Document:

Exhibit 10.2

 

AMENDMENT

TO THE

AMERICAN STATES WATER COMPANY

2000 STOCK INCENTIVE PLAN

(As Amended as of January 31, 2006)

WHEREAS,
American States Water Company (the “Corporation”) maintains the American States
Water Company 2000 Stock Incentive Plan (the “Plan”); and

WHEREAS,
Section 5.6 of the Plan provides that the Board of Directors may amend the
Plan.

NOW,
THEREFORE BE IT RESOLVED, that the Plan be, and it hereby is,
amended as set forth below:

Effective as of
November 1, 2006, Section 5.2(a) is amended in its entirety to read
as follows:

“(a)(1)  Adjustments.  Upon (or, as may be necessary to effect the
adjustment, immediately prior to): any reclassification, recapitalization,
stock split (including a stock split in the form of a stock dividend) or reverse
stock split; any merger, combination, consolidation, or other reorganization;
any spin-off, split-up, or similar extraordinary dividend distribution in
respect of the Common Stock; or any exchange of Common Stock or other
securities of the Corporation, or any similar, unusual or extraordinary
corporate transaction in respect of the Common Stock; then the Committee shall
equitably and proportionately adjust (1) the number and type of shares of
Common Stock (or other securities) that thereafter may be made the subject of
awards (including the specific share limits, maximums and numbers of shares set
forth elsewhere in this Plan), (2) the number, amount and type of shares of
Common Stock (or other securities or property) subject to any outstanding awards,
(3) the grant, purchase, or exercise price of any outstanding awards, and/or
(4) the securities, cash or other property deliverable upon exercise or payment
of any outstanding awards, in each case to the extent appropriate to preclude
the enlargement or dilution of rights and benefits under such awards.

Unless otherwise expressly provided in the applicable award agreement,
upon (or, as may be necessary to effect the adjustment, immediately prior to)
any event or transaction described in the preceding paragraph or a sale of all
or substantially all of the business or assets of the Corporation as an
entirety, the Committee shall equitably and proportionately adjust the
performance standards applicable to any then-outstanding performance-based
awards to the extent necessary to preserve (but not increase) the level of
incentives intended by the Plan and the then-outstanding performance-based
awards.

 

 

It is intended that, if possible, any adjustments contemplated by the
preceding two paragraphs be made in a manner that satisfies applicable legal,
tax (including, without limitation and as applicable in the circumstances,
Section 424 of the Code, Section 409A of the Code and Section 162(m) of the
Code) and accounting (so as to not trigger any charge to earnings with respect
to such adjustment) requirements.

Without limiting the generality of Section 1.2, any good faith
determination by the Committee pursuant to this Section 5.2(a)(1) shall be
conclusive and binding on all persons.

(2)  Corporate
Transactions-Assumption or Termination of Awards.  Upon the occurrence of any of the following:
any merger, combination, consolidation, or other reorganization; any exchange
of Common Stock or other securities of the Corporation; a sale of all or
substantially all the business, stock or assets of the Corporation; a
dissolution of the Corporation; or any other event in which the Corporation
does not survive (or does not survive as a public company in respect of its
Common Stock); then the Committee may make provision for a cash payment in
settlement of, or for the assumption, substitution or exchange of any or all
outstanding share-based awards or the cash, securities or property deliverable
to the holder of any or all outstanding share-based awards, based upon, to the
extent relevant under the circumstances, the distribution or consideration
payable to holders of the Common Stock upon or in respect of such event.

The Committee may adopt such valuation methodologies for outstanding
awards as it deems reasonable in the event of a cash or property settlement
and, in the case of Options or similar rights, but without limitation on other
methodologies, may base such settlement solely upon the excess if any of the
per share amount payable upon or in respect of such event over the exercise or
base price of the award.

In any of the events referred to in this Section 5.2(a)(2), the
Committee may take such action contemplated by this Section 5.2(a)(2) prior to
such event (as opposed to on the occurrence of such event) to the extent that
the Committee deems the action necessary to permit the participant to realize
the benefits intended to be conveyed with respect to the underlying shares.

Without limiting the generality of Section 1.2, any good faith
determination by the Committee pursuant to this Section 5.2(a)(2) shall be
conclusive and binding on all persons.”

IN
WITNESS WHEREOF, this Corporation has caused its duly
authorized officer to execute this Amendment on this 10th day of November,
2006.

	
  

  	
  By:

  	
  /s/ Robert J. Sprowls

  	
   

  
	
   

  	
  Name: Robert J.
  Sprowls

  	
   

  
	
   

  	
  Title: Sr. Vice
  President, Chief Financial Officer, Treasurer and Corporate Secretary

  	
   

  

 

 ii
 

 

 

AMERICAN STATES WATER COMPANY

2000 STOCK INCENTIVE PLAN

(As Amended as of January 31, 2006)

 iii

 

 

TABLE OF CONTENTS

	
  

  	
   

  	
   

  	
   

  	
  Page

  
	
  1.

  	
  THE PLAN

  	
   

  	
  1

  
	
   

  	
  1.1

  	
  Purpose

  	
   

  	
  1

  
	
   

  	
  1.2

  	
  Administration and Authorization; Power and
  Procedure

  	
   

  	
  1

  
	
   

  	
  1.3

  	
  Participation

  	
   

  	
  2

  
	
   

  	
  1.4

  	
  Shares Available for Awards; Share Limits

  	
   

  	
  2

  
	
   

  	
  1.5

  	
  Grant of Awards

  	
   

  	
  3

  
	
   

  	
  1.6

  	
  Award Period

  	
   

  	
  3

  
	
   

  	
  1.7

  	
  Limitations on Exercise and Vesting of Awards

  	
   

  	
  3

  
	
   

  	
  1.8

  	
  Acceptance of Notes to Finance Exercise

  	
   

  	
  4

  
	
   

  	
  1.9

  	
  No Transferability; Limited Exception to Transfer
  Restrictions

  	
   

  	
  4

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  OPTIONS

  	
   

  	
  5

  
	
   

  	
  2.1

  	
  Grants

  	
   

  	
  5

  
	
   

  	
  2.2

  	
  Option Price

  	
   

  	
  5

  
	
   

  	
  2.3

  	
  Limitations on Grant and Terms of Incentive Stock
  Options

  	
   

  	
  6

  
	
   

  	
  2.4

  	
  Limits on 10% Holders

  	
   

  	
  6

  
	
   

  	
  2.5

  	
  Option Repricing/Cancellation and Regrant/Waiver

  	
   

  	
  7

  
	
   

  	
  2.6

  	
  Effects of Termination of Employment; Termination of
  Subsidiary Status; Discretionary Provisions.

  	
   

  	
  7

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  RESTRICTED STOCK AWARDS

  	
   

  	
  8

  
	
   

  	
  3.1

  	
  Grants

  	
   

  	
  8

  
	
   

  	
  3.2

  	
  Restrictions

  	
   

  	
  8

  
	
   

  	
  3.3

  	
  Return to the Corporation

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  STOCK UNIT AWARDS

  	
   

  	
  9

  
	
   

  	
  4.1

  	
  Grants.

  	
   

  	
  9

  
	
   

  	
  4.2

  	
  Payouts

  	
   

  	
  9

  
	
   

  	
  4.3

  	
  Non-Transferability

  	
   

  	
  9

  
	
   

  	
  4.4

  	
  Dividend Equivalent Rights

  	
   

  	
  10

  
	
   

  	
  4.5

  	
  Cancellation of Restricted Stock Units

  	
   

  	
  10

  

 

 

 

	
  5.

  	
  OTHER PROVISIONS

  	
   

  	
  10

  
	
   

  	
  5.1

  	
  Rights of Eligible Employees, Participants and
  Beneficiaries

  	
   

  	
  10

  
	
   

  	
  5.2

  	
  Adjustments; Acceleration

  	
   

  	
  11

  
	
   

  	
  5.3

  	
  Effect of Termination of Service on Awards

  	
   

  	
  13

  
	
   

  	
  5.4

  	
  Compliance with Laws

  	
   

  	
  14

  
	
   

  	
  5.5

  	
  Tax Matters

  	
   

  	
  14

  
	
   

  	
  5.6

  	
  Plan Amendment, Termination and Suspension

  	
   

  	
  14

  
	
   

  	
  5.7

  	
  Privileges of Stock Ownership

  	
   

  	
  15

  
	
   

  	
  5.8

  	
  Effective Date of the Plan

  	
   

  	
  15

  
	
   

  	
  5.9

  	
  Term of the Plan

  	
   

  	
  15

  
	
   

  	
  5.10

  	
  Governing Law/Construction/Severability

  	
   

  	
  15

  
	
   

  	
  5.11

  	
  Captions

  	
   

  	
  16

  
	
   

  	
  5.12

  	
  Stock-Based Awards in Substitution for Stock Options
  or Awards Granted by Other Corporation

  	
   

  	
  16

  
	
   

  	
  5.13

  	
  Non-Exclusivity of Plan

  	
   

  	
  16

  
	
   

  	
  5.14

  	
  No Corporate Action Restriction

  	
   

  	
  16

  
	
   

  	
  5.15

  	
  Other Company Benefit and Compensation Program

  	
   

  	
  17

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  DEFINITIONS

  	
   

  	
  17

  
	
   

  	
  6.1

  	
  Definitions

  	
   

  	
  17

  

 

 ii

 

 

AMERICAN STATES WATER COMPANY

2000 STOCK INCENTIVE PLAN

(As Amended as of January 31, 2006)

1.     THE PLAN

1.1                                 Purpose 

 

The purpose of this Plan is to promote the success of
the Company by providing an additional means through the grant of Awards to
attract, motivate, retain and reward key employees, including officers, whether
or not directors, of the Company with awards and incentives for high levels of
individual performance and improved financial performance of the Company.  “Corporation” means American States Water Company and “Company” means the Corporation
and its Subsidiaries, collectively. 
These terms and other capitalized terms are defined in Article 6.

1.2                                  Administration and Authorization; Power and
Procedure.

 

(a)       Committee.  This Plan shall be administered by and all
Awards to Eligible Employees shall be authorized by the Committee.  Action of the Committee with respect to the
administration of this Plan shall be taken pursuant to a majority vote or by
written consent of its members.

(b)       Plan Awards; Interpretation; Powers of
Committee.  Subject to the express
provisions of this Plan, the Committee shall have the authority:

(i)            to determine eligibility and, from
among those persons determined to be eligible, the particular Eligible
Employees who will receive an Award;

(ii)            to grant Awards to Eligible Employees,
determine the price at which securities will be offered or awarded and the
amount of securities to be offered or awarded to any of such persons, and
determine the other specific terms and conditions of such Awards consistent
with the express limits of this Plan, and establish the installments (if any)
in which such Awards shall become exercisable or shall vest, or determine that
no delayed exercisability or vesting is required, and establish the events of
termination or reversion of such Awards;

(iii)           to approve the forms of Award
Agreements (which need not be identical either as to type of award or among
Participants);

(iv)           to construe and interpret this Plan and
any agreements defining the rights and obligations of the Company and
Participants under this Plan, further define the terms used in this Plan, and
prescribe, amend and rescind rules and regulations relating to the
administration of this Plan;

(v)            to cancel, modify, or waive the Corporation’s
rights with respect to, or modify, discontinue, suspend, or terminate any or
all 

 

outstanding Awards
held by Eligible Employees, subject to any required consent under Section 5.6;

(vi)           to accelerate or extend the
exercisability or extend the term of any or all such outstanding Awards (in the
case of Options, within the maximum ten-year term of such Awards under Section
1.6); and

(vii)          to make all other determinations and
take such other action as contemplated by this Plan or as may be necessary or
advisable for the administration of this Plan and the effectuation of its
purposes.

(c)       Binding Determinations/Liability
Limitation.  Any action taken by, or
inaction of, the Corporation, any Subsidiary, the Board or the Committee
relating or pursuant to this Plan and within its authority hereunder or under
applicable law shall be within the absolute discretion of that entity or body
and shall be conclusive and binding upon all persons.  Neither the Board nor any Committee, nor any
member thereof or person acting at the direction thereof, shall be liable for
any act, omission, interpretation, construction or determination made in good
faith in connection with this Plan (or any Award made under this Plan), and all
such persons shall be entitled to indemnification and reimbursement by the
Company in respect of any claim, loss, damage or expense (including, without
limitation, attorneys’ fees) arising or resulting therefrom to the fullest
extent permitted by law and/or under any directors and officers liability
insurance coverage that may be in effect from time to time.

(d)       Reliance on Experts.   In making any determination or in taking or
not taking any action under this Plan, the Committee or the Board, as the case
may be, may obtain and may rely upon the advice of experts, including
professional advisors to the Corporation. 
No director, officer or agent of the Company shall be liable for any
such action or determination taken or made or omitted in good faith.

(e)       Delegation.  The Committee may delegate ministerial,
non-discretionary functions to individuals who are officers or employees of the
Company.

1.3                                  Participation

Awards may be granted by
the Committee only to those persons that the Committee determines to be
Eligible Employees.  An Eligible Employee
who has been granted an Award may, if otherwise eligible, be granted additional
Awards if the Committee shall so determine.

1.4                                 Shares
Available for Awards; Share Limits.

(a)       Shares Available.  Subject to the provisions of Section 5.2, the
capital stock that may be delivered under this Plan shall be shares of the
Corporation’s authorized but unissued Common Stock.  The shares may be delivered for any lawful
consideration.

(b)        Share Limits.  The maximum number of shares of Common Stock
that may be delivered pursuant to Awards granted to Eligible Employees under
this Plan shall not exceed 1,050,000 shares (the “Share Limit”).   The maximum number of shares of Common Stock
that may be delivered pursuant to options qualified as Incentive Stock 

 2
 

 

Options granted under
this Plan is 187,500 shares.  The maximum
number of shares subject to those options that are granted during any calendar
year to any individual shall be limited to 50,000 and the maximum individual
limit on the number of shares in the aggregate subject to all Awards that
during any calendar year are granted under this Plan shall be 50,000.  Each of the four foregoing numerical limits shall be subject to adjustment as
contemplated by this Section 1.4 and Section 5.2.

(c)           Share Reservation; Replenishment
and Reissue of Unvested Awards.  No
Award may be granted under this Plan unless, on the date of grant, the sum of
(i) the maximum number of shares issuable at any time pursuant to such Award,
plus (ii) the number of shares that have previously been issued pursuant to
Awards granted under this Plan, other than reacquired shares available for
reissue consistent with any applicable legal limitations, plus (iii) the
maximum number of shares that may be issued at any time after such date of
grant pursuant to Awards that are outstanding on such date, does not exceed the
Share Limit.  Shares that are subject to
or underlie Awards which expire or for any reason are cancelled or terminated,
are forfeited, fail to vest, or for any other reason are not paid or delivered
under this Plan, as well as reacquired shares, shall again, except to the
extent prohibited by law, be available for subsequent Awards under the
Plan.  Except as limited by law, if an
Award is or may be settled only in cash, such Award need not be counted against
any of the limits under this Section 1.4.

1.5                                  Grant of Awards.

Subject to the express provisions of this Plan, the
Committee shall determine the number of shares of Common Stock subject to each
Award and the price (if any) to be paid for the shares or the Award.  Each Award shall be evidenced by an Award
Agreement signed by the Corporation and, if required by the Committee, by the
Participant.  The Award Agreement shall
set forth the material terms and conditions of the Award established by the
Committee consistent with the specific provisions of this Plan.

