Exhibit 10.5

SECURITY AGREEMENT

SECURITY AGREEMENT (this “Security Agreement”) dated as of March 11, 2010, by
and among NovaRay Medical, Inc. (the “Company” and/or the “Debtor”), and Vision
Capital Advisors, LLC, in its capacity as the collateral agent (together with
any successors thereto in such capacity, the “Collateral Agent”) for the benefit
of the holders (the “Holders”) of the Notes (as defined below) (the Collateral
Agent and the Holders are hereinafter referred to as the “Secured Parties”).

Recitals

A. Pursuant to the Note and Warrant Purchase Agreement, dated as of the date
hereof (including all annexes, exhibits and schedules thereto, as from time to
time amended, restated, supplemented or otherwise modified, the “Purchase
Agreement”), among the Debtor and the Purchasers named therein (the
“Purchasers”), the Debtor has agreed to issue, and subject to the terms thereof,
and the Purchasers have agreed to purchase, the Debtor’s Senior Secured 10%
convertible notes in the aggregate principal amount of up to $2,708,000
(together with all renewals, extensions and modifications thereof and any note
or notes issued in substitution or exchange therefor, the “Notes”);

B. As a condition to each of the Purchasers’ obligation to purchase the Notes,
the Purchasers have required, and the Debtor has agreed, to execute and deliver
this Security Agreement to provide collateral security for the Secured
Obligations of the Debtor under the Purchase Agreement, the Notes, this Security
Agreement (hereinafter collectively referred to as the “Note Documents”).

Agreement

NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

1. Defined Terms. Terms not otherwise defined in this Security Agreement
(including Annex A hereto), unless the context indicates otherwise, have the
meanings set forth in the Purchase Agreement, or if not defined in the Purchase
Agreement, then as provided for by the Code to the extent the same are used or
defined therein.

2. Grant Of Lien.

(a) To secure the prompt and complete payment, performance and observance when
due (whether at stated maturity, by acceleration or otherwise) of all of the
Secured Obligations, the Debtor hereby grants, assigns, conveys, mortgages,
pledges, hypothecates and transfers to the Collateral Agent, for itself and the
benefit of the Secured Parties, security interests in all of its right, title
and interest in, to and under all personal property and other assets described
below, whether now owned by or owing to, or hereafter acquired by or arising in
favor of the Debtor, and whether owned or consigned by or to, or leased from or
to, the Debtor, and

 

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regardless of where located (all of which being hereinafter collectively
referred to as the “Collateral”): (i) all Accounts; (ii) all General
Intangibles; (iii) all goods, including, without limitation, Inventory and
Equipment; (v) all Chattel Paper; (vi) all Instruments (including all promissory
notes); (vii) all documents; (viii) all Deposit Accounts, including all deposits
therein; (ix) all money, cash or cash equivalents of the Debtor; (x) all books
and records pertaining to the Collateral; (xi) all investment property
(including securities, whether certificated or uncertificated, securities
accounts, security entitlements, commodity contracts or commodity accounts);
(xii) all Trademarks, Patents or Copyrights or other Intellectual Property;
(xiii) to the extent not otherwise included, all Proceeds, tort claims,
insurance claims and other rights to payments not otherwise included in the
foregoing and products of the foregoing and all accessions to, substitutions and
replacements for, and rents and profits of, each of the foregoing.

(b) In addition, to secure the prompt and complete payment, performance and
observance of the Secured Obligations and in order to induce the Secured Parties
as aforesaid, the Debtor hereby grants to the Collateral Agent, for the benefit
of the Secured Parties, a right of setoff against the property of the Debtor
held by the Secured Parties, consisting of property described above in
Section 2(a) now or hereafter in the possession or custody of or in transit to
the Secured Parties, for any purpose, including safekeeping, collection or
pledge, for the account of the Debtor, or as to which the Debtor may have any
right or power.

3. Representations and Warranties. Except as set forth in the Schedule of
Exceptions (as defined in the Purchase Agreement), the Debtor represents and
warrants, as of the date hereof, that:

(a) The Debtor has rights in and the power to transfer, and is the sole
beneficial owner of, each item of the Collateral upon which it purport to grant
a Lien hereunder free and clear of any and all Liens other than Permitted
Encumbrances.

(b) No effective security agreement, financing statement, equivalent security or
Lien instrument or continuation statement covering all or any part of the
Collateral is on file or of record in any public office, except such as may have
been filed by the Debtor in favor of the Collateral Agent pursuant to this
Security Agreement or the other Note Documents.

(c) This Security Agreement is effective to create a valid and continuing Lien
on and, upon the filing of appropriate financing statements with the
governmental offices listed on Schedule I hereto, a perfected Lien in favor of
the Collateral Agent, for the benefit of the Secured Parties, on the Collateral
with respect to which a Lien may be perfected by filing pursuant to Article 9 of
the Code. As of the Closing, such Lien will be prior to all other Liens, except
Permitted Encumbrances and is enforceable as such as against any and all
creditors of and purchasers from the Debtor (other than purchasers of Inventory
in the ordinary course of business).

(d) The Debtor’s name as it appears in official filings in the jurisdiction of
its incorporation or other organization, the type of entity of the Debtor
(including corporation, partnership, limited partnership or limited liability
company), organizational identification number issued by the Debtor’s
jurisdiction of incorporation or organization or a statement that no such number
has been issued, the Debtor’s jurisdiction of organization or incorporation, the

 

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location of the Debtor’s chief executive office, principal place of business,
offices and premises where Collateral is stored or located, and the locations of
its books and records concerning the Collateral are set forth on Schedule II
hereto. The Debtor has only one state of incorporation or organization. The
Debtor has not, during the five years prior to the date of this Security
Agreement, been known by or used any other corporate or fictitious name or been
party to any merger or consolidation, or acquired all or substantially all of
the assets of any Person, or acquired any of its property or assets out of the
ordinary course of business, except as set forth on Schedule II hereto. The
Debtor has not (i) within the period of four months prior to the date hereof,
changed its location (as defined in Section 9-307 of the Code), (ii) except as
specified on Schedule II hereto, heretofore changed its name, or (iii) except as
specified on Schedule II hereto, heretofore became “new debtor” (as defined in
Section 9-102(a)(56) of the Code) with respect to a currently effective security
agreement previously entered into by any other Person.

4. Covenants. The Debtor covenants and agrees with the Collateral Agent, for the
benefit of the Secured Parties, that from and after the date of this Security
Agreement and until the Termination Date:

(a) Further Assurances.

(i) At any time and from time to time, upon any written request of the
Collateral Agent, at the sole expense of the Debtor, the Debtor shall promptly
and duly execute and deliver any and all such further instruments and documents
and take such further actions as may be necessary or desirable or reasonably
requested by the Collateral Agent to obtain the full benefits of this Security
Agreement and of the rights and powers herein granted, including (A) using all
reasonable efforts to secure all consents and approvals necessary or appropriate
to enforce the security interests granted hereunder; and (B) filing any
financing statements, mortgages, continuation statements, assignments and
amendments with respect to the Liens granted hereunder as to those jurisdictions
that are not Uniform Commercial Code jurisdictions.

