**Exhibit 4.2**

 

**1998 STOCK OPTION PLAN**

 

This 1998 Stock Option Plan(the “Plan”) provides for the grant of options to acquire common shares (the“Common Stock”), of QSound Labs, Inc, an Alberta corporation (the“Company”).  Stock Options granted underthis Plan are referred to as “Options.”

 

**1.**             **PURPOSES**

 

The purposes ofthis Plan are to retain the services of valued key employees and consultants ofthe Company and such other persons as the Plan Administrator may select inaccordance with Section 3 below, to encourage such persons to acquire a greaterproprietary interest in the Company, thereby strengthening their incentive toachieve the objectives of the shareholders of the Company, and to serve as anaid and inducement in the hiring of new employees and to provide an equityincentive to consultants and other persons selected by the Plan Administrator.

 

**2**.             **ADMINISTRATION**

 

**(a)** This Plan will be administeredinitially by the Board of Directors of the Company (the “Board”), except thatthe Board may, in its discretion, establish a committee composed of two (2) ormore members of the Board or two (2) or more other persons to administer thePlan, which committee (the “ommittee”) may be an executive, compensation orother committee, including a separate committee especially created for thispurpose.  The Committee will have thepowers and authority vested in the Board hereunder (including the power andauthority to interpret any provision of the Plan or of any Option).  The members of any such Committee will serveat the pleasure of the Board.  Amajority of the members of the Committee will constitute a quorum, and allactions of the Committee will be taken by a majority of the memberspresent.  Any action may be taken by awritten instrument signed by all of the members of the Committee and any actionso taken will be fully effective as if it had been taken at a meeting.  The Board or, if applicable, the Committeeis referred to in this Plan as the “ Plan Administrator.”

 

**(b)** Subject to the provisions of thisPlan, and with a view to effecting its purpose, the Plan Administrator has soleauthority, in its absolute discretion, to **(i)** construe and interpret this Plan; **(ii)**define the terms used in the Plan; **(iii)** prescribe, amend and rescind therules and regulations relating to this Plan; **(iv)** correct any defect,supply any omission or reconcile any inconsistency in this Plan; **(v)**grant Options under this Plan; **(vi)** determine the individuals to whomOptions will be granted under this Plan; **(vii)** determine the time or times at whichOptions are granted under this Plan; **(viii)** determine the number of shares ofCommon Stock subject to each Option, the exercise price of each Option, theduration of each Option and the time at which each Option will becomeexercisable; **(ix)** determine all other terms and conditions of the Options;and **(x)**make all other determinations and interpretations necessary and advisable forthe administration of the Plan. All decisions, determinations andinterpretations made by the Plan Administrator will be binding and conclusiveon all participants in the Plan and on their legal representatives, heirs andbeneficiaries.

 

**(c)**The Board or, if applicable , theCommittee may delegate to one or more executive officers of the Company theauthority to grant Options under this Plan to employees of the Company who, onthe Date of Grant , are not subject to Section 16 of the Exchange Act withrespect to the Common Stock (“Insiders”) and in connection therewith theauthority to determine:**(i)** the number of shares of Common Stocksubject to such Options;**(ii)** the duration of the Option; **(iii)**the vesting schedule for determining the times at which such Option will becomeexerciseable, and**(iv)** all other conditions of such Options.  The exercise price for any Option  granted by action of the executive officeror officers pursuant to such delegation of authority will not be less than thefair market value per share of the Common Stock on the Date of Grant.  Unless expressly  approved in advance by the Board or the Committee, suchdelegation of authority will not include the authority to accelerate vesting,extend the period for exercise or otherwise alter the terms of outstandingOptions.  The term “Plan Administrator”when used in any provision of The Plan other than Section 2, 5(f), 5(m), and 11refers to the Board or the Committee, as the case may be, and an executiveofficer who has been authorized to grant Options  pursuant thereto, insofar as such provisions may be applied topersons that are not Insiders and Options granted to such persons.

 

**3.**             **ELIGIBILITY**

 

Options may begranted to employees, consultants, advisers, officers, directors and otherservice providers (collectively 

 

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“Employees”) of the Companyand any parent or subsidiary of the Company and to such other  persons as the Plan Administrator mayselect.  Options may be granted insubstitution for outstanding Options of another corporation in connection withthe merger, consolidation, acquisition of property or stock or otherreorganization between such other corporation and the Company or any subsidiaryof the Company.  Options also may begranted in exchange for outstanding Options. Any person to whom an Option is granted under this Plan or who is theowner of an Option under this Plan  isreferred or as a “Optionee”.

