UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-QSB

             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934, AS AMENDED:

                  For the Quarterly Period Ended June 30, 2005

                         ------------------------------

                          Commission File No. 33-49797
                         ------------------------------

                               eTOTALSOURCE, INC.
        (Exact name of small business issuer as specified in its charter)

            COLORADO                                     84-1066959
----------------------------------          ------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)

                    1510 Poole Boulevard, Yuba City, CA 95993
                     Address of principal executive offices)

                                 (530) 751-9615
              (Registrant's Telephone Number, Including Area Code)

   Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

                                 Yes |X| No |_|

  As of June 30, 2005, the issuer had 46,710,821 shares of common stock, no par
value per share, issued and outstanding.

Documents Incorporated by Reference:  None

Transitional Small Business Disclosure Format: Yes |_| No |X|

<PAGE>

                               eTOTALSOURCE, INC.

                                   FORM 10-QSB

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                      <C>
PART I. - FINANCIAL INFORMATION
     ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..................................................3
         Balance Sheets - June 30, 2005 and December 31, 2004..............................................4
         Statements of Operations - Three and Six Months Ended June 30, 2005 and 2004......................5
         Statements of Cash Flows - Six Months Ended June 30, 2005 and 2004................................6
         Notes to Financial Statements.....................................................................7
     ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................................8
     ITEM 3.  CONTROLS AND PROCEDURES.....................................................................22

PART II. - OTHER INFORMATION
     ITEM 1.  LEGAL PROCEEDINGS...........................................................................22
     ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS...................................................22
     ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.............................................................22
     ITEM 4.  SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS..........................................22
     ITEM 5.  OTHER INFORMATION...........................................................................22
     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K............................................................23

SIGNATURE PAGE ...........................................................................................27
</TABLE>


                                       2
<PAGE>

                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

                               eTOTALSOURCE, INC.
                   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               As of June 30, 2005

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                     PAGE

<S>                                                                                                    <C>
CONDENSED  CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2005 AND DECEMBER 31, 2004                       4

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,            5
2005 AND 2004

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND             6
2004

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005                               7
</TABLE>


                                       3
<PAGE>

                               eTotalSource, Inc.
                      Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
ASSETS                                                                     June 30, 2005    December 31, 2004
                                                                            -----------      -----------
<S>                                                                         <C>              <C>
Current Assets
Cash                                                                        $     8,859      $    37,849
Accounts receivable                                                               1,121               --
Other                                                                             1,244            1,296
                                                                            -----------      -----------

Total Current Assets                                                             11,224           39,145
                                                                            -----------      -----------

Property and Equipment

Furniture and equipment                                                          86,772           88,122

   Less accumulated depreciation                                                (62,038)         (56,786)
                                                                            -----------      -----------
                                                                                 24,734           31,336
                                                                            -----------      -----------

Other Assets
Patents applications and trademarks, less $17,448 and $15,431 accumulated
amortization, respectively                                                       22,890           24,907

Deposits                                                                            721            1,162
                                                                            -----------      -----------

                                                                                 23,611           26,069
                                                                            -----------      -----------

Total Assets                                                                $    59,569      $    96,550
                                                                            ===========      ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities

Convertible notes payable                                                   $   250,000      $   417,569
Other notes payable                                                             757,000          632,000
Judgments payable                                                               204,788          204,788
Accounts payable                                                                356,526          183,461
Accrued compensation payable                                                  1,021,408          845,880
Accrued interest payable                                                        214,661          185,475
Deferred revenue                                                                 45,000           67,500
                                                                            -----------      -----------
Total Current Liabilities                                                     2,849,382        2,536,673

Convertible Notes Payable, less current maturities and $197,942 discount        152,058          117,900
                                                                            -----------      -----------

Total Liabilities                                                             3,001,440        2,654,573
                                                                            -----------      -----------

Commitments and Contingencies

Stockholders' Equity (Deficit)
Common stock; no par value; 300 million shares authorized,
  46,710,821 shares issued and outstanding                                    6,002,403        5,784,300

Accumulated (deficit)                                                        (8,944,273)      (8,342,323)
                                                                            -----------      -----------

Total Stockholders' Equity (Deficit)                                         (2,941,870)      (2,558,022)
                                                                            -----------      -----------

Total Liabilities and Stockholders' Equity (Deficit)                        $    59,569      $    96,550
                                                                            ===========      ===========
</TABLE>

                            See accompanying notes.

                                       4
<PAGE>

                              eTotalSource, Inc.
                Condensed Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                              Three months Ended June 30,      Six months Ended June 30,
                                              ----------------------------    ----------------------------
                                                  2005            2004            2005            2004
                                              ------------    ------------    ------------    ------------
<S>                                           <C>             <C>             <C>             <C>
Revenues                                      $     13,998    $     97,174    $     28,984    $    115,266

General and Administrative Expenses                267,146         807,875         519,671       1,205,138
                                              ------------    ------------    ------------    ------------

Operating Income (Loss)                           (253,148)       (710,701)       (490,686)     (1,089,871)

Other Income (Expense)
Gain (loss) on sale or retirement of assets             --          (1,122)             --          (1,140)

Interest expense                                   (64,778)        (76,512)       (112,539)       (103,879)

Other income (expense), net                            (67)          1,273           1,275           1,273
                                              ------------    ------------    ------------    ------------
Total Other Income (Expense)                       (64,846)        (76,361)       (111,264)       (103,747)
                                              ------------    ------------    ------------    ------------

Net (Loss)                                    $   (317,994)   $   (787,062)   $   (601,951)   $ (1,193,618)
                                              ============    ============    ============    ============

Basic and Diluted (Loss) per Share            $      (0.01)   $      (0.02)   $      (0.01)   $      (0.04)
                                              ============    ============    ============    ============

Weighted Average Common Shares Outstanding      46,710,821      32,556,481      46,710,821      31,552,844
                                              ============    ============    ============    ============
</TABLE>

                            See accompanying notes.


                                       5
<PAGE>

                           eTotalSource, Inc.
             Condensed Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                         Six months Ended June 30,
                                                                        --------------------------
                                                                            2005           2004
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
Cash Flows From (Used in) Operating Activities:
Net (loss)                                                              $  (601,951)   $(1,193,618)

Depreciation and amortization                                                40,594         11,139
Gain (loss) on sale or retirement of assets                                      67          1,141

Stock issued for services and in lieu of interest                                --        642,700

Stock options and warrant expense                                            52,648         52,927
Changes in assets and liabilities:

Decrease (increase) in accounts receivable                                   (1,121)        (3,055)
Decrease (increase) in other current assets                                      53         (7,623)
Decrease (increase) in deposits                                                 441            196
Increase (decrease) in payables, credit cards and accrued liabilities       377,778        222,451

Increase (decrease) in deferred revenue                                     (22,500)       (22,500)
                                                                        -----------    -----------

Net Cash (Used in) Operating Activities                                    (153,990)      (296,243)
                                                                        -----------    -----------

Cash Flows From (Used in) Investing Activities:

Purchase of equipment                                                            --         (9,077)
                                                                        -----------    -----------

Net Cash (Used in) Investing Activities                                          --         (9,077)
                                                                        -----------    -----------

Cash Flows From (Used in) Financing Activities:

Proceeds from issuance of notes payable                                     125,000             --
                                                                        -----------    -----------

Net Cash From Financing Activities                                          125,000             --
                                                                        -----------    -----------

Increase (decrease) in Cash and Cash Equivalents                            (28,990)      (305,320)

Cash and Cash Equivalents - Beginning of Period                              37,849        313,082
                                                                        -----------    -----------

                                                                        ===========    ===========
Cash and Cash Equivalents - End of Period                               $     8,859    $     7,762
                                                                        ===========    ===========
</TABLE>

                            See accompanying notes.