(ii) The Debtor hereby irrevocably and unconditionally authorizes the Collateral
Agent at any time and from time to time to file in any filing office in any
Uniform Commercial Code jurisdiction any initial financing statements,
continuation statements, assignments and amendments thereto that (a) indicate
the Collateral, and (b) contain any other information required by Article 9 of
the Code for the sufficiency or filing office acceptance of any financing
statement or amendment. The Debtor agrees to furnish any such information to the
Collateral Agent promptly upon request. The Debtor also ratifies its
authorization for the Collateral Agent to have filed in any Uniform Commercial
Code jurisdiction any initial financing statements or amendments thereto if
filed prior to the date hereof and ratifies and confirms the authorization of
the Collateral Agent to file such financing statements (and amendments, if any).
The Debtor hereby authorizes the Collateral Agent to adopt on behalf of the
Debtor any symbol required for authenticating any electronic filing. In the
event that the description of the collateral in any financing statement naming
the Collateral Agent or its designee as the secured party and the Debtor as
debtor includes assets and properties of the Debtor that do not at any time
constitute Collateral, whether hereunder, under any of the other Note Documents
or otherwise, the filing of such financing statement shall nonetheless be deemed
authorized by the Debtor to the extent of the Collateral included in such
description and it shall not render the financing statement ineffective as to
any of the Collateral or otherwise affect the financing statement as it

 

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applies to any of the Collateral. In no event shall the Debtor at any time file,
or permit or cause to be filed, any correction statement or termination
statement with respect to any financing statement (or amendment or continuation
with respect thereto) naming the Collateral Agent or its designee as secured
party and the Debtor as debtor.

(iii) Upon the occurrence and during the continuance of any Event of Default,
the Debtor shall take all steps necessary to grant the Collateral Agent control
of and a perfected Lien on all Chattel Paper, Instruments, Deposit Accounts,
Investment Property, investment accounts, security accounts, commodity accounts,
letters of credit or banker’s acceptance constituting Collateral (including,
without limitation, the delivery to the Collateral Agent of all such Collateral,
accompanied by such instruments of transfer or assignment duly executed in
black, the delivery of a deposit or investment property control agreement
executed by the Debtor and any applicable financial institution).

(iv) The Debtor shall, upon the occurrence and during the continuance of any
Event of Default, upon request of the Collateral Agent, promptly notify (and the
Debtor hereby authorizes the Collateral Agent so to notify) each Account Debtor
in respect of any Accounts of the Debtor that such Collateral has been assigned
to the Collateral Agent hereunder, and that any payments due or to become due in
respect thereof are to be made directly to the Collateral Agent.

(b) Maintenance of Records. The Debtor shall keep and maintain, at its own cost
and expense, satisfactory and complete records of the Collateral, including a
record of any and all payments received and any and all credits granted with
respect to the Collateral in the same manner such records are presently kept and
maintained.

(c) Limitation on Liens on Collateral. The Debtor will not create, permit or
suffer to exist, and the Debtor will defend the Collateral against, and take
such other action as is necessary to remove, any Lien on the Collateral except
Permitted Encumbrances, and will defend the right, title and interest of the
Secured Parties in and to any of the Debtor’s rights under the Collateral
against the claims and demands of all Persons whomsoever.

(d) Limitations on Disposition. The Debtor will not sell, license, lease,
transfer or otherwise dispose of any of the Collateral (other than Inventory in
the ordinary course of business), or attempt or contract to do so except as
permitted by the Purchase Agreement.

(e) Further Identification of Collateral. The Debtor will, if so requested by
the Collateral Agent, furnish to the Collateral Agent, as often as the
Collateral Agent reasonably requests, statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Collateral Agent may reasonably request, all in such
detail as the Collateral Agent may reasonably specify.

(f) Notices. The Debtor will advise the Collateral Agent promptly, in reasonable
detail, (i) of any Lien (other than Permitted Encumbrances) or written claim
made or asserted against any of the Collateral, and (ii) of the occurrence of
any other event which could have a material adverse effect on the value of the
Collateral or on the Liens created hereunder.

 

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(g) No Reincorporation; No Name Change. The Debtor shall not reincorporate or
reorganize itself under the laws of any jurisdiction other than the
jurisdictions in which they are incorporated or organized as of the date hereof
without the prior written consent of the Collateral Agent. The Debtor shall not
change its legal name without first giving 30 days prior written notice of its
intent to do so to the Collateral Agent.

5. Collateral Agent’s Appointment As Attorney-in-fact. On the Closing Date, the
Debtor shall execute and deliver to the Collateral Agent a power of attorney
(the “Power of Attorney”) substantially in the form attached hereto as Exhibit
A. The power of attorney granted pursuant to the Power of Attorney is a power
coupled with an interest and shall be irrevocable until the Termination Date.
The powers conferred on the Collateral Agent, for the benefit of the Secured
Parties, under the Power of Attorney are solely to protect the Collateral
Agent’s interests (for the benefit of the Secured Parties) in the Collateral and
shall not impose any duty upon the Secured Parties to exercise any such powers.
The Collateral Agent agrees with the Secured Parties and the Company that
(a) except for the powers granted in clause (h) of the Power of Attorney, it
shall not exercise any power or authority granted under the Power of Attorney
unless an Event of Default has occurred and is continuing, (b) it shall not
exercise any power or authority under the Power of Attorney unless such action
has been approved in writing by the holders of a majority in principal amount of
the Notes outstanding (the “Required Holders”), and (c) the Collateral Agent
shall account for any moneys received by the Collateral Agent in respect of any
foreclosure on or disposition of Collateral pursuant to the Power of Attorney
provided that the Secured Parties shall not have any duty as to any Collateral,
and the Secured Parties shall be accountable only for amounts that they actually
receive as a result of the exercise of such powers. NONE OF THE SECURED PARTIES
OR THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR
REPRESENTATIVES SHALL BE RESPONSIBLE TO THE DEBTOR FOR ANY ACT OR FAILURE TO ACT
UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF DAMAGES
ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS
FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION.

6. Remedies: Rights Upon Default.

(a) In addition to all other rights and remedies granted to it under this
Security Agreement, the other Note Documents and under any other instrument or
agreement securing, evidencing or relating to any of the Secured Obligations, if
any Event of Default shall have occurred and be continuing, the Collateral Agent
may exercise all rights and remedies of a secured party under the Code. Without
limiting the generality of the foregoing, the Debtor expressly agrees that in
any such event the Collateral Agent, on behalf of the Secured Parties, without
demand of performance or other demand, advertisement or notice of any kind
(except the notice specified below of time and place of public or private sale)
to or upon the Debtor or any other Person (all and each of which demands,
advertisements and notices are hereby expressly waived to the maximum extent
permitted by the Code and other applicable law), may forthwith enter upon the
premises of the Debtor where any Collateral is located through self-help,
without judicial process, without first obtaining a final judgment or giving the
Debtor or any other Person notice and opportunity for a hearing on the Secured
Parties’ claim or action and may collect, receive, assemble, process,
appropriate and realize upon the Collateral, or any part

 

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thereof, and may forthwith sell, lease, license, assign, give an option or
options to purchase, or sell or otherwise dispose of and deliver said Collateral
(or contract to do so), or any part thereof, in one or more parcels at a public
or private sale or sales, at any exchange at such prices as it may deem
acceptable, for cash or on credit or for future delivery without assumption of
any credit risk. The Collateral Agent shall have the right upon any such public
sale or sales and, to the extent permitted by law, upon any such private sale or
sales, to purchase for the benefit of the Secured Parties, the whole or any part
of said Collateral so sold, free of any right or equity of redemption, which
equity of redemption the Debtor hereby releases. Such sales may be adjourned and
continued from time to time with or without notice. The Collateral Agent shall
have the right to conduct such sales on the Debtor’s premises or elsewhere and
shall have the right to use the Debtor’s premises without charge for such time
or times as the Collateral Agent deems necessary or advisable.

