Document:

Exhibit 10.1 to CapSource Financial, Inc. Form 8-K dated December 28, 2005

Exhibit 10.1  

	
 

	

CAPSOURCE FINANCIAL, INC.

SECURITIES PURCHASE AGREEMENT

May 1, 2006

	
 

	

	
 

	
 

	
 

	
 

	
TABLE OF CONTENTS

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Page

	
 

	
 

	
 

	
 

	
SECTION 1 

	
PURCHASE AND SALE OF SECURITIES 

	
1

	
 

	
1.1

	
Sale and
  Issuance of Securities

	
1

	
 

	
1.2

	
The Closing

	
1

	
SECTION 2 

	
DELIVERIES 

	
1

	
 

	
2.1

	
Closing
  Deliveries

	
1

	
SECTION 3 

	
THE COMPANY’S
REPRESENTATIONS AND WARRANTIES 

	
2

	
 

	
3.1

	
Organization
  and Standing

	
2

	
 

	
3.2

	
Corporate
  Power

	
2

	
 

	
3.3

	
Subsidiaries

	
2

	
 

	
3.4

	
Capitalization

	
2

	
 

	
3.5

	
Financial
  Statements; Accounts Receivable

	
3

	
 

	
3.6

	
Changes

	
4

	
 

	
3.7

	
Material
  Obligations

	
5

	
 

	
3.8

	
Material
  Contracts

	
5

	
 

	
3.9

	
Intellectual
  Property

	
7

	
 

	
3.10

	
Title to
  Properties and Assets

	
8

	
 

	
3.11

	
No Defaults

	
8

	
 

	
3.12

	
Compliance
  with Other Instruments

	
8

	
 

	
3.13

	
Litigation

	
8

	
 

	
3.14

	
Tax Returns
  and Payments

	
8

	
 

	
3.15

	
Employees

	
9

	
 

	
3.16

	
Related
  Party Obligations

	
9

	
 

	
3.17

	
Environmental
  and Safety Laws

	
9

	
 

	
3.18

	
Condition of
  Properties

	
10

	
 

	
3.19

	
Licenses

	
10

	
 

	
3.20

	
Insurance

	
10

	
 

	
3.21

	
Consent

	
10

	
 

	
3.22

	
Offering

	
10

	
 

	
3.23

	
Brokers or
  Finders

	
10

	
 

	
3.24

	
No Market
  Manipulation

	
10

	
 

	
3.25

	
Reporting
  Company

	
11

	
 

	
3.26

	
Information
  Concerning Company

	
11

	
 

	
3.27

	
Stop
  Transfer Order

	
11

	
 

	
3.28

	
No
  Integrated Offering

	
11

	
 

	
3.29

	
No General
  Solicitation

	
11

	
 

	
3.30

	
Listing

	
11

	
 

	
3.31

	
Correctness
  of Representations

	
11

	
 

	
3.32

	
Disclosure

	
12

	
SECTION 4 

	
THE INVESTOR’S
REPRESENTATIONS AND WARRANTIES 

	
12

	
 

	
4.1

	
No
  Registration

	
12

	
 

	
4.2

	
Investment
  Intent

	
12

	
 

	
4.3

	
Investment
  Experience

	
12

	
 

	
4.4

	
Speculative
  Nature of Investment

	
12

	
 

	
4.5

	
Access to
  Data and Documentation

	
12

	
 

	
4.6

	
Accredited
  Investor

	
13

i

	
 

	
 

	
 

	
 

	
TABLE OF CONTENTS

	
(continued)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Page

	
 

	
 

	
 

	
 

	
 

	
4.7

	
Residency

	
13

	
 

	
4.8

	
Rule 144

	
13

	
 

	
4.9

	
Authorization

	
13

	
 

	
4.10

	
Further
  Limitations on Disposition

	
13

	
 

	
4.11

	
Legend;
  Restriction on Transfer

	
14

	
 

	
4.12

	
Warrant
  Legend

	
14

	
SECTION 5 

	
COVENANTS OF
THE COMPANY 

	
15

	
 

	
5.1

	
Stop Orders

	
15

	
 

	
5.2

	
Listing

	
15

	
 

	
5.3

	
Market
  Regulations

	
15

	
 

	
5.4

	
Reporting
  Requirements

	
15

	
 

	
5.5

	
Use of
  Proceeds

	
15

	
 

	
5.6

	
Reservation
  of Common Stock

	
16

	
 

	
5.7

	
Designation
  of Board Members

	
16

	
 

	
5.8

	
Taxes

	
16

	
 

	
5.9

	
Insurance

	
16

	
 

	
5.10

	
Books and
  Records

	
16

	
 

	
5.11

	
Governmental
  Authorities

	
16

	
 

	
5.12

	
Intellectual
  Property

	
16

	
 

	
5.13

	
Properties

	
16

	
 

	
5.14

	
Correctness
  of Representations

	
16

	
SECTION 6 

	
INVESTOR’S
CLOSING CONDITIONS 

	
17

	
 

	
6.1

	
Representations
  and Warranties

	
17

	
 

	
6.2

	
Covenants

	
17

	
 

	
6.3

	
Blue Sky

	
17

	
 

	
6.4

	
Due
  Diligence

	
17

	
 

	
6.5

	
Convertible
  Debt

	
17

	
 

	
6.6

	
Registration
  Rights Agreement

	
17

	
 

	
6.7

	
Voting
  Agreement

	
17

	
 

	
6.8

	
Reservation
  of Shares of Conversion Stock

	
17

	
 

	
6.9

	
Payment of
  Fees

	
17

	
 

	
6.10

	
Intentionally
  Omitted

	
17

	
 

	
6.11

	
Compliance
  Certificate

	
17

	
 

	
6.12

	
Legal
  Opinion

	
18

	
 

	
6.13

	
Secretary’s
  Certificate; Amendment to Bylaws

	
18

	
 

	
6.14

	
Consents;
  Permits and Waivers

	
18

	
 

	
6.15

	
Proceedings
  and Documents

	
18

	
SECTION 7 

	
THE COMPANY’S
CLOSING CONDITIONS 

	
18

	
 

	
7.1

	
Representations
  and Warranties

	
18

	
 

	
7.2

	
Covenants

	
18

	
 

	
7.3

	
Compliance
  with Securities Laws

	
18

	
 

	
7.4

	
Registration
  Rights Agreement

	
18

	
 

	
7.5

	
Intentionally
  Omitted

	
18

	
 

	
7.6

	
Consents and
  Waivers

	
18

	
 

	
7.7

	
Proceedings
  and Documents

	
18

ii

	
 

	
 

	
 

	
 

	
TABLE OF CONTENTS

	
(continued)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Page

	
 

	
 

	
 

	
 

	
SECTION 8 

	
MISCELLANEOUS 

	
19

	
 

	
8.1

	
Opinion

	
19

	
 

	
8.2

	
Amendment

	
19

	
 

	
8.3

	
Notices

	
19

	
 

	
8.4

	
Payment of
  Fees; Option

	
20

	
 

	
8.5

	
Governing
  Law

	
20

	
 

	
8.6

	
Survival

	
20

	
 

	
8.7

	
Successors
  and Assigns

	
20

	
 

	
8.8

	
Entire
  Agreement

	
20

	
 

	
8.9

	
Delays or
  Omissions

	
21

	
 

	
8.10

	
Severability

	
21

	
 

	
8.11

	
Titles and
  Subtitles

	
21

	
 

	
8.12

	
Counterparts

	
21

	
 

	
8.13

	
Facsimile
  Execution and Delivery

	
21

	
 

	
8.14

	
Jurisdiction
  and Venue

	
21

	
 

	
8.15

	
Further
  Assurances

	
21

	
 

	
8.16

	
Construction

	
21

iii

EXHIBITS

	
 

	
 

	
A

	
Schedule of
  Investors

	
B

	
Form of
  Warrant

	
C

	
Form of
  Registration Rights Agreement

	
D

	
Form of
  Voting Agreement and Irrevocable Proxy

	
E

	
Wire
  Transfer Instructions

	
F

	
Form of
  Compliance Certificate

	
G

	
Form of
  Legal Opinion

	
H

	
Form of
  Secretary’s Certificate

SCHEDULES

	
 

	
 

	
3.3

	
Subsidiaries
  

	
3.4(e)

	
Warrants,
  options or other rights to acquire stock

	
3.5(a)

	
Financial
  Statements; Off balance sheet transactions

	
3.6(g)

	
Material
  changes in compensation

	
3.6(l)

	
Debts or
  other obligations

	
3.6(n)

	
Share
  issuance

	
3.8(a)

	
Material
  Contracts

	
3.8(c)

	
Affiliates
  arrangements

	
3.9(a)

	
Intellectual
  Property Agreements

	
3.15

	
Employment
  Matters

	
3.16

	
Debts owed
  to Affiliates

	
3.19

	
Licenses,
  Permits, etc.

	
3.23

	
Broker

	
3.25

	
SEC 12 month
  filing exceptions 

	
3.26

	
Material
  Adverse Changes

iv

CapSource Financial, Inc.

SECURITIES PURCHASE AGREEMENT

This
Securities Purchase Agreement (this “Agreement”),
dated May 1, 2006 (the “Effective
Date”), is executed by and between CapSource Financial, Inc., a
Colorado corporation (the “Company”), and
the entity listed on the Schedule of Investors attached as Exhibit A
(the “Investor”). The
Company and the Investor are each individually referred to in this Agreement as
a “Party,” and are
collectively referred to in this Agreement as the “Parties.”

SECTION 1

Purchase and Sale of Securities

          1.1
Sale and Issuance of Securities.
Subject to the terms and conditions of this Agreement, the Investor agrees to
purchase at the Closing (as defined in Section 1.2), and the Company
agrees to sell and issue to the Investor at the Closing, 2,500,000 shares of
the Company’s Common Stock, $.01 par value per share (the “Shares”) and a warrant, in the form
attached as Exhibit B (the “Warrant”),
to purchase 2,500,000 shares of Common Stock at an exercise price of $.90 per
share (the “Warrant Shares”)
for a purchase price of$.40per Share and Warrant, for the aggregate
purchase price of $1,000,000 (the “Purchase Price”). Such Shares together
with the Warrants, are collectively referred to herein as the “Securities”.

          1.2
The Closing. The closing of
the purchase and sale of the Securities described herein shall take place at
the offices of Whitebox Advisors, LLC, 3033 Excelsior Boulevard, Suite 300,
Minneapolis, Minnesota 55416, at 8:30 a.m., Minneapolis time, on May 1,
2006 (the “Closing”), or at
such other place or different time or day as may be mutually acceptable to the
Investor and the Company.

SECTION 2

Deliveries

          2.1
Closing Deliveries.

               (a)
At the Closing, the Investor will deliver to the Company (i) an executed
counterpart signature page to this Agreement; (ii) executed counterpart
signature page to the Registration Rights Agreement dated as of the Effective
Date by and among the Company, Randolph M. Pentel and the Investors listed on
Exhibit A thereto in the form attached hereto as Exhibit C (the “Registration Rights Agreement”);
and (iii) payment of the Purchase Price for the Securities purchased by
the Investor at such Closing by (A) certified check payable to the
Company; or (B) wire transfer of immediately available funds to the bank
account designated on the wire transfer instructions set forth on Exhibit D.
This Agreement and the Registration Rights Agreement, together with the
exhibits, Schedule of Exceptions (as defined below), and all other documents
required to be delivered in connection herewith and therewith, shall be
referred to collectively as the “Transaction
Agreements.”

SECTION 3

The Company’s Representations and Warranties

Except as set
forth on the schedules delivered separately to the Investor in connection with
this Agreement (the “Schedules”),
the Company represents and warrants to the Investor as of the Effective Date as
follows:

          3.1
Organization and Standing. The
Company is a corporation duly organized and existing under, and by virtue of,
the laws of the State of Colorado and is in good standing under such laws. The
Company has the requisite corporate power and authority to own and operate the
Company’s properties and assets, and to carry on the Company’s business as
presently conducted. The Company is presently qualified to do business as a
foreign corporation in each jurisdiction where the failure to be so qualified
would have a Material Adverse Effect. No proceeding has been instituted in any
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification. “Material Adverse Effect” shall mean any event,
happening, occurrence or development that, individually or in the aggregate,
whether or not arising in the ordinary course of business, could reasonably be
expected to have a material adverse effect on the Company’s business,
operations, properties, prospects, assets, liabilities or condition (financial
or otherwise). 

          3.2 Corporate Power. The
Company has all requisite legal and corporate power and authority to execute
and deliver the Transaction Agreements, to sell and issue the Securities in
accordance with this Agreement, to issue Warrant Shares issuable upon exercise
of the Warrants, and to carry out and perform the Company’s obligations under the
terms of the Transaction Agreements. The Transaction Agreements have been duly
authorized, executed and delivered by the Company and are valid and binding
agreements enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors’ rights generally.

          3.3
Subsidiaries. Except as set
forth on Schedule 3.3, the Company does not own or control, directly or
indirectly, any interest in any corporation, partnership, limited liability
company, association, or other business entity.

          3.4 Capitalization. 

               (a)
The Company’s authorized capital stock consists of 100,000,000 shares of
undesignated stock, of which 12,378,657 shares of Common Stock, par value $.01
per share, were issued and outstanding as of March 27, 2006. 

               (b)
The outstanding shares of the Company’s Common Stock are duly authorized,
validly issued, fully paid, and non-assessable.

               (c)
The Company has reserved:

                    (i)
2,875,000 shares of Common Stock for issuance pursuant to this Agreement;

                    (ii)
2,875,000 shares of Common Stock for issuance upon exercise of the Warrant issued
pursuant to this Agreement;

2

                    (iii)
550,000 shares of Common Stock for issuance to employees, directors,
consultants, and advisors pursuant to the Company’s 2001 Stock Option Plan
under which no options to purchase shares of Common Stock are issued and
outstanding as of the Effective Date; 

                    (iv)
937,334 shares
of Common Stock for issuance in connection with discretionary warrants that
have been issued and are outstanding as of the Effective Date; and

                    (v)
4,359,328 shares of Common Stock for issuance in connection with the shares and
warrant that will be issued to Mr. Pentel as a result of the conversion by him
of his outstanding notes pursuant to Section 6.5 hereof; 

               (d)
The Shares, when issued, delivered and paid for in compliance with the
provisions of this Agreement, will be validly issued, fully paid and
non-assessable. The Warrant Shares issuable upon exercise of the Warrants have
been duly and validly reserved and, when issued in compliance with the
provisions of this Agreement, the Warrant, and applicable law, will be validly
issued, fully paid, and non-assessable. The Shares and Warrant Shares will be
free of any liens or encumbrances, other than any liens or encumbrances created
by or imposed upon the Investor; provided, however, that the Shares and Warrant
Shares are subject to transfer restrictions under state and/or federal
securities laws and as set forth in the Transaction Agreements. The Shares and
Warrant Shares are not subject to any preemptive rights or first refusal
rights. Neither the offer nor issuance of the Securities constitutes an event
under any anti-dilution provisions of any securities issued or issuable by the
Company which will either increase the number of shares issuable pursuant to
such provisions or decrease the consideration per share to be received by the
Company pursuant to such provisions.

               (e)
Except as set forth on Schedule 3.4(e), there are no outstanding
agreements or preemptive or similar rights affecting the Company’s capital
stock and no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of any shares of capital stock of the Company.

               (f)
There are no shareholder agreements, voting agreements, proxy rights or other
similar agreements with respect to the Company’s Common Stock to which the
Company is a party or between or among any of the Company’s shareholders.

          3.5
Financial Statements; Accounts Receivable.

               (a)
The Company’s: (i) Form 10-KSB for the year ended December 31, 2005,
as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2006; and (ii) unaudited
balance sheet, statements of operations, shareholders’ equity and cash flow as
of and for the three months ended March 31, 2006 (the “Balance Sheet Date”), complete and
correct copies of which are attached hereto as Schedule 3.5(a) (collectively,
the “Financial Statements”),
present fairly the financial position of the Company as of such dates and the
results of operations for the periods covered thereby (subject, in the case of
the interim financial statements, to year-end audit adjustments) and have been
prepared in accordance with generally accepted accounting principles
consistently applied (“GAAP”),
except as to the absence of footnotes thereto. Specifically, but not by way of
limitation, (x) the balance sheets or notes thereto disclose all of the debts,
liabilities and obligations of any nature of the Company properly accrued at
December 31, 2005 and at the Balance Sheet Date which, individually or in
the aggregate, are material and which in accordance with GAAP would be required
to be disclosed in such balance sheets, and the omission of which would, in the
aggregate, have a Material Adverse Effect on the Company; (y) except as set
forth on Schedule 3.5(a), the Company does not have any off-balance
sheet arrangements or transactions; and (z) the Financial Statements include
appropriate reserves for all taxes and other liabilities accrued at such date
but not yet payable. 

3

               (b)
All accounts receivable of the Company referenced in the Financial Statements
(except such accounts receivable as have been collected since such date) are
valid and enforceable claims, and the goods and services sold and delivered
which gave rise to such accounts were sold and delivered in conformity with the
applicable purchase orders, payor contracts, agreements and specifications.
Such accounts receivable are subject to no valid defense or offsets. The
Company’s uncollectible accounts will not exceed the reserves for doubtful
accounts.

