Exhibit 10.8
EXECUTION COPY
SERIES A CONVERTIBLE PREFERRED STOCK
AND
WARRANT PURCHASE AGREEMENT

Dated as of December 27, 2007
among
NOVARAY MEDICAL, INC.
and
THE PURCHASERS LISTED ON EXHIBIT A

 

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TABLE OF CONTENTS

                              PAGE  
 
                ARTICLE I Purchase and Sale of Preferred Stock; Escrow     2  
 
               
 
  Section 1.1   Purchase and Sale of Stock     2  
 
  Section 1.2   Warrants     2  
 
  Section 1.3   Lead Investor Warrants     2  
 
  Section 1.4   NovaRay Note Holders     2  
 
  Section 1.5   Conversion Shares     3  
 
  Section 1.6   Purchase Price and Closings     3  
 
                ARTICLE II Representations and Warranties     4  
 
               
 
  Section 2.1   Representations and Warranties of the Company     4  
 
  Section 2.2   Representations, Warranties and Covenants of the Purchasers    
14  
 
                ARTICLE III Covenants     17  
 
               
 
  Section 3.1   Securities Compliance     17  
 
  Section 3.2   Registration and Listing     17  
 
  Section 3.3   Inspection Rights     18  
 
  Section 3.4   Compliance with Laws     18  
 
  Section 3.5   Keeping of Records and Books of Account     18  
 
  Section 3.6   Reporting Requirements     18  
 
  Section 3.7   Amendments     19  
 
  Section 3.8   Other Agreements     19  
 
  Section 3.9   Distributions     19  
 
  Section 3.10   Use of Proceeds     19  
 
  Section 3.11   Reservation of Shares     19  
 
  Section 3.12   Transfer Agent Instructions     19  
 
  Section 3.13   Disposition of Assets     20  
 
  Section 3.14   Reporting Status     20  
 
  Section 3.15   Disclosure of Transaction     20  
 
  Section 3.16   Disclosure of Material Information     21  
 
  Section 3.17   Pledge of Securities     21  
 
  Section 3.18   Form SB-2 Eligibility     21  
 
  Section 3.19   Lock-Up Agreement     21  
 
  Section 3.20   DTC     21  
 
  Section 3.21   Sarbanes-Oxley Act     21  
 
  Section 3.22   No Commissions in connection with Conversion of Preferred
Shares     21  

 

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                              PAGE  
 
                ARTICLE IV Conditions     22  
 
               
 
  Section 4.1   Conditions Precedent to the Obligation of the Company to Sell
the Shares     22  
 
  Section 4.2   Conditions Precedent to the Obligation of the Purchasers to
Purchase the Shares     22  
 
                ARTICLE V Stock Certificate Legend     25  
 
               
 
  Section 5.1   Legend     25  
 
                ARTICLE VI Indemnification     26  
 
               
 
  Section 6.1   Indemnification of Purchasers     26  
 
  Section 6.2   Indemnification Procedure     26  
 
                ARTICLE VII Miscellaneous     27  
 
               
 
  Section 7.1   Fees and Expenses     27  
 
  Section 7.2   Specific Enforcement, Consent to Jurisdiction.     27  
 
  Section 7.3   Entire Agreement; Amendment     28  
 
  Section 7.4   Notices     28  
 
  Section 7.5   Rescission and Withdrawal Right     29  
 
  Section 7.6   Waivers     29  
 
  Section 7.7   Headings     29  
 
  Section 7.8   Successors and Assigns     29  
 
  Section 7.9   No Third Party Beneficiaries     29  
 
  Section 7.10   Governing Law     30  
 
  Section 7.11   Survival     30  
 
  Section 7.12   Counterparts     30  
 
  Section 7.13   Publicity     30  
 
  Section 7.14   Severability     30  
 
  Section 7.15   Further Assurances     30  
 
  Section 7.16   Break-Up Fee     30  

EXHIBITS

     
A.
  Purchasers and Amounts
B.
  Form of Certificate of Designation
C-1.
  Form of Series A Warrant
C-2.
  Form of Series J Warrant
C-3.
  Form of Series J-A Warrant
D.
  Form of Registration Rights Agreement
E.
  Form of Lock-Up Agreement
F.
  Form of Irrevocable Transfer Agent Instructions
G.
  Form of Opinion of Counsel

 

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SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE
AGREEMENT
     This SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
(the “Agreement”) is dated as of December 27, 2007 by and among NovaRay Medical,
Inc., a Delaware Corporation (the “Company”), and each of the Purchasers of
shares of Series A Convertible Preferred Stock and Warrants of the Company whose
names are set forth on Exhibit A hereto (individually, a “Purchaser” and
collectively, the “Purchasers”).
RECITALS
     WHEREAS, the Company, Vision Acquisition Subsidiary, Inc. a Delaware
Corporation and a wholly-owned subsidiary of the Company (“Merger Sub”) and
NovaRay, Inc., a Delaware corporation (“NovaRay”) are parties to a merger
agreement (the “Merger Agreement”), pursuant to which the Merger Sub will merge
with and into NovaRay, with NovaRay remaining as the surviving entity after the
merger (the “Merger”) whereby the stockholders of NovaRay will receive common
stock of the Company in exchange for their capital stock of NovaRay;
     WHEREAS, the closing of the Merger is a condition to the Initial Closing as
described herein;
     WHEREAS, concurrently with the closing of the Merger, the Purchasers desire
to complete a private placement financing of not less than $10,000,000.00 (not
including conversion of the NovaRay Notes as described below) (the “Financing”)
whereby the Company will issue to the Purchasers, and the Purchasers will
purchase from the Company, the Preferred Shares and Warrants (as such terms are
defined in Sections 1.1 and 1.3 below) on the terms and conditions set forth in
this Agreement;
     WHEREAS, each of the NovaRay Note Holders (as defined in Section 1.4 below)
holds a promissory note previously issued by NovaRay in the principal amount set
forth beneath the caption “NovaRay Note Principal Amount” opposite such NovaRay
Note Holder’s name on Exhibit A attached hereto that is convertible into
securities of NovaRay (the “NovaRay Notes”); and
     WHEREAS, as a material inducement to the Company consummating the Merger
and the Purchasers purchasing the Preferred Shares and the Warrants in the
Financing, each of the NovaRay Note Holders has agreed to cancel its NovaRay
Note in exchange for the issuance by the Company to such NovaRay Note Holder of
Preferred Shares and Series A Warrants (as such terms are defined in Sections
1.2) in accordance with the terms and conditions set forth in this Agreement.
     NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:

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ARTICLE I
Purchase and Sale of Preferred Stock; Escrow
     Section 1.1 Purchase and Sale of Stock. Upon the following terms and
conditions, the Company shall issue and sell to the Purchasers and each of the
Purchasers shall purchase from the Company the number of shares (the “Preferred
Shares”) of the Company’s Series A Convertible Preferred Stock, par value
$0.0001 per share (the “Preferred Stock”), at a purchase price of $2.67 per
Preferred Share, convertible into shares of the Company’s common stock, par
value $0.0001 per share (the “Common Stock”), set forth opposite such
Purchaser’s name on Exhibit A hereto. The designation, rights, preferences and
other terms and provisions of the Series A Convertible Preferred Stock are set
forth in the Certificate of Designation of the Relative Rights and Preferences
of the Series A Convertible Preferred Stock attached hereto as Exhibit B (the
“Certificate of Designation”). The Company and the Purchasers are executing and
delivering this Agreement in accordance with and in reliance upon the exemption
from securities registration afforded by Rule 506 of Regulation D
(“Regulation D”), as promulgated by the United States Securities and Exchange
Commission (the “Commission”), under the Securities Act of 1933, as amended (the
“Securities Act”), or Section 4(2) of the Securities Act.
     Section 1.2 Warrants. Upon the following terms and conditions and for no
additional consideration, each of the Purchasers shall be issued a warrant, in
substantially the form attached hereto as Exhibit C-1, to purchase one-third
(1/3) of a share of Common Stock for every Preferred Share purchased, rounded
down to the nearest whole share, as set forth opposite such Purchaser’s name on
Exhibit A hereto (the “Series A Warrants”).
     Section 1.3 Lead Investor Warrants. Upon the following terms and conditions
and for no additional consideration, Vision Opportunity Master Fund, Ltd. (the
“Lead Investor”) shall also be issued (i) a warrant, in substantially the form
attached hereto as Exhibit C-2, to purchase up to that number of shares of
Preferred Stock determined by dividing the aggregate purchase price paid for the
Preferred Shares issued to the Lead Investor pursuant to Section 1.1 above by
$4.33, as set forth opposite the Lead Investor’s name on Exhibit A hereto (the
“Series J Warrant”), and (ii) a Series J-A Warrant, in substantially the form
attached hereto as Exhibit C-3 (the “Series J-A Warrant” and, together with the
Series A Warrants and the Series J Warrant, the “Warrants”), to purchase up to a
number of shares of Common Stock equal to thirty-three and one-third percent
(33-1/3%) of the number of Preferred Shares actually purchased by the Lead
Investor pursuant to exercises of its Series J Warrant, rounded down to the
nearest whole share; provided, however, that in the event that the Lead Investor
does not exercise the Series J Warrant at all prior to its expiration date, the
Series J-A Warrant shall terminate immediately and be of no further force or
effect. The Series A Warrants shall expire five (5) years following the Initial
Closing Date, the Series J Warrant issued to the Lead Investor shall expire
twelve (12) months following the Initial Closing Date and the Series J-A
Warrants issued to the Lead Investor shall expire five (5) years following the
date of exercise of the Series J Warrant. Each of the Warrants shall have an
exercise price per share equal to its respective Warrant Price (as defined in
the applicable Warrant).
     Section 1.4 NovaRay Note Holders. Subject to the terms and conditions of
this Agreement, at the Initial Closing (as defined below), the Company shall
issue and deliver to each

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Purchaser who is a holder (each a “NovaRay Note Holder” and collectively the
“NovaRay Note Holders”) of a NovaRay Note or NovaRay Notes in the aggregate
principal amount plus accrued interest through November 15, 2007 as set forth
opposite such NovaRay Note Holder’s name on Exhibit A hereto, the Preferred
Shares and Series A Warrants against delivery by such NovaRay Note Holder to the
Company of evidence of cancellation of the NovaRay Note in a form reasonably
acceptable to the Company. In addition, within five (5) days of the Initial
Closing, the Company will deliver to each NovaRay Note Holder a cash payment
equal to the amount of interest accrued on the NovaRay Note between November 15,
2007 and the Initial Closing which is listed beneath the caption “Interest
Payment” opposite such NovaRay Note Holder’s name on Exhibit A attached hereto
(the “Accrued Interest Payment”).
     Section 1.5 Conversion Shares. The Company has authorized and has reserved
and covenants to continue to reserve, free of preemptive rights and other
similar contractual rights of stockholders, a number of shares of Common Stock
equal to one hundred ten percent (110%) of the number of shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all of the
Preferred Shares (including those underlying the Series J Warrant) and exercise
of all of the Warrants then outstanding. Any shares of Common Stock issuable
upon conversion of the Preferred Shares or the Underlying Preferred Shares (and
such shares when issued) are herein referred to as the “Conversion Shares”. Any
shares of Common Stock issuable upon exercise of the Warrants or any shares of
Preferred Stock issuable upon exercise of the Warrants (the “Underlying
Preferred Shares”) (and such shares of Common Stock and/or Underlying Preferred
Shares when issued) are herein referred to as the “Warrant Shares”. The
Preferred Shares, the Conversion Shares and the Warrant Shares are sometimes
collectively referred to as the “Shares”.
     Section 1.6 Purchase Price and Closings. In consideration of and in express
reliance upon the representations, warranties, covenants, terms and conditions
of this Agreement, the Company agrees to issue and sell to the Purchasers and,
in consideration of and in express reliance upon the representations,
warranties, covenants, terms and conditions of this Agreement, the Purchasers,
severally but not jointly, agree to purchase the numbers of Preferred Shares and
Warrants set forth opposite their respective names on Exhibit A. The minimum
purchase price paid at the Initial Closing (as defined below) will be
$10,000,000 (excluding any Purchase Price paid by cancellation of the NovaRay
Notes) and the maximum aggregate purchase price paid at all closings (including
by cancellation of the NovaRay Notes) will be $20,174,399.85 (the aggregate of
all such purchase prices paid at any Closing, the “Purchase Price”). The
Preferred Shares and Warrants shall be sold and funded in separate closings
(each, a “Closing”), in each case pursuant to terms of this Agreement and
provided that each Purchaser executes a signature page hereto and to each of the
other Transaction Documents (as defined in Section 2.1(b) hereof) to which the
Purchasers are a party, and thereby agrees to be bound by and subject to the
terms and conditions hereof and thereof. All additional new Purchasers and all
additional Preferred Shares and Warrants to be purchased hereunder shall be
reflected on Exhibit A, which shall automatically be amended without any further
action by any party hereto. The initial Closing under this Agreement (the
“Initial Closing”) shall take place on or about December 27, 2007, or as soon
thereafter as the Company has identified Purchasers to invest at least
$10,000,000 and all other conditions to closing have been satisfied or waived
(the “Initial Closing Date”). Each subsequent Closing under this Agreement
(each, a “Subsequent Closing”) shall take place upon the mutual agreement of the
Company and the Purchasers participating in such Subsequent

