##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For
the quarterly period ended June 30, 2008.
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the transition period from  to.
 Commission File Number 0-52731
 NovaRay Medical, Inc.
  
 Delaware
    
    16-1778998(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)39655 Eureka Drive, Suite A,Newark, California
    
    94560(Address of principal executive offices)
    
    (zip code)
 
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 þ o
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
þ
 o þ




---



##### 



NOVARAY MEDICAL, INC.
Table of Contents
 PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Condensed Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2008 and 2007
    
    
    4Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2008 and 2007
    
    
    5NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4T. Controls and Procedures
    
    
    20PART II  Other Information
    
    
    21Item 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 NOVARAY MEDICAL, INC.
(A Development Stage Company)
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007(Restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,241,289
    
    
    $
    9,233,926Miscellaneous receivable
    
    
    394,385
    
    
    
    13,872Prepaid expenses
    
    
    336,643
    
    
    
    16,947Total current assets
    
    
    4,972,317
    
    
    
    9,264,745Property and equipment, net
    
    
    105,287
    
    
    
    42,455Other assets:Deposits and restricted assets
    
    
    635,000
    
    
    
    Total other assets
    
    
    635,000
    
    
    
    Total assets
    
    $
    5,712,604
    
    
    $
    9,307,200Liabilities and Stockholders DeficitCurrent liabilities:Accounts payable
    
    $
    2,444,514
    
    
    $
    566,146Accrued liabilities
    
    
    247,210
    
    
    
    205,505Notes payable
    
    
    95,312
    
    
    
    125,312Total current liabilities
    
    
    2,787,036
    
    
    
    896,963Total liabilities
    
    
    2,787,036
    
    
    
    896,963Stockholders equity (deficit):Series A convertible preferred stock, NovaRay
Medical, Inc., $0.0001 par value Authorized shares
10,000,000; Issued 4,946,888 at June 30, 2008 and
December 31, 2007 (Liquidation preference -$0- at
June 30, 2008)
    
    $
    495
    
    
    $
    495Common stock, NovaRay Medical, Inc., $0.0001 par
value Authorized shares - 110,000,000; Issued and
outstanding shares - 9,767,853 at June 30, 2008 and
December 31, 2007
    
    
    1,269
    
    
    
    1,269Additional paid-in capital
    
    
    14,544,764
    
    
    
    14,100,931Deficit accumulated during the development stage
    
    
    (11,616,831
    )
    
    
    (5,688,327
    )Less: treasury stock, at cost, 1,239,999 shares
outstanding at June 30, 2008 and December 31, 2007,
    
    
    (4,130
    )
    
    
    (4,130
    )Total stockholders equity (deficit)
    
    
    2,925,567
    
    
    
    8,410,238Total liabilities and stockholders equity (deficit)
    
    $
    5,712,603
    
    
    $
    9,307,200
  3




---



##### Table of Contents



NOVARAY MEDICAL, INC.
(A Development Stage Company)
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    
    Six Months Ended
    
    
    From Inception (June 7, 2005)June 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,
    
    
    to June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Operating expenses:Research and development
    
    $
    3,008,393
    
    
    
    63,483
    
    
    $
    4,283,986
    
    
    $
    112,458
    
    
    $
    4,631,679General and administrative
    
    
    897,705
    
    
    
    244,214
    
    
    
    1,670,888
    
    
    
    511,900
    
    
    
    6,394,727Total operating expenses
    
    
    3,906,098
    
    
    
    307,697
    
    
    
    5,954,874
    
    
    
    624,358
    
    
    
    11,026,406Operating loss
    
    
    (3,906,098
    )
    
    
    (307,697
    )
    
    
    (5,954,874
    )
    
    
    (624,358
    )
    
    
    (11,026,406
    )Miscellaneous income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000Interest income
    
    
    13,007
    
    
    
    1,258
    
    
    
    32,216
    
    
    
    2,502
    
    
    
    38,328Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,719Interest expense
    
    
    (2,851
    )
    
