Product Distribution Agreement

Exhibit 10.38

PRODUCT DISTRIBUTION AGREEMENT


THIS PRODUCT DISTRIBUTION AGREEMENT (the "Agreement") is entered into and effective on this day, November 28, 2002 (the "Effective Date"), by and between R2 Technology, Inc., a Delaware corporation having a principal place of business at 1195 Fremont Ave., Sunnyvale, California 94087 ("R2"), and Vital Images, Inc., organized under the laws of Minnesota, having a principal place of business at 3300 Fernbrook Lane N., Suite 200, Plymouth, Minnesota 55447 ("VTAL").

RECITALS

A. R2 is engaged in the business of developing, manufacturing, distributing, and selling computer aided detection ("CAD" as further defined below) software and hardware.

B. VTAL is engaged in the business of developing, distributing and selling VTAL Workstations (as hereafter defined).

C. The parties desire that R2 customize its Lung Nodule CAD Application (as defined below) and related software such that it will operate with the VTAL Workstation ("R2 Products" as further defined below).

D. The parties further desire that VTAL distribute the R2 Products in conjunction with the VTAL Workstation, either: (i) installed on, and as a component of the VTAL Workstation; or (ii) on a stand-alone basis, to VTAL Installed Base Sites (as defined below) solely for use with the VTAL Workstation, in accordance with the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows:

1. DEFINITIONS 1.1 " ASP" means average sales price as more fully described in Section 8.5. 1.2 " CAD" means computer aided detection and similar automated disease detections systems. 1.3 " Confidential Information" has the meaning set forth in Section 13.1 1.4 " Customer" means an end user customer to whom VTAL or its distributors, sells the R2 Product. 1.5 " Europe Date" means the later of: (a) the date on which R2 is able to meet CE certification requirements and produce a "Declaration of Conformance" for the R2 Product; or (b) the completion of the milestones in the Development Plan with respect to the R2 Product that will be distributed in Europe. 1.6 " Intellectual Property Rights" means any and all current and future trade secrets, technical know-how, copyrights, moral rights, patents, patent applications (including any


substitutions, extensions, reissues, renewals, divisions, continuations, or continuations-in-part), and any and all other worldwide intellectual property rights. 1.7 " Lung Nodule CAD Application" means R2's proprietary lung nodule CAD software, including Updates, Upgrades and New Features made available by R2 during the term of this Agreement, and all related documentation. 1.8 " New Features" means significant improvements or enhancements, other than Updates and/or Upgrades, to the operating system, application software or hardware component of the Lung Nodule CAD Application or R2 Product, as the context requires, if any. 1.9 " Maintenance Program" means the maintenance and support arrangement between VTAL (or its Subdistributors) and a Customer, as more fully described in Section 3.3. 1.10 " Minimum" means the minimum number of Lung Nodule CAD Application units that VTAL will purchase each Quarter in accordance with Sections 8.2 and 8.4. 1.11 " Quarter" means each three-month period beginning with the first day of the first month following the Europe Date; by way of non-limiting example, if the Europe Date is February 15, 2003, the first 3-month period would run from March 1, 2003 to May 31, 2003. 1.12 " R2 Installed Base Sites" means those persons or entities identified on a separate document delivered by R2 to VTAL quarterly, as may be accurately updated by R2 from time to time, who are located in the United States and Europe and are in possession of R2 products (other than demonstration units). Notwithstanding anything to the contrary, R2 Installed Base Sites shall include up to twenty (20) entities identified by R2 within sixty (60) days of the Effective Date who work with R2 in an advisory or other similar capacity, but who may not have actually purchased R2 products. 1.13 " R2 Product" means the (i) Lung Nodule CAD Application configured by R2 for use by with the VTAL Workstation, as reflected in the Specifications; (ii) visualization software applications; (iii) all other supporting software applications (including bug fixes made pursuant to Section 3.4, Updates, Upgrades and New Features to the foregoing (i), (ii) and (iii) made available by R2 during the term of this Agreement); and (iv) all related documentation. 1.14 " R2 Showcase" means the combination of R2's proprietary workstation and related products which incorporate the Lung Nodule CAD Application, as more fully described in Section 2.8. 1.15 " Server" has the meaning set forth in Section 3.6. 1.16 " Specifications" means the functional and technical standards of the Lung Nodule CAD Application as well as the compatibility standards for the R2 Products to loosely integrate and operate with the VTAL Workstation, developed pursuant to Section 2.1 below. The parties understand that the Specifications with respect to the performance in sensitivity and specificity of the R2 Product delivered by R2 to VTAL will be the same as those for the Lung Nodule CAD Application used by R2 in the R2 Showcase. 1.17 " Territory" means those countries, regions or geographical markets identified on Exhibit B.