          3.6
Changes. Since the Balance
Sheet Date, the Company has not:

               (a)
suffered any change in the Company’s assets, liabilities, financial condition,
or operating results, except for changes in the ordinary course of business,
none of which have had a Material Adverse Effect;

               (b)
suffered any damage, destruction, or loss (whether or not covered by insurance)
that, in any case or in the aggregate, have had a Material Adverse Effect;

               (c)
agreed to waive or actually waived any valuable right or any material debt owed
to the Company;

               (d)
suffered any change or amendment to any agreement by which the Company or any
of the Company’s assets or properties are bound or subject, except to the
extent that any such change or amendment has not had, or will not likely have,
a Material Adverse Effect;

               (e)
made any loans to the Company’s employees, officers or directors, or to any
members of their respective immediate families, other than travel advances and
other advances made in the ordinary course of the Company’s business;

               (f)
received any Company officer’s resignation or terminated any Company officer;

               (g)
except as set forth on Schedule 3.6(g), made any material change in any
compensation arrangement or agreement with any employee;

               (h)
made any declaration or payment of any dividend or other distribution;

               (i)
received notice or become aware that the Company has lost a customer or that
any Company customer has canceled a material order, which loss or cancellation
would constitute a Material Adverse Effect; or

               (j)
suffered any change or amendment to any agreement relating to a change in the
contingent obligations of the Company;

               (k)
received notice of any labor organization activity related to the Company;

               (l)
except as set forth on Schedule 3.6(l), incurred any debt obligation or
liability, including any debts assumed or guaranteed by the Company, except
those for immaterial amounts and for current liabilities incurred in the
ordinary course of business;

               (m)
made any sale, assignment or transfer of any patents, trademarks, copyrights,
trade secrets or other intangible assets;

4

               (n)
except as set forth on Schedule 3.6(n), issued or sold any partnership
interests, shares of capital stock or other securities or granted any options,
warrants or other purchase rights with respect thereto other than as
contemplated by this Agreement;

               (o)
suffered any other event or condition of any character that has had, or could
be reasonably expected to have, a Material Adverse Effect; or

               (p)
made any arrangement or commitment by the Company to do any of the acts
described in (a) through (o) above.

          3.7
Material Obligations. The
Company has no liabilities or obligations (whether absolute, accrued,
contingent or otherwise), except for such liabilities or obligations
specifically reflected in balance sheets in the Financial Statements and
current liabilities incurred in the ordinary course of business since the
Balance Sheet Date, which are not, either in any individual case or in the
aggregate, material to the Company.

          3.8
Material Contracts.

               (a)
Set forth on Schedule 3.8(a) is a detailed list of the Company’s bona fide and
existing contracts that, individually or in the aggregate, are material to the
business, properties, prospects, assets, liabilities or condition (financial or
otherwise) of the Company (except as in Section 3.8(a)(ii)) (“Material Contracts”), specifically
referring to this Section 3.8 and identifying such contracts in accordance
with the following subsections:

                    (i)
each license or franchise agreement, either as licensor or licensee or
franchisor or franchisee, including any related to intellectual property, or
distributor, dealership or sales agency contract, agreement or understanding;

                    (ii)
a true and complete description of all real properties owned by the Company;

                    (iii)
each indenture, lease, sublease, license or other instrument under which the
Company claims or holds a leasehold interest in real property (including any
agreement related to the purchase or sale of such assets);

                    (iv)
each lease of personal property involving payments remaining to or from the
Company in excess of $10,000;

                    (v)
each collective bargaining agreement, employment agreement, consulting
agreement, noncompetition agreement, nondisclosure agreement, inventions
assignment agreement, executive compensation plan, profit sharing plan, bonus
plan, restricted stock award agreement, deferred compensation agreement,
employee pension retirement plan, employee benefit stock option, stock awards
or stock purchase plan, buy-sell agreement and any other employee or
shareholder agreements or employee benefit plans, entered into or adopted by
the Company;

                    (vi)
each bank account (or account with other financial institutions) maintained by
the Company, together with the persons authorized to make withdrawals from such
account;

5

                    (vii)
the name of each employee of the Company whose salary exceeds $50,000 per year
and the remuneration currently payable (including bonus or commission
arrangements) to each such employee;

                    (viii)
the name, amount and vesting schedule of each employee, officer, director or
consultant granted stock options, warrants or other similar rights;

                    (ix)
each partnership, joint venture, alliance or other similar agreement or
arrangement with another entity;

                    (x)
each promissory note, indenture, mortgage, loan agreement, guaranty, security
agreement, pledge or similar agreement with any lender;

                    (xi)
each agreement granting voting rights, registration rights, first negotiating
rights or preemptive rights to a third party; and

                    (xii)
each material product development, research, manufacturing, marketing, sales
distribution or supply agreement, warranty or indemnification agreement,
purchase agreement, royalty agreement, product, patent or trademark licensing
or assignment agreement and any other material contract entered into by the
Company or by which the Company is bound.

               (b)
The Company is not in default or, but for the giving of notice or passage of
time would be in default, under any Material Contract.

               (c)
Except as set forth on Schedule 3.8(c), there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, affiliates or any affiliate thereof.

               (d)
There are no agreements, instruments, contracts, judgments, orders, writs or
decrees to which the Company is a party or by which it is bound which may
involve (i) obligations of, or payments to, the Company in excess of
$10,000 (other than obligations of, or payments to, the Company arising from
purchase or sale agreements entered into in the ordinary course of business),
(ii) the transfer or license of any patent, copyright, trade secret or
other proprietary right to or from the Company (other than licenses arising
from the purchase of “off the shelf products”), (iii) provisions
restricting the development, manufacture or distribution of the Company’s
products or services, or (iv) indemnification by the Company with respect
to infringements of proprietary rights (other than indemnification obligations
arising from purchase or sale of goods and services or license agreements entered
into in the ordinary course of business).

               (e)
The Company has not (i) declared or paid any dividends, or authorized or
made any distribution upon or with respect to any class or Series of its
capital stock, (ii) incurred or guaranteed any indebtedness for money
borrowed or any other liabilities (other than with respect to indebtedness and
other obligations incurred in the ordinary course of business or as
specifically disclosed in the Financial Statements) individually in excess of
$10,000 or, in the case of indebtedness and/or liabilities individually less
than $10,000, in excess of $20,000in
the aggregate, (iii) made any loans or advances to any person, other than
ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory
in the ordinary course of business.

               (f)
For the purposes of subsections (d) and (e) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person

6

or entity
(including persons or entities the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual
minimum dollar amounts of such subsections.

          3.9
Intellectual Property.

               (a)
The Company owns or possesses sufficient legal rights to all trademarks,
service marks, trade names, patents, copyrights, trade secrets, licenses
(software or otherwise), information, processes, and similar proprietary rights
(collectively, “Intellectual Property”)
necessary to the Company’s business as presently conducted. The Company has no
knowledge nor has it received notice that the conduct of the Company’s business
as presently conducted materially conflicts with or infringes the Intellectual
Property Rights of others. Except for agreements with the Company’s own
employees or consultants listed in Schedule 3.9(a) and Material
Contracts for standard end-user license agreements, and for support/maintenance
agreements and agreements entered in the ordinary course of the Company’s
business, there are no material outstanding options, licenses, or agreements
relating to the foregoing, and the Company is not bound by or a party to any
material options, licenses, or agreements with respect to the Intellectual
Property of any other person or entity. The Company has not received any
written communication alleging that the Company has violated any of the
Intellectual Property of any other person or entity. The Company is not
obligated to make any payments by way of royalties, fees, or otherwise to any
owner of, licensor of, or claimant to any Intellectual Property with respect to
the use of such Intellectual Property in connection with the conduct of the
Company’s business as presently conducted. There are no material agreements,
understandings, instruments, contracts, judgments, orders, or decrees to which
the Company is a party or by which the Company is bound that involve
indemnification by the Company with respect to Intellectual Property
infringements (other than indemnification obligations arising from purchase or
sale of goods and services or license and other agreements entered into in the
ordinary course of business).

               (b)
No employee is obligated under any contract or other agreement, or subject to
any judgment, decree, or order of any court or administrative agency, that
would materially interfere with the use of such employee’s best efforts to
promote the Company’s interests or that would conflict with the Company’s
business as presently conducted. Neither the execution nor delivery of this
Agreement, nor the Company employees’ conduct of the Company’s business, nor
the Company’s conduct of the Company’s business as presently conducted, will
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant, or instrument under
which any of such employees is now obligated. The Company does not believe that
it is or will be necessary to use any inventions of any of the Company’s
employees made before their employment by the Company.

               (c)
Each Company employee has executed a confidential information, non-competition
and invention assignment agreement, substantially in the form(s) made available
to the Investor (each, a “Confidentiality
Agreement”). No employee has excluded from such employee’s
Confidentiality Agreement any works or inventions that were made by such
employee before such employee’s employment with the Company and that are also
relevant to the Company’s business as currently conducted or as proposed to be
conducted. Each Company consultant who has had access to the Company’s
intellectual property has entered into an agreement containing appropriate
confidentiality, non-competition and invention assignment provisions.

          3.10
Title to Properties and Assets.
The Company has good and marketable title to the Company’s properties and
assets, and the Company has good title to all of the Company’s leasehold
interests, in each case subject to no material mortgage, pledge, lien, lease,
or encumbrance, except for (a) liens for current taxes not yet due and
payable, (b) liens imposed by law and incurred in the ordinary course of
business for obligations not past due, (c) liens in respect of pledges or
deposits under workers’

7

compensation
laws or similar legislation, and (d) possible minor liens, encumbrances,
and title defects that do not in any case have a Material Adverse Effect on the
value of the property subject thereto or have a Material Adverse Effect on the
Company’s operations and that have not arisen other than in the ordinary course
of the Company’s business.

          3.11
No Defaults. Neither the
Company nor any of its subsidiaries is in violation of its Articles of
Incorporation or Bylaws. Neither the Company nor any of its subsidiaries is (i)
in default under or in violation of any other agreement or instrument to which
it is a party or by which it or any of its properties are bound or affected,
which default or violation would have a Material Adverse Effect on the Company,
(ii) in default with respect to any order of any court, arbitrator or
governmental body or subject to or party to any order of any court or governmental
authority arising out of any action, suit or proceeding under any statute or
other law respecting antitrust, monopoly, restraint of trade, unfair
competition or similar matters, or (iii) in violation of any statute, rule or
regulation of any governmental authority which violation would have a Material
Adverse Effect on the Company.

          3.12
Compliance with Other Instruments.
The Company’s execution, delivery, and performance of and compliance with
the Transaction Agreements and the Company’s issuance of the Securities and, if
exercised, the Warrant Shares issuable upon exercise of the Warrants, will not
result in any violation of, or conflict with, or constitute a default under,
the Articles of Incorporation or Bylaws, each as amended to date, or any of the
Company’s agreements, nor result in the creation of any mortgage, pledge, lien,
or encumbrance upon any of the Company’s properties or assets.

          3.13
Litigation. There is no
action, suit, proceeding or investigation pending or currently threatened in
writing against the Company that questions the validity of this Agreement, the
other Transaction Agreements, any Material Contracts or the right of the
Company to enter into any of such agreements, or to consummate the transactions
contemplated hereby or thereby, or which could be expected to result, either
individually or in the aggregate, in any Material Adverse Effect or any change
in the current equity ownership of the Company, nor is the Company aware that
there is any basis for any of the foregoing. The foregoing includes, without
limitation, actions pending or threatened, either verbally or in writing,
involving the prior employment of any of the Company’s employees, their use in
connection with the Company’s business of any information or techniques
allegedly proprietary to any of their former employers, or their obligations
under any agreements with prior employers. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.

          3.14
Tax Returns and Payments. The
Company has filed with appropriate federal, state, and local governmental
agencies all tax returns that the Company is required to file. All taxes shown
to be due and payable on such returns, any assessments imposed, and all other
taxes due and payable by the Company have been paid or will be paid before the
time they become delinquent. The Company has not been advised in writing or
otherwise become aware (a) that any of the Company’s tax returns have been
or are being audited as of the Effective Date or (b) of any deficiency in
assessment or proposed judgment with respect to the Company’s federal, state,
or local taxes.

          3.15
Employees.

               (a)
The Company has no collective bargaining agreements with any of its employees.
There is no labor union organizing activity pending or threatened with respect
to the Company. No employee of the Company, nor any consultant with whom the
Company has contracted, is in violation of any term of any employment contract,
proprietary information and invention assignment agreement or any other agreement
relating to the right of any such individual to be employed by, or to 

8

contract with,
the Company because of the nature of the business to be conducted by the
Company; and the continued employment by the Company of its present employees,
and the performance of the Company’s contracts with its independent
contractors, will not result in any such violation. The Company has not
received any notice alleging that any such violation has occurred. Except as
set forth on Schedule 3.15, no employee of the Company has been granted
the right to continued employment by the Company or to any material
compensation following termination of employment with the Company. The Company
is not aware that any officer, key employee or group of employees intends to
terminate his, her or their employment with the Company, nor does the Company
have a present intention to terminate the employment of any officer, key
employee or group of employees.

               (b)
Each officer and key employee of the Company is currently devoting one hundred
percent (100%) of his or her business time to the conduct of the business of
the Company. The Company is not aware that any officer or key employee of the
Company is planning to work less than full time at the Company in the future.
No officer or key employee is currently working or, to the Company’s knowledge,
plans to work for a competitive enterprise, whether or not such officer or key
employee is or will be compensated by such enterprise, and all officers and key
employees have signed and are subject to noncompetition agreements in
connection with their employment by the Company.

          3.16
Related Party Obligations. Except
as set forth on Schedule 3.16, no Company employee, officer, director or
shareholder, and no immediate family member of any Company employee, officer,
director, or shareholder, is indebted to the Company, nor is the Company
indebted (or committed to make loans or extend or guarantee credit) to any of
such persons other than (a) for payment of salary for services rendered,
(b) reimbursement for reasonable expenses incurred on the Company’s
behalf, and/or (c) for other standard employee benefits made generally
available to all employees (including stock option agreements outstanding under
any stock option plan approved by the Company’s Board of Directors and stock
purchase agreements approved by the Company’s Board of Directors). None of such
persons have any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has
a business relationship or in any firm or corporation that competes with the
Company, except in connection with the ownership of stock in publicly-traded
companies. No Company employee, officer, director, or stockholder, nor any
their immediate family members, is, directly or indirectly, interested in any
Material Contract with the Company (other than such Material Contracts that
relate to any such person’s ownership of Company capital stock or other Company
securities).

          3.17
Environmental and Safety Laws. The
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and no
expenditures are or are reasonably anticipated to be required in order to
comply with any such existing statute, law or regulation. During the period
that the Company has owned or leased its properties and facilities,
(i) there have been no disposals, releases or threatened releases of
Hazardous Materials (as defined below) by the Company on, from or under such
properties or facilities, and (ii) other than normal office products and
cleaning supplies, it has not used, generated, manufactured or stored on, under
or about such properties or facilities or transported to or from such properties
or facilities any Hazardous Materials. For purposes of this Section, the terms “disposal,”
“release” and “threatened release” shall have the definitions assigned thereto
by the Comprehensive Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. Section 9601, et seq. as
amended (“CERCLA”). For the
purposes of this Section, “Hazardous
Materials” shall mean any hazardous or toxic substance, material
or waste, which is regulated under, or defined as a “hazardous substance,” “pollutant,”
“contaminant,” “toxic chemical,” “hazardous material,” “toxic substance” or “hazardous
chemical” under (1) CERCLA; (2) the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Section 11001, et
seq.; (3) the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq.; (4) the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq.; (5) the Occupational Safety and Health Act of
1970, 29

9

U.S.C. Section
651, et seq.; (6) regulations
promulgated under any of the above statutes; or (7) any applicable state
or local statute, ordinance, rule or regulation that has a scope or purpose
similar to those statutes identified above.

          3.18
Condition of Properties. The
offices and material equipment, inventory and other assets of the Company have
been kept in reasonable condition and repair in the ordinary course of
business, are reasonably fit and suitable for the purposes for which they are
being used and are believed by the Company to conform in all material respects
with applicable ordinances, regulations and laws.

          3.19
Licenses. The Company
possesses from the appropriate agency, commission, board and government body
and authority, whether state, local, federal or foreign, all licenses, permits,
authorizations, approvals, franchises and rights which (i) are necessary
for it to engage in the business currently conducted by it, and (ii) if
not possessed by the Company, would have a Material Adverse Effect. A list of
all material licenses, permits, approvals and similar rights currently in
effect is set forth on Schedule 3.19.

          3.20
Insurance. The Company has
in full force and effect fire and casualty insurance policies and insurance
against other hazards, risks, and liabilities to persons and property to the
extent and in the manner customary for similarly situated companies in similar
businesses, and such insurance policies have been issued by financially sound,
duly licensed and reputable insurers. 