    
    (69,381
    )
    
    
    (5,846
    )
    
    
    (123,014
    )
    
    
    (800,472
    )Net loss
    
    $
    (3,895,942
    )
    
    $
    (375,820
    )
    
    $
    (5,928,504
    )
    
    $
    (744,870
    )
    
    $
    (11,616,831
    )Basic and diluted loss per share of common stock
    
$
    (0.40
    )

    $

    (0.05
)

    $
    (0.61
    )

$
    (0.11
)


$
    (1.51
)Weighted average number of common shares
outstanding used in basic and diluted loss per
share
    

    9,787,853
    


    6,931,713

    
    
    
    9,767,853
    
    
    
    6,931,713
    
    
    
    7,705,984
 4




---



##### Table of Contents



NOVARAY MEDICAL, INC.
(A Development Stage Company)
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months Ended,From InceptionJune 30,
    
    
    June 30,
    
    
    (June 7, 2005) to2008
    
    
    2007
    
    
    June 30, 2008Operating activities:Net loss
    
    $
    (5,928,504
    )
    
    $
    (744,870
    )
    
    $
    (11,616,831
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation
    
    
    8,803
    
    
    
    7,703
    
    
    
    89,469Loss on conversion of preferred debt
    
    
    
    
    
    
    
    
    
    
    252,328Beneficial conversion of convertible debt
    
    
    
    
    
    
    
    
    
    
    263,528Amortization of warrants in research and development
    
    
    443,833
    
    
    
    
    
    
    
    443,833Interest expense capitalized as long term debt
    
    
    
    
    
    
    104,605
    
    
    
    156,641Interest expense converted to preferred stock
    
    
    
    
    
    
    60,864
    
    
    
    60,864Changes in operating assets and liabilitiesMiscellaneous receivables
    
    
    (380,513
    )
    
    
    7,915
    
    
    
    (394,384
    )Prepaid expenses
    
    
    (319,696
    )
    
    
    (127,064
    )
    
    
    (336,643
    )Accounts payable
    
    
    1,878,368
    
    
    
    96,128
    
    
    
    2,444,514Accrued liabilities
    
    
    41,707
    
    
    
    (89,125
    )
    
    
    246,940Net cash used in operating activities
    
    
    (4,256,002
    )
    
    
    (684,564
    )
    
    
    (8,389,741
    )Investing activities:Property and equipment assigned by shareholders and purchased
    
    
    (71,635
    )
    
    
    (10,216
    )
    
    
    (147,389
    )Restricted cash for lease deposit
    
    
    (135,000
    )
    
    
    
    
    
    
    (135,000
    )Security deposit with related party
    
    
    (500,000
    )
    
    
    
    
    
    
    (500,000
    )Net cash used in investing activities
    
    
    (706,635
    )
    
    
    
    
    
    
    (782,389
    )Financing activities:Repayment of long-term debt
    
    
    
    
    
    
    
    
    
    
    Proceeds from subscriptions receivable
    
    
    
    
    
    
    
    
    
    
    100,472Proceeds from issuance of short term debt
    
    
    
    
    
    
    625,000
    
    
    
    1,742,805Long-term debt assumed at inception in connection with the acquisition
of intellectual property
    
    
    
    
    
    
    
    
    
    
    1,283,473Proceeds from sale of Series A convertible preferred stock
    
    
    
    
    
    
    390,000
    
    
    
    10,429,820Repayment of notes payable
    
    
    (30,000
    )
    
    
    
    
    
    
    (30,000
    )Issuance costs incurred in sale of Series A convertible preferred stock
    
    
    
    
    
    
    (24,910
    )
    
    
    (122,910
    )Proceeds from sale of common stock
    
    
    
    
    
    
    
    
    
    
    13,889Purchase of treasury stock
    
    
    
    
    
    
    (4,130
    )
    
    
    (4,130
    )Net cash provided (used) by financing activities
    
    
    (30,000
    )
    
    
    985,960
    
    
    
