Document:

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 under
this Plan are referred to as “Options.”

 

1.             PURPOSES

 

The purposes of
this Plan are to retain the services of valued key employees and consultants of
the Company and such other persons as the Plan Administrator may select in
accordance with Section 3 below, to encourage such persons to acquire a greater
proprietary interest in the Company, thereby strengthening their incentive to
achieve the objectives of the shareholders of the Company, and to serve as an
aid and inducement in the hiring of new employees and to provide an equity
incentive to consultants and other persons selected by the Plan Administrator.

 

2.             ADMINISTRATION

 

(a) This Plan will be administered
initially by the Board of Directors of the Company (the “Board”), except that
the Board may, in its discretion, establish a committee composed of two (2) or
more members of the Board or two (2) or more other persons to administer the
Plan, which committee (the “ommittee”) may be an executive, compensation or
other committee, including a separate committee especially created for this
purpose.  The Committee will have the
powers and authority vested in the Board hereunder (including the power and
authority to interpret any provision of the Plan or of any Option).  The members of any such Committee will serve
at the pleasure of the Board.  A
majority of the members of the Committee will constitute a quorum, and all
actions of the Committee will be taken by a majority of the members
present.  Any action may be taken by a
written instrument signed by all of the members of the Committee and any action
so taken will be fully effective as if it had been taken at a meeting.  The Board or, if applicable, the Committee
is referred to in this Plan as the “ Plan Administrator.”

 

(b) Subject to the provisions of this
Plan, and with a view to effecting its purpose, the Plan Administrator has sole
authority, in its absolute discretion, to (i) construe and interpret this Plan; (ii)
define the terms used in the Plan; (iii) prescribe, amend and rescind the
rules 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 whom
Options will be granted under this Plan; (vii) determine the time or times at which
Options are granted under this Plan; (viii) determine the number of shares of
Common Stock subject to each Option, the exercise price of each Option, the
duration of each Option and the time at which each Option will become
exercisable; (ix) determine all other terms and conditions of the Options;
and (x)
make all other determinations and interpretations necessary and advisable for
the administration of the Plan. All decisions, determinations and
interpretations made by the Plan Administrator will be binding and conclusive
on all participants in the Plan and on their legal representatives, heirs and
beneficiaries.

 

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

 

3.             ELIGIBILITY

 

Options may be
granted to employees, consultants, advisers, officers, directors and other
service providers (collectively 

 

 

“Employees”) of the Company
and any parent or subsidiary of the Company and to such other  persons as the Plan Administrator may
select.  Options may be granted in
substitution for outstanding Options of another corporation in connection with
the merger, consolidation, acquisition of property or stock or other
reorganization between such other corporation and the Company or any subsidiary
of the Company.  Options also may be
granted in exchange for outstanding Options. 
Any person to whom an Option is granted under this Plan or who is the
owner of an Option under this Plan  is
referred or as a “Optionee”.

 

4.             STOCK

 

The Plan
Administrator is authorized to grant Options to acquire up to a total of
2,000,000 shares of the Company’s authorized but unissued, or reacquired,
Common Stock.  The number of shares with
respect to which Options may be granted hereunder is subject to adjustment as
set forth in Section 5(m) hereof.  If
any outstanding Option expires or is terminated for any reason, the shares of
Common Stock allocable to the unexercised portion of such Option may again be
subject to an Option granted to the same optionee or to a different person
eligible under Section 3 of this Plan.

 

5.             TERMS AND CONDITIONS OF OPTIONS

 

Each Option granted
under this Plan will be evidenced by a written agreement approved by the Plan
Administrator (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 the
following requirements:

 

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

 

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

 

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

 

(d)           Duration of Options 
At
the 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 date
must not be later than ten (10) years from the Date of Grant.  Each Agreement must state the expiration
date of the Option.

 

(e)           Vesting Schedule

 

(i) No Option will be exercisable until
it has vested. The Plan Administrator may specify a vesting schedule for each
Option.

