10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                to

Commission file number: 000-51560

MathStar, Inc.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	41-1881957 (I.R.S. Employer Identification No.)
19075 NW Tanasbourne Drive, Suite 200, Hillsboro, Oregon (Address of principal executive offices)	97124 (Zip Code)

(503) 726-5500
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

         Securities registered pursuant to Section 12(b) of the Act: None.

         Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value.

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer"," accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company ý

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         The aggregate market value of the voting and non-voting common stock held by non-affiliates, computed by reference to the price at which the common stock was last sold as of June 30, 2008 as reported on The NASDAQ Global Market, was $12 million. Shares of common stock held by each officer, director and holders of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. Such determination of affiliate status is not necessarily a conclusive determination for other purposes. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at March 9, 2009
Common Stock, $0.01 par value per share	9,181,497 shares

2008 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	13
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	13
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	23
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	49
Item 9A(T).	Controls and Procedures	49
Item 9B.	Other Information	50
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	51
Item 11.	Executive Compensation	54
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	58
Item 13.	Certain Relationships and Related Transactions, and Director Independence	60
Item 14.	Principal Accountant Fees and Services	61
PART IV
Item 15.	Exhibits and Financial Statement Schedules	62
Signatures		64

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PART I

Item 1.    Business

Our Business

        We are a company that designed, developed and marketed a new class of semiconductor integrated circuit, or chip, we call field programmable object arrays, or FPOAs. Our primary focus during 2007 was to gain broad acceptance of our FPOA technology and generate revenue from sales of our current products. As well, we continued to invest in research and development activities to expand our FPOA technology and products available for sale. Although we believe our FPOA technology offers customers a distinct advantage over FPGAs in certain applications and is less expensive and faster to develop than ASIC chips, the market was slow to accept our technology at commercial levels. On May 20, 2008, our Board of Directors voted to suspend research and development activities. During the three months ended June 30, 2008, we announced a curtailment of operations as our Board evaluated strategic alternatives. Strategic alternatives that are being evaluated by our Board of Directors and management include, but are not limited to, restarting the company; merging with or acquiring another company, including or excluding our intellectual property (IP); increasing operations in another structure; or liquidation. The primary criteria for determining the strategic alternative is to maximize shareholder value, which may or may not include the use of the accumulated net operating losses (NOL). Although we have curtailed operations, we have met all financial obligations with vendors, key suppliers, and strategic partners. We have engaged a third party investment banking firm to explore the sale of intellectual property and patents and potential merger and acquisition alternatives.

        An integrated circuit chip is a small electronic device made out of a semiconductor material that is used for a variety of electronic devices, including personal computers, audio and video equipment, and other electronic products and systems. Our FPOAs are high-performance, reprogrammable integrated circuits based on our proprietary silicon object technology. An FPOA consists of very small, pre-designed, high-speed computing and data storage elements, or silicon objects, arranged in a grid pattern, along with internal and external memory and data input and output channels. The grid of silicon objects is overlaid with a high-speed interconnection system, creating the silicon object array. This array of objects and interconnect matrix is programmed to execute unique customer applications using industry-standard and FPOA-specific software design tools. Each of our silicon objects can execute its function at a rate of up to one billion times per second, which is up to four times faster than commercially available programmable logic devices. Our first FPOA contains 400 silicon objects, and each of these can operate simultaneously, creating a chip capable of executing 400 billion computational operations per second.

        Currently, two of the most common methods used to design logic devices are the application-specific integrated circuit method, or ASIC, and the programmable logic device method, or PLD. The field programmable gate array, or FPGA, is a segment of the PLD market. ASICs are designed by the end customer with fixed functions for a single application and cannot be reprogrammed. The primary advantages of using ASIC technology are low per unit cost and high performance. The primary disadvantages of using ASICs are their high up-front development costs, long time-to-market and inability to change the chip's function as applications and algorithms change. An algorithm is a finite set of well-defined instructions for accomplishing a task and can be implemented by computer programs. In contrast to ASICs, FPGAs, purchased off-the-shelf, are programmed by the customer and can be used in a wide range of applications. This inherent flexibility of FPGAs provides the advantages of design change simplicity, shorter time-to-market, lower up-front development cost and longer time-in-market. The primary disadvantages of using FPGAs are their lower performance and higher per unit cost as compared to ASICs. We believe these disadvantages limit the applications that can be effectively served by the FPGA architecture. We introduced a new chip architecture that combines the cost and performance advantages of ASICs with the reprogrammability of FPGAs.

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        We believe FPOA chips offer better performance than ASIC or FPGA chips, low per unit cost advantages comparable to ASIC chips and the time-to-market and time-in-market advantages of FPGA chips for the following reasons:

•

Speed.  Each object in the FPOA operates at a speed of up to one GigaHertz, or GHz, which is up to four times the speed of FPGAs. A GigaHertz is a measure of frequency, or clock speed, and is equal to a billion hertz or a thousand megahertz.

•

Design simplicity.  Our FPOA architecture simplifies the silicon design process. ASIC and FPGA chips require the designer to perform the complex task of implementing algorithms using millions of individual logic gates. In electronics and digital circuits, a logic gate is an arrangement of switches used to calculate operations. FPOA designers implement these algorithms by programming a few hundred interconnected objects, reducing design costs and improving overall system performance and time-to-market.

•

Smaller physical size.  In high-performance applications, we believe our FPOAs will have a per unit manufacturing cost advantage over FPGAs because FPOAs are smaller. In many cases, the FPOA architecture will realize solutions that have a higher functional density than typical FPGAs, reducing the amount of silicon required for a given design. Functional density refers to the number and complexity of functions that can be performed by a chip of a specific size.

•

Fewer chips needed.  We believe the size and performance advantages of FPOAs will enable our customers to use fewer chips to implement electronic system functions as compared to FPGAs, which is expected to result in space savings and lower overall system power consumption.

•

Fast time-to-market.  FPOAs will have a faster time-to-market than ASICs because FPOAs are available off-the-shelf.

•

Reprogrammable.  Our FPOAs are reprogrammable. This allows our customers to change the functionality of their systems in the field, thus increasing time-in-market as compared to ASICs.

        The accompanying financial statements have been prepared assuming the Company will continue as a going concern. Although the Company has incurred recurring losses and negative cash flows from operations, we have met all financial obligations with vendors, key suppliers, and strategic partners both prior and subsequent to curtailing operations. We have sufficient cash and investments to meet all known obligations as well as projected expenditures for the next twelve months at current spending levels. However, since we have not committed to any of the strategic alternatives being evaluated, we cannot predict our long-term cash needs or ultimate cash requirements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our Markets

        We targeted our FPOA technology at market applications that require chips combining high-speed performance, in-field programmability, low per unit price and rapid time-to-market. Because the FPOA chip is new, there is limited independent research available on the market size for FPOAs. We competed with FPGAs, ASICs and some types of digital signal processors, or DSPs. DSPs are high-speed single chip microprocessors designed to perform mathematically-intensive digital signal processing computational tasks. Most of our early design wins were with customers in the high definition video, machine vision and military/aerospace markets. We believed the machine vision, test and measurement, high definition video, medical imaging, high performance imaging, security and surveillance, military/defense and aerospace, digital signal processing and cellular wireless base stations markets have the characteristics that could have made them suited to take advantage of the FPOA architecture.

        Our revenue of $536,000 for the year ended December 31, 2008 was concentrated with two major customers. We had revenue from sales to Zenith/LG of $400,000, representing 75% of our total

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revenue, and revenue from sales to Adaptive Microware of $50,000, representing 9% of our total revenue. Sales to other customers totaled $86,000, representing 16% of our revenue. Our revenue of $588,000 for the year ended December 31, 2007 was concentrated with two major customers. We had revenue from sales to Zenith/LG of $301,000 representing 51% of our total revenue and revenue from sales to Adaptive Microware of $97,000, representing 17% of our total revenue.

Our Business Strategy

        Prior to the curtailment of operations in 2008, our goal was to achieve rapid adoption of the FPOA in commercial applications. To achieve this goal, we used a sales representative model as well as developing system-level solutions for key high volume customers that were to demonstrate our superior technology as well as accelerating their time to market. We had contracted with sales representatives to cover the 22 territories in North America and had contracted with four foreign sales representatives (England, France, Germany and Israel). As part of the curtailment of operations, all contracts with sales representatives were terminated. Our current goal is to explore strategic alternatives that will maximize shareholder value.

        In 2007, MathStar rolled out its certified design center plan, giving customers additional trained resources in FPOA technology and development. These design centers assisted customers who wanted the value associated with an FPOA design but wanted a solution at a higher level of integration—either a complete software, board or system-level solution without the infrastructure burden of retraining their existing employees. In addition to chip development, MathStar developed a number of application algorithms for sale to customers, the purpose of which was to ease the transition to FPOA technology and accelerate their time to market for initial products.

        Prior to September 2008, we had a business development agreement with Mentor Graphics Corporation to incorporate our physical layer design tools into the Visual Elite design tool suite. We and our customers used the resulting design tool suite to program, or map, the customers' intellectual property to our FPOAs. MathStar and Mentor Graphics developed an HDL-based design suite to be used on the next generation of FPOA products, making physical design even easier.

Source of Materials

        Until we curtailed operations in the second quarter of 2008, all of our chip fabrication needs were supplied by independent contractors, and we worked with Taiwan Semiconductor Manufacturing Company, or TSMC, in Taiwan to fabricate the silicon wafers used in our FPOA chips. Should we have demand in excess of inventories, contracts are in place to produce additional chips.

Competition

        The semiconductor industry is highly competitive and characterized by rapid and disruptive technological change, product obsolescence and heightened international competition. Our ability to compete successfully in the industry depended on our ability to develop, manufacture and sell complex semiconductor components and design tools that offer customers greater value and higher performance than solutions offered by competing vendors.

        Significant competitive factors in the semiconductor market include, among others, product features, performance, price, timing of market introductions, effectiveness of sales channels, emergence of new computing and networking standards, quality, reliability and customer support. Our FPOA chips may be used in applications now served by vendors of FPGAs, ASICs and digital signal processors, and we competed against vendors of these products. Most of these competitors, including Xilinx, Inc. and Altera Corporation, have greater technical, financial and marketing resources, well-established market positions, name recognition, broader product lines and longer standing customer relationships than we do. There are multiple manufacturers of communications and digital signal processing semiconductor chips currently planning or offering products that compete with our FPOA chips.

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Research and Development

        In 2008, and until we curtailed our operations in the second quarter of 2008, we continued to incur significant research and development costs in the expansion of our FPOA technology with the completion of the design phase of our next generation of chips. In 2008, we also improved our design tools, making it easier for customers to adapt to our FPOA technology and program our chips, and expanded our library of application IP. The amount spent on research and development during 2006, 2007, and 2008 was $14,090,000, $12,447,000 and $7,267,000, respectively.

Employees

        As of December 31, 2008, we had one full-time employee—Douglas M. Pihl, our Chief Executive Officer and Chief Financial Officer. In addition, we had two part-time employees and two contract workers. None of our employees are subject to a collective bargaining agreement. We have not experienced any work stoppages and believe our relationships with our employees, past and present, to be good.

Company Information

        We were incorporated under Minnesota law in April 1997, and we reincorporated under Delaware law on June 14, 2005. Our executive offices are located at 19075 N.W. Tanasbourne Drive, Suite 200, Hillsboro, Oregon 97124. Our telephone number is (503) 726-5500. Our website is www.mathstar.com. Information contained on our website is not a part of this filing. We have included our website address in this filing as an inactive textual reference only.

        In this Annual Report on Form 10-K, unless otherwise stated or the context otherwise requires, references to "MathStar", "we", "us", "our", "our company" and similar references refer to MathStar, Inc. To access our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, other reports and documents filed with or furnished to the United States Securities and Exchange Commission (the "SEC") and amendments to these reports free of charge, go to the "Corporate" section of our website, then to the "Investor Relations" category, and then to the "SEC Filings" subcategory, where we make such filings available as soon as reasonably practicable after they are filed with or furnished to the SEC. The "Corporate Governance" category of the "Investor Relations" section of our website also contains free copies of the Charters for the Audit Committee, Compensation Committee, and Nominating and Governance Committee of our Board of Directors, as well as our Code of Business Conduct and Ethics, which is our written code of ethics under Section 406 of the Sarbanes-Oxley Act of 2002. Each of the above referenced documents can also be obtained free of charge (other than a reasonable charge for copying exhibits to our reports on Forms 10-K, 10-Q or 8-K) in print by any shareowner who requests them from our investor relations department. The investor relations department's email address is ir@mathstar.com and its mail address is: Investor Relations, MathStar, Inc., 19075 N.W. Tanasbourne Drive, Suite 200, Hillsboro, Oregon 97124.

        You may also obtain copies of our SEC filings on the SEC's website at www.sec.gov or at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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Forward Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward looking statements that involve risks and uncertainties. You should review "Item 1A. Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward looking statements contained in the following discussion and analysis.

Item 1A.    Risk Factors

         We have limited revenue and a history of net losses.

        We had net losses of $22,643,000, $20,365,000 and $14,611,000 for the years ended December 31, 2006, 2007 and 2008, respectively. We had revenues of $53,000, $588,000 and $536,000 for the years ended December 31, 2006, 2007 and 2008, respectively. As of December 31, 2008, we had an accumulated deficit of $141,113,000. We are using the proceeds from our June 2007 public offering and any proceeds we receive upon exercise of outstanding warrants and options to maintain our public company requirements and evaluate strategic alternatives. We will continue to incur losses.

         Our financial results and condition, and any strategic transactions we may enter into, are subject to a number of economic risks due to global adverse business, economic and market conditions.

        As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in securities prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that include severely restricted credit and declines in real estate values. These economic developments affect businesses in a number of adverse ways. The current tightening of credit in financial markets adversely affects the ability of customers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for products and services as well as impact the ability of customers to make payments. Similarly, this tightening of credit may adversely affect supplier bases and increase the potential for suppliers to experience financial distress or bankruptcy. Global business is also adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending and construction activity. Any of these factors could adversely affect any strategic transaction we may enter into. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the United States and other countries.

         We are currently considering various strategic alternatives and may not be able to complete the one we decide to pursue, whose failure could result in increased expenses and/or a delay in finally completing the selected strategy, or pursuing and completing another alternative.

        On May 20, 2008, the Board of Directors voted to curtail research and development activities and ongoing operations while analyzing alternatives to protect the value to the stockholders. Alternatives could include restarting the company, merging with or acquiring another company, increasing operations in another structure, or liquidation. We may select a strategic alternative that we may not be able to complete for various reasons, including a decision of our principal stockholders not to approve such alternative; our inability to obtain regulatory approval; the inability to secure adequate financing; or possible litigation involving the selected alternative. The inability to complete a selected alternative may adversely affect us or limit other strategic alternatives still available to us, including by adversely

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affecting our financial results or our ability to liquidate, or deterring other companies from entering into a merger or acquisition with us.

         We may need additional financing in the future, which may not be available to us on favorable terms or at all. If we need additional financing but do not obtain it when we need it or on terms that are favorable to us, our business would be adversely and materially affected.

        We may need additional financing in the future to finance any strategic transaction. The timing and amount of such additional financing would depend on many factors, including the strategy adopted by the company; the costs of restarting sales and marketing activities; the cost of hiring and training qualified personnel; the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs; the costs of defending any patent or trademark infringement actions brought against us by third parties; and the cost of being a public company because of the disclosure, reporting, financial accounting and other requirements that apply to public companies.

        Additional financing may not be available to us when we need it, or on terms that are favorable to us or at all. If we cannot obtain adequate financing on a timely basis or under terms that are favorable to us, we may be forced to delay or limit aspects of our then-existing business plan, which could have a material adverse effect on our business, revenue, financial condition and results of operations. In addition, we may be required to seek funds from sources that will place limits on our operations and management or that require rights that are superior to those possessed by the holders of our common stock. If we raise additional funds by issuing equity securities, the new equity securities may dilute the average per share price or ownership interests of our stockholders and the rights of the holders of the new equity securities may be more favorable than those of the current holders of our common stock.

         Because our FPOA chips are highly complex, they may contain defects or errors that are detected only after deployment in commercial applications, which would result in increased liability and expense.

        We are currently selling our FPOA chips to our two principal customers—Zenith/LG and Adaptive Microwave. Our FPOA chips are highly complex and may contain defects, errors or failures. After the initial fabrication and packaging of an FPOA chip, we tested their functionality and performance internally. However, because our chips are programmable in the field, they can be fully tested only when deployed and functioning in commercial applications. Consequently, our customers may discover errors after our chips have been deployed. The occurrence of any defects, errors or failures in our FPOA chips could result in the cancellation of orders, product returns, repairs or replacements, diversion of our resources, legal actions by our customers or our customers' end users and other costs and losses to us or to our customers or end users, which would adversely affect our business, revenue, financial condition and results of operations. We have experienced defects in the past and may experience defects in the future. Timing-related defects in our original FPOA design caused a low yield of chips that could operate at a clock speed of one GHz. As a result, we had to manufacture additional chips and sort through the available supply of chips to find those that worked properly, which increased our costs and delayed the marketing of our chips. Because the trend in the semiconductor industry is moving toward even more complex products, this risk probably will intensify over time and may result in increased liability and expenses.

         Our ability to sell or otherwise capitalize on our intellectual property depends on our ability to protect our intellectual property, and it may not be adequately protected.

        Our ability to sell or otherwise capitalize on our intellectual property depends upon our ability to protect our intellectual property. We rely on a combination of United States patents, copyrights, trademarks, trade secret law, employee non-disclosure agreements and work-for-hire and non-disclosure agreements with independent contractors to protect and enforce our intellectual property rights. As of the date of this filing, we have been granted two United States patents: a patent granted in November

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2004 expiring in 2024 and a patent granted in February 2006 expiring in 2026. We have six patent applications on file with the United States Patent and Trademark Office, or USPTO. However, filing a patent application does not mean we will be issued a patent or that any patent eventually issued will be as broad as requested in the patent application or sufficient to protect our technology. In addition, there are a number of factors that could cause our patents to become invalid or unenforceable or that could cause our patent applications to not be granted, including known or unknown prior art, deficiencies in the patent application or the lack of originality of the technology. Also, any common law protection of our intellectual property could be compromised by the fact that we do not have assignment of inventions agreements with some of our former employees.

        We have registered our trademarks MathStar, FPOA and ARRIX with the USPTO. We do not have any trademarks registered outside the United States, nor do we have any trademark applications pending outside the United States. Even though our trademarks are registered with the USPTO, our trademark rights may be challenged. It is also possible our competitors or others will adopt trademarks similar to ours, thus impeding our ability to build brand identity and possibly leading to customer confusion. We could incur substantial costs in prosecuting or defending trademark infringement suits. We currently hold one domain name relating to our business, MathStar.com. We may be unable to acquire other relevant domain names in the United States and in other countries where we conduct or may conduct business.

        Our patents and patent applications and copyrights, trademarks, trade secret law, employee non-disclosure agreements and work-for-hire and non-disclosure agreements with independent contractors may not provide meaningful protection from our competitors because the status of any patent and other intellectual property rights involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Our competitors may be able to circumvent our patents and other intellectual property rights or develop new patentable technologies that displace our existing technology. In addition, and despite our efforts to protect our proprietary rights from unauthorized use or disclosure, third parties, including our employees, former employees or consultants, may attempt to disclose, obtain or use our proprietary information or technologies without our authorization. If other companies obtain our proprietary information or technologies or develop substantially equivalent information or technologies, they may develop products that successfully compete against our FPOA chips and FPOA technology.

         Our technology has no patent protection outside of the United States because we have no non-United States patents or patent applications, and we do not currently plan on applying for non-United States patents. This could result in the appropriation of our technology outside of the United States, which could have an adverse effect on our ability to sell or otherwise capitalize on our intellectual property.

        We have no patents outside of the United States, and we do not currently plan on applying for non-United States patents. Thus, our technology does not have patent protection outside of the United States. This could result in the appropriation of our technology outside of the United States, which could have an adverse effect on our ability to sell or otherwise capitalize on our intellectual property. The laws of certain countries in which our FPOA chips are or may be developed, manufactured or sold may not protect our technology and intellectual property rights to the same extent as the laws of the United States. Policing the unauthorized use of our technology is difficult and may result in significant expense to us. Even if we spend significant resources and efforts to protect our intellectual property, there can be no assurance that we will be able to prevent the appropriation of our technology. The appropriation and use by others of our proprietary intellectual property could materially harm our ability to sell or otherwise capitalize on our intellectual property.

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         We are at risk of intellectual property infringement claims.

        The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. If we prosecute infringement claims against third parties who are infringing or illegally using our intellectual property, or if we defend ourselves or our licensees against any similar claims brought by others, it could be costly and time-consuming to us and would divert the attention of management and key personnel from business issues, regardless of the claims' merit. Due to the anticipated costs involved in filing and conducting an infringement action to protect our technology, we may decide not to file such an action, which could result in another party misappropriating our intellectual property. We could also incur substantial costs in interference proceedings declared by the USPTO in connection with any patents or patent applications or opposition proceedings declared by the USPTO in connection with our trademarks.

        Although we have filed patent applications and have been granted two patents in the United States, we have not conducted, and are not required to conduct, any search or study regarding the existence of any technology on which our technology may infringe before filing a patent application. We are required to investigate any patented technology of which we have knowledge on which our technology may infringe. We have no knowledge of any such patented technology. However, a patent application is confidential until 18 months after its filing date and, for this reason, and due to the complexities of such a search, a search may not discern technology subject to patent applications on which our technology may infringe.

        A third party claiming infringement may be able to obtain an injunction or other equitable relief against us and the use of our technology by us or others, which could prevent or inhibit the sale of our FPOA chips or FPOA technology. If another party bringing a claim of infringement against us prevailed, we or any licensees or purchasers of our FPOA technology may be required to obtain one or more licenses from or pay royalties to third parties, which could entail significant expense. There can be no assurance that we or such licensees or purchasers would be able to obtain from a third party any required license of technology at a reasonable cost or at all, or be able to design commercially acceptable non-infringing alternatives. Our failure or the failure of our licensees or purchasers to obtain such a license or develop such alternatives could have a material adverse effect on our ability to sell or otherwise capitalize on our intellectual property.

         As of December 31, 2008, we had $828,000 invested in auction preferred securities (APS). Since mid-February 2008, the auctions for these APS have been failing, which adversely affects their liquidity. If we must record impairment charges on the recorded value of these APS, recognize additional unrealized losses, or recognize a loss on the disposition of our APS, our financial condition would be adversely affected.

        In January 2008, we purchased $2.6 million of investments comprised of APS. All of our APS are AAA rated by one of the major credit rating agencies. Since mid-February 2008, we have experienced failed auctions for our entire APS portfolio, resulting in our inability to sell these securities. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates on the APS do not reset at a market rate but instead reset based on a formula contained in the APS, which generally is higher than the current market rate. The issuer of the APS redeemed $1.85 million of the securities on May 27, 2008 at face value and is actively putting a plan in place to redeem the remainder. Our APS were purchased through UBS AG. On August 8, 2008, UBS announced that it reached a settlement with the New York Attorney General, the Massachusetts Securities Division, the SEC and other regulatory agencies to restore liquidity to holders of APS. On November 14, 2008, we entered into an agreement with UBS under which UBS and /or the issuer agreed to redeem the APS by July 2, 2012. We currently do not need the funds invested in the APS to meet outstanding obligations or short-term operating requirements. However, if the credit worthiness of the issuer deteriorates, UBS does not or is unable to restore liquidity, or we no longer

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have the ability to hold these securities, it would adversely affect our financial condition and our ability to complete any desired strategic transaction.

         The success of any strategic transaction we enter into would depend on the services and skills of our existing management.

        The success of any strategic transaction we enter into would depend to a significant extent upon the continued services of our current management and members of our board of directors. We do not have employment or noncompetition agreements with any members of management, although we have non-disclosure agreements with them. The loss of the services of one or more of our executive officers, key employees, members of our board of directors or contractors could impair our ability to successfully identify a strategic alternative or enter into a strategic transaction.

         Our board of directors may issue and fix the terms of shares of our preferred stock without stockholder approval, which could adversely affect the voting power of holders of our common stock or any change in control of MathStar.

        Our board of directors is authorized, without stockholder action, to establish various classes or series of preferred stock from time to time and to determine the rights, preferences and privileges of any unissued classes or series including, among other matters, any dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms, the number of shares constituting any such series and the description thereof, and to issue any such shares. Our board of directors may, without stockholder approval, issue shares of a class or series of preferred stock with voting and conversion rights that could adversely affect the voting power of the holders of the common stock and may have the effect of delaying, deferring or preventing a change in control of us.

         We will not pay cash dividends on our common stock in the foreseeable future.

        We intend to retain any earnings or cash flow to finance our business. Accordingly, we do not anticipate the payment of cash dividends on our common stock in the foreseeable future. We have not paid any dividends in the past, and we may be restricted or prevented from paying cash dividends by loan covenants with any lenders or cash dividends on our common stock by the terms of any preferred stock that we issue.

         Our common stock was delisted from The NASDAQ Stock Market, LLC, which adversely affects its liquidity.

        In the last quarter of 2008, our common stock was delisted from The NASDAQ Stock Market, LLC, and it is currently quoted on the Pink OTC Markets. The delisting of our stock has had a negative effect on our liquidity, and it may impair our ability to raise capital in the future.

         Our common stock is thinly traded, and our stock price may be volatile, which means that purchasers of our common stock could incur substantial losses.

        Our stock price may be volatile. The stock market in general has experienced extreme volatility. The market price for our common stock may be influenced by many factors, including disputes concerning patents or other proprietary rights; litigation; the condition of our balance sheet; the departure of key personnel; future sales of our common stock; changes in accounting principles; our failure to maintain adequate internal control over financial reporting or disclosure controls and procedures; investors' perceptions of us; or general economic, industry and other market conditions.

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         Our common stock is subject to the "penny stock" rules of the SEC, which could restrict trading in our common stock and thus its liquidity.

        We are subject to the SEC's "penny stock" rules because our common stock sells below $5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, information regarding the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction involving penny stocks and must be given to the customer in writing before or with the customer's confirmation.

        In addition, the penny stock rules require that prior to a transaction in penny stocks, the broker and/or dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for our common stock. As long as our common stock is subject to the penny stock rules, the holders of our shares may find it more difficult to sell such shares.

         If there are substantial sales of our common stock, our stock price could decline.

        If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders may sell shares of common stock, the market price of our common stock could decline significantly.

         The anti-takeover provisions of the Delaware General Corporation Law, or the DGCL, may delay or prevent transactions that are favorable to our stockholders.

        As a Delaware corporation, we are subject to provisions of the DGCL regarding "business combinations," as that term is defined in the DGCL. Our directors' ability to issue and fix the terms of our undesignated preferred stock without stockholder approval could be used as an anti-takeover measure. We may, in the future, consider adopting additional anti-takeover measures. The anti-takeover provisions of the DGCL, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of the company not approved by our board of directors. As a result, our stockholders may lose opportunities to dispose of their shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal, and the market price, voting and other rights of the holders of common stock may also be affected.

         We may be at risk of shareholder litigation.

        Since May 2008, our Board of Directors has been evaluating strategic alternatives for MathStar, and the Board has considered various proposals from third parties regarding transactions involving MathStar. To date, MathStar has not entered into any transaction. Some MathStar shareholders have informed our Board that they believe MathStar should enter into particular transactions, including mergers and liquidation, and that they disagree with the Board's actions to date. Although no lawsuit has been served on MathStar or filed, and the Board believes there is no basis for such a lawsuit, there is always the possibility that such a lawsuit could be commenced. Our defense of any such lawsuit, regardless of the claims' merit, would divert the attention of management and could be costly and time-consuming.

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Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Our headquarters are located in Hillsboro, Oregon, near Portland, in approximately 14,294 square feet of leased space under a lease expiring on August 31, 2011. We also lease a 1,325 square foot location in Minneapolis, Minnesota. Rents under these lease agreements averaged approximately $29,000 per month during the year ended December 31, 2008. Depending on the strategic alternative selected, we may sublease all or part of the Hillsboro facility to minimize expenses, although there can be no assurance that we can do so.

Item 3.    Legal Proceedings

        We are currently not a party to any legal proceedings.

Item 4.    Submission of Matters to a Vote of Security Holders

        No matters were submitted to a vote of our stockholders during the fourth quarter ended December 31, 2008.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        (a)   Since October 23, 2008, our common stock has been quoted on the Pink OTC Markets. From October 27, 2005 through October 23, 2008, our common stock was listed on The NASDAQ Market, LLC under the symbol "MATH." Before October 27, 2005, there was no public market for our common stock. The following table shows the high and low sales prices for our common stock as reported on The NASDAQ Stock Market, LLC or the Pink OTC Markets, as applicable, for the periods indicated. As of March 9, 2009, there were 9,181,497 shares of our common stock issued and outstanding, and we had approximately 255 holders of record of our common stock.

		High		Low
Year ended December 31, 2007
	First quarter (through March 31, 2007)	$	5.08	$	2.55
	Second quarter (through June 30, 2007)	$	2.67	$	1.40
	Third quarter (through September 30, 2007)	$	1.77	$	1.10
	Fourth quarter (through December 31, 2007)	$	1.15	$	0.65
Year ended December 31, 2008
	First quarter (through March 31, 2008)	$	3.75	$	2.45
	Second quarter (through June 30, 2008)	$	2.90	$	1.05
	Third quarter (through September 30, 2008)	$	1.43	$	1.05
	Fourth quarter (through December 31, 2008)	$	1.09	$	0.66

        We have never declared or paid cash dividends on our common stock. We currently intend to retain our cash and do not intend to pay cash dividends to our stockholders in the foreseeable future.

        Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend upon then existing conditions, including our financial condition, results of operations, any contractual restrictions on the payment of dividends, capital requirements, business prospects and other factors our board of directors may deem relevant.

        We had no sales of our equity securities during 2008 that were not registered under the Securities Act of 1933, as amended.

        (b)   Not applicable.

        (c)   Not applicable.

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Item 6.    Selected Financial Data

        The selected financial data below should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" and the financial statements and notes thereto included elsewhere in this report.

	Year ended December 31,
	2004			2005			2006			2007			2008
	(in thousands, except per share amounts)
Statement of Operations Data:
Revenue	$	130		$	134		$	53		$	588		$	536
Cost of goods sold		53			52			126			655			1,195
Gross profit (loss)		77			82			(73	)		(67	)		(659	)
Operating expenses:
Research and development		4,830			8,228			14,090			12,447			7,267
Selling, general and administrative		4,053			6,564			9,133			8,865			4,749
Restructuring and impairment charges(2)														2,618
Total operating expenses		8,883			14,792			23,223			21,312			14,634
Operating loss		(8,806	)		(14,710	)		(23,296	)		(21,379	)		(15,293	)
Other income (expense)(1)		57			(4,225	)		653			1,014			682
Net loss	$	(8,749	)	$	(18,935	)	$	(22,643	)	$	(20,365	)	$	(14,611	)
Basic and diluted net loss per share	$	(4.75	)	$	(7.81	)	$	(6.29	)	$	(2.97	)	$	(1.59	)
Weighted average basic and diluted shares outstanding		1,842			2,424			3,600			6,862			9,181

	As of December 31,
	2004			2005			2006			2007			2008
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	4,132		$	20,149		$	12,891		$	4,339		$	11,767
Investments		—			—			—			24,799			3,315
Working capital		3,904			19,676			11,852			26,358			14,160
Total assets		4,504			22,202			15,614			32,457			15,589
Total liabilities		487			2,028			2,997			2,961			686
Accumulated deficit		(64,559	)		(83,494	)		(106,137	)		(126,502	)		(141,113	)
Total stockholders' equity		4,017			20,174			12,617			29,496			14,903

(1)

Other expenses for the year ended December 31, 2005 of $4,225,000 included $4,395,000 of interest expense associated with the convertible notes issued April 2005 (which included the amortization of discount recorded for the value of the beneficial conversion feature and the warrants issued to the note holders and interest costs). This expense was partially offset by interest income of $170,000. Other income disclosed in years 2004, 2006, 2007 and 2008 is interest income earned on positive cash balances and investments.

(2)

Operating expenses for the year ended December 31, 2008 totaling $14,634,000 included charges of $2,618,000 for restructuring and asset impairment charges due to the Board of Directors' decision to curtail operations. There were no similar expenses charged in years 2004, 2005, 2006 or 2007.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

        Until we curtailed operations in the second quarter of 2008, we were a fabless semiconductor company engaged in the development, marketing and selling of our high-performance, programmable platform FPOA chips and design tools required to program our chips. During the three months ended March 31, 2008, sales did not materialize as expected, and the development of the next generation of FPOA fell behind schedule. As a result, on May 20, 2008, the Board of Directors voted to suspend research and development activities and curtail ongoing operations while analyzing strategic alternatives. The Board of Directors continues to explore these strategic alternatives, which could include restarting the company, merging with or acquiring another company, increasing operations in another structure or liquidation. We have engaged a third party investment banking firm to explore the sale of intellectual property and patents and potential merger and acquisition alternatives.

Financial Operations Overview

Critical Accounting Policies and Significant Judgments and Estimates

        Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our judgments related to accounting estimates. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

        We recognize revenue from the sale of products or services in the following four general areas: (1) production chips, (2) evaluation boards and licenses, (3) application intellectual property, or IP; and (4) non-recurring engineering ("NRE") services, and other. Based on the type of product or service delivered, revenues are recognized in accordance with Staff Accounting Bulletin ("SAB") 104, Revenue Recognition ("SAB 104"); Emerging Issues Task Force ("EITF") Issue No. 00-21 Revenue Arrangements with Multiple Deliverables; or, if our arrangements contain software that is more than incidental to the product in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended ("SOP 97-2").

        We recognize revenue from the sale of production chips, evaluation boards, licenses and NRE and other in accordance with SAB 104. Production chip revenues consist of sales of our FPOAs. Revenues generated from evaluation boards and licenses consist primarily of the hardware and license agreements necessary in order for our customers to program, or map, their intellectual property applications, or algorithms, to our FPOA chips. Revenues from NRE are derived from situations where we will develop the initial design and prototype for a customer to accelerate their time to market. We recognize revenues when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, collection of resulting receivables is reasonably assured, and there are no customer acceptance requirements or no remaining significant obligations.

        When more than one element is contained in a single arrangement, we allocate revenue in accordance with EITF 00-21 between the elements based on each element's relative fair value, provided

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that each element meets the criteria as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and verifiable evidence of the fair value of the separate element. Fair value is generally determined based upon the price charged when the element is sold separately. For most multiple element arrangements to date the fair value of each element has not been objectively determinable; therefore, all revenue under such arrangements has been recognized on delivery of the final element in the arrangement.

        Revenue and cost relating to such distributor sales are deferred until the product is sold by the distributor or return privileges and price protection rights terminate, at which time related estimated distributor resale revenue, estimated effects of distributor price adjustments, and estimated costs are reflected in income.

        We recognize revenue from the sale of application IP in accordance with SOP 97-2. Application IP revenues are derived from a library of existing applications developed by the Company to provide customers with an established algorithm. We recognize revenues when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, collection of resulting receivables is probable, and there are no customer acceptance requirements or no remaining significant obligations. For arrangements with multiple elements, we recognize revenue when vendor-specific objective evidence, or VSOE, exists for all undelivered elements of the arrangement or at the point when all elements have been delivered. We do not provide software maintenance and support or have any continuing obligations post delivery.

Research and Development

        Research and development expenses represent costs incurred for designing and engineering our FPOA chip and developing design tools and applications to enable customers to more easily program our chip. Research and development expenses consist primarily of salaries and related costs of our engineering organization; fees paid to third party consultants associated with chip and application development; an allocation of facilities; and depreciation expenses. We expense all research and development costs related to the development of our FPOA chips. Development of certain design tools and application IP includes software available for resale. Such research and development expenses are required to be expensed until the technological feasibility of the software is established.

Accounts Receivable

        Accounts receivable are initially recorded at invoice value upon the shipment of products or services to customers. They are stated net of allowances for uncollectible accounts, which represent estimated losses resulting from the inability of customers to make the required payments. When determining the allowances for uncollectible accounts, we take several factors into consideration, including our prior history of accounts receivable write-offs, the type of customer and our knowledge of specific customers.

Inventory

        Inventory is valued at the lower of cost or market and held as an asset until such time as it is consumed or sold. Inventory is consumed on a first in, first out basis. On a quarterly basis, management reviews the inventory balance for inventory that is not forecasted to be used in the normal course of business. A reserve will be established for any amount deemed excessive or obsolete. This will result in a non-cash charge to cost of sales. If and when the inventory is written off, the inventory reduction is offset against the reserve. If the level of future sales differs significantly from that of the forecast, any future inventory write-off could result in additional charges to the income statement. Because we have chosen to curtail sales and operations, we are unable to forecast if any of our

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remaining chip inventory will be sold. As such, we reserved 100% of the value of the inventory as part of our restructuring and impairment charge.

Stock-Based Compensation

        On January 1, 2006, we adopted Statement of Financial Accounting Standard, or SFAS, No. 123(R), Share-Based Payment, using the modified prospective transition method. Under the transition method, compensation costs recognized in periods after the date of adoption include compensation costs for share-based payments granted prior to but not vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Compensation costs for all share-based payments granted subsequent to January 1, 2006 are based on the grant date fair value estimated in accordance with SFAS No. 123(R).

        We account for restricted stock by amortizing the grant date fair value over the vesting period.

        We account for stock-based compensation to nonemployees using the fair value method prescribed by EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Compensation cost for awards granted to nonemployees is measured based on the fair value of the award at the measurement date, which is the date performance is satisfied or services are rendered by the nonemployee. Compensation cost is remeasured each period prior to the establishment of the measurement date. Compensation costs, if any, are amortized over the underlying awards vesting terms.

        The application of SFAS No. 123(R) includes the use of a number of estimates to compute the fair value of options granted. Such estimates include the use of an appropriate valuation model, and assumptions including stock price volatility, expected terms and forfeiture rates. We have developed an index based on five comparable companies within the semiconductor industry to use as a volatility index due to the short period of time we have been public. Average option life has been calculated using the "simplified" method as prescribed in SEC Staff Accounting Bulletin 107. Estimated forfeiture rates are determined based on historical results. Changes in such assumptions could have a material impact on the financial statements. The only awards remaining are to the officers remaining as employees and members of the Board of Directors.

Capitalization of Software

        We were developing certain design tool software and application IP for use on our FPOA chips. The accounting for development costs of these applications is covered under SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed." Software development costs are capitalized once technological feasibility of an application is established and such costs are determined to be recoverable. Judgment is required in determining when technological feasibility is established, and this determination is evaluated on a project by project basis. For design tools and basic application IP of established algorithms, we define technological feasibility of an application development project to be the point at which a feasibility assessment is complete and a detailed technical design document is established. For design tools and complex applications of new algorithms or where a technical design document is not sufficiently detailed, technological feasibility is the point at which a working model has been created. All costs incurred prior to establishing technological feasibility are expensed when incurred and are included within research and development expense. Costs after that date are capitalized and then amortized to cost of sales based on the greater of a straight-line basis over the useful life of the applications or the ratio of current sales to the total current and anticipated future sales.

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        We evaluate future recoverability of capitalized amounts on a quarterly basis. The recoverability of capitalized application software is evaluated based on estimated future revenues of each specific application reduced by the estimated future costs of completing and disposing of that product.

Investments

        We invest available funds in government securities, money market funds and high quality securities. The investment criteria is based on the desire to preserve capital, maintain adequate balances to meet obligations, minimize risk of principal loss, and yield maximization within the investment guidelines. Trading and available-for-sale securities are valued at fair value, and held-to-maturity securities are reported at amortized cost. Fair value is based on quoted market prices. There is no active market for the APS we hold. Management used its best estimates and the guidelines as prescribed under SFAS No. 157 to value the APS and disclose their value in the financial statements. Refer to Note 2 of the financial statements for required disclosure.

Income Taxes

        We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. The asset and liability approach of SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the tax consequences of temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes using enacted tax rates in effect for the years in which the differences are expected to reverse. We have recorded a full valuation allowance to offset our net deferred tax assets based upon our history of generating losses and the related uncertainty about our ability to generate sufficient taxable income to realize these benefits.

Recently Issued Accounting Pronouncements

        See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Results of Operations

Years ended December 31, 2007 and 2008

        Revenue and Cost of Sales.    We recognized revenue for the year ended December 31, 2008 of $536,000 compared to $588,000 for the year ended December 31, 2007. Revenue in 2008 consisted of the sale of production chips of $531,000 and $4,000 in evaluation boards. Revenue in 2007 consisted of the sale of evaluation boards of $53,000, development licenses of $79,000, application IP of $40,000, NRE services of $400,000 and production chips of $16,000. Cost of sales was $1,195,000 and $655,000 for the years ended December 31, 2008 and 2007, respectively. Cost of sales for 2008 consisted of product costs of $36,000, scrap costs of $370,000, a noncash charge to increase the excess and obsolete inventory reserve of $776,000, and other costs of $13,000. The scrap costs in 2008 were for proprietary inventory that could not be sold and was subsequently disposed. The excess and obsolete inventory reserve was required because, due to our curtailed sales and operations, we are unable to determine the probability of future FPOA sales. Cost of sales for 2007 consisted of evaluation boards of $31,000, development licenses of $60,000, application IP of $13,000, NRE costs of $397,000, chip costs of $1,000 and other costs of $153,000. Other costs in 2007 include year-end inventory adjustments of $14,000 and a noncash charge to increase the excess and obsolete inventory reserve by $106,000.

        Research and Development.    Research and development costs decreased 42% or $5,180,000 to $7,267,000 for the year ended December 31, 2008 compared to $12,447,000 for the year ended December 31, 2007. The $5,180,000 decrease was primarily the result of our suspending research and development activities based on our Board of Directors' decision to curtail operations that decreased employee related expenses of $2,798,000, consulting and contractor payments of $2,067,000, design tool

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costs of $340,000, application IP charges of $264,000, building and equipment rent of $360,000, maintenance costs of $117,000, recruiting and other costs of $148,000, and travel costs of $85,000. These decreases were offset by increased product development costs associated with completing the design phase of the next generation of FPOA products of $999,000.

        Selling, General and Administrative.    Selling, general and administrative costs decreased 46% or $4,116,000 to $4,749,000 for the year ended December 31, 2008 from $8,865,000 for the year ended December 31, 2007. The $4,116,000 decrease was primarily the result of sales activities being suspended and general activities being reduced as the Board of Directors curtailed operations while evaluating strategic options. Decreased expenses include compensation costs of $2,965,000, advertising and product promotions of $123,000, consulting and contract fees of $289,000, travel of $341,000, insurance of $42,000, computer hardware and software expenses of $106,000 and general expenses due to curtailing operations of $363,000, offset by increased investment banking activity costs of $113,000.

        Restructuring and Impairment Charges.    For the year ended December 31, 2008, we recorded restructuring and impairment charges of $2,618,000. See further discussion of these restructuring and impairment charges in Note 2 of the financial statements.

        Other Income (Expense).    Other income for the year ended December 31, 2008 of $682,000 consisted of interest income on invested cash balances of $702,000 and a foreign currency loss of $20,000. Other income for the year ended December 31, 2007 of $1,014,000 consisted of interest income on invested cash balances of $1,048,000 and a foreign currency loss of $34,000.

Years ended December 31, 2006 and 2007

        Revenue and Cost of Sales.    We recognized revenue for the year ended December 31, 2007 of $588,000 compared to $53,000 for the year ended December 31, 2006. Revenue in 2007 consisted of the sale of evaluation boards of $53,000, development licenses of $79,000, application IP of $40,000, NRE services of $400,000 and production chips of $16,000. Revenue in 2006 consisted of $43,000 from the sale of evaluation units, $5,000 from the sale of product and $5,000 in other related sales. Cost of sales was $655,000 and $126,000 for the years ended December 31, 2007 and 2006, respectively. Cost of sales for 2007 consisted of evaluation boards of $31,000, development licenses of $60,000, application IP of $13,000, NRE costs of $397,000, chip costs of $1,000 and other costs of $154,000. Other costs in 2007 include year-end inventory adjustments of $14,000 and a noncash charge to increase the excess and obsolete inventory reserve by $106,000. Cost of sales for 2006 included the associated costs of the evaluation units, $23,000; product costs, $1,000; other costs associated with sales, $10,000; and a $92,000 noncash charge associated with the excess and obsolete inventory reserve.

        Research and Development.    Research and development costs decreased 12% or $1,643,000 to $12,447,000 for the year ended December 31, 2007 compared to $14,090,000 for the year ended December 31, 2006. The $1,643,000 decrease was the result of decreased engineering expenses of $2,951,000, reduced design tool costs of $193,000, rent expense of $566,000, decreased maintenance contracts of $157,000, and reduced travel costs of $60,000. These decreases were offset by increased payroll costs of $1,040,000 due to a head count increase from 34 to 45, contractor expense of $465,000, charges of $420,000 for the development of application IP, and a charge for impaired application IP of $359,000. The higher 2006 expense mainly was driven by the expenses associated with design completion, tape out and validation of our first production product line. Engineering expenses in 2007 were mainly employee related expenses for the design efforts of the next generation of products anticipated to be taped out in 2008. We reduced rent expense by consolidating the majority of engineering efforts in Portland and moving remaining engineers to a smaller location in Minnesota.

        Selling, General and Administrative.    Selling, general and administrative costs decreased 3% or $268,000 from $9,133,000 for the year ended December 31, 2006 to $8,865,000 for the year ended

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December 31, 2007. The $268,000 decrease was the result of decreased compensation costs of $795,000, of which $1,918,000 were non-cash expenses related to stock options and restricted stock awards, offset by headcount increases of $1,123,000 primarily in the areas of sales, marketing and operations. Sales and general operating costs increased due to increases in commissions of $32,000, advertising and product promotions of $148,000, recruiting fees of $58,000, travel of $54,000, insurance and professional services of $76,000, and other infrastructure costs of $158,000.

        Other Income (Expense).    Other income for the year ended December 31, 2007 of $1,014,000 consisted of interest income on invested cash balances. Other income for the year ended December 31, 2006 of $653,000 consisted of interest income from investments and cash balances.

Liquidity and Capital Resources

        During 2006, we received $11,661,000 of net proceeds from a private placement of our common stock and warrants to purchase common stock, $512,000 from the exercise of 253,967 warrants and $80,000 from the exercise of 91,065 options. During 2007, we received $36,473,000 from a public sale of common stock and $30,000 from the exercise of warrants and stock options. During 2008, we generated no sources of financing.

        Our future capital requirements will depend on many factors, including the strategic direction the company chooses, our sales levels, the type and structure of any strategic transaction into which we enter, and working capital needs. We believe that our cash on hand and investment securities will be sufficient to meet our current obligations as well as projected expenditures for the next twelve months at current spending levels. However, our long-term financing requirements will depend significantly on the strategic direction we choose to take. We cannot quantify our long-term cash requirements until a strategic alternative is decided. Should cash and investments and revenues generated from a strategic alternative not meet our needs, we may need to raise funds through the issuance of debt or equity securities. These securities may have rights senior to those currently associated with our common stock, and they could contain covenants that would restrict our operations. If we are unable to obtain additional financing, we may be unable to continue our operations.

Net Cash Used in Operating Activities

        Net cash used in operating activities was $18,992,000, $19,536,000 and $14,048,000 for the years ended December 31, 2006, 2007 and 2008, respectively. Net cash used for operating activities for the year ended December 31, 2006 was to fund on-going research and development activities, tape out our initial production chip and restructure and grow the sales, marketing and administrative organization in order to begin the commercialization of our FPOA technology and operate as a publicly-traded company. Net cash used for operating activities for the year December 31, 2007 was for developing our next generation of FPOA chips, developing applications and software, commercialization of our initial products and general costs of a being a publicly-traded company. Net cash used for operating activities for the year December 31, 2008 was for severance and shut down expenses of $2,618,000, costs associated with evaluating strategic alternatives of $113,000 and general operating costs of $11,317,000.

Net Cash Provided (Used) by Investing Activities

        For the years ended December 31, 2006 and 2007, cash used in investing activities was $519,000 and $25,482,000, respectively. For the year ended December 31, 2008, cash provided by investing activities was $21,482,000. Net cash used in 2006 was used to continue the development of our infrastructure and lab equipment used to qualify our FPOA chips and for restricted cash. Net cash used in 2007 was to acquire investments to maximize the return of excess cash received in our June 2007 stock sale. Net cash provided in 2008 was from the sale of investment securities less the purchase of lab equipment.

21

Net Cash Provided by Financing Activities

        Net cash provided by financing activities was $12,253,000, $36,503,000 and $0 for the years ended December 31, 2006, 2007 and 2008, respectively. For 2006 and 2007, financing cash flows consist of the proceeds from the issuance of common stock and warrants for the purchase of common stock and the exercise of common stock warrants and stock options.

Contractual Cash Obligations

        The following tables show the future payments that we are obligated to make based on agreements in place as of December 31, 2008 (in thousands); these expenses are for non-cancellable commitments for design licenses and operating leases:

	Due in the Year Ended December 31,
	2009		2010		2011		2012		2013		Thereafter		Total
Operating leases	$	345	$	344	$	226	$	—	$	—	$	—	$	915
Purchase obligations		302		151		—		—		—		—		453
Total	$	647	$	495	$	226	$	—	$	—	$	—	$	1,368

Off-Balance Sheet Arrangements

        We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

        Our exposure to market risk is confined to our cash equivalents and investments. We have invested in high-quality financial instruments, primarily money market funds, federal agency notes and asset-backed securities, which we believe are subject to limited credit risks. Our investments were matched to forecasted cash needs such that investments would not have to be sold prior to maturity and expose MathStar to losses due to interest rate changes. The market risks associated with our holding of APS is reflected in the market adjustment recorded in the financial statements. Given the settlement between UBS and regulatory agencies, we believe we will recover approximately 100% of our investment in the APS plus all accrued interest.

22

Item 8.    Financial Statements and Supplementary Data

        Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2008 is as follows:

		Three Months Ended
		March 31,			June 30,			Sept. 30,			Dec. 31,
		(In thousands, except per share amounts)
2007
Revenue		$	92		$	120		$	63		$	313
Cost of goods sold			69			54			58			474
Gross profit (loss)			23			66			5			(161	)
Operating expenses:
	Research and development		3,125			2,607			2,655			4,060
	Selling, general and administrative		2,462			2,107			2,164			2,132
	Total operating expenses		5,587			4,714			4,819			6,192
Operating loss			(5,564	)		(4,648	)		(4,814	)		(6,353	)
Other income, net			117			93			421			383
Net loss		$	(5,447	)	$	(4,555	)	$	(4,393	)	$	(5,970	)
Basic and diluted net loss per share		$	(1.30	)	$	(0.94	)	$	(0.48	)	$	(0.65	)
Weighted average basic and diluted shares outstanding			4,179			4,827			9,181			9,181
2008
Revenue		$	226		$	54		$	80		$	176
Cost of goods sold			291			904			—			—
Gross profit (loss)			(65	)		(850	)		80			176
Operating expenses:
	Research and development		3,552			3,542			165			8
	Selling, general and administrative		2,093			1,469			666			521
	Restructuring and impairment charges(1)					2,601			17
	Total operating expenses		5,645			7,612			848			529
Operating loss			(5,710	)		(8,462	)		(768	)		(353	)
Other income, net			317			199			107			59
Net loss		$	(5,393	)	$	(8,263	)	$	(661	)	$	(294	)
Basic and diluted net loss per share		$	(.59	)	$	(.90	)	$	(.07	)	$	(.03	)
Weighted average basic and diluted shares outstanding			9,181			9,181			9,181			9,181

(1)

Operating expenses for the three months ended June 30, 2008 and September 30, 2008 included restructuring and impairment charges totaling $2,601,000 and $17,000 respectively. There were no similar charges in 2007 or in the three months ended March 31, 2008 or December 31, 2008.

23

Report of Independent Registered Public Accounting Firm

        To the Board of Directors and Stockholders of MathStar, Inc.:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of MathStar, Inc. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As described in Note 1 of the consolidated financial statements, during 2008 the Company curtailed operations and is currently evaluating strategic alternatives including, but not limited to, restarting the Company, merging with or acquiring another company, increasing operations in another structure or liquidation. As of the date of this report, the Company has not committed to any of the strategic alternatives being evaluated.

PricewaterhouseCoopers LLP
Portland, Oregon
March 31, 2009

24

MathStar, Inc.

Consolidated Balance Sheets

(in thousands, except per share data)

				December 31,
				2007			2008
Assets
Current assets
	Cash and cash equivalents			$	4,339		$	11,767
	Restricted cash				107			—
	Investments in marketable securities—short term				22,200			2,530
	Accounts receivable				271			176
	Inventory				623			—
	Prepaid expenses and other current assets				1,326			222
		Total current assets			28,866			14,695
Property and equipment, net					557			60
Investments in marketable securities—long term					2,599			785
Put option					—			26
Other assets					435			23
		Total assets		$	32,457		$	15,589
Liabilities and Stockholders' Equity
Current liabilities
	Accounts payable			$	930		$	16
	Deferred revenue				162			—
	Accrued expenses				1,416			519
			Total current liabilities		2,508			535
		Other long term liabilities			453			151
		Total liabilities			2,961			686
Commitments and contingencies (Note 9)
Stockholders' equity
	Preferred stock, $0.01 par value; 10,000 shares authorized; no shares issued and outstanding				—			—
	Common stock, $0.01 par value; 18,000 shares authorized; 9,181 shares issued and outstanding at December 31, 2007 and 2008				459			92
	Additional paid-in capital				155,539			155,924
	Accumulated deficit				(126,502	)		(141,113	)
		Total stockholders' equity			29,496			14,903
		Total liabilities and stockholders' equity		$	32,457		$	15,589

The accompanying notes are an integral part of these consolidated financial statements.

25

MathStar, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

		Year Ended December 31,
		2006			2007			2008
Revenue		$	53		$	588		$	536
Cost of sales			126			655			1,195
Gross loss			(73	)		(67	)		(659	)
Operating expenses
	Research and development		14,090			12,447			7,267
	Selling, general and administrative		9,133			8,865			4,749
	Restructuring and impairment charges								2,618
			23,223			21,312			14,634
	Operating loss		(23,296	)		(21,379	)		(15,293	)
Interest income			653			1,048			702
Other income, net			—			(34	)		(20	)
Net loss		$	(22,643	)	$	(20,365	)	$	(14,611	)
Basic and diluted loss per share		$	(6.29	)	$	(2.97	)	$	(1.59	)
Weighted average basic and diluted shares outstanding			3,600			6,862			9,181

The accompanying notes are an integral part of these consolidated financial statements.

26

MathStar, Inc

Consolidated Statements of Changes in Stockholders' Equity

	Common Stock												Accumulated Other Comprehensive (Loss) Income
	Shares			Par Value			Additional Paid-in Capital			Unearned Compensation						Accumulated deficit			Total
Balances at December 31, 2005		17,415		$	175		$	105,717		$	(2,224	)		—		$	(83,494	)	$	20,174
Exercise of warrants		253			2			510												512
Stock option exercises		91			1			79												80
Issuance of common stock in PIPE offering, net of offering costs of $910		3,142			31			11,630												11,661
Restricted stock issued to employees, net		21
Reclassify Unearned Compensation expense on adoption of FAS 123(R)								(2,224	)		2,224
Contractor warrant expense								169												169
Stock-based employee compensation—								2,664												2,664
Net loss																	(22,643	)		(22,643	)
Balances at December 31, 2006		20,922			209			118,545			—			—			(106,137	)		12,617
Exercise of warrants		5						21												21
Stock option exercises		10						9												9
Issuance of common stock in equity offering		25,000			250			36,223												36,473
Contractor warrant expense								2												2
Stock-based employee compensation		(30	)					739												739
Net loss																	(20,365	)		(20,365	)
Balances at December 31, 2007		45,907			459			155,539			—			—			(126,502	)		29,496
1 for 5 reverse stock split		(36,726	)		(367	)		367
Stock-based employee compensation								18												18
Mark to market—available for sale securities														(43	)					(43	)
Transfer loss from available-for-sale securities to trading securities														43			—			43
Net loss																	(14,611	)		(14,611	)
Balances at December 31, 2008		9,181		$	92		$	155,924		$	—			—		$	(141,113	)	$	14,903

The accompanying notes are an integral part of these consolidated financial statements.

27

MathStar, Inc

Consolidated Statements of Cash Flows

(in thousands, except per share data)

				Year Ended December 31,
				2006			2007			2008
Cash flows from operating activities
Net loss				$	(22,643	)	$	(20,365	)	$	(14,611	)
Adjustments to reconcile net loss to net cash used in operating activities
	Depreciation and amortization				140			182			171
	Loss on asset disposal				4			3			58
	Issuance of put option				—			—			(26	)
	Mark to market, trading securities				—			—			43
	Asset impairment charges				—			—			1,006
	Amortization of discount on held-to-maturity securities				—			13			74
	Loss on sale of available-for-sale securities				—			—			7
	Non-cash changes in inventory				—			—			734
	Impairment of capitalized application software				—			359			—
	Stock-based compensation				2,833			741			18
	Restructuring charges				—			—			563
	Gain on sale of marketable securities				—			—			(42	)
	Foreign currency remeasurement				—			(9	)		(44	)
	Change in operating assets and liabilities
		Accounts receivable			61			(257	)		95
		Inventory			(274	)		(13	)		(111	)
		Prepaid expenses and other assets			(81	)		(200	)		804
		Accounts payable			1,057			(861	)		(914	)
		Deferred revenue			—			162			(162	)
		Accrued expenses			(89	)		709			(1,711	)
			Net cash used in operating activities		(18,992	)		(19,536	)		(14,048	)
Cash flows from investing activities
Purchase of property and equipment					(416	)		(243	)		(50	)
Proceeds from sale of equipment					—			—			23
Purchase of capitalized application software					—			(423	)		—
Proceeds from sale of held-to-maturity securities					—			—			22,558
Proceeds from sale of available-for-sale securities					—			—			4,460
Purchases of held-to-maturity securities					—			(22,207	)		(2,931	)
Purchases of available-for-sale securities					—			(2,605	)		(2,685	)
Restricted cash					(103	)		(4	)		107
			Net cash (used in) provided by investing activities		(519	)		(25,482	)		21,482
Cash flows from financing activities
Proceeds from issuance of common stock, net of offering costs					11,661			36,473			—
Proceeds from exercise of warrants, net of costs					512			21			—
Proceeds from exercise of stock options					80			9			—
			Net cash provided by financing activities		12,253			36,503			—
Effect of exchange rate changes on cash								(37	)		(6	)
			Net (decrease) increase in cash and cash equivalents		(7,258	)		(8,552	)		7,428
Cash and cash equivalents
Beginning of period					20,149			12,891			4,339
End of period				$	12,891		$	4,339		$	11,767

The accompanying notes are an integral part of these consolidated financial statements.