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Closing, but in no event later than forty-five (45) days from the Initial
Closing Date (each, a “Subsequent Closing Date”). The Initial Closing Date and
each Subsequent Closing Date are sometimes referred to in this Agreement as the
“Closing Date”. Each Closing under this Agreement shall take place at the
offices of Morrison & Foerster LLP, 755 Page Mill Road, Palo Alto, California
94304, at 10:00 a.m., New York time, or at such other time and place as may be
mutually agreed upon. Subject to the terms and conditions of this Agreement, at
each Closing the Company shall deliver or cause to be delivered to each
Purchaser participating in such Closing (x) a certificate for the number of
Preferred Shares set forth opposite the name of such Purchaser on Exhibit A
hereto and (y) any other documents required to be delivered pursuant to
Article IV hereof. At each Closing, each Purchaser shall cause its Purchase
Price to be delivered by wire transfer to the Company. Notwithstanding the
foregoing, in lieu of paying in cash, the holders of the NovaRay Notes shall pay
their respective portion of the Purchase Price hereunder through the
cancellation of such holders’ NovaRay Notes in the respective individual amounts
as listed under “NovaRay Note Principal Amount” opposite such NovaRay Note
Holder’s name on Exhibit A; provided, however, that such payments shall not be
considered for purposes of determining whether the minimum purchase price
obligation has been satisfied.
ARTICLE II
Representations and Warranties
     Section 2.1 Representations and Warranties of the Company. The Company
hereby represents and warrants to each Purchaser, as of the date hereof (except
as set forth in the schedule of exceptions delivered by the Company to a
Purchaser at a Closing in which such Purchaser participates (the “Schedule of
Exceptions”) with each numbered Schedule corresponding to the section number
herein), as follows:
          (a) Organization, Good Standing and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted. Except as set forth on Schedule 2.1(a), the Company and
each of its subsidiaries is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except for any jurisdiction(s) (alone or in the aggregate) in which
the failure to be so qualified could not reasonably be expected to have a
Material Adverse Effect (as defined in Section 2.1(c) hereof).
          (b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement in the form attached hereto as Exhibit D (the
“Registration Rights Agreement”), the Lock-Up Agreements (as defined in
Section 3.19 hereof) in the forms attached hereto as Exhibit E-1 and Exhibit E-2
respectively, the Irrevocable Transfer Agent Instructions (as defined in
Section 3.12), the Certificate of Designation, and the Warrants (collectively,
the “Transaction Documents”) and to issue and sell the Shares and the Warrants
in accordance with the terms hereof. The execution, delivery and performance of
the Transaction Documents by the Company, and the consummation by it of the
transactions contemplated hereby and thereby,

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have been duly and validly authorized by all necessary corporate action, and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required. This Agreement has been duly executed and delivered by
the Company. The other Transaction Documents will have been duly executed and
delivered by the Company at the Closing. Each of the Transaction Documents
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor’s rights and remedies or by other
equitable principles of general application.
          (c) Capitalization. The authorized capital stock of the Company and
the shares thereof issued and outstanding immediately following the closing of
the Merger, are set forth on Schedule 2.1(c) hereto. All of the outstanding
shares of the Common Stock immediately following the closing of the Merger have
been duly and validly authorized. Except as set forth on Schedule 2.1(c) hereto,
no shares of Common Stock are entitled to preemptive rights or registration
rights and there are no outstanding options, warrants, scrip, rights to
subscribe to, call relating to, or securities or rights convertible into, any
shares of capital stock of the Company. Except as set forth on Schedule 2.1(c)
hereto, there are no contracts, commitments, understandings, or arrangements by
which the Company is or may become bound to issue additional shares of the
capital stock of the Company or options, securities or rights convertible into
shares of capital stock of the Company. Except as set forth on Schedule 2.1(c)
hereto, the Company is not a party to any agreement granting registration or
anti-dilution rights to any person with respect to any of its equity or debt
securities. The Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company. The offer and sale of all capital stock, convertible securities,
rights, warrants, or options of the Company issued prior to the Closing complied
with all applicable Federal and state securities laws, and no stockholder has a
right of rescission or claim for damages with respect thereto which would have a
Material Adverse Effect (as defined below). The Company has furnished or made
available to the Purchasers true and correct copies of the Company’s Certificate
of Incorporation as in effect on the date hereof (the “Certificate”), and the
Company’s Bylaws as in effect on the date hereof (the “Bylaws”). For the
purposes of this Agreement, “Material Adverse Effect” means any material adverse
effect on the business, operations, properties, prospects or financial condition
of the Company and its subsidiaries, taken as a whole, and/or any condition,
circumstance, or situation that would prohibit or otherwise impair the ability
of the Company to perform any of its obligations under this Agreement in any
material respect; provided, however, that any adverse effect that that is caused
primarily by conditions generally affecting the U.S. economy shall be deemed not
to be a Material Adverse Effect.
          (d) Issuance of Shares. The Preferred Shares and the Warrants to be
issued at the Closing have been duly authorized by all necessary corporate
action and the Preferred Shares, when paid for and issued in accordance with the
terms hereof, shall be validly issued and outstanding, fully paid and
nonassessable and entitled to the rights and preferences set forth in the
Certificate of Designation. When the Conversion Shares and the Warrant Shares
are paid for and issued in accordance with the terms of the Certificate of
Designation and the Warrants, respectively, such shares will be duly authorized
by all necessary corporate action and validly

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issued and outstanding, fully paid and nonassessable, and the holders shall be
entitled to all rights accorded to a holder of Common Stock and/or Preferred
Stock (as the case may be).
          (e) No Conflicts. Except as set forth on Schedule 2.1(e) hereto, the
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations thereunder and the
consummation by the Company of the transactions contemplated herein and therein
do not and will not (i) violate any provision of the Company’s Certificate or
Bylaws, (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, mortgage, deed of trust, indenture, note, bond, license, lease
agreement, instrument or obligation to which the Company is a party or by which
it or its properties or assets are bound, (iii) create or impose a lien,
mortgage, security interest, charge or encumbrance of any nature on any property
of the Company under any agreement or any commitment to which the Company is a
party or by which the Company is bound or by which any of its respective
properties or assets are bound, or (iv) result in a violation of any federal,
state, local or foreign statute, rule, regulation, order, judgment or decree
(including Federal and state securities laws and regulations) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries are bound or affected, except, in all cases
other than violations pursuant to clauses (i) and (iv) above, for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect. The business of the Company and its subsidiaries is not being
conducted in violation of any laws, ordinances or regulations of any
governmental entity, except for possible violations which singularly or in the
aggregate do not and will not have a Material Adverse Effect. The Company is not
required under Federal, state or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under the Transaction Documents, or issue and sell the
Preferred Shares, the Warrants, the Conversion Shares and the Warrant Shares in
accordance with the terms hereof or thereof (other than (x) any consent,
authorization or order that has been obtained as of the date hereof, (y) any
filing or registration that has been made as of the date hereof or (z) any
filings which may be required to be made by the Company with the Commission or
state securities administrators subsequent to the Closing, any registration
statement which may be filed pursuant hereto, and the Certificate of
Designation); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Purchasers herein.
          (f) Commission Documents, Financial Statements. Except as indicated on
Schedule 2.1(f), the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it since the closing of
the Merger with the Commission pursuant to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), including
material filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all of
the foregoing including filings incorporated by reference therein being referred
to herein as the “Commission Documents”). The Company has delivered or made
available to each of the Purchasers (through the EDGAR system or otherwise) true
and complete copies of the Commission Documents. The Company has not provided to
the Purchasers any material non-public information or other information which,
according to applicable law, rule or regulation,

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was required to have been disclosed publicly by the Company but which has not
been so disclosed, other than with respect to the transactions contemplated by
this Agreement and the Merger Agreement. At the times of their respective
filings, the Company has complied in all material respects with the requirements
of the Exchange Act and the rules and regulations of the Commission promulgated
thereunder and other federal, state and local laws, rules and regulations
applicable to such documents, and, as of their respective dates, none of the
Commission Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the Commission Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the Commission or other applicable rules and regulations with respect thereto.
Such financial statements have been prepared in accordance with United States
generally accepted accounting principles (“GAAP”) applied on a consistent basis
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes), and fairly
present in all material respects the financial position of the Company and its
subsidiaries as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).
          (g) Subsidiaries. Schedule 2.1(g) hereto sets forth each subsidiary of
the Company, showing the jurisdiction of its incorporation or organization and
showing the percentage of each person’s ownership. For the purposes of this
Agreement, “subsidiary” shall mean any corporation or other entity of which at
least a majority of the securities or other ownership interest having ordinary
voting power (absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other subsidiaries. All of the
outstanding shares of capital stock of each subsidiary have been duly authorized
and validly issued, and are fully paid and nonassessable. There are no
outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any subsidiary for the purchase
or acquisition of any shares of capital stock of any subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock. Neither the Company nor any
subsidiary is subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any subsidiary
or any convertible securities, rights, warrants or options of the type described
in the preceding sentence. Neither the Company nor any subsidiary is party to,
nor has any knowledge of, any agreement restricting the voting or transfer of
any shares of the capital stock of any subsidiary.
          (h) No Material Adverse Change. Since the closing of the Merger, the
Company has not experienced or suffered any Material Adverse Effect, and since
September 30, 2007, the Company’s subsidiaries have not experienced or suffered
any Material Adverse Effect.
          (i) No Undisclosed Liabilities. Except as set forth on
Schedule 2.1(i), neither the Company nor any of its subsidiaries has any
liabilities, obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured, absolute, accrued, contingent or otherwise) other than:
(i) those reflected in the financial statements of the Company or any financial
statements of any subsidiary of the Company filed with the Commission in
connection with the

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Merger (the “NovaRay Financial Statements”); or (ii) those incurred in the
ordinary course of the Company’s or its subsidiaries respective businesses since
September 30, 2007, and which, individually or in the aggregate, do not or would
not have a Material Adverse Effect on the Company or its subsidiaries.
          (j) No Undisclosed Events or Circumstances. Since the closing of the
Merger, no event or circumstance has occurred or exists with respect to the
Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial condition, which, under applicable law, rule
or regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed, other than with respect
to the transactions contemplated by this Agreement and the Merger Agreement.
          (k) Indebtedness. Schedule 2.1(k) hereto sets forth as of a recent
date all outstanding secured and unsecured Indebtedness of the Company or any
subsidiary, or for which the Company or any subsidiary has commitments, in each
case that have not previously been set forth in the Commission Documents or the
NovaRay Financial Statements. For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
$100,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $25,000 due under leases required to be
capitalized in accordance with GAAP. Except as set forth on Schedule 2.1(k),
neither the Company nor any subsidiary is in default with respect to any
Indebtedness.
          (l) Title to Assets. Except as set forth on Schedule 2.1(l), each of
the Company and the subsidiaries has good and marketable title to all of its
real and personal property, free and clear of any mortgages, pledges, charges,
liens, security interests or other encumbrances, or such that, individually or
in the aggregate, do not cause a Material Adverse Effect. Except as set forth on
Schedule 2.1(l), all leases of the Company and each of its subsidiaries are
valid and subsisting and in full force and effect.
          (m) Actions Pending. There is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or any other proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any subsidiary which questions the validity of this Agreement or any of the
other Transaction Documents or the transactions contemplated hereby or thereby
or any action taken or to be taken pursuant hereto or thereto. There is no
action, suit, claim, investigation, arbitration, alternate dispute resolution
proceeding or any other proceeding pending or, to the knowledge of the Company,
threatened, against or involving the Company, any subsidiary or any of their
respective properties or assets. There are no outstanding orders, judgments,
injunctions, awards or decrees of any court, arbitrator or governmental or
regulatory body against the Company or any subsidiary or any officers or
directors of the Company or subsidiary in their capacities as such.

