Etotalsource (ETLS) 10QSB 2007 Q1 Quarterly report (small business)

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 March 31, 2007

_________________________________

Commission File No. 33-49797

_________________________________

ETOTALSOURCE, INC.

(Name of Small Business Issuer in Its Charter)

Colorado	84-1066959
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
1818 North Farwell Avenue, Milwaukee, WI	53202
(Address of Principal Executive Offices)	(Zip Code)
(414) 727-2695
(Issuer’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 o

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

As of March 31, 2007, the issuer had 87,239,448 shares of common stock, no par value, issued and outstanding.

Transitional Small Business Disclosure Format. Yes o    No x

ETOTALSOURCE, INC.

FORM 10-QSB

TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS	3
Balance Sheets - March 31, 2007 and December 31, 2005	3
Statements of Operations - Three Months Ended March 31, 2007 and 2006	4
Statements of Cash Flows - Three Months Ended March 31, 2007 and 2006	5
Notes to Financial Statements	6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION	11
ITEM 3. CONTROLS AND PROCEDURES	15
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	16
ITEM 5. OTHER INFORMATION	16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K	17

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PART I

FINANCIAL INFORMATION

Item 1.Financial Statements.

eTotalSource, Inc.
Consolidated Balance Sheet
	Unaudited March 31, 2007			December 31, 2006
Current Assets
Cash	$	126		$	563
Total Current Assets		126			563
Other Assets
Deposits		801			801
Total Assets	$	927		$	1,364
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Convertible notes payable	$	250,000		$	250,000
Other notes payable		797,114			797,114
Judgments payable		204,788			204,788
Accounts payable and other accrued liabilities (Including $84,158 owed to related parties)		363,953			337,593
Accrued compensation payable		1,262,453			1,249,203
Accrued interest payable		540,230			505,555
Total Current Liabilities		3,418.539			3,344,253
Convertible Notes Payable, less current maturities and $155,582 discount		773,560			761,666
Total Liabilities		4,192,098			4,105,919
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock; no par value; 300 million shares authorized,
87,239,448 shares issued and outstanding		6,473,522			6,467,521
Accumulated (deficit)		(10,664,693	)		(10,572,076	)
Total Stockholders' Equity (Deficit)		(4,191,171	)		(4,104,555	)
Total Liabilities and Stockholders' Equity (Deficit)	$	927		$	1,364

See accompanying notes.

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eTotalSource, Inc.
Condensed Consolidated Statements of Operations Unaudited
	Three Months Ended March 31
	2007			2006
Revenues	$	-		$	12,819
General and Administrative Expenses		16,222			216,201
Operating Income (Loss)		(16,222	)		(203,382	)
Other Income (Expense)
Interest expense		(76,394	)		(94,405	)
Other income (expense), net		-			-
Total Other Income (Expense)		(76,394	)		(94,405	)
Net (Loss)	$	(92,616	)	$	(297,787	)
Basic and Diluted (Loss) per Share	$	(.001	)	$	(0.01	)
Weighted Average Common Shares Outstanding		83,670,427			47,428,413

See accompanying notes.

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	eTotalSource, Inc.
	Consolidated Statements of Cash Flows Unaudited
		Three Months Ended March 31,
		2007			2006
Cash Flows From (Used in) Operating Activities:
Net (loss)		$	(92,616	)	$	(297,787	)
Depreciation			-			2,832
Amortization of discounted notes payable			17,894			26,365
Stock options and warrant expense			-			25,060
Changes in assets and liabilities:
Decrease (increase) in other current assets			-			2
Decrease (increase) in deposits			-			(80	)
Increase (decrease) in payables, credit cards and accrued liabilities			74,285			142,179
Increase (decrease) in deferred revenue			-			(11,250	)
Net Cash (Used in) Operating Activities			(437	)		(112,682	)
Cash Flows From (Used in) Investing Activities:
Purchase of equipment			-			-
Net Cash (Used in) Investing Activities			-			-
Cash Flows From (Used in) Financing Activities:
Proceeds from notes payable			-			-
Net Cash From Financing Activities			-			-
Increase (Decrease) in Cash and Cash Equivalents			(437	)		(112,682	)
Cash and Cash Equivalents - Beginning of Period			563			118,958
Cash and Cash Equivalents - End of Period		$	126		$	6,276
Supplemental Disclosures:
Interest paid		$	-		$	20,613
Income taxes paid			-			800
Non-cash investing and financing transactions:
Conversion of debt to equity			-			10,000
Conversion of convertible debenture			6,000			-
Discount on convertible debentures			1,200			-

See accompanying notes.

