of additional debt and/or equity contributions.

Management believes that the cash on hand at March 31, 2006, the cash
received from the sale of Company common stock on May 1, 2006, and cash expected to be generated by operations, will provide
sufficient operational funds for the next twelve months, and to satisfy obligations as they become due. If the Company experiences
occasional cash short-falls, management expects to cover them with funds provided by the Companys Chairman.

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(4)    Recognition of revenue from equipment
sales   Revenue 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 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 March
31, 2006, 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.

(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 issuance   On
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. On May 1, 2006, the
Company increased its equity by selling 5,000,000 shares of common stock for $2,000,000. In addition, the Companys Chairman
and largest stockholder, converted $871,866 of debt owed to him by the Company, into 2,179,664 shares of Company common stock. The
Companys current report on Form 8-K filed May 5, 2006, as amended by Amendment No. 1 filed May 9, 2006, reporting this event
is incorporated by reference.

The March 31, 2005 consolidated statement of operations includes a charge of
$353,100 to interest expense that represents the amortization of the beneficial conversion feature discount in connection with the
convertible stockholder note.

For the three months ended March 31, 2006 and 2005, 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.

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(8)    Earnings per share   The
following summarizes the weighted-average common shares issued and outstanding for the three months ended March 31, 2006 and 2005:

|                                                                      | 2006 |  | 2005
|--------------------------------------------------------------------- | ---- |  | ----
|Common and common equivalent shares outstanding  beginning of period |      |  |     
|Common shares issued for conversion of debt                           |      |  |     
|                                                                      |      |  |     
|Common and common equivalent shares outstanding  end of period       |      |  |     
|                                                                      |      |  |     
|                                                                     
|Historical common equivalent shares outstanding  beginning of period |      |  |     
|Weighted average common shares issued during period                   |      |  |     
|                                                                      |      |  |     
|Weighted average common shares outstanding  basic and diluted        |      |  |     
|                                                                      |      |  |     

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 937,334 and 887,334 common shares as of March 31, 2006
and 2005, 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

|                                         | March 31,2006 |  | December 31,2005
|---------------------------------------- | ------------- |  | ----------------
|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)    Commitments   As of March
31, 2006, the Company had committed to purchase an additional 145 trailers from Hyundai Translead, at a total purchase price of
approximately $3,600,000, towards which the Company had made down payments of $361,452.

# 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.

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# 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 this
business through two wholly-owned operating subsidiaries in Mexico  REMEX and RESALTA. In addition, as of May 1, 2006, we
acquired and began operating the truck trailer sales business of Prime Time Equipment, Inc., a California-based trailer dealer.
The details of this acquisition are included in the Companys current report on Form 8-K filed May 5, 2006, as amended by
Amendment No. 1 filed May 9, 2006.

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
Mexican 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.

Prime Time is the sole
authorized distributor for Hyundai Translead truck trailers and related equipment in California. The acquisition of Prime Time
provides CapSource with an established operation with access to markets on the West Coast and in the Southwestern United States.
Prime Time markets and distributes trailers and trailer products from its location in Fontana, California.

# Results of Operations

Consolidated total revenue
first quarter ended March 31, 2006 was $5,494,718 compared with $3,175,518 for the same period last year, an increase of 73.0%.
Total revenue is made up of two components: trailer sales/service revenues, which grew in the first quarter of 2006 by $2,302,401,
an increase of 75.5% over the same period of 2005; and lease/rental income, which improved by $16,799, an increase of 13.4%
compared to the same period last year. Trailer sales growth was driven by emphasis on expanding trailer sales volume in Mexico. We
have continued to concentrate our working capital in trailer sales inventory and facilities. However, after three years of
gradually reducing our equipment lease portfolio in order to focus on increasing our trailer sales volume, we added to our trailer
lease fleet during the first quarter of 2006, thereby producing an increase in lease/rental income.

Gross profit consists of
total revenue less cost of sales and operating leases. For the first quarter ended March 31, 2006, gross margin increased 90.1% to
$469,947 compared to $247,202 for the same period last year. This increase in gross profit was due, in part, to the increase in
trailer sales volume, as well as improvement in the average gross profit margin per sale. This margin improvement resulted from
our ability to reduce reliance on lower-margin, large fleet customers, increasing sales to higher-margin, lower-volume customers.

Selling, general and
administrative expense for the first quarter ended March 31, 2006 was $575,517 compared to $531,192 for the same period last year.
This increase was due primarily to expenses associated with operating our trailer sales/storage facilities in Mexico, as well as
well as additional 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 $105,570 in the first quarter ended March 31, 2006, compared to $283,990 for the same period last year. This operating
loss improvement of $178,420 resulted from the growth in trailer sales and gross profit, partially offset by the increase in
selling, general and administrative expenses.

Net interest expense for the
first quarter ended March 31, 2006 was $78,370 compared to $419,489 for the same period last year. Net interest expense in the
first quarter of 2005 included a one-time charge of $343,100, which represents the accretion of the beneficial conversion feature
discount related to the $1,100,000 Company debt converted into equity by the Companys majority stockholder on February 18,
2005. Excluding the one-time charge, the net interest expense of $78,370 in the first quarter of 2006 was a slight increase of
$1,981 over the $76,389 interest expense in the same period last year.

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Other expense, net, which is
primarily foreign exchange gains/(losses), was a loss of $22,421 in the first quarter of 2006, compared to a loss of $9,844 in the
same period last year. The foreign exchange losses incurred in 2006 were not significantly different from those incurred in the
same period of 2005 because the exchange rate fluctuations of the Mexican peso in relation to the US dollar were similar during
the same period of both years.