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          (n) Compliance with Law. The business of the Company’s subsidiaries,
and, since the consummation of the Merger, the business of the Company, has been
and is presently being conducted in accordance with all applicable federal,
state and local governmental laws, rules, regulations and ordinances, except for
such noncompliance that, individually or in the aggregate, would not cause a
Material Adverse Effect. The Company and each of its subsidiaries have all
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals necessary for the conduct of its business as now
being conducted by it unless the failure to possess such franchises, permits,
licenses, consents and other governmental or regulatory authorizations and
approvals, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect.
          (o) Taxes. The Company and each of the subsidiaries has accurately
prepared and filed all federal, state and other tax returns required by law to
be filed by it, has paid or made provisions for the payment of all taxes shown
to be due and all additional assessments, and adequate provisions have been and
are reflected in the financial statements of the Company and the subsidiaries
for all current taxes and other charges to which the Company or any subsidiary
is subject and which are not currently due and payable. None of the federal
income tax returns of the Company or any subsidiary have been audited by the
Internal Revenue Service. The Company has no knowledge of any additional
assessments, adjustments or contingent tax liability (whether federal or state)
of any nature whatsoever, whether pending or threatened against the Company or
any subsidiary for any period, nor of any basis for any such assessment,
adjustment or contingency.
          (p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto, no
brokers, finders or financial advisory fees or commissions will be payable by
the Company or any subsidiary or any Purchaser with respect to the transactions
contemplated by this Agreement.
          (q) Disclosure. Neither this Agreement or the Schedule of Exceptions
hereto nor any other documents, certificates or instruments required to be
delivered to the Purchasers by or on behalf of the Company or any subsidiary by
this Agreement or the other Transaction Documents contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements made herein or therein, in the light of the circumstances under
which they were made herein or therein, not misleading.
          (r) Environmental Compliance. The Company and each of its subsidiaries
have obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. Schedule 2.1(r) describes all material permits, licenses and other
authorizations issued under any Environmental Laws to the Company or its
subsidiaries. “Environmental Laws” shall mean all applicable laws relating to
the protection of the environment including, without limitation, all
requirements pertaining to reporting, licensing, permitting, controlling,
investigating or remediating emissions, discharges, releases or threatened
releases of hazardous substances, chemical substances, pollutants, contaminants
or toxic substances, materials or wastes, whether solid, liquid or gaseous in
nature, into the air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of hazardous substances, chemical substances, pollutants,
contaminants or toxic substances, material or wastes, whether solid, liquid or
gaseous

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in nature. The Company has all necessary governmental approvals required under
all Environmental Laws and used in its business or in the business of any of its
subsidiaries. The Company and each of its subsidiaries are also in compliance
with all other limitations, restrictions, conditions, standards, requirements,
schedules and timetables required or imposed under all Environmental Laws.
Except for such instances as would not individually or in the aggregate have a
Material Adverse Effect, the Company is not aware of any past or present events,
conditions, circumstances, incidents, actions or omissions relating to the
Company or its subsidiaries that violate or may violate any Environmental Law
after the Initial Closing Date.
          (s) Books and Records. The books and records of the Company and its
subsidiaries accurately reflect in all material respects the information
relating to the business of the Company and the subsidiaries, the location and
collection of their assets, and the nature of all transactions giving rise to
the obligations or accounts receivable of the Company or any subsidiary.
          (t) Material Agreements. Except as set forth on Schedule 2.1(t),
neither the Company nor any subsidiary is a party to any written or oral
contract, instrument, agreement, commitment, obligation, plan or arrangement, a
copy of which would be required to be filed with the Commission as an exhibit to
a registration statement on Form SB-2 (collectively, “Material Agreements”) if
the Company or any subsidiary were registering securities under the Securities
Act. Except as set forth on Schedule 2.1(t), the Company and each of its
subsidiaries has in all material respects performed all the obligations required
to be performed by them to date under the foregoing agreements, have received no
notice of default and are not in default under any Material Agreement now in
effect, the result of which could cause a Material Adverse Effect. Except as set
forth on Schedule 2.1(t), no written or oral contract, instrument, agreement,
commitment, obligation, plan or arrangement of the Company or of any subsidiary
limits the payment of dividends on the Company’s Preferred Shares, other
preferred stock, if any, or its Common Stock.
          (u) Intellectual Property. The Company and its subsidiaries own, or
have rights to use, all inventions, know-how, patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses, trade secrets and other similar rights that are necessary for the
conduct of their respective businesses now operated by them which the failure to
so have would have or reasonably be expected to result in a Material Adverse
Effect (collectively, the “Intellectual Property Rights”). Schedule 2.1(u) sets
forth a complete and accurate list of the Company’s material Intellectual
Property Rights. Neither the Company’s nor any subsidiary’s Intellectual
Property Rights have expired or terminated, or are expected to expire or
terminate, within three years from the date of this Agreement. Neither the
Company nor any subsidiary has received written notice that the Intellectual
Property Rights used by the Company or any Subsidiary violates or infringes upon
the rights of any person. To the knowledge of the Company, the Company and its
subsidiaries’ Intellectual Property Rights do not infringe any patent,
copyright, trademark, trade name or other proprietary rights of any third party,
and there is no claim, action or proceeding being made or brought against, or to
the Company’s knowledge, being threatened against, the Company or any subsidiary
regarding any of the Intellectual Property Rights used by the Company or any
subsidiary. The Company does not have any knowledge of an infringement by
another person of any of its Intellectual Property Rights by third parties and
has no reason to believe that any of its Intellectual Property Rights is

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unenforceable. The Company has taken commercially reasonable security measures
to protect the secrecy and confidentiality of its Intellectual Property Rights.
          (v) Transactions with Affiliates. Except as set forth on
Schedule 2.1(v), there are no loans, leases, agreements, contracts, royalty
agreements, management contracts or arrangements or other continuing
transactions between (a) the Company or any subsidiary on the one hand, and
(b) on the other hand, any officer, employee, consultant or director of the
Company, or any of its subsidiaries, or any person owning any capital stock of
the Company or any subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any corporation or
other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder.
          (w) Securities Act of 1933. Based in material part upon the
representations herein of the Purchasers, the Company has complied and will
comply with all applicable federal and state securities laws in connection with
the offer, issuance and sale of the Preferred Shares and the Warrants hereunder.
Neither the Company nor anyone acting on its behalf, directly or indirectly, has
or will sell, offer to sell or solicit offers to buy any of the Shares, the
Warrants or similar securities to, or solicit offers with respect thereto from,
or enter into any preliminary conversations or negotiations relating thereto
with, any person, or has taken or will take any action, so as to bring the
issuance and sale of any of the Shares and the Warrants under the registration
provisions of the Securities Act and applicable state securities laws, and
neither the Company nor any of its affiliates, nor 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 any of the Preferred Shares and the
Warrants.
          (x) Governmental Approvals. Except for the filing of any notice prior
or subsequent to the Closing Date that may be required under applicable state
and/or federal securities laws (which if required, shall be filed on a timely
basis), including the filing of a Form D and a registration statement or
statements pursuant to the Registration Rights Agreement, and the filing of the
Certificate of Designation with the Secretary of State for the State of
Delaware, no authorization, consent, approval, license, exemption of, filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
for, or in connection with, the execution or delivery of the Preferred Shares
and the Warrants, or for the performance by the Company of its obligations under
the Transaction Documents.
          (y) Employees. Neither the Company nor any subsidiary has any
collective bargaining arrangements or agreements covering any of its employees.
Except as set forth on Schedule 2.1(y), neither the Company nor any subsidiary
is a party to any employment contract, agreement regarding proprietary
information, non-competition agreement, non-solicitation agreement, or
confidentiality agreement relating to the right of any officer, employee or
consultant to be employed or engaged by the Company or such subsidiary. No
officer, consultant or key employee of the Company or any subsidiary whose
termination, either individually or in the aggregate, could have a Material
Adverse Effect, has terminated or, to the

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knowledge of the Company, has any present intention of terminating his or her
employment or engagement with the Company or any subsidiary.
          (z) Foreign Corrupt Practices. Neither the Company nor any of its
Subsidiaries nor, to the knowledge of the Company, any director, officer, agent,
or employee acting on behalf of the Company or any of its Subsidiaries has, in
the course of its actions for, or on behalf of, the Company (a) used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (b) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (c) violated or is in violation of any provision
of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (d) made any
unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
          (aa) Absence of Certain Developments. Except as set forth on Schedule
2.1(aa), since the consummation of the Merger the Company, and since
September 30, 2007 the Company’s subsidiaries, have not:
               (i) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;
               (ii) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except: (i) liabilities already disclosed
in the financial statements of the Company or the NovaRay Financial Statements;
and (ii) liabilities incurred in the ordinary course of business;
               (iii) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than liabilities paid in
the ordinary course of business;
               (iv) declared or made any payment or distribution of cash or
other property to stockholders with respect to its stock, or purchased or
redeemed, or entered into any agreements so to purchase or redeem, any shares of
its capital stock;
               (v) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business;
               (vi) sold, assigned or transferred any of the Company’s or any
subsidiary’s Intellectual Property Rights, or disclosed any of the Company’s or
any subsidiary’s proprietary confidential information to any person except to
customers or consultants of the Company or any subsidiary in the ordinary course
of business or to the Purchasers or their representatives;
               (vii) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of business;
               (viii) made any changes in employee compensation except in the
ordinary course of business and consistent with past practices;

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               (ix) made capital expenditures or commitments therefor that
aggregate in excess of $100,000;
               (x) made charitable contributions or pledges in excess of
$25,000;
               (xi) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;
               (xii) experienced any material problems with labor or management
in connection with the terms and conditions of their employment;
               (xiii) entered into an agreement, written or otherwise, to take
any of the foregoing actions.
          (bb) Public Utility Holding Company Act and Investment Company Act
Status. The Company is not a “holding company” or a “public utility company” as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended. The Company is not, and as a result of and immediately upon the Closing
will not be, an “investment company” or a company “controlled” by an “investment
company,” within the meaning of the Investment Company Act of 1940, as amended.
          (cc) ERISA. Neither the Company nor its subsidiaries, through any
trade or business, whether or not incorporated, which, together with the Company
or any subsidiary, is under common control, as described in Section 414(b) or
(c) of the Internal Revenue Code of 1986, as amended (the “Code”), has
established or maintained, or made any contributions to an “employee pension
benefit plan” (as defined in Section 3 of Employee Retirement Income Security
Act of 1974, as amended (“ERISA”).
          (dd) Dilutive Effect. The Company understands and acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred
Shares in accordance with this Agreement and the Certificate of Designation and
its obligations to issue the Warrant Shares upon the exercise of the Warrants in
accordance with this Agreement and the Warrants, is, in each case, absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interest of other stockholders of the Company.
          (ee) 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
Preferred Shares and Warrants pursuant to this Agreement to be integrated with
prior offerings by the Company for purposes of the Securities Act which would
prevent the Company from selling the Shares pursuant to Rule 506 under the
Securities Act, nor will the Company or any of its affiliates or subsidiaries
take any action or steps that would cause the offering of the Shares to be so
integrated with other offerings. The Company does not have any registration
statement pending before the Commission or currently under the Commission’s
review.
          (ff) Sarbanes-Oxley Act. Since the consummation of the Merger, the
Company is in compliance with the applicable provisions of the Sarbanes-Oxley
Act of 2002 (the

