Exhibit 10.8


 


STRATEGIC
PARTNERSHIP AGREEMENT


 


THIS STRATEGIC PARTNERSHIP AGREEMENT is entered into as of the 8th of
October, 2004 (the “Effective Date”) by and between MathStar, Inc., a
Minnesota corporation (“MathStar”); Valley Technologies, Inc., a Pennsylvania
corporation (“VTI”); and, for purposes of only Sections 2.5, 3.1.2 and
3.3, Gerald Petrole, the President and Chief Executive Officer of VTI (“Petrole”).  MathStar and VTI are hereinafter referred to
as the “Parties” and individually as a “Party.”


 


RECITALS


 


WHEREAS, MathStar is a fabless semiconductor company addressing the
reprogrammable logic markets with a new class of platform chips called “Field
Programmable Object Arrays” (“FPOAs”), which are high performance,
reprogrammable integrated circuits based on MathStar’s proprietary Silicon
Object technology;


 


WHEREAS, VTI provides very high performance digital signal processing (“DSP”)
and data acquisition boards and systems to the commercial and military markets;


 


WHEREAS, VTI is willing to be engaged in developing and supporting
products, algorithms and applications for the FPOAs (the “VTI Products”), and
VTI is willing to provide the services of Petrole to assist MathStar in
marketing the FPOAs, all as provided herein;


 


WHEREAS, some of the VTI Products will be printed circuit board
products utilizing FPOAs (the “Hardware Products”); and


 


WHEREAS, the Parties desire to set forth the terms and conditions under
which such development and marketing shall take place.


 


NOW, THEREFORE, in consideration of the foregoing, the mutual promises
herein contained, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, MathStar and VTI hereby agree
as follows:


 


SECTION 1


 


DEFINITIONS


 


As used throughout this Agreement, and in addition to the other
definitions contained in this Agreement, the following terms shall have the
meanings set forth below:


 


1.1.         “Affiliate” of a Party
means any Person controlling, controlled by or under common control with such
Party.  Two Persons will be considered to
be affiliated with one another if one of them controls the other, or if both of
them are controlled by a common third party. 
One Person will be considered to control another Person if it has the
power to direct or cause the 


 


1





















 


direction of the management and policies of the other Person, whether
directly or indirectly, through one or more intermediaries or otherwise, and
whether by virtue of the ownership of shares or other equity interests, the
holding of voting rights or contractual rights, or otherwise.


 


1.2.         “Agreement” means the
terms and conditions contained in this Agreement and all attached Exhibits,
Schedules, Attachments, and Addenda and any other documents made a part of this
Agreement or incorporated by reference (including Statements of Work), as the
same may be amended, modified or supplemented from time to time.


 


1.3.         “Bankruptcy Event” means
that a Party:  (i) ceases conducting
its business in the normal course; (ii) becomes insolvent or unable to
meet its obligations as they become due; (iii) makes a general assignment
for the benefit of its creditors; (iv) petitions, applies for, or suffers
or permits, with or without its consent, the appointment of a custodian,
receiver, trustee in bankruptcy or similar officer for all or any substantial
part of its business or assets; or (v) avails itself or becomes subject to
any proceeding under the United States Bankruptcy Code or any similar state,
federal or foreign statute relating to bankruptcy, insolvency, reorganization,
receivership, arrangement, adjustment of debts, dissolution or liquidation,
which proceeding is not dismissed within sixty (60) days of the commencement
thereof.


 


1.4.         “Change of Control” means
with respect to a Party:  (i) the
direct or indirect acquisition by another entity in a single transaction or
series of related transactions of either (A) the majority of the voting
stock of such Party or (B) all or substantially all of the assets of such
Party; or (ii) such Party has merged with, or into, another entity, and
the holders of securities of that Party representing 100% of the voting power
before the merger hold less than 50% of the voting power of the surviving
entity immediately after the merger.


 


1.5.         “Code” means the United
States Internal Revenue Code of 1986, as amended.


 


1.6.         “Confidential Information”
means information including, without limitation, Technology, that is
transmitted or otherwise provided, directly or indirectly, by or on behalf of
either Party to the other Party in connection with this Agreement and the
activities hereunder, and that should reasonably have been understood by the
receiving Party because of legends or other markings, the circumstances of
disclosure or the nature of the information itself, to be proprietary and
confidential to the disclosing Party. 
Confidential Information may be disclosed in written or other tangible
form (including on magnetic media) or by oral, visual or other means, including
inspection or discovery of tangible objects.


 


1.7.         “Deliverable” means any
tangible or intangible material, work or thing delivered by one Party to the
other Party hereunder pursuant to this Agreement, including any associated
Documentation.


 


1.8.         “Derivative Work” has the
meaning ascribed to it under the United States Copyright Law, Title 17 U.S.C. Section 101
et. seq., as amended now or in the future.


 


1.9.         “Design Wins” means the
acceptance by a customer or prospective customer of the FPOAs for use in or
with respect to such customer’s or prospective customer’s products, as
determined by the mutual agreement of the Parties.


 


2





















 


1.10.       “Development Schedule”
means the schedule for the completion of identified Deliverables as set
forth in Exhibit A this Agreement or a Statement of Work.


 


1.11.       “Documentation” means all
or any portion of the materials, in written or other tangible form (including
on magnetic media), generated by either Party in the performance of development
hereunder or generally made available by either Party for use in connection
with the VTI Products and FPOAs including, without limitation, any summaries;
designs; architectures; program logic; flow charts; program listings;
functional or technical specifications; logical models; user guides; operator
guides; installation and operation guides; and any other supporting or
programming materials.


 


1.12.       “Enhancement” means any
improvement, upgrade, new version of, enhancement to, fix, extension which is
compatible or interoperable with, or any Derivative Work of, any Technology.


 


1.13.       “Fully Diluted Basis” means
all shares of a Party’s capital stock outstanding as of any specified date and
all shares of such Party’s capital stock subject to options, warrants, convertible
debt or other rights to acquire such Party’s capital stock outstanding as of
such date.


 


1.14.       “Intellectual Property
Rights” means all rights of a Person in, to, or arising out of:  (i) any United States, international or
foreign patent or any application therefor and any and all reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof; (ii) inventions
(whether patentable or not in any country), invention disclosures,
improvements, trade secrets, proprietary information, know-how, Technology and
technical data; (iii) copyrights, copyright registrations, mask works,
mask work registrations and applications therefor in the United States or any
foreign country, and all other rights corresponding thereto throughout the world;
(iv) Trademarks, Trademark registrations and applications therefor in the
United States or any foreign country; (v) trade secrets; and (vi) any
other proprietary rights in Technology anywhere in the world.


 


1.15.       “MathStar Common Stock”
means the common stock of MathStar, $0.01 par value per share.


 


1.16.       “MathStar Personnel” means
MathStar employees, agents and subcontractors and the employees and agents of
any such subcontractors directly or indirectly supplied or otherwise used
hereunder by MathStar.


 


1.17.       “MathStar Technology” shall
mean Technology, including FPOAs, owned by or licensed to MathStar and provided
to VTI hereunder, but excluding VTI Technology.


 


1.18.       “Person” means any
individual or entity including, without limitation, any corporation, company,
partnership, joint venture, association, joint stock company, trust,
unincorporated association, limited liability corporation, limited liability
partnership, firm, governmental entity or other person or entity of similar
nature.


 


1.19.       “Revenues” means all
revenues as recognized at any time by VTI in accordance with United States
generally accepted accounting principles, consistently applied, from all sales,
licenses, rentals, leases, subscriptions and any other dispositions of VTI
Products, less actual 


 


3





















 


returns, discounts and rebates, and from maintenance and support
services rendered by or on behalf of VTI with respect to the VTI Products.


 


1.20.       “Software” means all
tangible and intangible information in object code form constituting one or
more computer or apparatus programs and the informational content of such
programs including, without limitation, associated data files, data (including
image and sound data), design tools, user interfaces, templates, menus, buttons
and icons, together with all related Documentation.


 


1.21.       “Specifications” means the
specifications as set forth in Exhibit A to this Agreement and any
amendments or changes to such specifications made in accordance with this
Agreement.


 


1.22.       “Statement of Work” means a
written document that is mutually agreed upon by the Parties setting forth the
requirements for the development of VTI Products and FPOAs and Enhancements to
VTI Products and FPOAs.  Each Statement
of Work shall be effective only when signed by the Parties.  Once agreed upon and executed by the Parties,
a Statement of Work shall be deemed incorporated into and shall become a part
of this Agreement.


 


1.23.       “Technology” means all
technology, including all know-how, show-how, techniques, design rules, trade
secrets, inventions (whether or not patented or patentable), algorithms,
routines and Software and associated Documentation, files, data-bases, works of
authorship, processes, devices and hardware.


 


1.24.       “Trademarks” means all
trademarks, trade names, service marks, logos, trade dress or the like, now
owned or hereafter acquired by either Party, and all other trademarks, trade
names, service marks and logos identifying or used in connection with their
respective Technology, whether or not registered in any jurisdiction.


 


1.25.       “VTI Personnel” means VTI
employees, agents and subcontractors and the employees and agents of any such
subcontractors directly or indirectly supplied or otherwise used hereunder by
VTI, including Petrole.


 


1.26.       “VTI Technology” shall mean
Technology owned by or licensed to VTI and used hereunder to develop the VTI
Products, but excluding MathStar Technology.


 


SECTION 2


 


DEVELOPMENT,
MARKETING AND RELATED OBLIGATIONS


 


2.1.         Development.


 


2.1.1.      Development
of VTI Products.  During the period beginning September 1,
2004 and through and including the date one year from the effective date, using
the FPOAs and other MathStar Technology licensed to VTI hereunder, VTI shall
expend at least Two Million and 00/100 Dollars ($2,000,000.00) on the
development of the VTI Products in accordance with the Specifications and
Development Schedule set forth in Exhibit A, as such
Specifications and Development Schedule may be amended or modified by 


 


4





















 


Statements of Work.  Of the $2,000,000.00, at least One Hundred
Thousand and 00/100 Dollars ($100,00.00) will be spent on MathStar development
tools, including development software. 
As reasonably requested by VTI, MathStar shall assist VTI in such
development and shall allow VTI access to the source code and related
Documentation including, without limitation, all updates, Enhancements and new
versions (collectively, the “Source Materials”) for the FPOAs for the purpose
of VTI undertaking such development.  As
reasonably requested by MathStar, VTI shall allow MathStar access to the Source
Materials for the VTI Products for the purpose of MathStar assisting VTI in
such development.


 


2.1.2.      Ownership
of Intellectual Property Rights in VTI Products.  The Parties
agree that VTI shall own all Intellectual Property Rights contained in the VTI
Products.  Notwithstanding such rights,
the Parties agree that MathStar shall retain exclusive ownership of all Intellectual
Property Rights contained in or related to the FPOAs.  The Parties shall cooperate with each other
to register and enforce against third parties all Intellectual Property Rights
that the Parties mutually agree should be registered and enforced with respect
to the VTI Products and the FPOAs.


