Document:

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                                                                    EXHIBIT 4.01

                                  FORM OF NOTE

THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"), TO A NOMINEE OF DTC OR BY DTC OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
TO SALOMON SMITH BARNEY HOLDINGS INC. OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO.
OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

No. R-1                                         INITIAL PRINCIPAL AMOUNT
CUSIP [         ]                               REPRESENTED $[               ]
                                                representing [            ] ELKS
                                                ($10 per ELKS)

                       SALOMON SMITH BARNEY HOLDINGS INC.
                  Equity Linked Securities (ELKS(SM)) based upon
                the Common Stock of Motorola, Inc. due [ ], 2003

         Salomon Smith Barney Holdings Inc., a New York corporation (hereinafter
referred to as the "Company", which term includes any successor corporation
under the Indenture herein referred to), for value received and on condition
that this Note is not redeemed by the Company prior to [ ], 2003 (the "Stated
Maturity Date"), hereby promises to pay to CEDE & CO., or its registered
assigns, the Maturity Payment (as defined below), on the Stated Maturity Date.
This Note will bear semi-annual payments of interest, is not subject to any
sinking fund, is not subject to redemption at the option of the Holder thereof
prior to the Stated Maturity Date, and is not subject to the defeasance
provisions of the Indenture.

         Payment of the Maturity Payment with respect to this Note shall be made
upon presentation and surrender of this Note at the corporate trust office of
the Trustee in the Borough of Manhattan, The City and State of New York, in such
coin or currency of the United States as at the time of payment is legal tender
for payment of public and private debts or, if applicable, in the common stock
of Motorola, Inc. ("Motorola").

         This Note is one of the series of Equity Linked Securities based upon
the common stock of Motorola, Inc. due [ ], 2003 (the "ELKS").
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COUPON

         A coupon of $[ ] per ELKS will be paid in cash on [ ], 2002 and a
coupon of $[ ] per ELKS will be paid in cash on [ ], 2003. The [ ], 2002 coupon
will be composed of $[ ] of interest and a partial payment of an option premium
in the amount of $[ ]. The [ ], 2003 coupon will be composed of $[ ] of interest
and a partial payment of an option premium in the amount of $[ ]. Coupon
payments will be payable to the persons in whose names the ELKS are registered
at the close of business on the Business Day preceding each Interest Payment
Date. If an Interest Payment Date falls on a day that is not a Business Day, the
coupon payment to be made on such Interest Payment Date will be made on the next
succeeding Business Day with the same force and effect as if made on such
Interest Payment Date, and no additional interest will accrue as a result of
such delayed payment.

         "Business Day" means any day that is not a Saturday, a Sunday or a day
on which the AMEX or banking institutions or trust companies in the City of New
York are authorized or obligated by law or executive order to close.

         The interest portion of the coupon will represent interest accruing at
a rate of [ ]% per annum from [ ], 2002 or from the most recent Interest Payment
Date to which the interest portion of the coupon has been paid or provided for
until maturity. The interest portion of the coupon will be computed on the basis
of a 360-day year of twelve 30-day months.

PAYMENT AT MATURITY

         On the Stated Maturity Date, Holders of the ELKS will receive for each
ELKS the Maturity Payment described below.

DETERMINATION OF THE MATURITY PAYMENT

         The Maturity Payment for each ELKS equals either:

         -        a number of shares of Motorola common stock equal to the
                  Exchange Rate, if the Trading Price of Motorola common stock
                  on any Trading Day after [ ], 2002 up to and including the
                  third Trading Day before the Stated Maturity Date (whether
                  intra-day or at the close of trading on any day) is less than
                  or equal to [ ], or

         -        $10 in cash.

         In lieu of any fractional share of Motorola common stock otherwise
payable in respect of any ELKS, at the Stated Maturity Date, the Holder of this
Note will receive an amount in cash equal to the value of such fractional share
of Motorola common stock, based on the Closing Price of Motorola common stock on
the third Trading Day before the Stated Maturity Date. The number of full shares
of Motorola common stock, and any cash in lieu of a fractional share, to be
delivered at the Stated Maturity Date to the Holder of this Note will be
calculated based on the aggregate number of ELKS held by such Holder.