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“Sarbanes-Oxley Act”), and the rules and regulations promulgated thereunder,
that are effective, and intends to comply with other applicable provisions of
the Sarbanes-Oxley Act, and the rules and regulations promulgated thereunder,
upon the effectiveness of such provisions.
          (gg) Independent Nature of Purchasers. The Company acknowledges that
the obligations of each Purchaser under the Transaction Documents are several
and not joint with the obligations of any other Purchaser, and no Purchaser
shall be responsible in any way for the performance of the obligations of any
other Purchaser under the Transaction Documents. The Company acknowledges that
the decision of each Purchaser to purchase securities pursuant to this Agreement
has been made by such Purchaser independently of any other purchase and
independently of any information, materials, statements or opinions as to the
business, affairs, operations, assets, properties, liabilities, results of
operations, condition (financial or otherwise) or prospects of the Company or of
its subsidiaries which may have made or given by any other Purchaser or by any
agent or employee of any other Purchaser. The Company acknowledges that nothing
contained herein, or in any Transaction Document, and no action taken by any
Purchaser pursuant hereto or thereto, shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents. The Company acknowledges that each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation, the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that for reasons of administrative convenience
only, the Transaction Documents have been prepared by counsel for the Lead
Investor and such counsel does not represent all of the Purchasers but only the
Lead Investor and the other Purchasers have had the opportunity to retain their
own individual counsel with respect to the transactions contemplated hereby.
          (hh) Insurance. The insurance policies owned and maintained by the
Company that are material to the Company are in full force and effect, all
premiums due and payable thereon have been paid (other than retroactive or
retrospective premium adjustments that the Company is not currently required,
but may in the future be required, to pay with respect to any period ending
prior to the date of this Agreement), and the Company has received no notice of
cancellation or termination with respect to any such policy that has not been
replaced on substantially similar terms prior to the date of such cancellation.
          (ii) Transfer Agent. The name, address, telephone number, fax number,
contact person and email of the Company’s current transfer agent is set forth on
Schedule 2.1(ii) hereto.
     Section 2.2 Representations, Warranties and Covenants of the Purchasers.
Each Purchaser hereby makes the following representations, warranties and
covenants to the Company with respect solely to itself and not with respect to
any other Purchaser:
           (a) Organization and Standing of the Purchasers. If the Purchaser is
an entity, such Purchaser is a corporation, partnership or limited liability
company duly incorporated or

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organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.
          (b) Authorization and Power. Each Purchaser has the requisite power
and authority to enter into and perform this Agreement and to purchase the
Preferred Shares and Warrants being sold to it hereunder. The execution,
delivery and performance of this Agreement and the Registration Rights Agreement
by such Purchaser and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate or
partnership action, and no further consent or authorization of such Purchaser or
its Board of Directors, stockholders, members, managers or partners, as the case
may be, is required. Each of this Agreement and the Registration Rights
Agreement has been duly authorized, executed and delivered by such Purchaser and
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of such Purchaser enforceable against such Purchaser in
accordance with the terms thereof.
          (c) No Conflicts. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement by each Purchaser and the
consummation by such Purchaser of the transactions contemplated hereby and
thereby or relating hereto do not and will not (i) result in a violation of such
Purchaser’s charter documents or bylaws or other organizational documents or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of any agreement,
indenture or instrument or obligation to which such Purchaser is a party or by
which its properties or assets are bound, or result in a violation of any law,
rule, or regulation, or any order, judgment or decree of any court or
governmental agency applicable to such Purchaser or its properties (except for
such conflicts, defaults and violations as would not, individually or in the
aggregate, have a material adverse effect on such Purchaser’s ability to perform
its obligations hereunder). Such Purchaser is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under this Agreement or the Registration Rights Agreement or
to purchase the Preferred Shares or acquire the Warrants in accordance with the
terms hereof, provided that for purposes of the representation made in this
sentence, such Purchaser is assuming and relying upon the accuracy of the
relevant representations and agreements of the Company herein.
          (d) Acquisition for Investment. Each Purchaser is acquiring the
Preferred Shares and the Warrants in the ordinary course of its business and
solely for its own account for the purpose of investment and not as a nominee or
with a view to or for sale in connection with distribution. Each Purchaser does
not have a present intention to sell the Preferred Shares or the Warrants in a
manner that would violate the registration requirements of Federal and state
securities laws, nor a present arrangement (whether or not legally binding) or
intention to effect any distribution of the Preferred Shares or the Warrants to
or through any person or entity; provided, however, that by making the
representations herein and subject to Section 2.2(h) below, such Purchaser does
not agree to hold the Shares or the Warrants for any minimum or other specific
term and reserves the right to dispose of the Shares or the Warrants at any time
in accordance with Federal and state securities laws applicable to such
disposition. Each Purchaser will not, directly or indirectly, offer, sell,
pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase
or otherwise acquire or take a pledge of) any of the Preferred Shares or

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Warrants, nor will such Purchaser engage in any short sale that results in a
disposition of any of the Preferred Shares or Warrants by such Purchaser, except
in compliance with any applicable state and Federal securities laws. Each
Purchaser acknowledges that it is able to bear the financial risks associated
with an investment in the Preferred Shares and the Warrants and that it has been
given full access to such records of the Company and the subsidiaries and to the
officers of the Company and the subsidiaries and has carefully reviewed and
considered all such information as it has deemed necessary or appropriate to
conduct such Purchaser’s due diligence investigation and has sufficient
knowledge and experience in investing in companies similar to the Company in
terms of the Company’s stage of development so as to be able to evaluate the
risks and merits of its investment in the Company.
          (e) Status of Purchasers. Each Purchaser is an “accredited investor”
as defined in Regulation D promulgated under the Securities Act. Such Purchaser
is not required to be registered as a broker-dealer under Section 15 of the
Exchange Act and such Purchaser is not a broker-dealer.
          (f) Opportunities for Additional Information. Subject to Section 7.3
hereof, each Purchaser acknowledges that such Purchaser has had the opportunity
to ask questions of and receive answers from, or obtain additional information
from, the executive officers of the Company concerning the financial and other
affairs of the Company, and to the extent deemed necessary in light of such
Purchaser’s personal knowledge of the Company’s affairs, such Purchaser has
asked such questions and received answers to the full satisfaction of such
Purchaser, and such Purchaser desires to invest in the Company.
          (g) No General Solicitation. Each Purchaser acknowledges that the
Preferred Shares and the Warrants were not offered to such Purchaser by means of
any form of general or public solicitation or general advertising, or publicly
disseminated advertisements or sales literature, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media, or broadcast over television or radio, or
(ii) any seminar or meeting to which such Purchaser was invited by any of the
foregoing means of communications.
          (h) Rule 144. Such Purchaser understands that the Shares must be held
indefinitely unless such Shares are registered under the Securities Act or an
exemption from registration is available. Such Purchaser acknowledges that such
Purchaser is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act (“Rule 144”),
and that such person has been advised that Rule 144 permits resales only under
certain circumstances. Such Purchaser understands that to the extent that
Rule 144 is not available, such Purchaser will be unable to sell any Shares
without either registration under the Securities Act or the existence of another
exemption from such registration requirement.
          (i) General. Such Purchaser understands that the Shares are being
offered and sold in reliance on a transactional exemption from the registration
requirement of Federal and state securities laws and the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Shares.

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          (j) Independent Investment. Except as may be disclosed in any filings
with the Commission by the Purchasers under Section 13 and/or Section 16 of the
Exchange Act, no Purchaser has agreed to act with any other Purchaser for the
purpose of acquiring, holding, voting or disposing of the Shares purchased
hereunder for purposes of Section 13(d) under the Exchange Act, and each
Purchaser is acting independently with respect to its investment in the Shares.
Each Purchaser understands that nothing in the Agreement or any other materials
presented to such Purchaser in connection with the purchase and sale of the
Preferred Shares and Warrants constitutes legal, tax or investment advice. Each
Purchaser has consulted such legal, tax and investment advisors as it, in its
sole discretion, has deemed necessary or appropriate in connection with its
purchase of the Preferred Shares and Warrants.
          (k) Risk of Loss; No Public Market. Each Purchaser understands that
its investment in the Preferred Shares and Warrants involves a significant
degree of risk, including a risk of total loss of such Purchaser’s investment.
Each Purchaser understands that there currently is no public market for the
securities of the Company; that the purchase price for the Shares was
established by negotiations between NovaRay and the Lead Investor; and that no
representation is being made as to the future value of any of the Company’s
securities.
ARTICLE III
Covenants
     The Company covenants with each of the Purchasers as follows, which
covenants are for the benefit of the Purchasers and their permitted assignees
hereunder.
     Section 3.1 Securities Compliance. The Company shall notify the Commission
in accordance with its rules and regulations of the transactions contemplated by
any of the Transaction Documents, including filing a Form D with respect to the
Preferred Shares, Warrants, Conversion Shares and Warrant Shares as required
under Regulation D and applicable “blue sky” laws, 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 Preferred
Shares, the Warrants, the Conversion Shares and the Warrant Shares to the
Purchasers or subsequent holders.
     Section 3.2 Registration and Listing. The Company shall (a) either
(i) cause its Common Stock to continue to be registered under Section 12(b) or
12(g) of the Exchange Act, or (ii) continue to voluntarily file all reports
required to be filed as if the Company were so registered, and in any event
shall comply in all respects with its reporting and filing obligations under the
Exchange Act, (b) comply with all requirements related to any registration
statement filed pursuant to this Agreement, and (c) not take any action or file
any document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act
or Securities Act, except as permitted herein. The Company will take all action
necessary to begin the listing or trading of its Common Stock on the OTC
Bulletin Board or other similar exchange or market no later than forty-five
(45) days from the Effectiveness Date (as defined in the Registration Rights
Agreement). Subject to the terms of the Transaction Documents, the Company
further covenants that it will take such further action as the Purchasers

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may reasonably request, all to the extent required from time to time, to enable
the Purchasers to sell the Shares without registration under the Securities Act
within the limitation of the exemptions provided by Rule 144. Upon the request
of the Purchasers, the Company shall deliver to the Purchasers a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
     Section 3.3 Inspection Rights. The Company shall permit, during normal
business hours and upon reasonable request and reasonable notice, each Purchaser
or any employees, agents or representatives thereof, so long as such Purchaser
shall be obligated hereunder to purchase the Preferred Shares or shall
beneficially own any Preferred Shares, or shall own Conversion Shares which, in
the aggregate, represent more than 2% of the total combined voting power of all
voting securities then outstanding, for purposes reasonably related to such
Purchaser’s interests as a stockholder, to examine and make reasonable copies of
and extracts from the records and books of account of, and visit and inspect the
properties, assets, operations and business of the Company and any subsidiary,
and to discuss the affairs, finances and accounts of the Company and any
subsidiary with any of its officers, consultants, directors, and key employees.
As a condition to such inspection, Purchasers shall keep such information
confidential; provided that such information may be disclosed (i) to the extent
required by applicable law, regulation or legal process, subpoena, civil
investigative demand or other similar process, (ii) to the extent reasonably
necessary in connection with the enforcement of rights under this Agreement,
(iii) to any governmental, judicial or regulatory authority requiring or
requesting such information, and (iv) to its directors, officers, employees,
accountants, and legal counsel who need to know such information.
     Section 3.4 Compliance with Laws. The Company shall comply, and cause each
subsidiary to comply, with all applicable laws, rules, regulations and orders,
noncompliance with which could have a Material Adverse Effect.
     Section 3.5 Keeping of Records and Books of Account. The Company shall keep
and cause each subsidiary to keep adequate records and books of account, in
which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
     Section 3.6 Reporting Requirements. If the Commission ceases making
periodic reports filed under the Exchange Act available via the Internet, then
at a Purchaser’s request the Company shall furnish the following to such
Purchaser so long as such Purchaser shall be obligated hereunder to purchase the
Preferred Shares or shall beneficially own any Shares:
          (a) Quarterly Reports filed with the Commission on Form 10-QSB as soon
as practical after the document is filed with the Commission, and in any event
within five (5) days after the document is filed with the Commission;
          (b) Annual Reports filed with the Commission on Form 10-KSB as soon as
practical after the document is filed with the Commission, and in any event
within five (5) days after the document is filed with the Commission; and

