|
|

# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, 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 JUNE 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

# There were 11,235,800
shares of common stock outstanding at August 9, 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 June 30, 2005 and December 31, 2004                                        |         
|                                                                                               
|Statements of Operations for the three-month and six-month periods ended June 30, 2005 and 2004 |         
|                                                                                               
|Statements of Cash Flows for the six-month periods ended June 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                                                                       |         
|                                                                                               
|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

---

# Part I - Financial
Information

# Item 1. Unaudited
Condensed, Consolidated Financial Statements

# CAPSOURCE FINANCIAL,
INC. AND SUBSIDIARIES

Unaudited Condensed
Consolidated Balance Sheets

|                                           |  | June 30
2005 |   | December 31,
2004
|------------------------------------------ |  | ------------ | - | -----------------
|Assets                                     |  |              |   |                  
|Current assets:                            |  |             
|Cash and cash equivalents                  |  |              | $ | 457,150          
|Rents and accounts receivable, net         |  |              |   | 1,126,258        
|Mexican value added taxes receivable       |  |              |   | 20,133           
|Inventory                                  |  |              |   | 4,774,491        
|Advances to vendors                        |  |              |   | 539,321          
|Prepaid insurance and other current assets |  |              |   | 114,312          
|                                           |  |              |   |                  
|Total current assets                       |  |              |   | 7,031,665        
|Property and equipment, net                |  |              |   | 1,298,479        
|Other assets                               |  |              |   | 94,813           
|                                           |  |              |   |                  
|Total assets                               |  |              | $ | 8,424,957        
|                                           |  |              |   |                  
|                                          
|Liabilities and Stockholders Equity       |  |             
|Current liabilities:                       |  |             
|Accounts payable and accrued expenses      |  |              | $ | 2,891,815        
|Deposits and advance payments              |  |              |   | 1,178,177        
|Notes payable                              |  |              |   | 2,322,302        
|Convertible notes payable, net of discount |  |              |   | 47,144           
|                                           |  |              |   |                  
|Total current liabilities                  |  |              |   | 6,439,438        
|                                           |  |              |   |                  
|                                          
|Long-term liabilities:                     |  |             
|Notes payable                              |  |              |   | 262,000          
|Payable to stockholder, net of discount    |  |              |   | 1,262,670        
|                                           |  |              |   |                  
|Total long-term liabilities                |  |              |   | 1,524,670        
|                                           |  |              |   |                  
|Total liabilities                          |  |              |   | 7,964,108        
|                                           |  |              |   |                  
|                                          
|Commitments and contingencies              |  |             
|                                          
|Stockholders equity:                      |  |             
|Common stock                               |  |              |   | 112,358          
|Additional paid-in capital                 |  |              |   | 10,933,832       
|Accumulated deficit                        |  |              |   | (10,585,341      
|                                           |  |              |   |                  
|Total stockholders equity                 |  |              |   | 460,849          
|                                           |  |              |   |                  
|Total liabilities and stockholders equity |  |              | $ | 8,424,957        
|                                           |  |              |   |                  

See accompanying notes to unaudited
condensed consolidated financial statements.

---

3

---

# CAPSOURCE FINANCIAL,
INC. AND SUBSIDIARIES

Unaudited Condensed
Consolidated Statements of Operations

|                                                       |  | THREE MONTHS ENDED |   | SIX MONTHS ENDED
|------------------------------------------------------ |  | ------------------ | - | ----------------
|
|Net sales and rental income                            |  |                    | $ | 6,061,022       
|Cost of sales and operating leases                     |  |                    |   | (5,703,202      
|Selling, general and administrative                    |  |                    |   | (558,623        
|                                                       |  |                    |   |                 
|Operating loss                                         |  |                    |   | (200,803        
|Interest, net                                          |  |                    |   | (93,122         
|Other expense, net                                     |  |                    |   | (22,235         
|                                                       |  |                    |   |                 
|Loss before income taxes                               |  |                    |   | (316,160        
|Income taxes                                           |  |                    |   | (9,595          
|                                                       |  |                    |   |                 
|Net loss                                               |  |                    | $ | (325,755        
|                                                       |  |                    |   |                 
|                                                      
|Net loss per basic and diluted share                   |  |                    | $ | (0.03           
|                                                       |  |                    |   |                 
|                                                      
|Weighted-average shares outstanding, basic and diluted |  |                    |   | 11,235,800      
|                                                       |  |                    |   |                 

See accompanying notes to unaudited
condensed consolidated financial statements.

