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# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-KSB/A

Amendment No. 1

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(Mark One)

|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDEDDECEMBER 31, 2005
|- |  | --------------------------------------------------------------------------------------------------------------------------------

# OR

|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE
ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------

# Commission File Number: 1-31730

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CapSource Financial, Inc.
(Name of Small Business Issuer 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)

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

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Securities registered pursuant to section 12(b) of the Exchange Act: Common
Stock, par value $.01 per share

Securities registered pursuant to section 12(g) of the Act: None.

Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the 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.
x YESo NO

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. x

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
o YESx NO

Issuers revenues for the fiscal year ended December 31, 2005 were
$20,608,509.

The aggregate market value of the Registrants Common Stock held by
non-affiliates of the Registrant as of March 22, 2006 was approximately $450,000.

The Registrant had 12,378,657 shares of Common Stock outstanding as of
March 27, 2006.

The following documents are incorporated by reference: Registrants
prospectus filed pursuant to Rule 424(b)(3) on April 7, 2003.

Transitional Small Business Disclosure Format (check one):
o YESx NO





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# 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
annual report on Form 10-KSB for the fiscal year ending December 31, 2005 (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. In addition to textual changes requested by the SEC, this Amendment No. 1 includes revisions to note no. 7 of the
financial statements dealing with income taxes.

The information contained
in this Amendment No. 1 does not reflect events occurring after the filing of the initial annual 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 annual report.

# TABLE OF CONTENTS

|           |         
|---------- | --------
|PART I     |         
|           | ITEM 1. 
|           | ITEM 2. 
|           | ITEM 3. 
|           | ITEM 4. 
|          
|PART II    |         
|           | ITEM 5. 
|           | ITEM 6. 
|           | ITEM 7. 
|           | ITEM 8. 
|           | ITEM 8A.
|           | ITEM 8B.
|          
|PART III  
|           | ITEM 9. 
|           | ITEM 10.
|           | ITEM 11.
|           | ITEM 12.
|           | ITEM 13.
|           | ITEM 14.
|          
|SIGNATURES | 27      

2

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Table of Contents

# PART I

|ITEM 1. |  | DESCRIPTION OF BUSINESS
|------- |  | -----------------------

# FORWARDING LOOKING STATEMENTS

This Form 10K-SB/A contains
statements that, to the extent that they are not recitations of historical fact, constitute forward-looking statements
within the meaning of applicable securities legislation. The SEC encourages companies to disclose forward-looking information so
that investors can better understand a companys future prospects and make informed investment decisions. Forward-looking
statements may include financial and other projections, as well as statements regarding our future plans, objectives or economic
performance, or the assumptions underlying any of the foregoing. We use words such as may, would,
could, will, likely, expect, anticipate, believe,
intend, plan, forecast, project, estimate and similar expressions to
identify forward-looking statements. You can identify forward-looking statements by the fact that they do not relate
strictly to historical or current facts.

Our forward-looking statements are based on assumptions and
analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future
developments, as well as other factors we believe are appropriate and reasonable in the circumstances. Any statement containing
forward-looking information speaks only as of the date on which it is made; and, except to fulfill our obligations under the U.S.
securities laws, we undertake no obligation to update any such statement to reflect events or circumstances after the date on
which it is made. A number of factors could cause the Companys actual results to differ materially from those indicated in
the forward looking statements in this discussion. All such factors are difficult to predict, contain uncertainties that may
materially affect actual results, and may be beyond our control. It is not possible for our management to predict all of such
factors or to assess the effect of each factor on our business. All of our forward-looking statements should be considered in
light of these factors. For more information about such factors and risks, see the other documents incorporated by reference in
this document.

# GENERAL BUSINESS DEVELOPMENT

Trailers Modernos
International, Inc. (TMI) was established June 19, 1992, as a United States company incorporated in the State of
Virginia. TMI formed a wholly owned Mexican operating subsidiary, named Trailers Modernos S.A. de C.V. (TMSA), and
located in Mexico City. TMI and TMSA spent several years attempting to establish a truck trailer manufacturing, truck stops and
truck trailer leasing business in Mexico.

As part of its efforts to
obtain private financing, TMI, on February 16, 1996, formed a wholly owned subsidiary, named Mexican-American-Canadian Trailers
Leasing, Inc. (MAC), a United States corporation incorporated in Colorado. MAC also formed a wholly owned Mexican
subsidiary, named Trailers Modernos Arrendamiento S.A. de C.V. (TMA). Upon incorporation, MAC exchanged 1,000,000 of
its shares of common stock with TMI for title to equipment (19 truck van trailers).

In response to efforts to
obtain private financing, Randolph Pentel invested approximately $400,000 for 399,950 shares of MAC common stock. TMI then
requested Mr. Pentel to loan MAC $500,000 as a bridge loan to be used to purchase additional equipment and for working
capital. The bridge loan was secured by a pledge of 500,000 of the 1,000,000 shares of MAC common stock owned by TMI and all
rights to any lease payments generated by the equipment purchased with the proceeds from the bridge loan in the event of a
default. MAC defaulted on the bridge loan in August of 1997, and Mr. Pentel foreclosed on the 500,000 shares of MAC common
stock that served as collateral for the bridge loan. In 1998, we determined that the North American Free Trade Agreement and the
resulting substantial increase in trade among the signatory countries presented a significant business opportunity. To capitalize
on this opportunity, at a meeting of MAC and TMI stockholders on January 8, 1998, the current management group took control of MAC
by electing new directors of MAC and resolving all issues regarding title to certain MAC rolling stock and management agreements
between MAC and its subsidiary and TMI and its subsidiary, thereby gaining control of Mexican-American-Canadian Trailer Rentals,
Inc., the predecessor to CapSource.

A holding company structure
was adopted and the businesss name was changed to CapSource Financial, Inc. to reflect our business strategy more
accurately. Since that time, CapSource has operated independently from TMI and its subsidiary and a member of the current
management group has invested approximately $7.56 million of additional equity capital in the Company.

# BUSINESS

# GENERAL

CapSource Financial, Inc. 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 two wholly owned Mexican operating subsidiaries. As is customary in Mexico,
the operating companies have an associated service company that employs all of the personnel who perform services for the
operating companies. The service company invoices the operating companies for the total personnel costs incurred on a monthly
basis. This operating structure, which is common business practice in Mexico, is done as part of a financial and tax planning tool
to limit certain personnel costs and related tax liabilities.

RESALTA, CapSources
wholly owned subsidiary, sells new Hyundai truck trailers and related equipment in Mexico, as well as used trailer equipment and
trailer repair services. RESALTA was formed in 2001 to take advantage of an agreement negotiated between CapSource and Hyundai
which provides CapSource with the exclusive right to market and sell Hyundai truck trailers and parts. Hyundai markets its
products directly and through a network of dealers in the U.S.

3

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REMEX,
CapSources wholly owned subsidiary, the successor to Mexican-American-Canadian
Trailer Rentals Mexican operations, operates primarily as the equipment leasing arm
of CapSource, with headquarters in Mexico City. REMEX currently leases truck trailers and
related equipment to contract carriers and private fleets in Mexico. As of December 31,
2005, REMEX had 120 units in its lease/rental pool with an approximate aggregate cost of
$2,100,000, of which 112 were on lease. All leases are operating leases, whereby we retain
title to and ownership of the equipment.

# INDUSTRY BACKGROUND

Mexico
is strategically situated between Atlantic Europe and the nations of the Pacific Rim, as
well as culturally and geographically located between the worlds largest economy,
the United States to the north, and the developing economies of Central and South America.

In
terms of land area, Mexico is the 13th largest country in the world with an area of
1,967,183 square km or 759,530 square miles, about three times the size of Texas. (Source:
2001 CIA World Factbook). Mexico has an estimated population of 103.0 million, 72% of whom
live in urban areas and more than 50% of whom are less than twenty years of age. Mexico
has three major inland industrial centers: Monterrey, Guadalajara and Mexico City. In
addition, Mexico has major ports on both the Atlantic and Pacific coasts.

On
January 1, 1994, Mexico entered the North American Free Trade Agreement with the U.S. and
Canada, further reducing barriers to trade with Mexico for U.S. and Canadian companies and
removing many restrictions on foreign investment. (Source: What is NAFTA, Wall
Street Journal, September 15, 1993, p. A18, providing a summary of the contents of the
five volume North American Free Trade Agreement). NAFTA has created a powerful economic
bloc of 406 million consumers in the U.S., Mexico and Canada. The combined gross national
products of the three NAFTA participants are over $11 trillion U.S. (Source: Fact Sheet on
NAFTA, The White House, President George W. Bush, April 22, 2001). The U.S. Trade office
states that NAFTA has and will continue to provide numerous opportunities to business,
industry and workers throughout the trade area. NAFTA was designed to lead to a more
efficient use of North American resources  capital, land, labor and technology
 while heightening competitive market forces. (Source: Joint Statement of United
States Trade Representative Robert B. Zoellick, Canadian Minister for International Trade
Pierre S. Pettigrew, and Mexican Secretary of Economy Luis Ernesto Derbez, following the
July 31, 2001 meeting of the NAFTA Free Trade Commission). Mexico exported $139 billion to
its NAFTA partners in 2001, 225 percent more than in 1993, the year prior to the start of
NAFTA implementation. U.S.-Mexico bilateral trade surpassed U.S.-Japan bilateral trade,
which placed Mexico as the United States second largest trading partner. (Source:
U.S. Mexico Chamber of Commerce; U.S. Bureau of the Census). Trucks carry 90% of the trade
between Mexico and the United States. (Source: Closing the Border under NAFTA: The
Strength of the Teamsters or Weakness of Leadership?, James Giermanski, Capital Research
Center, February 2000). Data provided by the U.S. Customs Service shows that since the
passage of NAFTA, truck crossings at the various U.S./Mexican border checkpoints have
increased approximately 198%.

On
November 27, 2002, President George W. Bush announced his decision to open U.S. highways
to Mexican trucks beyond the 20-mile commercial border zones, which is the current
limitation for Mexican trucks entering the United States. Motor carriers domiciled in
Mexico operating in the United States will be subject to the same Federal and State laws,
regulations and procedures, including safety regulations that apply to carriers domiciled
in the United States. President Bushs decision complies with a provision of NAFTA.
Mexican rigs currently transfer their cargo to U.S. trucks that carry the loads to points
within the United States. In December 2002, a coalition of environmental, labor and
trucking industry groups requested the 9th U.S. Circuit Court of Appeals to
issue an emergency stay of President Bushs decision to open U.S. highways to Mexican
trucks. On January 16, 2003, the 9th Circuit Court of Appeals ruled that the
Bush administration violated federal environmental law by opening the border to
Mexican-domiciled trucks without first reviewing possible environmental impacts. The Court
held that the government must first complete an environmental impact statement under the
National Environmental Policy Act and a conformity statement under the Clean Air Act
before it can enact rules allowing Mexican trucks into the U.S. Accordingly, it is not
known when, if ever, Mexican trucks will be allowed into the U.S., beyond the 20 mile
commercial border zone.

# BUSINESS AND EXPANSION STRATEGY

CapSources executive
management works with the operating company management team at REMEX and RESALTA to formulate and implement business plans and
strategies consistent with our overall corporate goals. Our subsidiaries are party to inter-company service agreements whereby the
parent company provides management services in exchange for a fee. Operating company management personnel direct the operating
companies based on established goals. Investment and capital allocation decisions are made by the executive management and board
of directors of CapSource.

4

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We
intend to expand our business operations through the acquisition of existing businesses
and the integration of acquired businesses with existing operations.

In
evaluating potential acquisitions, we consider the following factors:

| | The
geographic location of the candidate. Our first priority is to acquire candidates located
in areas where we believe the market for services is strong and growing and the candidate
represents a strong contributor in that market. We also consider the ease with which such
businesses can be integrated into our existing operations. Once we have entered a region,
we may seek to increase our presence in the region through expansion of our existing
operations, additional acquisitions and/or new business opportunities;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
candidates profitability. We seek to acquire businesses that are profitable at the
time of acquisition. We also review other financial factors such as historic levels of
revenue and earnings and the opportunity to increase profitability through operational
improvements;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
candidates existing and potential customer base. We seek to acquire businesses with
a strong customer base and a reputation for high quality service. We attempt to retain
key personnel through the use of employment agreements containing noncompetitive
provisions and incentive programs. In addition, we assess the probability of being able
to expand the existing lease base; and
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
candidate is evaluated for potential synergy with our existing businesses.
|- | -------------------------------------------------------------------------------

We
are engaged in discussions with prospective acquisition candidates and are in the process
of exchanging information with certain of these candidates. Although we would like to make
one or more acquisitions in the next twelve months, as of the date of this annual report
we have not agreed to make any acquisitions and no assurance can be given as to whether,
when, or on what terms any such possible acquisitions may be completed. We expect that any
acquisition would require seller financing, debt or equity financing or a combination of
some or all these financing techniques that will be decided on a case-by-case basis.

# REMOLQUES Y SISTEMAS
ALIADOS de TRANSPORTACION, S.A. de C.V. (d/b/a  RESALTA)

On
November 17, 2000, CapSource executed an agreement with Hyundai Translead, giving
CapSource and/or its subsidiary RESALTA, exclusive distribution rights for Hyundai truck
trailers and related equipment in Mexico. The original agreement has been subsequently
renewed, providing CapSource with continuing exclusivity until at least 2007.

HYUNDAI
AGREEMENT.On February 11, 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 contact, Hyundai grants RESALTA, the exclusive right to sell Hyundai trailers and
parts in Mexico. In addition, Hyundai Translead provides a credit facility of $1,000,000
to facilitate the Companys inventory of Hyundai trailers in Mexico. In contrast with
the prior contract, the new agreement does not require the Company to meet any minimum
purchase requirements. The contract expires in November of 2007.

HYUNDAI.Hyundai is a global conglomerate engaged in insurance, shipbuilding,
          engineering and construction, electronics and automotive as well as other
          businesses.

Hyundai
owns and operates a maquiladora plant in Tijuana, Mexico. The facility produces van
trailers, refrigerated trailers known as reefers, container chassis and domestic and
refrigerated containers for the U.S. market. For the past two decades, Hyundai has been
the largest manufacturer of sea going containers in the world. Hyundai is one of the
largest container chassis suppliers in the U.S. market.

Hyundais
manufacturing process and quality assurance system have been internationally recognized by
achieving ISO 9002 certification. Hyundai is the first North American trailer and
container manufacturer to receive ISO 9002 designation. Made with American components,
Hyundai trailers feature many standard features that are optional on competitive trailers.
Hyundai markets its products both directly and through dealers in the U.S. Hyundais
agreement with RESALTA represents its initial entry into the Mexican market.

RESALTA
BUSINESS STRATEGY.The Mexican economy saw significant growth in 2000 when gross
domestic product increased approximately 6.9% (Source: Banamex). In 2001, the global
economic slowdown affected the Mexican economy where the GDP growth was a negative 0.3%
(Source: Banamex). In 2002, Mexicos GDP began to recover with growth of 0.9%. In
subsequent years, its economy has continued to improve with GDP growth of: 1.3% in 2003;
4.4% in 2004; and 3.0% in 2005. GDP growth in 2006 is projected to be 3.4%. Nevertheless,
we believe the transportation sector of the Mexican economy is investing to replace and
grow infrastructure based upon increased traffic due to NAFTA. We believe that Hyundai is
the lowest cost producer of van trailers in North America. We believe this gives us a
competitive advantage.