If any Event of Default shall have occurred and be continuing, the Debtor
further agrees, at the Collateral Agent’s request, to assemble the Collateral
and make it available to the Collateral Agent at a place or places designated by
the Collateral Agent which are reasonably convenient to the Collateral Agent and
the Debtor, whether at the Debtor’s premises or elsewhere. Until the Collateral
Agent is able to affect a sale, lease, or other disposition of Collateral, the
Collateral Agent shall have the right to hold or use Collateral, or any part
thereof, to the extent that it deems appropriate for the purpose of preserving
Collateral or its value or for any other purpose deemed appropriate by the
Collateral Agent. The Collateral Agent shall have no obligation to the Debtor to
maintain or preserve the rights of the Debtor as against third parties with
respect to Collateral while Collateral is in the possession of the Collateral
Agent. The Collateral Agent may, if it so elects, seek the appointment of a
receiver or keeper to take possession of Collateral and to enforce any of the
Secured Parties’ or Collateral Agent’s remedies, with respect to such
appointment without prior notice or hearing as to such appointment. The
Collateral Agent shall apply the net proceeds of any such collection, recovery,
receipt, appropriation, realization or sale to the Secured Obligations as
provided in the Note Documents, and only after so paying over such net proceeds,
and after the payment by the Collateral Agent of any other amount required by
any provision of law, need the Collateral Agent account for the surplus, if any,
to the Debtor. To the maximum extent permitted by applicable law, the Debtor
hereby waives all claims, damages, and demands against the Secured Parties and
the Collateral Agent arising out of the repossession, retention or sale of the
Collateral except such as arise solely out of the gross negligence or willful
misconduct of such Secured Party or Collateral Agent as finally determined by a
court of competent jurisdiction. The Debtor agrees that ten (10) days prior
notice by the Collateral Agent of the time and place of any public sale or of
the time after which a private sale may take place is reasonable notification of
such matters. The Debtor shall remain liable for any deficiency if the proceeds
of any sale or disposition of the Collateral are insufficient to pay all Secured
Obligations, including any attorneys’ fees and other expenses incurred by the
Collateral Agent to collect such deficiency.

(b) Except as otherwise specifically provided herein, the Debtor hereby waives
presentment, demand, protest or any notice (to the maximum extent permitted by
applicable law) of any kind in connection with this Security Agreement or any
Collateral.

(c) To the extent that applicable law imposes duties on Secured Parties or the
Collateral Agent to exercise remedies in a commercially reasonable manner, the
Debtor

 

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acknowledges and agrees that it is not commercially unreasonable for the Secured
Parties or Collateral Agent (i) to fail to incur expenses reasonably deemed
significant by the Secured Parties or Collateral Agent to prepare Collateral for
disposition or otherwise to complete raw material or work in process into
finished goods or other finished products for disposition, (ii) to fail to
obtain third party consents for access to Collateral to be disposed of, or to
obtain or, if not required by other law, to fail to obtain governmental or third
party consents for the collection or disposition of Collateral to be collected
or disposed of, (iii) to fail to exercise collection remedies against Account
Debtors or other Persons obligated on Collateral or to remove Liens on or any
adverse claims against Collateral, (iv) to exercise collection remedies against
Account Debtors and other Persons obligated on Collateral directly or through
the use of collection agencies and other collection specialists, (v) to
advertise dispositions of Collateral through publications or media of general
circulation, whether or not the Collateral is of a specialized nature, (vi) to
contact other Persons, whether or not in the same business as the Debtor, for
expressions of interest in acquiring all or any portion of such Collateral,
(vii) to hire one or more professional auctioneers to assist in the disposition
of Collateral, whether or not the Collateral is of a specialized nature,
(viii) to dispose of Collateral by utilizing internet sites that provide for the
auction of assets of the types included in the Collateral or that have the
reasonable capacity of doing so, or that match buyers and sellers of assets,
(ix) to dispose of assets in wholesale rather than retail markets, (x) to
disclaim disposition warranties, such as title, possession or quiet enjoyment,
(xi) to purchase insurance or credit enhancements to insure the Secured Parties
and/or the Collateral Agent against risks of loss, collection or disposition of
Collateral or to provide to the Secured Parties a guaranteed return from the
collection or disposition of Collateral, or (xii) to the extent deemed
appropriate by the Collateral Agent, to obtain the services of other brokers,
investment bankers, consultants and other professionals to assist the Collateral
Agent in the collection or disposition of any of the Collateral. The Debtor
acknowledges that the purpose of this Section 6(c) is to provide non-exhaustive
indications of what actions or omissions by the Secured Parties or Collateral
Agent would not be commercially unreasonable in the Secured Parties’ or
Collateral Agent’s exercise of remedies against the Collateral and that other
actions or omissions by the Secured Parties or Collateral Agent shall not be
deemed commercially unreasonable solely on account of not being indicated in
this Section 6(c). Without limitation upon the foregoing, nothing contained in
this Section 6(c) shall be construed to grant any rights to the Debtor or to
impose any duties on the Secured Parties or Collateral Agent that would not have
been granted or imposed by this Security Agreement or by applicable law in the
absence of this Section 6(c).

(d) The Secured Parties and Collateral Agent shall not be required to make any
demand upon, or pursue or exhaust any of their rights or remedies against, the
Debtor, any other obligor, guarantor, pledgor or any other Person with respect
to the payment of the Secured Obligations or to pursue or exhaust any of their
rights or remedies with respect to any Collateral therefor or any direct or
indirect guarantee thereof. The Secured Parties and Collateral Agent shall not
be required to marshal the Collateral or any guarantee of the Secured
Obligations or to resort to the Collateral or any such guarantee in any
particular order, and all of its and their rights hereunder or under any other
Document shall be cumulative. To the extent it may lawfully do so, the Debtor
absolutely and irrevocably waives and relinquishes the benefit and advantage of,
and covenants not to assert against the Secured Parties or the Collateral Agent,
any valuation, stay, appraisement, extension, redemption or similar laws and any
and all rights or defenses it may have as sureties now or hereafter existing
which, but for this provision, might be applicable

 

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to the sale of any Collateral made under the judgment, order or decree of any
court, or privately under the power of sale conferred by this Security
Agreement, or otherwise.

7. Grant Of Licenses To Use Intellectual Property Collateral. For the purpose of
enabling the Collateral Agent to exercise rights and remedies under Section 6
hereof (including, without limiting the terms of Section 6 hereof, in order to
take possession of, hold, preserve, process, assemble, prepare for sale, market
for sale, sell or otherwise dispose of Collateral) at such time as the
Collateral Agent shall be lawfully entitled to exercise such rights and
remedies, the Debtor hereby grants to the Collateral Agent, irrevocable,
nonexclusive licenses (exercisable without payment of royalty or other
compensation to the Debtor) to use, license or sublicense any Intellectual
Property now owned or hereafter acquired by the Debtor, and wherever the same
may be located, and including in such licenses access to all media in which any
of the licensed items may be recorded or stored and to all computer software and
programs used for the compilation or printout thereof.