          3.21
Consent. Other than the
declaration of effectiveness by the SEC of any registration statement required
to be filed pursuant to the Registration Rights Agreement, no consent,
approval, authorization or order of any court, governmental agency or body or
arbitrator having jurisdiction over the Company, or any of its affiliates, the
NASD, OTC Bulletin Board or the Company’s shareholders is required for
execution of the Transaction Agreements, including, without limitation the
issuance and sale of the Securities and the performance of the Company’s
obligations under the Transaction Agreements.

          3.22
Offering. Subject in part
to the accuracy of the Investor’s representations and warranties in
Section 4, the offer, sale, and issuance of the Securities in compliance
with the terms of this Agreement constitute transactions exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended (the “Securities Act”),
and all applicable state securities laws. Neither the Company nor any agent on
its behalf has solicited or will solicit any offers to sell or has offered to
sell or will offer to sell all or any part of the Securities to any person or
persons so as to bring the sale of such Securities by the Company within the
registration provisions of the Securities Act or any applicable state
securities laws.

          3.23
Brokers or Finders. Except
as set forth on Schedule 3.23, the Company has not engaged any brokers,
finders, or agents, and the Investor has not incurred, and will not incur,
directly or indirectly, as a result of any action taken by the Company, any
liability for brokerage or finders’ fees or agents’ commissions or any similar
charges in connection with the Transaction Agreements. 

          3.24
No Market Manipulation. The
Company has not taken, and will not take, directly or indirectly, any action
designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of the common stock of the Company
to facilitate the sale or resale of the Securities or affect the price at which
the Securities may be issued.

          3.25
Reporting Company. The
Company is a publicly-held company subject to reporting obligations pursuant to
Sections 15(d) and 13 of the Securities Exchange Act of 1934 (the “Exchange Act”) and has a class of common
stock registered pursuant to Section 12(g) of the Exchange Act. The Company’s
Common Stock is listed on the OTC Bulletin Board. Pursuant to the provisions of
the

10

Exchange Act,
the Company has timely filed all reports and other materials required to be
filed thereunder with the Securities and Exchange Commission (together with any
and all filings made under the Securities Act, the “SEC Filings”) during the preceding twelve months except as
set forth on Schedule 3.25 hereto.

          3.26
Information Concerning Company.
The Company’s SEC Filings contain all material information relating to the
Company and its operations and financial condition as of their respective dates
which information is required to be disclosed therein. Since the Balance Sheet
Date and except as stated in Schedule 3.26, there has been no
material adverse change in the Company’s business, financial condition or
affairs that has not been disclosed in an SEC Filings as required by the
Exchange Act, not disclosed in the SEC Filings. The SEC Filings do not contain
any untrue statement of a material fact or omit to state a material fact in
light of the circumstances when made required to be stated therein or necessary
to make the statements therein not misleading.

          3.27
Stop Transfer Order. The
Securities are restricted securities as of the date of this Agreement. The
Company will not issue any stop transfer order or other order impeding the sale
and delivery of the Securities, except as may be required by federal securities
laws, in which case the Company will promptly provide written notice of such
stop order with an explanation of the basis for such stop order to the Investor
as provided below in Section 5.1.

          3.28
No Integrated Offering.
Neither the Company, nor any of its affiliates, nor any person acting on its or
their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this Agreement to be
integrated with prior offerings by the Company for purposes of the Securities
Act or any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of OTC Bulletin Board nor will the
Company or any of its affiliates or subsidiaries take any action or steps that
would cause the offering of the Securities to be integrated with other
offerings. The Company has not conducted and will not conduct any offering
other than the transactions contemplated hereby that will be integrated with
the issuance of the Securities.

          3.29
No General Solicitation. Neither
the Company, nor any of its affiliates or any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Securities Act) in connection
with the offer or sale of the Securities.

          3.30
Listing. The Company’s
Common Stock is quoted on, and listed for trading on the OTC Bulletin Board.
The Company has not received any oral or written notice that its Common Stock
will be delisted from the OTC Bulletin Board or that the Common Stock does not
meet all requirements for the continuation of such listing, and the Company is
not aware of any event or circumstance that will or may cause the Company’s
Common Stock to be delisted from the OTC Bulletin Board.

          3.31
Correctness of Representations.
The Company represents that the foregoing representations and warranties are
true and correct as of the date hereof, and, unless the Company otherwise
notifies the Investor in writing prior to the Closing Date, shall be true and
correct as of the Closing Date.

          3.32
Disclosure. To the best
knowledge of the Company, the Company has made available to the Investor, all
the information that the Investor has requested for deciding whether to
purchase the Securities. Neither the Transaction Agreements nor any other
documents or certificates delivered in connection with this Agreement, which
shall include the Company’s SEC Filings, when taken as a whole, contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the 

11

statements
contained herein or therein not misleading in light of the circumstances under
which they were made.

SECTION 4

The Investor’s Representations and Warranties

As a material
inducement to the Company to enter into this Agreement and consummate the
transactions contemplated hereby, the Investor hereby makes to the Company the
representations and warranties contained in this Section 4.

          4.1
No Registration. The
Investor understands and expressly acknowledges that the Securities have not
been, and will not be, registered under the Securities Act in reliance on a
specific exemption from the Securities Act’s registration provisions, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Investor’s representations as
expressed in this Agreement or otherwise made pursuant to this Agreement.

          4.2
Investment Intent. The
Investor is acquiring the Securities for investment for the Investor’s own
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution of the Securities.

          4.3
Investment Experience. The
Investor (or the Investor’s purchaser representative, within the meaning of
Regulation D, Rule 501 (h) promulgated by the SEC), has substantial experience
in evaluating and investing in private placement transactions of securities in
companies similar to the Company so that the Investor or such purchaser
representative is capable of evaluating the merits and risks of the Investor’s
investment in the Company and has the capacity to protect the Investor’s own
interests. The Investor has received, carefully reviewed and understands the
terms and conditions set forth in this Agreement and the other Transaction
Agreements which contains the financial statements of the Company and other
information important to an investment in the Company.

          4.4
Speculative Nature of Investment.
The Investor understands and expressly acknowledges that the Investor’s
investment in the Company is speculative and entails a substantial degree of
risk and the Investor is in a position to lose the entire amount of the
Investor’s investment.

          4.5
Access to Data and Documentation.
The Investor acknowledges that it has reviewed this Agreement, along with
the Exhibits and Schedules attached hereto, and the other Transaction
Agreements and made its own investigation of the Company, its business,
personnel and prospects; has had an opportunity to discuss the Company’s
business, management, and financial affairs with the Company’s management and
the terms of this investment. The Investor has also had an opportunity to ask
questions of the Company’s officers, which questions were answered to the
Investor’s full satisfaction, and obtain such additional information and
documents as the Investor considers necessary or advisable in order to form a
decision concerning an investment in the Company. This Section 4.5 does
not limit or modify the Company’s representations and warranties contained in
Section 3 or the Investor’s right to rely on the Company’s representations
and warranties.

          4.6
Accredited Investor. The
Investor is an “accredited investor” within the meaning of Regulation D, Rule
501 (a), promulgated by the Securities and Exchange Commission.

          4.7
Residency. The Investor’s
place and state of residency, or, in the case of a partnership, corporation, or
other entity, such entity’s principal place of business, is correctly set forth
on Exhibit A.

12

          4.8
Rule 144. Investor
acknowledges and agrees that the Shares, and, if issued, the Warrant Shares are
“restricted securities” as defined in Rule 144 promulgated under the Securities
Act, as in effect from time to time, and must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Investor has been advised or is aware of the
provisions of Rule 144, which permits limited resale of shares purchased in a
private placement subject to the satisfaction of certain conditions, including,
among other things: the availability of certain current public information
about the Company, the resale occurring following the required holding period
under Rule 144 and the number of shares being sold during any three-month
period not exceeding specified limitations.

          4.9
Authorization.

               (a)
The Investor has all requisite power and authority to execute and deliver the
Transaction Agreements, to purchase the Securities under this Agreement, and to
carry out and perform the Investor’s obligations under the terms of the
Transaction Agreements. All action required by the Investor for the
authorization, execution, delivery, and performance of the Transaction
Agreements, and the performance of all of the Investor’s obligations under the
Transaction Agreements, has been taken.

               (b)
The Transaction Agreements, when executed and delivered by the Investor, will
constitute the Investor’s valid and legally binding obligations, enforceable in
accordance with their terms except: (i) to the extent that the indemnification
provisions contained in the Registration Rights Agreement may be limited by
applicable law and public policy principles, (ii) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors’ rights generally, and
(iii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies or by general
equity principles.

          4.10
Further Limitations on Disposition.
The Investor hereby acknowledges and agrees to be bound by the transfer
restrictions associated with the Securities set forth in the Registration
Rights Agreement. In addition, the Investor hereby acknowledges and agrees as
follows:

               (a)
Without in any way limiting the representations and warranties set forth
elsewhere in this Section 4 or any covenants set forth in this Agreement,
the Investor agrees not to make any disposition of all or any portion of the
Securities unless and until (i) there is then in effect a registration
statement under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement or
(ii) the Investor will have notified the Company of the proposed disposition
and, if reasonably requested by and at the sole expense of the Company, the
Investor will have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will be exempt from
registration under the Securities Act.

               (b)
Notwithstanding the foregoing subsection, no such registration statement or
opinion of counsel will be necessary for a transfer by the Investor:

                    (i)
to a fund, partnership, limited liability company, or other entity that is
affiliated with the transferring Investor;

                    (ii)
to a partner or member (or retired partner or member) of the transferring
Investor, or to the estate of any such partner or member (or retired partner or
member);

                    (iii)
to the transferring Investor’s spouse, siblings, lineal descendants, or
ancestors by gift, will, or intestate succession; or

13

                    (iv)
in compliance with Rule 144(k) (or any successor provision) of the Securities
Act so long as the Company is furnished with satisfactory evidence of full
compliance with Rule 144(k) (or any successor provision); provided, however,
that, in the case of Section 4.10(b)(i), Section 4.10(b)(ii), or Section 4.10
(b)(iii), the transferee agrees in writing to be subject to the terms of this
Agreement and other Transaction Agreements to the same extent as if such
transferee were an original Investor under this Agreement; provided, further,
however, that any proposed purchaser, assignee, transferee or pledgee be an “accredited
investor” and that the Securities have been held for twelve months from the
date of the Closing and applicable to any such Securities. The Investor will
cause any proposed purchaser, assignee, transferee, or pledgee of any
Securities held by the Investor to take and hold such securities subject to the
provisions and upon the conditions of this Agreement. The Investor consents to
the Company’s making a notation on the Company’s records and giving
instructions to any transfer agent for the Company’s capital stock to implement
the transfer restrictions established in this Agreement.

          4.11
Legend; Restriction on Transfer.
The Investor understands and agrees that the certificates evidencing the Shares
and Warrant Shares, or any other securities issued in respect thereof upon any
stock split, stock dividend, recapitalization, merger, consolidation, or
similar event, will bear the legend required by the Transaction Agreements, and
federal and state securities laws, including the following: 

	
 

	
 

	
 

	
“THE SHARES
  REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
  ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES LAWS. THESE SHARES MAY NOT
  BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
  EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS OR AN OPINION OF
  COUNSEL REASONABLY SATISFACTORY TO CAPSOURCE FINANCIAL, INC. THAT SUCH
  REGISTRATION IS NOT REQUIRED.”

          4.12
Warrant Legend. The
Warrants shall bear the following legend:

	
 

	
 

	
 

	
“THIS
  WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
  BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE
  SECURITIES LAW. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF
  THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
  THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER
  SAID ACT OR LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
  CAPSOURCE FINANCIAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

SECTION 5

Covenants of the Company

The Company
covenants and agrees with the Investor as follows:

          5.1
Stop Orders. The Company
will advise the Investor, promptly after it receives notice of issuance by the
SEC, any state securities commission or any other regulatory authority, of any
stop order or of any order preventing or suspending any offering of any
securities of the Company, or of the suspension of the qualification of the
Common Stock of the Company for offering or sale in any 

14

jurisdiction,
or the initiation of any proceeding for any such purpose, and such notice shall
include an explanation of the basis for any such order, suspension or
proceeding.

          5.2
Listing. The Company shall
promptly secure the listing of the Shares and Warrant Shares issuable upon
exercise of the Warrants on the OTC Bulletin Board (subject to official notice
of issuance) and shall maintain such listing so long as any of the Shares,
Warrant or Warrant Shares are held by the Investor. The Company will maintain
the listing of its Common Stock on the OTC Bulletin Board or, in the
alternative, a national securities exchange or automated quotation system, such
as the NASDAQ SmallCap Market or American Stock Exchange, and will comply in all
respects with the Company’s reporting, filing and other obligations under the
bylaws or rules of the National Association of Securities Dealers, Inc. (“NASD”) and the
OTC Bulletin Board. The Company will provide the Investor with copies of all
notices it receives notifying the Company of the threatened or actual delisting
of the Common Stock from the OTC Bulletin Board provided the provisions of such
information to the Investor would not violate the provisions of Regulation FD
under the Securities Act.

          5.3
Market Regulations. The
Company shall notify the SEC, NASD, the OTC Bulletin Board and applicable state
authorities, in accordance with their requirements, if any, of the transactions
contemplated by the Transaction Agreements, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the
Investor and promptly provide copies thereof to the Investor.

          5.4
Reporting Requirements. From
the Closing Date and until three (3) years following the earlier of the
expiration or exercise of the Warrants, the Company will (i) cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the
Exchange Act, (ii) comply in all respects with its reporting and filing
obligations under the Exchange Act, (iii) comply with all reporting
requirements that is applicable to an issuer with a class of Shares registered
pursuant to Section 12(g) of the Exchange Act, and (iv) comply with all
requirements related to the registration statement filed with the SEC covering
the Shares and Warrant Shares under the terms of the Registration Rights
Agreement (the “Registration Statement”). The Company will use its best efforts
not to take any action or file any document (whether or not permitted by the
Securities Act or the Exchange Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under said Acts so long as any of the Shares, Warrants or Warrant
Shares are held by the Investor. 

          5.5
Use of Proceeds. The
Company shall use the proceeds from this offer and sale of the Securities for
the acquisition of Prime Time Equipment, Inc. and for general corporate
purposes; provided, however, that at no time may the Company utilize such
proceeds for payment of or reduction of any indebtedness of the Company,
whether now existing or hereinafter incurred. 

          5.6
Reservation of Common Stock.
The Company shall reserve from its authorized but unissued Common Stock, for as
long as the Warrants remain outstanding, one share of Common Stock for each
Warrant Share issuable from time-to-time upon exercise of the Warrants.

          5.7 Designation of Board Member.
The Company agrees to enter into and deliver to the Investor a Voting Agreement
and Irrevocable Proxy, in the form attached hereto as Exhibit D,
pursuant to which the Company shall cause to be nominated for, and Randolph
Pentel agrees to vote all of the Common Stock beneficially owned by him in
favor of, the election of one (1) individual to be designated from time to time
by the Investor as a member of the Company’s Board of Directors (the “Designated
Director”), to serve until such time as the Investor no longer hold any of the
Shares, Warrants or Warrant Shares. The Company also agrees that, within
fifteen (15) days following the Closing, it shall undertake to cause its Board
of Directors to perform all steps necessary (including, if appropriate, an
action to increase the size of the board to create a directorship vacancy as
permitted by Section 3.11 of the

15

Company’s
Bylaws), to appoint the Designated Director to serve as a director of the
Company until the Company’s next annual meeting of shareholders or until his or
her successor is duly elected and qualified.

          5.8
Taxes. The Company will
promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all lawful taxes, assessments and governmental charges or levies
imposed upon the income, profits, property or business of the Company;
provided, however, that any such tax, assessment, charge or levy need not be
paid if the validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company shall have set aside on its books
adequate reserves with respect thereto, except that the Company will pay all
such contested taxes, assessments, charges or levies immediately upon the
commencement of proceedings to foreclose any lien which may have attached as
security therefore.

          5.9
Insurance. The Company will
keep its assets which are of an insurable character insured by financially
sound, duly licensed and reputable insurers against loss or damage by fire,
explosion and other risks customarily insured against by companies in the
Company’s line of business and not in any event less than 100% of the insurable
value of the property insured; and the Company will maintain, with financially
sound, duly licensed and reputable insurers, insurance against other hazards
and risks and liability to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated and to the
extent available on commercially reasonable terms.

          5.10
Books and Records. The
Company will keep true records and books of account in which full, true and
correct entries will be made of all dealings or transactions in relation to its
business and affairs in accordance with generally accepted accounting principles
applied on a consistent basis.

          5.11
Governmental Authorities. The
Company shall duly observe and conform to all applicable requirements of
governmental or quasi-governmental authorities relating to the conduct of its
business or to its properties or assets.

          5.12
Intellectual Property. The
Company shall maintain in full force and effect its corporate existence, rights
and franchises and all licenses and other rights to use intellectual property
owned or possessed by it and reasonably deemed to be necessary to the conduct
of its business.