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          (c) Copies of all notices and information, including without
limitation notices and proxy statements in connection with any meetings, that
are provided to holders of shares of Common Stock, contemporaneously with the
delivery of such notices or information to such holders of Common Stock.
     Section 3.7 Amendments. The Company shall not amend or waive any provision
of the Certificate or Bylaws of the Company in any way that would adversely
affect the liquidation preferences, dividends rights, conversion rights, voting
rights or redemption rights of the Preferred Shares; provided, however, that any
creation and issuance of another series of Junior Stock (as defined in the
Certificate of Designation) shall not be deemed to materially and adversely
affect such rights, preferences or privileges.
     Section 3.8 Other Agreements. The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability of the Company or any subsidiary to perform under any
Transaction Document.
     Section 3.9 Distributions. So long as any Preferred Shares or Underlying
Preferred Shares remain outstanding, the Company agrees that it shall not
(i) declare or pay any dividends or make any distributions to any holder(s) of
Common Stock or (ii) purchase or otherwise acquire for value, directly or
indirectly, any Common Stock or other equity security of the Company except for
(y) repurchases of shares of Common Stock issued to or held by employees,
officers, directors, or consultants of the Company or its subsidiaries upon
termination of their employment or services pursuant to agreements providing for
the right of said repurchase, and (z) repurchases of shares of Common Stock
issued to or held by employees, officers, directors, or consultants of the
Company or its subsidiaries pursuant to rights of first refusal contained in
agreements providing for such rights.
     Section 3.10 Use of Proceeds. The net proceeds from the sale of the Shares
hereunder shall be used by the Company for working capital and general corporate
purposes and not to redeem any Common Stock or securities convertible,
exercisable or exchangeable into Common Stock or to settle any outstanding
litigation.
     Section 3.11 Reservation of Shares. So long as any of the Preferred Shares
or Warrants remain outstanding, the Company shall take all action necessary to
at all times have authorized, and reserved for the purpose of issuance, no less
than one hundred ten percent (110%) of the aggregate number of shares of Common
Stock needed to provide for the issuance of the Conversion Shares and the
Warrant Shares.
     Section 3.12 Transfer Agent Instructions. The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of each Purchaser or its
respective nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by each Purchaser to the Company upon
conversion of the Preferred Shares (or Underlying Preferred Shares) or exercise
of the Warrants in the form of Exhibit F attached hereto (the “Irrevocable
Transfer Agent Instructions”). Prior to registration of the Conversion Shares
and the Warrant Shares under the Securities Act, all such certificates shall
bear the restrictive legend specified in Section 5.1 of this Agreement. The
Company warrants that no instruction other than the Irrevocable Transfer

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Agent Instructions referred to in this Section 3.12 will be given by the Company
to its transfer agent and that the Shares shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. If a Purchaser provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company, to the effect that a public sale, assignment or transfer of the Shares
may be made without registration under the Securities Act or the Purchaser
provides the Company with reasonable assurances that such Shares can be sold
pursuant to Rule 144 without any restriction as to the number of securities
acquired as of a particular date that can then be immediately sold, the Company
shall permit the transfer, and, in the case of the Conversion Shares and the
Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by such
Purchaser and without any restrictive legend. The Company acknowledges that a
breach by it of its obligations under this Section 3.12 will cause irreparable
harm to the Purchasers by vitiating the intent and purpose of the transactions
contemplated hereby. Accordingly, the Company acknowledges that the remedy at
law for a breach of its obligations under this Section 3.12 will be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 3.12, that the Purchasers shall be entitled, in
addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
     Section 3.13 Disposition of Assets. So long as any Preferred Shares and/or
Underlying Preferred Shares remain outstanding, neither the Company nor any
Subsidiary shall sell, transfer or otherwise dispose of any of its properties,
assets and rights including, without limitation, its software and intellectual
property, to any person except for licenses or sales to customers in the
ordinary course of business or with the prior written consent of the holders of
a majority of the Preferred Shares and Underlying Preferred Shares then
outstanding.
     Section 3.14 Reporting Status. So long as a Purchaser beneficially owns any
of the Shares, the Company shall timely file all reports required to be filed
with the Commission pursuant to the Exchange Act, and the Company shall not
cease filing reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would permit such termination.
     Section 3.15 Disclosure of Transaction. The Company shall issue a press
release describing the material terms of the transactions contemplated hereby
(the “Press Release”) as soon as practicable after the Initial Closing but in no
event later than 9:00 A.M. Eastern Time on the first Trading Day following the
Initial Closing. The Company shall also file with the Commission a Current
Report on Form 8-K (the “Form 8-K”) describing the material terms of the
transactions contemplated hereby (and attaching as exhibits thereto this
Agreement, the Registration Rights Agreement, the Certificate of Designation,
the Lock-Up Agreements, the form of each series of Warrant and the Press
Release) as soon as practicable following the Closing Date but in no event more
than four (4) Trading Days following the Closing Date, which Press Release and
Form 8-K shall be subject to prior review and comment by counsel for the
Purchasers. “Trading Day” means any day during which the OTC Bulletin Board (or
other quotation venue or principal exchange on which the Common Stock is traded)
shall be open for trading.

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     Section 3.16 Disclosure of Material Information. The Company covenants and
agrees that neither it nor any other person acting on its behalf has provided or
will provide any Purchaser or its agents or counsel with any information that
the Company believes constitutes material non-public information (other than
with respect to the transactions contemplated by this Agreement), unless prior
thereto such Purchaser shall have executed a written agreement regarding the
confidentiality and use of such information. The Company understands and
confirms that each Purchaser shall be relying on the foregoing representations
in effecting transactions in securities of the Company.
     Section 3.17 Pledge of Securities. The Company acknowledges and agrees that
the Shares may be pledged by a Purchaser in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the Common
Stock. The pledge of Common Stock shall not be deemed to be a transfer, sale or
assignment of the Common Stock hereunder, and no Purchaser effecting a pledge of
Common Stock shall be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document; provided that a Purchaser and its pledgee shall be
required to comply with the provisions of Article V hereof in order to effect a
sale, transfer or assignment of Common Stock to such pledgee. At the Purchasers’
expense, the Company hereby agrees to execute and deliver such documentation as
a pledgee of the Common Stock may reasonably request in connection with a pledge
of the Common Stock to such pledgee by a Purchaser.
     Section 3.18 Form SB-2 Eligibility. The Company currently meets the
“registrant eligibility” and transaction requirements set forth in the general
instructions to Form SB-2 applicable to “resale” registrations on Form SB-2.
     Section 3.19 Lock-Up Agreement. The parties listed on Schedule 3.19
attached hereto shall be subject to the terms and provisions of a lock-up
agreement in substantially the form as Exhibit E-1 (the “Stockholder Lock-Up
Agreement”) or Exhibit E-2 (the “AIG Lock-Up Agreement,” and together with the
Stockholder Lock-Up Agreement, collectively, the “Lock-Up Agreements”) hereto as
indicated on such Schedule, which shall provide the manner in which such persons
will sell, transfer or dispose of their shares of Common Stock.
     Section 3.20 DTC. Not later than the effective date of the Registration
Statement (as defined in the Registration Rights Agreement), the Company shall
cause its Common Stock to be eligible for transfer with its transfer agent
pursuant to the Depository Trust Company Fast Automated Securities Transfer
Program.
     Section 3.21 Sarbanes-Oxley Act. The Company shall use its best efforts to
be in compliance with the applicable provisions of the Sarbanes-Oxley Act.
     Section 3.22 No Commissions in connection with Conversion of Preferred
Shares. In connection with the conversion of the Preferred Shares or Underlying
Preferred Shares into Conversion Shares, neither the Company nor any person
acting on its behalf will take any action that would result in the Conversion
Shares being exchanged by the Company other than with the then existing holders
of the Preferred Shares or Underlying Preferred Shares exclusively where

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no commission or other remuneration is paid or given directly or indirectly for
soliciting the exchange in compliance with Section 3(a)(9) of the Securities
Act.
ARTICLE IV
Conditions
     Section 4.1 Conditions Precedent to the Obligation of the Company to Sell
the Shares. The obligation hereunder of the Company to issue and sell the
Preferred Shares and the Warrants to each Purchaser (taken individually) is
subject to the satisfaction or waiver, at or before the Closing, of each of the
conditions set forth below. These conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion.
          (a) Accuracy of Each Purchaser’s Representations and Warranties. The
representations and warranties of each Purchaser shall be true and correct in
all material respects as of the date when made and as of the Closing Date
applicable to such Purchaser as though made at that time, except for
representations and warranties that are expressly made as of a particular date,
which shall be true and correct in all material respects as of such date.
          (b) Performance by the Purchasers. Each Purchaser shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Purchaser at or prior to the Closing.
          (c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
          (d) Delivery of Purchase Price. The Purchase Price for the Preferred
Shares and Warrants has been delivered to the Company.
          (e) Delivery of Transaction Documents. The Transaction Documents have
been duly executed and delivered by the Purchasers to the Company.
          (f) Merger. Prior to the Closing, the Company, the Merger Sub and
NovaRay shall have consummated the Merger and the Certificate of Merger shall
have been filed with the Secretary of State of Delaware.
          (g) Cancellation of NovaRay Notes. The NovaRay Note Holders shall have
agreed to cancel their NovaRay Notes in accordance with this Agreement.
     Section 4.2 Conditions Precedent to the Obligation of the Purchasers to
Purchase the Shares. The obligation hereunder of each Purchaser to acquire and
pay for the Preferred Shares and the Warrants is subject to the satisfaction or
waiver, at or before the Closing, of each of the conditions set forth below.
These conditions are for each Purchaser’s sole benefit and may be waived by such
Purchaser at any time in its sole discretion.

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          (a) Accuracy of the Company’s Representations and Warranties. Each of
the representations and warranties of the Company in this Agreement and the
Registration Rights Agreement shall be true and correct in all respects as of
the date when made and shall be true and correct in all material respects as of
the Closing Date applicable to such Purchaser as though made at that time
(except for representations and warranties that are expressly made as of a
particular date, which shall be true and correct in all material respects as of
such date); provided, however, that to the extent that any representation and
warranty of the Company or its subsidiary, Vision Acquisition Subsidiary, Inc.,
in Article 3 of the Merger Agreement shall not be true and correct in any
respect, the breach of any corresponding representation and warranty of the
Company contained herein shall not entitle the Lead Investor to terminate or
otherwise not fulfill its obligations hereunder on the basis of this
Section 4.2(a).
          (b) Performance by the Company. The Company shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing.
          (c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
          (d) No Proceedings or Litigation. No action, suit or proceeding before
any arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any subsidiary, or any of the officers, directors or affiliates
of the Company or any subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.
          (e) Certificate of Designation of Rights and Preferences. Prior to the
Closing, the Certificate of Designation in the form of Exhibit B attached hereto
shall have been filed with the Secretary of State of Delaware.
          (f) Opinion of Counsel, Etc. At the Initial Closing, the Lead Investor
shall have received an opinion of counsel to the Company, dated as of the
Initial Closing Date, in substantially the form of Exhibit G hereto, and such
other certificates and documents as the Lead Investor or its counsel shall
reasonably require incident to the Closing.
          (g) Registration Rights Agreement. At the Closing, the Company shall
have executed and delivered the Registration Rights Agreement in the form of
Exhibit D attached hereto to each Purchaser.
          (h) Certificates. The Company shall have executed and delivered to the
Purchasers the certificates for the Preferred Shares and the Warrants being
acquired by such Purchaser at the Closing (in each case, in such denominations
as such Purchaser shall request).