    13,413,419Net increase (decrease) in cash and cash equivalents
    
    
    (4,992,637
    )
    
    
    291,180
    
    
    
    4,241,289Cash and cash equivalentsbeginning of period
    
    
    9,233,926
    
    
    
    40,827
    
    
    
    Cash and cash equivalentsend of period
    
    $
    4,241,289
    
    
    $
    332,007
    
    
    $
    4,241,289Supplemental Disclosures of Cash Flow Information:Cash paid for interest
    
    $
    
    
    
    $
    
    
    
    $
    26,696Cash paid for taxes
    
    $
    
    
    
    $
    
    
    
    $
    2,827Supplemental Disclosure of Non-Cash Financing ActivitiesConvertible preferred stock issued in exchange for cancellation of debt
    
    $
    
    
    
    $
    
    
    
    $
    3,921,903Convertible preferred stock issued in exchange for cancellation of
accrued interest on debt
    
    $
    
    
    
    $
    60,864
    
    
    $
    233,182Interest expense capitalized as long term debt
    
    $
    
    
    
    $
    104,605
    
    
    $
    156,641
  5




---



##### Table of Contents



NOVARAY MEDICAL, INC.
(A Development Stage Company)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2008 and 2007
 (Unaudited)
 1. Summary of Significant Accounting Policies
 Business description
  Uses of estimates in the preparation of financial statements
  Research and development
  Cash and cash equivalents
  Prepaid expenses
  Accrued liabilities
  Fair values of financial instruments
  6




---



##### Table of Contents



Property and equipment
  June 30,
    
    
    December 31,2008
    
    
    2007Computer hardware, software, and equipment
    
    $
    96,483
    
    
    $
    80,439Less: accumulated depreciation
    
    
    (46,788
    )
    
    
    (37,984
    )Leasehold improvements in progress
    
    
    55,592
    
    
    
    Property and equipment, net
    
    $
    105,287
    
    
    $
    42,455
  Warrants
 Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
  Loss per share
   Six
months ended June 30,2008
    
    
    2007Basic and Diluted:Net loss available to common shareholders
    
    $
    (5,928,504
    )
    
    $
    (744,870
    )Net loss per share available to common shareholders
    
$
    (0.61
)
    
$
    (0.11
)Weighted average common shares outstanding
    
    
    9,767,853
    
    
    
    6,931,713
  Recent accounting pronouncements
 Share-Based Payment
 7




---



##### Table of Contents



8




---



##### Table of Contents



NOVARAY MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 2. Restatement
   RECONCILIATION OF BALANCE SHEET AS OF MARCH 31, 2008
 As Reported (A)
    
    
    Adjustments
    
    
    RestatedCurrent AssetsCash and cash equivalents
    
    $
    6,873,835
    
    
    $
    
    
    
    $
    6,873,835Miscellaneous receivables
    
    
    22,992
    
    
    
    
    
    
    
    22,992Prepaid expenses
    
    
    225,172
    
    
    
    (2,200
    )(1)
    
    
    227,372Total Current Assets
    
    
    7,121,999
    
    
    
    (2,200
    )
    
    
    7,124,199Property, plant, and equipment, net
    
    
    38,433
    
    
    
    
    
    
    
    38,433Other assetsDeferred interest
    
    
    1,469,955
    
    
    
    1,469,955
    (2)
    
    
    Deferred consulting
    
    
    1,704,614
    
    
    
    1,704,614
    (3)
    
    
    Deposits and restricted assets
    
    
    635,000
    
    
    
    
    
    
    
    635,000Total other assets
    
    
    3,809,569
    
    
    
    3,174,569
    
    
    
    635,000Total Assets
    
    $
    10,970,001
    
    
    $
    3,172,369
    
    
    $
    7,797,632LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    772,707
    
    
    $
    
    (2)(1)
    
    $
    772,709Accrued liabilities
    
    
    330,019
    
    
    
    
    
    
    
    330,019Notes payable
    
    
    95,312
    
    
    
    
    
    
    
    95,312Total current liabilities
    
    
    1,198,038
    
    
    
    
    (2)
    
    
    1,198,040Stockholders equity (deficit):Series A convertible preferred NovaRay Medical Inc
    
    
    495
    
    
    
    
    
    
    
    495Common stock, NovaRay Medical Inc.
    
