UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                  FORM 10-QSB/A
                                 Amendment No. 1

(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, 2006

( ) 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 (  )

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12B-2 OF THE EXCHANGE ACT).   YES ( )   NO (X)

THERE WERE 19,558,321 SHARES OF COMMON STOCK OUTSTANDING AT AUGUST 21, 2006.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):  YES (  )   NO (X)




<PAGE>

                                EXPLANATORY NOTE

         On October 5, 2006, the Registrant filed a registration statement on
Form SB-2 (the "Registration Statement"). This Amendment No. 1 to the quarterly
report on Form 10-QSB for the period ending June 30, 2006 ("Amendment No. 1")
for the Registrant is being filed in connection with the Registrant's responses
to Securities and Exchange Commission comments to the Registration Statement.
This Amendment No. 1 contains a restatement of the Statements of Cash Flows for
the period ending June 30, 2006, and the related Note 3 to such financial
statements.

         The information contained in this Amendment No. 1 does not reflect
events occurring after the filing of the initial quarterly report. Developments
with respect to our business have occurred and are described in filings we have
made with the Securities and Exchange Commission after filing the initial
quarterly report.



                            CAPSOURCE FINANCIAL, INC.

                                      INDEX
PART I - FINANCIAL INFORMATION

                                                                        PAGE NO.
                                                                        --------
     ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Balance Sheets as of June 30, 2006 and December 31, 2005.................3

     Statements of Operations for the three-month and six-month periods
         ended June 30, 2006 and 2005.........................................4

     Statements of Cash Flows for the six-month periods ended
         June 30, 2006 and 2005...............................................5

     Notes to Unaudited Condensed Consolidated Financial Statements...........6

     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS...........................................11

     ITEM 3. CONTROLS AND PROCEDURES.........................................15

PART II - OTHER INFORMATION

     ITEM 1. LEGAL PROCEEDINGS...............................................16

     ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.....16

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................16

     ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS............16

     ITEM 5. OTHER INFORMATION...............................................16

     ITEM 6. EXHIBITS .......................................................16

SIGNATURE....................................................................17



                                       2

<PAGE>


PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS

                   CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES
                 Unaudited Condensed Consolidated Balance Sheets

                                                  JUNE 30,      DECEMBER 31,
                                                    2006            2005
                                                ------------    ------------
Assets
Current assets:
   Cash and cash equivalents                    $    379,678    $    612,790
   Rents and accounts receivable, net              1,527,699         795,812
   Mexican value added taxes receivable              333,886          10,237
   Inventory                                       4,736,683       1,193,701
   Advances to vendors                               612,151         891,256
   Prepaid insurance and other current assets         95,428         123,278
                                                ------------    ------------
       Total current assets                        7,685,525       3,627,074
Property and equipment, net                        1,270,351       1,269,752
Other assets                                          51,231         155,584
Intangible assets                                    485,057              --
                                                ------------    ------------
Total assets                                    $  9,492,164    $  5,052,410
                                                ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses        $  2,775,795    $    532,582
   Deposits and advance payments                     212,072         702,069
   Notes payable                                   3,776,706       2,126,209
   Payable to stockholder                                 --         832,705
                                                ------------    ------------
       Total current liabilities                   6,764,573       4,193,565
Long-term debt                                       330,000         342,000
                                                ------------    ------------
       Total liabilities                           7,094,573       4,535,565
                                                ------------    ------------

Commitments and contingencies (Note 8)

Stockholders' equity:
   Common stock                                      195,583         123,787
   Additional paid-in capital                     14,952,576      11,722,403
   Accumulated deficit                           (12,750,568)    (11,329,345)
                                                ------------    ------------
       Total stockholders' equity                  2,397,591         516,845
                                                ------------    ------------
Total liabilities and stockholders' equity      $  9,492,164    $  5,052,410
                                                ============    ============

See accompanying notes to unaudited condensed consolidated financial statements.


================================================================================

                                       3

<PAGE>


                   CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES

            Unaudited Condensed Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED                SIX MONTHS ENDED
                                       ----------------------------    ----------------------------
                                         JUNE 30,        JUNE 30,        JUNE 30,        JUNE 30,
                                           2006            2005            2006            2005
                                       ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>
Net sales and rental income            $  4,295,561    $  6,061,022    $  9,790,279    $  9,236,540
Cost of sales and operating leases       (3,913,365)     (5,703,202)     (8,938,136)     (8,631,518)
Selling, general and administrative      (1,466,625)       (558,623)     (2,042,142)     (1,089,815)
                                       ------------    ------------    ------------    ------------
Operating loss                           (1,084,429)       (200,803)     (1,189,999)       (484,793)
Interest, net                               (78,890)        (93,122)       (157,260)       (512,611)
Other expense, net                          (19,104)        (22,235)        (41,525)        (32,079)
                                       ------------    ------------    ------------    ------------
Loss before income taxes                 (1,182,423)       (316,160)     (1,388,784)     (1,029,483)
Income taxes                                (10,391)         (9,595)        (32,439)        (20,979)
                                       ------------    ------------    ------------    ------------
Net loss                               $ (1,192,814)   $   (325,755)   $ (1,421,223)   $ (1,050,462)
                                       ============    ============    ============    ============