 

**4.**             **STOCK**

 

The PlanAdministrator is authorized to grant Options to acquire up to a total of2,000,000 shares of the Company’s authorized but unissued, or reacquired,Common Stock.  The number of shares withrespect to which Options may be granted hereunder is subject to adjustment asset forth in Section 5(m) hereof.  Ifany outstanding Option expires or is terminated for any reason, the shares ofCommon Stock allocable to the unexercised portion of such Option may again besubject to an Option granted to the same optionee or to a different personeligible under Section 3 of this Plan.

 

**5.**             **TERMS AND CONDITIONS OF OPTIONS**

 

Each Option grantedunder this Plan will be evidenced by a written agreement approved by the PlanAdministrator (the “Agreement”). Agreements may contain such provisions, not inconsistent with this Plan,as the Plan Administrator in its discretion may deem advisable.  All Options must also comply with thefollowing requirements:

 

**(a) Number of Shares and Typesof Options. **Each Agreement must state the numberof shares of Common Stock to which it pertains.

 

**(b) Date of Grant**Each Agreement must state the datethe Plan Administrator has deemed to be the effective date ofthe Option forpurpose of this Plan ( the “Date of Grant”).

 

**(c) Option Price** Each Agreement must state the priceper share of Common Stock at which it is exercisable.  The Plan Administrator may fix the exercise price in its solediscretion; provided that Options granted in substitution for outstanding optionsof another corporation in connection with the merger, consolidation,acquisition of property or stock or other reorganization involving such othercorporation and the Company or any subsidiary of the Company may be grantedwith an exercise price equal to the exercise price for the substituted optionof the other corporation, subject to any adjustment consistent with the termsof the transaction pursuant to which the substitution is to occur.

 

**(d)           Duration of Options **Atthe time of the grant of the Option, the Plan Administrator will designate,subject to paragraph 5(g) below, the expiration date of the Option, which datemust not be later than ten (10) years from the Date of Grant.  Each Agreement must state the expirationdate of the Option.

 

**(e)           Vesting Schedule**

 

**(i)** No Option will be exercisable untilit has vested. The Plan Administrator may specify a vesting schedule for eachOption.

 

**(ii)** The Plan Administrator may specifya vesting schedule for all or any portion of an Option based on the achievementof performance objectives established by the Plan Administrator.  Performance objectives may be expressed interms including but not limited to one or more of the following: return onequity, return on assets, share price, market share, sales, earnings per share,costs, net earnings, net worth, inventories, cash and cash equivalents, grossmargin or the Company’s performance relative to its internal businessplan.  Performance objectives may be inrespect of the performance of the Company as a whole (whether on a consolidatedor unconsolidated  basis), an affiliatedcompany, or a subdivision, operating unit, product or product line of either ofthe foregoing.  Performance objectivesmay be absolute or relative and may be expressed in terms of a progression or arange.  An Option that is exercisable(in full or in part) upon the achievement of one or more performance objectivesmay be exercised only

 

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following written notice tothe Optionee and the Company by the Plan Administrator that the performanceobjective has been achieved.

 

**(f)** **Acceleration of Vesting** The vesting of one or more outstandingOptions may be accelerated by the Plan Administrator at such time and in suchamounts as it determines in its sole discretion.

 

**(g) Term of Option**

 

**(i)**  Vested options will terminate,to the extent not previously exercised, upon the occurrence of the first of thefollwoing events: **(A)** the expiration of the Option, asdesignated by the Plan Administrator in accordance with Section 5 (d) above; **(B)**the date of an Optionee’s termination of employment or contractual relationshipwith the Company or any affiliated company for cause (as dteremined in the solediscretion of the Plan Administrator); **(C)** the expiration of thirty (30) days fromthe date of the Optionee’s termination of employment or contrcatualrelationship with the Company or any affiliated company for any reasonwhatsoever other than cause, death or Disability (as defined below) unless theexercise period is extended by the Plan Administrator until a date not laterthan the expiration date of the Option; or **(D)** the expiration of one year fromtermination of an Optionee’s employment or contractual relationship by reasonof death or Disability (as defined below) unless the exercise period isextended by the Plan Administrator until a date not later that the expirationdate of the Option.  Upon the death ofan Optionee, any vested Options held by the Optionee will be exercisable onlyby the person or persons to whom such Optionee’s rights under such Option willpass by the Optionee’s will or by the laws of descent and distribution of thestate or country of the Optionee’s domicile at the time of death and only untilsuch Options terminate as provided above.  For purposes of the plan, unless otherwise defined in theAgreement, “ Disability” means medically determinable physical or mentalimpairment which  has lasted or can beexpected to last for a continuous period of not less than twelve (12) months orthat can be expected to result in death. The Plan Administrator will determine whether an Optionee has incurred aDisability on the basis of medical evidence acceptable to the PlanAdministrator.  Upon making adetermination of Disability,  the PlanAdministrator will, for purpose of the Plan, determine the date of anOptionee’s  termination of employment orcontractual relationship.