          5.13
Properties. The Company
will keep its properties in good repair, working order and condition,
reasonable wear and tear excepted, and from time to time make all needful and
proper repairs, renewals, replacements, additions and improvements thereto; and
the Company will at all times comply with each provision of all leases to which
it is a party or under which it occupies property if the breach of such
provision could reasonably be expected to have a material adverse effect

          5.14
Correctness of Representations.
The Company represents that the foregoing representations and warranties
are true and correct as of the date hereof and, unless the Company otherwise
notifies the Investor prior to the Closing Date (as hereinafter defined), shall
be true and correct as of the Closing Date.

SECTION 6

Investor’s Closing Conditions

The Investor’s
obligation to purchase the Securities at a Closing is subject to the
fulfillment, on or before such Closing, of each of the following conditions,
unless waived by such Investor:

16

          6.1
Representations and Warranties.
The representations and warranties made by the Company in Section 3
(as modified by the disclosures on the Schedule of Exceptions which may be
updated from time to time in connection with the Closing) will be true and
correct in all respects as of the Closing.

          6.2
Covenants. All covenants,
agreements, and conditions contained in this Agreement to be performed by the
Company on or before the Closing will have been performed or complied with in
all material respects on or before such Closing.

          6.3
Blue Sky. The Company will
have received all necessary Blue Sky law permits and qualifications, or have
available corresponding exemptions, as required by any state for the offer and
sale of the Shares and the Common Stock issuable upon conversion of the Shares.

          6.4
Due Diligence. The Investor will have completed, as
determined in its sole discretion, the Investor’s legal and financing due
diligence review of the Company, and such review will have been determined by
the Investor to be satisfactory. 

          6.5
Convertible Debt. The
Company’s outstanding indebtedness owed to Randolph M. Pentel together with all
accrued but unpaid interest thereon, which totals $871,865.89 as of May 1,
2006, will have converted into shares and warrants to purchase shares of the
Company’s Common Stock at the same price per share and warrant paid by the
Investor for the purchase of Shares and Warrants hereby, and the Investor will
have received satisfactory evidence thereof; provided that such shares and
warrant shares received by Randolph M. Pentel upon the completion of the
foregoing conversion shall be subject to and entitled to the benefits of the
Registration Rights Agreement, in the form attached hereto as Exhibit C,
to the same extent as the Investor’s Shares and Warrant Shares, and Randolph M.
Pentel shall be party to such Registration Rights Agreement. 

          6.6 Registration Rights Agreement. The
Company, Randolph M. Pentel and the Investor will have executed and delivered
the Registration Rights Agreement in the form attached as Exhibit C,
which shall be in a form acceptable to the Investor in its sole discretion.

          6.7 Voting Agreement. The
Company, Randolph M. Pentel and the Investor will have executed and delivered
the Voting Agreement and Irrevocable Proxy in the form attached as Exhibit C,
which shall be in a form acceptable to the Investor in its sole discretion.

          6.8
Reservation of Shares of Conversion Stock.
The Shares and Warrant Shares shall have been duly authorized and reserved
for issuance.

          6.9
Payment of Fees. All fees
required to be paid at the Closing under Section 8.4 shall have been paid.

          6.10
[Intentionally Omitted]

          6.11
Compliance Certificate. The
Company will have delivered to counsel for the Investor, a certificate,
executed on the Company’s behalf by the Company’s Chief Financial Officer, in
substantially the form attached as Exhibit F, certifying the
satisfaction of the closing conditions listed in Section 6.1 and
Section 6.2.

          6.12
Legal Opinion. The Investor
will have received from the Company’s legal counsel a legal opinion, dated as
of the Effective Date, in substantially the form attached as Exhibit G.

17

          6.13
Secretary’s Certificate. The
Company will have delivered to counsel for the Investor, a certificate,
executed on the Company’s behalf by the Company’s Secretary, in substantially
the form attached as Exhibit H. 

          6.14
Consents; Permits and Waivers. The
Company shall have obtained any and all consents, authorizations, permits and
waivers necessary or appropriate for consummation of the transactions
contemplated by this Agreement and the other Transaction Agreements.

          6.15
Proceedings and Documents. The
Investor’s counsel will have reasonably approved (a) all proceedings
undertaken in connection with the transactions contemplated by the Transaction
Agreements and (b) all documents and instruments incident to such
proceedings.

SECTION 7

The Company’s Closing Conditions

The Company’s
obligation to sell and issue the Securities at the Closing is subject to the
fulfillment on or before the Closing of the following conditions, unless waived
by the Company:

          7.1
Representations and Warranties.
The representations and warranties contained in Section 4 of the
Investor at the Closing will be true and correct when made and will be true and
correct as of the date of such Closing.

          7.2
Covenants. All covenants,
agreements, and conditions contained in the Transaction Agreements to be
performed by Investor on or before the Closing will have been performed or
complied with in all material respects as of the Closing.

          7.3
Compliance with Securities Laws.
The Company will be satisfied that the offer and sale of the Securities
will be qualified or exempt from registration or qualification under all
applicable federal and state securities laws.

          7.4
Registration Rights Agreement. The
Company, Randolph M. Pentel and the Investor will have executed and delivered
the Registration Rights Agreement in the form attached as Exhibit C. 

          7.5
[Intentionally Omitted]

          7.6
Consents and Waivers. The
Company will have received any and all consents, permits, and waivers necessary
or appropriate for consummating the transactions contemplated by the
Transaction Agreements.

          7.7
Proceedings and Documents. The
Company’s counsel will have reasonably approved (a) all corporate
proceedings and other proceedings undertaken in connection with the
transactions contemplated by the Transaction Agreements at the Closing, and
(b) all documents and instruments incident to such proceedings.

18

SECTION 8

Miscellaneous

          8.1 Opinion. The offer and
sale of the Securities is being made pursuant to the exemption from the
registration provisions of the Securities Act of 1933, as amended, afforded by
Rule 506 of Regulation D promulgated thereunder. On the Closing Date, the
Company will provide an opinion reasonably acceptable to the Investor from the
Company’s legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of the Securities. A form of
the legal opinion is annexed hereto as Exhibit G. The Company will
provide, at the Company’s expense, such other legal opinions in the future as
are reasonably necessary for the exercise of the Warrants.

          8.2
Amendment. Except as
expressly provided in this Agreement, neither this Agreement nor any term of
this Agreement may be amended, waived, discharged, or terminated other than by
a written instrument referencing this Agreement and signed by the Company and
the Investor. 

          8.3
Notices. All notices and
other communications required or permitted under this Agreement or under any
other Transaction Agreement will be in writing and will be mailed by registered
or certified mail, postage prepaid, sent by facsimile, sent by electronic mail,
or otherwise delivered by hand or by messenger addressed: 

               (a)
if to the Company, to:

	
 

	
 

	
 

	
 

	
CapSource
  Financial, Inc.

	
CapSource
  Financial, Inc.

	
 

	
2305 Canyon
  Boulevard

	
1729 Donegal
  Drive

	
 

	
Suite 103

	
Woodbury, MN
  55125

	
 

	
Boulder, CO
  80302

	
Attn: Steven
  Reichert, Secretary

	
 

	
Attn: Fred
  C. Boethling, CEO

	
Facsimile
  number: (651) 578-6614

	
 

	
Facsimile
  number: (303) 245-0521

	
 

	
 

	
 

	
 

	
 

	
with a copy
  by facsimile only to:

	
 

	
 

	
 

	
 

	
 

	
Rider
  Bennett LLP

	
 

	
 

	
33 South 6th
  St.

	
 

	
 

	
Minneapolis,
  MN 55402

	
 

	
 

	
Attn: David
  B. Dean

	
 

	
 

	
Facsimile
  number: (612) 337-7616

	
 

               (b)
if to the Investor, to the name, address and telecopy number set forth on Exhibit
A for the Investor.

               (c)
Each such notice or other communication will, for all purposes of this
Agreement and the other Transaction Agreements, be treated as effective or
having been given when delivered if delivered personally, or, if sent by mail,
at the earlier of its receipt or 72 hours after such communication has been
deposited in a regularly maintained receptacle for the deposit of the United
States mail, addressed and mailed as specified above or, if sent by facsimile,
upon confirmation of facsimile transfer or, if sent by electronic mail, when
directed to the electronic mail address set forth on Exhibit A.

19

          8.4
Payment of Fees; Option.

               (a)
Legal Fees of Investor. The
Company shall pay to legal counsel for the Investor all legal fees and expenses
incurred by the Investor and its advisors, Whitebox Advisors, LLC (“Whitebox Advisors”), in connection with
this Agreement, the other Transaction Agreements and the Registration
Statement, including but not limited to any and all fees and expenses related
to due diligence or other matters relating to or arising out of any of the
foregoing.

               (b)
Origination Fee; Option to Purchase
Additional Securities. 

                    (i)
The Company will pay to Whitebox Advisors an origination fee
equal to two percent (2%) of the Purchase Price for the Securities sold
pursuant to this Agreement (“Origination Fee”).
The Origination Fee shall be paid to Whitebox Advisors on the Closing Date by
wire transfer to the account so designated by Whitebox Advisors. 

                    (ii)
For a period of 180 days from the Closing
Date, the Investor will have the option, in its sole discretion, to subscribe
for and purchase from the Company an additional 375,000 Shares at a purchase
price of $.40 per share and a Warrant to purchase 375,000 Warrant Shares with
an exercise price of $.90 per share. Upon subscription for and purchase of such
additional Shares and Warrants, the Company will issue and deliver to the
Investor, certificates representing the Shares along with a Warrant for the
purchase of such Warrant Shares in form of attached hereto as Exhibit B.

               (c)
Indemnification for Fees.
The Company on the one hand, and the Investor on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any other persons claiming brokerage commissions, finder’s fees
or other similar payments, except as specified in Section 8.4(b) above, on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby and arising out of such party’s actions. Except as set
forth in Section 8.4(b) or on Schedule 3.23, the Company represents
that there are no other parties entitled to receive fees, commissions, or
similar payments in connection with this Agreement.

          8.5
Governing Law. This
Agreement will be governed in all respects by the internal laws of the State of
Minnesota as applied to agreements entered into among Minnesota residents to be
performed entirely within Minnesota, without regard to Minnesota
conflicts-of-law principles.

          8.6
Survival. The
representations, warranties, covenants, and agreements made in this Agreement
will survive any investigation made by any Party and the closing of the
transactions contemplated by this Agreement.

          8.7
Successors and Assigns. This
Agreement, and any and all rights, duties, and obligations under this
Agreement, will not be assigned, transferred, delegated, or sublicensed by any
Party without the other Party’s prior written consent. Any attempt by any Party
without such prior written consent to assign, transfer, delegate, or sublicense
any rights, duties, or obligations that arise under this Agreement will be
void. Subject to the foregoing and except as otherwise provided in this
Agreement, the provisions of this Agreement will inure to the benefit of, and
be binding upon, the Parties’ respective successors, assigns, heirs, executors,
and administrators.

          8.8
Entire Agreement. The
Transaction Agreements constitute the full and entire understanding and
agreement between the Parties with regard to the subject matter hereof and
thereof, and no Party will be liable or bound to any other Party in any manner
with regard to the subject matter hereof

20

or thereof by
any warranties, representations, or covenants, in each case except as
specifically set forth in the Transaction Agreements.

          8.9
Delays or Omissions. Except
as expressly provided in this Agreement, no delay or omission to exercise any
right, power, or remedy accruing to any Party upon any breach or default of any
other Party under this Agreement will impair any such right, power, or remedy
of such non-defaulting Party, nor will such delay or omission be construed to
be a waiver of any such breach or default, or an acquiescence in such breach or
default, or of or in any similar breach or default subsequently occurring, nor
will any waiver of any single breach or default be deemed a waiver of any other
previous or subsequent breach or default. Any waiver, permit, consent, or
approval of any kind or character on the part of any Party of any breach or
default under this Agreement, or any waiver on the part of any Party of any
provisions or conditions of this Agreement, must be in writing and will be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
Party, will be cumulative and not alternative.

          8.10
Severability. Unless
otherwise expressly provided in this Agreement, each Investor’s rights under
this Agreement and under the other Transaction Agreements are several rights,
not rights jointly held with any of the other Investors. If any provision of
this Agreement becomes or is declared by a court of competent jurisdiction to
be illegal, unenforceable, or void, then this Agreement will continue in full
force and effect without such illegal, unenforceable, or void provision, and
the Parties agree to negotiate, in good faith, a legal and enforceable
substitute provision which most nearly effects the Parties’ intent in entering
into this Agreement as expressed in this Agreement.

          8.11
Titles and Subtitles. The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this Agreement. All
references in this Agreement to sections, paragraphs, exhibits, and schedules
will, unless otherwise provided, refer to sections and paragraphs of this
Agreement and exhibits and schedules attached to this Agreement.

          8.12
Counterparts. This
Agreement may be executed in any number of counterparts, each of which will be
enforceable against the Parties actually executing such counterparts, and all
of which together will constitute one instrument.

          8.13
Facsimile Execution and Delivery.
A facsimile or other reproduction of this Agreement and/or the other
Transaction Agreements may be executed by one or more Parties, and an executed
copy of this Agreement and/or the other Transaction Agreements may be delivered
by one or more Parties by facsimile or similar electronic transmission device
pursuant to which the signature of or on behalf of such Party can be seen, and
such execution and delivery will be considered valid, binding, and effective
for all purposes. At any Party’s request, all Parties agree to execute an
original of this Agreement and/or any other Transaction Agreements as well as
any facsimile or other reproduction hereof and/or thereof.

          8.14
Jurisdiction and Venue. With
respect to any disputes arising out of or related to this Agreement or to any
other Transaction Agreement, the Parties consent to the exclusive jurisdiction
of, and venue in, the state courts in Hennepin County, Minnesota (or, in the
event of exclusive federal jurisdiction, the federal courts of the District of
Minnesota).

          8.15
Further Assurances. Each
Party agrees to execute and deliver, by the proper exercise of such Party’s
corporate, limited liability company, partnership, or other powers, all such
other and additional instruments and documents and do all such other acts and
things as may be necessary to more fully perform this Agreement.

21

          8.16
Construction. The Parties
have participated jointly in negotiating and drafting this Agreement and the
other Transaction Agreements. If any ambiguity, question of intent, or question
of interpretation arises with respect to this Agreement or any other
Transaction Agreement, then this Agreement or that other Transaction Agreement
will be construed as if drafted jointly by the Parties, and no presumption or
burden of proof will arise favoring or disfavoring any Party by virtue of the
authorship of any of the provisions of this Agreement or of any other
Transaction Agreement. As used in this Agreement and in the other Transaction
Agreements, the word “including” means “including, without limitation.”

[signature page follows]

22

The Parties
have executed this Securities Purchase Agreement as of the Effective Date.

	
 

	
 

	
 

	
 

	
CAPSOURCE FINANCIAL, INC.,

	
 

	
 

	
 

	
By:

	
 

	
 

	
 

	

	
 

	
 

	
Steven
  Reichert

	
 

	
 

	
Vice
  President and Secretary

	
 

	
 

	
 

	
 

	
INVESTOR:

	
 

	
 

	
 

	
WHITEBOX INTERMARKET PARTNERS L.P.

	
 

	
 

	
 

	
By:

	
 

	
 

	
 

	

	
 

	
 

	
Jonathan D.
  Wood

	
 

	
 

	
Chief
  Financial Officer

23

EXHIBIT
A

Schedule
of Investor

	
Investors

	
 

	
Securities Being Acquired

	
 

	
Purchase Price

	

	
 

	

	
 

	

	
Whitebox Intermarket Partners L.P.

	
 

	
2,500,000 Shares and a
  warrant to purchase 2,500,000 Shares

	
 

	
$1,000,000

	
3033
  Excelsior Boulevard, Suite 300

	
 

	
 

	
 

	
 

	
Minneapolis,
  Minnesota 55416 

	
 

	
 

	
 

	
 

	
Attn:
  Jonathan Wood

	
 

	
 

	
 

	
 

	
Facsimile
  number: (612) 253-6151

	
 

	
 

	
 

	
 

A-1

EXHIBIT
B

Form
of Warrant

(attached)

B-1

EXHIBIT
C

Form
of Registration Rights Agreement

(attached)

C-1

EXHIBIT
D

Form
of Voting Agreement and Irrevocable Proxy

(attached)

D-1

EXHIBIT
E

Wire
Transfer Instructions

E-1

EXHIBIT
F

Form
of Compliance Certificate

(attached)

F-1

EXHIBIT
G

Form
of Legal Opinion

(attached)

G-1

EXHIBIT
H

Form
of Secretary’s Certificate

(attached)

H-1Exhibit 10.2 to CapSource Financial, Inc. Form 8-K dated December 28, 2005

Exhibit 10.2  

CAPSOURCE FINANCIAL, INC.

SECURITIES PURCHASE AGREEMENT

May 1, 2006

TABLE OF CONTENTS

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Page

	
 

	
SECTION 1

	
PURCHASE AND
  SALE OF SECURITIES

	
 

	
1

	
 

	
1.1

	
Sale and
  Issuance of Securities

	
 

	
1

	
 

	
1.2

	
The Closing

	
 

	
1

	
SECTION 2

	
DELIVERIES

	
 

	
1

	
 

	
2.1

	
Closing
  Deliveries

	
 

	
1

	
SECTION 3

	
THE
  COMPANY’S REPRESENTATIONS AND WARRANTIES

	
 

	
2

	
 

	
3.1

	
Organization
  and Standing

	
 

	
2

	
 

	
3.2

	
Corporate
  Power

	
 

	
2

	
 

	
3.3

	
Subsidiaries

	
 

	
2

	
 

	
3.4

	
Capitalization

	
 

	
2

	
 

	
3.5

	
Financial
  Statements; Accounts Receivable.