 

(ii) The Plan Administrator may specify
a vesting schedule for all or any portion of an Option based on the achievement
of performance objectives established by the Plan Administrator.  Performance objectives may be expressed in
terms including but not limited to one or more of the following: return on
equity, return on assets, share price, market share, sales, earnings per share,
costs, net earnings, net worth, inventories, cash and cash equivalents, gross
margin or the Company’s performance relative to its internal business
plan.  Performance objectives may be in
respect of the performance of the Company as a whole (whether on a consolidated
or unconsolidated  basis), an affiliated
company, or a subdivision, operating unit, product or product line of either of
the foregoing.  Performance objectives
may be absolute or relative and may be expressed in terms of a progression or a
range.  An Option that is exercisable
(in full or in part) upon the achievement of one or more performance objectives
may be exercised only

 

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following written notice to
the Optionee and the Company by the Plan Administrator that the performance
objective has been achieved.

 

(f)  Acceleration of Vesting The vesting of one or more outstanding
Options may be accelerated by the Plan Administrator at such time and in such
amounts 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 the
follwoing events: (A) the expiration of the Option, as
designated by the Plan Administrator in accordance with Section 5 (d) above; (B)
the date of an Optionee’s termination of employment or contractual relationship
with the Company or any affiliated company for cause (as dteremined in the sole
discretion of the Plan Administrator); (C) the expiration of thirty (30) days from
the date of the Optionee’s termination of employment or contrcatual
relationship with the Company or any affiliated company for any reason
whatsoever other than cause, death or Disability (as defined below) unless the
exercise period is extended by the Plan Administrator until a date not later
than the expiration date of the Option; or (D) the expiration of one year from
termination of an Optionee’s employment or contractual relationship by reason
of death or Disability (as defined below) unless the exercise period is
extended by the Plan Administrator until a date not later that the expiration
date of the Option.  Upon the death of
an Optionee, any vested Options held by the Optionee will be exercisable only
by the person or persons to whom such Optionee’s rights under such Option will
pass by the Optionee’s will or by the laws of descent and distribution of the
state or country of the Optionee’s domicile at the time of death and only until
such Options terminate as provided above.  For purposes of the plan, unless otherwise defined in the
Agreement, “ Disability” means medically determinable physical or mental
impairment which  has lasted or can be
expected to last for a continuous period of not less than twelve (12) months or
that can be expected to result in death. 
The Plan Administrator will determine whether an Optionee has incurred a
Disability on the basis of medical evidence acceptable to the Plan
Administrator.  Upon making a
determination of Disability,  the Plan
Administrator will, for purpose of the Plan, determine the date of an
Optionee’s  termination of employment or
contractual relationship.

 

(ii) Unless accelerated in accordance
with Section 5(f) above, unvested Options will terminate immediately upon
termination of employment of the Optionee by the Company for any reason
whatsoever including death or Disability. 
For purpose of this Plan, transfer or employment between or among the
Company and/or any affiliated company will not be deemed to constitute a
termination of employment with the Company or affiliated company.  For purpose of this subsection, employment
will be deemed to continue while the Optionee is on military leave, sick leave
or other bona fide leave of absence (as determined by the Plan
Administrator).  The foregoing
notwithstanding, employment will not be deemed to continue beyond the first
ninety (90) days of such leave, unless the Optionee’s re-employment rights are
guaranteed by statute or by contract.

 

(h)  Exercise of Options

 

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

 

(ii) Options or portions therof may be
exercised by giving written notice to the Company,  which notice will specify the number of shares to be purchased, and
be accompanied by payment in the amount of the aggregate exercise price for the
Common Stock so purchased, which payment must be in the form specified in
Section 5(i) below.  The Company will
not be obligated to issue, transfer or deliver a certificate of Common Stock to
the Optionee of any Option, until provision            has
been made by the Optionee to the satisfaction of the Company, for the payment
of the aggregate exercise price for all shares for which the Option has been
exercised and for satisfaction of any tax withholding obligations associated
with such exercise.  During the lifetime
of an Optionee, Options are exercisable only by the Optionee or transferee who takes
title to such Option in the manner permitted by subsection 5(k) hereof.