8. Indemnity; Expenses; Limitation On Secured Parties’ and Collateral Agent’s
Duty In Respect Of Collateral.

(a) Whether or not the transactions contemplated hereby are consummated, the
Debtor shall indemnify and hold the Secured Parties, the Collateral Agent, their
respective Affiliates, and each of their directors, officers, agents and
employees (collectively, the “Indemnified Persons”) harmless from and against
any and all liabilities, obligations, losses, damages, penalties, claims,
demands, actions, judgments, suits, costs, charges, expenses and disbursements
(including reasonable attorneys fees and expenses) of any kind or nature
whatsoever which may at any time (including at any time following the
termination of the Secured Obligations and the termination, resignation or
replacement of the Collateral Agent or any assignment by a Secured Party) be
imposed on, incurred by or asserted against any such Indemnified Person in any
way relating to or arising out of or in connection with the execution, delivery,
enforcement, performance or administration of this Security Agreement, the other
Note Documents or any other agreement, letter or instrument delivered in
connection with the transactions contemplated hereby or the consummation of the
transactions contemplated hereby or any actual or prospective claim, litigation,
investigation or proceeding relating to any of the foregoing, whether based on
contract, tort or any other theory (including any investigation of, preparation
for, or defense of any pending or threatened claim, investigation, litigation or
proceeding) and regardless of whether any Indemnified Person is a party thereto
(all the foregoing, collectively, the “Indemnified Liabilities”), in all cases,
whether or not caused by or arising, in whole or in part, out of the negligence
of any Indemnified Person; provided that such indemnity shall not, as to any
Indemnified Person, be available to the extent that such Indemnified Liabilities
are determined by a court of competent jurisdiction by final and nonappealable
judgment to have resulted from the gross negligence or willful misconduct of
such Indemnified Person. In the case of an investigation, litigation or other
proceeding to which the indemnity in this Section 8 applies, such indemnity
shall be effective whether or not such investigation, litigation or proceeding
is brought by the Debtor, its directors, shareholders or creditors or an
Indemnified Party or any other Person, whether or not an Indemnified Person is
otherwise a party thereto and whether or not any of the transactions
contemplated hereunder or under any of the other Note Documents are consummated.
All amounts due under this Section 8 shall be payable within five Business Days
after demand therefor. The agreements in this

 

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Section 8 shall survive the resignation of the Collateral Agent, the assignment
by a Secured Party and the repayment, satisfaction or discharge of all the other
Secured Obligations. In the event that any investigation, litigation or
proceeding is asserted or threatened in writing or instituted against any
Indemnified Person, or any remedial, removal or response action which is
requested of it or any other Indemnified Person, for which such Indemnified
Person may desire indemnity or defense hereunder, such Indemnified Person shall
notify the Debtor in writing of such event; provided that failure to so notify
the Debtor shall not affect the right of any Indemnified Person to seek
indemnification under this Section 8.

(b) the Debtor will upon demand pay to the Collateral Agent the amount of any
and all reasonable expenses, including, without limitation, the fees and
expenses of its counsel and of any experts and agents, that the Collateral Agent
may incur in connection with (i) the administration of this Security Agreement,
(ii) the custody, preservation, use or operation of, or the sale of, collection
from or other realization upon, any of the Collateral of the Debtor, (iii) the
exercise or enforcement of any of the rights of the Secured Parties hereunder or
(iv) the failure by the Debtor to perform or observe any of the provisions
hereof.

(c) The Secured Parties and Collateral Agent shall use reasonable care with
respect to the Collateral in their possession or under their control. The
Secured Parties and Collateral Agent shall not have any other duty as to any
Collateral in its possession or control or in the possession or control of any
agent or nominee of the Secured Parties, or any income thereon or as to the
preservation of rights against prior parties or any other rights pertaining
thereto.

9. Collateral Agent.

(a) Collateral Agent Has No Duty. The powers conferred on the Collateral Agent
hereunder are solely to protect its interest (on behalf of the Secured Parties)
in the Collateral and shall not impose any duty on it to exercise any such
powers.

(b) Reasonable Care. The Collateral Agent is required to exercise reasonable
care in the custody and preservation of any of the Collateral in its possession;
provided, however, that the Collateral Agent shall be deemed to have exercised
reasonable care in the custody and preservation of any of the Collateral if it
takes such action for that purpose as any owner thereof reasonably requests in
writing at times other than upon the occurrence and during the continuance of
any Event of Default, but failure of the Collateral Agent, to comply with any
such request at any time shall not in itself be deemed a failure to exercise
reasonable care.

(c) Other Provisions Relating to the Collateral Agent.

(i) The Collateral Agent has such powers, rights and obligations as are
expressly delegated to the Collateral Agent by the terms of this Security
Agreement and the other Note Documents. Subject to Section 9(c)(iv), the
Collateral Agent may, from time to time, appoint another Person to act as
Collateral Agent. The Collateral Agent, acting in its capacity as such, shall
have only such duties with respect to the Collateral as are set forth herein.

(ii) Except during the continuance of an Event of Default, the Collateral Agent
need perform only those duties that are specifically set forth in this Security

 

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Agreement and no others, and no implied covenants or obligations will be read
into this Security Agreement against the Collateral Agent. In case an Event of
Default has occurred and is continuing, if so directed by the Required Holders,
the Collateral Agent shall exercise those rights and powers vested in it by this
Security Agreement, and use the same degree of care and skill in their exercise,
as a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.

(iii) As to any matters not expressly provided for by this Security Agreement or
the other Note Documents, the Collateral Agent shall not be required to take any
action or exercise any discretion, but shall be required to act or to refrain
from acting upon the instructions of the Required Holders and shall in all such
cases be fully protected in acting, or in refraining from acting, in accordance
with such instructions of the Required Holders, and any action taken or failure
to act pursuant thereto shall be binding on the Holders. Notwithstanding any
other provisions herein, the Collateral Agent shall not be required to advance
or expend any funds or otherwise incur any financial liability in the
performance of its duties or the exercise of its powers or rights hereunder at
the request of the Required Holders unless the Debtor or the Holders have
provided to the Collateral Agent security or indemnity, which the Collateral
Agent, in its reasonable discretion, deems sufficient against any and all
liability or expense which may be incurred by it by reason of taking or
continuing to take such action. The Collateral Agent shall have no liability to
either the Company or the Secured Parties, or any of them, for the performance
or non-performance of its duties hereunder, provided such performance or
non-performance is within the standards and obligations expressly set forth
herein.