    
    1,269
    
    
    
    
    
    
    
    1,269Additional paid in capital
    
    
    17,103,665
    
    
    
    2,780,817
    (2),(3)
    
    
    14,322,848Deficit accumulated during the development stage
    
    
    (7,327,137
    )
    
    
    393,762
    (4)
    
    
    (7,720,899
    )Less treasury stock
    
    
    (4,130
    )
    
    
    
    
    
    
    (4,130
    )Total stockholders equity (deficit)
    
    $
    9,774,162
    
    
    $
    3,174,570
    
    
    $
    6,599,592Total Liabilities and stockholders equity (deficit)
    
    $
    10,972,200
    
    
    $
    3,174,568
    
    
    $
    7,797,632
 
 (A)
    
    Balance as reported May 14, 2008, the filing date of the Companys 10-Q for the quarter ended
March 31, 2008.(1)
    
    Correction of prepaids, payables and a rounding error(2)
    
    To reclassify warrants granted to Vision and investment advisors initially recorded as
deferred interest at December 31, 2007 to closing costs and reverse impact of amortization(3)
    
    To correct treatment of Triple Ring Warrant which was initially recorded at December 31, 2007
as a deferred asset and additional paid in capital for the full amount of the warrant.(4)
    
    Impact of adjustments above on deficit accumulated during the development period 9




---



##### Table of Contents



NOVARAY MEDICAL, INC.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 RECONCILIATION OF BALANCE SHEET DECEMBER 31, 2007
 As Reported (A)
    
    
    Adjustments
    
    
    RestatedASSETS:Current assets:Cash and cash equivalents
    
    $
    9,233,926
    
    
    
    
    
    
    $
    9,233,926Miscellaneous receivables
    
    
    13,872
    
    
    
    
    
    
    
    13,872Prepaid expenses
    
    
    16,947
    
    
    
    
    
    
    
    16,947Total current assets
    
    
    9,264,745
    
    
    
    
    
    
    
    9,264,745Property and equipment, net
    
    
    42,454
    
    
    
    1
    (1)
    
    
    42,455Other assets
    
    
    
    
    
    
    Deferred interest
    
    
    1,584,336
    
    
    
    (1,584,336
    )(2)
    
    
    Deferred consulting
    
    
    1,926,531
    
    
    
    (1,926,531
    )(3)
    
    
    Total other assets
    
    
    3,510,867
    
    
    
    (3,003,026
    )Total Assets
    
    $
    12,818,066
    
    
    $
    (3,510,866
    )
    
    $
    9,307,200LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    566,146
    
    
    
    
    
    
    
    566,146Accrued liabilities
    
    
    205,503
    
    
    
    1
    (1)
    
    
    205,504Notes payable
    
    
    125,312
    
    
    
    
    
    
    
    125,312Total current liabilities
    
    
    896,961
    
    
    
    1
    
    
    
    896,963Stockholders equity (deficit):Series A convertible preferred NovaRay Medical Inc.
    
    
    495
    
    
    
    
    
    
    
    495Series A convertible preferred NovaRay Inc.
    
    
    Common stock, Novaray Medical Inc.
    
    
    977
    
    
    
    292
    (1)
    
    
    1,269Common stock, Novaray Inc.
    
