exv10w11



 





Exhibit 10.11



THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF 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 ISSUER SHALL HAVE RECEIVED AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.




SERIES A WARRANT TO PURCHASE




SHARES OF COMMON STOCK




OF




NOVARAY MEDICAL, INC.




Expires:
December 27, 2012




	 	 	 
	No.: W-A-07-[     ]

	 	Number of Shares:                     
	Date
of Issuance: December 27, 2007
	 	 






     FOR VALUE RECEIVED, the undersigned, NOVARAY MEDICAL, INC., a Delaware corporation (together
with its successors and assigns, the “Issuer”), hereby certifies that
                     or its registered assigns is entitled to subscribe for and purchase, during
the Term (as hereinafter defined), up to                      shares (subject to adjustment as
hereinafter provided) of the duly authorized, validly issued, fully paid and non-assessable Common
Stock of the Issuer, at an exercise price per share equal to the Warrant Price then in effect,
subject, however, to the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall have the respective
meanings specified in Section 8 hereof.



     1. Term. The term of this Warrant shall commence on the date hereof and shall expire
at 6:00 p.m., Eastern Time, on December 27, 2012 (such period being the “Term”).



     2. Method of Exercise; Payment; Issuance of New Warrant; Transfer and
Exchange.



     (a) Time of Exercise. The purchase rights represented by this Warrant may be
exercised in whole or in part during the Term.



     (b) Method of Exercise. The Holder hereof may exercise this Warrant, in whole or in
part, by the surrender of this Warrant (with the exercise form attached hereto duly executed) at



 









 




the principal office of the Issuer, and by the payment to the Issuer of an amount of
consideration therefor equal to the Warrant Price in effect on the date of such exercise multiplied
by the number of shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable at such Holder’s election (i) by certified or official bank check or by wire
transfer to an account designated by the Issuer, (ii) by “cashless exercise” in accordance with the
provisions of subsection (c) of this Section 2, or (iii) by a combination of the
foregoing methods of payment selected by the Holder of this Warrant.




     (c) Cashless Exercise. Notwithstanding any provisions herein to the contrary and
commencing one (1) year following the Original Issue Date if the Per Share Market Value of one
share of Common Stock is greater than the Warrant Price (at the date of calculation as set forth
below), the Holder may exercise this Warrant by a cashless exercise and shall receive the number of
shares of Common Stock equal to an amount (as determined below) by surrender of this Warrant at the
principal office of the Issuer together with the properly endorsed Notice of Exercise in which
event the Issuer shall issue to the Holder a number of shares of Common Stock computed using the
following formula:



	 	 	 	 	 
	 

	 	X =
	 	Y - (A)(Y)

           B
	 
	 	 	 	 
	Where

	 	X =
	 	the number of shares of Common Stock to be issued to the Holder.
	 
	 	 	 	 
	 

	 	Y =
	 	the number of shares of Common Stock purchasable upon
exercise of all of the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised.
	 
	 	 	 	 
	 

	 	A =
	 	the Warrant Price.
	 
	 	 	 	 
	 

	 	B =
	 	the Per Share Market Value of one share of Common Stock.






     (d) Issuance of Stock Certificates. In the event of any exercise of this Warrant in
accordance with and subject to the terms and conditions hereof, certificates for the shares of
Warrant Stock so purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three (3) Trading Days after such exercise (the
“Delivery Date”) or, at the request of the Holder (provided that a registration statement
under the Securities Act providing for the resale of the Warrant Stock is then in effect and the
Holder so requests in writing of the Issuer), issued and delivered to the Depository Trust Company
(“DTC”) account on the Holder’s behalf via the Deposit Withdrawal Agent Commission System
(“DWAC”) within a reasonable time, not exceeding three (3) Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the holder of the shares of
Warrant Stock so purchased as of the date of such exercise. Notwithstanding the foregoing to the
contrary, the Issuer or its transfer agent shall only be obligated to issue and deliver the shares
to the DTC on a holder’s behalf via DWAC if the Issuer and its transfer agent are participating in
DTC through the DWAC system. The Holder shall deliver this original Warrant, or an indemnification
undertaking in a form reasonably satisfactory to the Issuer with respect to such Warrant in the
case of its loss, theft or destruction, at such time that this Warrant is fully



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exercised. With respect to partial exercises of this Warrant, the Issuer shall keep written
records for the Holder of the number of shares of Warrant Stock exercised as of each date of
exercise.




     (e) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise.
In addition to any other rights available to the Holder, if the Issuer fails to cause its transfer
agent to transmit to the Holder a certificate or certificates representing the Warrant Stock
pursuant to an exercise on or before the Delivery Date, and if after such date the Holder is
required by its broker to purchase (in an open market transaction or otherwise) shares of Common
Stock to deliver in satisfaction of a sale by the Holder of the Warrant Stock which the Holder
anticipated receiving upon such exercise (a “Buy-In”), then the Issuer shall (1) pay in
cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of shares of Warrant Stock that the Issuer was required to deliver to
the Holder in connection with the exercise at issue times (B) the Warrant Price, as may be adjusted
in accordance with this Warrant, and (2) at the option of the Holder, either reinstate the portion
of the Warrant and equivalent number of shares of Warrant Stock for which such exercise was not
honored or deliver to the Holder the number of shares of Common Stock that would have been issued
had the Issuer timely complied with its exercise and delivery obligations hereunder. For example,
if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In
with respect to an attempted exercise of the Warrant for shares of Common Stock with an aggregate
sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately
preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide
the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In,
together with applicable confirmations and other evidence reasonably requested by the Issuer.
Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing
shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof.



     (f) Transferability/Exchangeability of Warrant. Subject to Section 2(h)
hereof, this Warrant may be transferred by a Holder, in whole or in part, without the consent of
the Issuer. If transferred pursuant to this paragraph, this Warrant may be transferred on the
books of the Issuer by the Holder hereof in person or by duly authorized attorney, upon surrender
of this Warrant at the principal office of the Issuer, properly endorsed (by the Holder executing
an assignment in the form attached hereto) and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. This Warrant is exchangeable at the principal
office of the Issuer for Warrants to purchase the same aggregate number of shares of Warrant Stock,
each new Warrant to represent the right to purchase such number of shares of Warrant Stock as the
Holder hereof shall designate at the time of such exchange. All Warrants issued on transfers or
exchanges shall be dated the Original Issue Date and shall be identical with this Warrant except as
to the number of shares of Warrant Stock issuable pursuant thereto.



