Document:

Prepared and filed by St Ives Burrups

 

Exhibit 10.2

 

	
  

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE DEFERRED COMPENSATION    PLAN

  
	
   

  	
  ADOPTION AGREEMENT

  
	
   

  	
   

  

 

     Adoption  and Effective Date of the Plan

 

	
  Before completing    this document, you should consult with an attorney or other expert advisor as    to the legal and tax effects of adopting this Plan.

  	
   

  	
   

  	
   

  	
  BY THIS AGREEMENT, the Lead    Employer hereby ... [check one]:

   

  
	
   

  	
  A.

  	
  
  	
  adopts a new nonqualified deferred    compensation plan with an original Effective Date of December 31, 2004.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  All    Capitalized terms used in this Adoption Agreement shall have the meanings set    forth in the accompanying Basic Plan Document.

  	
   

  	
  B.

  	
  
  	
  amends/restates its existing nonqualified    deferred compensation plan, effective as of [complete 1 and 2]:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1.

  	
  Amendment/Restatement Effective Date:    _______________________, 20____.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  Original Plan Effective Date:    ________________________________, 20____.

  

 

1     Employer  and Plan Information

	
      Employer    Information
    (Plan § 2.13)

   

  Under    the Plan, “Employer” includes the Lead Employer named above and any    affiliates of the Lead Employer that also adopt the Plan (called    “Participating Employers”). Provide the Lead Employer’s full legal name,    address of principal place of business, IRS Employer ID Number, and e-mail    address, if any.

  	
       

  	
      A.

  	
       

  	

   

  	

   

  	

   

  	
       

  
	
       

  	
      NCO Financial Systems,    Inc.

  	

   

  	

   

  	
       

  
	
       

  	
      

  	
   

  	

   

  	
       

  
	
       

  	
      Lead Employer Name

  	

   

  	
   

  	

   

  	
       

  
	
       

  	
       

  	

   

  	

   

  	

   

  	
       

  
	
       

  	
      507 Prudential Road

  	
   

  	
   

  	
   

  	
       

  
	
       

  	
      

  	
   

  	

   

  	
   

  	
       

  
	
       

  	
      Street

  	
   

  	

   

  	
   

  	
       

  
	
       

  	
       

  	
   

  	

   

  	
   

  	
       

  
	
       

  	
      Horsham

  	
   

  	

  PA

  	
   

  	
      19044

  
	
       

  	
      

  	
   

  	

  

  	
   

  	
      

  
	
       

  	
      City

  	
   

  	

  State

  	
   

  	
      ZIP

  
	
       

  	
       

  	
   

  	

   

  	
   

  	
       

  
	
       

  	
      23-1670927

  	
   

  	
      george.huyler@ncogroup.com

  
	
       

  	
      

  	
   

  	
      

  
	
       

  	
      Employer Identification Number

  	

   

  	
      e-mail Address

  

 

	
      Participating Employers
        (Plan §2.13)

    	
      

    	
      B.

    	The Participating
      Employers that will adopt the Plan in addition to the Lead Employer
      are ... [check one]:
	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    
	
      Enter the names of any Participating
        Employers that will be adopting the Plan.  An entity will cease to
        be a Participating Employer as soon as it ceases to be a member of a “controlled
        group” with the Lead Employer.

    	
       

    	
      1.

    	
         N/A
        – there are no other Participating Employers.

    
	
       

    	
       

    
	
      2.

    	
         ...
        the following entities affiliated with the Lead Employer [complete]:

    
	
       

    	
       

    	
       

    
	
       

    	
           NCO
        Portfolio Management

    	
       

    	
       

    	
      52-2300752

    
	
       

    	
      

    	
       

    	
       

    	
      

    
	
       

    	
      Name

    	
       

    	
       

    	
       

    	
          Employer
        ID Number

    
	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    
	
       

    	
           RMH

    	
       

    	
       

    	
      23-2250564

    
	
       

    	
       

    	
      

    	
       

    	
       

    	
      

    
	
       

    	
       

    	
      Name

    	
       

    	
       

    	
       

    	
           Employer
        ID Number

    
	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
      

    	
       

    	
       

    	
      

    
	
       

    	
       

    	
      Name

    	
       

    	
       

    	
       

    	
           Employer
        ID Number

    
	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
      [Attach additional
        sheet if necessary.]

    

 

PAGE 1

 

	
      Name of Plan

      (Plan §2.17)

    	
       

    	
      C.

    	
      The name of the Plan is
        [enter full legal name]:

    
	
       

    	
       

    	
       

    	
       

    
	
      The name of the Plan should
        include the name of the Lead Employer.

    	
       

    	
       

    	
      NCO Group Deferred Compensation
        Plan

    
	 	 	
      

    
	
       

    	
       

    	
       

    	
       

    
	
      Associated Plan (Plan §2.3)

    	
       

    	
      D.

    	
      The full legal name of the Associated
        Plan is ... [complete if the Plan relies on a qualified plan
        for any definition, benefit determination, or other purpose]:

    
	 	 	 	 
	
      

      Some of the provisions of
        the Plan may be defined by reference to the qualified 401(k) or other
        retirement plan you specify here, called the “Associated Plan.”

    	 	 	NCO
      Group 401(k) Retirement Plan
	
      

    	
      

    	
      

    
	
       

    	
       

    	
      

    

 

	
      Plan    Administrator (Plan § 7.1)

  	
       

  	
      E.

  	
      The Plan    Administrator is [check one]:

  
	
       

  	
       

  	
       

  	
       

  	
       

  
	
      The Plan    Administrator is the business, committee, individual or other    entity that oversees the operation of the Plan and has complete discretionary    control, authority and legal responsibility to administer all aspects of the    Plan and to interpret and decide all matters under the Plan.  If no Plan Administrator is specified, the Lead    Employer automatically will be the Plan Administrator.

  	
       

  	
  
  	
      the Lead Employer.

  
	
       

  	
       

  	
       

  
	
       

  	
  
  	
      the same as the plan administrator of the Associated    Plan.

  
	
       

  	
       

  	
       

  	
       

  
	
       

  	
  
  	
      a Committee consisting of the following individuals [complete]:

  
	
       

  	
       

  	
       

  	
       

  
	
       

  	
       

  	
       

  	
      

  
	
       

  	
       

  	
       

  	
      Name                                                                                                              Title

  
	
       

  	
       

  	
       

  	
       

  
	
       

  	
       

  	
       

  	
      

  
	
       

  	
       

  	
       

  	
      Name                                                                                                              Title

  
	
       

  	
       

  	
       

  	
       

  
	
       

  	
       

  	
       

  	
      

  
	
       

  	
       

  	
       

  	
      Name                                                                                                              Title

  
	
       

  	
       

  	
       

  	
       

  
	
       

  	
       

  	 
    	
      the following other individual or entity [complete]:

  

 

	
      Plan Year

  (Plan §2.19)

  	
       

  	
      F.

  	 The Plan
      Year of the Plan is the twelve-consecutive-month period ending on the
      last day of the month of ... 
	
       

  	
       

  	
       

  	
       

  	
       

  
	 Plan
      Year means the 12-month period with regard to which all Plan
      calculations and operations are performed (including, if applicable, a short
      Plan Year when the Plan is first established).  Please specify the
      last month of the Plan Year, and provide information on a short Plan Year
      or amended Plan Year, if any. 	
       

  	
       

  	
      December    in each year, and [check one, if    applicable] ...

  
	
       

  	
       

  	
       

  	
       

  
	
       

  	
       

  	 
    	 the first
      Plan Year is a short year that begins on the Original Effective Date and
      ends on ... [complete]:
       

  12/31/04 

  
	
       

  	
       

  	
       

  	
       

  
	
       

  	
       

  	 
    	 the Plan
      Year has been amended.  The last Plan Year before the amendment ended
      on ... [complete]: 
	
       

  	
       

  	
       

  	
       

  	
      

  
	
       

  	
       

  	
       

  	
       

  	
       

  
	
       

  	
       

  	
       

  	
       

  	 and the
      short Plan Year resulting from the amendment began on the next day and ended
      on ... [complete]: 
	
       

  	
       

  	
       

  	
       

  	
       

  
	
       

  	
       

  	
       

  	
       

  	
      

  

 

 

PAGE  2

 

2   Eligibility to Participate

	
  Covered Employment
    (Plan §2.11)

  	
   

  	
  A.

  	
  Covered Employment    includes only employment with a Participating Employer as ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  You must define a “select group of    management or highly compensated employees” who will be eligible for the    Plan.

  	
   

  	
   

  	
  1.

  	
  
  	
  ... an    employee who is expected to have compensation in excess of the limit under    Code §401(a)(17) for the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  ... an    executive designated as eligible to participate in the Plan, by... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CAUTION:  In order to preserve the exemption of the    Plan from most of the provisions of ERISA, you should consult with an    attorney or other expert advisor in choosing the “select group” of employees    that is to be covered.

  	
   

  	
   

  	
   

  	
   

  	
      

  	
  ... the Plan    Administrator.

   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
      

  	
  ... the Lead Employer’s    Board of Directors or a committee of the Board of Directors.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
  
  	
  ... the    following [describe in detail the covered    class of employees, either by name or by category(ies) of employment]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Required Age and Service
    (Plan §3.1)

  	
   

  	
  B.

  	
  In order for    an Employee to participate in the Plan, he or she must be in Covered    Employment and must also have ... [check    one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  You may require employees to attain a    certain age or to complete a certain period of employment in order to become    eligible to participate in the Plan.

  	
   

  	
   

  	
  1.

  	
  
  	
  ... attained    age 21and completed  0 Years of    Service.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  ... met the    age and service requirements for participation in the Associated Plan.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
  
  	
  N/A – there    is no age or service requirement.

  

 

PAGE 3

 

3   Employee  Deferrals

 

	
  Employee    Deferrals

  (Plan §4.1)

  	
   

  	
  A.

  	
  
  	
  Employee    Deferrals ... [check one]:

   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Please    indicate whether Employee Deferrals will be allowed under the Plan.

  	
   

  	
   

  	
   

  	
  
  	
  ... will be allowed under the Plan.

   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  
  	
  ... will not be allowed under the Plan.  [If checked, skip to Section 5.]

  

 

	
  Limitations
    (Plan §4.1)

  	
   

  	
  B.

  	
  
  	
  Employee Deferrals will be allowed, by means of pay    reduction, in any whole percentage or whole dollar amount of Compensation,    subject to the following limitations upon each Participant ... [check all    that apply]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  You    may choose to impose limits on the amount or type of Employee Deferrals.  Also, if bonuses are not excluded for    purposes of measuring Employee Deferrals, you may make them subject to a    different percentage limit.

  	
   

  	
   

  	
  1.

  	
  
   

  	
  N/A – no maximum is imposed on Employee Deferrals.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  A Participant may defer no more
      than __ % of his or her Compensation in a Plan Year ... [check if
      applicable]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  
  	
  except that a Participant may defer up to ________ %    of his or her bonus Compensation (if not excluded from Compensation under    3.C.2, below) in a Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  3.

  	
  
  	
  A Participant may defer no more than $___________ in    each Plan Year.

   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  4.

  	
  
  	
  The Plan Administrator may from time to time specify    limits on Employee Deferrals for each Plan Year, in its sole discretion.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  5.

  	
  
  	
     A    Participant may defer up to the IRC 402(g) limit in effect, less amounts    contributed to the Associated Plan.

  

 

	
  Compensation

  	
   

  	
  C.

  	
  For purposes of calculating Employee Deferrals, Compensation    ... [check one]:

  
	
  (Plan §2.8)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Indicate the definition of Compensation for    purposes of calculating Employee Deferrals.     If the Plan is meant to reflect the provisions of an Associated Plan,    you may want to select the same definition contained in that plan.  Compensation always includes elective deferrals    under the Associated Plan, Employee Deferrals under this Plan, and amounts    deferred under any “cafeteria plan” described in Code section 125.