 

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

 

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Company in cash or by
certified or cashiers check.  In
addition, the Optionee may pay for all or any portion of the aggregate exercise
price by complying with one or more of the following alternatives:

 

(i)  By
delivering a properly executed exercise notice together with irrevocable
instructions to a broker promptly to sell or margin a sufficient portion of the
shares and deliver directly to the Company the amount of sale or margin loan
proceeds to pay the exercise price; or

 

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

 

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

 

(k) Transfer of Option        Options granted under this Plan and the rights
and privileges conferred by this Plan may not be transferred, assigned, pledged
or hypothecated in any manner (whether by operation of law or otherwise) other
than by will, by applicable laws of descent and distribution or (except in the
case of an Incentive Stock Option) pursuant to a qualified domestic relation
order, and will not be subject  to
execution, attachment or similar process; provided however, that any Agreement
may provide or be amended to provide that an Option to which it relates is
transferable without payment of consideration to trusts or partnerships or
limited liability companies established exclusively for the benefit of the
Optionee.  Upon any attempt to transfer,
assign, pledge,hypothecate or otherwise dispose of any Option or of any right
or privilege conferred by this Plan contrary to the provisions hereof, or upon
the sale, levy or any attachment or similar process upon the rights and privileges
conferred by this Plan,  such Option
will thereupon terminate and become null and void.

 

(l) Securities Regulation and
Tax Withholding

 

(i) 
Shares will not be issued with respect to an Option unless the exercise
of such Option and the issuance and delivery of such shares comply with all
relevant provisions of law, including, without limitation, any applicable
Canadian, provincial or US state securities laws, the Securities Act of 1933,
as amended, the Exchange Act, the rules and regulations thereunder and the
requirements of any stock exchange or automated inter-dealer quotation system
of a registered national securities association upon which such shares may then
be listed and such issuance will be further subject to the approval of counsel
for the Company with respect to such compliance, including the availability of
an exception from registration for the issuance and sale of such shares.  The inability of the Company to obtain from
any regulatory body the authority deemed by the Company to be necessary for the
lawful issuance and sale of any shares under this Plan, or the unavailability
of an exemption from registration for the issuance and sale of any shares under
this Plan, will relieve the Company of any liability with respect to the
non-issuance or sale of such shares.

 

(ii) As a condition to the exercise of
an Option, the Plan Administrator may require the Optionee  to represent and warrant in writing at the
time of such exercise that the shares are being purchased only for investment
and without any then-present intention to sell or distribute such shares.  At the option of the Plan Administrator, a
stop-transfer order againstsuch shares may be placed on the stock books and
records 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 stating
that such transfer is not in violation of any applicable law or regulation, may
be stamped on the certificates representing such shares in order to assure an
exemption from registration.  The Plan
Administrator also may require such other documentation as may from time to
time be necessary to comply with federal, provincial and state securities laws.  THE COMPANY HAS NO OBLIGATION TO REGISTER THE OPTIONS
OR THE SHARES OF STOCK ISSUABLE UPON THE EXERCISE OF OPTIONS.

 

(iii) The Optionee must pay to the
Company 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 foreign
withholding taxes that the Plan Administrator, in its discretion, determines to
result upon exercise of an Option or from a

 

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transfer or other disposition
of shares of Common Stock acquired upon exercise of an Option or otherwise
related to an Option or shares of Common Stock acquired in connection with an
Option.  Upon approval of the Plan
Administrator, an Optionee may satisfy such obligation by complying with one or
more of the following alternatives selected by the Plan Administrator:

 

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

 

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

 

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

 

(m) Stock Dividend or
Reorganization

 

(i) 
If (A)
the Company is at any time involved in any merger, reorganization,
consolidation or amalgamation; (B) the Company declares a dividend payable
in, or subdivides or combines, its Common Stock or (C) any other event with
substantially the same effect occurs, the Plan Administrator will, subject to
applicable law, with respect to each outstanding Option, proportionately adjust
the number of shares of Common Stock subject to such Option and/or the exercise
price per share so as to preserve the rights of the Optionee substantially
proportionate to the rights of the Optionee prior to such event, and to the
extent that such action includes an increase or decrease in the number of
shares of Common Stock subject to outstanding Options, the number of shares
available under Section 4 of this Plan will automatically be increased or
decreased, as the case may be, proportionately, without further action on the
part of the Plan Administrator, the Company, the Company’s shareholders, or any
Optionee.