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          (i) Resolutions. The Board of Directors of the Company shall have
adopted resolutions consistent with Section 2.1(b) hereof in a form reasonably
acceptable to such Purchasers (the “Resolutions”).
          (j) Reservation of Shares. As of the Closing Date, the Company shall
take all action necessary to at all times have authorized, and reserved for the
purpose of issuance, no less than (i) such number of shares of Underlying
Preferred Shares equal to one hundred percent (100%) of the number of shares of
Underlying Preferred Shares as shall from time to time be sufficient to effect
the entire exercise of the Series J Warrant; (ii) such number of shares of
Common Stock equal to one hundred ten percent (110%) of the number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all of the Preferred Shares and Underlying Preferred Shares; and (iii) as of
the date hereof, such number of shares of Common Stock equal to one hundred ten
percent (110%) of the number of shares of Common Stock as shall from time to
time be sufficient to effect the exercise of the Series A Warrants and
Series J-A Warrants then outstanding.
          (k) Transfer Agent Instructions. As of the Closing Date, the
Irrevocable Transfer Agent Instructions shall have been delivered to and
acknowledged in writing by the Company’s transfer agent.
          (l) Lock-Up Agreement. As of the Closing Date, the parties listed on
Schedule 3.19 hereto shall have delivered to the Purchasers either a fully
executed Stockholder Lock-Up Agreement in the form of Exhibit E-1 attached
hereto or an AIG Lock-Up Agreement in the form of Exhibit E-2 attached hereto as
indicated on such Schedule.
          (m) Good Standing Certificates. The Company shall have delivered to
the Lead Investor good standing certificates showing it and any subsidiary are
validly existing and in good standing under the laws of the state of their
incorporation and as a foreign corporation in each jurisdiction in which the
nature of the business conducted or property owned by such entity makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, would not result in a direct and/or indirect
Material Adverse Effect
          (n) Secretary’s Certificate. The Company shall have delivered to such
Purchaser a secretary’s certificate, dated as of the Closing Date, as to (i) the
Resolutions, (ii) the Certificate, (iii) the Bylaws, (iv) the Certificate of
Designation, each as in effect at the Closing, and (v) the authority and
incumbency of the officers of the Company executing the Transaction Documents
and any other documents required to be executed or delivered in connection
therewith.
          (o) Officer’s Certificate. The Company shall have delivered to the
Purchasers a certificate of an executive officer of the Company, dated as of the
Closing Date, confirming the accuracy of the Company’s representations,
warranties and covenants as of the Closing Date and confirming the compliance by
the Company with the conditions precedent set forth in this Section 4.2 as of
the Closing Date.

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          (p) Material Adverse Effect. There have been no events or occurrences
on or before the Closing Date which, individually or in the aggregate, have had
or would reasonably be expected to have a Material Adverse Effect.
ARTICLE V
Stock Certificate Legend
     Section 5.1 Legend. Each certificate representing the Preferred Shares, the
Underlying Preferred Shares and the Warrants, and, if appropriate, securities
issued upon conversion thereof, shall be stamped or otherwise imprinted with a
legend substantially in the following form (in addition to any legend required
by applicable state securities or “blue sky” laws):
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL
THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
     The Company agrees to reissue certificates representing any of the
Conversion Shares and the Warrant Shares, without the legend set forth above if
at such time, prior to making any transfer of any such securities, such holder
thereof shall give written notice to the Company describing the manner and terms
of such transfer and removal as the Company may reasonably request. Such
proposed transfer and removal will not be effected until: (a) either (i) the
Company has received an opinion of counsel reasonably satisfactory to the
Company, to the effect that the registration of the Conversion Shares or the
Warrant Shares under the Securities Act is not required in connection with such
proposed transfer, or (ii) a registration statement under the Securities Act
covering such proposed disposition has been filed by the Company with the
Commission and has become effective under the Securities Act; and (b) either
(i) the Company has received an opinion of counsel reasonably satisfactory to
the Company, to the effect that registration or qualification under the
securities or “blue sky” laws of any state is not required in connection with
such proposed disposition, or (ii) compliance with applicable state securities
or “blue sky” laws has been effected or a valid exemption exists with respect
thereto. The Company will respond to any such notice from a holder within five
(5) business days. In the case of any proposed transfer under this Section 5.1,
the Company will use reasonable efforts to comply with any such applicable state
securities or “blue sky” laws, but shall in no event be required, (x) to qualify
to do business in any state where it is not then qualified, (y) to take any
action that would subject it to tax or to the general service of process in any
state where it is not then subject, or (z) to comply with state securities or
“blue sky” laws of any state for which registration by coordination is
unavailable to the Company. The restrictions on transfer

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contained in this Section 5.1 shall be in addition to, and not by way of
limitation of, any other restrictions on transfer contained in any other section
of this Agreement. Whenever a certificate representing the Conversion Shares or
Warrant Shares is required to be issued to a Purchaser without a legend, in lieu
of delivering physical certificates representing the Conversion Shares or
Warrant Shares (provided that a registration statement under the Securities Act
providing for the resale of the Warrant Shares and Conversion Shares is then in
effect), the Company shall cause its transfer agent to electronically transmit
the Conversion Shares or Warrant Shares to a Purchaser by crediting the account
of such Purchaser or such Purchaser’s Prime Broker with the Depository Trust
Company (“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”) system
(to the extent not inconsistent with any provisions of this Agreement).
ARTICLE VI
Indemnification
     Section 6.1 Indemnification of Purchasers. The Company agrees to indemnify
and hold harmless the Purchasers (and their respective directors, officers,
managers, partners, members, shareholders, affiliates, agents, successors and
assigns) from and against any and all losses, liabilities, deficiencies, costs,
damages and expenses (including, without limitation, reasonable attorneys’ fees,
charges and disbursements) incurred by the Purchasers as a result of any
inaccuracy in or breach of the representations, warranties or covenants made by
the Company herein.
     Section 6.2 Indemnification Procedure. Any party entitled to
indemnification under this Article VI (an “indemnified party”) will give prompt
written notice to the party required to provide indemnification under this
Article VI (the “indemnifying party”) of any matters giving rise to a claim for
indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VI except to the
extent that the indemnifying party is actually prejudiced by such failure to
give prompt notice. In case any action, proceeding or claim is brought against
an indemnified party in respect of which indemnification is sought hereunder,
the indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect to such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim. In any event, unless and until the indemnifying party
elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party’s costs and expenses arising out of
the defense, settlement or compromise of any such action, claim or proceeding
shall be losses subject to indemnification hereunder. The indemnified party
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the indemnified party which

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relates to such action or claim. The indemnifying party shall keep the
indemnified party fully apprised at all times as to the status of the defense or
any settlement negotiations with respect thereto. If the indemnifying party
elects to defend any such action or claim, then the indemnified party shall be
entitled to participate in such defense with counsel of its choice at its sole
cost and expense. The indemnifying party shall not be liable for any settlement
of any action, claim or proceeding effected without its prior written consent.
Notwithstanding anything in this Article VI to the contrary, the indemnifying
party shall not, without the indemnified party’s prior written consent, settle
or compromise any claim or consent to entry of any judgment in respect thereof
which imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party of a release from all liability in respect of
such claim. The indemnification required by this Article VI shall be made by
periodic payments of the amount thereof during the course of investigation or
defense, as and when bills are received or expense, loss, damage or liability is
incurred, so long as the indemnified party irrevocably agrees to refund such
moneys if it is ultimately determined by a court of competent jurisdiction that
such party was not entitled to indemnification. The indemnity agreements
contained herein shall be in addition to (a) any cause of action or similar
rights of the indemnified party against the indemnifying party or others, and
(b) any liabilities the indemnifying party may be subject to pursuant to the
law.
     Section 6.3 Exclusive Remedy. After the Closing, the indemnities provided
for herein shall constitute the sole and exclusive remedy of any indemnified
party for damages arising out of, resulting from or incurred in connection with
any claims related to this Agreement or arising out of the issuance and sale of
the Preferred Shares and the Warrants. In addition, the Lead Investor hereby
acknowledges and agrees that it shall not be entitled to any indemnification
pursuant to this Article VI to the extent that any breach of a representation,
warranty or covenant of the Company contained in this Agreement also constitutes
a breach of a representation, warranty or covenant of the Company or its
subsidiary, Vision Acquisition Subsidiary, Inc., contained in Article 3 of the
Merger Agreement.
ARTICLE VII
Miscellaneous
     Section 7.1 Fees and Expenses. Irrespective of whether the Initial Closing
is effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If the Initial Closing is effected, the Company shall, at the Initial
Closing, reimburse the reasonable fees and out-of-pocket expenses of one special
counsel for the Lead Investor, not to exceed [$100,000] in the aggregate,
$10,000 of which has already been paid. If any action at law or in equity is
necessary to enforce or interpret the terms of the Transaction Documents, the
prevailing party shall be entitled to reasonable attorney’s fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
     Section 7.2 Specific Enforcement, Consent to Jurisdiction.
          (a) The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement or the other

27

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Transaction Documents were not performed in accordance with their specific terms
or were otherwise breached. It is accordingly agreed that the parties shall be
entitled to seek an injunction or injunctions to prevent or cure breaches of the
provisions of this Agreement or the Registration Rights Agreement and to enforce
specifically the terms and provisions hereof or thereof, this being in addition
to any other remedy to which any of them may be entitled by law or equity.
          (b) Each of the Company and the Purchasers (i) hereby irrevocably
submits to the jurisdiction of the United States District Court sitting in the
Southern District of New York and the courts of the State of New York located in
New York county for the purposes of any suit, action or proceeding arising out
of or relating to this Agreement or any of the other Transaction Documents or
the transactions contemplated hereby or thereby and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Each of the Company and the
Purchasers consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing in this
Section 7.2 shall affect or limit any right to serve process in any other manner
permitted by law.
     Section 7.3 Entire Agreement; Amendment. This Agreement and the Transaction
Documents collectively contain the entire understanding and agreement of the
parties with respect to the matters covered hereby and, except as specifically
set forth herein or in the Transaction Documents, neither the Company nor any of
the Purchasers makes any representations, warranty, covenant or undertaking with
respect to such matters and they supersede all prior understandings and
agreements with respect to said subject matter, all of which are merged herein.
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the Company and the holders of at a majority of the
Preferred Shares and Underlying Preferred Shares then outstanding, and no
provision hereof may be waived other than by an a written instrument signed by
the party against whom enforcement of any such amendment or waiver is sought. No
such amendment shall be effective to the extent that it applies to less than all
of the holders of the Preferred Shares and Underlying Preferred Shares then
outstanding. No consideration shall be offered or paid to any person to amend or
consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration is also offered to all of the parties to
the Transaction Documents or holders of Preferred Shares and Underlying
Preferred Shares, as the case may be.
     Section 7.4 Notices. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery or by facsimile at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:

28

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If to the Company:
  1850 Embarcadero
Palo Alto, CA 94303
Attn: Chief Executive Officer
Facsimile: (650) 565-8601
 
   
with copies to:
  Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, California 94304-1018
Attn: Michael C. Phillips
Facsimile: (650) 494-0792
 
   
If to any Purchaser:
  At the address of such Purchaser set forth on Exhibit A to this Agreement,
with copies to Purchaser’s counsel as set forth on Exhibit A or as specified in
writing by such Purchaser with copies to:

     Any party hereto may from time to time change its address for notices by
giving at least ten (10) days written notice of such changed address to the
other party hereto.
     Section 7.5 Rescission and Withdrawal Right. Notwithstanding anything to
the contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a material right,
election, demand or option under a Transaction Document and the Company does not
timely perform its related obligations within the periods therein provided, then
such Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights.
     Section 7.6 Waivers. No waiver by either party of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any other provisions,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
     Section 7.7 Headings. The article, section and subsection headings in this
Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.
     Section 7.8 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and assigns.
     Section 7.9 No Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the