  	
   

  	
   

  	
  1.

  	
  
  	
  ... has the same definition as compensation for    purposes of making §401(k) elective deferrals under the Associated Plan    (before application of the dollar limit under section 401(a)(17) of the    Code).

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  ... means the Participant’s total earnings for federal    income tax withholding purposes, but excluding ...[check each that applies]:

  
	
   

  	
   

  	
   

  	
   

  	
  
  	
  bonuses.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  
  	
  commissions.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  
  	
  severance pay paid at or prior to termination of    employment.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  
  	
  other [specify in    detail]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  

 

PAGE 4

 

4   Matching Credits

 

	
  Matching Credits

  (Plan §4.2)

  	
   

  	
  A.

  	
  
  	
  Matching    Credits ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  
  	
  will

  
	
  If    you allow Employee Deferrals in Section 3.A, indicate whether the Plan will    add Matching Credits based on those Employee Deferrals and the method of    calculating those Credits.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  
  	
  will not [if checked, skip to Section 5]

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  ... be added to each Participant’s Account, in an    amount based on the amount of the Participant’s Employee Deferrals for the    Plan Year and calculated as follows.

  

 

	
  Matching Credit    Formula

  	
   

  	
  B.

  	
  
  	
  Matching    Credits will be ... [check one]:

  
	
  (Plan §4.2)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  If    you allow Matching Credits, indicate how the amount of the Credits will be    determined.

  	
   

  	
   

  	
  1.

  	
  
  	
  ... based on the percentage of Compensation elected as    Employee Deferrals for the Plan Year, according to the following schedule [complete    the schedule]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  The    Matching Credit will be

  	
   

  	
   

  	
  ... of    Employee Deferrals (expressed as a percentage of Compensation

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  _______    %

  	
   

  	
  of the first

  	
  __________%

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  _______    %

  	
   

  	
  of the next

  	
  __________%

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  _______    %

  	
   

  	
  of the next

  	
  __________%

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  2.

  	
  
  	
  ... based on the dollar    amount contributed as Employee Deferrals for the Plan Year, according to the    following schedule [complete the schedule]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  The    Matching Credit will be:

  	
   

  	
   

  	
  ... of the    Employee Deferrals (expressed as a dollar amount of Compensation)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  _______    %

  	
   

  	
  of the first

  	
  $__________

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  _______    %

  	
   

  	
  of the next

  	
  $__________

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  _______    %

  	
   

  	
  of the next

  	
  $__________

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  3.

  	
  
  	
  ... determined annually for each Plan Year by the    Employer, in its absolute and sole discretion, and allocated to Participants    in proportion to their Employee Deferrals for the Plan Year.

  
										

 

PAGE 5

 

	
  Annual Matching
    Credit Limitation
    (Plan §4.2)

  	
   

  	
  C.

  	
  
  	
  Notwithstanding    any formula chosen above, the Matching Credits received by a Participant for    a Plan Year under the Plan may in no event exceed ... [check one and complete as    necessary]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  You may also choose to limit the amount of    Matching Credits to a certain percentage of Compensation or dollar amount for    the Plan Year, regardless of the total that would otherwise be credited under    the Matching Credit formula chosen in B.1 or B.2.

  	
   

  	
   

  	
  1.

  	
  
  	
  N/A – there    is no maximum imposed on Matching Credits other than the maximum resulting    under the Matching Credit formula selected above.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  $__________________    per Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
  
  	
  ________% of    the Participant’s Compensation for the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Requirements to Receive
    Matching Credits
    (Plan §4.2)

  	
   

  	
  D.

  	
  
  	
  A    Participant will receive the Matching Credits described above only if    he or she ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  1.

  	
  
  	
  N/A – there    is no employment or service requirement to receive Matching Credits.

  
	
  You may    provide that a Participant will only receive the Matching    Credits provided above if he or she meets the employment and/or service    requirement(s) you choose. Or, you may provide that there is no service or    last-day requirement at all (D.1).

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  ... is an    employee on the last day of the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
  
  	
  ... has    completed at least one-half Year of Service during the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  4.

  	
  
  	
  ... either    is an employee on the last day of the Plan Year or has completed at    least one-half Year of Service during the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  5.

  	
  
  	
  ... both    is an employee on the last day of the Plan Year and has completed at    least one-half Year of Service during the Plan Year.

  
	
  You can also choose to have the plan waive    the employment and/or service requirement(s) in the event of the    Participant’s termination of employment because of death, disability, or    retirement.

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  [If any of 2 through 5 is checked, check    here if applicable]:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  
  	
  However,    neither the last-day employment requirement nor the one-half Year of Service    requirement will apply in any case, if a Participant’s employment terminated    during the Plan Year by reason of the Participant’s death, disability, or    retirement after Normal Retirement Age.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  In the event of a short Plan Year, the    requisite one-half Year of Service, if any, will be proportionately reduced.

  	
   

  	
   

  	
   

  	
   

  

 

PAGE 6

 

5   Supplemental Credits

	
  Supplemental Credits

  (Plan §4.3)

  	
   

  	
  A.

  	
  
  	
  Supplemental Credits, without    regard to whether any Employee Deferrals have been made by a Participant for    the Plan Year, ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  These are additions made to the accounts of    Participants by the Employer that are similar to profit-sharing contributions    under a qualified plan.  Indicate    whether the Plan will permit Supplemental Credits to be given by the    Employer.

  	
   

  	
   

  	
   

  	
  
  	
  ... will be    allowed under the Plan.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  
  	
  ... will not    be allowed under the Plan.  [If    checked, skip to Section 6.]

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Supplemental Credits
    Formula

  (Plan §4.3)

  	
   

  	
  B.

  	
  
  	
  Supplemental Credits    will be added by the Employer to the Accounts of Participants entitled to    receive them for each Plan Year ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  Supplemental Credits can be determined    pursuant to a fixed formula (i.e., a certain dollar amount or a certain percentage    of Compensation for each Plan Year), or they can be left in the discretion of    the Plan Administrator each year.

  	
   

  	
   

  	
  1.

  	
  
  	
  in an amount    determined for each Plan Year by the Employer, in its discretion, and    credited to the Accounts of such Participants in proportion to their    Compensation (as defined in C., below) for the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  in an amount    for each such Participant equal to ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  a.          $___________________    for the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  b.          ________%    of his or her Compensation for the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  3.

  	
  
  	
  on an excess    basis, in an amount for each such Participant who participates in the    Associated Plan, equal to the Employer profit-sharing contributions that    would have been made to the Associated Plan on that Participant’s behalf    under all the terms of the Associated Plan, but which were prohibited by the    Internal Revenue Code limit on plan compensation provided in Code §401(a)(17)    ($200,000 for the 2002 Plan Year) and/or by the limit on annual additions    provided in Code §415 (the lesser of $40,000 or 100 percent of compensation    for the 2002 Plan Year).

  

 

	
  Compensation

  (Plan §2.8)

  	
   

  	
  C.     Compensation.  For purposes of    allocating discretionary Supplemental Credits for a Plan Year in accordance    with B.1, above, Compensation ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  For a Supplemental Credits formula other    than a fixed dollar amount or an “excess” Credit, a definition of    Compensation should be selected for purposes of allocating such Credits. Compensation always    includes elective deferrals under the Associated Plan, Employee Deferrals    under this Plan, and amounts deferred and excluded from income under any    “cafeteria plan” described in Code §125.

  	
   

  	
  1.

  	
  
  	
  ... has the    same definition as compensation for purposes of allocating employer    profit-sharing contributions under the Associated Plan (before application of    the dollar limit under section 401(a)(17) of the Code).

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  2.

  	
  
  	
  ... total    earnings for federal income tax withholding purposes, but excluding...[check    each that applies]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  
  	
  bonuses.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  
  	
  commissions.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  
  	
  severance    pay paid at or prior to termination of service.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  
  	
  other [specify in detail]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  

 

PAGE 7

 

	
  Requirements to Receive
    Supplemental Credits
    (Plan §4.3)

  	
   

  	
  D.

  	
  
  	
  A    Participant will receive the Supplemental Credits described above only    if he or she ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1.

  	
    

  	
  N/A – there    is no employment or service requirement to receive Supplemental Credits.

  
	
  You may    provide that a Participant will only receive Supplemental    Credits if he or she meets the employment and/or service requirement(s) you    choose.  Or, you may provide that    there is no service or last-day requirement at all (D.1).

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  2.

  	
    

  	
  ... is an    Employee on the last day of the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  3.

  	
    

  	
  ... has    completed at least one-half Year of Service during the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.

  	
    

  	
  ... either    is an employee on the last day of the Plan Year or has completed at    least one-half Year of Service during the Plan Year.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.

  	
    

  	
  ... both    is an employee on the last day of the Plan Year and has completed at    least one-half Year of Service during the Plan Year.

  
	
  You may also choose to have the plan waive    any employment and/or service requirement(s) in the event of the    Participant’s termination of employment because of death, disability, or    retirement.

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  [If any of 2 through 5 is checked, check    here if applicable]:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
    

  	
  However,    neither the last-day employment requirement nor the one-half Year of Service    requirement will apply in any case, if a Participant’s employment terminated    during the Plan Year by reason of the Participant’s death, disability, or    retirement after Normal Retirement Age.

  
	
   

  	
   

  	
   

  	
   

  
	
  You may also provide that, regardless of    eligibility of employees for other components of the Plan, Supplemental    Credits will only be received by the group of Participants you specifically    describe (D.6).

  	
   

  	
  6.

  	
    

  	
  ... is in the    classification of Participants described as follows [describe in detail the class of employees entitled    to Supplemental Credits, either by name or by category(ies) of employment]:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  In the event of a short Plan Year, the    requisite one-half Year of Service, if any, will be proportionately reduced.

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  

  

 

PAGE 8

 

6   Vesting and Forfeiture of  Benefits

 

	
  Vesting

  (Plan §5.4, 5.5)

  	
   

  	
  Each    Participant shall be Vested in his or her Account attributable to Matching    Credits or Supplemental Credits (if any) as follows [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  The portion of a Participant’s account that    consists of Employee Deferrals is always 100% nonforfeitable (or “Vested”).

  	
   

  	
  A.

  	
  
  	
  All Matching Credits and/or Supplemental Credits will be 100% Vested    at all times.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  
  	
  Matching    Credits and/or Supplemental Credits will be Vested according to the following    schedule, based on Years of Service with the Employer (as defined in Plan    Section 2.23) [complete the first and last lines and as many of the other lines as    necessary]:

  
	
  If your plan allows Matching Credits or    Supplemental Credits, you may provide that all Credits are 100% Vested at all    times, or you may choose to require a certain number of Years of Service    before Credits are Vested.  The same    Vesting schedule must apply to both Matching Credits and Supplemental    Credits.

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Years of    Service                                    Percent    Vested

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Less than ______3                                              0%

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  At least    3______ but less than ______:         100%

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  At least    ______ but less than ______:         ______%

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  At least    ______ but less than ______:         ______%

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  At least ______    but less than ______:      ______%

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  At least    ______ but less than ______:         ______%

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  At least    ______ but less than ______:         ______%

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  At least    ______ but less than ______:         ______%

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  ________ or more                                       100%

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Acceleration of Vesting in Certain    Circumstances
    (Plan §5.4)

  	
   

  	
  C.

  	
  
  	
  Special Vesting Rules.  Notwithstanding any vesting schedule set    forth in B., a Participant will become 100% Vested in his or her Account, if    ... [check    all that apply and complete as necessary]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  The Plan can provide that a Participant’s    Account becomes 100% Vested, regardless of any other Vesting rules, upon the    happening of any of the optional events you choose.

  	
   

  	
  1.

  	
  
  	
  ... the    Participant’s employment with the Employer is terminated due to death or    Disability.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  2.

  	
  
  	
  ... the    Participant reaches age 65 and completes _______ Years of Service (and is    still employed).