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eTotalSource, Inc.

Notes to Consolidated Condensed Financial Statements as of March 31, 2007

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

eTotalSource, Inc., (the “Company” - formerly named Premium Enterprises, Inc. (“PMN”), was incorporated in Colorado on September 16, 1987. The principal activities of the Company are developing and publishing proprietary multimedia software technology and training media. The Company’s primary customers are corporations, governmental organizations and agencies. The Company is based in Yuba City, California.

Reorganization in 2002

On December 30, 2002, PMN acquired 91% of the preferred and common stock of eTotalSource, Inc. (“eTS” - incorporated in California on February 7, 2000), pursuant to an Agreement and Plan of Reorganization effective December 30, 2002, by issuing 15,540,011 shares of PMN common stock to eTS shareholders. Immediately after the transaction, the eTS shareholders owned approximately 88.5% of the Company’s common stock. During 2004, the Company issued 697,791 shares of previously reserved common stock to acquire the remaining eTS stock and 583,505 shares to settle pre-reorganization accounts payable of PMN totaling $100,000.

Going Concern Uncertainty

The accompanying financial statements have been presented assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred significant operating losses since inception and as of March 31, 2007 had a net working capital deficit of approximately $3,418,412, a stockholders’ deficit of $4,191,171, notes payable totaling $897,114 were in default and judgments against the Company of $204,788 had been adjudicated. Management’s plans to address these matters include the issuance of debt and equity securities and increasing revenue. Unless the Company successfully obtains suitable significant additional financing and attains profitable operations, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary after the elimination of inter-company balances and transactions.

Cash Equivalents

For the purpose of reporting cash flows, the Company considers as cash equivalents all highly liquid investments with a maturity of three months or less at the time of purchase.

Earnings (Loss) Per Share

Basic earnings per share are computed using the weighted average number of shares outstanding during each period. Diluted earnings per share is computed on the basis of the average number of common shares outstanding and the dilutive effect of convertible notes payable, stock options and warrants using the “treasury stock” method. Basic and diluted earnings per share are the same during the periods presented since the Company had net losses and the inclusion of stock options and warrants would be anti-dilutive.

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Beneficial Conversion Feature of Debt

In accordance with Emerging Issues Task Force No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the Company recognizes the value of conversion rights attached to convertible debt. These rights give the debt holder the ability to convert his debt into common stock at a price per share that is less than the trading price to the public on the day the loan is made to the Company. The beneficial value is calculated based on the market price of the stock at the commitment date in excess of the conversion rate of the debt and related accruing interest and is recorded as a discount to the related debt and an addition to additional paid in capital. The discount is amortized as interest expense over the remaining outstanding period of related debt.

Recent Accounting Pronouncements

On February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. The fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Statement 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company does not expect that adoption of SFAS No. 159 will have a material effect on its financial position, results of operations, or liquidity and does not currently believe it will have a material impact on our financial statements.