1.18 " Trademarks" with respect to a party means the trademarks, service marks, logos and other proprietary marks that such party may adopt from time to time. 1.19 " Updates" means software bug fixes and corrections that ensure functionality of the Lung Nodule CAD Application or R2 Product, as the context requires, that are released by R2 for field use, if any. Updates do not include improvements or enhancement to the operating system, applications software, or hardware and do not include new software features. 1.20 " Upgrades" means a release or version of the Lung Nodule CAD Application or R2 Product, as the context requires, that contains new CAD detection improvements including algorithm and performance enhancements, limited to an increase in sensitivity and/or a decrease in marker rate, if any. For example: improvement in the algorithm through reduced false positives. Upgrades do not include new software features or new hardware. 1.21 " US Date" means the later of : (a) the date on which R2 obtains FDA approval for the Lung Nodule CAD Application pursuant to Section 7.1, below, or (ii) the completion of the milestones in the Development Plan with respect to the R2 Product that will be distributed in the United States. 1.22 " VTAL Installed Base Sites" means those persons or entities identified on a separate document delivered by VTAL to R2 quarterly, as may be accurately updated by VTAL from time to time, who are in possession of one (1) or more VTAL Workstation(s) (other than demonstration units). 1.23 " VTAL Workstation" means any VTAL workstation and the components thereof, including without limitation the Vitrea brand workstation, consisting of hardware, display devices and Vitrea and other software applications . 1.24 " Warranty Period" means a period of one (1) year after delivery and installation of the R2 Product at a Customer location. In addition to the foregoing, terms such as "sale", "purchase", "distribute" and variants and synonyms thereof, when used with reference to software herein, are used for convenience only and refer to transactions involving the grant of a software license for the R2 Product.

2. DEVELOPMENT 2.1 Development Efforts . The parties will develop and implement a plan to define and test the Specifications and to address other compatibility issues of the R2 Product with the VTAL Workstation (the " Development Plan"). The parties will use their best efforts to complete and attach the Development Plan to this Agreement as Exhibit A within fourteen (14) days of the Effective Date. The parties may amend the Development Plan as they mutually agree in writing to reflect changes in the Specifications. The parties acknowledge and agree that the development efforts are dependent on mutual cooperation and performance of each party's obligations set forth in the Development Plan. 2.2 Progress Meetings . The parties will conduct meetings each calendar quarter and keep each other reasonably informed with respect to progress under the Development Plan and other significant changes, modifications, revisions, or updates that are being planned for their respective products.