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Management
expects the majority of sales will be dry vans and refrigerated trailers sold pursuant to
the Hyundai Agreement. However, RESALTA intends to supplement its dry van business by
adding other types of trailers as follows:

| |  | flat beds;
| | - | ----------

| |  | curtain side
trailers;
| | - | ----------------------

| |  | bulk
hoppers;
| | - | -------------

| |  | livestock
trailers;
| | - | -------------------

| |  | trailer
dollies; and
| | - | --------------------

| |  | after-market
equipment, etc.
| | - | ----------------------------

RESALTA
COMPETITION.Since the passage of NAFTA, the Mexican van trailer market has
been dominated by one U.S. manufacturer, Utility, and its independent distributor, Utility
de Mexico. Other strong competitors are the Mexican dealers for Great Dane and Wabash, and
Fruehauf de Mexico, which is the only significant Mexican trailer manufacturer. While no
reliable market statistics are available, we believe that Utility de Mexico has been
gaining market share and is now the dominant distributor in the market. A number of U.S.
manufacturers have sold trailers in Mexico but have not developed a significant presence
in the market.

We
believe that companies with the most efficient manufacturing operations, the lowest cost
of manufacturing, the lowest transportation costs and the most efficient distributions
systems will dominate the market. We believe that RESALTA and Hyundai are well positioned
in this regard.

RESALTA
OPERATIONS.During the initial months of operations in 2001,
we focused on establishing brand recognition of the Hyundai name, specifically emphasizing
the quality and reliability of Hyundai trailers. We established sales offices in Mexico
City and Monterrey and developed a network of independent sales personnel, in order to
cover the major transportation centers in Mexico. We introduced Hyundai products at a
major Mexican transportation trade show, ExpoTransporte in Guadalajara. In addition,
RESALTA is working jointly with REMEX, the equipment-leasing subsidiary of CapSource,
whereby RESALTA supplies equipment to REMEX, which REMEX then leases directly to its
customers.

RESALTA
completed its first sale in August 2001. The overall economic downturn, exacerbated by the
tragic events of September 11, 2001, negatively impacted our entry into the Mexican
market. After suffering sporadic sales in early 2002, our sales, revenue and earnings
began to grow by the second half of that year. In the first quarter of 2003, as we focused
our efforts on improving customer service and increasing our visibility as the exclusive
Hyundai trailer distributor in Mexico, we opened a new trailer sales facility in Mexico
City, hiring a full-time general manager to direct the sales/distribution operations.
Consequently, in 2003, we achieved a 70% trailer sales volume growth versus 2002. In 2004,
our volume growth was slowed to 20% over 2003, due to a lack of trailers available for
sale in 2004. Subsequently, in 2005, with an adequate supply of trailer inventory, our
trailer sales volume grew by more than 180% over 2004.

# INVENTORY SUPPLY

The
effective management of trailer inventory is critical to CapSources success. The
Companys primary supplier is Hyundai Translead, which produces all of its trailers
for distribution in North America, at its one large production facility in Tijuana,
Mexico. In January 2004, the demand for additional trucking equipment in North America
increased significantly. Hyundai, as well as most of the other North American trailer
manufacturers, experienced a backlog of orders for trailer production. Accordingly, we
experienced some delivery delays and shortages from Hyundai, causing some customers to
seek alternate suppliers. This backlog continued through November of 2004. As of December
31, 2004, we had an adequate supply of inventory. Hyundai generally was able to provide us
with sufficient trailer inventory during 2005, allowing us to nearly triple our trailer
sales volume. However, there is no assurance that Hyundai will not experience delivery
delays or shortages during 2006.

# RENTAS Y REMOLQUES de
MEXICO, S.A. de C. V. (d/b/a REMEX)

REMEX
is engaged in equipment leasing with headquarters in Mexico City. REMEX currently focuses
on leasing truck trailer equipment to customers of RESALTA, which prefer to lease rather
than buy. REMEXs primary customers are contract carriers and private fleets. REMEX
will consider leasing other types of capital equipment where market conditions are
favorable.

6

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REMEX
BUSINESS STRATEGY. Mexico has replaced Japan as the U.S.s second
largest trading partner. The net effect has been an explosion in cross-border shipments.
(Source: U.S. Customs Service, Inspection and Control Division and Texas A&M
International University). The growth in shipping has resulted in a substantial increase
in demand for truck trailers. Moreover, there is a need to generally upgrade Mexican
transportation infrastructure. Further, CapSource anticipates that Mexican companies, like
their U.S. counterparts, will attempt to out-source their transportation fleets and fleet
management in order to utilize a variable cost approach to operating their businesses. We
believe REMEX is well positioned to capitalize on these economic and regulatory changes.

Mexico
suffers from a chronic shortage of investment capital and a relatively high cost of
borrowing. These factors argue against the direct ownership of capital equipment.
REMEXs leasing services offer an alternative to direct equipment ownership. REMEX
offers triple-net operating leases. REMEX arranges for the license, insurance and taxes
relating to the leased equipment. REMEX leases are typically mid-term  from one to
five years. The customer pays all costs and returns the equipment to REMEX at the end of
the lease term. REMEX does not offer financial or full payout leases.

Mid-term
operating lease rates are usually higher than finance lease rates but lower than
short-term rental rates. REMEX leases generally result in the recovery of the full cost of
the leased equipment during the initial term of the lease. However, to realize an
acceptable return on our investment, we must re-lease or sell the equipment. Accordingly,
at the beginning of each lease, REMEX estimates the value of the used equipment or
residual value at the end of the term of the lease. To the extent that the sale or release
of the equipment results in more or less proceeds to REMEX than the residual value that is
carried on REMEXs book, the actual profit and rate of return on the invested capital
will vary. REMEX focuses on mid-term operating leases because it believes that such leases
provide the optimal balance between risk and return  a high rate of return on
invested capital and an acceptable level of risk.

REMEX
occasionally offers short-term leases at rates that are higher than mid-term leases in
order to keep overall fleet utilization at maximum levels and maximize cash flow.

REMEX
TARGET MARKETS. REMEX has targeted small to mid-size companies that are
financially stable, adequately capitalized, well managed with strong growth potential and
good credit. Management is focused on opportunities to lease equipment which is
non-specialized including dry vans, flat beds and trailer dollies. However, REMEX
occasionally leases more specialized equipment if the term of the lease and the rate of
return justify the added risks of these leases. Of particular interest are business
sectors which have recently been or are in the process of being privatized, such as
railroads, port facilities and grain collection, warehousing and distribution, where REMEX
can become the predominant lessor.

REMEX
COMPETITION. Competition for REMEX comes from three main areas:

| | other
firms offering operating leases;
|- | --------------------------------------

| | financial
leases; and
|- | ---------------------

| | other
financing arrangements.
|- | -----------------------------

In
Mexico, as compared to the United States, the leasing business is in its infancy and,
accordingly, competition for the leasing of truck trailers is somewhat limited.

With
respect to operating leases, REMEX has two primary competitors, XTRA Mexicana, S.A. de
C.V. and TIP de Mexico, S.A. de C.V. They are the Mexican subsidiaries of the two largest
U.S. firms offering operating leases to the transportation industry, XTRA Corporation
located St. Louis, MO, and the TIP division of GE Capital Services, a
unit of General Electric Company located in Fairfield, CT. Nevertheless, they too are
relatively new to the Mexican market, both since the passage of NAFTA in 1994.

Financial
leases are an alternative to operating leases. Captive truck leasing firms, including
PACCAR Leasing, Volvo Credit and Mercedes Benz Leasing, occasionally offer to put trailers
on lease along with their trucks to enhance truck sales. In addition, there are a number
of firms, major financial institutions including banks and asset based lenders, which
offer financial leases and/or other financing arrangements.

REMEX
OPERATIONS. Doing business in Mexico is relationship oriented. The Director
General of REMEX is responsible for new business generation which is accomplished by
developing relationships with and soliciting business directly from potential lessees or
through relationships with manufacturers of transportation equipment and/or their
distributors. In order to achieve its growth objectives, management anticipates it will
expand its sales and marketing activities through the addition of one or more employees
whose time would be devoted to such activities. By assisting these manufacturers and/or
their distributors in providing timely, convenient and competitive financing for their
equipment sales and offering a variety of value-added services, REMEX simultaneously
promotes their equipment sales and the utilization of REMEX as the equipment finance
provider. Leases are originated as a result of REMEXs sales and marketing
activities. REMEX employs underwriting policies and procedures that are intended to
minimize the risk of delinquencies and credit losses.

7

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REMEXs
servicing responsibilities generally include billing, processing payments, paying taxes
and insurance and performing collection and liquidation functions. Currently, REMEX
performs all of the servicing functions for its leases. REMEX primarily acquires trailers
and related equipment from Hyundai Translead, through RESALTA. Equipment purchasing is
generally driven by the lessees requirements. The lessee usually specifies the type
of equipment to be leased. Specifications typically include:

| | the
trailer type,
|- | -----------------

| | structural
elements,
|- | --------------------

| | length,
|- | -------

| | suspension
 mechanical or air ride, and
|- | ----------------------------------------

| | tires,
brakes and other features.
|- | ---------------------------------

These
specifications are usually driven by a combination of the lessees customers
need, current fleet composition and operating experience, equipment cost and availability,
the lessees requirements and other factors. Generally REMEX does not acquire
equipment without a commitment to lease.

We
have one customer who represents more than ten percent of REMEXs rental income. The
loss of this significant customer could have a material adverse effect on our business. We
can offer no assurance that this significant customer will continue to choose REMEX for
its trailer rental needs.

REMEX
ASSET POOL.As of December 31, 2005, REMEX had 120 units in its
lease/rental asset pool with an original cost of $2.1 million. Our utilization rate was
93%. Utilization is a key measure of a leasing companys operating performance. Based
on in-house research, leasing company utilization in the U.S. generally falls in the range
of 65-85%. REMEXs utilization historically has exceeded 85%.

REMEX
AND RESALTA SERVICE SUBSIDIARY. As is the custom in Mexico, REMEX and
RESALTA have an associated service company. The assets reside in the primary operating
subsidiaries, while the service company employs the employees. The sole purpose for the
service company is to hire and retain the employees who provide the services. The service
company has a service contract with the operating companies and invoices them for the
total personnel costs incurred on a monthly basis. This operating structure, which is the
common business practice in Mexico, is done as part of a financial and tax planning tool
to limit certain personnel costs and related tax liabilities. The service company for
REMEX and RESALTA is Opciones Integrales de Arrendamiento, S.A. de C.V. REMEX, RESALTA and
their service company are located in Mexico City and are wholly owned by CapSource.
However, because Mexican law requires that all Mexican companies have a Mexican
shareholder, Lynch Grattan, our director of Mexican operations, holds one share each of
REMEX, RESALTA and their service company to comply with Mexican law.

WORKING
CAPITAL.Since its inception, the Company has generated losses from
operations, and as of December 31, 2005, had an accumulated deficit of $11,329,345, with a
working capital deficit of $566,491.

# GOVERNMENT REGULATION

Our
truck trailer leasing and distributor businesses are subject to extensive and changing
governmental regulation governing licensure, conduct of operations, payment of referral
fees, purchase or lease of facilities, and employment of personnel by business
corporations. We believe that our operations are structured to comply with all such laws
and regulations currently in effect as well as laws and regulations enacted or adopted but
not yet effective. We can offer no assurance, however, that enforcement authorities will
not take a contrary position. We also believe that, if it is subsequently determined that
our operations do not comply with such laws or regulations, we can restructure our
operations to comply with such laws and regulations. We can offer no assurance, however,
that we would be able to so restructure our operations. In addition, we can offer no
assurance that jurisdictions in which we operate or will operate will not enact similar or
more restrictive laws and that we will be able to operate or restructure our operations to
comply with such new legislation or regulations or interpretations of existing or new
legislation and regulations.

8

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# EMPLOYEES

At
December 31, 2005, we had 19 full-time and one part-time employees, and one consultant
supplying financial management services. None of our employees are subject to any
collective bargaining agreements and we believe that our relations with our employees are
good. In addition to our employees, we have exclusive contracts with several independent
sales representatives to sell trailers and parts throughout Mexico.

# REPORTS TO SECURITY
HOLDERS

The
Company is required as a reporting company under the Security and Exchange Act of 1934 to
file annual, quarterly and current reports electronically with the SEC. These reports and
any other information that the Company has filed with the Securities Exchange Commission
may be read or copied at the SECs Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20529. The public may obtain information on the operation of the Public
Reference Room by calling 1-800-SEC-0330. The Commission maintains an Internet site that
contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the Commission. The Internet address of the
Commissions site is (http://www.sec.gov). The Company expects to deliver an annual
report to security holders for the fiscal year ended December 31, 2005. CapSource
will prospectively furnish to stockholders:

| | an
annual report containing financial information audited by our certified public
accountants;
|- | ----------------------------------------------------------------------------------------------

| | unaudited
financial statements for each quarter of the current fiscal year; and
|- | -------------------------------------------------------------------------------

| | additional
information concerning the business and operations of CapSource as deemed appropriate by
the Board of Directors.
|- | ---------------------------------------------------------------------------------------------------------------------------

The Company also maintains an
Internet website at www.capsource-financial.com.

|ITEM 2. |  | DESCRIPTION OF PROPERTY
|------- |  | -----------------------

We
sublease by reimbursing our president, Fred Boethling, at approximately 86% of the lease
cost to him for 1250 square feet of commercial office space at 2305 Canyon Boulevard,
Suite 103, Boulder, Colorado 80302, under a renewable lease that will expire on May 31,
2006. Mr. Boethling is reimbursed in the approximate amount of $1,500 per month for
the use of this space. We also reimburse our vice president and general counsel, Steve
Reichert, in the amount of $300 per month for the use of his house as our Minnesota
office. As a result, our monthly base rental expense for these U.S. offices is
approximately $1,800. RESALTA and REMEX together lease a 32,000 square feet trailer sales
/ storage yard, along with approximately 3,400 square feet of commercial office space in
Mexico City, from an unrelated third party, under a renewable lease expiring December 31,
2006, at a rental rate of approximately $7,600 per month. RESALTA also leases
approximately 18,000 square feet of trailer sales / storage yard, along with approximately
500 square feet of commercial office space in Monterrey, Mexico from an unrelated third
party under a renewable lease that will expire March 31, 2007, at a rental rate of
approximately $2,430 per month. We believe that our facilities are adequate for our
foreseeable needs.

|ITEM 3. |  | LEGAL PROCEEDINGS
|------- |  | -----------------

From
time to time, we may become involved in various claims and lawsuits incident to the
operation of our business, including claims arising from accidents or from the delay or
inability to meet our contractual obligations. We do not have any pending or threatened
actions at this time.

|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- |  | ---------------------------------------------------

The
Company incorporates by reference the information contained in Schedule 14C Information
Statement filed on July 18, 2005.

9

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Table of Contents

# PART II

|ITEM 5. |  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- |  | --------------------------------------------------------

Market Information:

The
Company currently is listed on the NASDAQ  over-the-counter  bulletin board (OTC:BB)
under the trading symbol:  CPSO.  After  concluding  the initial  public stock  offering
in 2003,  the shares of Company  stock began trading on January 5, 2004.