NOTE 2. NOTES PAYABLE

Note payable to a trust; interest at 15% payable monthly through December 18, 2003 when principal and unpaid interest are due. The note is in default.	$	172,000
Note payable to a trust; interest at 10% and principal due January 17, 2003, extended to December 17, 2003 (with interest increased to 18% and due monthly beginning February 17, 2003). The note is in default.		110,000
Note payable to a trust; interest at 15% payable monthly through December 18, 2003 when principal and unpaid interest are due. The note is in default.		40,000
Promissory notes payable; interest at 6% payable monthly, due in 2001, unsecured. Principal and accrued interest ($36,701 at December 31, 2006) are convertible to common stock at $.50 per share. Warrants also issued to two note holders to purchase 37,500 shares of common stock for five years at $.50 per share. The notes are in default.		150,000
Promissory note payable; principal and accrued interest at 8% payable in 2002, extended to May 15, 2003, unsecured. Principal and accrued interest ($18,868 at December 31, 2006) convertible to Company common stock at $.50 per share. Warrants also issued to the note holder to purchase 55,248 shares of common stock for five years at $.50 per share. The note is in default.		100,000
Note payable to an unrelated trust; stated interest rate of 10% due June 2003, extended to June 2004. As consideration for forbearance, the note holder received 50,000 shares of common stock in 2004, valued at $.525 per share ($26,250). In October 2004, the note was extended to April 2005. In December 2005, the note was extended to June 2006. Accrued unpaid interest of $2,483 was added to the principal in 2005. *		52,483
Note payable to an unrelated trust; principal and interest at 10% due monthly. This note is a revolving credit obligation and eTotalSource can repay and borrow up to the amount of the note. In October 2004, the note was extended to April 2005. In December 2005, the note was extended to June 2006. Accrued unpaid interest of $12,631 was added to the principal in 2005. *		262,631

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Convertible debentures payable to an unrelated company, principal and interest at 12%, payable November 1, 2008, secured by 225,000,000 shares of common stock and 7 million warrants. Principal and accrued interest convertible to common stock at a conversion price equal to the lower of (i) $.024 price per share of common stock or (ii) 80% of the lowest closing bid price of our common stock, as quoted by Bloomberg, L.P., for the five trading days immediately preceding the conversion date. At the due date the Company has the option to repay the debt or issue common stock. In connection with this transaction, the Company recorded a discount of $320,734, for the relative value of the warrants; as of March 31, 2007, the debt is stated net of the unamortized discount of $154,075. During the period ending March 31, 2007, the holder converted $6,000 to 7,071,429 shares of common stock. On April 26, 2007, the holder converted $2,800 to 3,500,000 shares.		767,425
Convertible debentures payable to an unrelated company, principal and interest at 12%, payable December 21, 2008. Principal and accrued interest ($25 at December 31, 2006) convertible to common stock at a conversion price equal to the lower of (i) $.0018 price per share of common stock or (ii) 80% of the lowest closing bid price of our common stock, as quoted by Bloomberg, L.P., for the five trading days immediately preceding the conversion date. At the due date the Company has the option to repay the debt or issue common stock. In connection with this transaction, the Company recorded a discount of $1,528, for the relative value of the warrants; as of March 31, 2007, the debt is stated net of the unamortized discount of $1,507.		6,135
Note payable to an unrelated individual; principal and unpaid interest at 12%, due October 15, 2006. The note is in default.		25,000
Note payable to a director; principal and interest at 9.2%, due December 4, 2002, extended to May 1, 2003, unsecured. The note is in default.		10,000
Note payable to an unrelated company; principal and interest at 10%, due August 1, 2005. The note is in default.		25,000
Note payable to an unrelated company; principal and interest at 12%, due August 1, 2005. The note is in default.		100,000
Total		1,820,674
Less: current maturities		1,047,114
Long-term maturities	$	773,560
* In connection with the extension of the maturity date of these notes to June 2006, the Company is obligated to issue 2,000,000 shares of its common stock to the note-holder of both notes. The Company has accrued this liability based on the fair market value of its common stock as of the date of the extension agreement and recorded the related interest expense in the accompanying financial statements.

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NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash, accounts payable and accrued liabilities approximate fair value because of their short-term maturities. The fair value of notes and judgments payable approximates fair value because of the market rate of interest on the debt.

NOTE 4. FINANCIAL INSTRUMENTS AND CONCENTRATIONS

Financial Instruments

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash.

The Company maintains its cash deposits in one bank. Its bank accounts are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. The amount on deposit in the financial institution did not exceed the $100,000 FDIC insured limit at December 31, 2006. Management believes that the financial institution is financially sound.

NOTE 5. COMMITMENTS AND CONTINGENCIES

Executive Employment Contracts

The Company has employment agreements with its two executive officers:

1. Agreements were executed with the Chief Executive Officer at the inception of the Company (February 7, 2000) which expired December 31, 2006. Annual salary is $150,000 and accrues a non-accountable automobile allowance of $9,000. The agreements also provide for an annual bonus of incentive stock options (covering 200,000 shares). In addition, the CEO is entitled to a 5% referral commission on certain sales. Unpaid salary and commissions can be paid with warrants to purchase common stock at $1 per share. During both 2006 and 2005, CEO compensation expensed pursuant to these arrangements totaled $159,000 during 2006 and 2005, respectively (exclusive of the fair value and of incentive stock options). The CEO has elected to forego the 2006 and 2005 annual bonus of incentive stock options. Mr. Eilers resigned on March 27, 2007.