 


2.1.3.      Planning
Committee.  The Parties shall appoint employees from each Party
to a planning committee (the “Planning Committee”).  The Planning Committee’s responsibilities
shall include, but not be limited to, planning and monitoring development
activities, scheduling, marketing, pricing conditions and other matters
relating to the Parties’ obligations under this Agreement.  The Parties agree that the Planning Committee’s
membership can be changed from time to time to properly staff the Planning
Committee to address relevant issues. 
The Planning Committee shall be responsible for:  (i) deciding on and approving
specifications for the VTI Products; (ii) coordinating and disseminating
all development schedules; and (iii) coordinating joint marketing efforts.


 


2.2.         Subcontracting.  Either
Party may subcontract the performance of any portion of the development to be
performed under this Agreement to any third party subject to the other Party’s
prior consent, which consent shall not be unreasonably withheld.  The Parties agree that no subcontracting to a
direct or indirect competitor of either Party will occur hereunder.  Each Party shall provide the other Party with
the names of any third parties to whom the subcontracting party subcontracts
the performance of any portion of the development under this Agreement, along
with proof of receipt of written assurances and warranties by such third party
contractors regarding ownership of all resulting Intellectual Property Rights
by MathStar and VTI jointly, indemnification and confidentiality.  Notwithstanding any such subcontracting,
unless otherwise agreed by the Parties in writing, each Party shall in any
event and at all times remain liable for performance of its obligations under
this Agreement.


 


2.3.         No Limitation of Other
Rights.  The acceptance by either Party of any Deliverable from
the other Party pursuant to this Agreement shall not limit in any manner the
accepting Party’s rights pursuant to any other provision of this Agreement including,
without limitation, any warranty granted hereunder.


 


5





















 


2.4.         Marketing Activities.  During
the Term, MathStar and VTI shall jointly market the VTI Products, which
marketing activities may include, but may not be limited to, the following:


 


(i)            promoting,
distributing, soliciting and obtaining orders for the VTI Products;


 


(ii)           demonstrating
the VTI Products’ utility for distributors, potential resellers, customers and
potential customers;


 


(iii)          publishing
information about the VTI Products, including electronically and on the Parties’
respective websites;


 


(iv)          demonstrating
the VTI Products for industry analysts;


 


(v)           including
the VTI Products in trade shows, conferences and other marketing events;


 


(vi)          determining
the packaging, branding and/or any advertising campaigns and promotions for the
VTI Products; and


 


(vii)         determining
pricing for the VTI Products.


 


Each of MathStar and VTI shall bear its own expenses in connection with
the marketing activities set forth in this Section 2.4.


 


2.5.         Services of Petrole.  During
the period ending twelve (12) months from the Effective Date, VTI shall provide
MathStar with the services of Petrole, who shall promote the use of FPOAs in
the military and space industries and secure Design Wins for the FPOAs on
behalf of MathStar.  Petrole shall remain
an employee of VTI for all purposes and shall not become an employee of
MathStar.


 


2.5.1.      Fee
Paid to VTI.  In consideration of VTI providing Petrole’s
services to MathStar as provided in the foregoing paragraph, MathStar shall pay
to VTI the amount of Twelve Thousand Five Hundred and 00/100 Dollars
($12,500.00) per calendar month.  Such
payment shall be made with respect to services rendered in each calendar month
on or before the fifteenth (15th) calendar day of the next calendar month.  By way of example, and not by way of
limitation, for services rendered by Petrole in January 2005, MathStar is
to pay to VTI $12,500.00 on or before February 15, 2005.


 


2.5.2.      Expense
Reimbursement.  MathStar shall reimburse VTI for all normal,
reasonable business travel expenses incurred by VTI with respect to Petrole
rendering the services as provided in this Section 2.5.  MathStar shall reimburse VTI within thirty
(30) calendar days after receiving reasonable proof of the incurrence and
amount of such expenses; provided, that MathStar shall not be obligated to make
such reimbursement payment more often than once every calendar month.  Expenses of greater that $1,000 shall receive
the prior approval of MathStar’s Vice President of Sales and Marketing. In the
case of travel expenses, the purpose of which is to benefit both VTI and
MathStar, VTI and MathStar shall agree on the proper allocation of expenses
between the Parties.


 


 


6





















 


2.6.         Technical
Training.  At each Party’s reasonable request to the other Party,
and upon at least ten (10) days’ written notice by such requesting Party
to the other Party, the Party receiving the notice will provide the other Party
with technical training for personnel selected by the requesting Party at such
times and locations as shall be mutually agreed to by the Parties.  Each Party shall bear its own expenses in
connection with complying with this Section 2.6.


 


2.7.         Maintenance and
Support Services.  VTI shall be principally responsible under
this Agreement for providing maintenance and support services to customers and
other end-users of the VTI Products with respect to the VTI Products.  As reasonably requested by VTI, MathStar
shall assist VTI in rendering such services. 
Each Party shall bear its own expenses in complying with this Section 2.7.


 


SECTION 3


 


OTHER
AGREEMENTS


 


3.1.         Warrants to Purchase
MathStar Common Stock.


 


3.1.1.      VTI
Warrants and VTI Employee Warrants.  On the Effective Date,
MathStar shall issue to VTI warrants to purchase a total of 250,000 shares of
MathStar Common Stock (the “VTI Warrants”). 
Within twelve months (12) after the Effective Date, MathStar shall issue
to individuals who are key employees of VTI (the “VTI Employees”), and who are
identified in written notices given by VTI to MathStar as hereinafter provided
from time to time during the twelve (12)-month period described in the
foregoing sentence, warrants to purchase a total of five hundred thousand
(500,000) shares of MathStar Common Stock (the “VTI Employee Warrants”).  The VTI Warrants and the VTI Employee
Warrants shall have a term of ten (10) years from the Effective Date,
shall have an initial exercise price of $2.00 per share, shall vest as to
one-third of the shares subject to the VTI Warrants and the VTI Employee
Warrants on each of the first, second and third anniversary dates of the
Effective Date, provided that the Agreement is then in effect, and shall
otherwise be in the form attached hereto as Exhibit B.  During the twelve (12)-month period described
in the first sentence of this Section 3.1.1, VTI shall identify in written
notices to MathStar the identities, addresses and Social Security numbers of
the VTI Employees and the number of VTI Employee Warrants each VTI Employee is
to receive.  MathStar shall not have any
obligation to issue any VTI Employee Warrants after the expiration of the
twelve (12)-month period described in the first sentence of this Section 3.1.1.  In addition, and notwithstanding the
foregoing, MathStar will not be obligated to issue the VTI Employee Warrants to
the VTI Employees if MathStar determines, in its sole discretion, that such
transfers would be in violation of applicable securities laws.  The VTI Warrants and the VTI Employee
Warrants shall terminate and be of no further force or effect with respect to
any portion thereof that has not vested upon the termination or expiration of
this Agreement.


 


3.1.2.      Petrole
Warrants.  Upon the execution of this Agreement, MathStar shall
issue to Petrole warrants to purchase a total of two hundred fifty thousand
(250,000) shares of MathStar Common Stock (the “Petrole


 










* Confidential Treatment has been requested, the portion indicated has
been redacted and the redacted portion has been separately filed with the
Securities and Exchange Commission.


 


7





















 


Warrants”). 
The Petrole Warrants shall have a term of five (5) years from the
Effective Date, shall have an initial exercise price of $2.00 per share, shall
vest as to 50,000 shares of MathStar Common Stock upon the achievement of each
Design Win, and shall otherwise be in the form attached hereto as Exhibit C.  The Petrole Warrants shall terminate and be of
no further force or effect with respect to any portion thereof that has not
vested on or before the first anniversary date of the Effective Date.


 


3.2.         MathStar Option.  VTI
hereby grants to MathStar an option (the “MathStar Option”) to purchase a number
of shares of VTI’s capital stock equal to ten percent (10%) of VTI’s shares of
capital stock on a Fully Diluted Basis as of the date of exercise of the
MathStar Option, after taking into account the shares subject to the MathStar
Option,  for a total purchase price of one
million and 00/100 Dollars ($1,000,000.00). 
The MathStar Option shall vest as to 100% of the shares of capital stock
subject to the MathStar Option immediately after VTI becomes a
Subchapter C corporation under the Code or upon the termination or
expiration of this Agreement, whichever occurs first.  The MathStar Option shall have a term of ten (10) years
from the Effective Date.


 


3.3.         Right of First Refusal.  Until
three years after the Effective Date, if VTI proposes to enter into a Change of
Control, MathStar shall have the exclusive right of first refusal (the “Right
of First Refusal”) to acquire all shares of VTI capital stock then outstanding
in cash for a purchase price that is equivalent to the purchase price to be
paid in the Change of Control transaction (whether the consideration involved
in such Change of Control transaction consists of cash, securities and/or other
property).  When VTI has knowledge of a
potential Change of Control transaction involving VTI, it shall notify MathStar
in writing within five (5) calendar days of obtaining such knowledge.  MathStar then shall have thirty (30) calendar
days after receiving the written notice from VTI to exercise its Right of First
Refusal hereunder, and it shall exercise such Right of First Refusal by giving
written notice to VTI within such thirty (30) day period.  The closing of the exercise by MathStar of
the Right of First Refusal the shall occur on such time and date and at such
place as shall be mutually agreed upon by the Parties.  Petrole hereby agrees for himself
individually and the shares of VTI capital stock beneficially owned by him that
he shall be bound by the terms of this Section 3.3.


 


3.4.         Independent
Contractors.


 


3.4.1.      The
relationship of the Parties hereunder shall be that of independent
contractors.  Accordingly, and without
modification of any obligations of either Party under this Agreement, each
Party will provide day-to-day management and supervision of the development and
marketing tasks for which it is responsible under the terms of this Agreement
including, without limitation, determining the time, scheduling, manner, method
and place of performance.


 


3.4.2.      VTI
represents and warrants that pursuant to the Code, the regulations promulgated
thereunder and applicable provisions of common law, all VTI Personnel will be
independent contractors in relation to MathStar.  Accordingly, VTI will file any and all
required forms and necessary payments appropriate to the status of VTI
Personnel as independent contractors in relation to MathStar.  If such independent contractor status is


 


8





















 


denied or changed and any VTI Personnel are
declared to have “employee” status with respect to MathStar, VTI agrees to hold
MathStar harmless from and against all costs, including any interest, penalties
and legal fees, which MathStar may incur as the result of such change in
status.


 


3.5.         Personnel Taxes and
Benefits.  Each Party shall be responsible for all
employee-related benefits applicable to its personnel performing development,
marketing or other activities under this Agreement.  Neither Party shall be obligated to provide
the other Party’s personnel with employee benefits of any type unless otherwise
required by law.  Each Party is
responsible for withholding its portion of Federal Insurance Contributions Act
(“FICA”) taxes and for withholding income taxes for federal and state income
tax purposes in the manner required by law. 
Each Party will, in a timely manner, pay over all amounts withheld to
the Internal Revenue Service or to the appropriate state or foreign government
authorities, as the case may be, and will timely pay its share of all FICA and
Federal Unemployment Tax Act taxes for all of its personnel performing work under
this Agreement.  Each Party shall be
indemnified and held harmless by the other Party from any liability, cost or
expense, including any interest, penalties and legal fees, that may be assessed
against or incurred by the other Party’s failure to make any such payment.


 


3.6.         Nonsolicitation.  During
the Term and for a period of twelve (12) months thereafter, neither Party will
directly or indirectly solicit for employment any employees of the other Party;
provided, however, that this Section 3.6 shall not be construed as
precluding either Party from hiring any Person that seeks employment or
responds to a general advertisement.