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  If you choose the accelerated Vesting rule    under C.3, you must provide a definition of “Cause.”

  	
   

  	
  3.

  	
  
  	
  ... the    Participant’s employment is terminated by the Employer without Cause, defined as follows [describe    in detail – use addendum if necessary]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  4.

  	
  
  	
  ... the Participant’s    participation in the Plan is terminated by the Plan Administrator pursuant to    Section 3.3 of the Plan.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  SECTION CONTINUED    ON NEXT PAGE

  

 

PAGE 9

 

	
  Acceleration of Vesting in Certain    Circumstances (continued) . . .

  	
   

  	
  5.

  	
  
  	
  ... there is a    Change    of Control, defined as follows [describe in detail – use addendum if necessary]:

  
	
   

  	
   

  	
   

  	
   

  	
  See Addendum

  
	
  If you choose the accelerated Vesting rule    under C.5, you must provide a definition of “Change of Control.”

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  6.

  	
  
  	
  ... the    following event(s) occur(s) [describe in detail – use addendum if necessary]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  7.

  	
  
  	
  ... the Plan    is terminated pursuant to Plan §8.2.

  

 

	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Forfeiture of All or Part of Benefits for    Criminal Acts, Disloyalty, Etc.
 (Plan §5.6)

   

  	
   

  	
  D.

  	
  
  	
  Notwithstanding    any other Vesting provision set forth in this Section 6, a Participant will    forfeit the following portion of his or her Account attributable to Matching    Credits and/or Supplemental Credits, if any of the events specified below has    occurred with respect to the Participant, as determined by the Plan    Administrator in its sole discretion:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  You can provide that a Participant will    lose all or a portion of his or her benefits (even Vested benefits), other than    Employee Deferrals, if he or she commits any of the wrongful acts    set forth in this section.

  	
   

  	
   

  	
   

  	
   

  	
  The Participant will 
    forfeit this percentage 
    of his or her Vested Account

  	
   

  	
  ... if the Plan Administrator 
    determines    in its sole discretion that the following event has occurred:

   

  
	
   

  	
   

  	
   

  	
   

  	
  

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
  _______ %

  	
   

  	
  any event    defined as “Cause” in 6.C.3, above.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  _______ %

  	
   

  	
  the    Participant’s is employed by a competitor of the Employer within 12 months    after his or her termination of employment with the Employer.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  _______ %

  	
   

  	
  Other [specify    in detail – use addendum if necessary]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  

  
										

 

PAGE 10

 

7   Payments of Benefits

 

	
  Date Payments Commence. (Plan §6.1)

  	
   

  	
  A.

  	
  Distributions    of benefits under the Plan shall commence [check one and complete as necessary]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Choose when the payment of benefits will be    made.

  	
   

  	
   

  	
  1.

  	
  
  	
  ... as soon as    practicable following the Participant’s termination of employment.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  2.

  	
  
  	
  ... as soon as    practicable after the end of the Plan Year in which the Participant’s    termination of employment occurred.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  3.

  	
  
  	
  ... on a date    chosen by the Participant when he or she chooses the form of payment, but    commencing no later than ______ years following the Participant’s termination    of employment.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  [Check if applicable]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  
  	
  In addition,    distributions of benefits under the Plan shall commence as soon as    practicable after the occurrence of a Change of Control, as defined in Section    6.C.5.

  

 

	
  Form of Payments
    (Plan §6.3)

  	
   

  	
  B.

  	
  The form(s)    of distribution of benefits under the Plan shall be ... [check one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Indicate whether benefit payments will be    available only in a single lump sum, or whether Participants will be allowed    to elect between a lump sum and installment payments.  You may also choose to limit the term of    any installment payments.

  	
   

  	
   

  	
  1.

  	
  
  	
  ... a single    lump sum.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  ... at the    election of the Participant, either (a) a single lump-sum; (b) installments    over a fixed period; (c) installments of a fixed dollar amount, or (d) a    combination of lump sum and installment payments, as elected by the    Participant in a manner prescribed by the Plan Administrator, and ... [check if    applicable]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  
  	
  ... no    installment payout period exceeding a period of _______ years may be elected,    and no installment payment dollar amount may be elected if it is deemed    likely to result in a payment period in excess of the period of years    specified above, as determined by the Plan Administrator in its sole    discretion.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Timing of Participant Election (Plan §6.4)

  	
   

  	
  C.

  	
  If a    Participant selects a form of benefit and/or a date of commencement of    benefit payments under A.3 and B.2, above, such selection will be made at the    time the Participant first becomes eligible for the Plan, and ... [check    one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  If the Plan allows Participants to elect    the timing and/or form of benefit payments (under A.3 and B.2, above),    indicate whether such elections will be irrevocable, or whether Participants    will be able to change those elections at a later time.  Please consult an attorney or other expert as to the    possible “constructive receipt” consequences of allowing Participants to    change payment elections.

  	
   

  	
   

  	
  1.

  	
  
  	
  ... such    election will be irrevocable and shall apply to all amounts payable under the    Plan.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  
  	
  ... the    Participant may later elect a different payment form and date for    commencement of payments, to apply to all amounts payable under the Plan.  Any such new election will not be effective    until ... [complete]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
      X    [at least    6] months after the new election is made.

  

 

PAGE 11

 

	
  Payments to    Beneficiaries (Plan §§2.4, 6.7)

  	
   

  	
  D.

  	
  If a    Participant dies before receiving payment of all amounts credited to his or    her Account, any amounts payable to the Participant’s Beneficiary ...  [check    one]:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Indicate the form and timing of payment to    a Beneficiary if a Participant dies while still entitled to payments from the    Plan.

  	
   

  	
   

  	
  1.

  	
  
  	
  ... will be    paid to the Beneficiary in a lump sum, as soon as practicable after the    Participant’s death.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  2.

  	
  
  	
  ... will be    paid to the Beneficiary according to the form of payment and commencement    date election then in effect for the Participant.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Withdrawals Due to Emergency Financial Need    (Plan §6.5)

  	
   

  	
  E.

  	
  If a    Participant has a severe financial emergency, he or she ... [check    one]:

  
	
   

  	
   

  	
   

  	
   

  	
       may               may    not

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Indicate whether the Plan will permit early    withdrawal of amounts by a Participant who demonstrates a special need or    hardship due to “severe financial emergency.”

  	
   

  	
   

  	
  ... apply to    the Plan Administrator for a cash distribution from the Plan, not to exceed    the total in his or her vested Account under the Plan, and not to exceed the    amount necessary to alleviate such emergency (including amounts necessary to    pay any federal, state or local income taxes reasonably anticipated to result    from the distribution).

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Withdrawals due to “severe financial emergency”    will be made first from the portion of the Participant’s Account that is    attributable to Employee Deferrals, then proportionally from any other    Credits.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

PAGE 12

 

Execution

 

	
  Choice of State    Law

  	
  The Plan will be construed and administered in    accordance with the laws of the State or Commonwealth of ... 

  
	
   

  	
  Pennsylvania,    to the extent that such laws are not preempted by the laws of the United    States of America.

  

 

PLEASE NOTE:  This  Adoption Agreement and the accompanying Basic Plan Document for the Putnam  Executive Deferred Compensation Plan are intended to assist you in developing  documentation for a nonqualified deferred compensation plan.  However, the rules governing nonqualified  deferred compensation plans are complex.   This document is not intended to reflect all possible plan provisions or  to meet all deferred compensation goals.   You should consult with an attorney or other expert advisor as to the  most appropriate plan design to meet your organization’s goals and as to the  legal and financial impact of the plan on your organization.  In using this document, you acknowledge that  it has not been reviewed or approved by the Internal Revenue Service, and that  Putnam Investments is not providing legal or tax advice by making this document  available or by providing recordkeeping, administrative or
trustee services  with respect to the plan.

 

	
      Execution by Lead Employer

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
       

    
	
      Also obtain and execute the
        appropriate Board of Directors resolution(s).

    	
      IN WITNESS WHEREOF, the
        Employer has caused this Adoption Agreement to be executed by its officer,
        thereunto duly authorized, as of the Effective Date specified above.

    
	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
      
         

      

    	
       By: 

    	/s/ Steven  L. Winokur
	
       

    	
       

    	
       

    	
       

    	
      

    
	
       

    	
       

    	
       

    	
       

    	 Officer’s
      Signature 
	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
      Print Name/Title: Steven 
        L. Winokur

    
	
       

    	
       

    	
       

    	
      

    
	
       

    	
       

    	
       

    	
       Executive Vice President -
          Finance,

        Chief Financial Officer and

        Chief Operating Officer -

        Shared Services

    
	 	 
	
       

    	
      Dated:

    	December
    30, 2004	 	 	 
	 	 	

    	 	 	 

 

PAGE 13

 

Adoption By a Participating Employer

	
      Execution by Participating
        Employer

    	
       

    	
      The undersigned employer, an
        entity affiliated with the Lead Employer, hereby adopts the Plan, as established
        by the Lead Employer, and agrees to be a “Participating Employer”
        under the Plan.

    
	
       

    	
       

    	
       

    	
       

    	
       

    
	
      Affiliates of the Lead Employer
        are permitted to adopt the Plan, pursuant to Sections 1.1 and 2.13 of
        the Plan, with the consent of the Lead Employer.  Please execute
        a separate copy of this page for each Participating Employer that
        adopts the Plan.

       

       

       

       

       

       

    	
       

    	
       

    	
      

    	
      By:

    	/s/ Rick Palmer
	
       

    	
       

    	
       

    	  	
      

    
	
       

    	
       

    	
       

    	
      

    	Officer’s
      Signature
	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
      Print Name/Title:   Rick
        Palmer

    
	
       

    	
       

    	
       

    	
     
	
       

    	
       

    	
       

    	Senior Vice President and

      Chief Financial Officer
    
	 	 	 	 
	
       

    	
       

    	
       

    	
      NCO
        Portfolio Management

    
	
       

    	
       

    	
       

    	
      

    
	
       

    	
       

    	
       

    	
      Name of Participating Employer

    

 

	
        Consent of
        the Lead Employer

    	
       

    	
      The Lead Employer hereby consents
        to the adoption of the Plan, pursuant to Sections 1.1 and 2.13 of the
        Plan, by the affiliated employer named above.

    
	
       

    	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
      

    	
      By:

    	/s/ Steven L. Winokur
	
       

    	
       

    	
       

    	
       

    	  	
      

    
	
       

    	
       

    	
       

    	
       

    	
      

    	Officer’s
      Signature
	
       

    	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
       

    	
      Print Name/Title:  Steven
        L Winokur

    
	
       

    	
       

    	
       

    	
       

    	
      

    
	 	 	 	 	 Executive
        Vice President - Finance,

Chief Financial Officer and

Chief Operating Officer -

Shared Services 
	
       

    	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
      Dated: 

    	 December 30,
    2004	 	 	 
	 	 	 	

    	 	 	 

 

PAGE 14

 

	
      Execution by Participating
        Employer

    	
       

    	
      The undersigned employer, an
        entity affiliated with the Lead Employer, hereby adopts the Plan, as established
        by the Lead Employer, and agrees to be a “Participating Employer”
        under the Plan.

    
	
       

    	
       

    	
       

    	
       

    	
       

    
	
      Affiliates of the Lead Employer
        are permitted to adopt the Plan, pursuant to Sections 1.1 and 2.13 of
        the Plan, with the consent of the Lead Employer.  Please execute
        a separate copy of this page for each Participating Employer that
        adopts the Plan.