2. An agreement was executed August 1, 2000 with the Chief Operating Officer which expired December 31, 2007. Annual salary is $120,000 and a non-accountable automobile allowance of $9,000. The agreement also provides for an annual bonus of incentive stock options (covering 200,000 shares). Unpaid salary and commissions can be paid with warrants to purchase common stock at $1 per share. During 2006 and 2005, COO compensation expensed pursuant to these arrangements was accrued on a “half-time” basis and totaled $69,000 and $69,000, respectively (exclusive of the fair value of incentive stock options). The officer has elected to forego the 2006 and 2005 annual bonus of incentive stock options. Mr. Sullinger resigned on March 27, 2007.

On April 3, 2006, Virgil Baker, the Chief Financial Officer, submitted his resignation as Chief Financial Officer and Director, such resignation to be effective on May 15, 2006.

On May 1, 2006, John (Cody) Morrow submitted his resignation as Director, such resignation to be effective on May 1, 2006.

On December 6, 2006, ETLS and Terry Eilers are being sued by Gary Miller for an alleged breach of contract claim. Gary Miller is a holder of three notes payables totaling $175,000. The lawsuit is asking for payment of the notes plus all upaid interest and attorney fees.

ETLS has defended an action and has reached a settlement for $50,000 with Alchemy Communications in connection with a breach of contract claim involving co-location of ETLS' servers with Alchemy. $83,000 has been accrued as a judgment payable as of December 31, 2002. ETLS intends to pay $50,000 as soon as sufficient funds are available to do so, and in March of 2003, ETLS issued 30,000 shares of its common stock in partial satisfaction of the settlement. No action has been taken by Alchemy to enforce the terms of the settlement and ETLS does not anticipate any action will be taken by Alchemy to enforce the settlement, provided that the balance of funds owed is paid within a reasonable period of time.

9

In 1997, Premium Enterprises, Inc. was sued by Tusco, Inc. for an alleged breach of the company’s lease with Tusco. Tusco prevailed in its suit and obtained a judgment against Premium for $75,000. No action has been taken by Tusco to enforce the judgment against Premium or ETLS, its successor, and ETLS does not anticipate any action will be taken by Tusco to enforce the judgment. Nonetheless, ETLS has recorded a liability for the full amount of the judgment.

In 1996, Premium Enterprises, Inc. was sued by Ally Capital Corporation for an alleged breach of contract claim. Ally prevailed in its suit and obtained a judgment against Premium for $47,000. No action has been taken by Ally to enforce the judgment against Premium or ETLS, its successor, and ETLS does not anticipate any action will be taken by Ally to enforce the judgment as Ally is no longer in business according to Colorado Secretary of State’s office. Nonetheless, ETLS has recorded a liability for the full amount of the judgment.

NOTE 6. STOCK CONVERSION

On January 4, 2007, Cornell converted $3,500 of convertible debentures into 3,500,000 shares of common stock.

On March 28, 2007, Cornell converted $2,500 of convertible debentures into 3,571,429 shares of common stock.

NOTE 7. EVENTS SUBSEQUENT TO MARCH 31, 2007

On April 13, 2007, the Company issued a convertible debenture to Cornell in the principal amount of $72,000(principal and interest at 12% payable April 13, 2009). Principal and accrued interest convertible to common stock at a conversion price equal to the lower of (i) $.0018 price per share of common stock or (ii) 80% of the lowest closing bid price of our common stock, as quoted by Bloomberg, L.P., for the five trading days immediately preceding the conversion date.

On April 26, 2007, Cornell converted $2,800 of convertible debentures into 3,500,000 shares of common stock.

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Item 2. Management's Discussion And Analysis Or Plan 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

The Company was incorporated in Colorado on September 16, 1987 as Premium Enterprises, Inc. (“Premium”) On December 20, 2002, Premium entered into a Plan and Agreement of Reorganization with eTotalSource, Inc., a California corporation (the “Company” or “eTotalSource”) 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 to change the name of Premium Enterprises, Inc. to eTotalSource, Inc.