1.6                                  Award Period.

Each Award and all executory rights or obligations
under the related Award Agreement shall expire on such date (if any) as shall
be determined by the Committee, but in the case of Options not later than ten
(10) years after the Award Date.

1.7                                 Limitations
on Exercise and Vesting of Awards.

(a)       Provisions for
Exercise.  Unless the Committee
otherwise expressly provides, no Award shall be exercisable or shall vest until
at least six months after the initial Award Date, and once exercisable an Award
shall remain exercisable until the expiration or earlier termination of the
Award.

(b)       Procedure.  Any exercisable Award shall be deemed to be
exercised when the Secretary of the Corporation receives written notice of such
exercise from the Participant, together with any required payment made in
accordance with Section 2.2.

(c)       Fractional Shares/Minimum Issue.  Fractional share interests shall be
disregarded, but may be accumulated. The Committee, however, may determine in
the 

 3
 

 

case of Eligible
Employees that cash, other securities, or other property will be paid or
transferred in lieu of any fractional share interests.  No fewer than 100 shares may be purchased on
exercise of any Award at one time unless the number purchased is the total
number at the time available for purchase under the Award.

1.8                                  Acceptance of Notes to Finance Exercise.

To the extent permitted by applicable law, the
Corporation may, with the Committee’s approval, accept one or more notes from
any Eligible Employee in connection with the exercise or receipt of any
outstanding Award; provided that any such note shall be subject to the
following terms and conditions:

(a)       The principal of the note shall not exceed
the amount required to be paid to the Corporation upon the exercise or receipt
of one or more Awards under the Plan and the note shall be delivered directly
to the Corporation in consideration of such exercise or receipt.

(b)       The initial term of the note shall be
determined by the Committee; provided that the term of the note,
including extensions, shall not exceed a period of five years.

(c)       The note shall provide for full recourse
to the Participant and shall bear interest at a rate determined by the
Committee but not less than the interest rate necessary to avoid the imputation
of interest under the Code.

(d)       If the employment of the Participant
terminates, the unpaid principal balance of the note shall become due and
payable on the 10th business day after such termination; provided, however,
that if a sale of such shares would cause such Participant to incur liability
under Section 16(b) of the Exchange Act, the unpaid balance shall become due
and payable on the 10th business day after the first day on which a sale of
such shares could have been made without incurring such liability assuming for
these purposes that there are no other transactions (or deemed transactions in
securities of this Corporation) by the Participant subsequent to such termination.

(e)       If required by the Committee or by
applicable law, the note shall be secured by a pledge of any shares or rights
financed thereby in compliance with applicable law.

(f)        The terms, repayment provisions, and
collateral release provisions of the note and the pledge securing the note
shall conform with applicable rules and regulations of the Federal Reserve
Board as  then in effect.

1.9                                  No Transferability; Limited Exception to
Transfer Restrictions.  

(a)       Limit On Exercise and Transfer.  Unless otherwise expressly provided in (or
pursuant to) this Section 1.9, by applicable law and by the Award Agreement, as
the same may be amended, (i) all Awards are non-transferable and shall not be
subject in any manner to sale, transfer, anticipation, alienation, assignment,
pledge, encumbrance or charge; (ii) awards shall be exercised only by the
Participant; and (iii) amounts payable or shares issuable pursuant to an Award
shall be delivered only to (or for the account of) the Participant.

 4
 

 

(b)       Exceptions.  The Committee may permit Awards to be
exercised by and paid only to certain persons or entities related to the
Participant, including but not limited to members of the Participant’s
immediate family, or trusts or other entities whose beneficiaries or beneficial
owners are members of the Participant’s immediate family, pursuant to such
conditions and procedures as the Committee may establish.  Any permitted transfer shall be subject to
the condition that the Committee receive evidence satisfactory to it that the transfer
is being made for essentially estate and/or tax planning purposes on a
gratuitous or donative basis and without consideration (other than nominal
consideration or in exchange for an interest in a qualified transferee).  Notwithstanding the foregoing or anything to
the contrary in Section 1.9(c), ISOs and Restricted Stock Awards shall be
subject to any and all additional transfer restrictions under the Code.

(c)       Further Exceptions to Limits On
Transfer.  The exercise and transfer
restrictions in Section 1.9(a) shall not apply to:

(i)            transfers to the Corporation,

(ii)           the designation of a beneficiary to
receive benefits in the event of the Participant’s death or, if the Participant
has died, transfers to or exercise by the Participant’s beneficiary, or, in the
absence of a validly designated beneficiary, transfers by will or the laws of
descent and distribution,

(iii)          transfers pursuant to a QDRO order if
approved or ratified by the Committee,

(iv)          if the Participant has suffered a
disability, permitted transfers or exercises on behalf of the Participant by
his or her legal representative, or

(v)            the authorization by the Committee of
“cashless exercise” procedures with third parties who provide financing for the
purpose of (or who otherwise facilitate) the exercise of Awards consistent with
applicable laws and the express authorization of the  Committee.

2.      OPTIONS.

2.1                                 Grants.

One or more Options may be granted under this Article
to any Eligible Employee.  Each Option
granted shall be designated in the applicable Award Agreement, by the Committee
as either an Incentive Stock Option, subject to Section 2.3, or a Non-Qualified
Stock Option.

2.2                                  Option Price.

(a)       Pricing Limits.  The purchase price per share of the Common
Stock covered by each Option shall be determined by the Committee at the time
of the Award, but shall not be less than 100% (110% in the case of an ISO
granted to a Participant 

 5
 

 

described in Section 2.4)
of the Fair Market Value of the Common Stock on the date of grant.

(b)       Payment Provisions. The purchase
price of any shares purchased on exercise of an Option granted under this
Article shall be paid in full at the time of each purchase in one or a
combination of the following methods: 
(i) in cash or by electronic funds transfer; (ii) by check payable to
the order of the Corporation;  (iii) if
authorized by the Committee or specified in the applicable Award Agreement, by
a promissory note of the Participant consistent with the requirements of Section
1.8; (iv) by notice and third party payment in such manner as may be authorized
by the Committee; or (v) by the delivery of shares of Common Stock of the
Corporation already owned by the Participant, provided, however,
that the Committee may in its absolute discretion limit the Participant’s
ability to exercise an Award by delivering such shares, and provided further
that any shares delivered which were initially acquired upon exercise of a
stock option must have been owned by the Participant at least six months as of
the date of delivery.  Shares of Common
Stock used to satisfy the exercise price of an Option shall be valued at their
Fair Market Value on the date of exercise.

2.3                                  Limitations on Grant and Terms of Incentive
Stock Options.  

(a)       $100,000 Limit.  To the extent that the aggregate “Fair Market
Value” of stock with respect to which incentive stock options first become
exercisable by a Participant in any calendar year exceeds $100,000, taking into
account both Common Stock subject to Incentive Stock Options under this Plan
and stock subject to incentive stock options under all other plans of the
Company, such options shall be treated as Nonqualified Stock Options.  For this purpose, the “Fair Market Value” of
the stock subject to options shall be determined as of the date the options
were awarded.  In reducing the number of
options treated as incentive stock options to meet the $100,000 limit, the most
recently granted options shall be reduced first.  To the extent a reduction of simultaneously
granted options is necessary to meet the $100,000 limit, the Committee may, in
the manner and to the extent permitted by law, designate which shares of Common
Stock are to be treated as shares acquired pursuant to the exercise of an
Incentive Stock Option.

(b)       Option Period.  Each Option and all rights thereunder shall
expire no later than 10 years after the Award Date.

(c)       Other Code Limits.  Incentive Stock Options may only be granted
to Eligible Employees of the Corporation or a Subsidiary that satisfies the
other eligibility requirements of the Code. 
There shall be imposed in any Award Agreement relating to Incentive
Stock Options such other terms and conditions as from time to time are required
in order that the Option be an “incentive stock option” as that term is defined
in Section 422 of the Code.

2.4                                  Limits on 10% Holders.

No Incentive Stock Option may be granted to any person
who, at the time the Option is granted, owns (or is deemed to own under Section
424(d) of the Code) shares of outstanding Common Stock possessing more than 10%
of the total combined voting power of all classes of stock of the Corporation,
unless the exercise price of such 

 6
 

 

Option is at least 110% of the Fair Market Value of
the stock subject to the Option and such Option by its terms is not exercisable
after the expiration of five years from the date such Option is granted.

2.5                                  Option Repricing/Cancellation and
Regrant/Waiver of Restrictions.

Subject to Section 1.4
and Section 5.6 and the specific limitations on Awards contained in this Plan,
the Committee from time to time may authorize, generally or in specific cases
only, for the benefit of any Eligible Employee any adjustment in the exercise
or purchase price, the vesting schedule, the number of shares subject to, the
restrictions upon or the term of, an Option granted under this Article by
cancellation of an outstanding Option and a subsequent regranting of an Option,
by amendment, by substitution of an outstanding Option, by waiver or by other
legally valid means.  Such amendment or
other action may result in, among other changes, an exercise or purchase price
which is higher or lower than the exercise or purchase price of the original or
prior Option, provide for a greater or lesser number of shares subject to the
Option, or provide for a longer or shorter vesting or exercise period;
provided, however, that, except for adjustments contemplated by Section 5.2,
any such amendment that results in the reduction of the exercise or purchase
price below the exercise price or purchase price of the original or prior Option
shall be subject to prior shareholder approval.

2.6                                 Effects
of Termination of Employment; Termination of Subsidiary Status; Discretionary
Provisions.

(a)       Options - Resignation or Dismissal.  If the Participant’s employment by the
Company terminates for any reason (the date of such termination being referred
to as the “Severance Date”) other than Retirement, Total Disability or
death, or for Cause (as determined in the discretion of the Committee), the
Participant shall have, unless otherwise provided in the Award Agreement and
subject to earlier termination pursuant to or as contemplated by Section 1.6 or
5.2, three months after the Severance Date to exercise any Option to the extent
it shall have become exercisable on the Severance Date.  In the case of a termination for Cause, the
Option shall terminate on the Severance Date. 
In other cases, the Option, to the extent not exercisable on the
Severance Date, shall terminate.

(b)       Options - Death or Disability.  If the Participant’s employment by the Company
terminates as a result of Total Disability or death, the Participant,
Participant’s Personal Representative or his or her Beneficiary, as the case
may be, shall have, unless otherwise provided in the Award Agreement and
subject to earlier termination pursuant to or as contemplated by Section 1.6 or
5.2, until 12 months after the Severance Date to exercise any Option to the
extent it shall have become exercisable by the Severance Date.  Any Option to the extent not exercisable on
the Severance Date shall terminate.

(c)       Options - Retirement.  If the Participant’s employment by the
Company terminates as a result of Retirement, the Participant, Participant’s
Personal Representative or his or her Beneficiary, as the case may be, shall
have, unless otherwise provided in the Award Agreement and subject to earlier
termination pursuant to or as contemplated by Section 1.6 or 5.2, until 12
months after the Severance Date to exercise 

 7
 

 

any Option to the extent
it shall have become exercisable by the Severance Date.  The Option, to the extent not exercisable on
the Severance Date, shall terminate.

(d)        Committee Discretion.  Notwithstanding the foregoing provisions of
this Section 2.6, in the event of, or in anticipation of, a termination of
employment with the Company for any reason, other than discharge for Cause, the
Committee may, in its discretion, increase the portion of the Participant’s
Option available to the Participant, or Participant’s Beneficiary or Personal
Representative, as the case may be, or, subject to the provisions of Section
1.6, extend the exercisability period upon such terms as the Committee shall
determine and expressly set forth in or by amendment to the Award Agreement;
provided, however, that in no event shall any such extension of the exercisability
period exceed the latest of  (i) the 15th day of the third month following the date that
the Option would have otherwise terminated in connection with a termination of
employment, (ii) December 31 of the calendar year in which the Option would have
otherwise terminated in connection with a termination of employment (but in no
event shall such exercisability period be extended to a date after the
termination of the original term pursuant to Section 1.6 hereof), or (iii) such
other date that is allowable under Section 409A of the Code without making the
Option subject to Section 409A.

3.      RESTRICTED STOCK AWARDS.

3.1                                  Grants.

The Committee may, in its discretion, grant one or
more Restricted Stock Awards to any Eligible Employee.  Each Restricted Stock Award Agreement shall
specify the number of shares of Common Stock to be issued to the Participant,
the date of such issuance, the consideration for such shares (but not less than
the minimum lawful consideration under applicable state law) by the Participant,
the extent (if any) to which and the time (if ever) at which the Participant
shall be entitled to dividends, voting and other rights in respect of the
shares prior to vesting, and the restrictions (which may be based on
performance criteria, passage of time or other factors or any combination
thereof) imposed on such shares and the conditions of release or lapse of such
restrictions.  Such restrictions shall
not lapse earlier than six months after the Award Date, except to the extent
the Committee may otherwise provide. 
Stock certificates evidencing shares of Restricted Stock pending the
lapse of the restrictions (“Restricted Shares”) shall bear a legend making
appropriate reference to the restrictions imposed hereunder and shall be held
by the Corporation or by a third party designated by the Committee until the
restrictions on such shares shall have lapsed and the shares shall have vested
in accordance with the provisions of the Award and Section 1.7.  Upon issuance of the Restricted Stock Award,
the Participant may be required to provide such further assurance and documents
as the Committee may require to enforce the restrictions.

3.2                                  Restrictions.

(a)       Pre-Vesting Restraints.  Except as provided in Section 3.1 and 1.9,
restricted shares comprising any Restricted Stock Award may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered, either
voluntarily or involuntarily, until the restrictions on such shares have lapsed
and the shares have become vested.

 8
 

 

(b)       Dividend and Voting Rights.  Unless otherwise provided in the applicable
Award Agreement, a Participant receiving a Restricted Stock Award shall be
entitled to cash dividend and voting rights for all shares issued even though
they are not vested, provided that such rights shall terminate immediately as
to any Restricted Shares which cease to be eligible for vesting.

(c)       Cash Payments.  If the Participant shall have paid or
received cash (including any dividends) in connection with the Restricted Stock
Award, the Award Agreement shall specify whether and to what extent such cash
shall be returned (with or without an earnings factor) as to any Restricted
Shares which cease to be eligible for vesting.

3.3                                  Return to the Corporation.

Unless the Committee otherwise expressly provides,
Restricted Shares that remain subject to restrictions at the time of
termination of employment or are subject to other conditions to vesting that
have not been satisfied by the time specified in the applicable Award Agreement
shall not vest and shall be returned to the Corporation in such manner and on
such terms as the Committee shall therein provide.

4.     STOCK UNIT AWARDS

4.1                                  Grants.

The Committee may, in its discretion, (a) authorize
and grant to any Eligible Employee a Stock Unit Award, (b) credit to any
Eligible Employee Stock Units, (c) permit an Eligible Employee to irrevocably
elect to defer by means of Stock Units or receive in Stock Units all or a
portion of any Award hereunder, or (d) grant Stock Units in lieu of, in
exchange for, in respect of, or in addition to any other compensation or Award
under this Plan.  The specific terms,
conditions, and provisions relating to each Stock Unit grant or election,
including the applicable vesting and payout provisions of the Stock Units and
the form of payment to be made at or following the vesting thereof, shall be
set forth in or pursuant to the applicable Award Agreement and any relevant
Company bonus, performance or other service or deferred compensation plan, in
form substantially as approved by the Committee, in each case subject to
compliance with Section 409A of the Code.