                                       6
<PAGE>

                               eTOTALSOURCE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005

Note A - Basis of Presentation

The  accompanying  unaudited  financial  statements of  eTotalSource,  Inc. (the
"Company")  were  prepared in  accordance  with  generally  accepted  accounting
principles for interim  financial  information and Article 10 of Regulation S-X.
Accordingly,  they do not include all of the information and footnotes  required
by generally accepted accounting principles for complete financial statements.

In the opinion of management,  all adjustments  considered  necessary for a fair
presentation  of the  results of  operations  and  financial  condition  for the
periods presented have been included. Such adjustments are of a normal recurring
nature. The results of operations for the three and six-month periods ended June
30, 2005 are not necessarily indicative of the results of operations that can be
expected for the fiscal year ending December 31, 2005. For further  information,
refer to the  Company's  audited  financial  statements  and  footnotes  thereto
included in Item 7 of Form 10-KSB filed by the Company on March 25, 2005.

Certain  reclassifications  have been made to prior year  expenses to conform to
the current  year  presentation  and have no effect on the reported net loss for
either period.

Note B - Going Concern Contingency

As  reported in the  December  31, 2004  financial  statements,  the Company has
incurred  significant  recurring  losses from  operations  and has a substantial
liquidity  shortage,  including default  conditions on certain notes payable and
judgments payable to creditors. The foregoing raises substantial doubt about the
Company's  ability  to  continue  as  a  going  concern.  These  conditions  are
substantially  unchanged  through the second quarter of 2005.  The  accompanying
condensed  consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

Note C - Convertible Debentures

On April 20, 2005, the Company and Cornell Capital Partners, LP ("Cornell"), the
holder of two  $175,000  convertible  debentures  issued by the Company in 2004,
agreed to modify the 20% floating  conversion  rate of the debentures to a fixed
rate equal to $0.0112 per share.  In addition,  the term of the  debentures  was
reset for a new 24-month period beginning April 20, 2005, when the principal and
accrued  interest  shall be, at the Company's  option,  either paid or converted
into shares of common stock at a conversion price equal to $0.0112 per share.

The debentures are reported net of a $197,942  unamortized discount related to a
beneficial  conversion feature. This discount represents the quoted market price
of the  Company's  common  stock  on  April  20,  2005 in  excess  of  Cornell's
conversion  rate.  The discount is being  amortized over the revised term of the
debentures.

Note D - Notes Payable

On April 20, 2005,  the Company  borrowed  $100,000 from Cornell and issued it a
note payable with interest accruing at 12%. The note and accrued interest is due
on the earlier of (i) the effective  date a proposed  Registration  Statement on
Form SB-2 is filed with the United  States  Securities  and Exchange  Commission
(the "SEC"), or (ii) August 1, 2005 (currently in default).  The note is secured
by 8,117,946 shares of Company common stock  beneficially held by three officers
of the Company.

On June 27, 2005, the Company borrowed $25,000 from Cornell and issued it a note
payable with interest  accruing at 10%. The note and accrued  interest is due on
the earlier of (i) the effective date a proposed Registration  Statement on Form
SB-2 is filed with the United States  Securities  and Exchange  Commission  (the
"SEC"), or (ii) August 1, 2005 (currently in default).


                                       7
<PAGE>

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

Forward-Looking   Statements  and  Associated   Risks.   This  report   contains
forward-looking  statements.  Such forward-looking statements include statements
regarding,  among other things, (a) our projected sales and  profitability,  (b)
our growth strategies,  (c) anticipated  trends in our industry,  (d) our future
financing plans, (e) our anticipated needs for working capital,  (f) our lack of
operational experience,  and (g) the benefits related to ownership of our common
stock.  Forward-looking  statements,  which involve assumptions and describe our
future plans, strategies, and expectations, are generally identifiable by use of
the  words  "may,"  "will,"  "should,"   "expect,"   "anticipate,"   "estimate,"
"believe,"  "intend,"  or  "project"  or the  negative  of these  words or other
variations  on these  words or  comparable  terminology.  This  information  may
involve known and unknown risks, uncertainties, and other factors that may cause
our actual results, performance, or achievements to be materially different from
the future results,  performance,  or  achievements  expressed or implied by any
forward-looking  statements.  These statements may be found under  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
"Business,"  as well as in this Report  generally.  Actual events or results may
differ materially from those discussed in forward-looking statements as a result
of various  factors,  including,  without  limitation,  the risks outlined under
"Risk Factors" and matters described in this Report generally. In light of these
risks and  uncertainties,  there can be no  assurance  that the  forward-looking
statements contained in this report will in fact occur as projected.

Description of Our Business

      History and Overview

      The company was incorporated in Colorado on September 16, 1987, as Premium
Enterprises,  Inc. On December 20, 2002 Premium  Enterprises,  Inc.  ("Premium")
entered into a Plan and Agreement of Reorganization with eTotalSource,  Inc. and
its  shareholders  whereby  Premium  acquired 91% of the issued and  outstanding
common stock of eTotalSource  in exchange for 15,540,001  shares of common stock
of Premium.  The contract  was  completed  December 31, 2002.  On June 17, 2003,
shareholders  voted to amend the Articles of Incorporation to change the name of
"Premium  Enterprises,  Inc." to "eTotalSource,  Inc". For a period of time from
1988 to 1994,  Premium  operated three fast lube locations,  at various times in
Arizona  and  Colorado  as  Grease  Monkey   franchises.   The  locations   were
unprofitable, two were sold, and the last franchise closed in 1994. Premium then
attempted to enter the automobile and truck tire recycling  business in 1994. It
formed a limited  partnership of which it owned 62.5% and commenced limited tire
recycling operations.  The equipment proved to be inadequate and Premium ran out
of capital to continue  operations  and ceased all  operations in 1996.  Premium
wrote-off all of its  investment in equipment and licenses for tire recycling in
1996.  Premium  was  dormant  from 1996  until  2002,  when it  effectuated  the
above-described  Plan and Agreement of Reorganization  with eTotalSource and its
shareholders.

      eTotalSource,  Inc., a California corporation,  was founded on February 7,
2000. eTotalSource is a subsidiary of Premium and the sole business of Premium.

      eTotalSource  is  a  developer  and  supplier  of  proprietary  multimedia
software technology, and a publisher of multimedia training content. Our clients
have included:  the U.S. Department of Defense,  Boeing, Steven Spielberg Online
Film  School,  Pacific  Bell/SBC,   Grant  School  District,   California  State
University,  Logistics Management  Institute,  First American Title Company, and
other  corporate  entities.  eTotalSource's  clients work with  eTotalSource  to
develop,  produce,  market,  and  distribute  multimedia  development  software.
eTotalSource  also  markets  educational   training  programs  it  has  produced
utilizing its proprietary software.


                                       8
<PAGE>

      eTotalSource  was  founded  with the  express  goal of  designing a better
interface for information and education multimedia  delivery.  Approximately one
year after inception,  the beta Presenta ProTM platform was completed.  Presenta
ProTM  features   back-end   development  of   multi-panel   time   synchronized
presentations  and course work,  as well as testing,  feedback  and  performance
monitoring.  Clients are  utilizing  Presenta  ProTM as a platform  for distance
learning  and  computer-based  training.  Presenta  ProTM is  delivered  via the
Internet, intranet, or CD/DVD.