Net loss per basic and diluted share   $      (0.07)   $      (0.03)   $      (0.10)   $      (0.10)
                                       ============    ============    ============    ============

Weighted-average shares
 outstanding, basic and diluted          17,112,501      11,235,800      14,758,656      10,863,562
                                       ============    ============    ============    ============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.


================================================================================


                                       4

<PAGE>


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


<TABLE>
<CAPTION>
                                                                          SIX MONTHS ENDED
                                                                     --------------------------
                                                                      JUNE 30,        JUNE 30,
                                                                        2006            2005
                                                                     -----------    -----------
<S>                                                                  <C>            <C>
Cash flows from operating activities:
   Net loss                                                          $(1,421,223)   $(1,050,462)
   Adjustments to reconcile net loss to net cash used
      in operating activities:
         Provision for doubtful accounts                                  11,398         (3,387)
         Depreciation and amortization                                   134,913        128,507
         Accretion of discount on convertible notes payable
            and payable to stockholder                                        --         16,731
         Accretion of discount on payable to stockholder
            converted to equity prior to maturity                             --        353,100
         Discount on conversion of stockholder debt                      784,679             --
         Loss on disposal of assets                                           --          2,251
         Changes in operating assets and liabilities, net of
             business acquired:
            Rents and other receivables                                 (654,863)       178,051
            Inventory                                                 (2,507,633)    (4,234,661)
            Advances to vendors and other current assets                 235,337        257,661
            Accounts payable and accrued expenses                      2,149,913      1,882,681
            Dealer floor plan financing arrangement                      562,071             --
            Deposits and advance payments                               (489,997)     1,086,322
            Other assets                                                 104,353           (753)
                                                                     -----------    -----------
              Net cash used in operating activities                   (1,091,052)    (1,383,959)
                                                                     -----------    -----------

Cash flows from investing activities:
   Purchase of acquired business, net of cash acquired                (1,014,290)            --
   Purchase of property and equipment                                   (133,063)       (20,882)
   Proceeds from disposition of property and equipment                    25,080        114,345
                                                                     -----------    -----------
              Net cash (used in) provided by investing activities     (1,122,273)        93,463
                                                                     -----------    -----------

Cash flows from financing activities:
   Proceeds from payable to stockholder                                   30,200      1,083,000
   Proceeds from notes payable and convertible notes payable             252,078      1,426,101
   Repayment of notes payable and payable to stockholder                 (28,773)      (973,351)
   Proceeds from sale of common stock                                  2,000,000             --
   Offering costs                                                       (273,292)            --
                                                                     -----------    -----------
              Net cash provided by financing activities                1,980,213      1,535,750
                                                                     -----------    -----------

              Net (decrease) increase in cash and cash equivalents      (233,112)       245,254
Cash and cash equivalents, beginning of the period                       612,790        211,896
                                                                     -----------    -----------

Cash and cash equivalents, end of the period                         $   379,678    $   457,150
                                                                     ===========    ===========

Supplemental cash flow information:
         Cash paid for interest                                      $   156,044    $    66,291
                                                                     ===========    ===========
         Cash paid for income taxes                                  $    33,892    $    14,732
                                                                     ===========    ===========
         Stockholder debt converted to common stock                  $   871,866    $ 1,100,000
                                                                     ===========    ===========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.


                                       5


<PAGE>

                   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 now operates the
acquired business through its wholly owned U.S. subsidiary, CapSource Equipment
Company, Inc., d/b/a Prime Time Trailers. 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 June 30, 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, and in conjunction with the
Company's Form 8-K reports filed May 5, 2006 (as amended by Amendment No. 1
filed May 8, 2006), May 25, 2006 and July 14, 2006. The results of operations
for the three months and six months ended June 30, 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 June 30, 2006, had an accumulated deficit of $12,750,568
and working capital of $920,952.

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 (See Note 8).

On May 1, 2006, in conjunction with the acquisition of the Prime Time Trailer
business, the Company obtained a floor plan inventory line of credit of
approximately $3,000,000, to finance the purchase of new and used truck trailer
inventory.

In addition to 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 June 30, 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.