28

MathStar, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except per share data)

1.    Principles of Consolidation, Nature of the Business and Going Concern

        The accompanying consolidated financial statement as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 include accounts of MathStar Holdings B.V. and its wholly-owned subsidiary, MathStar Limited, collectively MathStar, Inc. ("MathStar" or "the Company"). The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All material intercompany accounts and transactions have been eliminated in consolidation.

        The Company was incorporated as a Minnesota corporation in April 1997 and reincorporated under Delaware law in June 2005. The Company is a fabless semiconductor company addressing the reconfigurable logic markets with a new class of platform chips designed to be high performance, reconfigurable integrated circuits based on the Company's proprietary silicon object technology.

        In November 2005, the Company closed on its initial public offering of 800 shares of its common stock at $30.00 per share, and in December 2005, the Company closed on the underwriter's overallotment option of 120 shares of the Company's common stock at $30.00 per share, resulting in net proceeds to the Company of $24,633. In October 2006, the Company sold 629 shares at $20.00 per share in a private placement, with net proceeds after expenses of $11,661. In June 2007, the Company sold 5,000 shares at $8.00 per share, raising net proceeds of $36,473.

        On May 20, 2008, our Board of Directors voted to suspend research and development activities. During the three months ended June 30, 2008, we announced a curtailment of operations as our Board evaluated strategic alternatives. Strategic alternatives that are being evaluated by our Board of Directors and management include, but are not limited to, restarting the company; merging with or acquiring another company, including or excluding our intellectual property (IP); increasing operations in another structure; or liquidation. We have engaged a third party investment banking firm to explore the sale of intellectual property and patents and potential merger and acquisition alternatives.

        The accompanying financial statements have been prepared assuming the Company will continue as a going concern. Although the Company has incurred recurring losses and negative cash flows from operations, we have met all financial obligations with vendors, key suppliers, and strategic partners both prior and subsequent to curtailing operations. We have sufficient cash and investments to meet all known obligations as well as projected expenditures for the next twelve months at current spending levels. However, since we have not committed to any of the strategic alternatives being evaluated, we cannot predict our long-term cash needs or ultimate cash requirements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

2.    Restructuring and Impairment Charges

        On May 20, 2008, the Company announced a curtailment of its operations as it evaluated strategic alternatives. This decision resulted in restructuring and impairment charges of $3,500 for the year ended December 31, 2008. Management determined that it was highly likely that certain operational assets would not be used and no alternatives existed. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" issued by the Financial Accounting Standards Board ("FASB"), these assets were deemed to be impaired and either held-for-sale or abandoned and written down to their fair market value. A plan to locate potential buyers was put in place for their disposal, and no further depreciation expense will be

29

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

2.    Restructuring and Impairment Charges (Continued)

charged to the Company's operating activity. In addition, the Company evaluated assets that were not abandoned or held-for-sale and determined that the estimated useful lives of these assets should be shortened. Accordingly, higher depreciation expense has been incurred since May 20, 2008. As well, in accordance with SFAS No. 146 issued by the FASB, "Accounting for Costs Associated with Exit or Disposal Activities", certain one-time charges relating to severance of terminated employees, and fees associated with early contract terminations no longer used and giving economic benefit to the Company, were recorded. As the liabilities for these charges are settled, payment will be made against the liability, and there will not be any further impact on the Company's operating results.

        During the quarter ended September 30, 2008, the Company ceased all operations in Minnesota and is no longer utilizing the facility covered under a non-cancellable lease arrangement. MathStar recognized a restructuring charge of $17 for the potential liability of this lease.

        Management believes that no further charges will be incurred for this activity, except for potential termination of non-cancellable lease liabilities for the Hillsboro, Oregon facility, which will depend on the strategic direction chosen by the Company. The amount of the potential lease termination liability will not be known until the strategic direction is identified. Total commitments under this lease are $886 as of December 31, 2008. Below is the detail of restructuring and impairment charges.

	Twelve Months Ended December 31, 2008
Inventory abandoned	$	349
Increase in excess and obsolete reserve		533
Charged to cost of sales		882
Severance		1,506
Fair market adjustment of assets held-for-sale		328
Contract termination		57
Assets abandoned		727
Charged to operating expenses as restructuring and impairment charges		2,618
Total charges for restructuring and impairment	$	3,500

30

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

2.    Restructuring and Impairment Charges (Continued)

        Severance expense of $1,506 impacted approximately 75 employees, which accounted for a majority of the Company's workforce. The following is a roll forward of the restructuring liability for the year ended December 31, 2008.

	Restructuring Liability
Liability as of March 31, 2008	$	—
Additions		1,506
Payments		(943	)
Liability as of June 30, 2008		563
Additions		17
Payments		(568	)
Liability as of September 30, 2008		12
Additions		—
Payments		(8	)
Liability as of December 31, 2008	$	4

3. Summary of Significant Accounting Policies

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

        The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

Fair Value of Financial Instruments

        The carrying amounts of the Company's financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued expenses, approximate their fair values due to their short maturities and/or market-consistent interest rates. Investments classified as trading or available-for-sale are recorded at fair value. Investments recorded as held-to-maturity are recorded at amortized cost, which, as of December 31, 2008, approximates fair value. The estimated fair value of these investments is more fully disclosed in Note 4 of the financial statements.

Inventory

        Inventory is valued at the lower of cost or market and held as an asset until such time as it is consumed or sold. Inventory is consumed on a first in, first out basis. On a quarterly basis,

31

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

3. Summary of Significant Accounting Policies (Continued)

management reviews the inventory balance for inventory that is not forecasted to be used in the normal course of business. A reserve will be established for any amount deemed excessive or obsolete. This will result in a non-cash charge to cost of sales. If and when the inventory is written off, the inventory reduction is offset against the reserve, with no resulting income statement impact. All inventory currently held is fully reserved as of December 31, 2008 due to our curtailed sales activity and inability to predict future sales.

Property and Equipment

        Property and equipment are recorded at cost and depreciated over their estimated useful lives, initially determined to be two to five years, using the straight-line method. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in operating results. Repairs and maintenance costs are expensed as incurred. In connection with the curtailment of operations, certain useful lives were re-evaluated and shortened to five months from the date of announcement.

Patents

        The Company has filed applications for patents with the U.S. Patent and Trademark Office. The legal fees and application costs associated with obtaining patents from the U.S. Patent and Trademark Offices are expensed as incurred based on uncertainty as to the recoverability of these amounts.

Long-Lived Assets

        The recoverability of long-lived assets is assessed periodically or whenever adverse events or changes in circumstances or business climate indicate that the expected cash flows previously anticipated warrant a reassessment. When such reassessments indicate the potential of impairment, all business factors are considered and, if the carrying value of such assets is not likely to be recovered from future undiscounted operating cash flows, they will be written down for financial reporting purposes. During 2008, all assets related to curtailed operations were either disposed of or written down to fair market value. As of December 31, 2008 we had long-lived assets with a net book value of $60.

Research and Development

        Research and development expenses represent costs incurred for designing and engineering of the Company's products, including the costs of developing design tools and applications to enable customers to more easily utilize the Company's products. The Company expenses all research and development costs related to development of its FPOA chips. Development of certain design tools and application IP includes the development of software for resale. All research and development was discontinued based on the Board of Directors' decision to curtail operations.

Capitalization of Software

        The Company was developing certain design tool software and application IP for use on its FPOA chips. The accounting for development costs of these applications is covered under SFAS No. 86,

32

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

3. Summary of Significant Accounting Policies (Continued)

"Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed." Software development costs are capitalized once technological feasibility of an application is established and such costs are determined to be recoverable. Judgment is required in determining when technological feasibility is established, and this determination is evaluated on a project by project basis. For design tools and basic application IP of established algorithms, we define technological feasibility of an application development project to be the point at which a feasibility assessment is complete and a detailed technical design document is established. For design tools and complex applications of new algorithms or where a technical design document is not sufficiently detailed, technological feasibility is the point at which a working model has been created. All costs incurred prior to establishing technological feasibility are expensed when incurred and are included within research and development expense. Costs after that date are capitalized and then amortized to cost of sales based on the greater of a straight-line basis over the useful life of the applications or the ratio of current sales to the total current and anticipated future sales.

        We evaluate future recoverability of capitalized amounts on a quarterly basis. The recoverability of capitalized application software is evaluated based on estimated future revenues of each specific application reduced by the future costs of completing and disposing of that product.

Investments

        The Company invests available funds in government securities, money market funds and high quality securities. The investment criteria is based on the desire to preserve capital, maintain adequate balances to meet obligations, minimize risk of principal loss, and yield maximization within the investment guidelines. Trading and available-for-sale securities are valued at fair value and held-to-maturity securities are reported at amortized cost.

Revenue Recognition

        We recognize revenue from the sale of products or services in the following four general areas: (1) production chips, (2) evaluation boards and licenses, (3) application IP and (4) NRE and other. Based on the type of product or service delivered, revenues are recognized in accordance with Staff Accounting Bulletin ("SAB") 104, Revenue Recognition ("SAB 104"); Emerging Issues Task Force ("EITF") Issue No. 00-21 Revenue Arrangements with Multiple Deliverables; or, if our arrangements contain software that is more than incidental to the product in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended ("SOP 97-2").

        We recognize revenue from the sale of production chips, evaluation boards, licenses and NRE and other in accordance with SAB 104. Production chip revenues consist of sales of our FPOAs. Revenues generated from evaluation boards and licenses consist primarily of the hardware and license agreements necessary in order for our customers to program, or map, their intellectual property applications, or algorithms, to our FPOA chips. Revenues from NRE are derived from situations where the Company will develop the initial design and prototype for a customer to accelerate their time to market. We recognize revenues when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, collection of resulting receivables is reasonably assured, and there are no customer acceptance requirements or no remaining significant obligations.

33

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

3. Summary of Significant Accounting Policies (Continued)

        When more than one element is contained in a single arrangement, we allocate revenue in accordance with EITF 00-21 between the elements based on each element's relative fair value, provided that each element meets the criteria as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and verifiable evidence of the fair value of the separate element. Fair value is generally determined based upon the price charged when the element is sold separately. For most multiple element arrangements to date the fair value of each element has not been objectively determinable; therefore, all revenue under such arrangements has been recognized on delivery of the final element in the arrangement.

        Certain of our production chip sales are made to distributors under agreements providing price protection and right of return on unsold merchandise. Revenue and cost relating to such distributor sales are deferred until the product is sold by the distributor or return privileges and price protection rights terminate, at which time related estimated distributor resale revenue, estimated effects of distributor price adjustments, and estimated costs are reflected in income.

        We recognize revenue from the sale of application IP in accordance with SOP 97-2. Application IP revenues are derived from a library of existing applications developed by the Company to provide customers with an established algorithm. We recognize revenues when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, collection of resulting receivables is probable, and there are no customer acceptance requirements or no remaining significant obligations. For arrangements with multiple elements, we recognize revenue when vendor-specific objective evidence ("VSOE") exists for all undelivered elements of the arrangement or at the point when all elements have been delivered. We do not provide software maintenance and support or have any continuing obligations post delivery.

Warranties

        We provide warranties on the products we sell. To date, the costs incurred under these warranties have been immaterial.

Stock-Based Compensation

        On January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (Revised 2001), using the modified prospective transition method. Under the transition method, compensation costs recognized in periods after the date of adoption include compensation costs for share-based payments granted prior to but not vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Compensation costs for all share-based payments granted subsequent to January 1, 2006 are based on the grant date fair value estimated in accordance with SFAS No. 123(R).

        The Company accounts for restricted stock by amortizing the grant date fair value over the vesting period.

        The Company accounts for stock-based compensation to nonemployees using the fair value method prescribed by Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Compensation cost for awards granted to nonemployees is measured based on the fair value of the

34

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

3. Summary of Significant Accounting Policies (Continued)

award at the measurement date, which is the date performance is satisfied or services are rendered by the nonemployee. Fair value is remeasured each period prior to the establishment of the measurement date. Compensation costs, if any, are amortized over the underlying awards' vesting terms.

Income Taxes

        The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. The asset and liability approach of SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the tax consequences of temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes using enacted tax rates in effect for the years in which the differences are expected to reverse.

        The Company adopted the provisions of the FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. This adoption did not have a material effect on the Company's consolidated financial position or results of operations. As of December 31, 2008, the Company had $52,536 of deferred tax assets; however, valuation allowances have been established to fully offset these deferred tax assets due to the uncertainty about the Company's ability to generate the future taxable income necessary to realize these deferred tax assets, particularly in light of the Company's recent history of significant operating losses. The Company records interest and penalties, if any, within operating expenses as a tax expense.

        The Company files federal and state income tax returns in the United States. The federal statute of limitations has not expired for fiscal years 2005, 2006 and 2007, respectively. With limited exceptions, the Company is no longer subject to state and foreign tax examinations for years before fiscal 2005. The Company is not currently under examination in any of its major tax jurisdictions.

Concentration of Credit Risk

        Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents primarily in checking and money market accounts with one financial institution that management considers creditworthy. However, the Federal Deposit Insurance Corporation does not insure most of these accounts.

        During 2008, we had two significant customers that represented 75% and 9% of our revenue during the year ended December 31, 2008 and 100% and 0% our accounts receivable balance as of December 31, 2008, respectively. These two customers represented 51% and 17% of our revenue in the year ended December 31, 2007, respectively. The outstanding receivable as of December 31, 2008 has been subsequently collected.

Earnings Per Share

        Basic earnings per share are computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants using the treasury stock method. Potential dilutive shares for convertible notes payable are determined based on the if-converted method. Options and warrants to purchase 5,268,

35

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

3. Summary of Significant Accounting Policies (Continued)

6,712 and 737 shares of common stock were outstanding at December 31, 2006, 2007 and 2008, respectively, but were not included in the computation of net loss per share, as their effect was anti-dilutive. Common shares issuable upon exercise of the convertible notes payable and related accrued interest and shares of the Company's restricted stock also were not included in the computation of net loss per share, as their effect was anti-dilutive (see Note 6).

New Accounting Pronouncements

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.

        Relative to SFAS No. 157, the FASB issued FASB Staff Positions (FSP) 157-1, 157-2 and 157-3. FSP 157-1 amends SFAS No. 157 to exclude SFAS No. 13, "Accounting for Leases," and its related interpretive accounting pronouncements that address leasing transactions. FSP SFAS No. 157-2 delays the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active.

        The adoption of SFAS No. 157 did not have a material effect on the Company's consolidated financial statements for financial assets and liabilities and any other assets and liabilities carried at fair value, although we expanded the disclosure requirements to comply with SFAS No. 157. The Company is currently in the process of evaluating the impact of adopting this pronouncement for its non-financial assets or liabilities.

        SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1	Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2	Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability
Level 3	Unobservable inputs for the asset or liability

        We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

36

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

3. Summary of Significant Accounting Policies (Continued)

        In February 2007, the FASB issued SFAS No. 159, "The fair value option for Financial Assets and Liabilities—including Amendment of FAS No. 115". SFAS No. 159 gives companies the option of recording certain financial assets and liabilities at fair value. SFAS No. 159 was effective for the Company commencing January 1, 2008. The Company's adoption of SFAS No. 159 did not have a material impact on its financial statements.

        In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations," and SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements". These standards aim to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of SFAS No. 141(R) and SFAS No. 160 apply to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2008. The Company does not expect that the provisions of SFAS No. 141(R) and SFAS No. 160 will have an effect on its consolidated financial position and results of operations.

4. Selected Balance Sheet Information

Restricted Cash

        As of December 31, 2007, we had pledged a $107 certificate of deposit as collateral for company-issued credit cards. All cards were cancelled and the funds were released by Pacific Continental Bank in July 2008. There are no restricted funds as of December 31, 2008.

Investment Securities

			December 31, 2007		December 31, 2008
Short-term
	Available-for-sale		$	—	$	—
		Municipal securities		2,605		—
	Held-to-maturity
		Government securities		19,595		—
		Corporate bonds and notes		—		2,530
	Total short-term investments			22,200		2,530
Long-term
	Trading
		Auction preferred securities		—		785
	Held-to-maturity
		Corporate bonds and notes		2,599		—
	Total long-term investments			2,599		785
Total investments			$	24,799	$	3,315

        Investments classified as held-to-maturity have timed maturities to meet forecasted cash needs and are reported at amortized cost, as the Company has the ability and intent to hold these securities to maturity. These investments were sold subsequent to December 31, 2008 in February 2009. Amortized

37

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

4. Selected Balance Sheet Information (Continued)

cost approximates fair value for held-to-maturity investments. Investments with maturities beyond one year are classified as long-term investment securities.

        Assets measured at fair value on a recurring basis at December 31, 2008 are as follows:

				Fair Value Measurement at Reporting Date Using
Description		12/31/08		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Put option		$	26		—		—	$	26
Trading securities			785		—		—		785
	Total	$	811		—		—	$	811

        We have auction preferred securities (APS), which are preferred equity instruments in a closed-end mutual fund that provide liquidity through an auction process conducted by an independent auction agent that resets the applicable dividend rate at pre-determined calendar intervals, generally every 28 days. These instruments are senior equity securities that have a liquidation preference of $26 per share plus the amount of accumulated but unpaid dividends. Upon the liquidation, dissolution or winding up of the fund, APS holders are entitled to receive their liquidation preference before any distribution or payment is made to holders of the fund's common shares. Dividends declared and payable on the APS have a priority over dividends on the fund's common shares. Outstanding APS may be redeemed at the option of the fund upon giving notice to APS holders.

        The Company generally invests in these securities as part of its overall cash management program. During the first quarter of 2008, the Company's APS failed to auction due to sell orders exceeding buy orders. The funds associated with failed auctions will not be accessible until a successful auction occurs, the fund redeems outstanding APS or an active secondary market is created and a buyer is identified outside of the auction process.

        At December 31, 2008, there was insufficient observable APS market information available to determine the fair value of the Company's investments in APS. Therefore, the Company estimated Level 3 fair values for these securities by incorporating assumptions that market participants would use in their estimates of fair value. Despite the failed auctions, the Company's APS continue to be highly rated by the rating agencies. Of the original $2,680 in APS purchased, $1,852 was redeemed on May 27, 2008 at face value.

38

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

4. Selected Balance Sheet Information (Continued)

        As further required by SFAS No. 157, provided below is a reconciliation of the beginning and ending balances for each type of security valued using a Level 3 valuation at December 31, 2008.

		Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
		Put Option		Auction Preferred Securities
Beginning balance as of December 31, 2007		$	—	$	—
Total gains (losses) realized/unrealized included in earnings			—		(43	)
	Purchases		—		2,680
	Settlements		—		(1,852	)
	Issuance of put option		26		—
Ending balance as of December 31, 2008		$	26	$	785

        On November 14 2008, we accepted an offer from UBS AG ("UBS"), providing us with rights related to our APS (the "Rights"). The Rights permit us to require UBS to purchase our APS at any time during the period from June 30, 2010 until July 2, 2012 at par value, which is defined as the price equal to the liquidation preference of the APS plus accrued but unpaid dividends or interest. Conversely, UBS has the right, in its discretion, to purchase or sell our APS at any time until July 2, 2012 so long as we receive payment at par value upon any sale or disposition. We expect to sell our APS under the Rights. However, if the Rights are not exercised before July 2, 2012, they will expire, and UBS will have no further rights or obligation to buy our APS. So long as we hold our APS, they will continue to accrue interest as determined by the auction process or the terms of the APS if the auction process fails. UBS's obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

        The Rights represent a firm agreement in accordance with SFAS No. 133, which defines a firm agreement as an agreement with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics: a) the agreement specifies all significant terms, including the quantity to be exchanged, the fixed price, and the timing of the transaction; and b) the agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable. The enforceability of the Rights results in a put option and should be recognized as a free-standing asset separate from the APS. Upon acceptance of the offer from UBS, we recorded $26 as the fair value of the put option asset with a corresponding credit to interest income, net. The put option does not meet the definition of a derivative instrument under SFAS No. 133. Therefore, we have elected to measure the put option at fair value under SFAS No. 159, which permits an entity to elect the fair value option for recognized financial assets, in order to match the changes in the fair value of the APS. As a result, unrealized gains and losses will be included in earnings in future periods. We expect that future changes in the fair value of the put option will approximate fair value movements in the related APS. Prior to accepting the UBS offer, we recorded our APS as investments available-for-sale. We recorded unrealized gains and losses on our available-for-sale debt securities, net of a tax benefit, in accumulated

39

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

4. Selected Balance Sheet Information (Continued)

other comprehensive income in the shareholders' equity section of our balance sheets. Such an unrealized loss did not reduce net income for the applicable accounting period.

        In connection with our acceptance of the UBS offer in November 2008, resulting in our right to require UBS to purchase our APS at par value beginning on June 30, 2010, we transferred our APS from investments available-for-sale to trading securities in accordance with SFAS No. 115. The transfer to trading securities reflects management's intent to exercise its put option during the period from June 30, 2010 to July 3, 2012. Prior to our agreement with UBS, our intent was to hold the APS until the market recovered. The unrealized loss on our APS was $43 as of December 31, 2008. Upon transfer to trading securities, we immediately recognized a loss of $43, which is included in interest income, net, for the amount of the unrealized loss not previously recognized in earnings.

Inventory

	December 31,
	2007			2008
Raw material and sub assemblies	$	113		$	—
Finished goods		717			446
		830			446
Less: Reserve for excess and obsolete inventory		(207	)		(446	)
Total inventory, net	$	623		$	—

Prepaid and Other Current Assets

	December 31,
	2007		2008
Design licenses (short term)	$	729	$	—
Interest receivable		307		61
Prepaid insurance		189		105
Prepaid rent		33		26
Other		68		30
Total prepaid and other current assets	$	1,326	$	222

40

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

4. Selected Balance Sheet Information (Continued)

Property and Equipment

	December 31,
	2007			2008
Computer equipment	$	144		$	50
Purchased software		533			91
Equipment		207			—
Furniture and fixtures		387			198
	$	1,271		$	339
Less: Accumulated depreciation		(714	)		(279	)
Total property and equipment, net	$	557		$	60

        Depreciation expense was $140, $170 and $162 for the years ended December 31, 2006, 2007 and 2008, respectively. In 2008, the Company disposed of assets with a net book value of $823, which resulted in a loss of $58.

Other Assets

	December 31,
	2007		2008
Deposits	$	36	$	23
Design licenses (long-term)		347		—
Capitalized IP, net of accumulated amortization of $12 (2007) and $0 (2008)		52		—
Total other assets	$	435	$	23

        Amortization expense associated with capitalized application software was $12 and $9 for the years ended December 31, 2007 and 2008, respectively. During the fourth quarter of 2007, the Company reassessed its ongoing application development projects and decided to reallocate internal resources to focus on projects with more immediate sales opportunities. This action reduced the estimated future revenues of certain projects for which costs had previously been capitalized and resulted in a $359 write-off to research and development expense in the fourth quarter of 2007. The remainder of the capitalized IP was written off in conjunction with the decision to curtail operations in 2008.

41

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

4. Selected Balance Sheet Information (Continued)

Accrued Expenses

	December 31,
	2007		2008
Accrued rent	$	48	$	47
Accrued compensation		702		9
Accrued professional fees		161		148
Accrued license contracts		389		302
Accrued restructuring charges				4
Other		116		9
Total accrued expenses	$	1,416	$	519

5. Stock Based Compensation

        Under SFAS No. 123(R), the Company has elected to use the modified prospective transition method, which requires the Company to record compensation expense in accordance with the provisions of SFAS No. 123(R) only for options issued after January 1, 2006. Stock based compensation expense for the years ended December 31, 2006, 2007 and 2008 was $274, $510 and $21, respectively. For the year ended December 31, 2006, the expense was $104 for research and development and $170 was charged to selling, general, and administrative expense. For the year ended December 31, 2007, the expense was $220 for research and development and $290 was charged to selling, general and administrative expense. For the year ended December 31, 2008, $2 was credited to research and development and $23 was charged to selling, general and administrative expense. Including the expenses for restricted stock and cheap stock, the total stock compensation expense for the years ended December 31, 2006, 2007 and 2008 was $2,664, $739 and $18, respectively.

        The Company has chosen to use the Black-Scholes option-pricing model to determine the fair value of options. The Black-Scholes model's variables are stock price volatility, average option life, risk free interest rate and dividend rate. The Company has developed an index based on its own stock price and five comparable companies within the semiconductor industry to use as a volatility index due to the short period of time it has been public. Average option life has been calculated using the simplified method prescribed in SEC Staff Accounting Bulletin 107. The Company anticipates using this method until it has enough history to calculate a meaningful life. The Company uses the treasury bill rate corresponding with the average life as its risk free interest rate. The dividend rate used is zero, as the Company does not have any plans to pay dividends. SFAS No. 123(R) requires the Company to estimate forfeitures in calculating the expense relating to stock-based compensation as opposed to recognizing these forfeitures and the corresponding reduction in expense as they occur.

        The following table summarizes the weighted average assumptions used by the Company in the Black-Scholes option-pricing model. Due to the curtailment of operations, it was determined that there was a high probability that all options granted to employees would be forfeited rather than exercised.

42

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

5. Stock Based Compensation (Continued)

As such, the forfeiture rate on those options was increased to 100% in the Black-Scholes model, and associated expenses were adjusted.

	Year Ended December 31,
	2006			2007			2008
Expected option term		6.25 Yrs			6.25 Yrs			6.25 Yrs
Expected volatility factor		71.2	%		67.0	%		64.3	%
Expected dividend yield		0	%		0	%		0	%
Risk free interest rate		4.62	%		4.42	%		2.63	%

Stock Option Plans

        In January 2002, the Company and its stockholders adopted the 2002 Combined Incentive and Nonstatutory Stock Option Plan (the "2002 Plan"). In April 2000, the Company and its stockholders adopted the 2000 Combined Incentive and Nonstatutory Stock Option Plan (the "2000 Plan"). Under the 2002 Plan and the 2000 Plan, 1,000 and 333 shares of the Company's common stock were reserved for issuance, respectively, for incentive and nonqualified stock options to directors, officers and employees of and advisers to the Company at exercise prices as determined by the Board of Directors on the date of grant. These options have exercise prices and vesting terms established by a committee of the Board of Directors at the time of each grant. Vesting terms of outstanding options are generally four years. In no event are the options exercisable more than ten years after the date of grant. These plans were terminated by the Board of Directors effective in May 2006, and options to purchase 199 shares were no longer available for grant under the plans. In 2007, options to purchase an additional 266 shares were forfeited and then cancelled from these plans.

        In October 2004, the Company adopted and in June 2005 its stockholders approved the 2004 Amended and Restated Long-Term Incentive Plan (the "2004 Plan"). Under the 2004 Plan, 1,633 shares of the Company's common stock were reserved for the issuance of restricted stock and incentive and nonqualified stock options to directors, officers and employees of and advisors to the Company at exercise prices as determined by the Board of Directors on the dates of grants. With the approval of shareholders at the 2006 and 2007 annual meetings, 300 and 1,367 additional shares were reserved, respectively, under the 2004 Plan. In connection with the acquisition of Digital Mediacom, Inc. ("DMC") on August 31, 2001, the Company assumed DMC's stock option plan, and 744 shares of the Company's common stock had been reserved for issuance under the assumed plan. This plan was cancelled in May 2006.

	Shares Available for Grant			Number of Options			Weighted- Average Exercise Price
Outstanding at December 31, 2007		46			670		$	18.13
Net increase in authorized shares		600			—			—
Options granted		(30	)		30			2.34
Options forfeited		596			(596	)		16.74
Options cancelled		(163	)		—			—
Restricted stock cancelled		—			—			—
Options exercised		—			—			—
Outstanding at December 31, 2008		1,049			104		$	21.54

43

MathStar, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except per share data)

5. Stock Based Compensation (Continued)

        The following table summarizes information about stock options outstanding at December 31, 2008:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Number Outstanding		Weighted- Average Exercise Price
$0.72		4		9.95	$	0.72		0	$	—
$3.10-$5.35		11		7.49	$	4.00		11	$	4.00
$8.45		18		8.38	$	8.45		5	$	8.45
$17.25-$24.45		28		3.35	$	19.50		26	$	19.44
$30.00-$31.50		25		6.72	$	30.60		23	$	30.52
$41.25		18		3.02	$	41.25		18	$	41.25
		104		5.69	$	21.54		83	$	24.47

        Options outstanding at December 31, 2008 had an aggregate intrinsic value of $0, and options exercisable at December 31, 2008 had a weighted average contractual term of 4.97 years and an aggregate intrinsic value of $0.

        The weighted-average grant-date fair value of options granted during the years ended December 31, 2006, 2007 and 2008 was $3.49, $0.99 and $1.48, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006 and 2007 was $350 and $35, respectively. There were no options exercised during the year ended December 31, 2008. The total fair value of shares vested for the years ended December 31, 2006, 2007 and 2008 were $1,698, $1,890 and $896, respectively.

        The following table shows the status of the Company's unvested shares as of December 31, 2008 and changes during the year then ended:

	Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2007		456		$	6.92
Granted		25			1.39
Vested		(64	)		7.87
Forfeited		(396	)		6.42
Unvested at December 31, 2008		21		$	6.87

        Stock options outstanding at December 31, 2008 include options to purchase 78 shares that were granted to non-employees and options to purchase 26 shares that were granted to employees. Compensation expense related to stock options that will be amortized into future operating expenses was $83 at December 31, 2008. That cost is expected to be recognized over a weighted-average period of 3.21 years.