    	
       

    	
       

    	
      

    	
      By:

    	/s/ Steven
    L. Winokur
	
       

    	
       

    	
       

    	  	
      

    
	
       

    	
       

    	
       

    	
      

    	Officer’s
      Signature
	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
      Print Name/Title:  Steven
        L Winokur

    
	
       

    	
       

    	
       

    	
       

    	CFO 
	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
      RMH

    
	
       

    	
       

    	
       

    	
      

    
	
       

    	
       

    	
       

    	
      Name of Participating Employer

    
	
       

    	
       

    	
       

    	
       

    	
       

    
	
      Consent of the Lead Employer

    	
       

    	
      The Lead Employer hereby consents
        to the adoption of the Plan, pursuant to Sections 1.1 and 2.13 of the
        Plan, by the affiliated employer named above.

    
	
       

    	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
      

    	
      By:

    	/s/ Steven L. Winokur
	
       

    	
       

    	
       

    	
       

    	  	
      

    
	
       

    	
       

    	
       

    	
       

    	
      

    	Officer’s
      Signature
	
       

    	
       

    	
       

    	
       

    	
       

    
	
       

    	
       

    	
       

    	
       

    	
      Print Name/Title: Steven L Winokur

    
	
       

    	
       

    	
       

    	
       

    	
      

    
	 	 	 	 	 Executive
        Vice President - Finance,

Chief Financial Officer and

Chief Operating Officer -

Shared Services 
	
       

    	
       

    	
       

    	
       

    	
       

    
	 	 	Dated:	December
    30, 2004	 	 
	 	 	 	

    	 	 

 

[Use an additional  copy of this sheet for each

other Participating  Employer.]

 

PAGE 15

 

For Purposes of this Trust, Change of Control shall mean: (i) the  acquisition of the power to direct or cause the direction of, the management  and policies of NCO by a Person (not previously possessing such power), acting  alone or in conjunction with others, whether through the ownership of Stock, by  contract or otherwise, (ii) the acquisition, directly or indirectly, or the  power to vote 35% or more of the outstanding Stock by a Person or Persons  9other than a person possessing such power on the date this Trust Agreement  becomes effective or NCO or an employee benefit plan established and maintained  by NCO), where, for purposes of this definition, customary agreements with or  between underwriters and selling group members with respect to bona fide public  offering of Stock shall be disregarded, (iii) the approval by stockholders of  the Company and consummation of a merger, consolidation or reorganization  involving the Company, and as a result of
such merger, consolidation or  reorganization less than a majority or the combined voting power of the then  outstanding securities of such corporation, person or entity immediately prior  to such transaction, (iv) the Company sells or otherwise transfers all or  substantially all of its assets to any other corporation, person or entity, and  less than a majority of the combined voting power of the then outstanding  securities of such corporation, person or entity immediately after such sale or  transfer is held in the aggregate by the holders of voting stock of the Company  immediately prior to such sale or transfer or (v) a complete liquidation or  dissolution of the Company.

 

PAGE 16<PAGE>

                                                                     EXHIBIT 4.1

                          SECURITIES PURCHASE AGREEMENT

      This SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of December
16, 2004, is between QSound Labs, Inc., a corporation organized under the laws
of Alberta, Canada (the "COMPANY"), and Capital Ventures International, a
corporation organized under the laws of the Cayman Islands (the "PURCHASER").

                                   BACKGROUND

      A.    The Company and the Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("REGULATION D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "SECURITIES ACT").

      B.    Upon the terms and conditions stated in this Agreement, the Company
desires to issue and sell to the Purchaser, and the Purchaser desires to
purchase, 347,826 units (the "UNITS"), each Unit consisting of (i) one share of
the Company's common stock, no par value per share (the "COMMON STOCK"), (ii) a
warrant, dated the date hereof, (the "SERIES A WARRANTS"), to acquire initially
0.4 shares of Common Stock, and (iii) a warrant, dated the date hereof, (the
"SERIES B WARRANTS" and, together with the Series A Warrants, the "INITIAL
WARRANTS"), to acquire (y) initially 1.5 shares of Common Stock and (z) a
warrant to acquire initially 0.6 shares of Common Stock (the "SERIES C
WARRANTS"). The shares of Common Stock issuable upon exercise of or otherwise
pursuant to the Initial Warrants and the Series C Warrants are referred to
herein as the "WARRANT SHARES." The Common Stock, the Initial Warrants, the
Series C Warrants and the Warrant Shares are collectively referenced herein as
the "SECURITIES" and each of them may individually be referred to herein as a
"SECURITY."

      C.    Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit A (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws. This Agreement, the Initial Warrants, the
Series C Warrants and the Registration Rights Agreement are collectively
referred to herein as the "TRANSACTION DOCUMENTS."

      NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Purchaser,
intending to be legally bound, hereby agree as follows:

1.    PURCHASE AND SALE OF SECURITIES.

      (a)   Purchase and Sale of Securities. Subject to the terms and conditions
hereof, the Company hereby issues and sells to the Purchaser, and the Purchaser
hereby purchases from the Company, 347,826 Units for a purchase price equal to
$2,000,000.

<PAGE>

      (b)   Deliveries.

            (i)   The Company has, simultaneously or prior to the execution and
delivery of this Agreement, delivered to the Purchaser:

                  (A)   duly executed certificates representing the shares of
Common Stock and the Initial Warrants being purchased by the Purchaser (each in
such denominations as the Purchaser shall request), registered in the
Purchaser's name;

                  (B)   original copies of the Registration Rights Agreement
duly executed by the Company;

                  (C)   an opinion or opinions of the Company's counsel, dated
as of the date hereof, and satisfactory to the Purchaser; and

                  (D)   a copy of resolutions, duly adopted by the Board of
Directors of the Company, which shall be in full force and effect on the date
hereof, authorizing the execution, delivery and performance by the Company of
this Agreement and the other Transaction Documents and the consummation by the
Company of the transactions contemplated hereby and thereby, certified as such
by the Secretary or Assistant Secretary of the Company, and such other documents
as they reasonably request in connection with the Closing.

            (ii)  The Purchaser has, simultaneously with the execution and
delivery of this Agreement and the deliveries listed in Section 1(b)(i),
delivered to the Company the Purchase Price.

2.    PURCHASER'S REPRESENTATIONS AND WARRANTIES.

      The Purchaser represents and warrants to the Company as follows:

      (a)   Purchase for Own Account, Etc. The Purchaser is purchasing the
Securities for its own account for investment purposes only and not with a
present view towards the public sale or distribution thereof, except pursuant to
sales that are exempt from the registration requirements of the Securities Act
and/or sales registered under the Securities Act. The Purchaser understands that
it must bear the economic risk of this investment indefinitely, unless the
Securities are registered pursuant to the Securities Act and any applicable
state securities or blue sky laws or an exemption from such registration is
available, and that the Company has no present intention of registering the
resale of any such Securities other than as contemplated by the Registration
Rights Agreement. Notwithstanding anything in this Section 2(a) to the contrary,
by making the representations herein, the Purchaser does not agree to hold the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption from the registration requirements under
the Securities Act.

      (b)   Accredited Investor Status. The Purchaser is an "Accredited
Investor" as that term is defined in Rule 501(a) of Regulation D.

                                     - 2 -
<PAGE>

      (c)   Reliance on Exemptions. The Purchaser understands that the
Securities are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the
Purchaser's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Purchaser set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Purchaser to acquire the Securities.

      (d)   Information. The Purchaser and its counsel have been furnished all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities that have been
specifically requested by the Purchaser or its counsel. Neither such inquiries
nor any other investigation conducted by the Purchaser or its counsel or any of
its representatives shall modify, amend or affect the Purchaser's right to rely
on the Company's representations and warranties contained in Section 3 below.
The Purchaser understands that its investment in the Securities involves a high
degree of risk.

      (e)   Governmental Review. The Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.

      (f)   Authorization; Enforcement. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of the Purchaser and are valid and binding agreements of it
enforceable against the Purchaser in accordance with their respective terms.

      (g)   Residency. The Purchaser is a corporation formed under the laws of
the Cayman Islands.

      (h)   Alberta Securities Law Representation. The Purchaser acknowledges
that: (i) no securities commission or similar regulatory authority has reviewed
or passed on the merits of the Securities; (ii) there is no government or other
insurance covering the Securities; (iii) there are risks associated with the
purchase of the Securities; (iv) there are restrictions on the Purchaser's
ability to resell the Securities and it is the responsibility of the Purchaser
to find out what those restrictions are and to comply with them before selling
the Securities; (v) the Company has advised the Purchaser that the Company is
relying on an exemption from the Alberta securities law requirements to provide
the Purchaser with a prospectus and to sell the Securities through a person or
company registered to sell securities under the Alberta Securities Act and, as a
consequence of acquiring the Securities pursuant to this exemption, certain
protections, rights and remedies provided by the Alberta Securities Act,
including statutory rights of rescission or damages, will not be available to
the Purchaser; and (vi) for a period of four months following issuance of the
Common Stock and Warrant Shares, the certificates for the Common Stock and
Warrant Shares will bear the following legend: "Unless permitted under
securities legislation, the shares represented by this certificate may not be
sold to a resident of Alberta during the period ending on April 17, 2005."

      The Purchaser's representations and warranties made in this Article 2 are
made solely for the purpose of permitting the Company to make a determination
that the offer and sale of the Securities pursuant to this Agreement comply with
applicable Canadian, provincial, U.S. federal

                                     - 3 -
<PAGE>

and state securities laws and not for any other purpose. Accordingly, the
Company may not rely on such representations and warranties for any other
purpose. The Purchaser has neither made nor hereby makes any other
representations or warranties, express or implied, to the Company in connection
with the transactions contemplated hereby.

3.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      Except as set forth on a Disclosure Schedule executed and delivered by the
Company to the Purchaser (the "DISCLOSURE Schedule"), the Company represents and
warrants to the Purchaser as follows:

      (a)   Organization and Qualification. The Company and each of its direct
and indirect subsidiaries (collectively, the "SUBSIDIARIES") is a corporation
duly organized and existing in good standing under the laws of the jurisdiction
in which it is incorporated or organized, and has the requisite corporate power
to own its properties and to carry on its business as now being conducted. The
Company and each of its Subsidiaries is duly qualified as a foreign corporation
to do business and is in good standing in every jurisdiction in which the nature
of the business conducted by it makes such qualification necessary and where the
failure so to qualify or be in good standing would have a Material Adverse
Effect. For purposes of this Agreement, "MATERIAL ADVERSE EFFECT" means any
effect which, individually or in the aggregate with all other effects,
reasonably would be expected to be materially adverse to (i) the Securities,
(ii) the ability of the Company to perform its obligations under this Agreement
or the other Transaction Documents or (iii) the business, operations,
properties, prospects, financial condition or results of operations of the
Company and its Subsidiaries, taken as a whole.

      (b)   Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement and the other Transaction Documents, to issue and sell the Units
in accordance with the terms hereof, to issue the Warrant Shares upon exercise
of the Initial Warrants and the Series C Warrants in accordance with the terms
thereof; (ii) the execution, delivery and performance of this Agreement and the
other Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance of the Units and the issuance and reservation for issuance of the
Warrant Shares) have been duly authorized by the Company's Board of Directors
and no further consent or authorization of the Company, its Board of Directors,
or any committee of the Board of Directors is required, and (iii) this Agreement
constitutes, and, upon execution and delivery by the Company of the other
Transaction Documents, such Transaction Documents will constitute, valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms. Neither the execution, delivery or performance by the Company
of its obligations under this Agreement or the other Transaction Documents, nor
the consummation by it of the transactions contemplated hereby or thereby
(including, without limitation, the issuance of the Units or the issuance or
reservation for issuance of the Warrant Shares) requires any consent or
authorization of the Company's stockholders.