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         The "Closing Price" of Motorola common stock (or any other security for
which a Closing Price must be determined) on any date of determination will be
(1) if the common stock is listed on a national securities exchange on that date
of determination, the closing sale price or, if no closing sale price is
reported, the last reported sale price on that date on the principal U.S.
exchange on which the common stock is listed or admitted to trading, (2) if the
common stock is not listed on a national securities exchange on that date of
determination, or if the closing sale price or last reported sale price is not
obtainable (even if the common stock is listed or admitted to trading on such
exchange), and the common stock is quoted on the Nasdaq National Market, the
closing sale price or, if no closing sale price is reported, the last reported
sale price on that date as reported on the Nasdaq, and (3) if the common stock
is not quoted on the Nasdaq on that date of determination or, if the closing
sale price or last reported sale price is not obtainable (even if the common
stock is quoted on the Nasdaq), the last quoted bid price for the common stock
in the over-the-counter market on that date as reported by the OTC Bulletin
Board, the National Quotation Bureau or a similar organization. If no closing
sale price or last reported sale price is available pursuant to clauses (1), (2)
or (3) of the preceding sentence or if there is a Market Disruption Event, the
Closing Price on any date of determination will be the arithmetic mean, as
determined by the calculation agent, of the bid prices of the common stock
obtained from as many dealers in such stock (which may include Salomon Smith
Barney Inc. or any of our other subsidiaries or affiliates), but not exceeding
three such dealers, as will make such bid prices available to the calculation
agent. A security "quoted on the Nasdaq National Market" will include a security
included for listing or quotation in any successor to such system and the term
"OTC Bulletin Board" will include any successor to such service.

         The "Initial Share Price" will equal [ ], the price per share of
Motorola common stock at the market close on [ ], 2002.

         The "Exchange Rate" will equal [ ].

         A "Market Disruption Event" means the occurrence or existence of any
suspension of or limitation imposed on trading (by reason of movements in price
exceeding limits permitted by any exchange or market or otherwise) of, or the
unavailability, through a recognized system of public dissemination of
transaction information, of accurate price, volume or related information in
respect of, (1) the shares of Motorola common stock on any exchange or market,
or (2) any options contracts or futures contracts relating to the shares of
Motorola common stock, or any options on such futures contracts, on any exchange
or market if, in each case, in the determination of the calculation agent, any
such suspension, limitation or unavailability is material.

         A "Trading Day" means a day, as determined by the calculation agent, on
which trading is generally conducted (or was scheduled to have been generally
conducted, but for the occurrence of a Market Disruption Event) on the New York
Stock Exchange, the AMEX, the Nasdaq National Market, the Chicago Mercantile
Exchange and the Chicago Board Options Exchange, and in the over-the-counter
market for equity securities in the United States.

         The "Trading Price" of Motorola common stock (or any other common stock
for which a Trading Price must be determined) on any date of determination will
be (1) if the common stock

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is listed on a national securities exchange on that date of determination, any
reported sale price, regular way, of the principal trading session on that date
on the principal U.S. exchange on which the common stock is listed or admitted
to trading, (2) if the common stock is not listed on a national securities
exchange on that date of determination, or if the reported sale price on such
exchange is not obtainable (even if the common stock is listed or admitted to
trading on such exchange), and the common stock is quoted on the Nasdaq National
Market, any reported sale price of the principal trading session on that date as
reported on the Nasdaq, and (3) if the common stock is not quoted on the Nasdaq
on that date of determination, or if the reported sale price on the Nasdaq is
not obtainable (even if the common stock is quoted on the Nasdaq), any reported
sale price of the principal trading session on the over-the-counter market on
that date as reported on the OTC Bulletin Board, the National Quotation Bureau
or a similar organization. The determination of the Trading Price by the
calculation agent in the event of a Market Disruption Event may be deferred by
the calculation agent for up to five consecutive Trading Days on which a Market
Disruption Event is occurring. If no reported sale price of the principal
trading session is available pursuant to clauses (1), (2) or (3) above or if
there is a Market Disruption Event, the Trading Price on any date of
determination, unless deferred by the calculation agent as described in the
preceding sentence, will be the arithmetic mean, as determined by the
calculation agent, of the bid prices of the common stock obtained from as many
dealers in such stock (which may include Salomon Smith Barney Inc. or any of our
other subsidiaries or affiliates), but not exceeding three such dealers, as will
make such bid prices available to the calculation agent. A security "quoted on
the Nasdaq National Market" will include a security included for listing or
quotation in any successor to such system and the term "OTC Bulletin Board" will
include any successor to such service.