 

**(ii)** Unless accelerated in accordancewith Section 5(f) above, unvested Options will terminate immediately upontermination of employment of the Optionee by the Company for any reasonwhatsoever including death or Disability. For purpose of this Plan, transfer or employment between or among theCompany and/or any affiliated company will not be deemed to constitute atermination of employment with the Company or affiliated company.  For purpose of this subsection, employmentwill be deemed to continue while the Optionee is on military leave, sick leaveor other bona fide leave of absence (as determined by the PlanAdministrator).  The foregoingnotwithstanding, employment will not be deemed to continue beyond the firstninety (90) days of such leave, unless the Optionee’s re-employment rights areguaranteed by statute or by contract.

 

**(h)  Exercise of Options**

 

**(i)**Options will be exercisable, in fullor in part, at any time after vesting, until termination.  If less than all of the shares included inthe vested portion of any Option are purchased, the remainder may be purchasedat any subsequent time prior to the expiration of the Option term. Only wholeshares may be issued pursuant to an Option, and to the extent that an Optioncovers less than one (1) share, it is unexercisable.

 

**(ii)** Options or portions therof may beexercised by giving written notice to the Company,  which notice will specify the number of shares to be purchased, andbe accompanied by payment in the amount of the aggregate exercise price for theCommon Stock so purchased, which payment must be in the form specified inSection 5(i) below.  The Company willnot be obligated to issue, transfer or deliver a certificate of Common Stock tothe Optionee of any Option, until provision            hasbeen made by the Optionee to the satisfaction of the Company, for the paymentof the aggregate exercise price for all shares for which the Option has beenexercised and for satisfaction of any tax withholding obligations associatedwith such exercise.  During the lifetimeof an Optionee, Options are exercisable only by the Optionee or transferee who takestitle to such Option in the manner permitted by subsection 5(k) hereof.

 

**(i) Payment upon Exercise ofOption **Upon the exercise of any Option, theaggregate exercise price will be paid to the

 

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Company in cash or bycertified or cashiers check.  Inaddition, the Optionee may pay for all or any portion of the aggregate exerciseprice by complying with one or more of the following alternatives:

 

**(i) **Bydelivering a properly executed exercise notice together with irrevocableinstructions to a broker promptly to sell or margin a sufficient portion of theshares and deliver directly to the Company the amount of sale or margin loanproceeds to pay the exercise price; or

 

**(ii)** By complying with any other payment mechanism approved by the Plan Administratorat the time of exercise.

 

**(j)****Rights as a Shareholder **An Optionee will have no rightsas a shareholder with respect to any shares covered by an Option until suchOptionee becomes a record holder of such shares, irrespective of whether suchOptionee has given notice of exercise. Subject to the provisions in Section 5(m) hereof, no rights will accrueto a Optionee and no adjustment will be made on account of dividends (ordinaryor extraordinary, whether in cash, securities or other property) or distributionsor other rights declared on, or created in, the Common Stock for which therecord date is prior to the date the Optionee becomes a record holder of theshares of Common Stock covered by the Option, irrespective of whether suchOptionee has given notice of exercise.

 

**(k) Transfer of Option       **Options granted under this Plan and the rightsand privileges conferred by this Plan may not be transferred, assigned, pledgedor hypothecated in any manner (whether by operation of law or otherwise) otherthan by will, by applicable laws of descent and distribution or (except in thecase of an Incentive Stock Option) pursuant to a qualified domestic relationorder, and will not be subject  toexecution, attachment or similar process; provided however, that any Agreementmay provide or be amended to provide that an Option to which it relates istransferable without payment of consideration to trusts or partnerships orlimited liability companies established exclusively for the benefit of theOptionee.  Upon any attempt to transfer,assign, pledge,hypothecate or otherwise dispose of any Option or of any rightor privilege conferred by this Plan contrary to the provisions hereof, or uponthe sale, levy or any attachment or similar process upon the rights and privilegesconferred by this Plan,  such Optionwill thereupon terminate and become null and void.