 

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

 

(iii)  The foregoing adjustments on the shares to
Options will be made by the Plan Administrator, or by any successor
administrator of this Plan, or by the applicable terms of any assumption or
substitution document.

 

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

 

6.             EFFECTIVE DATE TERM

 

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

 

7.             NO OBLIGATIONS TO EXERCISE OPTION

 

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

 

5

 

8.             NO RIGHT TO OPTIONS OR TO EMPLOYMENT

 

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

 

9.             APPLICATION OF FUNDS

 

The proceeds
received by the Company from the sale of Common Stock issued upon the exercise
of Options will be used for general corporate purposes, unless otherwise
directed by the Board.

 

10.          INDEMNIFICATION OF PLAN ADMINISTRATOR

 

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

 

11.          AMENDMENT OF PLAN

 

The Plan
Administrator may, at any time, modify, amend or terminate this Plan or modify
or amend Options granted under this Plan, including, without limitation, such
modifications or amendments as are necessary to maintain compliance with
applicable statutes, rules or regulations; provided however, no amendment with
respect to an outstanding Option which has the effect of reducing the benefits
afforded to the Optionee thereof will be made over the objection of such
Optionee, further provided, that the events triggering acceleration of vesting
of outstanding Options may be modified, expanded or eliminated without the
consent of Optionee.  The Plan
Administrator may condition the effectiveness of any such amendment on the
receipt of shareholder approval at such time and in such manner as the Plan
Administrator may consider necessary for the Company to comply with or to avail
the Company and/or the Optionees of the benefits of any securities, tax, market
listing or other administrative or regulatory requirements.

 

 

	
  Effective
  Date:

  	
  February 19, 1998.

  	
   

  

 

6EXHIBIT
4.3

 

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

 

dated as of October 1,
2002 between David Gallagher, 311 Diamond Willow Point, Calgary, AB  T3Z 2Z5, phone 403 242 0826, fax 403 242
9105 (“Executive”) and QSound Labs, Inc., 400 – 3115 12th Street NE,
Calgary, AB T2E 7J2, phone 403 291 2492, fax 403 250 1521 (“QSound”).

 

Whereas QSound and
Executive entered into an employment agreement dated October 1, 1994, as
amended on January 11, 1997, February 10, 1998, August 21, 1998 and February
25, 2000 (collectively the “Original Employment Agreement”);

 

And whereas QSound and
Executive desire to amend and restate the Original Employment Agreement and in
connection therewith to incorporate the terms and provisions of the Original
Employment Agreement, as amended and restated, into one agreement, all as
hereinafter provided;

 

In consideration of the
premises and the mutual covenants and agreements herein contained, QSound and
Executive agree as follows:

 

1.00        Employment

 

1.01           Position.  QSound hereby confirms the employment of
Executive as QSound’s President and Chief Executive Officer and Executive
hereby confirms his acceptance of the employment, all subject to the terms and
conditions set forth in this Agreement.

 

1.02         Duties and Responsibilities.  During the Term (as defined below),
Executive shall have such duties, responsibilities and authority as are
generally consistent with the position of President and Chief Executive
Officer. During the Term, Executive shall faithfully and diligently serve
QSound, devote a majority of his working time and efforts to the business and
affairs of QSound, and act in the best interests of QSound.

 

1.03         Term.  Subject to earlier termination in accordance with Article 5.00
hereof, the term of the employment of Executive shall continue in effect until
September 30, 2004 (“Term”).

 

1.04         Employment Policies  Executive agrees to be bound by QSound employment
policies in effect from time to time, except to the extent that there is a
conflict between any provision of the policies and any provision of this
Agreement, in which case the provision of this Agreement shall govern.

 

1.05         Place of Employment  Executive shall report to work at the
Calgary, Alberta offices of 
QSound.  Executive agrees to travel as may be required
to carry out his duties and responsibilities hereunder.

 

2.00        Compensation

 

2.01         Salary  Executive’s base annual salary is Two Hundred Thousand Dollars
($200,000 U.S.) U.S., payable in accordance with QSound’s normal payroll
practices with such payroll deductions and withholdings as are required by law
(“Base Salary”).