4.2                                  Payouts.

Subject to compliance with Section 409A of the Code,
the Committee in the applicable Stock Unit Award Agreement or other award
agreement or the relevant Company deferred compensation plan may permit the
Eligible Employee to elect the form and time of payout of vested Stock Units on
such conditions or subject to such procedures as the Committee may impose, and
may permit Stock Unit offsets or other provision for payment of any applicable
taxes that may be due on the crediting, vesting or payment in respect of the
Stock Units.

4.3                                  Non-Transferability.  

Rights in respect of
Stock Unit awards may not be sold, pledged, assigned, hypothecated,
transferred, or otherwise disposed of or encumbered, either voluntarily or 

 9
 

 

involuntarily, other than
by will or the laws of descent or distribution, until any restrictions have
lapsed and the shares issuable pursuant to the Stock Unit award have been
issued.

4.4                                  Dividend Equivalent Rights.

In its discretion,
the Committee may grant to any Eligible Employee “Dividend Equivalent Rights”
concurrently with the grant of any Stock Unit award, on such terms as set forth
by the Committee in the Stock Unit Agreement or other applicable award
agreement.  Dividend Equivalent Rights
shall be based on all or part of the amount of dividends declared on shares of
Common Stock and shall be credited as of dividend payment dates, during the
period between the date of grant (or such later date as the Committee may set)
and the date the Stock Unit award expires (or such earlier date as the
Committee may set), as determined by the Administrator.  Dividend Equivalent Rights shall be payable
in cash or Shares, and may be subject to such conditions, as may be determined
by the Administrator.

4.5                                  Cancellation of Restricted Stock Units.

Unless the
Committee otherwise expressly provides, Restricted Stock Units that remain
subject to conditions to vesting at the time of termination of employment or
service or are subject to other conditions to vesting that have not been
satisfied by the time specified in the applicable Award Agreement shall not
vest and shall be cancelled, unless the Committee otherwise provides in or by
amendment to the applicable terms of the Award.

5.     OTHER PROVISIONS

5.1                                  Rights of Eligible Employees, Participants and
Beneficiaries.

(a)       Employment Status.  Status as an Eligible Employee shall not be
construed as a commitment that any Award will be made under this Plan to an
Eligible Employee or to Eligible Employees generally.

(b)       No Employment Contract.  Nothing contained in this Plan (or in any
other documents under this Plan or in any Award) shall confer upon any Eligible
Employee or Participant any right to continue in the employ or other service of
the Company, constitute any contract or agreement of employment or other
service or affect an employee’s status as an employee at will, nor shall
interfere in any way with the right of the Company to change a person’s
compensation or other benefits, or to terminate his or her employment or other
service, with or without cause.  Nothing
in this Section, however, is intended to adversely affect any express
independent right of such person under a separate employment or service
contract other than an Award Agreement.

(c)       Plan Not Funded.  Awards payable under this Plan shall be
payable in shares or from the general assets of the Corporation, and (except as
provided in Section 1.4(c)) no special or separate reserve, fund or deposit
shall be made to assure payment of such Awards. 
No Participant, Beneficiary or other person shall have any right, title
or interest in any fund or in any specific asset (including shares of Common
Stock, except as expressly otherwise provided) of the Company by reason of any
Award hereunder.

 10
 

 

Neither the provisions of
this Plan (or of any related documents), nor the creation or adoption of this
Plan, nor any action taken pursuant to the provisions of this Plan shall
create, or be construed to create, a trust of any kind or a fiduciary
relationship between the Company and any Participant, Beneficiary or other
person.  To the extent that a
Participant, Beneficiary or other person acquires a right to receive payment
pursuant to any Award hereunder, such right shall be no greater than the right
of any unsecured general creditor of the Company.

5.2                                  Adjustments; Acceleration.

(a)       Adjustments.  Upon or in contemplation of any
reclassification, recapitalization, stock split (including a stock split in the
form of a stock dividend) or reverse stock split; any merger, combination,
consolidation, or other reorganization; any spin-off, split-up, or similar
extraordinary dividend distribution (“spin-off”) in respect of the Common Stock
(whether in the form of securities or property); any exchange of Common Stock
or other securities of the Corporation, or any similar, unusual or
extraordinary corporate transaction in respect of the Common Stock; or a sale
of all or substantially all the assets of the Corporation as an entirety (“asset
sale”); then the Committee shall, in such manner, to such extent (if any) and
at such time as it deems appropriate and equitable in the circumstances:

(1)            proportionately adjust any or all of
(a) the number and type of shares of Common Stock (or other securities) that
thereafter may be made the subject of Awards (including the specific maxima and
numbers of shares set forth elsewhere in this Plan), (b) the number, amount and
type of shares of Common Stock (or other securities or property) subject to any
or all outstanding Awards, (c) the grant, purchase, or exercise price of any or
all outstanding Awards, (d) the securities, cash or other property deliverable
upon exercise of any outstanding Awards, or (e) (subject to limitations under
Section 5.10(c)) the performance standards appropriate to any outstanding
Awards, or

(2)           make provision for a cash payment or
for the assumption, substitution or exchange of any or all outstanding
share-based Awards or the cash, securities or property deliverable to the holder
of any or all outstanding share-based Awards, based upon the distribution or
consideration payable to holders of the Common Stock upon or in respect of such
event.

The Committee may adopt
such valuation methodologies for outstanding Awards as it deems reasonable in
the event of a cash or property settlement and, in the case of Options, but
without limitation on other methodologies, may base such settlement solely upon
the excess if any of the amount payable upon or in respect of such event over
the exercise or strike price of the Award.

In each case, with
respect to Awards of Incentive Stock Options, no adjustment shall be made in a
manner that would cause the Plan to violate Section 422 or 424(a) of the Code
or any successor provisions without the written consent of holders materially
adversely affected thereby.  Further, in
each case, no adjustment shall be made to any Award that 

 11
 

 

would subject the
holder of such Award to additional tax under Section 409A of the Code with
respect to such Award.

In any of such
events, the Committee may take such action prior to such event to the extent
that the Committee deems the action necessary to permit the Participant to
realize the benefits intended to be conveyed with respect to the underlying
shares in the same manner as is or will be available to shareholders generally.

(b)           Possible
Early Termination of Accelerated Awards. If any Option or other right to
acquire Common Stock under this Plan has been fully accelerated as required or
permitted by Section 5.2(c) but is not exercised prior to (1) a dissolution of
the Company, or (2) an event described in Section 5.2(a) that the Company does
not survive, or (3) the consummation of an event described in Section 5.2(a)
involving a Change of Control Event approved by the Board, such Option or right
shall terminate, subject to any provision that has been expressly made by the
Board or the Committee, through a plan of reorganization or otherwise, for the
survival, substitution, assumption, exchange or other settlement of such Option
or right.

(c)           Acceleration
of Awards Upon Change in Control. 
Unless prior to a Change in Control Event the Committee determines that,
upon its occurrence, benefits under any or all Awards shall not be accelerated
or determines that only certain or limited benefits under any or all Awards
shall be accelerated and the extent to which they shall be accelerated, and/or
establishes a different time in respect of such Event for such acceleration,
then upon the occurrence of a Change in Control Event:

(1)            each Option shall become immediately
exercisable, and

(2)            Restricted
Stock shall immediately vest free of restrictions, and

(3)            Restricted Stock Units shall
immediately vest free of restrictions and become payable.

The Committee may
override the limitations on acceleration in this Section 5.2(c) by express
provision in the Award Agreement and may accord any Eligible Employee a right
to refuse any acceleration, whether pursuant to the Award Agreement or
otherwise, in such circumstances as the Committee may approve.  Any acceleration of Awards shall comply with
applicable legal requirements and, if necessary to accomplish the purposes of
the acceleration or if the circumstances require, may be deemed by the
Committee to occur (subject to Section 5.2(d) a limited period of time not
greater than 30 days before the event. 
Without limiting the generality of the foregoing, the Committee may deem
an acceleration to occur immediately prior to the applicable event and/or reinstate
the original terms of an Award if an event giving rise to an acceleration does
not occur.  Notwithstanding the
foregoing, an Award shall not be accelerated and/or become payable pursuant to
this Section 5(c) to the extent that such acceleration and/or payment shall
cause the holder of such Award to be subjected to additional tax under Section
409A of the Code with respect to such Award.

(d)       Possible Rescission of Acceleration.  If the vesting of an Award has been
accelerated expressly in anticipation of an event or upon shareholder approval
of an 

 12
 

 

event and the Committee
or the Board later determines that the event will not occur, the Committee may
rescind the effect of the acceleration as to any then outstanding and
unexercised or otherwise unvested Awards.

(e)       Acceleration Upon Termination of
Service Following a Change in Control.

(1)       Termination After Change in Control.  If any Participant’s employment is terminated
by the Company upon or within one year after a Change in Control Event, and the
termination is not the result of death, Total Disability, Retirement or a
termination for Cause, then, subject to the other provisions of this Section
5.2 (including without limitation Section 5.2(b) and Section 5.4), all
outstanding Options and other Awards held
by the Participant shall be deemed fully vested immediately prior to the
Severance Date and Stock Units shall become payable upon such Severance Date
(or, to the extent applicable under Section 409A, upon the date that is six
months after such Severance Date), irrespective of the vesting and/or payment
provisions of the Participant’s Award Agreement, unless the Award Agreement
specifies a different result in the case of a Change in Control Event.

(2)       No Extension Beyond Expiration.  Notwithstanding the foregoing, in no event
shall an Award be reinstated or extended beyond its final expiration date.

5.3                                  Effect of Termination of Service on Awards.

(a)       General.  The Committee shall establish the effect of a
termination of employment on the rights and benefits under each Award under
this Plan and in so doing may make distinctions based upon the cause of
termination.

(b)       Events Not Deemed Terminations of
Service.  Unless Company policy or
the Committee otherwise provides, the employment relationship shall not be
considered terminated in the case of (i) sick leave, (ii) military leave, or
(iii) any other leave of absence authorized by the Company or the Committee;
provided that unless reemployment upon the expiration of such leave is
guaranteed by contract or law, such leave is for a period of not more than 90
days. In the case of any Eligible Employee on an approved leave of absence,
continued vesting of the Award while on leave from the employ of the Company
shall be suspended, unless the Committee otherwise provides or applicable law
otherwise requires.  In no event shall an
Award be exercised after the expiration of the term set forth in the Award
Agreement.

(c)       Effect of Change of Subsidiary Status.  For purposes of this Plan and any Award, if
an entity ceases to be a Subsidiary a termination of employment shall be deemed
to have occurred with respect to each Eligible Employee in respect of the
Subsidiary who does not continue as an Eligible Employee in respect of another
entity within the Company.

 13
 

 

5.4                                  Compliance with Laws.

This Plan, the granting
and vesting of Awards under this Plan, the offer, issuance and delivery of
shares of Common Stock, the acceptance of promissory notes and/or the payment
of money under this Plan or under Awards are subject to compliance with all
applicable federal and state laws, rules and regulations (including but not
limited to state and federal securities law and federal margin requirements)
and to such approvals by any listing, regulatory or governmental authority as
may, in the opinion of counsel for the Company, be necessary or advisable in
connection therewith.  The person
acquiring any securities under this Plan will, if requested by the Company,
provide such assurances and representations to the Company as the Committee may
deem necessary or desirable to assure compliance with all applicable legal and
accounting requirements.

5.5                                  Tax Matters.

(a)       Provision for Tax Withholding or
Offset.  Upon any exercise, vesting,
or payment of any Award or upon the disposition of shares of Common Stock
acquired pursuant to the exercise of an Incentive
Stock Option prior to satisfaction of the holding period requirements of
Section 422 of the Code, the Company shall have the right at its option to (i)
require the Participant (or Personal Representative or Beneficiary, as the case
may be) to pay or provide for payment of the minimum amount of any taxes which
the Company may be required to withhold with respect to such Award event or
payment or (ii) deduct from any amount payable in cash the minimum amount of
any taxes which the Company may be required to withhold with respect to such
cash payment.  In any case where a tax is
required to be withheld in connection with the delivery of shares of Common
Stock under this Plan, the Committee may in its sole discretion (subject to
Section 5.4) grant (either at the time of the Award or thereafter) to the
Participant the right to elect, pursuant to such rules and subject to such
conditions as the Committee may establish, to have the Corporation reduce the
number of shares to be delivered by (or otherwise reacquire) the appropriate
number of shares valued at their Fair Market Value, to satisfy such minimum
withholding obligation, determined in each case as of the trading day next
preceding the applicable date of exercise, vesting or payment.  Shares in no event
shall be withheld in excess of the minimum number required for tax withholding
under these provisions.

5.6                                  Plan Amendment, Termination and Suspension.

(a)       Board Authorization.  The Board may, at any time, terminate or,
from time to time, amend, modify or suspend this Plan, in whole or in
part.  No Awards may be granted during
any suspension of this Plan or after termination of this Plan, but the
Committee shall retain jurisdiction as to Awards then outstanding in accordance
with the terms of this Plan.

(b)       Shareholder Approval.  To the extent then required under Sections
162, 422 or 424 of the Code or any other applicable law, or by the provisions
of Section 2.5 of the Plan, or deemed necessary or advisable by the Board, any
amendment to this Plan shall be subject to shareholder approval.

(c)       Amendments to Awards.  Without limiting any other express authority
of the Committee under (but subject to) the express limits of this Plan, the
Committee by agreement or resolution may waive conditions of or limitations on
Awards to Participants that the Committee in the prior exercise of its
discretion has imposed, 

 14
 

 

without the consent of a
Participant, and (subject to the requirements of Section 1.2(b)) may make other
changes to the terms and conditions of Awards that do not affect in any manner
materially adverse to the Participant, the Participant’s rights and benefits
under an Award.

(d)       Limitations on Amendments to Plan and
Awards.  No amendment, suspension or
termination of this Plan or change of or affecting any outstanding Award shall,
without written consent of the Participant, affect in any manner materially
adverse to the Participant any rights or benefits of the Participant or
obligations of the Company under any Award granted under this Plan prior to the
effective date of such change.  Changes
contemplated by Section 5.2 shall not be deemed to constitute changes or
amendments for purposes of this Section 5.6.

5.7                                  Privileges of Stock Ownership.

Except
as otherwise expressly authorized by the Committee or this Plan, a Participant
shall not be entitled to any privilege of stock ownership as to any shares of
Common Stock not actually delivered to and held of record by the
Participant.  No adjustment will be made
for dividends or other rights as a shareholder for which a record date is prior
to such date of delivery.

5.8                                  Effective Date of the Plan.

This
Plan is effective as of January 27, 2000 the date of approval by the
Board.  The Plan shall be submitted for
and subject to shareholder approval.

5.9                                  Term of
the Plan.

No
Award will be granted under this Plan after January 26, 2010 (the “termination
date”).  Unless otherwise expressly
provided in this Plan or in an applicable Award Agreement, any Award granted
prior to the termination date may extend beyond such date, and all authority of
the Committee with respect to Awards hereunder, including the authority to
amend an Award, shall continue during any suspension of this Plan and in
respect of Awards outstanding on the termination date.