44

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

5. Stock Based Compensation (Continued)

Cheap Stock

        In 2005, the Company issued options to purchase 1,065 shares to certain employees at a price below the fair market value on the date of grant. Under Accounting Policy Bulletin, or APB, No. 25 "Accounting for Stock Issued to Employees", the difference between the fair value and the exercisable value is expensed over the vesting period of four years. This resulted in compensation expenses of $239 and $224 for the years ended December 31, 2006 and 2007. For the year ended December 31, 2008, we recaptured a net $3 due to the termination of employees in the quarter ended June 30, 2008. All options issued after our initial public offering were issued at the fair value at the date of grant, and no cheap stock expense was incurred. All cheap stock expense will be fully realized by the end of 2009.

6. Stockholders' Equity

Authorized Shares

        The Company's authorized capital consists of 28,000 shares of capital stock, of which 18,000 shares have been designated as common stock ($0.01 per share par value), and 10,000 shares have been designated as preferred stock ($0.01 per share par value). In addition, as of December 31, 2008, 1,860 of the 18,000 shares of common stock had been reserved for issuance under the Company's stock option plans. Each share of common stock entitles the holder to one vote.

Stock Split

        On May 23, 2008, the Board of Directors and stockholders declared a one-for-five reverse stock split. The accompanying financial statements and related notes give retroactive effect to this reverse stock split.

Warrants

        In October 2006, in connection with its private placement, the Company issued warrants to purchase 1,367 common shares at an exercise price of $6.00 per share and an expiration date of October 2011. Of these warrants, 1,257 were issued to purchasers of the shares and 110 shares to the selling agent. As a condition of the private placement, and based on the $1.60 sale price of the additional shares issued in the June 2007 public offering, warrants to purchase an additional 493 shares were issued, consisting of warrants to purchase 453 shares issued to investors and warrants to purchase 40 shares issued to the private placement selling agent, and all warrants were revalued with an exercise price of $4.41.

        During 2007, the Company received net proceeds of $21 from the exercise of warrants to purchase 5 shares with an average exercise price of $4.80.

        During 2006, the Company received net proceeds of $512 from the exercise of warrants to purchase 253 shares with an average exercise price of $2.25.

        During 2005, the Company received net proceeds of $235 from the exercise of warrants to purchase 101 shares with an average exercise price of $2.33.

45

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

6. Stockholders' Equity (Continued)

        In November 2005, in connection with its initial public offering, the Company issued warrants to purchase 400 common shares to the selling agent at an exercise price of $7.20 per share expiring in October 2010.

        In connection with the issuance of convertible notes in April 2005, the Company issued warrants to purchase 367 common shares at an exercise price of $4.80 per share.

        In March 2005, the Company granted fully vested warrants to purchase 33 common shares at an exercise price of $6.00 per share to a consultant of the Company. In August 2005, the Company granted warrants to purchase 80 common shares at an exercise price of $6.00 per share to a consultant of the Company. These warrants vest ratably over three years beginning retroactively to October 2004. In October and December 2004, the Company granted warrants to purchase 253 shares of the Company's common stock at a price of $6.00 per share to consultants of the Company. Of these warrants, warrants to purchase 170 shares vested over three years and have a ten-year term. The remaining warrants to purchase 83 shares vested based on design wins and have a five-year term.

        Total stock-based compensation expense related to these warrants during the years ended December 31, 2006, 2007 and 2008 was $169, $2 and $0, respectively. The fair value of these warrants was measured as they were earned using the Black-Scholes option pricing model over the vesting period.

        The following table summarizes warrant activity:

	Warrants Outstanding			Price Range Per Share
Outstanding at December 31, 2005		1,984		$1.50—$10.50
Warrants issued		1,367
Warrants exercised		(253	)
Warrants expired		(8	)
Outstanding at December 31, 2006		3,090		$4.80—$10.50
Warrants issued		493
Warrants exercised		(5	)
Warrants expired		(214	)
Outstanding at December 31, 2007		3,364		$4.41—$7.20
Warrants issued		—
Warrants exercised		—
Adj. for 1 for 5 reverse split		(2,691	)
Warrants expired		(40	)
Outstanding at December 31, 2008		633		$22.05—$36.00

7. Income Taxes

        The Company has not recorded any income tax benefit for losses recorded since inception.

46

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

7. Income Taxes (Continued)

        The components of deferred income taxes are as follows:

	December 31,
	2007			2008
Net operating loss carryforwards	$	42,288		$	47,954
Research and experimentation credit carryforwards		3,582			3,886
Stock options, warrants, restricted stock, accrued expenses, reserves		778			696
Total deferred tax assets		46,648			52,536
Valuation allowance		(46,648	)		(52,536	)
Net deferred tax asset	$	—		$	—

        The Company has established valuation allowances to fully offset its deferred tax assets due to uncertainty about the Company's ability to generate the future taxable income necessary to realize these deferred tax assets, particularly in light of the Company's recent history of significant operating losses. The valuation allowance increased by $9,352, $8,344 and $5,888 for the years 2006, 2007 and 2008, respectively. Future utilization of available net operating loss carryforwards may be limited under Internal Revenue Code Section 382 as a result of significant changes in ownership. These limitations could result in expiration of these net operating loss carryforwards before they are utilized. For the years ended December 31, 2006, 2007 and 2008, the Company has generated federal net operating loss carryforwards of approximately $21,710, $18,600 and $15,116, respectively.

        The Company's federal net operating loss carryforwards and state net operating loss carryforwards expire in various calendar years from 2014 through 2028. Available research and development credit carryforwards at December 31, 2008, represent federal and state amounts of $3,231 and $1,007, respectively, with expiration dates in calendar years 2020 through 2028.

        The Company's effective income tax rate differs from the U.S. Federal income tax rate as shown below:

	2006			2007			2008
Tax expense (benefit) at the federal statutory rate		(35.00	)%		(35.00	)%		(35.00	)%
State income tax (benefit), net of federal income tax effect		(5.96	)%		(5.76	)%		(5.61	)%
Research credits		(3.10	)%		(2.51	)%		(1.97	)%
Permanent differences		1.80	%		1.47	%		(.04	)%
Tax provision to tax return true-up		0.00	%		0.00	%		2.06	%
Other		0.96	%		0.83	%		2.32	%
Increase in valuation allowance		41.30	%		40.97	%		38.25	%
Effective tax rate		0.00	%		0.00	%		0.00	%

47

MathStar, Inc.

Notes to the Consolidated Financial Statements (Continued)

(in thousands, except per share data)

8. 401(k) Savings Plan

        During 2000, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company may make contributions to the plan at the discretion of the Board of Directors. The Company has made no contributions to the plan. The plan was terminated on December 31, 2008.

9. Commitments

Operating Leases

        The Company leases its office and research facilities and certain office equipment under non-cancellable operating leases. Total rent expense under these operating leases was $1,163, $673 and $370 for the years ended December 31, 2006, 2007 and 2008, respectively.

        Future minimum lease payments under non-cancellable operating leases at December 31, 2008 are as follows:

Year Ending December 31,
2009	$	345
2010		344
2011		226
2012		—
2013		—
2014 and thereafter		—
	$	915

Other Long-term Commitments

        The Company has entered into a non-cancellable long-term commitment with Synopsys for the purchase of design tools. Payments under this agreement are $302 and $151 for the years ended December 31, 2009, and 2010, respectively.

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 9A(T).    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to reasonably ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

        Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered in this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that the Company's disclosure controls and procedures were effective as of December 31, 2008.

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Management's Report on Internal Control Over Financial Reporting

        Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

        Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and is subject to lapses in judgment or breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control—Integrated Framework". Based on this assessment, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2008.

        This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this Annual Report on Form 10-K.

Changes in Internal Controls Over Financial Reporting

        There were no changes in the Company's internal control over financial reporting during the most recently completed quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.    Other Information

        Not applicable.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

Directors

        The following table sets forth information about the members of MathStar's board of directors as of March 1, 2009:

Name	Positions	Age		Director Since
Douglas M. Pihl	Chairman, Chief Executive Officer and Chief Financial Officer		69	April 1997
Benno G. Sand	Director, Chairman of the Audit Committee, member of the Compensation Committee		54	August 2001
Merrill A. McPeak	Director, Chairman of the Compensation Committee, member of the Audit Committee and Governance and Nominating Committee		73	October 2005
Michael O. Maerz	Director, member of the Governance and Nominating Committee and Compensation Committee		64	December 2006
Richard C. Perkins	Director, member of the Governance and Nominating Committee, Compensation Committee and Audit Committee		55	February 26, 2009

        Biographical information about our board members follows:

        Douglas M. Pihl has been Chairman and Chief Executive Officer of MathStar since he founded it in 1997. He was appointed as Chief Financial Officer on March 31, 2008. He also served as President of MathStar from 1997 until February 2008 and has again served in such capacity since August 1, 2008. He has been a director of Vital Images, Inc. (NASDAQ: VTAL) since May 1997 and was Chairman of the Board of Vital Images from December 1997 until September 2008. Vital Images is a leading provider of enterprise-wide advanced visualization and analysis solutions for use by medical professionals in clinical analysis and therapy planning for medical conditions. In 1996, Mr. Pihl co-founded RocketCHiPS, Inc., a developer of high-speed silicon CMOS integrated circuits and related intellectual property aimed at the high-speed wired and wireless communications markets. He served as RocketCHiPS' Chairman and Chief Financial Officer until the company was sold to Xilinx, Inc. (NASDAQ: XLNX) in November 2000. Since January 1997, Mr. Pihl has been a director of Astrocom Corporation, a privately-held provider of redundant Internet access solutions. Astrocom was a publicly-held company that voluntarily filed for bankruptcy protection in July 2004 under Chapter 11 of the United States Bankruptcy Code. Astrocom emerged from bankruptcy protection in September 2004, and it became a non-reporting privately-held company in November 2004.

        Benno G. Sand has been a director of MathStar since August 2001. He is Executive Vice President, Business Development, Investor Relations and Secretary at FSI International, Inc. (NASDAQ: FSII), a global supplier of wafer-cleaning and resist-processing equipment and technology, and he has served in such positions since January 2000. Mr. Sand also serves on the board of Digitiliti, Inc. (DIGI: OTC), which develops and markets on-line management services. He also serves on the boards of several subsidiaries of FSI International and other privately-held companies. Throughout his career, Mr. Sand has served as a director of various public and private companies and several community organizations.

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        General Merrill A. McPeak has been a director of MathStar since October 26, 2005, which was the effective date of MathStar's initial public offering. He is President of McPeak and Associates, a management consulting firm he founded in 1995. General McPeak was Chief of Staff of the Air Force from November 1990 to October 1994, when he retired from active military service. Before its merger into another public company, General McPeak was for several years Chairman of ECC International Corp., a Florida-based simulation and training company. He has served as a director of several other public companies, including Tektronix, Inc. and Trans World Airlines, Inc. (TWA). Currently, General McPeak is Chairman of the Board of Ethicspoint, Inc., a company providing confidential corporate governance compliance and "whistleblower" reporting services. He is a director of Del Global Technologies Corp. (OTC: DGTC.PK), GigaBeam Corporation (NASDAQ: GGBM), QPC Lasers, Inc. (OTC BB: QPCI.OB) and Point Blank Solutions, Inc. (PBSO.PK). He also serves on the boards of several other privately-held companies.

        Michael O. Maerz has been a director of MathStar since December 2006. He serves on the boards of directors of Mercy Corps, a leading international relief and development agency, and EasyOne AG, a software startup company focused on small business sales force and resource planning automation. From October 1998 until December 2002, he was Chairman and Chief Executive Officer of etrieve, Inc., a mobile office software and services company. From June 1996 to April 1998, Mr. Maerz was Chief Executive Officer of The Palace Inc., a joint venture between Intel Corporation, SoftBank and Time Warner. From January 1990 until June 1996, he was a Vice President and General Manager at Intel Corporation in Hillsboro, Oregon, where he planned and managed Intel's 1991 entry into the personal computer networking business.

        Richard C. Perkins has been a director of MathStar since February 26, 2009. He is a Chartered Financial Analyst, has been Executive Vice President and Portfolio Manager of Perkins Capital Management, Inc. since 1990, and has over 30 years of experience in the investment business. From 1978 until 1990, Mr. Perkins was an Investment Executive with Piper, Jaffray & Hopwood, Incorporated, an investment banking firm. From 1975 through 1977, he was a Grain Merchandiser with General Mills, Inc. Mr. Perkins served as President of the Board of Directors, YMCA Camp Olson in Rochester, Minnesota from 1983 through 1986 and from 2004 through 2006. He has also served on the Boards of several privately-held companies.

Executive Officers

        The following table identifies and sets forth information regarding MathStar's principal executive officer (that is, chief executive officer) who served as such during 2008 and the only individual other than the principal executive officer who was serving as an executive officer of MathStar as of December 31, 2008. Our executive officers have been appointed by our board of directors to hold office until their successors are elected and qualified or their earlier death, resignation or removal.

Name	Age(1)		Current Position(s) with MathStar	Executive Officer Since
Douglas M. Pihl		69	Chairman of the Board, Chief Executive Officer and Chief Financial Officer	April 1997
John M. Jennings		55	Chief Accounting Officer and Secretary	March 2008

(1)

As of March 1, 2009.

        Douglas M. Pihl.    For biographical information for Douglas M. Pihl, see "Directors" above.

        John M. Jennings has been Chief Accounting Officer and Secretary of MathStar since March 2008 and the Controller of MathStar since July 2005. He is employed by Mathstar on a part-time, as-needed

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basis. Mr. Jennings also works as a Director of Finance for The Greenbrier Companies, Inc. (NYSE: GBX), a leading designer, manufacturer and marketer of railroad freight car equipment in North America and Europe. From August 2000 to July 2005, he was Corporate Controller at Synetics Solutions, Inc., a capital equipment manufacturer in the semiconductor industry. From February 1999 to July 2000, he was Division Controller at Exhibitgroup / Giltspur, a manufacturer of trade show and retail displays. From March 1993 to February 1999, he was Division Controller at Fiserv EFT, an outsource provider of electronic fund processing for financial institutions.

Section 16(a) Beneficial Ownership Reporting Compliance

        Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than 10% of the outstanding shares of our common stock to file with the Securities and Exchange Commission initial reports of beneficial ownership and reports of changes in beneficial ownership of shares of our common stock and other equity securities. To the best of our knowledge, based solely on our review of the copies of such reports furnished to us or otherwise in our files and on written representations from our directors and executive officers, our executive officers and directors and persons who own more than 10% of our common stock complied with all applicable Section 16(a) filing requirements during 2008, except that Form 4s were inadvertently filed one day late for the automatic grant of options on December 12, 2008 to each of Benno G. Sand, Merrill A. McPeak, Morris Goodwin, Jr. (who resigned from the Board on February 23, 2009), and Michael O. Maerz.

Code of Business Conduct and Ethics

        Our Code of Business Conduct and Ethics ("Conduct Code") applies to all of our directors, officers and employees, including our principal executive officer and principal financial and accounting officer. The Governance and Nominating Committee of the board is responsible for overseeing the Conduct Code. Any waivers of the Conduct Code for directors and executive officers must be approved by MathStar's board of directors. The Conduct Code is available, free of charge, on our website at www.MathStar.com. We will also post any waivers or our Conduct Code for our directors or executive officers on our website. No waivers were considered or granted in 2008. You may also obtain a copy of our Conduct Code, free of charge, by writing to us at MathStar, Inc., Attention: Corporate Secretary, 19075 N.W. Tanasbourne Drive, Suite 200, Hillsboro, Oregon 97124.

Corporate Governance

        Shareholder Nominees to the Board.    There were no changes during 2008 to the procedures by which security holders may recommend nominees to the MathStar board. These procedures were described in MathStar's proxy statement dated April 21, 2008.

Audit Committee. Throughout 2008, the Audit Committee of the MathStar board of directors consisted of Benno G. Sand (chairman), Merrill A. McPeak and Morris Goodwin, Jr. The board determined that each individual who served on the Audit Committee during 2008 was an "independent director" under Rule 4200(a)(15) of the Marketplace Rules of The NASDAQ Stock Market, Inc. and met the independence requirements of Rule 4350(d)(2)(A) of such Marketplace Rules. Richard C. Perkins was appointed to the Audit Committee effective on February 26, 2009 to fill the vacancy created by the resignation of Morris Goodwin, Jr. Based in part on the information set forth in Item 10 of this Part III set forth above regarding Benno G. Sand, MathStar's board of directors has determined that he is qualified as an "audit committee financial expert," as that term is defined in Item 401(h)(2) of Regulation S-K of the Securities and Exchange Commission.

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Item 11.    Executive Compensation.

        The following table sets forth information about compensation awarded, earned by or paid to our named executive officers—our principal executive officer and the one other executive officer for whom we are required to disclose compensation under Item 402 of Regulation S-K—for the years ended December 31, 2008 and 2007.

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Summary Compensation Table—2008 and 2007

Name and Principal Position		Year		Salary($)		Bonus($)		Stock Awards ($)		Option Awards ($)(1)		Non-Equity Incentive Plan Compensation($)(2)		All Other Compensation($)			Total($)
Douglas M. Pihl			2008	$	216,286	$	—	$	—	$	20,767	$	—	$	226,278	(3)	$	463,331
	President, Chief Executive		2007	$	220,000	$	—	$	—	$	12,951	$	21,304	$	8,159		$	262,414
	Officer and Chief Financial Officer
John M. Jennings			2008	$	135,665	$	—	$	—	$	11,153	$	—	$	85,011	(4)	$	231,829
	Chief Accounting Officer and		2007	$	89,458	$	—	$	—	$	9,590	$	10,937	$	4,318		$	114,303
	Secretary

(1)

The value of the option awards is the amount of the awards that MathStar recognizes for financial reporting purposes under SFAS No. 123(R). Refer to "Note 2—Significant Accounting Policies—Stock-Based Compensation" in this Annual Report on Form 10-K and in our Annual Report on Form 10-K for the year ended December 31, 2007 for a discussion of the assumptions used in calculating the expense under SFAS No. 123(R).

(2)

Represents bonuses earned in 2007 and paid in February 2008.

(3)

Consists of $9,992 in health and life insurance premiums and a $216,286 severance payment, as described below.

(4)

Consists of $5,011 in health and life insurance premiums and an $80,000 severance payment, as described below.

        On May 15, 2008, in connection with the board's decision to curtail MathStar's operations, the board approved severance payments equal to twelve months of base pay for Douglas M. Pihl and six months of base pay for John M. Jennings. The severance payments are set forth in the Summary Compensation Table above. On May 15, 2008, the board also approved severance payments for other executive officers and employees of MathStar. The severance payments were paid between June 15, 2008 and July 31, 2008.

        Neither Douglas M. Pihl or John M. Jennings has an employment agreement or arrangement with MathStar. In addition, during 2008, MathStar did not approve or grant any bonus, option, restricted stock award, non-equity incentive plan award or other award to Mr. Pihl or Mr. Jennings.

        The following table sets forth information about unexercised options that were held at December 31, 2008 by the named executive officers:

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END—2008

	Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options(#) Exercisable		Number of Securities Underlying Unexercised Options(#) Unexercisable			Option Exercise Price($)		Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested(#)		Market Value of Shares or Units of Stock That Have Not Vested($)
Douglas M. Pihl		3,750		11,250	(1)	$	8.45		5/16/2017		—		—
John M. Jennings		6,000		2,000	(2)	$	31.50		7/15/2015		—		—
		750		2,250	(3)	$	8.45		5/16/2017		—		—

(1)

The options vest as to 3,750 shares on each of May 16, 2009, 2010 and 2011 if Mr. Pihl is then an employee of MathStar.

(2)

The options vest as to all 2,000 shares on July 15, 2009 if Mr. Jennings is then an employee of MathStar.

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(3)

The options vest as to 750 shares on each of May 16, 2009, 2010 and 2011 if Mr. Jennings is then an employee of MathStar.

General Description of the 2004 Incentive Plan

        All options described in the above table entitled "Outstanding Equity Awards at Fiscal Year-End—2008" are incentive stock options that were granted under the 2004 Incentive Plan. The following is a summary of the terms of the 2004 Incentive Plan.

        The 2004 Incentive Plan currently provides that the total number of shares of MathStar's common stock that may be subject to options, restricted stock awards and other equity awards granted under the 2004 Incentive Plan shall not exceed 1,200,000 shares. As of March 1, 2009, options to purchase 64,000 shares of MathStar common stock were outstanding under the 2004 Incentive Plan.

        The purpose of the 2004 Incentive Plan is to aid MathStar in recruiting and retaining employees, directors, independent contractors and other service providers to MathStar and to motivate such employees, directors, independent contractors and other service providers to exert their best efforts on behalf of MathStar by providing incentives through the grant of incentive stock options ("ISOs") qualified as such under Section 422 of the Internal Revenue Code of 1986 (the "Code") and nonqualified stock options ("NQOs" and, together with ISOs, "Options"), awards of restricted stock, stock appreciation rights, other stock-based awards, cash-based awards or any combination of such awards (collectively, the "Awards"). Management believes that MathStar benefits from the stock ownership opportunities and other benefits provided to participants under the 2004 Incentive Plan to encourage alignment of their interest in MathStar's success with that of other stakeholders.

        Administration.    The 2004 Incentive Plan is administered by the Compensation Committee of MathStar's board of directors, which has the exclusive power to make Awards and to determine when and to whom Awards will be granted under the 2004 Incentive Plan, other than the NQOs automatically granted to non-employee directors under the 2004 Incentive Plan. In addition, the Compensation Committee determines the form, amount and other terms and conditions of each Award, subject to the provisions of the 2004 Incentive Plan. The determinations made by the Compensation Committee under the 2004 Incentive Plan are not required to be made on a uniform basis and are final, binding and conclusive.

        Participants.    A participant in the 2004 Incentive Plan means an employee of MathStar or an "affiliate" (as the term "affiliate" is defined in the 2004 Incentive Plan) who is selected by the Compensation Committee to participate in the 2004 Incentive Plan; a director of MathStar who receives Options or Awards under the 2004 Incentive Plan; or any consultant, agent, advisor or independent contractor who is selected by the Compensation Committee to participate in the 2004 Incentive Plan and who renders bona fide services to MathStar or its affiliate. However, only employees of MathStar are eligible for selection to receive Options qualified as ISOs under Section 422 of the Code.

        Termination Date.    The 2004 Incentive Plan will terminate on the earlier of the date on which it is terminated by MathStar's board of directors or October 7, 2014. However, the termination of the 2004 Incentive Plan will not affect any Awards then outstanding under the 2004 Incentive Plan. The board of directors may amend, alter or discontinue the 2004 Incentive Plan. However, no amendment, alteration or discontinuation may be made by the board without the consent of a participant in the 2004 Incentive Plan if such action would diminish any of the rights of the participant under any Award held by the participant.

        Shares Subject to 2004 Incentive Plan.    The 2004 Incentive Plan currently provides that the total number of shares of MathStar's common stock that may be issued under the 2004 Incentive Plan is 1,200,000 shares, subject to adjustments as provided in the 2004 Incentive Plan. The shares to be issued

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under the 2004 Incentive Plan are authorized but unissued shares of MathStar's common stock. The number of shares of MathStar's common stock available under the 2004 Incentive Plan and under other equity Awards granted under the 2004 Incentive Plan, the exercise price of any Option and the exercise price of any stock appreciation right granted under the 2004 Incentive Plan will be appropriately adjusted upon any stock dividend, stock split, reverse stock split, reclassification, combination, exchange of shares or other similar recapitalizations of MathStar.

No Other Plans or Arrangements

        MathStar currently has no plan that provides for the payment of retirement benefits, or benefits that will be paid primarily following retirement. In addition, it has no contract, agreement, plan or arrangement that provides for payments to an executive officer in connection with the resignation, retirement or other termination of an executive officer, a change in control of MathStar, or a change in the executive officer's responsibilities following a change in control.

Compensation of Directors

        The following table sets forth certain information regarding the compensation paid by MathStar to its directors for the year ended December 31, 2008:

DIRECTOR COMPENSATION TABLE

Name(1)	Fees Earned or Paid in Cash		Option Awards(2)(3)		Total Compensation
Benno G. Sand	$	26,250	$	2,852	$	29,102
Merrill A. McPeak	$	26,500	$	2,852	$	29,352
Morris Goodwin, Jr.(4)	$	22,500	$	2,852	$	25,352
Michael O. Maerz	$	22,250	$	34,979	$	57,229

(1)

Douglas M. Pihl received no fees, options, awards or other compensation from MathStar during 2008 for serving as a director.

(2)

The amounts shown for option awards reflect the dollar amounts recognized by MathStar for financial statement reporting purposes for the year ended December 31, 2008 in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123(R), excluding the amount of forfeitures. Refer to "Note 2—Significant Accounting Policies—Stock-Based Compensation" in this Annual Report on Form 10-K for a discussion of the assumptions used in calculating fair value under SFAS No. 123(R). On December 12, 2008, each of Mr. Sand, Mr. McPeak, Mr. Goodwin and Mr. Maerz was automatically granted a ten-year option under the 2004 Incentive Plan to purchase 1,000 shares at an exercise price of $0.72 per share with a grant date fair value of $431. These options vest as to all of the shares on December 12, 2009, but only if the director is then a director of MathStar.

(3)

As of December 31, 2008, Mr. Sand had outstanding options to purchase 14,667 shares, which were vested as to 13,667 shares and not vested as to 1,000 shares; Mr. McPeak had outstanding options to purchase 8,000 shares, which were vested as to 7,000 shares and not vested as to 1,000 shares; Mr. Goodwin had outstanding options to purchase 8,000 shares, which were vested as to 7,000 shares and not vested as to 1,000 shares; and Mr. Maerz had outstanding options to purchase 14,000 shares, which were vested as to 11,333 shares and not vested as to 2,667 shares.

(4)

Mr. Goodwin resigned from the board on February 23, 2009.

57

        Director Fees.    Our non-employee directors receive a cash retainer of $1,500 per quarter plus a meeting fee of $750 per board meeting. The chairperson of the Audit Committee receives $1,000 per meeting of the Audit Committee, and the other members of the Audit Committee receive $750 per meeting of the Audit Committee. The chairpersons of the Compensation Committee and the Governance Committee receive $750 per Committee meeting, and the other members of such Committees receive $500 per committee meeting.

        Director Options.    Under the 2004 Incentive Plan, non-employee directors automatically receive an option to purchase 5,000 shares of MathStar's common stock when they are initially elected or appointed to our board, which vests as to one-third of the shares subject to the option on the first, second and third anniversary dates of the date of grant so long as they are directors of MathStar. Non-employee directors also automatically receive an option to purchase 1,000 shares upon each anniversary date of the initial grant to them so long as they are then MathStar directors, which vests as to all of the shares subject to the option on the first anniversary date of the date of grant of the option if they are then directors of MathStar. The exercise price of these options is equal to the closing price of our common stock on the grant date of the option, and all options expire 10 years after the date of grant. Under the automatic grant provisions of the 2004 Incentive Plan, on December 12, 2008, Messrs. Sand, McPeak, Goodwin and Maerz each received an option to purchase 1,000 shares at an exercise price of $0.72 per share.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Securities Authorized for Issuance Under Equity Compensation Plans

        The following table summarizes equity securities authorized for issuance under our equity compensation plans as of December 31, 2008:

Plan Category	Number of securities to be issued upon exercise of Outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in First column)
Equity compensation plans approved by stockholders(1)		103,769	$	21.54		1,049,020
Equity compensation plans not approved by stockholders		—		—		—
Total		103,769				1,049,020

(1)

Consists of the 2004 Incentive Plan, the 2002 and 2000 Combined Incentive and Non-Statutory Stock Option Plans and the Digital MediaCom, Inc. 1999-2000 Stock Option Plan.

58

Security Ownership of Certain Beneficial Owners and Management

        The following table contains certain information regarding the beneficial ownership as of March 1, 2009 (except as otherwise indicated) of our common stock by (i) each person who is known by MathStar to own beneficially more than 5% of the outstanding shares of our common stock; (ii) each director of MathStar; (iii) each executive officer of MathStar named in the Summary Compensation Table set forth under the section of this Annual Report on Form 10-K in Item 11 entitled "Executive Compensation;" and (iv) all current executive officers and directors as a group. This information is based on information received from or on behalf of the named individuals. Unless otherwise indicated, the address of each stockholder listed in the following table is c/o MathStar, Inc., 19075 N.W. Tanasbourne Drive, Suite 200, Hillsboro, Oregon 97124.

Name of Beneficial Owner	Number of Shares Beneficially Owned(1)			Percent of Shares Outstanding(2)
S. Muoio & Co. LLC 509 Madison Avenue, Suite 446 New York, New York 10022		634,100	(3)		6.9	%
Zanett Opportunity Fund, Ltd 635 Madison Avenue, 15th Floor New York, New York 10022		604,103	(4)		6.6	%
Douglas M. Pihl		341,171	(5)		3.7	%
Benno G. Sand		16,334	(6)		*
Merrill A. McPeak		9,800	(7)		*
Michael O. Maerz		11,333	(8)		*
John M. Jennings		6,750	(9)		*
Richard C. Perkins		148,441	(10)		1.6	%
All current executive officers and directors as a group (6 persons) (11)		533,829	(12)		5.8	%

*

Less than one percent

(1)

Each person has sole voting and sole dispositive power with respect to all outstanding shares, except as noted.

(2)

Based on 9,181,497 shares outstanding as of March 1, 2009. Such number does not include 736,853 shares of common stock issuable upon exercise of stock options and warrants outstanding as of March 1, 2009. Each figure showing the percentage of outstanding shares owned beneficially has been calculated by treating as outstanding and owned the shares which could be purchased by the indicated person(s) on March 1, 2009 or within 60 days of March 1, 2009 upon the exercise of stock options and warrants.