 


3.7.         Competing Products.  Without
MathStar’s express written consent, VTI shall not reproduce FPOAs or related
Documentation, in whole or in part, in any form or medium, except as permitted
under this Agreement.  Except as provided
in this Agreement, VTI shall not engage, directly or indirectly, or in concert
with any Person, in the distribution or sale of any platform chips or other products
competitive with FPOAs during the Term and for a period of two (2) years
thereafter.  Without VTI’s express
written consent, MathStar shall not reproduce VTI Products or related
Documentation, in whole or in part, in any form or medium, except as permitted
under this Agreement.  Except as provided
in this Agreement, MathStar shall not directly engage in the distribution or
sale of any products competitive with VTI Products during the Term and for a
period of two (2) years thereafter.


 


3.8.         Communication.  During
the Term, MathStar and VTI will communicate regularly with each other as
appropriate on issues relating to the development, marketing and distribution
of the VTI Products and FPOAs.  Each
Party agrees to use reasonable efforts to ensure that all actions and
statements made by its employees about VTI Products and FPOAs do not adversely
affect the other Party’s goodwill, reputation or products.


 


3.9.         Royalty; Reports and
Audit Rights.  During the Term, VTI shall pay to MathStar a
royalty (the “Royalty”) equal to * of all Revenues derived from the Hardware
Products and, in connection therewith, the parties agree to the following
provisions:


 










* Confidential Treatment has been requested, the portion indicated has
been redacted and the redacted portion has been separately filed with the
Securities and Exchange Commission.


 


9





















 


3.9.1.      Reports.  Within
ten (10) days after the last day of each calendar quarter, VTI shall
deliver to MathStar a report showing, in reasonable detail, the types and
sources of Revenues recognized by VTI during each calendar month in such
calendar quarter, the number of VTI Products generating such Revenues and the
total amount of all Revenues.  All
Revenues shall be recorded on the reports in United States Dollars.  Any monetary conversions required to make the
report shall be calculated based on the exchange rate reported by The Wall
Street Journal on the last business day of the calendar month for which the
Revenues are reported.


 


3.9.2.      Audit
Rights.  Upon reasonable prior notice, MathStar shall have the
right to appoint an independent accounting firm or other agent reasonably
acceptable to VTI to examine such financial books, records and accounts during
VTI’s normal business hours to verify the information contained in any of the
reports provided by VTI pursuant to Section 3.9.1, subject to the
execution of VTI’s standard confidentiality agreement by the accounting firm or
agent; provided, however, that execution of such agreement will not preclude
such firm from reporting its audit results to MathStar.  If such audit discloses an underreporting of
Revenues of 5% or more, VTI will bear all costs associated with any such audit.  In every other case, MathStar shall bear such
costs.  In no event will VTI be subject
to more than two audits per year unless the audit for the prior year or other
period disclosed an underreporting of Revenues of 5% or more.


 


3.9.3.      Payment
of Revenues.  Within fifteen (15) calendar days after the end of each
calendar quarter, VTI shall pay to MathStar, by wire transfer or other
immediately available funds, the Royalty for such calendar quarter.


 


3.10.       Costs and Expenses.  Unless
expressly provided otherwise in this Agreement, each Party shall be responsible
for paying its own costs and expenses of performing its obligations and duties
under this Agreement.


 


3.11.       Conflicting Agreements.  During
the Term and for a period of twelve (12) months thereafter, and except for this
Agreement:


 


(i)            MathStar
shall not enter into an agreement or arrangement with any other Person which
involves the use of FPOAs by such Person or such Person’s Affiliates in the
development of single board computers and, in addition, involves the issuance
of MathStar Common Stock to such Person or such Person’s Affiliates; and


 


(ii)           VTI
shall not enter into an agreement or arrangement with any other Person which
involves the use of such other Person’s integrated circuits in the development
or production of single board computers by VTI or its Affiliates and, in
addition, involves the issuance of VTI’s capital stock to such Person or such
Person’s Affiliates.


 


10





















 


SECTION 4


 


LICENSES
AND PROPRIETARY RIGHTS


 


4.1.         VTI Technology.  VTI
shall own all rights, title and interest in and to all VTI Technology and any
Derivative Works thereof, including all Intellectual Property Rights therein
and thereto.


 


4.2.         MathStar Technology.  MathStar
shall retain exclusive ownership of all rights, title and interest in and to
all MathStar Technology and any Derivative Works thereof, including all
Intellectual Property Rights therein and thereto.


 


4.3.         Prohibitions
Against Modifications.  Except as may otherwise be provided in
this Agreement, during the Term, neither Party shall:  (i) modify, adapt, translate, localize,
distribute or create Derivative Works of the VTI Products or FPOAs except with
the prior written consent of the Other Party; (ii) decompile, disassemble,
reverse engineer or otherwise reduce the VTI Products or FPOAs to human
perceptible form; (iii) remove or allow to be removed the other Party’s
copyright, Trademark, trade secrets or other proprietary rights notice from any
unit of VTI Products or FPOAs; or (iv) make copies of the VTI Products or
FPOAs or related documentation except for back copies if needed for such Party
to fulfill its obligations under this Agreement.


 


4.4.         Disclosure of Third
Party Materials.  Each Party shall promptly disclose to the other
party the extent to which any Deliverable, or any portion thereof, uses,
incorporates or is dependent upon Technology owned by or licensed from third
parties, and the disclosing Party shall obtain for the other Party, at no cost
to the other Party, any license rights to any Intellectual Property Rights
embodied in any Deliverable necessary or appropriate to the other Party’s right
to use such Deliverable.


 


4.5.         Trademark License.  Each
Party authorizes the other Party to use its current and future Trademarks
solely in connection with the marketing and distribution of VTI Products and
FPOAs pursuant to this Agreement.  Each
Party shall use the Trademarks of the other Party solely in accordance with the
quality control requirements from the other Party and agrees that the other
Party may, from time to time, revise these quality control requirements for the
purpose of protecting the standards of quality established for that Party’s
goods and services sold under the Trademarks and protecting that Party’s rights
in the Trademarks.


 


4.6.         No Other Licenses.  Except
as expressly set forth in this Agreement, nothing contained in this Agreement
shall be construed as granting or conferring, by implication, estoppel or
otherwise, any license or right under any Intellectual Property Rights, whether
now existing or hereafter obtained, and no such license or other right shall
arise from this Agreement or from any acts or omissions in connection with the
execution of this Agreement or the performance of the obligations of the
Parties hereunder.


 


4.7.         Tangible Property.  Unless
otherwise agreed to in writing, any tangible property including, but not
limited to, Documentation and equipment or material of every description
furnished by one Party to the other Party hereunder, is and shall main the
property of the furnishing Party.  The
Parties shall not use such property except in performing its obligations under
this Agreement.  All such property shall
be returned to the furnishing Party upon the 


 


11





















 


earlier of either the furnishing Party’s request, the completion or
termination of the relevant services or the expiration or termination of this
Agreement.


 


4.8.         Access.  
Throughout the Term of this Agreement, both Parties shall have access to the
Intellectual Property of the other to the extent required to fulfill their
obligations under this Agreement.


 


4.9.         Bankruptcy Event.  If a Bankruptcy Event occurs with respect to
either Party, or if either Party terminates this Agreement under Section 9.2
or Section 9.3, the other Party shall forthwith be entitled to a complete
duplicate of (or complete access to, as appropriate) any Technology licensed to
it hereunder and all embodiments of such Technology and the same, if not
already in such Party’s possession, shall be delivered to the Party upon that
Party’s written request.  In any of such
events, the Party entitled to the Technology shall have the non-exclusive,
perpetual, worldwide, royalty-free right to fully exploit in any manner all
such Technology and Intellectual Property Rights and to perform any and all of
the other Party’s obligations hereunder.


 


SECTION 5


 


REPRESENTATIONS
AND WARRANTIES


 


5.1.         VTI Representations
and Warranties.  As an inducement to MathStar entering into this
Agreement, VTI represents and warrants to MathStar on the Effective Date and on
an ongoing basis as follows:


 


5.1.1.      Organization
Representations; Enforceability.  VTI is duly organized, validly
existing and in good standing under the laws of the State of Pennsylvania.  The execution and delivery of this Agreement
by VTI and the transactions contemplated hereunder have been duly and validly
authorized by all necessary action on the part of VTI.  This Agreement constitutes a valid and
binding obligation of VTI enforceable in accordance with its terms, except as
such enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting enforcement of creditors’ rights
generally and by general principles of equity (whether applied at law or in
equity).


 


5.1.2.      No
Conflict.  The entering into and performance of this Agreement by
VTI does not and will not violate, conflict with or result in a material
default under any other contract, agreement, indenture, decree, judgment,
undertaking, conveyance, lien or encumbrance to which VTI is a party or by
which it or any of its properties is or may become subject or bound.  VTI will not grant any rights under any
future agreement, nor will it permit or suffer any lien, obligation or
encumbrance, that will conflict with the full enjoyment by MathStar of MathStar’s
rights under this Agreement.


 


5.1.3.      Right
to Make Full Grant.  VTI has and shall have all requisite
ownership, rights, licenses, capital structure and corporate authority to
perform its obligations under this Agreement fully as contemplated hereby and
to grant to MathStar all rights with respect to the VTI Technology,
Deliverables, VTI Products, the MathStar Option, the Right of First Refusal and
Intellectual Property Rights purported to be granted by VTI to MathStar
hereunder, free and clear of any and all agreements, liens, adverse claims,
encumbrances 


 


12





















 


and interests of any Person including,
without limitation, VTI’s employees, agents and contractors and such contractors’
employees and agents who have provided, are providing or will provide services
with respect to the development of the Deliverables.


 


5.1.4.      Noninfringement.  Nothing
contained in the VTI Technology or contained or to be contained in the VTI Products
will infringe, violate or misappropriate any Intellectual Property Right of any
third party, and no characteristic of the VTI Technology contained or to be
contained in the VTI Products does or will cause manufacturing, using,
licensing, maintaining or selling the VTI Products to infringe, violate or
misappropriate any Intellectual Property Right of any third party.


 


5.1.5.      No
Harmful Code or Viruses.  To VTI’s knowledge, the VTI Products
will contain no matter which is injurious to end-users or their property, “booby
traps,” “time bombs” or other programming that may interfere with the normal
functioning of the VTI Products or the end-user’s equipment, programs or
data.  To VTI’s knowledge, the VTI
Products will be free from computer viruses.


 


5.1.6.      Performance.  VTI
represents and warrants to MathStar that the VTI Products will substantially
perform in accordance with the Specifications therefor.


 


5.1.7.      Indemnity.  VTI
shall be responsible for, indemnify and hold MathStar harmless from, any
damages, costs, liabilities and/or expenses (including, without limitation,
reasonable attorneys’ fees), arising out of the breach of the foregoing
Sections 5.1.1 through 5.1.6 (inclusive).


 


5.2.         MathStar’s
Representations and Warranties.  As an inducement to VTI entering
into this Agreement, MathStar represents and warrants to VTI on the Effective
Date and on an ongoing basis as follows:


 


5.2.1.      Organization
Representations; Enforceability.  MathStar is duly organized,
validly existing and in good standing under the laws of the State of
Minnesota.  The execution and delivery of
this Agreement by MathStar and the transactions contemplated hereunder have
been duly and validly authorized by all necessary action on the part of MathStar.  This Agreement constitutes a valid and
binding obligation of MathStar enforceable in accordance with its terms, except
as such enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting enforcement of creditors’ rights
generally and by general principles of equity (whether applied at law or in
equity).