DILUTION ADJUSTMENTS

         If Motorola, after the closing date of the offering of the ELKS,

         (1)      pays a stock dividend or makes a distribution with respect to
                  its common stock in shares of the stock,

         (2)      subdivides or splits the outstanding shares of its common
                  stock into a greater number of shares,

         (3)      combines the outstanding shares of the common stock into a
                  smaller number of shares, or

         (4)      issues by reclassification of shares of its common stock any
                  shares of other common stock of Motorola,

then, in each of these cases, the Exchange Rate will be multiplied by a dilution
adjustment equal to a fraction, the numerator of which will be the number of
shares of common stock outstanding immediately after the event, plus, in the
case of a reclassification referred to in (4) above, the number of shares of
other common stock of Motorola, and the denominator of which will be the number
of shares of common stock outstanding immediately before the event.

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         If Motorola, after the closing date, issues, or declares a record date
in respect of an issuance of, rights or warrants to all holders of its common
stock entitling them to subscribe for or purchase shares of its common stock at
a price per share less than the Then-Current Market Price of the common stock,
other than rights to purchase common stock pursuant to a plan for the
reinvestment of dividends or interest, then, in each of these cases, the
Exchange Rate will be multiplied by a dilution adjustment equal to a fraction,
the numerator of which will be the number of shares of common stock outstanding
immediately before the adjustment is effected, plus the number of additional
shares of common stock offered for subscription or purchase pursuant to the
rights or warrants, and the denominator of which will be the number of shares of
common stock outstanding immediately before the adjustment is effected by reason
of the issuance of the rights or warrants, plus the number of additional shares
of common stock which the aggregate offering price of the total number of shares
of common stock offered for subscription or purchase pursuant to the rights or
warrants would purchase at the Then-Current Market Price of the common stock,
which will be determined by multiplying the total number of shares so offered
for subscription or purchase by the exercise price of the rights or warrants and
dividing the product obtained by the Then-Current Market Price. To the extent
that, after the expiration of the rights or warrants, the shares of common stock
offered thereby have not been delivered, the Exchange Rate will be further
adjusted to equal the Exchange Rate which would have been in effect had the
adjustment for the issuance of the rights or warrants been made upon the basis
of delivery of only the number of shares of common stock actually delivered.

         If Motorola, after the closing date, declares or pays a dividend or
makes a distribution to all holders of the common stock of any class of its
capital stock, the capital stock of one or more of its subsidiaries, evidences
of its indebtedness or other non-cash assets, excluding any dividends or
distributions referred to in the above paragraph, or issues to all holders of
its common stock rights or warrants to subscribe for or purchase any of its or
one or more of its subsidiaries' securities, other than rights or warrants
referred to in the above paragraph, then, in each of these cases, the Exchange
Rate will be multiplied by a dilution adjustment equal to a fraction, the
numerator of which will be the Then-Current Market Price of one share of the
common stock, and the denominator of which will be the Then-Current Market Price
of one share of the common stock, less the fair market value (as determined by a
nationally recognized independent investment banking firm retained for this
purpose by the Company, whose determination will be final) as of the time the
adjustment is effected of the portion of the capital stock, assets, evidences of
indebtedness, rights or warrants so distributed or issued applicable to one
share of common stock.