 

2.02         Stock Options   The Compensation Committee of the Board of
Directors of QSound (“Compensation Committee”) may review stock options held by
Executive from time to time and may in its discretion grant additional stock
options to Executive.

 

2.03         Other Compensation   Executive may participate in any bonus,
pension or profit sharing plan as may be established form time to time by the
Compensation Committee and for which Executive, as an officer of QSound,

 

 

is eligible.  Executive may also
receive discretionary bonuses from time to time if approved by the Compensation
Committee.

 

2.04         Other Benefits   Executive shall be entitled to the normal
vacation, health insurance and other benefits offered from time to time to
other senior executives of QSound.

 

2.05         Expenses   QSound shall reimburse Executive for all
reasonable, direct, out-of-pocket expenses incurred by him for  business purposes in connection with his
employment (including, without limitation, expenses for travel, entertainment
and home office incurred in conducting or promoting the business of QSound), in
accordance with QSound’s Employee Policies in effect from time to time.

 

3.00        Confidentiality

 

3.01         Confidentiality  Executive shall keep confidential and not
use or disclose QSound’s confidential information on the terms and conditions
of the Non-Disclosure Terms attached hereto as Exhibit A, which is incorporated
into and forms part of this Agreement.

 

4.00        Change of
Control

 

4.01         Definition For the purpose of
this Agreement, “Control” shall mean direct or indirect ownership of 50% or
more of the outstanding voting securities of QSound with the right to vote for
the election of directors, or the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of QSound.

 

4.02         Change of Control  In the event of a change of Control:

 

a) all unvested options then held by Executive shall immediately and
automatically vest and become exercisable; and

 

b) Executive may in his
discretion elect to not continue his employment, in which case Executive shall
give written notice of his election to the Board of Directors, and Executive’s
employment shall terminate effective upon the giving of such written notice.

 

5.00        Termination

 

5.01         Termination by Executive

 

a) Executive may
terminate his employment by giving QSound no less that ninety (90) days prior
written notice of termination (“Voluntary Termination”).

 

b) Executive may retire
prior to reaching the age of 65 by giving QSound no less than one years’ prior
written notice of retirement and commencing to receive pension payments from
Executive’s pension plan (“Pension Plan”) upon retirement taking effect
(“Retires”).

 

5.02         Termination “For Cause”  QSound may terminate Executive’s employment
with immediate effect upon written notice to Executive in the event that any of
the following events (each one of which constitutes “For Cause”) takes place:

 

a) Executive refuses to
follow a lawful order or a direction of the Board of Directors;

 

2

 

b) Executive, in the
course of carrying out his duties under this Agreement, engages in willful
misconduct, dishonesty or reckless disregard of his responsibilities;  or

 

c)  Executive is convicted of a felony or a
criminal offence of similar gravity, or a crime of moral turpitude.

 

5.03         No Severance Payments  If the employment of Executive is
terminated  by Executive as a Voluntary
Termination or by QSound “For Cause”, no payment in lieu of notice, and no
other cash payments or other benefits shall be due, owing or payable to
Executive other than Base Salary earned by Executive before the date of
termination of employment.

 

5.04         Waiver   Executive hereby expressly waives any right,
by implication or otherwise, which Executive might otherwise have or claim to
reasonable notice upon termination of employment.

 

5.05         Termination Other than “For Cause”   QSound may terminate Executive’s employment
with immediate effect for any reason other than “For Cause”, or for no reason,
upon written notice to Executive at any time in the sole discretion of the
Board of Directors.

 

5.06         Deemed Termination Other than “For
Cause”  QSound shall be deemed to
have terminated Executive’s employment other than “For Cause”, effective upon
occurance of any of the events set out in subsections a) to d) below,  if:

 

a) Executive is unable for a minimum period of  ninety (90) consecutive days to carry out
his duties due to disability or incapacity;

 

b) death of Executive
occurs;

 

c) QSound does not renew
this Employment Agreement and Executive’s employment for at least one year
following expiration of the Term; or

 

d)  Executive gives written
notice that he elects to not continue his employment following a Change of
Control as set out in section 4.02 b) hereof.