 


5.2.2.      No
Conflict.  The entering into and performance of this Agreement by
MathStar does not and will not violate, conflict with or result in a material
default under any other contract, agreement, indenture, decree, judgment,
undertaking, conveyance, lien or encumbrance to which MathStar is a party or by
which it or any of its properties is or may become subject or bound.  MathStar will not grant any rights under any
future agreement, nor will it permit or suffer any lien, obligation or
encumbrance, that will conflict with the full enjoyment by VTI of VTI’s rights
under this Agreement.


 


13





















 


5.2.3.      Right
to Make Full Grant.  MathStar has and shall have all requisite
ownership, rights and licenses to perform its obligations under this Agreement
fully as contemplated hereby and to grant to VTI all rights with respect to the
MathStar Technology, FPOAs, VTI Warrants, VTI Employee Warrants, Petrole
Warrants, and Intellectual Property Rights purported to be granted by MathStar
to VTI hereunder, free and clear of any and all agreements, liens, adverse
claims, encumbrances and interests of any Person including, without limitation,
MathStar’s employees, agents and contractors and such contractors’ employees
and agents who have provided, are providing or will provide services with
respect to the development of the Deliverables.


 


5.2.4.      Noninfringement.  Nothing
contained in the MathStar Technology contained or to be contained in the FPOAs
will infringe, violate or misappropriate any Intellectual Property Right of any
third party, and no characteristic of the FPOAs contained or to be contained in
the VTI Products does or will cause manufacturing, using, licensing,
maintaining or selling the VTI Products to infringe, violate or misappropriate
any Intellectual Property Right of any third party.


 


5.2.5.      No
Harmful Code or Viruses.  To MathStar’s knowledge, the FPOAs to
be delivered by MathStar to VTI for use in the VTI Products will contain no
matter which is injurious to end-users or their property, “booby traps,” “time
bombs” or other programming that may interfere with the normal functioning of
the VTI Products or the end-user’s equipment, programs or data.  To MathStar’s knowledge, such FPOAs will be
free from computer viruses.


 


5.2.6.      Performance.  MathStar
represents and warrants to VTI that the FPOAs will substantially perform in
accordance with the Specifications therefor.


 


5.2.7.      Indemnity.  MathStar
shall be responsible for, indemnify and hold VTI harmless from, any damages,
costs, liabilities, and/or expenses (including, without limitation, reasonable
attorneys’ fees), arising out of the breach of the foregoing
Sections 5.2.1 through 5.2.6 (inclusive).


 


5.3.         Warranty Disclaimer.  EXCEPT
AS SET FORTH IN THIS AGREEMENT AND IN ANY APPLICABLE STATEMENT OF WORK, NEITHER
PARTY MAKES ANY WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, REGARDING OR
RELATING TO THE SUBJECT MATTER HEREOF. 
EACH PARTY SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE
SUBJECT MATTER HEREOF.


 


5.4.         Consequential Damages.  Notwithstanding
any other provisions of this Agreement, and with the exception of the infringement
indemnification set forth in Sections 5.1.7 and 5.2.7 of this Agreement,
neither Party (“Defending Party”) shall be liable to the other Party or any
Person claiming by, through or under the other Party for any special,
incidental, indirect or consequential damages whatsoever including, but not
limited to, loss of profits or loss of business, arising out of, or resulting
from Defending Party’s performance of this Agreement, from any cause or causes
including, without limitation, any such damages caused by the negligence,
professional errors or omissions, strict liability, or breach of contract or
warranty,


 


14





















 


express or implied, of the Defending Party or its partners, employees,
agents or subcontractors, even if advised of the possibility of such damages.


 


5.5.         Failure of Essential
Purpose.  The Parties agree that the limitations specified in
this Section 5 shall survive and apply even if any limited remedy
specified in this Agreement is found to have failed of its essential purpose.


 


SECTION 6


 


CONFIDENTIAL
INFORMATION


 


6.1.         Terms of Agreement.  The
terms of this Agreement are the Confidential Information of both Parties and
shall not be disclosed by either Party in any manner (including, but not limited
to, news releases, articles, brochures, advertisements, speeches or other
information releases) without the prior written consent of the other Party,
which shall not be unreasonably withheld.


 


6.2.         Limitations on Use and
Disclosure.  Each Party receiving Confidential Information (the “Recipient”)
agrees as to any such Confidential Information that may be disclosed to it by
the other Party hereunder (the “Discloser”):


 


(i)            to
protect such Confidential Information from disclosure to others, using the same
degree of care used to protect its own confidential or proprietary information
of like importance, but in any case using no less than a reasonable degree of
care.  Recipient may disclose
Confidential Information received hereunder to (A) its Affiliates who
agree, in advance, in writing, to be bound by this Agreement, and (B) to
its employees and subcontractors, and its Affiliates’ employees and
subcontractors, who have a need to know, for the purpose of this Agreement, and
who are bound to protect, the received Confidential Information from
unauthorized use and disclosure under the terms of a written agreement.  Confidential Information shall not otherwise
be disclosed to any third party without the prior written consent of the Party
owning such Confidential Information;


 


(ii)           to
use such Confidential Information only for the purposes of this Agreement;


 


(iii)          not
to make copies of any such Confidential Information or any part thereof except
for the purposes of this Agreement; and


 


(iv)          to
reproduce and maintain on any copies of any Confidential Information such
proprietary legends or notices as are contained in or on the original or as the
owner of the Confidential Information may otherwise reasonably request.


 


6.3.         Technology.  The
Parties agree that the MathStar Technology and the VTI Technology, as
applicable, and Deliverables embodying the same, shall be deemed the
Confidential Information of the Party owning such Technology under the terms
hereof.


 


6.4.         Exceptions.  The
restrictions of this Section 6 on use and disclosure of Confidential
Information shall not apply to information that (i) was publicly known at
the time of Discloser’s


 


15





















 


communication thereof to Recipient; (ii) becomes publicly known
through no fault of Recipient subsequent to the time of Discloser’s
communication thereof to Recipient; (iii) was in Recipient’s possession
free of any obligation of confidence at the time of Discloser’s communication
thereof to Recipient; (iv) is developed by Recipient independently of and
without reference to any of Discloser’s Confidential Information or other
information that Discloser disclosed in confidence to any third party; (v) is
rightfully obtained by Recipient from third parties authorized to make such
disclosure without restriction; or (vi) is identified by Discloser as no
longer proprietary or confidential.  In
addition to the foregoing, it is understood and agreed that nothing contained
in this Section 6 is intended to, nor shall, restrict the use by either
Party of general ideas, concepts, approaches, techniques or know-how learned or
developed by such Party as a result of access to Discloser’s Confidential
Information; provided, however, that such ideas, concepts, approaches,
techniques or know-how are not embodied or specifically described in written
information, software code or other tangible form furnished by the Discloser to
such Party hereunder.


 


6.5.         Disclosure Pursuant to
Legal Requirement.  If Recipient is required by law, regulation
or court order to disclose any of Discloser’s Confidential Information,
Recipient will promptly notify Discloser in writing before making any such
disclosure in order to facilitate Discloser seeking a protective order or other
appropriate remedy from the proper authority. 
Recipient agrees to cooperate with Discloser in seeking such order or
other remedy.  Recipient further agrees
that if Discloser is not successful in precluding the requesting legal body
from requiring the disclosure of the Confidential Information, it will furnish
only that portion of the Confidential Information which is legally required and
will exercise all reasonable efforts to obtain reliable assurances that
confidential treatment will be accorded the Confidential Information.


 


6.6.         Return of Confidential
Information.  All Confidential Information disclosed under this
Agreement (including information in computer software or held in electronic
storage media) shall be and remain the property of Discloser.  All such information in any computer memory
or data storage apparatus shall be erased or destroyed and all such information
in tangible form shall be returned to Discloser, promptly upon the earlier
of:  (i) the written consent of the
Discloser; or (ii) completion or termination of the applicable Statement
of Work; or (iii) termination or expiration of this Agreement, and shall
not thereafter be retained in any form by Recipient.  If Discloser requests the return of
Confidential Information pursuant to subsection (i) of this Section 6.6,
then Recipient shall comply with such request; provided, however, that if
returning such Confidential Information prevents Recipient from exercising a
license granted hereunder, such request shall constitute a material breach of
this Agreement.  In addition to the
foregoing, if either Party has received the other Party’s source code in
furtherance of the purposes of the Agreement, the Party receiving such source
code shall return or destroy all copies thereof as soon as reasonably practical
after no longer having a need for such source code.


 


6.7.         Equitable Relief.  The
Parties acknowledge that their respective Confidential Information is unique
and valuable, and that breach by either Party of the obligations of this
Agreement regarding such Confidential Information and Intellectual Property
Rights will result in irreparable injury to the affected Party for which
monetary damages alone would not be adequate remedy. Therefore, the Parties
agree that in the event of a breach or threatened breach of such provisions,
the affected Party shall be entitled to specific performance and injunctive or
other 


 


16





















 


equitable relief as a remedy for any such breach or anticipated breach
without the necessity of posting a bond. 
Any such relief shall be in addition to and not in lieu of any
appropriate relief in the way of monetary damages.


 


SECTION 7


 


LIMITATIONS
OF LIABILITY


 


EXCEPT (A) AS TO THE OBLIGATIONS OF THE PARTIES UNDER SECTION 8,
(B) FOR LIABILITY ARISING OUT OF BREACHES OF SECTION 6 AND (C) ANY
MISUSE OR MISAPPROPRIATION OF A PARTY’S INTELLECTUAL PROPERTY RIGHTS BY THE
OTHER PARTY HERETO, TO THE MAXIMUM EXTENT ALLOWED BY APPLICABLE LAW, UNDER NO
CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL,
INCIDENTAL, INDIRECT, STATUTORY OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
REVENUE OR PROFITS) RESULTING FROM, ARISING OUT OF, OR RELATED TO ITS
PERFORMANCE OR FAILURE TO PERFORM ANY OF ITS OBLIGATIONS UNDER, OR BREACH
OF, THIS AGREEMENT, WHETHER OR NOT THE OTHER PARTY HAS BEEN ADVISED, KNEW, OR
SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES.  EXCEPT (X) AS TO THE OBLIGATIONS OF THE
PARTIES UNDER SECTION 8, (Y) FOR LIABILITY ARISING OUT OF BREACHES OF SECTION 6
AND (Z) ANY MISUSE OR MISAPPROPRIATION OF A PARTY’S INTELLECTUAL PROPERTY
RIGHTS BY THE OTHER PARTY HERETO, EACH PARTY’S LIABILITY FOR DAMAGES SHALL BE
LIMITED TO THE AMOUNT OF REVENUES TO WHICH IT IS ENTITLED UNDER THIS AGREEMENT.