      Our Software And Intellectual Property

      eTotalSource  has developed a software  application,  Presenta  ProTM that
simplifies the production and delivery of multimedia  presentations  and content
while  at  the  same  time  improving  the  quality  and  effectiveness  of  the
presentations.  Presenta  ProTM is  designed  with cost saving  features  and it
offers post-production opportunities.

      Presenta ProTM features include:

      o     Multi-panel time synchronized presentation
      o     Quick content and program development
      o     Rich video and content experience
      o     Still images
      o     Graphics
      o     Flash
      o     Links to Website
      o     Live Cams
      o     Test and quizzes to tract performance
      o     Users progress can be tracked
      o     Diagrams
      o     Simple server requirements
      o     Reduces training and learning curve time
      o     Easy to implement and use

      Our Business Model

      eTotalSource   employs  a  dual  strategy  to  meet  market   demands  and
opportunities that includes both software licensing and publishing.

      eTotalSource  is  licensing   Presenta  ProTM  software  via  distribution
partners and an internal  sales and marketing  team.  The marketing team directs
its sales effort in targeting the education,  corporate and government  markets.
The cost of the product  ranges from $5,500 to  $15,000,  and  eTotalSource  has
positioned  the  software  package for a volume  intensive  market.  The nearest
competitor  (in  quality  or  functionality),  Virage,  prices  its  product  at
substantially higher prices. The aggressive pricing policy is intended to appeal
to governments, schools and corporate clients.

      eTotalSource  publishes and produces original content and  post-production
services,  and participates in the sales and distribution of the final published
product.


                                       9
<PAGE>

      eTotalSource  shares  in the  revenue  derived  from  the  program  sales.
eTotalSource  carefully  chooses its content,  identifying  unique  subjects and
niches offering more probable sales. We believe that these markets are generally
underserved  and  in  need  of  the  program   packages  that  are  produced  by
eTotalSource. Examples of finished products currently being marketed include:

      o     Anger Management Facilitator Training and Certification
      o     Domestic Violence Facilitator Training and Certification
      o     School Maintenance, Cleaning Training and Certification
      o     Emergency Disaster Preparedness - Terrorist Awareness
      o     Mandated School Internet Acceptable Use Policy ("AUP")

      Intellectual Property Differentiation

      eTotalSource currently has five patents pending:

      o     Multiple  screen  operating  environment,  framework  and  tools for
            transacting e-commerce;

      o     System  and  method  for  pre-loading   still  imagery  data  in  an
            interactive  multimedia   presentation,   which  provides  an  image
            pre-loading system that maximizes available network bandwidth;

      o     System and method  for  dynamically  managing  web  content  using a
            browser independent framework,  which provides an interactive system
            for enabling dynamic updating of web content to "live" websites;

      o     System  and  method  for   providing   an   interactive   multimedia
            presentation  environment with low bandwidth capable sessions, which
            provides  an  integrated  presentation   environment  consisting  of
            multi-screen clinic logically defined within a browser  application;
            and

      o     Presenta Pro(TM)  production and delivery  system,  which provides a
            multi-screen  environment  for presenting  multimedia  presentations
            with video,  images,  flash images and text all integrating with the
            video.

      eTotalSource's technological  differentiation is based on high quality and
low  cost  software.  We  believe  that  Presenta  ProTM  is  easier  to use and
considerably more flexible than eTotalSource's  closest  competitor.  We believe
that  Presenta   ProTM  is  priced  to  be   affordable,   cost-effective,   and
training-efficient.  Presenta  Pro'sTM ease of  implementation  and quality it a
viable choice for authoring software and distance learning tools.

      Technology

      The Presenta  Pro(TM),  production and delivery  system is modular and was
designed to allow rapid addition of  functionality.  The platform  provides high
quality  streaming of video and audio,  and was  designed for delivery  over the
Internet,  intranet,  compact  disk ("CD") or digital  video disk  ("DVD").  The
Presenta  Pro(TM) system has been created using the Delphi  development  system.
The server  portion of Presenta  Pro(TM) is a custom  control that connects to a
Microsoft SQL server. The data is distributed to the viewing client via a custom
control that connects to the server via Extensible Markup Language ("XML").  The
backend is scalable and  transportable.  The  production  client uses all custom
code written in Delphi  connecting  to the SQL server via  Transmission  Control
Protocol/Internet  Protocol  ("TCP/IP").  The end-user  client can be run on any
Windows based personal computer and requires minimum system resources. There are
several  modules to the end-user  client that allow the producer to export video
to either a CD/DVD format or stand alone website. We believe that eTotalSource's
technology  and user  interface  are  advanced  in their  simplicity  of use and
ability to deliver multiple platforms and media simultaneously. eTotalSource has
no plans for any research and development in the next 12 months.


                                       10
<PAGE>

      eTotalSource  has no plans at this  time for  purchases  or sales of fixed
assets which would occur in the next 12 months.

      Employees

      As of June 30, 2005, we had seven full-time employees, of which three were
executive.  No employees  are  presently  represented  by any labor  unions.  We
believe  our  relations  with  our  employees  to be  good,  however  additional
employees will need to be recruited to meet our growth projections. eTotalSource
has no expectation or anticipation of significant changes in number of employees
in the next 12 months.  It may add  full-or  part-time  employees  of an unknown
number in the next 12 months if its business expands.

Going Concern

      There is substantial  doubt about the ability of  eTotalSource to continue
as a going concern as disclosed in the notes to the December 31, 2004  financial
statements  filed by  eTotalSource  on Form  10-KSB  on March  25,  2005.  Those
conditions  continued  through the second quarter of 2005 resulting in operating
losses and liquidity  shortages,  including default  conditions on certain notes
payable  and  judgments  payable  to  creditors.  As of June 30,  2005,  current
liabilities exceed current assets by approximately $2.84 million.

      Management   continues  to  meet  operating   deficits  primarily  through
short-term  borrowings and is attempting to utilize other debt and  non-dilutive
equity financing alternatives to sustain operations. Whether such financing will
be available as needed and the ultimate form of such  financing is uncertain and
the effects of this uncertainty could ultimately lead to bankruptcy.

Risk Factors

eTotalSource  Lost Money For The Years Ended December 31, 2004 and 2003, The Six
months Ended June 30, 2005, And Losses May Continue In The Future

      For the 12 months ended December 31, 2004 and 2003, we incurred a net loss
of $2,372,675 and  $1,966,575,  respectively.  For the six months ended June 30,
2005,  we incurred a net loss of  $601,951.  We  anticipate  that we will in all
likelihood  have  to  rely  on  external   financing  for  all  of  our  capital
requirements.  Future  losses  are  likely to  continue  unless we  successfully
implement our business  plan. Our ability to continue as a going concern will be
dependent  upon our  ability  to draw down on the  Standby  Equity  Distribution
Agreement ("SEDA") which we have entered into with Cornell Capital Partners,  LP
("Cornell")  as  described  in detail  below  under the  section of this  Report
entitled  "Liquidity & Capital  Resources."  If we incur any problems in drawing
down the SEDA, we may experience  significant  liquidity and cash flow problems.
If we are not successful in reaching and maintaining profitable  operations,  we
may not be able to attract  sufficient  capital to continue our operations.  Our
inability  to obtain  adequate  financing  will  result  in the need to  curtail
business operations and will likely result in a lower stock price.