---

4

---

# CAPSOURCE FINANCIAL,
INC. AND SUBSIDIARIES

Unaudited Condensed
Consolidated Statements of Cash Flows

|                                                                                      |  | SIX 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                                                            |  |                 
|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 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                                                            |  |                 
|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

---

# 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 June 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 six months ended June 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 June 30, 2005, had an accumulated deficit of $10,585,341,
          and working capital of $592,227. 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 six months ended June 30, 2005, he loaned
          an additional $1,083,000 to the Company through a note maturing October 15,
          2006, of which $573,351 was repaid prior to June 30, 2005.

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.

The Company currently is negotiating
with third party investors to supply additional debt or equity funding, although no
financing agreements have been completed. In addition, the Companys Chairman and
largest stockholder has expressed his willingness and ability to continue to financially
support the Company, at least through June 30, 2006, if needed, by way of additional debt
and/or equity contributions.

Management believes that the cash on
hand at June 30, 2005, together with cash expected to be received from a private placement
of debt/equity in 2005 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 short-falls, management expects to
cover them with funds provided by the Companys Chairman.

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

6

---

(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 June
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 June 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
          six months ended June 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 six months
ended June 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.

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

|                                                                       |  | THREE MONTHS ENDED |  | SIX MONTHS ENDED
|---------------------------------------------------------------------- |  | ------------------ |  | ----------------
|
|
|                                                                       |  |                    |  |                 
|Common and common equivalent shares outstanding at beginning of period |  |                    |  | 9,860,800       
|Common shares issued for conversion of debt                            |  |                    |  | 1,375,000       
|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 |  |                    |  | 11,235,000      
|Weighted average common shares issued during period                    |  |                    |  | 0               
|                                                                       |  |                    |  |                 
|                                                                      
|Weighted average common shares outstanding - basic and diluted         |  |                    |  | 11,235,000      
|                                                                       |  |                    |  |                 

7

---

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 June 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

|                                         |  | June 30,
2005 |   | December 31,
2004
|---------------------------------------- |  | ------------- | - | -----------------
|Rents and accounts receivable, net:      |  |               |   |                  
|Rents and accounts receivable            |  |               | $ | 1,132,571        
|Allowance for doubtful accounts          |  |               |   | (6,313           
|                                         |  |               |   |                  
|Total rents and accounts receivable, net |  |               | $ | 1,126,258        
|                                         |  |               |   |                  
|                                        
|Property and equipment, net:             |  |              
|Trailer and semi-trailer equipment       |  |               | $ | 2,070,663        
|Vehicles                                 |  |               |   | 68,230           
|Furniture and computer equipment         |  |               |   | 137,056          
|                                         |  |               |   |                  
|                                         |  |               |   | 2,275,949        
|Accumulated depreciation                 |  |               |   | (977,470         
|                                         |  |               |   |                  
|Total property and equipment, net        |  |               | $ | 1,298,479        
|                                         |  |               |   |                  

(10)  
          CommitmentsAs of June 30, 2005, the Company had committed to purchase an
          additional 115 trailers from Hyundai Translead during the remainder of 2005. The
          total purchase price will be approximately $2,282,000, towards which the Company
          had made cash down payments totaling $228,204 as of June 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.

# 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.

8

---

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 second quarter ended June 30, 2005 was $6,061,022 compared with
$1,401,955 for the same period last year, an increase of 332.3%. Total revenue is made up
of two components: trailer sales/service revenues, which grew in the second quarter of
2005 by $4,696,888, an increase of 381.0% over the same period of 2004; and lease/rental
income, which declined by $37,821, a reduction of 22.4% 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 six months of 2005, as most trailer manufacturers were able to
produce an adequate supply of trailers. During the second 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 six months ended June 30, 2005, our consolidated total revenue increased 238.6% to
$9,236,540, compared to $2,728,071 in the same period last year. This increase was a
result of increased trailer sales, partially offset by reduced lease/rental income.