(iv) Subject to the appointment and acceptance of a successor Collateral Agent,
the Collateral Agent may resign at any time by giving not less than thirty
(30) days’ notice thereof to the Holders and the Debtor. Upon the acceptance of
any appointment as Collateral Agent hereunder by a successor Collateral Agent,
(A) such successor Collateral Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of the retiring Collateral
Agent, and the retiring Collateral Agent shall be discharged from its duties and
obligations hereunder, and (B) the retiring Collateral Agent shall promptly
transfer all Collateral within its possession or control to the possession or
control of the successor Collateral Agent and shall execute and deliver such
notices, instructions and assignments as may be necessary or desirable to
transfer the rights of the Collateral Agent in respect of the Collateral to the
successor Collateral Agent. After any retiring Collateral Agent’s resignation or
replacement hereunder as Collateral Agent, the provisions of this Section shall
continue in effect for its benefit in respect of any actions taken or omitted to
be taken by it while it was acting as Collateral Agent. Upon any such
resignation or removal, the former Collateral Agent shall take all steps
necessary to assign the Collateral to the successor Collateral Agent.

10. Reinstatement. This Security Agreement shall remain in full force and effect
and continue to be effective should any petition be filed by or against the
Debtor for liquidation or reorganization, should the Debtor become insolvent or
make an assignment for the benefit of any creditor or creditors or should a
receiver or trustee be appointed for all or any significant part of the Debtor’s
assets, and shall continue to be effective or be reinstated, as the case may be,
if at any time payment and performance of the Secured Obligations, or any part
thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must
otherwise be restored or returned by any obligee of the Secured Obligations,
whether as a “voidable preference,” “fraudulent

 

10

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conveyance,” or otherwise, all as though such payment or performance had not
been made. In the event that any payment, or any part thereof, is rescinded,
reduced, restored or returned, the Secured Obligations shall be reinstated and
deemed reduced only by such amount paid and not so rescinded, reduced, restored
or returned.

 

If to the Company:   

39655 Eureka Drive

Newark, California 94560

Attn: Chief Executive Officer

Telephone: (510) 619-9200

Facsimile: (510) 291-3001

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 the Collateral Agent:   

Vision Capital Advisors, LLC

20 West 55th Street

New York, NY 10019

Attn: Jess Jones

Telephone: (212) 849-8243

Facsimile: (212) 867-1416

with copies to:   

Sadis & Goldberg LLP

551 Fifth Avenue, 21st Floor

New York, New York 10176

Attention: Paul Fasciano, Esq.

Telephone: (212) 573-8025

Facsimile: (212) 573-8026

11. Severability. Whenever possible, each provision of this Security Agreement
shall be interpreted in a manner as to be effective and valid under applicable
law, but if any provision of this Security Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Security Agreement. This Security
Agreement is to be read, construed and applied together with the Purchase
Agreement and the other Note Documents which, taken together, set forth the
complete understanding and agreement of the Collateral Agent, the Holders and
the Debtor with respect to the matters referred to herein and therein.

12. No Waiver; Cumulative Remedies. The Secured Parties shall not by any act,
delay, omission or otherwise be deemed to have waived any of its rights or
remedies hereunder,

 

11

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and no waiver shall be valid unless in writing, signed by the Collateral Agent
and then only to the extent therein set forth. A waiver by the Collateral Agent
of any right or remedy hereunder on any one occasion shall not be construed as a
bar to any right or remedy which the Collateral Agent would otherwise have had
on any future occasion. No failure to exercise nor any delay in exercising on
the part of the Secured Parties, any right, power or privilege hereunder, shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or future exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies hereunder provided are cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights and remedies provided by law.
None of the terms or provisions of this Security Agreement may be waived,
altered, modified or amended except by an instrument in writing, duly executed
by the Collateral Agent and the Debtor.

13. Limitation By Law. All rights, remedies and powers provided in this Security
Agreement may be exercised only to the extent that the exercise thereof does not
violate any applicable provision of law, and all the provisions of this Security
Agreement are intended to be subject to all applicable mandatory provisions of
law that may be controlling and to be limited to the extent necessary so that
they shall not render this Security Agreement invalid, or unenforceable, in
whole or in part, or not entitled to be recorded, registered or filed under the
provisions of any applicable law.

14. Termination Of This Security Agreement. Subject to Section 10 hereof, this
Security Agreement shall terminate upon the Termination Date.

15. Successors And Assigns. This Security Agreement and all obligations of the
Debtor hereunder shall be binding upon the successors and assigns of the Debtor
(including any debtor-in-possession on behalf of the Debtor) and shall, together
with the rights and remedies of the Collateral Agent, for the benefit of the
Secured Parties, hereunder, inure to the benefit of the Secured Parties and all
future holders of any instrument evidencing any of the Secured Obligations and
their respective successors and assigns. No sales of participations, other
sales, assignments, transfers or other dispositions of any agreement governing
or instrument evidencing the Secured Obligations or any portion thereof or
interest therein shall in any manner impair the Lien granted to the Collateral
Agent, for the benefit of the Secured Parties, hereunder. The Debtor may not
assign, sell, hypothecate or otherwise transfer any interest in or obligation
under this Security Agreement.

16. Counterparts. This Security Agreement may be authenticated in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement. This Security Agreement may be authenticated by manual
signature, facsimile or, if approved in writing by the Collateral Agent,
electronic means, all of which shall be equally valid.

17. Governing Law. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY,
ENFORCEMENT AND INTERPRETATION OF THIS SECURITY AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH PARTY HEREBY IRREVOCABLY
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL

 

12

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COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY
TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT
SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. NOTHING IN THIS SECURITY AGREEMENT
SHALL BE DEEMED OR OPERATE TO PRECLUDE THE SECURED PARTIES FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL
OR ANY OTHER SECURITY FOR THE SECURED OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF THE SECURED PARTIES. EACH PARTY HEREBY IRREVOCABLY
WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY
SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR
CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY
AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS SECURITY AGREEMENT AND
AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS
AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY
ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE COMPANY HEREBY
WAIVES ALL RIGHTS TO A TRIAL BY JURY.

18. Waiver Of Jury Trial. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX
FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY, THE PARTIES DESIRE THAT DISPUTES ARISING HEREUNDER OR RELATING
HERETO BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, AMONG THE SECURED PARTIES AND THE DEBTOR ARISING OUT OF,
CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED IN
CONNECTION WITH, THIS SECURITY AGREEMENT OR ANY OF THE OTHER NOTES DOCUMENTS OR
THE TRANSACTIONS RELATED HERETO OR THERETO.

19. Expenses. The Debtor agrees to reimburse the Secured Parties for all costs
and expenses incurred by them (including, without limitation, the fees and
expenses of legal counsel) in connection with (i) any Default or Event of
Default and any enforcement or collection proceeding resulting therefrom,
including, without limitation, all manner of participation in or other
involvement with (w) performance by the Collateral Agent of any obligations of
the Debtor in respect of the Collateral that the Debtor has failed or refused to
perform, (x) bankruptcy, insolvency, receivership, foreclosure, winding up or
liquidation proceedings, or any actual or attempted sale, or any exchange,
enforcement, collection, compromise or settlement in respect of any of the
Collateral, and for the care of the Collateral and defending or asserting rights
and

 

13

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claims of the Collateral Agent in respect thereof, by litigation or otherwise,
including expenses of insurance, (y) judicial or regulatory proceedings and
(z) workout, restructuring or other negotiations or proceedings (whether or not
the workout, restructuring or transaction contemplated thereby is consummated)
and (ii) the enforcement of this Section 19, and all such costs and expenses
shall be Secured Obligations entitled to the benefits of the collateral security
provided pursuant to Section 2.

20. Section Titles. The Section titles contained in this Security Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement among the parties hereto.