                                       11
<PAGE>

We May Not Be Able To Access Sufficient Funds When Needed Under The SEDA And The
Price Of Our Common Stock Will Affect Our Ability To Draw Down On The SEDA

      Currently,   we  are  dependent  upon  external   financing  to  fund  our
operations.  Our financing needs are expected to be provided,  in large part, by
the SEDA.  The amount of each advance  under the SEDA is subject to a maximum of
$200,000 every seven trading days.  Because of the advance  restriction,  we may
not be able to access  sufficient funds when needed.  If the market price of our
shares of common  stock  declines,  we would be required to issue more shares of
common stock in order to draw down the same dollar  amount of an advance than if
our stock  price was  higher.  Therefore,  if we are  unable to draw down on the
SEDA, we may be forced to curtail or cease our business operations.

We Have Negative  Working  Capital Which May Affect our Ability to Continue As A
Going Concern

      We had negative  working  capital of $2,497,528 and $2,385,502 at December
31, 2004 and  December  31,  2003,  respectively,  negative  working  capital of
$2,838,158 for the six months ended June 30, 2005, and continue to need cash for
operations.  We have  relied  on  significant  external  financing  to fund  our
operations.  As of June 30, 2005,  we had $8,859 of cash on hand,  total current
assets were $11,224, and our total current liabilities were $2,849,382.  We will
need to raise additional capital to fund our anticipated  operating expenses and
future  expansion.  Among other  things,  external  financing may be required to
cover  our  operating  costs.  Unless  we obtain  profitable  operations,  it is
unlikely  that we will be able to  secure  additional  financing  from  external
sources. If we are unable to secure additional  financing or we cannot draw down
on the SEDA, we believe that we have sufficient funds to continue operations for
approximately one month. We estimate that we will require $2,000,000 to fund our
anticipated  operating  expenses for the next 12 months.  The sale of our common
stock to raise  capital may cause  dilution to our  existing  shareholders.  Our
inability  to obtain  adequate  financing  will  result  in the need to  curtail
business  operations.  Any of these  events would be  materially  harmful to our
business and may result in a lower stock price. Our inability to obtain adequate
financing will result in the need to curtail  business  operations and you could
lose your  entire  investment.  Our  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.

We Need Additional  Capital To Be Successful,  Which Will Potentially Dilute The
Value Of Our Shareholders' Shares

      We need  substantial  capital to execute our business plan. To finance our
operations to date, we have relied on private offerings,  exercises of warrants,
and loans. As of June 30, 2005, we have issued an aggregate of 11,731,908 shares
of common  stock to finance our  operations.  We will issue up to an  additional
33,534,700  shares if all of the  outstanding  debentures  are converted and all
options  and  warrants  exercised.  The  terms  on which  we  obtain  additional
financing,  including  the  exercise  of  outstanding  warrants,  may dilute the
existing shareholders' investment, or otherwise adversely affect their position.
It is also possible that we will be unable to obtain the  additional  funding we
need as and when we need it. If we are  unable to obtain  additional  funding as
and when needed, we could be forced to curtail or cease our operations.

All Of Our Assets Are Securing Our Obligations To Cornell

      Pursuant to the terms contained in that certain  Security  Agreement dated
October 6, 2004, by and between eTotalSource and Cornell, all of our obligations
under the Securities Purchase Agreement,  the Secured Convertible Debenture, the
Investor   Registration  Rights  Agreement,   the  Irrevocable   Transfer  Agent
Instructions, and the Escrow Agreement (which we entered into in connection with
the SEDA) are  secured  by  substantially  all of our  assets as of such date or
thereafter acquired by us.  Accordingly,  if we are unable to satisfy any of our
obligations  under the foregoing  agreements,  our assets may be foreclosed upon
and our business may be shut down.


                                       12
<PAGE>

Our Success Is Based On Increasing Demand For Our Products

      We  depend on the  continued  demand  for our  products  and on  favorable
general  economic  conditions.  We cannot assure you that our business  strategy
will be  successful  or  that  we  will  successfully  address  these  risks  or
difficulties.  If we should  fail to  adequately  address  any of these risks or
difficulties, we could be forced to curtail or cease our business operations.

We Rely On Our Senior Management And Will Be Harmed If Any Or All Of Them Leave

      Our success is dependent on the efforts,  experience and  relationships of
Terry Eilers, our Chief Executive Officer and Chairman,  Virgil Baker, our Chief
Financial  Officer and a Director,  and Michael  Sullinger,  our Chief Operating
Officer and a Director,  and other essential staff. If any of these  individuals
become  unable to continue in their role,  our  business or  prospects  could be
adversely  affected.  Although we have entered into  employment  agreements with
each of our executive officers,  we cannot assure you that such individuals will
continue in their present capacity for any particular period of time.

Fluctuations In Our Operating  Results May Adversely  Affect Our Stock Price And
Purchasers  Of Our  Shares  Of Common  Stock May Lose All Or A Portion  Of Their
Investment

      Historically, there has been volatility in the market price for our common
stock. Our quarterly operating results,  the number of shareholders  desiring to
sell their shares,  changes in general conditions in the economy,  the financial
markets or the healthcare  industry,  or other developments  affecting us or our
competitors,  could  cause the  market  price of our common  stock to  fluctuate
substantially.  We expect to experience  significant  fluctuations in our future
quarterly operating results due to a variety of factors.

      Accordingly,  in one or more future  quarters,  our operating  results may
fall below the expectations of securities analysts and investors. In this event,
the market  price of our  common  stock  would  likely be  materially  adversely
affected.  If the  selling  shareholders  all elect to sell their  shares of our
common stock at the same time,  the market price of our shares may decrease.  It
is possible that the selling shareholders will offer all of the shares for sale.
Further,  because it is possible  that a  significant  number of shares could be
sold at the  same  time,  the  sales,  or the  possibility  thereof,  may have a
depressive effect on the market price of our common stock.

Our Common  Stock May Be Affected By Limited  Trading  Volume And May  Fluctuate
Significantly

      Our common  stock is  currently  traded on the  Over-the-Counter  Bulletin
Board and Pink Sheets.  Prior to this offering,  there has been a limited public
market for our common stock and there can be no assurance that an active trading
market  for our common  stock will  develop.  This  could  adversely  affect our
shareholders'  ability  to sell  our  common  stock in short  time  periods,  or
possibly at all.  Our common  stock is thinly  traded  compared to larger,  more
widely known  companies in our industry.  Thinly traded common stock can be more
volatile than common stock traded in an active public market.  The average daily
trading  volume of our common stock from  approximately  January 1, 2005 through
June 30, 2005 was 631,609  shares.  The high and low trading price of our common
stock during the same period has been $0.058 and $0.02, respectively. Our common
stock has  experienced,  and is likely to experience in the future,  significant
price and volume fluctuations,  which could adversely affect the market price of
our common stock without regard to our operating  performance.  In addition,  we
believe that factors such as quarterly fluctuations in our financial results and
changes in the overall  economy or the condition of the financial  markets could
cause the price of our common stock to fluctuate substantially.