5.10                           Governing
Law/Construction/Severability.

(a)       Choice of Law.  This Plan, the Awards, all documents
evidencing Awards and all other related documents shall be governed by, and
construed in accordance with the laws of the State of California.

(b)       Severability.  If a court of
competent jurisdiction holds any provision invalid and unenforceable, the
remaining provisions of this Plan shall continue in effect.

 15
 

 

(c)       Plan Construction.

(1)       Rule 16b-3.  It is the intent of the Corporation that the
Awards and transactions permitted by Awards be interpreted in a manner that, in
the case of Participants who are or may be subject to Section 16 of the
Exchange Act, satisfies the applicable requirements for exemptions under Rule
16b-3.  The exemption will not be
available if the authorization of actions by any Committee of the Board with
respect to such Awards does not satisfy the applicable conditions of Rule
16b-3.  Notwithstanding the foregoing,
the Corporation shall have no liability to any Participant for Section 16 consequences
of Awards or events under Awards.

(2)       Section 162(m).  It is the further intent of the Company that
(to the extent the Company or Awards under this Plan may be or become subject
to limitations on deductibility under Section 162(m) of the Code), Options
granted with an exercise or base price not less than Fair Market Value
on the date of grant will qualify as performance-based compensation or
otherwise be exempt from deductibility limitations under Section 162(m) of the
Code, to the extent that the authorization of the Award (or the payment
thereof, as the case may be) satisfies any applicable administrative
requirements thereof.

5.11                            Captions.

Captions and headings are
given to the sections and subsections of this Plan solely as a convenience to facilitate
reference.  Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
this Plan or any provision thereof.

5.12                           Stock-Based
Awards in Substitution for Stock Options or Awards Granted by Other Corporation.

Awards may be granted to
Eligible Employees under this Plan in substitution for employee stock options,
stock appreciation rights, restricted stock or other stock-based awards granted
by other entities to persons who are or who will become Eligible Employees in
respect of the Company, in connection with a distribution, merger or other
reorganization by or with the granting entity or an affiliated entity, or the
acquisition by the Company, directly or indirectly, or all or a substantial
part of the stock or assets of the employing entity.

5.13                            Non-Exclusivity of
Plan.

Nothing in this
Plan shall limit or be deemed to limit the authority of the Board or the
Committee to grant awards or authorize any other compensation, with or without
reference to the Common Stock, under any other plan or authority.

5.14                           No
Corporate Action Restriction.

The existence of the
Plan, the Award Agreements and the Awards granted hereunder shall not limit,
affect or restrict in any way the right or power of the Board or the shareholders
of the Corporation to make or authorize: (a) any adjustment,

 16
 

 

recapitalization, reorganization or other change in
the Corporation’s or any Subsidiary’s capital structure or its business, (b)
any merger, amalgamation, consolidation or change in the ownership of the
Corporation or any subsidiary, (c) any issue of bonds, debentures, capital,
preferred or prior preference stock ahead of or affecting the Corporation’s or
any Subsidiary’s capital stock or the rights thereof, (d) any dissolution or liquidation
of the Corporation or any Subsidiary, (e) any sale or transfer of all or any
part of the Corporation or any Subsidiary’s assets or business, or (f) any
other corporate act or proceeding by the Corporation or any Subsidiary.  No participant, beneficiary or any other
person shall have any claim under any Award or Award Agreement against any
member of the Board or the Committee, or the Corporation or any employees,
officers or agents of the Corporation or any Subsidiary, as a result of any
such action.

5.15                           Other
Company Benefit and Compensation Program.

Payments and other
benefits received by a Participant under an Award made pursuant to this Plan
shall not be deemed a part of a Participant’s compensation for purposes of the
determination of benefits under any other employee welfare or benefit plans or
arrangements, if any, provided by the Corporation or any Subsidiary, except
where the Committee or the Board expressly otherwise provides or authorizes in
writing.  Awards under this Plan may be
made in addition to, in combination with, as alternatives to or in payment of
grants, awards or commitments under any other plans or arrangements of the
Company or the Subsidiaries.

6.      DEFINITIONS.

6.1                                  Definitions.

(a)       “Award” means an award of any
Option, Restricted Stock or Stock Unit or any combination thereof, whether
alternative or cumulative, authorized by and granted under this Plan.

(b)       “Award Agreement” means any
writing setting forth the terms of an Award that has been authorized by the
Committee.

(c)       “Award Date” means the date upon
which the Committee took the action granting an Award or such later date as the
Committee designates as the Award Date at the time of the Award.

(d)       “Award Period” means the period
beginning on an Award Date and ending on the expiration date of such Award.

(e)       “Beneficiary” means the person,
persons, trust or trusts designated by a Participant or, in the absence of a
designation, entitled by will or the laws of descent and distribution, to
receive the benefits specified in the Award Agreement and under this Plan in
the event of a Participant’s death, and shall mean the Participant’s executor
or administrator if no other Beneficiary is designated and able to act under
the circumstances.

(f)        “Board” means the Board of
Directors of the Corporation.

 17
 

 

(g)       “Cause”
with respect to a Participant means (unless otherwise expressly provided in the
applicable Award Agreement or another applicable contract with the Participant)
a termination of employment based upon a finding by the Company, acting in good
faith and based on its reasonable belief at the time, that the Participant:

(1)           has failed to render services to the
Company where such failure amounts to gross negligence or misconduct of the
Participant’s responsibility and duties; or

(2)           has committed an act of fraud or been
dishonest against the Company or any affiliate of the Company; or

(3)            has been convicted of a felony or
other crime involving moral turpitude.

A termination for Cause shall be deemed to occur
(subject to reinstatement upon a contrary final determination by the Committee)
on the date on which the Company first delivers written notice to the
Participant of a finding of termination for Cause.

(h)       “Change in Control Event” means
any of the following events

(1)           the dissolution or liquidation of
either the Company, unless its business is continued by another entity in which
holders of the Company’s voting securities immediately before the event own,
either directly or indirectly, more than 50% of the continuing entity’s voting
securities immediately after the event;

(2)           any sale, lease, exchange or other
transfer (in one or a series of transactions) of all or substantially all of
the assets of either the Company, unless its business is continued by another
entity in which holders of the Company’s voting securities immediately before
the event own, either directly or indirectly, more than 50% of the continuing
entity’s voting securities immediately after the event;

(3)           any
reorganization or merger of the
Company, unless the holders of the Company’s voting securities immediately
before the event own, either directly or indirectly, more than 50% of the
continuing or surviving entity’s voting securities immediately after the event;

(4)            an acquisition by any person, entity
or group acting in concert of more than 50% of the voting securities of the
Company, unless the holders of the Company’s voting securities immediately
before the event own, either directly or indirectly, more than 50% of the
acquirer’s voting securities immediately after the acquisition; or

(5)            a change of
one-half or more of the members of the Board of Directors of the Company within
a twelve-month period, unless the election or nomination for election by shareholders of new directors within such period constituting a majority of
the applicable Board was approved by the vote of at least two-thirds of the
directors then still in office who were in office at the beginning of the
twelve-month period.

 18
 

 

(i)        “Code” means the Internal Revenue
Code of 1986, as amended from time to time.

(j)        “Commission” means the Securities
and Exchange Commission.

(k)       “Committee” means the Board or one
or more committees appointed by the Board to administer all or certain aspects
of this Plan, each committee to be comprised solely of one or more directors or
such number as may be required under applicable law.

(l)        “Common Stock” means the Common
Shares of the Corporation and such other securities or property as may become
the subject of Awards, or become subject to Awards, pursuant to an adjustment
made under Section 5.2 of this Plan.

(m)      “Company” means, collectively, the
Corporation and its Subsidiaries.

(n)       “Corporation” means American
States Water Company, a California corporation, and its successors.

(o)        “Eligible Employee” means an
officer (whether or not a director) or key employee of the Company, including
participants in the American States Water Company Annual Incentive Plan.

(p)       “Exchange Act” means the
Securities Exchange Act of 1934, as amended from time to time.

(q)       “Fair Market Value” on any date
means (1) if the stock is listed or admitted to trade on a national securities
exchange, the closing price of the stock on the Composite Tape, as published in
the Western Edition of The Wall Street Journal, of the principal national
securities exchange on which the stock is so listed or admitted to trade, on
such date, or, if there is no trading of the stock on such date, then the
closing price of the stock as quoted on such Composite Tape on the next
preceding date on which there was trading in such shares; (2) if the stock is
not listed or admitted to trade on a national securities exchange, the last
price for the stock on such date, as furnished by the National Association of
Securities Dealers, Inc. (“NASD”) through the NASDAQ National Market Reporting
System or a similar organization if the NASD is no longer reporting such
information; (3) if the stock is not listed or admitted to trade on a national
securities exchange and is not reported on the National Market Reporting System,
the mean between the bid and asked price for the stock on such date, as
furnished by the NASD or a similar organization; or (4) if the stock is not
listed or admitted to trade on a national securities exchange, is not reported
on the National Market Reporting System and if bid and asked prices for the
stock are not furnished by the NASD or a similar organization, the value as
established by the Committee at such time for purposes of this Plan.

(r)        “Incentive Stock Option” means an
Option which is intended, as evidenced by its designation, as an incentive
stock option within the meaning of Section 422 of the Code, the award of which
contains such provisions and is made under such circumstances and to such
persons as may be necessary to comply with that section.

 19
 

 

(s)       “Nonqualified Stock Option” means
an Option that is designated as a Nonqualified Stock Option  and shall include any Option intended as an
Incentive Stock Option that fails to meet the applicable legal requirements
thereof.  Any Option granted hereunder
that is not designated as an incentive stock option shall be deemed to be
designated a nonqualified stock option under this Plan and not an incentive
stock option under the Code.

(t)        “Option” means an option to
purchase Common Stock granted under this Plan. 
The Committee shall designate any Option granted to an Eligible Employee
as a Nonqualified Stock Option or an Incentive Stock Option.

(u)       “Participant” means an Eligible
Employee who has been granted an Award under this Plan.

(v)       “Personal Representative” means
the person or persons who, upon the disability or incompetence of a
Participant, shall have acquired on behalf of the Participant, by legal
proceeding or otherwise, the power to exercise the rights or receive benefits
under this Plan and who shall have become the legal representative of the
Participant.

(w)      “Plan” means this 2000 Stock
Incentive Plan, as it may be amended from time to time.

(x)        “QDRO” means a qualified domestic
relations order.

(y)       “Restricted Shares” or “Restricted
Stock” means shares of Common Stock awarded to a Participant under this
Plan, subject to payment of such consideration, if any, and such conditions on
vesting (which may include, among others, the passage of time, specified
performance objectives or other factors) and such transfer and other
restrictions as are established in or pursuant to this Plan and the related
Award Agreement, for so long as such shares remain unvested under the terms of
the applicable Award Agreement.

(z)        “Restricted Stock Unit” means a
Stock Unit subject to such conditions on vesting and payout as the Committee
may determine.

(aa)     “Retirement” means retirement from
active service as an employee or officer of the Company on or after attaining
age 65.

(bb)     “Rule 16b-3”  means Rule 16b-3 as promulgated by the
Commission pursuant to the Exchange Act, as amended from time to time.

(cc)     “Section 16 Person” means a person
subject to Section 16(a) of the Exchange Act.

(dd)     “Securities Act” means the
Securities Act of 1933, as amended from time to time.

(ee)     “Stock Unit” means a bookkeeping
entry that serves as a unit of measurement relative to a share of Common Stock
for purposes of determining the payment of the Stock Unit grant.  Stock Units are not outstanding shares of
Common 

 20
 

 

Stock and do not entitle
a grantee to any dividend, voting or other rights in respect of any Common
Stock.  Stock Units may, however, by
express provision in the applicable Award Agreement, entitle a Participant to
dividend equivalent rights, credited in the form of cash or additional Stock
Units, as determined by the Committee.

(ff)       “Subsidiary” means any corporation
or other entity a majority of whose outstanding voting stock or voting power is
beneficially owned directly or indirectly by the Corporation.

(gg)     “Total Disability” means a
“permanent and total disability” within the meaning of Section 22(e)(3) of the
Code and such other disabilities, infirmities, afflictions or conditions as the
Committee by rule may include.

 21Exhibit 10.1

 

 

 

U.S. $65,000,000

deCODE genetics, Inc.

3.50% SENIOR CONVERTIBLE NOTES DUE 2011

PURCHASE AGREEMENT

 

 

November 14, 2006

 1
 

 

 

November 14, 2006

Lehman Brothers Inc.

As Representative of the several
   Initial Purchasers named in Schedule I
attached hereto,

c/o Lehman Brothers Inc.

745 Seventh Avenue

New York, New York 10019

Dear Sirs and Mesdames:

deCODE
genetics, Inc., a Delaware corporation (the “Company”), proposes to issue and sell to the
several purchasers named in Schedule I hereto (the “Initial Purchasers”)
$65,000,000 aggregate principal amount of its 3.50% Senior Convertible Notes
due 2011 (the “Firm Securities”) to be issued
pursuant to the provisions of an Indenture to be dated as of November 17, 2006
(the “Indenture”) between the Company and The
Bank of New York as Trustee (the “Trustee”).  The Company also proposes to issue and sell
to the several Initial Purchasers not more than an additional $15,000,000
aggregate principal amount of its 3.50% Senior Convertible Notes due 2011 (the “Additional Securities”), if and to the extent that you, as
Lead Managers of the offering, shall have determined to exercise, on behalf of
the Initial Purchasers, the right to purchase such 3.50% Senior Convertible
Notes due 2011 granted to the Initial Purchasers in Section 2 hereof. The Firm
Securities and the Additional Securities are hereinafter collectively referred
to as the “Securities”.  The Securities will be convertible, on the
terms and subject to the conditions set forth in the Indenture and the Securities,
into shares of common stock, par value $0.001 per share, of the Company (the “Underlying Securities”).

The
Securities and the Underlying Securities will be offered and sold to the
Initial Purchasers without being registered under the Securities Act of 1933,
as amended (the “Securities Act”),
pursuant to an exemption from registration provided by Section 4(2) of the
Securities Act, and you propose to offer and resell the Securities to qualified
institutional buyers in compliance with the exemption from registration
provided by Rule 144A under the Securities Act (the “Offering”).

The
Initial Purchasers and their direct and indirect transferees will be entitled
to the benefits of a Resale Registration Rights Agreement dated as of the
Closing Date (as defined in Section 4 hereof) between the Company and the
Initial Purchasers (the “Registration Rights
Agreement”).

In
connection with the sale of the Securities, the Company has prepared a
preliminary offering memorandum (the “Preliminary
Memorandum”), a pricing term sheet substantially in the form
attached hereto as Schedule II (the “Pricing Term Sheet”)
setting forth the terms of the Securities omitted from the Preliminary
Memorandum and will prepare a final offering memorandum (the “Final Memorandum”) including or
incorporating by reference a description of 

 2
 

 

 

the terms of the Securities and the Underlying
Securities, the terms of the offering and a
description of the Company.  The
Preliminary Memorandum, as supplemented and as amended as of the Applicable
Time (as defined below), together with the Pricing Term Sheet and any of the
documents listed on Schedule III hereto are collectively referred to as the “Pricing Disclosure Package”. 
The Company hereby confirms that that it has authorized the use of the
Pricing Disclosure Package and the Final Memorandum in connection with the
offering and resale of the Securities by the Initial Purchasers. “Applicable Time” means 8.30 a.m. (New York City time) on the
date of this Agreement.