         Notwithstanding the foregoing, in the event that, with respect to any
dividend or distribution to which the above paragraph would otherwise apply, the
denominator in the fraction referred to in the above formula is less than $1.00
or is a negative number, then the Company may, at its option, elect to have the
adjustment provided by this paragraph not be made and in lieu of this
adjustment, at maturity, each Holder of the ELKS will be entitled to receive an
additional amount of cash equal to the product of the number of ELKS held by the
holder multiplied by the fair market value of the capital stock, indebtedness,
assets, rights or warrants (determined, as of the date this dividend or
distribution is made, by a nationally recognized independent investment banking
firm retained for this purpose by the Company, whose

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determination will be final) so distributed or issued applicable to a number of
shares of Motorola common stock equal to the Exchange Rate.

         If Motorola, after the closing date, declares a record date in respect
of a distribution of cash, other than any Permitted Dividends described below,
any cash distributed in consideration of fractional shares of common stock and
any cash distributed in a Reorganization Event referred to below, by dividend or
otherwise, to all holders of its common stock, or makes an Excess Purchase
Payment, then the Exchange Rate will be multiplied by a dilution adjustment
equal to a fraction, the numerator of which will be the Then-Current Market
Price of the common stock, and the denominator of which will be the Then-Current
Market Price of the common stock on the record date less the amount of the
distribution applicable to one share of common stock which would not be a
Permitted Dividend, or, in the case of an Excess Purchase Payment, less the
aggregate amount of the Excess Purchase Payment for which adjustment is being
made at the time divided by the number of shares of Motorola common stock
outstanding on the record date.

         For the purposes of these adjustments:

         A "Permitted Dividend" is any quarterly cash dividend in respect of
Motorola common stock, other than a quarterly cash dividend that exceeds the
immediately preceding quarterly cash dividend, and then only to the extent that
the per share amount of this dividend results in an annualized dividend yield on
the common stock in excess of 10%.

         An "Excess Purchase Payment" is the excess, if any, of (x) the cash and
the value (as determined by a nationally recognized independent investment
banking firm retained for this purpose by the Company, whose determination will
be final) of all other consideration paid by Motorola with respect to one share
of common stock acquired in a tender offer or exchange offer by Motorola, over
(y) the Then-Current Market Price of the common stock.

         Notwithstanding the foregoing, in the event that, with respect to any
dividend or distribution or Excess Purchase Payment to which the fifth paragraph
in this section would otherwise apply, the denominator in the fraction referred
to in the formula in that paragraph is less than $1.00 or is a negative number,
then the Company may, at its option, elect to have the adjustment provided by
the fifth paragraph in this section not be made and in lieu of this adjustment,
at maturity, each Holder of the ELKS will be entitled to receive an additional
amount of cash equal to the product of the number of ELKS held by the Holder
multiplied by the sum of the amount of cash plus the fair market value of other
consideration (determined, as of the date this dividend or distribution is made,
by a nationally recognized independent investment banking firm retained for this
purpose by the Company, whose determination will be final) so distributed or
applied to the acquisition of the common stock in the tender offer or exchange
offer applicable to a number of shares of Motorola common stock equal to the
Exchange Rate.

         Each dilution adjustment will be effected as follows:

         -        in the case of any dividend, distribution or issuance, at the
                  opening of business on the Business Day next following the
                  record date for determination of holders of Motorola common
                  stock entitled to receive this dividend, distribution or
                  issuance

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                  or, if the announcement of this dividend, distribution, or
                  issuance is after this record date, at the time this dividend,
                  distribution or issuance was announced by Motorola,

         -        in the case of any subdivision, split, combination or
                  reclassification, on the effective date of the transaction,

         -        in the case of any Excess Purchase Payment for which Motorola
                  announces, at or prior to the time it commences the relevant
                  share repurchase, the repurchase price per share for shares
                  proposed to be repurchased, on the date of the announcement,
                  and

         -        in the case of any other Excess Purchase Payment, on the date
                  that the holders of the repurchased shares become entitled to
                  payment in respect thereof.