      (c)   Capitalization. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of

                                     - 4 -
<PAGE>

shares issuable and reserved for issuance pursuant to securities (other than the
Initial Warrants and the Series C Warrants) exercisable or exchangeable for, or
convertible into, any shares of capital stock and the number of shares to be
reserved for issuance upon exercise of the Initial Warrants is set forth in
Section 3(c) of the Disclosure Schedule. All of such outstanding shares of
capital stock have been, or upon issuance in accordance with the terms of any
such exercisable, exchangeable or convertible securities will be, validly
issued, fully paid and non-assessable. No shares of capital stock of the Company
(including shares of Common Stock and the Warrant Shares) are subject to
preemptive rights or any other similar rights of the stockholders of the Company
or any liens or encumbrances. Except for the Securities and as set forth in
Section 3(c) of the Disclosure Schedule, (i) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exercisable
or exchangeable for, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries,
nor are any such issuances, contracts, commitments, understandings or
arrangements contemplated, (ii) there are no contracts, commitments,
understandings or arrangements under which the Company or any of its
Subsidiaries is obligated to register the sale of any of its or their securities
under the Securities Act (except the Registration Rights Agreement); (iii) there
are no outstanding securities or instruments of the Company or any of its
Subsidiaries that contain any redemption or similar provisions, and there are no
contracts, commitments, understandings or arrangements by which the Company or
any of its Subsidiaries is or may become bound to redeem or otherwise acquire
any security of the Company or any of its Subsidiaries; and (iv) the Company
does not have any shareholder rights plan, "poison pill" or other anti-takeover
plans or similar arrangements. Section 3(c) of the Disclosure Schedule sets
forth all of the securities or instruments issued by the Company or any of its
Subsidiaries that contain anti-dilution or similar provisions, and, except as
and to the extent set forth thereon, the sale and issuance of the Securities
will not trigger any anti-dilution adjustments to any such securities or
instruments. The Company has furnished to the Purchaser true and correct copies
of the Company's Certificate of Incorporation as in effect on the date hereof
("CERTIFICATE OF INCORPORATION"), the Company's Bylaws as in effect on the date
hereof (the "BYLAWS"), and all other instruments and agreements governing
securities convertible into or exercisable or exchangeable for capital stock of
the Company, all of which instruments and agreements are set forth in Section
3(c) of the Disclosure Schedule. The Company or one of its Subsidiaries has the
unrestricted right to vote, and (subject to limitations imposed by applicable
law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or any such Subsidiary.

      (d)   Issuance of Securities. The Units (and the securities comprising the
Units) are duly authorized and, upon issuance in accordance with the terms of
this Agreement, (i) will be validly issued, fully paid and non-assessable and
free from all taxes, liens, claims and encumbrances, (ii) will not be subject to
preemptive rights, rights of first refusal or other similar rights of
stockholders of the Company or any other person and (iii) will not impose
personal liability on the holder thereof. The Warrant Shares are duly authorized
and reserved for issuance, and, upon exercise of the Initial Warrants and the
Series C Warrants in accordance with the terms thereof, (x) will be validly
issued, fully paid and non-assessable, and free from all taxes, liens, claims
and encumbrances, (y) will not be subject to preemptive rights, rights of first

                                     - 5 -
<PAGE>

refusal or other similar rights of stockholders of the Company or any other
person and (z) will not impose personal liability upon the holder thereof.

      (e)   No Conflicts; Consents. The execution, delivery and performance of
this Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Units and the issuance and
reservation for issuance of the Warrant Shares) will not (i) result in a
violation of the Certificate of Incorporation or Bylaws, (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment (including, without limitation, the triggering of any anti-dilution
provisions), acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree
(including United States federal and state securities laws, rules and
regulations and rules and regulations of any self-regulatory organizations to
which either the Company or its securities are subject) applicable to the
Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected (except, with respect to
clauses (ii) and (iii), for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations that would not, individually or in
the aggregate, have a Material Adverse Effect). Except (w) as may be required
under the Securities Act in connection with the performance of the Company's
obligations under the Registration Rights Agreement, (x) for the filing of a
Form D with the SEC and the listing of additional shares with the SmallCap
Market (as that term is defined below), (y) as may be required for compliance
with applicable state securities or "blue sky" laws, or (z) as otherwise set
forth in Section 3(e) of the Disclosure Schedule, the Company is not required to
obtain any consent, approval, authorization or order of, or make any filing or
registration with, any court or governmental agency or any regulatory or
self-regulatory agency or other third party (including, without limitation,
pursuant to any Material Contract (as defined in Section 3(g) below)) in order
for it to execute, deliver or perform any of its obligations under this
Agreement or any of the other Transaction Documents.

      (f)   Compliance. The Company is not in violation of its Certificate of
Incorporation, Bylaws or other organizational documents and no Subsidiary is in
violation of any of its organizational documents. Neither the Company nor any of
its Subsidiaries is in default (and no event has occurred that with notice or
lapse of time or both would put the Company or any of its Subsidiaries in
default) under, nor has there occurred any event giving others (with notice or
lapse of time or both) any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party (including, without limitation, the Material
Contracts), except for actual or possible violations, defaults or rights that
would not, individually or in the aggregate, have a Material Adverse Effect. The
businesses of the Company and its Subsidiaries are not being conducted, and
shall not be conducted so long as the Purchaser owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental entity, except
for possible violations the sanctions for which either individually or in the
aggregate have not had and would not have a Material Adverse Effect. Neither the
Company, nor any of its Subsidiaries, nor any director, officer, agent, employee
or other person acting on behalf of the Company or any Subsidiary has, in the
course of his actions for, or on behalf of, the Company or any Subsidiary, used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to

                                     - 6 -
<PAGE>

political activity, made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds, violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977,
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee. The Company
and its Subsidiaries possess all certificates, authorizations and permits issued
by the appropriate federal, state, provincial or foreign regulatory authorities
that are material to the conduct of its business, and neither the Company nor
any of its Subsidiaries has received any notice of proceeding relating to the
revocation or modification of any such certificate, authorization or permit.

      (g)   SEC Documents, Financial Statements. Since December 31, 1998, the
Company has timely filed (within applicable extension periods) all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT") (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein, the "SEC
DOCUMENTS"). The Company has delivered to the Purchaser true and complete copies
of the SEC Documents. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act or the
Securities Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. None of the
statements made in any such SEC Documents is, or has been, required to be
amended or updated under applicable law (except for such statements as have been
amended or updated in subsequent filings made prior to the date hereof). As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
applicable with respect thereto. Such financial statements have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP"),
consistently applied, during the periods involved (except as may be otherwise
indicated in such financial statements or the notes thereto or, in the case of
unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal, immaterial year-end audit adjustments). Except
as set forth in the financial statements of the Company included in the Select
SEC Documents (as defined below), the Company has no liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to the date of such financial statements and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under GAAP to be reflected in such financial
statements, which liabilities and obligations referred to in clauses (i) and
(ii), individually or in the aggregate, are not material to the financial
condition or operating results of the Company. To the extent required by the
rules and regulations of the SEC applicable thereto, the Select SEC Documents
contain a complete and accurate list of all material undischarged written or
oral contracts, agreements, leases or other instruments to which the Company or
any Subsidiary is a party or by which the Company or any

                                     - 7 -
<PAGE>

Subsidiary is bound or to which any of the properties or assets of the Company
or any Subsidiary is subject (each, a "MATERIAL CONTRACT"). Except as set forth
in the Select SEC Documents, none of the Company, its Subsidiaries or, to the
best knowledge of the Company, any of the other parties thereto is in breach or
violation of any Material Contract, which breach or violation could have a
Material Adverse Effect. For purposes of this Agreement, "SELECT SEC DOCUMENTS"
means the Company's (A) Proxy Statement for its most recent Annual Meeting, (B)
Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (the
"2003 ANNUAL REPORT"), and (C) all Current Reports on Form 6-K filed since
December 31, 2003.

      (h)   Internal Accounting Controls. The Company and each of its
Subsidiaries maintains a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences. The Company has established disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company
and designed such disclosures controls and procedures to ensure that material
information relating to the Company, including its Subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which the Company's Annual Report on Form 20-F or Current Reports
on Form 6-K, as the case may be, is being prepared. The Company's certifying
officers have evaluated the effectiveness of the Company's controls and
procedures as of a date within 90 days prior to the filing date of the 2003
Annual Report and the Company's most recently filed Current Report on Form 6-K
(each such date, an "EVALUATION DATE"). The Company presented in the 2003 Annual
Report and its most recently filed Current Report on Form 6-K the conclusions of
the certifying officers about the effectiveness of the disclosure controls and
procedures based on their evaluations as of the respective Evaluation Date.
Since the Evaluation Date for the 2003 Annual Report, there have been no
significant changes in the Company's internal controls (as such term is defined
in Item 307(b) of Regulation S-K under the Exchange Act) or, to the Company's
knowledge, in other factors that could significantly affect the Company's
internal controls.

      (i)   Absence of Certain Changes. Except as set forth in the Select SEC
Documents, since December 31, 2003, there has been no material adverse change
and no material adverse development in the business, properties, operations,
prospects, financial condition or results of operations of the Company and its
Subsidiaries, taken as a whole. The Company has not taken any steps, and does
not currently expect to take any steps, to seek protection pursuant to any
bankruptcy or receivership law, nor does the Company or any of its Subsidiaries
have any knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings with respect to the Company or any of its
Subsidiaries.

      (j)   Transactions With Affiliates. Except as set forth in the Select SEC
Documents, none of the officers, directors, or employees of the Company or any
of its Subsidiaries is presently a party to any transaction with the Company or
any of its Subsidiaries (other than for ordinary course services solely in their
capacity as officers, directors or employees), including any contract, agreement
or other arrangement providing for the furnishing of services to or by,

                                     - 8 -
<PAGE>

providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any such officer, director or employee or any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has an ownership interest of five percent or more or is an
officer, director, trustee or partner.

      (k)   Absence of Litigation. Except as disclosed in the Select SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, self-regulatory organization
or body (including, without limitation, the SEC or the NASD) pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company, any of its Subsidiaries, or any of their respective
directors or officers in their capacities as such. There are no facts which, if
known by a potential claimant or governmental authority, could give rise to a
claim or proceeding which, if asserted or conducted with results unfavorable to
the Company or any of its Subsidiaries, could reasonably be expected to have a
Material Adverse Effect.

      (l)   Intellectual Property. Each of the Company and its Subsidiaries owns
or is duly licensed (and, in such event, has the unfettered right to grant
sublicenses) to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright applications,
licenses, permits, inventions, discoveries, processes, scientific, technical,
engineering and marketing data, object and source codes, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) and other similar rights and
proprietary knowledge (collectively, "INTANGIBLES") necessary for the conduct of
its business as now being conducted and as presently contemplated to be
conducted in the future. Section 3(l) of the Disclosure Schedule sets forth a
list of all Intangibles owned and/or used by the Company in its business. To the
knowledge of the Company and its Subsidiaries, neither the Company nor any
Subsidiary of the Company infringes or is in conflict with any right of any
other person with respect to any third party Intangibles. Neither the Company
nor any of its Subsidiaries has received written notice of any pending conflict
with or infringement upon such third party Intangibles. Neither the Company nor
any of its Subsidiaries has entered into any consent agreement, indemnification
agreement, forbearance to sue or settlement agreement with respect to the
validity of the Company's or its Subsidiaries' ownership of or right to use its
Intangibles and there is no reasonable basis for any such claim to be
successful. The Intangibles are valid and enforceable and no registration
relating thereto has lapsed, expired or been abandoned or canceled or is the
subject of cancellation or other adversarial proceedings, and all applications
therefor are pending and in good standing. The Company and its Subsidiaries have
complied, in all material respects, with their respective contractual
obligations relating to the protection of the Intangibles used pursuant to
licenses. No person is infringing on or violating the Intangibles owned or used
by the Company or its Subsidiaries.

      (m)   Title. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and merchantable title to all
personal property owned by them that is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as do not materially affect the value of such property and
do not materially interfere with the use made and proposed to be made of such
property by the Company and its Subsidiaries. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable

                                     - 9 -
<PAGE>

leases with such exceptions as are not material and do not materially interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.