                                       13
<PAGE>

Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements

      Our common stock is deemed to be "penny  stock" as that term is defined in
Rule 3a51-1  promulgated  under the Securities  Exchange Act of 1934, as amended
(the "Exchange Act"). Penny stocks are stock:

      o     with a price of less than $5.00 per share;

      o     that are not traded on a "recognized" national exchange;

      o     whose prices are not quoted on the NASDAQ automated quotation system
            (NASDAQ-listed  stock must still have a price of not less than $5.00
            per share); or

      o     stock in issuers with net tangible  assets less than  $2,000,000 (if
            the  issuer  has been in  continuous  operation  for at least  three
            years) or $5,000,000 (if in continuous operation for less than three
            years),  or with average  revenues of less than  $6,000,000  for the
            last three years.

      Broker-dealers  dealing in penny stocks are required to provide  potential
investors  with a  document  disclosing  the  risks of penny  stocks.  Moreover,
broker-dealers  are required to determine whether an investment in a penny stock
is a suitable  investment for a prospective  investor.  These  requirements  may
reduce  the  potential  market for our common  stock by  reducing  the number of
potential investors. This may make it more difficult for investors in our common
stock to sell  shares to third  parties or to  otherwise  dispose of them.  This
could cause our stock price to decline.

      Shareholders should be aware that,  according to SEC, the market for penny
stocks has  suffered  in recent  years from  patterns  of fraud and abuse.  Such
patterns  include  (i)  control of the market for the  security  by one or a few
broker-dealers   that  are  often  related  to  the  promoter  or  issuer;  (ii)
manipulation of prices through  prearranged  matching of purchases and sales and
false and misleading  press releases;  (iii) "boiler room"  practices  involving
high-pressure  sales tactics and unrealistic  price projections by inexperienced
sales persons;  (iv) excessive and undisclosed bid-ask differentials and markups
by selling broker-dealers;  and (v) the wholesale dumping of the same securities
by promoters and broker-dealers  after prices have been manipulated to a desired
consequent investor losses. eTotalSource' management is aware of the abuses that
have occurred historically in the penny stock market. Although eTotalSource does
not  expect to be in a  position  to dictate  the  behavior  of the market or of
broker-dealers who participate in the market,  management will strive within the
confines of practical  limitations to prevent the described  patterns from being
established with respect to eTotalSource' securities.

Existing  Shareholders  Will  Experience  Significant  Dilution From Our Sale Of
Shares Under The SEDA

      The sale of shares  pursuant to the SEDA that we entered into with Cornell
on October 6, 2004 will have a dilutive impact on our stockholders.  At a recent
stock price of $0.02, we would have to issue  apparently  510,204,081  shares of
common stock to draw down the entire $10 million available to us under the SEDA.
These shares would represent  approximately 84% of our outstanding  common stock
upon issuance.  Please refer to the section of this report entitled "Liquidity &
Capital Resources" for a detailed explanation of the SEDA.


                                       14
<PAGE>

Sale Of Shares Eligible For Future Sale Could Adversely Affect The Market Price

      All  of the  approximate  8,117,946  shares  of  common  stock  which  are
currently  held,  directly  or  indirectly,  by  management  have been issued in
reliance on private  placement  exemptions  under the Securities Act of 1933, as
amended (the  "Securities  Act").  Such shares will not be available for sale in
the open market without separate  registration  except in reliance upon Rule 144
under the Securities Act. In general,  under Rule 144 a person (or persons whose
shares  are  aggregated),  who  has  beneficially  owned  shares  acquired  in a
non-public  transaction,  for at least one year,  including  persons  who may be
deemed affiliates of eTotalSource,  as defined, would be entitled to sell within
any 3-month  period a number of shares that does not exceed the greater of 1% of
the then  outstanding  shares of common stock,  or the average  weekly  reported
trading volume during the four calendar weeks preceding such sale, provided that
current public  information is then  available.  If a substantial  number of the
shares  owned by these  stockholders  were sold under  Rule 144 or a  registered
offering, the market price of the common stock could be adversely affected.

eTotalSource's  Competition  is Better  Capitalized  and Has  Greater  Marketing
Capabilities Which Could Adversely Affect  eTotalSource's  Ability to Compete in
the Marketplace

      eTotalSource is in competition with other services and products  developed
and marketed by much larger corporations,  which are better capitalized and have
far greater marketing capabilities than eTotalSource. eTotalSource expects to be
at a disadvantage when competing with many firms that have substantially greater
financial and management  resources and  capabilities  than  eTotalSource.  As a
result  of  these  disadvantages,  eTotalSource  may not be able to  effectively
complete in the  markets in which its  products  and  services  are sold,  which
would, in turn, affect its ability to continue to operate.

Critical Accounting Policies

      Revenue  Recognition  eTotalSource  recognizes  revenue in accordance with
Statement  of Position No. 97-2  "Software  Revenue  Recognition"  issued by the
Accounting  Standards Executive Committee of the American Institute of Certified
Public  Accountants  ("AICPA").  Revenues are  recorded net of an allowance  for
estimated returns and collectibility at the time of billing.

      Product  revenue  is  derived  primarily  from the  sale of  self-produced
training multimedia and related  off-the-shelf  software products.  eTotalSource
recognizes  revenue  from sales of these  products  at the time of  shipment  to
customers.  Service  revenue is primarily  derived from production of videos for
others and is recognized upon customer acceptance.

      Deferred revenue includes  payments received for product licenses covering
future  periods  and  advances  on  service  contracts  that  have  not yet been
fulfilled.

      Other

      Significant  estimates include evaluation of eTotalSource's income tax net
operating loss  carry-forwards  and valuation of  non-monetary  transactions  in
connection  with  issuances of convertible  debentures,  common stock and common
stock warrants and options.


                                       15
<PAGE>

Results of Operations

      Results of  Operations  For The  Three-Month  Period  Ended June 30,  2005
      Compared To The Same Period Ended June 30, 2004

      Revenues.

      Revenues  for the  three-months  ended June 30, 2005 were  $13,998  versus
$97,174 for the  corresponding  2004  period,  a decrease of $83,176 or 86%. The
decrease was  attributable to fewer sales of the compact disk training  products
and decreased sales of software.

      Expenses.

      Operating  expenses  for the  three-month  period ended June 30, 2005 were
$267,146 as compared with $807,875 for the comparable period in 2004, a decrease
of  $540,729  or 67%.  The  decrease  was  primarily  due to a decrease in stock
compensation and payroll expenses.  Payroll expenses for the three-month  period
ended June 30, 2005 were  $90,065 as compared  to  $119,002  for the  comparable
period in 2004, a decrease of $28,937 or 24%.

      Interest  expense  for the  three-month  period  ended  June 30,  2005 was
$64,778 as compared with $76,512 for the  corresponding  2004 period, a decrease
of  $11,734  or  15%.  The  decrease  is  attributable  to the  non-issuance  of
additional  interest for  consideration  of extending notes payable due date for
the three month  period  ended June 30, 2005 versus the  issuance of  additional
interest  for  consideration  of  extending  notes  payable  due  date  for  the
corresponding 2004 period.

      Gain (Loss) From Operations.

      The Company  recognized a loss for the  three-month  period ended June 30,
2005 in the amount of  $317,994,  $.01 per  share,  as  compared  with a loss of
$787,062,  $0.02 per share for the corresponding period ended June 30, 2004. The
decrease  of  $469,068 or $0.01 per share was  attributable  to the  decrease in
stock issued as compensation and in lieu of interest.

      Results  of  Operations  For The  Six-Month  Period  Ended  June 30,  2005
      Compared To The Same Period Ended June 30, 2004

      Revenues.