         All dilution adjustments will be rounded upward or downward to the
nearest 1/10,000th or, if there is not a nearest 1/10,000th, to the next lower
1/10,000th. No adjustment in the Exchange Rate will be required unless the
adjustment would require an increase or decrease of at least one percent
therein, provided, however, that any adjustments which by reason of this
sentence are not required to be made will be carried forward (on a percentage
basis) and taken into account in any subsequent adjustment. If any announcement
or declaration of a record date in respect of a dividend, distribution, issuance
or repurchase requiring an adjustment as described herein is subsequently
canceled by Motorola, or this dividend, distribution, issuance or repurchase
fails to receive requisite approvals or fails to occur for any other reason,
then, upon the cancellation, failure of approval or failure to occur, the
Exchange Rate will be further adjusted to the Exchange Rate which would then
have been in effect had adjustment for the event not been made. If a
Reorganization Event described below occurs after the occurrence of one or more
events requiring an adjustment as described herein, the dilution adjustments
previously applied to the Exchange Rate will not be rescinded but will be
applied to the new Exchange Rate provided for below.

         The "Then-Current Market Price" of the common stock, for the purpose of
applying any dilution adjustment, means the average Closing Price per share of
common stock for the 10 Trading Days immediately before this adjustment is
effected or, in the case of an adjustment effected at the opening of business on
the Business Day next following a record date, immediately before the earlier of
the date the adjustment is effected and the related Ex-Date. For purposes of
determining the Then-Current Market Price, the determination of the Closing
Price by the calculation agent in the event of a Market Disruption Event, as
described in the definition of Closing Price, may be deferred by the calculation
agent for up to five consecutive Trading Days on which a Market Disruption Event
is occurring.

         The "Ex-Date" with respect to any dividend, distribution or issuance is
the first date on which the shares of the common stock trade in the regular way
on their principal market without the right to receive this dividend,
distribution or issuance.

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         In the event of any of the following "Reorganization Events":

         -        any consolidation or merger of Motorola, or any surviving
                  entity or subsequent surviving entity of Motorola, with or
                  into another entity, other than a merger or consolidation in
                  which Motorola is the continuing corporation and in which the
                  common stock outstanding immediately before the merger or
                  consolidation is not exchanged for cash, securities or other
                  property of Motorola or another issuer,

         -        any sale, transfer, lease or conveyance to another corporation
                  of the property of Motorola or any successor as an entirety or
                  substantially as an entirety,

         -        any statutory exchange of securities of Motorola or any
                  successor of Motorola with another issuer, other than in
                  connection with a merger or acquisition, or

         -        any liquidation, dissolution or winding up of Motorola or any
                  successor of Motorola,

each Holder of the ELKS will have the right to receive cash in an amount per $10
principal amount of ELKS equal to the Exchange Rate multiplied by the
Transaction Value (as defined below).

         The "Transaction Value" will be the sum of:

         (1)      for any cash received in a Reorganization Event, the amount of
                  cash received per share of common stock,

         (2)      for any property other than cash or Marketable Securities
                  received in a Reorganization Event, an amount equal to the
                  market value on the date the Reorganization Event is
                  consummated of that property received per share of common
                  stock, as determined by a nationally recognized independent
                  investment banking firm retained for this purpose by the
                  Company, whose determination will be final, and

         (3)      for any Marketable Securities received in a Reorganization
                  Event, an amount equal to the Closing Price per share of these
                  Marketable Securities on the Trading Day immediately prior to
                  the maturity date or Exchange Date multiplied by the number of
                  these Marketable Securities received for each share of common
                  stock.

         "Marketable Securities" are any perpetual equity securities or debt
securities with a stated maturity after the maturity date, in each case that are
listed on a U.S. national securities exchange or reported by the Nasdaq Stock
Market. The number of shares of any equity securities constituting Marketable
Securities included in the calculation of Transaction Value pursuant to clause
(3) above will be adjusted if any event occurs with respect to the Marketable
Securities or the issuer of the Marketable Securities between the time of the
Reorganization Event and maturity that would have required an adjustment as
described above, had it occurred with respect

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to the Motorola common stock or Motorola. Adjustment for these subsequent events
will be as nearly equivalent as practicable to the adjustments described above.