 

5.07         Severance Payments   If the employment of Executive is
terminated by QSound as set out in section 5.05 hereof or is deemed to be
terminated by QSound as set out in section 5.06 hereof, QSound shall pay to
Executive a lump sum payment in an amount equal to the greater of Executive’s
Base Salary, less normal payroll deductions and withholdings as are required by
law pro-rated for: i) the unexpired Term; and ii) one year.

 

5.08         Retirement
Compensation  a) If, prior to the
Executive reaching age 65,  the
employment of Executive is terminated by QSound as set out in section 5.05
hereof or is deemed to be terminated by QSound as set out in section 5.06
hereof, QSound shall pay into a Retirement Compensation Agreement (RCA)
sufficient funds to enable Executive to receive the same pension, including a
terminal contribution that would enhance his benefits so that there is no
reduction for early retirement, indexing at full consumers price index and the
maximum bridge payment to age 65, that Executive would have received had the
employment not been terminated and the Pension Plan continued to be funded by
QSound until Executive attained age 65.

 

b)  If Executive Retires after
age 60 and prior to age 65, QSound shall pay into the Pension Plan sufficient
funds to enable Executive to receive the same pension, including a terminal
contribution that would enhance his benefits so that there is no reduction for
early retirement, indexing at full consumers price index and the maximum bridge
payment to age 65, that Executive would have received had Executive not retired
and Executive’s Pension Plan continued to be funded by QSound until Executive
attained age 65.  If Executive Retires prior
to age 60, QSound and Executive agree to negotiate in good faith a terminal
contribution to the Pension Plan.

 

3

 

5.09         Effect of
Termination  Subject to section 5.
10 hereof, termination of Executive’s employment shall include termination of this
Agreement.

 

5.10         Survival  Articles 3.00, 6.00, 7.00, 8.00, 10.00,
13.00, 14.00 and 15.00 and sections 5.04, 5.07, 5.08 and 17.05 shall survive
expiration or termination of this Agreement.

 

6.00        Non-solicitation

 

6.01         Non-Solicitation  Executive hereby agrees that he will not,
during the period commencing on the date hereof and ending one year following
the expiration of the Term or termination of Executive’s employment, be a party
to or abet any solicitation of customers, clients or suppliers of QSound or any
of its subsidiaries, to transfer business from QSound or any of its
subsidiaries to any other person, or seek in any way to persuade or entice any
employee of QSound or any of its subsidiaries to leave that employment or to be
a party to or abet any such action.

 

7.00        Non-Competition

 

7.01         Non-Competition Executive hereby
agrees that he will not, during the period commencing on date of this Agreement
and ending two years following the expiration of the Term or termination of
Executive’s employment: i) be employed by or provide services to any person,
corporation or other entity located or organized in Canada, the United States,
Europe, Japan or Australia, which may be or is contemplating to be engaged in
any business which is directly or indirectly competitive with the services,
technologies or products in which QSound is or is contemplating to be engaged
in (“Competitor”); or ii) own any equity interest greater than 5%  in or manage or participate in the management
of or be in any other way connected with a Competitor.

 

7.02         Terms Reasonable  Executive confirms that all restrictions in
this Article 7.00 are reasonable and valid and all defences to the strict
enforcement thereof by QSound are hereby waived by Executive.

 

8.00        Return of
Materials

 

8.01         Return of Materials  All files, forms, brochures, books,
materials, written correspondence, memoranda, documents, manuals, computer
disks, software products and lists (including lists of customers, suppliers,
products and prices) pertaining to the business of QSound or any of its
subsidiaries and associates that may come into the possession or control of
Executive shall at all times remain the property of QSound or such subsidiary
or associate, as the case may be.  On
termination of Executive’s employment for any reason, or upon expiration of
this Agreement, Executive agrees to deliver promptly to QSound all such
property of QSound in the possession of Executive or directly or indirectly
under the control of Executive. Executive agrees not to make for his personal
or business use or that of any other party, reproductions or copies of any such
property or other property of QSound.