    
    Additional paid in capital
    
    
    17,103,957
    
    
    $
    (3,003,026
    )(1),(2)
    
    
    14,100,391Accumulated deficit
    
    
    (5,180,194
    )
    
    
    (508,133
    )(4)
    
    
    (5,688,327
    )Less treasury stock
    
    
    (4,130
    )
    
    
    
    
    
    
    (4,130
    )Total stockholders equity (deficit)
    
    $
    11,921,105
    
    
    $
    (3,510,867
    )
    
    $
    8,410,238Total Liabilities and stockholders equity (deficit)
    
    $
    12,818,066
    
    
    $
    (3,510,866
    )
    
    $
    9,307,200
 
 (A)
    
    Balances as reported March 31, 2008, the filing date of the Companys Form 10 KSB for the
reporting year ending December 31, 2007.(1)
    
    Correction of rounding error(2)
    
    To reclassify warrants granted to Vision and investment advisors from deferred interest to
closing costs and reverse impact of amortization(3)
    
    To correct treatment of Triple Ring Warrant which was initially recorded as a deferred asset
and additional paid in capital for the full amount of the warrant and beneficial conversion
option for debt conversion.(4)
    
    See explanations detailed in Statement of Operations on next page. 10




---



##### Table of Contents



NOVARAY MEDICAL, INC.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  RECONCILIATION OF STATEMENT OF OPERATIONS AS OF MARCH 31, 2008
 As Reported(A)
    
    
    Adjustments
    
    
    RestatedOperating expensesResearch and development
    
    $
    1,275,593
    
    
    
    
    
    
    $
    1,275,593General and administrative
    
    
    773,183
    
    
    
    
    
    
    
    773,183Total operating expenses
    
    $
    2,048,776
    
    
    $
    
    
    
    $
    2,048,776Operating lossMiscellaneous income
    
    
    
    
    
    
    
    
    
    
    Interest income
    
    
    19,209
    
    
    
    
    
    
    
    19,209Interest expense
    
    
    (117,376
    )
    
    
    (114,381
    )(1)
    
    
    (2,995
    )Net loss
    
    $
    1,950,609
    
    
    $
    (114,381
    )
    
    $
    2,032,562Basic and diluted loss per share of common
    
    $
    (0.20
    )
    
    $
    (0.01
    )
    
    $
    (0.21
    )Weighted average number of shares used in basic and diluted loss per share
    
    
    9,767,853
    
    
    
    9,767,853
    
    
    
    9,767,853
 
 (A)
    
    Balance as reported May 14, 2008, the filing date of the Companys 10Q for the quarter ended
March 31, 2007.(1)
    
    To adjust interest expense for warrant costs to properly record them as closing costs RECONCILIATION OF STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007
 As Reported(B)
    
    
    Adjustments
    
    
    RestatedOperating expenses:Research and development
    
    $
    313,896
    
    
    $
    
    
    
    $
    313,896General and administrative
    
    
    1,275,458
    
    
    
    
    
    
    
    1,275,458Total operating expenses
    
    
    1,589,354
    
    
    
    
    
    
    
    1,589,354Operating loss
    
    
    (1,589,354
    )
    
    
    
    
    
    
    (1,589,354
    )Miscellaneous income
    
    
    452,091
    
    
    
    (452,091
    )(1)
    
    
    Interest income
    
    
    4,875
    
    
    
    
    
    
    
    4,875Interest expense
    
    
    (293,253
    )
    
    
    (255,805
    )(2)
    
    
    (549,058
    )Gain on extinguishment of debt
    
    
    
    
    
    
    199,763
    (1),(3)
    
    
    199,763Net loss
    
    $
    (1,425,641
    )
    
    $
    (508,133
    )
    
    $
    (1,933,774
    )Basic and diluted loss per share of common
    
    $
    (0.21
    )
    
    $
    (0.08
    )
    
    $
    (0.29
    )Weighted average number of common shares used in basic and diluted loss per share
    
    
    6,689,392
    
    
    
    6,689,392
    
    
    
    6,689,392
 
 (B)
    
    Balance as reported March 31, 2008, the filing date of the Companys form 10KSB for the
reporting year ending December 31, 2007.(1)
    
    To reclassify debt extinguishment costs from other income to a separate line item for
extinguishment of debt(2)
    
    To adjust interest expense for warrants costs to properly record them as closing costs and
recorded the $263,000 beneficial conversion option of shares as interest expense under EITF
00-27.(3)
    