29

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benefit of, nor may any provision hereof be enforced by, any other person (other
than the indemnified parties under Article VI).
     Section 7.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to any of the conflicts of law principles which would result in
the application of the substantive law of another jurisdiction. This Agreement
shall not be interpreted or construed with any presumption against the party
causing this Agreement to be drafted.
     Section 7.11 Survival. The representations and warranties of the Company
and the Purchasers shall survive the execution and delivery hereof and the
Closings hereunder for a period of one year following the last Closing Date.
     Section 7.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other parties hereto, it being understood that all parties need
not sign the same counterpart. In the event that any signature is delivered by
facsimile or electronic transmission, such signature shall create a valid
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile or
electronic signature were the original thereof.
     Section 7.13 Publicity. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the Purchasers without
the consent of the Purchasers unless and until such disclosure is required by
law or applicable regulation, and then only to the extent of such requirement.
     Section 7.14 Severability. The provisions of this Agreement and the
Transaction Documents are severable and, in the event that any court of
competent jurisdiction shall determine that any one or more of the provisions or
part of the provisions contained in this Agreement or the Transaction Documents
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement or the Transaction
Documents and such provision shall be reformed and construed as if such invalid
or illegal or unenforceable provision, or part of such provision, had never been
contained herein, so that such provisions would be valid, legal and enforceable
to the maximum extent possible.
     Section 7.15 Further Assurances. From and after the date of this Agreement,
upon the request of any Purchaser or the Company, each of the Company and the
Purchasers shall execute and deliver such instrument, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement, the Preferred
Shares, the Conversion Shares, the Warrants, the Warrant Shares, the Certificate
of Designation, the Registration Rights Agreement and the other Transaction
Documents.
     Section 7.16 Breakup Fee. If, at any time after signing this Agreement but
prior to December 31, 2007, the Company accepts or approves any proposal for
equity or debt financing

30

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other than as contemplated by this Agreement, the Company shall pay the Lead
Investor a fifty thousand dollar ($50,000) break-up fee (the “Break-Up Fee”).
Such Break-Up Fee shall be paid to the Lead Investor by wire transfer within
five (5) business days of the date of the Company’s acceptance of the proposed
equity or debt financing. Upon payment of the Break-Up Fee in accordance with
this Section 7.16, the Company and the Lead Investor shall not have any further
obligation or liability (including arising from such termination) to the other,
and no Purchaser will have any liability to any other Purchaser under the
Transaction Documents as a result therefrom.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

31

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          NOVARAY MEDICAL, INC.
    By:   /s/ Jack Price      Jack Price, Chief Executive Officer   

[Signature Page to Series A Stock Purchase Agreement]

32

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          VISION OPPORTUNITY
MASTER FUND, LTD.
    By:   /s/ Adam Benowitz     Name:   Adam Benowitz      Title:   Director   
 

[Signature Page to Series A Stock Purchase Agreement]

33

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          LYNDA WIJCIK
    By:   /s/ Lynda Wijcik     Name:   Lynda Wijcik      Title:        

[Signature Page to Series A Stock Purchase Agreement]

34

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          COMMERCE AND INDUSTRY INSURANCE COMPANY,
    By:   AIG Global Investment Corp.,       its investment advisor        By:  
/s/ F.T. Chong      Name:   F.T. Chong      Title:   Managing Director     

[Signature Page to Series A Stock Purchase Agreement]

35

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          AIU INSURANCE COMPANY,
    By:   AIG Global Investment Corp.,       its investment advisor         
By:   /s/ F.T. Chong       Name:   F.T. Chong       Title:   Managing Director 
   

[Signature Page to Series A Stock Purchase Agreement]

36

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.
AIG PRIVATE EQUITY PORTFOLIO, L.P.,
By: AIG PEP GP, L.P., its General Partner
By: AIG PEP, LLC, its General Partner
By: AIG Global Investment Corp., its Sole Member

          By:   /s/ F.T. Chong      Name:   F.T. Chong     Title:   Managing
Director     

[Signature Page to Series A Stock Purchase Agreement]

37

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          AIG HORIZON PARTNERS FUND, L.P.,                   By: AIG Horizon
Partners GP, L.P., its General Partner
      By:  AIG Horizon Partners LLC, its General Partner             By:   AIG
Global Investment Corp., its Managing Member             By:  /s/ F.T. Chong    
    Name:   F.T. Chong        Title:   Managing Director       

[Signature Page to Series A Stock Purchase Agreement]

38

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          AIG HORIZON SIDE-BY-SIDE FUND, L.P.,             By: AIG Horizon SBS
GP, L.P.,
its General Partner         By:   AIG Horizon Partners, LLC,
its General Partner             By:   AIG Global Investment Corp.,
its Managing Member         By:   /s/ F.T. Chong       Name:   F.T. Chong      
Title:   Managing Director       

[Signature Page to Series A Stock Purchase Agreement]

39

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          WHEATLEY MEDTECH PARTNERS, L.P.
      By:   /s/ Barry Rubenstein       Name:   Barry Rubenstein        Title:  
CEO, Wheatley Medtech Partners, LLC          General Partner       

[Signature Page to Series A Stock Purchase Agreement]

40

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          LLOYD INVESTMENTS, L.P.
      By:   /s/ L.J. Lloyd       Name:   L.J. Lloyd        Title:   GP       

[Signature Page to Series A Stock Purchase Agreement]

41

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          HEARTSTREAM CAPITAL B.V..
      By:   /s/ George J.M. Hersbach       Name:   George J.M. Hersbach      
Title:   President & CEO       

[Signature Page to Series A Stock Purchase Agreement]

42

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          BIOBRIDGE LLC
      By:   /s/ Lynda Wijcik       Name:   Lynda Wijcik        Title:   Managing
Partner       

[Signature Page to Series A Stock Purchase Agreement]

43

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

          ARIE JACOB MANINTVELD
      By:   /s/ Arie Jacob Manintveld       Name:   Arie Jacob Manintveld      
Title:          

[Signature Page to Series A Stock Purchase Agreement]

44

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EXHIBIT A TO THE
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
PURCHASERS

              Names and Addresses         of Purchasers and   Number of
Preferred   Dollar Amount Purchasers’ Counsel   Shares & Warrants Purchased   Of
Investment    
Vision Opportunity
Master Fund, Ltd.
20 West 55th Street
5th Floor
New York, NY 10019
Attn: Antti Uusiheimala
  3,745,319 Preferred Shares
Series A Warrants: 1,248,439
Series J Warrants: 2,309,469
Series J-A Warrants: 769,823   $ 10,000,001.73  
 
           
Sadis & Goldberg LLP,
551 Fifth Avenue, 21st Floor
New York, New York 10176
Attn: Paul Fasciano
             

NOVARAY NOTE HOLDERS

                                              Number of Preferred     NovaRay
Note   Interest   Shares & Series A Name of NovaRay Note Holder   Principal
Amount   Payment   Warrants
Lynda Wijcik
  $ 325,577.13 (1)   $ 2,879.93       Preferred Shares:
15941 Overlook Way
                    121,939  
Los Gatos, CA 95070
                  Series A Warrants:
 
                    40,646  
 
                       
Commerce and Industry Insurance Company
  $ 582,658.08 (2)   $ 5,532.16       Preferred Shares:
 
                    218,224  
277 Park Avenue, 43rd Floor
                  Series A Warrants:
New York, New York 10172
                    72,741  
Attn: F.T. Chong
Fax: (646) 857-8842
                       

 

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

 

                                              Number of Preferred     NovaRay
Note   Interest   Shares & Series A Name of NovaRay Note Holder   Principal
Amount   Payment   Warrants
AIU Insurance Company
  $ 308,232.81 (3)   $ 2,842.03       Preferred Shares:
277 Park Avenue, 43rd Floor
                    115,443  
New York, New York 10172
                  Series A Warrants:
Attn: F.T. Chong
                    38,481  
Fax: (646) 857-8842
                       
 
                       
AIG Private Equity Portfolio, L.P.
  $ 102,439.89 (3)   $ 944.03       Preferred Shares:
277 Park Avenue, 43rd Floor
                    38,367  
New York, New York 10172
                  Series A Warrants:
Attn: F.T. Chong
                    12,789  
Fax: (646) 857-8842
                       
 
                       
AIG Horizon Partners Fund L.P.
  $ 58,537.08 (3)   $ 539.44       Preferred Shares:
277 Park Avenue, 43rd Floor
                    21,924  
New York, New York 10172
                  Series A Warrants:
Attn: F.T. Chong
                    7,308  
Fax: (646) 857-8842
                       
 
                       
AIG Horizon Side-by-Side Fund L.P.
  $ 130,792.62 (3)   $ 1,206.50       Preferred Shares:
277 Park Avenue, 43rd Floor
                    48,986  
New York, New York 10172
                  Series A Warrants:
Attn: F.T. Chong
                    16,328  
Fax: (646) 857-8842
                       
 
                       
Wheatley MedTech Partners, L.P.
  $ 367,670.21 (4)   $ 3,398.17       Preferred Shares:
Attn: David R.
                    142,632  
Dantzker, M.D.
                  Series A Warrants:
825 Third Ave. 32nd Floor
                    47,544  
 
                       
Lloyd Investments, L.P.
  $ 65,329.56 (3)   $ 604.06       Preferred Shares:
Attn: Jack Lloyd
                    24,468  
7 Haciendas Road
                  Series A Warrants:
Orinda, CA 94563-1714
                    8,156  

 

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

 

                                              Number of Preferred     NovaRay
Note   Interest   Shares & Series A Name of NovaRay Note Holder   Principal
Amount   Payment   Warrants
Heartstream Capital B.V.
  $ 580,769.86 (5)   $ 5,065.76       Preferred Shares:
Attn: George J.M. Hersbach
                    271,896  
President & CEO
                  Series A Warrants:
Gooise Poort
                    90,632  
Gooimeer 3 - 25
1411 DC Naarden
Netherlands
                       
 
                       
BioBridge LLC
  $ 211,745.95 (6)   $ 1,843.09       Preferred Shares:
Attn: Lynda Wijcik
                    99,132  
15941 Overlook Dr.
                  Series A Warrants:
Los Gatos, CA 95070
                    33,044  
 
                       
Arie Jacob Manintveld
  $ 210,519.89 (7)   $ 1,841.76       Preferred Shares:
c/o Heartstream Capital BV
                    98,558  
Gooise Poort
                  Series A Warrants:
Gooimeer 3 — 25
                    32,852  
1411 DC Naarden
Netherlands
                       

 

(1)   Represents principal and accrued interest through November 15, 2007 owed
to such NovaRay Note Holder pursuant to a NovaRay Note dated August 13, 2004 and
a NovaRay Note dated June 21, 2005 (in the amount of $222,125.31).   (2)  
Represents principal and accrued interest through November 15, 2007 owed to such
NovaRay Note Holder pursuant to a NovaRay Note dated June 24, 2004 (in the
amount of $268,022.61) and a NovaRay Note dated June 21, 2005 (in the amount of
$314,635.47).   (3)   Represents principal and accrued interest through
November 15, 2007 owed to such NovaRay Note Holder pursuant to a NovaRay Note
dated June 21, 2005.   (4)   Represents principal and accrued interest through
November 15, 2007 owed to such NovaRay Note Holder pursuant to a NovaRay Note
dated June 15, 2004 (in the amount of $53,715.06), a NovaRay Note dated June 21,
2005 (in the amount of $261,326.25) and a NovaRay Note dated March 20, 2007 (in
the amount of $52,628.90, which amount is convertible at a 20% discount to the
purchase price of $2.67 per Preferred Share).   (5)   Represents principal and
accrued interest through November 15, 2007 owed to such NovaRay Note Holder
pursuant to a NovaRay Note dated February 20, 2007 (in the

 

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

 

    amount of $317,621.06) and a NovaRay Note dated March 20, 2007 (in the
amount of $263,148.79), both of which are convertible at a 20% discount to the
purchase price of $2.67 per Preferred Share.   (6)   Represents principal and
accrued interest through November 15, 2007 owed to such NovaRay Note Holder
pursuant to a NovaRay Note dated February 20, 2007, which amount is convertible
at a 20% discount to the purchase price of $2.67 per Preferred Share.   (7)  
Represents principal and accrued interest through November 15, 2007 owed to such
NovaRay Note Holder pursuant to a NovaRay Note dated March 20, 2007, which
amount is convertible at a 20% discount to the purchase price of $2.67 per
Preferred Share.