     (g) Continuing Rights of Holder. The Issuer will, at the time of or at any time after
each exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing the
extent, if any, of its continuing obligation to afford to such Holder all rights to which such



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Holder shall continue to be entitled after such exercise in accordance with the terms of this
Warrant; provided that if any such Holder shall fail to make, or the Issuer shall fail to honor,
any such request, the failure shall not affect the continuing obligation of the Issuer to afford
such rights to such Holder.




     (h) Compliance with Securities Laws.




     (i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant
and the shares of Warrant Stock to be issued upon exercise hereof are being acquired solely
for the Holder’s own account and not as a nominee for any other party, and for investment,
and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares
of Warrant Stock to be issued upon exercise hereof except pursuant to an effective
registration statement, or an exemption from registration, under the Securities Act and any
applicable state securities laws.




     (ii) Except as provided in paragraph (iii) below, this Warrant and all certificates
representing shares of Warrant Stock issued upon exercise hereof shall be stamped or
imprinted with a legend in substantially the following form:




THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF 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 ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED.




     (iii) The Issuer agrees to reissue this Warrant or certificates representing any of the
Warrant Stock, without the legend set forth above if at such time, prior to making any
transfer of any such securities, the Holder shall give written notice to the Issuer
describing the manner and terms of such transfer. Such proposed transfer will not be
effected until: (a) either (i) the Issuer has received an opinion of counsel reasonably
satisfactory to the Issuer, to the effect that the registration of such securities 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 Issuer with the Securities and Exchange Commission and has become effective
under the Securities Act, and (b) either (i) the Issuer has received an opinion of counsel
reasonably satisfactory to the Issuer, to the effect that registration or qualification
under the securities or “blue sky” laws of any state is not required in connection with



4









 







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 Issuer
will respond to any such notice from a holder within five (5) Trading Days. In the case of
any proposed transfer under this Section 2(h), the Issuer will pay the expenses of
and 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, or (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. The restrictions on
transfer contained in this Section 2(h) shall be in addition to, and not by way of
limitation of, any other restrictions on transfer contained in any other section of this
Warrant. Whenever a certificate representing the Warrant Stock is required to be issued to
a Holder without a legend, at the request of the Holder, in lieu of delivering physical
certificates representing the Warrant Stock, the Issuer shall cause its transfer agent to
electronically transmit the Warrant Stock to the Holder by crediting the account of the
Holder’s Prime Broker with DTC through its DWAC system (to the extent not inconsistent with
any provisions of this Warrant or the Purchase Agreement).



     (i) Accredited Investor Status. In no event may the Holder exercise this Warrant in
whole or in part unless the Holder is an “accredited investor” as defined in Regulation D under the
Securities Act.



     3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.



     (a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees that all
shares of Warrant Stock which may be issued upon the exercise of this Warrant or otherwise
hereunder will, when issued in accordance with the terms of this Warrant, be duly authorized,
validly issued, fully paid and non-assessable and free from all taxes, liens and charges. The
Issuer further covenants and agrees that during the period within which this Warrant may be
exercised, the Issuer will at all times have authorized and reserved for the purpose of the
issuance upon exercise of this Warrant a number of authorized but unissued shares of Common Stock
equal to at least one hundred ten percent (110%) of the number of shares of Common Stock issuable
upon exercise of this Warrant without regard to any limitations on exercise.



     (b) Reservation. If any shares of Common Stock required to be reserved for issuance
upon exercise of this Warrant or as otherwise provided hereunder require registration or
qualification with any Governmental Authority under any federal or state law before such shares may
be so issued, the Issuer will in good faith use best efforts as expeditiously as possible at its
expense to cause such shares to be duly registered or qualified. If the Issuer shall list any
shares of Common Stock on any securities exchange or market it will, at its expense, list thereon,
and maintain and increase when necessary such listing of, all shares of Warrant Stock from time to
time issued upon exercise of this Warrant or as otherwise provided hereunder (provided that such
Warrant Stock has been registered pursuant to a registration statement under the Securities Act
then in effect), and, to the extent permissible under the applicable securities exchange rules, all
unissued shares of Warrant Stock which are at any time issuable hereunder, so long as any shares of
Common Stock shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder of this Warrant



5









 




shall be entitled to receive upon the exercise of this Warrant if at the time any securities
of the same class shall be listed on such securities exchange or market by the Issuer.




     (c) Covenants. The Issuer shall not by any action including, without limitation,
amending the Certificate of Incorporation or the by-laws of the Issuer, or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities
or any other action, avoid or seek to avoid the observance or performance of any of the terms of
this Warrant, but will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such actions as may be necessary or appropriate to protect the rights of the
Holder hereof against dilution (to the extent specifically provided herein) or impairment. Without
limiting the generality of the foregoing, the Issuer will (i) not permit the par value, if any, of
its Common Stock to exceed the then effective Warrant Price, (ii) not amend or modify any provision
of the Certificate of Incorporation or by-laws of the Issuer in any manner that would materially
and adversely affect the rights of the Holders of the Warrants, (iii) take all such action as may
be reasonably necessary in order that the Issuer may validly and legally issue fully paid and
nonassessable shares of Common Stock, free and clear of any liens, claims, encumbrances and
restrictions (other than as provided herein) upon the exercise of this Warrant, and (iv) use best
efforts to obtain all such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be reasonably necessary to enable the Issuer to perform its
obligations under this Warrant.



     (d) Loss, Theft, Destruction, Mutilation of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction or mutilation of
any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or
security satisfactory to the Issuer or, in the case of any such mutilation, upon surrender and
cancellation of such Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase
the same number of shares of Common Stock.



     (e) Payment of Taxes. The Issuer will pay any documentary stamp taxes attributable to
the initial issuance of the Warrant Stock issuable upon exercise of this Warrant; provided,
however, that the Issuer shall not be required to pay any tax or taxes which may be payable in
respect of any transfer involved in the issuance or delivery of any certificates representing
Warrant Stock in a name other than that of the Holder in respect to which such shares are issued.