Any
reference to the Preliminary Memorandum, the Pricing Disclosure Package or the
Final Memorandum shall be deemed to refer to and include the Company’s most
recent Annual Report on Form 10-K and all subsequent documents filed with the
U.S. Securities and Exchange Commission (the “Commission”)
pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934,
as amended (the “Exchange Act”), on or prior to the
date of the Preliminary Memorandum, the Pricing Disclosure Package or the Final
Memorandum, as the case may be.  Any
reference to the Preliminary Memorandum, Pricing Disclosure Package or the
Final Memorandum, as the case may be, as amended or supplemented, as of any
specified date, shall be deemed to include (i) any documents filed with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act after the
date of the Preliminary Memorandum, Pricing Disclosure Package or the Final
Memorandum, as the case may be, and prior to such specified date.  All documents filed under the Exchange Act
and so deemed to be included in the Preliminary Memorandum, Pricing Disclosure
Package or the Final Memorandum, as the case may be, or any amendment or
supplement thereto are hereinafter called the “Exchange Act
Reports”.  The Exchange Act
Reports, when they were or are filed with the Commission, conformed or will
conform in all material respects to the applicable requirements of the Exchange
Act and the applicable rules and regulations of the Commission thereunder.

It
is understood and acknowledged that upon original issuance thereof, and until
such time as the same is no longer required under the applicable requirements
of the Securities Act, the Securities (and all securities issued in exchange
therefor or in substitution thereof) shall bear the following legend (along with
such other legends as the Initial Purchasers and their counsel deem necessary):

‘‘THE NOTES EVIDENCED
HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”). NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 

 3
 

 

 

SECURITIES ACT. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS NOTIFIED THAT THE SELLER MAY BE
RELYING ON THE EXEMPTION FROM SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE
144A THEREUNDER. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1)
REPRESENTS THAT (A) IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING
ITS NOTE IN AN “OFFSHORE TRANSACTION” PURSUANT TO RULE 904 OF REGULATION S
UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE
WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k)
UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER
OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS NOTE) OR THE
LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF
THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE) AND (Y) SUCH LATER DATE, IF ANY, AS
MAY BE REQUIRED BY APPLICABLE LAW (THE “RESALE RESTRICTION TERMINATION DATE”),
OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY, (B)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER
THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED
INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL
GIVE TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY, THE TRUSTEE AND THE
REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER 

 4
 

 

 

PURSUANT TO CLAUSE (D) OR
(E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/ OR
OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED
UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
AS USED HEREIN, THE TERMS “OFFSHORE TRANSACTION”, “UNITED STATES” AND “U.S.
PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES
ACT.”

1.     Representations
and Warranties. The Company represents and warrants to and agrees
with you that:

(a)   The Exchange Act Reports filed or to be filed
pursuant to the Exchange Act and incorporated by reference in either of the
Preliminary Memorandum, the Pricing Disclosure Package or the Final Memorandum
complied or will comply when so filed in all material respects with the
Exchange Act and the applicable rules and regulations of the Commission
thereunder

(b)   The Pricing Disclosure Package did not, as of
the Applicable Time, and will not, as of the Closing Date, contain an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading; provided that
no representation or warranty is made as to information contained in or omitted
from the Pricing Disclosure Package in reliance upon and in conformity with
written information furnished to the Company through the Representatives by or
on behalf of any Initial Purchasers specifically for inclusion therein (which
information is set forth in Schedule IV hereto).

(c)   The Final Memorandum will not, as of its date
and as of the Closing Date, contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading; provided that no representation or
warranty is made as to information contained in or omitted from the Final
Memorandum in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of any
Initial Purchasers specifically for inclusion therein (which information is set
forth in Schedule IV hereto).

(d)   The Company has not made any offer to sell or
solicitation of an offer to buy the Securities that would constitute a “free
writing prospectus” (if the offering of the Securities was made pursuant to a 

 5
 

 

 

registered
offering under the Securities Act), as defined in Rule 405 under the Securities
Act (a “Free Writing Offering Document”)
without the prior consent of the Representatives; any such Free Writing
Offering Document the use of which has been previously consented to by the
Initial Purchasers is set forth substantially in form and substance as attached
hereto on Schedule III.

(e)   The Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in each of the
Preliminary Memorandum, the Pricing Disclosure Package and the Final Memorandum
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or leasing
of property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.

(f)    Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described in each
of the Preliminary Memorandum, the Pricing Disclosure Package and the Final
Memorandum and is duly qualified to transact business and is in good standing
in each jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole; all of
the issued shares of capital stock of each subsidiary of the Company have been
duly authorized and validly issued, are fully paid and non-assessable and
except as disclosed in each of the Preliminary Memorandum, the Pricing
Disclosure Package and the Final Memorandum are owned directly by the Company,
free and clear of all liens, encumbrances, equities or claims.

(g)   This Agreement has been duly authorized,
executed and delivered by the Company.

(h)   The authorized capital stock of the Company
conforms as to legal matters to the description thereof contained in the
Pricing Disclosure Package and the Final Memorandum.

(i)    The outstanding shares of common stock of
the Company have been duly authorized and are validly issued, fully paid and
non-assessable.

 6
 

 

 

(j)    The Securities have been duly authorized and,
when executed and authenticated in accordance with the provisions of the
Indenture and delivered to and paid for by the Initial Purchasers in accordance
with the terms of this Agreement, will be valid and binding obligations of the
Company, enforceable in accordance with their terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors’ rights generally and equitable principles of general applicability,
and will be entitled to the benefits of the Indenture and the Registration
Rights Agreement pursuant to which such Securities are to be issued.

(k)   The Underlying Securities issuable upon
conversion of the Securities have been duly authorized and reserved and, when
issued upon conversion of the Securities in accordance with the terms of the
Securities, will be validly issued, fully paid and non-assessable, and
the issuance of the Underlying Securities will not be subject to any preemptive
or similar rights.

(l)    Each of the Indenture and the Registration
Rights Agreement has been duly authorized, and when executed and delivered by
the Company and, in the case of the Registration Rights Agreement, when
executed and delivered by the Initial Purchasers (assuming due authorization by
the Initial Purchasers) and, in the case of the Indenture, when executed and
delivered by the Trustee (assuming due authorization by the Trustee), will be a
valid and binding agreement of, the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors’ rights generally and equitable principles of
general applicability and except as rights to indemnification and contribution
under the Registration Rights Agreement may be limited under applicable law.

(m)  The execution and delivery by the Company of,
and the performance by the Company of its obligations under, this Agreement,
the Indenture, the Registration Rights Agreement and the Securities will not
contravene any provision of applicable law or the certificate of incorporation
or by-laws of the Company or any agreement or other instrument binding
upon the Company or any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or any
subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, the
Indenture, the Registration Rights Agreement and the Securities, except (i)
such as may be required by the securities or Blue Sky laws of the various
states of the United States of America or by the securities laws of other
applicable jurisdictions in connection with the offer and sale of the
Securities and 

 7
 

 

 

(ii) by Federal
and state securities laws with respect to the Company’s obligations under the
Registration Rights Agreement.

(n)   There has not occurred any material adverse
change, or any development involving a prospective material adverse change, in
the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that set
forth in the Preliminary Memorandum or in any amendment thereof provided to
prospective purchasers of the Securities.

(o)   There are no legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or any
of its subsidiaries is subject other than proceedings accurately described in
all material respects in each of the Preliminary Memorandum, the Pricing
Disclosure Package and the Final Memorandum and proceedings that would not have
a material adverse effect on the Company and its subsidiaries, taken as a
whole, or on the power or ability of the Company to perform its obligations
under this Agreement, the Indenture, the Registration Rights Agreement or the
Securities or to consummate the transactions contemplated by each of the
Preliminary Memorandum, the Pricing Disclosure Package and the Final
Memorandum.

(p)   The Company is not, and after giving effect
to the offering and sale of the Securities and the application of the proceeds
thereof as described in each of the Preliminary Memorandum, the Pricing
Disclosure Package and the Final Memorandum will not be, required to register
as an “investment company” as such term is defined in the Investment Company
Act of 1940.

(q)   Neither the Company nor any affiliate (as
defined in Rule 501(b) of Regulation D under the Securities Act, an “Affiliate”) of the Company has directly, or
through any agent, (i) sold, offered for sale, solicited offers to buy or
otherwise negotiated in respect of, any security (as defined in the Securities
Act) which is or will be integrated with the sale of the Securities in a manner
that would require the registration under the Securities Act of the Securities
or (ii) offered, solicited offers to buy or sold the Securities by any form of
general solicitation or general advertising (as those terms are used in
Regulation D under the Securities Act) or in any manner involving a public
offering within the meaning of Section 4(2) of the Securities Act.

(r)    Assuming the accuracy of the Initial
Purchasers’ representations, warranties and covenants contained herein, it is
not necessary in connection with the offer, sale and delivery of the Securities
to the Initial Purchasers in the manner contemplated by this Agreement to 

 

 8
 

 

 

register the
Securities under the Securities Act or to qualify the Indenture under the Trust
Indenture Act of 1939, as amended.

(s)   The Securities satisfy the requirements set
forth in Rule 144A(d)(3) under the Securities Act.

(t)    The Company and its subsidiaries (i) are in
compliance with any and all applicable Icelandic and United States federal,
state and local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants (“Environmental
Laws”), (ii) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.

(u)   There are no costs or liabilities associated
with Environmental Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.

(v)   The Company and its subsidiaries have good
and marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which 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 are described in each of the
Preliminary Memorandum, the Pricing Disclosure Package and the Final Memorandum
or such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries, in each case except as described
in or contemplated by each of the Preliminary Memorandum, the Pricing
Disclosure Package and the Final Memorandum.

(w)  The Company and its subsidiaries own or
possess, or can acquire on reasonable terms, all material patents, patent
rights, licenses, 

 9
 

 

 

inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them, and, except as disclosed in
each of the Preliminary Memorandum, the Pricing Disclosure Package and the
Final Memorandum, neither the Company nor any of its subsidiaries has received
any notice of infringement of or conflict with asserted rights of others with
respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries, taken as
a whole.  All patents, patent rights,
licenses, inventions, copyrights, know how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names owned or possessed
and currently employed by (i) the subsidiaries of Islensk erfdagreining ehf.
(including Encode ehf.), and (ii) MediChem Life Sciences, Inc. (and its
subsidiaries, (including Emerald BioStructures, Inc.) are not material to the
Company and its subsidiaries, taken as a whole.

(x)    The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for; and neither the Company
nor any such subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or operations of
the Company and its subsidiaries, taken as a whole, except as described in or
contemplated by each of the Preliminary Memorandum, the Pricing Disclosure
Package and the Final Memorandum.

(y)   The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries, taken as
a whole, except as described in or contemplated by each of the

 10

 

 

Preliminary
Memorandum, the Pricing Disclosure Package and the Final Memorandum.

(z)    The Company and each of its subsidiaries
maintain 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
generally accepted accounting principles 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.

(aa)   The Company
and each of its subsidiaries is in compliance with the Foreign Corrupt
Practices Act of 1977 (the “FCPA”) and the
Company has no reason to believe that any of its officers, directors, employees
or agents have violated the provisions of the FCPA.

(bb)   The operations
of the Company are and have been conducted at all times in compliance with
applicable financial recordkeeping and reporting requirements of the Currency
and Foreign Transactions Reporting Act of 1970, as amended, the money
laundering statutes of all jurisdictions, the rules and regulations thereunder
and any related or similar rules, regulations or guidelines, issued,
administered or enforced by any governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by
or before any court or governmental agency, authority or body or any arbitrator
involving the Company with respect to the Money Laundering Laws is pending or,
to the knowledge of the Company, threatened, except, in each case, as would not
reasonably be expected to materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.

(cc)   Neither the
Company nor, to the knowledge of the Company, any director, officer, agent,
employee or affiliate of the Company is currently subject to any U.S. sanctions
administered by the Office of Foreign Assets Control of the U.S. Treasury
Department (“OFAC”); and the Company will not
directly or indirectly use the proceeds of the offering, or lend, contribute or
otherwise make available such proceeds to any joint venture partner or other
person or entity, for the purpose of financing the activities of any person
currently subject to any U.S. sanctions administered by OFAC.

(dd)   The Company
has not taken and will not take, directly or indirectly, any action designed to
or that has constituted or that could

 

 11
 

 

 

reasonably be
expected to cause or result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the shares
of the Securities.

(ee)   Except as
described in the Pricing Disclosure Package and the Final Memorandum (exclusive
of any amendments or supplements thereto subsequent to the date of this
Agreement), the Company has not sold, issued or distributed any shares of
common stock during the six-month period preceding the date hereof, including
any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities
Act, other than shares issued pursuant to employee benefit plans, qualified
stock option plans or other employee compensation plans or pursuant to
outstanding options, rights or warrants.

(ff)   Deloitte & Touche LLP,
PricewaterhouseCoopers LLP and PricewaterhouseCoopers ehf, who have certified
certain financial statements of the Company and its subsidiaries, are each
independent public accountants with respect to the Company and its subsidiaries
as required by the Securities Act.

Any
certificate signed by any officer of the Company and delivered to the Initial
Purchasers or counsel for the Initial Purchasers in connection with the
offering of the Securities shall be deemed a representation and warranty by the
Company, as to matters covered thereby, to the Initial Purchasers.

2.     Agreements
to Sell and Purchase. The Company hereby agrees to sell to the
several Initial Purchasers, and each Initial Purchaser, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective principal amount of Firm Securities set forth in
Schedule I hereto opposite its name at a purchase price (the “Purchase Price”) of 66.75% of the principal amount thereof, plus accrued
interest, if any, to the Closing Date (as defined in Section 4 hereof).

On
the basis of the representations and warranties contained in this Agreement,
and subject to its terms and conditions, the Company agrees to sell to the
Initial Purchasers the Additional Securities, and the Initial Purchasers shall
have the right but not the obligation to purchase, severally and not jointly,
up to $15,000,000 principal amount of Additional Securities at the Purchase
Price plus accrued interest, if any, to the date of payment and delivery.  If you, on behalf of the Initial Purchasers,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the principal amount of Additional Securities to be purchased by the Initial
Purchasers and the date on which such Additional Securities are to be
purchased.  Each purchase date must be at
least two business days after
the written notice is given and may not be earlier than the closing date for the
Firm Securities nor later than ten business days after the date of such
notice.  On each 

 12
 

 

 

day, if any, that Additional Securities are to be
purchased (an “Option Closing Date”), each
Initial Purchaser agrees, severally and not jointly, to purchase the principal
amount of Additional Securities (subject to such adjustments to eliminate
fractional Securities as you may determine) that bears the same proportion to
the total principal amount of Additional Securities to be purchased on such
Option Closing Date as the principal amount of Firm Securities set forth in
Schedule I hereto opposite the name of such Initial Purchaser bears to the
total principal amount of Firm Securities.