 

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EXHIBIT B to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF CERTIFICATE OF DESIGNATION

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EXHIBIT C-1 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF SERIES A WARRANT

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

 

EXHIBIT C-2 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF SERIES J WARRANT

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

 

EXHIBIT C-3 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF SERIES J-A WARRANT

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

 

EXHIBIT D to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF REGISTRATION RIGHTS AGREEMENT

D-1

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EXHIBIT E-1 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF STOCKHOLDER LOCK-UP AGREEMENT

E-1-1

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EXHIBIT E-2 to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF AIG LOCK-UP AGREEMENT

E-2-1

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EXHIBIT F to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
as of ____________, 2007          
Registrar and Transfer Company
Attn: William Saeger
10 Commerce Drive
Cranford, New Jersey 07016
Ladies and Gentlemen:
     Reference is made to that certain Series A Convertible Preferred Stock
Purchase Agreement (the “Purchase Agreement”), dated as of December 27, 2007, by
and among NovaRay Medical, Inc., a Delaware corporation (the “Company”), and the
purchasers named therein (collectively, the “Purchasers”) pursuant to which the
Company is issuing to the Purchasers shares (the “Preferred Shares”) of its
Series A Convertible Preferred Stock, par value $0.0001 per share (the
“Preferred Stock”), and warrants (the “Warrants”) to purchase Preferred Stock
and/or shares of the Company’s common stock, $0.0001 per share (the “Common
Stock”), as the case may be. This letter shall serve as our irrevocable
authorization and direction to you provided that you are the transfer agent of
the Company at such time) to issue (a) shares of Common Stock upon conversion of
the Preferred Shares or Underlying Preferred Shares (the “Conversion Shares”)
and (b) Common Stock and/or Preferred Stock (as the case may be) upon exercise
of the Warrants (the “Warrant Shares”) to or upon the order of a Purchaser from
time to time upon (i) surrender to you of a properly completed and duly executed
Conversion Notice or Exercise Notice, as the case may be, in the form attached
hereto as Exhibit I and Exhibit II, respectively, (ii) in the case of the
conversion of Preferred Shares or Underlying Preferred Shares, a copy of the
certificates (with the original certificates delivered to the Company)
representing Preferred Shares or Underlying Preferred Shares being converted or,
in the case of Warrants being exercised, a copy of the Warrants (with the
original Warrants delivered to the Company) being exercised (or, in each case,
an indemnification undertaking with respect to such share certificates or the
warrants in the case of their loss, theft or destruction), and (iii) delivery of
a treasury order or other appropriate order duly executed by a duly authorized
officer of the Company. So long as you have previously received (x) written
confirmation from counsel to the Company that a registration statement covering
resales of the Conversion Shares or Warrant Shares, as applicable, has been
declared effective by the Securities and Exchange Commission (the “SEC”) under
the Securities Act of 1933, as amended (the “1933 Act”), and no subsequent
notice by the Company or its counsel of the suspension or termination of its
effectiveness and (y) a copy of such registration statement, and if the
Purchaser represents in writing that the Conversion Shares or the Warrant
Shares, as the case may be, were sold pursuant to the Registration Statement and
that a prospectus was delivered in accordance prospectus delivery requirements
under the 1933 Act, then certificates representing the Conversion Shares and the
Warrant Shares, as the case may be, shall not bear any legend restricting
transfer of the Conversion Shares and the Warrant Shares, as the case may be,
thereby and should not be subject

F-1

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to any stop-transfer restriction. Provided, however, that if you have not
previously received those items and representations listed above, then the
certificates for the Conversion Shares and the Warrant Shares shall bear the
following legend:
     “THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY
STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS,
OR NOVARAY MEDICAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.”
and, provided further, that the Company may from time to time notify you to
place stop-transfer restrictions on the certificates for the Conversion Shares
and the Warrant Shares in the event a registration statement covering the
Conversion Shares and the Warrant Shares is subject to amendment for events then
current.
     A form of written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares and the Warrant
Shares has been declared effective by the SEC under the 1933 Act is attached
hereto as Exhibit III.
     Please be advised that the Purchasers are relying upon this letter as an
inducement to enter into the Purchase Agreement and, accordingly, each Purchaser
is a third party beneficiary to these instructions.
     Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at ________.

            Very truly yours,
NovaRay Medical, Inc.
      By:           Name:   Jack Price        Title:   Chief Executive Officer 
   

          ACKNOWLEDGED AND AGREED:
REGISTRAR AND TRANSFER COMPANY
      By:           Name:           Title:        

Date: ____________

F-2

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EXHIBIT I
NOVARAY MEDICAL, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series A Preferred Stock of NovaRay Medical, Inc. (the
“Certificate of Designation”). In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of Series A Preferred Stock, par value $0.0001 per share (the
“Preferred Shares”), of NovaRay Medical, Inc. a Delaware corporation (the
“Company”), indicated below into shares of Common Stock, par value $0.0001 per
share (the “Common Stock”), of the Company, by tendering the stock
certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below.
     Date of Conversion:
     Number of Preferred Shares to be converted:
     Stock certificate no(s). of Preferred Shares to be converted:
     The Common Stock has been sold pursuant to the Registration Statement (as
defined in the Registration Rights Agreement): YES ___   NO ___
     Please confirm the following information:
     Conversion Price:
Number of shares of Common Stock
to be issued:
Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the Date of Conversion: __________________
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
Facsimile Number:
Authorization:

                  By:           Title:             

     Dated:

 

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EXHIBIT II
FORM OF EXERCISE NOTICE
EXERCISE FORM
NOVARAY MEDICAL, INC.
The undersigned _________, pursuant to the provisions of the within Warrant,
hereby elects to purchase ____ shares of Common Stock or Series A Preferred
Stock (as applicable) of NovaRay Medical, Inc. covered by the within Warrant.

                     
Dated:
          Signature        
 
 
 
         
 
   
 
                   
 
          Address        
 
             
 
   
 
             
 
   

Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the date of Exercise: _______________
ASSIGNMENT
FOR VALUE RECEIVED, _________ hereby sells, assigns and transfers unto
______________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _________, attorney, to transfer the said
Warrant on the books of the within named corporation.

                     
Dated:
          Signature        
 
 
 
         
 
   
 
                   
 
          Address        
 
             
 
   
 
             
 
   

PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________ hereby sells, assigns and transfers unto _________
the right to purchase ______ shares of Warrant Stock evidenced by the within
Warrant together with all rights therein, and does irrevocably constitute and
appoint _______________, attorney, to transfer that part of the said Warrant on
the books of the within named corporation.

                     
Dated:
          Signature        
 
 
 
         
 
   
 
                   
 
          Address        
 
             
 
   
 
             
 
   

 

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FOR USE BY THE ISSUER ONLY:
This Warrant No. W-____ canceled (or transferred or exchanged) this ____ day of
_______, ____, shares of Common Stock or Series A Preferred Stock (as
applicable) issued therefor in the name of ______, Warrant No. W-____ issued for
____ shares of Common Stock or Series A Preferred Stock (as applicable) in the
name of _________.

 

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EXHIBIT III
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[INSERT TRANSFER AGENT INFO]
          Re:   NovaRay Medical, Inc.
Ladies and Gentlemen:
     We are counsel to NovaRay Medical, Inc., a Delaware corporation (the
“Company”), and have represented the Company in connection with that certain
Series A Convertible Preferred Stock and Warrant Purchase Agreement (the
“Purchase Agreement”), dated as of December 27, 2007, by and among the Company
and the purchasers named therein (collectively, the “Purchasers”) pursuant to
which the Company issued to the Purchasers shares (the “Preferred Shares”) of
its Series A Convertible Preferred Stock, par value $0.0001 per share (the
“Preferred Stock”) and warrants (the “Warrants”) to purchase shares of the
Company’s common stock, par value $0.0001 per share (the “Common Stock”) and/or
Preferred Stock, as applicable. Pursuant to the Purchase Agreement, the Company
has also entered into a Registration Rights Agreement with the Purchasers (the
“Registration Rights Agreement”), dated as of December 27, 2007, pursuant to
which the Company agreed, among other things, to register the Registrable
Securities (as defined in the Registration Rights Agreement), including the
shares of Common Stock issuable upon conversion of the Preferred Shares and
exercise of the Warrants, under the Securities Act of 1933, as amended (the
“1933 Act”). In connection with the Company’s obligations under the Registration
Rights Agreement, on ______, 200_, the Company filed a Registration Statement on
Form SB-2 (File No. 333-___) (the “Registration Statement”) with the Securities
and Exchange Commission (the “SEC”) relating to the resale of the Registrable
Securities which names each of the present Purchasers as a selling stockholder
thereunder.
     In connection with the foregoing, we advise you that a member of the SEC’s
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC’s staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and accordingly, the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.

            Very truly yours,

MORRISON & FOERSTER, LLP
      By:                      

cc:   [LIST NAMES OF PURCHASERS]

 

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EXHIBIT G to the
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
NOVARAY MEDICAL, INC.
FORM OF OPINION OF COUNSEL

1.   The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. The Company has the
requisite corporate power to own its properties and to conduct its business as
it is currently being conducted.   2.   The Company has the corporate power and
authority to execute and deliver and to perform its obligations under the
Documents. The Documents have been duly authorized, executed and delivered by
the Company and constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms.   3.
  The Preferred Shares to be received by each Purchaser pursuant to the
Agreement, the shares of the Company’s Common Stock issuable upon exercise of
the Series A Warrants and Series J-A Warrant, and the shares of the Company’s
Series A Convertible Preferred Stock issuable upon exercise of the Series J
Warrant have been duly authorized and, upon issuance and delivery against
payment therefor in accordance with the terms of the Agreement, or the Warrants,
as applicable, will be validly issued, fully paid and nonassessable. The
Company’s Common Stock issuable upon the (i) conversion of (a) the Preferred
Shares and (b) the shares of the Company’s Series A Convertible Preferred Stock
issuable upon exercise of the Series J Warrant and (ii) exercise of the Series A
Warrants and Series J-A Warrant has been duly authorized for issuance and
validly reserved by all necessary corporate action of the Company and, when
issued in accordance with the Amended and Restated Certificate and the terms of
the Warrants, will be validly issued, fully paid and nonassessable.   4.   The
execution, delivery and performance of the Documents by the Company and the
issuance of the Preferred Shares and the Warrants as contemplated by the
Agreement and the Warrants (i) do not violate any provision of the Amended and
Restated Certificate or Bylaws of the Company, (ii) do not violate any law, rule
or regulation applicable to the Company, and (iii) except as set forth in the
Agreement and the Opinion Certificate, do not violate or constitute a default
under the provisions of any judgment, decree, order or material agreement to
which the Company is a party, except, in all cases other than violations
pursuant to clause (i) above, for such conflicts, default, terminations,
amendments, acceleration, cancellations and violations as would not result,
individually or in the aggregate, in any material adverse change in the assets,
financial condition or operations of the Company.   5.   Assuming the filing of
a Form D in accordance with Regulation D under the Securities Act of 1933, as
amended (the “Securities Act”), the offer and sale of the Preferred Shares and
the Warrants pursuant to the terms of the Agreement are exempt from registration
under the Securities Act.

 

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6.   All consents, approvals, orders or authorizations of, and all
qualifications, registrations or filings with, any federal or State of New York
governmental authority on the part of the Company required in connection with
the consummation of the transactions contemplated by the Agreement, except for
the filing of a Form D in accordance with Regulation D under the Securities Act,
have been made or obtained.   7.   To our knowledge, no action, investigation or
proceeding is pending or overtly threatened against the Company before any court
or administrative agency which questions the validity of the Agreement or the
transactions contemplated thereby or which might result, either individually or
in the aggregate, in any material adverse change in the assets, financial
condition or operations of the Company.