STRATEGIC PARTNERSHIP AGREEMENT

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

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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.

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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

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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

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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.

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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.

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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.

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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

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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.

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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.

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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

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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

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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.

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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 WA