     4. Adjustment of Warrant Price and Number of Shares Issuable Upon Exercise. The
Warrant Price and the number of shares of Warrant Stock that may be purchased upon exercise of this
Warrant shall be subject to adjustment from time to time as set forth in this Section 4.
The Issuer shall give the Holder notice of any event described below which requires an adjustment
pursuant to this Section 4 in accordance with the notice provisions set forth in
Section 5.



     (a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale.




     (i) In case the Issuer after the Original Issue Date shall do any of the following
(each, a “Triggering Event”): (a) consolidate or merge with or into any other



6









 







Person and the Issuer shall not be the continuing or surviving Person of such consolidation
or merger, or (b) permit any other Person to consolidate with or merge into the Issuer and
the Issuer shall be the continuing or surviving Person but, in connection with such
consolidation or merger, any Capital Stock of the Issuer shall be changed into or exchanged
for Securities of any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect a capital
reorganization or reclassification of its Capital Stock, then, and in the case of each such
Triggering Event, proper provision shall be made to the Warrant Price and the number of shares of Warrant Stock that may be purchased upon exercise of this Warrant so that, upon
the basis and the terms and in the manner provided in this Warrant, the Holder of this
Warrant shall be entitled upon the exercise hereof at any time after the consummation of
such Triggering Event, to the extent this Warrant is not exercised prior to such Triggering
Event, to receive at the Warrant Price as adjusted to take into account the consummation of
such Triggering Event, in lieu of the Common Stock issuable upon such exercise of this
Warrant prior to such Triggering Event, the Securities, cash and property to which such
Holder would have been entitled upon the consummation of such Triggering Event if such
Holder had exercised the rights represented by this Warrant immediately prior thereto
(including the right of a shareholder to elect the type of consideration it will receive
upon a Triggering Event), subject to adjustments (subsequent to such corporate action) as
nearly equivalent as possible to the adjustments provided for elsewhere in this Section
4. Immediately upon the occurrence of a Triggering Event, the Issuer shall notify the
Holder in writing of such Triggering Event and provide the calculations in determining the
number of shares of Warrant Stock issuable upon exercise of the new warrant and the adjusted
Warrant Price. Upon the Holder’s request, the continuing or surviving Person as a result of
such Triggering Event shall issue to the Holder a new warrant of like tenor evidencing the
right to purchase the adjusted number of shares of Warrant Stock and the adjusted Warrant
Price pursuant to the terms and provisions of this Section 4(a)(i). Notwithstanding
the foregoing to the contrary, this Section 4(a)(i) shall only apply if the
surviving entity pursuant to any such Triggering Event has a class of equity securities
registered pursuant to the Securities Exchange Act of 1934, as amended, and its common stock
is listed or quoted on a national securities exchange, national automated quotation system
or the OTC Bulletin Board. In the event that the surviving entity pursuant to any such
Triggering Event is not a public company that is registered pursuant to the Securities
Exchange Act of 1934, as amended, or its common stock is not listed or quoted on a national
securities exchange, national automated quotation system or the OTC Bulletin Board, then the
Holder shall have the right to demand that the Issuer pay to the Holder an amount in cash
equal to the value of this Warrant calculated in accordance with the Black-Scholes formula.




     (ii) In the event that the Holder has elected not to exercise this Warrant prior to the
consummation of a Triggering Event, so long as the surviving entity pursuant to any
Triggering Event is a company that has a class of equity securities registered pursuant to
the Securities Exchange Act of 1934, as amended, and its common stock is listed or quoted on
a national securities exchange, national automated quotation system or the OTC Bulletin
Board, the surviving entity and/or each Person (other than the Issuer) which may be required
to deliver any shares of Warrant Stock (including all Securities,



7









 







cash or property) upon the exercise of this Warrant as provided herein shall assume, by
written instrument delivered to, and reasonably satisfactory to, the Holder of this Warrant,
(A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the
consummation of such Triggering Event, such assumption shall be in addition to, and shall
not release the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (B) the obligation to deliver to such Holder such Securities, cash or property as, in
accordance with the foregoing provisions of this subsection (a).



     (b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall:




     (i) make or issue or set a record date for the holders of the Common Stock for the
purpose of entitling them to receive a dividend payable in, or other distribution of, shares
of Common Stock,




     (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of
Common Stock, or




     (iii) combine its outstanding shares of Common Stock into a smaller number of shares of
Common Stock,


then (1) the number of shares of Common Stock for which this Warrant is exercisable immediately
after the occurrence of any such event shall be adjusted to equal the number of shares of Common
Stock which a record holder of the same number of shares of Common Stock for which this Warrant is
exercisable immediately prior to the occurrence of such event would own or be entitled to receive
after the happening of such event, and (2) the Warrant Price then in effect shall be adjusted to
equal (A) the Warrant Price then in effect multiplied by the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of
shares of Common Stock for which this Warrant is exercisable immediately after such adjustment.




     (c) Certain Other Distributions. If at any time the Issuer shall make or issue or set
a record date for the holders of the Common Stock for the purpose of entitling them to receive any
dividend or other distribution of:




     (i) cash,




     (ii) any evidences of its indebtedness, any shares of stock of any class or any other
Securities or property of any nature whatsoever (other than cash, Common Stock Equivalents
or Additional Shares of Common Stock), or




     (iii) any warrants or other rights to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or property of any
nature whatsoever (other than cash, Common Stock Equivalents or Additional Shares of Common
Stock), then (1) the number of shares of Common Stock for which this Warrant is exercisable
shall be adjusted to equal the product of the number of shares of



8









 







Common Stock for which this Warrant is exercisable immediately prior to such adjustment
multiplied by a fraction (A) the numerator of which shall be the Per Share Market Value of
Common Stock at the date of taking such record and (B) the denominator of which shall be
such Per Share Market Value minus the amount allocable to one share of Common Stock of any
such cash so distributable and of the fair value (as determined in good faith by the Board
of Directors of the Issuer of any and all such evidences of indebtedness, shares of stock,
other securities or property or warrants or other subscription or purchase rights so
distributable, and (2) the Warrant Price then in effect shall be adjusted to equal (A) the
Warrant Price then in effect multiplied by the number of shares of Common Stock for which
this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such
adjustment. A reclassification of the Common Stock (other than a change in par value, or
from par value to no par value or from no par value to par value) into shares of Common
Stock and shares of any other class of stock shall be deemed a distribution by the Issuer to
the holders of its Common Stock of such shares of such other class of stock within the
meaning of this Section 4(c) and, if the outstanding shares of Common Stock shall be
changed into a larger or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or combination, as the case may
be, of the outstanding shares of Common Stock within the meaning of Section 4(b).