CORRECTION OF ERROR IN REPORTING DEALER FLOOR PLAN FINANCING ARRANGEMENT IN THE
STATEMENTS OF CASH FLOWS

The consolidated Statements of Cash Flows for the six months ended June 30, 2006
and 2005 have been restated for a correction of an error in the classification
of transactions involving the floor plan inventory line of credit. Although on
an overall basis the corrections did not change the beginning or ending balances
of cash and cash equivalents, the previous classifications incorrectly reported
such credit line activities as cash flows provided by or used in operating and
financing activities.

A reconciliation between amounts presented in the restated consolidated
statements of cash flows and amounts previously reported is as follows:


<TABLE>
<CAPTION>
                                                                                    June 30,
                                                                          --------------------------
                                                                              2006          2005
                                                                          -----------    -----------
<S>                                                                       <C>             <C>
Net cash used in operating operating activities, as previously reported   $(1,653,123)    (1,383,959)
Correction of dealer floor plan financing arrangement cash flows              562,071             --
                                                                          -----------    -----------
Net cash used in operating activities, as corrected                       $(1,091,052)    (1,383,959)
                                                                          -----------    -----------

Net cash provided by financing activities, as previously reported         $ 2,542,284      1,535,750
Correction of notes payable cash flows                                       (562,071)            --
                                                                          -----------    -----------
Net cash provided by financing activities, as corrected                   $ 1,980,213      1,535,750
                                                                          -----------    -----------
</TABLE>


                                       6

<PAGE>


(4) ACQUISITION On May 1, 2006, the Company, through its wholly-owned subsidiary
CapSource Equipment Company, Inc., a Nevada corporation ("CECO"), entered into
an Asset Purchase Agreement with Prime Time Equipment, Inc. ("Prime Time"), a
Fontana, California based authorized California dealer for Hyundai Translead
trailers and its shareholder, Kenneth Moore, to purchase substantially all Prime
Time's assets and business for total consideration of approximately $1,970,000,
of which $1,014,300 was paid in cash at closing, and the balance consisted of
the assumption of certain liabilities that will be paid in due course. The total
purchase price consideration of $1,970,000 has been allocated to the assets
acquired, including identifiable intangible assets, based on their respective
fair values at the date of acquisition. Such allocation resulted in goodwill of
approximately $98,000. The purchase price was allocated to intangibles based on
management's estimate. Management expects to finalize the purchase price
allocation within twelve months of the acquisition date upon completion of an
independent appraisal of the fair values of the acquired assets, and as certain
initial accounting estimates are resolved. The results of Prime Time's
operations have been included in the Company's interim consolidated financial
statements since May 1, 2006.

The preliminary purchase price allocation is as follows (in thousands):


Intangibles:
Non-compete agreements                                              $  400.0

Goodwill                                                                98.3

Tangible assets and liabilities acquired:
Accounts receivable                                                    412.0
Inventory                                                            1,035.3
Other assets                                                            24.0
Total assets                                                        $1,969.6
                                                                    ========
Accrued payable                                                        (93.3)
Short-term debt                                                       (862.0)
                                                                    --------
Net assets acquired                                                 $1,014.3
                                                                    ========

The Company believes that the intangible assets acquired have useful lives of 5
years.

Pro-forma Results of Operations
-------------------------------

             The following presents the unaudited pro-forma combined results of
operations of the Company with Prime Time for the three months and six months
ended June 30, 2006 and 2005, after giving effect to certain pro forma
adjustments related to the amortization of the acquired intangible assets. These
unaudited pro-forma results are not necessarily indicative of the actual
consolidated results of operations had the acquisitions actually occurred on
January 1, 2006 and January 1, 2005 or of future results of operations of the
consolidated entities:

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED               SIX MONTHS ENDED
                                              JUNE 30,                        JUNE 30,
                                   ----------------------------    ----------------------------
                                       2006            2005            2006            2005
                                   ------------    ------------    ------------    ------------

<S>                                <C>             <C>             <C>             <C>
Revenues                           $  5,534,986    $ 10,920,175    $ 13,888,145    $ 28,311,657

Net loss                             (1,140,414)       (201,855)     (1,275,689)       (712,025)
                                   ------------    ------------    ------------    ------------

Basic and diluted loss per share          (0.06)          (0.01)          (0.07)           0.04)
                                   ============    ============    ============    ============
</TABLE>


(5) 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.


                                       7

<PAGE>


(6) 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, 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.

(7) 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.

(8) COMMON STOCK ISSUANCE On May 1, 2006, the Company increased its equity
through a private equity placement, selling 5,000,000 shares of common stock at
$0.40 per share for $2,000,000, together with warrants to purchase another
5,000,000 shares of Company common stock at an exercise price of $0.90 per
share. In addition, the private placement agreements grant the investors the
right to purchase a total of an additional 750,000 shares of common stock at
$0.40 per share for $300,000 for 180 days after May 1, 2006. If the investors
exercise this option to purchase additional shares, the number of shares covered
by the warrants will correspondingly increase to a total of 5,750,000 warrant
shares.