History.

For a period of time in 1988-1994, 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 and ceased all operations in 1996. Premium wrote-off all of its investment in equipment and licenses for tire recycling in 1996 and became dormant.

Business.

The sole business of the Company is that of eTotalSource.

Recent Developments

Management Transition . On March 27, 2007, the Company’s Board of Directors accepted the resignations of Terry Eilers, A. Richard Barber, and Michael Sullinger as members of the Board. The Company did not have a disagreement with any of the resigning directors. Mr. Eilers, Mr. Barber, and Mr. Sullinger did not serve on any committees of the Board. On March 27, 2007, the Company’s Board of Directors also accepted the resignations of the following officers: Terry Eilers, President and Chief Executive Officer, and Michael Sullinger, Chief Operating Officer and Secretary. The Company did not have a disagreement with any of the resigning officers.

In addition, on March 27, 2007, the Board of Directors of the Company appointed David Marks as a member of the Board and appointed Frank Orlando as Chief Restructuring Officer, Chief Financial Officer and Secretary of the Company. Mr. Orlando and Mr. Marks are not our employees, and as of the date of this report we do not have employment contracts with either of them nor agreements regarding compensation and related matters. Mr. Orlando and Mr. Marks are each an officer of Crivello Group, LLC and other entities. We expect that Crivello Group, LLC will enter into a management services agreement with us.

The new management team will be undertaking an analysis and evaluation of the Company’s current business model and industry, our assets and liabilities, our financial condition, and overall prospects in order to determine whether to continue the Company’s current operations or to develop and implement a new business strategy that could result in a substantial change in the Company’s business model, a liquidation of the Company’s existing assets, and other changes. During this evaluation phase, we have substantially reduced our production and sales programs and certain other operations and reduced our personnel to no full-time employees and no part-time employees in order to minimize operating costs pending the outcome of the analysis noted above. In addition, during this evaluation phase, we anticipate that our operating revenues will be negligible, that the Company will generate a significant loss from operations, and that the Company will need to obtain debt and/or equity financing for working capital purposes. No assurance can be given that such financing will be available purposes. No assurance can be given that such financing will be available on terms acceptable to the Company.

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Debenture Financing. We have entered into a series of debenture financings with Cornell Capital Partners, L.P. (“Cornell”) as described in greater detail below in this report. Most recently, we issued and sold a $7,642 debenture to Cornell in December 2006 and a $72,000 debenture to Cornell in April 2007. The proceeds from these two debt financing were used to pay professional fees associated with securities law compliance, audit fees, transaction costs, and related fees.

Recent Historical Operations.

The Company’s business has been as a developer and supplier of proprietary multimedia software technology, and a publisher of multimedia training content. Its clients have included: 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. The Company's clients have worked with ETLS to develop, produce, market, and distribute multimedia development software. ETLS has also marketed educational training programs it has produced utilizing its proprietary software.

eTotalSource was founded in February 2000 with the express goal of designing a better interface for information and education multimedia delivery. Approximately one year after inception, the beta Presenta Pro ^TM platform was completed. Presenta Pro ^TM 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 Pro ^TM as a platform for distance learning and computer-based training. Presenta Pro ^TM is delivered via the Internet, intranet, or CD/DVD ROM. Presenta Pro ^TM simplifies the production and delivery of multimedia presentations and content while at the same time improving the quality and effectiveness of the presentations. Presenta Pro ^TM is designed with cost saving features and it offers post-production opportunities.

Presenta Pro ^TM features include:

· Multi-panel time synchronized presentation;

· Quick content and program development;

· Rich video and content experience;

· Still images;

· Graphics;

· Flash;

· Links to Website;

· Live Cams;

· Test and quizzes to tract performance;

· Users progress can be tracked;

· Diagrams;

· Simple server requirements;

· Reduces training and learning curve time; and

· Easy to implement and use.

Business Model.

STRATEGY: The Company has employed a dual strategy to meet market demands and opportunities that includes both software licensing and publishing.