The
ranges of high and low bid  information  for the Companys  common equity each quarter
within the last two fiscal years are as set forth below:

|Year Ended December 31, 2005     |  | High |   | Low 
|-------------------------------- |  | ---- | - | ----
|                                 |  |      |   |     
|Quarter ended December 31, 2005  |  |      | $ | 1.01
|Quarter ended September 30, 2005 |  |      | $ | 0.51
|Quarter ended June 30, 2005      |  |      | $ | 0.55
|Quarter ended March 31, 2005     |  |      | $ | 1.06

|Year Ended December 31, 2004     |  | High |   | Low 
|-------------------------------- |  | ---- | - | ----
|                                 |  |      |   |     
|Quarter ended December 31, 2004  |  |      | $ | 1.30
|Quarter ended September 30, 2004 |  |      | $ | 1.30
|Quarter ended June 30, 2004      |  |      | $ | 1.50
|Quarter ended March 31, 2004     |  |      | $ | 1.40

The over the counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

There can be no assurance that an
active public market for the common stock will be created, continue or be sustained. In
addition, the shares of common stock are subject to various governmental or regulatory
body rules, which affect the liquidity of the shares.

Holders:

There
were approximately 70 holders of record of the Companys common stock as of December
31, 2005.

Dividends:

The
Company has never paid cash dividends on its common stock and does not intend to do so in
the foreseeable future. There are no external restrictions on the Companys ability
to pay dividends. The Company currently intends to retain its earnings, if any, for the
operation and expansion of its business. The Companys continued need to retain
earnings for operations and expansion is likely to limit the Companys ability to pay
dividends in the future.

10

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Table of Contents

Securities Authorized for
Issuance Under Equity Compensation Plans

Equity
Compensation Plan Information

|Plan category                                                                       |  | Number of securities to
be issued upon exerciseof outstanding options,warrants and rights |         | Weighted average
exercise price ofoutstanding options,warrants and rights |       | Number of securities
remaining available forfuture issuance
|----------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------- | ----- | -----------------------------------------------------------
|                                                                                   
|
|                                                                                   
|Equity compensation plans approved by
security holders,  2001 Stock Option Plan     |  |                                                                                           | 0       |                                                                           | N/A   |                                                            
|                                                                                   
|Equity compensation plans not approved
by security holders,  Discretionary Warrants |  |                                                                                           | 937,334 |                                                                           | $1.35 |                                                            
|                                                                                   
|Total                                                                               |  |                                                                                           | 937,334 |                                                                           | $1.35 |                                                            

# WARRANTS

At
December 31, 2005, we had outstanding warrants to purchase a total of 937,334 shares of
common stock exercisable at prices ranging from $0.70 per share to $5.00 per share and
expiring at varying times through December 31, 2010. Such warrants were issued in a number
of financing transactions, in connection with consulting arrangements, underwriting
agreements and as compensation to members of the Board of Directors. See Director
Compensation. The warrant holders, as such, are not entitled to vote, receive
dividends, or exercise any of the rights of holders for shares of common stock for any
purpose until such warrants have been duly exercised and payment of the purchase price has
been made. No warrants have been issued or will be issued with an exercise price of less
than eighty-five percent (85%) of the fair value on the date of grant. No warrants have
been issued or will be issued with a term of longer than five years.

# OPTIONS AND 2001 STOCK
OPTION PLAN

Effective
February 16, 2001, our Board of Directors and Stockholders adopted the 2001 Omnibus Stock
Option and Incentive Plan. This plan provides for the grant of options to purchase shares
of common stock to our key employees, directors and advisors. The aggregate number of
shares of common stock that can be awarded under the plan is 550,000. The plan permits the
Board to grant qualified options with an exercise price of not less than the fair market
value on the date of grant, and non-qualified options at an exercise price of not less
than eighty-five percent (85%) of the fair value of CapSources underlying shares of
common stock on the date of the grant. The plan permits the Board to grant options with a
term of up to ten years for certain qualified options and not more than five years for
options granted to a person holding 10% or more of our stock. However, we do not intend to
issue any options with a term longer than five years. Options will be used by us to
attract and retain certain key individuals and to give such individuals a direct financial
interest in our future success and profitability. There are currently no outstanding
options to purchase shares under the 2001 Stock Option Plan.

# NOTE FINANCING

From time to time we have offered
both convertible and non-convertible notes to investors. The following table summarizes
outstanding notes issued by us and the principal amounts due as of December 31, 2005:

|                                         |  | Principal
Amount |   | Date      |  | Rate |          | Convertible |  | Conversion Rate |  | Maturity
|---------------------------------------- |  | ---------------- | - | --------- |  | ---- | -------- | ----------- |  | --------------- |  | --------
|                                         |  |                  |   |           |  |      |          |             |  |                 |  |         
|Patricia and Gary Dolphus                |  |                  | $ | 70,000    |  |      | 12/31/03 |             |  | 10%             |  |         
|                                        
|Steven J. Kutcher,                       |  |                 
|(Custodian for Anthony J. Kutcher, UTMA) |  |                  | $ | 40,000    |  |      | 12/31/03 |             |  | 10%             |  |         
|                                        
|Steven J. Kutcher,                       |  |                 
|(Custodian for Nicole E. Kutcher, UTMA)  |  |                  | $ | 40,000    |  |      | 12/31/03 |             |  | 10%             |  |         
|                                        
|Irwin Pentel                             |  |                  | $ | 192,000   |  |      | 12/31/04 |             |  | 10%             |  |         
|                                        
|Randy Pentel                             |  |                  | $ | 832,705   |  |      | 12/31/04 |             |  | Prime + 1.0%    |  |         
|                                        
|Marshall Bank                            |  |                  | $ | 1,599,733 |  |      | 12/24/04 |             |  | Prime + 2.0%    |  |         
|                                        
|Joyce L. Birch                           |  |                  | $ | 504,000   |  |      | 12/31/03 |             |  | 10%             |  |         

11

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Table of Contents

Terms of the Notes. The notes
bear interest at various rates ranging from 7.5% to 10.0%. Interest on the notes is
payable monthly. The principal amount of each note is payable at maturity. The notes
mature at various times between April 1, 2006 and January 5, 2008. No commissions were
paid in connection with the sale of the notes. The proceeds from the sale of the notes
were used to acquire inventory for RESALTA, increase the REMEXs lease/rental fleet
and for general corporate purposes. The notes were not issued pursuant to an indenture and
no trustee was retained to enforce any of the obligations represented by the notes.

# RECENT SALES OF
UNREGISTERED SECURITIES

During the past four years, we have
sold the following securities pursuant to exemptions from registration under the
Securities Act of 1933, as amended (the Securities Act):

| | 1. | In February 2002, CapSource issued a 12%, $50,000 convertible promissory note to
                    Patricia and Gary Dolphus, in exchange for cash of $50,000. The note was
                    convertible to common stock at a 25% discount to market price and matured
                    February 2004. The note was not paid by the Company upon maturity, and as such,
                    was converted to a note payable on demand. It was subsequently paid on June 29,
                    2004 and cancelled by the Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In April 2002, CapSource issued an 11%, $50,000 convertible promissory note to
                    Fredrick J. and Jean D. Huppert in exchange for cash of $50,000. The note is
                    convertible to common stock at a 25% discount to market price and matures
                    February 2005.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In July 2002, CapSource issued a 12%, $250,000 promissory note to the Church of
                    the Risen Messiah in exchange for cash of $250,000. The note matured December
                    2002. The note was note paid by the Company upon maturity, an as such, was
                    converted to a note payable on demand.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | In August 2002, CapSource issued 29,143 shares of common stock to Randolph M.
                    Pentel in exchange for cash of $51,000.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------

| | 5. | In October 2003, CapSource issued 1,461,680 shares of common stock to Randolph
                    M. Pentel in connection with the conversion of notes in the amount of $2,064,133
                    made by Randolph M. Pentel.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | In October 2003, CapSource issued 42,971 shares of common stock to Steven E.
                    Reichert in exchange for accrued compensation valued at $75,200.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | In October 2003, CapSource issued 60,971 shares of common stock to Fred C.
                    Boethling in exchange for accrued compensation valued at $106,700.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8. | In March 2004, CapSource issued 35,000 shares of common stock to CEOcast, Inc.
                    in exchange for services valued at $61,250.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 9. | On June 29, 2004, CapSource issued 45,455 shares of common stock for the
                    exercise of warrants to buy the stock at $1.10 per share. The shares were valued
                    at $50,000.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10. | In February 2005, CapSource issued 1,375,000 shares of common stock to Randolph
                    M. Pentel in connection with the conversion of notes in the amount of $1,100,000
                    made by Randolph M. Pentel.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 11. | In December 2005, CapSource issued 1,142,857 shares of common stock to Randolph
                    M. Pentel in connection with the conversion of notes in the amount of $800,000
                    made by Randolph M. Pentel.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 12. | We have issued warrants to officers, directors and others from time to time,
                    aggregating 1,192,334 shares, at exercise prices between $0.70 and $5.00. Some
                    of the warrants were issued for board participation, some as compensation for
                    services, and some as companion to convertible note offerings. As of December
                    31, 2005, there are 937,334 warrants outstanding.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
above transactions were made in reliance upon the exemptions from registration provided
under Section 4(2) and 4(6) of the Securities Act, and Rules 504, 505 and 506 of
Regulation D. The purchasers of such securities acquired the securities for their own
account and not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear (or will bear upon issuance, in the case of convertible
securities) a legend stating that the securities may not be offered, sold or transferred
other than pursuant to an effective Registration Statement under the Securities Act, or an
exemption from such registration requirements.

12

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Table of Contents

|ITEM 6. |  | MANAGEMENTS DISCUSSION AND ANALYSIS
|------- |  | ------------------------------------

# CRITICAL ACCOUNTING
POLICIES AND ESTIMATES

Our
discussion and analysis of CapSources financial condition and results of operations
are based upon consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. Our significant
accounting policies are described in Note 1 to our Consolidated Financial Statements as
set forth elsewhere in this Form 10-KSB. We have identified certain of these policies as
being of particular importance to the portrayal of our financial position and results of
operations and which require the application of significant judgment by our management. We
analyze our estimates, including those related to lease revenue, depreciation rates,
impairment of equipment, residual values, allowance for doubtful accounts, income tax
valuation allowance, the fair value of beneficial conversion features and contingencies
and litigation, and base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates. We believe the following critical accounting policies affect
our most significant judgments and estimates used in the preparation of our consolidated
financial statements:

LEASE
ACCOUNTING. Statement of Financial Accounting Standards No. 13, Accounting for
Leases, as amended, requires that a lessor account for each lease by either the direct
financing or sales-type method (collectively capital leases), or the operating lease
method. Capital leases are defined as those leases that transfer substantially all of the
benefits and risks of ownership of the equipment to the lessee. Our leases are classified
as operating leases for all of our leases and for all lease activity as the lease
contracts do not satisfy the criteria to be recognized as capital leases. For all types of
leases, the determination of return on investment considers the estimated value of the
equipment at lease termination, referred to as the residual value. We establish residual
values at lease inception equal to the estimated value to be received from the equipment
following termination of the initial lease (which in certain circumstances includes
anticipated re-lease proceeds). In estimating such values, we consider all relevant
information and circumstances regarding the equipment and the lessee.

The
cost of equipment is recorded as equipment and is depreciated on a straight-line basis
over the estimated useful life of the equipment. Leasing revenue consists principally of
monthly rentals and related charges due from lessees. Leasing revenue is recognized over
the related rental term. Deposits and advance rental payments are recorded as a liability
until repaid or earned by us. Operating lease terms range from month-to-month rentals to
five years. Initial direct costs (IDC) are capitalized and amortized over the lease term
in proportion to the recognition of rental income. Depreciation expense and amortization
of IDC are recorded as leasing costs in the accompanying consolidated statements of
operations. Our assets are depreciated over a period that we believe best represents the
useful lives of the assets.

IMPAIRMENT.
We evaluate our long lived assets for impairment whenever events or
circumstances indicate that an assets carrying value may not be
recoverable. In determining possible impairment, we consider economic
conditions, the activity in used equipment markets, the effect of actions by
equipment manufacturers, the financial condition of lessees, the expected
courses of action by lessees with regard to leased equipment at termination of
the initial lease term, and other factors which we believe are relevant.
Recoverability of an assets value is measured by a comparison of the
carrying amount of the asset, to the future net cash flows that we expect to be
generated by the asset. If a loss is indicated, the loss to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Asset dispositions are recorded upon the sale of the
underlying assets.

BENEFICIAL
CONVERSION OPTION. In connection with the issuance of debt instruments, we granted the
holders the option to convert the debt into our common stock at a beneficial conversion
rate. In calculating the fair value of these beneficial conversions, we estimated the fair
value of our stock based on current results, budgeted performance, and recent transactions
involving our common stock.

FOREIGN
EXCHANGE TRANSLATION. The financial statements of our Mexican subsidiaries,
where the U.S. dollar is the functional currency, include transactions denominated in the
local currency, which are remeasured into the U.S. dollar. The remeasurement of the local
currency into U.S. dollars creates foreign exchange gains and losses that are included in
other income (expense).

The
accounts of our Mexican subsidiaries are reported in the Mexican peso; however, as all
leases and generally all other activities are denominated in U.S. dollars, the functional
currency is the U.S. dollar. For those operations, certain assets and liabilities are
remeasured into U.S. dollars at historical exchange rates and certain assets and
liabilities are translated into U.S. dollars at period-end exchange rates. Income and
expense accounts are translated at average monthly exchange rates. Net exchange gains or
losses resulting from translation of those assets and liabilities, which have been
translated into U.S. dollars at the period-end exchange rates, are recognized in the
results of operations in the period incurred.

13

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INCOME
TAXES.We account for income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date.

A
valuation allowance is recorded to reduce the carrying amount of deferred tax assets if we
are unable to determine that realization of the deferred tax asset is more likely than
not. Due to our history of operating losses, we have recorded a valuation allowance to
reduce net deferred tax assets to zero.

LIQUIDITY

We
currently are 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 March 31, 2007 if needed,
by way of additional debt and/or equity contributions.

We
believe that the cash to be generated by operations, plus the cash to be received from a
private debt and/or equity placement will provided the Company with sufficient funds for
the next twelve months, and to satisfy obligations as they become due. If the Company
experiences occasional cash shortfalls, we expect to cover them with funds provided by the
Companys Chairman.

# GENERAL

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

REMEX,
our lease/rental subsidiary, leases truck trailer equipment under operating lease
contracts that are denominated in U.S. dollars. This reduces our foreign exchange risk,
transferring it to the lessees.

RESALTA,
our trailer sales/distribution company, has the exclusive right to distribute Hyundai
truck trailers in Mexico. RESALTA began operations in 2001.

# RESULTS OF OPERATIONS

# PERFORMANCE IN 2005
COMPARED WITH 2004

Consolidated
total revenue for the fourth quarter ended December 31, 2005 was $5,291,577 compared with
$2,523,414 for the same period last year, an increase of 109.7%. Total revenue is made up
of two components: trailer sales/service revenues, which grew in the fourth quarter of
2005 by $2,797,917, an increase of 118.6% over the same period of 2004; and lease/rental
income, which declined by $29,854 in 2005, a reduction of 18.2% compared to the same
period last year. Trailer sales growth was driven by our continuing emphasis on expanding
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 2005, as most trailer manufacturers were able to produce an
adequate supply of trailers. During most of 2004, including the fourth quarter, we
suffered a shortage of trailer inventory available for sale, as most trailer manufacturers
experienced a rapid unexpected growth in demand. Due to the resulting shortages and
delays, we had to forego certain sales opportunities in 2004. As we continue to direct our
working capital towards increased sales, we have reduced our equipment lease portfolio,
with the resulting decline in lease/rental income.