GENERAL

         This Note is one of a duly authorized issue of Debt Securities of the
Company, issued and to be issued in one or more series under a Senior Debt
Indenture, dated as of October 27, 1993, as supplemented by a First Supplemental
Indenture, dated as of November 28, 1997, a Second Supplemental Indenture, dated
as of July 1, 1999, and as further supplemented from time to time (the
"Indenture"), between the Company and The Bank of New York, as Trustee (the
"Trustee", which term includes any successor trustee under the Indenture), to
which Indenture reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the ELKS, and the terms upon which the ELKS are,
and are to be, authenticated and delivered.

         If an Event of Default with respect to the ELKS shall have occurred and
be continuing, the principal of the ELKS may be declared due and payable in the
manner and with the effect provided in the Indenture. In such case, the amount
declared due and payable upon any acceleration permitted by the Indenture will
be determined by the calculation agent and will be equal to, with respect to
this Note, the Maturity Payment calculated as though the Stated Maturity Date of
this Note were the date of early repayment. In case of default at Maturity of
this Note, this Note shall bear interest, payable upon demand of the beneficial
owners of this Note in accordance with the terms of the ELKS, from and after
Maturity through the date when payment of such amount has been made or duly
provided for, at the rate of [ ]% per annum on the unpaid amount (or the cash
equivalent of such unpaid amount) due.

         The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Debt Securities of each series to
be affected under the Indenture at any time by the Company and a majority in
aggregate principal amount of the Debt Securities at the time Outstanding of
each series affected thereby. The Indenture also contains provisions permitting
the Holders of specified percentages in aggregate principal amount of the Debt
Securities of any series at the time Outstanding, on behalf of the Holders of
all Debt Securities of such series, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.

         The Holder of this Note may not enforce such Holder's rights pursuant
to the Indenture or the Notes except as provided in the Indenture. No reference
herein to the Indenture and no provision of this Note or of the Indenture shall
alter or impair the obligation of the Company to pay the Maturity Payment with
respect to this Note, and to pay any interest on any overdue amount thereof at
the time, place and rate, and in the coin or currency, herein prescribed.

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         All terms used in this Note which are defined in the Indenture but not
in this Note shall have the meanings assigned to them in the Indenture.

         Unless the certificate of authentication hereon has been executed by
the Trustee by manual signature, this Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purposes.

                                       10
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         IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.

                                              SALOMON SMITH BARNEY HOLDINGS INC.

                                              By: ____________________________
                                                  Name:
                                                  Title:

Corporate Seal
Attest:

By:
    ____________________________________
     Name:
     Title:

Dated: [          ], 2002

CERTIFICATE OF AUTHENTICATION
         This is one of the Notes referred to in
         the within-mentioned Indenture.

The Bank of New York,
as Trustee

By:
    ___________________________________
     Authorized Signatory

                                       11<PAGE>
                                                                   Exhibit 10.21

                        INCENTIVE STOCK OPTION AGREEMENT

         THIS AGREEMENT is made effective as of January 2, 2001 between
CENTENNIAL BANCORP, an Oregon corporation (the "Company"), and THADDEUS (TED) R.
WINNOWSKI (the "Optionee").

         Pursuant to the Company's Restated 1995 Stock Incentive Plan (the
"Plan"), the Company has granted Optionee an incentive stock option to purchase
shares of the Company's Common Stock, without par value (the "Common Stock"), in
the amount indicated below.

         NOW, THEREFORE, in consideration of the promises and the mutual
covenants contained in this Option Agreement, the parties agree as follows:

         1. Grant. The Company grants to Optionee, upon the terms and conditions
set forth below, the right and option (the "Option") to purchase 29,348 shares
of Common Stock at an exercise price of $8.75 per share (the "Exercise Price"),
subject to the terms and conditions of the Plan, which are incorporated herein
by reference. In the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall govern. The Option is intended to qualify as an
Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").

         2. Term of Option. Subject to reductions in the term of the Option as
provided in the Plan and this Option Agreement, the Option shall continue in
effect until 10 years from the date of this Option Agreement and may be
exercised during such term only in accordance with the provisions of the Plan
and this Option Agreement.