      (n)   Tax Status. Except as set forth in the Select SEC Documents, the
Company and each of its Subsidiaries has made or filed all Canadian, foreign,
provincial and local income and all other tax returns, reports and declarations
required by any jurisdiction to which it is subject (unless and only to the
extent that the Company and each of its Subsidiaries has set aside on its books
provisions reasonably adequate for the payment of all unpaid and unreported
taxes) and has paid all taxes and other governmental assessments and charges
that are material in amount, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith and has set
aside on its books provisions reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim. The Company has not executed a
waiver with respect to any statute of limitations relating to the assessment or
collection of any Canadian, foreign, provincial or local tax. None of the
Company's tax returns is presently being audited by any taxing authority.

      (o)   Key Employees. Each of the Company's directors and officers and any
Key Employee (as defined below) is currently serving the Company in the capacity
disclosed in the Select SEC Documents. No Key Employee is, or is now expected to
be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its Subsidiaries to any material liability with respect to any
of the foregoing matters. No Key Employee has, to the knowledge of the Company
and its Subsidiaries, any intention to terminate or limit his employment with,
or services to, the Company or any of its Subsidiaries, nor is any such Key
Employee subject to any constraints which would cause such employee to be unable
to devote his full time and attention to such employment or services. For
purposes of this Agreement, "KEY EMPLOYEE" means the persons listed in Section
3(o) of the Disclosure Schedule and any individual who assumes or performs any
of the duties of a Key Employee.

      (p)   Employee Relations. Neither the Company nor any of its Subsidiaries
is involved in any material union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. The Company
and its Subsidiaries believe that their relations with their employees are good.
No executive officer (as defined in Rule 501(f) of the Securities Act) has
notified the Company that such officer intends to leave the Company or otherwise
terminate such officer's employment with the Company. The Company and its
Subsidiaries are in compliance with all federal, state, local and foreign laws
and regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours, except where failure to be in
compliance would not, either individually or in the aggregate, result in a
Material Adverse Effect.

      (q)   Insurance. The Company and each of its Subsidiaries has in force
fire, casualty, product liability and other insurance policies, with extended
coverage, sufficient in amount to allow it to replace any of its material
properties or assets which might be damaged or destroyed

                                     - 10 -
<PAGE>

or sufficient to cover liabilities to which the Company may reasonably become
subject, and such types and amounts of other insurance with respect to its
business and properties, on both a per occurrence and an aggregate basis, as are
customarily carried by persons engaged in the same or similar business as the
Company. No default or event has occurred that could give rise to a default
under any such policy.

      (r)   Environmental Matters. There is no environmental litigation or other
environmental proceeding pending or, to the knowledge of the Company or any of
its Subsidiaries, threatened by any governmental regulatory authority or others
with respect to the current or any former business of the Company or any of its
Subsidiaries or any partnership or joint venture currently or at any time
affiliated with the Company or any of its Subsidiaries. No state of facts exists
as to environmental matters or Hazardous Substances (as defined below) that
involves the reasonable likelihood of a material capital expenditure by the
Company or any of its Subsidiaries that may otherwise have a Material Adverse
Effect. No Hazardous Substances have been treated, stored or disposed of, or
otherwise deposited, in or on the properties owned or leased by the Company or
any of its Subsidiaries or by any partnership or joint venture currently or at
any time affiliated with the Company or any of its Subsidiaries in violation of
any applicable environmental laws. The environmental compliance programs of the
Company and each of its Subsidiaries comply in all respects with all
environmental laws, whether foreign, federal, state, provincial or local,
currently in effect. For purposes of this Agreement, "HAZARDOUS SUBSTANCES"
means any substance, waste, contaminant, pollutant or material that has been
determined by any governmental authority to be capable of posing a risk of
injury to health, safety, property or the environment.

      (s)   Solvency. Based on the financial condition of the Company as of the
Closing Date, (i) the fair saleable value of the Company's assets exceeds the
amount that will be required to be paid on or in respect of the Company's
existing debts and other liabilities (including known contingent liabilities) as
they mature; (ii) the Company's assets do not constitute unreasonably small
capital to carry on its business for the current fiscal year as now conducted
and as proposed to be conducted including its capital needs taking into account
the particular capital requirements of the business conducted by the Company,
and projected capital requirements and capital availability thereof; and (iii)
the current cash flow of the Company, together with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into account
all anticipated uses of the cash, would be sufficient to pay all amounts on or
in respect of its debt when such amounts are required to be paid. The Company
does not intend to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash payable on or in
respect of its debt).

      (t)   Listing. The Common Stock is currently listed for trading on the
Nasdaq SmallCap Market (the "SMALLCAP MARKET"). The Company is not in violation
of the listing requirements of the SmallCap Market, does not reasonably
anticipate that the Common Stock will be delisted by the SmallCap Market for the
foreseeable future, and has not received any notice regarding the possible
delisting of the Common Stock from the SmallCap Market. The Company has secured
the listing of the Warrant Shares on the SmallCap Market and on each other
national securities exchange, automated quotation system or over-the-counter
market upon which shares of Common Stock are currently listed (subject to
official notice of issuance).

                                     - 11 -
<PAGE>

      (u)   Form F-3 Eligibility. The Company is eligible to register the resale
of its Common Stock on a registration statement on Form F-3 under the Securities
Act. There exist no facts or circumstances that would prohibit or delay the
preparation and filing of a registration statement on Form F-3 with respect to
the Registrable Securities (as defined in the Registration Rights Agreement).
The Company has no basis to believe that its past or present independent public
auditors will withhold their consent to the inclusion, or incorporation by
reference, of their audit opinion concerning the Company's financial statements
that are included in the Registration Statement required to be filed pursuant to
the Registration Rights Agreement.

      (v)   Anti-Takeover Provisions. The Company and its board of directors
have taken all necessary action, if any, in order to render inapplicable any
control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under its Certificate of Incorporation or the laws of the jurisdiction of its
incorporation or other laws or regulations which are or could become applicable
to any Purchaser as a result of the transactions contemplated by this Agreement,
including, without limitation, the Company's issuance of the Securities and any
and all Purchaser's ownership of the Securities.

      (w)   Acknowledgment Regarding The Purchaser's Purchase of the Securities.
The Company acknowledges and agrees that the Purchaser is acting solely in the
capacity of arm's length purchaser with respect to this Agreement and the other
Transaction Documents and the transactions contemplated hereby and thereby, and
that no Purchaser is (i) an officer or director of the Company, (ii) an
"affiliate" of the Company (as defined in Rule 144 under the Securities Act
(including any successor rule, "RULE 144")) or (iii) a "beneficial owner" of
more than 5% of the Common Stock (as defined for purposes of Rule 13d-3 of the
Exchange Act). The Company further acknowledges that no Purchaser is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement or the other Transaction Documents and the
transactions contemplated hereby and thereby, and any advice given by a
Purchaser or any of its representatives or agents in connection with this
Agreement or the other Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to the Purchaser's purchase of the
Securities. The Company further represents to the Purchaser that the Company's
decision to enter into this Agreement and the other Transaction Documents has
been based solely on the independent evaluation by the Company and its
representatives.

      (x)   No General Solicitation or Integrated Offering. Neither the Company
nor any distributor participating on the Company's behalf in the transactions
contemplated hereby (if any) nor any person acting for the Company, or any such
distributor, has conducted any "general solicitation" (as such term is defined
in Regulation D) with respect to any of the Securities being offered hereby.
Neither the Company nor any of its affiliates, nor any person acting on its or
their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would require registration of the Securities being offered hereby under the
Securities Act or cause this offering of Securities to be integrated with any
prior offering of securities of the Company for purposes of the Securities Act,
which result of such integration would require registration under the Securities
Act, or any applicable stockholder approval provisions.

                                     - 12 -
<PAGE>

      (y)   No Brokers. The Company has taken no action that would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments by any Purchaser relating to this Agreement or the transactions
contemplated hereby.

      (z)   Acknowledgment Regarding Securities. The number of Warrant Shares
issuable upon exercise of the Initial Warrants and the Series C Warrants may
increase in certain circumstances. The Company's directors and executive
officers have studied and fully understand the nature of the Securities being
sold hereunder. The Company acknowledges that its obligation to issue the
Warrant Shares upon the exercise of the Initial Warrants and the Series C
Warrants in accordance with the terms thereof is absolute and unconditional,
regardless of the dilution that such issuance may have on the ownership
interests of other stockholders and the availability of remedies provided for in
any of the Transaction Documents relating to a failure or refusal to issue
Warrant Shares. Taking the foregoing into account, the Company's Board of
Directors has determined in its good faith business judgment that the issuance
of the Units hereunder and the consummation of the other transactions
contemplated hereby are in the best interests of the Company and its
stockholders.

      (aa)  Blue Sky Laws. The Company has, prior to the date hereof, taken such
action as the Company reasonably believes is necessary to qualify the Securities
for sale to the Purchaser pursuant to this Agreement under applicable securities
or "blue sky" laws of the provinces of Canada and the states of the United
States or has obtained an exemption therefrom, and has provided evidence of any
such action so taken to the Purchaser.

      (bb)  Disclosure. All information relating to or concerning the Company
and/or any of its Subsidiaries set forth in this Agreement or provided to the
Purchaser pursuant to Section 2(d) hereof or otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
exists with respect to the Company or its Subsidiaries or their respective
businesses, properties, prospects, operations or financial conditions, which has
not been publicly disclosed but, under applicable law, rule or regulation, would
be required to be disclosed by the Company in a registration statement filed on
the date hereof by the Company under the Securities Act with respect to a
primary issuance of the Company's securities.

4.    COVENANTS.

      (a)   Form D; Blue Sky Laws. The Company shall file with the SEC a Form D
with respect to the Securities as required under Regulation D and provide a copy
thereof to the Purchaser promptly after such filing. On the business day
immediately following the date hereof, the Company shall file a Form 6-K with
the SEC concerning this Agreement and the transactions contemplated hereby,
which Form 6-K shall attach this Agreement and its Exhibits as exhibits to such
Form 6-K (the "6-K FILING"). The Purchaser shall be consulted by the Company in
connection with such 6-K Filing prior to its release and shall be provided with
a copy thereof and must provide specific consent to the use of its name in
connection therewith. From and after the 6-K Filing, the Company shall insure
that no Purchaser shall be in possession of any material nonpublic information
received from the Company, any of its Subsidiaries or any

                                     - 13 -
<PAGE>

of its respective officers, directors, employees or agents, that is not
disclosed in the 6-K Filing. The Company shall not, and shall cause each of its
Subsidiaries and its and each of their respective officers, directors, employees
and agents not to, provide any Purchaser with any material nonpublic information
regarding the Company or any of its Subsidiaries from and after the 6-K Filing
without the express written consent of the Purchaser; provided, however, that if
the Purchaser exercises its rights under Section 4(k) hereof it shall be deemed
to have given such express written consent. In the event of a breach of the
foregoing covenant by the Company, any of its Subsidiaries or any of its or
their respective officers, directors, employees and agents, in addition to any
other remedy provided herein or in the other Transaction Documents, a Purchaser
shall have the right to make a public disclosure, in the form of a press
release, public advertisement or otherwise, of such material nonpublic
information without the prior approval by the Company, its Subsidiaries or any
of its or their respective officers, directors, employees or agents. No
Purchaser shall have any liability to the Company, its Subsidiaries or any of
its or their respective officers, directors, employees, shareholders or agents
for any such disclosure. Subject to the foregoing, neither the Company nor any
Purchaser shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Purchaser, to make
any press release or other public disclosure with respect to such transactions
(i) in substantial conformity with the 6-K Filing and contemporaneously
therewith and (ii) as is required by applicable law and regulations (provided
that in the case of clause (i) the Purchaser shall be consulted by the Company
in connection with any such press release or other public disclosure prior to
its release).