SOFTWARE LICENSING: The Company has licensed Presenta Pro ^TM software via distribution partners and an internal sales and marketing team. The cost of the product ranges from $5,500 to $15,000. The nearest competitor (in quality or functionality), Virage, prices its product at substantially higher prices. The Company believes that its aggressive pricing policy appeals to governments, schools and corporate clients.

PUBLISHING: The Company has published and produced original content and postproduction services, and has participated in the sales and distribution of the final published product.

ETLS shares in the revenue derived from program sales. The Company has carefully chosen its content, identifying unique subjects and niches offering more probable sales. The Company believes that these topics/markets are generally underserved and in need of the program packages that are produced by ETLS. Examples of finished products that have been marketed include:

· Anger Management Facilitator Training and Certification;

· Domestic Violence Facilitator Training and Certification;

· School Maintenance, Cleaning Training and Certification;

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· Emergency Disaster Preparedness - Terrorist Awareness; and

· Mandated School Internet Acceptable Use Policy.

Intellectual Property Differentiation.

ETLS currently has five patents pending:

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

· 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;

· 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;

· 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

· Presenta Pro™ 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.

ETLS’ technological differentiation is based on high quality and low cost software. We believe that Presenta Pro ^TM is easier to use and considerably more flexible than eTotalSource’s closest competitor. We believe that Presenta Pro ^TM is priced to be affordable, cost-effective, and training-efficient. Presenta Pro’s ^TM ease of implementation and quality has made 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 ETLS’ 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.

Set forth below is a discussion of the financial condition and results of operations of etotalSource, Inc. (the "Company," "we," "us," or "our") for the three months ended March 31, 2007 and 2006. The following discussion should be read in conjunction with the information set forth in the consolidated financial statements and the related notes thereto appearing elsewhere in this quarterly report.

Results of Operations - Three months ended March 31, 2007 compared to the three months ended March 31, 2006.

Revenues.

Revenues for the three months ended March 31, 2007 were $0 verses $12,819 for the corresponding 2005 period, a decrease of $12, 819 or 100%. This decrease was attributed to the decrease in operations of eTotalSource.

Expenses.

Operating expenses for the three month period ended March 31, 2007 were $16,222 as compared to $216,201 for the comparable 2006 period, or a decrease of $199,979 or 92%. This decrease was primarily due to the decrease in operations of eTotalSource.

Interest expense for the three month period ended March 31, 2007 was $76,394 as compared to $94,405 for the comparable 2006 period, a decrease of $18,011 or 19%. This decrease was attributed to the decrease in operations of eTotalSource.

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Gain (Loss) From Operations.

eTotalSource recognized a loss for the three month period ended March 31, 2007in the amount of $92,616 or $.001 per share, as compared with a loss of $297,787 or $.001 per share for the corresponding period ended March 31, 2006. The decrease of $205,171 or $0.002 per share was attributable to the decrease in operations of eTotalSource.

Liquidity and Capital Resources

At March 31, 2007, eTotalSource had $126 in cash with which to conduct operations, a decrease of $437 during the quarter, and no other capital resources. The company needs equity or debt financing for working capital but has no commitments for new capital availability. There can be no assurance that ETLS will be able to pursue its business plan or fully exploit business opportunities that management may identify. Accordingly, ETLS 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. ETLS presently has no sources of capital. ETLS is unable to carry out any plan of business without funding. Because of the re-evaluation of our business model currently in process, we are unable to quality and estimate our working capital requirements for the 12 months ending December 31, 2007. 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.

The Standby Equity Distribution Agreements.

On November 2, 2005, we terminated the 2005 SEDA, the 2005 Secured Convertible Debentures, the 2005 Securities Purchase Agreement, and all other financing agreements that we entered into with Cornell on April 20, 2005 by execution of the November Termination Agreement. The 2004 SEDA, along with the related Investor Registration Rights Agreement, related Placement Agent Agreement, related Irrevocable Transfer Agent Instructions, and related Escrow Agreement, each dated October 6, 2004, were mutually terminated by the Company and Cornell on April 20, 2005 pursuant to the April Termination Agreement. We have recently entered into a December 2006 Debenture and an April 2007 Debenture. All of the foregoing documents are described in detail above.

The November 2005 Debentures.