(3)

Reflects information derived from Amendment No. 1 to a Schedule 13D filed on February 12, 2009 with the Securities and Exchange Commission ("SEC") by S. Muoio & Co. LLC ("SMC") and Salvatore Muoio. According to the Schedule 13D, as amended, Mr. Muoio and SMC share voting and dispositive power with respect to these shares, and Mr. Muoio is the managing member of SMC, an investment management firm that serves as the general partner and/or investment manager to a number of private investment vehicles and managed accounts.

(4)

Reflects information derived from Amendment No. 1 to a Schedule 13D filed on February 20, 2009 with the SEC by Zanett Opportunity Fund, Ltd. ("ZOF"), Lombardier Management, Ltd.

59

("LML") and Zachary McAdoo. According to the Schedule 13D, as amended, ZOF has sole voting and dispositive power with respect to these shares, and LML and Mr. McAdoo share voting and dispositive power with respect to these shares. Also according to the Schedule 13D, as amended, ZOF is a Bermuda Exempted Mutual Fund Company managed by LML, investment manager to ZOF, and Mr. McAdoo is the portfolio manager on behalf of LML.

(5)

Includes 270,501 shares owned by only Mr. Pihl and 66,920 shares jointly owned by Mr. Pihl and his wife. Also includes options to purchase 3,750 shares. Does not include 25,634 shares and warrants to purchase 12,527 shares owned by Mr. Pihl's wife, of which Mr. Pihl disclaims beneficial ownership. Mr. Pihl also disclaims beneficial ownership of 1,601 shares owned by irrevocable trusts for which Mr. Pihl was the grantor and another individual is the trustee. Ms. Pihl disclaims beneficial ownership of the shares held only in Mr. Pihl's name.

(6)

Consists of 2,667 outstanding shares and options to purchase 13,667 shares.

(7)

Consists of 2,800 outstanding shares and options to purchase 7,000 shares.

(8)

Consists of options to purchase 11,333 shares.

(9)

Consists of options to purchase 6,750 shares.

(10)

Includes 143,110 shares held in client accounts for which Perkins Capital Management, Inc. is the investment advisor. As the holder of 20% of the outstanding equity interests of Perkins Capital Management, Inc., Richard C. Perkins has shared dispositive power over all 143,110 shares and, therefore, may be deemed to have beneficial ownership over the shares. Of those 143,110 shares, Richard C. Perkins may be deemed to have shared voting power over 53,081 shares. Also includes 667 shares owned by the Perkins Foundation, of which Richard C. Perkins is a trustee and thus has both shared voting and dispositive power over these shares. Does not include 2,000 shares held in the Perkins Capital Management, Inc. Profit Sharing Plan, of which Richard C. Perkins disclaims beneficial ownership. Includes warrants to purchase 4,664 shares held in client accounts for which Perkins Capital Management, Inc. is the investment advisor. As the holder of 20% of the outstanding equity interests of Perkins Capital Management, Inc., Richard C. Perkins has shared dispositive power over these warrants.

(11)

Consists of Messrs. Pihl, Sand, McPeak, Maerz, Jennings and Perkins.

(12)

Consists of 486,665 outstanding shares, warrants to purchase a total of 4,664 shares and options to purchase a total of 42,500 shares.

Item 13.    Certain Relationships and Related Transactions and Director Independence.

Certain Relationships and Related Transactions

        During 2008, there were no transactions with related persons, promoters or control persons within the meaning of Item 404 of Regulation S-K in which MathStar was involved.

Independence of Directors

        MathStar's board determined that all of the non-employee directors who served as directors throughout 2008 (consisting of Benno G. Sand, Merrill A. McPeak, Morris Goodwin, Jr. and Michael O. Maerz) were independent directors under Rule 4200(a)(15) of the Marketplace Rules of The NASDAQ Stock Market, Inc. and met the independence requirements of Rule 4350(d)(2)(A) of such Marketplace Rules.

60

Item 14.    Principal Accountant Fees and Services.

Audit and Other Professional Fees

        The aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP for the audit of MathStar's annual financial statements for MathStar's last two fiscal years and fees billed for other services rendered by PricewaterhouseCoopers LLP during those years are set forth in the following table:

		2007		% Pre-approved by Audit Committee			2008		% Pre-approved by Audit Committee
Audit fees		$	322,705		100	%	$	172,800		100	%
Audit-related fees			—		—			—
Tax fees			—		—			—
All other fees			1,500		100	%		—		100	%
	Total	$	324,205				$	172,800

Pre-Approval Policies

        As provided in the Audit Committee Charter, all audit and non-audit services performed by PricewaterhouseCoopers LLP, and all audit services performed by other independent registered public accounting firms, are pre-approved by the Audit Committee. These services include, but are not limited to, the annual financial statement audit, reviews of quarterly financial statements, compliance with the Sarbanes-Oxley Act of 2002, tax compliance assistance and tax consulting and assistance.

61

PART IV

Item 15.    Exhibits and Financial Statement Schedules

Financial Statements and Schedules

        (a)(1)    The Financial Statements, together with the report thereon of our independent registered public accounting firm, are included on the pages indicated below:

	Page
Report of Independent Registered Public Accounting Firm	24
Balance Sheets as of December 31, 2007 and 2008	25
Statements of Operations for the years ended December 31, 2006, 2007 and 2008	26
Statements of Changes in Stockholders' Equity for the years ended December 31, 2006, 2007 and 2008	27
Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008	28
Notes to Consolidated Financial Statements	29

        (2)   Financial Statement Schedules

Schedule II—Valuation and Qualifying Accounts S-1

        All other schedules have been omitted because the required information is included in the Consolidated Financial Statements or the notes thereto, or is not applicable or required

        (3)   The following exhibits are filed herewith or incorporated herein by reference, as indicated, and this list is intended to constitute the exhibit index.

Exhibit No.		Description of Exhibit
	3.1	Certificate of Incorporation of MathStar, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed by MathStar, Inc. with the Securities and Exchange Commission ("SEC") on August 3, 2005, Registration No. 333-127164 ("Registration Statement")).
	3.2	Certificate of Amendment of the Certificate of Incorporation of MathStar, Inc. filed with the Delaware Secretary of State on May 23, 2008 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on May 23, 2008).
	3.3	By-laws of MathStar, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement).
	4.1	Form of common stock certificate of MathStar, Inc. (incorporated by reference to Exhibit 4.1 to the Registration Statement).
	10.1	Letter agreement dated July 24, 2007, amending Lease dated June 1, 2005 as amended September 23, 2005, by and between Mark Tanasbourne LLC and MathStar, Inc.
	23.1	Consent of Independent Registered Public Accounting Firm.
	31.01	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act) (filed electronically herewith).

62

Exhibit No.		Description of Exhibit
	31.02	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act) (filed electronically herewith).
	32.01	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed electronically herewith).

63

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date March 31, 2009	MATHSTAR, INC.
	/s/ DOUGLAS M. PIHL Douglas M. Pihl President, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 2009:

Signature	Title
/s/ DOUGLAS M. PIHL Douglas M. Pihl	Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors (Principal Executive Officer and Principal Financial Officer)
/s/ JOHN M. JENNINGS John M. Jennings	Chief Accounting Officer (Principal Accounting Officer)
/s/ BENNO G. SAND Benno G. Sand	Director
/s/ MERRILL A. MCPEAK Merrill A. McPeak	Director
/s/ MICHAEL O. MAERZ Michael O. Maerz	Director

64

MathStar, Inc
Valuation and Qualifying Accounts
(in thousands)

		Balance at the Beginning of period		Charged to costs and expenses		Charged to other accounts		Write-offs, net of recoveries		Balance at end of period
Fiscal Year ended December 31, 2006
	Allowance for excess and obsolete inventory	$	29	$	90	$	—	$	18	$	101
	Allowance for deferred taxes		28,952		9,352						38,304
		$	28,981	$	9,442	$	—	$	18	$	38,405
Fiscal Year ended December 31, 2007
	Allowance for excess and obsolete inventory	$	101	$	106	$	—	$	—	$	207
	Allowance for deferred taxes		38,304		8,344						46,648
		$	38,405	$	8,450	$	—	$	—	$	46,855
Fiscal Year ended December 31, 2008
	Allowance for excess and obsolete inventory	$	207	$	772		—	$	533		446
	Allowance for deferred taxes		46,648		5,888						52,536
		$	46,855	$	6,660		—	$	533	$	52,982

S-1

EX-10.1

Exhibit 10.1

July 24, 2007

Jim Cruckshank

MathStar

19075 NW Tanasbourne Drive

Hillsboro, Or 97124

Dear Mr. Cruckshank:

Reference is made to that certain Lease dated June 1, 2005, and as amended September 23, 2005 by and between MARK TANASBOURNE LLC, an Oregon limited liability company, Landlord and MATHSTAR, a Minnesota corporation, Tenant.

This letter shall serve as an amendment to said Lease and shall change only the following terms and conditions:

PREMISES:	Effective upon substantial completion of the tenant improvements, Suite 290, an area of approximately 2,360 rentable square feet, as shown on the attached Exhibit A (“Second Expansion Premises”) shall be added to the Premises.
TENANT’S PROPORTIONATE SHARE:	Effective upon substantial completion, Tenant’s proportionate share for the Second Expansion Premises shall be 3.39% with a Base Year of 2007. The proportionate share for the Total Premises shall be 20.65%.
BASE MONTHLY RENTAL:	Effective upon substantial completion of the tenant improvements Base Monthly Rental for the Second Expansion Premises shall be as follows:
		Substantial compl – 6/30/08	21.63	$4,253.90/mo.
		7/1/08 – 6/30/09	22.68	$4,460.40/mo.
		7/1/09 – 6/30/10	22.95	$4,513.50/mo.
		7/1/10 – 2/28/11	23.64	$4,649.20/mo.
		3/1/11 – 8/31/11	24.35	$4,788.83/mo.
LEASE EXTENSION, SUITES 200 AND 210:	The lease of the existing premises, Suites 200 and 210 shall be extended to August 31, 2011.
TENANT IMPROVEMENTS	Landlord shall improve the leased premises per the attached Exhibit “B”. Any and all other improvements shall be at the sole cost of the Tenant.
OPTION TO TERMINATE	There are no further options to terminate.

111 SOUTHWEST COLUMBIA, SUITE 1380 · PORTLAND, OREGON 97201 · TELEPHONE: 15031 223-.9203 FAX:(503) 223-4606 www.melvinmark.com

CORE Worldwide Commercial Real Estate Services· Portland · Seattle · San Francisco · Sacramento · Long Beach · Los Angeles · San Diego · Honolulu ·Denver
Phoenix · Dallas · Houston · Chicago · New York · Boston · Hartford · Baltimore · Washington D.C. · Orlando · Atlanta · Toronto · London

MathStar

July 24, 2007

Page 2

All other terms and conditions of said Lease shall remain the same. If the terms of this Amendment meet with your approval, please sign all copies and return to us for execution by Mark Tanasbourne LLC, Landlord. We will return one fully executed copy for each of your files.

Thank you.

Sincerely,

/s/ M. James Mark

M. James Mark

Chief Executive Officer

Melvin Mark Companies

MARK TANASBOURNE LLC				MATHSTAR, a Minnesota Corporation
an Oregon limited liability company
	By:	Mark Properties Limited Partnership
		an Oregon limited partnership		By:	/s/ James W. Cruckshank
		Managing Member
	By:	Mark Management LLC		Its:	VP Admin/CFO
		an Oregon limited liability company
		General Partner
	By:	/s/ M. James Mark
			M. James Mark
			Manager

MathStar

July 24, 2007

Page 2

EXHIBIT A

FLOOR PLAN

MathStar

July 24, 2007

Page 2

EXHIBIT B

CONSTRUCTION BUDGET SHEET

MELVIN MARK CONSTRUCTION COMPANY
CONSTRUCTION BUDGET SHEET
TENANT:		MathStar
BUILDING:		Sunset Center
SUITE:		# 200
RSF:						$35.02/rsf
JOB NO:
ESTIMATE DATE:			July 16, 2007					revised 07/19/07
PLAN DATE:			July 3, 2007
DESCRIPTION					QUOTE			DESCRIPTION		QUOTE
Demo existing reception wall					75.00			Furnish & install (29) 2X4 light fixtures:
								(1) new exit sign, (3) emergency 2X4
Demising wall and installation					3,135.00			fixtures; (8) 120 volt duplex outlets;
New sheetrock partition walls w/ Insulation					6,640.00			(4) light switches; (4) power base
Exterior shell walls and vapor barrier					1,210.00			feeds; (2) floor feeds; (1) power for
Carpet protection					105.00			card reader; VHV power connection;
Pick up and haul materials and clean up					736.00			(6) phone/data boxes: fire alarm
								devices; furnish and install (4) new
Furnish and install new doors, frames and								fluorescent recessed down lights w/
relites					7,084.00			dimming ballasts & (2) fluorescent
								dimmer switches		15,698.00
Install building stock ceiling title and grid					4,486.00
								New duct work, temperature sensors;
New fire protection sprinklers					3,146.00			Install (i) new VHV cooling unit		10,475.00
Paint walls, doors, frames & relite frames					1,675.00			Furnish & install new direct glue		4,713.00
								carpet to match existing; floor prep		106.00
(10) exterior & (2) interior mini-blinds					1,560.00
								MMC labor		350.00
Furnish & Install new 4” rubber base					427.00			Construction clean up		575.00
								Contingency		500.00
(THIS IS NOT AN INVOICE)								SUB TOTAL #1		62,696.00
								PERMITS & INSPECTIONS		1,700.00
								OVERHEAD & FEE		9,659.40
								SUB TOTAL #2		74,055.40
								ARCHITECT FEE		1,500.00
								DESIGNER FEE		0.00
								TOTAL ESTIMATED COST		75,555.40
CLARIFICATIONS:
AUTHORIZATION SIGNATURES:
MMCC:	/s/ David W. Zier							Date:	7/19/07
	David W. Zier, President
TENANT:	/s/ [ILLEGIBLE]							Date:	07/19/07
THIS WORK IS TO BE PAID FOR BY:				Tenant			—
				Owner			—

SUNSET CENTER AT TANASBOURNE

OFFICE LEASE AGREEMENT

Between

MARK TANASBOURNE LLC,

an Oregon limited liability company

(“Landlord”)

And

MATHSTAR,

a Minnesota corporation

(“Tenant”)

Dated: June 1, 2005

TABLE OF CONTENTS

				Page
1.		SECTION 1 DEMISE AND PREMISES		1
	1.1		Demise	1
	1.2		Premises	1
	1.3		Commencement and Expiration Dates	1
2.		SECTION 2 RENT		1
	2.1		Rents	1
	2.2		Base Rent	1
3.		SECTION 3 ADDITIONAL RENT		2
	3.1		Operating Expenses	2
	3.2		Operating Expense Exclusions	3
	3.3		Taxes	3
4.		SECTION 4 PAYMENT OF ADDITIONAL RENT		3
	4.1		Written Statement of Estimate	3
	4.2		Final Written Statement	3
	4.3		Adjustment for Reduced Occupancy	4
	4.4		Tenant Examination	4
5.		SECTION 5 SECURITY DEPOSIT		4
6.		SECTION 6 USE		4
	6.1		General	4
	6.2		Negative Covenants as to Use	5
7.		SECTION 7 SUBORDINATION		5
8.		SECTION 8 TRANSFERS BY TENANT		5
	8.1		General	5
	8.2		Landlord’s Option to Recapture Premises	6
	8.3		Landlord’s Option to Increase Rent	6
9.		SECTION 9 LIABILITY AND INSURANCE		6
	9.1		Waiver of Subrogation	6
	9.2		Tenant’s Insurance	6
	9.3		Delivery of Policies; Cancellation	7
10.		SECTION 10 ALTERATIONS		7
	10.1		General	7
	10.2		Bonds	7
	10.3		Permits	7
	10.4		Manner	7
	10.5		Indemnification of Landlord	8
11.		SECTION 11 LANDLORD’S AND TENANT’S PROPERTY		8
	11.1		Landlord’s Property	8
	11.2		Tenant’s Property	8
	11.3		Abandonment	8

12.		SECTION 12 REPAIRS AND MAINTENANCE		8
	12.1		Landlord’s Obligations	8
	12.2		General	8
	12.3		Manner	9
	12.4		Waiver	9
13.		SECTION 13 ELECTRIC ENERGY		9
	13.1		High Voltage Equipment	9
	13.2		Cost of Increasing Capacity	9
14.		SECTION 14 CLIMATE CONTROL		9
15.		SECTION 15 OTHER SERVICES		10
	15.1		Elevators	10
	15.2		Cleaning	10
	15.3		Removal of Excess Refuse	10
	15.4		Building Directory	10
	15.5		Signs	10
16.		SECTION 16 ACCESS		11
17.		SECTION 17 INDEMNIFICATION		11
18.		SECTION 18 DAMAGE OR DESTRUCTION		11
	18.1		General	11
	18.2		Rent Abatement	12
19.		SECTION 19 EMINENT DOMAIN		12
	19.1		Total Condemnation	12
	19.2		Partial Condemnation	12
	19.3		Effect of Termination or Continuation	12
	19.4		Award	12
20.		SECTION 20 SURRENDER		12
21.		SECTION 21 EVENTS OF DEFAULT		13
	21.1		Events of Default	13
22.		SECTION 22 REMEDIES UPON DEFAULT		13
	22.1		Remedies	13
	22.2		Cumulative Remedies	14
	22.3		Interest on Damages	14
23.		SECTION 23 CURING TENANT’S DEFAULTS		14
24.		SECTION 24 BROKER		14
25.		SECTION 25 NOTICES		14
26.		SECTION 26 ESTOPPEL CERTIFICATES		15
27.		SECTION 27 RELOCATION OF PREMISES		15
28.		SECTION 28 PARKING		15

29.		SECTION 29 MISCELLANEOUS		15
	29.1		Entire Agreement	15
	29.2		Successors and Assigns	15
	29.3		Nonrecourse Lease	16
	29.4		Force Majeure	16
	29.5		Effect of Failure to Consent	16
	29.6		Rules and Regulations	16
	29.7		Tenant Holdover	16
	29.8		Tenant Representations	16
	29.9		Non-Waiver	17
	29.10		Square Footage Calculations Approximate	17
	29.11		Time	17
	29.12		Late Fees	17
	29.13		Attorneys’ Fees	17
	29.14		Quiet Enjoyment	17
	29.15		Severability	17
	29.16		Incorporation of Exhibits	18
	Exhibit A - Outline of Premises
	Exhibit A-1 – Outline of Expansion Space
	Exhibit B- Legal Description of Land
	Exhibit C- Work Agreement
	Exhibit C-1 - Plan
	Exhibit C-2 – General Specifications for Tenant Improvements
	Exhibit C-3 – Construction Budget Sheet
	Exhibit D - Estoppel Certificate
	Exhibit E - Rules and Regulations
	Exhibit F-1 – Monument View 1
	Exhibit F-2 – Monument View 2
	Addendum to Lease

SUMMARY OF FUNDAMENTAL PROVISIONS

DATED:		June 1, 2005
BETWEEN:			MARK TANASBOURNE LLC, an Oregon limited
			liability company			(“Landlord”)
AND:			MATHSTAR, a Minnesota corporation			(“Tenant”)
1.	TERM:
	A.		Estimated Commencement Date: July 1, 2005 (see Section 1.3).
	B.		Estimated Expiration Date: December 31, 2010 (see Section 1.3).
	C.		Length of Term: Sixty-six (66) months
2.	BUILDING: 19075 NW Tanasbourne Drive, Hillsboro, Oregon 97124.
3.	PROJECT: Sunset Center at Tanasbourne.
4.	PREMISES: 6,473 rentable square feet on the second (2nd) floor(s) of the Building (see Exhibit “A”).
5.	BASE RENT:
					Annual Rate Per
	Months				Rentable Square Foot		Monthly Base Rent
	Commencement Date
	through 6th month				$21.00		Abated
	7th month – 18th month				$21.00		$11,327.75
	19th month – 30th month				$21.63		$11,667.58
	31st month – 42nd month				$22.28		$12,018.20
	43rd month – 54th month				$22.95		$12,379.61
	55th month – 66th mouth				$23.64		$12,751.81
6.	SECURITY DEPOSIT: $12,751.81 (see Section 5).
7.	TENANT’S PROPORTIONATE SHARE OF OPERATING EXPENSES AND OF TAXES: 9.3 percent (see Section 3 and Section 4).
8.	BASE YEAR: 2005
9.	USE OF PREMISES: Office Use.
10.	PARKING SPACES: 1 space for every 250 rentable square feet of leased Premises.
11.	NOTICE ADDRESSES:
	Landlord:			Mark Tanasbourne LLC
				c/o Melvin Mark Brokerage Company
				111 SW Columbia Street, Suite 1380
				Portland, OR 97201

Tenant:	MathStar, a Minnesota corporation
	19075 NW Tanasbourne Drive, Suite 200
	Hillsboro, OR 97124

12.	LANDLORD’S BROKER:	M. James Mark, Melvin Mark Brokerage Company
13.	TENANT’S BROKER:	Gordon King, Colliers International

OFFICE LEASE AGREEMENT

DATED:	May 18, 2005
BETWEEN:	MARK TANASBOURNE, LLC, an Oregon limited
	liability company	(“Landlord”)
AND:	MathStar, a Minnesota corporation (“Tenant”)

SECTION 1DEMISE AND PREMISES

1.1Demise

Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon the terms and conditions set forth in this Lease, the Premises described in Section 1.2 in the Building described in the Summary of Fundamental Provisions (the “Building”). The Building is located upon the land described on the attached Exhibit B (the “Land”). The Land, the Building, and all other improvements on the Land whether now in existence or constructed during the term of this Lease are part of Sunset Center at Tanasbourne (the “Project”).

1.2Premises

The Premises (the “Premises”) leased to Tenant are identified by the outlining on the floor plan(s) attached as Exhibit A and are described in the Summary of Fundamental Provisions.

1.3Commencement and Expiration Dates

The term of this Lease shall commence on the earlier of (a) the date on which Tenant takes possession of the Premises or (b) the date on which Landlord’s work, if any, in the Premises as described in the Work Agreement attached as Exhibit C to the Lease (“Landlord’s Work”) is substantially completed. If Landlord is unable to give possession of the Premises on the estimated commencement date set forth in the Summary of Fundamental Provisions, Landlord shall not be subject to any liability, and the validity of this Lease shall not be impaired under such circumstances, but Base Rent and Additional Rent shall be abated (provided Tenant is not responsible for the delay) until Landlord has given notice to Tenant that the Premises are ready for Tenant’s possession. If Landlord has given Tenant permission to take possession of the Premises prior to the date on which Landlord’s Work is substantially completed, such possession shall be deemed to be upon all the terms, covenants, conditions and provisions of this Lease, including, without limitation, the payment of Base Rent and the Additional Rent. The term of this Lease shall expire, unless sooner terminated pursuant to the provisions of this Lease, sixty-six (66) months after the Commencement Date (the “Expiration Date”).

SECTION 2RENT

2.1Rents

Tenant agrees to pay to Landlord rent consisting of Base Rent and Additional Rent described in Section 3 of this Lease (which may, along with all other sums which become payable to Landlord by Tenant, be referred to in this Lease as “Rents”). All Rents shall be paid in advance on the first day of each month unless otherwise expressly provided in this Lease. All Rents shall be paid in lawful money of the United States to Landlord at its office set forth in the Summary of Fundamental Provisions, or such other place as Landlord shall designate by written notice to Tenant. Tenant shall pay all Rents promptly when due without notice or demand therefor and without any abatement, deduction or setoff, for any reason whatsoever, except as may be expressly provided in this Lease. If the Commencement Date occurs on a day other than the first day of a calendar month, the Rents for that partial calendar month shall be prorated based on the number of days in such month.

2.2Base Rent

The Base Rent shall be as set forth in the Summary of Fundamental Provisions.

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SECTION 3ADDITIONAL RENT

3.1Operating Expenses

Tenant agrees to pay its Proportionate Share of all increases in Operating Expenses in excess of those incurred by Landlord during the Base Year. Tenant’s Proportionate Share of Operating Expenses is set forth in the Summary of Fundamental Provisions and is determined by dividing the number of rentable square feet in the Premises by the number of rentable square feet in the Building. The term “Operating Expenses” shall mean all costs, fees, and expenses paid or incurred by Landlord or on Landlord’s behalf as determined by Landlord to be necessary or appropriate for the efficient operation, maintenance, repair, replacement, management, administration and insurance of the Project and the curbs, sidewalks, common areas, parking garage, and plazas adjoining the Project, except for Taxes which shall be paid in accordance with Sections 3.3 and 4 below. Operating Expenses include, without limitation, the following:

3.1.1Salaries, wages, medical, insurance, union and general welfare benefits, pension payments, payroll taxes, worker’s compensation insurance, uniforms and related expenses and benefits of persons engaged in the repair, operation, maintenance, management, administration, engineering and security of the Project;

3.1.2All expenses incurred for gas, electricity, heat, ventilation, air-conditioning, water, sewer, garbage and waste disposal, recycling, elevator service and other services or utilities furnished to the Project, together with any taxes thereon;

3.1.3All maintenance, repair, and replacement costs relating to the Project including, but not limited to, the public and service areas of the Project including, but not limited to, sidewalks, landscaping, parking, service areas, mechanical rooms and improvement exteriors;

3.1.4The cost of all insurance charges, including but not limited to rent loss insurance, casualty, liability, fire with extended coverage endorsement, and other insurance covering the Project;

3.1.5The cost or rental of all supplies, including without limitation, cleaning supplies, light bulbs, tubes and ballasts, materials and equipment, and all taxes thereon;

3.1.6The cost of hand tools and other moveable equipment used in the repair, maintenance or operation of the Project;

3.1.7The cost of all charges for window and other cleaning, janitorial and security services;

3.1.8Charges of independent contractors performing repairs or services to the Project not otherwise charged to a specific tenant;

3.1.9Repairs, replacements and general maintenance made by Landlord or on Landlord’s behalf;

3.1.10Alterations and improvements to the Project made by reason of the laws and requirements of any public authorities or the requirements of insurance bodies;

3.1.11Management fees paid to a third party, or, if no managing agent is employed by Landlord, Landlord shall be entitled to charge a management fee which is not in excess of the then-prevailing rates for management fees of other first-class office projects in the Portland, Oregon metropolitan area;

3.1.12The costs of any capital improvements or repairs to the Project and/or of any machinery or equipment installed in the Project amortized over the useful life of the improvements, machinery and/or equipment as estimated by Landlord, which is made or becomes operational, as the case may be, after the completion of the initial construction of the Building.

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3.1.13The rental costs or rental value of the management offices serving the Project;

3.1.14 Legal, accounting and other professional fees incurred in connection with operation, maintenance and management of the Project; and

3.1.15All other charges properly allocable to the operation of the Project in accordance with standard real estate accounting practices in the Portland, Oregon metropolitan area.

3.2Operating Expense Exclusions

The following expenses shall be excluded front Operating Expenses: (a) depreciation or amortization on the initial construction of the Project; (b) debt service (including without limitation, interest, principal and any impound payments) required to be made on any mortgage or deed of trust recorded with respect to the Project; (c) rent on any ground lease; (d) the cost of leasehold improvements made for Tenant or any tenants of the Project; (e) leasing commissions, attorneys’ fees, costs and disbursements and other expenses (including advertising) incurred in connection with leasing, renovating, or improving space for tenants or other occupants of the Project; (f) repairs, replacements, alterations and general maintenance paid for by insurance proceeds or by Tenant or third parties; and (g) specific costs incurred for the account of, or separately billed to and paid by, specific tenants of the Project.

3.3Taxes

Tenant agrees to pay its Proportionate Share of all increases in Taxes (as defined below) in excess of the Taxes payable by Landlord during the Base Year. Tenant’s Proportionate Share of Taxes shall be the same as Tenant’s Proportionate Share of Operating Expenses, as provided in Section 3.1 of this Lease. “Taxes” shall mean all taxes and assessments of all public, quasi-public, and governmental authorities and owner associations against the Project or the ownership, management, or operation of the Project, all rent taxes, local improvement districts, special and general assessments, gross receipts taxes, taxes on Landlord’s interest under this Lease, all taxes in lieu of or in addition to the foregoing, whether or not such taxes are now in effect (excluding, however, any tax based upon Landlord’s net income and any inheritance taxes), and the cost of contesting any such taxes or assessments.

SECTION 4PAYMENT OF ADDITIONAL RENT

4.1Written Statement of Estimate

Prior to the beginning of each calendar year during the term of this Lease after the Base Year, or as soon thereafter as practical, Landlord shall furnish Tenant with a written statement setting forth Tenant’s Proportionate Share of the increase in the estimated Operating Expenses and Taxes for the next calendar year. Failure of Landlord to deliver the statement of estimated Operating Expenses and Taxes shall not relieve Tenant of its obligation to pay Tenant’s Proportionate Share of Operating Expenses and Taxes. Tenant shall each month pay to Landlord as Additional Rent an amount equal to Tenant’s Proportionate Share as shown in Landlord’s written statement.