      (b)   Reporting Status. So long as the Purchaser (or any of its
affiliates) beneficially owns any of the Securities, the Company shall timely
file all reports required to be filed with the SEC pursuant to the Exchange Act,
and the Company shall not terminate its status as an issuer required to file
reports under the Exchange Act even if the Exchange Act or the rules and
regulations thereunder would permit such termination. In addition, the Company
shall take all actions necessary to meet the "registrant eligibility"
requirements set forth in the general instructions to Form F-3 or any successor
form thereto, to continue to be eligible to register the resale of its Common
Stock on a registration statement on Form F-3 under the Securities Act.

      (c)   Use of Proceeds. The Company shall use the proceeds from the sale
and issuance of the Units for general corporate purposes and working capital.
Such proceeds shall not be used to (i) pay dividends; (ii) pay for any increase
in executive compensation or make any loan or other advance to any officer,
employee, shareholder, director or other affiliate of the Company, without the
express approval of the Board of Directors acting in accordance with past
practice; (iii) purchase debt or equity securities of any entity (including
redeeming the Company's own securities), except for (A) evidences of
indebtedness issued or fully guaranteed by the United States of America and
having a maturity of not more than one year from the date of acquisition, (B)
certificates of deposit, notes, acceptances and repurchase agreements having a
maturity of not more than one year from the date of acquisition issued by a bank
organized in the United States having capital, surplus and undivided profits of
at least $500,000,000, (C) the highest-rated commercial paper having a maturity
of not more than one year from the date of acquisition, and (D) "Money Market"
fund shares, or money market accounts fully insured by the Federal Deposit
Insurance Corporation and sponsored by banks and other financial institutions,
provided that the investments consist principally of the types of investments
described in clauses (A), (B),

                                     - 14 -
<PAGE>

or (C) above; or (iv) make any investment not directly related to the current
business of the Company.

      (d)   Financial Information. So long as the Purchaser (or any of its
affiliates) beneficially owns any of the Securities, the Company shall send (via
electronic transmission or otherwise) the following reports to each the
Purchaser: (i) within ten days after the filing with the SEC, a copy of its
Annual Report on Form 20-F, its proxy statements and any Current Reports on Form
6-K; and (ii) within one day after release, copies of all press releases issued
by the Company or any of its Subsidiaries.

      (e)   Reservation of Shares. The Company currently has authorized and
reserved for the purpose of issuance 1,086,957 shares of Common Stock to provide
for the full exercise of the Initial Warrants and the Series C Warrants and the
issuance of the Warrant Shares in connection therewith and as otherwise required
by the Initial Warrants, the Series C Warrants and the Registration Rights
Agreement (collectively, the "ISSUANCE OBLIGATIONS"). In the event such number
of shares becomes insufficient to satisfy the Issuance Obligations, the Company
shall take all necessary action to authorize and reserve such additional shares
of Common Stock necessary to satisfy the Issuance Obligations.

      (f)   Listing. So long as the Purchaser (or any of its affiliates)
beneficially owns any of the Securities, the Company shall maintain the listing
of all Warrant Shares from time to time issuable upon exercise of the Initial
Warrants and the Series C Warrants on each national securities exchange,
automated quotation system or electronic bulletin board on which shares of
Common Stock are currently listed. The Company shall use its best efforts to
continue the listing and trading of its Common Stock on the SmallCap Market or
on the Nasdaq National Market (the "NATIONAL MARKET"), the New York Stock
Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") and shall
comply in all respects with the reporting, filing and other obligations under
the bylaws or rules of the National Association of Securities Dealers, Inc. (the
"NASD"), such exchanges, or such electronic system, as applicable. The Company
shall promptly provide to the Purchaser copies of any notices it receives
regarding the continued eligibility of the Common Stock for trading on any
securities exchange or automated quotation system on which securities of the
same class or series issued by the Company are then listed or quoted, if any.

      (g)   Corporate Existence. So long as the Purchaser (or any of its
affiliates) beneficially owns any of the Securities, the Company shall maintain
its corporate existence, and in the event of a merger, consolidation or sale of
all or substantially all of the Company's assets, the Company shall ensure that
the surviving or successor entity in such transaction (i) assumes the Company's
obligations under this Agreement and the other Transaction Documents and the
agreements and instruments entered into in connection herewith and therewith
regardless of whether or not the Company would have had a sufficient number of
shares of Common Stock authorized and available for issuance in order to effect
the exercise in full of all Initial Warrants and the Series C Warrants
outstanding as of the date of such transaction and (ii) except in the event of a
merger, consolidation of the Company into any other corporation, or the sale or
conveyance of all or substantially all of the assets of the Company where the
consideration consists solely of cash, the surviving or successor entity is a
publicly traded corporation whose

                                     - 15 -
<PAGE>

common stock is listed for trading on the SmallCap Market, the National Market,
the NYSE or the AMEX.

      (h)   No Integrated Offerings. The Company shall not make any offers or
sales of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered or sold hereunder under the
Securities Act or cause this offering of the Securities to be integrated with
any other offering of securities by the Company for purposes of any stockholder
approval provision applicable to the Company or its securities.

      (i)   Legal Compliance. The Company shall conduct its business and the
business of its Subsidiaries in compliance with all laws, ordinances or
regulations of governmental entities applicable to such businesses, except where
the failure to do so would not have a Material Adverse Effect.

      (j)   Information. So long as the Purchaser (or any of its affiliates)
beneficially owns any of the Securities, the Company shall furnish to the
Purchaser:

            (i)   concurrently with the filing with the SEC of its annual
reports on Form 20-F, a certificate of the President, a Vice President or a
senior financial officer of the Company stating that, based upon such
examination or investigation and review of this Agreement as in the opinion of
the signer is necessary to enable the signer to express an informed opinion with
respect thereto, neither the Company nor any of its Subsidiaries is or has
during such period been in default in the performance or observance of any of
the terms, covenants or conditions hereof, or, if the Company or any of its
Subsidiaries shall be or shall have been in default, specifying all such
defaults, and the nature and period of existence thereof, and what action the
Company or such Subsidiary has taken, is taking or proposes to take with respect
thereto; and

            (ii)  the information the Company must deliver to any holder or to
any prospective transferee of Securities in order to permit the sale or other
transfer of such Securities pursuant to Rule 144A of the SEC or any similar rule
then in effect.

The Company shall keep at its principal executive office a true copy of this
Agreement (as at the time in effect), and cause the same to be available for
inspection at such office during normal business hours by any holder of
Securities or any prospective transferee of Securities designated by a holder
thereof.

      (k)   Inspection of Properties and Books. So long as the Purchaser (or any
of its affiliates) beneficially owns any of the Securities, the Purchaser and
its representatives and agents (collectively, the "INSPECTORS") shall have the
right, at the Purchaser's expense, to visit and inspect any of the properties of
the Company and of its Subsidiaries, to examine the books of account and records
of the Company and of its Subsidiaries, to make or be provided with copies and
extracts therefrom, to discuss the affairs, finances and accounts of the Company
and of its Subsidiaries with, and to be advised as to the same by, its and their
officers, employees and independent public accountants (and by this provision
the Company authorizes such accountants to discuss such affairs, finances and
accounts, whether or not a representative of the Company is present) all at such
reasonable times and intervals and to such reasonable extent as the Purchaser
may desire; provided, however, that each Inspector shall hold in confidence and
shall not make

                                     - 16 -
<PAGE>

any disclosure (except to the Purchaser) of any such information which the
Company determines in good faith to be confidential, and of which determination
the Inspectors are so notified, unless (i) the disclosure of such information is
necessary to avoid or correct a misstatement or omission in any Registration
Statement filed pursuant to the Registration Rights Agreement, (ii) the release
of such information is ordered pursuant to a subpoena or other order from a
court or government body of competent jurisdiction, or (iii) such information
has been made generally available to the public other than by disclosure in
violation of this or any other agreement. The Purchaser agrees that it shall,
upon learning that disclosure of such information is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the information deemed confidential.

      (l)   Shareholders Rights Plan. No claim shall be made or enforced by the
Company or any other person that the Purchaser is an "Acquiring Person" under
any shareholders rights plan or similar plan or arrangement in effect or
hereafter adopted by the Company, or that the Purchaser could be deemed to
trigger the provisions of any such plan or arrangement, by virtue of receiving
Securities under this Agreement or any other Transaction Documents or under any
other agreement between the Company and the Purchaser.

      (m)   Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by the Purchaser in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and the Purchaser effecting a pledge
of Securities shall not be required to provide the Company with any notice
thereof or otherwise make any delivery to the Company pursuant to this Agreement
or any other Transaction Document. The Company shall execute and deliver such
documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by the Purchaser.

      (n)   Variable Securities. So long as the Purchaser (or any of its
affiliates) beneficially owns any of the Securities, the Company shall not,
without first obtaining the written approval of the Purchaser (which approval
may be given or withheld by the Purchaser in its sole and absolute discretion),
issue or sell any rights, warrants or options to subscribe for or purchase
Common Stock, or any other securities directly or indirectly convertible into or
exchangeable or exercisable for Common Stock, at an effective conversion,
exchange or exercise price that varies or may vary with the market price of the
Common Stock, including by way of one or more reset(s) to any fixed price.

      (o)   Expenses. On the date hereof, the Company has paid to the Purchaser
reimbursement for the out-of-pocket expenses reasonably incurred by the
Purchaser, its affiliates and its or their advisors in connection with the
negotiation, preparation, execution and delivery of this Agreement and the other
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby, including, without limitation, the Purchaser's and its
respective affiliates' and advisors' reasonable due diligence and attorneys'
fees and expenses (the "EXPENSES"); provided, however, that the Purchaser shall
be permitted, in its discretion, to deduct all of its Expenses not previously
paid for by the Company from the Purchase Price payable by the Purchaser
hereunder; and provided, further, that the aggregate amount of the

                                     - 17 -
<PAGE>

Expenses payable to the Purchaser shall not exceed $30,000 (the "EXPENSE CAP,")
unless prior approval is obtained from the Company. In addition, from time to
time thereafter, upon the Purchaser's written request, the Company shall pay to
the Purchaser such additional Expenses (not to exceed, in the aggregate
(together with the Expenses already paid) the Expense Cap), if any, not covered
by such payment, in each case to the extent reasonably incurred by the
Purchaser, its affiliates or its or their advisors in connection with the
negotiation, preparation, execution and delivery of this Agreement and the other
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby.

5.    SECURITIES TRANSFER MATTERS.

      (a)   Exercise. Upon the date hereof, and upon exercise of the Initial
Warrants or the Series C Warrants by any person, (i) if the DTC Transfer
Conditions (as defined below) are satisfied, the Company shall cause its
transfer agent to electronically transmit all Common Stock and Warrant Shares
(as the case may be) by crediting the account of such person or its nominee with
the Depository Trust Company ("DTC") through its Deposit Withdrawal Agent
Commission system; or (ii) if the DTC Transfer Conditions are not satisfied, the
Company shall issue and deliver, or instruct its transfer agent to issue and
deliver, certificates (subject to the legend and other applicable provisions
hereof, the Initial Warrants and the Series C Warrants), registered in the name
of such person or its nominee, physical certificates representing the Common
Stock and Warrant Shares, as applicable. Even if the DTC Transfer Conditions are
satisfied, any person exercising Warrants may instruct the Company to deliver to
such person or its nominee physical certificates representing the Warrant
Shares, as applicable, in lieu of delivering such shares by way of DTC Transfer.
For purposes of this Agreement, "DTC TRANSFER CONDITIONS" means that (A) the
Company's transfer agent is participating in the DTC Fast Automated Securities
Transfer program and (B) the certificates for the Warrant Shares required to be
delivered do not bear a legend and the person effecting such conversion or
exercise is not then required to return such certificate for the placement of a
legend thereon.