The
Company hereby agrees that, without the prior written consent of Lehman Brothers
Inc., on behalf of the Initial Purchasers, it will not, during the period
ending 90 days after the date of the Final
Memorandum, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock of the Company
or (ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the common
stock of the Company, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of common stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder or (B) transactions relating to shares of
common stock of the Company or other securities acquired in open market
transactions after the completion of the Offering or (C) the issuance by the
Company of shares of its common stock to be used in the context of strategic
investments or acquisitions for which the Initial Purchasers have previously
been consulted or (D) (i) the issuance by the Company of shares of common stock
upon the exercise of an option or a warrant or the conversion of a security
outstanding on the date hereof; and (ii) the issuance by the Company of shares
or options to purchase shares of common stock, and the issuance of shares upon
the exercise of such options, that are eligible for issuance under the Company’s
1996, 2002 and 2006 Equity Incentive Plans, as amended, on the Closing Date (as
defined in Section 4 hereof), or (E) the issuance by the Company of the
Underlying Securities upon conversion of the Securities in accordance with the
provisions of the Indenture. Notwithstanding the foregoing, Lehman Brothers
Inc., on behalf of the Initial Purchasers, will not unreasonably withhold its consent
to a waiver of the restrictions in the first sentence of this paragraph in
the event that the Company is able to issue securities on commercially
acceptable terms during such 90-day period. Nothing contained in this agreement
shall be construed to prevent the Company from filing with the Commission a
universal shelf registration statement on Form S-3 from the 30th day after the
date of the Final Memorandum.

3.     Terms of
Offering. The Company is advised by you that the Initial Purchasers
propose to make an offering of the Securities purchased by the Initial
Purchasers hereunder on the terms to be set forth in the Pricing Disclosure
Package and the Final Memorandum, as soon as practicable after this Agreement
is entered into as in your judgment is advisable.

 13
 

 

 

4.     Payment and Delivery. Payment for the Firm Securities shall be
made to the Company in Federal or other funds immediately available in New York
City against delivery of such Firm Securities for the respective accounts of
the several Initial Purchasers at 10:00 a.m., New York City time, on November
17, 2006 or at such other time on the same or such other date, not later than
November 24, 2006, as shall be designated in writing by you. The time and date
of such payment are hereinafter referred to as the “Closing Date”.

Payment
for any Additional Securities shall be made to the Company in Federal or other
funds immediately available in New York City against delivery of such
Additional Securities for the respective accounts of the several Initial
Purchasers at 10:00 a.m., New York City time, on the date specified in the
corresponding notice described in Section 2 or at such other time on the same
or on such other date, in any event not later than December 26, 2006, as shall
be designated in writing by you.

The
Securities shall be in definitive form or global form, as specified by you and
registered in such names and in such denominations as you shall request in
writing not later than two full business
days prior to the Closing Date or the
applicable Option Closing Date, as the case may be. The Securities shall be
delivered to you on the Closing Date or an Option Closing Date, as the case may
be, for the respective accounts of the several Initial Purchasers, with any
transfer taxes payable in connection with the transfer of the Securities to the
Initial Purchasers duly paid, against payment of the Purchase Price therefor
plus accrued interest, if any, to the date of payment and delivery.

5.     Conditions
to the Initial Purchasers’ Obligations.  The several obligations of the Initial
Purchasers to purchase and pay for the Securities on the Closing Date or any
Option Closing Date are subject to the following conditions:

(a)   Subsequent to the execution and delivery of
this Agreement and prior to the Closing Date or any Option Closing Date, as the
case may be:

(i)    there shall not have
occurred any downgrading, nor shall any notice have been given of any intended
or potential downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating accorded to any of
the Company’s securities by any “nationally recognized statistical rating
organization”, as such term is defined for purposes of Rule 436(g)(2) under the
Securities Act; and

(ii)   there shall not have occurred
any change, or any development involving a prospective change, in the
condition, financial or otherwise, or in the earnings, business or operations
of the Company and its subsidiaries, taken as a whole, from that set forth in
the Preliminary Memorandum provided to prospective 

 14
 

 

 

purchasers of the
Securities that, in your judgment, is material and adverse and that makes it,
in your judgment, impracticable to proceed with the completion of the sale and
payment for the Securities on the terms and in the manner contemplated in the
Pricing Disclosure Package and the Final Memorandum.

(b)   The Initial Purchasers shall have received on
the Closing Date, or such Option Closing Date, as the case may be, a
certificate, dated the Closing Date, or such Option Closing Date, as the case
may be, and signed by an executive officer of the Company, to the effect set
forth in Sections 5(a)(i) and 5(a)(ii) above and to the effect that the
representations and warranties of the Company contained in this Agreement are
true and correct as of the Closing Date, or such Option Closing Date, as the
case may be, and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date, or such Option Closing Date, as the
case may be.

The officer signing and delivering such certificate
may rely upon the best of his or her knowledge as to proceedings threatened.

(c)   The Initial Purchasers shall not have
discovered and disclosed to the Company on or prior to the Closing Date that
the Pricing Disclosure Package, the Final Offering Memorandum, any Free Writing
Offering Document, or any amendment or supplement thereto, contains an untrue
statement of a fact which, in the opinion of Davis Polk & Wardwell, counsel
for the Initial Purchasers, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein or is
necessary to make the statements therein not misleading.

(d)   All corporate proceedings and other legal
matters incident to the authorization, form and validity of this Agreement, the
Securities, the Pricing Disclosure Package, the Final Offering Memorandum, and
all other legal matters relating to this Agreement and the transactions
contemplated hereby shall be reasonably satisfactory in all material respects
to counsel for the Initial Purchasers, and the Company shall have furnished to
such counsel all documents and information that they may reasonably request to
enable them to pass upon such matters.

(e)   The Initial Purchasers shall have received on
the Closing Date, or such Option Closing Date, as the case may be, opinions of
Stevens & Lee, P.C., U.S. counsel for the Company, dated the Closing Date,
or such Option Closing Date, as the case may be, to the effect set forth in
Exhibits A-1 and A-2 hereto.

 15
 

 

 

(f)    The Initial Purchasers shall have received
on the Closing Date, or such Option Closing Date, as the case may be, an
opinion of Lögmenn Skolavordustig 12, Icelandic counsel for the Company, dated
the Closing Date, or such Option Closing Date, as the case may be, to the
effect set forth in Exhibit B hereto.

(g)   The Initial Purchasers shall have received on
the Closing Date, or such Option Closing Date, as the case may be, an opinion
of Hamilton Brook Smith & Reynolds, P.C., U.S. Intellectual Property
counsel for the Company, dated the Closing Date, or such Option Closing Date,
as the case may be, to the effect set forth in Exhibit C hereto.

(h)   The Initial Purchasers shall have received on
the Closing Date, or such Option Closing Date, as the case may be, an opinion
of Davis Polk & Wardwell, U.S. counsel for the Initial Purchasers, dated
the Closing Date, or such Option Closing Date, as the case may be, to the
effect set forth in Exhibit D hereto.

(i)    The Initial Purchasers shall have received,
on each of the date hereof and the Closing Date, or such Option Closing Date,
as the case may be, a letter dated the date hereof or the Closing Date, or such
Option Closing Date, as the case may be, in form and substance satisfactory to
the Initial Purchasers, from each of Deloitte & Touche LLP,
PricewaterhouseCoopers LLP, and PricewaterhouseCoopers ehf, independent public
accountants, containing statements and information of the type ordinarily
included in accountants’ “comfort letters” to underwriters with respect to the
financial statements and certain financial information contained in or
incorporated by reference into each of the Preliminary Memorandum, the Pricing
Disclosure Package and the Final Memorandum; provided
that the letter delivered on the Closing Date shall use a “cut-off date” not
earlier than the date hereof and any letter delivered on any Option Closing
Date shall use a “cut-off date” not earlier than the first business
day immediately preceding such Option Closing Date.

(j)    The “lock-up” agreements, each substantially
in the form of Exhibit E hereto, between the Initial Purchasers and the
directors and executive officers of the Company, in each case relating to sales
and certain other dispositions of shares of common stock or certain other
securities of the Company, delivered to you on or before the date hereof, shall
be in full force and effect on the Closing Date.

(k)   The Initial Purchasers shall have received on
the Closing Date an opinion of Marshall, Gerstein & Borun LLP. Intellectual
Property counsel for the Company, dated the Closing Date to the effect set
forth in Exhibit F hereto.

 16
 

 

 

(l)     The Initial Purchasers shall have received
on the Closing Date an opinion of Heslin Rothenberg Farley & Mesiti, P.C.,
Intellectual Property counsel for the Company, dated the Closing Date to the
effect set forth in Exhibit G hereto.

All
opinions, letters, evidence and certificates mentioned above or elsewhere in
this Agreement shall be deemed to be in compliance with the provisions hereof
only if they are in form and substance 
reasonably satisfactory to counsel for the Initial Purchasers.

The
several obligations of the Initial Purchasers to purchase Additional Securities
hereunder are subject to the delivery to you on the applicable Option Closing
Date of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization execution and authentication of
the Additional Securities to be sold on such Option Closing Date and other
matters related to the execution and authentication of such Additional
Securities.

6.     Covenants
of the Company. In further consideration of the agreements of the
Initial Purchasers herein contained, the Company covenants with each Initial
Purchaser as follows:

(a)   To furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Final Memorandum, any documents
incorporated by reference therein and any supplements and amendments thereto as
you may reasonably request.

(b)   Before amending or supplementing either the
Preliminary Memorandum, the Pricing Disclosure Package or the Final Memorandum
(other than by the filing with the Commission of a document incorporated
therein by reference), to furnish to you a copy of each such proposed amendment
or supplement and not to use any such proposed amendment or supplement to which
you reasonably object.

(c)   If, during such period after the date hereof
and prior to the date on which all of the Securities shall have been sold by
the Initial Purchasers, any event shall occur or condition exist as a result of
which it is necessary to amend or supplement the Pricing Disclosure Package or
the Final Memorandum in order to make the statements therein, in the light of
the circumstances under which they were made when either the Pricing Disclosure
Package or the Final Memorandum is delivered to a purchaser, not misleading, or
if, in the opinion of counsel for the Initial Purchasers, it is necessary to
amend or supplement the Pricing Disclosure Package or the Final Memorandum to
comply with applicable law, forthwith to prepare and furnish, at its own
expense, to the Initial Purchasers, either

 17
 

 

 

amendments or
supplements to the Pricing Disclosure Package or the Final Memorandum so that
the statements in the Pricing Disclosure Package and the Final Memorandum, as
the case may be, as so amended or supplemented will not, in the light of the
circumstances under which they were made when either the Pricing Disclosure
Package or the Final Memorandum is delivered to a purchaser, be misleading or
so that the Pricing Disclosure Package and the Final Memorandum, as amended or
supplemented, will comply with applicable law.

(d)      The
Company will not make any offer to sell or solicitation of an offer to buy the
Securities that would constitute a Free Writing Offering Document without the
prior consent of the Representatives, which consent shall not be unreasonably
withheld or delayed; if at any time following issuance of a Free Writing
Offering Document any event occurred or occurs as a result of which such Free
Writing Offering Document conflicts with the information in the Preliminary
Memorandum, the Pricing Disclosure Package or the Final Memorandum or, when
taken together with the information in the Preliminary Memorandum, the Pricing
Disclosure Package or the Final Memorandum, includes an untrue statement of a
material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstances then prevailing, not
misleading, as promptly as practicable after becoming aware thereof, the
Company will give notice thereof to the Initial Purchasers through the
Representatives and, if requested by the Representatives, will prepare and
furnish without charge to each Initial Purchaser a Free Writing Offering
Document or other document which will correct such conflict, statement or
omission.

(e)   To endeavor to qualify the Securities for
offer and sale under the securities or Blue Sky laws of such jurisdictions as
you shall reasonably request.

(f)    Whether or not the transactions contemplated
in this Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all expenses incident to the performance of its obligations
under this Agreement, including:  (i) the
fees, disbursements and expenses of the Company’s counsel and the Company’s accountants
in connection with the issuance and sale of the Securities and all other fees
or expenses in connection with the preparation of each of the Preliminary
Memorandum, the Pricing Disclosure Package and the Final Memorandum and all
amendments and supplements thereto, including all printing costs associated
there­with, and the delivering of copies thereof to the Initial Purchasers, in
the quantities hereinabove specified, (ii) all costs and expenses related to
the transfer and delivery of the Securities to the Initial Purchasers,
including any transfer or other taxes payable thereon, (iii) the cost of
printing or producing any Blue Sky or Legal Investment memorandum in connection
with the offer and sale of the Securities under 

 18
 

 

 

state securities
laws and all expenses in connection with the qualification of the Securities
for offer and sale under state securities laws as provided in Section 6(e)
hereof, including filing fees and the reasonable fees and disbursements of
counsel to the Initial Purchasers incurred in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) any fees charged by the rating agencies of the rating of the
Securities, if any, (v) the fees and expenses, if any, incurred in connection
with the admission of the Securities for trading in PORTAL or any appropriate
market system, (vi) the costs and charges of the Trustee and any transfer
agent, registrar or depositary, (vii) the cost of the preparation, issuance and
delivery of the Securities, (viii) the costs and expenses of the Company
relating to investor presentations on any “road show” undertaken in connection
with the marketing of the offering of the Securities, including, without
limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with the
road show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show, (ix) the costs and expenses of the Initial Purchasers in connection with
the transactions contemplated hereby, and (x) all other costs and expenses
incident to the performance of the obligations of the Company hereunder for
which provision is not otherwise made in this Section.

(g)   Not to sell or permit any Affiliate to sell,
offer for sale or solicit offers to buy or otherwise negotiate in respect of
any security (as defined in the Securities Act) which could be integrated with
the sale of the Securities in a manner which would require the registration
under the Securities Act of the Securities.

(h)   Not to solicit any offer to buy or offer or
sell the Securities or the Underlying Securities by means of any form of
general solicitation or general advertising (as those terms are used in
Regulation D under the Securities Act) or in any manner involving a public
offering within the meaning of Section 4(2) of the Securities Act.

(i)    While any of the Securities or the
Underlying Securities remain “restricted securities” within the meaning of the
Securities Act, to make available, upon request, to any seller of such
Securities the information specified in Rule 144A(d)(4) under the Securities
Act, unless the Company is then subject to Section 13 or 15(d) of the Exchange
Act.

(j)    If requested by you, to use its best efforts
to permit the Securities to be designated PORTAL securities in accordance with
the rules and regulations adopted by the National Association of Securities
Dealers, Inc. relating to trading in the PORTAL Market.

 19

 

 

(k)   During the period of two
years after the Closing Date or any Option Closing Date, if later, the Company
will not, and will not permit any of its affiliates (as defined in Rule 144
under the Securities Act) to resell any of the Securities or the Underlying
Securities which constitute “restricted securities” under Rule 144 that have
been reacquired by any of them; provided, however, that this covenant shall not apply to any of the
Securities or the Underlying Securities that are sold by the Company, or have
previously been sold, pursuant to an effective registration statement or under
Rule 144.

(l)    Not to take any action
prohibited by Regulation M under the Exchange Act in connection with the
distribution of the Securities contemplated hereby.

(m)  To use its best efforts to
cause the directors and executive officers of the Company (whose names are set
forth in Schedule V hereto) to execute on or prior to the Closing Date Lock-up
Agreements substantially in the form of Exhibit E hereto.