	
 

	
3

	
 

	
3.6

	
Changes

	
 

	
4

	
 

	
3.7

	
Material
  Obligations

	
 

	
5

	
 

	
3.8

	
Material
  Contracts

	
 

	
5

	
 

	
3.9

	
Intellectual
  Property

	
 

	
7

	
 

	
3.10

	
Title to
  Properties and Assets

	
 

	
8

	
 

	
3.11

	
No Defaults

	
 

	
8

	
 

	
3.12

	
Compliance
  with Other Instruments

	
 

	
8

	
 

	
3.13

	
Litigation

	
 

	
8

	
 

	
3.14

	
Tax Returns
  and Payments

	
 

	
8

	
 

	
3.15

	
Employees

	
 

	
9

	
 

	
3.16

	
Related
  Party Obligations

	
 

	
9

	
 

	
3.17

	
Environmental
  and Safety Laws

	
 

	
9

	
 

	
3.18

	
Condition of
  Properties

	
 

	
10

	
 

	
3.19

	
Licenses

	
 

	
10

	
 

	
3.20

	
Insurance

	
 

	
10

	
 

	
3.21

	
Consent

	
 

	
10

	
 

	
3.22

	
Offering

	
 

	
10

	
 

	
3.23

	
Brokers or
  Finders

	
 

	
10

	
 

	
3.24

	
No Market
  Manipulation

	
 

	
10

	
 

	
3.25

	
Reporting
  Company

	
 

	
11

	
 

	
3.26

	
Information
  Concerning Company

	
 

	
11

	
 

	
3.27

	
Stop
  Transfer Order

	
 

	
11

	
 

	
3.28

	
No
  Integrated Offering

	
 

	
11

	
 

	
3.29

	
No General
  Solicitation

	
 

	
11

	
 

	
3.30

	
Listing

	
 

	
11

	
 

	
3.31

	
Correctness
  of Representations

	
 

	
11

	
 

	
3.32

	
Disclosure

	
 

	
12

	
SECTION 4

	
THE
  INVESTOR’S REPRESENTATIONS AND WARRANTIES

	
 

	
12

	
 

	
4.1

	
No
  Registration

	
 

	
12

	
 

	
4.2

	
Investment
  Intent

	
 

	
12

	
 

	
4.3

	
Investment
  Experience

	
 

	
12

	
 

	
4.4

	
Speculative
  Nature of Investment

	
 

	
12

	
 

	
4.5

	
Access to
  Data and Documentation

	
 

	
12

	
 

	
4.6

	
Accredited
  Investor

	
 

	
13

i

TABLE OF CONTENTS
(continued)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Page

	
 

	
 

	
4.7

	
Residency

	
 

	
13

	
 

	
4.8

	
Rule 144

	
 

	
13

	
 

	
4.9

	
Authorization

	
 

	
13

	
 

	
4.10

	
Further
  Limitations on Disposition

	
 

	
13

	
 

	
4.11

	
Legend;
  Restriction on Transfer

	
 

	
14

	
 

	
4.12

	
Warrant
  Legend

	
 

	
14

	
SECTION 5

	
COVENANTS OF
  THE COMPANY

	
 

	
15

	
 

	
5.1

	
Stop Orders

	
 

	
15

	
 

	
5.2

	
Listing

	
 

	
15

	
 

	
5.3

	
Market
  Regulations

	
 

	
15

	
 

	
5.4

	
Reporting
  Requirements

	
 

	
15

	
 

	
5.5

	
Use of
  Proceeds

	
 

	
15

	
 

	
5.6

	
Reservation
  of Common Stock

	
 

	
16

	
 

	
5.7

	
Designation
  of Board Members

	
 

	
16

	
 

	
5.8

	
Taxes

	
 

	
16

	
 

	
5.9

	
Insurance

	
 

	
16

	
 

	
5.10

	
Books and
  Records

	
 

	
16

	
 

	
5.11

	
Governmental
  Authorities

	
 

	
16

	
 

	
5.12

	
Intellectual
  Property

	
 

	
16

	
 

	
5.13

	
Properties

	
 

	
16

	
 

	
5.14

	
Correctness
  of Representations

	
 

	
16

	
SECTION 6

	
INVESTOR’S
  CLOSING CONDITIONS

	
 

	
17

	
 

	
6.1

	
Representations
  and Warranties

	
 

	
17

	
 

	
6.2

	
Covenants

	
 

	
17

	
 

	
6.3

	
Blue Sky

	
 

	
17

	
 

	
6.4

	
Due
  Diligence

	
 

	
17

	
 

	
6.5

	
Convertible
  Debt

	
 

	
17

	
 

	
6.6

	
Registration
  Rights Agreement

	
 

	
17

	
 

	
6.7

	
Voting
  Agreement

	
 

	
17

	
 

	
6.8

	
Reservation
  of Shares of Conversion Stock

	
 

	
17

	
 

	
6.9

	
Payment of
  Fees

	
 

	
17

	
 

	
6.10

	
Intentionally
  Omitted

	
 

	
17

	
 

	
6.11

	
Compliance
  Certificate

	
 

	
17

	
 

	
6.12

	
Legal
  Opinion

	
 

	
18

	
 

	
6.13

	
Secretary’s
  Certificate; Amendment to Bylaws

	
 

	
18

	
 

	
6.14

	
Consents;
  Permits and Waivers

	
 

	
18

	
 

	
6.15

	
Proceedings
  and Documents

	
 

	
18

	
SECTION 7

	
THE
  COMPANY’S CLOSING CONDITIONS

	
 

	
18

	
 

	
7.1

	
Representations
  and Warranties

	
 

	
18

	
 

	
7.2

	
Covenants

	
 

	
18

	
 

	
7.3

	
Compliance
  with Securities Laws

	
 

	
18

	
 

	
7.4

	
Registration
  Rights Agreement

	
 

	
18

	
 

	
7.5

	
Intentionally
  Omitted

	
 

	
18

	
 

	
7.6

	
Consents and
  Waivers

	
 

	
18

	
 

	
7.7

	
Proceedings
  and Documents

	
 

	
18

ii

TABLE OF CONTENTS
(continued)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Page

	
 

	
SECTION 8

	
MISCELLANEOUS

	
 

	
19

	
 

	
8.1

	
Opinion

	
 

	
19

	
 

	
8.2

	
Amendment

	
 

	
19

	
 

	
8.3

	
Notices

	
 

	
19

	
 

	
8.4

	
Payment of
  Fees; Option

	
 

	
20

	
 

	
8.5

	
Governing
  Law

	
 

	
20

	
 

	
8.6

	
Survival

	
 

	
20

	
 

	
8.7

	
Successors
  and Assigns

	
 

	
20

	
 

	
8.8

	
Entire
  Agreement

	
 

	
20

	
 

	
8.9

	
Delays or
  Omissions

	
 

	
21

	
 

	
8.10

	
Severability

	
 

	
21

	
 

	
8.11

	
Titles and
  Subtitles

	
 

	
21

	
 

	
8.12

	
Counterparts

	
 

	
21

	
 

	
8.13

	
Facsimile
  Execution and Delivery

	
 

	
21

	
 

	
8.14

	
Jurisdiction
  and Venue

	
 

	
21

	
 

	
8.15

	
Further
  Assurances

	
 

	
21

	
 

	
8.16

	
Construction

	
 

	
21

iii

EXHIBITS

	
 

	
 

	
A

	
Schedule of
  Investors

	
B

	
Form of
  Warrant

	
C

	
Form of
  Registration Rights Agreement

	
D

	
Form of
  Voting Agreement and Irrevocable Proxy

	
E

	
Wire
  Transfer Instructions

	
F

	
Form of
  Compliance Certificate

	
G

	
Form of
  Legal Opinion

	
H

	
Form of
  Secretary’s Certificate

SCHEDULES

	
 

	
 

	
3.3

	
Subsidiaries
  

	
3.4(e)

	
Warrants,
  options or other rights to acquire stock

	
3.5(a)

	
Financial
  Statements; Off balance sheet transactions

	
3.6(g)

	
Material
  changes in compensation

	
3.6(l)

	
Debts or
  other obligations

	
3.6(n)

	
Share
  issuance

	
3.8(a)

	
Material
  Contracts

	
3.8(c)

	
Affiliates
  arrangements

	
3.9(a)

	
Intellectual
  Property Agreements

	
3.15

	
Employment
  Matters

	
3.16

	
Debts owed
  to Affiliates

	
3.19

	
Licenses,
  Permits, etc.

	
3.23

	
Broker

	
3.25

	
SEC 12 month
  filing exceptions 

	
3.26

	
Material
  Adverse Changes

iv

CapSource Financial, Inc.

SECURITIES PURCHASE AGREEMENT

This
Securities Purchase Agreement (this “Agreement”),
dated May 1, 2006 (the “Effective
Date”), is executed by and between CapSource Financial, Inc., a
Colorado corporation (the “Company”), and
the entity listed on the Schedule of Investors attached as Exhibit A
(the “Investor”).  The Company and the Investor are
each individually referred to in this Agreement as a “Party,” and are collectively referred to in this
Agreement as the “Parties.”

SECTION 1

Purchase and Sale of Securities

          1.1
Sale and Issuance of Securities.  Subject to the terms and conditions of this
Agreement, the Investor agrees to purchase at the Closing (as defined in
Section 1.2), and the Company agrees to sell and issue to the Investor at
the Closing, 2,500,000 shares of the Company’s Common Stock, $.01 par value per
share (the “Shares”) and a
warrant, in the form attached as Exhibit B (the “Warrant”), to purchase 2,500,000
shares of Common Stock at an exercise price of $.90 per share (the “Warrant Shares”) for a purchase
price of$.40per Share and Warrant, for the aggregate
purchase price of $1,000,000 (the “Purchase Price”).  Such Shares together with the Warrants, are
collectively referred to herein as the “Securities”.

          1.2
The Closing.  The closing of the purchase and sale of
the Securities described herein shall take place at the offices of Whitebox
Advisors, LLC, 3033 Excelsior Boulevard, Suite 300, Minneapolis, Minnesota
55416, at 8:30 a.m., Minneapolis time, on May 1, 2006 (the “Closing”), or at such other place
or different time or day as may be mutually acceptable to the Investor and the
Company.

SECTION 2

Deliveries

          2.1
Closing Deliveries.

                    (a)
At the Closing, the Investor will deliver to the Company (i) an executed
counterpart signature page to this Agreement; (ii) executed counterpart
signature page to the Registration Rights Agreement dated as of the Effective
Date by and among the Company, Randolph M. Pentel and the Investors listed on
Exhibit A thereto in the form attached hereto as Exhibit C (the “Registration Rights Agreement”);
and (iii) payment of the Purchase Price for the Securities purchased by
the Investor at such Closing by (A) certified check payable to the
Company; or (B) wire transfer of immediately available funds to the bank
account designated on the wire transfer instructions set forth on Exhibit D.  This Agreement and the Registration Rights
Agreement, together with the exhibits, Schedule of Exceptions (as defined
below), and all other documents required to be delivered in connection herewith
and therewith, shall be referred to collectively as the “Transaction Agreements.”

SECTION 3

The Company’s Representations and Warranties

Except as set
forth on the schedules delivered separately to the Investor in connection with
this Agreement (the “Schedules”),
the Company represents and warrants to the Investor as of the Effective Date as
follows:

          3.1
Organization and Standing.  The Company is a corporation duly
organized and existing under, and by virtue of, the laws of the State of
Colorado and is in good standing under such laws.  The Company has the requisite corporate power and authority to
own and operate the Company’s properties and assets, and to carry on the
Company’s business as presently conducted.
The Company is presently qualified to do business as a foreign
corporation in each jurisdiction where the failure to be so qualified would
have a Material Adverse Effect. No proceeding has been instituted in any
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification.  “Material Adverse Effect”
shall mean any event, happening, occurrence or development that,
individually or in the aggregate, whether or not arising in the ordinary course
of business, could reasonably be expected to have a material adverse effect on
the Company’s business, operations, properties, prospects, assets, liabilities
or condition (financial or otherwise).  

          3.2 Corporate Power.  The Company has all
requisite legal and
corporate power and authority to execute and deliver the Transaction
Agreements, to sell and issue the Securities in accordance with this Agreement,
to issue Warrant Shares issuable upon exercise of the Warrants, and to carry
out and perform the Company’s obligations under the terms of the Transaction
Agreements.  The Transaction Agreements
have been duly authorized, executed and delivered by the Company and are valid
and binding agreements enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors’
rights generally.

          3.3
Subsidiaries.   Except as set forth on Schedule 3.3,
the Company does not own or control, directly or indirectly, any interest in
any corporation, partnership, limited liability company, association, or other
business entity.

          3.4 Capitalization.  

                    (a)
The Company’s authorized capital stock consists of 100,000,000 shares of
undesignated stock, of which 12,378,657 shares of Common Stock, par value $.01
per share, were issued and outstanding as of March 27, 2006. 

                    (b)
The outstanding shares of the Company’s Common Stock are duly authorized,
validly issued, fully paid, and non-assessable.

                    (c)
The Company has reserved:

                              (i)
2,875,000 shares of Common Stock for issuance pursuant to this Agreement;

                              (ii)
2,875,000 shares of Common Stock for issuance upon exercise of the Warrant
issued pursuant to this Agreement;

2

                              (iii)
550,000 shares of Common Stock for issuance to employees, directors,
consultants, and advisors pursuant to the Company’s 2001 Stock Option Plan
under which no options to purchase shares of Common Stock are issued and
outstanding as of the Effective Date; 

                              (iv)
937,334 shares of Common Stock for issuance in
connection with discretionary warrants that have been issued and are
outstanding as of the Effective Date; and

                              (v)
4,359,328 shares of Common Stock for issuance in connection with the shares and
warrant that will be issued to Mr. Pentel as a result of the conversion by him
of his outstanding notes pursuant to Section 6.5 hereof;  

                    (d)
The Shares, when issued, delivered and paid for in compliance with the
provisions of this Agreement, will be validly issued, fully paid and
non-assessable.  The Warrant Shares
issuable upon exercise of the Warrants have been duly and validly reserved and,
when issued in compliance with the provisions of this Agreement, the Warrant,
and applicable law, will be validly issued, fully paid, and
non-assessable.  The Shares and Warrant
Shares will be free of any liens or encumbrances, other than any liens or
encumbrances created by or imposed upon the Investor; provided, however, that
the Shares and Warrant Shares are subject to transfer restrictions under state
and/or federal securities laws and as set forth in the Transaction
Agreements.  The Shares and Warrant
Shares are not subject to any preemptive rights or first refusal rights.  Neither the offer nor issuance of the
Securities constitutes an event under any anti-dilution provisions of any
securities issued or issuable by the Company which will either increase the
number of shares issuable pursuant to such provisions or decrease the consideration
per share to be received by the Company pursuant to such provisions.

                    (e)
Except as set forth on Schedule 3.4(e), there are no outstanding
agreements or preemptive or similar rights affecting the Company’s capital
stock and no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of any shares of capital stock of the Company.

                    (f)
There are no shareholder agreements, voting agreements, proxy rights or other
similar agreements with respect to the Company’s Common Stock to which the
Company is a party or  between or among
any of the Company’s shareholders.

          3.5
Financial Statements; Accounts Receivable.

                    (a)
The Company’s: (i) Form 10-KSB for the year ended December 31, 2005,
as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2006; and
(ii) unaudited balance sheet, statements of operations, shareholders’
equity and cash flow as of and for the three months ended March 31, 2006 (the “Balance Sheet Date”),
complete and
correct copies of which are attached hereto as Schedule 3.5(a) (collectively,
the “Financial Statements”),
present fairly the financial position of the Company as of such dates and the
results of operations for the periods covered thereby (subject, in the case of
the interim financial statements, to year-end audit adjustments) and have been
prepared in accordance with generally accepted accounting principles
consistently applied (“GAAP”),
except as to the absence of footnotes thereto.
Specifically, but not by way of limitation, (x) the balance sheets or
notes thereto disclose all of the debts, liabilities and obligations of any
nature of the Company properly accrued
at December 31, 2005 and at the Balance Sheet Date which,
individually or in the aggregate, are material and which in accordance with
GAAP would be required to be disclosed in such balance sheets, and the omission
of which would, in the aggregate, have a Material Adverse Effect on the
Company; (y) except as set forth on Schedule 3.5(a), the Company does
not have any off-balance sheet arrangements or transactions; and (z) the
Financial Statements include appropriate reserves for all taxes and other
liabilities accrued at such date but not yet payable.

3

                    (b)
All accounts receivable of the Company referenced in the Financial Statements
(except such accounts receivable as have been collected since such date) are
valid and enforceable claims, and the goods and services sold and delivered
which gave rise to such accounts were sold and delivered in conformity with the
applicable purchase orders, payor contracts, agreements and specifications.  Such accounts receivable are subject to no
valid defense or offsets.  The Company’s
uncollectible accounts will not exceed the reserves for doubtful accounts.