2.3 DICOM Standard . Whenever possible, the standard of communication for images and the corresponding CAD results between the CAD component of the R2 Products and the VTAL Workstation shall be the Digital Imaging and Communications in Medicine ("DICOM") Standard when such standard supports the classes and services required. VTAL agrees that the DICOM header in each acquisition device contained in the VTAL Workstation shall contain a unique identifier for each such acquisition device. The parties shall meet periodically to discuss such changes, modifications, revisions, or updates, and shall provide each other with such information and assistance as may be necessary or useful and commercially reasonable to enable compatibility and interoperability between future versions of the R2 Product and the VTAL Workstation. Such changes and modifications may include, but are not limited to: (a) the addition or deletion of services supported, (b) changes to the information contained in the DICOM fields of DICOM headers, including the use of required fields, (c) changes to the image processing used to create DICOM for presentation images. 2.4 Validation Testing . Each party shall provide commercially reasonable levels of resources necessary to validate DICOM connectivity and verify clinical usability after each Update, Upgrade or New Feature, if any. 2.5 Development and Test Data . The development and testing data provided by VTAL to R2, or generated by R2 under this Agreement, together with any and all other cases, training databases and other related materials provided to R2 by VTAL ("Test Data") will remain the property of VTAL. VTAL agrees to remove all personally identifiable patient information on any Test Data before delivery to R2. VTAL hereby grants to R2 a non-exclusive, royalty-free, perpetual, irrevocable, non-transferable (subject to Section 15.1) license to use the Test Data: (i) internally for R2's business and development purposes; and (ii) in aggregate form, as necessary for the purpose of obtaining the regulatory approvals described in Section 7. All Test Data provided by VTAL to R2 hereunder will be deemed "Confidential Information" of R2, subject to the obligations of Section 13.2, except for purposes of (ii) above. 2.6 Restrictions . Unless otherwise stated in the Development Plan, neither party is entitled to receive any source code, algorithms, designs, or similar source materials from the other party. With respect to the other party's products and Confidential Information provided hereunder, neither party shall: (a) reverse engineer, decompile, disassemble, or otherwise attempt to derive any source code, algorithms, ideas, process, technique, know how, technology, or other underlying content therefrom; or (b) copy, alter, modify, or create derivative works of any portion or component thereof; or (c) assist any third party, or allow or permit any third party within its control, to do any of the foregoing. 2.7 Ownership . (a) As between VTAL and R2, R2 will own, and hereby retains, all right, title, and interest in and to the Lung Nodule CAD Application and the R2 Product, and any improvements, enhancements, interface components, and/or derivative works thereof, and all Intellectual Property Rights relating thereto. At R2's request, VTAL will assign or cause to be assigned to R2 all right, title, interest in and to the foregoing materials and Intellectual Property Rights therein, and VTAL shall reasonably assist and cooperate with R2 in prosecuting, maintaining, filing for, enforcing, and otherwise protecting R2's rights and interests therein. Any and all registerable and patentable designs relating to the Lung Nodule CAD Application and/or the R2 Product, and the right to apply for protection therefore, shall belong exclusively to R2.

(b) As between R2 and VTAL, VTAL will own, and hereby retains, all right, title, and interest in and to the VTAL Workstation and any modifications, improvements, enhancements, interface components, and/or derivative works thereof, and all Intellectual Property Rights relating thereto. At VTAL's request, R2 will assign or cause to be assigned to VTAL all right, title and interest in and to the foregoing materials and Intellectual Property Rights therein, and R2 shall reasonably assist and cooperate with VTAL in prosecuting, maintaining, filing for, enforcing, and otherwise protecting VTAL's rights and interests therein. Any and all registerable or patentable designs relating to the VTAL Workstation, and the right to apply for protection therefore, shall belong exclusively to VTAL. The parties acknowledge that R2 has been given, under the terms and conditions to be imposed upon VTAL customers, third party beneficiary rights to enforcement its Intellectual Property Rights with respect to Customers. The parties agree, however, that (i) R2 shall not exercise such rights so long as VTAL acts to protect such R2 Rights with at least the same degree of care and diligence it uses to protect its own rights of similar type and value, and in any event with at least reasonable care and diligence and (ii) R2 shall exercise such rights at its own cost and expense.