Income taxes of $22,048 and
$11,384 were accrued for the three months ended March 31, 2006 and 2005, respectively. 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
$228,409, or $0.02 per diluted share for the first quarter ended March 31, 2006, compared with a net loss of $724,707, or $0.07
per diluted share for the same period last year. Excluding the one-time interest charge of $343,100 in the first quarter of 2005,
our net loss was $228,409, or $0.02 per diluted share in the first quarter of 2006, compared with a net loss of $381,607, or $0.04
per diluted share for the same period last year. This 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.

Liquidity and Capital Resources

Our principal sources of
liquidity primarily have been from debt and equity funding provided by our majority stockholder, as well as through our initial
public offering that concluded in July 2003. On May 1, 2006, we increased the Companys liquidity by selling 5,000,000 shares
of common stock for $2,000,000. In addition, on May 1, 2006 the Companys Chairman and largest stockholder, converted
$871,866 of debt owed to him by the Company, into 2,179,664 shares of Company common stock.

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. In addition, as of May 1, 2006, we acquired and began operating the trailer sales business of Prime
Time Equipment, Inc., a California based trailer dealer, for a total purchase price of approximately $1.7 million, of which
approximately $700,000 was funded by the assumption of certain liabilities, and the remainder paid or to be paid in cash. In
conjunction with this acquisition, we obtained Floor Plan financing of approximately $3,000,000 to finance the purchase of new and
used truck trailer inventory. The details of these transactions are included in the Companys current report on Form 8-K
filed May 5, 2006, as amended by Amendment No. 1 filed May 9, 2006.

Net cash used in operating
activities was $638,955 for the first three months of 2006, compared to $636,960 for the same period last year. Net operating cash
used was similar in the same period of both years, although, in the first quarter of this year, the net loss was less than last
year. In both years, there was a growth in receivables and inventory, partially offset by an increase in accounts payable.
However, there was a reduction in customer deposits and advance payments this year, compared to an increase in the same period
last year. As sales orders increased for trailers to be delivered in the second quarter of both years, we increased the levels of
inventory and accounts payable.

During the three months ended
March 31, 2006, we acquired property and equipment of $106,054, which were primarily equipment for the lease/rental pool, offset
by proceeds of $9,310 from disposals. This compares to $19,781 and $97,500, respectively, for the three months ended March 31,
2005. As a result, net cash used in investing activities was $96,744 for the three months ended March 31, 2006, compared to net
cash provided by investing activities of $77,719 for the three months ended March 31, 2005.

During the three months ended
March 31, 2006, we received proceeds from the issuance of debt totaling $296,973, which was partially offset by debt repayment of
$17,500. During the same period last year, we received proceeds from the issuance of debt of $726,567, which was partially offset
by debt repayment totaling $70,000. As a result, net cash provided by financing activities for the three months ended March 31,
2006 and 2005 was $279,473 and $656,567, 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 Company
common stock at the conversion price of $0.80 per share.

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On February 15, 2005, the
Company entered into a new agreement with Hyundai Translead to extend its contract to sell and 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.

Effective May 1, 2006, in
conjunction with our acquisition of the Prime Time trailer sales business, we were granted Floor Plan financing of approximately
$3,000,000 by Navistar Financial Corporation, to finance the purchase of new and used truck trailer inventory in the United
States. The details of this financing are included in the Companys current report on Form 8-K filed May 5, 2006, as amended
by Amendment No. 1 filed May 9, 2006, and incorporated by reference to this report.

As of March 31, 2006, we had
committed to purchase additional trailers from Hyundai Translead, at a total purchase price of approximately $3,600,000, towards
which we had made down payments of $361,452. Under the terms of the commitment, we must pay Hyundai the remaining balance due of
approximately $3,250,000 upon taking delivery of the trailers. In addition, we have begun to place orders for delivery during the
latter half of 2006 and for 2007, to ensure an uninterrupted supply sufficient to meet our anticipated customer demand in 2006 and
2007.

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. Prior
to the sale of Company common stock on May 1, 2006, we have been dependent on our Chairman and largest stockholder to provide cash
through loans, some of which have been subsequently converted to equity. Our Company Chairman and largest stockholder has
expressed, in writing, his willingness and ability to continue to financially support the Company, at least until March 31, 2007
if needed, by way of additional debt and/or equity contributions.

As of March 31, 2006, we had
an accumulated deficit of $11,557,754 and a working capital deficit of $759,659. We believe that the cash on hand at March 31,
2006, together with the cash received from the sale of Company common stock on May 1, 2006, the Floor Plan financing arrangement
effective as of May 1, 2006, 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 short-falls, we expect to
cover them with funds provided by the Companys Chairman.

# Item 3.   CONTROLSAND 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.

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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, which is both costly and challenging.

# PART II  OTHER INFORMATION

# Item 1.   LEGALPROCEEDINGS

None.

# Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

# Item 3.   DEFAULTSUPON SENIOR SECURITIES

None.

# Item 4.   SUBMISSIONSOF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

# Item 5.   OTHERINFORMATION

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                                                                                                                                                                                | 
|**20.1      |  | Form 8-K as filed with SEC on May 5, 2006 and as amended May 9, 2006                                                                                                                   | 
|**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.                                                                                                                                                                        | 

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

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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.
|-------------------- | -------------------------
|                    
|                    
|Date:   May 15, 2006 | By:                      
|                     |                          
|                    

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