    To reflect a $452,091 gain on extinguishment of debt reclassified from miscellaneous income
and to properly record debt conversion loss of $252,000 under FAS 84. 11




---



##### Table of Contents



3. Other Assets
 Deposits and restricted assets
  June 30,
    
    
    December 31,2008
    
    
    2007Deposits to a related party
    
    $
    500,000
    
    
    $
    Restricted cash for a lease
    
    
    135,000
    
    
    
    Total deferred assets
    
    $
    635,000
    
    
    $
    
  4. Accounts payable and accrued liabilities
  June 30,
    
    December 31,2008
    
    2007Accounts Payable
    
    $
    2,444,514
    
    
    $
    566,146Accrued Liabilities
    
    $
    247,210
    
    
    $
    205,505
   5. Notes payable
   Application of Issue 98-5 to Certain
Convertible Instrument,
 12




---



##### Table of Contents



6. Income taxes
   7. Stockholders equity
  13




---



##### Table of Contents



Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
   Induced Conversions of Convertible Debt
  Exercise Price
    
    Calculated Fair ValueDate of Acceptance of the Deliverables
    
    per Share
    
    of warrants*On or prior to March 30, 2009
    
    $
    0.06
    
    
    $
    3,476,000On or after March 31, 2009 but on or prior to July 30, 2009
    
    $
    0.15
    
    
    $
    3,365,000On or after July 30, 2009 but on or prior to December 30, 2009
    
    $
    1.33
    
    
    $
    1,956,000On or after December 30, 2009 but on or prior to February 28,
2010
    
    $
    2.67
    
    
    $
    907,000
 
 *
    
    Calculated using Black Scholes method using exercise price, expected term of two years, and a
risk free rate of $3.98%.  14




---



##### Table of Contents



Warrant
    
    Number of
    
    Exercise
    
    Expected
    
    Risk Free
    
    ValuationGroup
    
    Warrants
    
    Price
    
    Term in Years
    
    Rate
    
    ComputationSeries A
    
    
    1,648,960
    
    
    $
    4.25
    
    
    
    5
    
    
    
    3.63
    %
    
    $
    1,038,754Series J-A
    
    
    769,822
    
    
    $
    6.91
    
    
    
    1
    
    
    
    4.25
    %
    
    $
    3,249Series J
    
    
    2,309,468
    
    
    $
    4.33
    
    
    
    1
    
    
    
    4.25
    %
    
    $
    170,926Consultants
    
    
    600,000
    
    
    $
    4.25
    
    
    
    5
    
    
    
    3.63
    %
    
    $
    377,967Triple Ring
    
    
    1,320,000
    
    
    $
    1.33
    
    
    
    2
    
    
    
    3.98
    %
    
    $
    1,956,000
 Series A Convertible Preferred Stock NovaRay Medical Inc.
  June 30, 2008
    
    December 31 ,2007Liquidation
    
    
    
    
    
    
    
    
    
    LiquidationAuthorized
    
    Issued
    
    Preference
    
    Authorized
    
    Issued
    
    PreferenceSeries A (NovaRay
Medical, Inc.)
    
    
    10,000,000
    
    
    
    4,946,888
    
    
    $
    
    
    
    
    10,000,000
    
    
    
    4,946,888
    
    
    $
    
 Common stock
  June 30, 2008
    
    December 31 ,2007Authorized
    
    Issued
    
    Authorized
    
    IssuedCommon Stock (NovaRay Medical, Inc.)
    