For
the year ended December 31, 2005, our consolidated total revenue increased 185.5% to
$20,608,509, compared to $7,217,276 in the same period last year. The 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 fourth
quarter ended December 31, 2005, gross profit increased 67.9% to $321,161 compared to
$191,275 for the same period last year. This increase in gross profit was due, in part, to
the increase in trailer sales volume, partially offset by lower profit margins resulting
from pricing pressures on trailer sales during 2005, as well as the impact of the decline
in lease/rental income.

14

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For
the year ended December 31, 2005, gross profit increased 84.0% to $1,335,772 compared to
$725,813 for the same period last year. This improvement resulted from the increase in
trailer sales, partially offset by the lower profit margins resulting from pricing
pressures on trailer sales during 2005, as well as the impact of the decline in
lease/rental income.

Selling,
general and administrative expense for the fourth quarter ended December 31, 2005 was
$671,412 compared to $599,228 for the same period last year. This increase of 12.0% 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 year ended December 31, 2005, selling, general and administrative expense increased to
$2,300,847 compared to $1,981,629 for the same period last year. This increase of 16.1%
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 $350,251 in the
fourth quarter ended December 31, 2005, compared to $407,953 for the same period last
year. This operating loss improvement of $57,702 resulted from the growth in trailer sales
and gross profit, partially offset by the increase in selling, general and administrative
expense.

For
the year ended December 31, 2005, our operating loss was $965,075, compared to $1,255,816
for the same period last year. This operating loss improvement of $290,741 resulted from
the growth in trailer sales and gross profit, partially offset by the increase in selling,
general and administrative expense.

Net
interest expense for the fourth quarter and year ended December 31, 2005 was $91,282 and
$702,648, compared to $85,213 and $269,220, respectively, for the same periods last year.
The net interest expense for the year ended December 31, 2005 included a one-time non-cash
charge of $353,100, which represents the accretion of the beneficial conversion feature
discount, related to $1,100,000 of Company debt that was converted into equity by the
Companys majority stockholder on February 18, 2005. Excluding the one-time charge,
net interest expense in the year ended December 31, 2005 was $349,548. The increase in
2005 is associated with higher debt levels related to our increase in trailer inventory.

Foreign
exchange loss, net, was a loss of $21,756 and $75,151 in the fourth quarter and year ended
December 31, 2005, respectively, compared to a loss of $12,674 and $18,704, respectively,
in the same periods last year. The foreign exchange losses incurred during the fourth
quarter and year ended December 31, 2005 were larger than last year, because the exchange
rate fluctuations in 2005 were less beneficial to our monetary position than in 2004,
resulting in greater foreign exchange losses this year.

Income
taxes of $12,517 and $51,592 were accrued for the fourth quarter and year ended December
31, 2005, respectively, compared with $8,081 and $32,602, 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 have no taxable income.

We
recognized a net loss of $475,806, or $0.04 per diluted share for the fourth quarter ended
December 31, 2005, compared with a net loss of $513,911, or $0.05 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, net interest expense and foreign exchange loss, net.

For
the year ended December 31, 2005, our net loss was $1,794,456, or $0.16 per diluted share.
Excluding the one-time interest charge of $353,100 in 2005, our net loss was $1,441,356,
or $0.13 per diluted share, compared to a net loss of $1,576,163, or $0.16 per diluted
share for the same period last year. The reduction in net loss was a result of the growth
in trailer sales and gross profit, partially offset by increases in selling, general and
administrative expense, net interest expense, foreign exchange loss, net and income taxes.

15

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Table of Contents

# LIQUIDITY AND CAPITAL
RESOURCES

Our
principal sources of liquidity are from borrowings, principally 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 $1,307,556 for the year ended December 31, 2005,
compared with $1,648,577 for the prior year. Net operating cash used in 2005 decreased
compared to last year, primarily due to the reduction of rents and accounts receivable and
the increase in customer deposits and advance payments, partially offset by the increase
of inventory and advances to vendors and other current assets, and the reduction of
accounts payable. Inventory levels grew during the second half of 2005, as our trailer
sales orders increased. The reduction of rents and accounts receivable resulted from the
decrease of December 2005 sales on credit terms as compared to sales made on credit terms
in December 2004.

During
the year ended December 31, 2005, we acquired property and equipment of $189,868, offset
by proceeds of $159,037 from disposals, which were primarily equipment from the
lease/rental pool that were removed from lease as their lease terms expired. This compares
to $82,074 and $126,914, respectively, during the year ended December 31, 2004. As a
result, net cash used in investing activities was $30,831 for the year ended December 31,
2005, compared to cash provided by investing activities of $44,840 for the year ended
December 31, 2004.

During
the year ended December 31, 2005, we received proceeds from the issuance of debt totaling
$3,324,102, which was partially offset by debt repayment of $1,584,821. During the year
ended December 31, 2004, we received proceeds from the issuance of debt totaling
$2,659,708, which was partially offset by debt repayment of $995,000. As a result, net
cash provided by financing activities for the years ended December 31, 2005 and 2004 was
$1,739,281 and $1,664,708, respectively.

On
February 18, 2005, the Companys Chairman and largest stockholder converted
$1,100,000 of Company notes payable into 1,375,000 shares of Company common stock. In
addition, on December 28, 2005, he converted $800,000 of Company notes payable into
1,142,857 shares of Company 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 contact,
Hyundai Translead will provide a credit facility of $1,000,000 to facilitate the
Companys inventory of Hyundai trailers in Mexico.

As
of December 31, 2005, the Company had committed to purchase additional trailers from
Hyundai for sale or lease. The total purchase price was approximately $8,876,000, towards
which the Company had made down payments to Hyundai of approximately $888,000 as of
December 31, 2005.

On
a long-term basis, liquidity is dependent on an adequate supply of inventory available for
sale, continuation and expansion of operations, the sale of equipment, the renewal of
leases and the receipt of revenue, as well as additional infusions of equity and debt
capital. We currently are negotiating with third party investors to provide us with
additional debt and/or equity funding, although no financing agreements have been
completed. We are, and have been, dependent on our Chairman and largest stockholder to
provide cash through loans, some of which have been subsequently converted to equity. On
March 1, 2006, the Companys Chairman and largest stockholder expressed, in writing
to the Companys President/CEO, his willingness and ability to continue to
financially support the Company, at least through March 31, 2007, if needed, by way of
additional debt and/or equity contributions. Should our Chairman fail to provide further
financial support to the Company, or should we be unsuccessful in obtaining funding from
third parties, the Company could be forced to dramatically scale back its operations and
activities.

CAPSOURCE
FINANCIAL STRATEGY. Funding and financial strategy are significant factors in our
business plan. The cost, reliability and flexibility of the actual and potential funding
sources will dictate, to a large extent, our ability to acquire additional businesses
pursuant to our strategic plan. Additionally, each operating subsidiarys ability to
grow and improve its competitive position within its respective business sector is
similarly dependent upon its ability to secure adequate funding, either directly or
through the parent company.

To
date, our lease equipment portfolio has been financed largely with equity from CapSource.
In order to achieve our growth objectives in our leasing operations, we believe that our
financial structure needs to include various forms of borrowings, including both a
short-term credit facility, commonly termed a warehouse credit facility, and
long-term debt. We believe that the optimum debt-to-equity ratio for our leasing business
is approximately 80% debt and 20% equity. Our trailer sales/distribution subsidiary
requires two forms of financing  equity and a short-term credit facility commonly
referred to as floor plan financing. Floor plan financing is similar to the
warehouse credit facility being sought by REMEX, in that it is used to finance the
purchase of inventory on an ongoing basis. However, in the case of floor plan financing,
the facility is repaid through the sale of equipment rather than being replaced with
long-term debt. We currently are seeking floor plan financing.

16

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We
expect that the proceeds to be received from the private placement of additional debt, in
addition to cash expected to be generated from operations, will be adequate to provide for
our cash requirements for the next twelve months. However, there is no assurance that any
additional financing can be obtained for the Company or its subsidiaries.

Our
strategy is to continue to expand operations through acquisitions and to achieve
profitability. Future financing may result in dilution to holders of common stock. It is
anticipated that funds required for future acquisitions and the integration of acquired
businesses with us, will be provided from the proceeds of future debt offerings and
additional stock offerings. However, there can be no assurance that suitable acquisition
candidates will be identified by us in the future, that suitable financing for any such
acquisitions can be obtained by us or that any such acquisitions will occur. Following the
completion of our public offering in 2003, we are now incurring additional expenses due to
being a public company. Our growth strategy will require expanded support, increased
personnel throughout our business, expanded operational and financial systems and
implementation of new control procedures. These factors will affect future results and
liquidity.

In
order to conserve capital resources, our policy is to lease our physical facilities. As of
December 31, 2005, we had no material commitments to purchase capital assets. However, we
had a commitment to purchase approximately 380 additional trailers from Hyundai during
2006.

# INFLATION

Inflation
in Mexico has abated in the last few years. Nevertheless, increased operating costs that
are subject to inflation, such as labor and supply costs, without a compensating increase
in lease rates or equipment sales revenue, could adversely impact results of operations in
the future.

# INSURANCE

We
maintain liability coverage in the amount of $1,000,000 per occurrence and $3,000,000 in
the aggregate, as well as $2,000,000 of general premises liability insurance for each of
our facilities and our executive offices. While we believe our insurance policies to be
sufficient in amount and coverage for current operations, there can be no assurance that
coverage will continue to be available in adequate amounts or at a reasonable cost, and
there can be no assurance that the insurance proceeds, if any, will cover the full extent
of loss resulting from any claims.

# QUANTITATIVE AND
QUALITATIVE MARKET RISKS

Our
operations are conducted in Mexico. All leases are denominated in United States dollars,
but administrative activities are generally denominated in the Mexican peso. We do not
enter into foreign currency exchange contracts either to hedge our exposure to currency
fluctuations or for trading purposes.

Most
of our indebtedness is at fixed interest rates, although a portion of our debt is at
variable rates that are based on the prime lending rate. We do not enter into interest
rate swaps or any other type of derivative instruments.

# OFF-BALANCE SHEET
ARRANGEMENTS

None.

|ITEM 7. |  | FINANCIAL STATEMENTS
|------- |  | --------------------

The
Companys Financial Statements, and the report of BDO-Hernández Marrón
y Cía, S.C., independent registered public accountants, with respect thereto,
referred to in the Index to Financial Statements, appear elsewhere in this Form 10-KSB.

|ITEM 8. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------

On
March 4, 2005, the Companys Board of Directors dismissed KPMG LLP as the
Companys independent registered public accounting firm and appointed BDO
Hernández Marrón y Cía, S.C. as the Companys independent
registered public accounting firm. During the year ended December 31, 2004, and the
subsequent interim period through the date of dismissal, there were no disagreements
between the Company and KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of the former accountant, would have caused it to make
reference to the subject matter of the disagreement(s) in connection with its reports.

17

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Table of Contents

There
have been no disagreements with BDO Hernández Marrón y Cía, S.C.
since the date of their appointment.

|ITEM 8A. |  | 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 (i) accumulated and communicated to our management, including our chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure and (ii) 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. However, our
disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our chief
executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective at the level
of reasonable assurance.

COMPLIANCE WITH
SECTION 404 OF SARBANES-OXLEY ACT

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

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

|ITEM 8B. |  | OTHER INFORMATION
|-------- |  | -----------------

The
Company has no information required to be disclosed in a report on Form 8-K during the
fourth quarter of the fiscal year ending December 31, 2005 that was not reported.

18

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Table of Contents

# PART III

|ITEM 9. |  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT
|------- |  | ------------------------------------------------------------------------------------------------------------

# DIRECTORS AND EXECUTIVE
OFFICERS

We have listed below the names, ages
and positions of our directors and executive officers. The Companys directors are
elected at the annual meeting of stockholders and hold office until their successors are
elected and qualified. The Companys officers are appointed by the Board of Directors
and serve at the pleasure of the Board and subject to employment agreements, if any,
approved and ratified by the Board. We do not maintain key person life insurance on any or
our key personnel:

|Name               |  | Age |    | Position With CapSource
|------------------ |  | --- | -- | -----------------------
|Fred C. Boethling  |  |     | 61 |                        
|Steven Reichert    |  |     | 57 |                        
|Steven J. Kutcher  |  |     | 53 |                        
|Lynch Grattan      |  |     | 54 |                        
|Randolph M. Pentel |  |     | 45 |                        
|Wayne Hoovestal    |  |     | 48 |                        

Fred
C. Boethling. President, Chief Executive Officer and Director  CapSource
Financial, Inc.; Director  Rentas y Remolques de Mexico, S.A. de C. V.; Director
 Remolques y Sistemas Aliados de Transportes, S.A. de C. V.

Mr. Boethling
began his employment with CapSource in 1998. He is responsible for the overall direction and management of CapSource and its subsidiaries.
From 1994 to 1998, he was Co-Managing Partner of Capstone Partners, a firm specializing in
planning and finance. From 1989 to 1993, Mr. Boethling was President, CEO and
Chairman of the Board of Directors of KLH Engineering Group, Inc, a NASDAQ-listed
engineering services holding company. During this period, Mr. Boethling developed the
in-house acquisition management systems and procedures, developed and managed the deal
flow, evaluated over 400 acquisition candidates and completed seventeen acquisitions and
took the firm public. From 1983 to 1988, Mr. Boethling was Chairman of Sandstone
Capital Corporation, a private management consulting and investment firm specializing in
start-ups. From 1979 to 1982, he was a co-founder, President and Director of Hart
Exploration & Production Co., a NASDAQ-listed independent oil and gas firm. Prior to
that, for a period of eleven years, Mr. Boethling was employed by Cities Service Oil
Company, a Tulsa, Oklahoma-based, NYSE-listed major oil company, first as an Engineer in
Midland, Texas and then as Exploration Manager for Canada-Cities Service, Ltd., the
Canadian subsidiary of Cities Service. Mr. Boethling graduated from the University of
Minnesota with a Bachelors degree in engineering in 1968.

Steven
E. Reichert. Vice President, General Counsel, Secretary and Director  CapSource
Financial, Inc.; Director  Rentas y Remolques de Mexico, S.A. de C. V.; Director
 Remolques y Sistemas Aliados de Transportes, S.A. de C. V.

Mr. Reichert
began his employment with CapSource in 1998. He serves as general counsel for CapSource and is responsible for the negotiation of various
agreements and general legal matters and is involved in developing and implementing
overall financial strategy for CapSource. From 1994 to 1998, he was Co-Managing Partner of
Capstone Partners. From 1991 to 1994, Mr. Reichert was associated with the
international law firm of Popham, Haik, Schnobrich & Kaufman, Ltd. where he practiced
in the area of securities and complex commercial litigation. Prior to that,
Mr. Reichert was a founder and Senior Vice President and Director responsible for
strategic planning, acquisitions and capital development for Sequel Corporation, a
NASDAQ-listed telecommunications company. From 1979 to 1982, Mr. Reichert was a
co-founder, Senior Vice President and Director of Hart Exploration & Production Co., a
NASDAQ-listed independent oil and gas firm. From 1966 to 1979, Mr. Reichert was Vice
President in charge of the Underwriting Department at Dain Bosworth, Inc., a regional
investment banking firm. He is a past member of the Board of Arbitrators for the National
Association of Securities Dealers. Mr. Reichert received his Juris Doctor degree (Cum
Laude) from Hamline University School of Law in 1991 and his undergraduate degree in
economics from the University of Minnesota in 1988 .