     (d) Warrant Price Adjustments. The Warrant Price shall be subject to adjustment from
time to time as follows:




     (i) (A) If the Issuer shall issue, after the date upon which any shares of Preferred
Stock were first issued (the “Purchase Date”), any Additional Shares of Common Stock
(as defined below) without consideration or for a consideration per share less than the
Conversion Price for the Preferred Stock in effect immediately prior to the issuance of such
Additional Shares of Common Stock, the Warrant Price for this Warrant in effect immediately
prior to each such issuance shall (except as otherwise provided in this Section 4(d)(i)) be
adjusted concurrently with such issuance to a price determined by multiplying such Warrant
Price by a fraction, the numerator of which shall be the number of shares of Common Stock
outstanding and deemed issued pursuant to Section 4(d)(i)(E) immediately prior to such
issuance plus the number of shares of Common Stock that the aggregate consideration received
by this Issuer for such issuance would purchase at such Conversion Price; and the
denominator of which shall be the number of shares of Common Stock outstanding and deemed
issued pursuant to Section 4(d)(i)(E) immediately prior to such issuance plus the number of shares of such Additional Shares of Common Stock.




          (B) No adjustment of the Warrant Price pursuant to this Section 4(d) shall be made in
an amount less than one cent per share, provided that any adjustments that are not required
to be made by reason of this sentence shall be carried forward and shall be either taken
into account in any subsequent adjustment made prior to one (1) year from the date of the
event giving rise to the adjustment being carried forward, or shall be made at the end of
one (1) year from the date of the event giving rise to the adjustment being



9









 







carried forward. Except to the limited extent provided for in Sections 4(d)(i)(E)(3) and
4(d)(i)(E)(4), no adjustment of such Warrant Price pursuant to this Section 4(d)(i) shall
have the effect of increasing the Warrant Price above the Warrant Price in effect
immediately prior to such adjustment.




          (C) For purposes of this Section 4(d)(i), in the case of the issuance of Additional
Shares of Common Stock for cash, the consideration shall be deemed to be the amount of cash
paid therefor before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this Issuer for any underwriting or otherwise in connection
with the issuance and sale thereof.




          (D) For purposes of this Section 4(d)(i), in the case of the issuance of the Additional
Shares of Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as determined by
the Board irrespective of any accounting treatment.




          (E) In the case of the issuance (whether before, on or after the Purchase Date) of
Common Stock Equivalents, the following provisions shall apply for all purposes of this
Section 4(d)(i):




               (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise
(assuming the satisfaction of any conditions to exercisability, including, without
limitation, the passage of time, of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the manner provided
in Sections 4(d)(i)(C) and 4(d)(i)(D)), if any, received by this Issuer upon the issuance of
such options or rights plus the minimum exercise price provided in such options or rights
for the Common Stock covered thereby.




               (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion
of, or in exchange (assuming the satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of time, for any such
convertible or exchangeable securities or upon the exercise of options to purchase or rights
to subscribe for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities were issued
or such options or rights were issued and for a consideration equal to the consideration, if
any, received by the Issuer for any such securities and related options or rights (excluding
any cash received on account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by the Issuer upon the conversion or
exchange of such securities or the exercise of any related options or rights (the
consideration in each case to be determined in the manner provided in Sections 4(d)(i)(C)
and 4(d)(i)(D))




               (3) In the event of any change in the number of shares of Common Stock deliverable or
in the consideration payable to the Issuer upon exercise of



10









 







such options or rights or upon conversion of or in exchange for such convertible or
exchangeable securities, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Warrant Price, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to reflect such
change, but no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such options or rights or the
conversion or exchange of such securities.




               (4) Upon the expiration of any such options or rights, the termination of any such
rights to convert or exchange or the expiration of any options or rights related to such
convertible or exchangeable securities, the Warrant Price, to the extent in any way affected
by or computed using such options, rights or securities or options or rights related to such
securities, shall be recomputed to reflect the issuance of only the number of shares of
Common Stock (and convertible or exchangeable securities that remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such securities.




               (5) The number of shares of Common Stock deemed issued and the consideration deemed
paid therefor pursuant to Sections 4(d)(i)(E)(1) and 4(d)(i)(E)(2) shall be appropriately
adjusted to reflect any change, termination or expiration of the type described in either
Section 4(d)(i)(E)(3) or 4(d)(i)(E)(4).



          (ii) Termination. Notwithstanding anything else contained herein, the right to any
adjustments to the Warrant Price pursuant to this Section 4(d) shall terminate upon the earlier of:
(i) the expiration of the Term; or (ii) the occurrence of a Triggering Event. In addition, no
adjustment to the Warrant Price shall be made for all or any portion of this Warrant that is
exercised prior to any issuance of Additional Shares of Common Stock that would require an
adjustment pursuant to this Section 4(d).