 

9.00        Notices

 

9.01         Notice  Any notice required to be given hereunder shall be in writing and
shall be sent by personal delivery or, except during any period when postal
service in interrupted, by prepaid registered mail, or fax addressed as set
forth above, or by email: to QSound at legal@qsound.com; or to Executive at
david.gallagher@qsound.com (“other communication”).

 

9.02         Deemed Receipt  Notices shall be deemed received as
follows:  If given by registered mail
notice shall be deemed to have been received by the party to whom it was
addressed on the date falling seven business days following the date upon which
it was sent, if personally delivered during normal business hours, when so
delivered, and if given by other communication on the day of transmission and
confirmation of transmittal unless

 

4

 

such day is not a business day in which case the next following
business day.  QSound and Executive may
change the address designated from time to time, by notice in writing to the
other party.

 

10.00      Enforceability

 

10.01       Enforceability  Executive hereby confirms and agrees that
the covenants and restrictions pertaining to Executive contained in this
Agreement, including, without limitation, those contained in sections 6.01 and
7.01 hereof and Exhibit A hereto, are reasonable and valid and hereby further
acknowledges and agrees that QSound would suffer irreparable injury in the
event of any breach by Executive of his obligations under any such covenant or
restriction.  Accordingly, Executive
hereby acknowledges and agrees that damages would be an inadequate remedy at
law in connection with any such breach and that QSound shall therefore be
entitled in lieu of any action for damages, temporary and permanent injunctive
relief enjoining and restraining Executive from any such breach.

 

11.00      No
Assignment

 

11.01       No Assignment by Executive  Executive may not assign, pledge or encumber
Executive’s interest in this Agreement nor assign any of the rights or duties
of Executive under this Agreement without the prior written consent of QSound.

 

12.00      Successors

 

12.01       Successors  This Agreement shall be binding and on and
enure to the benefit of the successors and assigns of QSound and the heirs,
executors, personal legal representatives and permitted assigns of Executive.

 

13.00      Arbitration

 

13.01       Arbitration  QSound and Executive agree that any dispute
regarding the interpretation or enforcement of this Agreement shall be decided
by confidential, final and binding arbitration conducted in Calgary, Alberta by
a member of the Alberta Arbitration and Mediation Society, who has been agreed
to by QSound and Executive, provided that if the parties cannot agree upon one
arbitrator, then each party shall choose one arbitrator and those arbitrators
shall choose a third arbitrator.  Any
arbitration hereunder shall be conducted in accordance with then existing rules
of Alberta Arbitration and Mediation Society.

 

14.00      Governing
Law

 

14.01       Governing Law  This Agreement shall be governed by and
construed in accordance with the laws of the Province of Alberta.  Any disputes or other matters relating to
this Agreement which cannot be resolved by arbitration as set out in section
13.01 hereof shall be subject to the exclusive jurisdiction of the courts of
the Province of Alberta.

 

15.00      Severability

 

15.01       Severability  If any provision of this Agreement shall be
held by any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, in whole or in part, such invalidity or unenforceability shall
not affect the validity or enforceability of the remaining provisions, or part
thereof, of this Agreement and such remaining provisions, or part thereof,
shall remain enforceable and binding.

 

5

 

16.00      Independent
Legal Advice

 

16.01       Independent Legal Advice  Executive acknowledges that he has been
advised to obtain and that he has obtained or has been afforded the opportunity
to obtain legal counsel with respect to this Agreement and that he understand
the nature and consequences of this Agreement.

 

17.00      Miscellaneous

 

17.01       Waiver  No waiver of any breach of any provision of this Agreement shall
be effective or binding unless made in writing and signed by the party
purporting to give the same and, unless otherwise provided in the written
waiver, shall be limited to the specific breach waived.

 

17.02       Entire Agreement  This Agreement (including Exhibit A hereto)
is the  entire agreement and supersedes
and incorporates all other agreements between the parties, whether oral or
written,  including but not limited to
the Original Employment Agreement, in connection with the subject matter
hereof.. This Agreement shall not be subject to change or modification except
by the execution of another agreement in writing subscribed to by the parties
hereto.