         3. Vesting.

                  3.1 Timing of Exercise. The Option may be exercised in
accordance with the following schedule: (a) on the first anniversary of the date
hereof, one-third of the shares purchasable under the Option may be purchased,
in whole or in part, at any time thereafter until the Option expires; and (b)
continuing on each of the second and third anniversaries of the date hereof, an
additional one-third of the shares purchasable under the Option may be purchased
at any time thereafter until the Option expires.

                  3.2 Special Vesting Provisions. Notwithstanding the foregoing,
in the event that Optionee's employment with the Company terminates on account
of (i) death; (ii) Disability; or (iii) termination of Optionee's Employment
Agreement with the Company, dated July 29, 1997 (the "Employment Agreement") by
the Company without Cause or by Optionee with Good Reason, Optionee shall have
the right to purchase all of the shares purchasable under the Option in
accordance with Section 4. Furthermore, in the event that the Company incurs a
Change of Control, Optionee shall have the right to
<PAGE>
purchase all of the shares purchasable under the Option. Employment by a parent
or subsidiary of the Company shall be deemed to be employment by the Company.
The definitions in the Employment Agreement apply for purposes of this Section
3.2.

         4. Exercise of Option.

                  4.1 Right to Exercise. While Optionee is employed by the
Company, the Option is exercisable during its term in accordance with Section 3
and the applicable provisions of the Plan and this Option Agreement. In the
event that the Optionee's employment with the Company or a parent or subsidiary
of the Company terminates for any reason during the term of the Option, the
Option may be exercised at any time prior to the earlier of the expiration date
of the Option or the expiration of one year after the termination date, but only
to the extent that the Option was vested and exercisable under Section 3 at the
date of termination. In such event, to the extent that the Option was not
exercised within the applicable period, all further rights to purchase shares
pursuant to the Option shall cease and terminate at the expiration of such
period. Notwithstanding the Option's designation as an Incentive Stock Option,
the Option will not qualify for favorable tax treatment as an Incentive Stock
Option if the Option is exercised more than three months after the Optionee's
termination of service as an employee (or more than one year after termination
in the event of termination due to disability or death), or after the Optionee
has been on leave of absence for more than 90 days, unless the Optionee's
reemployment rights are guaranteed by statute or contract.

                  4.2 Method of Exercise. The Option is exercisable by delivery
of an exercise notice, which notice shall state the election to exercise the
Option, the number of shares of Common Stock in respect of which the Option is
being exercised (the "Exercised Shares") and such other representations and
agreements as may be required by the Company pursuant to the provisions of the
Plan. In addition, Optionee agrees to execute, as a condition of Option
exercise, such agreements respecting the Exercised Shares as the Committee, in
its reasonable discretion, determines to be required under the terms of
agreements to which the Company is a party or otherwise advisable and in the
best interests of the Company. The exercise notice shall be signed by Optionee
and shall be delivered in person or by certified mail to the Chief Financial
Officer of the Company. The exercise notice shall be accompanied by payment of
the aggregate Exercise Price as to all the Exercised Shares. The Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
exercise notice accompanied by such aggregate Exercise Price. For income tax
purposes the Exercised Shares shall be considered transferred to Optionee on the
date the Option is exercised with respect to such Exercised Shares.

         5. Conditions. The obligations of the Company under this Option
Agreement shall be subject to the approval of such state or federal authorities
or agencies as may have jurisdiction in the matter. The Company will use its
best efforts to take such steps as may be required by state or federal law or
applicable regulations, including rules and regulations of the Securities and
Exchange Commission and any national securities

                                       2
<PAGE>
exchange on which the Common Stock may then be listed, in connection with the
issuance or sale of any shares acquired pursuant to this Option Agreement or the
listing of such shares on any such exchange. The Company shall not be obligated
to issue or deliver shares of Common Stock under this Option Agreement if, upon
advice of its legal counsel, such issuance or delivery would violate state or
federal securities laws.