     (e) Other Provisions applicable to Adjustments under this Section. The following
provisions shall be applicable to the making of adjustments of the number of shares of Common Stock
for which this Warrant is exercisable and the Warrant Price then in effect provided for in this
Section 4:




     (i) Computation of Consideration. Except as otherwise provided, to the extent
that any Additional Shares of Common Stock or any Common Stock Equivalents (or any warrants
or other rights therefor) shall be issued for cash consideration, the consideration received
by the Issuer therefor shall be the amount of the cash received by the Issuer therefor, or,
if such Additional Shares of Common Stock or Common Stock Equivalents are offered by the
Issuer for subscription, the subscription price, or, if such Additional Shares of Common
Stock or Common Stock Equivalents are sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price (in any such case
subtracting any amounts paid or receivable for accrued interest or accrued dividends and
without taking into account any compensation, discounts or expenses paid or incurred by the
Issuer for and in the underwriting of, or



11









 







otherwise in connection with, the issuance thereof). In connection with any merger or
consolidation in which the Issuer is the surviving Person (other than any consolidation or
merger in which the previously outstanding shares of Common Stock of the Issuer shall be
changed to or exchanged for the stock or other securities of another Person), the amount of
consideration therefore shall be, deemed to be the fair value, as determined reasonably and
in good faith by the Board, of such portion of the assets and business of the nonsurviving
Person as the Board may determine to be attributable to such shares of Common Stock or
Common Stock Equivalents, as the case may be. The consideration for any Additional Shares
of Common Stock issuable pursuant to any warrants or other rights to subscribe for or
purchase the same shall be the consideration received by the Issuer for issuing such
warrants or other rights plus the additional consideration payable to the Issuer upon
exercise of such warrants or other rights. The consideration for any Additional Shares of
Common Stock issuable pursuant to the terms of any Common Stock Equivalents shall be the
consideration received by the Issuer for issuing warrants or other rights to subscribe for
or purchase such Common Stock Equivalents, plus the consideration paid or payable to the
Issuer in respect of the subscription for or purchase of such Common Stock Equivalents, plus
the additional consideration, if any, payable to the Issuer upon the exercise of the right
of conversion or exchange in such Common Stock Equivalents. In the event of any
consolidation or merger of the Issuer in which the Issuer is not the surviving Person or in
which the previously outstanding shares of Common Stock of the Issuer shall be changed into
or exchanged for the stock or other securities of another Person, or in the event of any
sale of all or substantially all of the assets of the Issuer for stock or other securities
of any Person, the Issuer shall be deemed to have issued a number of shares of its Common
Stock for stock or securities or other property of the other Person computed on the basis of
the actual exchange ratio on which the transaction was predicated, and for a consideration
equal to the fair market value on the date of such transaction of all such stock or
securities or other property of the other Person. In the event any consideration received
by the Issuer for any securities consists of property other than cash, the fair market value
thereof at the time of issuance or as otherwise applicable shall be as determined in good
faith by the Board. In the event Common Stock is issued with other shares or securities or
other assets of the Issuer for consideration which covers both, the consideration computed
as provided in this Section 4(e)(i) shall be allocated among such securities and
assets as determined in good faith by the Board.




     (ii) When Adjustments to Be Made. The adjustments required by this Section
4 shall be made whenever and as often as any specified event requiring an adjustment
shall occur, except that any adjustment of the number of shares of Common Stock for which
this Warrant is exercisable that would otherwise be required may be postponed (except in the
case of a subdivision or combination of shares of the Common Stock, as provided for in
Section 4(b)) up to, but not beyond the date of exercise if such adjustment either
by itself or with other adjustments not previously made adds or subtracts less than one
percent (1%) of the shares of Common Stock for which this Warrant is exercisable immediately
prior to the making of such adjustment. Any adjustment representing a change of less than
such minimum amount (except as aforesaid) which is postponed shall be carried forward and
made (x) as soon as such



12









 







adjustment, together with other adjustments required by this Section 4 and not
previously made, would result in a minimum adjustment, or (y) on the date of exercise. For
the purpose of any adjustment, any specified event shall be deemed to have occurred at the
close of business on the date of its occurrence.




     (iii) Fractional Interests. In computing adjustments under this Section
4, fractional interests in Common Stock shall be taken into account to the nearest one
one-hundredth (1/100th) of a share.




     (iv) When Adjustment Not Required. If the Issuer shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive a dividend or
distribution or subscription or purchase rights and shall, thereafter and before the
distribution to stockholders thereof, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall
be required by reason of the taking of such record and any such adjustment previously made
in respect thereof shall be rescinded and annulled.



     (h) Form of Warrant after Adjustments. The form of this Warrant need not be changed
because of any adjustments in the Warrant Price or the number and kind of Securities purchasable
upon the exercise of this Warrant.



     (i) Escrow of Warrant Stock. If after any property becomes distributable pursuant to
this Section 4 by reason of the taking of any record of the holders of Common Stock, but
prior to the occurrence of the event for which such record is taken, and the Holder exercises this
Warrant, any shares of Common Stock issuable upon exercise by reason of such adjustment shall be
deemed the last shares of Common Stock for which this Warrant is exercised (notwithstanding any
other provision to the contrary herein) and such shares or other property shall be held in escrow
for the Holder by the Issuer to be issued to the Holder upon and to the extent that the event
actually takes place, upon payment of the current Warrant Price. Notwithstanding any other
provision to the contrary herein, if the event for which such record was taken fails to occur or is
rescinded, then such escrowed shares shall be cancelled by the Issuer and escrowed property
returned.



     5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number shall be
adjusted pursuant to Section 4 hereof (for purposes of this Section 5, each an
“Adjustment”), the Issuer shall cause its Chief Financial Officer to prepare and execute a
certificate setting forth, in reasonable detail, the event requiring the Adjustment, the amount of
the Adjustment, the method by which such Adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant Price and Warrant Share
Number after giving effect to such Adjustment, and shall cause copies of such certificate to be
delivered to the Holder of this Warrant promptly after each Adjustment. Any dispute between the
Issuer and the Holder of this Warrant with respect to the matters set forth in such certificate may
at the option of the Holder of this Warrant be submitted to an Independent Appraiser mutually
selected by the Holder and the Issuer. The Independent Appraiser shall be instructed to deliver a
written opinion as to such matters to the Issuer and such Holder within thirty (30) days after
submission to it of such dispute. Such opinion shall be final and binding on



13









 




the parties hereto. The costs and expenses of the initial firm selected as Independent
Appraiser shall be paid equally by the Issuer and the Holder.




     6. Fractional Shares. No fractional shares of Warrant Stock will be issued in
connection with any exercise hereof, but in lieu of such fractional shares, the Issuer shall round
the number of shares to be issued upon exercise down to the nearest whole number of shares.