 

17.03       Further Assurances  Each party agrees to execute all documents
and perform all acts and do all such things 
as may be necessary or desirable in order to give effect to the
transactions contemplated hereunder.

 

17.04       Counterpart  This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same original.

 

17.05       Limitation of Liability  Executive acknowledges and agrees that
QSound shall not be liable for any misrepresentations (including negligent
misrepresentations) which may be made (whether directly or by implication) to
Executive by QSound, its officers, employees or agents, either prior to or
following the date of this Agreement, including but not limited to
misrepresentations regarding the nature and/or existence of the employment opportunity
offered and/or Executive’s employment with QSound.

 

 

IN WITNESS WHEREOF the
parties have executed this Agreement as of the day and year first above
written.

 

 

	
   

  	
   

  	
   

  	
   

  
	
  QSound Labs, Inc.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  per:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  David Gallagher

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Witness

  	
   

  	
   

  
					

 

6

 

Exhibit A

 

Non-Disclosure Terms

 

 

1.             In this Exhibit A the following words and phrases shall
have the following meanings unless the context otherwise requires:

 

a)             “Confidential
Information” refers to any and all information, including but not limited to
descriptions, designs, plans, specifications, schematics, compilations,
programs, methods, techniques, formulas, processes, information, intellectual
property, trade secrets, or concepts relating to technologies or products of,
or the business, affairs, marketing or technical plans of, QSound and of
QSound’s customers, affiliates, associates, partners or subsidiaries, but
Confidential Information shall not include Non-Proprietary Information.

 

b)            “Non-Proprietary Information” refers to information which
Executive proves:

 

i)              is
within the public domain at the date of its disclosure to the Executive or
which thereafter enters the public domain through no fault of the Executive
(but only after it becomes part of the public domain);

 

ii)             is
already known to the Executive at the time of its disclosure to the Executive
and is not subject to confidential restrictions, as can be proven by
contemporaneous documentation;

 

iii)            following
its disclosure to the Executive, is received by the Executive without
obligation of confidence from a third party who was lawfully in possession of
such information free of any obligation of confidence;

 

iv)           has
been approved for release by written authorization of QSound; or

 

v)            has
been disclosed by court order or as otherwise required by law (including
without limitation to the extent that disclosure may be required under
applicable securities laws), provided that Executive has notified QSound
immediately upon learning of the possibility of any such court order or legal
requirement and has given QSound a reasonable opportunity (and co-operated with
QSound) to contest or limit the scope of such required disclosure (including
application for a protective order).

 

Information shall not be deemed known to Executive or
publicly known for purposes of the above exceptions (A) merely because it is
embraced by more general information in the prior possession of Executive or
others, or (B) merely because it is expressed in public material in general
terms not specifically the same as Confidential Information.

 

2.             This Agreement
applies to Confidential Information which is disclosed to Executive at any time
during which Executive is providing services to QSound.

 

3.             Executive
acknowledges that the Confidential Information is a special, unique, valuable
asset of QSound or third parties to whom QSound has an obligation of confidence
and Executive agrees that:

 

a) Executive shall keep in confidence all Confidential
Information;

 

7

 

b) Executive shall not use any of the Confidential
Information except as necessary for carrying out his employment (“Purpose”) and
shall not make, have made, or permit to be made any copies of the Confidential
Information except those copies which are necessary for use of the Confidential
Information for the Purpose; and

 

c) Executive shall not make any disclosure of the
Confidential Information (including copies thereof, or methods or concepts
utilized therein) to any person or entity other than employees, affiliates or
consultants of the Executive to whom such disclosure is necessary for use of
the Confidential Information for the Purpose and then only with the consent of
the QSound.

 

4.             All Confidential
Information and any copies thereof, shall be promptly returned to QSound upon
request, or destroyed at QSound’s option.

 

5.             Nothing contained
in this Agreement shall be construed as granting or conferring any rights by
license or otherwise, expressly or impliedly, under the Confidential
Information or any part or portion thereof.

 

6.             In the event of a
breach by the Executive of any provision of this Agreement QSound shall, in
addition to any other remedy available to it in respect of such breach, be
entitled to injunctive relief which restrains the Executive from committing or
continuing such breach.

 

8

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