 


SECTION 8


 


INDEMNITY


 


Each Party (as applicable, an “Indemnifying Party”) will defend at its
expense and indemnify and hold harmless the other Party and its respective
directors, officers, employees, agents, advisers and customers (each, an “Indemnitee”)
from and against any action, suit or other proceeding, or settlement thereof,
to the extent that such action, suit or proceeding arises out of or results
from (i) damage to tangible personal property and personal injury or death
arising from any occurrence caused by any act or omission of the Indemnifying
Party related to the performance of this Agreement; or (ii) any claim,
allegation or finding that any exploitation of any Technology of the
Indemnifying Party or portion thereof infringes the Intellectual Property
Rights of any third party.  The
Indemnifying Party shall pay those losses, damages, expenses and costs
including, without limitation, interest, penalties and fees of attorneys and
accountants, awarded against, or incurred by, any Indemnitee in, or as a result
of, any such suit, action or other proceeding, or any settlement thereof,
provided that (A) the Indemnitee reasonably promptly notifies the
Indemnifying Party in writing of any such claim, (B) the Indemnifying
Party is accorded control of the defense and of all negotiations for settlement
or compromise of such claim, and (C) the Indemnitee cooperates with the
Indemnifying Party, at the Indemnifying Party’s expense, in the defense and
settlement of such claim, including providing to the 


 


17





















 


Indemnifying Party, at the Indemnifying Party’s expense, such
information and assistance as the Indemnifying Party may reasonably
request.  The Indemnitee may, at its own
expense, be represented in such defense.


 


 


 


SECTION 9


 


TERM AND
TERMINATION


 


9.1.         Term.  Unless
earlier terminated in accordance with its terms, the initial term of this
Agreement shall commence as of the Effective Date and shall remain in full
force and effect until and including September 30, 2007 (the “Term”).  Unless earlier terminated by either of the
Parties as otherwise provided in this Agreement, this Agreement shall
automatically renew for successive one (1)-year periods, commencing on October 1
of each year and ending on September 30 of the following year unless
either Party gives the other Party at least ninety (90) days’ written notice of
termination before the expiration of the period then in effect.


 


9.2.         Termination for Breach.  Either
Party may terminate this Agreement if the other Party is in material breach of
any term, condition or provision of this Agreement, which breach, if capable of
being cured, is not cured within thirty (30) days after the non-breaching Party
gives the breaching Party written notice of such breach.


 


9.3.         Termination for
Bankruptcy; Change of Control.  Either Party, may, at its sole
discretion, terminate this Agreement and all rights and licenses granted
hereunder effective immediately upon notice to the other Party if a Bankruptcy
Event or Change of Control occurs with respect to such other Party.


 


9.4.         Annual Review. The
Parties agree that during the initial term of this Agreement annual reviews
will be held to determine whether it is in the best interest of both Parties to
continue the Agreement. These reviews will focus on the mutual accomplishments
of the Parties in relation to the agreed upon projects and milestones. The
first review, at the end of the first twelve months, will be based on the
milestones of completing the proposed image processing demonstration system,
including the SBC, and the attainment of at least three design wins. Subsequent
annual reviews will be based on the mutually constructed development plans.


 


9.5.         Effect of Termination.  Subject
to the provisions of Section 4.9, if all or part of this Agreement is
terminated hereunder:


 


(a)           the
Parties shall continue performance of any portion of this Agreement or any
Statement of Work not terminated;


 


(b)           VTI
shall immediately document in detail the status of a Statement of Work, if any,
that has been terminated, and VTI shall deliver to MathStar all copies of the
Deliverables that are in its or any third party’s possession, whether or not
such Deliverables have been completed or are still in progress.  Such Deliverables shall, for all purposes of
this Agreement, be deemed transferred to MathStar, with respect to which
MathStar shall have all applicable ownership and license rights; and


 


18





















 


(c)           the
Parties shall immediately cease work as of the effective date of termination as
to any terminated Statement of Work.


 


9.6.         Available Remedies.  Termination
of all or any portion of this Agreement in accordance with this Section 9
shall not limit the terminating Party from pursuing any other remedies
otherwise available to it at law or in equity, including injunctive relief.


 


SECTION 10


 


GENERAL


 


10.1.       Waiver.  The
failure of either Party to insist on the strict performance of any terms,
covenants and conditions of this Agreement at any time, or in any one or more
instances, or its failure to take advantage of any of its rights hereunder, or
any course of conduct or dealing, shall not be construed as a waiver or
relinquishment of any such rights or conditions at any future time and shall in
no way affect the continuance in full force and effect of all the provisions of
this Agreement.


 


10.2.       Headings.  Headings
used in this Agreement are for convenience of reference only and shall not be
construed as altering or construing the meaning of this Agreement or any of its
parts.


 


10.3.       Governing Law;
Arbitration.


 


10.3.1.    Governing
Law.  This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota, excluding the body of law
pertaining to conflicts of law.


 


10.3.2.    Arbitration.  Except
with respect to any dispute involving a Party’s Intellectual Property Rights,
any dispute or claim arising out of or related to this Agreement, or the
interpretation, making, performance, breach or termination thereof, shall be
submitted to the American Arbitration Association (“AAA”) and finally settled
by binding arbitration under the AAA International Arbitration Rules by
three (3) arbitrators appointed in accordance with said Rules.  The location of such arbitration shall be at
a place in the United States designated by the Party not requesting arbitration.  Judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.  The arbitrators shall apply Minnesota law to
the merits of any dispute or claim, excluding the body of law pertaining to
conflicts of law.  At the request of
either Party, the arbitrators will enter an appropriate protective order to
maintain the confidentiality of information produced or exchanged in the course
of the arbitration proceedings.  The
costs of the arbitration, including administrative and arbitrator’s fees, shall
be shared equally by the Parties.  Each
Party shall bear the costs of its own attorneys’ fees and expert witness
fees.  Notwithstanding the foregoing,
neither Party shall be precluded from seeking an injunction or other equitable
relief in any court of competent jurisdiction applying the local law of such
court to remedy or prevent violation of any provision of this Agreement
relating to Confidential Information or their respective Intellectual Property
Rights.


 


19





















 


10.4.       Survival.  The
Parties agree that the provisions of Sections 2.3, 2.7, 3.3, 3.4, 3.5,
3.6, 4.1, 4.2, 4.6 and 5 through 10 (inclusive) shall survive the expiration or
any earlier termination of this Agreement. 
In addition, the following shall survive the termination or expiration
of this Agreement for any reason:


 


(i)            any
licenses to the VTI Products or FPOAs granted by VTI to resellers, end-users or
other third parties;


 


(ii)           any
rights VTI or MathStar needs to provide maintenance and support services to
end-users of the VTI Products;


 


(iii)          VTI’s
obligation to provide maintenance and support in accordance with Section 2.7;
and


 


(iv)          the
VTI Warrants, VTI Employee Warrants, the Petrole Warrants and the MathStar
Option, each in accordance with its terms.


 


10.5.       Severability.  If
any provision of this Agreement is held to be illegal, invalid or
unenforceable, the remaining terms shall not be affected.  The Agreement shall be interpreted as if the
illegal, invalid or unenforceable provision had not been included in it, and
the invalid or unenforceable provision shall be replaced by a mutually
acceptable provision which, being valid and enforceable, comes closest to the
intention of the Parties underlying the invalid or unenforceable provision.


 


10.6.       Notices.  All
notices, requests, demands, or communications required or permitted hereunder
shall be in writing and shall be delivered personally or by electronic mail,
facsimile or overnight delivery service at the respective addresses set forth
below (or at such other addresses as shall be given in writing by either Party
to the other pursuant to the terms of this Section).  All notices, requests, demand or
communications shall be deemed effective upon receipt for personal delivery, or
on the second business day following the date of sending by electronic mail,
facsimile or overnight delivery service.


 


	
  MathStar:

  	
   

  	
  MathStar, Inc.

  
	
   

  	
   

  	
  5900 Green Oak Drive

  
	
   

  	
   

  	
  Minnetonka, Minnesota 55343

  
	
   

  	
   

  	
  Attention: Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Telephone: (952) 746-2200

  
	
   

  	
   

  	
  Facsimile: (952) 746-2201

  



 


20





















 


	
  VTI:

  	
   

  	
  Valley Technologies, Inc.

  
	
   

  	
   

  	
  724 Claremont Avenue

  
	
   

  	
   

  	
  Tamaqua, PA 18252

  
	
   

  	
   

  	
  Attention: Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Telephone: (570) 668-3737

  
	
   

  	
   

  	
  Facsimile: (570) 668-6360

  



 


10.7.       Assignment.  The
respective rights and obligations provided in this Agreement shall bind and
inure to the benefit of the Parties and their legal representatives, successors
and permitted assigns.  Neither Party
shall assign this Agreement, in whole or in part, without the prior written
consent of the other Party, which consent may be withheld for any reason.  Notwithstanding the foregoing, neither VTI
nor MathStar shall be required to obtain the other Party’s consent to assign
this Agreement in connection with a merger or sale of all or substantially all
of such Party’s assets, but only if such merger or sale does not involve a
company the other Party reasonably deems to be a competitor, and only if the
non-merging Party has not terminated this Agreement under Section 9.3 in
connection with such merger or sale by the other Party.  Any assignment by either party in violation
of this Section 10.7 shall be null and void.


 


10.8.       Press Releases; Public
Announcements.  Neither Party may make any press release or
public announcement about this Agreement, its existence or its contents without
the prior written consent of the other Party.


 


10.9.       Relationship of Parties.  Nothing
contained in this Agreement shall be deemed or construed as creating a joint
venture or partnership between MathStar and VTI.  Neither Party is by virtue of this Agreement
authorized as an agent, employee or legal representative of the other Party.  Except as specifically set forth herein,
neither Party shall have power to control the activities and operations of the
other.  Neither Party shall have any
power or authority to bind or commit the other.


 


10.10.     Order of Precedence.  If
there is any ambiguity and/or inconsistency among the terms and conditions of
this Agreement and any Statement of Work, the terms and conditions of this
Agreement shall control unless such Statement of Work by its express terms
overrides a specific Section or Sections of this Agreement.


 


10.11.     Force Majeure.  Neither
Party shall be liable in case of “Force Majeure.”  The Parties to this Agreement agree that “Force
Majeure” shall include (but shall not be limited to):  material breakdown of equipment, labor
disputes of whatever nature or cause, and any other circumstances reasonably
beyond the control of one of the Parties. 
The occurrence of a Force Majeure event shall not relieve either Party
of its payment obligations under this Agreement.


 


10.12.     Entire Agreement;
Amendment.  This Agreement constitutes the entire understanding
of the Parties and supersedes all prior or contemporaneous written and oral
agreements, representations or negotiations with respect to the subject matter
hereof including, without limitation, the Mutual Non-Disclosure Agreement by
and between MathStar and VTI dated as of June 16, 2004, which is
terminated and shall be of no further force or effect, effective as of the 


 


21





















 


Effective Date. This Agreement may not be modified or amended except in
writing signed by both Parties.


 


IN WITNESS WHEREOF, this Agreement is executed by the duly authorized
representatives of the Parties as of the date first set forth above.


 


	
  MathStar, Inc.

  	
   

  	
  Valley Technologies, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Douglas M. Pihl

  	
   

  	
  /s/ Gerald Petrole Sr.

  
	
  Signature

  	
   

  	
  Signature

  
	
   

  	
   

  	
   

  
	
  Douglas M. Pihl

  	
   

  	
  Gerald Petrole Sr.