     7. Ownership Cap and Exercise Restriction. Notwithstanding anything to the contrary
set forth in this Warrant, at no time may a Holder of this Warrant exercise this Warrant if the
number of shares of Common Stock to be issued pursuant to such exercise would exceed, when
aggregated with all other shares of Common Stock owned by such Holder at such time, the number of
shares of Common Stock which would result in such Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.99% of
the then issued and outstanding shares of Common Stock; provided, however, that
upon a holder of this Warrant providing the Issuer with sixty-one (61) days notice (pursuant to
Section 12 hereof) (the “Waiver Notice”) that such Holder would like to waive this
Section 7 with regard to any or all shares of Common Stock issuable upon exercise of this
Warrant, this Section 7 will be of no force or effect with regard to all or a portion of
the Warrant referenced in the Waiver Notice; provided, further, that during the
sixty-one (61) day period prior to the Expiration Date of this Warrant the Holder may waive this
Section 7 upon providing the Waiver Notice at any time during such sixty-one (61) day period,
provided, further, that any Waiver Notice during the sixty-one (61) day period
prior to the Expiration Date will not be effective until the Expiration Date.



     8. Definitions. For the purposes of this Warrant, the following terms have the
following meanings:




     “Additional Shares of Common Stock” means any shares of Common Stock issued (or
deemed to have been issued pursuant to Section 4(d)(i)(E)) by
this Issuer after the
Purchase Date other than: (a) shares of Common Stock issued pursuant to a transaction
described in Section 4(c) hereof; (b) up to 3,750,000 shares of Common Stock (as adjusted
for any stock splits, stock dividends, combinations, recapitalizations or the like) issued
or deemed issued to employees, consultants, officers, directors or vendors (if in
transactions with primarily non-financing purposes) of this Issuer directly or pursuant to
a stock option plan or restricted stock purchase plan approved by the Board; (c) shares of
Common Stock issued or issuable (I) in a bona fide, firmly underwritten public offering
under the Securities Act before which or in connection with which all outstanding Preferred
Shares will be automatically converted to Common Stock, or (II) upon exercise of warrants or
rights granted to underwriters in connection with such a public offering; (d) shares of
Common Stock issued pursuant to the conversion or exercise of convertible or exercisable
securities outstanding as of the Purchase Date or subsequently issued after the Purchase
Date in accordance with this definition; (e) shares of Common Stock issued or issuable in
connection with a bona fide business acquisition of or by the Issuer, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise, each as approved by
the Board; (f) up to 500,000 shares of Common Stock (as adjusted for any stock splits, stock
dividends, combinations, recapitalizations or



14









 








the like) issued or issuable to persons or entities with which this Issuer has business
relationships provided such issuances are for other than primarily equity financing
purposes; or (g) shares of Common Stock issued or issuable in connection with any
transaction where such securities so issued are excepted from the definition “Additional
Shares of Common Stock” by the affirmative vote of holders of at least a majority of the
shares of Common Stock issued or issuable upon exercise of all Series A Warrants issued
pursuant to the Purchase Agreement.




     “Board” shall mean the Board of Directors of the Issuer.




     “Capital Stock” means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated) corporate stock,
including, without limitation, shares of preferred or preference stock, (ii) all partnership
interests (whether general or limited) in any Person which is a partnership, (iii) all
membership interests or limited liability company interests in any limited liability
company, and (iv) all equity or ownership interests in any Person of any other type.




     “Certificate of Incorporation” means the Certificate of Incorporation of the
Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended,
modified, supplemented or restated in accordance with the terms hereof and thereof and
pursuant to applicable law.




     “Common Stock” means the Common Stock of the Issuer, par value $0.0001 per
share, and any other Capital Stock into which such stock may hereafter be changed.




     “Common Stock Equivalent” means any Convertible Security or warrant, option or
other right to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible Security.




     “Conversion Price” means $2.67 per share, as may be adjusted in accordance with
the Certificate of Designations for the Preferred Stock, filed with the Delaware Secretary
of State in accordance with the terms of the Purchase Agreement.




     “Convertible Securities” means evidences of indebtedness, shares of Capital
Stock or other Securities which are or may be at any time convertible into or exchangeable
for Additional Shares of Common Stock. The term “Convertible Security” means one of
the Convertible Securities.




     “Delivery Date” shall be the date not exceeding three (3) Trading Days after an
exercise of this Warrant.




     “DTC” means the Depository Trust Company.




     “DWAC” means the Deposit Withdrawal Agent Commission System.




     “Expiration
Date” means December 27, 2012.



15









 






     “Governmental Authority” means any governmental, regulatory or self-regulatory
entity, department, body, official, authority, commission, board, agency or instrumentality,
whether federal, state or local, and whether domestic or foreign.




     “Holders” mean the Persons who shall from time to time own any Warrant. The
term “Holder” means one of the Holders.




     “Independent Appraiser” means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial statements of the
Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets
of corporations or other entities as going concerns, and which is not affiliated with either
the Issuer or the Holder of any Warrant.




     “Issuer” means NovaRay Medical, Inc., a Delaware corporation, and its
successors.




     “Majority Holders” means at any time the Holders of Warrants exercisable for a
majority of the shares of Warrant Stock issuable under the Warrants at the time outstanding.




     “Original Issue Date” means the date this Warrant is issued to the Holder as
set forth above.




     “OTC Bulletin Board” means the over-the-counter electronic bulletin board.




     “Other Common” means any other Capital Stock of the Issuer of any class which
shall be authorized at any time after the date of this Warrant (other than Common Stock) and
which shall have the right to participate in the distribution of earnings and assets of the
Issuer without limitation as to amount.




     “Outstanding Common Stock” means, at any given time, the aggregate amount of
outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as
applicable) of all options, warrants and other Securities which are convertible into or
exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that
are outstanding at such time.




     “Person” means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint venture,
Governmental Authority or other entity of whatever nature.