On November 2, 2005, the Company entered into a Securities Purchase Agreement with Cornell, pursuant to which we issued to Cornell secured convertible debentures in the principal amount of $1,000,000 (i.e., the November 2005 Debentures). Of this amount, $175,000 was previously funded on October 7, 2004, $175,000 was previously funded on December 2, 2004, $100,000 was previously funded on August 19, 2005, and $530,130 was funded on November 4, 2005. The November 2005 Debentures were issued to consolidate these prior debentures and to reflect additional funding to the Company in the amount of $530,130.

The November 2005 Debentures are secured by substantially all of the Company’s assets, has a three-year term and accrues interest at 12% per annum.Cornell is entitled, at its option, to convert, and sell all or any part of the principal amount of the November 2005 Debenture, plus accrued interest thereon, into shares of the Company’s common stock, at a price per share equal to the lesser of (a) an amount equal to an amount equal to 120% of the closing bid price of the common stock as listed on a principal market as quoted by Bloomberg L.P., on the date hereof or (b) an amount equal to 80% of the lowest closing bid price of the common stock for the five trading days immediately preceding the conversion date which may be adjusted pursuant to the other terms of the November 2005 Debenture. In the event the November 2005 Debentures are redeemed, then we will issue to Cornell a warrant to purchase 2,000,000 shares at an exercise price of $0.001 or as subsequently adjusted under the terms of the warrant.

The December 2006 Debenture.

On December 21, 2006 Cornell and the Company entered into an agreement providing for the Company’s issuance of a secured convertible debenture to Cornell in the face amount of $7,642 for a purchase price of $7,642 (the “December 2006 Debenture”). The conversion price per share, subject to adjustment, is the less of (i) $.0018 price per share of common stock or (ii) 80% of the lowest closing bid (as defined in the debenture) of the Company’s common stock for the five trading days immediately preceding the conversion date (as defined in the debenture)

The April 2007 Debenture.

On April 13, 2007 Cornell and the Company entered into an agreement providing for the Company’s issuance of a secured convertible debenture to Cornell in the face amount of $72,000 for a purchase price of $72,000 (the “April 2007 Debenture”). The conversion price per share, subject to adjustment, is the less of (i) $.0018 price per share of common stock or (ii) 80% of the lowest closing bid (as defined in the debenture) of the Company’s common stock for the five trading days immediately preceding the conversion date (as defined in the debenture)

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Contractual Obligations and Commercial Commitments

As of March 31, 2007, the following obligations were outstanding:

Payments Due Period

Contractual Obligations	Less than 1 year		2-3 years		4-5 years		After 5 years		Total
Judgments payable	$	204,788	$	.00	$	.00	$	.00	$	204,788
Short Term note payables		1,047,114		.00		.00		.00		1,047,114
Convertible debentures (net discounts - $155,582)		.00		773,560		.00		.00		773,560
Other current liabilities		2,166,636		.00		.00		.00		2,166,636
Total contractual cash obligations	$	3,418,539	$	773,560	$	.00	$	.00	$	4,192,098

In addition to the commitments listed in the table above, the Company occupies office/administration space in Yuba City, California on a month-to-month basis with non expiration date. Month rentals under the lease are approximately $400.

Dividends

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

Item 3. Controls and Procedures.

(a)   Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

(b)   Changes in internal controls.   There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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.

As of March 31, 2007, the Company is in default under the following notes payable:

Notes Payable issued on January 4, 2002 to an unrelated trust in the amount of $40,000 (14% interest), $110,000 (18% interest), and $172,000 (15% interest), are all in default. As of March 31, 2007, $322,000 of principal was outstanding on these notes.

Convertible Notes Payable issued on July 31, 2000 to unrelated parties in the total amount of $150,000 at 6% interest are in default. As of March 31, 2007, $150,000 of principal was outstanding on this note.

Note Payable issued on December 3, 2001 to an unrelated party in the amount of $100,000 at 8% interest is in default. As of March 31, 2007, $100,000 of principal was outstanding on this note.

Notes Payable issued on April 15, 2003 and August 3, 2003 to an unrelated trust in the amount of $52,483 and $262,631 at 10% interest are in default. As of March 31, 2007, $ 315,114 of principal was outstanding on this note.