      Revenues for the six month period ended June 30, 2005 were $28,984  versus
$115,266 for the  corresponding  2004 period,  a decrease of $86,282 or 75%. The
decrease was attributable to fewer sales of  eTotalSource's CD training products
and decreased sales of software.

      Expenses.

      Operating  expenses  for the  six-month  period  ended June 30,  2005 were
$519,671 as compared to $1,205,138 for the comparable 2004 period, a decrease of
$685,467  or  57%.  The  decrease  was  primarily  due to a  decrease  in  stock
compensation  and payroll  expenses.  Payroll  expenses for the six month period
ended June 30, 2005 were  $197,242 as  compared to $233,259  for the  comparable
period in 2004, a decrease of $36,017 or 15%.

      Interest expense for the six-month period ended June 30, 2005 was $112,539
as compared to $103,879 for the corresponding 2004 period, an increase of $8,860
or 8%. The  increase  in  interest  expense  is the  result of the  amortization
expense in 2005 of the fair value of warrants  issued as  incentives  to lenders
and the amortization of secured convertible debentures in 2005.


                                       16
<PAGE>

      Gain (Loss) From Operations.

      The Company recognized a loss for the six-month period ended June 30, 2005
in the  amount  of  $601,951  or $0.01 per  share,  as  compared  with a loss of
$1,193,618 or $0.04 per share for the corresponding  period ended June 30, 2004.
The decrease of $591,667 or $0.03 per share was  attributable to the decrease in
stock compensation and payroll expenses.

Contractual Obligations and Commercial Commitments

      As of June 30, 2005, the following obligations were outstanding:

<TABLE>
<CAPTION>
                                                 Payments Due Period
Contractual Obligations   Less than 1 year     2-3 years         4-5 years       After 5 years        Total
                            -----------       -----------       -----------       -----------       -----------
<S>                         <C>               <C>               <C>               <C>               <C>
Judgments payable           $   204,788       $       .00       $       .00       $       .00       $   204,788
Short Term note payables      1,007,000               .00               .00               .00         1,007,000
Convertible debentures              .00           350,000               .00               .00           350,000
Other current liabilities     1,637,594               .00               .00               .00         1,637,594
                            -----------       -----------       -----------       -----------       -----------
Total contractual cash
obligations                 $ 2,849,382       $   350,000       $       .00       $       .00       $ 3,199,382
                            -----------       -----------       -----------       -----------       -----------
</TABLE>

Facilities and Leases

      eTotalSource  leases its corporate  offices in Yuba City,  California on a
month-to-month  basis with no expiration  date.  Monthly rentals under the lease
are  approximately  $2,500.  Such premises are adequate to serve  eTotalSource's
current staffing level. The offices consist of approximately 1,700 square feet.

Dividends

      eTotalSource does not intend to pay dividends in the foreseeable future.

Liquidity and Capital Resources

      At June 30,  2005,  eTotalSource  had $8,859 in cash with which to conduct
operations,  a decline of $28,990 during the preceeding six months. There can be
no assurance  that  eTotalSource  will be able to complete its business  plan or
fully exploit business opportunities that management may identify.  Accordingly,
eTotalSource will need to seek additional  financing through loans, the sale and
issuance  of  additional  debt  and/or  equity  securities,  or other  financing
arrangements,   including  loans  from  our   shareholders  to  cover  expenses.
eTotalSource  presently has no capital except contingently available through the
SEDA described below.

      eTotalSource is unable to carry out any plan of business  without funding.
We cannot  predict to what  extent our  current  lack of  liquidity  and capital
resources  will  impair the  continuation  of  business or whether it will incur
further operating losses.  There is no assurance that we can continue as a going
concern without substantial funding, for which there is no source.


                                       17
<PAGE>

      eTotalSource  does not have  capital  sufficient  to meet its current cash
needs. We will have to seek loans or equity placements to cover such cash needs.
Lack of existing capital may be a sufficient  impediment to prevent eTotalSource
from  accomplishing  the  goal of  successfully  executing  its  business  plan.
eTotalSource  will  need to raise  additional  funds  to  conduct  its  business
activities over the next 12 months.  At the present,  our current cash will last
approximately a month.

      No commitments to provide additional funds have been made by management or
other stockholders.  Accordingly,  there can be no assurance that any additional
funds will be  available  to  eTotalSource  to allow it to cover its expenses as
they may be incurred.

      Irrespective of whether  eTotalSource's cash assets prove to be inadequate
to meet our operational needs, we might seek to compensate providers of services
by issuances of stock in lieu of cash.

      The SEDAs

      The 2004 SEDA

      On October  6,  2004,  we  entered  into a SEDA (the  "2004  "SEDA")  with
Cornell.  Pursuant to the 2004 SEDA, we could, at our  discretion,  periodically
sell to Cornell  shares of our common stock for a total  purchase price of up to
$10  million.  For each  share of common  stock  purchased  under the 2004 SEDA,
Cornell was obligated to pay us 98% of the lowest volume weighted  average price
of our common stock on the  Over-the-Counter  Bulletin Board or other  principal
market on which our common stock is traded for the five consecutive trading days
immediately  following  the advance  notice date.  Cornell is a private  limited
partnership whose business operations are conducted through its general partner,
Yorkville Advisors, LLC. Further,  Cornell was entitled to retain a fee of 5% of
each advance under the 2004 SEDA. We also paid Cornell a one-time commitment fee
pursuant to the 2004 SEDA on October 6, 2004,  which was paid by the issuance of
3,833,334 shares of our common stock.

      In addition, we engaged Newbridge Securities Corporation ("Newbridge"),  a
registered broker-dealer, to advise us in connection with the 2004 SEDA. For its
services,  Newbridge  received  a fee of $10,000  paid in 166,666  shares of our
common stock on October 6, 2004.  eTotalSource  registered  15,000,000 shares of
common stock  underlying the 2004 SEDA pursuant to a  Registration  Statement on
Form SB-2 that  eTotalSource  filed with the SEC on November 24, 2004 (the "2004
Registration Statement").

      Pursuant  to the 2004 SEDA,  we could  periodically  sell shares of common
stock to  Cornell  to raise  capital  to fund our  working  capital  needs.  The
periodic  sale of shares is known as an  advance.  We could  request  an advance
every seven trading days with a maximum of $200,000 per advance.  A closing will
be held five  trading  days  after  such  written  notice at which  time we were
obligated  to deliver  shares of common  stock and Cornell  will pay the advance
amount.

      We could request  advances under the 2004 SEDA once the underlying  shares
of stock  became  registered  with  the SEC  pursuant  to the 2004  Registration
Statement.  Thereafter,  we could  continue to request  advances  until  Cornell
advanced $10 million or 24 months after the effective  date of the  Registration
Statement, whichever occurred first.

      We withdrew the 2004 Registration Statement on April 19, 2005, pursuant to
a Form RW that we filed with the SEC on such date.  We filed the Form RW because
we intended to enter into a new financing  arrangement with Cornell that we were
negotiating in late-March 2005, and therefore, we did not register the shares of
stock underlying the 2004 SEDA.


                                       18
<PAGE>

      The 2005 SEDA

      On April 20,  2005,  we entered  into a new SEDA with  Cornell  (the "2005
SEDA"). Pursuant to the 2005 SEDA, we may, at our discretion,  periodically sell
to Cornell  shares of our common stock for a total  purchase  price of up to $10
million.  For each share of common stock purchased under the 2005 SEDA,  Cornell
will pay  eTotalSource  98% of the lowest volume  weighted  average price of our
common stock on the Over-the-Counter Bulletin Board or other principal market on
which our common stock is traded for the five trading days immediately following
the notice date. Cornell is entitled to retain a fee of 5% of each advance under
the 2005 SEDA.