          3.6
Changes.  Since the Balance Sheet Date, the
Company has not:

                    (a)
suffered any change in  the Company’s
assets, liabilities, financial condition, or operating results, except for
changes in the ordinary course of business, none of which have had a Material
Adverse Effect;

                    (b)
suffered any damage, destruction, or loss (whether or not covered by insurance)
that, in any case or in the aggregate, have had a Material Adverse Effect;

                    (c)
agreed to waive or actually waived any valuable right or any material debt owed
to the Company;

                    (d)
suffered any change or amendment to any agreement by which the Company or any
of the Company’s assets or properties are bound or subject, except to the
extent that any such change or amendment has not had, or will not likely have,
a Material Adverse Effect;

                    (e)
made any loans to the Company’s employees, officers or directors, or to any
members of their respective immediate families, other than travel advances and
other advances made in the ordinary course of the Company’s business;

                    (f)
received any Company officer’s resignation or terminated any Company officer;

                    (g)
except as set forth on Schedule 3.6(g), made any material change in any
compensation arrangement or agreement with any employee; 

                    (h)
made any declaration or payment of any dividend or other distribution;

                    (i)
received notice or become aware that the Company has lost a customer or that
any Company customer has canceled a material order, which loss or cancellation
would constitute a Material Adverse Effect; or

                    (j)
suffered any change or amendment to any agreement relating to a change in the
contingent obligations of the Company;

                    (k)
received notice of any labor organization activity related to the Company;

                    (l)
except as set forth on Schedule 3.6(l), incurred any debt obligation or
liability, including any debts assumed or guaranteed by the Company, except
those for immaterial amounts and for current liabilities incurred in the
ordinary course of business;

                    (m)
made any sale, assignment or transfer of any patents, trademarks, copyrights,
trade secrets or other intangible assets;

4

                    (n)
except as set forth on Schedule 3.6(n), issued or sold any partnership
interests, shares of capital stock or other securities or granted any options,
warrants or other purchase rights with respect thereto other than as
contemplated by this Agreement;

                    (o)
suffered any other event or condition of any character that has had, or could
be reasonably expected to have, a Material Adverse Effect; or

                    (p)
made any arrangement or commitment by the Company to do any of the acts
described in (a) through (o) above.

          3.7
Material Obligations.  The Company has no liabilities or
obligations (whether absolute, accrued, contingent or otherwise), except for
such liabilities or obligations specifically reflected in balance sheets in the
Financial Statements and current liabilities incurred in the ordinary course of
business since the Balance Sheet Date, which are not, either in any individual
case or in the aggregate, material to the Company.

          3.8
Material Contracts.

                    (a)
Set forth on Schedule 3.8(a) is a detailed list of the Company’s bona fide and
existing contracts that, individually or in the aggregate, are material to the
business, properties, prospects, assets, liabilities or condition (financial or
otherwise) of the Company (except as in Section 3.8(a)(ii)) (“Material Contracts”), specifically
referring to this Section 3.8 and identifying such contracts in accordance
with the following subsections:

                              (i)
each license or franchise agreement, either as licensor or licensee or
franchisor or franchisee, including any related to intellectual property, or
distributor, dealership or sales agency contract, agreement or understanding;

                              (ii)
a true and complete description of all real properties owned by the Company;

                              (iii)
each indenture, lease, sublease, license or other instrument under which the
Company claims or holds a leasehold interest in real property (including any
agreement related to the purchase or sale of such assets);

                              (iv)
each lease of personal property involving payments remaining to or from the
Company in excess of $10,000;

                              (v)
each collective bargaining agreement, employment agreement, consulting
agreement, noncompetition agreement, nondisclosure agreement, inventions
assignment agreement, executive compensation plan, profit sharing plan, bonus
plan, restricted stock award agreement, deferred compensation agreement, employee
pension retirement plan, employee benefit stock option, stock awards or stock
purchase plan, buy-sell agreement and any other employee or shareholder
agreements or employee benefit plans, entered into or adopted by the Company;

                              (vi)
each bank account (or account with other financial institutions) maintained by
the Company, together with the persons authorized to make withdrawals from such
account;

5

                              (vii)
the name of each employee of the Company whose salary exceeds $50,000 per year
and the remuneration currently payable (including bonus or commission
arrangements) to each such employee;

                              (viii)
the name, amount and vesting schedule of each employee, officer, director or
consultant granted stock options, warrants or other similar rights;

                              
(ix) each partnership, joint venture, alliance or other similar agreement or
arrangement with another entity;

                              
(x) each promissory note, indenture, mortgage, loan agreement, guaranty,
security agreement, pledge or similar agreement with any lender;

                              
(xi) each agreement granting voting rights, registration rights, first negotiating
rights or preemptive rights to a third party; and

                              
(xii) each material product development, research, manufacturing, marketing,
sales distribution or supply agreement, warranty or indemnification agreement,
purchase agreement, royalty agreement, product, patent or trademark licensing
or assignment agreement and any other material contract entered into by the
Company or by which the Company is bound.

                    (b)
The Company is not in default or, but for the giving of notice or passage of
time would be in default, under any Material Contract.

                    (c)
Except as set forth on Schedule 3.8(c), there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, affiliates or any affiliate thereof.

                    (d)
There are no agreements, instruments, contracts, judgments, orders, writs or
decrees to which the Company is a party or by which it is bound which may
involve (i) obligations of, or payments to, the Company in excess of
$10,000 (other than obligations of, or payments to, the Company arising from
purchase or sale agreements entered into in the ordinary course of business),
(ii) the transfer or license of any patent, copyright, trade secret or
other proprietary right to or from the Company (other than licenses arising
from the purchase of “off the shelf products”), (iii) provisions
restricting the development, manufacture or distribution of the Company’s
products or services, or (iv) indemnification by the Company with respect
to infringements of proprietary rights (other than indemnification obligations
arising from purchase or sale of goods and services or license agreements
entered into in the ordinary course of business).

                    (e)
The Company has not (i) declared or paid any dividends, or authorized or
made any distribution upon or with respect to any class or Series of its
capital stock, (ii) incurred or guaranteed any indebtedness for money
borrowed or any other liabilities (other than with respect to indebtedness and
other obligations incurred in the ordinary course of business or as
specifically disclosed in the Financial Statements) individually in excess of
$10,000 or, in the case of indebtedness and/or liabilities individually less than
$10,000, in excess of $20,000in
the aggregate, (iii) made any loans or advances to any person, other than
ordinary advances for travel expenses, or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than the sale of its inventory
in the ordinary course of business.

                    (f)
For the purposes of subsections (d) and (e) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person 

6

or entity
(including persons or entities the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual
minimum dollar amounts of such subsections.

          3.9
Intellectual Property.

                    (a)
The Company owns or possesses sufficient legal rights to all trademarks,
service marks, trade names, patents, copyrights, trade secrets, licenses
(software or otherwise), information, processes, and similar proprietary rights
(collectively, “Intellectual Property”)
necessary to the Company’s business as presently conducted.  The Company has no knowledge nor has it
received notice that the conduct of the Company’s business as presently
conducted materially conflicts with or infringes the Intellectual Property
Rights of others.  Except for agreements
with the Company’s own employees or consultants listed in Schedule 3.9(a)
and Material Contracts for standard end-user license agreements, and for
support/maintenance agreements and agreements entered in the ordinary course of
the Company’s business, there are no material outstanding options, licenses, or
agreements relating to the foregoing, and the Company is not bound by or a
party to any material options, licenses, or agreements with respect to the
Intellectual Property of any other person or entity.  The Company has not received any written communication alleging
that the Company has violated any of the Intellectual Property of any other
person or entity.  The Company is not
obligated to make any payments by way of royalties, fees, or otherwise to any
owner of, licensor of, or claimant to any Intellectual Property with respect to
the use of such Intellectual Property in connection with the conduct of the
Company’s business as presently conducted.  There are no material agreements, understandings, instruments,
contracts, judgments, orders, or decrees to which the Company is a party or by
which the Company is bound that involve indemnification by the Company with
respect to Intellectual Property infringements (other than indemnification
obligations arising from purchase or sale of goods and services or license and
other agreements entered into in the ordinary course of business).

                    (b)
No employee is obligated under any contract or other agreement, or subject to
any judgment, decree, or order of any court or administrative agency, that
would materially interfere with the use of such employee’s best efforts to
promote the Company’s interests or that would conflict with the Company’s business
as presently conducted.  Neither the
execution nor delivery of this Agreement, nor the Company employees’ conduct of
the Company’s business, nor the Company’s conduct of the Company’s business as
presently conducted, will conflict with or result in a breach of the terms,
conditions, or provisions of, or constitute a default under, any contract,
covenant, or instrument under which any of such employees is now
obligated.  The Company does not believe
that it is or will be necessary to use any inventions of any of the Company’s
employees made before their employment by the Company.

                    (c)
Each Company employee has executed a confidential information, non-competition
and invention assignment agreement, substantially in the form(s) made available
to the Investor (each, a “Confidentiality
Agreement”).  No employee
has excluded from such employee’s Confidentiality Agreement any works or
inventions that were made by such employee before such employee’s employment
with the Company and that are also relevant to the Company’s business as
currently conducted or as proposed to be conducted.  Each Company consultant who has had access to the Company’s
intellectual property has entered into an agreement containing appropriate
confidentiality, non-competition and invention assignment provisions.

          3.10
Title to Properties and Assets.  The Company has good and marketable
title to the Company’s properties and assets, and the Company has good title to
all of the Company’s leasehold interests, in each case subject to no material
mortgage, pledge, lien, lease, or encumbrance, except for (a) liens for
current taxes not yet due and payable, (b) liens imposed by law and
incurred in the ordinary course of business for obligations not past due,
(c) liens in respect of pledges or deposits under workers’

7

 compensation laws or similar legislation, and
(d) possible minor liens, encumbrances, and title defects that do not in
any case have a Material Adverse Effect on the value of the property subject
thereto or have a Material Adverse Effect on the Company’s operations and that
have not arisen other than in the ordinary course of the Company’s business.

          3.11
No Defaults.  Neither the Company nor any of its
subsidiaries is in violation of its Articles of Incorporation or Bylaws.  Neither the Company nor any of its
subsidiaries is (i) in default under or in violation of any other agreement or
instrument to which it is a party or by which it or any of its properties are
bound or affected, which default or violation would have a Material Adverse
Effect on the Company, (ii) in default with respect to any order of any court,
arbitrator or governmental body or subject to or party to any order of any
court or governmental authority arising out of any action, suit or proceeding
under any statute or other law respecting antitrust, monopoly, restraint of
trade, unfair competition or similar matters, or (iii) in violation of any
statute, rule or regulation of any governmental authority which violation would
have a Material Adverse Effect on the Company.

          3.12
Compliance with Other Instruments.  The Company’s execution, delivery, and
performance of and compliance with the Transaction Agreements and the Company’s
issuance of the Securities and, if exercised, the Warrant Shares issuable upon
exercise of the Warrants, will not result in any violation of, or conflict
with, or constitute a default under, the Articles of Incorporation or Bylaws,
each as amended to date, or any of the Company’s agreements, nor result in the
creation of any mortgage, pledge, lien, or encumbrance upon any of the
Company’s properties or assets.

          3.13
Litigation.  There is no action, suit, proceeding or
investigation pending or currently threatened in writing against the Company
that questions the validity of this Agreement, the other Transaction
Agreements, any Material Contracts or the right of the Company to enter into
any of such agreements, or to consummate the transactions contemplated hereby
or thereby, or which could be expected to result, either individually or in the
aggregate, in any Material Adverse Effect or any change in the current equity
ownership of the Company, nor is the Company aware that there is any basis for
any of the foregoing.  The foregoing
includes, without limitation, actions pending or threatened, either verbally or
in writing, involving the prior employment of any of the Company’s employees,
their use in connection with the Company’s business of any information or
techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers.  The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality.
There is no action, suit, proceeding or investigation by the Company
currently pending or which the Company intends to initiate.

          3.14
Tax Returns and Payments.  The Company has filed with appropriate
federal, state, and local governmental agencies all tax returns that the
Company is required to file.  All taxes
shown to be due and payable on such returns, any assessments imposed, and all
other taxes due and payable by the Company have been paid or will be paid
before the time they become delinquent.
The Company has not been advised in writing or otherwise become aware
(a) that any of the Company’s tax returns have been or are being audited
as of the Effective Date or (b) of any deficiency in assessment or
proposed judgment with respect to the Company’s federal, state, or local taxes.

          3.15
Employees.

                    (a)
The Company has no collective bargaining agreements with any of its
employees.  There is no labor union
organizing activity pending or threatened with respect to the Company.  No employee of the Company, nor any
consultant with whom the Company has contracted, is in violation of any term of
any employment contract, proprietary information and invention assignment
agreement or any other agreement relating to the right of any such individual
to be employed by, or to 

8

contract with,
the Company because of the nature of the business to be conducted by the
Company; and the continued employment by the Company of its present employees,
and the performance of the Company’s contracts with its independent
contractors, will not result in any such violation.  The Company has not received any notice alleging that any such
violation has occurred.  Except as set
forth on Schedule 3.15, no employee of the Company has been granted the
right to continued employment by the Company or to any material compensation
following termination of employment with the Company.  The Company is not aware that any officer, key employee or group
of employees intends to terminate his, her or their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any officer, key employee or group of employees.

                    (b)
Each officer and key employee of the Company is currently devoting one hundred
percent (100%) of his or her business time to the conduct of the business of
the Company.  The Company is not aware
that any officer or key employee of the Company is planning to work less than
full time at the Company in the future.
No officer or key employee is currently working or, to the Company’s
knowledge, plans to work for a competitive enterprise, whether or not such
officer or key employee is or will be compensated by such enterprise, and all
officers and key employees have signed and are subject to noncompetition
agreements in connection with their employment by the Company.

          3.16
Related Party Obligations.  Except as set forth on Schedule 3.16,
no Company employee, officer, director or shareholder, and no immediate family
member of any Company employee, officer, director, or shareholder, is indebted
to the Company, nor is the Company indebted (or committed to make loans or
extend or guarantee credit) to any of such persons other than (a) for
payment of salary for services rendered, (b) reimbursement for reasonable
expenses incurred on the Company’s behalf, and/or (c) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the Company’s
Board of Directors and stock purchase agreements approved by the Company’s
Board of Directors).  None of such
persons have any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has
a business relationship or in any firm or corporation that competes with the
Company, except in connection with the ownership of stock in publicly-traded
companies.  No Company employee,
officer, director, or stockholder, nor any their immediate family members, is,
directly or indirectly, interested in any Material Contract with the Company
(other than such Material Contracts that relate to any such person’s ownership
of Company capital stock or other Company securities).

          3.17
Environmental and Safety Laws.  The Company is not in violation of any
applicable statute, law or regulation relating to the environment or
occupational health and safety, and no expenditures are or are reasonably
anticipated to be required in order to comply with any such existing statute,
law or regulation.  During the period
that the Company has owned or leased its properties and facilities,
(i) there have been no disposals, releases or threatened releases of
Hazardous Materials (as defined below) by the Company on, from or under such
properties or facilities, and (ii) other than normal office products and
cleaning supplies, it has not used, generated, manufactured or stored on, under
or about such properties or facilities or transported to or from such properties
or facilities any Hazardous Materials.
For purposes of this Section, the terms “disposal,” “release” and
“threatened release” shall have the definitions assigned thereto by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
42 U.S.C. Section 9601, et seq. as
amended (“CERCLA”).  For the purposes of this Section, “Hazardous Materials” shall mean any
hazardous or toxic substance, material or waste, which is regulated under, or
defined as a “hazardous substance,” “pollutant,” “contaminant,”  “toxic
chemical,”  “hazardous  material,” “toxic substance” or “hazardous
chemical” under (1) CERCLA; (2) the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Section 11001, et
seq.; (3) the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq.; (4) the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq.; (5) the Occupational Safety and Health Act of
1970, 29 

9

U.S.C. Section
651, et seq.; (6) regulations
promulgated under any of the above statutes; or (7) any applicable state
or local statute, ordinance, rule or regulation that has a scope or purpose
similar to those statutes identified above.

          3.18
Condition of Properties.  The offices and material equipment,
inventory and other assets of the Company have been kept in reasonable
condition and repair in the ordinary course of business, are reasonably fit and
suitable for the purposes for which they are being used and are believed by the
Company to conform in all material respects with applicable ordinances,
regulations and laws.

          3.19
Licenses.  The Company possesses from the
appropriate agency, commission, board and government body and authority,
whether state, local, federal or foreign, all licenses, permits,
authorizations, approvals, franchises and rights which (i) are necessary
for it to engage in the business currently conducted by it, and (ii) if
not possessed by the Company, would have a Material Adverse Effect.  A list of all material licenses, permits,
approvals and similar rights currently in effect is set forth on Schedule
3.19.