In conjunction with the private equity placement on May 1, 2006, the Company's
Chairman and largest shareholder converted $871,866 of debt owed to him by the
Company into 2,179,664 shares of common stock at $0.40 per share, and obtained
warrants to purchase another 2,179,664 shares of common stock at an exercise
price of $.90 per share. Since the shareholder's debt was converted at a price
discount of $0.36 per share less than the last public trade prior to May 1, 2006
of $0.76 per share, the company recognized a loss on the extinguishment of the
shareholder debt of the total discount of $784,679. This non-cash loss is
recorded in selling, general and administrative expense, in the Company's
consolidated statement of operations for the three and six month periods ended
June 30, 2006.

The placement agent that coordinated the private equity placement received a
warrant to purchase 500,000 shares of Company common stock at $0.48 per share,
together with another warrant (Sub-Warrant) to purchase up to another 500,000
shares of common stock at $1.08 per share. The placement agent warrant and
Sub-Warrant shares will automatically be increased by up to 75,000 additional
shares each, if the investors exercise their right to purchase the additional
750,000 shares within 180 days after May 1, 2006.

In conjunction with the private equity placement that took place on May 1, 2006,
the Company is required to prepare and file with the Securities and Exchange
Commission, a registration statement covering all the shares that were or could
be issued as a result of the transaction. In addition, the Company is obliged to
have caused such registration statement to become effective within 180 days of
May 1, 2006. Any delays in meeting the obligation to have the registration
statement declared effective within 180 days of May 1, 2006 will result in the
Company being liable to the investors in an amount equal to one percent per
month of the purchase price paid for the shares, and, if exercised, the warrant
shares, pro-rated as appropriate for the duration of any such delay.


                                       8

<PAGE>


Proceeds from the private equity placement on May 1, 2006 totaled $2,000,000,
offset by offering costs of $354,576, resulting in a net increase to shareholder
equity of $1,645,424. In addition, the conversion of the Company's debt of
$871,866 with the Chairman and largest stockholder, and the related discount of
$784,679, resulted in a net increase to shareholder equity of $1,656,545. The
combined impact of the concurrent equity transactions was a net increase to
shareholder equity of $3,301,969 at June 30, 2006 compared to December 31, 2005.

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.

The June 30, 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 six months ended June 30, 2006 and 2005, the Company did not issue any
stock-based awards. 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.

(9) EARNINGS PER SHARE The following summarizes the weighted-average common
shares issued and outstanding for the three months and six months ended
June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED JUNE 30    SIX MONTHS ENDED JUNE 30
                                                                       --------------------------    ------------------------
                                                                          2006            2005          2006          2005
                                                                       ----------      ----------    ----------    ----------

<S>                                                                    <C>             <C>           <C>            <C>
Common and common equivalent shares outstanding-beginning of period    12,378,657      11,235,800    12,378,657     9,860,800
Common shares issued for sale of common stock                           5,000,000              --     5,000,000            --
Common shares issued for conversion of debt                             2,179,664              --     2,179,664     1,375,000
                                                                       ----------      ----------    ----------    ----------

Common and common equivalent shares outstanding - end of period        19,558,321      11,235,800    19,558,321    11,235,800
                                                                       ==========      ==========    ==========    ==========


Historical common equivalent shares outstanding - beginning of period  12,378,657      11,235,800    12,378,657     9,860,800
Weighted average common shares issued during period                     4,733,844              --     2,379,999     1,002,762
                                                                       ----------      ----------    ----------    ----------

Weighted average common shares outstanding - basic and diluted         17,112,501      11,235,800    14,758,656    10,863,562
                                                                       ==========      ==========    ==========    ==========
</TABLE>

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 9,076,998 and 887,334 common shares as of June 30, 2006 and
2005, respectively, were excluded from the treasury stock calculation because
they were anti-dilutive due to the Company's net losses.

(10)  SUPPLEMENTAL BALANCE SHEET INFORMATION

                                             JUNE 30,     DECEMBER 31
                                               2006           2005
                                           -----------    -----------
Rents and accounts receivable, net:
     Rents and accounts receivable         $ 1,551,662    $   808,377
     Allowance for doubtful accounts           (23,963)       (12,565)
                                           -----------    -----------
Total rents and accounts receivable, net   $ 1,527,699    $   795,812
                                           ===========    ===========

Property and equipment, net:
     Trailer and semi-trailer equipment    $ 2,087,913    $ 2,057,285
     Vehicles                                  108,730         68,230
     Furniture and computer equipment          151,456        140,557
                                           -----------    -----------
                                             2,348,099      2,266,072
     Accumulated depreciation               (1,077,748)      (996,320)
                                           -----------    -----------
Total property and equipment, net          $ 1,270,351    $ 1,269,752
                                           ===========    ===========


                                       9

<PAGE>


(11) COMMITMENTS As of June 30, 2006, the Company had placed committed orders to
purchase additional trailers from Hyundai Translead, at a total purchase price
of approximately $9,100,000, towards which the Company had made down payments of
$612,161. Under the terms of the commitment, we must pay Hyundai the remaining
balance due of approximately $8,490,000 upon taking delivery of the trailers. In
addition, we have begun to place orders for delivery during 2007 to ensure an
uninterrupted supply sufficient to meet our anticipated customer demand in 2007.