     “Per Share Market Value” means on any particular date (a) the last closing bid
price per share of the Common Stock on such date on the OTC Bulletin Board or another
registered national stock exchange on which the Common Stock is then listed, or if there is
no such price on such date, then the closing bid price on such exchange or quotation



16









 







system on the date nearest preceding such date, or (b) if the Common Stock is not
listed then on the OTC Bulletin Board or any registered national stock exchange, the last
closing bid price for a share of Common Stock in the over-the-counter market, as reported by
the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the close of
business on such date, or (c) if the Common Stock is not then reported by the OTC Bulletin
Board or the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the “Pink Sheet” quotes for the
applicable Trading Days preceding such date of determination, or (d) if the Common Stock is
not then publicly traded the fair market value of a share of Common Stock as determined by
an Independent Appraiser selected in good faith by the Majority Holders; provided, however,
that the Issuer, after receipt of the determination by such Independent Appraiser, shall
have the right to select an additional Independent Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such Independent
Appraiser; and provided, further that all determinations of the Per Share Market Value shall
be appropriately adjusted for any stock dividends, stock splits or other similar
transactions during such period. The determination of fair market value by an Independent
Appraiser shall be based upon the fair market value of the Issuer determined on a going
concern basis as between a willing buyer and a willing seller and taking into account all
relevant factors determinative of value, and shall be final and binding on all parties. In
determining the fair market value of any shares of Common Stock, no consideration shall be
given to any restrictions on transfer of the Common Stock imposed by agreement or by federal
or state securities laws, or to the existence or absence of, or any limitations on, voting
rights.




     “Preferred Stock” means shares of the Issuer’s Series A Convertible Preferred
Stock, par value $0.0001 per share issued to the Purchasers pursuant to the Purchase
Agreement and pursuant to the Series J Warrant.




     “Purchase
Agreement” means the Series A Convertible Preferred
Stock and Warrant Purchase
Agreement dated as of December 27, 2007, among the Issuer and the Purchasers.




     “Purchasers” means the purchasers of the Series A Convertible Preferred Stock
and the Warrants issued by the Issuer pursuant to the Purchase Agreement.




     “Securities” means any debt or equity securities of the Issuer, whether now or
hereafter authorized, any instrument convertible into or exchangeable for Securities or a
Security, and any option, warrant or other right to purchase or acquire any Security.
“Security” means one of the Securities.




     “Securities Act” means the Securities Act of 1933, as amended, or any similar
federal statute then in effect.



17









 






     “Subsidiary” means any corporation at least 50% of whose outstanding Voting
Stock shall at the time be owned directly or indirectly by the Issuer or by one or more of
its Subsidiaries, or by the Issuer and one or more of its Subsidiaries.




     “Term” has the meaning specified in Section 1 hereof.




     “Trading Day” means (a) a day on which the Common Stock is traded on the OTC
Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on
which the Common Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding its
functions of reporting prices); provided, however, that in the event that the Common Stock
is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any
day except Saturday, Sunday and any day which shall be a legal holiday or a day on which
banking institutions in the State of New York are authorized or required by law or other
government action to close.




     “Voting Stock” means, as applied to the Capital Stock of any corporation,
Capital Stock of any class or classes (however designated) having ordinary voting power for
the election of a majority of the members of the Board of Directors (or other governing
body) of such corporation, other than Capital Stock having such power only by reason of the
happening of a contingency.




     “Warrants” means the Warrants issued and sold pursuant to the Purchase
Agreement, including, without limitation, this Warrant, and any other warrants of like tenor
issued in substitution or exchange for any thereof pursuant to the provisions of Section
2(c), 2(d) or 2(e) hereof or of any of such other Warrants.




     “Warrant Price” initially means $4.25, as such price may be adjusted from time
to time as shall result from the adjustments specified in this Warrant, including
Section 4 hereto.




     “Warrant Share Number” means at any time the aggregate number of shares of
Warrant Stock which may at such time be purchased upon exercise of this Warrant, after
giving effect to all prior adjustments and increases to such number made or required to be
made under the terms hereof.




     “Warrant Stock” means Common Stock and/or Preferred Stock (as applicable)
issuable upon exercise of any Warrant or Warrants or otherwise issuable pursuant to any
Warrant or Warrants and/or Securities, cash and property to which such Holder would have
been entitled upon the occurrence of certain events set forth in Section 4.



     9. Other Notices. In case at any time:




	 	(A)	 	the Issuer shall make any
distributions to the holders of Common Stock; or




18









 













	 	(B)	 	the Issuer shall authorize the
granting to all holders of its Common Stock of rights to
subscribe for or purchase any shares of Capital Stock of any
class or other rights; or






	 	(C)	 	there shall be any
reclassification of the Capital Stock of the Issuer; or






	 	(D)	 	there shall be any capital
reorganization by the Issuer; or






	 	(E)	 	there shall be any (i)
consolidation or merger involving the Issuer or (ii) sale,
transfer or other disposition of all or substantially all of the
Issuer’s property, assets or business (except a merger or other
reorganization in which the Issuer shall be the surviving
corporation and its shares of Capital Stock shall continue to be
outstanding and unchanged and except a consolidation, merger,
sale, transfer or other disposition involving a wholly-owned
Subsidiary); or






	 	(F)	 	there shall be a voluntary or
involuntary dissolution, liquidation or winding-up of the Issuer
or any partial liquidation of the Issuer or distribution to
holders of Common Stock;




then, in each of such cases, the Issuer shall give written notice to the Holder of the date on
which (i) the books of the Issuer shall close or a record shall be taken for such dividend,
distribution or subscription rights or (ii) such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock of record shall
participate in such dividend, distribution or subscription rights, or shall be entitled to exchange
their certificates for Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or
winding-up, as the case may be. Such notice shall be given at least twenty (20) days prior to the
action in question and not less than ten (10) days prior to the record date or the date on which
the Issuer’s transfer books are closed in respect thereto. This Warrant entitles the Holder to
receive copies of all financial and other information distributed or required to be distributed to
the holders of the Common Stock.




     10. Amendment and Waiver; Failure or Indulgence Not Waiver. Any term, covenant,
agreement or condition in this Warrant may be amended, or compliance therewith may be waived
(either generally or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the Majority Holders;
provided, however, that no such amendment or waiver shall reduce the Warrant Share Number, increase
the Warrant Price (except as provided herein), shorten the period during which this Warrant may be
exercised or modify any provision of this Section 10 without the consent of the Holder of
this Warrant. No consideration shall be offered or paid to any person to amend or consent to a
waiver or modification of any provision of this Warrant unless the same



19









 




consideration is also offered to all holders of the Warrants. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege, nor shall any waiver
by the Holder of any such right or rights on any one occasion be deemed a waiver of the same right
or rights on any future occasion.