Gross
profit consists of total revenue less cost of sales and operating leases. For the second
quarter ended June 30, 2005, gross profit increased 116.7% to $357,820 compared to
$165,116 for the same period last year. This increase in gross profit was due, in part, to
the increase in trailer sales, partially offset by pricing pressures on trailer sales
during 2005, as well as the impact of the decline in lease/rental income.

For
the six months ended June 30, 2005, gross profit increased 74.2% to $605,022 compared to
$347,299 for the same period last year. This improvement resulted from the increase in
trailer sales, partially offset by 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 second quarter ended June 30, 2005 was $558,623
compared to $495,103 for the same period last year. This increase of 12.8% 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 six months ended June 30, 2005, selling, general and administrative expense increased
to $1,089,815 compared to $914,159 for the same period last year. This increase of 19.2%
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.

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 $200,803 in the
second quarter ended June 30, 2005, compared to $329,987 for the same period last year.
This operating loss improvement of $129,184 resulted from the growth in trailer sales and
gross profit, partially offset by the increase in selling, general and administrative
expense.

9

---

Net
interest expense for the second quarter and six months ended June 30, 2005 was $93,122 and
$512,611, compared to $58,594 and $116,942, respectively, for the same periods last year.
The first six months of 2005 included a one-time charge of $353,100, 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, net interest expense in the first six months of 2005
was $159,511. 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 $22,235
and $32,079 in the second quarter and six months ended June 30, 2005, respectively,
compared to a loss of $21,166 and $24,585, 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 $9,595 and $20,979 were accrued for the three and six months ended June 30, 2005,
respectively, compared to $8,214 and $16,539, 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 $325,755, or $0.03 per diluted share for the second quarter ended
June 30, 2005, compared with a net loss of $417,961, or $0.04 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.

For
the six months ended June 30, 2005, our net loss was $1,050,462, or $0.10 per diluted
share. Excluding the one-time interest charge of $353,100 in the first six months of 2005,
our net loss was $697,362, or $0.06 per diluted share, compared to a net loss of $724,926,
or $0.07 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 $1,383,959 for the first six months of 2005,
compared to $74,224 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 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 six months ended June 30, 2005, we acquired property and equipment of $20,882, offset
by proceeds of $114,345 from disposals, which were primarily equipment from the
lease/rental pool that were removed from lease as the lease terms expired. This compares
to $30,710 and $79,971, respectively, for the six months ended June 30, 2004. As a result,
net cash provided by investing activities was $93,463 for the six months ended June 30,
2005, compared to $49,261 for the six months ended June 30, 2004.

During
the six months ended June 30, 2005, we received proceeds from the issuance of debt
totaling $2,509,101 which was partially offset by repayments of $973,351. During the same
period last year, we received proceeds from the issuance of debt of $325,764, which was
partially offset by debt repayments totaling $260,000. As a result, net cash provided by
financing activities for the six months ended June 30, 2005 and 2004 was $1,535,750 and
$65,764, respectively.

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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 June 30, 2005, we had committed to purchase additional trailers in 2005 from Hyundai
for sale or lease, for which we had made partial advance payments of $228,204. Under the
terms of the commitment, we must pay Hyundai the remaining balance due of approximately
$2,054,000 upon taking delivery of the trailers, which we expect to occur by October 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 are currently negotiating with third party investors to provide us with
additional debt and/or equity funding, although no financing agreements have been
completed. In addition, the Companys Chairman and largest stockholder has expressed
his willingness and ability to continue to financially support the Company, at least for
the next twelve months if needed, by way of additional debt and/or equity funding.

As of June 30, 2005, we had an
accumulated deficit of $10,585,341, and working capital of $592,227. We believe that the
cash on hand at June 30, 2005, together with cash expected to be received from a private
placement of debt/equity in 2005 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.  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, 2006, 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,

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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.

# PART II OTHER INFORMATION

|Item 1. |  | LEGAL
PROCEEDINGSNone.
|------- |  | ----------------------

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

|Item 3. |  | DEFAULTS UPON SENIOR SECURITIESNone.
|------- |  | ------------------------------------

|Item 4. |  | SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERSNone.
|------- |  | ---------------------------------------------------------

|Item 5. |  | OTHER INFORMATIONNone.
|------- |  | ----------------------

|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.

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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: August 9, 2005 | By:                       | /s/ Fred C. Boethling                                            
|                     |                           | Fred C. Boethling,President, Chief Executive Officer
and Director

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