7.     Offering of Securities; Restrictions on
Transfer.

(a)   Each Initial Purchaser,
severally and not jointly, represents and warrants that such Initial Purchaser
is a qualified institutional buyer as defined in Rule 144A under the Securities
Act (a “QIB”).  Each Initial Purchaser, severally and not
jointly, agrees with the Company that (i) it will not sell, offer for sale,
solicit offers to buy or otherwise negotiate in respect of, any security (as
defined in the Securities Act) which is or will be integrated with the sale of the
Securities in a manner that would require the registration under the Securities
Act of the Securities, (ii) offer, solicit offers to buy or sell the Securities
by any form of general solicitation or general advertising (as those terms are
used in Regulation D under the Securities Act) or in any manner involving a
public offering within the meaning of Section 4(2) of the Securities Act, (iii)
it will solicit offers for such Securities only from, and will offer such
Securities only to, persons that it reasonably believes to be QIBs that in
purchasing such Securities are deemed to have represented and agreed as
provided in the Final Memorandum under the caption “Notice to Investors”.

(b)   Each Initial Purchaser has
not, nor, prior to the later to occur of (A) the Closing Date and (B)
completion of the distribution of the Securities, will not, use, authorize use
of, refer to or distribute any material in connection with the offering and
sale of the Securities other than (i) the Preliminary Memorandum, the Pricing
Disclosure Package, the Final Memorandum, (ii) any written communication that
contains no “issuer information” (as defined in Rule 433(h)(2) under the Act)
that was not included (including through incorporation by reference) in the
Preliminary Memorandum or any Free Writing Offering Document listed on Schedule
III hereto, (iii) the Free Writing Offering Documents listed on Schedule III 

 20
 

 

 

hereto, (iv) any
written communication prepared by such Initial Purchaser and approved by the
Company in writing, or (v) any written communication relating to or that
contains the terms of the Securities and/or other information that was included
(including through incorporation by reference) in the Preliminary Memorandum,
the Pricing Disclosure Package or the Final Memorandum.

8.     Indemnity
and Contribution

(a)   The Company agrees to
indemnify and hold harmless each Initial Purchaser, each person, if any, who
controls any Initial Purchaser within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in any Free Writing
Offering Document, the Preliminary Memorandum, the Pricing Disclosure Package
and the Final Memorandum (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact necessary to make the
statements therein in the light of the circumstances under which they were made
not misleading, except insofar as such losses, claims, damages or liabilities
are caused by any such untrue statement or omission or alleged untrue statement
or omission based upon information relating to any Initial Purchaser furnished
to the Company in writing by such Initial Purchaser through you expressly for
use therein (which information is set forth in Schedule IV hereto).

(b)   Each Initial Purchaser
agrees, severally and not jointly, to indemnify and hold harmless the Company,
its directors, its officers and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the Company
to such Initial Purchaser, but only with reference to information relating to
such Initial Purchaser furnished to the Company in writing by such Initial
Purchaser through you expressly for use in either the Preliminary Memorandum,
the Pricing Disclosure Package or the Final Memorandum or any amendments or
supplements thereto (which information is set forth in Schedule IV hereto).

(c)   In case any proceeding
(including any governmental investigation) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to Section 8(a) or
8(d), such person (the “indemnified party”)
shall promptly notify the person against whom such indemnity may be sought (the
“indemnifying party”) in writing.

 21
 

 

 

The indemnifying
party will be entitled to participate in such proceeding, and to the extent
that it may elect by written notice delivered to the indemnified party promptly
after receiving the aforesaid notice from such indemnified party, to assume the
defense thereof with counsel satisfactory to such indemnified party.  Whether or not the indemnifying party elects
to participate in such proceeding, it shall, upon request of the indemnified
party, retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i)
the indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
It is understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and expenses of
more than one separate firm (in addition to any local counsel) for all such
indemnified parties and that all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by Lehman Brothers
Inc., in the case of parties indemnified pursuant to Section 8(a), and by the
Company, in the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such 

 22
 

 

 

settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.

(d)   To the extent the
indemnification provided for in Section 8(a) or 8(b) is unavailable to an
indemnified party or insufficient in respect of any losses, claims, damages or
liabilities referred to therein, then each indemnifying party under such
paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and
the Initial Purchasers on the other hand from the offering of the Securities or
(ii) if the allocation provided by clause 8(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 8(d)(i) above but also the relative
fault of the Company on the one hand and of the Initial Purchasers on the other
hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Initial Purchasers on the other hand in connection with the offering of
the Securities shall be deemed to be in the same respective proportions as the
net proceeds from the offering of the Securities (before deducting expenses)
received by the Company and the total discounts and commissions received by the
Initial Purchasers bear to the aggregate offering price of the Securities.  The relative fault of the Company on the one
hand and of the Initial Purchasers on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the Initial
Purchasers and the parties’ relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.  The Initial Purchasers’ respective
obligations to contribute pursuant to this Section 8 are several in proportion
to the respective principal amount of Securities they have purchased hereunder,
and not joint.

(e)   The Company and the Initial
Purchasers agree that it would not be just or equitable if contribution
pursuant to this Section 8 were determined by pro
rata allocation (even if the Initial Purchasers were treated as one
entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in Section 8(d).  The amount paid or payable by an indemnified
party as a result of the losses, claims, damages and liabilities referred to in
Section 8(d) shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Initial

 23
 

 

 

Purchaser shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities resold by it in the initial placement of such
Securities were offered to investors exceeds the amount of any damages that
such Initial Purchaser has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Section 8 are not exclusive and shall not limit any rights or remedies which
may otherwise be available to any indemnified party at law or in equity.

(f)    The indemnity and
contribution provisions contained in this Section 8 and the representations,
warranties and other statements of the Company contained in this Agreement
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Initial Purchaser, any person controlling any Initial Purchaser or by or on
behalf of the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Securities.

9.     Termination.  This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange or the
Nasdaq Global Market, (ii) trading of any securities of the Company shall have
been suspended on any exchange or in any over-the-counter market,
(iii) a material disruption in securities settlement, payment or clearance
services in the United States shall have occurred, (iv) a general moratorium on
commercial banking activities in New York or Iceland shall have been declared
by governmental authorities or (iv) there shall have occurred any outbreak or
escalation of hostilities or any change in financial markets or any calamity or
crisis that, in your judgment, is material and adverse and (b) in the case of
any of the events specified in clauses 9(a)(i) through
9(a)(v), such event, singly or together with any
other such event, makes it, in your judgment, impracticable or inadvisable to
proceed with the offer, sale or delivery of the Securities on the terms and in
the manner contemplated in the Pricing Disclosure Package and the Final
Memorandum.

10.   Research Analyst
Independence.  The Company
acknowledges that the Initial Purchasers’ research analysts and research
departments are required to be independent from their respective investment
banking divisions and are subject to certain regulations and internal policies,
and that such Initial Purchasers’ research analysts may hold views and make
statements or investment recommendations and/or publish research reports with
respect to the Company and/or the offering that differ from the views of their
respective investment

 24
 

 

 

banking divisions.  The Company hereby waives and releases, to
the fullest extent permitted by law, any claims that the Company may have
against the Initial Purchasers with respect to any conflict of interest that
may arise from the fact that the views expressed by their independent research
analysts and research departments may be different from or inconsistent with
the views or advice communicated to the Company by such Initial Purchasers’
investment banking divisions.  The
Company acknowledges that each of the Initial Purchasers is a full service
securities firm and as such from time to time, subject to applicable securities
laws, rules and regulations, may effect transactions for its own account or the
account of its customers and hold long or short positions in debt or equity
securities of the Company; provided, however, that nothing in this Section 9
shall relieve the Initial Purchasers of any responsibility or liability they
may otherwise bear in connection with activities in violation of applicable
securities laws, rules and regulations.

11.   No Fiduciary Duty.  The Company acknowledges and agrees that in
connection with this offering, sale of the Securities or any other services the
Initial Purchasers may be deemed to be providing hereunder, notwithstanding any
preexisting relationship, advisory or otherwise, between the parties or any
oral representations or assurances previously or subsequently made by the
Initial Purchasers: (i) no fiduciary or agency relationship between the Company
and any other person, on the one hand, and the Initial Purchasers, on the
other, exists; (ii) the Initial Purchasers are not acting as advisors, expert
or otherwise, to the Company, including, without limitation, with respect to
the determination of the public offering price of the Securities, and such
relationship between the Company, on the one hand, and the Initial Purchasers,
on the other, is entirely and solely commercial, based on arms-length
negotiations; (iii) any duties and obligations that the Initial Purchasers may
have to the Company shall be limited to those duties and obligations
specifically stated herein; and (iv) the Initial Purchasers and their
respective affiliates may have interests that differ from those of the Company.
The Company hereby waives any claims that the Company may have against the
Initial Purchasers with respect to any breach of fiduciary duty in connection
with the sale of the Securities.

12.   Effectiveness;
Defaulting Initial Purchasers. 
This Agreement shall become effective upon the execution and delivery
hereof by the parties hereto.

If,
on the Closing Date or an Option Closing Date, as the case may be, any one or
more of the Initial Purchasers shall fail or refuse to purchase Securities that
it has or they have agreed to purchase hereunder on such date, and the
aggregate principal amount of Securities which such defaulting Initial
Purchaser agreed but failed or refused to purchase is not more than one-tenth
of the principal amount of Securities to be purchased on such date, the other
Initial Purchasers shall be obligated severally in the proportions that the
principal amount of Securities set forth opposite their respective names in
Schedule I bears to the aggregate principal amount of Securities set forth
opposite the names of all such non-defaulting Initial Purchasers, or in
such other proportions as you may specify,

 

 25
 

 

 

to purchase the Securities which such defaulting
Initial Purchaser or Initial Purchasers agreed but failed or refused to
purchase on such date; provided
that in no event shall the principal amount of Securities that any Initial
Purchaser has agreed to purchase pursuant to this Agreement be increased
pursuant to this Section 12 by an amount in excess of one-ninth of such
principal amount of Securities without the written consent of such Initial
Purchaser.  If, on the Closing Date, any
Initial Purchaser or Initial Purchasers shall fail or refuse to purchase Firm
Securities and the aggregate principal amount of Firm Securities with respect
to which such default occurs is more than one-tenth of the aggregate
principal amount of Firm Securities to be purchased on such date, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Securities are not made within 36 hours after such default, this Agreement
shall terminate without liability on the part of any non-defaulting
Initial Purchaser or the Company. In any such case either you or the Company
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Pricing
Disclosure Package or the Final Memorandum or in any other documents or
arrangements may be effected. If, on an Option Closing Date, any Initial Purchaser
or Initial Purchasers shall fail or refuse to purchase Additional Securities
and the aggregate principal amount of Additional Securities with respect to
which such default occurs is more than one-tenth of the aggregate principal
amount of Additional Securities to be purchased on such Option Closing Date,
the non-defaulting Initial Purchasers shall have the option to (i) terminate
their obligation hereunder to purchase the Additional Securities or (ii)
purchase not less than the principal amount of Additional Securities that such
non-defaulting Initial Purchasers would have been obligated to purchase in the
absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Initial Purchaser from liability in respect of any default
of such Initial Purchaser under this Agreement.

If
this Agreement shall be terminated by the Initial Purchasers, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Initial Purchasers or such Initial
Purchasers as have so terminated this Agreement with respect to themselves,
severally, for all out-of-pocket expenses (including the fees and
disbursements of their counsel) reasonably incurred by such Initial Purchasers
in connection with this Agreement or the offering contemplated hereunder.

13.   Counterparts.
This Agreement may be signed in two or more counterparts, each of which shall
be an original, with the same effect as if the signatures thereto and hereto
were upon the same instrument.

14.   Applicable
Law. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of New York.

 26
 

 

 

15.   Headings.
The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed a part of this Agreement.

 

 27

 

 

	
  

  	
  Very truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
  deCODE genetics, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kari Stefansson

  
	
   

  	
   

  	
  Name:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
  Title:

  	
  Kari Stefansson

  

 

Purchase Agreement Execution Page

 28
 

 

 

Accepted as of the date hereof

Lehman Brothers Inc.

Acting severally on behalf of themselves and the 

several Initial Purchasers named in Schedule I hereto.

	
  By:

  	
  Lehman Brothers Inc.

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Mark Schwartz

  	
   

  
	
   

  	
  Name: 

  	
  Mark Schwartz

  	
   

  
	
   

  	
  Title:

  	
  VP-GCM

  	
   

  

 

Purchase Agreement Execution Page

 29

 

 

SCHEDULE
I

	
  Initial Purchaser

  	
   

  	
  Principal Amount

  of Firm Securities

  To Be Purchased

  	
   

  
	
  Lehman Brothers Inc.

  	
   

  	
  $

  	
  48,750,000

  	
   

  
	
  Piper Jaffray & Co.

  	
   

  	
  $

  	
  16,250,000

  	
   

  
	
  Total:

  	
   

  	
  $

  	
  65,000,000

  	
   

  

 

 S-1

 

 

SCHEDULE
II

deCODE genetics, Inc.

PRICING TERM SHEET

 S-2

 

 

SCHEDULE III

1.                                       Insert
list of any “electronic road show” and each document provided as an amendment
or supplement to the Preliminary Memorandum: None.

2.                                       Pricing
term sheet containing the terms of the securities, substantially in the form of
Schedule II.

 S-3

 

 

SCHEDULE
IV

(a)                                  The
names of the Initial Purchasers as they appear on the cover page of each of the
Preliminary Memorandum and the Final Memorandum.

(b)                                 The
information set forth in the list of names and principal amount of Firm
Securities purchased as they appear under the caption “Plan of Distribution”
following the first paragraph on page 50 of each of the Preliminary Memorandum
and the Final Memorandum.

(c)                                  The
information under the heading “Plan of Distribution” in the fourth paragraph on
page 50 of each of the Preliminary Memorandum and the Final Memorandum.

(d)                                 The
sixth and seventh paragraphs on page 51 of each of the Preliminary Memorandum
and the Final Memorandum concerning stabilization and short sales by the
Initial Purchasers.

 S-4

 

 

SCHEDULE
V

Directors

Terrance G. McGuire

Kari Stefansson (also is an executive officer)

J. Neal Armstrong

Birgit Stattin Norinder

Linda Buck

James R. Beery

Earl M. Collier, Jr.

Peter Goodfellow

Officers

Mark Gurney

Lance Thibault

Tomas Sigurdsson

Daniel Hartman

Jakob Sigurdsson

 S-5

 

EXHIBIT A-1

OPINION OF STEVENS & LEE, P.C.

U.S. COUNSEL FOR THE COMPANY

(i)            The Company has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of Delaware, has the corporate power and authority to own its property and
to conduct its business as described in the Pricing Disclosure Package and the
Final Memorandum and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries, taken as a
whole.

(ii)           The authorized capital stock of the Company
conforms as to legal matters to the description thereof contained in the
Pricing Disclosure Package and the Final Memorandum.

(iii)          The Securities have been duly
authorized by the Company and, upon execution and authentication thereof in
accordance with the Indenture and delivery and payment therefor pursuant to the
Purchase Agreement, will constitute the valid and legally binding obligations
of the Company enforceable against the Company in accordance with their terms
and will be entitled to the benefits of the Indenture and the Registration
Rights Agreement; the shares of Common Stock initially issuable upon conversion
of the Securities have been duly authorized and reserved for issuance upon such
conversion and, if issued on the date hereof in accordance with the terms of
the Securities upon such conversion, would be validly issued, fully paid and
non-assessable, and such issuance would not be subject to any preemptive or similar
rights of any securityholder of the Company under the Delaware Law or the
Certificate of Incorporation of the Company; and the shares of Common Stock
issued and outstanding on the date hereof have been duly authorized and validly
issued and are fully paid and non-assessable.