 

**(l) Securities Regulation andTax Withholding**

 

**(i)** Shares will not be issued with respect to an Option unless the exerciseof such Option and the issuance and delivery of such shares comply with allrelevant provisions of law, including, without limitation, any applicableCanadian, provincial or US state securities laws, the Securities Act of 1933,as amended, the Exchange Act, the rules and regulations thereunder and therequirements of any stock exchange or automated inter-dealer quotation systemof a registered national securities association upon which such shares may thenbe listed and such issuance will be further subject to the approval of counselfor the Company with respect to such compliance, including the availability ofan exception from registration for the issuance and sale of such shares.  The inability of the Company to obtain fromany regulatory body the authority deemed by the Company to be necessary for thelawful issuance and sale of any shares under this Plan, or the unavailabilityof an exemption from registration for the issuance and sale of any shares underthis Plan, will relieve the Company of any liability with respect to thenon-issuance or sale of such shares.

 

**(ii)** As a condition to the exercise ofan Option, the Plan Administrator may require the Optionee  to represent and warrant in writing at thetime of such exercise that the shares are being purchased only for investmentand without any then-present intention to sell or distribute such shares.  At the option of the Plan Administrator, astop-transfer order againstsuch shares may be placed on the stock books andrecords of the Company, and a legend indicating that the stock may not be pledged,sold or otherwise transferred unless an opinion of counsel is provided statingthat such transfer is not in violation of any applicable law or regulation, maybe stamped on the certificates representing such shares in order to assure anexemption from registration.  The PlanAdministrator also may require such other documentation as may from time totime be necessary to comply with federal, provincial and state securities laws.  **THE COMPANY HAS NO OBLIGATION TO REGISTER THE OPTIONSOR THE SHARES OF STOCK ISSUABLE UPON THE EXERCISE OF OPTIONS.**

 

**(iii)** The Optionee must pay to theCompany by certified or cashiers check, promptly upon exercise of an Option or,if later, the date that the amount of such obligations becomes determinable,all applicable Canadian and US  federal,provincial,  state, local and foreignwithholding taxes that the Plan Administrator, in its discretion, determines toresult upon exercise of an Option or from a

 

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transfer or other dispositionof shares of Common Stock acquired upon exercise of an Option or otherwiserelated to an Option or shares of Common Stock acquired in connection with anOption.  Upon approval of the PlanAdministrator, an Optionee may satisfy such obligation by complying with one ormore of the following alternatives selected by the Plan Administrator:

 

**(A)** By executing appropriate loan documents approved by the PlanAdministrator by which the Optionee borrows funds from the Company to pay anywithholding taxes due under this Paragraph (ii), with such repayment terms asthe Plan Administrator may select; or

 

**(B)** By complying with any other payment mechanism approved by the PlanAdministrator from time to time.

 

**(iv)** The issuance, transfer or deliveryof certificates of Common Stock pursuant to the exercise of Options may bedelayed, at the discretion of the Plan Administrator, until the PlanAdministrator is satisfied that the applicable requirements of the federal,provincial,  and state securities lawsand the withholding provisions of applicable tax laws  have been met and that the Optionee has paid or otherwisesatisfied any withholding tax obligations as described in (ii) above.

 

**(m) Stock Dividend orReorganization**

 

**(i)** If **(A)**the Company is at any time involved in any merger, reorganization,consolidation or amalgamation; **(B)** the Company declares a dividend payablein, or subdivides or combines, its Common Stock or **(C)** any other event withsubstantially the same effect occurs, the Plan Administrator will, subject toapplicable law, with respect to each outstanding Option, proportionately adjustthe number of shares of Common Stock subject to such Option and/or the exerciseprice per share so as to preserve the rights of the Optionee substantiallyproportionate to the rights of the Optionee prior to such event, and to theextent that such action includes an increase or decrease in the number ofshares of Common Stock subject to outstanding Options, the number of sharesavailable under Section 4 of this Plan will automatically be increased ordecreased, as the case may be, proportionately, without further action on thepart of the Plan Administrator, the Company, the Company’s shareholders, or anyOptionee.