     11. Governing Law; Jurisdiction. This Warrant 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 Warrant shall not be interpreted or construed with any presumption against the
party causing this Warrant to be drafted. The Issuer and the Holder agree that venue for any
dispute arising under this Warrant will lie exclusively in the state or federal courts located in
New York County, New York, and the parties irrevocably waive any right to raise forum non
conveniens or any other argument that New York is not the proper venue. The Issuer and the Holder
irrevocably consent to personal jurisdiction in the state and federal courts of the state of New
York. The Issuer and the Holder consent 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 Warrant and agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing in this Section 11 shall affect or limit any right to serve
process in any other manner permitted by law. The Issuer and the Holder hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating to this Warrant or
the Purchase Agreement, shall be entitled to reimbursement for reasonable legal fees from the
non-prevailing party. The parties hereby waive all rights to a trial by jury.



     12. 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
by telecopy or 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:



	 	 	 
	If to the Issuer:

	 	NovaRay Medical, Inc.
	 

	 	1850 Embarcadero Road
	 

	 	Palo Alto, CA 94303
	 

	 	Attention: Chief Executive Officer
	 

	 	Tel. No.: (650) 331-7337
	 

	 	Fax No.: (650) 565-8601
	 
	 	 
	with copies (which copies
	 	 
	shall not constitute notice)
to:

	 	Morrison & Foerster, LLP
	 

	 	755 Page Mill Road
	 

	 	Palo Alto, California 94304-1018






20









 






	 	 	 
	 

	 	Attn: Michael C. Phillips
	 

	 	Facsimile: (650) 494-0792
	 
	 	 
	If to any Holder:

	 	At the address of such Holder set forth on
Exhibit A to the Purchase Agreement, with
copies to Holder’s counsel as set forth on
Exhibit A or as specified in writing by such
Holder






     Any party hereto may from time to time change its address for notices by giving written notice
of such changed address to the other party hereto.



     13. Warrant Agent. The Issuer may, by written notice to each Holder of this Warrant,
appoint an agent having an office in New York, New York for the purpose of replacing this Warrant
pursuant to Section 3(d) hereof, or any of the foregoing, and thereafter any such issuance,
exchange or replacement, as the case may be, shall be made at such office by such agent.



     14. Remedies. The Issuer stipulates that the remedies at law of the Holder of this
Warrant in the event of any default or threatened default by the Issuer in the performance of or
compliance with any of the terms of this Warrant are not and will not be adequate and that, to the
fullest extent permitted by law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction against a violation of
any of the terms hereof or otherwise.



     15. Successors and Assigns. This Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors and assigns of the Issuer, the Holder hereof
and (to the extent provided herein) the Holders of Warrant Stock issued pursuant hereto, and shall
be enforceable by any such Holder or Holder of Warrant Stock.



     16. Modification and Severability. If, in any action before any court or agency
legally empowered to enforce any provision contained herein, any provision hereof is found to be
unenforceable, then such provision shall be deemed modified to the extent necessary to make it
enforceable by such court or agency. If any such provision is not enforceable as set forth in the
preceding sentence, the unenforceability of such provision shall not affect the other provisions of
this Warrant, but this Warrant shall be construed as if such unenforceable provision had never been
contained herein.



     17. Headings. The headings of the Sections of this Warrant are for convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.



     18. Registration Rights. The Holder of this Warrant is entitled to the benefit of
certain registration rights with respect to the shares of Warrant Stock issuable upon the exercise
of this Warrant pursuant to the Registration Rights Agreement and the registration rights with
respect to the shares of Warrant Stock issuable upon the exercise of this Warrant by any subsequent
Holder may only be assigned in accordance with the terms and provisions of the Registrations Rights
Agreement and Section 2(e) hereof.



21









 





     19. Enforcement Expenses. If any action at law or in equity is necessary to enforce
or interpret the terms of this Warrant, 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.



     20. Binding Effect. The obligations of the Issuer and the Holder set forth herein
shall be binding upon the successors and assigns of each such party, whether or not such successors
or assigns are permitted by the terms hereof.



[remainder of page intentionally left blank]




22









 








     IN WITNESS WHEREOF, the Issuer has executed this Series A Warrant as of the day and year first
above written.



	 	 	 	 	 
	 	NOVARAY MEDICAL, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	Jack Price 	 
	 	 	Title:  	Chief Executive Officer 	 
	 




23









 








EXERCISE FORM

SERIES A WARRANT




NOVARAY MEDICAL, INC.





     The undersigned                     , pursuant to the provisions of the within Warrant, hereby elects to
purchase                       shares of Common Stock 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:                                         



The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of
1933, as amended.



The undersigned intends that payment of the Warrant Price shall be made as (check one):




               Cash Exercise ____________



               Cashless Exercise _________



If the Holder has elected a
Cash Exercise, the Holder shall pay the sum of $________ by certified
or official bank check (or via wire transfer) to the Issuer in accordance with the terms of the
Warrant.



If the Holder has elected a Cashless Exercise, a certificate shall be issued to the Holder for the
number of shares equal to the whole number portion of the product of the calculation set forth
below, which is _______. The Issuer shall pay a cash adjustment in respect of the fractional
portion of the product of the calculation set forth below in an amount equal to the product of the
fractional portion of such product and the Per Share Market Value on the date of exercise, which
product is _________.




     X
= Y - (A)(Y)


B

Where:



The number of shares of Common Stock to be issued to the Holder                      (“X”).



The number of shares of Common Stock purchasable upon exercise of all of the Warrant or, if only a portion
of the Warrant is being exercised, the portion of the Warrant being exercised                      (“Y”).




 









 







The
Warrant Price _________ (“A”).



The Per
Share Market Value of one share of Common Stock _________ (“B”).




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	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 





FOR USE BY THE ISSUER ONLY:



This
Warrant No. W-___ canceled (or transferred or
exchanged) this ___ day of __________, _________,
shares of Common Stock issued therefor in the name of _________, Warrant No. W- ______ issued
for _________ shares of Common Stock in the name of _______________.