21. No Strict Construction. The parties hereto have participated jointly in the
negotiation and drafting of this Security Agreement. In the event an ambiguity
or question of intent or interpretation arises, this Security Agreement shall be
construed as if drafted jointly by the parties hereto and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Security Agreement.

22. Benefit Of Secured Party. All Liens granted or contemplated hereby shall be
for the benefit of the Secured Parties, and all proceeds or payments realized
from Collateral in accordance herewith shall be applied to the Secured
Obligations in the manner determined by the Collateral Agent in its sole
discretion.

[remainder of page intentionally left blank]

 

14

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IN WITNESS WHEREOF, each of the parties hereto has caused this Security
Agreement to be executed and delivered by its duly authorized officer as of the
date first set forth above.

 

The Debtor: NOVARAY MEDICAL, INC. By:  

/s/ Marc C. Whyte

Title:  

Chief Executive Officer

The Collateral Agent:

VISION CAPITAL ADVISORS, LLC

By:  

/s/ Adam Benowitz

Title:  

Portfolio Manager

 

15

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ANNEX A

to

SECURITY AGREEMENT

DEFINITIONS

Capitalized terms used in the Security Agreement shall have the following
respective meanings, and all references to Sections, Exhibits, Schedules or
Annexes in the following definitions shall refer to Sections, Exhibits,
Schedules or Annexes of or to the Security Agreement:

“Account Debtor” means any Person who may become obligated to the Debtor under,
with respect to, or on account of, an Account.

“Accounts” means all “accounts,” as such term is defined in the Code, now owned
or hereafter acquired by the Debtor, including (as the context may reasonably
permit) (a) all accounts receivable, other receivables, book debts and other
forms of obligations (other than forms of obligations evidenced by Chattel Paper
or Instruments; but including any such obligations that may be characterized as
an account or contract right under the Code), (b) all of the Debtor’s rights in,
to and under all purchase orders or receipts for goods or services, (c) all of
the Debtor’s rights to any goods represented by any of the foregoing (including
unpaid sellers’ rights of rescission, reclamation and stoppage in transit and
rights to returned, reclaimed or repossessed goods), (d) all rights to payment
due to the Debtor for property sold, leased, licensed, assigned or otherwise
disposed of, for a policy of insurance issued or to be issued, for a secondary
obligation incurred or to be incurred, for energy provided or to be provided,
for the use or hire of a vessel under a charter or other contract, arising out
of the use of a credit card or charge card, or for services rendered or to be
rendered by the Debtor or in connection with any other transaction (whether or
not yet earned by performance on the part of the Debtor), (e) all health care
insurance receivables and (f) all collateral security of any kind, given by any
Account Debtor or any other Person with respect to any of the foregoing.

“Bankruptcy Code” means the provisions of Title 11 of the United States Code, 11
U.S.C. §§ 101 et seq.

“Business Day” means any day that is not a Saturday, a Sunday or a day on which
banks are required or permitted to be closed in the City of New York.

“Chattel Paper” means any “chattel paper,” as such term is defined in the Code,
including electronic chattel paper, now owned or hereafter acquired by the
Debtor.

“Code” means the Uniform Commercial Code as the same may, from time to time, be
enacted and in effect in the State of New York; provided, that to the extent
that the Code is used to define any term herein and such term is defined
differently in different Articles of the Code, the definition of such term
contained in Article 9 of the Code shall govern; provided further, that in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of, or remedies with respect to, the Lien on
any Collateral under the Security Agreement is governed by the Uniform
Commercial Code as enacted and in effect in a

 

1

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jurisdiction other than the State of New York, the term “Code” shall mean the
Uniform Commercial Code as enacted and in effect in such other jurisdiction
solely for purposes of the provisions thereof relating to such attachment,
perfection, priority or remedies and for purposes of definitions related to such
provisions.

“Collateral” has the meaning ascribed to it in Section 2(a).

“Copyright License” means any and all rights now owned or hereafter acquired by
the Debtor under any written agreement granting any right to use any Copyright
or Copyright registration.

“Copyrights” means all of the following now owned or hereafter adopted or
acquired by the Debtor: (a) all copyrights, all General Intangibles of like
nature (whether registered or unregistered), all registrations and recordings
thereof, and all applications in connection therewith, including all
registrations, recordings and applications in the United States Copyright Office
or in any similar office or agency of the United States, any state or territory
thereof, or any other country or any political subdivision thereof, (b) all
reissues, extensions or renewals thereof, (c) the right to recover for all past,
present and future infringements thereof and (d) all other rights of any kind
whatsoever accruing thereunder as pertaining thereto.

“Default” means any condition or event which is, or, with notice or lapse of
time or both, would become, an Event of Default.

“Deposit Accounts” means all “deposit accounts” as such term is defined in the
Code, now or hereafter held in the names of the Debtor.

“Event of Default” has the meaning ascribed to it in Section 2.1 of the Notes.

“General Intangibles” means all “general intangibles,” as such term is defined
in the Code, now owned or hereafter acquired by the Debtor, including (as the
context may reasonably permit) all right, title and interest that the Debtor may
now or hereafter have in or under any Contract, all payment intangibles,
customer lists, Licenses, Copyrights, Trademarks, Patents, and all applications
therefor and reissues, extensions or renewals thereof, rights in Intellectual
Property, interests in partnerships, joint ventures and other business
associations, licenses, permits, copyrights, trade secrets, proprietary or
confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, software, data
bases, data, skill, expertise, experience, processes, models, drawings,
materials and records, goodwill (including the goodwill associated with any
Trademark or Trademark License), all rights and claims in or under insurance
policies (including insurance for fire, damage, loss and casualty, whether
covering personal property, real property, tangible rights or intangible rights,
all liability, life, key man and business interruption insurance, and all
unearned premiums), choses in action, rights to receive tax refunds and other
payments, rights to receive dividends, distributions, cash, Instruments and
other property in respect of or in exchange for any pledged Investment Property,
rights of indemnification, all books and records, correspondence, credit files,
invoices and other papers, including without limitation all tapes, cards,
computer runs and other papers and documents in the possession or under the
control of the Debtor or any computer bureau or service company from time to
time acting for the Debtor.

 

2

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“Instruments” means all “instruments,” as such term is defined in the Code, now
owned or hereafter acquired by the Debtor, wherever located, and, in any event,
including all certificates of deposit, and all promissory notes and other
evidences of indebtedness, other than instruments that constitute, or are a part
of a group of writings that constitute, Chattel Paper.

“Intellectual Property” means collectively, all Copyrights, all Patents and all
Trademarks, together with (a) all inventions, processes, production methods,
proprietary information, know-how and trade secrets; (b) all Copyright Licenses,
Patent Licenses and Trademark Licenses; (c) all information, customer lists,
identification of suppliers, data, plans, blueprints, specifications, designs,
drawings, recorded knowledge, surveys, engineering reports, test reports,
manuals, materials standards, processing standards, performance standards,
catalogs, computer and automatic machinery software and programs; (d) all field
repair data, sales data and other information relating to sales or service of
products now or hereafter manufactured; (e) all accounting information and all
media in which or on which any information or knowledge or data or records may
be recorded or stored and all computer programs used for the compilation or
printout of such information, knowledge, records or data; (f) all licenses,
consents, permits, variances, certifications and approvals of governmental
agencies now or hereafter held by the Debtor and (g) all clauses of action,
claims, and warranties now or hereafter owned or acquired by the Debtor in
respect of any of the items listed above.