2.8 R2 Showcase Product . (a) VTAL acknowledges that R2 is in the process of developing its own workstation product that will incorporate the Lung Nodule CAD Application (when available) and that will be branded with the R2 Trademarks (" R2 Showcase"). The R2 Showcase is inclusive of the workstation, all accompanying non-CAD related software, and the Lung Nodule CAD Application, whether such components are sold at the same time or separately. Subject to Section 4.1, R2 reserves the right, by itself or with third parties, to develop, market, promote, sell, and distribute the Lung Nodule CAD Application, and any future versions, enhancements, derivative works, or modifications thereof, whether inside or outside of the Territory. (b) The parties will work together to coordinate the timing of the release of both the R2 Product and the R2 Showcase. In any case, R2 agrees that it will make the R2 Product available to VTAL for use with the VTAL Workstation upon the mutual completion by the parties of the milestones set forth in the Development Plan. Further, VTAL shall not release the R2 Product before such date that R2 releases the R2 Showcase. (c) Subject to Section 4, no provision of this Agreement shall be deemed to restrict either party's right to exploit any Intellectual Property Rights belonging to that party in other products or services, including without limitation, in products or services which may directly or indirectly compete with the other party's product or services, or with the products or services contemplated by this Agreement. 2.9 Costs . Except as expressly stated herein, each party shall bear its own costs and expenses in connection with the development activities contemplated herein.