  
	
  Named Types or Printed

  	
   

  	
  Name Typed or Printed

  
	
   

  	
   

  	
   

  
	
  President and CEO

  	
   

  	
  President and CEO

  
	
  Title Typed or Printed

  	
   

  	
  Title Typed or Printed

  



 


 


	
  /s/ Gerald Petrole Sr.

  	
   

  
	
  Gerald Petrole, as to only
  Sections 2.5, 3.1.2 and 3.3

  	
   

  	
   

  
				



 


22





















 


EXHIBIT A


 


DEVELOPMENT SCHEDULE


 





















 


Reconfiguarable Sensor Imaging System
Demonstration Project


 


 


 


Introduction


 


This project develops a demonstration system based on the specification
from customer(s).  This


demonstration system includes one FPOA SOA13D40-01, one Single Board
Computer (SBC), and a display


PC as shown in Figure 1.





The FPOA device performs
real-time data registration, processing and detection.  The SBC initializes and issues control
commands to FPOA. The display PC receives processed result and display them in
a user friendly format.


 


MathStar has teamed up with
Valley Technology for this project. The customer will provide the display PC


and the presentation software
and the rest of the system will be designed and implemented by the two
companies.  The division of work is
describe as following.


 


Hardware


 


VTI will provide


 


•                   Design and
implement one FPOA that can either standalone or interface with a PCI backplane


•                   Design and
implement one SBC board that can interface with a PCI backplane


•                   Final hardware
and software integration and test


 


MathStar will provide


 


•                   FPOA SOA13D40-1
device


 


Software


 


VTI will provide


 


•                   All software
running on SBC


•                   The following
software on FPOA


•                  Interface to PCI
bridge and SBC


•                  Interface to A/D
device


•                  Interface to
external memory (RLDRAM)


•                  Interface to
LEDs and jumpers


•                  The following
processing software: spike suppression, non-uniformity correction, super-frame
calculation, spatial filter, peak detection


 


MathStar will provide


 


 





















 


•                   Temporal
processing that includes: covariance matrix calculation, temporal matched
filter and peak detection


•                   Final FPOA
software integration and test


 


Documentations


 


VTI will
provide


 


•                   FPOA board
specification


•                   Demo system
specification


 


MathStar will
provide


 


•                   FPOA software
specification


 


 


 


 





















 


EXHIBIT B


 


FORM OF
VTI WARRANT


 





















 


THIS WARRANT, AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES
ACT”), AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS
(“BLUE SKY LAWS”). NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR
OTHER DISPOSITION OF THIS WARRANT OR ANY INTEREST THEREIN MAY BE MADE
EXCEPT PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND ANY APPLICABLE BLUE SKY LAWS OR (2) AN OPINION OF
COUNSEL FOR THE COMPANY OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.


 


	
                ,
  200   

  	
   

  	
  Series VTI-     

  



 


WARRANT


 


To Purchase           


Shares of Common Stock of


 


MATHSTAR,
INC.


 


MathStar, Inc., a Minnesota corporation
(the “Company”), for value received, hereby certifies that                ,
or his/her/its registered assigns (the “Holder”), is entitled, subject to the
terms set forth below, upon exercise of this Warrant, to purchase from the
Company, at any time or from time to time, subject to the vesting schedule set
forth in Section 1 of this Warrant below, and on or before 11:59 p.m.
(Minneapolis, Minnesota time) on October 8, 2014 (subject to earlier
termination as provided in Section 7 of this Warrant), a total of                   
(            )
shares of common stock of the Company, $0.01 par value per share (the “Common
Stock”), at an initial exercise price of $2.00 per share.  (The initial exercise price of $2.00 per
share set forth in the foregoing sentence is hereinafter referred to as the “Exercise
Price,” and the Exercise Price is subject to adjustment as provided in the
antidilution provisions of this Warrant under Section 5 hereof.)  This Warrant is one of a series of warrants
(the “VTI Strategic Warrants”) entitled the “VTI Warrants, “ the “VTI Employee
Warrants” and the “Petrole Warrants” issued pursuant to Sections 3.1.1 and
3.1.2 of the Strategic Partnership Agreement dated as of October 8, 2004
(the “Strategic Partnership Agreement”) by and among the Company, Valley
Technologies, Inc. (“VTI”) and Gerald Petrole.


 


The shares of Common Stock which may be
acquired upon exercise of this Warrant are referred to herein as the “Warrant
Shares.”  As used herein, the term “Holder”
includes any party who acquires all or a part of this Warrant as a registered
transferee, or any record holder or holders of the Warrant Shares issued upon
exercise, whether in whole or in part, of the Warrant.  The term “Common Stock” shall include any
capital stock of any class of the Company hereafter authorized which shall not
be limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.


 


B-1





















 


This Warrant is further subject to the
following provisions, terms and conditions:


 


1.     Vesting;
Exercise of Warrant.  This Warrant
shall become exercisable as to one-third (1/3) of the total number of Warrant
Shares on each of October 8, 2005, October 8, 2006 and October 8,
2007.  The Holder may exercise this
Warrant after the Warrant Shares have vested and before its expiration or
termination, in whole or in part (but not as to any fraction of a share of
Common Stock), by sending to the Company at its principal office (i) this
Warrant, (ii) the Exercise Form attached hereto as Exhibit A,
completed and duly executed by such Holder or by such Holder’s duly authorized
attorney-in-fact, and (iii) the payment of the Exercise Price in the form
of a wire transfer, a bank or certified check or, in the Company’s sole
discretion, a personal check, in the amount of the Exercise Price multiplied by
the number of Warrant Shares as to which the Warrant is being exercised.


 


2.     Effective
Date of Exercise.  Each exercise of
this Warrant shall be deemed effective as of the close of business on the day
on which this Warrant is surrendered to the Company as provided in Section 1
above.  At such time, the person or
persons in whose name or names any certificates for Warrant Shares shall be
issuable upon such exercise shall be deemed to have become the holder or
holders of record of the Warrant Shares represented by such certificates.


 


3.     Issuance
of the Warrant Shares. Within fifteen (15) days after the exercise of this
Warrant, in whole or in part, the Company will, at its expense, issue in the
name of and deliver to the Holder or such other person as the Holder may direct
(upon payment by such Holder of any applicable transfer taxes): (i) a
certificate or certificates for the number of full Warrant Shares to which
Holder is entitled upon exercise, and (ii) unless this Warrant has
expired, a new Warrant or Warrants (dated the date hereof and in form identical
hereto) representing the right to purchase the remaining number of shares of
Common Stock, if any, with respect to which this Warrant has not then been
exercised.


 


4.     Exchange
and Replacement. Subject to Sections 1 and 8, this Warrant
is exchangeable upon the surrender of the Warrant by the Holder to the Company
at its principal office for new Warrants of like tenor and date representing in
the aggregate the right to purchase the number of Warrant Shares then
purchasable hereunder. The new Warrants will represent the right to purchase
such number of Warrant Shares (not to exceed the aggregate total number then
purchasable hereunder) as the Holder shall designate at the time of such
surrender.  Upon receipt by the Company
of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to the Company, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant of like tenor, in lieu of this Warrant. This Warrant
shall be promptly canceled by the Company upon the surrender hereof in
connection with any exchange or replacement. 
The Company shall pay all expenses, taxes (other than stock transfer
taxes), and other charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Section 4.


 


5.     Antidilution
Adjustments to Exercise Price.  The
provisions of this Warrant are subject to adjustment as provided in this Section 5.


 


(a)   The
Exercise Price shall be adjusted from time to time such that in case the
Company shall hereafter:


 


B-2





















 


(i)            pay
any dividends on any class of stock of the Company payable in Common Stock or
securities convertible into Common Stock;


 


(ii)           subdivide
its then outstanding shares of Common Stock into a greater number of shares; or


 


(iii)          combine
outstanding shares of Common Stock, by reclassification or otherwise;


 


then, in any such event, the Exercise Price
in effect immediately prior to such event shall (until adjusted again pursuant
hereto) be adjusted immediately after such event to a price (calculated to the
nearest full cent) determined by dividing (A) the number of shares of
Common Stock outstanding immediately prior to such event, multiplied by the
then existing Exercise Price, by (B) the total number of shares of Common
Stock outstanding immediately after such event (including in each case the
maximum number of shares of Common Stock issuable in respect of any securities
convertible into Common Stock), and the resulting quotient shall be the
adjusted Exercise Price per share.  An
adjustment made pursuant to this Subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. 
If, as a result of an adjustment made pursuant to this Subsection, the
Holder of any Warrant thereafter surrendered for exercise shall become entitled
to receive shares of two or more classes of capital stock or shares of Common
Stock and other capital stock of the Company, the Board of Directors (whose
determination shall be conclusive) shall reasonably and not arbitrarily determine
the allocation of the adjusted Exercise Price between or among shares of such
classes of capital stock or shares of Common Stock and other capital
stock.  All calculations under this Subsection shall
be made to the nearest cent or to the nearest 1/100 of a share, as the case may
be.  If at any time as a result of an
adjustment made pursuant to this Subsection, the holder of any Warrant
thereafter surrendered for exercise shall become entitled to receive any shares
of the Company other than shares of Common Stock, thereafter the Exercise Price
of such other shares so receivable upon exercise of any Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common Stock
contained in this Section.


 


(b)   Upon
each adjustment of the Exercise Price pursuant to Section 5(a) above,
the Holder of each Warrant shall thereafter (until another such adjustment) be
entitled to purchase at the adjusted Exercise Price the number of shares,
calculated to the nearest full share, obtained by multiplying the number of
shares specified in such Warrant that may be purchased at such Exercise Price
(as adjusted as a result of all adjustments in the Exercise Price in effect
prior to such adjustment) by the Exercise Price in effect prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.


 


(c)   In
case of any consolidation or merger to which the Company is a party, other than
a merger or consolidation in which the Company is the continuing corporation,
or in case of any sale or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety, or in the case of
any statutory exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third corporation into the
Company), there shall be no adjustment under 


 


B-3





















 


Section 5(a) above,
but the Holder of each Warrant then outstanding shall have the right thereafter
to convert such Warrant into the kind and amount of shares of stock and other
securities and property which he would have owned or have been entitled to
receive immediately after such consolidation, merger, statutory exchange, sale,
or conveyance had such Warrant been exercised immediately before the effective
date of such consolidation, merger, statutory exchange, sale, or conveyance
and, in any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section with respect to
the rights and interests thereafter of any Holders of the Warrant, to the end
that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock and other securities and property thereafter deliverable
on the exercise of the Warrant.  The
provisions of this Subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.


 


(d)   Upon
any adjustment of the Exercise Price, then and in each such case, the Company
shall give written notice thereof, by first-class mail, postage prepaid,
addressed to the Holder as shown on the books of the Company, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease, if any, in the number of shares of Common Stock purchasable at
such price upon the exercise of this Warrant, setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based.


 


6.     Fractional
Shares.


 


(a)   Fractional
shares shall not be issued upon the exercise of this Warrant.  However, in any case where the Holder would,
except for the provisions of this Section 6, be entitled under the terms
hereof to receive a fractional share, the Company shall, upon the exercise of
this Warrant, issue the largest number of whole shares and pay a sum in cash
equal to the sum of (a) the excess, if any, of the Fair Market Value of
such fractional share over the proportional part of the Exercise Price
represented by such fractional share, plus (b) the proportional part of
the Exercise Price represented by such fractional share.