In conjunction with the private equity placement that took place on May 1, 2006,
the Company is required to prepare and file with the Securities and Exchange
Commission, a registration statement covering all the shares that were or could
be issued as a result of the transaction. In addition, the Company is obliged to
have caused such registration statement to become effective within 180 days of
May 1, 2006. Any delays in meeting the obligation to have the registration
statement declared effective within 180 days of May 1, 2006 will result in the
Company being liable to the investors in an amount equal to one percent per
month of the purchase price paid for the shares, and, if exercised, the warrant
shares, pro-rated as appropriate for the duration of any such delay.

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 this
business through two wholly-owned operating subsidiaries in Mexico - REMEX and
RESALTA. In addition, as of May 1, 2006, through our wholly-owned U.S.
subsidiary CapSource Equipment Company, Inc., we acquired and are now operating
the truck trailer sales business of Prime Time Equipment, Inc., a
California-based trailer dealer. We are operating the acquired business as:
d/b/a Prime Time Trailers.

         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 Trailers 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.

PRIVATE EQUITY PLACEMENT

         On May 1, 2006, we entered into Securities Purchase Agreements (the
"Purchase Agreements") with two investors, Pandora Select Partners L.P. and
Whitebox Intermarket Partners L.P. (the "Investors"), both Minnesota-based hedge
funds. According to the terms of the Purchase Agreements, the Company sold a
total of 5,000,000 shares of our common stock (the "Shares") at $0.40 per share
for $2,000,000, together with warrants (the "Warrants") to purchase another
5,000,000 shares of our common stock (the "Warrant Shares") having an exercise
price of $0.90 per share. The Purchase Agreements also granted the Investors the
right to purchase a total of an additional 750,000 shares of our common stock at
$0.40 per share for $300,000 for 180 days after the effective date of the
Purchase Agreements (the "Greenshoe Shares"). If both Investors exercise this
option to purchase additional shares, the number of shares covered by the
Warrants will correspondingly increase to a total of 5,750,000 Warrant Shares.


                                       10

<PAGE>


         The Shares and Warrants were offered and sold in a private placement
transaction under an exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and Rule 506 under that Section. Each of the investors
was an "accredited investor", as defined in Rule 501 under the Securities Act.

         The Purchase Agreements also required the Company to enter into
Registration Rights Agreements (the "Registration Rights Agreements") with each
investor by which the Company agreed to file with the Securities and Exchange
Commission, within 60 days, which period has been extended, a registration
statement covering all the Shares, Greenshoe Shares and all the Warrant Shares.

         As a condition to the placement of the Shares, Randolph M. Pentel, the
Company's Chairman and largest shareholder, converted $871,866 of debt owed to
him by the Company into 2,179,664 shares of common stock (the "Pentel Shares")
at $0.40 per share, and warrants to purchase another 2,179,664 shares of common
stock (the "Pentel Warrant Shares") having an exercise price of $0.90 per share.
This constitutes substantially all of the debt owed to Mr. Pentel by the
Company. The Registration Rights Agreements also provide that all the Pentel
Shares and the Pentel Warrant Shares are to be included in the registration
statement to be filed covering the Shares, Greenshoe Shares and Warrant Shares.
Since the shareholder's debt was converted at a price discount of $0.36 per
share less than the last public trade prior to May 1, 2006 of $0.76 per share,
this non-cash loss of $784,679 is recorded in selling, general and
administrative expense in the Company's consolidated statement of operations for
the three and six month periods ended June 30, 2006.


         Under the terms of the Registration Rights Agreement, we had until June
30, 2006 to file a registration statement covering all the shares referred to
above that were or could be issued as a result of the transaction, and we have
another 120 days thereafter to have caused such registration statement to become
effective. We received permission from the investors to delay filing the
registration statement beyond the June 30, 2006 date in order to prepare and
file a current report on Form 8-K to include audited financial statements for
Prime Time Trailers, the business we acquired May 1, 2006 with a portion of the
proceeds from the Purchase Agreements, and that current report on Form 8-K was
filed on July 14, 2006. Any delays in meeting the obligation to have the
registration statement declared effective within 180 days from May 1, 2006 will
result in our being liable to the Investors in an amount equal to one percent
per month of the purchase price paid for the Shares, and, if exercised, the
Warrant Shares, pro-rated as appropriate for the duration of any such delay.