3. DISTRIBUTION 3.1 Appointment . Subject to the terms and conditions herein, R2 hereby authorizes VTAL to distribute the R2 Product within the Territory either: (i) installed on, and as part of the VTAL Workstation; or (ii) to VTAL Installed Base Sites for use solely with the VTAL Workstation, and not on a stand-alone basis. VTAL shall include the terms and conditions attached as Exhibit G (which may be modified from time to time by either party subject to the other party's consent, which consent will not be unreasonably withheld) with the documentation VTAL provides to Customers. 3.2 Subdistributors . VTAL's distributors, resellers and channel partners that are authorized in writing by VTAL ("Subdistributors") may also purchase the R2 Product directly from R2 for distribution within the Territory to Customers solely in conjunction with the VTAL Workstation, either as part thereof, or to Customers already owning a VTAL Workstation for use in connection therewith, and not on a stand-alone basis, and subject to all other applicable terms and conditions of this Agreement. In all events, VTAL shall remain responsible and liable for its Subdistributors' compliance with the terms and conditions of this Agreement. 3.3 Customer Installation, Service and Support . VTAL shall be responsible, at its sole cost and expense, for the installation of the R2 Product at the Customer site. VTAL agrees to provide R2 with quarterly reports (no later than the twentieth (20) business day following February 28, May 31, August 31, and November 30) stating each Customer's name, location, contact information and date of sale. VTAL shall offer each Customer the opportunity to enter into a Maintenance Program through which VTAL will provide, through its own technical personnel, first-level technical support and maintenance to such Customer, in accordance with Exhibit H. Customers may also opt to receive quarterly newsletters and participate in a R2 sponsored Lung Nodule CAD user group under the Maintenance Program. R2 shall provide second-level support to VTAL with respect to all Customers free of charge during the Warranty Period, and thereafter for Customers in the Maintenance Program as further set forth in Exhibit H. VTAL hereby acknowledges that R2 shall have no responsibility or obligation to provide any support services directly to Customers; however, upon VTAL's request and in R2's sole discretion, R2 may provide direct support to Customers. R2 shall make available Updates, free of charge, to all Customers during the Warranty Period, and thereafter to Customers participating in a Maintenance Program, and VTAL may indicate to its Customers that it will provide Updates, when and if such Updates are made available. However, VTAL shall indicate that warranty and support services do not, and the Maintenance Program does not, include Upgrades or New Features. Upgrades and New Features, if any, are subject to an additional fee, as further set forth in Section 8.9. R2 agrees to make Updates, Upgrades and New Features for the R2 Product available to VTAL within the same time frames that R2 makes Updates, Upgrades and New Features for the Lung Nodule CAD Application generally available, if any. 3.4 Ongoing Support . For so long as a Customer has a software license for the R2 Product, all software "bug fixes" to the R2 Product that are released by R2 to correct safety and regulatory issues will be provided by R2 to VTAL free of charge and installed by VTAL on the VTAL Workstation free of charge. 3.5 Training . VTAL shall ensure that its service personnel are sufficiently skilled and knowledgeable about the R2 Product. R2 shall provide initial training to VTAL regarding the use and maintenance of the R2 Product as reasonably necessary, for VTAL to fulfill its service obligations to the Customer. Such training shall take place at the dates and locations as mutually agreed between the parties. 3.6 Hardware Procurement . VTAL shall purchase directly hardware that meets the R2 specifications attached as Exhibit I (as may be modified by R2 from time to time) for use with the R2 Product ("Servers"). The parties shall mutually agree upon vendors of such Servers. VTAL will install the R2 Product (shipped by R2 in accordance with Section 6) on the Servers at VTAL's expense. 4. EXCLUSIVITY 4.1 By R2 . R2 shall not license or otherwise provide lung nodule CAD technology to any vendors of freestanding workstations for sale in the United States, Canada or European Union and identified on Exhibit D ("Workstation Vendors"). Notwithstanding the foregoing, R2 shall not be restricted from providing the lung nodule CAD technology to: (i) any other third party workstation vendor not listed in Exhibit D; (ii) any PACS vendor identified on Exhibit D that sells workstations in conjunction with PACS ("PACS Vendor"); provided that R2 shall not provide the lung nodule CAD technology to any PACS Vendor for use with such vendor's sale of freestanding workstations; (iii) or to any third party OEM or PACS company that in turn contracts with any Workstation Vendor identified on Exhibit D. 4.2 By VTAL . During the term, VTAL shall not sell any lung nodule CAD technology in connection with any VTAL product or services (including the VTAL Workstation), other than the CAD provided by R2. Further, VTAL shall not: (i) sell the R2 Product to any R2 Installed Base Sites located in the United States for a period of six (6) months after the US Date; and (ii) sell the R2 Product or VTAL Workstation to any R2 Installed Base Sites located outside the United States for a period of six (6) months after the Europe Date. 5. MARKETING 5.1 VTAL Responsibilities . VTAL shall use commercially reasonable efforts to promote and market the R2 Product. 5.2 Materials . R2 will provide assistance to VTAL in the form of reasonable quantities of promotional and other marketing materials in English and such other languages as may be available from time to time. VTAL shall be responsible for such other translation of promotional materials and other documents required for use of R2 Product in the Territory, and in the event of any such translations, VTAL shall certify to R2 that any such translations have been appropriately verified, if, and only to the extent, such verification is required by a regulatory agency in the country for which the translation was made. VTAL shall provide to R2 for review an example of each item of promotional, advertising and educational materials and programs and other literature relating to the R2 Product that VTAL intends to use to market, promote and sell the R2 Product at least thirty (30) days prior to the commercial release of such materials or commencement of such programs. R2 reserves the right to reject any promotional materials that contain inaccurate claims regarding the R2 Product provided that if no written notice of rejection is received within the thirty (30) day period following receipt of an item, it shall be deemed approved. 5.3 Product Presentation . Each party represents and warrants that it will: (a) present the R2 Product fairly to potential Customers; (b) not disparage the other party, the other party's Trademarks, or the other party's products or services in any material respect, (c) avoid deceptive, misleading or unethical business practices, (d) avoid false or misleading representations with regard to the Lung Nodule CAD Application, the VTAL Workstation or the R2 Product, and (v) avoid soliciting orders for the R2 Product from any Customer that it knows engages in illegal or deceptive trade practices. 5.4 Demonstration and Training Licenses . VTAL will provide R2 with a quarterly listing of the total number, broken down by region, of VTAL direct sales personnel and distributor sales personnel who are selling the R2 Product. R2 will provide copies of the R2 Product, Updates, Upgrades and New Features for demonstration purposes only to each such salesperson. R2 will provide the first five (5) demonstration copies to VTAL free of charge. For the remainder, VTAL agrees to reimburse R2 for the costs to R2 directly attributable to third-party software licenses purchased by R2 in developing the Lung Nodule CAD Application, Updates, Upgrades or New Features. In addition, R2 will provide free of charge up to two (2) copies of the R2 Product, Updates, Upgrades and New Features (promptly following release) solely for VTAL's internal training of its sales personnel. The total number of copies provided to VTAL by R2 for demonstration and training purposes will not exceed a total of one hundred (100) during the first twelve (12) months of this Agreement and will not exceed a total of two hundred (200) over the term of the Agreement. 5.5 Trademarks . Subject to compliance with the terms of this Agreement, (a) R2 shall have the right to indicate to the public that the R2 Product has been tested for compatibility, and is being marketed for use, with the VTAL Workstation; (b) VTAL shall have the right to indicate to the public that the VTAL Workstation has been tested for compatibility and is being marketed for use with the R2 Product; and (c) each party shall have the right to use the other party's Trademarks in connection with performance of this Agreement. VTAL shall not alter or remove any R2 Trademarks applied to, or embedded in the R2 Product. VTAL shall market and promote the VTAL Workstation as having R2 lung nodule CAD capability and shall use the R2 Trademarks on all VTAL Workstation advertising materials that relate to lung nodule CAD technology. Each party shall submit samples of the other party's Trademarks prior to their first use for approval by the other party. Such approval will not limit the other party's obligation to comply with all applicable laws and will not be deemed an endorsement or approval of any of the other party's advertising content. Nothing herein shall grant either party any rights or title to the other party's Trademarks, and all goodwill associated with such party's Trademarks shall inure solely to the benefit of that party. Each party reserves the right to reject any use of its Trademark by the other party, and the other party shall immediately discontinue use of such Trademark upon notice. Neither party shall challenge, or assist others to challenge, the validity of the other party's Trademarks, and neither party shall register or attempt to register any trademarks, trade names or service marks confusingly similar to the other party's Trademarks. 5.6 Packaging and Labeling . VTAL shall reproduce all copyright and other proprietary notices contained in the R2 Product on the user interface of the VTAL Workstation. In addition, except for the addition of information required by applicable laws and regulations in the Territory, VTAL shall not re-label the R2 Product or any other R2 products supplied to VTAL by R2 hereunder without the prior written consent of R2. If applicable law or regulation requires re-labeling of the R2 Product, VTAL shall so notify R2, and promptly thereafter the parties shall cooperatively develop labels in compliance with such laws or regulations.