      Pursuant to the 2005 SEDA, we may periodically sell shares of common stock
to Cornell to raise capital to fund our working capital needs. We may request an
advance  every seven  trading  days with a maximum of $200,000  per  advance.  A
closing will be held five  trading days after such written  notice at which time
we will deliver shares of common stock and Cornell will pay the advance amount.

      We may request advances under the 2005 SEDA once the underlying shares are
registered with the SEC pursuant to the 2005  Registration  Statement  described
below.  Thereafter,  we may  continue  to request  advances  until  Cornell  has
advanced $10 million or 24 months after the effective  date of the  accompanying
registration statement, whichever occurs first.

      The amount of each  advance is limited to a maximum  draw down of $200,000
every seven  trading  days.  At a recent stock price of $0.02,  we would have to
issue  10,204,081  shares of common  stock to Cornell  to draw down the  maximum
advance  amount of  $200,000.  The amount  available  under the 2005 SEDA is not
dependent  on the price or volume of our common  stock.  Our  ability to request
advances are conditioned  upon our  registering  shares of common stock with the
SEC pursuant to the 2005 Registration Statement. In addition, we may not request
advances  if the  shares to be issued in  connection  with such  advances  would
result in Cornell owning more than 9.9% of our  outstanding  common stock. We do
not have any agreements with Cornell  regarding the  distribution of such stock,
although  Cornell  has  indicated  that it  intends to  promptly  sell any stock
received under the 2005 SEDA.

      We cannot predict the actual number of shares of common stock that will be
issued  pursuant to the 2005 SEDA,  in part,  because the purchase  price of the
shares will  fluctuate  based on prevailing  market  conditions  and we have not
determined the total amount of advances we intend to draw.  Nonetheless,  we can
estimate  the  number of shares of our common  stock  that will be issued  using
certain  assumptions.  Based on our  recent  stock  price  of $0.02  and that we
registered  200 million  shares of our common stock under the 2005 SEDA pursuant
to a Registration Statement on Form SB-2 that we filed with the SEC on April 21,
2005 (the "2005  Registration  Statement"),  we could draw down a maximum  gross
amount  of  $3,920,000  under the 2005  SEDA.  These 200  million  shares  would
represent approximately 81% of our outstanding common stock upon issuance.

      There is an inverse relationship between our stock price and the number of
shares to be issued under the 2005 SEDA.  That is, as our stock price  declines,
we will be required to issue a greater  number of shares under the 2005 SEDA for
a given  advance.  The issuance of a larger number of shares under the 2005 SEDA
may result in a change of  control.  That is, if all or a  significant  block of
such shares are held by one or more  shareholders  working  together,  then such
shareholder  or  shareholders  would  have  enough  shares to assume  control of
eTotalSource by electing its or their own directors.


                                       19
<PAGE>

      In order for us to utilize the full $10 million  available  under the 2005
SEDA,  it may be necessary  for our  shareholders  to approve an increase in our
authorized  common  stock  and for us to  register  additional  shares of common
stock.  This is  currently  the case based on our recent  stock  price of $0.02.
eTotalSource is authorized in its Articles of  Incorporation  to issue up to 300
million shares of common stock. As of June 30, 2005, eTotalSource had 46,710,821
shares of common stock outstanding.  eTotalSource  registered 200 million shares
of common stock to be issued under the 2005 SEDA by filing the 2005 Registration
Statement,  which as of the date of this Report is being reviewed by the SEC and
has not been declared effective.

      In the event we desire to draw down any available  amounts remaining under
the 2005 SEDA after we have issued the 200 million  shares being  registered  in
the 2005  Registration  Statement  (and  assuming we have  obtained  shareholder
approval to increase our authorized  common  stock),  we will have to file a new
registration  statement to cover such additional  shares which we will issue for
additional draw downs under the 2005 SEDA.

      We are not paying any commitment fees to Cornell,  nor any placement agent
fees to Newbridge, in connection with the 2005 SEDA.

      The costs associated with the 2005 Registration Statement are estimated to
be approximately  $85,000  (consisting  primarily of professional  fees), all of
which will be borne by us. There are no other significant  closing conditions to
draws under the 2005 SEDA.


                                       20
<PAGE>

Item 3. Controls and Procedures

a.    Evaluation Of Disclosure Controls And Procedures

      eTotalSource's   Principal  Executive  Officer  and  Principal  Accounting
Officer,  after  evaluating  the  effectiveness  of  eTotalSource's   disclosure
controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the
Exchange Act) as of the end of the period covered by this Report, have concluded
that as of such date,  eTotalSource's  disclosure  controls and procedures  were
adequate  and  effective  to  ensure  that  material   information  relating  to
eTotalSource that is required to be disclosed by eTotalSource in reports that it
files or submits under the Exchange Act, is recorded, processed,  summarized and
reported  within  the time  periods  specified  in United  States  Security  and
Exchange  Commission  rules and accumulated and  communicated to  eTotalSource's
management,  including its Principal Executive Officer and Principal  Accounting
and Financial Officer, to allow timely decisions regarding required disclosure.

      b.    Changes In Internal Controls Over Financial Reporting

      In connection  with the  evaluation of  eTotalSource's  internal  controls
during  eTotalSource's last fiscal quarter,  eTotalSource's  Principal Executive
Officer and  Principal  Accounting  Officer  have  determined  that there are no
changes to eTotalSource's  internal controls over financial  reporting that have
materially   affected,   or  are   reasonably   likely  to  materially   effect,
eTotalSource's internal controls over financial reporting.


                                       21
<PAGE>

                                     PART II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      None.

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

      None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

      Notes Payable  issued to an unrelated  Trust in the amount of $40,000 (14%
      interest)  $110,000 (18%  interest),  and $172,000  (15%  interest) are in
      default.

      Convertible  Notes Payable issued to unrelated parties with a total amount
      of $150,000 at 6% interest are in default.

      Note Payable issued to an unrelated  party in the amount of $100,000 at 8%
      interest is in default.

      Notes Payable issued to an unrelated trust with a total amount of $300,000
      at 10% interest are in default.

      Note  payable  issued to a director in the amount of $10,000 at 9.2% is in
      default.

      Notes Payable to an unrelated  party, due August 1, 2005, in the amount of
      $100,000 at 10% and $25,000 at 12% are in default.

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

      None.

ITEM 5. OTHER INFORMATION

      None.


                                       22
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      a.    Exhibits pursuant to Regulation S-K:

<TABLE>
<CAPTION>
 DESIGNATION OF EXHIBIT
AS SET FORTH IN ITEM 601
    OF REGULATION S-B                        DESCRIPTION                                   LOCATION
------------------------   ---------------------------------------------    ---------------------------------------
<C>                        <C>                                              <C>
2.1                        Agreement and Plan of Merger, dated August 7,    Incorporated  by  reference  to Exhibit
                           2000 between Calipso and Knowledge               2(1) to Form  8-K  filed  on  September
                           Foundations, Inc.                                27, 2000 to

2.2                        Merger Agreement, dated April 23, 2002,          Incorporated  by  reference  to Exhibit
                           between ETotalSource, Inc., Knowledge            99.2 to Form 8-K filed on May 9, 2002
                           Foundations, Inc. and KFI, Inc.