Steven
J. Kutcher. Vice President, Chief Financial Officer  CapSource Financial, Inc.

Mr. Kutcher
is responsible for treasury management, accounting and financial reporting for CapSource.
Mr. Kutcher has substantial experience in managing foreign operations. Prior to
joining CapSource, from 1982 to 2000, he was employed by International Multifoods
Corporation, initially as Manager of International Accounting & Analysis (Minneapolis,
Minnesota) (1982 to 1985), followed by Assistant Controller Venezuelan Operations
(Caracas) (1985 to 1987), Controller Mexican Operations

19

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(Mexico City) (1987 to 1990), Group
Controller International Operations (Minneapolis) (1990 to 1993), Director of Planning and
Procurement Venezuelan Operations (Caracas) (1993 to 1995), Vice President of Finance
Venezuelan Operations (Caracas) (1995 to 1999) and Chief Financial Officer and Vice
President of Finance Multifoods Distribution (Denver, Colorado) (1999 to 2000). Before
joining International Multifoods, he acquired public accounting experience, first as a
Staff Auditor with Mazanec, Carlson & Company, CPA in St. Paul, Minnesota from 1977 to
1978 and later as a Senior Auditor at Boyum & Barenscheer, CPA in Minneapolis from
1978 to 1981. From 1975 to 1977 he was Finance and Accounting Manager with Minnesota
Public Radio. From 1974 to 1975 he was an internal bank auditor with Bremer Bank Group, a
bank holding company located in St. Paul, Minnesota. Mr. Kutcher received a BA in
Accounting & Business Administration from St. Johns University in Collegeville,
Minnesota in 1974 and a Certificate of Advanced Studies in International Management from
Thunderbird-The American Graduate School of International Management in Phoenix, Arizona
in 1981. Mr. Kutcher holds various professional certifications and is a member of a
number of professional organizations.

Lynch
Grattan. Director  CapSource Financial, Inc.; Director General and Director  Rentas
y Remolques de Mexico, S.A. de C. V.; Director General and Director  Remolques y
Sistemas Aliados de Transportes, S.A. de C.V.

Mr. Grattan
is responsible for the overall management of REMEX and RESALTA. He has substantial
experience with Mexican development banks and other financial institutions. In addition,
he has been involved with various privatization efforts in Mexico. While he was born in
the U.S., Mr. Grattan has spent much of his life in Mexico. He has been a resident of
Mexico City for the past 18 years. He brings to us a thorough understanding of the Mexican
business culture, a broad base of contacts among Mexican and multi-national business
leaders domiciled in Mexico and a familiarity with Mexican government departments and
agencies. Prior to joining REMEX, from 1995 to 1997, Mr. Grattan was a Partner with
Palmer Associates, S.C., a risk management and consulting firm based in Mexico City.
Beginning in 1992, Mr. Grattan provided agribusiness-consulting services to a wide
range of clients. Also, in 1992, Mr. Grattan organized the agribusiness division of
FINBEST, S.C., a small Mexican merchant banking firm. While he is no longer active in the
firm, he remains a Partner. While he is employed full time at REMEX and RESALTA, he is
widely respected in the agribusiness sector and is called upon from time to time for
public speaking engagements. REMEX encourages this practice as it helps build
relationships that are essential to doing business in Mexico. From 1987 to 1992, he
represented ConAgra International, Inc. in Mexico. He opened and served as Director of the
Con-Agra Offices in Mexico City, where his primary responsibility was the formation of
export/import joint ventures. From 1982 to 1987, Mr. Grattan was Marketing and Sales
Manager for the Protein Technologies division of Ralston Purina Company. He organized,
staffed, trained and directed the national sales force for Isolated Soy Protein Products
in Mexico. From 1975 to 1981, Mr. Grattan was employed by Purina S.A. de C.V., the
Mexican subsidiary of Ralston Purina Company, first as District Manager and later as
National Products Manager. Mr. Grattan is a member of numerous Mexican civic and
business organizations. He is active in the American Chamber of Commerce in Mexico City,
the largest Chamber of Commerce outside the U.S. He has won several awards from the
Chamber and is currently Vice Chairman of the Agribusiness Committee. He holds a Bachelors
Degree in Agricultural Engineering from Texas Tech University.

Randolph
M. Pentel. Director  CapSource Financial, Inc.; Director  Rentas y Remolques, S.A.
de C. V.; Director  Remolques y Sistemas Aliados de Transportes, S.A. de C. V.

Mr. Pentel is also the Managing Member and principal owner of RTL Group, LLC. In addition, since 1987, he has been
the Executive Vice President and principal owner of Notification Systems, Inc., the largest provider of large-dollar check return
notifications in the U.S. The electronic network, developed by Mr. Pentel, known as EARNS, supplies banks with advanced data
notification of checks in the process of failing to clear, thereby allowing financial institutions nationwide the ability to
reduce operating losses. Since 1987, Notification Systems, Inc. has grown steadily from 4,500 notifications per day, to over
25,000 today. All of the top financial institutions in the country use Notification Systems services. Mr. Pentel is also
involved in various international charitable organizations.

Mr. Pentel is also the owner and Managing Member of RTL Group, LLC, founded in 1998, which manufactures aircraft
parts and components for companies such as Airbus Industries and Raytheon Corporation. RTL Group provides services such as
machining, casting, plating & coatings, painting, as well as assembly of subcomponents.

Wayne
Hoovestal.Director  CapSource Financial, Inc.

Mr. Hoovestal
is President and Chief Executive Officer of Hoovestol, Inc. a long-haul trucking company
headquartered in Eagan, Minnesota that specializes in providing trucking services to the
U.S. Postal Department. Mr. Hoovestol founded Hoovestol Inc. in 1978 with eight
trucks and trailers. Today, Hoovestol Inc. employs 400 people. Mr. Hoovestol is also
President and Chief Executive Officer of Major Transport, a long-haul truck load carrier
which he founded in 2000. Major Transport employs 300 people and is also headquartered in
Eagan, Minnesota. Mr. Hoovestol has recently completed 10 years of service as a
National Board Member of the National Star Route Mail Contractors Association. In
addition, he serves on the Board of Directors of two Midwest companies engaged in the
production of ethanol.

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Table of Contents

# SECTION 16(A) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE

Section
16(a) of the Securities Exchange Act of 1934 requires the Companys officers and
directors, and persons who own more than 10% of a registered class of the Companys
equity securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than 10% percent
shareholders are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. To the knowledge of the Company, no officer, director or
stockholder of the Company has failed to timely file a report under Section 16(a) during
2005.

|ITEM 10. |  | EXECUTIVE COMPENSATION
|-------- |  | ----------------------

# DIRECTOR COMPENSATION

Beginning
in 1999, each year we granted employee members of the Board of Directors for their
services on the Board, warrants to purchase 25,000 shares of common stock at prices
determined to be fair market value at the time of grant. We also granted non-employee
members of the Board of Directors for their services on the Board, warrants to purchase
50,000 shares of common stock at prices determined to be fair value at the time of grant,
and a $500 fee per meeting attended. All warrants vested immediately and expire five years
from the date of grant.

# EXECUTIVE COMPENSATION

Our
Board of Directors determines executive compensation. The following table provides certain
information regarding compensation earned by or paid to our Chief Executive Officer, Vice
President/General Counsel and Vice President/Chief Financial officer during each of the
past three years. No other executive officers received compensation in excess of $100,000
during the most recent fiscal year.

CapSource Financial,
Inc.Summary Compensation TableAs of 12/31/05

|                                 |  |  |      |  |   |         |     |   |        | Long Term Compensation
|-------------------------------- |  |  | ---- |  | - | ------- | --- | - | ------ | ----------------------
|
|
|                                 |  |  |      |  |   |         |     |   |        |                       
|Fred C. Boethling                |  |  | 2005 |  | $ | 143,925 |     |   |        |                       
|CEO & President                  |  |  | 2004 |  | $ | 101,400 |     | $ | 50,000 | (5)                   
|                                
|Steven E. Reichert               |  |  | 2005 |  | $ | 117,500 |     |   |        |                       
|Vice President & General Counsel |  |  | 2004 |  | $ | 65,000  |     | $ | 37,000 | (5)                   
|                                
|Steven J. Kutcher                |  |  | 2005 |  |   |         |     |   |        |                       
|Consultant, CFO & Vice President |  |  | 2004 |  | $ | 43,000  | (1) |   |        |                       

(1)    Represents
six months of employment. Employment terminated June 30, 2004.
(2)    Executive provided independent consulting services effective July 1, 2004.
(3)    Warrants granted to the executive in his capacity as a director.
(4)    Warrants granted to the executive in his capacity as a director for six months.
(5)    Performance incentive.

# EMPLOYMENT AGREEMENTS

On
December 10, 2000 we entered into employment agreements with Mr. Boethling,
Mr. Reichert and Mr. Grattan. Those agreements provide that we will employ
Mr. Boethling, Mr. Reichert and Mr. Grattan for a period ending two years
after we give written notice of our intention to terminate Mr. Boethling,
Mr. Reichert or Mr. Grattan or until they turn 65 years of age, whichever is
earlier. The contracts provide for an annual minimum base salary of $96,000 subject to
adjustments at the discretion of the Board of Directors, participation in any other
insurance, pension, savings and health and welfare plans offered by the Company, and the
executives option to receive up to 25% of his base salary in common stock on the
basis of one (1) share of common stock for each $1.00 of base salary so designated. Salary
accrued in 2002 and 2003 for Mr. Boethling and Mr. Reichert in the amounts
$56,700 and $25,200, respectively, was paid by CapSource common stock issued in October
2003, in lieu of cash payment. The employment may be terminated for cause or breach of the
contract after opportunity to cure.

21

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On
January 9, 2006, the Company entered into an employment agreement with Steven J. Kutcher
as its vice president and chief financial officer effective as of that date. The
employment agreement is for a term of three years. During the past five years
Mr. Kutcher has served as chief financial officer of the issuer and has acted as a
financial consultant to the issuer. Mr Kutcher has no family relationships with other
officers or directors of the issuer.

# STOCK OPTIONS, WARRANTS

No
options were granted to the named executive officers during 2005. Except for warrants for
participating on the Board in 2005, no warrants were granted to the named executive
officers, and no warrants were exercised by the named executive officers during 2005.

The
following table summarizes the aggregate value of the warrants to which the named
executive was entitled at December 31, 2005 by the executive officers named in the Summary
Compensation Table.

|                  |  | Year-End
Values
|----------------- |  | ---------------
|                 
|
|
|                  |  |                
|Fred C. Boethling |  | 125,000        
|Steven Reichert   |  | 125,000        
|Steven Kutcher    |  | 82,500         

_________________

(1)    These warrants vested 100% at the time of grant and were granted to the executive in his capacity as a director.
(2)    Based on an estimated market price of $0.61 per share.

|ITEM 11. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- |  | --------------------------------------------------------------

(a) Security
ownership of certain beneficial owners (5% or greater).

The following table presents
information provided to us about the beneficial ownership of common stock as of December
31, 2005, by persons known to us to hold 5% or more of our stock.

|Name and Address of Beneficial Owner (1) |  | Number of SharesBeneficially Owned |  | Percent ofShares
|---------------------------------------- |  | ---------------------------------- |  | ----------------
|                                         |  |                                    |  |                 
|Randolph Pentel (2)                      |  |                                    |  | 11,581,557      

_________________

|(1) | The
address of the named individual is c/o CapSource Financial, Inc., 2305 Canyon
Boulevard, Suite 103, Boulder, Colorado 80302.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
375,000 shares of common stock issuable upon the exercise of warrants that are
currently exercisable.
|--- | --------------------------------------------------------------------------------------------------------------

(b) Security ownership of
management.

The following table presents
information provided to us as to the beneficial ownership of Common Stock as of December
31, 2005, by all current directors, executive officers and all directors and executive
officers as a group. All shares represent sole voting and investment power, unless
indicated to the contrary.

|Name and Address of Beneficial Owner (1)                  |  | Number of SharesBeneficially Owned |  | Percent ofShares
|--------------------------------------------------------- |  | ---------------------------------- |  | ----------------
|                                                          |  |                                    |  |                 
|Fred C. Boethling (2)                                     |  |                                    |  | 457,730         
|Steven Reichert (3)                                       |  |                                    |  | 436,730         
|Randolph Pentel (4)                                       |  |                                    |  | 11,581,557      
|Lynch Grattan (5)                                         |  |                                    |  | 125,000         
|Wayne Hoovestal (6)                                       |  |                                    |  | 50,000          
|Steven Kutcher (7)                                        |  |                                    |  | 92,355          
|                                                          |  |                                    |  |                 
|All directors and officers and as a group (6 persons) (8) |  |                                    |  | 12,743,372      
|                                                          |  |                                    |  |                 

_________________

|(1) | The
address of the named individuals is c/o CapSource Financial, Inc., 2305 Canyon
Boulevard, Suite 103, Boulder, Colorado 80302.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
125,000 shares of common stock issuable upon the exercise of warrants
                    that are currently exercisable.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes
125,000 shares of common stock issuable upon the exercise of warrants that are
currently exercisable.
|--- | --------------------------------------------------------------------------------------------------------------

|(4) | Includes
375,000 shares of common stock issuable upon the exercise of warrants
                    that are currently exercisable.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes
125,000 shares of common stock                     issuable upon the exercise of warrants
that are currently exercisable.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes
50,000 shares of common stock issuable upon the exercise of warrants
                    that are currently exercisable.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes
82,500 shares of common stock issuable upon the exercise of warrants that are
currently exercisable.
|--- | -------------------------------------------------------------------------------------------------------------

|(8) | Includes
882,500 shares of common stock issuable upon the exercise of warrants that are
currently exercisable.
|--- | --------------------------------------------------------------------------------------------------------------

22

---

Table of Contents

The following table presents
information about all share and warrant acquisitions by current directors and officers.

|Name               |  | # of Shares |  | Purchase Price |  | # of Warrants |           | Exercise Price |  | Type of Consideration |  | Issue Date
|------------------ |  | ----------- |  | -------------- |  | ------------- | --------- | -------------- |  | --------------------- |  | ----------
|                   |  |             |  |                |  |               |           |                |  |                       |  |           
|Fred C. Boethling  |  |             |  | 1,250          |  | $             | 6,250     |                |  |                       |  |           
|                   |  |             |  | 132,366        |  | $             | 6,169     |                |  |                       |  |           
|                   |  |             |  | 134,643        |  | $             | 6,169     |                |  |                       |  |           
|                   |  |             |  | 3,500          |  | $             | 6,125     |                |  |                       |  |           
|                   |  |             |  | 60,971         |  | $             | 106,700   |                |  |                       |  |           
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                  
|Steven E. Reichert |  |             |  | 1,250          |  | $             | 6,250     |                |  |                       |  |           
|                   |  |             |  | 132,366        |  | $             | 6,169     |                |  |                       |  |           
|                   |  |             |  | 134,643        |  | $             | 6,169     |                |  |                       |  |           
|                   |  |             |  | 500            |  | $             | 875       |                |  |                       |  |           
|                   |  |             |  | 42,971         |  | $             | 75,200    |                |  |                       |  |           
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                  
|Randolph M. Pentel |  |             |  | 89,995         |  | $             | 449,975   |                |  |                       |  |           
|                   |  |             |  | 4,266,684      |  | $             | 2,133,341 |                |  |                       |  |           
|                   |  |             |  | 22,000         |  | $             | 22,000    |                |  |                       |  |           
|                   |  |             |  | 65,150         |  | $             | 65,150    |                |  |                       |  |           
|                   |  |             |  | 40,978         |  | $             | 20,489    |                |  |                       |  |           
|                   |  |             |  | 1,409,637      |  | $             | 1,409,637 |                |  |                       |  |           
|                   |  |             |  | 300,000        |  | $             | 300,000   |                |  |                       |  |           
|                   |  |             |  | 168,280        |  | $             | 168,280   |                |  |                       |  |           
|                   |  |             |  | 867,653        |  | $             | 867,653   |                |  |                       |  |           
|                   |  |             |  | 29,143         |  | $             | 51,000    |                |  |                       |  |           
|                   |  |             |  | 3,000          |  | $             | 5,250     |                |  |                       |  |           
|                   |  |             |  | 1,461,680      |  | $             | 2,064,133 |                |  |                       |  |           
|                   |  |             |  | 1,375,000      |  | $             | 1,100,000 |                |  |                       |  |           
|                   |  |             |  | 1,142,857      |  | $             | 800,000   |                |  |                       |  |           
|                   |  |             |  |                |  |               |           |                |  | 50,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 50,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 125,000               |  | $         
|                   |  |             |  |                |  |               |           |                |  | 50,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 50,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 50,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 50,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 50,000                |  | $         
|                  
|Lynch Grattan      |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                  
|Steven Kutcher     |  |             |  | 6,000          |  | $             | 10,500    |                |  |                       |  |           
|                   |  |             |  | 3,855          |  | $             | 1,953     |                |  |                       |  |           
|                   |  |             |  |                |  |               |           |                |  | 20,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 25,000                |  | $         
|                   |  |             |  |                |  |               |           |                |  | 12,500                |  | $         
|                  
|Wayne Hoovestal    |  |             |  |                |  |               |           |                |  | 50,000                |  | $         

23

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Table of Contents

(c) Changes in control.