4.2Final Written Statement

Within ninety (90) days after the close of each calendar year after the Base Year during the term of this Lease, or as soon thereafter as practical, Landlord shall deliver to Tenant a written statement (the “Operating Statement”) setting forth Tenant’s actual Proportionate Share of the increases, if any, in Operating Expenses and of the Taxes for the preceding calendar year over the Base Year. In the event Tenant’s share of the actual Operating Expenses is in excess of the amount actually paid by Tenant for Operating Expenses on an estimated basis for the year in question, Tenant shall pay the amount of such deficiency to Landlord within thirty (30) days following the date of such statement. In the event Tenant’s share of actual Operating Expenses is less than the amount actually paid by Tenant for Operating Expenses on an estimated basis for the year in question, then Landlord shall either apply the overpayment to Tenant’s next Rent payment, or promptly reimburse the excess to Tenant. In the event Tenant’s share of the actual Taxes is in excess of the amount actually paid by Tenant for Taxes on an estimated basis for the year in question, Tenant shall pay the amount of such deficiency to Landlord within thirty (30) days following

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the date of such statement. In the event Tenant’s share of actual Taxes is less than the amount actually paid by Tenant for Taxes on an estimated basis for the year in question, then Landlord shall either apply the overpayment to Tenant’s next Rent payment, or promptly reimburse the excess to Tenant. In no event shall Base Rent decrease pursuant to the provisions of Section 3 or Section 4 of this Lease.

4.3Adjustment for Reduced Occupancy

If during any calendar year, less than 95 percent of the rentable area of the Building is occupied, Landlord’s estimation and determination of Operating Expenses shall be based on Landlord’s estimate of Operating Expenses as if the Building were at least 95 percent occupied. Landlord shall use sound accounting and management principles to make appropriate adjustments in occupancy-related Operating Expenses for the year in question for the purpose of avoiding distortion in the amount of Operating Expenses by reason of variation in the total occupancy of the Building. The amount so determined by Landlord shall be deemed to be the Operating Expenses for the Building for the year in question.

4.4Tenant Examination

Any objections by Tenant to the Operating Statement shall be made in writing given to Landlord within 60 days after the Operating Statement is submitted to Tenant. If no objections are made within such time period, the Operating Statement shall be conclusive and binding on Tenant. If Tenant makes any such objection within the time period required by this Section 4.4, Tenant shall have the right to inspect, at Tenant’s sole cost and expense, Landlord’s records pertaining to the computation of Operating Expenses and Taxes, so long as the following provisions are complied with: (a) Tenant shall perform such inspection within 75 days following the receipt of the Operating Statement pertaining to the year in question, (b) Tenant shall provide to Landlord a copy of the inspection report, (c) Tenant shall keep the report confidential and shall not share the contents, results, or the fact that Tenant is investigating the Operating Expenses or the Taxes, or adjustments with any other person, except for its advisors on a need-to-know basis, and (d) Tenant shall pay to Landlord within ten (10) days following its inspection any amount determined to be owing by Tenant. Tenant’s inspection may only be conducted by Tenant’s employees, advisors or by Tenant’s certified public accountant paid on an hourly basis (and not a contingent fee basis). Landlord agrees to pay Tenant any amount determined to be owing to Tenant within ten (10) days following Landlord’s receipt of the inspection report or, if Landlord does not agree with Tenant’s inspection report, as determined by an independent certified public accountant within ten (10) days following the date on which a report by such independent certified public accountant is given to Landlord and Tenant. Such independent certified public accountant shall be selected by Landlord and approved in advance by Tenant, which approval shall not be unreasonably withheld.

SECTION 5SECURITY DEPOSIT

Tenant has deposited with Landlord the sum shown on the Summary of Fundamental Provisions as security for the full and faithful performance by Tenant of Tenant’s obligations under this Lease. The security deposit shall not earn interest, and shall not be considered an advance payment of rent or a measure of Landlord’s damages in the event of a default by Tenant. If Tenant defaults in the performance of any of Tenant’s obligations under this Lease, including the payment of Rents, Landlord may, but shall not be obligated to, use, apply or retain all or any part of the security deposit to the extent required for the payment of any sum in default. If Landlord shall so use, apply or retain all or any part of the security deposit, Tenant shall upon demand immediately deposit with Landlord a sum equal to the amount so used, applied or retained. If Tenant shall fully and faithfully comply with all of Tenant’s obligations under this Lease, the security deposit or any balance thereof shall be paid to Tenant within thirty (30) days after the date on which this Lease shall expire or sooner terminate, and after delivery to Landlord of possession of the Premises and after all payments required to be made by Tenant in this Lease, have been paid.

SECTION 6USE

6.1General

Tenant shall use and occupy the Premises continuously during the term of this Lease for general office use and for no other purpose without the prior written consent of Landlord. If any governmental license or

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permit shall be required for the proper and lawful conduct of Tenant’s business in the Premises, Tenant, at its expense, shall procure, maintain and comply with the terms and conditions of each such license or permit. Tenant shall, at Tenant’s expense, comply with all laws, codes, rules, statutes, regulations, orders and other requirements of public authorities (“Laws”) relating to Tenant’s use and occupancy of the Premises.

6.2Negative Covenants as to Use

Tenant shall not, without the prior written consent of Landlord, use any apparatus, machinery or device in or about the Premises which will cause any noise, vibration, fumes or electronic interference or which will overload the floors or structure of the Premises. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy the Premises, or permit anything to be done in the Premises, in any manner which:(a) violates the Certificate of Occupancy for the Premises or for the Building; or (b) causes or is liable to cause injury to the Premises or the Building or any equipment, facilities or systems therein; or (c) constitutes a violation of Laws or the requirements of insurance bodies; or (d) impairs or tends to impair the character, reputation or appearance of the Building as a first-class office building; or (e) impairs or tends to impair the proper and economic maintenance, operation and repair of the Building and/or its equipment, facilities or systems; or (f) annoys or inconveniences or tends to annoy or inconvenience other tenants or occupants of the Project; or (g) generates, releases, stores, or deposits on or about the Premises any environmentally hazardous or toxic substances, materials, wastes, pollutants, oils, or contaminants, as defined by any Law.

SECTION 7SUBORDINATION

This Lease, and all rights of Tenants hereunder, are and shall be subject and subordinate to any ground leases or master leases (“Master Leases”) covering the Land and/or the Building now or hereafter existing, and to all mortgages, trust deeds and other financing and security instruments (“Mortgages”), which may now or hereafter affect the Land and/or the Building, and to all renewals, modifications, replacements and extensions of such Master Leases and Mortgages. This Section shall be self-operative, and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall execute, acknowledge and deliver to Landlord any instrument that Landlord may reasonably request to evidence such subordination within ten days after a request therefor. If the interest of Landlord under this Lease is transferred, whether through possession, foreclosure or delivery of a new lease or deed, then Tenant shall recognize the party succeeding to Landlord’s rights and obligations (the “Successor Landlord”) as the Landlord under this Lease and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment. Upon such attornment, Tenant’s rights hereunder shall continue in full force and effect as a direct Lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as set forth in this Lease so long as Tenant is not in default. Landlord shall use commercially reasonable effort to obtain customary nondisturbance agreements from holders of encumbrances in the building.

SECTION 8TRANSFERS BY TENANT

8.1General

Tenant shall not assign this Lease or any interest therein, or sublet the Premises or any part thereof, or mortgage, encumber or otherwise transfer or dispose of Tenant’s interest in the Premises, either voluntarily or involuntarily, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. If Tenant requests consent to a proposed transfer, Tenant shall pay for Landlord’s reasonable legal and administrative expenses incurred in reviewing the request for consent to transfer. Consent to one such transfer shall not imply any future consent, and all subsequent transfers shall be made only upon obtaining prior written consent of Landlord. Assignees shall become directly liable to Landlord for all obligations of Tenant hereunder, but Tenant shall remain liable for all obligations under this Lease. Tenant agrees that the instrument by which any transfer consented to by Landlord is accomplished shall expressly provide that the transferee will perform and observe all the agreements, covenants, conditions and provisions to be performed and observed by Tenant under this Lease and that Landlord will have the right to enforce such agreements, covenants and conditions directly against such transferee. It shall be the responsibility of Tenant to provide Landlord, in a manner reasonably acceptable to Landlord, with such information as Landlord determines is necessary for Landlord to grant or withhold its consent. Landlord may withhold its consent if the proposed transferee fails to satisfy the criteria then generally (but not necessarily

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uniformly) used by Landlord in selecting new tenants, which criteria may include, without limitation, financial capability, business reputation, business experience, existing and future space requirements of other tenants, existing and future space requirements of the proposed transferee, the intended use, and the anticipated demand for services by the transferee., and the transferee’s anticipated contribution to the prestige of the Project. Landlord shall not be obligated to approve a transfer to an existing Project tenant or another party with whom Landlord has been negotiating to lease space in the Project. If Tenant is a corporation or other entity, then any merger, consolidation, liquidation, change in the ownership or power to vote the majority of voting stock or equity interests of tenant shall constitute a transfer for the purposes of this Section 8.

8.2Landlord’s Option to Recapture Premises

Tenant shall, together with any request for Landlord’s consent to assign this Lease or to sublet the Premises, or any part thereof, offer to Landlord the right to recapture all or any part of the Premises which Tenant desires to assign or sublet. Landlord shall have fifteen (15) thirty (30) days following receipt of Tenant’s notice to make an election to recapture under this Section 8.2. Landlord may require Tenant to assign or sublease to Landlord all or any portion of the Premises Tenant desires to assign or sublease. In the event Landlord shall elect to recapture all or any portion of the Premises, Base Rent shall be reduced by a fraction the numerator of which is the Net Rentable area of that portion of the Premises being recaptured by Landlord and the denominator of which is the total Net Rentable area of the Premises.

8.3Landlord’s Option to Increase Rent

In the event Landlord consents to Tenant’s proposed transfer, Landlord, at its option, may require Tenant to pay, when paid by the transferee to Tenant, the following sums which shall be added to and included in Base Rent: all of any rents, additional charges or other consideration payable pursuant to the transfer to Tenant (including all sums payable for the sale or rental of Tenant’s leasehold improvements or fixtures but reduced by any marketing expenses paid to third parties incurred in connection with relating the Premises or any portion thereof) by the transferee which are in excess of the Base Rent and Additional Rent payable by Tenant with respect to the space in question pursuant to the terms of this Lease. The sums payable under Section 8.3 shall be paid to Landlord as and when paid by the transferee to Tenant.

SECTION 9LIABILITY AND INSURANCE

9.1Waiver of Subrogation

Tenant and Landlord shall each secure appropriate clauses in, or endorsements upon, each insurance policy obtained by them which cover or are applicable to the Premises or the personal property, fixtures and equipment located therein, pursuant to which the insurance companies waive subrogation or permit the insureds, prior to any loss, to agree with a third party to waive any claim they might have against said third party without invalidating the coverage under the insurance policies. Tenant’s waiver of subrogation or permission for waiver of any claim shall extend to Landlord and its agents and employees. Landlord’s waiver of subrogation or permission of waiver of any claim shall extend to Tenant and its agents and employees. Tenant and Landlord hereby release each other and their respective agents and employees in respect of any claim which they might otherwise have against each other or their respective agents or employees for loss, damage or other casualty occurring during the term of this Lease and covered under a fire insurance policy with extended coverage endorsement in the form normally used in respect of similar property in the Portland, Oregon, metropolitan area.

9.2Tenant’s Insurance

Tenant, at its expense, shall procure and maintain at all times during the term of this Lease, commercial general liability insurance in respect of the Premises and the conduct or operation of business therein, with Landlord and its managing agent, if any, and any party to a Master Lease or any Mortgagee whose name and address shall previously have been furnished to Tenant, as additional named insureds, with limits of not less than $2,000,000 for bodily injury or death to any one person and $3,000,000 for bodily injury or death to any number of persons in any one occurrence, and $2,000,000 for property damage. All such insurance shall insure the performance by Tenant of the indemnity agreement as to liability for injury to, illness of, or death of persons and

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damage to property set forth in this Lease. Tenant shall maintain at Tenant’s expense, insurance with extended coverage endorsement covering Tenant’s Property as defined in Section 11.2 of this Lease.

9.3Delivery of Policies; Cancellation

Tenant shall deliver to Landlord and any additional named insureds evidence of the policies or certificates of insurance required by Section 9.2 in a form reasonably satisfactory to Landlord issued by an insurance company authorized to issue insurance in the State of Oregon, at least ten (10) days before the Commencement Date. Tenant shall procure and pay for renewals of such insurance prior to the time for the expiration of such policies, and Tenant shall deliver to Landlord and any additional named insureds evidence of such renewal policies at least thirty (30) days before the expiration of any existing policy. All such policies shall contain a provision whereby the policies cannot be canceled or modified unless Landlord and any additional named insureds are given at least thirty (30) days prior written notice of such cancellation or modification.

SECTION 10ALTERATIONS

10.1General

Except for any initial improvements which Landlord has expressly agreed to provide pursuant to the attached Exhibit C, Tenant is leasing the Premises “AS IS” on the date of this Lease. Tenant shall make no changes, additions, alterations or improvements to the Premises, or attach any fixtures or equipment (the “Alterations”) without the prior written consent of Landlord. Before proceeding with any Alterations, Tenant shall submit to Landlord for Landlord’s approval, plans and specifications for the proposed work to be done. Tenant shall not proceed with such work until Tenant obtains Landlord’s approval. Tenant shall pay to Landlord upon demand the cost and expense incurred by Landlord in reviewing or having reviewed, said plans and specifications, and inspecting the Alterations to determine whether the same are being performed in accordance with the approved plans and specifications and all Laws including, without limitation, the reasonable fees of any architect or engineer employed by Landlord for such purpose.

10.2Bonds

Before proceeding with any approved Alterations, at Landlord’s request, Tenant shall obtain and deliver to Landlord a performance bond and labor and materials payment bond (issued by a corporate surety licensed to do business in the State of Oregon), each in an amount equal to the estimated cost of the Alterations and in form satisfactory to Landlord.

10.3Permits

Tenant, at its expense, shall obtain all necessary governmental permits and certificates for the commencement and prosecution of the Alterations and for final approval thereof upon completion, and shall cause the Alterations to be performed in compliance with all such permits and certificates, applicable Laws and all applicable requirements of insurance.

10.4Manner

The Alterations shall, at Landlord’s option, be performed by Landlord or by contractors designated or first approved by Landlord, which approval shall not be unreasonably withheld. Tenant shall pay any construction supervision fees charged by Landlord or its construction supervision to supervise any such work. The Alterations shall be performed in such manner as not to interfere with or delay, and as not to impose any additional expense upon, Landlord in the construction, maintenance, repair or operation of the Project; and if any such additional expense shall be incurred by Landlord as a result of Tenant’s performance of the Alterations, Tenant shall pay such additional expense upon demand. In performing the Alterations, Tenant shall fully and promptly comply with and observe the Rules and Regulations of Landlord then in force with respect to the making of the Alterations.

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10.5Indemnification of Landlord

Tenant, at its expense, shall procure the cancellation or discharge of all notices of violation and/or liens arising from or otherwise connected with the Alterations, or any other work, labor, services or materials done for or supplied to Tenant, or any other person claiming through or under Tenant. Tenant shall defend, indemnify and save harmless Landlord and any Master Lessor and Mortgagee from and against any and all mechanics and other liens and encumbrances filed in connection with the Alterations, or any other work, labor, services or materials done for or supplied to Tenant, or any person claiming through or under Tenant. Tenant, at its expense, shall procure the satisfaction or discharge of record of all such liens and encumbrances of record within fifteen (15) days after the filing thereof.

SECTION 11LANDLORD’S AND TENANT’S PROPERTY

11.1Landlord’s Property

All fixtures, equipment, improvements, wires, cables, conduits and appurtenances attached to or built into the Premises, whether or not by or at the expense of Tenant, shall be and remain a part of the Premises, shall be deemed the property of Landlord and shall not be removed by Tenant, except as provided in Section 11.2; and except that, at Landlord’s written request, Tenant shall, at its sole expense upon termination of the Lease, remove those items specified by Landlord, which are deemed herein the property of Landlord, except for Building Standard office improvements which are installed as part of Landlord’s Work which Tenant shall not be required to remove.

11.2Tenant’s Property

All unattached business and trade fixtures, machinery and equipment, communications equipment and office equipment which are installed in the Premises by or for the account of Tenant without expense to Landlord and which can be removed without structural damage to the Building and all furniture, furnishings (excluding window coverings) and other articles of movable personal property owned by Tenant and located in the Premises (“Tenant’s Property”) shall be and remain the property of Tenant, may be removed by Tenant at any time during the term of this Lease, and shall be removed prior to the Expiration Date, or earlier termination date, of this Lease; provided, that if any of Tenant’s Property is removed, Tenant shall repair or pay the cost of repairing any damage to the Premises or to the Project resulting from the installation and/or removal thereof.

11.3Abandonment

Any items of Tenant’s Property which shall remain in the Premises after the Expiration Date of this Lease, or any earlier termination of this Lease, at the option of Landlord, may be deemed to have been abandoned, and in such case such items may be retained by Landlord, and Landlord may deal with Tenant’s Property in such manner as Landlord shall determine, at Tenant’s expense.

SECTION 12REPAIRS AND MAINTENANCE

12.1Landlord’s Obligations

Landlord shall cause to be made all structural repairs to the roof, walls, subflooring, and foundations of the Building as and when needed in or about the Premises and the cost thereof shall be an item of Operating Expenses, except for those repairs for which Tenant is responsible pursuant to any of the provisions of this Lease.

12.2General

Tenant shall, at its expense, throughout the term of this Lease, take good care of the Premises, the fixtures and appurtenances therein and Tenant’s Property. Tenant, at its expense, shall promptly replace all scratched, damaged or broken doors and glass (except for exterior window glass) in and about the Premises and shall be responsible for all repairs, maintenance and replacement of wall and floor coverings in the Premises and for the repair and maintenance of all sanitary and electrical fixtures and equipment therein reasonable wear and tear excepted. Tenant shall be responsible for all repairs, interior and exterior, structural and non-structural, ordinary

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and extraordinary, in and to the Premises and the Building and the facilities and systems thereof, the need for which arises out of the performance or existence of Tenant’s Alterations; the installation, use or operation of Tenant’s Property in the Premises; the moving of Tenant’s Property in or out of the Building; or the act, omission, misuse or neglect of Tenant or any of its subtenants or its or their employees, agents, contractors or invitees.

12.3Manner

Tenant shall promptly make, at Tenant’s expense, all repairs in or to the Premises for which Tenant is responsible, and any such repairs required to be made by Tenant to the mechanical, electrical, sanitary, heating, ventilating, air-conditioning or other systems of the Building. Such work shall be performed only by contractor(s) designated or approved in writing by Landlord. Any other repairs in or to the Building and the facilities and systems thereof for which Tenant is responsible may be performed by Landlord at Tenant’s expense; but Landlord may, at its option, before commencing any such work or at any time thereafter, require Tenant to furnish to Landlord such security, bond or surety in a form and amount as Landlord shall deem necessary to assure the payment for such work by Tenant.

12.4Waiver

In each case, time being of the essence, Landlord shall have no liability to Tenant, nor shall Tenant’s covenants and obligations under this Lease be reduced or abated in any manner whatsoever, by reason of any inconvenience, annoyance, interruption of or injury to Tenant’s business arising from Landlord’s making any repairs or changes which Landlord is required or permitted by this Lease or required by law to make in or to any portion of the Project, or in or to the fixtures, equipment or appurtenances of the Project.

SECTION 13ELECTRIC ENERGY

13.1High Voltage Equipment

Tenant shall not, without the prior written consent of Landlord, which consent will not be unreasonably withheld, use any equipment, machine, apparatus or device within the Premises which individually uses electric current in excess of 110 volts.

I3.2Cost of Increasing Capacity

Should Landlord consent to installation of equipment or a design load for the Premises in excess of that existing upon the Commencement Date, the additional equipment required to increase the capacity for Tenant’s excess equipment or design load shall be provided by Landlord. Tenant shall, upon installation, pay to Landlord the cost to purchase, install, service and maintain such additional equipment. The cost of the electric energy used in excess of the original design load for the Premises as determined by Landlord and its engineers and consultants shall not be an Operating Expense of the Building but shall be paid for by Tenant on a monthly basis with the Base Rent commencing on the date the additional electric energy is made available to Tenant.

SECTION 14CLIMATE CONTROL

Landlord shall maintain and operate the heating, ventilating and air-conditioning systems serving the Premises and shall furnish heat, ventilating and air-conditioning in the Premises, the expense of which shall be included in Operating Expenses, (except as otherwise provided in this Lease and except for any special requirements of Tenant for its particular use of the Premises) for occupancy of the Premises during Business Hours of Business Days. As used herein, “Business Hours” shall mean generally customary daytime business hours, but not before 7:00 a.m. or after 6:00 p.m. on weekdays and not before 8:00 a.m. or after 1:00 p.m. on Saturdays, and “Business Days” shall mean all days except Sundays and days observed by the Federal or the State government as legal holidays. If Tenant shall require heat or air-conditioning service at any other time, Landlord shall furnish such service upon not less than forty-eight (48) hours’ advance notice from Tenant, and Tenant shall pay to Landlord upon demand Landlord’s then-established charges therefor.

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SECTION 15OTHER SERVICES

15.1Elevators

Landlord shall provide elevator service to the Premises during Business Hours of Business Days and Landlord shall have at least one elevator subject to call at all other times. The expense of providing elevator service shall be included in Operating Expenses.

15.2Cleaning

The expenses for the cleaning of the Premises, including the exterior and interior of the windows of the Building, shall be included in the Operating Expenses. Landlord shall not be required to clean any portions of the Premises used for the preparation, serving or consumption of food or beverages, training rooms, data processing or reproduction operations or private lavatory or toilets. Tenant shall pay Landlord on demand the costs incurred by Landlord for extra cleaning work in the Premises required because of: (a) misuse or neglect on the part of Tenant or the Tenant Related Parties; or (b) interior glass partitions or surfaces; or (c) non-building standard materials or finishes installed by Tenant or at Tenant’s request, or (d) the use of the Premises by Tenant or the Tenant Related Parties other than during Business Hours on Business Days.

15.3Removal of Excess Refuse

Tenant shall pay to Landlord on demand for the costs of removal from the Premises and the Building of any refuse and rubbish of Tenant in excess of that ordinarily accumulated in business office occupancy or at times other than Landlord’s standard cleaning times.

15.4Building Directory

Landlord, at Tenant’s request and expense, shall provide listings on the Building directory of the names of Tenant, and the names of any of Tenant’s officers and employees, provided that the names so listed shall not use more than Tenant’s proportionate share of the space on the Building directory, as reasonably determined by Landlord.

15.5Signs

Tenant shall not inscribe, post, place or in any manner display any sign, notice, picture, placard or any advertising matter whatsoever, anywhere in, on or about the Premises or the Project without first obtaining Landlord’s prior written consent. All such approved signs shall be removed by Tenant upon the expiration or earlier termination of this Lease and any damage caused by such removal shall be repaired at Tenant’s expense. Landlord shall provide a sign for Tenant’s entrance door and at the first floor directory at Landlord’s sole cost and expense. Tenant, at Tenant’s sole cost and expense, shall have the right to place its name on an exterior Building sign (not attached to the building, but a common monument sign with up to six other Tenants in the Building, if (a) Landlord first approves the sign, which approval shall not be unreasonably withheld or delayed, (b) the sign complies with all applicable Laws, and (c) the sign complies with all recorded covenants, conditions, and restrictions related to the Project including without limitation the Tanasbourne Corporate Center Protective Covenants and the Tanasbourne Corporate Center Design and Development Guidelines (“CC&Rs”). Tenant shall maintain the sign in good condition and repair throughout the Term, pay all costs associated with the sign, and remove the sign on or before the expiration of the Lease or its earlier termination. Tenant shall be allowed exterior monument signage including MathStar’s name prominently displayed on an entry monument as shown on Exhibit “F”. The final design is subject to review by the City of Hillsboro, OR and to comply with all recorded covenants, conditions, and restrictions related to the Project including without limitation the Tanasbourne Corporate Center Protective Covenants and the Tanasbourne Corporate Center Design and Development Guidelines (“CC&Rs”). Tenant shall have the use of the top position on the monument.

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SECTION 16ACCESS

Landlord shall have access to the Premises at all reasonable times to: (a) inspect the Premises; or (b) exhibit the Premises to prospective purchasers, lenders or tenants; or (c) determine whether Tenant is complying with all its obligations hereunder; or (d) supply janitor service and any other service to be provided by Landlord to Tenant hereunder; or (e) post notices of non-responsibility; or (f) make repairs required of Landlord hereunder or repairs to any adjoining space or utility services or make repairs, alterations or improvements to any other portion of the Building, provided, however, that all such work shall be done as promptly as possible and so as to cause as little interference with the Tenant’s use of the Premises as reasonably possible. Tenant hereby waives any claim against Landlord for damages for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned by such entry except to the extent caused by the gross negligence or intentional misconduct of Landlord.

SECTION 17INDEMNIFICATION

Tenant shall indemnify, defend, and hold harmless Landlord and all parties to any Master Lease and/or Mortgagees and their respective partners, directors, officers, agents and employees (the “Landlord Related Parties”) from and against any and all claims arising from or in connection with (a) the conduct or management of the Premises or any business therein, or any condition created (other than by Landlord or the Landlord Related Parties) in or about the Premises; or (b) any act, omission or negligence of Tenant or any of its subtenants, licensees, or partners, directors, officers, agents, employees, invitees or contractors (collectively, the “Tenant Related Parties”); or (c) any accident, injury or damage whatever (unless caused by Landlord’s or the Landlord Related Parties’ negligence) occurring in, at or upon the Premises; or (d) any breach or default by Tenant in the full and prompt payment and performance of Tenant’s obligations under this Lease; together with all costs, expenses and liabilities incurred or in connection with each such claim or action or proceeding brought thereon, including, without limitation, all attorneys’ fees and expenses; provided, however that Tenant shall not be required to indemnify, defend or hold harmless Landlord to the extent any such claim is caused by Landlord’s negligence or willful conduct. Further, Tenant’s obligations under Section 17 shall not extend to the acts of Tenant’s invitees outside the Premises. Landlord shall not be liable for any loss or damage to any person or property, which may be caused by theft, or by any act or neglect of any tenant or occupant of the Project. Neither Landlord nor any of the Landlord Related Parties shall be liable for any loss, injury or damage to Tenant or to any other person, or to its or their property, irrespective of the cause of such injury, damage or loss, except to the extent caused by or resulting from the negligence of Landlord or the Landlord Related Parties, in the operation or maintenance of the Premises or the Project. Further, neither Landlord nor of the Landlord Related Parties shall be liable for any such damage caused by other tenants or persons in, upon or about the Project, even if negligent, for consequential damages, including lost profits, of Tenant or any person claiming through or under Tenant.

SECTION 18DAMAGE OR DESTRUCTION

18.1General

In the event the Premises shall be destroyed or rendered untenantable either wholly or in part, by fire or other unavoidable casualty, Landlord may, at its option, apply any insurance proceeds to the restoration of the Premises to their previous condition. This Lease shall remain in full force and effect unless Landlord, within sixty (60) days after the happening of any such casualty, shall notify Tenant of its election not to restore said Premises, in which event this Lease shall terminate as of the date of the casualty. Any restoration by Landlord shall not include replacement of furniture, equipment or other items designated as Tenant’s Property. Tenant shall be responsible for restoration of Tenant’s Property. If the Building shall be destroyed or damaged by fire or other casualty insured against under Landlord’s fire and extended coverage insurance policy to the extent that more than twenty percent (20%) thereof, as determined by Landlord’s architect, is rendered untenantable, or in the case the Building shall be materially destroyed or damaged by any other casualty, Landlord may, at its election, terminate this Lease by notice to Tenant within sixty (60) days after such destruction or damage. Such notice shall be effective thirty (30) days after receipt thereof by Tenant.

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18.2Rent Abatement

If all or part of the Premises shall be damaged or destroyed or rendered untenantable as a result of fire or other casualty, the Base Rent and Additional Rent provided herein shall be abated or reduced, as the case may be, in the proportion that the untenantable area of the Premises bears to the total area of the Premises, for the period from the date of the damage or destruction to the date the damage to the Premises shall be substantially repaired, or the date on which Tenant again uses the untenantable portion, whichever first occurs.

SECTION 19EMINENT DOMAIN

19.1Total Condemnation

If the whole of the Building or the Premises shall be taken by condemnation or in any other manner for any public or quasi-public use or purpose, (including a sale under threat of condemnation) this Lease shall terminate as of the date of vesting of title on such taking (the “Date of Taking”), and the Base Rent and Additional Rent shall be prorated and adjusted as of Date of Taking.

19.2Partial Condemnation

If a part of the Building or the Land shall be so taken, this Lease shall be unaffected by such taking, except that:

19.2.1Landlord may, at its option, terminate this Lease by giving Tenant notice to that effect within ninety (90) days after the Date of Taking; and

19.2.2If twenty percent (20%) or more of the Premises shall be so taken and the remaining area of the Premises shall not be reasonably sufficient for Tenant to continue feasible operation of its business, Tenant may terminate this Lease by giving Landlord notice to that effect within ninety (90) days after the Date of Taking.

19.3Effect of Termination or Continuation

This Lease shall terminate on the date that such notice from the Landlord or Tenant to the other shall be given, and the Base Rent and Additional Rent shall be prorated and adjusted as of such termination date. Upon a partial taking this Lease shall continue in force as to the remaining part of the Premises, and the Base Rent and Additional Rent shall be adjusted according to the rentable area remaining.

19.4Award

Landlord shall be entitled to receive the entire award or payment in connection with any taking without deduction therefrom for any estate vested in Tenant by this Lease and Tenant shall receive no part of such award. Tenant shall have no claim against Landlord or the condemning authority for the unexpired portion of the Lease term. Nothing contained in this Section 20.4 shall be deemed to prevent Tenant from making a separate claim proceeding for the value of any of Tenant’s Property which is included in the taking.