(iv)          Each of the Purchase Agreement,
Registration Rights Agreement and the Indenture has been duly authorized,
executed and delivered by
the Company and constitutes a valid and legally binding agreement of the
Company enforceable against the Company in accordance with its terms.

(v)           The execution and delivery by the
Company of, and the performance by the Company of its obligations under, the
Purchase Agreement, the Registration Rights Agreement, the Indenture and the
Securities by the Company (including the obligation of the Company to issue
shares of Common Stock upon the conversion of the Securities) will not
contravene any provision of applicable U.S. law or the certificate of
incorporation or by-laws of the Company or, to the best of such counsel’s
knowledge, any agreement or other instrument 

 A-1-1
 

 

governed by U.S. law or the laws of any State binding
upon the Company or any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or, to the best of such counsel’s
knowledge, any judgment, order or decree of any U.S. governmental body, agency
or court having jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification with, any U.S.
governmental body or agency is required for the performance by the Company of
its obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states of the United States in
connection with the offer and sale of the Securities.

(vi)          The statements in the Pricing
Disclosure Package and the Final Memorandum under the captions “The Offering”
and “Description of Notes” in each case insofar as such statements constitute
summaries of legal matters, fairly present the information called for with
respect to such legal matters and fairly summarize the matters referred to
therein.

(vii)         The statements in the Pricing
Disclosure Package and the Final Memorandum under the caption “United States
Federal Income Tax Consequences,” to the extent
that such statements purport to constitute a summary of the United States
Federal tax laws referred to therein, are accurate in all material respects.

(viii)        After due inquiry of the officers of the
Company, such counsel does not know of any legal or governmental proceedings
pending or threatened in the United States to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or any
of its subsidiaries is subject that would be required to be described in the
Pricing Disclosure Package and the Final Memorandum pursuant to the applicable
provisions of Regulation S-K if such Regulation were applicable to the Pricing
Disclosure Package and the Final Memorandum and are not so described or of any
statutes, regulations, contracts or other documents that would be required to
be described in the Pricing Disclosure Package and the Final Memorandum or
filed as exhibits to the Pricing Disclosure Package and the Final Memorandum
pursuant to the applicable provisions of Regulation S-K if such Regulation were
applicable to the Pricing Disclosure Package and the Final Memorandum that are
not so described or filed.

(ix)           The Company is not, and after giving
effect to the offering and sale of the Securities and the application of the
proceeds thereof as described in the Pricing Disclosure Package and the Final
Memorandum will not be, required to register as an “investment company” as such
term is defined in the Investment Company Act of 1940, as amended.

(x)            The Company has not made any offer
to sell or solicitation of an offer to buy the Securities that would constitute
a “free writing prospectus” (if the offering of the Securities was made
pursuant to a registered offering under the Securities Act), as defined in Rule
405 under the Securities Act (a “Free Writing Offering
Document”) without the prior consent of the Representatives; any
such 

 A-1-2
 

 

Free Writing Offering Document the use of which has
been previously consented to by the Initial Purchasers is set forth
substantially in form and substance as attached to Schedule III of the Purchase
Agreement.

(xi)           Based upon the representations,
warranties and agreements of the Company in Sections 1(n), 1(o), 6(f) and 6(g)
of the Purchase Agreement and of the Initial Purchasers in Section 7 of the
Purchase Agreement, it is not necessary in connection with the offer, sale and
delivery of the  Securities to the
Initial Purchasers under the Purchase Agreement or in connection with the
initial resale of such Securities by the Initial Purchasers in accordance with
Section 7 of the Purchase Agreement to register the Securities under the
Securities Act or to qualify the Indenture under the Trust Indenture Act, it
being understood that no opinion is expressed as to any subsequent resale of
any Security or Underlying Security.

(xii)          Such counsel is of the opinion that
each document filed pursuant to the Exchange Act and incorporated by reference
in the Pricing Disclosure Package and the Final Memorandum (except for the
financial statements and financial schedules and other financial and
statistical data included therein, as to which such counsel need not express
any belief) complied as to form when filed in all material respects with the
requirements of the Exchange Act and the applicable rules and regulations of
the Commission thereunder.

In
rendering such opinion, such counsel may rely as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries.

 A-1-3

 

 

EXHIBIT A-2

OPINION OF STEVENS & LEE, P.C.,

U.S. COUNSEL
FOR THE COMPANY

Such
counsel has participated in conferences with certain officers and
representatives of the Company, the independent public accountants for the
Company, the Initial Purchasers and the Initial Purchaser’s counsel at which
the contents of the Pricing Disclosure Package and the Final Memorandum and
related matters were discussed and, based solely on such participation and
without independent review or verification, except as stated in paragraph
(viii) of Exhibit A-1 no facts have come to the attention of such counsel which
would lead such counsel to believe that either the Pricing Disclosure Package
or the Final Memorandum contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, (it being understood that such counsel need express
no belief or opinion with respect to the financial statements, including the
notes and schedules thereto and other financial and statistical data).

 A-2-1

 

 

EXHIBIT B

OPINION OF LÖGMENN SKOLAVORDUSTIG 12,

ICELANDIC COUNSEL FOR THE COMPANY

(i)            No consent, approval, authorization
or order of, or qualification with, any governmental body or agency in Iceland
is required for the performance by the Company of its obligations under this
Agreement.

(ii)           The statements in the Pricing
Disclosure Package and the Final Memorandum under the captions “Risk Factors”
and “Business—Government Regulation”, in each case insofar as such statements
constitute summaries of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters referred to
therein.

(iii)          After due inquiry with officers of
Íslensk erfóagreining ehf (“IE”) and the Company, the Company, IE
and other Icelandic subsidiaries of the Company (A) are in compliance with any
and all applicable Icelandic Environmental Laws, (B) have received all permits,
licenses or other approvals required of them under applicable Icelandic
Environmental Laws to conduct their respective businesses and (C) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Icelandic Environmental Laws,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
would not, singly or in the aggregate, have a material adverse effect on the
Company and other Icelandic subsidiaries of the Company, taken as a whole.

(iv)          IE has been duly incorporated, is
validly existing as a corporation in good standing under the laws of Iceland,
has the corporate power and authority to own its property and to conduct its
business as described in the Pricing Disclosure Package and the Final
Memorandum and is duly qualified to transact business and is in good standing
in each jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a material
adverse effect on IE and the Company, taken as a whole.

(v)           After due inquiry with the Officers
of IE ad the Company, all of the issued shares of capital stock of IE have been
duly and validly authorized and issued, are fully paid and non-assessable. The
shares of IE are owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims.

(vi)          After due inquiry with officers of the
Company and of IE, such counsel does not know of any legal or governmental
proceedings pending or threatened in Iceland to which the Company, IE or other
Icelandic subsidiaries of the Company is a party or to which any of the
properties of the Company, IE or 

 B-1
 

 

other Icelandic subsidiaries of the Company is
subject, except as described in the Pricing Disclosure Package and the Final
Memorandum.

(vii)         The execution and delivery by the
Company of, and the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable Icelandic law or, to
the best of such counsel’s knowledge, any agreement or other instrument binding
upon IE that is material to the Company, IE or other Icelandic subsidiaries of
the Company, taken as a whole, or, to the best of such counsel’s knowledge, any
judgment, order or decree of any Icelandic governmental body, agency or court
having jurisdiction over the Company, IE or other Icelandic subsidiaries of the
Company, and no consent, approval, authorization or order of, or qualification
with, any Icelandic governmental body or agency is required for the performance
by the Company of its obligations under this Agreement.  The phrase “to the best of our knowledge”
where used hereinabove refers to the knowledge of the attorneys in this firm
who are actively involved in the representation of the Company and IE in
Iceland and does not include or imply any independent investigation or inquiry
as to the matter to which such phrase refers other than an inquiry of
responsible officers of the Company and IE.

 B-2

 

 

EXHIBIT C

OPINION OF HAMILTON

BROOK SMITH & REYNOLDS, P.C., 

INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY

deCODE
genetics, Inc. and deCODE genetics ehf. own or possess, or can acquire on
reasonable terms, all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them, and neither of them has
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would result in
any material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of deCODE genetics, Inc. and deCODE genetics
ehf., taken as a whole.

 C-1

 

 

EXHIBIT D

OPINION OF DAVIS POLK
& WARDWELL,

U.S. COUNSEL FOR THE INITIAL PURCHASERS

The
opinion of Davis Polk & Wardwell to be delivered pursuant to Section 5(h)
of the Purchase Agreement shall be to the effect that:

A.    The Purchase Agreement has been duly
authorized, executed and delivered by the Company.

B.    The Securities have been duly authorized by
the Company and, when executed and authenticated in accordance with the
provisions of the Indenture and delivered to and paid for by the Initial
Purchasers in accordance with the terms of the Purchase Agreement, will be
valid and binding obligations of the Company, enforceable in accordance with
their terms, subject to applicable bankruptcy, insolvency and similar laws
affecting creditors’ rights generally and equitable principles of general
applicability, and will be entitled to the benefits of the Indenture and the
Registration Rights Agreement pursuant to which such Securities are to be
issued.

C.    The Underlying Securities reserved for
issuance upon conversion of the Securities have been duly authorized and
reserved and, when issued upon conversion of the Securities in accordance with
the terms of the Securities, will be validly issued, fully paid and non-assessable,
and the issuance of the Underlying Securities will not be subject to any
preemptive or similar rights imposed by law, the Company’s Certificate of
Incorporation or bylaws.

D.    Each of the Indenture and the Registration
Rights Agreement has been duly authorized, executed and delivered by, and is a valid
and binding agreement of, the Company, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors’ rights generally and equitable principles of general applicability,
and except as rights to indemnification and contribution under the Registration
Rights Agreement may be limited under applicable law.

E.     The statements relating to legal matters,
documents or proceedings included in the Pricing Disclosure Package and the
Final Memorandum under the captions “Description of Notes”, “Plan of
Distribution” and “Transfer Restrictions” fairly summarize in all material
respects such matters, documents or proceedings.

F.     Based upon the representations, warranties
and agreements of the Company in Sections 1(n), 1(o), 6(f) and 6(g) of the
Purchase Agreement and of the Initial Purchasers in Section 7 of the Purchase
Agreement, it is not necessary in connection with the offer, sale and delivery
of the  Securities to the Initial
Purchasers under the Purchase Agreement or in connection with the initial
resale of such Securities by the Initial Purchasers in accordance with Section
7 of the 

 D-1
 

 

Purchase Agreement to
register the Securities under the Securities Act of 1933 or to qualify the
Indenture under the Trust Indenture Act of 1939, it being understood that no
opinion is expressed as to any subsequent resale of any Security or Underlying
Security.

G.    Nothing has come to the attention of such
counsel to cause such counsel to believe that (except for the financial
statements and financial schedules and other financial and statistical data, as
to which such counsel need not express any belief) the Pricing Disclosure
Package or the Final Memorandum when issued contained, or as of the date such
opinion is delivered contains, any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

With
respect to the matters referred to in the paragraph above, Davis Polk &
Wardwell may state that their beliefs are based upon their participation in the
preparation of the Pricing Disclosure Package and the Final Memorandum (and any
amendments or supplements thereto) and review and discussion of the contents
thereof (including the review of, but not participation in the preparation of,
the incorporated documents), but are without independent check or verification
except as specified.

 D-2

 

 

EXHIBIT E

FORM OF DIRECTOR/OFFICER
LOCK-UP LETTER

November [  ],
2006

Lehman Brothers Inc.

Piper Jaffray & Co.

c/o Lehman
Brothers Inc.

745 Seventh Avenue

New York, New York 10019

Dear Sirs and Mesdames:

The
undersigned understands that Lehman Brothers Inc., as Representative of the
several Initial Purchasers, proposes to enter into a Purchase Agreement (the “Purchase Agreement”) with deCODE genetics,
Inc., a Delaware corporation (the “Company”), providing for the offering (the “Offering”) by the several Initial Purchasers of $65,000,000 principal
amount of the 3.50% Senior Convertible Notes due 2011 (the “Securities”).  The
Securities will be convertible into shares of the Common Stock, $0.001 per
share par value of the Company (the “Common
Stock”).

To
induce the Initial Purchasers that may participate in the Offering to continue
their efforts in connection with the Offering, the undersigned hereby agrees
that, without the prior written consent of 
Lehman Brothers Inc. on behalf of the Initial Purchasers, [he] [she]
will not, during the period commencing on the date hereof and ending 90 days
after the date of the final offering memorandum relating to the Offering (the “Final Memorandum”), (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (2) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise.  The foregoing sentence shall
not apply to transactions relating to shares of Common Stock or other
securities acquired in open market transactions after the completion of the
Offering.  In addition, the undersigned
agrees that, without the prior written consent of  Lehman Brothers Inc. on behalf of the Initial
Purchasers, [he] [she] will not, during the period commencing on the date
hereof and ending 90 days after the date of the Final Memorandum, make any
demand for or exercise any right with respect to, the registration of any
shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock.

 E-1
 

 

 

The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company’s transfer agent and registrar against the transfer of the
undersigned’s shares of Common Stock except in compliance with the foregoing
restrictions.

The
undersigned understands that the Company and the Initial Purchasers are relying
upon this Lock-Up Agreement in proceeding toward consummation of the
Offering.  The undersigned further
understands that this Lock-Up Agreement is irrevocable and shall be binding
upon the undersigned and the undersigned’s heirs, legal representatives,
successors and assigns.

Whether or not the
Offering actually occurs depends on a number of factors, including market
conditions.  Any Offering will only be
made pursuant to the Purchase Agreement, the terms of which are subject to
negotiation between the Company and the Initial Purchasers.

	
  

  	
  Very truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

 E-2

 

 

EXHIBIT F

OPINION
OF

MARSHALL, GERSTEIN & BORUM LLP

INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY

Other than as
described in the Pricing Disclosure Package and the Final Offering Memorandum,
such Counsel are unaware of any facts indicating that the Company does not own
or possess rights to use, or may be able to acquire on reasonable terms, all
material patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary
or confidential information, systems or procedures), trademarks, service marks
and trade names currently employed by the Company in connection with the
business now operated by it as described in the Pricing Disclosure Package and
the Final Offering Memorandum; and such Counsel are unaware of any facts
indicating that the Company has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in any material adverse change in condition,
financial or otherwise, in the earnings, business or operations of the Company,
taken as a whole.

 F-1

 

 

EXHIBIT G

OPINION
OF

HESLIN ROTHENBERG FARLEY & MESITI, P.C.

INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY

Such Counsel is
unaware of any facts indicating that the Company does not own or possess rights
to use, or that it may not be able to acquire on reasonable terms, all material
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names currently employed by the Company in connection with the business
now operated by it as described in the Pricing Disclosure Package and the Final
Offering Memorandum; and we are unaware of any facts indicating that the
Company has received any notice of infringement of or conflict with asserted
rights of others with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
result in any material adverse change in condition, financial or otherwise, in
the earnings, business or operations of the Company, taken as a whole.

 G-1

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