         Keane Securities Inc. acted as placement agent in connection with the
offer and sale of the Shares. For its services as placement agent, Keane
Securities Inc. received a warrant (the "Placement Agent Warrant") to purchase
500,000 shares of our common stock at $0.48 per share (the "Placement Agent
Warrant Shares") together with another warrant (the "Sub-Warrant") to purchase
up to another 500,000 shares of common stock at $1.08 per share (the "Sub-
Warrant Shares") on the basis of a warrant to purchase one Sub-Warrant Share for
each Warrant Share purchased through the exercise of the Placement Agent
Warrant. The Placement Agent Shares and the Sub-Warrant Shares will
automatically be increased by up to 75,000 additional shares each, if Pandora
Select Partners L.P. and Whitebox Intermarket Partners L.P. exercise their right
to purchase the Greenshoe Shares. The Placement Agent Warrant and the
Sub-Warrant provide that all Placement Agent Warrant Shares and the Sub-Warrant
Shares are to be included in the registration statement to be filed covering the
Shares, Greenshoe Shares and Warrant Shares.

ACQUISITION

On May 1, 2006, through our wholly-owned subsidiary CapSource Equipment Company,
Inc., a Nevada corporation ("CECO"), we entered into an Asset Purchase Agreement
with Prime Time Equipment, Inc. ("Prime Time"), a Fontana, California based
authorized California dealer for Hyundai Translead trailers and its shareholder,
Kenneth Moore, to purchase substantially all of Prime Time's assets and business
for total consideration of approximately $1.970,000, of which $1,014,300 was
paid in cash at closing, and the balance consisted of the assumption of certain
liabilities that will be paid in due course. The total purchase price
consideration of $1,970,000 has been allocated to the assets acquired, including
identifiable intangible assets, based on their respective fair values at the
date of acquisition. Such allocation resulted in goodwill of approximately
$98,000. The purchase price was allocated to intangibles based on management's
estimate. We expect to finalize the purchase price allocation within twelve
months of the acquisition date upon completion of an independent appraisal of
the fair values of the acquired assets, and as certain initial accounting
estimates are resolved. The results of Prime Time's operations have been
included in our interim consolidated financial statements since May 1, 2006.


                                       11

<PAGE>


RESULTS OF OPERATIONS

         The current consolidated financial statements include the results of
Prime Time Trailers for the period May 1, 2006 through June 30, 2006.

                      SUMMARY OF NET SALES AND GROSS PROFIT
                                   BY COUNTRY
                               (U.S. $ THOUSANDS)

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED JUNE 30
                                     --------------------------------------------------------------------
                                                    2006                                 2005
                                                  --------                             --------
                                                   UNITED                               UNITED
                                      MEXICO       STATES       TOTAL      MEXICO       STATES     TOTAL
                                     --------     --------     -------     -------     --------   -------
<S>                                  <C>             <C>       <C>         <C>                    <C>
Net sales and rental income          $3,539.4        756.2     4,295.6     6,061.0       N/A      6,061.0
Cost of sales and operating leases   (3,212.5)      (700.9)   (3,913.4)   (5,703.2)      N/A     (5,703.2)
                                     --------     --------     -------     -------     --------   -------
  Gross profit                       $  326.9         55.3       382.2       357.8       N/A        357.8
                                     ========     ========     =======     =======     ========   =======
    MARGIN %                              9.2%         7.3%        8.9%        5.9%                   5.9%
</TABLE>


<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED JUNE 30
                                     --------------------------------------------------------------------
                                                    2006                                 2005
                                                  --------                             --------
                                                   UNITED                               UNITED
                                      MEXICO       STATES       TOTAL      MEXICO       STATES     TOTAL
                                     --------     --------     -------     -------     --------   -------
<S>                                  <C>            <C>        <C>         <C>           <C>     <C>
Net sales and rental income          $9,034.1       756.2      9,790.3     9,236.5       N/A      9,236.5
Cost of sales and operating leases   (8,237.2)     (700.9)    (8,938.1)   (8,631.5)      N/A     (8,631.5)
                                     --------     --------     -------     -------     --------   -------
  Gross profit                       $  796.9        55.3        852.2       605.0       N/A        605.0
                                     ========     ========     =======     =======     ========   =======
    MARGIN %                              8.8%        7.3%         8.7%        6.6%                   6.6%
</TABLE>