          3.20
Insurance.  The Company has in full force and effect
fire and casualty insurance policies and insurance against other hazards,
risks, and liabilities to persons and property to the extent and in the manner
customary for similarly situated companies in similar businesses, and such
insurance policies have been issued by financially sound, duly licensed and
reputable insurers. 

          3.21
Consent.  Other than the declaration of
effectiveness by the SEC of any registration statement required to be filed
pursuant to the Registration Rights Agreement, no consent, approval,
authorization or order of any court, governmental agency or body or arbitrator
having jurisdiction over the Company, or any of its affiliates, the NASD, OTC
Bulletin Board or the Company’s shareholders is required for execution of the
Transaction Agreements, including, without limitation the issuance and sale of
the Securities and the performance of the Company’s obligations under the
Transaction Agreements.

          3.22
Offering.  Subject in part to the accuracy of the
Investor’s representations and warranties in Section 4, the offer, sale,
and issuance of the Securities in compliance with the terms of this Agreement
constitute transactions exempt from the registration requirements of
Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), and all
applicable state securities laws.
Neither the Company nor any agent on its behalf has solicited or will
solicit any offers to sell or has offered to sell or will offer to sell all or
any part of the Securities to any person or persons so as to bring the sale of
such Securities by the Company within the registration provisions of the
Securities Act or any applicable state securities laws.

          3.23
Brokers or Finders.  Except as set forth on Schedule 3.23,
the Company has not engaged any brokers, finders, or agents, and the Investor
has not incurred, and will not incur, directly or indirectly, as a result of any
action taken by the Company, any liability for brokerage or finders’ fees or
agents’ commissions or any similar charges in connection with the Transaction
Agreements. 

          3.24
No Market Manipulation.  The Company has not taken, and will not
take, directly or indirectly, any action designed to, or that might reasonably
be expected to, cause or result in stabilization or manipulation of the price
of the common stock of the Company to facilitate the sale or resale of the
Securities or affect the price at which the Securities may be issued.

          3.25
Reporting Company.  The Company is a publicly-held company
subject to reporting obligations pursuant to Sections 15(d) and 13 of the
Securities Exchange Act of 1934 (the “Exchange
Act”) and has a class of common stock registered pursuant to Section
12(g) of the Exchange Act.  The
Company’s Common Stock is listed on the OTC Bulletin Board.  Pursuant to the provisions of the 

10

Exchange Act,
the Company has timely filed all reports and other materials required to be
filed thereunder with the Securities and Exchange Commission (together with any
and all filings made under the Securities Act, the “SEC Filings”) during the preceding twelve months except as
set forth on Schedule 3.25 hereto.

          3.26
Information Concerning Company.  The Company’s SEC Filings contain all
material information relating to the Company and its operations and financial
condition as of their respective dates which information is required to be
disclosed therein.  Since the Balance
Sheet Date and except as stated in Schedule 3.26, there has been no
material adverse change in the Company’s business, financial condition or
affairs that has not been disclosed in an SEC Filings as required by the
Exchange Act, not disclosed in the SEC Filings.  The SEC Filings do not contain any untrue statement of a material
fact or omit to state a material fact in light of the circumstances when made
required to be stated therein or necessary to make the statements therein not
misleading.

          3.27
Stop Transfer Order.  The Securities are restricted securities as
of the date of this Agreement.  The
Company will not issue any stop transfer order or other order impeding the sale
and delivery of the Securities, except as may be required by federal securities
laws, in which case the Company will promptly provide written notice of such
stop order with an explanation of the basis for such stop order to the Investor
as provided below in Section 5.1.

          3.28
No Integrated Offering.  Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the Securities
pursuant to this Agreement to be integrated with prior offerings by the Company
for purposes of the Securities Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
OTC Bulletin Board nor will the Company or any of its affiliates or
subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.  The Company has not conducted and will not conduct any offering
other than the transactions contemplated hereby that will be integrated with
the issuance of the Securities.

          3.29
No General Solicitation.  Neither the Company, nor any of its
affiliates or any person acting on its or their behalf, has engaged in any form
of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
the Securities.

          3.30
Listing.  The Company’s Common Stock is quoted on, and
listed for trading on the OTC Bulletin Board.
The Company has not received any oral or written notice that its Common
Stock will be delisted from the OTC Bulletin Board or that the Common Stock
does not meet all requirements for the continuation of such listing, and the
Company is not aware of any event or circumstance that will or may cause the
Company’s Common Stock to be delisted from the OTC Bulletin Board.

          3.31
Correctness of Representations.  The Company represents that the foregoing
representations and warranties are true and correct as of the date hereof, and,
unless the Company otherwise notifies the Investor in writing prior to the
Closing Date, shall be true and correct as of the Closing Date.

          3.32
Disclosure.  To the best knowledge of the Company,
the Company has made available to the Investor, all the information that the
Investor has requested for deciding whether to purchase the Securities.  Neither the Transaction Agreements nor any
other documents or certificates delivered in connection with this Agreement,
which shall include the Company’s SEC Filings, when taken as a whole, contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the 

11

statements
contained herein or therein not misleading in light of the circumstances under
which they were made.

SECTION 4

The Investor’s Representations and Warranties

As a material
inducement to the Company to enter into this Agreement and consummate the
transactions contemplated hereby, the Investor hereby makes to the Company the
representations and warranties contained in this Section 4.

          4.1
No Registration.  The Investor understands and expressly
acknowledges that the Securities have not been, and will not be, registered
under the Securities Act in reliance on a specific exemption from the
Securities Act’s registration provisions, the availability of which depends
upon, among other things, the bona fide nature of the investment intent and the
accuracy of the Investor’s representations as expressed in this Agreement or
otherwise made pursuant to this Agreement.

          4.2
Investment Intent.  The Investor is acquiring the Securities
for investment for the Investor’s own account, not as a nominee or agent, and
not with the view to, or for resale in connection with, any distribution of the
Securities.

          4.3
Investment Experience.  The Investor (or the Investor’s
purchaser representative, within the meaning of Regulation D, Rule 501 (h)
promulgated by the SEC), has substantial experience in evaluating and investing
in private placement transactions of securities in companies similar to the
Company so that the Investor or such purchaser representative is capable of
evaluating the merits and risks of the Investor’s investment in the Company and
has the capacity to protect the Investor’s own interests.  The Investor has received, carefully
reviewed and understands the terms and conditions set forth in this Agreement
and the other Transaction Agreements which contains the financial statements of
the Company and other information important to an investment in the Company.

          4.4
Speculative Nature of Investment.  The Investor understands and expressly
acknowledges that the Investor’s investment in the Company is speculative and
entails a substantial degree of risk and the Investor is in a position to lose
the entire amount of the Investor’s investment.

          4.5
Access to Data and Documentation.  The Investor acknowledges that it has
reviewed this Agreement, along with the Exhibits and Schedules attached hereto,
and the other Transaction Agreements and made its own investigation of the
Company, its business, personnel and prospects; has had an opportunity to
discuss the Company’s business, management, and financial affairs with the
Company’s management and the terms of this investment.  The Investor has also had an opportunity to
ask questions of the Company’s officers, which questions were answered to the
Investor’s full satisfaction, and obtain such additional information and
documents as the Investor considers necessary or advisable in order to form a
decision concerning an investment in the Company.  This Section 4.5 does not limit or modify the Company’s
representations and warranties contained in Section 3 or the Investor’s
right to rely on the Company’s representations and warranties.

          4.6
Accredited Investor.  The Investor is an “accredited investor”
within the meaning of Regulation  D,
Rule 501 (a), promulgated by the Securities and Exchange Commission.

          4.7
Residency.  The Investor’s place and state of residency,
or, in the case of a partnership, corporation, or other entity, such entity’s
principal place of business, is correctly set forth on Exhibit A.

12

          4.8
Rule 144.  Investor acknowledges and agrees that
the Shares, and, if issued, the Warrant Shares are “restricted securities” as
defined in Rule 144 promulgated under the Securities Act, as in effect from
time to time, and must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such registration is
available.  Investor has been advised or
is aware of the provisions of Rule 144, which permits limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things: the availability of certain current
public information about the Company, the resale occurring following the
required holding period under Rule 144 and the number of shares being sold
during any three-month period not exceeding specified limitations.

          4.9
Authorization.

                    (a)
The Investor has all requisite power and authority to execute and deliver the
Transaction Agreements, to purchase the Securities under this Agreement, and to
carry out and perform the Investor’s obligations under the terms of the
Transaction Agreements.  All action
required by the Investor for the authorization, execution, delivery, and
performance of the Transaction Agreements, and the performance of all of the
Investor’s obligations under the Transaction Agreements, has been taken.

                    (b)
The Transaction Agreements, when
executed and delivered by the Investor, will constitute the Investor’s
valid and legally binding obligations, enforceable in accordance with their
terms except: (i) to the extent that the indemnification provisions
contained in the Registration Rights Agreement may be limited by applicable law
and public policy principles, (ii) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors’ rights generally, and (iii) as limited
by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies or by general equity principles.

          4.10
Further Limitations on Disposition.  The Investor hereby acknowledges and
agrees to be bound by the transfer restrictions associated with the Securities
set forth in the Registration Rights Agreement.  In addition, the Investor hereby acknowledges and agrees as
follows:

                    (a)
Without in any way limiting the representations and warranties set forth
elsewhere in this Section 4 or any covenants set forth in this Agreement,
the Investor agrees not to make any disposition of all or any portion of the
Securities unless and until (i) there is then in effect a registration
statement under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement or (ii) the
Investor will have notified the Company of the proposed disposition and, if
reasonably requested by and at the sole expense of the Company, the Investor
will have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will be exempt from
registration under the Securities Act.

                    (b)
Notwithstanding the foregoing subsection, no such registration statement or
opinion of counsel will be necessary for a transfer by the Investor:

                              (i)
to a fund, partnership, limited liability company, or other entity that is
affiliated with the transferring Investor;

                              (ii)
to a partner or member (or retired partner or member) of the transferring
Investor, or to the estate of any such partner or member (or retired partner or
member);

                              (iii)
to the transferring Investor’s spouse, siblings, lineal descendants, or
ancestors by gift, will, or intestate succession; or

13

                              (iv)
in compliance with Rule 144(k) (or any successor provision) of the Securities
Act so long as the Company is furnished with satisfactory evidence of full
compliance with Rule 144(k) (or any successor provision); provided, however, that,
in the case of Section 4.10(b)(i), Section 4.10(b)(ii), or Section 4.10
(b)(iii), the transferee agrees in writing to be subject to the terms of this
Agreement and other Transaction Agreements to the same extent as if such
transferee were an original Investor under this Agreement; provided, further,
however, that any proposed purchaser, assignee, transferee or pledgee be an
“accredited investor” and that the Securities have been held for twelve months
from the date of the Closing and applicable to any such Securities.  The Investor will cause any proposed
purchaser, assignee, transferee, or pledgee of any Securities held by the
Investor to take and hold such securities subject to the provisions and upon
the conditions of this Agreement.  The
Investor consents to the Company’s making a notation on the Company’s records
and giving instructions to any transfer agent for the Company’s capital stock
to implement the transfer restrictions established in this Agreement.

          4.11
Legend; Restriction on Transfer.  The Investor understands and agrees that the
certificates evidencing the Shares and Warrant Shares, or any other securities
issued in respect thereof upon any stock split, stock dividend,
recapitalization, merger, consolidation, or similar event, will bear the legend
required by the Transaction Agreements, and federal and state securities laws,
including the following: 

	
 

	
 

	
 

	
 

	
“THE SHARES
  REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
  ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES LAWS.  THESE SHARES MAY NOT BE SOLD, OFFERED FOR
  SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
  STATEMENT UNDER SUCH ACT OR LAWS OR AN OPINION OF COUNSEL REASONABLY
  SATISFACTORY TO CAPSOURCE FINANCIAL, INC. THAT SUCH REGISTRATION IS NOT
  REQUIRED.”

	
 

          4.12
Warrant Legend.  The Warrants shall bear the following legend:

	
 

	
 

	
 

	
 

	
“THIS
  WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
  BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE
  SECURITIES LAW.  THIS WARRANT AND THE
  COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED
  FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
  STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR LAWS OR AN OPINION OF COUNSEL
  REASONABLY SATISFACTORY TO CAPSOURCE FINANCIAL, INC. THAT SUCH REGISTRATION
  IS NOT REQUIRED.”

	
 

SECTION 5

Covenants of the Company

The Company
covenants and agrees with the Investor as follows:

          5.1
Stop Orders.  The Company will advise the Investor,
promptly after it receives notice of issuance by the SEC, any state securities
commission or any other regulatory authority, of any stop order or of any order
preventing or suspending any offering of any securities of the Company, or of
the suspension of the qualification of the Common Stock of the Company for
offering or sale in any 

14

jurisdiction,
or the initiation of any proceeding for any such purpose, and such notice shall
include an explanation of the basis for any such order, suspension or
proceeding.

          5.2
Listing.  The Company shall promptly secure the
listing of the Shares and Warrant Shares issuable upon exercise of the Warrants
on the OTC Bulletin Board (subject to official notice of issuance) and shall
maintain such listing so long as any of the Shares, Warrant or Warrant Shares
are held by the Investor.  The Company
will maintain the listing of its Common Stock on the OTC Bulletin Board or, in
the alternative, a national securities exchange or automated quotation system,
such as the NASDAQ SmallCap Market or American Stock Exchange, and will comply
in all respects with the Company’s reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities Dealers,
Inc. (“NASD”)
and the OTC Bulletin Board.  The Company
will provide the Investor with copies of all notices it receives notifying the
Company of the threatened or actual delisting of the Common Stock from the OTC
Bulletin Board provided the provisions of such information to the Investor
would not violate the provisions of Regulation FD under the Securities Act.

          5.3
Market Regulations.  The Company shall notify the SEC, NASD, the
OTC Bulletin Board and applicable state authorities, in accordance with their
requirements, if any, of the transactions contemplated by the Transaction
Agreements, and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal
and valid issuance of the Securities to the Investor and promptly provide
copies thereof to the Investor.

          5.4
Reporting Requirements.  From the Closing Date and until three (3)
years following the earlier of the expiration or exercise of the Warrants, the
Company will (i) cause its Common Stock to continue to be registered under
Sections 12(b) or 12(g) of the Exchange Act, (ii) comply in all respects with
its reporting and filing obligations under the Exchange Act, (iii) comply with
all reporting requirements that is applicable to an issuer with a class of
Shares registered pursuant to Section 12(g) of the Exchange Act, and (iv)
comply with all requirements related to the registration statement filed with
the SEC covering the Shares and Warrant Shares under the terms of the
Registration Rights Agreement (the “Registration Statement”).  The Company will use its best efforts not to
take any action or file any document (whether or not permitted by the
Securities Act or the Exchange Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under said Acts so long as any of the Shares, Warrants or Warrant
Shares are held by the Investor.  

          5.5
Use of Proceeds.  The Company shall use the proceeds from this
offer and sale of the Securities for the acquisition of Prime Time Equipment,
Inc. and for general corporate purposes; provided, however, that at no time may
the Company utilize such proceeds for payment of or reduction of any indebtedness
of the Company, whether now existing or hereinafter incurred. 

          5.6
Reservation of Common Stock.  The Company shall reserve from its
authorized but unissued Common Stock, for as long as the Warrants remain
outstanding, one share of Common Stock for each Warrant Share issuable from
time-to-time upon exercise of the Warrants.

          5.7 Designation of Board Member.  The
Company agrees to enter into and deliver
to the Investor a Voting Agreement and Irrevocable Proxy, in the form attached
hereto as Exhibit D, pursuant to which the Company shall cause to be
nominated for, and Randolph Pentel agrees to vote all of the Common Stock
beneficially owned by him in favor of, the election of one (1) individual to be
designated from time to time by the Investor as a member of the Company’s Board
of Directors (the “Designated Director”), to serve until such time as the
Investor no longer hold any of the Shares, Warrants or Warrant Shares.  The Company also agrees that, within fifteen
(15) days following the Closing, it shall undertake to cause its Board of
Directors to perform all steps necessary (including, if appropriate, an action
to increase the size of the board to create a directorship vacancy as permitted
by Section 3.11 of the 

15

Company’s Bylaws),
to appoint the Designated Director to serve as a director of the Company until
the Company’s next annual meeting of shareholders or until his or her successor
is duly elected and qualified.

          5.8
Taxes.  The Company will promptly pay and discharge,
or cause to be paid and discharged, when due and payable, all lawful taxes,
assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company; provided, however, that any such
tax, assessment, charge or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if the
Company shall have set aside on its books adequate reserves with respect
thereto, except that the Company will pay all such contested taxes,
assessments, charges or levies immediately upon the commencement of proceedings
to foreclose any lien which may have attached as security therefore.

          5.9
Insurance.  The Company will keep its assets which are of
an insurable character insured by financially sound, duly licensed and
reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in the Company’s line of business and
not in any event less than 100% of the insurable value of the property insured;
and the Company will maintain, with financially sound, duly licensed and
reputable insurers, insurance against other hazards and risks and liability to
persons and property to the extent and in the manner customary for companies in
similar businesses similarly situated and to the extent available on
commercially reasonable terms.