 

**(ii)** If the Company at any time declares an extraordinary dividend withrespect to the Common Stock, whether payable in cash or other property, thePlan Administrator may, subject to applicable law, in the exercise of its solediscretion and with respect to each outstanding Option, proportionately adjustthe number of shares of Common Stock subject to such Option and/or adjust theexercise price per share so as to preserve the rights of the Optioneesubstantially proportionate to the rights of the Optionee prior to such event,and to the extent that such action includes an increase or decrease in thenumber of shares of Common Stock subject to outstanding Options, the number ofshares available under Section 4 of this Plan will automatically be increasedor decreased, as the case may be, proportionately, without further action onthe part of the Plan Administrator, the Company, the Company’s shareholders, orany Optionee.

 

**(iii) **The foregoing adjustments on the shares toOptions will be made by the Plan Administrator, or by any successoradministrator of this Plan, or by the applicable terms of any assumption orsubstitution document.

 

**(iv)** The grant of an Option will not affect in any way the right or power ofthe Company to make adjustments, reclassifications, reorganizations or changesof its capital or business structure, to merge, consolidate or dissolve, toliquidate or to sell or transfer all or any part of its business or assets.

 

**6.             EFFECTIVE DATE TERM**

 

Stock Optionsmay be granted by the Plan Administrator from time to time on or after the dateon which this Plan is adopted (the “Effective Date”) and until this Plan isterminated by the Board in its sole discretion.  Termination of this Plan will not terminate any Option grantedprior to such termination.

 

**7.             NO OBLIGATIONS TO EXERCISE OPTION**

 

The grant of anOption will impose no obligation upon the Optionee to exercise such Option.

 

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**8.             NO RIGHT TO OPTIONS OR TO EMPLOYMENT**

 

The PlanAdministrator will determine whether or not any Options are to be granted underthis Plan in its sole discretion, and nothing contained in this Plan will beconstrued as giving any person any right to participate under this Plan.  The grant of an Option will no wayconstitute any form of agreement or understanding binding on the Company,express or implied, that the Company will employ or contract with an Optioneefor any length of time, nor will it interfere with the Company’s or anyaffiliated company’s right to terminate Optionee’s employment at any time,which right is hereby reserved.

 

**9.             APPLICATION OF FUNDS**

 

The proceedsreceived by the Company from the sale of Common Stock issued upon the exerciseof Options will be used for general corporate purposes, unless otherwisedirected by the Board.

 

**10.          INDEMNIFICATION OF PLAN ADMINISTRATOR**

 

In addition to allother rights of indemnification they may have as members of the Board, membersof the Plan Administrator will be indemnified by the Company for all reasonableexpenses and liabilities of any type or nature, including attorney’s fees,incurred in connection with any action, suit or proceeding to which they or anyof them are a party by reason of, or in connection with, this Plan or anyOption granted under this Plan, and against all amounts paid by them insettlement thereof (provided that such settlement is approved by independentlegal counsel selected by the  Company),except to the extent that such expenses relate to matters for which it isadjudged that such Plan Administrator member is liable for willful misconduct;provided, that within fifteen (15) days after the institution of any suchaction, suit or proceeding, the Plan Administrator member involved thereinwill, in writing, notify the Company of such action, suit or proceeding, sothat the Company may have the opportunity to make appropriate arrangements toprosecute or defend the same.

 

**11.          AMENDMENT OF PLAN**

 

The PlanAdministrator may, at any time, modify, amend or terminate this Plan or modifyor amend Options granted under this Plan, including, without limitation, suchmodifications or amendments as are necessary to maintain compliance withapplicable statutes, rules or regulations; provided however, no amendment withrespect to an outstanding Option which has the effect of reducing the benefitsafforded to the Optionee thereof will be made over the objection of suchOptionee, further provided, that the events triggering acceleration of vestingof outstanding Options may be modified, expanded or eliminated without theconsent of Optionee.  The PlanAdministrator may condition the effectiveness of any such amendment on thereceipt of shareholder approval at such time and in such manner as the PlanAdministrator may consider necessary for the Company to comply with or to availthe Company and/or the Optionees of the benefits of any securities, tax, marketlisting or other administrative or regulatory requirements.

 

 
| **Effective  Date:** | **February 19, 1998.** |   |
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