         Consolidated net sales for the second quarter ended June 30, 2006 was
$4,295,561 compared with $6,061,022 for the same period last year, a decrease of
29.1%. Net sales is made up of two components: trailer sales/service revenues,
which declined in the second quarter of 2006 by $1,776,124, or 30.0% compared
with the same period of 2005; and lease/rental income, which improved by
$10,663, an increase of 8.1% over the same period last year. The trailer sales
decline of $2,532,362 during the second quarter of 2006 in Mexican operations
was partially offset by the trailer sales of $756,238 in our acquired U.S.
business, during its first two months of operations. The sales decline in the
Mexican operations was due, in part, to the fact that many customers postponed
capital expenditures during the weeks leading up to the Mexican presidential
election on July 2, 2006. Uncertainties surrounding the potential outcome of the
election resulted in temporary spending declines in a variety of industries in
Mexico during May and June of 2006. Subsequent to the presidential election, we
have experienced increasing sales volume. During the month of July 2006, our
Mexican operations recorded sales in excess of $2.6 million.

         For the six months ended June 30, 2006, our consolidated net sales
increased 6.0% to $9,790,279, compared to $9,236,540 in the same period last
year. This increase was a result of trailer sales growth in our Mexican
operations during the first quarter of 2006, combined with the sales of the
acquired U.S. operations in the second quarter of 2006, and partially offset by
the trailer sales decline in Mexican operations during the second quarter of
2006.

         Gross profit consists of total revenue less cost of sales and operating
leases. For the second quarter ended June 30, 2006, gross profit increased 6.8%
to $382,196 compared to $357,820 for the same period last year. This increase in
gross profit was due, in part, to improvement in the average gross profit margin
per sale, partially offset by the decline in net sales. The gross profit margin
improvement resulted from our ability to reduce reliance on lower-margin, large
fleet customers, increasing sales to higher-margin, lower-volume customers.


                                       12

<PAGE>


         For the six months ended June 30, 2006, gross profit increased
$247,121, or 40.8%, to $852,143 compared to $605,022 for the same period last
year. This improvement resulted from the increase in sales, combined with
improvement in the average gross profit margin per sale.

         Selling, general and administrative expense for the second quarter
ended June 30, 2006 was $1,466,625, including a one-time, non-cash charge of
$784,679 the discount on the loss resulting from the discount of the conversion
price from the market value of the stock on the conversion into equity of
shareholder debt as of May 1, 2006. Excluding the one-time charge, selling,
general and administrative expense for the second quarter of 2006 was $681,946
compared to $558,623 for the same period last year. This increase was due
primarily to expenses incurred in our acquired U.S. operations.

         For the six months ended June 30, 2006, selling, general and
administrative expense was $2,042,142, including the one-time, non-cash charge
on the loss of $784,679 related to the discount on the conversion of shareholder
debt. Excluding the one-time charge, selling, general and administrative expense
for the six months ended June 30, 2006 increased 15.4% to $1,257,463 compared to
$1,089,815 for the same period last year. This increase was due primarily to
expenses incurred in our acquired U.S. operations during the second quarter of
2006.

         Operating loss consists of net sales less cost of sales and operating
leases and selling, general and administrative expenses. In the second quarter
of 2006, we recognized an operating loss of $1,182,423, including the one-time,
non-cash charge on the loss of $784,679, as described above, to selling, general
and administrative expense. Excluding the one-time charge, the operating loss
was $299,750 in the second quarter ended June 30, 2006, compared to $200,803 for
the same period last year. This operating loss increase of $98,947 resulted from
the increase in selling, general and administrative expenses in our acquired
U.S. operations, partially offset by the increase in gross profit.

         For the six months ended June 30, 2006, we recognized an operating loss
of $1,388,784, including the one-time, non-cash charge on the loss of $784,679,
as described above, to selling, general and administrative expenses. Excluding
the one-time charge, the operating loss was $405,320 compared to $484,793 for
the same period last year. This operating loss improvement of $79,473 resulted
from the growth in gross profit, partially offset by the increase in selling,
general and administrative expense.

         Net interest expense for the second quarter ended June 30, 2006 was
$78,890 compared to $93,122 for the same period last year. This decrease of
$14,132 resulted primarily from the conversion to equity of payable to
stockholder during the second quarter of 2006.

         Net interest expense for the six months ended June 30, 2006 was
$157,260 compared to $512,611 for the same period last year. Net interest
expense in 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 of Company debt converted into equity by the Company's
majority stockholder on February 18, 2005. Excluding the one-time charge for the
beneficial conversion feature, the net interest expense of $157,260 in the first
six months of 2006 was a decrease of $2,251 compared to the $159,511 interest
expense in the same period last year.