5.7 Display Obligations . VTAL shall not alter, remove or obfuscate the R2 Trademarks that appear on any visualization or display of the output derived from the R2 Product on any screen, printout, and/or workstation that displays such output. VTAL shall ensure that the VTAL Workstation displays a standard size icon which permits the Customer to open the R2 Product. 6. ORDERS AND DELIVERY 6.1 Forecasts . To facilitate planning, at the start of each Quarter, VTAL will provide R2 with a non-binding, ninety (90)-day forecast. 6.2 Shipment/Risk of Loss . Each shipment of the R2 Product will be packaged by R2 and delivered to R2's designated shipping point (the "Shipping Point"). All freight, insurance, duty, and other shipping expenses, as well as any special packing expenses, shall be paid by VTAL. VTAL shall also bear all applicable taxes, tariffs, duties, and similar charges that may be assessed against the R2 Product(s) after delivery to the Shipping Point. All shipments and freight charges will be deemed correct unless R2 receives from VTAL, no later than forty-five (45) days after the shipping date of a given shipment, a written notice specifying the shipment, the purchase order number, and the exact nature of the discrepancy between the order and shipment or discrepancy in the freight cost, as applicable. 6.3 Inspection and Return . VTAL shall promptly, but in no event later than thirty (30) days, after the date of installation of the R2 Product at an Installed Base Site, on a Server or on a VTAL Workstation, inform R2 of a defect in the R2 Product. R2 shall replace such defective copy with a new copy, free of charge. 7. GOVERNMENTAL APPROVALS 7.1 Regulatory Approvals . With respect to the R2 Product, R2, at its expense, will be responsible for obtaining and maintaining, in R2's name: (a) FDA and other applicable United States regulatory agency approvals; (b) ISO9000 certification; (c) CE certification in accordance with the provisions of Directive 93/42 governing medical devices for the R2 Product; and (d) applicable regulatory approvals in Canada. R2 shall inform VTAL in writing, no less than frequently than quarterly, as to the status of such approvals. Further, R2 will promptly inform VTAL if any of the elements which has permitted R2 to ...