         6. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of Optionee:

                  (a) cash; or

                  (b) check; or

                  (c) delivery of such documentation as the Committee and
                  Optionee's broker shall require to effect an exercise of the
                  Option and delivery to the Company of the sale or margin loan
                  proceeds required to pay the aggregate Exercise Price of the
                  Exercised Shares; or

                  (d) surrender of other shares of Common Stock which have a
                  Fair Market Value on the date of surrender equal to the
                  aggregate Exercise Price of the Exercised Shares.

No shares shall be issued until full payment has been made, and the Optionee
shall have none of the rights of a shareholder until shares are issued. Upon
notification of the amount due and prior to or concurrently with delivery of the
certificate representing the shares, the Optionee shall pay to the Company any
amounts necessary to satisfy applicable federal, state, and local withholding
tax requirements.

         7. Provisions Relating to Transferability.

                  7.1 Restriction on Transfer. The Option is not transferable by
Optionee other than by will or the laws of descent and distribution and, during
the Optionee's lifetime, may be exercised only by the Optionee.

                  7.2 Exercise by Legal Representative or Successor. Whenever
the word "Optionee" is used in any provision of this Option Agreement under
circumstances when the provision should logically be construed to apply to the
Optionee's guardian, legal representative, executor, administrator, or the
person or persons to whom the Option may be transferred by testamentary
disposition or by the laws of descent and distribution, the word "Optionee"
shall be deemed to include such person or persons.

         8. Adjustment in Option Shares. In the event any change is made after
May 1999 to the Company's outstanding Common Stock by reason of any stock split,
stock dividend, combination of shares, exchange of shares, or other change
affecting the

                                       3
<PAGE>
outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments shall be made to (i) the total number of Option Shares
subject to this Option and (ii) the Exercise Price payable per share in order to
reflect such change and thereby preclude a dilution or enlargement of benefits
hereunder. Any such adjustment made by the Committee shall be conclusive. In the
event of the dissolution of the Company or a merger, consolidation, plan of
exchange or similar transaction affecting the Company, in lieu of adjusting the
Option as described above or in lieu of having the Option continue unchanged,
the Committee may, in its sole discretion, provide a 30-day period immediately
prior to such event during which the Optionee shall have the right to exercise
the Option in whole or in part without any limitation on exercisability.

         9. Legends. Certificates representing the shares subject to this Option
Agreement shall bear such legends as the Company shall deem appropriate to
reflect any restrictions on transfer imposed by federal or applicable state
securities laws.

         10. Employment. Nothing in the Plan or in this Option Agreement shall
(i) confer upon the Optionee any right with respect to employment with the
Company or any affiliate of the Company or (ii) interfere in any way with the
right of the Company or any affiliate of the Company to terminate the Optionee's
employment. In all matters with respect to Optionee's employment, the terms and
conditions of the Employment Agreement shall control.

         11. The Plan. The Option is subject to the terms and conditions of the
Plan.

         12. Definitions. Any capitalized term in this Option Agreement which is
not defined herein and which is defined in the Plan shall have the same
definition as in the Plan.

         13. Governing Law. To the extent that federal laws (such as the Code
and the federal securities laws) do not otherwise control, the Plan and this
Option Agreement shall be construed in accordance with the laws of the state of
Oregon.

         14. Headings. Headings contained in this Option Agreement are for
reference purposes and shall not affect the meaning or interpretation of this
Option Agreement.

         15. General. Optionee and the Company agree that the Option is granted
under and governed by the terms and conditions of the Plan and this Option
Agreement. Optionee has reviewed the Plan and this Option Agreement in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option Agreement and fully understands all provisions of the Plan
and Option Agreement. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Committee upon any questions
relating to the Plan and Option Agreement.

                                       4
<PAGE>
         The parties have signed this Agreement on the dates specified below,
with this Agreement to take effect as of the date first specified above.

         OPTIONEE:                            CENTENNIAL BANCORP

         /s/ Thaddeus R. Winnowski            /s/ Richard C. Williams
         -------------------------            ----------------------------------
         Thaddeus R. Winnowski                Chairman of the Board of Directors

                                       5

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