    
    110,000,000
    
    
    
    9,767,853
    
    
    
    110,000,000
    
    
    
    9,767,853
  Treasury stock
  15




---



##### Table of Contents



8. Related party transactions
 Triple Ring Technologies, Inc.
  Date ofAcceptance ofthe
    
    Exercise PriceDeliverables
    
    per ShareOn or prior to March 30, 2009
    
    $
    0.06On or after March 31, 2009 but on or prior to July 30, 2009
    
    $
    0.15On or after July 30, 2009 but on or prior to December 30, 2009
    
    $
    1.33On or after December 30, 2009 but on or prior to February 28,
2010
    
    $
    2.67
   NovaRayMedical
    
    Triple RingName
    
    Affiliation
    
    Interest OwnershipMarc Whyte
    
    CFO, COO, Director, Stockholder
    
    
    21.15
    %Edward Solomon
    
    CTO, Director
    
    
    21.15
    %Joseph Heanue
    
    Stockholder
    
    
    21.15
    %Augustus Lowell
    
    Stockholder
    
    
    21.15
    %Brian Wilfey
    
    Stockholder
    
    
    15.40
    %
 Series
A Warrants
  Number ofSeries AName
    
    WarrantsBioBridge LLC
    
    
    33,044Lynda Wijcik
    
    
    40,646Wheatley MedTech Partners, LP
    
    
    47,544W Capital Partners II, L.P.
    
    
    147,647Heartstream Capital B.V
    
    
    90,632359,513
 Restricted Stock Purchase Agreement
  16




---



##### Table of Contents



9. Commitments and contingencies
    Monthly Rate
    
    MonthlyMonths of Term
    
    Per Square Foot
    
    Base RentMonth 1  Month 18
    
    $
    0.85
    
    
    $
    34,950.30Month 19  Month 30
    
    $
    0.88
    
    
    $
    36,183.84Month 31  Month 42
    
    $
    0.90
    
    
    $
    37,006.20Month 43  Month 54
    
    $
    0.93
    
    
    $
    38,239.74Month 55  Month 64
    
    $
    0.96
    
    
    $
    39,473.28
 10. Subsequent Events
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  17




---



##### Table of Contents



Overview
    Critical Accounting Policies and Estimates
  Fair Values of Financial Instruments
  18




---



##### Table of Contents



Property and equipment
  Research and Development
  Stock-based compensation
 Share-Based Payment
 Warrants
 Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
  Results of Operations
 Research and Development
   19




---



##### Table of Contents



General and Administrative
   Interest Expense
   Liquidity and Capital Resources
     
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4T. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
  20




---



##### Table of Contents




    
    In July 2007, we engaged a third party consultant to assist in day to day accounting
matters .
    
    In July and August 2007, we upgraded our knowledge of accounting pronouncements related
to debt extinguishment and conversion through training and study on the relevant
pronouncements related to debt extinguishment, debt conversion and the related accounting
for warrants issued during a debt conversion and warrants issued in exchange for services.
  Changes in Internal Controls
  
 PART II  Other Information
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  21




---



##### Table of Contents



Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
  2.1
    
    Agreement and Plan of Merger, dated December 26, 2007, by and among Vision Acquisition I, Inc., NovaRay, Inc. and
Vision Acquisition Subsidiary, Inc.(1)3.1
    
    Complete Copy of the Certificate of Incorporation, as amended.(4)3.2
    
    Bylaws.(2)3.3
    
    Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock of
the NovaRay Medical, Inc.(3)31.1
    
    Certification of Jack E. Price, Chief Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Marc C. Whyte, Chief Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Jack E. Price, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Marc C. Whyte, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Incorporated by reference to the Exhibit 2.1 to the Registrants Current Report on Form 8-K
filed with the SEC on December 28, 2007.(2)
    
    Incorporated by reference to Exhibit 3.2 to the Registrants Registration Statement on Form
10-SB (No. 000-52731) filed with the SEC on July 20, 2007.(3)
    
    Incorporated by reference to Exhibit 3.4 to the Registrants Current Report on Form 8-K filed
with the SEC on December 28, 2007.(4)
    
    Incorporated by reference to Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q
filed with the SEC on May 14, 2008. 22




---



##### Table of Contents



SIGNATURES
  NOVARAY MEDICAL, INC.By:
    /s/ Jack E. PriceJack E. PricePresident and Chief Executive Officer By:
    /s/ Marc C. WhyteMarc C. WhyteChief Financial Officer and Chief Operating
Officer 23