As
of December 31, 2005 there are no arrangements, which may result in a change in control of
the Company.

|ITEM 12. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- |  | ----------------------------------------------

# PURCHASES OF OUR COMMON
STOCK

On
February 18, 2005, Randolph Pentel, a director, converted $1,100,000 of notes payable to
him, into 1,375,000 shares of our common stock at a conversion price of $0.80 per share.
In addition, on December 28, 2005, he converted $800,000 of notes payable to him, into
1,142,857 shares of our common stock at a conversion price of $0.70 per share.

A
company in which Randolph Pentel has a substantial interest has on occasion provided the
use of an aircraft for travel for certain executive officers. We have paid no more than
the price of a first class ticket charged by commercial airlines flying to the same
destination on those dates. While there is no arrangement or assurance that the use of
this aircraft will be made available in the future, if the occasion arises it is expected
that the same payment terms will be followed.

# PAST AFFILIATED
TRANSACTIONS

Randolph
Pentel has provided the majority of financing to us at interest rates comparable to those
available to unaffiliated third parties. We lacked disinterested directors that could
ratify these transactions at the time these transactions were initiated. There is no
assurance that such financing will be available to us in the future.

# APPOINTMENT OF
INDEPENDENT DIRECTORS AND AMENDMENT OF BYLAWS

We
have previously undertaken to appoint two independent directors. An independent director
shall be a member of our board of directors who: (1) is not an officer or employee of us
or our subsidiaries and has not been an officer or employee within the last two years; (2)
is not a promoter who organized or founded us or holds five percent or more of any class
of our equity securities; and (3) does not have a material business or professional
relationship with us.

During
2005 we appointed Wayne Hoovestal as an independent director. During 2006, we will
endeavor to appoint a second independent director to our board of directors. Once
accomplished, we will undertake to amend our Bylaws to require the appointment of at least
two independent directors and the approval by those independent directors of any future
material transactions, loans or forgiveness of loans.

# FUTURE MATERIAL
TRANSACTIONS AND LOANS

All
future material transactions and loans will be made or entered into on terms that are not
less favorable to us than those that can be obtained from unaffiliated third parties. All
future material transactions and loans, and any forgiveness of loans, must be approved by
majority of our independent directors who do not have an interest in the transactions and
who had access, at our expense, to us or to independent legal counsel. We do not have any
independent directors now. We will use our best efforts to recruit at least two
independent directors within the next 12 months.

24

---

Table of Contents

|ITEM 13. |  | EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
|-------- |  | -------------------------------------------------------

|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                                                                                                                                                                                                                                                  
|*4.1        | Specimen of Common Stock Certificate                                                                                                                                                                                                                     
|*5.1        | Opinion of Rider, Bennett, Egan & Arundel LLP                                                                                                                                                                                                            
|*10.1       | Employment Agreement dated December 10, 2000 Between Company and Fred C. Boethling                                                                                                                                                                       
|*10.2       | Employment Agreement dated December 10, 2000 Between Company and Steven E. Reichert                                                                                                                                                                      
|*10.3       | Employment Agreement dated December 10, 2000 Between Company and Lynch Grattan                                                                                                                                                                           
|*10.4       | CapSource Financial, Inc. 2001 Omnibus Stock Option and Incentive Plan                                                                                                                                                                                   
|*10.5       | Form of Warrant Agreement                                                                                                                                                                                                                                
|*10.6       | Form of Certificate for Common Stock Purchase Warrants                                                                                                                                                                                                   
|+10.7       | Hyundai Distribution Agreement                                                                                                                                                                                                                           
|*10.8       | 12% Promissory Note dated June 4, 2001 in Favor of Randolph M. Pentel                                                                                                                                                                                    
|*10.9       | 9.25% Convertible Promissory Note dated December 31, 2001 in Favor of Randolph M. Pentel                                                                                                                                                                 
|*10.10      | 12% Convertible Promissory Note dated November 6, 2001 in Favor of Steven J. Kutcher as custodian for Anthony J. Kutcher, UTMA                                                                                                                           
|*10.11      | 12% Convertible Promissory Note dated November 6, 2001 in Favor of Steven J. Kutcher as custodian for Nicole E. Kutcher, UTMA                                                                                                                            
|*10.12      | Conzuelo Shareholder Agreement with Amendment                                                                                                                                                                                                            
|**11.1      | Statement Regarding Computation of Per Share Earnings                                                                                                                                                                                                    
|*21.1       | List of Subsidiaries                                                                                                                                                                                                                                     
|**24.1      | Opinion of BDO-Hernández Marrón y Cía, S.C.                                                                                                                                                                                                              
|**31.1      | Certification of C.E.O. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|**31.2      | Certification of C.F.O. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|**32.1      | Certification of C.E.O. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|**32.2      | Certification of C.F.O. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|+           | Portions omitted pursuant to a Confidential Treatment Request (CRT), which CRT was granted pursuant to a Commission Order as of the effective date of this Registration Statement. The omitted portions have been filed separately with the Commission.
|*           | Incorporated by reference to the Companys Registration Statement on Form SB-2 filed October 7, 2002.                                                                                                                                                    
|**          | Filed herewith.                                                                                                                                                                                                                                          

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

# REPORTS ON FORM 8-K

We
filed a report on Form 8-K on March 7, 2005 regarding the change of our independent
registered public accounting firm.

We
filed a report on Form 8-K/A on March 18, 2005 regarding the change of our independent
registered public accounting firm, and the letter of agreement from the former accounting
firm.

We
filed a report on Form 8-K on March 29, 2005 regarding the conversion of $1,100,000 of
debt into common stock of the Company.

We
filed a report on Form 8-K on December 29, 2005 regarding the conversion of $800,000 of
debt into common stock of the Company.

We
filed a report on Form 8-K on January 10, 2006 regarding the appointment of the
Companys vice president and chief financial officer.

25

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Table of Contents

# INDEMNIFICATION OF
OFFICERS AND DIRECTORS

Insofar
as the indemnification of liabilities arising under the 1933 Act, as amended, may be
permitted to directors, officers and controlling persons of the Company pursuant to the
provisions of its Articles of Incorporation, Bylaws and the provisions of the Colorado
Business Corporation Act, or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against public policy
as expressed in the 1933 Act, as amended, and is, therefore, unenforceable.

|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- |  | --------------------------------------

The
following fees have been, or will be, billed by BDO Hernández Marrón y
Cía S.C., the Companys independent auditors for the fiscal years ending
December 31, 2005 and December 31, 2004, respectively, and KPMG LLP the Companys
independent auditors for the quarters ended March 31, 2004, June 30, 2004 and September
30, 2004.

# Audit Fees

The
aggregate fees billed by KPMG LLP for services for the fiscal year ended
December 31, 2004, which related to the reviews of quarterly financial statements,
statutory audits and review of documents filed with the Securities and Exchange
Commission, approximated $48,000.

The
aggregate fees billed or to be billed by BDO Hernández Marrón y Cía
S.C. for services for the fiscal years ended December 31, 2005 and December 31, 2004,
which related to the annual financial statement audit, reviews of quarterly financial
statement, statutory audits and review of documents filed with the Securities and Exchange
Commission, approximated $125,000 and $100,000 respectively.

# Audit-Related Fees

The
Company did not incur any audit-related fees for the fiscal years ended December 31, 2005
or December 31, 2004.

# Tax Fees

The
aggregate fees billed by KPMG LLP for services rendered to the Company, for tax
compliance, tax advice and tax planning for the fiscal years ended December 31, 2005 and
December 31, 2004 approximated $0 and $6,000, respectively. The Company did not incur any
fees with BDO Hernández Marrón y Cía S.C. for tax compliance, tax
advice and tax planning for the fiscal years ended December 31, 2005 or December 31,
2004.

# All Other Fees

The
Company did not incur any other fees with KPMG LLP or BDO Hernández Marrón y
Cía S.C. for the fiscal years ended December 31, 2005 or December 31, 2004.

# Pre-Approval Policies

The
Board of Directors of the Company acts as the audit committee for the Company. The Board
of Directors does not have any specific pre-approval policies and procedures with respect
to the engagement of auditors. All of the Audit-Related Fees, Tax Fees and All Other Fees
discussed above, if any, were approved by the Board of Directors.

26

---

Table of Contents

# SIGNATURES

In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: January 17, 2007

| | CAPSOURCE FINANCIAL, INC.
| | -------------------------

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

In
accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated.

Dated: January 17, 2007

|Signature              | Title                                                                   
|---------------------- | ------------------------------------------------------------------------
|                      
|/s/ Randolph M. Pentel |                                                                         
|                      
|Randolph M. Pentel     | Chairman of the Board of Directors                                      
|                      
|/s/ Fred C. Boethling  |                                                                         
|                      
|Fred C. Boethling      | President, Chief Executive Officer and Director                         
|                      
|/s/ Steven E. Reichert |                                                                         
|                      
|Steven E. Reichert     | Vice President, General Counsel and Director                            
|                      
|/s/ Steven J. Kutcher  |                                                                         
|                      
|Steven J. Kutcher      | Vice President, Chief Financial Officer and Principal Accounting Officer
|                      
|/s/ Lynch Grattan      |                                                                         
|                      
|Lynch Grattan          | Director                                                                
|                      
|/s/ Wayne Hoovestal    |                                                                         
|                      
|Wayne Hoovestal        | Director                                                                
|                      
|/s/ Bruce Nordin       |                                                                         
|                      
|Bruce Nordin           | Director                                                                
|                      
|/s/ Scot Malloy        |                                                                         
|                      
|Scot Malloy            | Director                                                                

27

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Table of Contents

# Supplemental
Information Furnished with Form 10KSB

No annual report or proxy material
has been sent to security holders as of the date of the filing of this Form 10-KSB. The
Company does expect that proxy materials will be furnished to security holders subsequent
to the filing of this Form 10-KSB. The Company shall furnish copies of any such proxy
materials to the Commission prior to the time it is sent to security holders.

28

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Table of Contents

CAPSOURCE FINANCIAL,
INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL
STATEMENTS

DECEMBER 31, 2005 AND
2004

(With Report of
Independent Registered Public Accounting Firm Thereon)

C O N T E N T S

|                                                                                               | Page 
|---------------------------------------------------------------------------------------------- | -----
|                                                                                              
|REPORT of HERNÁNDEZ MARRÓN Y CÍA, S.C., INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM          | F - 1
|                                                                                              
|CONSOLIDATED FINANCIAL STATEMENTS                                                             
|                                                                                              
|Consolidated balance sheets at December 31, 2005 and 2004                                      | F - 2
|                                                                                              
|Consolidated statements of operations for the years ended December 31, 2005 and 2004           | F - 3
|                                                                                              
|Consolidated statements of stockholders equity for the years ended December 31, 2005 and 2004 | F - 4
|                                                                                              
|Consolidated statements of cash flows for the years ended December 31, 2005 and 2004           | F - 5
|                                                                                              
|Notes to consolidated financial statements                                                     | F - 6



---

Table of Contents

Report of Independent
Registered Public Accounting Firm

The Board of Directors and Stockholders
CapSource Financial, Inc.:

We have audited the accompanying consolidated
balance sheets of CapSource Financial, Inc. and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of operations, stockholders equity,
and cash flows for each of the two years in the period ended December 31, 2005. These
consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.

We conducted our auditin
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of CapSource Financial, Inc. and subsidiaries as of December 31, 2005
and 2004, and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.

| | /s/
Hernández Marrón y Cía, S.C.
| | --------------------------------

México City, Mexico
March 7, 2006

F-1

---

Table of Contents

CAPSOURCE FINANCIAL,
INC. AND SUBSIDIARIES
Consolidated Balance Sheets

|                                                                        | December 31,
|----------------------------------------------------------------------- | ------------
|                                                                        |             
|
|                                                                        |             
|Assets                                                                  |             
|Current assets:                                                         |             
|Cash and cash equivalents                                               |             
|Rents and accounts receivable, net of allowance for doubtful            |             
|accounts of $12,565 and $9,700 in 2005 and 2004, respectively           |             
|Mexican value added taxes receivable                                    |             
|Inventory                                                               |             
|Advances to vendors                                                     |             
|Prepaid insurance and other current assets                              |             
|                                                                        |             
|Total current assets                                                    |             
|                                                                       
|Property and equipment, net                                             |             
|                                                                       
|Other assets                                                            |             
|                                                                        |             
|Total  assets                                                           |             
|                                                                        |             
|                                                                       
|Liabilities and Stockholders Equity                                    |             
|Current liabilities:                                                    |             
|Accounts payable and accrued expenses                                   |             
|Deposits and advance payments                                           |             
|Notes payable                                                           |             
|Convertible notes payable, net of discount                              |             
|Payable to stockholder                                                  |             
|                                                                        |             
|Total current liabilities                                               |             
|                                                                        |             
|                                                                       
|Long-term liabilities:                                                  |             
|Notes payable                                                           |             
|Payable to stockholder, net of discount                                 |             
|                                                                        |             
|Total long-term liabilities                                             |             
|                                                                        |             
|                                                                       
|Total liabilities                                                       |             
|                                                                        |             
|                                                                       
|Commitments and contingencies (Note 9)                                  |             
|                                                                       
|Stockholders equity:                                                   |             
|Common stock, $.01 par value. Authorized 100,000,000 shares; issued and |             
|outstanding 12,378,657 and 9,860,800 shares in 2005 and 2004,           |             
|respectively                                                            |             
|Additional paid-in capital                                              |             
|Accumulated deficit                                                     |             
|                                                                        |             
|Total stockholders' equity                                              |             
|                                                                        |             
|Total liabilities and stockholders' equity                              |             
|                                                                        |             

F-2

---

Table of Contents

# CAPSOURCE FINANCIAL,
INC. AND SUBSIDIARIES

Consolidated Statements of Operations

|                                                                 | Years Ended December 31,
|---------------------------------------------------------------- | ------------------------
|                                                                 |                         
|
|                                                                 |                         
|Sales                                                            |                         
|Rental income from operating leases                              |                         
|Other                                                            |                         
|                                                                 |                         
|Total revenue                                                    |                         
|                                                                 |                         
|Costs and expenses:                                              |                         
|Direct costs of sales                                            |                         
|Depreciation and direct costs of trailers under operating leases |                         
|Selling, general and administrative expenses                     |                         
|                                                                 |                         
|Total operating expenses                                         |                         
|                                                                 |                         
|Operating loss                                                   |                         
|                                                                 |                         
|Other expense:                                                   |                         
|Interest expense                                                 |                         
|Foreign exchange losses, net                                     |                         
|                                                                 |                         
|Total other expense, net                                         |                         
|                                                                 |                         
|Loss before income taxes                                         |                         
|Income taxes                                                     |                         
|                                                                 |                         
|Net loss                                                         |                         
|                                                                 |                         
|Net loss per basic and diluted share                             |                         
|                                                                 |                         
|Weighted-average number of shares outstanding, basic and diluted |                         
|                                                                 |                         

See accompanying notes to
consolidated financial statements.