2.3                        First Amendment to Merger Agreement dated        Incorporated  by  reference to Form S-4
                           August 8, 2002, between ETotalSource, Inc.,      filed on August 13, 2002
                           KFI, Inc. and Knowledge Foundations, Inc.

2.4                        Separation and Distribution Agreement by and     Incorporated  by  reference to Form S-4
                           among Knowledge Foundations, Inc., Cyber         filed on August 13, 2002
                           Knowledge, Inc. and CKI Group

3.1                        Articles of Incorporation                        Incorporated by Reference to the
                                                                            Registration Statement of Form SB-2
                                                                            filed on April 21, 2005 (File Number
                                                                            333-124220).

3.2                        Bylaws                                           Incorporated by Reference to the
                                                                            Registration Statement of Form SB-2
                                                                            filed on April 21, 2005 (File Number
                                                                            333-124220).

3.3                        Certificate of Amendment of the Articles of      Incorporated by reference to the
                           Incorporation                                    current report on Form 8-K dated July
                                                                            14, 2003. (File no. 000-49797)

3.4                        Articles of Amendment to the Articles of         Incorporated by reference to the
                           Incorporation                                    current report on Form 8-K dated
                                                                            December 1, 2003 (File no. 000-49797)

3.5                        Articles of Amendment to the Articles of         Incorporated by Reference to the
                           Incorporation                                    Registration Statement of Form SB-2
                                                                            filed on April 21, 2005 (File Number
                                                                            333-124220).
</TABLE>

                                       23
<PAGE>

<TABLE>
<CAPTION>
 DESIGNATION OF EXHIBIT
AS SET FORTH IN ITEM 601
    OF REGULATION S-B                        DESCRIPTION                                   LOCATION
------------------------   ---------------------------------------------    ---------------------------------------
<C>                        <C>                                              <C>
4.1                        2003 Stock Plan                                  Incorporated by reference to the
                                                                            current report on Form S-8 dated May
                                                                            23, 2003. (File no. 333-105518)

4.11                       2004 Stock Plan                                  Incorporated by reference to the
                                                                            current report on Form S-8 dated July
                                                                            15, 2004. (File no. 333-111732)

10.1                       Plan & Agreement of Reorganization dated         Incorporated by reference to the
                           December 18, 2002 by and between Premium         Annual Report on Form 8-K dated
                           Enterprises, Inc and eTotalSource, Inc.          December 30, 2002. (File no. 000-49797)

10.2                       Employment Agreement of Terry Eilers dated       Incorporated   by   reference   to  the
                           February 7, 2000                                 pending Registration  Statement on Form
                                                                            SB-2 dated  November 24, 2004 (File no.
                                                                            333-120786)

10.3                       Employment Agreement of Virgil Baker dated       Incorporated by reference to the
                           February 7, 2000                                 pending Registration Statement on Form
                                                                            SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)

10.4                       Employment Agreement of Michael Sullinger        Incorporated by reference to the
                           dated August 1, 2002                             pending Registration Statement on Form
                                                                            SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)

10.5                       Securities Purchase Agreement, dated October     Incorporated by reference to the
                           6, 2004 by and between eTotalSource, Inc. and    pending Registration Statement on Form
                           Cornell Capital Partners, L.P.                   SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)

10.6                       Investor Registration Rights Agreement, dated    Incorporated by reference to the
                           October 6, 2004, by and between eTotalSource,    pending Registration Statement on Form
                           Inc. and Cornell Capital Partners, L.P.          SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)
</TABLE>

                                       24
<PAGE>

<TABLE>
<CAPTION>
 DESIGNATION OF EXHIBIT
AS SET FORTH IN ITEM 601
    OF REGULATION S-B                        DESCRIPTION                                   LOCATION
------------------------   ---------------------------------------------    ---------------------------------------
<C>                        <C>                                              <C>
10.7                       Security Agreement, dated October 6, 2004, by    Incorporated by reference to the
                           and between eTotalSource, Inc. and Cornell       pending Registration Statement on Form
                           Capital Partners, L.P.                           SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)

10.8                       Irrevocable Transfer Agent Instructions, dated   Incorporated by reference to the
                           October 6, 2004, by and among eTotalSource,      pending Registration Statement on Form
                           Inc., Cornell Capital Partners, L.P., and        SB-2 dated November 24, 2004 (File no.
                           Executive Registrar & Transfer, Inc.             333-120786)

10.9                       Escrow Agreement (SEDA), dated October 6,        Incorporated by reference to the
                           2004, by and among eTotalSource, Inc., Cornell   pending Registration Statement on Form
                           Capital Partners, L.P., and David Gonzalez,      SB-2 dated November 24, 2004 (File no.
                           Esq.                                             333-120786)

10.10                      Escrow Agreement (CD), dated October 6, 2004,    Incorporated by reference to the
                           by and among eTotalSource, Inc., Cornell         pending Registration Statement on Form
                           Capital Partners, L.P., and David Gonzalez,      SB-2 dated November 24, 2004 (File no.
                           Esq.                                             333-120786)

10.11                      Secured Convertible Debenture                    Incorporated by reference to the
                                                                            pending Registration Statement on Form
                                                                            SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)

10.12                      Standby Equity Distribution Agreement, dated     Incorporated by reference to the
                           October 6, 2004, by and between eTotalSource,    pending Registration Statement on Form
                           Inc. and Cornell Capital Partners, L.P.          SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)

10.13                      Registration Rights Agreement, dated October     Incorporated by reference to the
                           6, 2004, by and between eTotalSource, Inc. and   pending Registration Statement on Form
                           Cornell Capital Partners, L.P.                   SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)

                                                                            Incorporated by reference to the
10.14                      Placement Agent Agreement, dated October 6,      pending Registration Statement on Form
                           2004, by and among eTotalSource, Inc., Cornell   SB-2 dated November 24, 2004 (File no.
                           Capital Partners, L.P., and Newbridge            333-120786)
                           Securities Corporation
</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>
 DESIGNATION OF EXHIBIT
AS SET FORTH IN ITEM 601
    OF REGULATION S-B                        DESCRIPTION                                   LOCATION
------------------------   ---------------------------------------------    ---------------------------------------
<C>                        <C>                                              <C>
14.1                       Code of Ethics                                   Incorporated by reference to the
                                                                            pending Registration Statement on Form
                                                                            SB-2 dated November 24, 2004 (File no.
                                                                            333-120786)

31.1                       Section 302 Certification of Terry L. Eilers     Provided Herewith

31.2                       Section 302 Certification of Virgil D. Baker     Provided Herewith

32.1                       Section 906 Certification of Terry L. Eilers     Provided Herewith

32.2                       Section 906 Certification of Virgil D. Baker     Provided Herewith
</TABLE>

      b.    Reports on Form 8-K:

            None.
                                       26
<PAGE>

                                   SIGNATURES

      In accordance  with the  requirements  of the  Securities  Exchange Act of
1934,  as  amended,  the  registrant  has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                       eTOTALSOURCE, INC.

August 12, 2005                        By: /s/ Terry L. Eilers
                                           -------------------------------------
                                           Terry L. Eilers, President, Principal
                                           Executive Officer, and Director

August 12, 2005                        By: /s/ Virgil D. Baker
                                           -------------------------------------
                                           Virgil D. Baker, CFO, Principal
                                           Accounting and Financial Officer, and
                                           Director


                                       27