          5.10
Books and Records.  The Company will keep true records and books
of account in which full, true and correct entries will be made of all dealings
or transactions in relation to its business and affairs in accordance with
generally accepted accounting principles applied on a consistent basis.

          5.11
Governmental Authorities.  The Company shall duly observe and conform to
all applicable requirements of governmental or quasi-governmental authorities
relating to the conduct of its business or to its properties or assets.

          5.12
Intellectual Property.  The Company shall maintain in full force and
effect its corporate existence, rights and franchises and all licenses and
other rights to use intellectual property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business.

          5.13
Properties.  The Company will keep its properties in
good repair, working order and condition, reasonable wear and tear excepted,
and from time to time make all needful and proper repairs, renewals,
replacements, additions and improvements thereto; and the Company will at all
times comply with each provision of all leases to which it is a party or under
which it occupies property if the breach of such provision could reasonably be
expected to have a material adverse effect

          5.14
Correctness of Representations.
 The Company represents that the
foregoing representations and warranties are true and correct as of the date
hereof and, unless the Company otherwise notifies the Investor prior to the
Closing Date (as hereinafter defined), shall be true and correct as of the
Closing Date.

SECTION 6

Investor’s Closing Conditions

The Investor’s
obligation to purchase the Securities at a Closing is subject to the
fulfillment, on or before such Closing, of each of the following conditions,
unless waived by such Investor:

16

          6.1
Representations and Warranties.  The representations and warranties made
by the Company in Section 3 (as modified by the disclosures on the
Schedule of Exceptions which may be updated from time to time in connection
with the Closing) will be true and correct in all respects as of the Closing.

          6.2
Covenants.  All covenants, agreements, and
conditions contained in this Agreement to be performed by the Company on or
before the Closing will have been performed or complied with in all material
respects on or before such Closing.

          6.3
Blue Sky.  The Company will have received all
necessary Blue Sky law permits and qualifications, or have available
corresponding exemptions, as required by any state for the offer and sale of
the Shares and the Common Stock issuable upon conversion of the Shares.

          6.4
Due Diligence.  The
Investor will have completed, as determined in its sole discretion, the
Investor’s legal and financing due diligence review of the Company, and such
review will have been determined by the Investor to be satisfactory. 

          6.5
Convertible Debt.  The Company’s outstanding indebtedness
owed to Randolph M. Pentel together with all accrued but unpaid interest
thereon, which totals $871,865.89 as of May 1, 2006, will have converted into
shares and warrants to purchase shares of the Company’s Common Stock at the
same price per share and warrant paid by the Investor for the purchase of
Shares and Warrants hereby, and the Investor will have received satisfactory
evidence thereof; provided that such shares and warrant shares received by
Randolph M. Pentel upon the completion of the foregoing conversion shall be
subject to and entitled to the benefits of the Registration Rights Agreement,
in the form attached hereto as Exhibit C, to the same extent as the
Investor’s Shares and Warrant Shares, and Randolph  M. Pentel shall be party to such Registration Rights
Agreement.  

          6.6 Registration Rights Agreement.  The
Company, Randolph M.
Pentel and the Investor will have executed and delivered the Registration
Rights Agreement in the form attached as Exhibit C, which shall be in a
form acceptable to the Investor in its sole discretion.

          6.7 Voting Agreement.  The Company,
Randolph M. Pentel and the
Investor will have executed and delivered the Voting Agreement and Irrevocable
Proxy in the form attached as Exhibit C, which shall be in a form
acceptable to the Investor in its sole discretion.

          6.8
Reservation of Shares of Conversion Stock.  The Shares and Warrant Shares shall have
been duly authorized and reserved for issuance.

          6.9
Payment of Fees.  All fees required to be paid at the
Closing under Section 8.4 shall have been paid.

          6.10
[Intentionally Omitted]

          6.11
Compliance Certificate.  The Company will have delivered to
counsel for the Investor, a certificate, executed on the Company’s behalf by
the Company’s Chief Financial Officer, in substantially the form attached as Exhibit F,
certifying the satisfaction of the closing conditions listed in
Section 6.1 and Section 6.2.

          6.12
Legal Opinion.  The Investor will have received from the
Company’s legal counsel a legal opinion, dated as of the Effective Date, in
substantially the form attached as Exhibit G.

17

          6.13
Secretary’s Certificate.  The Company will have delivered to
counsel for the Investor, a certificate, executed on the Company’s behalf by
the Company’s Secretary, in substantially the form attached as Exhibit H.  

          6.14
Consents; Permits and Waivers.  The Company shall have obtained any and
all consents, authorizations, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by this Agreement and the other
Transaction Agreements.

          6.15
Proceedings and Documents.  The Investor’s counsel will have
reasonably approved (a) all proceedings undertaken in connection with the
transactions contemplated by the Transaction Agreements and (b) all
documents and instruments incident to such proceedings.

SECTION 7

The Company’s Closing Conditions

The Company’s
obligation to sell and issue the Securities at the Closing is subject to the
fulfillment on or before the Closing of the following conditions, unless waived
by the Company:

          7.1
Representations and Warranties.  The representations and warranties
contained in Section 4 of the Investor at the Closing will be true and
correct when made and will be true and correct as of the date of such Closing.

          7.2
Covenants.  All covenants, agreements, and
conditions contained in the Transaction Agreements to be performed by Investor
on or before the Closing will have been performed or complied with in all
material respects as of the Closing.

          7.3
Compliance with Securities Laws.  The Company will be satisfied that the
offer and sale of the Securities will be qualified or exempt from registration
or qualification under all applicable federal and state securities laws.

          7.4
Registration Rights Agreement.  The Company, Randolph M. Pentel and the
Investor will have executed and delivered the Registration Rights Agreement in
the form attached as Exhibit C. 

          7.5
[Intentionally Omitted]

          7.6
Consents and Waivers.  The Company will have received any and
all consents, permits, and waivers necessary or appropriate for consummating
the transactions contemplated by the Transaction Agreements.

          7.7
Proceedings and Documents.  The Company’s counsel will have
reasonably approved (a) all corporate proceedings and other proceedings
undertaken in connection with the transactions contemplated by the Transaction
Agreements at the Closing, and (b) all documents and instruments incident
to such proceedings.

18

SECTION 8

Miscellaneous

          8.1 Opinion.  The offer and sale of the
Securities is being
made pursuant to the exemption from the registration provisions of the
Securities Act of 1933, as amended, afforded by Rule 506 of Regulation D
promulgated thereunder.  On the Closing
Date, the Company will provide an opinion reasonably acceptable to the Investor
from the Company’s legal counsel opining on the availability of the Regulation
D exemption as it relates to the offer and issuance of the Securities.  A form of the legal opinion is annexed
hereto as Exhibit G.  The Company
will provide, at the Company’s expense, such other legal opinions in the future
as are reasonably necessary for the exercise of the Warrants.

          8.2
Amendment.  Except as expressly provided in this
Agreement, neither this Agreement nor any term of this Agreement may be
amended, waived, discharged, or terminated other than by a written instrument
referencing this Agreement and signed by the Company and the Investor. 

          8.3
Notices.  All notices and other communications
required or permitted under this Agreement or under any other Transaction
Agreement will be in writing and will be mailed by registered or certified
mail, postage prepaid, sent by facsimile, sent by electronic mail, or otherwise
delivered by hand or by messenger addressed:

                    (a)
if to the Company, to:

	
 

	
 

	
 

	
 

	
CapSource
  Financial, Inc.

	
CapSource
  Financial, Inc.

	
 

	
2305 Canyon
  Boulevard

	
1729 Donegal
  Drive

	
 

	
Suite 103

	
Woodbury, MN
  55125

	
 

	
Boulder, CO
  80302

	
Attn: Steven
  Reichert, Secretary

	
 

	
Attn:  Fred C. Boethling, CEO

	
Facsimile
  number: (651) 578-6614

	
 

	
Facsimile
  number:  (303) 245-0521

	
 

	
 

	
 

	
 

	
 

	
with a copy
  by facsimile only to:

	
 

	
 

	
 

	
 

	
 

	
Rider
  Bennett LLP

  33 South 6th St.

  Minneapolis, MN 55402

  Attn:  David B. Dean

  Facsimile number:  (612) 337-7616

	
 

	
 

	
 

	
 

                    (b)
if to the Investor, to the name, address and telecopy number set forth on Exhibit
A for the Investor.

                    (c)
Each such notice or other communication will, for all purposes of this
Agreement and the other Transaction Agreements, be treated as effective or
having been given when delivered if delivered personally, or, if sent by mail,
at the earlier of its receipt or 72 hours after such communication has been
deposited in a regularly maintained receptacle for the deposit of the United
States mail, addressed and mailed as specified above or, if sent by facsimile,
upon confirmation of facsimile transfer or, if sent by electronic mail, when
directed to the electronic mail address set forth on Exhibit A.

19

          8.4
Payment of Fees; Option.

                    (a)
Legal Fees of Investor.  The Company shall pay to legal counsel for
the Investor all legal fees and expenses incurred by the Investor and its
advisors, Whitebox Advisors, LLC (“Whitebox
Advisors”), in connection with this Agreement, the other Transaction
Agreements and the Registration Statement, including but not limited to any and
all fees and expenses related to due diligence or other matters relating to or
arising out of any of the foregoing.

                    (b)
Origination Fee; Option to Purchase
Additional Securities.  

                              (i)The
Company will pay to
Whitebox Advisors an origination fee equal to two percent (2%) of the Purchase
Price for the Securities sold pursuant to this Agreement (“Origination Fee”). The Origination Fee
shall be paid to Whitebox Advisors on the Closing Date by wire transfer to the
account so designated by Whitebox Advisors. 

                              
(ii) For a period of 180 days from the Closing Date, the Investor will have the
option, in its sole discretion, to subscribe for and purchase from the Company
an additional 375,000 Shares at a purchase price of $.40 per share and a
Warrant to purchase 375,000 Warrant Shares with an exercise price of $.90 per
share. Upon subscription for and purchase of such additional Shares and
Warrants, the Company will issue and deliver to the Investor, certificates
representing the Shares along with a Warrant for the purchase of such Warrant
Shares in form of attached hereto as Exhibit B.

                    
(c) Indemnification for Fees.
The Company on the one hand, and the Investor on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any other persons claiming brokerage commissions, finder’s fees
or other similar payments, except as specified in Section 8.4(b) above, on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby and arising out of such party’s actions. Except as set
forth in Section 8.4(b) or on Schedule 3.23, the Company represents
that there are no other parties entitled to receive fees, commissions, or
similar payments in connection with this Agreement.

          8.5
Governing Law. This
Agreement will be governed in all respects by the internal laws of the State of
Minnesota as applied to agreements entered into among Minnesota residents to be
performed entirely within Minnesota, without regard to Minnesota
conflicts-of-law principles.

          8.6
Survival. The
representations, warranties, covenants, and agreements made in this Agreement
will survive any investigation made by any Party and the closing of the
transactions contemplated by this Agreement.

          8.7
Successors and Assigns. This
Agreement, and any and all rights, duties, and obligations under this
Agreement, will not be assigned, transferred, delegated, or sublicensed by any
Party without the other Party’s prior written consent. Any attempt by any Party
without such prior written consent to assign, transfer, delegate, or sublicense
any rights, duties, or obligations that arise under this Agreement will be
void. Subject to the foregoing and except as otherwise provided in this
Agreement, the provisions of this Agreement will inure to the benefit of, and
be binding upon, the Parties’ respective successors, assigns, heirs, executors,
and administrators.

          8.8
Entire Agreement. The
Transaction Agreements constitute the full and entire understanding and
agreement between the Parties with regard to the subject matter hereof and
thereof, and no Party will be liable or bound to any other Party in any manner
with regard to the subject matter hereof 

20

or thereof by
any warranties, representations, or covenants, in each case except as specifically
set forth in the Transaction Agreements.

          8.9
Delays or Omissions. Except
as expressly provided in this Agreement, no delay or omission to exercise any
right, power, or remedy accruing to any Party upon any breach or default of any
other Party under this Agreement will impair any such right, power, or remedy
of such non-defaulting Party, nor will such delay or omission be construed to
be a waiver of any such breach or default, or an acquiescence in such breach or
default, or of or in any similar breach or default subsequently occurring, nor
will any waiver of any single breach or default be deemed a waiver of any other
previous or subsequent breach or default. Any waiver, permit, consent, or
approval of any kind or character on the part of any Party of any breach or
default under this Agreement, or any waiver on the part of any Party of any
provisions or conditions of this Agreement, must be in writing and will be
effective only to the extent specifically set forth in such writing. All remedies,
either under this Agreement or by law or otherwise afforded to any Party, will
be cumulative and not alternative.

          8.10
Severability. Unless
otherwise expressly provided in this Agreement, each Investor’s rights under
this Agreement and under the other Transaction Agreements are several rights,
not rights jointly held with any of the other Investors. If any provision of
this Agreement becomes or is declared by a court of competent jurisdiction to
be illegal, unenforceable, or void, then this Agreement will continue in full
force and effect without such illegal, unenforceable, or void provision, and
the Parties agree to negotiate, in good faith, a legal and enforceable
substitute provision which most nearly effects the Parties’ intent in entering
into this Agreement as expressed in this Agreement.

          8.11
Titles and Subtitles. The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this Agreement. All references
in this Agreement to sections, paragraphs, exhibits, and schedules will, unless
otherwise provided, refer to sections and paragraphs of this Agreement and
exhibits and schedules attached to this Agreement.

          8.12
Counterparts. This
Agreement may be executed in any number of counterparts, each of which will be
enforceable against the Parties actually executing such counterparts, and all
of which together will constitute one instrument.

          8.13
Facsimile Execution and Delivery.
A facsimile or other reproduction of this Agreement and/or the other
Transaction Agreements may be executed by one or more Parties, and an executed
copy of this Agreement and/or the other Transaction Agreements may be delivered
by one or more Parties by facsimile or similar electronic transmission device
pursuant to which the signature of or on behalf of such Party can be seen, and
such execution and delivery will be considered valid, binding, and effective
for all purposes. At any Party’s request, all Parties agree to execute an
original of this Agreement and/or any other Transaction Agreements as well as
any facsimile or other reproduction hereof and/or thereof.

          8.14
Jurisdiction and Venue. With
respect to any disputes arising out of or related to this Agreement or to any
other Transaction Agreement, the Parties consent to the exclusive jurisdiction
of, and venue in, the state courts in Hennepin County, Minnesota (or, in the
event of exclusive federal jurisdiction, the federal courts of the District of
Minnesota).

          8.15
Further Assurances. Each
Party agrees to execute and deliver, by the proper exercise of such Party’s
corporate, limited liability company, partnership, or other powers, all such
other and additional instruments and documents and do all such other acts and
things as may be necessary to more fully perform this Agreement.

21

          8.16
Construction. The Parties
have participated jointly in negotiating and drafting this Agreement and the
other Transaction Agreements. If any ambiguity, question of intent, or question
of interpretation arises with respect to this Agreement or any other
Transaction Agreement, then this Agreement or that other Transaction Agreement
will be construed as if drafted jointly by the Parties, and no presumption or
burden of proof will arise favoring or disfavoring any Party by virtue of the
authorship of any of the provisions of this Agreement or of any other
Transaction Agreement. As used in this Agreement and in the other Transaction
Agreements, the word “including” means “including, without limitation.”

[signature page follows]

22

The Parties
have executed this Securities Purchase Agreement as of the Effective Date.

	
 

	
 

	
 

	
 

	
CAPSOURCE FINANCIAL, INC.,

	
 

	
 

	
 

	
 

	
By:

	
 

	
 

	
 

	

	
 

	
 

	
Steven
  Reichert

	
 

	
 

	
Vice
  President and Secretary

	
 

	
 

	
 

	
 

	
INVESTOR:

	
 

	
 

	
 

	
 

	
PANDORA SELECT PARTNERS L.P.

	
 

	
 

	
 

	
 

	
By:

	
 

	
 

	
 

	

	
 

	
 

	
Jonathan D.
  Wood

	
 

	
 

	
Chief
  Financial Officer

23

EXHIBIT
A

Schedule
of Investor

	
 

	
 

	
 

	
 

	
 

	
Investors

	
 

	
Securities Being Acquired

	
 

	
Purchase Price

	

	
 

	

	
 

	

	
 

	
 

	
 

	
 

	
 

	
Pandora Select Partners L.P.
3033 Excelsior Boulevard, Suite 300

  Minneapolis, Minnesota 55416

  Attn: Jonathan Wood

  Facsimile number: (612) 253-6151

	
 

	
2,500,000 Shares and a 
warrant to purchase 2,500,000 Shares

	
 

	
$1,000,000

A-1

EXHIBIT
B

Form
of Warrant

(attached)

B-1

EXHIBIT
C

Form
of Registration Rights Agreement

(attached)

C-1

EXHIBIT
D

Form
of Voting Agreement and Irrevocable Proxy

(attached)

D-1

EXHIBIT
E

Wire
Transfer Instructions

E-1

EXHIBIT
F

Form
of Compliance Certificate

(attached)

F-1

EXHIBIT
G

Form
of Legal Opinion

(attached)

G-1

EXHIBIT
H

Form
of Secretary’s Certificate

(attached) 

H-1

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