F-3

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Table of Contents

CAPSOURCE FINANCIAL, INC. AND
SUBSIDIARIES

Consolidated Statements of
Stockholders Equity

Years Ended December 31, 2005 and
2004

|                                      | Common stock
|------------------------------------- | ------------
|                                      |             
|
|                                      |             
|Balance at December 31, 2003          |             
|Exercise of common stock warrants     |             
|Common stock issued for services      |             
|Discount on payable to shareholder    |             
|Repurchase of common stock            |             
|Net loss                              |             
|                                      |             
|Balance at December 31, 2004          |             
|                                     
|Conversion of payable to              |             
|stockholder into common stock         |             
|Discount on convertible notes payable |             
|Net loss                              |             
|                                      |             
|                                     
|Balance at December 31, 2005          |             
|                                      |             

See accompanying notes to consolidated financial
statements.

F-4

---

Table of Contents

# CAPSOURCE FINANCIAL,
INC. AND SUBSIDIARIES

Consolidated Statements
Cash Flows

|                                                          | Years ended December 31,
|--------------------------------------------------------- | ------------------------
|                                                          |                         
|
|                                                          |                         
|Cash flows from operating activities:                     |                         
|Net loss                                                  |                         
|Adjustments to reconcile net loss to net cash used in     |                         
|operating activities:                                     |                         
|Provision for doubtful accounts                           |                         
|Depreciation                                              |                         
|Accretion of discount on convertible notes payable        |                         
|and payable to stockholder                                |                         
|Accretion of discount on payable to stockholder           |                         
|converted to equity prior to maturity                     |                         
|Gain on disposal  of assets                               |                         
|Common stock issued for services                          |                         
|Changes in operating assets and liabilities:              |                         
|Rents and other receivables                               |                         
|Inventory                                                 |                         
|Advances to vendors and other current assets              |                         
|Accounts payable and accrued expenses                     |                         
|Deposits and advance payments                             |                         
|Other assets                                              |                         
|                                                          |                         
|Net cash used in operating activities                     |                         
|                                                          |                         
|Cash flows from investing activities:                     |                         
|Purchase of property and equipment                        |                         
|Proceeds from disposition of property and equipment       |                         
|                                                          |                         
|Net cash (used in) provided by investing activities       |                         
|                                                          |                         
|Cash flows from financing activities:                     |                         
|Proceeds from payable to stockholder                      |                         
|Proceeds from notes payable and convertible notes payable |                         
|Repayment of payable to stockholder                       |                         
|Reduction in notes payable and convertible notes payable  |                         
|                                                          |                         
|Net cash provided by financing activities                 |                         
|                                                          |                         
|Net increase in cash and cash equivalents                 |                         
|Cash and cash equivalents, beginning of the year          |                         
|                                                          |                         
|Cash and cash equivalents, end of the year                |                         
|                                                          |                         
|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
consolidated financial statements.

F-5

---

Table of Contents

# CAPSOURCE FINANCIAL,
INC. AND SUBSIDIARIES

Consolidated Financial
Statements

December 31, 2005 and
2004

Notes To Consolidated Financial
Statements

|(1) | Summary
of Significant Accounting Policies
|--- | ------------------------------------------

| | (a) | 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 subsidiaries.
The Company operates in one segment, the leasing and selling of trailers, and all
operations currently are in Mexico.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Liquidity
| | --- | ---------

| | Since
 its inception, the Company has generated losses from operations, and as of December
31, 2005, had an accumulated deficit of $11,329,345, and working capital deficit of
$566,491. On February 18, 2005 and December 28, 2005, the Companys Chairman and
largest stockholder converted $1,100,000 and $800,000, respectively, of Company notes
payable and accrued interest, into Company common stock. During the 12 months ended
December 31, 2005, he loaned an additional $1,648,500 to the Company through a note
maturing October 15, 2006, of which $864,351 was repaid prior to December 31, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company currently is negotiating with third party investors to supply additional debt or
equity funding, although no financing agreements have been completed. The Company is, and
has been, dependent on its Chairman and largest shareholder to provide cash through
loans, some of which have been subsequently converted to equity. On March 1, 2006, the
Companys Chairman and largest stockholder expressed, in writing to the Companys
President/CEO, his willingness and ability to continue to financially support the
Company, at least through March 31, 2007 if needed, by way of additional debt and/or
equity contributions. Should the Chairman fail to provide financial support to the
Company, or should the Company be unsuccessful in obtaining funding from third parties,
the Company may be forced to dramatically scale back its operations and activities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
believes that the cash on hand at December 31, 2005, together with cash expected to be
received from a private placement of debt/equity and cash expected to be generated by
operations, will provide sufficient operational funds for the next twelve months, and
satisfy obligations as they become due. If the Company experiences occasional cash
short-falls, the Companys Chairman has committed to continue to provide the funds
necessary to cover such shortfalls.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Use
of Estimates
| | --- | ----------------

| | The
preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements, as well as
the reported amounts of revenue and expenses during the reporting period. Significant
estimates include depreciation rates, allowance for impairment of equipment, residual
values of operating leases / leased equipment, allowance for doubtful accounts, income
tax valuation allowance and the fair value of beneficial conversion features. Actual
results could differ significantly from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-6

---

Table of Contents

| | (d) | Principles
of Consolidation
| | --- | ---------------------------

| | The
accompanying consolidated financial statements include the accounts of CapSource
Financial, Inc. and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | Cash
and Cash Equivalents
| | --- |  | -------------------------

| | Cash
and cash equivalents include demand deposits and highly liquid investments with original
maturities of three months or less.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | Allowance
for Doubtful Accounts
| | --- |  | -------------------------------

| | An
allowance for doubtful accounts is maintained at levels determined by management to be
adequate based upon specific identification of certain past-due accounts, which are in
the legal collection process, and deemed to be improbable as to their collection. In
addition, a general percentage allowance is provided for all other past-due accounts,
based on account aging. Past-due accounts are charged-off against the allowance when
management considers that all practical efforts to collect the accounts have been
exhausted. Accounts receivable are reviewed quarterly to determine the adequacy of the
allowance for doubtful accounts. For the years ended December 31, 2005 and 2004, the
allowance was increased by $9,669 and $59,961, respectively. Accounts of $6,815 and
$174,250 were charged-off against the allowance during the years ended December 31, 2005
and 2004, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) |  | Mexican
Value-Added Tax Receivable
| | --- |  | ----------------------------------

| | Mexican
value-added tax receivable is the excess of the value-added tax paid versus the value
added tax collected, which the Company is in the process of collecting as a normal
value-added tax refund from the Mexican government.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h) |  | Inventory
| | --- |  | ---------

| | Inventory
represents trailers purchased for resale and are recorded at the lower of cost or market
on a first-in first-out basis.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | (i) |  | Recognition
of Revenue From Equipment Sales
| | --- |  | -------------------------------------------

| | Revenue generated by the sale of trailer and semi-trailer equipment is recorded at the time the equipment is delivered to the
buyer, provided the Company has evidence of an arrangement, the sale price is fixed or determinable and collectibility is
reasonably assured.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (j) |  | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-7

---

Table of Contents

| | 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 December 31, 2005 and 2004, 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 value to be received from 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 all relevant 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 changes in future periods.
At December 31, 2005, the Company had not recognized any impairment of equipment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (k) |  | Property
and Equipment
| | --- |  | ----------------------

| | Equipment
is recorded at cost. Trailer and semi-trailer equipment is depreciated on a straight-line
basis over the estimated useful life of ten years. Vehicles are depreciated on a
straight-line basis over the estimated useful life of three years. Furniture and computer
equipment are depreciated on a straight-line basis over estimated useful lives ranging
from three to ten years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (l) |  | Income
Taxes
| | --- |  | ------------

| | The
Company accounts for income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recorded to the extent that management cannot conclude
that realization of deferred tax assets is more likely than not.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (m) |  | Earnings
Per Share
| | --- |  | ------------------

| | The
following summarizes the weighted-average common shares issued and outstanding for the
three months and years ended December 31, 2005 and 2004:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

F-8

---

Table of Contents

THREE MONTHS ENDED
     
     TWELVE MONTHS ENDEDDecember 31,
     
     December 31,2005
     
     2004
     
     2005
     
     2004Common and common equivalent sharesoutstanding at beginning of period
     11,235,800
        
     9,871,454
        
     9,860,800
        
     9,790,999Common shares issued for conversion of debt
     1,142,857
        
     
        
     2,517,857
        
     Common shares issued for exercise of warrents
     
        
     
        
     
        
     45,455Common shares issued for services
     
        
     
        
     
        
     35,000Repurchase of common shares
     
        
     (10,654
        )
     
        
     (10,654
        )Common and common equivalent sharesoutstanding at end of period
     12,378,657
        
     9,860,800
        
     12,378,657
        
     9,860,800Historical common equivalent sharesoutstanding at beginning of period
     11,235,800
        
     9,871,454
        
     9,860,800
        
     9,790,999Weighted average common shares issuedduring period
     37,267
        
     
        
     1,199,804
        
     50,804Weighted average common shares
     11,273,067
        
     9,871,454
        
     11,060,604
        
     9,841,803


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

| | Warrants
to purchase 937,334 and 887,334 common shares as of December 31, 2005 and 2004,
respectively, were excluded from the treasury stock calculation because they were
anti-dilutive due to the Companys net losses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (n) |  | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (o) |  | Allowance
for Impairment
| | --- |  | ------------------------

| | An
allowance for impairment is maintained at levels determined by management to adequately
provide for any other than temporary declines in asset values. In determining impairment,
economic conditions, the activity in used equipment markets, the effect of actions by
equipment manufacturers, the financial condition of lessees, the expected courses of
action by lessees with regard to leased equipment at termination of the initial lease
term, and other factors which management believes are relevant, are considered.
Recoverability of an assets value is measured by a comparison of the carrying
amount of the asset to future net cash flows expected to be generated by the asset. If a
loss is indicated, the loss to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset and is recognized in
depreciation and direct costs of trailers. Asset dispositions are recorded upon the
termination or remarketing of the underlying assets. Assets are reviewed annually to
determine the adequacy of the allowance for losses. As of December 31, 2005, Company
management has determined that an impairment of approximately $19,000 exists in the
carrying value of inventory. This amount has been recognized as cost of trailer sales in
the Companys Statement of Operations for the year ended December 31, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9

---

Table of Contents

| | (p) |  | Foreign
Exchange Reporting
| | --- |  | --------------------------

| | The
financial statements of the Companys Mexican subsidiaries, where the U.S. dollar is
the functional currency, include transactions denominated in the local currency, which
are remeasured into the U.S. dollar. The remeasurement of the local currency into U.S.
dollars creates foreign exchange gains and losses that are included in other income
(expense) in the Companys Statement of Operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accounts of the Companys Mexican subsidiaries are reported in the Mexican peso;
however, all leases and generally all other activities are denominated in U.S. dollars.
For those operations, certain assets and liabilities are remeasured into U.S. dollars at
historical exchange rates and certain assets and liabilities are translated into U.S.
dollars at period-end exchange rates. Income and expense accounts are translated at
average monthly exchange rates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (q) |  | Beneficial
Conversion Option
| | --- |  | ----------------------------

| | In
connection with the issuance of debt instruments, the Company granted the holders the
option to convert the debt into equity of the Company at amounts less than the current
fair value of its common stock at the date of the transaction. In calculating the fair
value of these beneficial conversions, the Company estimated the fair value of the Companys
stock based on current results, budgeted performance, and recent proposed transactions
involving the Companys stock.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (r) |  | Stock-Based
Compensation
| | --- |  | ------------------------

| | The
Company accounts for its employee stock option plans and other employee stock-based
compensation arrangements in accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related interpretations. The Company applies the disclosure-only provisions of SFAS No.
123, Accounting for Stock-Based Compensation (SFAS No. 123), and SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, which allows entities
to continue to apply the provisions of APB Opinion No. 25 for transactions with employees
and provide pro forma disclosures for employee stock grants as if the fair value based
method of accounting in SFAS No. 123 had been applied to these transactions. The Company
accounts for equity instruments issued to non-employees in accordance with the provisions
of SFAS No. 123 and related interpretations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes relevant information as to reported results under our
intrinsic value method of accounting for stock awards (APB 25), with supplemental
information as if the fair value recognition provisions of SFAS 123, Accounting for
Stock Based Compensation had been applied for each of the two years in the period
ended December 31, 2005:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year ended December 31,2005
     
     2004Net loss, as reported
     
     
     $(1,794,466
        )
     $(1,576,163
        )Deduct: SFAS No. 123 pro forma compensation expense
     (80,000
        )
     (84,000
        )Net loss, pro forma
     $(1,874,466
        )
     $(1,660,163
        )Loss per share, pro forma
     $(0.17
        )
     $(0.17
        )Loss per share, as reported
     $(0.16
        )
     $(0.16
        )


F-10

---

Table of Contents

| | The
fair value per share of the warrants granted in 2005 and 2004 were $0.49 and $0.61,
respectively. These fair values were estimated on the date of grant using the
Black-Scholes option-pricing model and the following assumptions:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year ended December 31,2005
     