“Inventory” means all “inventory,” as such term is defined in the Code, now
owned or hereafter acquired by the Debtor, wherever located, and in any event
including (as the context may reasonably permit) inventory, merchandise, goods
and other personal property that are held by or on behalf of the Debtor for sale
or lease or are furnished or are to be furnished under a contract of service, or
that constitute raw materials, work in process, finished goods, returned goods,
or materials or supplies of any kind, nature or description used or consumed or
to be used or consumed in the Debtor’s business or in the processing,
production, packaging, promotion, delivery or shipping of the same, including
all supplies and embedded software.

“Investment Property” means all “investment property” as such term is defined in
the Code now owned or hereafter acquired by the Debtor, wherever located,
including (as the context may reasonably permit) (i) all securities, whether
certificated or uncertificated, including stocks, bonds, interests in limited
liability companies, partnership interests, treasuries, certificates of deposit,
and mutual fund shares; (ii) all securities entitlements of the Debtor,
including the rights of the Debtor to any securities account and the financial
assets held by a securities intermediary in such securities account and any free
credit balance or other money owing by any securities intermediary with respect
to that account; (iii) all securities accounts of the Debtor; (iv) all commodity
contracts of the Debtor; and (v) all commodity accounts held by the Debtor.

“License” means any Copyright License, Patent License, Trademark License or
other license of rights or interests now held or hereafter acquired by the
Debtor.

“Lien” means any mortgage or deed of trust, pledge, hypothecation, assignment,
deposit arrangement, lien, charge, claim, security interest, easement or
encumbrance, or preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including any lease or title
retention agreement, any financing lease having substantially the

 

3

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same economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement perfecting a security interest under the Code or
comparable law of any jurisdiction).

“Patent License” means rights under any written agreement now owned or hereafter
acquired by the Debtor granting any right with respect to any invention on which
a Patent is in existence.

“Patents” means all of the following in which the Debtor now hold or hereafter
acquire any interest: (a) all letters patent of the United States or of any
other country, all registrations and recordings thereof, and all applications
for letters patent of the United States or of any other country, including
registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State, or any other country, (b) all reissues, continuations,
continuations-in-part or extensions thereof, (c) all income, royalties, damages
and payments now or hereafter due and/or payable under and with respect thereto,
including, without limitation, damages and payments for past or future
infringements thereof, (d) the right to sue for past, present and future
infringements thereof, and (e) all rights corresponding thereto throughout the
world.

“Permitted Encumbrances” means the following encumbrances: (i) Liens for taxes
or assessments or other governmental charges or levies, either not yet due and
payable or which is being contested in good faith; (ii) pledges or deposits
securing obligations under workers’ compensation, unemployment insurance, social
security or public liability laws or similar legislation; (iii) pledges or
deposits securing bids, tenders, contracts or leases to which the Company or any
of its subsidiaries is a party as lessee made in the ordinary course of
business; (iv) deposits securing public or statutory obligations; (v) inchoate
and unperfected workers’, mechanics’, suppliers’ or similar liens arising in the
ordinary course of business; (vi) carriers’, warehousemen’s or other similar
possessory liens arising in the ordinary course of business; (vii) deposits
securing, or in lieu of, surety, appeal or customs bonds; (viii) encumbrances
arising out of agreements identified in Schedule 2.1(l) of the Schedule of
Exceptions to the Purchase Agreement; (ix) presently existing or hereafter
created Liens in favor of Secured Parties; and (x) any Lien that is junior to
the Lien granted under the Security Agreement.

“Person” means a corporation, an association, a partnership, an organization, a
business, an individual, a government or political subdivision thereof or
governmental authority.

“Proceeds” means “proceeds,” as such term is defined in the Code, including (as
the context may reasonably permit) (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to the Debtor from time to time with
respect to any of the Collateral, (b) any and all payments (in any form
whatsoever) made or due and payable to the Debtor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any governmental authority
(or any Person acting under color of governmental authority), (c) any claim of
the Debtor against third parties (i) for past, present or future infringement of
any Patent or Patent License, or (ii) for past, present or future infringement
or dilution of any Copyright, Copyright License, Trademark or Trademark License,
or for injury to the goodwill associated with any Trademark or Trademark
License, (d) any recoveries by the Debtor against third parties with respect to
any litigation or dispute concerning

 

4

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any of the Collateral including claims arising out of the loss or nonconformity
of, interference with the use of, defects in, or infringement of rights in, or
damage to, Collateral, (e) all amounts collected on, or distributed on account
of, other Collateral, including dividends, interest, distributions and
Instruments with respect to Investment Property, and (f) any and all other
amounts, rights to payment or other property acquired upon the sale, lease,
license, exchange or other disposition of Collateral and all rights arising out
of Collateral.

“Secured Obligations” means any and all obligations, liabilities and
indebtedness for the payment of monetary amounts of every kind, nature and
description owing by the Debtor to the Secured Parties under the Note Documents
and incurred prior to the earlier of the Mandatory Conversion Date, the Optional
Conversion Date (each as defined in the Notes) or repayment of all principal and
interest under the Notes, including principal, interest, charges, fees,
premiums, indemnities and expenses, however evidenced, whether as principal,
surety, endorser, a debtor or otherwise, whether arising under this Agreement or
otherwise, whether now existing or hereafter arising, whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured, and whether arising
directly or howsoever acquired by a Secured Party.

“Security Agreement” means this Security Agreement, as the same may be amended,
supplemented, restated or otherwise modified from time to time.

“Termination Date” means the date on which the Secured Obligations of the Debtor
under this Security Agreement and each other Note Document to which it is a
party, have been indefeasibly satisfied.

“Trademark License” means rights under any written agreement now owned or
hereafter acquired by the Debtor granting any right to use any Trademark.

“Trademarks” means all of the following now owned or hereafter existing or
adopted or acquired by the Debtor: (a) all trademarks, trade names, corporate
names, business names, trade styles, service marks, logos, other source or
business identifiers, prints and labels on which any of the foregoing have
appeared or appear, designs and General Intangibles of like nature (whether
registered or unregistered), all registrations and recordings thereof, and all
applications in connection therewith, including registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any state or territory thereof, or any
other country or any political subdivision thereof, (b) all reissues, extensions
or renewals thereof, (c) all rights corresponding thereto throughout the world
(d) the right to recover for all past, present and future infringements thereof
and (e) all other rights of any kind whatsoever accruing thereunder or
pertaining thereto, together, in each case, with the product lines and goodwill
of the business connected with the use of, and symbolized by, any of the
foregoing.

The words “herein,” “hereof” and “hereunder” and other words of similar import
refer to the Security Agreement as a whole, including all Annexes, Exhibits and
Schedules, as the same may from time to time be amended, restated, modified or
supplemented, and not to any particular section, subsection or clause contained
in the Security Agreement or any such Annex, Exhibit or Schedule.