 


(b)   For
purposes of this Section, the term “Fair Market Value” with respect to shares
of Common Stock as of a particular date (the “Determination Date”) shall mean:


 


(i)            If
the Company’s Common Stock is traded on an exchange or is quoted on The NASDAQ
National Market, then the average closing or last sale prices, respectively,
reported for the ten (10) consecutive trading days immediately preceding
the Determination Date;


 


(ii)           If
the Company’s Common Stock is not traded on an exchange or quoted on The NASDAQ
National Market but is traded on The NASDAQ SmallCap Market, the OTC Bulletin
Board or the local over-the-counter market, then the average of the mid-points
between the closing bid and asked prices reported for the ten (10) consecutive
trading days immediately preceding the Determination Date; and


 


B-4





















 


(iii)          If
the Company’s Common Stock is not publicly traded, then the then the price
established in good faith by the Company’s Board of Directors.


 


7.     Earlier
Termination.  Notwithstanding
anything in this Agreement to the contrary, (a) upon termination or
expiration of the Strategic Partnership Agreement, this Warrant shall
immediately terminate and be of no further force or effect with respect to any
Warrant Shares as to which this Warrant has not then vested, but such
termination or expiration shall not affect the vested portion of the Warrant,
and (b) if the employment of the Holder with VTI is terminated for any
reason other than by reason of the death or disability of the Holder, (i) this
Warrant shall immediately terminate and be of no further force or effect with
respect to any Warrant Shares as to which this Warrant has not then vested, and
(ii) the Holder shall have ninety (90) days after the effective date of
such termination of employment to exercise this Warrant with respect to any
Warrant Shares as to which this Warrant has vested and, if this Warrant is not
exercised during such ninety (90)-day period, it shall immediately terminate at
the end thereof and be of no further force or effect.  The termination of the Holder’s employment
with VTI due to the Holder’s death or disability (with disability being
determined in the Company’s sole discretion) shall not affect the vesting or
continuation of this Warrant.


 


8.     No
Voting Rights.  This Warrant shall
not entitle the Holder to any voting rights or other rights as a shareholder of
the Company unless and until exercised pursuant to the provisions hereof.


 


9.     Notification
of Transfer of Warrant or Resale of Warrant Shares.  The Holder of this Warrant, by acceptance
hereof, agrees to give written notice to the Company before transferring this
Warrant, in whole or in part, or transferring any shares of Common Stock issued
upon the exercise hereof, of such Holder’s intention to do so. The notice shall
include: (a) a brief description of the manner of any proposed transfer,
and (b) an opinion of counsel reasonably satisfactory to the Company that (i) the
proposed exercise or transfer may be effected without registration or
qualification under the Securities Act and any applicable Blue Sky Laws, or (ii) the
proposed exercise or transfer has been registered under such laws.  Upon delivering such notice, the Holder shall
be entitled to transfer this Warrant or such Warrant Shares, all in accordance
with the terms of the notice delivered by such Holder to the Company, provided
that an appropriate legend may be endorsed on the certificates for such shares
respecting restrictions upon transfer thereof necessary or advisable in the
reasonable opinion of counsel to the Company to prevent further transfer which
would be in violation of Section 5 of the Securities Act and applicable
Blue Sky Laws.


 


If, in the reasonable opinion of counsel to
the Company or other counsel reasonably acceptable to the Company, the proposed
transfer or disposition of this Warrant or the Warrant Shares described in the
written notice given pursuant to this Section 8 may not be effected
without registration of this Warrant or the Warrant Shares, the Company shall
promptly give written notice thereof to the Holder within ten (10) days
after the Company receives such notice, and such Holder will limit its
activities in respect to such as, in the opinion of such counsel, is permitted
by law.


 


10.  Covenants
of the Company.  The Company
covenants and agrees that all Warrant Shares will, upon issuance, be duly
authorized and issued, fully paid, nonassessable and free from all taxes, liens
and charges with respect to the issue thereof. 
The Company further covenants and agrees that during the period within
which the rights represented by this Warrant 


 


B-5





















 


may be exercised,  the Company will at all times have authorized
and reserved for the purpose of issue or transfer upon exercise hereof, a
sufficient number of shares of its Common Stock to provide for the exercise of
this Warrant.


 


11.  Notices.  All notices hereunder shall be in writing and
shall be delivered personally or by telefax (receipt confirmed), or shall be
sent by a reputable express delivery service or by certified mail, postage
prepaid with return receipt requested, addressed as follows:


 


(i)            if
to Holder, at such Holder’s registered address as reflected in the Company’s
records; and


 


(ii)           if
to the Company, to:


 


MathStar, Inc.


5900 Green Oak Drive


Minneapolis, MN 55343


Attention: 
Chief Executive Officer


Facsimile: 
(952) 746-2201


 


Any party may change the above-specified
recipient and/or mailing address by notice to all other parties given in the
manner herein prescribed.  All notices
shall be deemed given on the day when actually delivered as provided above if
delivered personally or by telefax or on the day shown on the return receipt if
delivered by mail or delivery service.


 


12.  Miscellaneous.


 


(a)   This
Warrant may be amended by agreement of the Company and the holders of
outstanding VTI Strategic Warrants to purchase at least a majority of the
number of shares of Common Stock then subject to outstanding VTI Strategic
Warrants.


 


(b)   This
Warrant shall be governed by and construed in accordance with the laws of the
State of Minnesota without regard to its conflict of laws provisions.


 


(c)   The
Company will not, by amendment of its Articles of Incorporation or through
reorganization, consolidation, merger, dissolution or sale of assets, or by any
other voluntary act or deed, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by the Company, but will, at all times in good faith,
assist, insofar as it is able, in the carrying out of all provisions hereof and
in the taking of all other action which may be necessary in order to protect
the rights of the Holder hereof against dilution, consistent with the terms of
this Warrant.


 


(d)   A
number of shares of Common Stock sufficient to provide for the exercise of this
Warrant upon the basis herein set forth shall at all times be reserved for the
exercise thereof.


 


B-6





















 


IN WITNESS WHEREOF, the Company has caused
this Warrant to be signed by its authorized officer and dated as of the date
stated above.


 


	
   

  	
  MathStar, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name Typed or Printed

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  
	
   

  	
   

  	
  Title Typed or Printed

  



 


B-7





















 


Exhibit A


 


WARRANT
EXERCISE FORM


 


To be signed only upon exercise
of Warrant.


 


The undersigned, the holder of the within
Warrant issued by MathStar, Inc., hereby irrevocably elects to exercise
the purchase rights represented by such Warrant for, and to purchase
thereunder, a total of               
Warrant Shares to which such Warrant relates and herewith makes payment of $              
per share and a total of $              
for the purchase of such Warrant Shares.


 


Said purchase price is paid in full herewith
in cash, via wire transfer, by certified or bank check or, in the sole
discretion of MathStar, Inc., by personal check, and the undersigned
requests that such shares be issued and be delivered to                                     ,
the address for which is set forth below the signature of the undersigned.


 


 


	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (Taxpayer’s I.D. Number)

  	
   

  	
  (Signature)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Address)

  



 


B-8





















 


EXHIBIT C


 


FORM OF
PETROLE WARRANT


 





















 


THIS WARRANT, AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES
ACT”), AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS
(“BLUE SKY LAWS”). NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR
OTHER DISPOSITION OF THIS WARRANT OR ANY INTEREST THEREIN MAY BE MADE
EXCEPT PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND ANY APPLICABLE BLUE SKY LAWS OR (2) AN OPINION OF
COUNSEL FOR THE COMPANY OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.


 


	
  Date:

  	
   

  	
  Series VTI     

  



 


WARRANT


 


To Purchase          


Shares of Common Stock of


 


MATHSTAR,
INC.


 


MathStar, Inc., a Minnesota corporation
(the “Company”), for value received, hereby certifies that                      
or his registered assigns (the “Holder”), is entitled, subject to the terms set
forth below, upon exercise of this Warrant, to purchase from the Company, at
any time or from time to time, subject to the vesting schedule set forth
in Section 1 of this Warrant below, and on or before 11:59 p.m.
(Minneapolis, Minnesota time) on                        
(subject to earlier termination as provided in Section 7 of this Warrant),
a total of                                    
(              )
shares of common stock of the Company, $0.01 par value per share (the “Common
Stock”), at an initial exercise price of $        
per share.  (The initial exercise price
of $             per
share set forth in the foregoing sentence is hereinafter referred to as the “Exercise
Price,” and the Exercise Price is subject to adjustment as provided in the
antidilution provisions of this Warrant under Section 5 hereof.)  This Warrant is one of a series of warrants
(the “VTI Strategic Warrants”) entitled the “VTI Warrants, “ the “VTI Employee
Warrants” and the “Petrole Warrants” issued pursuant to Sections 3.1.1 and
3.1.2 of the Strategic Partnership Agreement dated as of                    
(the “Strategic Partnership Agreement”) by and among the Company, Valley
Technologies, Inc. and Gerald Petrole.


 


The shares of Common Stock which may be
acquired upon exercise of this Warrant are referred to herein as the “Warrant
Shares.”  As used herein, the term “Holder”
includes any party who acquires all or a part of this Warrant as a registered
transferee, or any record holder or holders of the Warrant Shares issued upon
exercise, whether in whole or in part, of the Warrant.  The term “Common Stock” shall include any
capital stock of any class of the Company hereafter authorized which shall not
be limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.


 


C-1





















 


This Warrant is further subject to the
following provisions, terms and conditions:


 


13.  Vesting;
Exercise of Warrant.  This Warrant
shall become exercisable as to                        
(               )
Warrant Shares upon the achievement of each “Design Win,” as the term “Design
Win” is defined and determined in accordance with the Strategic Partnership
Agreement.  The Holder may exercise this
Warrant after the Warrant Shares have vested and before its expiration or
termination, in whole or in part (but not as to any fraction of a share of
Common Stock), by sending to the Company at its principal office (i) this
Warrant, (ii) the Exercise Form attached hereto as Exhibit A,
completed and duly executed by such Holder or by such Holder’s duly authorized
attorney-in-fact, and (iii) the payment of the Exercise Price in the form
of a wire transfer, a bank or certified check or, in the Company’s sole discretion,
a personal check, in the amount of the Exercise Price multiplied by the number
of Warrant Shares as to which the Warrant is being exercised.


 


14.  Effective
Date of Exercise.  Each exercise of
this Warrant shall be deemed effective as of the close of business on the day
on which this Warrant is surrendered to the Company as provided in Section 1
above.  At such time, the person or
persons in whose name or names any certificates for Warrant Shares shall be
issuable upon such exercise shall be deemed to have become the holder or
holders of record of the Warrant Shares represented by such certificates.


 


15.  Issuance
of the Warrant Shares. Within fifteen (15) days after the exercise of this
Warrant, in whole or in part, the Company will, at its expense, issue in the
name of and deliver to the Holder or such other person as the Holder may direct
(upon payment by such Holder of any applicable transfer taxes): (i) a
certificate or certificates for the number of full Warrant Shares to which
Holder is entitled upon exercise, and (ii) unless this Warrant has
expired, a new Warrant or Warrants (dated the date hereof and in form identical
hereto) representing the right to purchase the remaining number of shares of
Common Stock, if any, with respect to which this Warrant has not then been
exercised.


