In 1936, the Farallonian Air Staff was seeking a replacement for the Douglas biplanes of the 6th Observation Squadron. Requirements included a range of 1200 miles, a top speed of 200 miles per hour, and a crew of 2. The aircraft needed to be a stable camera platform and be easy-to-fly. During a visit to the USA, Lance Margon, head of the Farallonian purchasing mission, chanced to meet Talbert “Ted” Abrams. Abrams pitched his P-1 Explorer, then under construction.
On paper, the P-1 looked ideal for the Farallonians. Margon tried to purchase six P-1s right off the drawing board, but Abrams lacked the production capacity, so Margon worked out a license manufacturing arrangement on behalf of Capstan Aviation, Ltd. The first aircraft, christened Capstan Observer flew in mid-1937. Sixteen Capstan Observers were built in 1937 and 1938.
During 1938, it was decided to adapt the Observer to float undercarriage for use from ships of the Farallonian Navy as well as isolated island outposts. The float modification necessitated enlarging the vertical tail surfaces, but other changes were minimal. The resulting aircraft was not well-liked, as speed and range both fell dramatically. Nevertheless, twelve Observer IIs were built and equipped 4 Navy ships and a shore-based flight of the 6th Observation Squadron.
Finally, in 1940, with the Frigatebird II development program complete, the design department of Capstan turned to upgrading the Observer. The Observer III received an upgraded engine installation and retractable landing gear, and included the ability to carry drop tanks or external stores. Planned pressurization was abandoned as being beyond the state of the art for the Farallonians. The Observer III was not built in series, but there were two prototypes: one (6-O-14) received an R-1535 radial engine in an updated cowl, and the other (6-O-15) was equipped with a Curtiss V-1570 Conqueror. Both prototypes served in the 6th Observation Squadron on strategic reconnaissance missions.