SECTION 20SURRENDER

On the last day of the term of this Lease, or upon any earlier termination of this Lease, or upon re-entry by Landlord upon the Premises, Tenant shall quit and surrender the Premises to Landlord “broom-clean” and in good order, condition and repair, except for ordinary wear and tear and in accordance with the provisions of Section 11 of this Lease.

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SECTION 21EVENTS OF DEFAULT

21.1Events of Default

The occurrence of any one or more of the following events of default shall constitute a breach of this Lease by Tenant:

21.1.1Failure of Tenant to make any Base Rent or Additional Rent payment, or any other payment under this Lease when it is due within five (5) days written notice from Landlord that payment is past due.

21.1.2Tenant makes any transfer without Landlord’s prior written consent as required under Section 10.

21.1.3Tenant vacates or abandons the Premises during the Term, unless such failure is excused under other provisions of this Lease.

21.1.4Failure of Tenant to deliver the instruments described in Section 7 or Section 26 as and when required in such Sections, as applicable, or failure of Tenant to comply with any applicable Law when and as required by the applicable governmental authority.

21.1.5Failure of Tenant to comply with any other term or condition of this Lease or to fulfill any other obligation of this Lease within 15 days after written notice by Landlord specifying the nature of the failure with reasonable particularity. No notice and no opportunity to cure shall be required if Landlord has previously given Tenant notice of failure to comply with such term or condition or fulfill such other obligation of this Lease more than twice in any twelve-month period during the Term.

21.1.6Dissolution, termination of existence, insolvency on a balance sheet basis or business failure of Tenant; the commencement by Tenant of a voluntary case under the federal bankruptcy laws or under any other federal or state law relating to insolvency or debtor’s relief; the entry of a decree or order for relief against Tenant in an involuntary case under the federal bankruptcy laws or under any other applicable federal or state law relating to insolvency or debtor’s relief; the appointment of or the consent by Tenant to the appointment of a receiver, trustee or custodian of Tenant or of any of Tenant’s property; an assignment for the benefit of creditors by Tenant; Tenant’s failure generally to pay its debts as such debts become due; the making or suffering by Tenant of a fraudulent transfer under applicable federal or state law; concealment by Tenant of any of its property in fraud of creditors; or the imposition of a lien through legal proceedings or distraint upon any of the property of Tenant which is not discharged or bonded. During any period in which there is a Guarantor(s) of this Lease, each reference to “Tenant” in this paragraph shall be deemed to refer to “Guarantor or Tenant” separately.

SECTION 22REMEDIES UPON DEFAULT

22.1Remedies

Upon the occurrence of an event of default, Landlord may exercise any one or more of the remedies set forth in this Section, or any other remedy available under applicable law, at equity, or contained in this Lease.

22.1.1To the extent permitted by law, Landlord may re-enter and retake possession of the Premises, without notice, either through self-help, by summary proceedings, any other applicable action or proceeding, or other means. Landlord may use the Premises for Landlord’s own purposes or relet it upon any reasonable terms without prejudice to any other remedies that Landlord may have by reason of Tenant’s default. None of these actions will be deemed an acceptance of surrender by Tenant. To the extent permitted by law, and except as expressly provided in this Lease, Tenant waives the service of any notice of intention to terminate this Lease or to retake the Premises, and waives service of any demand for payment of rent or for possession, and of any and ever other notice or demand required or permitted under applicable law.

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22.1.2Landlord at its option may relet the whole or any part of the Premises, from time to time either in the name of Landlord or otherwise, to such tenants, for such terms ending before, on, or after the expiration date of the Term, at such rentals and upon such other conditions (including concessions and free rent periods) as Landlord, in its sole discretion, may determine to be appropriate. Landlord shall have no obligation to relet the Premises or any part and shall not be liable for refusal or failure to relet the Premises, or in the event of any such reletting, for refusal or failure to collect any rent due upon such reletting. No such refusal or failure shall operate to relieve Tenant of any liability under this Lease or otherwise affect Tenant’s liability. If there is other comparable unleased space in the Project, Landlord shall have no obligation to attempt to relet the Premises prior to leasing other space in the Project.

22.1.3Whether or not Landlord retakes possession of or relets the Premises, Landlord may recover all damages caused by the default (including but not limited to unpaid rent, attorneys’ fees reasonably incurred, and costs of reletting). Landlord may sue periodically to recover damages as they accrue during the remainder of the Term without barring a later action for further damages. Landlord may at any time bring an action for accrued damages plus damages for the remaining Term as allowed by law.

22.2Cumulative Remedies

The remedies provided for in this Lease are cumulative and in addition to any other remedy available to Landlord at law or in equity.

22.3Interest on Damages

In addition to any other remedies Landlord may have under this Lease, if any Rents, damages or other sums payable hereunder by Tenant to Landlord are not paid within five (5) days after their due date the same shall bear interest at a rate equal to the prime rate established by Wells Fargo Bank (or its successor) on the due date plus two percent (2%), accruing from the due date to the date of payment.

SECTION 23CURING TENANT’S DEFAULTS

If Tenant shall default in the performance of any of Tenant’s obligations under this Lease, Landlord, without waiving such default, may (but shall not be obligated to) perform the same for the account and expense of Tenant, without notice in a case of emergency, and in any other case only if such default continues after the expiration of five (5) days from the date Landlord gives Tenant notice of the default. Tenant agrees to reimburse Landlord upon demand for any expenses which Landlord may incur in complying with the terms of this Lease on behalf of Tenant.

SECTION 24BROKER

Tenant covenants, warrants and represents that it has not engaged any broker, agent or finder who would be entitled to any commission or fee in connection with the negotiation and execution of this Lease except as set forth in the Summary of Fundamental Provisions attached hereto. Tenant agrees to indemnify and hold harmless Landlord against and from any claims for any brokerage commissions and all costs, expenses and liabilities in connection therewith, including attorneys’ fees and expenses, arising out of any charge or claim for a commission or fee by any broker, agent or finder on the basis of any agreements made or alleged to have been made by or on behalf of Tenant. The provisions of this Section 24 shall not apply to any brokers named on the Summary of Fundamental Provisions.

SECTION 25NOTICES

Any notice or other communication required or permitted to be given by either party to the other pursuant to this Lease shall be in writing and delivered in person to the Landlord or Tenant or sent postage prepaid by registered or certified mail, addressed to the other party at the address set forth in the Summary of Fundamental Provisions or such other address which may be designated by a party in writing. Notice shall be considered given and effective on the date of delivery or, if mailed, on the date of such mailing.

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SECTION 26ESTOPPEL CERTIFICATES

Each party agrees that at any time requested by the other party, with not less than ten business (10) days’ prior notice, to execute and deliver to the other a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications), certifying the dates to which the Base Rent and Additional Rent have been paid, stating whether or not, to the best knowledge of the signer, the other party is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which the signer shall have knowledge, and stating whether or not, to the best knowledge of the signer, any event has occurred which with the giving of notice or passage of time, or both, would constitute such a default, and, if so, specifying each such event; it being intended that any such statement delivered pursuant hereto shall be deemed a representation and warranty to be relied upon by the party requesting the certificate and by others with whom such party may be dealing, regardless of independent investigation. Tenant shall also include in any such statement such other information concerning this Lease as Landlord may reasonably request. Within ten days after the Commencement Date, Tenant shall execute and deliver to Landlord a completed estoppel certificate in the form attached as Exhibit D.

SECTION 27RELOCATION OF PREMISES

If the Premises contain less than 3,000 rentable square feet, Landlord may elect by notice to Tenant to substitute for the Premises other office space in the Project (herein called “Substitute Premises”) designated by Landlord; provided that the Substitute Premises contain at least the same useable square foot area as the Premises and have a configuration substantially similar to that of the Premises. Tenant shall vacate and surrender the Premises and shall occupy the Substitute Premises promptly (and, in any event, not later than fifteen (15) days after Landlord has substantially completed the work to be performed by Landlord in the Substitute Premises pursuant to this Section). Base Rent for the remainder of the Lease term shall be adjusted such that the Base Rent payable by Tenant per net leasable square foot of the Substitute Premises shall be the same as that for the Premises. Additional Rent payable for the Substitute Premises shall be calculated in accordance with Section 4. Landlord shall, at Landlord’s expense: furnish and install in the Substitute Premises fixtures, equipment, improvements and appurtenances at least equal in kind and quality to those contained in the Premises at the time such notice of substitution is given by Landlord; and promptly reimburse Tenant for any other actual and reasonable out-of-pocket costs incurred by Tenant in connection with Tenant’s move from the Premises to the Substitute Premises provided such costs are approved by Landlord in advance, which approval shall not be unreasonably withheld.

SECTION 28PARKING

Tenant shall have the nonexclusive right, in common with others, to use up to the number of parking spaces listed in the Summary of Fundamental Provisions for automobile parking. Landlord reserves the right to grant parking rights to other tenants, to make rules and regulations relating to the use of parking areas, including reasonable restrictions on parking by tenants and employees, to designate specific spaces for the use by any tenant, and to change the parking layout from time to time. Tenant shall not park nor allow the Tenant Related Parties collectively to park in excess of the number of parking spaces listed in the Summary of Fundamental Provisions in the Project at any point in time.

SECTION 29MISCELLANEOUS

29.1Entire Agreement

All understandings and agreements between the parties are merged in this Lease and neither party is relying upon any statement or representation not embodied in this Lease. No agreement shall be effective to change or modify this Lease, unless such agreement is in writing, refers expressly to this Lease and is signed by the party against whom enforcement is sought.

29.2Successors and Assigns

Except as otherwise expressly provided in this Lease, the obligations of this Lease bind and benefit the successors and assigns of the parties.

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29.3Nonrecourse Lease

Tenant shall look only to Landlord’s estate and property in the Land and the Building (or the proceeds thereof) for the satisfaction of Tenant’s remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default by Landlord hereunder, and no other property or assets of Landlord or its partners or principals, disclosed or undisclosed, shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s remedies under or with respect to this Lease.

29.4Force Majeure

The obligations of Tenant hereunder shall in no way be affected, impaired or excused, nor shall Landlord have any liability whatsoever to Tenant, because: Landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under this Lease by reason of strike, other labor trouble, governmental preemption of priorities or other controls in connection with a national or other public emergency or shortages of fuel, supplies or labor resulting therefrom, or any other cause, whether similar or dissimilar, beyond Landlord’s reasonable control; or of any failure or defect in the supply, quantity or character of electricity, water or other utilities furnished to the Premises, by reason of any requirement, act or omission of the public utility or others serving the Building with electric energy, oil, gas or water, or for any other reason whether similar or dissimilar, beyond Landlord’s reasonable control.

29.5Effect of Failure to Consent

If Tenant shall request Landlord’s consent and Landlord shall fail or refuse to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord of its consent, it being intended that Tenant’s sole remedy shall be an action for specific performance or injunction, and that such remedy shall be available only in those cases where Landlord has expressly agreed in writing not unreasonably to withhold its consent or where as a matter of law Landlord may not unreasonably withhold its consent.

29.6Rules and Regulations

Tenant and its employees and agents shall faithfully observe and comply with the rules and regulations attached to this Lease as Exhibit E and such changes therein as Landlord may from time to time hereafter make and give notice of to Tenant (the “Rules and Regulations”). Landlord shall not be liable to Tenant for violation of the Rules and Regulations by any other tenant or its employees, agents, invitees or licensees.

29.7Tenant Holdover

If, without objection by Landlord, Tenant fails to vacate the Premises after the Expiration Date of this Lease, or any earlier termination hereof, Tenant shall at the election of Landlord become a tenant from month to month upon the terms of this Lease; provided, however that Base Rent shall be adjusted beginning on the first day after the Expiration Date to be the equal to 110% of the Base Rent in effect at the expiration of the Lease for the first two (2) months and 200% of the Base Rent in effect at the expiration of the Lease thereafter. Notwithstanding anything contained herein to the contrary, Tenant shall be liable to Landlord for any and all damages caused by such failure to vacate the Premises after the Expiration Date of this Lease or any earlier termination hereof, including but not limited to incidental and consequential damages to Landlord.

29.8Tenant Representations

If Tenant is a corporation or other entity, each person executing this Lease on behalf of Tenant hereby covenants and warrants that Tenant is duly formed and validly existing under the laws of its state of formation; Tenant has full right and authority to enter into this Lease and to perform all Tenant’s obligations hereunder; and each person (and both of the persons if more than one signs) signing this Lease on behalf of Tenant is duly and validly authorized to do so.

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29.9Non-Waiver

No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord. Landlord’s waiver of a breach of any term or condition of this Lease shall not be deemed a waiver of any subsequent breach. Acceptance of any Rents or other payments shall not be deemed a waiver of such breach.

29.10Square Footage Calculations Approximate

The parties acknowledge and agree that any calculations of square footage in the Premises and in the Project are approximations. No recalculation of square footage shall affect the obligation of Tenant under this Lease including, without limitation, the amount of Base Rent payable by Tenant or the amount of Tenant’s Proportionate Share of Operating Expenses or the amount of Tenant’s Proportionate Share of Taxes.

29.11Time

Time is of the essence of this Lease.

29.12Late Fees

Tenant acknowledges that late payment by Tenant to Landlord of any Rent due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs may include, without limitation, processing and accounting charges and late charges which may be imposed on Landlord under the terms of any Mortgage. Accordingly, if any Rent payment is not received by Landlord within five days after it is due, Tenant shall pay to Landlord a late charge equal to ten percent (10%) of the overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs incurred by Landlord by reason of the late payment by Tenant. Acceptance of any late charge by Landlord shall in no event constitute a waiver of Tenant’s default with respect to the overdue amount in question, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder.

29.13Attorneys’ Fees

In the event a suit, action, arbitration, or other proceeding of any nature whatsoever, including without limitation any proceeding under the U.S. Bankruptcy Code, is instituted, or the services of an attorney are retained, to interpret or enforce any provision of this Lease or with respect to any dispute relating to this Lease, the prevailing or non defaulting party shall be entitled to recover from the losing or defaulting party its attorneys’, paralegals’, accountants’, and other experts’ fees and all other fees, costs, and expenses actually incurred and reasonably necessary in connection therewith. In the event of suit, action, arbitration, or other proceeding, the amount thereof shall be determined by the judge or arbitrator, shall include fees and expenses incurred on any appeal or review, and shall be in addition to all other amounts provided by law.

29.14Quiet Enjoyment

So long as Tenant pays all Rents and complies with all of the terms and conditions of this Lease, Tenant shall peaceably and quietly have, hold and enjoy the Premises. This covenant shall be binding upon the subsequent successors in interest of Landlord’s interest in this Lease.

29.15Severability

If any portion of this Lease is held to be illegal, invalid or unenforceable under present or future law effective during the term of this Lease, the remainder of this Lease shall not be affected thereby.

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29.16Incorporation of Exhibits

Exhibit A (Floor Plans), Exhibit B (Legal Description of Project), Exhibit C (Work Agreement), Exhibit D (Estoppel Certificate) and Exhibit E (Rules and Regulations) are attached to this Lease and by this reference made a part hereof.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this lease as of the day and year first above written.

LANDLORD:	MARK TANASBOURNE LLC,
	an Oregon limited liability company
	By:		Mark Properties Limited Partnership,
			an Oregon limited partnership, Managing Member
			By:	Mark Management, LLC,
				an Oregon limited liability company, General Partner
				By:	/s/ M. James Mark
					M. James Mark, Co-Manager
TENANT:	MATHSTAR, a Minnesota corporation
	By	/s/ Daniel J. Sweeney
	Its	Chief Operating Officer

Exhibits

A: Outline of Premises

A-1: Outline of Expansion Space

B: Legal Description of Land

C: Work Agreement

C-1: Plan

C-2: General Specifications for Tenant Improvements

C-3: Construction Budget Sheet

D: Estoppel Certificate

E: Rules and Regulations

F-1: Monument View 1

F-2: Monument View 2

Addendum

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EXHIBIT “A” TO THAT LEASE DATED JUNE 1, 2005 BY
AND BETWEEN MARK. TANASBOURNE L.L.C. AN OREGON
LIMITED LIABILITY COMPANY, LANDLORD, AND
MATHSTAR. A MINNESOTA CORPORATION, TENANT
/s/ JM	LANDLORD	/s/ DS	TENANT

EXHIBIT “A” TO THAT LEASE DATED JUNE 1, 2005 BY
AND BETWEEN MARK. TANASBOURNE L.L.C. AN OREGON
LIMITED LIABILITY COMPANY, LANDLORD, AND
MATHSTAR. A MINNESOTA CORPORATION, TENANT
/s/ JM	LANDLORD	/s/ DS	TENANT

EXHIBIT B

LEGAL DESCRIPTION

Situated in the East one-half of Section 25, Township 2 North, Range 1 West, of the Willamette Meridian, in the City of Hillsboro, County of Washington and State of Oregon and being a portion of Lots 15 and 16, Plat of TANASBOURNE CORPORATE CENTER, recorded in Book 49, pages 47-49, Plat Records of said county and being described as follows:

Beginning at the Southwest corner of said Lot 15, said point also being on the North right-of-way line of N.W. Tanasbourne Drive and running thence North 29°55’47” East, on the West line of said Lot 15 at a distance of 569.73 feet to a point on the South right-of-way line of the Sunset Highway (US Highway 26); thence South 49°04’17” East, on said South right-of-way line a distance of 265.21 feet to a point on a non-tangent 2035.98 foot radius curve right; thence on said curve through a central angle of 06°18’39” (the long chord of which bears South 53°35’21” East, a distance of 224.13 feet) an arc distance of 224.25 feet to a point on a non-tangent 829.93 foot radius curve right; thence on said curve through a central angle of 02°15’27” (the long chord of which bears South 47°34’25” East, a distance of 32.70 feet) an arc distance of 32.70 feet to a point; thence leaving said South right-of-way line and running South 49°31’34” West, a distance of 275.00 feet; thence South 89°16’17” West, a distance of 32.02 feet to a point on a non-tangent 65.00 foot radius curve left, said point also being on the North right-of-way line of N.W. Stucki Place; thence on the North and West right-of-way lines of said N.W. Stucki Place the following courses: on said curve through a central angle of 150°43’58” (the long chord of which bears South 78°52’34” West, a distance of 125.78 feet) an arc distance of 171.00 feet to the end thereof and the beginning of a tangent 25.00 foot radius curve right; thence on said curve through a central angle of 43°45’40” (the long chord of which bears South 25°23’26” West, a distance of 18.63 feet) an arc distance of 19.09 feet to the end thereof; thence South 47°16’17” West, a distance of 122.75 feet to the beginning of a tangent 25.00 foot radius curve right; thence on said curve through a central angle of 90°00’00” (the long chord of which bears North 87°43’43” West, a distance of 35.36 feet) an arc distance of 39.27 feet to a point on the North right-of-way line of N.W. Tanasbourne Drive; thence on said North right-of-way line the following courses: North 42°43’43” West, a distance of 4.25 feet to the beginning of a tangent 430.00 foot radius curve left; thence on said curve through a central angle of 16°04’39” (the long chord of which bears North 50°46’03” West, a distance of 120.26 feet) an arc distance of 120.66 feet to the end thereof; thence North 58°48’22” West, a distance of 110.44 feet to the point of beginning.

TOGETHER WITH:

A parcel of land located in the northeast one-quarter of section 25, township 1 north, range 2 west, Willamette meridian, Washington County, Oregon, and being portions of lots 13 and 14 of “Tanasbourne Corporate Center”, described as follows:

Beginning at the southeast corner of said lot 14; thence along the east line of said lot north 29° 55’ 47” east 569.72 feet to a point on the south right-of-way line of sunset highway (highway 26) as established in deed document no. 92017391; thence leaving said lot line along said right-of-way line north 49° 04’ 17” west 55.11 feet to a point on the north line of said lot 14 and the south right-of-way line of sunset highway (highway 26) as shown on the plat of “Tanasbourne Corporate Center”, thence along said right-of-way line and the north lines of lot 14 and lot 13 north 60° 04’ 13” west 501.90 feet; thence leaving said line south 29° 55’ 47” west 605.84 feet to a point on the south line of said lot 13 and the north right-of-way line of N.W. Tanasbourne Drive; thence along said lot line and right-of-way line on a non-tangent curve concave to the north, the radius point of which bears north 23° 29’ 50” east, having a radius of 3,970.00 feet, through a central angle of 00° 59’ 50”, an arc length of 69.10 feet (chord bears south 67° 00’ 05” east 69.10 feet) to a point of reverse curvature; thence on a curve concave to the south, having a radius of 2,430.00 feet, through a central angle of 08° 41’ 38”, an arc length of 368.72 feet (chord bears south 63° 09’ 11” east 368.37 feet) to the point of beginning.

EXCEPTING THEREFROM the following described property:

A parcel of land located in the northeast one-quarter of section 25, township 1 north, range 2 West, Willamette meridian, Washington County, Oregon and being a portion of lot 13, “Tanasboume Corporate Center”, described as follows:

Beginning at the southeast corner of said lot 13; thence along the east line north 29° 55’ 47” east 586.25 feet to the northeast corner; thence along the north line north 60° 04’ 13” west 171.00 feet; thence leaving said line south 29° 55’ 47” west 605.74 feet to a point on the south line of said lot 13 and a point on the north right-of-way line on N.W. Tanasboume Drive; thence along said lot line and right-of-way line on a non-tangent curve concave to the north the radius point of which bears north 23° 29’50” east, having a radius of 3,970.00 feet, through a central angle of 00° 59’ 50”, an arc length of 69.10 feet (chord bears south 67° 00’ 05” east 69.10 feet) to a point of reverse curvature; thence on a curve concave to the south, having a radius of 2,430.00 feet, through a central angel of 02° 25’ 44”, an arc length of 103.02 feet (chord bears south 66° 17’ 08” east 103.01 feet) to the point of beginning.

EXHIBIT C

WORK AGREEMENT

SECTION 1        GENERAL

Landlord agrees to provide certain improvements in the Premises in accordance with this Work Agreement. Landlord shall pay for the shell all costs (estimated at $95,582,25) and up to $178,201.69 (the “T1 Allowance”) towards the cost of designing and construction the improvements in the Premises pursuant to the terms as provided in the attached Exhibit C-1 Plans and further described by the Exhibit C-2 General Outline Specification for Tenant Improvements and Exhibit C-3 Construction Budget Sheet. of this Work Agreement. All costs, fees, and expenses including, without limitation, governmental fees and assessments in connection with the design, permitting, installation, materials, labor, and construction of the improvements in the Premises in excess of the TI Allowance shall be paid for by Tenant within twenty (20) days after billing therefore excluding architectural and planning services provided by Landlord. Throughout the process of design and construction of the Tenant improvements, Dan Sweeney (“Tenant’s Construction Representative”) shall be available for onsite and telephone consultations and decisions as necessary. Tenant’s Construction Representative’s address is 5900 Green Oak Drive, Minneapolis MN 55343 and his telephone number is 503-310-2254. Tenant’s Construction Representative shall have the authority to bind Tenant as to all matters relating to the tenant improvements.

SECTION 2        DESIGN OF TENANT IMPROVEMENTS

2.1             Landlord shall retain the services of a space planner or architect to prepare the necessary drawings, including without limitation Basic Plans and Working Plans as described below for construction of the tenant improvements (the “Plans”). The costs, feeds, and expenses incurred in connection with the Plans shall be deducted from the T1 Allowance.

2.2             Within five (5) business days after Landlord delivers to Tenant a copy of the Basis Plans, Tenant shall either approve the Basic Plans or shall set out the revisions requested by Tenant to the Basis Plans. Also, Tenant shall clearly identify and locate on the Basic Plans any equipment requiring special plumbing or mechanical systems, areas subject to above normal leads, special openings in the floor, ceiling, or walls, and other major or special features; and (ii) locations of telephone and electrical receptacles, outlets, and other items requiring electrical power (for special conditions and equipment, power requirements, and manufacturer’s model numbers must be included).

2.3             Landlord shall review any revisions made to the Basic Plans and shall, in writing within         business days after receipt, either approve the revised Basic Plans or reject them, in which ease Landlord shall specify in reasonable detail the deficiencies in the Basic Plans as submitted. If the Basic Plans are rejected, Tenant shall resubmit required changes to the Basic Plans as soon as practicable until Landlord’s approval has been obtained. Following Landlord’s approval of the Basic Plans, Landlord’s space planner or architect shall produce full working drawings for construction sufficient to obtain all necessary permits and with sufficient detail to construct the improvements, including specifications for every item included thereon (the “Working Plans”). Landlord shall have the right to stop the design process at any point and terminate the Lease if it appears to Landlord that the cost; timing, or some other issues related to the tenant improvements will not be resolved between the parties.

2.4             Tenant shall be responsible for delays and additional costs in completion of the design and construction of Tenant’s improvements caused by changes made by Tenant to the attached plans. to the Working Plans after Landlord delivers them to Tenant or by delays in delivery of special materials requiring long lead times.

SECTION 3        CONSTRUCTION OF TENANT IMPROVEMENTS

3.1             Upon completion of the Working Plans and at the request of Tenant, Landlord and its contractor shall provide to Tenant in writing an estimate of the cost of improvements to be provided at Tenant’s expense pursuant to Section 1 of this Work Agreement. Within five days after Tenant’s receipt of such estimated cost, Tenant

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shall delete any items which Tenant elects not to have constructed and shall authorize construction of the balance of the improvements. In the absence of such written authorization, Landlord shall not be obligated to commence work on the Premises and Tenant shall be responsible for any costs due to any resulting delay in completion of the Premises. Notwithstanding the provisions of this Section 3.1, Tenant may request Landlord’s approval to use a contractor other than Landlord’s for the construction of Tenant’s improvements. Tenant shall include with any request for such approval a written estimate by Tenant’s contractor of the cost of the improvements. Landlord shall respond to any request for such approval within ten days after receipt of the request. If Landlord approves Tenant’s request to use its own contractor, the work performed by such contractor shall be in conformance with the provisions of Section 3.4 of this Work Agreement.

3.2             If Landlord’s contractor is to construct Tenant’s improvements, then prior to commencement of construction of the improvements, Tenant shall either (i) deposit with Landlord cash in an amount equal to the estimated cost of the improvements to be installed at Tenant’s expense pursuant to Section 1 of this Work Agreement, or (ii) provide Landlord with other evidence or assurance, such as a bond, satisfactory to Landlord of Tenant’s ability to pay the estimated cost of such improvements. Landlord’s contractor shall then complete the improvements in accordance with the Working Plans. Any additional amounts payable by Tenant for the actual cost of the improvements beyond the Improvement Allowance shall be paid upon acceptance of the Premises by Tenant in accordance with the terms of the Lease, or upon receipt of the final accounting. If each is deposited by Tenant as provided above in this Section 3.2, any excess paid by Tenant over the actual cost of the improvements shall be promptly refunded to Tenant by Landlord.

3.3             If Tenant desires any change to its improvements, Tenant shall submit a written request for such change to Landlord, together with all plans and specifications necessary to show and explain changes from the approved Working Plans. Any such change shall be subject to Landlord’s approval. If Landlord’s contractor is constructing Tenant’s improvements, Landlord or such contractor shall notify Tenant in writing of the amount, if any, which will be charged or credited to Tenant to reflect the cost of such change.

SECTION 4        COMPLETION AND INSPECTION

4.1            Substantial Completion Date. Landlord shall be deemed to have met its obligation to substantially complete Landlord’s Work in conformity with the working drawings for construction upon (a) the issuance by the City of Hillsboro of a certificate of occupancy or a temporary certificate of occupancy for the Building (or any comparable approval of Landlord’s work) which does not contain any condition preventing occupancy and the use of the Building (herein the “Certificate of Occupancy’), and (b) the issuance by the Architect of a certificate stating that, except for any then remaining Punchlist Items, construction of Landlord’s work has been substantially completed according to the Final Plans and Specifications (herein the “Architect’s Certificate”). The date upon which substantial completion occurs is herein referred to as the “Substantial Completion Date.”

4.2            Inspection and Creation of Punchlist. Approximately thirty (30) days prior to the date which Landlord anticipates to be the Substantial Completion Date, Landlord shall deliver to Tenant written notice of the expected Substantial Completion Date. Approximately five (5) days prior to the anticipated Substantial Completion Date, representatives of Landlord and Tenant shall make a joint inspection of the Building to create an agreed upon list of items of Landlord’s Work yet to be substantially completed. The items included in such list are herein referred to as the “Punchlist Items.” If the parties are unable to agree whether any particular item is to be included as a Punchlist Item, then the decision of the Architect as to such item shall be binding.

4.3            Performance of Punchlist Work; Final Completion. Landlord shall complete Punchlist Items after the Substantial Completion Date. The existence of Punchlist Items shall not delay delivery of possession nor the Lease Commencement Date. Tenant shall be given possession of the Premises upon the Substantial Completion Date, but Landlord shall continue to have complete access to the Premises for the purpose of taking any and all steps related to then remaining Punchlist Items, and Tenant shall cooperate to facilitate such steps. The obligation of Landlord to perform punchlist work shall be to perform the same to an industry

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standard level, not to perfection; any disagreement as to whether an item of punchlist work has been performed to industry standard shall be resolved by the Architect. If Landlord fails to complete any particular Punchlist Item within ninety (90) days after written notice front Tenant that the same remains uncompleted, and if such failure is not due to a cause beyond the reasonable control of Landlord, then Tenant may perform the necessary correction, in which event Landlord shall reimburse Tenant for all actual out-of-pocket expenses incurred in such correction upon deliver by Tenant of substantiation of amount of such expenses. Landlord shall be deemed to have fully and finally completed its construction obligations hereunder upon the date (herein the “Final Completion Date”) that Landlord shall have completed its punchlist obligations.