 


16.  Exchange
and Replacement. Subject to Sections 1 and 8, this Warrant
is exchangeable upon the surrender of the Warrant by the Holder to the Company
at its principal office for new Warrants of like tenor and date representing in
the aggregate the right to purchase the number of Warrant Shares then
purchasable hereunder. The new Warrants will represent the right to purchase
such number of Warrant Shares (not to exceed the aggregate total number then
purchasable hereunder) as the Holder shall designate at the time of such
surrender.  Upon receipt by the Company
of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to the Company, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant of like tenor, in lieu of this Warrant. This Warrant
shall be promptly canceled by the Company upon the surrender hereof in
connection with any exchange or replacement. 
The Company shall pay all expenses, taxes (other than stock transfer
taxes), and other charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Section 4.


 


17.  Antidilution
Adjustments to Exercise Price.  The
provisions of this Warrant are subject to adjustment as provided in this Section 5.


 


(a)   The
Exercise Price shall be adjusted from time to time such that in case the Company
shall hereafter:


 


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(i)            pay
any dividends on any class of stock of the Company payable in Common Stock or
securities convertible into Common Stock;


 


(ii)           subdivide
its then outstanding shares of Common Stock into a greater number of shares; or


 


(iii)          combine
outstanding shares of Common Stock, by reclassification or otherwise;


 


then, in any such event, the Exercise Price
in effect immediately prior to such event shall (until adjusted again pursuant
hereto) be adjusted immediately after such event to a price (calculated to the
nearest full cent) determined by dividing (A) the number of shares of
Common Stock outstanding immediately prior to such event, multiplied by the
then existing Exercise Price, by (B) the total number of shares of Common
Stock outstanding immediately after such event (including in each case the
maximum number of shares of Common Stock issuable in respect of any securities
convertible into Common Stock), and the resulting quotient shall be the
adjusted Exercise Price per share.  An
adjustment made pursuant to this Subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. 
If, as a result of an adjustment made pursuant to this Subsection, the
Holder of any Warrant thereafter surrendered for exercise shall become entitled
to receive shares of two or more classes of capital stock or shares of Common
Stock and other capital stock of the Company, the Board of Directors (whose
determination shall be conclusive) shall reasonably and not arbitrarily
determine the allocation of the adjusted Exercise Price between or among shares
of such classes of capital stock or shares of Common Stock and other capital
stock.  All calculations under this Subsection shall
be made to the nearest cent or to the nearest 1/100 of a share, as the case may
be.  If at any time as a result of an adjustment
made pursuant to this Subsection, the holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive any shares of the
Company other than shares of Common Stock, thereafter the Exercise Price of
such other shares so receivable upon exercise of any Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to Common Stock contained in this
Section.


 


(b)   Upon
each adjustment of the Exercise Price pursuant to Section 5(a) above,
the Holder of each Warrant shall thereafter (until another such adjustment) be
entitled to purchase at the adjusted Exercise Price the number of shares,
calculated to the nearest full share, obtained by multiplying the number of
shares specified in such Warrant that may be purchased at such Exercise Price
(as adjusted as a result of all adjustments in the Exercise Price in effect
prior to such adjustment) by the Exercise Price in effect prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.


 


(c)   In
case of any consolidation or merger to which the Company is a party, other than
a merger or consolidation in which the Company is the continuing corporation,
or in case of any sale or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety, or in the case of
any statutory exchange of securities with another corporation (including any
exchange effected in connection with a 


 


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merger of a
third corporation into the Company), there shall be no adjustment under Section 5(a) above,
but the Holder of each Warrant then outstanding shall have the right thereafter
to convert such Warrant into the kind and amount of shares of stock and other
securities and property which he would have owned or have been entitled to
receive immediately after such consolidation, merger, statutory exchange, sale,
or conveyance had such Warrant been exercised immediately before the effective
date of such consolidation, merger, statutory exchange, sale, or conveyance
and, in any such case, if necessary, appropriate adjustment shall be made in
the application of the provisions set forth in this Section with respect
to the rights and interests thereafter of any Holders of the Warrant, to the
end that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock and other securities and property thereafter deliverable
on the exercise of the Warrant.  The
provisions of this Subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.


 


(d)   Upon
any adjustment of the Exercise Price, then and in each such case, the Company
shall give written notice thereof, by first-class mail, postage prepaid,
addressed to the Holder as shown on the books of the Company, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease, if any, in the number of shares of Common Stock purchasable at
such price upon the exercise of this Warrant, setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is based.


 


18.  Fractional
Shares.


 


(a)   Fractional
shares shall not be issued upon the exercise of this Warrant.  However, in any case where the Holder would,
except for the provisions of this Section 6, be entitled under the terms
hereof to receive a fractional share, the Company shall, upon the exercise of
this Warrant, issue the largest number of whole shares and pay a sum in cash
equal to the sum of (a) the excess, if any, of the Fair Market Value of
such fractional share over the proportional part of the Exercise Price
represented by such fractional share, plus (b) the proportional part of
the Exercise Price represented by such fractional share.


 


(b)   For
purposes of this Section, the term “Fair Market Value” with respect to shares
of Common Stock as of a particular date (the “Determination Date”) shall mean:


 


(i)            If
the Company’s Common Stock is traded on an exchange or is quoted on The NASDAQ
National Market, then the average closing or last sale prices, respectively,
reported for the ten (10) consecutive trading days immediately preceding
the Determination Date;


 


(ii)           If
the Company’s Common Stock is not traded on an exchange or quoted on The NASDAQ
National Market but is traded on The NASDAQ SmallCap Market, the OTC Bulletin
Board or the local over-the-counter market, then the average of the mid-points
between the closing bid and asked prices reported for the ten (10) consecutive
trading days immediately preceding the Determination Date; and


 


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(iii)          If
the Company’s Common Stock is not publicly traded, then the then the price
established in good faith by the Company’s Board of Directors.


 


19.  Earlier
Termination.  Notwithstanding
anything in this Agreement to the contrary, on the earlier to occur of                 
or the effective date of the termination or expiration of the Strategic
Partnership Agreement, this Warrant shall terminate and be of no further force
or effect with respect to any Warrant Shares as to which this Warrant has not
then vested, but such termination shall not affect the vested portion of this
Warrant.


 


20.  No
Voting Rights.  This Warrant shall
not entitle the Holder to any voting rights or other rights as a shareholder of
the Company unless and until exercised pursuant to the provisions hereof.


 


21.  Notification
of Transfer of Warrant or Resale of Warrant Shares.  The Holder of this Warrant, by acceptance
hereof, agrees to give written notice to the Company before transferring this
Warrant, in whole or in part, or transferring any shares of Common Stock issued
upon the exercise hereof, of such Holder’s intention to do so. The notice shall
include: (a) a brief description of the manner of any proposed transfer,
and (b) an opinion of counsel reasonably satisfactory to the Company that (i) the
proposed exercise or transfer may be effected without registration or
qualification under the Securities Act and any applicable Blue Sky Laws, or (ii) the
proposed exercise or transfer has been registered under such laws.  Upon delivering such notice, the Holder shall
be entitled to transfer this Warrant or such Warrant Shares, all in accordance
with the terms of the notice delivered by such Holder to the Company, provided
that an appropriate legend may be endorsed on the certificates for such shares
respecting restrictions upon transfer thereof necessary or advisable in the
reasonable opinion of counsel to the Company to prevent further transfer which
would be in violation of Section 5 of the Securities Act and applicable
Blue Sky Laws.


 


If, in the reasonable opinion of counsel to
the Company or other counsel reasonably acceptable to the Company, the proposed
transfer or disposition of this Warrant or the Warrant Shares described in the
written notice given pursuant to this Section 8 may not be effected without
registration of this Warrant or the Warrant Shares, the Company shall promptly
give written notice thereof to the Holder within ten (10) days after the
Company receives such notice, and such Holder will limit its activities in
respect to such as, in the opinion of such counsel, is permitted by law.


 


22.  Covenants
of the Company.  The Company
covenants and agrees that all Warrant Shares will, upon issuance, be duly
authorized and issued, fully paid, nonassessable and free from all taxes, liens
and charges with respect to the issue thereof. 
The Company further covenants and agrees that during the period within
which the rights represented by this Warrant may be exercised,  the Company will at all times have authorized
and reserved for the purpose of issue or transfer upon exercise hereof, a
sufficient number of shares of its Common Stock to provide for the exercise of
this Warrant.


 


23.  Notices.   All notices hereunder shall be in writing
and shall be delivered personally or by telefax (receipt confirmed), or shall
be sent by a reputable express delivery service or by certified mail, postage
prepaid with return receipt requested, addressed as follows:


 


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(i)            if
to Holder, at such Holder’s registered address as reflected in the Company’s
records; and


 


(ii)           if
to the Company, to:


 


MathStar, Inc.


5900 Green Oak Drive


Minneapolis, MN  55343


Attention: 
Chief Executive Officer


Facsimile: 
(952) 746-2201


 


Any party may change the above-specified
recipient and/or mailing address by notice to all other parties given in the
manner herein prescribed.  All notices
shall be deemed given on the day when actually delivered as provided above if
delivered personally or by telefax or on the day shown on the return receipt if
delivered by mail or delivery service.


 


24.  Miscellaneous.


 


(a)   This
Warrant may be amended by agreement of the Company and the holders of
outstanding VTI Strategic Warrants to purchase at least a majority of the
number of shares of Common Stock then subject to outstanding VTI Strategic
Warrants.


 


(b)   This
Warrant shall be governed by and construed in accordance with the laws of the
State of Minnesota without regard to its conflict of laws provisions.


 


(c)   The
Company will not, by amendment of its Articles of Incorporation or through
reorganization, consolidation, merger, dissolution or sale of assets, or by any
other voluntary act or deed, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by the Company, but will, at all times in good faith,
assist, insofar as it is able, in the carrying out of all provisions hereof and
in the taking of all other action which may be necessary in order to protect
the rights of the Holder hereof against dilution, consistent with the terms of
this Warrant.


 


(d)   A
number of shares of Common Stock sufficient to provide for the exercise of this
Warrant upon the basis herein set forth shall at all times be reserved for the
exercise thereof.


 


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IN WITNESS WHEREOF, the Company has caused
this Warrant to be signed by its authorized officer and dated as of the date
stated above.


 


	
   

  	
  MathStar, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name Typed or Printed

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  
	
   

  	
   

  	
  Title Typed or Printed

  



 


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Exhibit A


 


WARRANT
EXERCISE FORM


 


To be signed only upon exercise
of Warrant.


 


The undersigned, the holder of the within
Warrant issued by MathStar, Inc., hereby irrevocably elects to exercise
the purchase rights represented by such Warrant for, and to purchase
thereunder, a total of                     
Warrant Shares to which such Warrant relates and herewith makes payment of $                    
per share and a total of $                  
for the purchase of such Warrant Shares.


 


Said purchase price is paid in full herewith
in cash, via wire transfer, by certified or bank check or, in the sole
discretion of MathStar, Inc., by personal check, and the undersigned
requests that such shares be issued and be delivered to                                  ,
the address for which is set forth below the signature of the undersigned.


 


 


	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (Taxpayer’s I.D. Number)

  	
   

  	
  (Signature)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Address)

  



 


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