 

5

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Wherever from the context it appears appropriate, each term stated in either the
singular or plural shall include the singular and the plural, and pronouns
stated in the masculine, feminine or neuter gender shall include the masculine,
feminine and neuter genders. The words “including”, “includes” and “include”
shall be deemed to be followed by the words “without limitation”; the word “or”
is not exclusive; references to Persons include their respective successors and
assigns or, in the case of governmental Persons, Persons succeeding to the
relevant functions of such Persons; and all references to statutes and related
regulations shall include any amendments of the same and any successor statutes
and regulations. Whenever any provision in this Security Agreement refers to the
knowledge (or an analogous phrase) of the Debtor, such words are intended to
signify that the Debtor has actual knowledge or awareness of a particular fact
or circumstance or the Debtor, if it had exercised reasonable diligence, would
have known or been aware of such fact or circumstance.

 

6

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SCHEDULE I

to

SECURITY AGREEMENT

FILING JURISDICTIONS

Secretary of State of Delaware

Secretary of State of California

United States Patent and Trademark Office

European Patent Office

French Patent Office

German Patent Office

Japan Patent Office

United Kingdom Patent Office

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

SCHEDULE II

to

SECURITY AGREEMENT

SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL

AND RECORDS CONCERNING DEBTOR’S COLLATERAL

Name: NovaRay Medical, Inc.

Type of Entity: Corporation

Organizational Identification Number: 4231532

Jurisdiction of Incorporation: Delaware

Location of chief executive office, principal place of business, offices and
premises where Collateral is stored or located, and the locations of its books
and records concerning the Collateral:

39655 Eureka Drive

Newark, California 94560

Morrison & Foerster LLP

755 Page Mill Road

Palo Alto, California 94304

Alston & Bird LLP

Two Palo Alto Square

3000 El Camino Real, Suite 400

Palo Alto, California 94306

BDO Seidman, LLP

50 West San Fernando Street, Suite 200

San Jose, California 95113

Wisconsin Institutes for Medical Research

1111 Highland Ave

Madison, WI 53705-2275

Lab Room 1267

Other Names during past five (5) years: Vision Acquisition I, Inc., NovaRay,
Inc.

Mergers, Consolidations and Acquisitions: Mergers with NovaRay, Inc.,
acquisition of assets of NexRay, Inc., acquisition of certain assets of Ambric

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SCHEDULE III

to

SECURITY AGREEMENT

SCHEDULE OF INTELLECTUAL PROPERTY

 

A. See Schedule 2.1(r) to the Schedule of Exceptions to the Purchase Agreement

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EXHIBIT A

FORM OF

POWER OF ATTORNEY

This Power of Attorney is executed and delivered by NOVARAY MEDICAL, INC., a
Delaware corporation (the “Grantor”), to Vision Capital Advisors, LLC
(hereinafter referred to the “Attorney”), as the Collateral Agent for the
benefit of the Secured Parties under a Security Agreement, dated as of March __,
2010 and other related documents (collectively, the “Documents”). No person to
whom this Power of Attorney is presented, as authority for the Attorney to take
any action or actions contemplated hereby, shall be required to inquire into or
seek confirmation from the Grantor as to the authority of the Attorney to take
any action described below, or as to the existence of or fulfillment of any
condition to this Power of Attorney, which is intended to grant to the Attorney
unconditionally the authority to take and perform the actions contemplated
herein. The power of attorney granted hereby is coupled with an interest, and
may not be revoked or canceled by the Grantor without the Attorney’s written
consent.

The Grantor hereby irrevocably constitutes and appoints the Attorney (and all
officers, employees or agents designated by the Attorney), with full power of
substitution, as the Grantor’s true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of the Grantor and in the
name of the Grantor or in its own name, from time to time in the Attorney’s
discretion, without notice to or assent by the Grantor, and at any time in the
case of clause (h) below and at any time an Event of Default (as defined in the
Security Agreement) has occurred and is continuing in the case of (a), (b), (c),
(d), (e), (f), (g), (i) and (j) below, to do the following: (a) change the
mailing address of the Grantor, open a post office box on behalf of the Grantor,
open mail for the Grantor, and ask, demand, collect, give acquittances and
receipts for, take possession of, endorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, drafts against debtor,
assignments, verifications, and notices in connection with any property of the
Grantor constituting Collateral; (b) effect any repairs to any asset of the
Grantor, or continue or obtain any insurance and pay all or any part of the
premiums therefor and costs thereof, and make, settle and adjust all claims
under such policies of insurance, and make all determinations and decisions with
respect to such policies; (c) pay or discharge any taxes, liens, security
interests, or other encumbrances levied or placed on or threatened against the
Grantor or its property constituting Collateral; (d) defend any suit, action or
proceeding brought against the Grantor if the Grantor does not defend such suit,
action or proceeding or if the Attorney believes that the Grantor is not
pursuing such defense in a manner that will maximize the recovery to the
Attorney, and settle, compromise or adjust any suit, action, or proceeding
described above and, in connection therewith, give such discharges or releases
as the Attorney may deem appropriate; (e) file or prosecute any claim,
litigation, suit or proceeding in any court of competent jurisdiction or before
any arbitrator, or take any other action otherwise deemed appropriate by the
Attorney for the purpose of collecting any and all such moneys due to the
Grantor whenever payable and to enforce any other right in respect of the
Grantor’s property constituting Collateral; (f) cause the certified public
accountants then engaged by the Grantor to prepare and deliver to the Attorney
at any time and from time to time, promptly upon the Attorney’s request, the
following reports: (1) a reconciliation of all accounts, (2) an aging of all

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accounts, (3) trial balances, (4) test verifications of such accounts as the
Attorney may request, and (5) the results of each physical verification of
inventory; (g) communicate in its own name with any party to any contract with
regard to the assignment of the right, title and interest of the Grantor in and
under the contracts and other matters relating thereto; (h) file such financing
statements with respect to the aforesaid Security Agreement, with or without the
Grantor’s signature, or to file a photocopy of the Security Agreement in
substitution for a financing statement, as the Collateral Agent may deem
appropriate and to execute in the Grantor’s name such financing statements and
amendments thereto and continuation statements which may require the Grantor’s
signature; (i) execute, in connection with any sale provided for in any
Document, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral and to otherwise direct such sale or
resale, all as though the Attorney were the absolute owner of the property of
the Grantor for all purposes, and (j) at the Attorney’s option and the Grantor’s
expense, at any time or from time to time, all acts and other things that the
Attorney reasonably deems necessary to perfect, preserve, or realize upon the
Grantor’s property or assets and the Collateral Agent’s Liens thereon, all as
fully and effectively as the Grantor might do. The Grantor hereby ratifies, to
the extent permitted by law, all that said Attorney shall lawfully do or cause
to be done by virtue hereof.

[signature page follows]

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IN WITNESS WHEREOF, this Power of Attorney is executed by the Grantor, and the
Grantor has caused its seal to be affixed pursuant to the authority of its board
of directors this [__] day of March, 2010.

 

The Grantor: NOVARAY MEDICAL, INC. By:  

 

Name:   Title:  

NOTARY PUBLIC CERTIFICATES

On this [    ] day of March, 2010,                              [name] who is
personally known to me appeared before me in his/her capacity as the
                             [title] of NOVARAY MEDICAL, INC. and executed on
behalf of such entity the Power of Attorney in favor of VISION CAPITAL ADVISORS,
LLC to which this Certificate is attached.

 

 

Notary Public