         Other expense, net, which is primarily foreign exchange gains/(losses),
was a loss of $19,104 and $41,525 in the second quarter and six months ended
June 30, 2006, respectively, compared to a loss of $22,235 and $32,079,
respectively, for the same periods of 2005. The foreign exchange losses incurred
in 2006 were not significantly different from those incurred in the same periods
of 2005 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 $10,391 and $32,439 were accrued for the three and six
months ended June 30, 2006, respectively, compared to $9,595 and $20,979,
respectively, in the same periods last year. This tax, which is an alternative
tax incurred by our Mexican subsidiaries, is applicable to most Mexican
corporations that otherwise have no taxable income.

         We recognized a net loss of $1,192,814, or $0.07 per diluted share for
the second quarter ended June 30, 2006, compared with a net loss of $325,755, or
$0.03 per diluted share for the same period last year. The increase in net loss
resulted from the increase in selling, general and administrative expenses in
our acquired U.S. operations, and the one-time charge of $784,679, as described
above, partially offset by the increase in gross profit and reduction of
interest expense.


                                       13

<PAGE>


         For the six months ended June 30, 2006, our net loss was $1,421,223, or
$0.10 per diluted share, compared to a net loss of $1,050,462, or $0.10 per
diluted share for the same period of 2005. The increase in the net loss resulted
from the increase in selling, general and administrative expense, including the
one-time charge of $784,679, as described above, partially offset by the
increase in gross profit and reduction of interest 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 $1.97 million, of which approximately $955,000 was funded by the
assumption of certain liabilities, and the remainder paid in cash. In
conjunction with this acquisition, we obtained a Floor Plan inventory financing
credit line of approximately $3,000,000 to finance the purchase of new and used
truck trailer inventory.

         Net cash used in operating activities was $1,091,052 for the first six
months of 2006, compared to $1,383,959 for the same period last year. Net
operating cash used in the current period decreased compared to the same period
of last year, primarily due to the reduction of rents and other receivables and
inventory, and the increase in dealer floor plan financing, partially offset by
the increase in net loss this year compared to last year, and the reduction in
customer deposits and advance payments this year, compared to an increase in the
same period last year.

         During the six months ended June 30, 2006, we acquired the net
operating assets of Prime Time Equipment, Inc. for a net cash disbursement of
$1,014,290. This disbursement included payment of $498,390 for related
intangible assets. In addition, during the first half of 2006, we acquired
property and equipment of $133,063, which were primarily equipment for the
lease/rental pool, offset by proceeds of $25,080 from disposals. This compares
to $20,882 and $114,345, respectively, for the six months ended June 30, 2005.
As a result, net cash used in investing activities was $1,122,273 for the six
months ended June 30, 2006, compared to net cash provided by investing
activities of $93,463 for the six months ended June 30, 2005.

         During the six months ended June 30, 2006, we received proceeds from
the issuance of debt totaling $282,278, which was partially offset by debt
repayment of $28,773. In addition, we received proceeds of $2,000,000 from the
private sale of common stock, partially offset by offering costs of $273,292.
During the same period last year, we received proceeds from the issuance of debt
of $2,509,101, which was partially offset by debt repayment totaling $973,351.
As a result, net cash provided by financing activities for the six months ended
June 30, 2006 and 2005 was $1,980,213 and $1,535,750, respectively.

         On May 1, 2006, the Company's Chairman and largest stockholder
converted $871,866 of Company notes payable into 2,179,664 shares of Company
common stock at the conversion price of $0.40 per share.

         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.


                                       14

<PAGE>


         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.

         As of June 30, 2006, we had committed to purchase additional trailers
from Hyundai Translead, at a total purchase price of approximately $9,100,000,
towards which we had made down payments of $612,161. Under the terms of the
commitment, we must pay Hyundai the remaining balance due of approximately
$8,490,000 upon taking delivery of the trailers. In addition, we have begun to
place orders for delivery during 2007 to ensure an uninterrupted supply
sufficient to meet our anticipated customer demand in 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 June 30, 2006, we had an accumulated deficit of $12,750,568 and a
working capital deficit of $920,952. We believe that the cash on hand at June
30, 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.  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.


                                       15

<PAGE>


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. For the fiscal year ending December 31, 2008, 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.  LEGAL PROCEEDINGS
         None

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
         See disclosure set forth in note 8 to the Company's unaudited condensed
         consolidated financial statements filed herewith.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         None.

ITEM 4.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
         None.

ITEM 5.  OTHER INFORMATION
         None.

ITEM 6.  EXHIBITS

                                LIST OF EXHIBITS

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

<TABLE>
<CAPTION>
EXHIBIT NO.                         DESCRIPTION
        ---                         -----------
<S>          <C>
       *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.
</TABLE>

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


                                       16

<PAGE>


                                    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: January 17, 2007              By:  /s/ Fred C. Boethling
                                        ------------------------------------
                                        Fred C. Boethling,
                                        President, Chief Executive Officer
                                        and Director




                                       17