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EXHIBIT “C-1” TO THAT LEASE DATED JUNE 1, 2005 BY
AND BETWEEN MARK. TANASBOURNE L.L.C. AN OREGON
LIMITED LIABILITY COMPANY, LANDLORD, AND
MATHSTAR. A MINNESOTA CORPORATION, TENANT
/s/ JM	LANDLORD	/s/ DS	TENANT

EXHIBIT C-2

SUNSET CENTER AT TANASBOURNE

General Outline Specifications for Tenant Improvements

Project Description:          Work shall include demising walls to underside of structure; interior walls to underside of suspended ceiling; general office finishes including floors, walls doors frames and hardware, suspended acoustic ceilings; HVAC in offices; wet fire sprinkler system; restroom and plumbing; electrical and lighting systems.

General Requirements:

·All construction permits are included as part of the Improvement Cost.

·Fire and extended coverage insurance (Builder’s Risk) shall be provided by Landlord as part of the Improvement Cost.

·All work shall be in accordance with the Uniform Building Code and local jurisdictions.

Cabinetry:

·Cabinets shall be particle-board construction with melamine faced interiors and plastic laminate at all exposed surfaces. Countertops and splashes shall be plastic laminate.

·Tenant reception counter is 0 allowance.

Insulation:

·3 1/2 “ unfaced batt insulation in demising walls and ceilings.

Door, Frames & Hardware:

·Interior doors shall be 3’0” x 8’ 10” x 13/4” flush, solid core (AWI grade Premium) with maple quarter sawn veneer face (AWI Type II) and pre-finished with clear lacquer.

·Interior door frames shall be knock-down metal drywall type (Timely) 18 ga; primed. Color: Match wall color.

·Interior door hardware shall be l 1/2” pr. 4 1/2” butt hinges; Schlage 625 latchsets and locksets in lever handles, Option 03 chrome finish; wall stops.

Partitions:

·Interior walls shall be 31/2” metal studs @ 24” o.c. to underside of suspended ceiling (9’ typical ); one layer of 5/8” drywall on each side with smooth finish; two coats of latex enamel paint; 4” rubber base.

Suspended Ceiling:

·Suspension system shall be 2’ x 4’ exposed T-bar grid supported from roof structure. Ceiling tile shall be non- directional, fissured mineral fiberboard with standard white finish at all offices (Armstrong #733 “Second Look”) at 9’0” above finished floor. Suspension system is included.

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Floor Coverings:

Office Carpet:

Style:		Shaw Design Services V (5A032) or equivalent
Gauge:		1/10
Stitches Per Inch:	9.5
Production Yarn Weight:	30 oz./SY
Finished Pile Thickness:	201 inches
Average Density:	5,373 oz./CY
Warranty:		10 year Commercial Ltd.

Sheet Vinyl:

Type:		Classic Corlon Sheet Vinyl Flooring
Width:		6 Feet
Style:		Seagate
Reference Specification:	Grade 1, Class A backing
Gauge:		2.16 mm overall/1.27 mm wear/layer
Load Limit:		500 psi
Manufacturer:		Armstrong “Seagate”

·        Sheet vinyl (Armstrong “Seagate”) in Janitors closet.

·        Vinyl cove base; 4” in carpeted areas; 4” in sheet vinyl and VCT areas.

Painting/Finishing:

·Interior drywall paint shall be a two coat, one color application; wood doors to be pre-finished maple quarter sawn veneer with clear lacquer. Miscellaneous metals receive an enamel finish.

Window Coverings:

·Hunter Douglas color 724 Crème de la crème (pearl) Blinds on any interior relites are not included.

Plumbing:

·Complete and code approved domestic water and sanitary sewer systems shall be provided.

·Plumbing fixtures shall be Kohler (or equal); including toilet, lavs (in countertops); faucets . Water heater; capacity as required. Drinking fountain as required by code. All fixtures to meet all applicable ADA requirements.

Fire Protection:

·Office areas shall have semi-recessed heads with chrome escutcheons complete per code.

Electrical/Exterior, Exit and Emergency Lighting:

·Exit and emergency lighting shall be provided to meet UBC and ADA requirements.

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Electrical/Interior Lighting:

·Office areas shall have 2’ x 4’ florescent “lay-in” Lithonia 18 cell parabolic fixtures. Cost of these fixtures is included in the overall shell cost.

·Light control switching minimum requirements shall be: offices – one switch on wall near door; conference rooms – two switches on wall near door; restrooms and lunch rooms – one switch on wall near door; corridors – two switches.

Electrical/Power:

·Receptacles shall be provided as required by code in all areas.

·Service panel will be a 100 amp, 42 circuit for the floor.

Electrical/Telephone & Data:

·Telephone and/or data outlets shall be wall mounted mud rings with pull cords only to above the ceiling line. Telephone equipment, signaling and intercom are not included.

·Data and/or computer wiring by Tenant.

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EXHIBIT “C-3” TO THAT LEASE DATED JUNE 1, 2005 BY
AND BETWEEN MA. TANASBOURNE L.L.C. AN OREGON
LIMITED LIABILITY COMPANY, LANDLORD, AND
MATHSTAR. A MINNESOTA CORPORATION, TENANT
/s/ JM	LANDLORD	/s/ DS	TENANT

CONSTRUCTION BUDGET SHEET

TENANT:	MATH STAR
BUILDING:	SUNSET CENTER I
SUITE:	2ND FLOOR
RSF:	6,473 SQ. FT.	$28.47 /sq. ft.

JOB NO:

ESTIMATE DATE:	June 1, 2005
PLAN DATE:	MMP PLAN June 1, 2005

DESCRIPTION	QUOTE	DESCRIPTION	QUOTE
220 if New walls; Furr out columns (6)	12,210.00
126 If Demising walls	3,465.00	Paint	3,600.00
(10) New doors, frames & hardware	15,000.00
Glass entry doors & site Iltes	12,000.00	Construction clean up	2,000.00
		Contingency	10,000.00
720 s.y. Carpet, pad, STD, VCT & installation	14,500.00
Rubber base	2,000.00	Office area secondary ductwork	6,400.00
		Low pressure ductwork, including grilles:
Electrical; (2) power poles, (5) floor duplex	23,300.00	Small Conference Room Exhaust Fan	1,200.00
outlets; (4) power whips @ columns; (121)		Small Conference Room Exhaust Fan	1,200.00
wall duplex outlets; (15) dedicated outlets;		Small Conference Room Exhaust Fan	1,200.00
(13) light switches; (42) telephone/data		Large Conference Room New Box	3,500.00
outlets; HVAC power for 24/7 units		Break Room New Box	3,500.00
		Testing Lab New 2-ton 24/7 Split	7,000.00
		Server Room New 3-ton 24/7 Split	8,000.00
Cabinets 24 If U/L p-lam	8,400.00
		Testing Lab Exhaust System	5,000.00
Plumbing; (1) standard sink	2,500.00
Window coverings	5,100.00
		SUB TOTAL #1	151,075.00
		PERMIT FEE (REIMBURSABLE)	3,100.00
		OVERHEAD & FEE	23,126.25
		SUB TOTAL #2	177,301.25
		ARCHITECT FEE	7,000.00
		DESIGNER FEE	0.00
		TOTAL ESTIMATE	184,301,25

CLARIFICATIONS:	Wood base	Add $3,000
	Excludes:Refrigerator, microwave & coffee maker
	Excludes:Test benches furniture, equipment racks & V/D cabling. 208 volt is available to building electrical panel

AUTHORIZATION SIGNATURES:

MMCC:	DATE:		June 1, 2005
TENANT:	DATE:
THIS WORK IS TO BE PAID FOR BY      TENANT		OWNER		OTHER

EXHIBIT D

ESTOPPEL CERTIFICATE

Landlord:	Mark Tanasbourne LLC, an Oregon limited liability company
Tenant:
Premises:		, Sunset Center at Tanasboume
Area:		Rentable Sq. Ft.	Lease Date:
Lender:

The undersigned Landlord and Tenant of the above-referenced Lease (the “Lease”) hereby ratify the Lease and certify to Lender as mortgagee of the real property of which the premises demised under the Lease (the “Premises”) is a part, as follows:

1.That the term of the Lease commenced on                                , 19           , Tenant is in full and complete possession of the Premises demised under the Lease, and Tenant has commenced full occupancy and use of the Premises, such possession having been delivered by Landlord and having been accepted by the Tenant.

2.That the Lease presently calls for monthly Base Rent installments of $                   and that Tenant is paying monthly installments of Base Rent of $                   which commenced (or will commence) to accrue on the                 day of                                               , 19         .

3.That no advance rental or other payment has been made in connection with the Lease, except rental for the current month, and that: (initial one)

(  )there is no “free rent” or other concession under the remaining term of the Lease and the rent has been paid to and including                           , 19        .

(  )there is “free rent” which extends through                                 , 19          , that the first month following the free rent period has been paid in advance, and no further free rent or prepaid rent exists throughout the remaining term of the Lease.

4.That a security deposit in the amount of $                      is being held by Landlord, which amount is not subject to any set-off or reduction or to any increase for interest or other credit due to Tenant.

5.That all obligations and conditions under said Lease to be performed to date by Landlord or Tenant have been satisfied, free of defenses and set-offs including construction work in the Premises.

6.That the Lease is a valid lease and in full force and effect and represents the entire agreement between the parties; that there is no existing default on the part of Landlord or Tenant in any of the terms and conditions thereof and no event has occurred which, with the passing of time or giving of notice or both, would constitute an event of default; and that said Lease has: (initial one)

(  )not been amended, modified, supplemented, extended, renewed or assigned.

(  )been amended, modified, supplemented, extended, renewed or assigned as follows by the following described agreements:

                                                                                                                                                        &n bsp;                 

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                                                                                                                                                        &n bsp;                 

.

7.That the Lease provides for a primary term of                                     months; the term of the Lease expires on the                   day of                                     , 19        ; and that: (initial one)

(  )neither the Lease nor any of the documents listed above in Paragraph 6 (if any), contain an option for any additional term or terms,

(  )the Lease and/or the documents listed above in Paragraph 6 contain an option for                                additional term(s) of                        year(s) and                       month(s) (each) at a rent to be determined as follows:

                                                                                                                                                        &n bsp;                 

                                                                                                                                                        &n bsp;                 

.

8.That Landlord has not rebated, reduced or waived any amounts due from Tenant under the Lease, either orally or in writing, nor has a Landlord provided financing for, made loans or advances to, or invested in the business of Tenant.

9.That, to the best of Tenant’s knowledge, there is no apparent or likely contamination of the Premises by Hazardous Materials, and Tenant does not use, nor has Tenant disposed of, Hazardous Materials in violation of Environmental Laws on the real property or the Premises.

10.That there are no actions, voluntary or involuntary, pending against Tenant under the bankruptcy laws of the United States or any state thereof.

11.That this certification is made knowing that Lender is relying upon the representations herein made.

LANDLORD:	MARK TANASBOURNE LLC,
	an Oregon limited liability company
	By:	Mark Properties Limited Partnership,
		an Oregon limited partnership, Managing Member
		By:	Mark Management, LLC,
			an Oregon limited liability company, General Partner
			By
				M. James Mark, Co-Manager

TENANT:	MATHSTAR, a Minnesota corporation
	By
	Its

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EXHIBIT E

RULES AND REGULATIONS

1.The entrances, halls, corridors, stairways, exits, and elevators shall not be obstructed by any of the tenants or used for any purpose other than for ingress and egress from their respective premises. The entrances, halls, corridors, stairways, exits, and elevators are not intended for use by the general public but for the tenant and its employees, licensees and invitees. Landlord reserves the right to control and operate the public portions of the Project and the public facilities as well as facilities furnished for the common use of the tenants, in such manner as it in its reasonable judgment deems best for the benefit of the tenants generally. No tenant shall invite to the tenant’s premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of any of the plazas, entrances, corridors, elevators and other facilities of the Project by any other tenants. Fire exits and stairways are for emergency use only, and they shall not be used for any other purpose.

2.Landlord may refuse admission to the Building outside of Business Hours on Business Days (as such terms are defined in the Lease) to any person not producing identification satisfactory to Landlord. If Landlord issues identification passes, Tenant shall be responsible for all persons for whom it issues any such pass and shall be liable to Landlord for all acts or omissions of such persons.

3.No awnings or other projections shall be attached to the outside walls of the Building. No curtains, blinds, shades or screens, if any, which are different from the standards adopted by Landlord for the Building shall be attached to or hung in any exterior window or door of the premises of any tenant without the prior written consent of Landlord.

4.No sign, placard, picture, name lettering, advertisement, notice or object visible from the exterior of any tenant’s premises shall be displayed in or on the exterior windows or doors, or on the outside of any tenant’s premises, or at any point inside any tenant’s premises where the same might be visible outside of such premises, without the prior written consent of Landlord. Landlord shall adopt and furnish to tenants general guidelines relating to signs inside the Building. Tenant shall conform to such guidelines. All approved signs or lettering shall be prepared, printed, affixed, or inscribed at the expense of the tenant and shall be of a size, color and style acceptable to Landlord.

5.The windows that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by any tenant, nor shall any bottles, parcels or other articles be placed on the window sills.

6.No showcases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors or vestibules.

7.No bicycles, vehicles, animals, fish or birds of any kind shall be brought into or kept in or about the premises of any tenant or the Building.

8.No noise, including, but not limited to, music or the playing of musical instruments, recordings, radio or television, which, in the judgment of Landlord, might disturb other tenants in the Project, shall be made or permitted by any tenant.

9.No tenant, nor any tenant’s contractors, employees, agents, visitors, invitees or licensees, shall at any time bring into or keep upon the premises or the Building any inflammable, combustible, explosive, environmentally hazardous or otherwise dangerous fluid, chemical or substance.

10.All movement of freight, furniture, packages, boxes, crates or any other object or matter of any description must take place during such hours and in such elevators, and in such manner as Landlord or its agent may determine from time to time. Any labor and engineering costs incurred by Landlord in connection with any moving herein specified, shall be paid by Tenant to Landlord, on demand.

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11.No tenant shall occupy or permit any portion of its premises to be occupied as an office for a public stenographer, public word processor, printer or photocopier. No tenant shall use its premises, or permit any part thereof to be used, for manufacturing or the sale at retail or auction of merchandise, goods or property of any kind.

12.Landlord shall have the right to prescribe the weight and position of safes and other objects of excessive weight, and no safe or other object whose weight exceeds the lawful load for the area upon which it would stand shall be brought into or kept upon any tenant’s premises. If, in the judgment of Landlord, it is necessary to distribute the concentrated weight of any heavy object, the work involved in such distribution shall be done at the expense of the tenant and in such manner as Landlord shall determine.

13.Landlord, its contractors, and their respective employees, shall have the right to use, without charge therefor, all light, power and water in the premises of any tenant while cleaning or making repairs or alterations in the premises of such tenant.

14.No premises of any tenant shall be used for lodging or sleeping or for any immoral or illegal purpose.

15.The requirements of tenants for any services by Landlord will be attended to only upon prior application to the Landlord. Employees of Landlord shall not perform any work or do anything outside of their regular duties, unless under special instructions from Landlord.

16.Canvassing, soliciting and peddling in the Project are prohibited and each tenant shall cooperate to prevent the same.

17.Each tenant shall store its trash and garbage within its premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of office building trash and garbage in the City of Hillsboro without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such times as Landlord shall designate. No tenant shall cause or permit any unusual or objectionable odors to emanate from its premises which would annoy other tenants or create a public or private nuisance.

18.No coin vending machine, video game, coin or token operated amusement device or similar machine shall be used or installed in any tenant’s premises without Landlord’s prior written consent.

19.No bankruptcy, going out of business, liquidation or other form of distress sale shall be held on any of tenant’s premises. No advertisement shall be done by loudspeaker, barkers, flashing lights or displays or other methods not consistent with the character of a high-quality office building.

20.Nothing shall be done or permitted in any tenant’s premises, and nothing shall be brought into or kept in any tenant’s premises, which would impair or interfere with the economic heating, cleaning or other servicing of the Building or the premises, or the use or enjoyment by any other tenant of any other premises, nor shall there be installed by any tenant any ventilating, air conditioning, electrical or other equipment of any kind which, in the reasonable judgment of Landlord, might cause any such impairment or interference.

21.No acids, vapors or other similar caustic materials shall be discharged or permitted to be discharged into the waste lines, vents or flues of the Building other than the vent for hard soldering as provided in the initial improvements. The water and wash closets and other plumbing fixtures in or serving any tenant’s premises shall not be used for any purpose other than the purposes for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other foreign substances shall be deposited therein. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose servants, employees, agents, invitees, visitors or licensees shall have caused the same.

10

22.All entrance doors in each tenant’s premises shall be left locked and all windows shall be left closed by the tenant when the tenant’s premises are not in use. Entrance doors to the tenant’s premises shall not be left open at any time. Each tenant, before closing and leaving its premises at any time, shall turn out all lights.

23.Hand trucks not equipped with rubber tires and side guards shall not be used within the Building.

24.Window coverings for all windows in each tenant’s premises above the ground floor shall be lowered as reasonably required because of the position of the sun, during the operation of the Building air-conditioning system to cool or ventilate the tenant’s premises.

25.Landlord reserves the right to rescind, modify, alter or waive any rule or regulation at any time prescribed for the Project when, in its reasonable judgment, it deems it necessary, desirable or proper for its best interest and for the best interests of the tenants generally, and no alteration or waiver of any rule or regulation in favor of one tenant shall operate as an alteration or waiver in favor of any other tenant. Landlord shall not be responsible to any tenant for the non-observance or violation by any other tenant of any of the rules and regulations at any time prescribed for the Project.

26.Landlord reserves the right to add to, modify or otherwise change these Rules and Regulations. Such changes shall become effective when written notice thereof is provided to tenants of the Project.

11

EXHIBIT “F-1” TO THAT LEASE DATED JUNE 1, 2005 BY
AND BETWEEN MARK. TANASBOURNE L.L.C. AN OREGON
LIMITED LIABILITY COMPANY, LANDLORD, AND
MATHSTAR. A MINNESOTA CORPORATION, TENANT
/s/ JM	LANDLORD	/s/ DS	TENANT

EXHIBIT “F-2” TO THAT LEASE DATED JUNE 1, 2005 BY
AND BETWEEN MARK. TANASBOURNE L.L.C. AN OREGON
LIMITED LIABILITY COMPANY, LANDLORD, AND
MATHSTAR. A MINNESOTA CORPORATION, TENANT
/s/ JM	LANDLORD	/s/ DS	TENANT

ADDENDUM TO THE LEASE DATED JUNE 1, 2005 BY AND BETWEEN
SUNSET CENTER, LLC, AN OREGON LIMITED LIABILITY COMPANY, LANDLORD
AND MATHSTAR, A MINNESOTA CORPORATION, TENANT

29.17OPTION TO EXPAND.

So long as Tenant is not then in default of the Lease beyond any applicable cure periods, Tenant shall have a one-time option to expand the Premises (the “Second Floor Expansion Option”) by adding approximately 2,072 rentable square feet located on the second floor of the Building as outlined on the attached Exhibit A-1 ((the “Second Floor Expansion Option”), in accordance with the terms of this Section 29.17. If Tenant wishes to exercise the Second Floor Expansion Option, Tenant shall do so by giving Landlord written notice of its exercise of the Second Floor Expansion Option (the “Second Floor Expansion Notice”) no later than on June 30, 2006. If Tenant does not give Landlord a written notice exercising Tenant’s Second Floor Expansion Option, then the Option shall terminate and shall be of no further force or effect.

If Tenant gives Landlord written notice of its exercise of the Second Floor Expansion Option on or before June 30, 2006, then, effective on the earlier of (a) the date on which tenant improvements in the Second Floor Expansion Space are substantially completed or (b) September 1, 2006 (the “Second Floor Expansion Space Commencement Date”), the Second Floor Expansion Space shall be added to the Premises. The annual Base Rent for the Second Floor Expansion Space (the “Second Floor Expansion Space Base Rent”) shall equal the rate per square foot at the time of the Second Floor Expansion Space Commencement Date, as set forth in the Summary of Fundamental Provisions, Item #5 of this Lease, multiplied by 2,072’, and the Second Floor Expansion Space Base Rent shall increase as set forth in the Summary of Fundamental Provisions, Item #5 of the Lease. The tenant improvement allowance to be provided by Landlord for the Second Floor Expansion Space shall equal $23.86 per rentable square foot.

Effective on the Second Floor Expansion Space Commencement Date, the following shall occur: (a) the Second Floor Expansion Space shall be added to the Premises for the remainder of the Term of the Lease, (b) Base Rent for the Premises shall be increased by an amount equal to the Second Floor Base Rent determined as provided in this Section 29.17, and (c) Tenant’s Proportionate Share of Operating Expenses shall increase proportionately based on the increase in square footage in the Premises. Subject to the tenant improvement allowance to be provided by Landlord and Landlord’s obligations regarding common areas described above in this Section 29.17, Tenant shall lease the Second Floor Expansion Space in its “as-is” condition as of the Second Floor Expansion Space Commencement Date. The terms of the work agreement attached as Exhibit C to this Amendment shall apply to the improvements to the Second Floor Expansion Space and the use of such tenant improvement allowance as if the Second Floor Expansion Space were the original Premises leased under this Lease.

29.18RIGHT OF FIRST REFUSAL.

During the first eighteen (18) months of the Lease, in the event a third party is interested in space on the second floor, Landlord agrees to give Tenant prior written notice. Tenant shall have seventy-two (72) hours to respond to the notice and to negotiate a lease satisfactory to Landlord, or Landlord may lease the area to the third party and Tenant shall have no further rights to this space. The same terms and conditions shall apply to said expansion space including, but not limited to, the base rental rate and an improvement allowance equal to $.46 per foot for each month remaining in the lease term effective with the addition of the additional space to the leased Premises. This Right of First Refusal shall expire on December 31, 2006.

29.19OPTION TO TERMINATION.

Provided Tenant is not in default, Tenant shall have the option to terminate the Lease effective December 31, 2008 by giving Landlord one hundred-eighty (180) days prior written notice. Upon said termination, Tenant shall be required to pay Landlord the unamortized balance of the cost of tenant improvements and all leasing commissions.

12

The balance shall be computed on the basis of an even payment amortization over the lease term at 6% annual interest and shall be due and payable on the date that the termination notice is given to Landlord.

13

July 24, 2007

Jim Cruckshank

MathStar

19075 NW Tanasbourne Drive

Hillsboro, Or 97124

Dear Mr. Cruckshank:

Reference is made to that certain Lease dated June 1, 2005, and as amended September 23, 2005 by and between MARK TANASBOURNE LLC, an Oregon limited liability company, Landlord and MATHSTAR, a Minnesota corporation, Tenant.

This letter shall serve as an amendment to said Lease and shall change only the following terms and conditions:

PREMISES:	Effective upon substantial completion of the tenant improvements, Suite 290, an area of approximately 2,360 rentable square feet, as shown on the attached Exhibit A (“Second Expansion Premises”) shall be added to the Premises.
TENANT’S PROPORTIONATE SHARE:	Effective upon substantial completion, Tenant’s proportionate share for the Second Expansion Premises shall be 3.39% with a Base Year of 2007. The proportionate share for the Total Premises shall be 20.65%.
BASE MONTHLY RENTAL:	Effective upon substantial completion of the tenant improvements Base Monthly Rental for the Second Expansion Premises shall be as follows:
		Substantial compl – 6/30/08	21.63	$4,253.90/mo.
		7/1/08 – 6/30/09	22.68	$4,460.40/mo.
		7/1/09 – 6/30/10	22.95	$4,513.50/mo.
		7/1/10 – 2/28/11	23.64	$4,649.20/mo.
		3/1/11 – 8/31/11	24.35	$4,788.83/mo.
LEASE EXTENSION, SUITES 200 AND 210:	The lease of the existing premises, Suites 200 and 210 shall be extended to August 31, 2011.
TENANT IMPROVEMENTS	Landlord shall improve the leased premises per the attached Exhibit “B”. Any and all other improvements shall be at the sole cost of the Tenant.
OPTION TO TERMINATE	There are no further options to terminate.

111 SOUTHWEST COLUMBIA, SUITE 1380 · PORTLAND, OREGON 97201 · TELEPHONE: (503) 223-9203 FAX: (503) 223-4606 www.melvinmark.com

CORE Worldwide Commercial Real Estate Services· Portland · Seattle · San Francisco · Sacramento · Long Beach · Los Angeles · San Diego · Honolulu · Denver
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MathStar

July 24, 2007

Page 2

All other terms and conditions of said Lease shall remain the same. If the terms of this Amendment meet with your approval, please sign all copies and return to us for execution by Mark Tanasbourne LLC, Landlord. We will return one fully executed copy for each of your files.

Thank you.

Sincerely,

/s/ M. James Mark

M. James Mark

Chief Executive Officer
Melvin Mark Companies

MARK TANASBOURNE LLC			MATHSTAR, a Minnesota Corporation
an Oregon limited liability company
By:	Mark Properties Limited Partnership		By:	/s/ James W. Cruckshank
	an Oregon limited partnership
	Managing Member		Its:	VP Admin/CFO
By:	Mark Management LLC
	an Oregon limited liability company
	General Partner
	By:	/s/ M. James Mark
		M. James Mark
		Manager

MathStar

July 24, 2007

Page 2

EXHIBIT A
FLOOR PLAN

MathStar

July 24, 2007

Page 2

EXHIBIT B

CONSTRUCTION BUDGET SHEET

MELVIN MARK CONSTRUCTION COMPANY
CONSTRUCTION BUDGET SHEET
TENANT:		MathStar
BUILDING:		Sunset Center
SUITE:		# 200
RSF:					$35.02/rsf
JOB NO:
ESTIMATE DATE:			July 16, 2007					revised 07/19/07
PLAN DATE:			July 3, 2007
DESCRIPTION						QUOTE		DESCRIPTION		QUOTE
Demo existing reception wall						75.00		Furnish & install (29) 2X4 light fixtures:
								(1) new exit sign, (3) emergency 2X4
Demising wall and installation						3,135.00		fixtures; (8) 120 volt duplex outlets;
New sheetrock partition walls w/ Insulation						6,640.00		(4) light switches; (4) power base
Exterior shell walls and vapor barrier						1,210.00		feeds; (2) floor feeds; (1) power for
Carpet protection						105.00		card reader; VHV power connection;
Pick up and haul materials and clean up						736.00		(6) phone/data boxes: fire alarm
								devices; furnish and install (4) new
Furnish and install new doors, frames and								fluorescent recessed down lights w/
relites						7,084.00		dimming ballasts & (2) fluorescent
								dimmer switches		15,698.00
Install building stock ceiling tile and grid						4,486.00
								New duct work, temperature sensors;
New fire protection sprinklers						3,146.00		Install (1) new VHV cooling unit		10,475.00
Paint walls, doors, frames & relite frames						1,675.00		Furnish & install new direct glue		4,713.00
								carpet to match existing; floor prep		106.00
(10) exterior & (2) interior mint·blinds						1,560.00
								MMC labor		350.00
Furnish & Install new 4” rubber base						427.00		Construction clean up		575.00
								Contingency		500.00
(THIS IS NOT AN INVOICE)								SUB TOTAL #1		62,696.00
								PERMITS & INSPECTIONS		1,700.00
								OVERHEAD & FEE		9,659.40
								SUB TOTAL #2		74,055.40
								ARCHITECT FEE		1,500.00
								DESIGNER FEE		0.00
								TOTAL ESTIMATED COST		75,555.40
CLARIFICATIONS:
AUTHORIZATION SIGNATURES:
MMCC:	/s/ David W. Zier							Date:	7/19/07
	David W. Zier, President
TENANT:	/s/ [ILLEGIBLE]							Date:	07/19/07
THIS WORK IS TO BE PAID FOR BY:				Tenant			—
				Owner			—

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We hereby consent to the incorporation by reference in the Registration Statement on Forms S-3 (Nos. 333-130680, 333-138244, 333-141362) and Forms S-8 (Nos. 333-134392 and 333-143054) of MathStar, Inc. of our report dated March 31, 2009 relating to the financial statements and financial statement schedule, which appears in this Form 10-K.

PricewaterhouseCoopers LLP
Portland, OR
March 31, 2009

EX-31.01

Exhibit 31.01

I, Douglas M. Pihl, certify that:

        1.     I have reviewed this Annual Report on Form 10-K of MathStar, Inc.;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

        c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        d)    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

        a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

        b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 31, 2009 By /s/ DOUGLAS M. PIHL
Douglas M. Pihl
Chief Executive Officer
(Principal Executive Officer)

EX-31.02

Exhibit 31.02

I, Douglas M. Pihl, certify that:

        1.     I have reviewed this Annual Report on Form 10-K of MathStar, Inc.;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

        c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        d)    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

        a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

        b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 31, 2009 By /s/ DOUGLAS M. PIHL
Douglas M. Pihl
Chief Financial Officer
(Principal Financial Officer)

EX-32.01

Exhibit 32.01

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report on Form 10-K of MathStar, Inc. (the "Company") for the year ended December 31, 2008 (the "Annual Report"), I, Douglas M. Pihl, Chief Executive Officer and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

        1.     The Annual Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

        2.     The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 31, 2009 By: /s/ DOUGLAS M. PIHL
Douglas M. Pihl
Chief Executive Officer and Chief Financial Officer