A note payable issued on January 4, 2002 to a director in the amount of $10,000 at 9.2% is in default. As of March 31, 2007, $10,000 of principal was outstanding on this note.

Notes Payable issued on April 20, 2005 and June 27, 2005, respectively, to an unrelated party, due August 1, 2005, in the amount of $100,000 at 10%, and $25,000 at 12%, are in default. As of March 31, 2007, $125,000 of principal was outstanding on these notes.

Note Payable issued on April 15, 2006 to an unrelated party in the amount of $25,000 at 12% interest is in default. As of March 31, 2007, $25,000 of principal was outstanding on this note.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information

None.

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Item 6. Exhibits and Reports on Form 8-K

a. Exhibits pursuant to Regulation S-K:

DESIGNATION OF EXHIBIT AS SET FORTH IN ITEM 601 OF REGULATION S-B	DESCRIPTION	LOCATION
3.1	Articles of Incorporation	Incorporated by Reference to the Registration Statement of Form SB-2 filed on April 21, 2005.
3.2	Bylaws	Incorporated by Reference to the Registration Statement of Form SB-2 filed on April 21, 2005.
3.3	Certificate of Amendment of the Articles of Incorporation	Incorporated by reference to the current report on Form 8-K dated July 14, 2003. (File no. 000-49797)
3.4	Articles of Amendment to the Articles of Incorporation	Incorporated by reference to the current report on Form 8-K dated December 1, 2003 (File no. 000-49797)
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 December 18, 2002 by and between Premium Enterprises, Inc and eTotalSource, Inc.	Incorporated by reference to the Annual Report on Form 8-K dated December 30, 2002. (File no. 000-49797)
10.2	Employment Agreement of Terry Eilers dated February 7, 2000	Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
10.3	Employment Agreement of Virgil Baker dated February 7, 2000	Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
10.4	Employment Agreement of Michael Sullinger dated August 1, 2002	Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
10.5	Securities Purchase Agreement, dated October 6, 2004 by and between eTotalSource, Inc. and Cornell Capital Partners, L.P.	Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
10.6	Investor Registration Rights Agreement, dated October 6, 2004, by and between eTotalSource, Inc. and Cornell Capital Partners, L.P.	Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
10.7	Security Agreement, dated October 6, 2004, by and between eTotalSource, Inc. and Cornell Capital Partners, L.P.	Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)

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DESIGNATION OF EXHIBIT AS SET FORTH IN ITEM 601 OF REGULATION S-B	DESCRIPTION	LOCATION
10.8	Irrevocable Transfer Agent Instructions, dated October 6, 2004, by and among eTotalSource, Inc., Cornell Capital Partners, L.P., and Executive Registrar & Transfer, Inc.	Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
10.9	Escrow Agreement (SEDA), dated October 6, 2004, by and among eTotalSource, Inc., Cornell Capital Partners, L.P., and David Gonzalez, Esq.	Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
10.10	Termination Agreement, dated November 2, 2005, by and among eTotalSource, Inc. and Cornell Capital Partners, L.P.	Incorporated by reference to the Current Report on Form 8-K dated November 8, 2005.
10.11	Agreement dated December 21, 2006 by and between eTotalSource, Inc. and Cornell Capital Partners, L.P.	Incorporated by reference to the Company’s on Form 10-QSB dated December 21, 2006.
10.12	Secured Convertible Debenture dated December 21, 2006 in the Principal Amount of $7,642 issued by eTotalSource, Inc. to Cornell Capital Partners, L.P.	Incorporated by reference to the Company’s on Form 10-QSB dated December 21, 2006.
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)
15.1	Letter on Change in Certifying Accountants	Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 30, 2006
16.1	Letter on Departure of Director -Virgil Baker	Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 30, 2006
16.2	Letter on Departure of Director - John (Cody) Morrow	Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 30, 2006
31.1	Certification of Chief Executive Officer and Interim Chief Financial Officer (one person) pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act	Filed herewith
32.1	Certification of Chief Executive Officer and Interim Chief Financial Officer (one person) pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	eTotalSource, Inc.
May 17, 2007		By:   /s/ Frank J. Orlando
		Frank J. Orlando Chief Restructuring Officer, Chief Financial Officer, Secretary and Director

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