      (b)   Transfer or Resale. The Purchaser understands that (i) except as
provided in the Registration Rights Agreement, the sale or resale of the
Securities have not been and are not being registered under the Securities Act
or any state securities laws, and the Securities may not be transferred unless
(A) the transfer is made pursuant to and as set forth in an effective
registration statement under the Securities Act covering the Securities; or (B)
the Purchaser shall have delivered to the Company an opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; or (C) sold under and in compliance with Rule 144; or (D) sold or
transferred to an affiliate of the Purchaser that agrees to sell or otherwise
transfer the Securities only in accordance with the provisions of this Section
5(b); and (ii) neither the Company nor any other person is under any obligation
to register such Securities under the Securities Act or any state securities
laws (other than pursuant to the terms of the Registration Rights Agreement).
Notwithstanding the foregoing or anything else contained herein to the contrary,
the Securities may be pledged as collateral in connection with a bona fide
margin account or other lending arrangement, provided such pledge is consistent
with applicable laws, rules and regulations.

                                     - 18 -
<PAGE>

      (c)   Legends. The Purchaser understands that the Initial Warrants and the
Series C Warrants, and until such time as the shares of Common Stock and Warrant
Shares have been registered under the Securities Act (including registration
pursuant to Rule 416 thereunder) as contemplated by the Registration Rights
Agreement or otherwise may be sold by the Purchaser under Rule 144, the
certificates for the Common Stock and Warrant Shares may bear a restrictive
legend in substantially the following form:

            The securities represented by this certificate have not been
            registered under the Securities Act of 1933, as amended, or the
            securities laws of any state of the United States or in any other
            jurisdiction. The securities represented hereby may not be offered,
            sold or transferred in the absence of an effective registration
            statement for the securities under applicable securities laws unless
            offered, sold or transferred pursuant to an available exemption from
            the registration requirements of those laws.

      The Company shall, immediately prior to a registration statement covering
the Securities (including, without limitation, the Registration Statements
contemplated by the Registration Rights Agreement) being declared effective,
deliver to its transfer agent an opinion letter of counsel, opining that at any
time such registration statement is effective, the transfer agent shall issue,
in connection with the issuance of the shares of Common Stock and Warrant
Shares, certificates representing such shares of Common Stock and Warrant Shares
without the restrictive legend above, provided such shares of Common Stock and
Warrant Shares are to be sold pursuant to the prospectus contained in such
registration statement. Upon receipt of such opinion, the Company shall cause
the transfer agent to confirm, for the benefit of the holders, that no further
opinion of counsel is required at the time of transfer in order to issue such
shares without such restrictive legend.

      The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if (i) the sale of such Security is registered under the Securities Act
(including registration pursuant to Rule 416 thereunder); (ii) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Security may be made without registration
under the Securities Act; or (iii) such holder provides the Company with
reasonable assurances that such Security can be sold under Rule 144. In the
event the above legend is removed from any Security and thereafter the
effectiveness of a registration statement covering such Security is suspended or
the Company determines that a supplement or amendment thereto is required by
applicable securities laws, then upon reasonable advance written notice to the
Purchaser the Company may require that the above legend be placed on any such
Security that cannot then be sold pursuant to an effective registration
statement or under Rule 144 and the Purchaser shall cooperate in the replacement
of such legend. Such legend shall thereafter be removed when such Security may
again be sold pursuant to an effective registration statement or under Rule 144.

      (d)   Transfer Agent Instruction. Upon compliance by any Purchaser with
the provisions of this Section 5 with respect to the transfer of any Securities,
the Company shall permit the transfer of such Securities and, in the case of the
transfer of shares of Common Stock

                                     - 19 -
<PAGE>

or Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates (or effect a DTC Transfer) in such name and in such denominations
as specified by the Purchaser. The Company shall not give any instructions to
its transfer agent with respect to the Securities, other than any permissible or
required instructions provided in this Section 5, and the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement.

6.    LOCK UP. Until the 60th day after the date on which the First Registration
Statement (as that term is defined in the Registration Rights Agreement) has
been declared effective by the SEC, the Company will not conduct, without the
prior written consent of the Purchaser or its designees, any equity or
equity-related financing involving or granting rights relating to the
registration of Common Stock or resale registration rights within 12 months
following the date hereof.

7.    GOVERNING LAW; MISCELLANEOUS.

      (a)   Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company and the
Purchaser irrevocably consent to the jurisdiction of the United States federal
courts and the state courts located in the County of New Castle, State of
Delaware, in any suit or proceeding based on or arising under this Agreement and
irrevocably agree that all claims in respect of such suit or proceeding may be
determined in such courts. The Company irrevocably waives the defense of an
inconvenient forum to the maintenance of such suit or proceeding in such forum.
The Company further agrees that service of process upon the Company mailed by
first class mail shall be deemed in every respect effective service of process
upon the Company in any such suit or proceeding. Nothing herein shall affect the
right of the Purchaser to serve process in any other manner permitted by law.
The Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.

      (b)   Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed execution page(s)
hereof to be physically delivered to the other party within five days of the
execution hereof, provided that the failure to so deliver any manually executed
execution page shall not affect the validity or enforceability of this
Agreement.

      (c)   Construction. Whenever the context requires, the gender of any word
used in this Agreement includes the masculine, feminine or neuter, and the
number of any word includes the singular or plural. Unless the context otherwise
requires, all references to articles and sections refer to articles and sections
of this Agreement, and all references to schedules are to schedules attached
hereto, each of which is made a part hereof for all purposes. The descriptive
headings

                                     - 20 -
<PAGE>

of the several articles and sections of this Agreement are inserted for purposes
of reference only, and shall not affect the meaning or construction of any of
the provisions hereof.

      (d)   Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.

      (e)   Entire Agreement; Amendments. This Agreement and the other
Transaction Documents (including any schedules and exhibits hereto and thereto)
contain the entire understanding of the Purchaser, the Company, their affiliates
and persons acting on their behalf with respect to the matters covered herein
and therein and, except as specifically set forth herein or therein, neither the
Company nor the Purchaser makes any representation, warranty, covenant or
undertaking with respect to such matters. No provision of this Agreement may be
waived other than by an instrument in writing signed by the party to be charged
with enforcement, and no provision of this Agreement may be amended other than
by an instrument in writing signed by the Company and the Purchaser.

      (f)   Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be in writing and sent by certified or registered
mail (return receipt requested) or delivered personally, by nationally
recognized overnight carrier or by confirmed facsimile transmission, and shall
be effective five days after being placed in the mail, if mailed, or upon
receipt or refusal of receipt, if delivered personally or by nationally
recognized overnight carrier or confirmed facsimile transmission, in each case
addressed to a party as provided herein. The initial addresses for such
communications shall be as follows, and each party shall provide notice to the
other parties of any change in such party's address:

            (i)   If to the Company:

                  QSound Labs, Inc.
                  400 - 3115 12th Street NE
                  Calgary, AB T2E 7J2
                  Telephone: (403) 291-2492
                  Facsimile: (403) 250-1521
                  Attention: David Gallagher

                  with a copy to Joanna Varvos, Esq.
                  as above

                                     - 21 -
<PAGE>

            (ii)  If to the Purchaser:

                  Capital Ventures International
                  c/o Heights Capital Management, Inc.
                  101 California Street
                  Suite 3250
                  San Francisco, CA 94111
                  Telephone: (415) 403-6500
                  Facsimile: (415) 403-6525
                  Attention: Martin Kobinger, Managing Director

      (g)   Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Except as
provided herein, the Company shall not assign this Agreement or any rights or
obligations hereunder. The Purchaser may assign or transfer the Securities
pursuant to the terms of this Agreement and of such Securities, or assign the
Purchaser's rights hereunder to any other person or entity.

      (h)   Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person; provided, however, that Section 4(o) may be enforced by
any Purchaser's affiliates and its or their advisors to the extent the same is
entitled to reimbursement of Expenses pursuant thereto.

      (i)   Survival. The representations and warranties of the Company and the
agreements and covenants set forth in Sections 2, 3, 4, 5, 6 and 7 hereof shall
survive after the date hereof notwithstanding any due diligence investigation
conducted by or on behalf of the Purchaser. Moreover, none of the
representations and warranties made by the Company herein shall act as a waiver
of any rights or remedies the Purchaser may have under applicable U.S. federal
or state securities laws.

      (j)   Publicity. In addition to the requirements set forth in Section
4(a), and not as a limitation:

            (i)   No later than 9:00 pm Eastern Standard Time on December 17,
2004, the Company shall issue a press release regarding this Agreement and the
transactions contemplated hereby.

            (ii)  The Purchaser shall have the right to approve before issuance
such press release, any SEC or, to the extent applicable, NASD filings, or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Purchaser, to make any press release or SEC or, to the extent
applicable, NASD filings with respect to such transactions as is required by
applicable law and regulations (although the Purchaser shall be consulted by the
Company in connection with any such press release and filing prior to its
release and shall be provided with a copy thereof and must provide specific
consent to the use of its name in connection therewith).

                                     - 22 -
<PAGE>

      (k)   Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

      (l)   Indemnification. In consideration of the Purchaser's execution and
delivery of this Agreement and the other Transaction Documents and purchase of
the Securities hereunder, and in addition to all of the Company's other
obligations under this Agreement and the other Transaction Documents, from and
after the date hereof, the Company shall defend, protect, indemnify and hold
harmless the Purchaser and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or
indirect investors and any of the foregoing persons' agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement, collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (i)
any misrepresentation or breach of any representation or warranty made by the
Company in this Agreement, any other Transaction Document or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement, any other Transaction Document or any other certificate, instrument
or document contemplated hereby or thereby or (iii) any cause of action, suit,
claim, order, proceeding or process brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) and arising out of or resulting from (A) the execution,
delivery, performance or enforcement of this Agreement, any other Transaction
Document or any other certificate, instrument or document contemplated hereby or
thereby, (B) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance and sale of the
Securities, (C) any disclosure made by the Purchaser pursuant to Section 4(a) or
4(k) hereof, or (D) the status of the Purchaser or holder of the Securities as
an investor in the Company. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. Except as otherwise set
forth herein, the mechanics and procedures with respect to the rights and
obligations under this Section 7(l) shall be the same as those set forth in
Section 6(c) of the Registration Rights Agreement.

      (m)   Payment Set Aside. To the extent that the Company makes a payment or
payments to the Purchaser hereunder or pursuant to any of the other Transaction
Documents or the Purchaser enforces or exercises its rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration

                                     - 23 -
<PAGE>

the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

      (n)   Joint Participation in Drafting. Each party to this Agreement has
participated in the negotiation and drafting of this Agreement and the other
Transaction Documents. As such, the language used herein and therein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any party to
this Agreement.

      (o)   Remedies. No provision of this Agreement or any other Transaction
Document providing for any remedy to the Purchaser shall limit any other remedy
which would otherwise be available to the Purchaser at law, in equity or
otherwise. Nothing in this Agreement or any other Transaction Document shall
limit any rights the Purchaser may have under any applicable Canadian,
provincial, U.S. federal or state securities laws with respect to the investment
contemplated hereby. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Purchaser by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
hereunder (including, but not limited to, its obligations pursuant to Section 5
hereof) will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Agreement (including, but not
limited to, its obligations pursuant to Section 5 hereof), that the Purchaser
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer of the
Securities, without the necessity of showing economic loss and without any bond
or other security being required.

      (p)   Knowledge. As used in this Agreement, the term "knowledge" of any
person or entity shall mean and include (i) actual knowledge and (ii) that
knowledge which a reasonably prudent business person could have obtained in the
management of his or her business affairs after making due inquiry and
exercising due diligence which a prudent business person should have made or
exercised, as applicable, with respect thereto.

                  [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]

                                     - 24 -
<PAGE>

      IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.

QSOUND LABS, INC.

By:   __________________________________________________
      Name:
      Title:

CAPITAL VENTURES INTERNATIONAL

      By:   Heights Capital Management, Inc.,
            its authorized agent

By:   __________________________________________________
      Name:
      Title:

                [SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]

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