     2004Risk-free interest rate
     
     
     4.38%
        
     3.63%Expected life
     5 years
        
     5 yearsExpected volatility
     100.0%
        
     100.0%Expected dividend yield
     0.0%
        
     0.0%


| | (s) |  | Effects
of Recent Accounting Pronouncements
| | --- |  | -------------------------------------------

| | In
May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections.
This Statement deals with the accounting and reporting of voluntary changes in accounting
principles, changes resulting from new regulations for which no transitional provisions
have been issued, and the correction of errors. The Statement replaces the APB No. 20 and
SFAS No. 3. Generally, changes in accounting principles will be accounted for
retrospectively. The Statement also requires that a change in depreciation or
amortization method for long term, non-financial assets be accounted for prospectively.
The Statement will be effective for fiscal years beginning after December 15, 2005. The
Company does not expect the application of this Statement to have a material impact on
its financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2005, the FASB issued EITF Issue No. 05-5 Accounting for Early Retirement or
Post Employment Programs with Specific Features. EITF Issue No. 05-5 provides
guidance for accounting and other incentive programs for early retirement with similar
characteristics. Under arrangements, employers pay to employees, benefits in the form of
salary, social contributions and additional bonuses. Under certain conditions a part of
these benefits is compensated through government subsidies. Under EITF Issue No. 05-5 the
salary expense should be recognized ratably over the remaining active service period. The
expense related to the additional bonuses granted by the employer should be accrued over
the period starting from the date the individual employee signs the contract until the
end of the active service period. Related government subsidies are recognized when the
employer is entitled to the subsidy and the recognition criteria are met. EITF Issue No.
05-5 is effective from fiscal years beginning after December 15, 2005 and has to be
applied prospectively. The adoption of EITF Issue No. 05-5 is not expected to have a
material impact on the Companys financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the FASB issued SFAS 123(R), Share-Based Payment. SFAS 123(R)
amends SFAS 123, Accounting for Stock-Based Compensation, and APB Opinion 25,
Accounting for Stock Issued to Employees. SFAS 123(R) requires that the cost
of share-based payment transactions (including those with employees and non-employees) be
recognized in the financial statements. SFAS 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or offering to
issue) its shares, share options, or other equity instruments (except for those held by
an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of
the entitys shares or other equity instruments, or (2) that require (or may
require) settlement by the issuance of an entitys shares or other equity
instruments. This Statement is effective for public companies qualifying as SEC small
business issuers, as of the first fiscal year beginning after December 15, 2005. The
Company will apply the provisions of this Statement for the fiscal year beginning January
1, 2006. Management is currently assessing the effect of SFAS No. 123(R) on the Companys
financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

---

Table of Contents

|(2) | Property
and Equipment
|--- | ----------------------

| | At
December 31, 2005 and 2004, equipment consists of the following:
| | -------------------------------------------------------------------

2005
     
     2004Trailer and semi-trailer equipment
     
     
     $2,057,285
        
     $2,381,817Vehicles
     68,230
        
     67,127Furniture and computer equipment
     140,557
        
     130,0242,266,072
        
     2,578,968Accumulated depreciation
     (996,320
        )
     (1,033,155
        )Total property and equipment, net
     $1,269,752
        
     $1,545,813


|(3) | Future
Minimum Rental Income
|--- | ----------------------------

| | Future
minimum lease payments receivable from noncancelable operating leases on equipment as of
December 31, 2005 are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------

Year ending December 31:2006
     
     
     $339,7012007
     214,2922008
     148,531$702,524


|(4) | Significant
Customers and Suppliers
|--- | -----------------------------------

| | All
of the Companys customers are located in Mexico. Revenue from sales and leases are
denominated in U.S. dollars. During the years 2005 and 2004, revenue from customers who
represent 10% or greater of total revenue are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Customer
     2005
     
     2004Customer A
     
     
     $11,292,195
        
     $2,166,600Customer B
     $761,450
        
     $736,549


| | The
Company relies primarily on one major supplier, Hyundai Translead and its Mexican
subsidiary, to provide the majority of its inventory for sale or lease.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---

Table of Contents

|(5) | Notes
Payable and Convertible Notes Payable
|--- | -------------------------------------------

| | Notes
payable consist of unpaid principal and accrued interest, payable at the following rates
as of December 31, 2005 and 2004:
| | --------------------------------------------------------------------------------------------------------------------------------

2005
     
     200410.0% notes, due April 1, 2006
     
     
     $504,000
        
     $508,28110.0% notes, due January 5, 2005
     
        
     252,17310.0% notes, due January 5, 2008
     80,000
        
     80,67910.0% notes, due January 5, 2007
     262,000
        
     264,226Prime rate (7.0% at 12-31-05)  plus 2.0%, notesdue August 6, 2006
     1,622,209
        
     402,3192,468,209
        
     1,507,678Less: current portion
     (2,126,208
        )
     (259,945
        )$342,000
        
     $1,247,733


| | Convertible
notes payable consist of unpaid principal and accrued interest, payable on the following
due dates at the following rates as of December 31, 2005 and 2004:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

2005
     
     200411% notes, due August 1, 2005
     
     
     $
        
     $50,46711% notes, due June 17, 2005
     
        
     50,467
        
     100,934Discount on convertible notes payable
     
        
     (3,331
        )
        
     97,603Less: current portion
     
        
     (97,603
        )$
        
     $


| | The
convertible notes payable are unsecured and are immediately convertible into common stock
at 75% of the market price (as defined in the agreement) of common stock on the date of
conversion. This beneficial conversion feature has been valued in accordance with EITF
98-5, Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios (EITF 98-5) and EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments (EITF 00-27) at
the intrinsic value at the commitment date. The beneficial conversion feature is recorded
as an increase to additional paid-in capital and a discount on the related debt, which is
accreted to interest expense from the commitment date to the stated maturity date of the
debt using the effective interest method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years ended December 31, 2005 and 2004, the Company recognized non-cash interest
expense totaling $19,998 and $66,955, respectively, related to the amortization of the
beneficial conversion feature discount.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13

---

Table of Contents

|(6) |  | Payable
to Stockholder
|--- |  | ----------------------

| | Payable
to stockholder at December 31, 2005 and 2004 consists of the following:
| | -------------------------------------------------------------------------------

2005
     
     2004Prime rate (7.0% at 12-31-05) plus 1.0%,
      unsecured notes payable to
      stockholder with accrued interest,
      due October 15, 2006
     
     
     $832,705
        
     $753,021Non-interest bearing, unsecured convertible notePayable to  Stockholder
     
        
     1,100,000832,705
        
     1,853,021Discount on convertible notes payable
     
        
     (353,100
        )832,705
        
     1,499,921Less: current portion
     (832,705
        )
     $
        
     $1,499,921


| | During
the year ended December 31, 2005, the Company borrowed an additional $1,648,500 in
conjunction with the unsecured note payable to the Companys majority stockholder, of
which $864,351 was repaid prior to December 31, 2005. On December 28, 2005, the
stockholder converted $800,000 of principle and interest accrued on the note, into Company
equity at a conversion price of $0.70 per share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 2004, the Company issued a non-interest bearing convertible note payable of
$1,100,000 to the Companys majority stockholder, replacing $1,100,000 of interest
bearing notes payable and accrued interest. The convertible note payable had a conversion
price of $0.80 per share, and specified that the Stockholder would convert the debt to
Company common stock as soon as practicable. The Company recorded a discount of $353,100
in the year ended December 31, 2004, in connection with the beneficial conversion feature
on the issuance of the note to the stockholder. Subsequently, on February 18, 2005, the
stockholder converted the note to Company equity. The December 31, 2005 consolidated
statement of operations includes a charge of $353,100 to interest expense, which
represents the unaccreted discount on the convertible stockholder note that was converted
to common stock.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Non-cash
interest expense recognized for the years ended December 31, 2005 and 2004 totaled
$353,100 and $48,594, respectively, related to the amortization of the beneficial
conversion feature discount on convertible notes payable to stockholder.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Maturities
of the Companys aggregate debt by year are as follows:
| | ------------------------------------------------------------------

Year ending December 31:2006
     
     
     $2,958,9132007
     262,0002008
     80,000


F-14

---

Table of Contents

|(7) |  | Income Taxes
|--- |  | ------------

| | Income tax benefit (expense) for the years ended December 31,
2005 and 2004 differ from the amount computed by applying the U.S. federal income tax rate of 34% because of the following:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2005
     
     2004Computed expected tax benefit
     
     
     $592,577
        
     $524,811Reduction (increase) in income taxes resulting from:State and local taxes, net of federal benefitand other
     26,143
        
     23,003Alternative foreign tax
     (51,592
        )
     (32,602
        )Adjustment for changes in enacted tax lawsand rates, and the effects of indexization of                utilized and expired net operating loss                carryforwards
     158,796
        
     (178,380
        )Non-deductible expenses
     (189,482
        )
     (214,373
        )Increase in valuation allowance
     (588,034
        )
     (511,821
        )Income tax expense
     $(51,592
        )
     $(32,602
        )


| | Losses before income taxes from U.S. operations were $1,227,000 in
2005 and $730,000 in 2004. Losses before income taxes from Mexican operations were $515,500 in 2005 and $815,000 in 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The net income tax expense of $51,592 and $32,602 in 2005 and
2004, respectively, represents an alternative tax on assets incurred by the Companys Mexican operations. This alternative
tax is applicable to some Mexican corporations that have no taxable earnings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The adjustment for changes to enacted laws and rates resulted from
the benefit to the Companys Mexican operations of indexing the net operating loss carryforwards, partially offset by the
reduction to 29% of the Mexican income tax rate being applied to the net operating loss carryforwards, as well as the reduction
due to the application and expiration of prior year net operating loss carryforwards.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The tax effect of temporary differences that give rise to
significant portions of deferred tax assets at December 31, 2005 and 2004 are presented below:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

2005
     
     2004Deferred tax assets:Allowance for doubtful accounts
     $3,644
        
     $2,913Accrued expenses and customer advances
     314,496
        
     102,644Net operating loss carryforwards
     2,881,855
        
     2,245,501Total gross deferred tax assets
     3,199,995
        
     2,751,058Deferred tax liabilities:Prepaid expenses
     8,366
        
     11,684Inventories
     
        
     135,779Total gross deferred tax liabilities
     8,366
        
     147,463Less valuation allowance
     (3,191,629
        )
     (2,603,595
        )Net deferred tax assets
     $
        
     $


F-15

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Table of Contents

| | As
of December 31, 2005, the Company had U.S. federal net operating loss carryforwards of
approximately $3.6 million, which are available to offset future federal taxable income
and expire at various dates from 2017 through 2025. The Companys Mexican operations
had net operating loss carryforwards of approximately $5.0 million that will expire at
various dates from 2006 through 2015.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during periods in which those temporary differences are
deductible. Due to historical losses, realization of tax assets is not assured and,
accordingly, management has recognized a valuation allowance for all deferred income tax
assets for all periods presented.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Common
and Preferred Stock
|--- |  | --------------------------

| | The
Company has authority to issue different classes of common stock and preferred stock up to
a total of 100,000,000 shares. At December 31, 2005 and 2004, no shares of preferred stock
or other classes of common stock have been issued.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 15, 2004, the Company issued 35,000 shares of common stock to a third party, valued
at $1.75 per share, for a total of $61,250, as partial compensation for performing public
relations services for the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 29, 2004, warrants to purchase 45,455 shares of Company common stock at $1.10 per
share were exercised. The shares, valued at a total of $50,000, were issued in
cancellation of a demand note payable of the same amount.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 2004, the Company repurchased 10,654 shares of Company common stock at $1.00
per share, from a customer of the Company, accepting the shares as payment of the
customers account receivable balance of $10,654.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 a
price of $0.80 per share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 28, 2005, the Companys Chairman and largest stockholder converted $800,000
of Company notes payable and accrued interest into 1,142,857 shares of Company common
stock at a price of $0.70 per share.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005 and 2004, the Company issued warrants to directors to purchase 175,000 and
137,500 shares of common stock, respectively, at $0.70 and $0.80, respectively. These
warrants are immediately exercisable and have a five-year life. The Company applies the
intrinsic value based method in accounting for stock options, warrants and awards to
employees, and qualified awards to non-employee directors. Accordingly, no compensation
expense has been recorded related to the grants in 2005 and 2004 as the exercise price of
the warrants is equal to the estimated fair value at the issue date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2001, in conjunction with a private placement offering to sell its common stock, the
Company issued 20,000 A Warrants and 20,000 B Warrants. Each A Warrant was exercisable
immediately and for a period of two years from the date of issue into one share of common
stock at an exercise price per share of $2.50. As of December 31, 2005, the 20,000 A
Warrants have expired. Each B Warrant is exercisable immediately and for a period of five
years from the date of issue into one share of common stock at an exercise price per share
of $5.00. The Warrants are callable by the Company at $0.05 each.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16

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Table of Contents

| | On
February 16, 2001, the Company adopted the 2001 Omnibus Stock Option and Incentive Plan
(the Plan). The Plan provides that options to purchase shares of the
Companys common stock may be granted to key employees, directors, consultants and
others who are expected to provide significant services to the Company. The exercise price
of the options ranges between 85% to 110% of the fair value of the Companys common
stock at the date of grant depending on the type of option and optionee. The aggregate
number of shares that can be issued under the Plan is 550,000. As of December 31, 2005, no
options have been issued under the Plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following summarizes information about outstanding warrants at December 31, 2005:
| | -------------------------------------------------------------------------------------

Exercise Prices
     Number of
Warrants
Outstanding
     
     Weighted-average
Remaining
contractual life
(in years)
     
     Number of
Warrants
Exercisable$0.70
     
     
     175,000
        
     5.0
        
     175,000$0.80
     137,500
        
     4.0
        
     137,500$1.10
     145,000
        
     0.5
        
     145,000$1.30
     125,000
        
     1.3
        
     125,000$1.75
     300,000
        
     2.5
        
     300,000$2.45
     34,834
        
     1.7
        
     34,834$5.00
     20,000
        
     0.3
        
     20,000937,334
        
     2.6
        
     937,334Weighted-averageexercise price
     $1.35
        
     
        
     $1.35


|(9) | Commitments
and Contingencies
|--- | -----------------------------

| | The
Company leases office space and trailer sale facilities under noncancelable operating
leases. The leases contain renewal options and provide for annual escalation for
utilities, taxes and service costs. Rent expense was $153,708 and $146,844 for the years
ended December 31, 2005 and 2004, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Minimum
future rental payments required under these leases are as follows:
| | --------------------------------------------------------------------------

Year ending December 31:2006
     
     
     $127,9872007
     7,625$135,612


| | On
February 11, 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 contact,
Hyundai grants the Companys Mexican subsidiary, RESALTA, the exclusive right to sell
Hyundai trailers and parts in Mexico. In addition, Hyundai Translead will provide a credit
facility of $1,000,000 to facilitate the Companys inventory of Hyundai trailers in
Mexico. The credit facility is guaranteed by a pledge of 680,000 shares of Company stock
owned by its Chairman Randolph Pentel. In contrast with the prior contract, the new
agreement does not require the Company to meet any minimum purchase requirements. The
contract expires in November of 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17

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Table of Contents

| | As
of December 31, 2005, the Company had committed to purchase additional trailers from
Hyundai for sale or lease. The total purchase price was approximately $8,876,000, towards
which the Company had made down payments to Hyundai of approximately $888,000 as of
December 31, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During the year ended December 31, 2004, the Companys Mexican leasing subsidiary, REMEX, received a favorable
legal judgment awarding it the recovery of disputed trade accounts receivable of $174,898, and the recovery of
related legal costs of $16,619.  During the year ended December 31, 2005, $18,704 of the judgment for accounts
receivable was collected.  Based on advice from legal counsel, Company management is confident of collecting the
balance of $156,194.  Nevertheless, the Company included $5,212 in the allowance for doubtful accounts relating
to this balance as of December 31, 2005, because certain assets that may be received in settlement of the
judgment, could suffer a slight decrease in value.  In addition, due to uncertainties related to the collection
of the judgment for legal costs, the Company recorded an allowance of $16,619 against other accounts receivable
as of December 31, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Fair
Value of Financial Instruments
|---- | -----------------------------------

| | The
carrying amounts of cash, rents receivable, other receivables, accounts payable, accrued
expenses, deposits and advance payments approximate their fair value because of the short
maturity of these instruments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of the payable to stockholder and convertible notes payable approximate
fair value (before discount) because the interest rates are based on currently offered
rates by lending institutions for similar debt instruments of comparable maturities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

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